Commissioner Of Income Tax ... vs Shri Subrata Roy, Lucknow
2013 Latest Caselaw 5226 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD, LUCKNOW BENCH
 
 

A.F.R.
 
RESERVED
 
Court No. - 24
 

 
Case :- INCOME TAX APPEAL No. - 59 of 2006
 
	   [Assessment Year - 1997-98]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur
 
Respondent :- Shri Subrata Roy, Lucknow
 
Counsel for Appellant :- Shri D.D. Chopra
 
ALONG WITH
 
Case :- INCOME TAX APPEAL No. - 57 of 2006
 
	   [Assessment Year - 1995-96]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur
 
Respondent :- Shri Subrata Roy, Lucknow
 
Counsel for Appellant :- Shri D.D. Chopra
 
ALONG WITH
 
Case :- INCOME TAX APPEAL No. - 58 of 2006
 
	   [Assessment Year - 1996-97]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur (At :2 P.M.)
 
Respondent :- Shri Subrata Roy, Lucknow
 
Counsel for Appellant :- Shri D.D. Chopra
 
ALONG WITH
 
Case :- INCOME TAX APPEAL No. - 60 of 2006
 
	   [Assessment Year - 1998-99]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur
 
Respondent :- Shri Subrata Roy, Lucknow
 
Counsel for Appellant :- D D Chopra
 
Counsel for Respondent :- Wasquddin Ahmad
 
ALONG WITH
 
Case :- INCOME TAX APPEAL No. - 61 of 2006
 
	   [Assessment Year - 1996-97]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur
 
Respondent :- O.P. Srivastava, Lucknow
 
Counsel for Appellant :- P. Agrawal
 
Counsel for Respondent :- Wasqudeen Ahmad
 
ALONG WITH
 
Case :- INCOME TAX APPEAL No. - 62 of 2006
 
	   [Assessment Year - 1997-98]
 
Appellant :- Commissioner Of Income Tax (Central), Kanpur
 
Respondent :- O.P. Srivastava, Lucknow
 
Counsel for Appellant :- P. Agrawal
 
Counsel for Respondent :- Waseequddin Ahmad
 
* * * * * 
 

 
Hon'ble Rajiv Sharma,J.

Hon'ble Dr. Satish Chandra,J.

All the appeals have been filed by the Department under Section 260A of the Income-Tax Act, 1961 against the judgments and orders dated 12.07.2005 and 13.07.2005, passed by the Income Tax Appellate Tribunal, Lucknow. The details of the Income Tax Appeals are as under:-

Appeal No.

Assessment

Year

Judgment & Order dated

ITA No. 160/Luc/2000 & CO No. 34/Luc/2005 & ITA No. 201/Luc/2002

1997-98

12/07/05

ITA No. 564/Alld/2000 & CO No. 08/Luc/2004

1995-96

12/07/05

ITA No. 100/Luc/2000 & CO No. 102/Luc/2004

1996-97

12/07/05

ITA No. 161/Luc/2000 & CO No. 35/Luc/2005 & ITA No. 202/Luc/2002

1998-99

12/07/05

ITA No.733/Alld/2000

1996-97

13/07/05

ITA No. 419/Luc/2000 & CO No. 49/Luc/2005

1997-98

13/07/05

On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal Nos.59, 57 and 58 of 2006, on the following substantial questions of law:-

"1. Whether the Hon'ble ITAT has erred in law and on facts in deleting the addition of Rs.36,57,27,195/- made on account of disallowance of interest accrued on money borrowed from M/s. Sahara India Mutual Benefit Co. Ltd., a company of Sahara Group which was invested by the respondent in purchase of shares of different companies of the same group without any intention of earning any income from such investments.

2.Whether the Hon'ble ITAT has erred in law and on facts in deleting the aforesaid addition, ignoring the fact that the dominant purpose for which investment was made by the respondent in the share capital of the companies of the Sahara Group was not to earn any income and as such the expenditure incurred in this behalf by way of interest on borrowings fell outside the purview of Section 57(iii) of the Income Tax Act, 1961.

3.Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent as he was provided with rent free accommodation, domestic servants, telephone, car with driver, free electricity, water, gas & reimbursement of club expenses from the various companies and firms in which he as a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.).

