Delhi High Court
Jagdish Rai Sood vs Income Tax Officer. on 30 September, 1992
Equivalent citations: (1993)45TTJ(DEL)246
ORDER
R. M. MEHTA, A.M. :
These appeals involving identical grounds are disposed of by means of a consolidated order having been heard together.
2. The appellant in this case is a director in two family concerns, namely, M/s. R. C. Sood & Co. Pvt. Ltd. and M/s. Ajay Enterprises Pvt. Ltd. In the returns of income filed by him for the assessment years under consideration he returned income under the head "salary, property, money-lending business, share from a partnership firm" and income under the head other sources such as interest, dividend, etc.
3. The first ground in the appeals pertains to the claim on account of standard deduction which was allowed at Rs. 1,000 by the ITO as against the claim of Rs. 5,000. The ITO was of the view that the standard deduction as claimed was not allowable inasmuch as there was the personal use of the companys care by the assessed in his capacity as a director and this being proved by the fact that in the assessments of the company, a disallowance on that score had been made year after year. On further appeal, the CIT(A) upheld the action on the part of the ITO.
4. The learned counsel for the appellant, at the outset, stated that there was no personal use of the companys cars by the assessed and that being the situation the standard deduction was required to be allowed at Rs. 5,000 and not at the reduced figure as had been held by the ITO and subsequently by the CIT(A). According to him, on identical facts the matters of the other directors of these companies had come up before the Tribunal and the consistent view which was being adopted was that standard deduction at Rs. 5,000 was allowable. In support he invited our attention to copies of some of these orders appended to his paperbook and these being :
(i) Shri Raman Kumar Sood - Asst. yr. 1983-84, ITA No. 1460 (Del) of 1987 (order dt. 12th Jan., 1990);
(ii) Shri Raman Kumar Sood - Asst. yr. 1984-85, ITA No. 152 (Del) of 1988 (order dt. 24th May, 1990);
(iii) Shri Satish Kumar Sood - Asst. yr. 1982-83, ITA No. 4724 (Del) of 1989 (order dt. 15th Jan., 1991); and
(iv) Shri Rattan Chand Sood - Asst. yr. 1984-85, ITA No. 3069 (Del) of 1989 (order dt. 28th Jan., 1991).
The learned Departmental Representative, on the other hand, supported the orders passed by the authorities below reiterating thereafter the reasons recorded in these orders in rejecting the view-point canvassed on behalf of the assessed.
5. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties. There is no challenge on the part of the Departmental Representative to the submission made by the learned counsel for the appellant that on absolutely identical facts the Tribunal had been pleased to allow full standard deduction in the cases of the other directors of the company the assessment years also being identical, viz., 1983-84 and 1984-85. That being the situation and with a view to maintain consistency, we accept the assesseds claim for grant of standard deduction at Rs. 5,000 as against the same being restricted to Rs. 1,000 by the tax authorities for both the assessment years under consideration. The common ground in the appeals is accordingly allowed.
6. The second common ground in the appeals once again pertains to an addition on account of the "perquisite" value of the car alleged to be used by the assessed for personal purposes. As a result of the view taken by the ITO to allow standard deduction at Rs. 1,000 he made a corresponding addition for both the years in respect of the perquisite value of the car in the hands of the assessed. This was upheld by the CIT(A). The learned counsel once again placed reliance on the same orders of the Tribunal which had been relied upon by him in respect of ground No. 1. According to him this addition had also been considered in those orders and after examining the facts the Tribunal in the ultimate analysis had come to the conclusion that same was not required to be made. According to him the facts of the present case were absolutely identical to those as considered by the Tribunal in the cases of the other directors of the company. Faced with this situation the Departmental Representative supported the orders passed by the tax authorities.
7. After examining the rival submissions, we find no good ground to sustain any addition whatsoever on account of the perquisite value of the car and this would once again be with a view to maintain consistency by following various orders of the Tribunal in the cases of the other directors of the company and no distinguishing features being pointed out by the Departmental Representative. The addition for both the years is accordingly deleted and the common ground in the appeals is allowed.
