Income Tax Appellate Tribunal - Delhi
Wig Investments , New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' NEW DELHI)
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER
AND
SHRI B.K. HALDAR, ACCOUNTANT MEMBER
I.T.A. No.1779 /Del/2011
Assessment year : 2006-07
Wig Investments, ACIT,
79-Sunder Nagar, Circe-32 (1),
New Delhi. V. New Delhi.
(Appellant) (Respondent)
PAN /GIR/No.AAAFW
/GIR/No.AAAFW-
AAAFW-6972-
6972-B
Appellant by : Shri Vinod Bindal &
Mr. Sweety Kothari. C.A.
Respondent by : Shri Mohanish Verma, CIT-DR.
ORDER
PER B.K. HALDAR, AM:
This is an appeal filed by the assessee against the order of Ld CIT, Delhi-XI, New Delhi dated 12.3.2011 u/s 263 of the Act for assessment year 2006-07.
2.The assessee has taken following grounds of appeals:-
1. The learned CIT erred in law, contrary to and based on incorrect interpretation of the facts in passing an order U/S 263 though the assessment order was neither erroneous nor prejudicial to the interests of Revenue and in directing the assessing officer to frame the assessment afresh. Thus the order passed U/S 263 has 2 ITA No1779/Del/11 been passed without fulfilling the conditions laid down by law and deserves to be quashed.
2. The learned CIT erred in law and on facts in passing an order U/S 263 on the issues regarding assessment of capital gain on mutual funds as business income and the capital contribution received from partner companies as deemed dividend U/S 2(22)(
e) of the Act though both the issues are highly debatable and two opinions are possible. Thus the order passed U/S 263 on debatable Issues should be quashed.
3. The learned CIT erred in law and on facts in passing order u/s 263 of the Act by holding that the short term capital gain on mutual funds should be assessed as business income in the hands of the assessee, without appreciating the facts of the case that the assessee had not carried on any regular business activity of purchase and sale of mutual funds but had only invested its funds in the mutual funds and by further ignoring that the said amount was declared as investment in the balance sheet of the assessee. Thus this issue cannot be considered for the purpose of section 263 and the order passed U/S 263 should be cancelled.
4. The learned CIT erred in law and on facts in passing order U/S 263 of the Act by holding that the amount contributed by the two partner companies in the assessee firm as capital contribution is liable to tax as deemed dividend under section 2(22)( e) by ignoring that:
a) the assessee received the money from the companies not as a loan or deposit but as capital contribution from a partner in the firm in consideration of which the said companies got a share in the profit of the firm; and 3 ITA No1779/Del/11
b) the said amount was given by the partner companies due to business exigencies and prudency and
c) the dividend income u/s 2(22)( e) can be assessed in the hands of the shareholder and not in the hands of the concern in which share holder has a substantial interest and therefore the firm could not be covered under the deeming provisions of the said section and
d) the deeming provisions should be given strict interpretation as per law and cannot be extended to cover those transactions which have not been provided by the Legislature.
Thus the order passed U/S 263 ignoring the facts and provision of law should be quashed.
5. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing.
3. In this case assessment for assessment year 2006-07 was completed by the Assessing Officer on 8.12.2008 by accepting the returned income of the assessee. Subsequently, the ld CIT issued notice u/s 263 of the Act dated 10.6.2009. The assessee is a firm consisting of four partners namely M/s Kwality Ice Creams (India) Pvt. Ltd. (ii) Kwality Processed Food Services & Equipments Pvt. Ltd. (iii) Pradeep Wig (HUF) and (iv) Smt. Neera Wig. Shri Pradeep Wig is the Managing Director of the above two companies. He is also the karta of the Pradeep Wig HUF and Smt. Neera Wig is his wife. The address of the assessee firm is the residence of Shri Pradeep Wig. M/s Kwality Ice Cream India Pvt. Ltd. had introduced the capital of `.47 crores and M/s Kwality Processed Food Services & Equipment Pvt. Ltd. had introduced capital of `.14 crores in cash and `.4.88 crores by way of shares of M/s Kwality Ice cream India Pvt. Ltd. No capital was introduced either by Shri Pradeep Wig or by Smt. Neera Wig. However, share of profit of the HUF and Smt. Neera Wig was 20% and 10% respectively. Thus, 4 ITA No1779/Del/11 1,09,99,508/- and `.54,99,754/- were allocated as profit/income for the assessment year under consideration to M/s Pradeep Wig (HUF) and Smt. Neea Wig respectively.