4. Whether the Hon'ble ITAT has erred in law and on facts in holding that there was no outgo of funds from M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) to the firm M/s Sahara India and therefore the provisions of Section 2(22)(e) of the Act were not attracted, without appreciating that the transactions between M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) and M/s Sahara India (Firm) were not at arm's length and the amount retained by the firm out of deposits collected which in fact belonged to the company was in the nature of loan/advance given by the company to the firm within the meaning of provisions of Section 2(22)(e) of the Act."

On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No.60 of 2006, on the following substantial questions of law:-

"1. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent as he was provided with rent free accommodation, domestic servants, telephone, car with driver, free electricity, water, gas & reimbursement of club expenses from the various companies and firms in which he as a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.).

2.Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in confirming the deletion of the addition made by the Assessing Officer on account of clubbing of income of the spouse of the respondent from the firm in which the respondent had a substantial interest, without appreciating that the spouse of the respondent did not possess any technical or professional qualification as envisaged in Section 64(1)(ii) of the Act and, therefore, the income of the spouse from the said firm was rightly clubbed in the hands of the respondent by the Assessing Officer.

3.Whether the Hon'ble ITAT has erred in law and on facts in holding that there was no outgo of funds from M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) to the firm M/s Sahara India and therefore the provisions of Section 2(22)(e) of the Act were not attracted, without appreciating that the transactions between M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) and M/s Sahara India (Firm) were not at arm's length and the amount retained by the firm out of deposits collected which in fact belonged to the company was in the nature of loan/advance given by the company to the firm within the meaning of provisions of Section 2(22)(e) of the Act.

4. Whether the Hon'ble ITAT has erred in law and on facts in holding that the provisions of Section 2(22)(e) of the Act were not attracted in this case without appreciating that this was a fit case where the veil of corporate identity had to be lifted for the purpose of understanding the real nature of the transactions and to show that the apparent was not real.

On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No.61 of 2006 on the following substantial question of law:-

"Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in deleting the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent, as he was provided with rent free accommodation, domestic servants, telephone, car with driver, furniture & fixtures, free electricity, etc. from the various companies and firms in which he was a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.)"

On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No. 62 of 2006 on the following substantial question of law:-

"Whether the Hon'ble ITAT has erred in law and on facts in deleting the addition of Rs.3,92,86,647/- made on account of disallowance of interest on loan taken from a company of Sahara Group which was invested by the respondent in the share capital of the companies of the same group without any intention of earning any income from such investments."

(Emphasis added)

The facts and circumstances in all the appeals are identical, except the dates and amounts etc. However, the figures and dates have been taken from the leading ITA No. 59 of 2006 to adjudicate present appeals.

I. DISALLOWANCE OF INTEREST:

Brief facts of the above-mentioned appeal are that the assessee is a partner of M/s. Sahara India (Firm); and Director in various companies of M/s. Sahara Group. For the assessment year 1997-98, the assessee has filed loss return for Rs.36,48,09,550/-. While completing regular assessment, the Assessing Officer disallowed the interest of Rs.36,57,27,195/- claimed by the assessee as interest paid on loan for purchase of shares under the head "income from other sources". The Assessing Officer noticed that the assessee had obtained loan from M/s. Sahara India Mutual Benefit Co. Ltd., and the loan amount was invested in purchase of shares of closely held companies of Sahara Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. Further, the assessee was having a substantial interest in the companies of Sahara Group. So, the AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability. So, he has disallowed the claim made by the Assessee pertaining to the interest and made the addition in each case, which was deleted by the first appellate authority as well as the Tribunal. Not being satisfied, the Department is before this Court.

With this backdrop, Sri D.D. Chopra, learned counsel for the Department, at the strength of written submission, has justified the order passed by the AO. He submits that the Tribunal has wrongly confirmed the deletion of the said addition merely relying on the judgment and order of the Hon'ble Apex Court in the case of Rajinder Pd. Moodi, 115 ITR 519, where it was observed that interest on borrowed capital has to be allowed under Section 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources. The facts of the aforesaid decision of the Hon'ble Apex Court are clearly distinguishable from the facts of the present cases. The Hon'ble Apex Court in the aforesaid case has emphasized on the language of Section 57(iii) and in particular, on the words "expended wholly and exclusively for the purpose of making or earning such income". The facts of these cases clearly show that, the purpose of making or earning income from the said investments in shares was grossly lacking. The Hon'ble Madras High Court in the case of CIT vs. Sujani Textile (P) Ltd., 151 ITR 653 has also taken the view that for the assessee to take the benefit of allowability of interest under Section 57(iii), there must be possibility of income coming from the investment though factually no such income need to have arisen in the year in question. In the present cases, there was no possibility of any income coming to the assessee and, therefore, relying on the ratio of the aforesaid decision of the Hon'ble Madras High Court, the claim of interest is not allowable under Section 57(iii) of the I.T. Act, 1961.