8. Ground No. 3 pertains to the claim for deduction in respect of "1/6th repairs" against income taxable under the head "property". The assessed is 1/5th owner in "Eros Cinema Building" along with other members of the family. This building has been leased out to M/s. R. C. Sood & Co. Pvt. Ltd. on a monthly rent of Rs. 36,000. The ITO in the course of the assessment proceedings did not allow deduction in respect of repairs claimed at 1/6th on the ground that the liability to carry out repairs was with M/s. R. C. Sood & Co. and not the owners and this fact being duly substantiated by the repair expenses being debited in the books of the company. The ITO also referred to the fact that in the lease agreement there was no clause pertaining to the liability on account of repair expenses. On these facts he rejected the claim for deduction and which was subsequently upheld by the CIT(A).
9. The learned counsel at the outset invite our attention to the various orders passed by the Tribunal in the case of the other co-owners whereby the claim for deduction at 1/6th had been duly allowed. These were the orders passed in the following cases :
(i) Shri Raman Kumar Sood (HUF) - Asst. yr. 1984-85, ITA No. 2630 (Del) of 1989 (order dt. 28th Jan., 1991);
(ii) Smt. Bachitra Rani Sood - Asst. yr. 1984-85, ITA No. 4850 (Del) of 1989 (order dt. 19th March, 1991);
(iii) Shri Ajay Kumar Sood (HUF) - Asst. yr. 1986-87, ITA No. 4919 (Del) of 1990 (order dt. 8th May, 1991); and
(iv) Shri Satish Kumar Sood - Asst. yr. 1987-88, ITA No. 1120 (Del) of 1991 (order dt. 9th March, 1992).
10. The learned Departmental Representative, on the other hand, supported the orders passed by the tax authorities.
11. After examining the rival submissions, we find no good ground to sustain the addition inasmuch as the Tribunal on identical facts has allowed the claim in respect of the other co-owners of the very same property. With a view to maintain consistency we do likewise and direct the Assessing Officer to allow necessary relief to the assessed for both the assessment years under consideration. The third common ground in the appeals is accordingly allowed.
12. The 4th common ground in the appeal pertains to the question of alleged "cross-gifts" and the taxability of the interest income in the hands of the assessed by invoking the provisions of Ss. 60 and 64 of the IT Act, 1961. The undisputed facts of the case, the arguments advanced before the authorities below and the decision of the CIT(A) can be straight away extracted from the order passed by the first appellate authority for the asst. yr. 1983-84 as follows :
"Ground No. 5 is against addition of Rs. 12,000 made by the ITO on account of interest from gifts covered by the mischief of S. 64. The ITO has given particulars of various gifts made by the appellant at pages 5 to 6 of the assessment order which are hit by the mischief of S. 64(1)(vi) and 64(1)(vii). According to the ITO the gift transactions are not genuine and these are merely colourable devices adopted by the appellant for diversion of income. The various gifts, which are subject-matter of S. 64 by the ITO are discussed as under :
(i) Gift of Rs. 25,000 to Poonam Sood on 2nd Nov., 1979 (Miss Poonam Sahni) A cheque of Rs. 25,000 was given by way of gift on 2nd Nov., 1979 at the time of betrothal of his son to Poonam. The cheque was cleared on 3rd Nov., 1979 and the money was withdrawn and deposited in the family business. On these facts, the ITO concluded that no genuine gift as such has been made and the control over the money remained with the appellant. Learned counsel argued that since the relation of husband and wife did not subsist on the date of the gift, the provision of S. 64(i)(vii) would not apply. I am not impressed with the contention. The sequence of events as well as the conduct of the appellant clearly lead to the inference that the gift was a colourable device. Making out of the cheque of Rs. 25,000 on 2nd Nov., 1979 and encashment of the same on the very next day and investing the money in the family business of the appellant amply brings out the real substance of the transfer as a colourable device designed for frustrating the provisions of S. 64.
