Income Tax Appellate Tribunal - Ahmedabad
V.D. Vachhani (Huf) vs Assistant Commissioner Of Income-Tax on 30 May, 2002
Equivalent citations: [2003]86ITD652(AHD)
ORDER
T.N. Chopra, Accountant Member
1. This group of appeals have been filed by five HUFs and seven Companies belonging to Vachhani group of cases. The appeals are directed against Block Assessments made by the Assistant CIT, Central Circle-2, Baroda, the Block period being assessment years 1987-88 to 1996-97 and further period 1-4-1986 to 26-6-1996. Since identical issues are involved and these appeals have been heard together, these are being disposed of by this single order for the sake of convenience.
2. Search operations were conducted by the Income-tax Authorities under Section 132 of the IT Act,1961 on 26-6-1996 at the residential as well as business premises of various members of the group resulting inter alia in seizure of documents and records. Various concerns of the group are engaged in the business of manufacture of ceramic tiles and food products etc.
3. These appeals have been heard on day to day basis over a period of seven days. On behalf of the Department Shri V.S. Shah, the learned Commissioner of Income-tax [(DR)] appeared and supported the impugned block assessments made by the Assessing Officer. Shri K.C. Patel, the learned Counsel appeared on behalf of one of the Companies of the group viz., Western India Ceramics P. Ltd. and stated that new management has taken over the controlling interest in the Company with effect from 1-12-1997. On behalf of another group Company viz-, Swiss Health Foods P. Ltd. which has gone into liquidation, none appeared despite service of notice on the liquidator who has been appointed by the Hon'ble Gujarat High Court for conducting liquidation proceedings. On behalf of the remaining five appellant companies as well as five HUFs of Vachhani Group, Shri S.N. Soparkar, the learned Counsel appeared.
4. The learned CIT (DR) filed separate paper books in connection with the afore-mentioned appeals. Shri K.C. Patel, learned Counsel filed paper books in two volumes in connection with the appeal in the case of Western India Ceramics P. Ltd. He also submitted compilation of 13 judgments of Hon'ble Supreme Court and various High Courts in support of his arguments. He filed synopsis of the arguments including therein references to the various papers and documents included in the paper books filed by him. Shri S.N. Soparkar, Advocate also furnished synopsis of his arguments as well as paper books in the cases of five HUFs and five companies of the group represented by him during the hearing.
5. Before we deal with various disputes arising from the group of Appeals, a few background facts may be indicated. The Kartas of five appellant-HUFs before us are real brothers being sons of Shri Devrajbhai Vachhani as under:
(1) Shri Krishnadas D. Vachhani (in short K D V) (2) Shri Maganlal D. Vachhani (in short M D V) (3) Shri Pravin Kumar D. Vachhani' (in short P D V) (4) Shri Bhagwandas D. Vachhani (in short B D V) (5) Shri Vallabhdas D. Vachhani (in short V D V) These HUFs have been filing their income-tax and wealth-tax returns at income-tax Office, Junagadh. During the course of search operations, it came to light that substantial agricultural income shown by the HUFs, by way of cash deposits in their respective Bank Accounts in Bank of Baroda, Sayaji Gunj, Baroda were admittedly non-genuine. The cash deposits are made in the Bank Accounts of the HUFs on day to day basis and subsequently withdrawals have been made for investments in various group concerns as well as for advancing loans to the family members. Over the entire block period, the total such agricultural income introduced by all the five HUFs aggregating to Rs. 8,54,53,808 is as under: -
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Asstt. KDV MDV PDV BDV VDV Year Rs. Rs. Rs. Rs. Rs.
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1987-88 374603 48828 599449 268719 373630
1988-89 275205 194379 285349 403687 318200
1989-90 392741 2522549 285125 434112 535973
1990-91 694575 2343439 411425 334469 371826
1991-92 1464677 2195751 1127731 864416 594875
1992-93 2655111 6414199 2586072 3828112 3537935
1993-94 744397 2730902 1232088 1536562 895861
1994-95 2160820 2038557 3031050 2620260 3527896
1995-96 2685806 2082450 1677362 2757708 2010328
1996-97 3157642 6180366 1996276 1523194 1658727
1997-98 350000 844528 107968 456000 275938
(1-4-96
to
26-6-96)
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14955577 28029948 13339895 15027239 14101189
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Total Deposits by the Five HUF: = Rs. 8,54,53,808/-
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6. The statements of the brothers were recorded under Section 132(4) during the course of search operations by the Authorized Officers from time to time wherein inflation of agricultural income has been admitted. Such statements are included in the various paper books filed by the learned representatives before us. For example in paper book No. II filed by Shri K.C. Patel, Advocate various such statements are included from pages 87 to 108. We may make a brief reference to such statements to bring out salient facts relevant for the present appeals at page-92 of the paper book appears the statement of Shri Maganlal Vachhani recorded on 27-6-96. In answer to question No. 3 Shri Maganlal Vachhani stated as under:
A.3 In this connection I have to state that it is very difficult for us to exactly identify the portion of the agricultural income which is not actually the agricultural income because our family members have been doing this for last many years, however, I admit that minimum of Rs. 1. 75 crores of our unaccounted income has been introduced in our books of account and returns of income in the form of agricultural income, this amount is to be collaborated with the assets generated out of these funds in the respective years which we shall verify on scrutiny of our books of account.
7. Shri Krishnadas D Vachhani videhis statement dated 27-6-96, placed at pages 88 to 91 recorded at the business premises of M/s. Western India Ceramic P. Ltd., admitted that non-genuine agricultural income was to the tune of Rs. 3 crores. The relevant portion of the said statement being question No. 7 and answer thereof is reproduced below:
Q.7 Your brother Shri M.D. Vacchani has stated under Section 132(4) on 27-6-96 that you are earning unaccounted income by way of:
a. Under invoicing b. Inflation of expenses c. Over billing of capital expenses.
Please give the details break-up of unaccounted income under the above heads.
A.7 I have consulted my brother Shri M.D. Vachhani, Shri V.D. Vachhani, Shri P.D. Vachhani and my CA Shri B.N. Gandhi and Shri J.R. Attarwala all of whom are present here and after due consultation, I state the followings:
We are not in a position to give detailed breakup of unaccounted income earned under the above heads by our group concern. However, we have approximately shown Rs. 6 crores (Six crores) as agricultural income in respective HUFs and individuals of our family during last few years. Out of which, Rs. 3 crores (Three crores) is our unaccounted income earned through the above mentioned three methods in our group concerns. The remaining Rs. 3 crores (Three crores) is our genuine agricultural income. We accept this Rs. 3 crores (Three crores) as our unaccounted income and we are prepared to pay taxes on this.
8. This statement has been further affirmed by his two brothers viz., S/Shri V.D. Vachhani and M.D. Vachhani who have put their signatures by way of affirmation thereof. Reference may further be made to the statement of Shri Krishnadas D. Vachhani recorded under Section 131 by the ADI Investigation on 3-7-1996 at the Income-tax Office, Baroda. This statement is placed at pages 97 to 100 of the above paper book. The relevant extracts, being answers to question Nos. 2 and 3, read as under:
Q.2 During the course of search proceedings you and your brother, Shri M.D. Vachhani have admitted to having bogus agricultural income to the tune of Rs. 3. 00 crores. Please state in what assets this bogus income has been invested ?
Ans. I have consulted my brother, Shri Pravin Vachhani and state that the above bogus income has been invested in the form of share capital of the following companies:
M/s. Western India Ceramics Ltd. -Rs. 3,00,00,000 I confirm that out of the total share capital of Western India Ceramic Ltd. Rs. 3,00,00,000 is out of bogus agricultural income.
Q.3 It is seen that you have shown agricultural income from land in Upleta and various lease lands in Chokari. Kindly give the bifurcation of the basis on which agricultural income was from the above land?
Ans. 20 per cent of our agricultural income shown is from land owned by us at Nagvadar, Upleta and remaining 80 per cent is from lease land at Chokari. We do not have any record regarding the basis of bifurcation of this income. However, the above approximation is on the basis of area of land at both the above places.
9. The Revenue Authorities have made detailed inquiries with regard to the ownership and cultivation of agricultural lands wherefrom agricultural income has been claimed by five HUFs of the group. There are mainly three categories of agricultural lands where from agricultural income has been claimed by the five families.
(1) Agricultural income from leased land at Chakhari and Kharkhadi villages (2) Agricultural income from leased land at Upleta/Junagadh (3) Agricultural income from lands owned by the HUF at Nagvadar/ Upleta.