To support his submission, learned counsel also relied on the ratio laid down in the following cases :-

(i) CIT vs. Amritben R. Shah, 238 ITR 777 (Bom);

(ii) Smt. Virmati Ram Krishna vs. CIT, (1981) 131 ITR 695 (Guj).

(iii) CIT vs. Malyalam Plantations Ltd., (1964) 53 ITR 140 (SC);

(iv) CIT vs. Birla Cotton Spinning & Weaving Mills Ltd., (1971) 82 ITR 165 (SC).

Learned counsel further submits that the impugned order as well as the order of the learned CIT(A) suffer from material illegality in so far as the learned Tribunal and the learned CIT(A) have failed to appreciate that the aforesaid transactions were entered into by the assessee with the companies/concerns of Sahara Group with the sole aim to avoid tax by employing dubious means and that such colourable devices cannot be a part of tax planning. In coming to the said judgment, learned Tribunal has also failed to appreciate the applicability of the binding principles of tax law as enshrined by the Hon'ble Apex Court in M/s. Mc Dowell & Co. vs. CIT [154 ITR 148 (SC)]. In the said judgment, the Hon'ble Apex Court has reiterated the principle that a taxing authority is not only entitled but bound to determine the true legal relation resulting from a transaction. It was also held that if the parties have chosen to employ concealing devices, it is open to the taxing authorities to unravel the device and determine the true character of the relationship.

Therefore, the Assessing Officer has rightly concluded from the undisputed material available on record that the assessee only acted as a conduit in the transfer of funds from one company of the group to the other concerns of the same group and that there was no dominant intention of earning any income from the said transactions, the real purpose being to avoid the incidence of tax. However, in spite of all evidence on record, the CIT(A) and the learned Tribunal have failed to appreciate that the assessee had resorted to mechanisms of tax avoidance which was evident by lifting the corporate veil behind which such transactions were being given effect.

Lastly, he made a request that the addition made by the AO may kindly be restored by keeping in mind the ratio laid down in the case of McDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC), where it was observed that it is the duty of the Court to expose avoidance device adopted by the assessee.

On the other hand, Sri Wasqudeen Ahmad, learned counsel for the assessee has justified the impugned order passed by the Tribunal. He submits that the whole approach of the AO is incorrect as the AO has accepted that the loans taken by the assessee were invested and purchased in the share. The entire observations of the AO are based only on surmises and conjectures and hypothesis and on the basis of the imaginary and illusionary, which cannot be found as basis for rejecting the assessee's claim for payment of interest. The case of the assessee is fully covered by the judgment of the Hon'ble Apex Court in the Moody's case (supra). He mentioned on 02.01.2000, an advertisement was published in the "Times of India, by Sahara India Parivar, in which, it was stated that all the Directors have taken an oath neither they nor their family members can ever share the profit or assets of the company. But the assessment will have to be completed as per the provisions contained in the Income-tax Act and not on the basis of any statement or advertisement published here and there.

Learned counsel further submits that the assessee took the loan from M/s. Sahara India Mutual Benefits Co. Ltd. (SIMBCL) and claimed payment of interest to the said company. Such interest had been declared by the said company in its income. A person will not take investment in share just to throw away his money unless and until he has a hope to earn an income from such investment. Whether the investment is a bad investment or a good investment depends upon the study of the person making the investment in the performance of the company.

It may be noticed that the companies giving outstanding performance go out of the market and the companies performing not so well tends to start showing better results. Lastly, he submits that in view of the judgment of the Hon'ble Apex Court in the case of Moody (supra), the interest in shares has to be allowed on the borrowed funds. So, he made a request that the appeals may kindly be dismissed.

We have heard both the parties at length and gone through the material available on record.