The ITO has next referred to a series of gifts transactions which are held to be cross-gifts. The important point to be noted regarding these gifts transactions are that the appellant has made gifts to children of his daughters and the donees have invested the amounts with the appellants family. Further, by way of cross-gifts the married daughters, whose children have received gifts from the appellant, have in turn made gifts to grandsons of the appellant who are the lineal decrements of the appellants family. It transpires that in some of the cases the appellants daughters have raised loans from various members of his family for making gifts to his grant children. The entire pattern of these gifts transactions bear stamp of striking similarities indicating that a deliberate attempt has been made for diversion of income by taking resort to colourable devices and thus defeating the provisions of S. 64. These gift transactions, as mentioned by the ITO are briefly indicated as under :
(a) On 4th April, 1982 the appellant made a cash gift of Rs. 10,000 to Master Satyan Parkash, who is son of Mrs. Sushma Parkash, daughter of the appellant and Mrs. Sushma Parkash deposited the money with Shri Satish Kumar Sood, son of the appellant on 10th April, 1982.
By way of cross-gifts, Mrs. Sushma Parkash made the following cash gifts on 1st April, 1982.
(i) Rs. 5,000 gifted to Mrs. Madhu Sood, w/o Raman Kumar Sood, son of the appellant.
(ii) Rs. 5,000 gift to Mrs. Poonam Sood, w/o Ajay Sood, son of the appellant.
(b) On 8th Dec., 1981 the appellant made a gift of Rs. 10,000 to Master Satyan Parkash, who again deposited the money with Shri Satish Kumar Sood on 10th Dec., 1981. By way of cross-gift Mrs. Sushma Parkash made gifts on 2nd July, 1981 of Rs. 10,000 each to Master Avneesh Kumar, minor son of Raman Kumar Sood and Baby Shivani, daughter of Raman Kumar Sood.
(c) On 4th April, 1982 the appellant made cash gift of Rs. 10,000 to Baby Shardha Parkash, d/o Sushma Parkash, which was deposited with Satish Kumar Sood, son of the appellant on 10th April, 1982. By way of cross-gifts Mrs. Sushma Parkash made cash gift of Rs. 10,000 on 16th Sept., 1982 to Master Aditya Sood, son of Satish Kumar Sood.
(d) On 10th Dec., 1980 and 6th June, 1981 the appellant made gifts of Rs. 10,000 each to Baby Sumedha Malhotra, d/o Mrs. Anita Malhotra, appellants daughters. The first amount of Rs. 10,000 gifted on 10th Dec., 1980 was deposited with M/s. Jagdish Rai Sood (HUF), on 13th Dec., 1980. The second amount of Rs. 10,000 gifted on 6th June, 1981 was deposited with Shri Satish Kumar Sood on 8th June, 1981. By way of cross-gifts Mrs. Anita Malhotra made gifts of Rs. 10,000 each on 2nd July, 1981 to Master Avneesh Sood, and Baby Shivani Sood, grandchildren of the appellant.
It is further relevant to mention here that Mrs. Anita Malhotra had taken loans of Rs. 20,000 in cash from Shri Raman Kumar Sood, son of the appellant and out of the loan amount gifts of Rs. 10,000 each were made as above to Master Avneesh Kumar Sood, son of Raman Kumar Sood and Baby Shivani, daughter of Shri Raman Kumar Sood. This is a peculiar case where loans were taken by a lady from her brother for making gifts to his children.
The facts as mentioned above, amply indicate that the gifts transactions were mere colourable devices which have been resorted to by the appellant for the sole purpose of frustrating the provisions of S. 64. In my opinion this is a clear case where the ratio of the celebrated decision of Supreme Court in McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) applies. The ITO is fully entitled to penetrate the veil of covering any transaction and ascertain the truth. The said decision has been followed by the Hon able Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1986) 157 ITR 77 (SC). Thus when we get behind the smoke screen and discover true state of affairs, it is amply established that the smoke screen and discover true state of affairs, it is amply established that the gifts transactions of the appellant, as above, are merely colourable devices and the provisions of S. 64(1)(vi), (vii) and (viii) are clearly applicable.