10. With regard to the leased lands at Chakhari and Kharkhadi villages, Shri M.D. Vachhani in his statement recorded on 26-6-96 claimed that the HUFs have taken on lease a vast track of agricultural land measuring about 600 bighas at village Chakhari and Kharkhadi on lease basis from seven co-operative socieities. However, no evidence with regard to the alleged lease could be produced on behalf of the assessees. The Income-tax authorities, on the other hand, made detailed inquiries and recorded the statements of presidents of co-operative Societies in the two villages as well as the statements of Talati and Sarpanch etc. From these statements it was revealed that no lands have been leased out by the Cooperative Societies in these villages to the Vachhani HUFs. It was further revealed that Vachhani family has merely procured their signatures on blank papers possibly for fabricating evidence of lease. The evidence so collected by the income-tax authorities was confronted to Shri K.D. Vachhani on 4-7-1996. Shri Vachhani admitted that no such lands have been leased by the family. His answer to question No. 7, as per page 102 of the paper book Volume II reads as under:
A3 The total agricultural shown by our HUFs (five) basically belongs to places, one at Nagvadar, Upleta and others at Chokari, Karkhadi, etc. Out of the above 2 agricultural income approximately 80 per cent of the income pertains to our two lease lands at Chokari, Karkhadi etc. I have partially produced some records before you and I am also trying to find out the complete records with respect to expenses vouchers, etc. However, I clearly state that the agricultural income shown as that of five respective HUFs pertaining to Chokari, Karkhadi grams is non-genuine, I further state that at this point of time I am not in a position to bifurcate exactly the agricultural income earned from Nagvadar, Upleta and what has been earned from lease land at Chokari, Karkhadi, etc. As I have stated earlier I have shown agricultural income in the last ten years of Rs. 8,14,32,000 and approx. Rs. 30 to Rs. 40 lacs in the current Financial year which means we have approximately shown Rs. 8. 5 crores in the five HUF's. Out of the above agricultural income as I have stated earlier, the income from Chokari, Karkhadi etc. gram is not genuine arid this is nearly 70 per cent of our total agricultural income which works out to Rs. 5,95,00,000. Out of the above I have already earlier admitted Rs. 3. 00 crores as non-genuine agricultural income and this amount of Rs. 3. 00 crores is included in the figures of Rs. 5,95,00,000 which I admit as non-genuine agricultural income.
11. With regard to the lease of land by Vachhani Family at Upleta, the claim of lease was again found to be non-genuine by the Assessing Officer. The assessee producd certain copies of lease deeds in support of its claim. However, the Assessing Officer noticed that no proper addresses of the land owners were given and further that the original lease deeds could not be produced for verification. No record of expenses incurred in respect of agricultural inputs or day to day expenses as well as record pertaining to the sale of agricultural produce was available with Vachhani Family. Spot inquiries made by the Assessing Officer from Upleta reveal that no such lands have been leased out to Vachhani Family and the claim was false.
11.1 At this stage, we may point out that Shri S.N. Soparkar, the learned Counsel for the appellant-HUFs before us fairly conceded that Vachhani family has not taken any land on lease basis either in Chokari and Karkhadi or in Upleta, as falsity claimed before the Income-tax Authorities. However, the question still remains with regard to extent of agricultural income from lands owned by Vachhani family at Nagvadar, Upleta. The learned Counsel submitted that even though the agricultural income shown by the HUFs of Vachhani family are admittedly inflated and further that the earlier claim of the assessee regarding agricultural lands taken by the family on lease at Chokari and Karkhadi villages of Taluka Padra as well as the lands at Upleta are non-genuine, yet a reasonable estimate of agricultural income from the own land of the family may be adopted. The learned Counsel furnished the following chart with regard to year wise break-up of Agricultural income from Upleta as well as Padra Tehsil and also the land area from which the income has been claimed and shown by the family:
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Asstt. Net Agricultural Net Agricultural
Income earned from Income earned from
sale of produced in land at Padra
the market near
Upleta (from owned +
Lease land) (ON LEASE)
Rs. Rs.
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1987-88 2101229 1988-89 1476820 1989-90 3334324 836176 1990-91 1953936 2201798 1991-92 3268632 2976818 1992-93 15201298 3820131 1993-94 2254473 4885537 1994-95 6280183 7098400 1995-96 2962513 7551141 1996-97 5355304 9160901
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Rs. 44188712 Rs. 38530702
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12. From the aforesaid chart it would be clear that out of the total agricultural income shown by Vachhani family at Rs. 8,27,19,414 for ten assessment years in the block period [which does not include the further agricultural income shown by Five HUFs in the remaining period 1 -4-1996 to 26-6-1996 (Rs. 8,54,53,808 - Rs. 8,27,19,414 = Rs. 27,34,394) agricultural income from Padra Taluka shown at Rs. 3,85,30,702 is entirely fictitious and out of the balance Rs. 4,41,88,712, this income has been shown from the own land of Vachhani family at Upleta as well as alleged leased land at Upleta. Now, so far as Upleta is concerned, it has been clearly admitted on behalf of Vachhani family that the claim of leased land at Upleta was false and it is only the own land of the assessee at Upleta from which income has been earned. However, no break-up in respect of the own land as well as the alleged leased land at Upleta has been furnished by the learned Counsel before us or at the assessment stage before the Assessing Officer.
13. From the block assessment Orders in the cases of five HUFs of Vachhani family, it appears that adequate opportunities have been allowed by the Assessing. Officer to furnish the material and evidence so as to ascertain the extent of agricultural income during the block period from the agricultural lands owned by the assessee at Upleta. However, cooperation and assistance in this behalf does not appear to have been extended by the HUFs to the Assessing Officer. The Vachhani family holds approximately 210 Bighas of agricultural lands at villages Nagvadar, Taluka Padra. The land is being rriaintained jointly by all Vachhani Brothers. Shri Dhiraj Vachhani and Shri K.D. Vachhani have been looking after the agricultural operations. The Assessing Officer has recorded their statements on this aspect. In the statement of Shri Dhiraj Vachhani recorded during the search proceedings as well as during the assessment proceedings, he has stated that he has managed labourers and supervising the agricultural operations on monthly payment basis. However, he stated that no records whatsoever regarding the agricultural expenses or sale of agricultural produce have been maintained by him. According to him, such records were being maintained by Shri V.D. Vachhani. When Shri K.D. Vachhani was questioned on this aspect, he confirmed that he was mainly managing funds and agricultural inputs without directly supervising the agricultural operations. He further confirmed that no details of expenses incurred for agricultural purposes have been maintained by him. The Assessing Officer has indicated in the Block Assessment Orders of Vachhani HUFs that during the search operations cash book and ledger for years 1992-93 to 1995-96 were found which show credit or agricultural income in cash on various dates. However, despite specific opportunities in this behalf, sale bills in support of credit entries have not been produced. Similarly with regard to expenses debited in these books, no bills or vouchers have been produced. Further, the assessee-HUFs also could not produce any books of account for the remaining assessment years covered under the Block Period despite specific opportunities allowed in this behalf. The Assessing Officer has also perused 7/12 records in respect of own lands of the family and noticed that the records indicate the cultivation of cotton, ground-nut and castor only whereas the assessee claims that the family has also been cultivating wheat, Teel etc. The Assessing Officer has worked out the average agricultural income of each of the assessee-HUFs over seven assessment years i. e. assessment years 1980-81 to 1986-87 and the same is considered to be the net agricultural income for the Financial Year 1985-86. On the basis of Index rates of wholesale price of agricultural products published by the Government of India and proceeding on the basis that the Index for the Financial Year 1985-86 is 129. 1, the Assessing Officer has proceeded to work out the agricultural income of the assessee from own land at Upleta and work out the inflation of agricultural income in respect of each HUF over the block period as under. The Assessing Officer treated the inflation of agricultural income as undisclosed income in the Block Assessments:
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Name Total Agricul- Total Agricul- Difference
HUF tural income tural income Taxed
shown estimated by substan-
the AO. tively as
undisclosed
income
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V.D. Vachhani-HUF 1,41,01,189 25,09,288 1,15,91,901 M.D. Vachhani-HUF 2,80,29,948 30,19,232 2,50,10,716 B.D. Vachhani-HUF 1,50,27,239 31,43,723 1,18,83,516 P.D. Vachhani-HUF 1,33,39,895 25,09,288 1,08,30,607 K.D. Vachhani-HUF 1,49,55,537 26,64,551 1,22,90,986
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8,45,53,803 1,38,46,082 7,16,52,533
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14. Thus the Assessing Officer made additions on substantive basis in the Block Assessments of Five HUFs aggregating to Rs. 7,16,52,533. While making the aforesaid additions, the Assessing Officer rejected the contention that since the agricultural income has been generated out of business activities of seven companies of Vachhani Group as stated by Vachhani Brothers in their statements, the deposits in the Bank Accounts of the HUFs have been fully explained and no addition in the Block Assessments is liable to be made.
15. While making the Block Assessments in the cases of Seven Companies of the Group, the Assessing Officer bifurcated the afore-mentioned aggregate addition of Rs. 7,16,52,533 in proportion to the turnover of the respective companies and made the additions on protective basis as under:
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Ratio Net Undisclosed
Income
---------------------------------------------------------------
1. Western India Ceramics P. Ltd. 62.14 4,45,24,884
2. Swiss Health Foods Pvt. Ltd. 7.62 54,59,923
3. Vimal Proteins Pvt. Ltd. 23.45 1,68,02,518
4. Gibraltern Glass and Ceramics 4.30 30,81,058
Pvt. Ltd.
