M/s Wig Investments, New Delhi V. ACIT, New Delhi

ITA 1779/DEL/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7021 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 29-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 13-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MOHANISH VERMA
• Keywords: Business income; Opportunity of being heard; Deemed dividend
• Section: 143(3); 142(1); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I NEW DELHI) BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI B.K. HALDAR, ACCOUNTANT MEMBER I.T.A. NO.1779 /DEL/2011 ASSESSMENT YEAR : 2006-07 WIG INVESTMENTS, ACIT, 79-SUNDER NAGAR, CIRCE-32 (1), NEW DELHI. V. NEW DELHI. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AAAFW AAAFW AAAFW AAAFW- -- -6972 6972 6972 6972- -- -B BB B APPELLANT BY : SHRI VINOD BINDAL & MR. SWEETY KOTHARI. C.A. RESPONDENT BY : SHRI MOHANISH VERMA, CIT-DR. ORDER PER B.K. HALDAR, AM: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD CIT, DELHI-XI, NEW DELHI DATED 12.3.2011 U/S 263 OF THE ACT FOR ASSESSMENT YEAR 2006-07. 2.THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APPEALS:- 1. THE LEARNED CIT ERRED IN LAW, CONTRARY TO AND BA SED ON INCORRECT INTERPRETATION OF THE FACTS IN PASSING AN ORDER U/S 26 3 THOUGH THE ASSESSMENT ORDER WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTERESTS OF REVENUE AND IN DIRECTING THE ASSESSING OFFIC ER TO FRAME THE ASSESSMENT AFRESH. THUS THE ORDER PASSED U/S 263 HAS ITA NO1779/DEL/11 2 BEEN PASSED WITHOUT FULFILLING THE CONDITIONS LAID DOW N BY LAW AND DESERVES TO BE QUASHED. 2. THE LEARNED CIT ERRED IN LAW AND ON FACTS IN PASSIN G AN ORDER U/S 263 ON THE ISSUES REGARDING ASSESSMENT OF CAPITAL GAIN ON MUTUAL FUNDS AS BUSINESS INCOME AND THE CAPITAL CONTRIBU TION RECEIVED FROM PARTNER COMPANIES AS DEEMED DIVIDEND U/ S 2(22)( E) OF THE ACT THOUGH BOTH THE ISSUES ARE HIGHLY DEBATA BLE AND TWO OPINIONS ARE POSSIBLE. THUS THE ORDER PASSED U/S 263 ON DEBATABLE ISSUES SHOULD BE QUASHED. 3. THE LEARNED CIT ERRED IN LAW AND ON FACTS IN PASSIN G ORDER U/S 263 OF THE ACT BY HOLDING THAT THE SHORT TERM CAPIT AL GAIN ON MUTUAL FUNDS SHOULD BE ASSESSED AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE, WITHOUT APPRECIATING THE FACTS OF THE CASE THAT THE ASSESSEE HAD NOT CARRIED ON ANY REGULAR BUSINESS ACTIVITY OF PURCHASE AND SALE OF MUTUAL FUNDS BUT HAD ONLY INVESTED ITS FUNDS IN THE MUTUAL FUNDS AND BY FURTHER IGNORING THAT THE SAID AMOUNT WAS DECLARED AS INVESTMENT IN TH E BALANCE SHEET OF THE ASSESSEE. THUS THIS ISSUE CANNOT BE CONSIDERED FOR THE PURPOSE OF SECTION 263 AND THE ORDER PASSED U/S 263 SHOULD BE CANCELLED. 4. THE LEARNED CIT ERRED IN LAW AND ON FACTS IN PASSING O RDER U/S 263 OF THE ACT BY HOLDING THAT THE AMOUNT CONTRIBUT ED BY THE TWO PARTNER COMPANIES IN THE ASSESSEE FIRM AS CAPITAL CONTRIB UTION IS LIABLE TO TAX AS DEEMED DIVIDEND UNDER SECTION 2(22) ( E) BY IGNORING THAT: A) THE ASSESSEE RECEIVED THE MONEY FROM THE COMPANIES NO T AS A LOAN OR DEPOSIT BUT AS CAPITAL CONTRIBUTION FROM A PA RTNER IN THE FIRM IN CONSIDERATION OF WHICH THE SAID COMPANIES GOT A SHARE IN THE PROFIT OF THE FIRM; AND ITA NO1779/DEL/11 3 B) THE SAID AMOUNT WAS GIVEN BY THE PARTNER COMPANIES DUE TO BUSINESS EXIGENCIES AND PRUDENCY AND C) THE DIVIDEND INCOME U/S 2(22)( E) CAN BE ASSESSED IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE C ONCERN IN WHICH SHARE HOLDER HAS A SUBSTANTIAL INTEREST AND THE REFORE THE FIRM COULD NOT BE COVERED UNDER THE DEEMING PROVISIO NS OF THE SAID SECTION AND D) THE DEEMING PROVISIONS SHOULD BE GIVEN STRICT INTERP RETATION AS PER LAW AND CANNOT BE EXTENDED TO COVER THOSE TRANSAC TIONS WHICH HAVE NOT BEEN PROVIDED BY THE LEGISLATURE. THUS THE ORDER PASSED U/S 263 IGNORING THE FACTS AND PROVISION OF LAW SHOULD BE QUASHED. 5. THE APPELLANT CRAVES THE LEAVE TO ADD, SUBSTITUTE, MODIFY, DELETE OR AMEND ALL OR ANY GROUND OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING. 3. IN THIS CASE ASSESSMENT FOR ASSESSMENT YEAR 2006-07 WAS COMPLETED BY THE ASSESSING OFFICER ON 8.12.2008 BY ACCE PTING THE RETURNED INCOME OF THE ASSESSEE. SUBSEQUENTLY, THE LD CI T ISSUED NOTICE U/S 263 OF THE ACT DATED 10.6.2009. THE ASSESSEE IS A FIRM CONSISTING OF FOUR PARTNERS NAMELY M/S KWALITY ICE CRE AMS (INDIA) PVT. LTD. (II) KWALITY PROCESSED FOOD SERVICES & EQUIPMENTS PVT. LTD. (III) PRADEEP WIG (HUF) AND (IV) SMT. NEERA WIG. SHRI PRA DEEP WIG IS THE MANAGING DIRECTOR OF THE ABOVE TWO COMPANIES. HE IS ALSO THE KARTA OF THE PRADEEP WIG HUF AND SMT. NEERA WIG IS HIS WIFE. THE ADDRESS OF THE ASSESSEE FIRM IS THE RESIDENCE OF SHRI PRADEEP WIG. M/S KWALITY ICE CREAM INDIA PVT. LTD. HAD INTRODUCED THE CAPITAL OF `.47 CRORES AND M/S KWALITY PROCESSED FOOD SERVICES & EQUIPMENT PVT. LTD. HAD INTRODUCED CAPITAL OF `.14 CRORES IN CASH AND `.4.88 CRORES BY WA Y OF SHARES OF M/S KWALITY ICE CREAM INDIA PVT. LTD. NO CAPITAL WAS IN TRODUCED EITHER BY SHRI PRADEEP WIG OR BY SMT. NEERA WIG. HOWEVER, SHA RE OF PROFIT OF THE HUF AND SMT. NEERA WIG WAS 20% AND 10% RESPECTIVE LY. THUS, ITA NO1779/DEL/11 4 1,09,99,508/- AND `.54,99,754/- WERE ALLOCATED AS P ROFIT/INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION TO M/S PRADEEP WIG (H UF) AND SMT. NEEA WIG RESPECTIVELY. 