From the record, it appears that the assessee is a partner in the firm, known as M/s. Sahara India (Firm), where he is holding 62% shares and remaining shares are lying with other partners including Smt. Swapna Roy, the wife of the assessee. Thus, for all the purposes, the firm has become propriety concerned. This firm has collected the money from the public, on behalf of various companies of Sahara Groups. For this purpose, the expenditure about 4.5% was charged by the firm. In addition, the firm has retained the money for a longer period without transmitted to the concerned companies. The firm has also borrowed the funds on interest from SIMBCL; a company of the group. The assessee has invested this amount in a few companies of Sahara Groups, which were suffering heavy losses. In another words, the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning.

In the instant case, the assessee has invested the amount in the companies, which were already suffering heavy losses. So, there was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in M/s. Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group.

In these circumstances, the AO has rightly observed that during the assessment year under consideration, the firm M/s. Sahara India had received money in the form of loan/advance from public and SIMBCL; SIFCOL; and Sahara India Housing Corporation Ltd. (SIHCL) and had retained it for a considerable period, before investing in loss making companies of the group, as submitted by the learned counsel for the Department.

Needless to mention that Section 57(iii) provides that any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable as deduction.

Further, Section 36(i)(iii) provides that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession is deductable.

In the peculiar facts and circumstances of the case, it appears that the interest paid on borrowed funds was not for exclusively and wholly for the purposes of business. No prudent businessman would like to make an investment in loss suffering companies when the firm itself has borrowed the funds on interest.

Further, it may be mentioned that the provisions of Section 14A was inserted in the Income-tax Act vide Finance Act, 2001 with retrospective effect from 01.04.1962 with a view to provide specific provision in the Act for disallowance of an expenditure (which includes interest) incurred in relation to income, which does not the part of the total income under the Act.

However, the provisions of sub-sections (2) & (3) of Section 14A were inserted in the Income-tax Act vide Finance Act, 2006 w.e.f. 01.04.2007 (wrongly mentioned as Clause 1 & 2 in the Income Tax Act published by the Taxman). It was provided vide sub-sections (2) that the expenditure disallowable shall be determined in accordance with such method, as may be prescribed. Pursuant to above provision made in the Act, Rule 8D of the Income Tax Rules was notified by the Government on 25.03.2008, as per the ratio laid down by the High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT; [2010] ITR (328) 81 (Bom); and High Court of Delhi in the case of Maxopp Investment Ltd. vs. CIT; [2012] ITR (347) 272 (Del).

The admitted position is that upto the assessment year 2007-08, the disallowance has to be made only on the basis of sub-section (1) of Section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred.

In the instant case, the assessee has shown no income from the company, where interest bearing borrowed funds were invested. Thus, the transactions were not exclusively and wholly for the purpose of business. In fact, it was colourable devices for tax evasion. In fact, it is an attempt of the assessee to divest the funds to avoid tax liability. In the case of McDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC), the Hon'ble Apex Court observed that it is the duty of the Court to expose of colourable device by uplifting the corporate veil.

In view of above and by considering the totality of the facts and circumstances, we set aside the impugned order passed by the appellate authorities and restored the orders passed by the AO pertaining to the disallowance of the interest on borrowed funds in the relevant appeals.

II. PERQUISITE VALUE:

Further, the assessee has claimed perquisite. But the AO has disallowed the same and made an addition of perquisite value of various items. However, the same was restricted by the first appellate authority and the Tribunal has deleted the same.

Learned counsel for the Department submits that the assessee is a partner in M/s. Sahara India (Firm); and Director in various other Group Companies. One of the Company is M/s. Sahara India Financial Corporation Ltd., from where the assessee was receiving salary income. During the course of assessment proceedings, the AO observed that the assessee was enjoying the perquisite by way of rent free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc. As per AO, the value comes to Rs.10,33,835/-. So, the AO added the value of the said perquisite as an income of the assessee.

But the same was restricted by the CIT(A), who has confirmed the following additions :-

(a)

Furniture & Fixtures

Rs.25,000/-

(b)

Salary of Servants etc.

Rs.57,600/-

(c)

Chauffeur driven car

Rs.36,000/-

(d)

Telephone expenses

Rs.72,000/-

(e)

Water charges

Rs.1,880/-

(f)

Electricity Expenses

Rs.60,000/-

Learned counsel for the Department submits that the Tribunal has deleted the addition without any discussion and just by following its earlier order in the case of one J.B. Roy. So, he made a request to restore the order of the AO.