As regards the reliance placed by the learned counsel on the decision of Supreme Court in CIT vs. C. M. Kothari (1963) 49 ITR 107 (SC), the said decision in fact supports the conclusion being drawn by the ITO on the basis of the facts and circumstances of the case. In the said decision it has been observed at page 111 of the report :
If the two transfers are inter-connected and are parts of the same transaction in such a way that it cannot be said that the circuitous method has been adopted as a device to evade implications of this section the case will fall within the section. In this case, the device is palpable and the two transfers are too intimately connected that they cannot but be regarded as parts of a single transaction.
For the reasons as discussed above I uphold the addition of Rs. 12,000 made by the ITO and dismiss this ground of appeal."
13. The learned counsel, at the outset, stated that in so far as the gift of Rs. 25,000 on 2nd Nov., 1979 to Miss Poonam Sahni, as she then was (later on Mrs. Poonam Sood) could not be hit by the provisions of S. 64(1)(vi) inasmuch as the relationship of husband and wife did not subsist on the date of the gift. According to him the marriage took place on 30th Nov., 1979 when she became the daughter-in-law of the assessed. The further submission was that there was no bar in investing in the family concern of the assessed the amount received as gift especially when Poonam Sahni ultimately became the assesseds daughter-in-law, soon after the date of the gift.
14. As regards the other gifts, the learned counsel reiterated the arguments advanced before the authorities below, but highlighted the following :
1. These could not be treated as cross-gifts inasmuch as in most of the transactions there was a substantial time-gap;
2. There was no bar to the amounts being invested in various family concerns under the control of the assessed; and
3. That in respect of most of the transactions all necessary formalities had been completed including the filing of the gift-tax returns and the framing of the assessments thereof.
15. The learned counsel during the course of the hearing, however, conceded that in so far as the gift of Rs. 10,000 to Master Satyan Parkash on 4th April, 1982 was concerned the same was to be treated as a cross-gift inasmuch as the corresponding gift came about within a couple of days only.
16. In support of his arguments advanced in the direction of contending that the gifts were valid and genuine and not cross-gifts as held by the tax authorities, he placed reliance on the decision of the Hon able Supreme Court in the case of CIT vs. C. M. Kothari (1963) 49 ITR 107 (SC). The learned Departmental Representative, on the other hand, supported the orders passed by the authorities below reiterating thereafter the reasons recorded in these orders in rejecting the viewpoint canvassed on behalf of the assessed. In his short reply, the learned counsel contended that since gift-tax assessments had already been made and the factum of gifts having been made duly accepted by the Department, there was no question of treating the transactions as a device and applying the decision of the Hon able Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC). He invited our attention in this connection to the later decision of the Hon able Supreme Court in the case of CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC).
17. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties. The decision of the Hon able Supreme Court in the case of C. M. Kothari (supra) has also been duly considered. On the facts of the case, we are of the view that the orders passed by the tax authorities to treat the transactions in question as cross-gifts and a device adopted by the assessed to overcome the provisions of S. 64 are just and required to be upheld.
There is no dispute whatsoever that the amounts in question have found their way back to various companies and institutions which are under the direct control of the assessed and other family members and we could go to the extent of saying that the transfers are intimately inter-connected. The learned counsel himself has conceded during the course of the hearing that the transaction pertaining to the cash gift of Rs. 10,000 to Master Satyan Parkash on 4th April, 1982 and the corresponding cross-gift is squarely hit by the provisions of S. 64 due to the proximity of the dates. On the same analogy, we do not find much difference in respect of the other transactions where the time-gap is a period of few months, since this fact itself does not change the complex of the transactions.
18. However, our view regarding the gift of Poonam Sahni (later on Poonam Sood) is somewhat different because this is not a case of cross-gift, but represents a gift given to her a few days prior to the date of her marriage with the assesseds son and as is apparent from the record at the time of betrothal. This sort of a gift is customary and there is no reason to doubt its genuineness only on the ground that the money has found its way back to the "family business", since that would be the normal act on the part of the prospective daughter-in-law who under normal circumstances would not part with the money to her own parents. In respect of this gift our view is that this would not be hit by the provisions of S. 64 and would have to be excluded being a genuine and bona fide transaction. We find on pages 44 to 47 of the paperbook filed by the learned counsel that there is a declaration by the assessed vis-a-vis the gift, and its acceptance on the part of said Poonam Sahni. There is also the gift-tax assessment order in respect of the same gift and this is appended at pages 46 and 47 of the paperbook. In the final analysis the corresponding addition on account of interest vis-a-vis the aforesaid gift of Rs. 25,000 would have to be excluded from the taxable income of the assessed. The remaining addition in both the assessment years is, however, confirmed.