5. Swiss Pack Pvt. Ltd. 0.58 4,15,588
6. Swiss Chocolates P. Ltd. 1.65 11,82,266
7. Sweety Confectionery P. Ltd. 0.26 11,86,296
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100.00 7,16,52,533
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16. The main dispute arising from the present batch of appeals on which detailed submissions have been made by the learned CIT (DR) as well as the learned Counsel appearing on behalf of the assessees, centers around the quantum of additions on account of inflation of agricultural income and whether such amount is to be included in the Block Assessments of the Companies or the Five HUFs of the Group. Shri V.S. Shah, Learned CIT (DR) strongly urged that since the unexplained investments in the form of bank deposits are appearing in the Bank Accounts of the HUFs, the substantive additions has rightly been made in the HUFs cases under the provisions of Section 69 of the Act.
17. Shri K.C. Patel, the learned Counsel appearing on behalf of Western India Ceramics P. Ltd. [IT(SS) A No. l39/Ahd/1997] supported the Department's stand and argued that the protective addition made in the Block Assessments of the Companies may be deleted. Shri S.N. Soparkar, on the other hand, appearing on behalf of Five HUFs and Five Companies of the group, argued that since the agricultural income is attributable to the business activities of the Companies, the additions on account of deposits may be sustained in the hands of the Companies and the substantive additions made in block assessments of the HUFs may be deleted.
18. The entire dispute has thus two facts; firstly the quantum of inflation of agricultural income and secondly the assessability of such income in the hands of Vachhani HUFs or Group Companies.
19. First we will deal with the quantum of inflation of agricultural income. On this issue, Shri S.N. Soparkar, argued that the estimate of genuine agricultural income made by the Assessing Officer is on the lower side since the basis adopted by the Assessing Officer is erroneous. According to the learned Counsel, there are following mistakes in the Assessing Officer's computation:
(a) The Assessing Officer has taken the average agricultural income of last 10 years and estimated the income on the basis of that average. It is submitted that 10 years is long period and average should have been restricted to 3 or at the most 5 years.
(b) The said average, in any case, was required to be enhanced by atleast 4. 27% at a yearly basis which is the growth rate achieved by the agricultural sector in the period 1980 to 1994.
(c) The Assessing Officer has applied the wholesale price index of 1985-86 as the basis and proceeded to estimate the income by extrapolating the figure by taking that index as the basis.
(d) In some cases there is actual purchase of agricultural land during the block period for which the appropriate credit is required to be given.
20. The learned CIT(DR) strongly opposed the submissions of the learned Counsel and argued that the estimate of agricultural income adopted by the Assessing Officer is at a rational basis and is liable to be upheld.
21. After careful consideration of the facts and circumstances of the case, we are inclined to uphold the estimate of agricultural income of the entire Vachhani family during the block period at Rs. 1,38,10,275 made by the Assessing Officer and uphold the addition on account of inflation worked out at Rs. 7,16,52,533. It is significant to note that Vachhani family has taken resort to explain the cash deposits in the bank accounts during the block period by making false and fabricated claim that it has taken on lease lands in Chokari and Karkhadi villages in Padra Taluka as well as in Upleta. When confronted' with the statements of the concerned land holders, the family retracted its claim and admitted that the agricultural income has been earned only from the own lands of the family in Upleta. However, despite specific opportunities allowed by the Assessing Officer, no evidence whatsoever with regard to the agricultural activities carried out by the assessees as well as details of sale bills of the agricultural products and particulars of agricultural expenses like cost of inputs etc. have been produced. The assessee has even failed to produce particulars of the Commission Agents through whom agricultural produce even from the own lands of the assessee has been sold. In fact, the entire exercise of estimating agricultural income from the own lands of the family has to be made on the basis of past figures of such income shown in the returns filed by the HUFs. There is nothing on record to indicate whether the Income-tax authorities have scrutinized the reasonableness of the agricultural income shown by the five HUFs in the earlier years and whether such estimates are reliable or not. In any case, the approach of the Assessing Officer in estimating the agricultural income based on average of last 7 years, though necessarily involving guess work, appears to be reasonable and justified on the facts of the case. Regarding the contention of the learned Counsel pointing out so called mistakes in computation, we may point out that the agricultural income shown by the assessee during the block period does not show any pattern whatsoever. There are variations in the income which are really violent variations like Vachhani family has shown agricultural income for assessment year 1987-88 at Rs. 3,73,630 whereas for assessment years 1992-93 and 1994-95 the aggregate figures of income shown are Rs. 35,37,935 and Rs. 35,27,896 respectively. As against this in the intervening year i. e. assessment year 1993-94 the aggregate income shown by the Vachhani family is Rs. 8,95,861 only. Viewed in context of these facts, we feel that it would be highly unrealistic and unreasonable to argue for adoption of a formula of mathematical precision in the backdrop of facts and circumstances of the case. We have therefore no hesitation in upholding the estimate of agricultural income from the own lands adopted by the Assessing Officer at Rs. 1,38,10,275. We have already referred to the statements of Vachhani Brothers admitting substantially varying figures of inflation of agricultural income. Shri K.D. Vachhani in his statement has admitted that 20 per cent of agricultural income is genuine. In other statement 30 per cent of the agricultural income shown has been claimed as genuine. Out of the total income of Rs. 854 lacs shown by the Vachhani family there is no dispute that the amount of Rs. 385 lacs shown from the leased lands at Padra is fictitious inasmuch as no lands have admittedly been taken on lease. With regard to the balance income from Upleta it also includes non-genuine claim of leased lands. If 20 per cent of income is taken as genuine as stated by Vachhani Brothers and this is applied to Upleta income claims at Rs. 4. 5 crores nearly, the amount of genuine agricultural income would be much less than the figure adopted by the Assessing Officer at Rs. 1. 38 crores. We feel that the Assessing Officer has been very fair and lenient in the matter of estimating the agricultural income and therefore no further relief in the matter of quantum of inflation of agricultural income is called for. The contentions of the learned Counsel for the assessee on this score are therefore rejected.
22. The second facet of the controversy is regarding the assessability of aforesaid income in the hands of five HUFs or seven companies of Vachhani group.
23. The case of the Revenue before us is that the cash deposits on various dates appear in the bank accounts of five HUFs of Vachhani group and therefore Section 69 expressly saddles these assessee-HUFs with the onus to establish the source and nature of the deposits. According to the Revenue, the assessee-HUFs have clearly admitted that the agricultural income has been substantially inflated to explain these deposits. The claim of the assessee-HUFs is that the concealed income of seven group Companies have been deposited by the HUFs in their respective bank accounts. The claim has however been rejected by the Revenue for want of evidence and substantive additions have accordingly been made under Section 69 for unexplained deposits in the bank accounts of the HUFs. Since the assessee-HUFs claimed that the deposits have been made out of concealed income of the group Companies, the Assessing Officer has made protective additions in the hands of the group Companies by way of abundant precaution. Shri V.S. Shah, learned CIT (DR) pleaded before us that substantive additions aggregating to Rs. 7,16,52,533 in the hands of the HUFs may be upheld and the protective additions made in the cases of the group Companies may be deleted. Shri K.C. Patel, the learned Counsel who appeared on behalf of Western India Ceramics P. Ltd. supported the Revenue's stand, whereas Shri S.N. Soparkar, who appeared for the assessee-HUFs as well as five companies of the group [excluding Western India Ceramics P. Ltd. and Swiss Foods P. Ltd. which is under liquidation] urged that the protective additions in the hands of the Group Companies be confirmed and the substantive additions in the hands of the five HUFs be deleted.
24. We first heard the arguments of Shri S.N. Soparkar, the learned Counsel who appeared on behalf of the HUFs and five group companies. He submitted a brief synopsis of his arguments pleading for deletion of the substantive additions made in HUFs' cases. The brief synopsis of his arguments submitted during the course of hearing is reproduced below:
1. In view of the voluminous oral and documentary evidence, it is impossible to come to the conclusion that income was not earned by the companies. As a matter of fact there is no serious dispute as to that fact.
* The statements are made by all the directors of the company during and after the search proceedings wherein the directors have not only admitted that the Company has earned unaccounted income, but have also admitted the mode of earning such income.
* Such admissions made by the directors have never been disputed, much less retracted, by the directors before the Assessing Officer.
* The returns of income filed by the Companies clearly admit the above position. ' * Even before this Hon'ble Tribunal, at the time of filing these appeals, no such dispute has been raised.
* Except for the oral arguments raised on behalf of the one Company (WICL), no attempt is made to dispute this position.
2. Once it is found that the income is earned by the Companies, the same must be taxed in the hands of the Companies. Income is to be taxed on its accrual in the hands of the person earning the same. Destination of income or its application cannot determine taxability.
* 227 ITR 172 at page 186 and 222 ITR 456 at page 468 (SC)
3. Even on the principle of diversion of income at source by an overriding title, the income can not be taxed in the hands of the Directors because there was no overriding title to deny the income to the Company in preference to the Directors.
* 190 CIT 1 (SC) and 222 ITR 456 at Pp. 469-71 (SC)
4. The question of the "lifting of the corporate veil" cannot arise in the present case at all.
* The whole concept of the "lifting of the corporate veil" presupposes that the person behind the "veil" has earned the income for his own benefit and the ostensible owner is not the real owner. This concept is directly contrary to Section 88 of the Indian Trust Act,1882 see 1994: 6 SCC 68.