On the other hand, learned counsel for the assessee submits that working out of the valuation of the aforesaid perquisites, the AO has relied upon the statement on both of the assessee recorded on 27.01.1997, in which the replies were given according to the situation prevailing on the date of the statement and cannot be applied for the assessment order under consideration. So, the inference drawn are factually correct and the payment is unwarranted.

Learned counsel further submits that official work was being carried out from the premises owned by the firm. He further submits that the addition pertaining to the furniture was made without any evidence on record. Regarding the salary to the servants, it was submitted that all the servants were engaged for the purpose of keeping of the property pertaining to the firm, which was used for official purposes. On similar grounds, the perquisite value on account of car, telephones, electricity, etc., were challenged.

On specific inquiry made by the Bench, learned counsel admits that the property was inspected by the Inspector, who reported that the residence of the assessee was a composite property in which apparently there was no office. The report was confronted with the assessee on 10.03.1999.

Regarding the foreign travel, it is stated that the journey was performed by the assessee. This addition was restored by the CIT(A) to the file of the AO, vide order dated 05.05.2000. None of the party is able to tell the present status of this addition. However, we are of the view that the valuation of the perquisite is taxable.

After hearing both the parties and on perusal of record, it appears that the assessee is a partner in M/s. Sahara India (Firm) and a Director in various group companies. The assessee was also receiving the salary income from M/s. Sahara India Financial Corporation Ltd. The assessee was enjoying the facilities of the free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc. For the assessment year 1997-98, the AO took the value of perquisite and made an addition of Rs.10,33,835/-, but the CIT(A) has restricted the same on estimate basis, as per details given in the order.

Needless to mention that Section 17(2) of the Income-tax Act, provides that :-

"Section 17(2) "perquisite" includes-

(i) the value of rent-free accommodation provided to the assessee by his employer;

(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

x x x x x x x x x

Explanation 3.--For the purposes of this sub-clause, "salary" includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be, but does not include the following, namely:--

(a) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

(b) employer's contribution to the provident fund account of the employee;

x x x x x x x x x

(iii)  the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases--

(a)  by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income 82[under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds [fifty] thousand rupees:]

[***]

[Explanation.--For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause;]

x x x x x x x x x

It may be mentioned that the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer.

In the instant case, as per the Inspector Report, the AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. The assessee's report was confronted on 10.03.1999 with the assessee.

Needless to mention that carrying of official work from the residence; and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. Section 28(iv) is independent section, whereby such indirect benefits were taxed. So, the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm, the same is not exempted under the provisions of Section 17(2) of the Act.

In the light of above discussion, it appears that perquisite is a part of salary and taxable. So, the perquisite will have to come under the clutches of the Income-tax. Being the salaried person, the assessee is entitled for the standard deduction on the salary. The remaining perquisite is taxable.

For the purpose of the valuation of the perquisite, Section 295(2)(c) of the Act provides that CBDT may make rules for the determination of the value of any perquisite chargeable to tax under this Act in such manner and on such basis as appears to the Board to be proper and reasonable. As per the CBDT Circular No. 219 dated 15th March, 1971, the perquisite value is taxable pertaining to the sweeper, gardener, watchmen, rent free accommodation etc. Hence, the perquisite are subject to tax as mentioned in the Section.

It may also be mentioned that Section 28(iv) of the Act provides that "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" is chargeable to tax.

In the instant case, the assessee has raised objection before the AO as well as CIT(A) regarding the perquisite value which were rightly dealt. When it is so, then we are of the view that the value of perquisite taken by the AO is correct and the same is taxable. Hence, we set aside the impugned orders passed by the appellate authorities and restore the orders passed by the AO pertaining perquisite value in the relevant appeals.

III. DEEMED DIVIDEND:

The AO also made the addition pertaining to the deemed dividend under Section 2(22)(e) as the assessee was the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares of M/s. Sahara India Financial Corporation Ltd. (SIFCOL); M/s. Sahara India Airlines Ltd.; M/s. Sahara India International Corporation Ltd.; as also a partner holding substantial interest in M/s. Sahara India (Firm). The assessee was having 62% share as partner in M/s. Sahara India (Firm) and remaining major share was holding by other partners including his wife. After discussing the issue at length, the AO made the addition on account of deemed dividend under Section 2(22)(e) of the Act, which was deleted by the first appellate authority as well as by the Tribunal. Being aggrieved, the Department has filed the present appeals.