4. The only activity carried on by the assessee during the year under consideration was purchase and sale of mutual funds and securities. BY the said activity, it had earned total amount of `.4,18,84,950/- which was disclosed as short term capital gains. As per the details available on record, there were huge transactions in mutual funds and securities during the years. The purchase made during the year amounted to `.68.18 crores (approximately). All these transactions were through the portfolio Managers to whom Portfolio Management Fees have been paid. In the partnership deed dated 12.7.2005 it was indicated that the business of the firm comprised of investment in stock shares etc. However, this deed was revised on 31st August, 2005 wherein the prefix business was removed. As per the evidence on record Shri Pradeep Wig was the person who was having control over all the affairs of the assessee firm as well as the two companies who are partners in the assessee firm.
5. In the above facts, the ld CIT proposed to revise the assessment order passed u/s 143(3) of the Act for the assessment year 2006-07 mainly on two grounds, namely:-
(i) whether the income shown by the assessee was required to be assessed under the head business or profession or under the head capital gains and
(ii) whether the provisions of section 2(22)(e) of the Act was applicable or not.
6. In response to notice u/s 263 of the act, the assessee made detailed submissions before the Ld CIT. It was contended that there was no application of section 2(22)(e) as the partner companies did not 5 ITA No1779/Del/11 give any loan or advanced any money to the assessee firm or the companies' share holders. As regards assessing the income shown by the assessee under the head business or profession, it was submitted that the assessee did not intend to carry on the business of sale and purchase of securities etc. It intended to make long term investments. Thus, income declared under the head of short term capital gain could not be treated as income under the head business. For the above proposition it relied on plethora of case laws as enumerated by the Ld CIT in para 5 of the impugned order.
7. The Ld CIT was of the opinion that the transactions entered into by the assessee during the relevant previous year was required to be examined in terms of circular No.4/2007 of CBDT dated 15.6.2007. Analyzing the issue from various angles, it was held by him that the order of the Assessing Officer accepting the claim of the assessee that the income was required to be assessed as short term capital gain and not as business income was both erroneous and prejudicial to the interest of revenue. He, therefore, set aside the impugned assessment order and directed the Assessing Officer to frame the assessment as per the correct provisions of law and taking into account the applicability of the Circular No.4/2007 dated 15.6.2007 and Instruction No.1827 dated 31.8.1989.
8. As regards the applicability of section 2(22)(e) of the Act, the Ld CIT tabulated capital introduced, share of profit, shares capital, drawings and balance as on 31.3.2006 of all the partners which is reproduced below:-
Partner (s) Kwality Ice Kwality Pradeep Neera Wig Creams(India) Processed Wig Pvt. Ltd.KICPT Food HUF Services & Equipments P. Ltd.
6 ITA No1779/Del/11
Capital 47 cr. 14 cr. Nil Nil
Introduced
Add: Share 2.75 cr. 1.10 cr. 1.10 cr. 54.99
of profit (Lakhs)
Add; Share
of KICPT -- 4.48 cr. Nil Nil
Less: Drawings 20.55 cr. 9.25 cr. 10 lakhs NIL
Balance as
on 31.3.2006 29.20 cr. 10.73 cr. 99.99 lakhs 54.99
(Lakhs)
Also as per the provisions of the partnership deed, though M/s Pradeep Wig (HUF) (Sic) and Smt. Neera Wig (Sic) ( it should be the partner companies) were to have 50% & 20% share of profit respectively, they were not to share losses incurred by the firm. The Ld CIT, therefore, was of the opinion that the assessee firm was created with the sole object of transferring the accumulated profits/funds of the controlled companies through the artifice of the assessee firm. The Ld CIT quoted from the judgment of the Hon'ble Apex Court in the case of CIT v.
Mukendrey Kumar Shah v. CIT 290 ITR 433 (SC) which is reproduced hereunder:-
" ..... We find merit in this civil appeal. The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or 7 ITA No1779/Del/11 not. The declaration of dividend is entirely within the discretion of this group. Therefore, the Legislature realized that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) of the Act.
In the case of CIT V. L. Alagusundaram Chettiar (1977) 109 ITR 508, the Madras High Court held that the word "payment" in the said section means the act of paying and, therefore, in that case it was held that payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, L. Alagsundaram Chettiar, and was therefore assessable as dividend in the hands of the assessee. In the said judgment it has been held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Applying the above test to the facts of the present case, we are of the view that the Tribunal was right in holding, on examination of the cash flow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to buy 9 per cent RBI Relief Bonds in the financial year 1999-2000. It is in the sense that the Tribunal was right in holding the two firms were used as conduits by the assessee. It is not in dispute that the assessee had more -than 10 per cent of voting power in MKSEPL during the block period. It is not in dispute that the assessee had substantial interest of about 16 per cent. In MKF. It is not in dispute that the three companies were controlled companies.