4. THE ONLY ACTIVITY CARRIED ON BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WAS PURCHASE AND SALE OF MUTUAL FUN DS AND SECURITIES. BY THE SAID ACTIVITY, IT HAD EARNED TOTAL AMOUNT OF `.4,18,84,950/- WHICH WAS DISCLOSED AS SHORT TERM CAPITA L GAINS. AS PER THE DETAILS AVAILABLE ON RECORD, THERE WERE HUGE TRA NSACTIONS IN MUTUAL FUNDS AND SECURITIES DURING THE YEARS. THE PURCHASE MAD E DURING THE YEAR AMOUNTED TO `.68.18 CRORES (APPROXIMATELY). AL L THESE TRANSACTIONS WERE THROUGH THE PORTFOLIO MANAGERS TO WH OM PORTFOLIO MANAGEMENT FEES HAVE BEEN PAID. IN THE PARTNERSHIP D EED DATED 12.7.2005 IT WAS INDICATED THAT THE BUSINESS OF THE FIR M COMPRISED OF INVESTMENT IN STOCK SHARES ETC. HOWEVER, THIS DEED WAS R EVISED ON 31 ST AUGUST, 2005 WHEREIN THE PREFIX BUSINESS WAS REMOVED. AS PER THE EVIDENCE ON RECORD SHRI PRADEEP WIG WAS THE PERSON WH O WAS HAVING CONTROL OVER ALL THE AFFAIRS OF THE ASSESSEE FIRM AS WEL L AS THE TWO COMPANIES WHO ARE PARTNERS IN THE ASSESSEE FIRM. 5. IN THE ABOVE FACTS, THE LD CIT PROPOSED TO REVISE T HE ASSESSMENT ORDER PASSED U/S 143(3) OF THE ACT FOR THE ASSESSMENT YEAR 2006-07 MAINLY ON TWO GROUNDS, NAMELY:- (I) WHETHER THE INCOME SHOWN BY THE ASSESSEE WAS REQUIRED TO BE ASSESSED UNDER THE HEAD BUSINESS OR PROFESSION OR UNDER T HE HEAD CAPITAL GAINS AND (II) WHETHER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WAS APPLICABLE OR NOT. 6. IN RESPONSE TO NOTICE U/S 263 OF THE ACT, THE ASSESSE E MADE DETAILED SUBMISSIONS BEFORE THE LD CIT. IT WAS CONTENDED THAT THERE WAS NO APPLICATION OF SECTION 2(22)(E) AS THE PARTNER COMPANIES DID NOT ITA NO1779/DEL/11 5 GIVE ANY LOAN OR ADVANCED ANY MONEY TO THE ASSESSEE FIR M OR THE COMPANIES SHARE HOLDERS. AS REGARDS ASSESSING THE INCOME SHO WN BY THE ASSESSEE UNDER THE HEAD BUSINESS OR PROFESSION, IT WAS SUB MITTED THAT THE ASSESSEE DID NOT INTEND TO CARRY ON THE BUSINESS OF SALE AND PURCHASE OF SECURITIES ETC. IT INTENDED TO MAKE LONG T ERM INVESTMENTS. THUS, INCOME DECLARED UNDER THE HEAD OF SHORT TERM CA PITAL GAIN COULD NOT BE TREATED AS INCOME UNDER THE HEAD BUSINESS. FOR T HE ABOVE PROPOSITION IT RELIED ON PLETHORA OF CASE LAWS AS ENUM ERATED BY THE LD CIT IN PARA 5 OF THE IMPUGNED ORDER. 7. THE LD CIT WAS OF THE OPINION THAT THE TRANSACTION S ENTERED INTO BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WAS REQ UIRED TO BE EXAMINED IN TERMS OF CIRCULAR NO.4/2007 OF CBDT DAT ED 15.6.2007. ANALYZING THE ISSUE FROM VARIOUS ANGLES, IT WAS HELD BY HIM THAT THE ORDER OF THE ASSESSING OFFICER ACCEPTING THE CLAIM OF T HE ASSESSEE THAT THE INCOME WAS REQUIRED TO BE ASSESSED AS SHORT TERM CAPIT AL GAIN AND NOT AS BUSINESS INCOME WAS BOTH ERRONEOUS AND PREJUDICIA L TO THE INTEREST OF REVENUE. HE, THEREFORE, SET ASIDE THE IMP UGNED ASSESSMENT ORDER AND DIRECTED THE ASSESSING OFFICER TO FRAME THE A SSESSMENT AS PER THE CORRECT PROVISIONS OF LAW AND TAKING INTO ACC OUNT THE APPLICABILITY OF THE CIRCULAR NO.4/2007 DATED 15.6. 2007 AND INSTRUCTION NO.1827 DATED 31.8.1989. 8. AS REGARDS THE APPLICABILITY OF SECTION 2(22)(E) O F THE ACT, THE LD CIT TABULATED CAPITAL INTRODUCED, SHARE OF PROFIT, SH ARES CAPITAL, DRAWINGS AND BALANCE AS ON 31.3.2006 OF ALL THE PARTN ERS WHICH IS REPRODUCED BELOW:- PARTNER (S) KWALITY ICE KWALITY PRADEEP NEERA W IG CREAMS(INDIA) PROCESSED WIG PVT. LTD.KICPT FOOD HUF SERVICES & EQUIPMENTS P. LTD. ITA NO1779/DEL/11 6 CAPITAL 47 CR. 14 CR. NIL NIL INTRODUCED ADD: SHARE 2.75 CR. 1.10 CR. 1.10 CR. 54.99 OF PROFIT (LAKHS) ADD; SHARE OF KICPT -- 4.48 CR. NIL NIL LESS: DRAWINGS 20.55 CR. 9.25 CR. 10 LAKHS NIL BALANCE AS ON 31.3.2006 29.20 CR. 10.73 CR. 99.99 LAKHS 54.99 (LAKHS) ALSO AS PER THE PROVISIONS OF THE PARTNERSHIP DEED, THO UGH M/S PRADEEP WIG (HUF) (SIC) AND SMT. NEERA WIG (SIC) ( IT SHOULD BE THE PARTNER COMPANIES) WERE TO HAVE 50% & 20% SHARE OF PROFIT RE SPECTIVELY, THEY WERE NOT TO SHARE LOSSES INCURRED BY THE FIRM. THE LD C IT, THEREFORE, WAS OF THE OPINION THAT THE ASSESSEE FIRM WAS CREATED WIT H THE SOLE OBJECT OF TRANSFERRING THE ACCUMULATED PROFITS/FUNDS OF