Learned counsel for the Department submits that the assessee is the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares in varous companies of the group.

Learned counsel for the Department read out Section 2(22)(e) of the Act. On reproduction, it reads as under:-

"Section 2(22)-dividend includes-

(a) * * *

(b) * * *

(c) * * *

(d) * * *

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."

After reading Section 2(22)(e) of the Act, learned counsel submits that in the present appeals, all the three conditions mentioned below are present i.e. -

(a) The company should be one in which the public are not substantially interested within the meaning of Section 2(18) of the Act;

(b) The shareholder should be a person who has substantial interest in the company in accordance with Section 2(22)(e) i.e. the shareholder should own a minimum beneficial interest of at least 20% of the equity capital. Besides, payment by such company to any concern in which the shareholder is a member or a partner having substantial interest is also covered under Section 2(22)(e); and

(c) The company should possess accumulated profits.

A deeming fiction is created that a dividend has been distributed by the company to its shareholder in the form of a loan. In the present case -

(a) SISICOL is a company in which the public are not substantially interested and it was a private limited company;

(b) The respondent Subrata Roy was a beneficial owner of shares of SISICOL, holding 14,36,702/- shares out of total shares of 15,48,500;

(c) The respondent was a partner of 62% shares in the profits of M/s. Sahara India i.e. he is holding substantial interest in the firm;

(d) SISICO had an accumulated profit of Rs.16,98,12,423/- as on 31.03.1995;

(e) SISICOL had offered a loan of Rs.1,06,800/- to the respondent through his current account with M/s. Sahara India during the year;

(f) SISICOL had also offered Rs.21,70,79,103/- to M/s. Sahara India indirectly, by the action of the latter not to transfer the said sum of moneys with SISICOL when the same had already been collected from the depositors for investment;

(g) The firm M/s. Sahara India has shown the loan/advances from SISICOL on its liability side, thereby affirming that the action of retaining the deposit collected has created a loan transaction between SISICOL and M/s. Sahara India.

Therefore, since all conditions mentioned in Section 2(22)(e) are present in the case, so, the Assessing Officer rightly made an addition of deemed dividend of Rs.15,13,93,117/- to the income of the respondent.

It is also a submission of the learned counsel for the Department that the firm and the company SISICOL are nothing but one man show. In fact, if corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL. Assessee allowed huge interest bearing sums of money of SISICOl to remain with the firm and never charged any interest thereon. Lastly, he made a request to restore the order passed by the AO.

On the other hand, learned counsel for the assessee submits that the whole approach of the AO is incorrect. The observations and the inferences drawn by the Assessing Officer are ill-founded and against the facts and circumstances. The Assessing Officer has lost sight of relationship between the firm which was acting as an agent and the principals i.e. the Companies. The AO failed to appreciate that the amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. So, Section 2(22)(e) of the Act is not applicable in the instant case.

It is also a submission of the learned counsel that if the firm and company of the assessee is only one man show and everything belongs to the assessee, then there is no question of giving any loan by somebody to anybody because the total amount belongs to the assessee himself. So, the observations of the AO is misconceived. All the entities under different status were assessed, so the submission of the learned counsel for the Department that they are nothing but only one man show, is absolutely incorrect, uncalled for and against the facts and circumstances of the case. Lastly, he submits that the companies have not given any loan to the assessee or to the firm, there is no question of making any addition in the hands of the assessee.

After hearing both the parties and on perusal of the record, it appears that as per memorandum of understanding between the firm and the company, the firm has issued receipt to the depositors in the name of the company and, therefore, the amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly. It was collected by the branches of the firm to its command office, Lucknow but the assessee deliberately retained or allowed to be retained the funds in the firm. Therefore, it cannot be said that there was no payment to the company to the firm. The firm was supposed to send the money to the company promptly. Moreover, the Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. When the liability amount is shown in the balance-sheet as a liability then it is nothing except a loan.