* It is not disputed that the Companies are genuine entities and have substantial activities of their own.
* It is not even suggested that the corporate structure or facade is "used" for the purpose of ulterior purpose of tax evasion, and for no other purpose, and that the income is in reality earned by the HUFs only.
* The veil can be lifted to find out the identity behind the veil to determine the identity of the "real person". When the identity and genuineness of the entity is not disputed, the veil cannot be lifted to tax only some - and not all the transactions. Lifting of the veil is in respect of the "entity" and not the "transactions".
* In any case merely because the directors of the companies might have not fully accounted for the transactions of the Companies, it can not lead to a conclusion that the directors can be called upon to pay tax on such income. Otherwise this will lead to very serious anomalies. Some being -
1. Splitting and then taxing income of one person in the hands of different persons.
2. Impossibility of finalizing the assessments.
3. Section 179 will become meaningless.
4. The "income" would thereafter, belong to the directors and the company can never recover the money back from them.
25. Shri K.C. Patel, the learned counsel appearing on behalf of Western India Ceramaics P. Ltd. was next heard by us. Shri Patel at the outset, invited our attention to page 139 of the Paper Book Volume II filed by him containing the list of Directors for the financial year 1997-98 onwards and observed that new management has taken over the company with effect from 1 -12-1997 with the exit of Vachhani group from Board of Directors and induction of Patel group as Directors from December 1997 onwards. Shri Patel strongly contended that Western India Ceramics P. Ltd. has been controlled, managed and run by Vachhani family which held total way over the Board of Directors as well as General Body Meeting of the shareholders. The learned Counsel dwelt upon at length on the Doctrine of "lifting of the corporate veil" and pleaded that Vachhani group Companies, including Western India Ceramics P. Ltd. were merely helpless creatures of Vachhani family who dance to its biding. According to Shri Patel, the Revenue authorities are entitled to go behind the smoke-screen of the corporate mantle and discover the true state-of-affairs. He cited series of judgments of Hon'ble Supreme Court and various High Courts in support of his contentions that the corporate veil should be penetrated to ascertain the true nature of the transactions. Various decisions cited by Shri Patel in respect of doctrine of lifting of corporate veil are as under:
(1) CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) (2) JuggilalKamlapat v. CIT [1969] 73 ITR 702 (SC) (3) Tata Engg. & Locomotive Co. Ltd. v. State of Bihar AIR. 1965 SC 40 (4) State of UP v. Rennsagar Power Co. AIR 1988 SC 1737 (5) Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC) (6) DDA v. Skipper Construction Co. (P. ) Ltd. [1997] 89 Comp. Cas. 362 (SC) (7) Jawahar Mills Ltd. v. Official Receiver, Sha Mulchand & Co. Ltd. [1949] 19 Comp. Cas. 138 (Mad. ) (8) Shri Ambica Mills Ltd., In re [1986] 59 Comp. Cas. 368 (Guj. ) (9) CIT v. L.N. Dalmia [1994] 207 ITR 89 (Cal. ) (10) Dindas Shankar Thange v. State of Maharashtra [1998] 17 SCL 194 (Bom.) (11) PNB Finance Ltd. v. ShitalPrasad Jain [1983] 54 Comp. Cas. 66 (Delhi) (12) Jyoti Ltd. v. Kanwaljit Kaur Bhasin [1987] 62 Comp. Cas. 626 (Delhi) (13) Santanu Ray v. Union of India [1989] 65 Comp. Cas. 196 (Delhi)
26. Shri Patel argued that the statements of erstwhile Directors of the Company belonging to Vachhani group who have admittedly utilised instrumentality of the corporate entity for self-aggrandisement are self-serving statements and cannot be used to transfer their burden of tax liabilities on the shoulders of the assessee-company. The learned Counsel further submitted that the funds siphoned off by Vachhani family from group Companies under a systematic, regular and well-conceived arrangement have resulted in accretion of capital office HUFs of Vachhani group. He submitted a chart reflecting family wise accretion during the block period as under:
--------------------------------------------------------
AY 1987-88 AY 1997-98
Sr. Name Capital Capital
No. Account Account
Rs. Rs.
--------------------------------------------------------
1. Shri M.D. Vachhani-HUF 16,12,021 2,50,52,616
2. Shri P.O. Vachhani-HUF 11,55,089 1,37,48,821
3. Shri V.D. Vachhani-HUF 12,57,967 1,47,38,876
4. Shri K.D. Vachhani-HUF 13,01,874 1,56,12,646
5. Shri B.D. Vachhani-HUF 13,99,564 1,51,99,178
--------- ------------
67,26,515 8,43,52,137
--------------------------------------------------------
27. From the aforesaid chart Shri Patel submitted that the total capital of five HUFs has increased from Rs. 67,26,515 as on 31-3-1987 to Rs. 8,43,52,137 as on 31-3-1997 which shows that the HUFs have acquired over the years substantial capital which unquestionably belongs to them and is exclusively owned and enjoyed by them. These funds exclusively owned by the HUFs cannot in any manner be included in the income of the Companies including Western India Ceramics P. Ltd. Shri Patel further added that any such proposition to include the funds of the HUFs in the income of the Companies would be contrary to all provisions of taxing statutes as well as the theory of real income endorsed and approved by the Hon'ble Supreme Court in various decisions.
28. The learned Counsel further argued that insofar as the assessee-company, namely, WICPL is concerned, no evidence has been brought on record to support and substantiate any addition on the ground of under invoicing of sales or inflation of expenses as alleged by the erstwhile Directors of the Company. Shri Patel added that the accounts of the Company are subject to audit and statements recorded by Revenue authorities at the back of the assessee-company regarding charging of on money or inflation of expenses have not been confronted to the assessee and such evidence therefore cannot be utilised for drawing any adverse conclusion against the assessee-company. Concluding his arguments, the learned Counsel stated that he supports the case of the Revenue for deleting the protective additions in the cases of group Companies.
29. Shri V.S. Shah, learned CIT (DR) reiterated the Department's case and argued that since the HUFs have not discharged the onus under Section 69, the substantive additions made in the cases of HUFs are liable to be upheld and as necessary corollary the protective additions in Companies' cases may be deleted.
30. We have carefully considered the rival submissions and gone through the orders of the Revenue authorities in the cases of HUFs as well as group Companies on the issue. The facts and evidences as reflected in the paper books filed by the learned representatives before us have also been gone through. We have also closely perused the various judicial authorities cited before us.
31. The basic question which falls for determination is whether five HUFs of Vachhani group have explained the source and nature of the cash deposits appearing in their respective bank accounts during the block period. In the regular returns of income filed by these HUFs these deposits have been shown as made out of agricultural income of the respective HUFs. However, during the course of search proceedings it has been admitted by the Kartas of HUFs that the agricultural income has been inflated and the HUFs have taken resort to fabricating non-genuine lease agreements for the ulterior motive of explaining the cash deposits as agricultural income. We have already discussed hereinbefore that inflation in the agricultural income claimed by the assessee-HUFs amounts to Rs. 7,16,52,533 and therefore cash deposits to this extent in the bank accounts of the HUFs remained unexplained and are liable to be treated as undisclosed income under the provisions of Section 69 of the Act.
32. There is no denying the fact that the bank accounts and the deposits made therein belonged to the assessee-HUFs and these funds are owned, possessed and enjoyed by the HUFs. Such ownership is uncontested, undisputed and unquestioned. The onus lies upon the HUFs to explain the source and nature of these bank deposits. In our opinion, such onus cast under Section 69 is not discharged by the statements of the Kartas of these HUFs that these amounts have been received on account of under-invoicing of sales, inflation of expenses by the group Companies. Such statements by itself would not absolve the HUFs from the onus cast under the provisions of Section 69. From the facts on record, we find that conflicting and contradictory versions on the issue have been given in the cases of the HUFs as well as Companies of the Group. In the cases of Companies, block returns have been filed and that too after completion of the block assessments showing nil figure in respect of undisclosed income. These returns are signed by Vachhani Brothers who are Directors of the Companies and also are karats of their respective HUFs. Further while filing the appeals by the group companies before the Tribunal, specific grounds have been taken against the protective additions made by the Assessing Officer on the ground of under-invoicing of sales, inflation of expenses and over-billing of capital expenses. The grounds in the cases of group Companies being ground Nos. 2 and 3 in each appeal are identically worded (excepting that the quantum of addition is different). In the case of Swiss Chocolate P. Ltd. IT (SS) Appeal No. 42 (Ahd) of 1997 in ground Nos. 2 and 3 read as under:
2. The Learned Assessing Officer has erred in not properly appreciating the various detailed submissions made before him and consequently order in holding that the appellant has indulged into:
(a) Under-invoicing of sales,
(b) Inflation of expenses, and
(c) Over-billing of capital expenses.
In any case the estimate of alleged unexplained income on that basis was highly exaggerated and excessive.
3. The learned Assessing Officer, Baroda has erred in law and on facts in adding, on protective basis, a sum of Rs. 11,82,266 in the hands of assessee company on account of alleged unaccounted income for the block period. The appellant has earned no such income. In any case the quantum of such income is highly excessive. Apart from this, distribution of alleged unexplained income between different companies solely on the basis of turnover is totally unscientific, arbitrary and notional. The addition, therefore, deserves to be deleted.