8 ITA No1779/Del/11 There is one more point which needs to be mentioned. The timing of the socalled repayments by the company to MKF and MKI and the immediate withdrawal of the funds by the assessee- cum-director-cum-shareholder-cumpartner and the timing of investment in purchase of Bonds were around the same time. Moreover, in MKSEPL the assessee is not only a shareholder having more than 10 per cent. Of total voting power, he is also a director of that company. The said company is also a partner in MKF and MKI which explains why the amount of Rs. 5.99 Crores was routed by splitting said amount into two parts of Rs. 2.79 crores and Rs. 3.20 crores. In the present case, the most important aspect, which has not been considered by the High Court, was that withdrawal of money by the assessee from his capital account, in the books of MKI, during the financial year 1999-2000 led to a debit balance of Rs. 8.18 crores as on March 3 ist 2,000. To this extent, the finding given by the Assessing Officer and by the Tribunal remains unchallenged.........."
According to the Ld CIT, the present case was squarely covered by the above judgment of the Hon'ble Apex Court. The accumulated profits of the two companies as on 31.3.2006 were as under:-
1) M/s Kwality Ice Cream India Pvt. Ltd. `.30,91,28,877/-
2) M/s Kwality Processed Food & `.11,48,49,332/-
Equipments Pvt. Ltd/ The Ld CIT, therefore, opined that the amounts contributed as partners capital by the two partners companies were to be treated as deemed dividend u/s 2(22)(e) of the Act to the extent of accumulated profits of such companies.
9. The Ld CIT, therefore, exercised his jurisdiction u/s 263 of the Act and in para 7.6. of the impugned order held as under:-
9 ITA No1779/Del/11 "7.6. In view of the above facts, it is obvious that the order of the Assessing Officer u/s 143(3) dated 08.12.2008 is erroneous and prejudicial to the interests of Revenue because the deemed dividend u/s 2(22)(e) of the Income-tax Act, 1961, accruing to the assessee, by way of payment received as partners' capital contributions from the two partner companies, which are substantially controlled by Sh. Pradeep Wig (as individual and as Karta of HUF) and his wife Smt. Neera Wig, who in turn are also majority stake holders in the assessee firm as partners, has not been brought to tax by the Assessing Officer. Therefore, considering the law laid down in judgments of the Hon'ble Supreme Court in the case of CIT Vs. Mukundray K. Shah [2007J 290 ITR 433 (SC), as discussed above, the assessment order of the AO passed u/s 143(3) of the Income tax Act, 1961, dated 8.12.2008 is set aside with the directions to the assessing officer to frame the assessment afresh as per the correct provisions of law and after taking into account the applicability of the above judgment of the Hon'ble Supreme Court reported in 290 ITR 433.
The assessee should be given sufficient opportunity of being heard before the assessment is framed afresh."
10. Aggrieved the assessee filed appeal before the Tribunal.
11. Before us Ld AR for the assessee submitted that this was the first year of assessment of the assessee firm. A copy of the partnership deed dated 12.7.2005 is available in assessee's paper book pages 22- 23 whereas the amended partnership deed dated 31.8.2005 is available in assessee's paper book pages 24-26. It was contended by him that in consonance with the partnership deed, the assessee during the relevant previous year only invested in mutual fund and did not deal with any shares. It was, therefore, contended by him that facts mentioned by the Ld CIT in the impugned order wherein it was stated 10 ITA No1779/Del/11 that the assessee was carrying on the activity of purchase and sale of mutual funds and securities were incorrect. It was contended by him that the Assessing Officer during the assessment proceedings did examine the issue as to whether the income shown by the assessee was required to be assessed under the head business or profession or under the head capital gains as would be evidenced from assessee's paper book pages 65,66 & 67. Referring to assessee's paper book pages 160-167, it was contended by him that the transactions entered into by the assessee were only for earning income from investment and therefore the view of the Ld CIT that the transactions were required to be seen with reference to Board's Circular No.4/2007 dated 15.6.2007 ,which probably the Assessing Officer has failed to do, was incorrect. The Assessing Officer noted the facts submitted by the assessee and came to a conclusion that the income of the assessee was assessable under the head capital gains. If the CIT was of a different view than that taken by the Assessing Officer, merely on that basis he was not justified in invoking the provisions of section 263 of the Act. The issue as to whether income arising from investment from PMS should be assessed as business income or as capital gain is a debatable issue. There are decisions of the honourable tribunal that the same is required to be assessed as capital gain. If the AO has taken one of the possible view, the Ld. CIT could not assume jurisdiction u/s 263 of the Act. In support of the above proposition, the Ld AR for the assessee relied on the following case laws among others:-
1. CIT v. Max India Ltd. 295 ITR 282 (SC),
2. CIT v. Malabar Industries Ltd. 243 ITR 83(SC),
12. It was further contended by the Ld AR for the assessee that the firm is a separate entity from that of its constituent partners. The firm was not a shareholder of either of the companies who were its 11 ITA No1779/Del/11 partners. Even otherwise, the capital contribution made by the partner companies could not be considered as loan or advances. Thus, these amounts cannot be considered to be deemed dividend in the hands of the firm. In support of the above proposition, the Ld AR for the assessee relied on the following case laws;-
1. Judgment of Hon'ble Delhi High Court in I.T.A. No.462/2009 dated 11.5.2011 in the case of CIT v. Ankitech (P) Ltd. and others (Assessee's paper book pages 192 to 2440.