THE CONTROLLED COMPANIES THROUGH THE ARTIFICE OF THE ASSESSEE FIRM. THE LD CIT QUOTED FROM THE JUDGMENT OF THE HON'BLE APEX COURT IN THE CASE OF CIT V. MUKENDREY KUMAR SHAH V. CIT 290 ITR 433 (SC) WHICH IS REPRODUCED HEREUNDER:- ' ..... WE FIND MERIT IN THIS CIVIL APPEAL. THE COMP ANIES HAVING ACCUMULATED PROFITS AND THE COMPANIES IN WHICH SUBSTANT IAL VOTING POWER LIES IN THE HANDS OF THE PERSON OTHER THA N THE PUBLIC (CONTROLLED COMPANIES) ARE REQUIRED TO DISTRIBUTE ACC UMULATED PROFITS AS DIVIDENDS TO THE SHAREHOLDERS. IN SUCH COMPAN IES, THE CONTROLLING GROUP CAN DO WHAT IT LIKES WITH THE MANA GEMENT OF THE COMPANY, ITS AFFAIRS AND ITS PROFITS. IT IS FOR THIS GROUP TO DECIDE WHETHER THE PROFITS SHOULD BE DISTRIBUTED AS DIV IDENDS OR ITA NO1779/DEL/11 7 NOT. THE DECLARATION OF DIVIDEND IS ENTIRELY WITHIN THE DISCRETION OF THIS GROUP. THEREFORE, THE LEGISLATURE REALIZED TH AT THOUGH FUNDS WERE AVAILABLE WITH THE COMPANY IN THE FORM OF PROFITS, THE CONTROLLING GROUP REFUSED TO DISTRIBUTE ACCUMULATED P ROFITS AS DIVIDENDS TO THE SHAREHOLDERS BUT ADOPTED THE DEVICE O F ADVANCING THE SAID PROFITS BY WAY OF LOAN TO ONE OF I TS SHAREHOLDERS SO AS TO AVOID PAYMENT OF TAX ON ACCUMULA TED PROFITS. THIS WAS THE MAIN REASON FOR ENACTING SECTION 2 (22)(E) OF THE ACT. IN THE CASE OF CIT V. L. ALAGUSUNDARAM CHETTIAR (1977 ) 109 ITR 508, THE MADRAS HIGH COURT HELD THAT THE WORD 'PAYME NT' IN THE SAID SECTION MEANS THE ACT OF PAYING AND, THEREFORE, I N THAT CASE IT WAS HELD THAT PAYMENT BY THE COMPANY TO KARUPPIAH CHETTIAR WAS FOR THE BENEFIT OF THE ASSESSEE, THE MANAGING DIREC TOR OF THE COMPANY, L. ALAGSUNDARAM CHETTIAR, AND WAS THEREFORE ASSESSABLE AS DIVIDEND IN THE HANDS OF THE ASSESSEE. IN THE SAID JUDGMENT IT HAS BEEN HELD THAT THE BASIC TEST TO BE AP PLIED IN SUCH CASES IS NOT WHETHER THE LOAN GIVEN IS A BENEFIT BU T WHETHER PAYMENT BY THE COMPANY TO KARUPPIAH CHETTIAR WAS FO R THE BENEFIT OF THE ASSESSEE WHO WAS THE MANAGING DIRECTOR OF THE PAYING COMPANY. APPLYING THE ABOVE TEST TO THE FACTS OF THE PRESENT CASE, WE ARE OF THE VIEW THAT THE TRIBUNAL WA S RIGHT IN HOLDING, ON EXAMINATION OF THE CASH FLOW STATEMENT, THAT MKSEPL HAD MADE PAYMENTS TO MKF AND MKI FOR THE BENEFIT OF THE ASSESSEE WHICH ENABLED THE ASSESSEE TO BUY 9 PER CENT RBI RELIEF BONDS IN THE FINANCIAL YEAR 1999-2000. IT IS I N THE SENSE THAT THE TRIBUNAL WAS RIGHT IN HOLDING THE TWO FIRMS WERE USED AS CONDUITS BY THE ASSESSEE. IT IS NOT IN DISPUTE THAT THE A SSESSEE HAD MORE -THAN 10 PER CENT OF VOTING POWER IN MKSEP L DURING THE BLOCK PERIOD. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD SUBSTANTIAL INTEREST OF ABOUT 16 PER CENT. IN MKF. IT IS NOT IN DISPUTE THAT THE THREE COMPANIES WERE CONTROLLED COMP ANIES. ITA NO1779/DEL/11 8 THERE IS ONE MORE POINT WHICH NEEDS TO BE MENTIONED. THE TIMING OF THE SOCALLED REPAYMENTS BY THE COMPANY TO MKF AND MKI AND THE IMMEDIATE WITHDRAWAL OF THE FUNDS BY THE ASSESSEE- CUM-DIRECTOR-CUM-SHAREHOLDER-CUMPARTNER AND THE TI MING OF INVESTMENT IN PURCHASE OF BONDS WERE AROUND THE SAME TI ME. MOREOVER, IN MKSEPL THE ASSESSEE IS NOT ONLY A SHAREHOLDE R HAVING MORE THAN 10 PER CENT. OF TOTAL VOTING POWER , HE IS ALSO A DIRECTOR OF THAT COMPANY. THE SAID COMPANY IS ALSO A P ARTNER IN MKF AND MKI WHICH EXPLAINS WHY THE AMOUNT OF RS. 5.99 CRORES WAS ROUTED BY SPLITTING SAID AMOUNT INTO TWO PARTS OF RS. 2.79 CRORES AND RS. 3.20 CRORES. IN THE PRESENT CASE, THE MOST IMPORTANT ASPECT, WHICH HAS NOT BEEN CONSIDERED BY TH E HIGH COURT, WAS THAT WITHDRAWAL OF MONEY BY THE ASSESSEE FROM HIS CAPITAL ACCOUNT, IN THE BOOKS OF MKI, DURING THE FIN ANCIAL YEAR 1999-2000 LED TO A DEBIT BALANCE OF RS. 8.18 CRORES A S ON MARCH 3 IST 2,000. TO THIS EXTENT, THE FINDING GIVEN BY T HE ASSESSING OFFICER AND BY THE TRIBUNAL REMAINS UNCHALLENGED.. ........ ACCORDING TO THE LD CIT, THE PRESENT CASE WAS SQUARELY COVERED BY THE ABOVE JUDGMENT OF THE HON'BLE APEX COURT. THE ACCUM ULATED PROFITS OF THE TWO COMPANIES AS ON 31.3.2006 WERE AS UNDER:- 1) M/S KWALITY ICE CREAM INDIA PVT. LTD. `.30,91, 28,877/- 2) M/S KWALITY PROCESSED FOOD & `.11,48,49,332/- EQUIPMENTS PVT. LTD/ THE LD CIT, THEREFORE, OPINED THAT THE AMOUNTS CONTR IBUTED AS PARTNERS CAPITAL BY THE TWO PARTNERS COMPANIES WERE TO BE TREA TED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT TO THE EXTENT OF AC CUMULATED PROFITS OF SUCH COMPANIES. 