These group Companies have thus categorically denied earning of any income on account of under-invoicing of sales and inflation of expenses etc. while filing the returns of income as well as while filing the appeals before the Tribunal. The block assessments in the Companies cases have been made in June,1997. Despite lapse of about five years no tax has been paid either by the HUFs or by the Companies of the group. We feel anguished to note that even after unequivocal admission by Vachhani HUFs that they have resorted to fabricating lease agreements as well as inflating agricultural income and depositing their concealed income under the garb of agricultural income, such undisclosed income has not been shown in the returns filed under the block assessment procedure. During the search operations the Directors gave numerous statements, which were categorical and unequivocal, on sworn testimony to the effect that they have indulged in under-invoicing of sales and inflation of expenses in the cases of group Companies, yet while filing the returns in the cases of group Companies on one hand as well as HUFs on the other, such undisclosed income has not been reflected. Further more, in the appeals filed before the Tribunal both types of entities HUFs as well as group Companies have raised the grounds challenging any additions on account of under-invoicing of sales or inflation of expenses. It is indeed a sad spectacle which shows callous and blatant disregard for truth, integrity and rectitude. When confronted with the inherent contradictions in the stand taken by two sets of entities the HUFs and the group Companies by the Bench during the hearing, Shri Soparkar came up with the belated offer that the protective additions in the cases of Companies may be confirmed. However, Shri K.C. Patel, representing Western India Ceramics P. Ltd. very strongly opposed the plea and argued that it was too late in the day for making such offer on behalf of the group Companies when Western India Ceramics P. Ltd., once considered the flagship of Vachhani group, has changed hands and taken over by Patel Management and the other Company viz., Swiss Foods P. Ltd. has gone into liquidation. Shri Patel further added, invisibly agitated tone that after fleecing two main Companies of the group and selling off its shareholdings in one Company and pushing the other into the lap of liquidation, Vachhani group are not entitled to cast off the resultant tax liability, by making such illusory concessions which are neither genuine nor sincere. We see merit in the arguments of Shri Patel that mere statements of erstwhile directors of the Companies would not enable the Vachhani HUFs from transferring the tax liabilities of the HUFs to the Companies of the group. In our opinion, the assessee HUFs have failed to discharge the onus under Section 69 of the Act. The Assessing Officer in our opinion is fully justified in holding that no evidence has been furnished during the assessment proceedings of the Five HUFs for linking the cash deposits with the income and funds of the Companies of the group.
33. Without prejudice to our findings as above, we may examine the merits of the substantive additions in the hands of the assessee-HUFs, proceeding on the basis that the cash deposits have been made out of concealed income of the group Companies received/earned by under-invoicing of sales and inflation of expenses etc. Even if this version strongly pleaded and argued by Shri Soparkar is to be accepted, we are of the view that the income has to be assessed substantively in the hands of the HUFs in the light of realities and actualities of the situation hereunder the assessee HUFs have received the income by utilizing instrumentality of corporate entity as mere puppets. The facts are undisputed that the group Companies are under the direct control and management of Vachhani Brothers who have total control over the Board of Management as well as General Body Meeting of Shareholders. Under a systematic plan and well organized arrangement the income generated through instrumentality of the corporate entities of the Group have been sliced away by the HUFs. It is an established proposition increasingly accepted in the Anglo Saxon jurisprudence as well as in America and other countries that the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. Various classes of cases where the concept of corporate entity should be ignored and the veil drawn aside have been spelt out by various judicial authorities as well as eminent jurists from time to time and the ghost of Salomon v. Salomon & Co. Ltd. 1897 AC 22 has since been laid to rest. While it is not necessary for us to enumerate all cases where the corporate veil can be penetrated, one relevant to us is "when the corporate personality is being blatantly used as a cloak for fraud or improper conduct". [Principles of Modern Companies Law Edition 1979 at page 137]: Pennington's Company Law,5th Edition 1985, at page 53, also states that:
where the protection of public interests is of paramount importance, or where the company has been formed to evade obligations imposed by the law", the court will disregard the corporate veil. A professor of law, S. Ottolenghi, in his article From Peeping behind the Corporate veil, to Ignoring it Completely says "the concept of piercing the veil, in the United States is much more developed than in the U.K. The motto, which was laid down by Sunburn J. and cited since then as the law, is that when the notion of legal entity is used to defeat public convenience, justify wrong, protection fraud, or defend crime, the law will regard the corporation as an association of persons. The same can be seen in various European jurisdictions". (1990) 53 Modern Law Review 358 Indeed, as for back as 1912, another American Professor, L Maurice Wormer, examined the American decisions on the subject in a brilliantly written article piercing the Veil of Corporate Entity [published in [1912] XII Columbia Law Review 496] and summarised their central holding in the following words:
When the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime, the courts will draw aside the web of entity, will regard the corporate company as an association of live, up-and-doing, men and women shareholders, and will do justice between real persons.
The various decisions of the Hon'ble Apex Court as well as High Courts cited by Shri K.C. Patel, the learned Counsel for Western India Ceramics P. Ltd., upheld the doctrine of lifting of the corporate veil particularly if it is used for violation of tax legislation or welfare legislation. Few such decisions may be considered at this stage.
34. In Shri Meenakshi Mills Ltd. 's case (supra) it has been held that the reality of the transaction would have to be seen keeping in view if the entire transactions formed part of an arrangement or scheme to circumvent tax obligations.
35. In Juggilal Kamlapat's case (supra) it has been held that the Income-tax authorities were entitled to pierce the veil of corporate personality and look at the reality of the transaction. The Court further observed that it was true that from the juristic point of view the company was a legal personality entirely distinct from its members. But in certain exceptional cases, the Court was entitled to pierce veil of corporate entity and pay regard to the economic realities behind the legal facade. The Court further observed that the judicial authorities have power to disregard the corporate entity if it was used for tax evasion or to circumvent tax obligations or to perpetrate fraud.
36. In Renusagar Power Co. 's case (supra) the Hon'ble Supreme Court observed as under:
It is high time to reiterate that in the expending of horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence. The concept of lifting the corporate veil is a changing concept and is of expanding horizons.
In this case consumption of energy by Hindustan Aluminium Corporation Ltd. from its subsidiary Renusagar Power Co. was held to be from its own source of generation. The Hon'ble Supreme Court held that corporate veil should be lifted and Hindustan Aluminium Corporation Ltd. and Renusagar Power Co. be treated as one concern.
37. We may at this stage refer to a decision in the case of Wallersteiner v. Moir [1974] 1 WLR 991 (CA), delivered by the Court of Appeal in England, which refused to allow Dr. Wallersteiner to put in a defence out of time to claim for misfeasance as a director in relation to breaches of the Companies Act. Lord Denning, M.R. made the following observations in that connection at page 1013:
He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures - for whose doings he should be, and is, responsible.
Applying the principles enunciated in the aforesaid decisions in the context of the facts and circumstances of the instant case, the inference is irresistible that Vachhani Brothers who were Kartas of the HUFs were really the directing mind and will of the Companies, the very ego and centre of these Companies of the group. The Companies were being used as mere puppets bound hand and foot to the Directors who were Kartas of the HUFs interested in getting their family arrangement and family interest promoted and nurtured by their actions. It is in the light of these facts that the income earned by Vachhani HUFs through their association with the Companies has to be assessed on substantive basis in their hands since the income unquestionably belongs to them and enjoyed by them. Thus even on the basis of self-serving statements of the Directors recorded during the search operations, the income is liable to be assessed in the hands of the HUFs on substantive basis.
38. Now we may deal with the contentions of Shri S.N. Soparkar, against assessing the income on substantive basis in the hands of Vachhani HUFs. The contention of Shri Soparkar based on the Statements of the Directors, as we have already pointed out above, are controverted by their own conduct and actions reflected in non-declaring of such income in the hands of the Companies' as well as disputing such additions by the Companies before the Tribunal.
39. Shri Soparkar has next argued that since the income has been earned by the Companies the same was liable to be taxed in the hands of the Companies on accrual basis. Firstly it is to be noted that there is no evidence on record to establish that the income of the Companies has found its way into the bank accounts of the HUFs by way of cash deposits. Secondly we have already discussed hereinbefore that on the basis of doctrine of lifting the veil of corporate personality which is fully applicable in the facts or the present case. The income has in reality been earned by Vachhani HUFs and has been received by them and deposited by them in their own bank accounts. It is only mere instrumentality of the corporate entity which has been used by the HUFs for earning the income. The decision cited by the learned Counsel in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT[1997] 227 ITR 172 does not in any manner support the arguments advanced by Shri Soparkar. In the present case, the income has been earned by the HUFs and it has accordingly reached the coffers of the HUFs. The learned Counsel has further relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Udayan Chinubhai[l996] 222 ITR 456. The present case is not a case of diversion of income by overriding title. The decision therefore does not help the learned Counsel.
40. The next decision of the Hon'ble Supreme Court in the case of Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 cited by the learned Counsel again deals with the diversion of income by overriding title which does not apply in the instant case.