2. ACIT v. Bhoumic Colour Pvt. Ltd. 118 ITD 1 (SB) (Mumbai).
13. It was contended by the ld AR for the assessee that for assuming jurisdiction u/s 263 of the Act, it was obligatory on the part of the Ld CIT to show that the order of Assessing Officer was erroneous and prejudicial to the interest of revenue. If there were two possible views or if the Ld CIT only raised some kind of doubt on the correctness of the decision taken by the Assessing Officer, it would not be sufficient for him to assume jurisdiction u/s 263 of the Act.
14. As regards the applicability of section 2(22)(e) of the Act is concerned, it was pointed out by the Ld AR for the assessee that the Ld CIT proceeded on wrong facts. Actually the shares of profit & loss by the various partners have been wrongly mentioned by him. The share of four partners in the profit & loss of the firm as per the partnership deed was as under:-
Partner share in profit share in loss
Pradeep Wig (HUF) 20% 67%
Mrs. Neera Wig. 10% 33%
Kwality Ice Cream India Pvt.Ltd. 50% Nil
12 ITA No1779/Del/11
Kwality Processed Food &
Equipments Pvt. Ltd. 20% Nil
15. The Ld AR for the assessee distinguished the case of Mr. Munkandrey (supra). It was argued by him that in that case, Mr. Mukendray was a director and shareholder of MKSCPL, the company that made payments to the two firms, namely, NKF and NKI in which he was a partner. The amount paid by the company in these firms was withdrawn by Mr. Mukendray and the amounts were utilized for purchase of bonds. In the above facts, it was held by Hon'ble Court that section 2(22)(e) was attracted. However, in the present case, the companies made capital contribution in the assessee firm and the Ld CIT(A) has alleged that deemed dividend was required to be taxed in the hands of the firm in view of the judgment in the case of Mr. Mukendray. The firm is not a substantial shareholder of the partner companies. Thus, the case of Mr. Mukendray did not apply to the facts of the present case. Similarly, by stating the facts in the case of Alagusundaram (supra), the Ld AR for the assessee argued that the above case is also distinguishable on facts. It was further submitted by the Ld AR for the assessee that for subsequent assessment year the contention of the assessee has been accepted by the Department. It was, therefore, submitted by him that the Ld CIT was not justified in assuming jurisdiction u/s 263 of the Act.
16. The Ld DR, on the other hand, submitted that the impugned assessment order was criptic. It is only a one page order accepting the income returned by the assessee. From the said order, it cannot be made out as to whether the issues raised by the Ld CIT were examined by the Assessing Officer or not. Referring to the assessee's paper book 13 ITA No1779/Del/11 page 65, it was contended by him that though the details were called for, the Assessing Officer did not apply his mind to the same and merely accepted the submission of the assessee. As this was the first year of assessment and as it was not a very normal partnership, it was submitted by Ld DR that, the Assessing Officer was required to apply his mind to the case.
17. It was further submitted by him that the partnership deed was signed on 12.7.2005 and the same was modified on 31.8.2005. It is the claim of the assessee that by modifying clause (2) of the partnership deed the transactions entered into by the assessee become investments made by the assessee and recouping of the same investment. The income ,therefore, becomes taxable under the head capital gains. Thus, according to the assessee no business was carried on by it during the relevant assessment year. In the above facts, it is contended by him that the case was required to be examined keeping in view Board's Circular No.4 of 2007 supra. As the Assessing Officer has failed to do so the order passed by the Assessing Officer was prejudicial to the interest of revenue and the Ld CIT was justified in assuming jurisdiction u/s 263 of the Act. It was further submitted by the Ld DR that it was not necessary for the CIT to give specific direction in an order passed u/s 263 of the Act. He can also set aside the impugned assessment order and direct the Assessing Officer to do necessary enquiry which he has not done while framing the impugned assessment order. On the issue of applicability of section 2(22)(e) of the Act, it was contended by the Ld DR that the Assessing Officer did not examine this issue at all. It was submitted by him that if the Assessing Officer failed to make enquiry which was required to be made, the Ld CIT can assume jurisdiction u/s 263 of the Act. Reliance was placed on the following case laws:-
14 ITA No1779/Del/11
1) 99 ITR 375 (Del.) Gee Vee Enterprises v. Addl. CIT.
