Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income-Tax vs Strong Foundation (India) (P.) Ltd. on 28 August, 1995
Equivalent citations: [1996]57ITD9(AHD)
ORDER
B.L. Chhibber, Accountant Member
1. Since common issues are involved in these two appeals by the Revenue, the same are consolidated and disposed of by this common order for the sake of convenience.
2. The first grievance of the Revenue is that the CIT(A) is not justified in deleting the additions of Rs. 2,01,178 in the asstt. year 1984-85 and Rs. 61,053 in the asstt. year 1985-86 - being interest received by the assessee-company from M/s. V.H. Mehta.
2.1 The assessee-company was incorporated on 24-10-1981 of which Shri V.H. Mehta is Chairman-cum-Managing Director and his wife Smt. Aruna V. Mehta and daughter Miss Shilpa V. Mehta are the Directors. The issued share capital is only Rs. 200 which belongs to Shri V.H. Mehta and his wife Smt. Aruna V. Mehta. A non-trading association in the name of M/s. Strong Foundation Association (hereinafter referred to as "SFA") was also registered on 17-10-1981 of which Shri V.H. Mehta is the President. Advertisements were floated and a scheme was sponsored in which plots measuring 1,000 sq. yards were offered for sale to the first 100 members who had to pay Rs. 16,551 and further contribute Rs. 20,000 each by way of "Parton Membership Amount" which was a non-refundable amount tc be spent on developmental activities in the complex styled as "Treasure Chest". On behalf of the said SFA it was stated before the ITO that the assessee-company was assisting the said SFA in enrolling new members and collection of application money, enrolment amount and development contribution from the said members. It was further stated that the said amounts were being utilised on behalf of the SFA for the acquisition of land, promotion of the project, enrolment of members and carrying on development of land including provision for infrastructure facilities like water supply, electric supply, construction of roads, sports complex, etc. It was further stated that the idle surplus amount received and lying on behalf of the SFA for a period when such surplus funds were not immediately required for the business of SFA were invested with a view to bring down the cost of SFA's project. Such investment of idle money was made in terms of Clause (3) of the letter dated 11-11-1981. The said Clause (3) reads as under :
You can receive application money, enrolment amount and subsequent instalments from members selected by you on our behalf and utilise these funds towards the land value and incidental expenses thereof as also towards the cost of publicity, promotion of the project and other allied expenditure. The surplus fund lying with you from members' contribution should be made productive so as to off-set, to the extent possible, the preliminary and incidental expenses on the project. The income/interest earned from the surplus fund should be passed over to us along with expenses to be borne by us.
Para 10 of the above letter dated 11-11-1981 provided as under :--
It is further agreed that a proper and detailed agreement will be executed between us when you will make sufficient progress on the complex.
During the years under consideration, surplus funds were invested with M/s. V.H. Mehta, a proprietary concern of Shri V.H. Mehta, who was the Managing Director of the assessee-company and interest was earned amounting to Rs. 2,01,178 and Rs. 61,053 in the asstt. years 1984-85 and 1985-86 respectively. It was contended before the ITO that the income by way of interest received from M/s. V.H. Mehta belonged to the SFA. However, the ITO noted that the assessee-company had passed certain entries in the books of account which showed that the income by way of interest received from M/s. V.H. Mehta represented income of the assessee-company. It was submitted before him that apparently through a mistake the Accountant of the assessee-company had passed certain entries in the books of account which showed that the income by way of interest received from M/s. V.H. Mehta represented income of the assessee-company because subsequently on detection of the error certain other entries were passed in the books of account crediting the account of SFA by the amount of interest so received. The ITO was of the opinion that all the transactions in regard to the interest payment and receipt and the entries relating thereto in the books of account of the assessee company were nothing but paper entries inasmuch as the said SFA was essentially a smoke screen brought into existence by Shri V.H. Mehta. In coming to the above conclusion, the ITO took note of the entries originally passed by the Accountant in the books and the subsequent reversal of the entries as well as of the fact that the letter dated 11-11-1981 from SFA to the assessee-company, on which strong reliance has been placed on behalf of the assessee-company during the course of assessment proceedings, did not constitute a valid agreement between the two parties, viz., the assessee-company and the said SFA. According to the ITO the terms and conditions of the said letter did not appear to have been accepted by the assessee-company nor was any agreement executed as per Clause 10 of the said letter. The ITO also observed that the facts of the case are such that the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) was squarely applicable to the case. He accordingly treated the amounts of Rs. 2,01,178 and Rs. 61,053 as income of the assessee-company for the two asstt. years under appeal.
2.2 On appeal, the CIT(A) held that the findings of the ITO were not sustainable. He held that the relation between the assessee-company and the SFA was that of an agent and a principal and the entries in the books of account passed subsequent to the entries originally passed in the books of account in regard to the interest receivable were not relevant. He further held that the letter dated 11-11-1981 constituted a valid agreement between the assessee-company and the SFA and the terms and the conditions of the letter having been understood and acted upon consistently by both the parties ever since, was a relevant piece of evidence. He further held that the SFA was a separate entity and was not a smoke screen of Shri V.H. Mehta who is Managing Director of the assessee-company and hence the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) was not applicable. He accordingly deleted the impugned additions.