It may be mentioned that, the word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. It is a sum of money or portion of divisible thing to be distributed according to a fixed scheme being what the shareholder earns as return on his investment; it is his share of corporate earnings credited to his account. The characteristic feature of 'dividend' is that it is declared and paid wholly from the net profits or undivided earnings leaving intact the shareholder's fractional interest represented by his holding in the capital stock. A 'dividend' is not capital but the produce of capital. Subject to well recognised limitations, 'dividend' is a word of general and indefinite meaning without any narrow, technical or rigid significance. As explained above, the term 'dividend' is applied to a distributive sum, share or percentage arising from some joint venture as profits of a corporation. In the second sense, it is proportionate amount paid on liquidation of a company. In this context, 'dividend' is referred to as corporate profits set apart for rateable division amongst the shareholders being surplus assets obtained in excess of capital.

As stated earlier, M/s. Sahara India (Firm) has collected the deposits from the public on behalf of the various companies. The money was retained by the firm, which was supposed to be transmitted to the concerning companies after deducting the services charges. But the firm has retained the amount for a longer period. The assessee is a shareholder in all the companies. The amount collected was the fresh deposit (loan) and the same was not old loan.

The AO has observed that the retained amounts by M/s. Sahara India on behalf of SIFCOL were to the tune of Rs.9,28,320,075/- and on behalf of M/s. Sahara India Airlines Ltd., a sum of Rs.55,46,77,466/-; and Rs.92,679,162/- from M/s. Sahara India International Corporation Ltd. The AO treated the said amounts as a loans as the said amount was not transmitted to the concerned company and was shown in the books of account under the head of liability. So, in each case, it is a loan. Further, the AO observed that Sahara India Housing Ltd. had also given a loan of Rs.750,00,000/- to Sahara India Ltd., in which the assessee, Sri Subrata Roy is a substantial shareholder. The AO has come to the conclusion that the amount of loans to M/s. Sahara India (Firm) was treated deemed dividend earned and brought to the clutches of tax under Section 2(22)(e) of the Act.

It may be mentioned that Hon'ble Apex Court in the case of CIT vs. Alga Sundaram Chettiar, [2001] 252 ITR 893, 894, observed that the term "payment" must not be given a literal interpretation but it must be seen whether a jural relationship of debtor and creditor was created between the parties and it was not necessary that payment should have been made in cash or in specie to the assessee. Had the assessee not retained the amount in the Firm and transmitted the same immediately to the concerned companies then companies might have earned the profits, or at least saved interest liability.

Needless to mention that as per provision of sub section (e) of Section 2(22) of the Act, by way of loan to a share-holder amounts to dividend. For a dividend to arise under this sub-clause, the following conditions should be fulfilled:

(i) the company must be a company shares of which are closely held.

(ii) money (not money's worth) should be paid by the company.

(iii) the money must form a part of the assets of the company.

(iv) it may be paid either by way of advance or loan or it may be "any payment".

(v) (a) the payee must be a shareholder of the company having substantial interest in the company, or

(b) the payee must be a person who is acting on behalf of or for the individual benefit of such shareholder.

The expression "person who has a substantial interest in the company" is defined in section 2(32) as meaning "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power."

If these conditions are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits.

Further, from the Assessment Year 1988-89 (onwards) the provisions of Section 2(22)(e) have undergone modification by the Finance Act, 1987. Accordingly, it also includes advances or loans made to any concern in which such shareholder is a member or partner and in which he has a substantial interest. In the latter case, the advance or loan will logically have to be treated as dividend in the hands of the shareholder concerned and not the concern because the scope of the sub-clause is only to rope in benefits given by a closely-held company to certain shareholders, directly or indirectly. This construction, however, will create difficulties in a case where more than one shareholder has a substantial interest in the concern. It would, therefore, be more logical to tax the concern which enjoys benefit from the advance or loan though it has directly nothing to do with the closely-held company. It is also conceivable that payments made to a concern in which the shareholder has no interest or even less than substantial interest if they can be shown to have been made on behalf of or for the individual benefit of such shareholder so as to attract the second part of the sub-clause.

This sub-clause of Section 2(22)(e) treats loans granted by 'closely-held' company to any of its shareholders in the same manner as it treats dividends distributed by it to them. The justification is plain. The company in question is a company in which assessee is controlling its affairs and possessing a block of majority shares. Since there was substantial income of the assessee and a tax planning was made by this nobel method to avoid the payment of tax. So, the assessee would not be liable to pay tax. In order to avoid such a tax liability the loan were granted. When such a loan is advanced to a shareholder who has a substantial interest in the company, the inference is irresistible that the loan is a made-up affair, and there is every reason for treating such a loan as dividend.