2) 220 ITR 456 (Del.) Duggal & Co. v. CIT.
3) 243 ITR 83 (SC).Malabar Indl. Co. Ltd. v CIT.
4) 299 ITR 435 (MP) CIT v. Deepak Kumar Garg.
5) 301 ITR 45 (Raj.). Smt. Renu Gupta v. CIT.
18. As regards the submission of the Ld AR for the assessee that in subsequent year the claim of the assessee has been accepted by the Assessing Officer, it has been submitted by the Ld DR that there is no res judicata in income tax proceedings and every year is an independent year.
19. In the rejoinder, the ld AR for the assessee submitted that it is not disputed that the ld CIT in exercise of his power u/s 263 of the Act can set aside the assessment order and direct the Assessing Officer to make further enquiries. However, in the present case, it is contended by the Ld AR for the assessee that, the Assessing Officer did all necessary enquiries required in the facts of the present case and no further enquiry was required to be done. According to the Ld AR for the assessee the details furnished in the assessee's paper book would show that the Assessing Officer has made requisite enquiry and come to a particular conclusion. If the Ld CIT had a different opinion, it was contended by him ,on that basis jurisdiction u/s 263 of the Act could not be validly assumed by him.
20. As regards the applicability of section 2(22)(e) of the Act, it was contended by the Ld AR for the assessee that all relevant facts are on record. The Ld CIT had made all the requisite enquiries in this 15 ITA No1779/Del/11 regard and therefore he should have given a clear cut direction on the same.
21. As regards the applicability of Instruction No.4 of 2007, it was submitted by the Ld AR for the assessee that although no enquiry was made specifically on this issue by the Assessing Officer, he did make enquiry regarding the assessability of income under the head "capital gain". Just because no specific enquiry was made, it would not mean that the Assessing Officer was not aware of the instruction and that the same was not applied by him in coming to the conclusion that the income of the assessee was assessable under the head "capital gain". It was, therefore, contended by him that the impugned order of the Ld CIT u/s 263 be quashed.
22. The case was subsequently fixed for clarification when the Ld AR for the assessee was asked to clarify following points:-
1) Whether a partnership firm can exist for the purpose other than carrying on a business.
2) Purport of Hon'ble jurisdictional High Court's decision in the case of CIT v. M/s National Travels Services I.T.A. No.223 of 2010,
3. Effect of holding of shares of M/s Kwality Ice -creams India Pvt.
Ltd. by the firm.
23. As regards the first query, it was submitted by the Ld AR for the assessee that the assessee intended to do business of money lending. Though there was no evidence of commencing business of money lending, as the assessee intended to do so, it was contended by the Ld AR for the assessee that the partnership was valid. It was also contended by him that a partnership could exist for a purpose other 16 ITA No1779/Del/11 than the purpose of carrying on business. However, no authority in support of the above contention could be furnished by the Ld AR for the assessee.
24. With reference to the Hon'ble jurisdictional High Court's decision in the case of CIT v. M/s National Travels Services (supra), it was contended by the Ld AR for the assessee, that there is a factual difference between that case and the present one. In the case of National Travels Services (supra), firm's money was invested in the shares of the company whereas in the present case the share holders invested their own money for acquiring shares of the company. Thus, it was contended that the ratio laid down by the jurisdictional High Court in the case of M/s National Travels Services Ltd. (supra) was not applicable in the facts of the present case.
25. As regards the issue of holding shares of M/s Kwality Icre-cream India Pvt. Ltd., it was submitted by the Ld AR for the assessee that the same was received on capital account and not as loan or advance. Even otherwise, amounts were received from the said company prior to the date when the firm became the owner of such shares. In such circumstances, it was contended by him that section 2(22)(e) would have no application. Reliance was placed on the following case laws:-
1. CIT v. Late CR Dass 157 DTR 201.
2. CIT v. HK Mittal 219 ITR 420 (Alld.).
3. CIT v. Smt. S. Parvathani Amal 219 ITR 661 (Kerala).
4. DCIT v. Oskar Investment Ltd. 98 ITD 399 (Bom.).
26. The Ld DR, on the other hand, emphasized that the merit of the issues involved, that is as to whether a particular amount was 17 ITA No1779/Del/11 assessable as income or not, is not material for deciding the issue as to whether ld CIT was justified in assuming jurisdiction u/s 263 of the Act. In the present case, the books of accounts of the assessee were not examined by the Assessing Officer. The books of accounts were also not audited. The examination made by the Ld CIT was necessitated because no such examination was made by the Assessing Officer. The Ld CIT has applied his mind to the facts of the case whereas there is no indication that the Assessing Officer has done so. Thus, it was contended by him that the Ld CIT was justified in assuming jurisdiction u/s 263 of the Income Tax Act, 1961.