41. Shri Soparkar Counsel has next challenged the application of the doctrine of lifting of corporate veil and argued that the lifting of veil is in respect of entity and not the transaction and further that since the genuineness of the corporate entity is not doubted, there is no occasion for applying the doctrine. The arguments of the learned Counsel are without merit. The true essence of doctrine of piercing corporate veil is to ascertain the reality and substance of the transaction. The substance of the transaction may be covered by the persons of corporate entity or by the arrangement entered into for concealing true form of the transaction. In the various decisions cited above, the principle has been applied even when the genuineness of corporate entity by itself is not in dispute. In Sri Meenakshi Mills Ltd. 's case (supra) the Hon'ble Supreme Court held that corporate entity has to be disregarded for ascertaining the true nature of the transaction. The genuineness of the corporate entity itself was not in question before the Hon'ble Supreme Court. Similarly in the case of Renusagar Power Co. (supra) cited above the genuineness of the subsidiary company was not in dispute, and the corporate veil was however lifted to ascertain the reality and substance of the transaction involving consumption of electricity generated by the subsidiary company. The limitations thus sought to be placed by Shri Soparkar on the doctrine of lifting of corporate veil are entirely misplaced. It would be profitable in this context to refer to the decision of the Hon'ble Gujarat High Court in the case of Shri Ambica Mills Ltd. (supra) wherein their Lordships of the Gujarat High Court observed that the evidence on record indicated that the managing directors were the real persons who were taking the first step towards implementation of the family arrangement and they were the persons who were pulling the strings in the main proceedings for the sanction of the reduction of capital; the corporate veil of the company has been pierced and lifted and knowledge of the company is the knowledge of the directors regarding the proceedings before the Court. In this case also the veil is lifted for ascertaining the substance of the transaction and not necessarily the genuineness of the corporate entity.
41.1 The learned Counsel has next argued that the concept of lifting the corporate veil runs contrary to Section 88 of the Indian Trust Act,1882. We are not inclined to accept the contention. The principle of lifting of corporate veil, as we have already discussed above, has been increasingly accepted in legal jurisprudence of various countries of the world and it does not in any manner runs contrary to the Indian Trust Act. Section 88 of the Indian Trust Act pre-supposes; i pecuniary advantage gained by a Director in his fiduciary capacity. In such circumstances Section 38 of the Indian Trust Act enjoins upon him to hold such advantage for the benefit of the company. The provisions would obviously not be applicable when the Directors of the Company carry out the transactions under a well planned arrangement to circumvent legislation or to perpetrate fraud. In such circumstances there is absolutely no occasion for invoking the provisions of Section 88 of the Indian Trust Act. In the instant case Vachhani Brothers have in fact operated common pre-conceived and collective arrangement endorsed and approved by the Kartas of the HUFs who are Directors and having control of Board of Directors as well as General Body of Shareholders who are key organs of the company. In such circumstances when the corporate veil is lifted, the very applicability of Section 88 of the Indian Trust Act becomes redundant. The gains arising to the Directors under such circumstances would not be governed by Section 88 of the Indian Trust Act. The contentions of the learned Counsel therefore are rejected.
42. Shri Soparkar has next argued that when a Director takes away unauthorisedly the funds of the company, the said funds are liable to be returned back to the company and can not be taxed in the hands of the Director. The proposition advanced by the learned Counsel however is not applicable in the facts of the present case. There is not even a whisper of allegation by the Companies of the group or by any party whatsoever that the funds of the companies have been taken away by the HUFs in an unauthorized manner. If at all, the statements of the Directors are to be accepted for explaining the cash deposits in bank accounts of the HUFs, the facts are undisputed that the possession and ownership of the funds are unquestionably with the HUFs. Whatever has been taken away by the Directors is under a common collective arrangement entered into by the Directors on the Board of Management of the Company who also controlled the General Body of Shareholders. Thus it can not be said that any funds of the companies have been misappropriated or taken away without knowledge of the companies. On the contrary, the entire arrangemerit has the implicit approval of the Board of Directors as well as the General Body of Shareholders and these executive organs of the group Companies are unquestionably in the knowledge of entire scheme and the arrangement under which income has been received by the Directors and deposited in the bank accounts of the HUFs.
42.1 Regarding various decisions cited by Shri Soparkar in support of his contention, we have gone through these decisions and find that these are clearly distinguishable on facts. In CIT v. A.R. Adaikappa Chettiar[l973] 91 ITR 90 (Mad. ) it has been held that the user of car by the director without authority or knowledge of the company can not be considered as a perquisite under the provisions of Section 2(6C)(m) of the Income-tax Act,1922. The Court held that the benefits allowed to the director should be by some sort of arrangement with the company. As we have already discussed hereinbefore, the karats of the HUFs held the total control over the operations of the group companies and if any funds have been passed to the HUFs, these have been under well conceived arrangement entered into by the directors controlling the executive organs of the group companies. The Madras High Court decision rendered in the context of its own facts therefore does not assist the learned Counsel.
42.2 The next decision cited by Shri Soparkar has been rendered by the Hon'ble Madras High Court in CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629. In this case, the Managing Director of the company had been allowed interest free loans. The Court held that it can not be said that the sanction of such loans were unauthorized. According to the High Court, the company should be deemed to have granted a benefit to the director to the extent it allowed the Managing Director to use its funds without any obligation to pay any interest thereon. This decision in fact supports the view taken by us that the amounts received from the group companies, if any, by the HUFs can not be treated as unauthorized and are liable to be assessed as income of the HUFs. The other decisions relied upon by the learned counsel viz., CIT v. G. Venkataraman [1975] 101 ITR 673 (Mad. ) CIT v. G. Venkataraman [1978] 111 ITR 444 (Mad. ) and MM. Mehta v. CIT [1979] 117 ITR 362 (Cal. ) have also been gone through by us and in our opinion do not advance the case of the HUFs.
43. At this stage, we may point out that the deposits in the HUFs accounts have been utilised for making loans to Directors in their individual capacity as well as other members who have further invested by way of acquisitions of share capital as well as deposits in the group Companies. This share capital as well as deposits appearing in the names of family members have continued unchanged without any modification regarding ownership of such moneys as reflected in the books of account of the Companies. During the course of hearing the Bench put a specific question to Shri Soparkar that if the funds invested by the Directors and family members with the Companies are out of concealed income of the Companies and belong to the Companies, why necessary entries changing the ownership of such funds have not been made in the books of the Companies in consonance with the sworn testimony of the Directors. The specific query of the Bench did not elicit any response from the learned Counsel. On further repetition of the query by the Bench Shri Soparkar very faintly suggested that the query was not relevant to the point in issue. The inference is irresistible that ownership, possession and enjoyment of funds by the HUFs is undisputed and has been expressly accepted and acknowledged in the books of the group Companies. In our opinion it is amply clear that the arguments put forward by Shri Soparkar against the substantive additions of cash deposits in the hands of the Vachhani HUFs are factually and legally erroneous and can not be accepted.
44. For the aforesaid reasons, we sustain the substantive additions aggregating to Rs. 7,16,52,533 made by the Assessing Officer in the cases of Vachhani HUFs and delete the corresponding protective additions in the cases of the group Companies. We would summarise our findings and conclusions on the issue of assessment of undisclosed income of Rs. 7,16,52,533 in the hands of the HUFs on substantive basis as under:
(1) Section 69 cast the onus on the HUFs to prove the source and nature of deposits appearing in their bank accounts. The onus has not been discharged and therefore the deposits are liable to be treated as undisclosed income of the HUFs.
(2) The cash deposits were claimed to be out of agricultural income as per stand taken in the regular assessment proceedings relating to the block period. However, subsequently when falsity of the claim came to light during the search operations, the HUFs attempted to explain the cash deposits on the ground that these are out of concealed income of the group Companies received on account of under-invoicing of sales and inflation of expenses etc. However, no evidence linking cash deposits with the concealed income of the Companies has been furnished by the HUFs. The Claim is based on the statements of the Directors which are at variance with their own conduct in the matter of filing the returns of the Companies under the block assessment procedure as well as disputing the income in the appeals by the said companies before the Tribunal. Moreover, even after pleading that the money belonged to the Companies, share capital as well as deposits made by the Directors as well as other family members continued to be acknowledged as genuine in the books of the group Companies, (3) Assuming but not admitting that the cash deposits are out of income due to under-invoicing and inflation of expenses indulged by the Directors, the facts of the case indicate that such income has been earned by Vachhani Family by virtue of their exclusive control and management of the group Companies and these corporate entities have been utilised under a well conceived arrangement to siphon of the funds for the benefit of the Vachhani family. Therefore on this basis also the income is liable to be assessed in the hands of the HUFs on substantive basis as done by the Assessing Officer. We therefore uphold the substantive additions in the hands of the five HUFs and delete the protective additions in the hands of seven Companies.