In the case of CIT vs. Alagusundaram Chettiar (L) (1977) 109 ITR 508 (Mad), it was observed that the provisions of this clause are attracted to any payment by a company, of any sum (whether as representing a part of the assets of the company or otherwise) by way of (1) advance; or (2) loan; (3) any payment on behalf of any shareholder; or (4) any payment for the individual benefit of any shareholder. The first two cases deal with a payment to the shareholder directly. The last two cases contemplate payment by a company not to the shareholder but to a third party on behalf of or for the individual benefit of the shareholder.

On the date the loan is advanced, the recipient should be a shareholder. If it is not so established, the provisions of section 2(22)(e) will not apply as observed in the case of CIT vs. Mittal (HK) (1996) 219 ITR 420 (All).

Thus, any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of the section. It would seem that deposits made by a closely-held company would also be covered by the expressions advance or loan.

Advances given by a company to its shareholders should be treated as payment out of accumulated profits of the company, whether capitalised or not, and must be treated as dividend and would go to reduce the tax liability, whenever such tax liability is required to be determined as observed in the case of CIT vs. Narasimhan (G) (1999) 236 ITR 327 (SC).

Advance given to the managing director, who had also substantial interest in the company for meeting cost for construction of building to be taken on lease by the company and the advance is to be adjusted with the lease rent, will be treated as deemed dividend for the purpose of section 2(22)(b) as observed in the case of CIT vs. Abubucker (PK) (2003) 259 ITR 507 (Mad).

Even if the loan is not granted directly to a shareholder who has a substantial interest as aforesaid, if a payment be made to a third person on behalf of or for the individual benefit of such a shareholder, the amount granted as loan would be treated as dividend as observed in the case of Ravindra D Amin vs. CIT (1994) 208 ITR 815 (Guj). In another case as observed in the case of CIT vs. Alagusundaram Chettiar (L) (1977) 109 ITR 508 (Mad), a company advanced moneys out of accumulated profits to a low-paid employee and it was found that he was, in turn, advancing huge sums by way of advances to the Managing Director of the company. It was held that the Managing Director was assessable under this sub-clause. Advances received by an assessee from a company in which he has no substantial interest but the company advances the sums out of sums borrowed by it on the very same date from another company in which the assessee has substantial interest can be said to be payments by the latter for the benefit of the assessee and so taxable under the sub-clause. But if there is no such correlation and the company that advances the loan does so out of mixed funds, the sub-clause will not be applicable as observed in the case of Nandlal Kanoria vs. CIT (1980) 122 ITR 405 (Cal.). The mischief of this sub-clause, which does not contain the words 'directly or indirectly', cannot be extended to cover a case where it cannot be established that the amounts were in fact received by the taxpayer from the company by way of loan or advance.

In the instant case, no circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. For this reason alone, we agree that it is a case of deemed income as the assessee is a shareholder in all the companies. Hence, we restore the orders of the AO in this regard by setting aside appellate orders.

IV. CLUBBING OF INCOME:

Lastly, he made a request that the order passed by the Tribunal may kindly be set aside.

It may be mentioned that Section 64(1)(ii) of the Act provides as under :

"Section 64(1)(ii)-to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest:

[Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience;]"

During the course of assessment, the Assessing Officer has concluded that Smt. Swapna Roy, the spouse of the assessee, was drawing a net income of Rs.6,22,230/-. The AO has clubbed the income of Smt. Swapna Roy, the wife of the assessee, with the income of the assessee. Thus, the income of the husband-wife were clubbed together. But the appellate authorities have treated both the assessees separately.

After hearing both the parties, it appears that Smt. Swapna Roy is a post-graduate and is also a Director in many companies. She has expertise in business matter also. She is a separate assessee since long, so, her income cannot be clubbed. Hence, we find no merit in the grounds taken by the Department. The order passed by the Tribunal is hereby upheld.

The answer to the substantial questions of law are in favour of the department and against the assessee.

In view of above, the appeals filed by the department are allowed (partly), as stated above.

Order Date : 27/08/2013

Rakesh/-