27. In the rejoinder, the Ld AR for the assessee submitted that it was incorrect to say that books of accounts were not examined by the Assessing Officer. He reiterated his submission that the impugned order of the of the Ld CIT may please be cancelled.
28. When asked by the Bench regarding the implication of the judgment of Hon'ble jurisdictional High Court in the case of Dalmia Cement Pvt. Ltd. wherein the Hon'ble High Court has held that despite specific and pointed queries in section 143(3) assessment, the Assessing Officer cannot be said to have formed any opinion if explicit opinion was not recorded, the Ld AR for the assessee was not able to enlighten us on the same.
29. We have heard the parties and perused the record. We have also gone through the case laws relied on by either of the parties. Before deciding the issues at hand, we would like to enumerate/reproduce the relevant material.
i)The impugned assessment order dated 8.12.2008 is as under:-
18 ITA No1779/Del/11 "The assessee firm filed its return of income on 29.07.2006 declaring income of `.418,84,945/-. The case was processed u/s 143(1) of the IT Act on 31.3.2008. Subsequently the case was selected for scrutiny under CASS. Notice u/s 143(2) of the Income Tax Act dated 18.7.2007 was sent through Speed Post. Another notice u/s 142(1) along with questionnaire dated 8.9.2008 was issued and served on the assessee.
In response to the said notice Shri Kedar Mishra and Ms. Sweety Kothari, ARs of the assessee firm attended the case from time to time and the case was discussed with them.
During the year under consideration, the assessee firm is engaged in the business of money lending and derived income from business capital gain. Details were filed and examined on text check basis.
In view of the above, the returned income of the assessee is accepted.
Assessed at an income of `.418,84,945/-. Issue necessary forms, give credit to repaid taxes, charge interest as per the provisions of the IT Act.
(Sd/-) (Ravinder Maini) Assessment. CIT, Circle-32(1), New Delhi.
19 ITA No1779/Del/11
ii) As per order sheet entry for assessment effective hearing started on 21.11.2008 and the same was completed on 8.12.2008 on which date the assessment order was passed (Departmental paper book page 13-14). As per assessee's paper book page 65, notice u/s 142(1) was issued on 8.9.2008 fixing hearing on 16.9.2008 but there is no order sheet entry to that effect. In the order sheet, there is entry dated 21.11.2008 onwards.
iii) On 21.11.2008, the following details were asked for:-
Present Mr. Kedar Mishra, AR. Furnished reply, which is put on record. Requested to bring remaining details along with the following details/documents:-
- If the accounts have been audited or not?
-provision of audit report.
- Licence of money lending.
- POA.
- Separate books for stock-in-trade and investment assets.
- If provisions of sec. 94(7) /94(7)/94(8) applicable or not.
- Dividend details.
-Expn. Regarding STCG (generated during Fourth quarter Jan- Mar).
- S.T.G.C. on tax exempted mutual fund.
- Latest partnership deed.
- Addition to Capital (source).
-Loans & advances given.
- Provisions.
iv) First partnership deed as entered into on 12.7.2005. Para 2 of page 1 of the partnership deed reads as under:-
20 ITA No1779/Del/11 "Whereas the first, second, third and the fourth parties aforesaid have decided to form a partnership for the purpose of doing business w.e.f. 12th July, 2005 admitting the first & second partners as working partners without capital and hence formed the partnership."
Para 2, page 2 of the deed reads as under:-
"That the business of the firm shall be comprising of investments in stocks, shares, debentures, bonds, mutual funds, or any other securities of lending of monies for interest, or on other terms and conditions out of own fund or arranged funds in the name of the firm or such other names as may be mutually agreed to among the partners and for this purpose borrowing monies from any source or sources including banks, financial institutions, partners and or their associates or associated concern or relatives and other persons on such terms and conditions by offering as securities assets of the firm, partners, their associates concerns or relatives that may be mutually agreed among the partners from time to time."