19. Before we part with this ground, we would like to mention that no doubt the gift-tax assessments have been duly completed by the GTO and these have not been held to be void, but the Department had no option but to frame these assessments especially when the assessed had filed the returns. This fact, however, cannot lead to the conclusion that the present is not a case of cross-gifts which have been entered into with a view to bypass the provisions of S. 64. On the facts of the case the decision of the Hon able Supreme Court in the case of CWT vs. Arvind Narottam (supra) would not come to the aid of the assessed.
20. The last common ground in these appeals pertains to the addition of Rs. 1,20,000 in each of the years on account of "household expenses".
21. The ITO in the course of the assessment proceedings undertook the exercise of ascertaining the "sufficiency" of withdrawals made by the assessed and other family members. Before we proceed further it would be necessary to mention that the assesseds case before the ITO was that he, his parents, his married children and their families resided together at 19, Golf Links, New Delhi, sharing a common kitchen. The total withdrawals for asst. yr. 1983-84 shown by the assessed and other family members aggregated Rs. 93,146, the corresponding figure for asst. yr. 1983-84 being Rs. 93,100. As according to the ITO the aforesaid withdrawals were inadequate he afforded an opportunity to the assessed to explain the same by furnishing further details regarding the household expenses. The ITO also proceeded to record the assesseds statement on 11th March, 1986 vis-a-vis the amount expended towards household expenses. On the basis of the facts that came out as a result of the aforesaid statement, the ITO in the ultimate analysis concluded that the assessed was "deliberately withholding" relevant information which was within his special knowledge. He accordingly resorted to an estimate on account of household expenses on the basis of the following facts :
"I am otherwise left with no alternative but to make an estimate regarding household expenses. The replies of the assessed make it clear beyond doubt that he does not want to state facts which are within his special knowledge. Keeping in view the fact that inspite of repeated requests the assessed was not prepared to say any correct thing about household expenses.
He stated that they did not need any doctor in the last 4-5 months. With reference to the question as to in which hospital or Nursing Home the last child was born (which is about 1-1/2 year back), his reply was that he did not remember. Regarding the salary of employees his reply was the same. The important point was regarding rooms in the house in 19, Golf Links in which has been living for some decades (Q. No. 9), he stated that he never counted the rooms. In the year under consideration there were 10 adults members 6 or 7 children (including 2 children about 10 to 12 years old), there was a birth of one child in that year. Mother of Shri J. R. Sood with Gods Grace was alive in that year. Father and Mother of Shri J. R. Sood in advanced age did need normally medical care. The newly born child and mother also did require the expenses of medical care. Out of 16/17 members of the family plus 4 servants, not having visited any hospital or Nursing Home for some months altogether is one of the impossibilities. The household expenses depend mainly upon :
(a) The real income of the family
(b) Environments (C) Society in which we move
(d) Relations; and
(e) Associates The family consisting of 16 members, all having income in higher bricket, even one years old child is having high taxable income and wealth. The total declared income of the family is about Rs. 10,00,000. They are living in 15 roomed Bungalow in Delhi's most affluent, sophisticated and excellent area "Golf Links". Family members are members of the most important clubs of Metropolities. The expenses in my view, the minimum hereunder per month for 16/17 members of the family plus 4 children :
Salary of servants (There should be atleast 2 servants for upkeep, 2 for kitchen and 2 nurses/ayas) 1,000 Medical attendance 2,000 Club and entertainment 2,000 Education of children 1,000 Cloth atleast Rs. 2,000 per adults and Rs. 1,200 per child p.a. 12 adults x 2,000 = 24,000 5 children x 1,200 = 6,000 30,000 p.a. p.m. 2,500 Servants are supposed to wear old clothes of masters Repairs and furnishing, electrical gages 2,000 Misc.