9. THE LD CIT, THEREFORE, EXERCISED HIS JURISDICTION U/S 263 OF THE ACT AND IN PARA 7.6. OF THE IMPUGNED ORDER HELD AS UNDER :- ITA NO1779/DEL/11 9 7.6. IN VIEW OF THE ABOVE FACTS, IT IS OBVIOUS THAT T HE ORDER OF THE ASSESSING OFFICER U/S 143(3) DATED 08.12.2008 IS ERRONEOU S AND PREJUDICIAL TO THE INTERESTS OF REVENUE BECAUSE THE DE EMED DIVIDEND U/S 2(22)(E) OF THE INCOME-TAX ACT, 1961, A CCRUING TO THE ASSESSEE, BY WAY OF PAYMENT RECEIVED AS PARTNERS' CA PITAL CONTRIBUTIONS FROM THE TWO PARTNER COMPANIES, WHICH A RE SUBSTANTIALLY CONTROLLED BY SH. PRADEEP WIG (AS INDIV IDUAL AND AS KARTA OF HUF) AND HIS WIFE SMT. NEERA WIG, WHO IN TU RN ARE ALSO MAJORITY STAKE HOLDERS IN THE ASSESSEE FIRM AS PARTNERS, HAS NOT BEEN BROUGHT TO TAX BY THE ASSESSING OFFICER. THEREFORE , CONSIDERING THE LAW LAID DOWN IN JUDGMENTS OF THE HON 'BLE SUPREME COURT IN THE CASE OF CIT VS. MUKUNDRAY K. SHA H [2007J 290 ITR 433 (SC), AS DISCUSSED ABOVE, THE ASSESSMENT ORDER OF THE AO PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961, DATED 8.12.2008 IS SET ASIDE WITH THE DIRECTIONS TO THE ASSESSING OFFICER TO FRAME THE ASSESSMENT AFRESH AS PER THE CORRECT PROVISI ONS OF LAW AND AFTER TAKING INTO ACCOUNT THE APPLICABILITY OF THE ABOVE JUDGMENT OF THE HON'BLE SUPREME COURT REPORTED IN 2 90 ITR 433. THE ASSESSEE SHOULD BE GIVEN SUFFICIENT OPPORTUNITY OF BE ING HEARD BEFORE THE ASSESSMENT IS FRAMED AFRESH. 10. AGGRIEVED THE ASSESSEE FILED APPEAL BEFORE THE TRIBUNAL. 11. BEFORE US LD AR FOR THE ASSESSEE SUBMITTED THAT T HIS WAS THE FIRST YEAR OF ASSESSMENT OF THE ASSESSEE FIRM. A COPY OF THE PART NERSHIP DEED DATED 12.7.2005 IS AVAILABLE IN ASSESSEES PAPER B OOK PAGES 22- 23 WHEREAS THE AMENDED PARTNERSHIP DEED DATED 31.8.2 005 IS AVAILABLE IN ASSESSEES PAPER BOOK PAGES 24-26. IT WAS CO NTENDED BY HIM THAT IN CONSONANCE WITH THE PARTNERSHIP DEED, TH E ASSESSEE DURING THE RELEVANT PREVIOUS YEAR ONLY INVESTED IN MUTUAL FU ND AND DID NOT DEAL WITH ANY SHARES. IT WAS, THEREFORE, CONTENDED B Y HIM THAT FACTS MENTIONED BY THE LD CIT IN THE IMPUGNED ORDER WHERE IN IT WAS STATED ITA NO1779/DEL/11 10 THAT THE ASSESSEE WAS CARRYING ON THE ACTIVITY OF PURCHA SE AND SALE OF MUTUAL FUNDS AND SECURITIES WERE INCORRECT. IT WAS CO NTENDED BY HIM THAT THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDING S DID EXAMINE THE ISSUE AS TO WHETHER THE INCOME SHOWN BY THE ASSESSEE WAS REQUIRED TO BE ASSESSED UNDER THE HEAD BUSINESS OR PROF ESSION OR UNDER THE HEAD CAPITAL GAINS AS WOULD BE EVIDENCED FR OM ASSESSEES PAPER BOOK PAGES 65,66 & 67. REFERRING TO ASSESSEES PAP ER BOOK PAGES 160-167, IT WAS CONTENDED BY HIM THAT THE TRANSA CTIONS ENTERED INTO BY THE ASSESSEE WERE ONLY FOR EARNING INCOME FROM INVESTMENT AND THEREFORE THE VIEW OF THE LD CIT THAT THE TRANS ACTIONS WERE REQUIRED TO BE SEEN WITH REFERENCE TO BOARDS CIRCULA R NO.4/2007 DATED 15.6.2007 ,WHICH PROBABLY THE ASSESSING OFFICER HAS FAIL ED TO DO, WAS INCORRECT. THE ASSESSING OFFICER NOTED THE FACTS SUBMITTE D BY THE ASSESSEE AND CAME TO A CONCLUSION THAT THE INCOME OF THE ASSESSEE WAS ASSESSABLE UNDER THE HEAD CAPITAL GAINS. IF THE CIT WAS OF A DIFFERENT VIEW THAN THAT TAKEN BY THE ASSESSING OFFICER , MERELY ON THAT BASIS HE WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 263 OF THE ACT. THE ISSUE AS TO WHETHER INCOME ARISING FROM IN VESTMENT FROM PMS SHOULD BE ASSESSED AS BUSINESS INCOME OR AS CAPITAL GAIN IS A DEBATABLE ISSUE. THERE ARE DECISIONS OF THE HONOURABLE TRIBUNAL THAT THE SAME IS REQUIRED TO BE ASSESSED AS CAPITAL GAIN. IF TH E AO HAS TAKEN ONE OF THE POSSIBLE VIEW, THE LD. CIT COULD NOT ASSUME JURISDICTION U/S 263 OF THE ACT. IN SUPPORT OF THE ABOVE PROPOSITION, THE LD AR FOR THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS AMONG OTHERS:- 1. CIT V. MAX INDIA LTD. 295 ITR 282 (SC), 2. CIT V. MALABAR INDUSTRIES LTD. 243 ITR 83(SC), 12. IT WAS FURTHER CONTENDED BY THE LD AR FOR THE ASSESSEE THAT THE FIRM IS A SEPARATE ENTITY FROM THAT OF ITS CONSTITUENT PARTNERS. THE FIRM WAS NOT A SHAREHOLDER OF EITHER OF THE COMPANIES WHO W ERE ITS ITA NO1779/DEL/11 11 PARTNERS. EVEN OTHERWISE, THE CAPITAL CONTRIBUTION MA DE BY THE PARTNER COMPANIES COULD NOT BE CONSIDERED AS LOAN OR ADVANCES. THUS, THESE AMOUNTS CANNOT BE CONSIDERED TO BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM. IN SUPPORT OF THE ABOVE PROPOSITION, THE LD AR FOR THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS;- 1. JUDGMENT OF HON'BLE DELHI HIGH COURT IN I.T.A. NO.4 62/2009 DATED 11.5.2011 IN THE CASE OF CIT V. ANKITECH (P) LTD. AN D OTHERS (ASSESSEES PAPER BOOK PAGES 192 TO 2440. 2. ACIT V. BHOUMIC COLOUR PVT. LTD. 118 ITD 1 (SB) (MU MBAI). 