v). The Second partnership deed was entered on 31.8.2005. Para 2 of the page 2 reads as under:-
"That the firm shall invest in stocks, shares, debentures, bonds. Mutual funds or any other securities and carry on the business of lending of monies for interest, or on other terms and conditions out of own funds or arranged funds in the name of the firm or such other names as may be mutually agreed to among the partners and for this purpose borrowing monies from any source 21 ITA No1779/Del/11 of sources including banks, financial institutions, partners and or their associates or associated concerns or relatives and other persons on such terms and conditions by offering as securities assets of the firm, partners, their associates, associated concerns Or relatives that may be mutually agreed among the partners from time to time."
vi). As per copy of account of KPF (P) Ltd. in assessee's books of accounts till 30.8.2005, total amount of `.9.75 crores were received, similarly, total amount of `.30 crores were received till 30.8.2005 from the other partner company (APB 119-120).
vii). Subscription to mutual fund made till 30.8.2005 amounted to `.31.50 crores (APB 155).
viii).Note No.3 of Schedule-16 of audit report of Kwality ice cream (India) Pvt. Ltd. reads as under:-
Particulars in respect of investment in partnership firm of M/s Wig Investments in which directors are interested/partners.
Name of partner Capital as at Share of
st
31 March 2006 profit
(`.). %
Kwality Ice cream(India) Pvt. Ltd. 291,998,70 50
Kwality Processed Food Services
& Equipment Pvt. Ltd. 107,299,508 20
Mr. Pradeep Wig (HUF). 9,999.508 20
Mrs. Neera Wig. 5,499.754 10
--------------------------- --------------414,797,540 100
--------------------------- ------------- The partnership was formed on 12th July, 2005.
22 ITA No1779/Del/11
ix). Similarly, Note No.2 of Schedule-15 of the audit report of M/s Kwality Processed Food Services & Equipment Pvt. Ltd.
reads as under:-
--------------------------------------------------------------------------------------------------- Particulars in respect of investment in partnership firm of M/s Wig Investments in which directors are interested/partners.
Name of partner Capital as at Share of
31st March 2006 profit
(`.). %
Kwality Ice cream(India) Pvt.Ltd. 291,998,70 50
Kwality Processed Food Serrvices
& Equipment Pvt. Ltd. 107,299,508 20
Mr. Pradeep Wig (HUF). 9,999.508 20
Mrs. Neera Wig. 5,499.754 10
--------------------------- --------------414,797,540 100
--------------------------- ------------- The partnership was entered into on 12th July, 2005.
x) Share of profit/loss of the partners as per Ist & 2nd Partnership Deeds are as under:-
--------------------------------------------------------------------------------------------------
Partner Ist Deed 2nd Deed
Profit Loss Profit Loss
Ist 25% 50% 20% 67%
2nd 25% 50% 10% 33%
3rd 40% Nil 50% Nil
4th 10% Nil 20% Nil
With certain conditions.
23 ITA No1779/Del/11
30. Perusal of the above material would show that the issues involved were quite complex to which the Assessing Officer did not apply his mind and mechanically accepted the submissions of the assessee without any cogent reasons.
31. We also agree with the submissions of the Ld CIT (DR) that the issue before us is not assessibility of any amount on merit. We are to decide the issue of jurisdiction of the Ld CIT u/s 263 of the Act. We would, therefore, not discuss the submissions of the ld AR for the assessee on the issue of assessibility of any amount as income of the assessee.
32. It is not disputed that the transactions entered into by the assessee were with reference to mutual funds, the details of which are available in assessee's paper book pages 160 to 167. All the transactions were entered into from Ist August, 2005 to 31st March, 2006 i.e. within a period of 8 months. The transactions were made in the portfolio of 3685594217 . It has also been stated by the Ld AR for the assessee that all the transactions were through portfolio manager to whom portfolio management fees has been paid. The assessee did not enter into any share transaction during the year under consideration. The current value of the holding of the assessee in the portfolio of 3685594217 as on 31.3.2006 was `.33,18,31,674/-.
33. From the above facts, it is clear that the assessee did not enter into any independent transaction during the year under consideration.
All the transactions were made through portfolio managers. If it is so, the nature of transactions would depend on the terms of PMS agreements. We find that copies of PMS agreements were furnished by the assessee only before the Ld CIT. Thus, the submission of the Ld AR 24 ITA No1779/Del/11 for the assessee that the Assessing Officer had made all requisite enquiry as per Board's Circular No.4 / 2007 does not appear to be borne out of the record.
34. Also from the Profit & Loss Account of the assessee available on assessee's paper book page 19 and computation of income available on APB 17, we find that the assessee has reduced portfolio management fee of `.3,73,053/- for arriving at taxable capital gain. From the above, it does not appear that the Assessing Officer has applied his mind while passing the cryptic one page order which we have reproduced earlier.