1,000 Birthdays celebration 1,000 Education of 2-3 children
-
Kitchen expenses including fruit, vegetable, pulses, rice, flour & sugar, etc., for 20/21 persons (at middle class livelihood).
6,000 Total Rs.
18,500 The above figures have been taken into consideration keeping the expenses of a middle class family, but the expenses of a high class family should be more; all the items such as furniture, electronic items, etc., have not been taken into consideration. I would only refer, as a matter of caution, to the judgment of Punjab & Haryana High Court in Vidya Sagar Oswal case (1 (1977) 108 ITR 861 (P&H) regarding penalty under S. 271(1)(C) regarding household expenses. The least possible expenses should be Rs. 17,500 p.m., viz., Rs. 2,10,000 p.a. This would leave a gap of Rs. 1,20,000 after taking into consideration the withdrawals of Rs. 93,000 shown by the assessed family. This gap has been met from undisclosed sources. As Shri J. R. Sood is the main senior person, Shri R. C. Sood his father being old, expense have to be considered in his case. No doubt the individual members should have incurred some expenses and they should explain for their ownselves. But the real control of the firms as a matter of fact remains with Shri J. R. Sood. As the plea of common kitchen is pressed, the addition of Rs. 1,20,000 for low household expenses is to be made in the case of Shri J. R. Sood the same having been met from undisclosed sources."
22. As regards asst. yr. 1984-85 on the same set of facts a similar addition of Rs. 1,20,000 was repeated.
23. On further appeal the CIT(A) confirmed the addition made by the ITO in respect of both the assessment years agreeing in toto with the views expressed by the Assessing Officer.
24. We have examined the rival submissions and have also perused the material on record to which our attention was invited by the parties. On the facts of the case, we are of the view that an addition is called for inasmuch as the household expenses indicated by the assessed and other family members are somewhat low taking note of the background and standard of living as also the period of time with which we are concerned. We are, however, not able to subscribe to some of the figures adopted by the Assessing Officer in arriving at the said estimate. The ITO has arrived at a figure of Rs. 17,500 per month by assuming birthday celebrations every month, the employment of six servants, medical expenditure of Rs. 2,000 per month and club and entertainment once again at Rs. 2,000 per month. In our opinion, these estimates are somewhat in the realm of imagination. Then again the ITO has assumed expenditure on clothing at Rs. 2,500 per month whereas the real situation may be that in some months there may be no expenditure at all whereas in others it may be more than this figure. As regards the clubs, the assessed in the course of his statement categorically mentioned that he was not in the habit of frequenting the various clubs, of which he had been a member for the last many years. Another aspect of the matter which has to be referred to is that in the preceding assessment years the household expenses as shown by the assessed and other family members had been duly accepted and to refer to one such assessment year Rs. 83,418 for asst. yr. 1983-84 (page 81 of the paperbook). This fact by itself, however, cannot be a bar to come to a conclusion otherwise vis-a-vis the expenditure for household purposes. The ITO in the assessment years under appeal has made detailed enquiries and has thereafter come to the conclusion that an addition is required to be made, but as already observed by us this appears to be on the higher side. On the facts of the case, we are of the view that an addition of Rs. 40,000 in asst. yr. 1983-84 and Rs. 60,000 in asst. yr. 1984-85 would be fair and reasonable as against Rs. 1,20,000 made by the authorities below in both the years. We direct accordingly.
25. Before we part with this ground, we would like to refer to an argument advanced by the learned counsel during the course of the hearing and that being to the effect that all the family members of the assessed were income-tax assesseds and it was Shri R. C. Sood, who was the head of the family and not Shri J. R. Sood. The submission, in other words, was that the question of drawings for household purposes was required to be examined either in the individual cases or in the case of Shri R. C. Sood. In our opinion, this argument on the peculiar facts of the case is required to be rejected. The ITO in the course of the assessment proceedings sought information on various occasions, but when this was not forthcoming, he requested for the production of a senior member of the family for recording his statement on the point in question. It was the assessed who ultimately appeared before the ITO and it was under these circumstances that the addition came to be made in his hands rather than in the individual assessments of various family members including Shri R. C. Sood.
26. In the result, both the appeals are partly allowed.