13. IT WAS CONTENDED BY THE LD AR FOR THE ASSESSEE THAT FOR ASSUMING JURISDICTION U/S 263 OF THE ACT, IT WAS OBLIGA TORY ON THE PART OF THE LD CIT TO SHOW THAT THE ORDER OF ASSESSING OFFICER W AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. IF THER E WERE TWO POSSIBLE VIEWS OR IF THE LD CIT ONLY RAISED SOME KIND OF DOUBT ON THE CORRECTNESS OF THE DECISION TAKEN BY THE ASSESSING OFFICER, IT WOULD NOT BE SUFFICIENT FOR HIM TO ASSUME JURISDICTION U/S 263 OF THE ACT. 14. AS REGARDS THE APPLICABILITY OF SECTION 2(22) (E) OF THE ACT IS CONCERNED, IT WAS POINTED OUT BY THE LD AR FOR THE A SSESSEE THAT THE LD CIT PROCEEDED ON WRONG FACTS. ACTUALLY THE SHARES OF P ROFIT & LOSS BY THE VARIOUS PARTNERS HAVE BEEN WRONGLY MENTIONED BY H IM. THE SHARE OF FOUR PARTNERS IN THE PROFIT & LOSS OF THE FIRM AS PE R THE PARTNERSHIP DEED WAS AS UNDER:- PARTNER SHARE IN PROFIT SHARE IN LOSS PRADEEP WIG (HUF) 20% 67% MRS. NEERA WIG. 10% 33% KWALITY ICE CREAM INDIA PVT.LTD. 50% NIL ITA NO1779/DEL/11 12 KWALITY PROCESSED FOOD & EQUIPMENTS PVT. LTD. 20% NIL 15. THE LD AR FOR THE ASSESSEE DISTINGUISHED THE CASE OF MR. MUNKANDREY (SUPRA). IT WAS ARGUED BY HIM THAT IN THA T CASE, MR. MUKENDRAY WAS A DIRECTOR AND SHAREHOLDER OF MKSCPL, T HE COMPANY THAT MADE PAYMENTS TO THE TWO FIRMS, NAMELY, NKF AND NKI IN WHICH HE WAS A PARTNER. THE AMOUNT PAID BY THE COMPANY IN TH ESE FIRMS WAS WITHDRAWN BY MR. MUKENDRAY AND THE AMOUNTS WERE UTIL IZED FOR PURCHASE OF BONDS. IN THE ABOVE FACTS, IT WAS HELD BY HON'BLE COURT THAT SECTION 2(22)(E) WAS ATTRACTED. HOWEVER, IN THE PRESENT CASE, THE COMPANIES MADE CAPITAL CONTRIBUTION IN THE ASSESSEE FIR M AND THE LD CIT(A) HAS ALLEGED THAT DEEMED DIVIDEND WAS REQUIRED TO BE TAXED IN THE HANDS OF THE FIRM IN VIEW OF THE JUDGMENT IN THE CASE OF MR. MUKENDRAY. THE FIRM IS NOT A SUBSTANTIAL SHAREHOLDER OF THE PARTNER COMPANIES. THUS, THE CASE OF MR. MUKENDRAY DID NOT AP PLY TO THE FACTS OF THE PRESENT CASE. SIMILARLY, BY STATING THE FACTS I N THE CASE OF ALAGUSUNDARAM (SUPRA), THE LD AR FOR THE ASSESSEE ARGUE D THAT THE ABOVE CASE IS ALSO DISTINGUISHABLE ON FACTS. IT WAS FURTHE R SUBMITTED BY THE LD AR FOR THE ASSESSEE THAT FOR SUBSEQUENT ASSESSMENT YE AR THE CONTENTION OF THE ASSESSEE HAS BEEN ACCEPTED BY THE DEPA RTMENT. IT WAS, THEREFORE, SUBMITTED BY HIM THAT THE LD CIT WAS N OT JUSTIFIED IN ASSUMING JURISDICTION U/S 263 OF THE ACT. 16. THE LD DR, ON THE OTHER HAND, SUBMITTED THAT THE IMPUGNED ASSESSMENT ORDER WAS CRIPTIC. IT IS ONLY A ONE PAGE ORDER ACCEPTING THE INCOME RETURNED BY THE ASSESSEE. FROM THE SAID ORDER, I T CANNOT BE MADE OUT AS TO WHETHER THE ISSUES RAISED BY THE LD CIT W ERE EXAMINED BY THE ASSESSING OFFICER OR NOT. REFERRING TO THE ASSESSEE S PAPER BOOK ITA NO1779/DEL/11 13 PAGE 65, IT WAS CONTENDED BY HIM THAT THOUGH THE DET AILS WERE CALLED FOR, THE ASSESSING OFFICER DID NOT APPLY HIS MIND TO THE SAME AND MERELY ACCEPTED THE SUBMISSION OF THE ASSESSEE. AS THIS WAS T HE FIRST YEAR OF ASSESSMENT AND AS IT WAS NOT A VERY NORMAL PARTNE RSHIP, IT WAS SUBMITTED BY LD DR THAT, THE ASSESSING OFFICER WAS REQUIR ED TO APPLY HIS MIND TO THE CASE. 17. IT WAS FURTHER SUBMITTED BY HIM THAT THE PARTN ERSHIP DEED WAS SIGNED ON 12.7.2005 AND THE SAME WAS MODIFIED ON 31.8. 2005. IT IS THE CLAIM OF THE ASSESSEE THAT BY MODIFYING CLAUSE (2) O F THE PARTNERSHIP DEED THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE BECOME INVESTMENTS MADE BY THE ASSESSEE AND RECOUPING OF THE SAME INVESTMENT. THE INCOME ,THEREFORE, BECOMES TAXABLE UN DER THE HEAD CAPITAL GAINS. THUS, ACCORDING TO THE ASSESSEE NO BUSINE SS WAS CARRIED ON BY IT DURING THE RELEVANT ASSESSMENT YEAR. IN THE A BOVE FACTS, IT IS CONTENDED BY HIM THAT THE CASE WAS REQUIRED TO BE EXA MINED KEEPING IN VIEW BOARDS CIRCULAR NO.4 OF 2007 SUPRA. AS THE ASSESSING OFFICER HAS FAILED TO DO SO THE ORDER PASSED BY THE ASSESSING OFFI CER WAS PREJUDICIAL TO THE INTEREST OF REVENUE AND THE LD CI T WAS JUSTIFIED IN ASSUMING JURISDICTION U/S 263 OF THE ACT. IT WAS FURTHER SUBMITTED BY THE LD DR THAT IT WAS NOT NECESSARY FOR THE CIT TO GIV E SPECIFIC DIRECTION IN AN ORDER PASSED U/S 263 OF THE ACT. HE C AN ALSO SET ASIDE THE IMPUGNED ASSESSMENT ORDER AND DIRECT THE ASSESSING OFF ICER TO DO NECESSARY ENQUIRY WHICH HE HAS NOT DONE WHILE FRAMING THE IMPUGNED ASSESSMENT ORDER. ON THE ISSUE OF APPLICABILITY OF SECTIO N 2(22)(E) OF THE ACT, IT WAS CONTENDED BY THE LD DR THAT THE ASSESSIN G OFFICER DID NOT EXAMINE THIS ISSUE AT ALL. IT WAS SUBMITTED BY HIM THAT IF THE ASSESSING OFFICER FAILED TO MAKE ENQUIRY WHICH WAS REQU IRED TO BE MADE, THE LD CIT CAN ASSUME JURISDICTION U/S 263 OF THE ACT. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- ITA NO1779/DEL/11 14 1) 99 ITR 375 (DEL.) GEE VEE ENTERPRISES V. ADDL. CIT. 2) 220 ITR 456 (DEL.) DUGGAL & CO. V. CIT. 3) 243 ITR 83 (SC).MALABAR INDL. CO. LTD. V CIT. 4) 299 ITR 435 (MP) CIT V. DEEPAK KUMAR GARG. 5) 301 ITR 45 (RAJ.). SMT. RENU GUPTA V. CIT. 18. AS REGARDS THE SUBMISSION OF THE LD AR FOR THE ASSESSEE THAT IN SUBSEQUENT YEAR THE CLAIM OF THE ASSESSEE HAS BEEN ACCE PTED BY THE ASSESSING OFFICER, IT HAS BEEN SUBMITTED BY THE LD DR THAT THERE IS NO RES JUDICATA IN INCOME TAX PROCEEDINGS AND EVERY Y EAR IS AN INDEPENDENT YEAR. 19. IN THE REJOINDER, THE LD AR FOR THE ASSESSEE SU BMITTED THAT IT IS NOT DISPUTED THAT THE LD CIT IN EXERCISE OF HIS POWER U/S 263 OF THE ACT CAN SET ASIDE THE ASSESSMENT ORDER AND DIRECT THE ASSESSING OFFICER TO MAKE FURTHER ENQUIRIES. HOWEVER, IN THE PRESENT CASE, IT IS CONTENDED BY THE LD AR FOR THE ASSESSEE THAT, THE ASSESSING OFFICER D ID ALL NECESSARY ENQUIRIES REQUIRED IN THE FACTS OF THE PRESENT CASE AND NO FURTHER ENQUIRY WAS REQUIRED TO BE DONE. ACCORDING T O THE LD AR FOR THE ASSESSEE THE DETAILS FURNISHED IN THE ASSESSEES PAPER BOOK W OULD SHOW THAT THE ASSESSING OFFICER HAS MADE REQUISITE ENQUIRY AND COME TO A PARTICULAR CONCLUSION. IF THE LD CIT HAD A DIFF ERENT OPINION, IT WAS CONTENDED BY HIM ,ON THAT BASIS JURISDICTION U/S 263 O F THE ACT COULD NOT BE VALIDLY ASSUMED BY HIM. 20. AS REGARDS THE APPLICABILITY OF SECTION 2(22)( E) OF THE ACT, IT WAS CONTENDED BY THE LD AR FOR THE ASSESSEE THAT ALL RE LEVANT FACTS ARE ON RECORD. THE LD CIT HAD MADE ALL THE REQUISITE ENQ UIRIES IN THIS ITA NO1779/DEL/11 15 REGARD AND THEREFORE HE SHOULD HAVE GIVEN A CLEAR CU T DIRECTION ON THE SAME. 21. AS REGARDS THE APPLICABILITY OF INSTRUCTION NO .4 OF 2007, IT WAS SUBMITTED BY THE LD AR FOR THE ASSESSEE THAT ALTHOUGH N O ENQUIRY WAS MADE SPECIFICALLY ON THIS ISSUE BY THE ASSESSING OFFICER, H E DID MAKE ENQUIRY REGARDING THE ASSESSABILITY OF INCOME UNDER THE HEAD CAPITAL GAIN. JUST BECAUSE NO SPECIFIC ENQUIRY WAS MADE, IT WO ULD NOT MEAN THAT THE ASSESSING OFFICER WAS NOT AWARE OF THE INSTRUCTI ON AND THAT THE SAME WAS NOT APPLIED BY HIM IN COMING TO THE CONCLUSIO N THAT THE INCOME OF THE ASSESSEE WAS ASSESSABLE UNDER THE HEAD CAPITA L GAIN. IT WAS, THEREFORE, CONTENDED BY HIM THAT THE IMPUGNE D ORDER OF THE LD CIT U/S 263 BE QUASHED. 22. THE CASE WAS SUBSEQUENTLY FIXED FOR CLARIFICATION W HEN THE LD AR FOR THE ASSESSEE WAS ASKED TO CLARIFY FOLLOWING POINTS:- 1) WHETHER A PARTNERSHIP FIRM CAN EXIST FOR THE PURPOSE OTHER THAN CARRYING ON A BUSINESS. 2) PURPORT OF HON'BLE JURISDICTIONAL HIGH COURTS DECISIO N IN THE CASE OF CIT V. M/S NATIONAL TRAVELS SERVICES I.T.A. NO.223 OF 2010, 3. EFFECT OF HOLDING OF SHARES OF M/S KWALITY ICE CRE AMS INDIA PVT. LTD. BY THE FIRM. 23. AS REGARDS THE FIRST QUERY, IT WAS SUBMITTED BY T HE LD AR FOR THE ASSESSEE THAT THE ASSESSEE INTENDED TO DO BUSINESS OF MONEY LE NDING. THOUGH THERE WAS NO EVIDENCE OF COMMENCING BUSINESS OF MONEY LENDING, AS THE ASSESSEE INTENDED TO DO SO, IT WAS CONTEND ED BY THE LD AR FOR THE ASSESSEE THAT THE PARTNERSHIP WAS VALID. IT W AS ALSO CONTENDED BY HIM THAT A PARTNERSHIP COULD EXIST FOR A PURPOSE OTHER ITA NO1779/DEL/11 16 THAN THE PURPOSE OF CARRYING ON BUSINESS. HOWEVER, NO A UTHORITY IN SUPPORT OF THE ABOVE CONTENTION COULD BE FURNISHED B Y THE LD AR FOR THE ASSESSEE. 24. WITH REFERENCE TO THE HON'BLE JURISDICTIONAL HIG H COURTS DECISION IN THE CASE OF CIT V. M/S NATIONAL TRAVELS SERVICES (SUP RA), IT WAS CONTENDED BY THE LD AR FOR THE ASSESSEE, THAT THERE IS A FACTUAL DIFFERENCE BETWEEN THAT CASE AND THE PRESENT ONE. IN THE CASE OF NATIONAL TRAVELS SERVICES (SUPRA), FIRMS MONEY WAS INVE STED IN THE SHARES OF THE COMPANY WHEREAS IN THE PRESENT CASE THE SH ARE HOLDERS INVESTED THEIR OWN MONEY FOR ACQUIRING SHARES OF THE C OMPANY. THUS, IT WAS CONTENDED THAT THE RATIO LAID DOWN BY THE JURISDI CTIONAL HIGH COURT IN THE CASE OF M/S NATIONAL TRAVELS SERVICES LTD. (SUPRA ) WAS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE. 25. AS REGARDS THE ISSUE OF HOLDING SHARES OF M/S KWALITY ICRE-CREAM INDIA PVT. LTD., IT WAS SUBMITTED BY THE LD AR FOR TH E ASSESSEE THAT THE SAME WAS RECEIVED ON CAPITAL ACCOUNT AND NOT AS LOAN O R ADVANCE. EVEN OTHERWISE, AMOUNTS WERE RECEIVED FROM THE SAID C OMPANY PRIOR TO THE DATE WHEN THE FIRM BECAME THE OWNER OF SUCH S HARES. IN SUCH CIRCUMSTANCES, IT WAS CONTENDED BY HIM THAT SECTION 2(2 2)(E) WOULD HAVE NO APPLICATION. RELIANCE WAS PLACED ON THE FOL LOWING CASE LAWS:- 1. CIT V. LATE CR DASS 157 DTR 201. 2. CIT V. HK MITTAL 219 ITR 420 (ALLD.). 3. CIT V. SMT. S. PARVATHANI AMAL 219 ITR 661 (KERALA) . 4. DCIT V. OSKAR INVESTMENT LTD. 98 ITD 399 (BOM.). 