35. The Ld CIT ,it appears ,was of the prima facie opinion that either the income of the assessee should be assessed under the head business income or if the same is assessed under the head capital gain, the partnership deed entered into by the parties would amount to a device for utilization of the funds of the two partner companies by the share holders who are partners in the assessee firm. The Assessing Officer did not enquire into the above issue and therefore the Ld CIT set aside the impugned order with the direction that the Assessing Officer should make all necessary enquiries and come to a conclusion as per law. The above view of the ld CIT appears to be quite reasonable in the facts narrated by us herein above. It is un- disputed proposition of law that no partnership as per the Indian Partnership Act, 1932 can come in to existence for any purpose other than that of carrying on business. If the partnership on the basis of which the assessee came into existence was not carrying on any business such partnership deed would be a invalid deed and in such circumstances, and the facts obtained in the present case, possibly the prima facie opinion of the Ld CIT that the partnership was entered into 25 ITA No1779/Del/11 only to utilize the funds of the so-called partner companies by the other partners of the assessee firm may be correct. Even otherwise, as per the partnership deeds, initial capital contribution made by KICIPL and KPFS&EPL were to be 2000 lakhs and 500 lakhs respectively. There is no provision for fixed capital. As per copy of capital accounts, the maximum credit balance in the capital accounts of the two companies during the year were Rs.3000 lakhs and Rs.1073 lakhs(approx) respectively( APB 119-120). We have noticed that M/s Kwality Processed Food Services & Equipments Pvt. Ltd. contributed shares of M/s Kwality Ice Cream India Pvt. Ltd. at `.4,88,00,000/- as its capital in the assessee firm. The Assessing Officer did not enquire into this aspect of the case. From the details filed by the assessee before the ld CIT during the 263 proceedings, namely, the photo copy of balance sheet, Profit & Loss A/c of M/s Kwality Ice Cream India Pvt. Ltd., and M/s Kwality Processed Food Services & Equipment Ltd. available in assessee's paper book pages 129 to 154, it is noticed that the total number of shares issued by M/s Kwality Ice Cream India Pvt. Ltd. were 16000 out of which 6034 equity shares were contributed by M/s Kwality Processed Food services & Equipment Pvt. Ltd. as its share capital in the assessee firm. Thus, clearly section 2(22)(e) was attracted in assessee's case if the [partnership deed was held to be a mere device.
36. In view of the discussion made above, we are of the considered opinion that the Ld CIT was justified in coming to the conclusion that the impugned assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue as the Assessing Officer has failed to take into consideration Circular No.4/2007 dated 15.6.209097 and Instruction No.1527 dated 31st August, 1989 of the 26 ITA No1779/Del/11 CBDT while computing the total income of the assessee. Thus ground No.1 taken by the assessee is rejected.
37. As regards ground No.2 & 4 taken by the assessee on the issue of applicability of section 2(22)(e)of the Act, we have discussed the impugned issue in the earlier part of this order. It is not disputed by the assessee that the assessee firm was holding more than 10% voting power in the company M/s Kwality Ice Cream India Pvt. Ltd. This aspect was not at all investigated by the Assessing Officer. The Ld CIT in his order u/s 263 of the Act has directed the Assessing Officer to enquire as to whether the partnership deed by which the assessee came into being was a device or not and if it was a device whether section 2(22)(e) of the Act was attracted in assessee's case. In the facts narrated by us, we are of the considered opinion that the ld CIT was quite justified in giving the above direction. The assumption of jurisdiction u/s 263 of the Act on the above ground by the ld CIT was also justified.
38. We have not discussed the case laws cited by both the parties as factually we are of the opinion that the assessing officer did not make necessary enquiries as were required to be made by him and without application of mind has accepted in toto the submissions of the assessee. However, we find that the Ld. CIT has given specific finding on certain issues even though he has directed the AO to reframe the assessment as per the correct provisions of law and after giving the assessee adequate opportunity of being heard. We are of the considered opinion that he was not justified in giving such specific findings. The impugned order u/s 263 of the Act is accordingly modified and the AO is directed to reframe the assessment as per law without 27 ITA No1779/Del/11 being bound down by such findings of the Ld. CIT. Ground nos. 2,3 and 4 taken by the assessee are allowed to the above extent,
39. In the result, the appeal filed by the assessee is allowed to the above extent.
40. Order pronounced in the open court on the 25th day of November, 2011.
Sd/- Sd/-
(DIVA SINGH) (B.K. HALDAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dt. 25.11.2011.
HMS
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.
True copy.
By Order
(ITAT, New Delhi).
28 ITA No1779/Del/11
Date of hearing
Date of Dictation
Date of order signed by the
Hon'ble" Member.
Date of order Sent to the
concerned Bench