45. The next common issue in the cases of the Companies of the group involved in the present batch of appeals relates to claim of deductions under Chapter VIA of the Act like deductions under Section 80HH/80-I etc. in relation to undisclosed income. The learned Counsel placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Electrotherm India Ltd., in IT (SS) Appeal No. 38 (Ahd) of 1997 dated 29-12-1998 a copy of the Tribunal's decision has been placed on record. The learned Counsel further pointed out that the Hon'ble Gujarat High Court has upheld the conclusion of the Tribunal vide its order dated 5-7-2000 and held that no substantial question of law arises. Respectfully following the orders of the Tribunal as well as the High Court, we are inclined to accept the submissions of the learned Counsel that the assessee would be entitled to deduction under Chapter VIA in relation to undisclosed income included in the block assessment. This is of course subject to the relevant provisions as contained in Chapter VIA for allowing various deductions and relief to the assessee.
46. Now, we take up the remaining grounds in the cases of Companies of the group.
Western India Ceramics P. Ltd., Baroda IT(SS) Appeal No. 139'/A hd/1997:
1. The first dispute is against the protective addition of Rs. 4,45,24,884 on account of under-invoicing as well as inflation of expenses. We have already discussed the issue above and accepted the contentions of the learned CIT (DR) that the substantive additions made in the cases of five HUFs of the group may be upheld and the corresponding protective additions made in the cases of group companies may be deleted. For the reasons discussed hereinbefore, we delete the protective addition of Rs. 4,45,24,884.
2. The next ground is against the addition of Rs. 1,10,17,624 on account of difference in closing stock. The Assessing Officer has dealt with this issue vzWepara-13 of his block assessment order. The Assessing Officer noticed that for assessment year 1996-97 the assessee has shown closing stock of Rs. 78,94,328 as on 31-3-1996. The Assessing Officer noticed that the assessee has given stock hypothecation statement to the bank showing the value of stock as on 25-3-1996 at Rs. 1,97,93,267. When called upon to explain the discrepancy the assessee explained that there was no major discrepancy in so far as the quantities of various items of stock are concerned and the discrepancy has arisen because of provisional figures of estimate basis given by the assessee to the bank authorities for availing of higher over draft facilities. The Assessing Officer, however, rejected the explanation and made an addition of Rs. 1,10,17,624 on account of difference in the two figures. The Assessing Officer further observed that there was a difference in the closing stock inventory prepared by the search party as on 26-6-1996 as compared with the stock-reflected in the books on the date of search. The discrepancy observed by the Assessing Officer comprised of the following items:
(i) Finished Goods Rs. 87,255 (ii) Raw Material Rs. 11,664
The assessee explained that the difference was minor and no addition is called for. The Assessing Officer, however, rejected the explanation and adopted the difference of Rs. 98,919 as undisclosed income of the assessee. Thus the Assessing Officer made an aggregate addition of Rs. 1,11,16,543 being sum of aforesaid two figures [Rs. 1,10,17,624 + Rs. 98,919].
2.1 Shri K.C. Patel, learned Counsel for the assessee-company strongly urged that there were no discrepancies in the closing stock and the addition made by the Assessing Officer is totally unjustified. The learned Counsel referred to written submissions made by the assessee dated 23-6-1997 during the course of assessment proceedings which are placed in the paper book-I at pages 45 to 53. With regard to the discrepancies pointed out by the Assessing Officer as on 31-3-1996 the learned Counsel invited our attention to copy of Provisional Stocks Statement submitted by the assessee to the bank as on 26-3-96 which is placed at page 269 of the paper book-II. Shri Patel stated that there is no difference in the quantities of raw materials and finished goods as per the bank statement as well as per the closing stock inventory prepared on the basis of assessee's books. According to him the comparison of the quantities of raw materials and finished goods in the two statements is placed at pages 30-31 which forms part of written submissions made before the Assessing Officer. On comparison of the two statements, Shri Patel pointed out that no major discrepancy in the quantities would be noticed. With regard to the consumable stores reflected in the Provisional Bank statement, the learned Counsel submitted that the figure is an estimate which would be apparent from the following facts:
(i) The total purchase of consumables during the entire period is Rs. 33. 20 lacs against which the stock as per bank statement is shown at Rs. 47,62,448. According to the learned Counsel the approximation in the Provisional Statement furnished to the bank is very much evident from these figures. With regard to the work-in-progress, the figures shown in the Provisional Stock Statement aggregates to Rs. 79,53,062 whereas the total raw material purchased during the year including color, transport charges comes to Rs. 386. 34 lacs. These figures further prove that the bank statement merely gave estimated figures of work-in-progress which have no reality with the facts of the case. The learned Counsel emphasized that the very fact that during the course of survey operations no excess stocks have been found by the survey party after detailed inventorisation of the stock, it further proves the veracity of the closing stock given by the assessee as on 31-3-1996. The learned CIT (DR), on the other hand, supported the order of the Assessing Officer on the issue.
2.2 We see merit in the contentions raised on behalf of the assessee. It is significant that the survey party did not notice the stock discrepancies on comparing the stocks as found during the search operations and the stocks as reflected in the stock registers of the company. This in our opinion is a very material and significant fact. The discrepancy pointed out by the Assessing Officer being Rs. 98,919 is a insignificant. No quantitative discrepancy whatsoever has been brought out by the Assessing Officer to assail the stock position as reflected in the books. Regarding the comparison of stocks as on 31-3-1996 with the Provisional Bank Statement dated 25-3-1996, we are inclined to concur with the learned Counsel that no discrepancies in respect of quantities of raw materials as well as finished goods have been brought out by comparing the closing stock inventory as per books with the Provisional Bank Statement. The very fact that the bank statement has been furnished as on 25-3-1996 and the statement is treated as a Provisional Stock Statement, would detract from the merit of any comparison with the figures in the books as on 31-3-1996. In our opinion, it is very important that the business premises of the assessee have been subjected to search operations. If there is any excess stock as on 31-3-1996, no such stock over and above the book figures appears to have come to light during the search operations conducted by the Income-tax authorities. This by itself demolished the Revenue's case for making the impugned addition on the basis of comparison with the Provisional Bank Statement. For the aforesaid reasons, we are inclined to delete the impugned addition. We may point out that even though the Assessing Officer has worked out the addition vide para-13 of the impugned assessment order in the sum of Rs. 1,11,16,543, while making computation at page 18 of the assessment order, the addition to the extent of Rs. 1,10,17,624 only has been made. We would accordingly delete the impugned addition and allow this ground.
3. The next dispute is against the addition of Rs. 80,00,483 on account of unsecured loans treated as non-genuine by the Assessing Officer. The Assessing Officer has dealt with the issue vide para-14 of the impugned assessment order. Vide said para, the Assessing Officer has reproduced the position of unsecured loans including the deposits from the dealers at the end of the previous year of each assessment year for the block period as under:
Asstt. Year Total
1987-88 57,29,597
1988-89 80,00,483
1989-90 45,70,346
1990-91 53,12,271
1991-92 29,40,271
1992-93 36,40,271
1993-94 54,55,013
1994-95 -
1995-96 4,72,000
1996-97 -
1997-98 -
(1-4-96 to
26-6-96)
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3,61,20,252
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3.1 The Assessing Officer has pointed out that the despite specific opportunities allowed to the assessee, the genuineness of the aforesaid deposits have not been proved and the confirmations have not been filed. The Assessing Officer further referred to Annexure A of the Panchnama dated 29-6-1996 in respect of premises of Western India Ceramics P. Ltd. which runs into 63 pages. Photo copies of these documents included in the Annexure are available in the paper book filed by the learned CIT (DR) before us. These documents seized from the office of the assessee company included copies of accounts of certain creditors as well as confirmation letters from these creditors which are blank and bear the signatures of the creditors. The details of such creditors as appearing in the books of the assessee as on 31-3-1993 are placed in the Revenue's paper book at page 80. The total of these credits works out to Rs. 22,85,900 as under:
Sr. No. Name Amount (Rs.)
01. Khimjibhai Jethabhai 15,000
02. Narandas Madhavbhai 19,500
03. Chunilal J. Garda 18,000
04. Ramnildar Vallabhdas 18,000
05. Manubhai Ghulabhai 19,500
06. Suresh Kumar Kanjibhai 17,000
07. Hasmukhabhai Gulabhai 19,500
08. Vinubhai Vithalbhai 18,500
09. Girdharilal Jamnadas 45,800
10. Jagdish Parshottam Devada 19,000
11. Girishbhai Babubhai 19,500
12. Jayantilal Gangadas 15,000
13. Ramesh Kanjibhai 18,000
14. Mrs. Hinaben A Makadia 15,500
15. Krushnadas Vallabhdas 31,000
16. Hiteshkumar M. Vachhani 6,500
17. Vallabhbhai Gordhanbhai 10,000
18. Harilal Jamnadas 19,000
19. Amrutlal Jamnadas 18,000
20. Dinesh Savjibhai 19,000
21. Valjibhai Arjunbhai 48,900
22. Mansukhbhai Mendapara 18,500
23. Maganbhai Ravjibhai 19,500
24. Chhaganbhai Devraj 17,10,000
25. Suresh Kumar M. Dhavbhai 17,500
26. Gikaldas Khimjibhai 19,000
27. Sureshbhai Becharbhai 18,000
28. Smt. Pushpaben A. Makadia 54,000
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22,85,900
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3.2 The Assessing Officer has mentioned that the statement of Shri V.D. Vachhani was recorded on 29-9-96 during the search proceedings at the premises of the assessee-company. The statement is placed at page 95 of the assessee's paper book Volume II. The relevant portion of the statement reads as under:
Q.2 During the search proceedings at your factory and office premises of WICL, Padra, unsigned as well as signed confirmatory letters of depositors in WICL have been found and seized as per Annexure Al dated 29-6-1996 pages 1 to 63. It is seen that all these deposits have been taken in cash and are ranging from Rs. 15,000 to Rs. 19,500. You are requested to state the genuineness of these deposits.