26. THE LD DR, ON THE OTHER HAND, EMPHASIZED THAT TH E MERIT OF THE ISSUES INVOLVED, THAT IS AS TO WHETHER A PARTICULAR AMOU NT WAS ITA NO1779/DEL/11 17 ASSESSABLE AS INCOME OR NOT, IS NOT MATERIAL FOR DECIDING THE ISSUE AS TO WHETHER LD CIT WAS JUSTIFIED IN ASSUMING JURISDICTION U/ S 263 OF THE ACT. IN THE PRESENT CASE, THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE NOT EXAMINED BY THE ASSESSING OFFICER. THE BOOKS OF ACCOUNTS WERE ALSO NOT AUDITED. THE EXAMINATION MADE BY THE LD CIT WAS NECESSITATED BECAUSE NO SUCH EXAMINATION WAS MADE BY THE ASSESSING OFFI CER. THE LD CIT HAS APPLIED HIS MIND TO THE FACTS OF THE CASE WH EREAS THERE IS NO INDICATION THAT THE ASSESSING OFFICER HAS DONE SO. THUS, IT WAS CONTENDED BY HIM THAT THE LD CIT WAS JUSTIFIED IN ASSUM ING JURISDICTION U/S 263 OF THE INCOME TAX ACT, 1961. 27. IN THE REJOINDER, THE LD AR FOR THE ASSESSEE SUBMIT TED THAT IT WAS INCORRECT TO SAY THAT BOOKS OF ACCOUNTS WERE NOT EXAMI NED BY THE ASSESSING OFFICER. HE REITERATED HIS SUBMISSION THAT THE I MPUGNED ORDER OF THE OF THE LD CIT MAY PLEASE BE CANCELLED. 28. WHEN ASKED BY THE BENCH REGARDING THE IMPLICATIO N OF THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF DALMIA CEMENT PVT. LTD. WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT DESPITE SPECIFIC AND POINTED QUERIES IN SECTION 143(3) ASSESSMENT , THE ASSESSING OFFICER CANNOT BE SAID TO HAVE FORMED ANY OPIN ION IF EXPLICIT OPINION WAS NOT RECORDED, THE LD AR FOR THE ASSESSEE WAS NOT ABLE TO ENLIGHTEN US ON THE SAME. 29. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. WE HAVE ALSO GONE THROUGH THE CASE LAWS RELIED ON BY EITHER OF THE PARTIES. BEFORE DECIDING THE ISSUES AT HAND, WE WOULD LIKE TO ENUMERAT E/REPRODUCE THE RELEVANT MATERIAL. I)THE IMPUGNED ASSESSMENT ORDER DATED 8.12.2008 IS AS UN DER:- ITA NO1779/DEL/11 18 THE ASSESSEE FIRM FILED ITS RETURN OF INCOME ON 29.07.2 006 DECLARING INCOME OF `.418,84,945/-. THE CASE WAS PROC ESSED U/S 143(1) OF THE IT ACT ON 31.3.2008. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. NOTICE U/S 143(2) OF THE INCOME TAX ACT DATED 18.7.2007 WAS SENT THROUGH SPEED POST. A NOTHER NOTICE U/S 142(1) ALONG WITH QUESTIONNAIRE DATED 8.9. 2008 WAS ISSUED AND SERVED ON THE ASSESSEE. IN RESPONSE TO THE SAID NOTICE SHRI KEDAR MISHRA AND MS. SWEETY KOTHARI, ARS OF THE ASSESSEE FIRM ATTENDED THE C ASE FROM TIME TO TIME AND THE CASE WAS DISCUSSED WITH THEM. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MONEY LENDING AND DERIVED INCOME FROM BUSINESS CAPITAL GAIN. DETAILS WERE FILED AND EXA MINED ON TEXT CHECK BASIS. IN VIEW OF THE ABOVE, THE RETURNED INCOME OF THE ASSE SSEE IS ACCEPTED. ASSESSED AT AN INCOME OF `.418,84,945/-. ISSUE NECESSARY FO RMS, GIVE CREDIT TO REPAID TAXES, CHARGE INTEREST AS PER TH E PROVISIONS OF THE IT ACT. (SD/-) (RAVINDER MAINI) ASSESSMENT. CIT, CIRCLE-32(1), NEW DELHI. ITA NO1779/DEL/11 19 II) AS PER ORDER SHEET ENTRY FOR ASSESSMENT EFFECTIVE HEA RING STARTED ON 21.11.2008 AND THE SAME WAS COMPLETED ON 8.12.2008 ON WHICH DATE THE ASSESSMENT ORDER WAS PASSED (DEPARTMENTAL PAPER BOOK PAGE 13-14). AS PER ASSESSEES P APER BOOK PAGE 65, NOTICE U/S 142(1) WAS ISSUED ON 8.9.2008 FIXING HEARING ON 16.9.2008 BUT THERE IS NO ORDER SHEET ENTR Y TO THAT EFFECT. IN THE ORDER SHEET, THERE IS ENTRY DATED 21. 11.2008 ONWARDS. III) ON 21.11.2008, THE FOLLOWING DETAILS WERE ASKED FOR:- PRESENT MR. KEDAR MISHRA, AR. FURNISHED REPLY, WHICH I S PUT ON RECORD. REQUESTED TO BRING REMAINING DETAILS ALONG W ITH THE FOLLOWING DETAILS/DOCUMENTS:- - IF THE ACCOUNTS HAVE BEEN AUDITED OR NOT? -PROVISION OF AUDIT REPORT. - LICENCE OF MONEY LENDING. - POA. - SEPARATE BOOKS FOR STOCK-IN-TRADE AND INVESTMENT ASSE TS. - IF PROVISIONS OF SEC. 94(7) /94(7)/94(8) APPLICABLE OR NOT. - DIVIDEND DETAILS. -EXPN. REGARDING STCG (GENERATED DURING FOURTH QUAR TER JAN- MAR). - S.T.G.C. ON TAX EXEMPTED MUTUAL FUND. - LATEST PARTNERSHIP DEED. - ADDITION TO CAPITAL (SOURCE). -LOANS & ADVANCES GIVEN. - PROVISIONS. IV) FIRST PARTNERSHIP DEED AS ENTERED INTO ON 12.7.200 5. PARA 2 OF PAGE 1 OF THE PARTNERSHIP DEED READS AS UNDER:- ITA NO1779/DEL/11 20 WHEREAS THE FIRST, SECOND, THIRD AND THE FOURTH PARTI ES AFORESAID HAVE DECIDED TO FORM A PARTNERSHIP FOR THE PURPOSE O F DOING BUSINESS W.E.F. 12TH JULY, 2005 ADMITTING THE FIRST & SE COND PARTNERS AS WORKING PARTNERS WITHOUT CAPITAL AND HENC E FORMED THE PARTNERSHIP. PARA 2, PAGE 2 OF THE DEED READS AS UNDER:- THAT THE BUSINESS OF THE FIRM SHALL BE COMPRISING OF IN VESTMENTS IN STOCKS, SHARES, DEBENTURES, BONDS, MUTUAL FUNDS, OR ANY OTHER SECURITIES OF LENDING OF MONIES FOR INTEREST, OR ON OTH ER TERMS AND CONDITIONS OUT OF OWN FUND OR ARRANGED FUNDS IN THE NAME OF THE FIRM OR SUCH OTHER NAMES AS MAY BE MUTUALLY AGREED TO AMONG THE PARTNERS AND FOR THIS PURPOSE BORROWING MONIES FROM ANY SOURCE OR SOURCES INCLUDING