2.3 Shri T. Mohandas, the learned DR submitted that there was no justification on the part of the CIT(A) to delete the impugned additions. He submitted that the said SFA was a creation of Shri V.H. Mehta, Managing Director of the assessee-company and the President of the said SFA. It had no independent existence of its own, and in fact it was created as a smoke screen to evade tax. He further submitted that nothing had been brought on record by the assessee whether the aforesaid amounts of interest had been taxed in the hands of the SFA or Shri V.H. Mehta. The learned DR further submitted that no reliance can be placed on the letter dated 11-11-1981 because it was not an agreement and the agreement was yet to be executed as per para 10 of the said letter. The learned DR further relied upon the judgment of the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC).
2.4 Shri S.N. Soparkar, the learned Counsel for the assessee strongly supported the order of the CIT(A). He submitted that the funds were collected by the assessee from the prospective buyers on behalf of the SFA and as such the surplus funds belonged to the said SFA and the interest accrued was the income of the said SFA and could not be assessed in the hands of the assessee-company. He submitted that it is wrong to state that the SFA was only a smoke-screen created by Shri V.H. Mehta because it was a legal entity in its own right and relationship between the assessee-company and such SFA was that of an agent and a principal. The learned Counsel further submitted that the entries made initially by mistake by the Accountant of the assessee-company which indicated that the interest income belonged to the assessee-company were not relevant because on detection of the mistake these entries were reversed and this was evident from the said books of account which were seized during the course of search under Section 132 which was carried out at the premises of Shri V.H. Mehta, Managing Director of the company.
2.5 We have considered the rival submissions and perused the facts on record. From the facts of the case as reproduced supra it is evident that the Strong Foundation Association (SFA) is a creation of Shri V.H. Mehta. It is a "non-trading association" of some prospective buyers, i.e., some would be members. It has no existence of its own and has no locus standi. It was created as a smoke-screen by Shri V.H. Mehta as its President who is also the Managing Director of the assessee-company. It is well-settled that Taxing Authorities are entitled to took into surrounding circumstances to find out the reality of the transaction. CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). In Sumati Dayal v. CIT, the Hon'ble Supreme Court has held that considering surrounding circumstances and applying the tests of human probabilities is a must. Looking to the surrounding circumstances under which the SFA came into existence, it can safely be inferred that it was a colourable device to evade tax. It is further noted that in the books of account, the assessee first passed entries which showed that the interest received from M/s. V.H. Mehta represented the income of the assessee-company but later on it reversed the entries with the aim of avoiding payment of due tax. This behaviour of the assessee cannot be ignored. We do not agree with the finding of the CIT(A) that the letter dated 11-11-1981 constituted a contractual agreement between the assessee and the SFA and was acted upon as it was only a piece of enabling/self-serving correspondence between the assessee-company and the SFA and it was not acted upon as no agreement was drawn in pursuance to para 10 of the said letter. In taxation matters it is not necessary to construe documents from their purely legal or technical aspect. It is open to the Court not to merely look at the documents themselves but also to consider surrounding circumstances so as to know what was the real nature of the transactions from the point of view of two businessmen who were carrying out the transaction. Viewed in the light of surrounding circumstances the said letter cannot be said to be a valid agreement establishing the relation of an agent and a principal between the assessee-company and the said SFA. We agree with the learned DR that the case of the assessee is squarely hit by the decision of the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. (supra). In this case the respondent-company had purchased some years back Rs. 4.5 lakhs worth of share of Inarco and the dividends received in respect of those shares were taken into account for the purpose of calculating the bonus payable to its workmen. In 1968, the respondent-company transferred all those shares to Aril, a wholly owned subsidiary company. Aril had no other business or source of income whatever except receiving the dividends on those Inarco shares. The dividend income was not transferred to the respondent-company and it did not find a place in its profit and loss account with the result that the available surplus for payment of bonus to workmen got reduced, and bonus was paid at the rate of 4% only for 1969 instead of at 16% to which the workmen would otherwise have been entitled. Subsequently, in 1971, Aril was wound up and amalgamated with the respondent-company. The workmen raised an industrial dispute claiming bonus at 16% for 1969. The Industrial Tribunal and the High Court on a writ petition rejected the claim on the ground that the respondent and Aril were two independent companies with separate legal existence and the profit made by Aril could not be treated as the profit of the respondent-company. On appeal, the Hon'ble Supreme Court reversing the decision of the High Court held that a new company was created wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profits of the principal company. The facts spoke for themselves. There could not be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that was served and which stared one in the face was to reduce the amount to be paid by way of bonus to workmen. The Supreme Court held that it was such an obvious device that no further evidence, direct or circumstantial, was necessary. Since the creation of Aril was a device to reduce the amount to be paid as bonus to the workmen of the respondent-company, the separate existence of the two companies had to be ignored and the amount of dividend from Inarco received by Aril had to be taken into account in assessing the gross profit of the respondent-company for the purpose of calculating the rate of bonus payable to the workmen of the respondent-company. The Supreme Court further held as under :
It is the duty of the Court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction.... Avoidance of welfare legislation is as common of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same.
As stated above, SFA had no existence of its own, it was a creation of Shri V.H. Mehta, it was a non-trading association of some prospective buyers whose identity was never disclosed before the ITO, it was admittedly not assessed to tax, it had no business or income of its own and was nothing but a smoke-screen created for the purpose of evading tax. In our opinion, creation by Shri V.H. Mehta of SFA which was nothing but a smokescreen was a colourable device to evade tax and cannot be part of tax planning as held by the Supreme Court in the case of McDowell & Co. Ltd. (supra) and as such the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) is applicable to the facts of the present case. We accordingly reverse the findings of the CIT(A) and hold that the amounts of Rs. 2,01,178 and Rs. 61,053 being interest income are assessable in the hands of the assessee-company.
3. to 8. [These paras are not reproduced here as they involved minor issues].