Ans. I have gone through the contents of Annexure A-1 and I state that all these deposits taken by our company are non-genuine and they have been introduced in our books of account from our undisclosed sources of income which have been admitted, by us in our overall group concerns and individual disclosure of Rs. 3 crore (Three Crore). [The total of these deposits as per Annexure A-l comes to Rs. 5,69,200 which I admit as non-genuine cash credits in our accounts. ] 3.3 In the impugned order the Assessing Officer has further referred to the ledger of the assessee-company for the Financial Year 1995-96 which shows cash loans received from the following Directors on various dates, the total aggregating to Rs. 5 lacs in the accounts of each Director as under:
1. Shri V.D. Vachhani Rs. 5,00,000
2. Shri K.D. Vachhani Rs. 5,00,000
3. Shri P.O. Vachhani Rs. 5,00,000
4. Shri C.B. Vachhani Rs. 5,00,000
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Rs. 20,00,000
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3.4 According to the Assessing Officer, the assessee has failed to furnish evidence regarding genuineness of the aforesaid deposits and loans and in the circumstances the maximum amount outstanding at the end of the previous year relevant to assessment year 1988-89 amounting to Rs. 80,00,483 has been treated as undisclosed income for the block period.
3.5 Shri K.C. Patel, learned Counsel assailing the impugned addition argued that the deposits and loans appearing in the books of accounts are genuine and the Assessing Officer has even levied penalty under Section 27ID for assessment year 1993-94 treating the loans as genuine. The learned Counsel referred to pages 54 to 59 of the paper book Volume I filed by him which contains penalty order under Section 27ID passed by the Assessing Officer. The said penalty order has however been cancelled by the CIT(A), Baroda vide order dated 22-6-1998, appearing at pages 60 to 63 of the paper book. The learned Counsel contended that while deleting the impugned penalty, the learned CIT(A) has held that genuine borrowings have been made by the assessee-company for meeting urgencies of business and further that these loans have been accepted as genuine by the Assessing Officer. According to the learned Counsel, once the loans have been held to be genuine and accepted in cash under exceptional circumstances, as held by the CIT(A), there is no justification for the Assessing Officer to treat these loans as non-genuine while passing the block assessment order. The learned Counsel further argued that the deposits appearing in the books of account for the various assessment years have been made by the family members and friends who regularly file their income-tax returns and are assessed to tax with the same Income-tax authority. Confirmation letters in support of genuineness of the loans have been duly filed during the regular assessment proceedings and same have been treated as genuine. According to the learned Counsel, the Assessing Officer has added the peak amount of the deposits/loans aggregating to RsjK80,00,483 without any basis and as such the entire addition deserves to be deleted. Regarding the cash loans of Rs. 22,85,900, referred by the Assessing Officer, the learned Counsel pointed out that the statement of Shri V.D. Vachhani recorded during the search proceedings contains the admission to the extent of Rs. 5,69,200 only and the said statement can not be made the basis for treating the entire cash loans as non-genuine. The learned Counsel made strong grievance of the fact that the Assessing Officer as proceeded to make the impugned addition of Rs. 80,00,483 without allowing proper opportunity to the assessee and totally ignoring the facts and evidence on record supporting the genuineness of the loan transactions.
3.6 Shri V.S. Shah, the learned CIT (DR), on the other hand, argued that the deposits aggregating to Rs. 22,85,900, as per Annexure A of the Panchnama dated 29-6-96 have been categorically admitted by the assessee-company as non-genuine. Once the credits have been admitted as non-genuine and such confession is supported by incriminating evidence, found during the search proceedings like blank letters of confirmation purportedly bearing the signatures of the creditors, it is amply established that the credits aggregating to Rs. 22,85,900 are non-genuine. According to the CIT(DR), the Assessing Officer has made the addition of Rs. 80,00,483 being the peak of unsecured loans and deposits appearing in the books of the company as on 31-3-1988.
3.7 We have carefully considered the rival submissions and gone through the facts and material placed on record. Regarding the addition of Rs. 80,00,483 made by the Assessing Officer on the basis of peak deposit for assessment year 1988-89, the approach of the Assessing Officer, in our opinion, is contrary to the express letter and spirit of the block assessment scheme as enacted by the Legislature in Chapter XVIB of the Act. Under Section 158BB of the Act, for computing the undisclosed income of the block period, the Assessing Officer has to compute the total income of the relevant previous year on the basis of evidence found as a result of search and such other material or information as are available with the Assessing Officer. The evidence found as a result of search would be evidence that has been gathered by Authorized Officer under Sections 132 and 132A of the Act. This would also include the statements recorded by the Authorized Officer during the course of search and seizure under Section 132(4). The evidence so gathered by the Authorized Officer under Section 132 alongwith other material seized, marked or inventorised would be available before the Assessing Officer when he exercises his powers to assess the undisclosed income under Chapter XIVB of the Act. In the instant case, the statements recorded by the Authorized Officer as well as the evidence found during the search operations pertain to non-genuineness of the loan as per Annexure A of the Panchnama dated 29-6-96 which have been detailed hereinbefore aggregating to Rs. 22,85,900. Regarding the loans and deposits appearing in the books of account for the various assessment years other than the aforesaid credits as per Annexure A of the Panchnam a referred to in the statement of Shri V.D. Vachhani would be outside the purview of block assessment procedure as laid down in Chapter XIV-B and of course such loan transactions would be liable to be considered by the Assessing Officer under regular assessment procedure as provided in the Income-tax Act. The View taken by us is supported by direct decision of the Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733.
3.8 Now, so far as cash deposits as reflected in the seized documents included in Annexure A-1 of the Panchnama are concerned, the aggregate of such deposits works out to Rs. 22,85,900 whereas Shri V.D. Vachhani in his statement dated 29-6-1996, reproduced hereinbefore, has stated that "the total of these deposits as per Annexure A-l comes Rs. 5,69,200 which I admit as non-genuine cash credits in our accounts". Thus, the admission of Shri V.D. Vachhani is in respect of Rs. 5,69,200 whereas the total as per Annexure A-1 of the Panchnama works out to Rs. 22,85,900. The discrepancy in the two figures appears to have been ignored by the Assessing Officer while considering the issue. It appears to us that the Assessing Officer, in his anxiety to treat the peak deposits during the block period as non-genuine, has failed to focus his attention on the scrutiny of the seized documents running into 63 pages forming part of Annexure A-1 of the Panchnama dated 29-6-1996. Photo copies of these documents, as already pointed out above, are available in the Departmental paper book. These documents considered in the conjunction with the statement of Shri V.D. Vachhani dated 29-6-96 furnish a relevant material for the purpose of genuineness of such deposits in the block assessment proceedings. The statement of Shri V.D. Vachhani admitting the deposits to the extent of Rs. 5,69,200 constitutes relevant evidence for deciding the issue of considering genuineness of such loans. However, the statement by itself would not clinch the issue and the other facts and material like the creditors being assessed to tax by the Income-tax Department and confirmation letters filed during the regular assessment proceedings by the assessee and accepted by the Assessing Officer would also have to be considered and evaluated by the Assessing Officer. We feel that the Assessing Officer should have allowed proper opportunity to the assessee to prove genuineness of the loans in question and to rebut and refute the evidence brought on record during the search proceedings. It appears to us that proper opportunity in this behalf has not been allowed by the Assessing Officer. We would therefore remit the issue concerning the genuineness of loans as per Annexure A-1 of the Panchnama, to the file of the Assessing Officer for fresh adjudication after allowing opportunity to the assessee. We may clarify that the Assessing Officer would confine himself to the transactions as reflected in the seized documents contained in Annexure A-1 of the Panchnama dated 29-6-1996. The issue is therefore, set aside for fresh adjudication.
3.9 The appeal of the assessee-company is thus partly allowed.
Vimal Proteins Pvt. Ltd., Baroda IT (SS) Appeal No. 142/AHD/97:
1. The first dispute is against the protective addition of Rs. 1,68,02,518 on account of under-invoicing as well as inflation of expenses. We have already discussed the issue above and accepted the contentions of the learned CIT (DR) that the substantiv^ additions made in the cases of Five HUFs of the group may be upheld and the corresponding protective additions made in the cases of Group Companies may be deleted. For the reasons discussed hereinbefore, we delete the protective addition of Rs. 1,68,02,518.
2. The second ground is against the addition of Rs. 28,643 on account of difference in closing stock. The Assessing Officer has discussed the issue vide para-3 of the assessment order. During the search, the Authorized Officer prepared stock inventory in respect of goods valued at Rs. 20,32,096. As against this the stock as per books of account was valued at Rs. 20,03,453. The Assessing Officer accordingly treated the amounting to Rs.