BANKS, FINANCIAL INSTITUTION S, PARTNERS AND OR THEIR ASSOCIATES OR ASSOCIATED CONCERN OR RELATIV ES AND OTHER PERSONS ON SUCH TERMS AND CONDITIONS BY OFFERING A S SECURITIES ASSETS OF THE FIRM, PARTNERS, THEIR ASSOCIATES CO NCERNS OR RELATIVES THAT MAY BE MUTUALLY AGREED AMONG THE P ARTNERS FROM TIME TO TIME. V). THE SECOND PARTNERSHIP DEED WAS ENTERED ON 31.8.2 005. PARA 2 OF THE PAGE 2 READS AS UNDER:- THAT THE FIRM SHALL INVEST IN STOCKS, SHARES, DEBENTU RES, BONDS. MUTUAL FUNDS OR ANY OTHER SECURITIES AND CARRY ON THE BUSINESS OF LENDING OF MONIES FOR INTEREST, OR ON OTHER TERMS AND CONDITIONS OUT OF OWN FUNDS OR ARRANGED FUNDS IN THE NAME OF T HE FIRM OR SUCH OTHER NAMES AS MAY BE MUTUALLY AGREED TO AMONG TH E PARTNERS AND FOR THIS PURPOSE BORROWING MONIES FROM ANY SOURCE ITA NO1779/DEL/11 21 OF SOURCES INCLUDING BANKS, FINANCIAL INSTITUTIONS, PAR TNERS AND OR THEIR ASSOCIATES OR ASSOCIATED CONCERNS OR RELATIVES AND O THER PERSONS ON SUCH TERMS AND CONDITIONS BY OFFERING AS SECUR ITIES ASSETS OF THE FIRM, PARTNERS, THEIR ASSOCIATES, ASSOCIATED C ONCERNS OR RELATIVES THAT MAY BE MUTUALLY AGREED AMONG THE P ARTNERS FROM TIME TO TIME. VI). AS PER COPY OF ACCOUNT OF KPF (P) LTD. IN ASSESSEE S BOOKS OF ACCOUNTS TILL 30.8.2005, TOTAL AMOUNT OF `.9.75 CROR ES WERE RECEIVED, SIMILARLY, TOTAL AMOUNT OF `.30 CRORES WERE RECEIVED TILL 30.8.2005 FROM THE OTHER PARTNER COMPANY (APB 119-1 20). VII). SUBSCRIPTION TO MUTUAL FUND MADE TILL 30.8.200 5 AMOUNTED TO `.31.50 CRORES (APB 155). VIII).NOTE NO.3 OF SCHEDULE-16 OF AUDIT REPORT OF K WALITY ICE CREAM (INDIA) PVT. LTD. READS AS UNDER:- PARTICULARS IN RESPECT OF INVESTMENT IN PARTNERSHIP FI RM OF M/S WIG INVESTMENTS IN WHICH DIRECTORS ARE INTERESTED/PARTNERS. NAME OF PARTNER CAPITAL AS AT SHARE OF 31 ST MARCH 2006 PROFIT (`.). % KWALITY ICE CREAM(INDIA) PVT. LTD. 291,998,70 50 KWALITY PROCESSED FOOD SERVICES & EQUIPMENT PVT. LTD. 107,299,508 20 MR. PRADEEP WIG (HUF). 9,999.508 20 MRS. NEERA WIG. 5,499.754 10 --------------------------- -------------- 414,797,540 100 --------------------------- ------------- THE PARTNERSHIP WAS FORMED ON 12 TH JULY, 2005. ITA NO1779/DEL/11 22 IX). SIMILARLY, NOTE NO.2 OF SCHEDULE-15 OF THE AUD IT REPORT OF M/S KWALITY PROCESSED FOOD SERVICES & EQUIPMENT PVT. LT D. READS AS UNDER:- --------------------------------------------------- ------------------------------------------------ PARTICULARS IN RESPECT OF INVESTMENT IN PARTNERSHIP FI RM OF M/S WIG INVESTMENTS IN WHICH DIRECTORS ARE INTERESTED/PARTNERS. NAME OF PARTNER CAPITAL AS AT SHARE OF 31 ST MARCH 2006 PROFIT (`.). % KWALITY ICE CREAM(INDIA) PVT.LTD. 291,998,70 50 KWALITY PROCESSED FOOD SERRVICES & EQUIPMENT PVT. LTD. 107,299,508 20 MR. PRADEEP WIG (HUF). 9,999.508 20 MRS. NEERA WIG. 5,499.754 10 --------------------------- -------------- 414,797,540 100 --------------------------- ------------- THE PARTNERSHIP WAS ENTERED INTO ON 12 TH JULY, 2005. X) SHARE OF PROFIT/LOSS OF THE PARTNERS AS PER IST & 2 ND PARTNERSHIP DEEDS ARE AS UNDER:- --------------------------------------------------- ----------------------------------------------- PARTNER IST DEED 2 ND DEED PROFIT LOSS PROFIT LOSS IST 25% 50% 20% 67% 2 ND 25% 50% 10% 33% 3 RD 40% NIL 50% NIL 4 TH 10% NIL 20% NIL WITH CERTAIN CONDITIONS. ITA NO1779/DEL/11 23 30. PERUSAL OF THE ABOVE MATERIAL WOULD SHOW THAT THE ISSUES INVOLVED WERE QUITE COMPLEX TO WHICH THE ASSESSING OFFI CER DID NOT APPLY HIS MIND AND MECHANICALLY ACCEPTED THE SUBMISSIO NS OF THE ASSESSEE WITHOUT ANY COGENT REASONS. 31. WE ALSO AGREE WITH THE SUBMISSIONS OF THE LD CIT (DR ) THAT THE ISSUE BEFORE US IS NOT ASSESSIBILITY OF ANY AMOUNT ON MERIT . WE ARE TO DECIDE THE ISSUE OF JURISDICTION OF THE LD CIT U/S 263 OF THE ACT. WE WOULD, THEREFORE, NOT DISCUSS THE SUBMISSIONS OF THE LD AR FOR THE ASSESSEE ON THE ISSUE OF ASSESSIBILITY OF ANY AMOUNT AS INCOME OF THE ASSESSEE. 32. IT IS NOT DISPUTED THAT THE TRANSACTIONS ENTER ED INTO BY THE ASSESSEE WERE WITH REFERENCE TO MUTUAL FUNDS, THE DETAIL S OF WHICH ARE AVAILABLE IN ASSESSEES PAPER BOOK PAGES 160 TO 167. AL L THE TRANSACTIONS WERE ENTERED INTO FROM IST AUGUST, 2005 T O 31 ST MARCH, 2006 I.E. WITHIN A PERIOD OF 8 MONTHS. THE TRANSACTIO NS WERE MADE IN THE PORTFOLIO OF 3685594217 . IT HAS ALSO BEEN STATED BY THE LD AR FOR THE ASSESSEE THAT ALL THE TRANSACTIONS WERE THROUGH POR TFOLIO MANAGER TO WHOM PORTFOLIO MANAGEMENT FEES HAS BEEN PAID. THE ASSESSEE DID NOT ENTER INTO ANY SHARE TRANSACTION DURING THE YEAR UNDER CONSIDERATION. THE CURRENT VALUE OF THE HOLDING OF THE ASSESSEE IN THE PORTFOLIO OF 3685594217 AS ON 31.3.2006 WAS `.33,18,3 1,674/-. 33. FROM THE ABOVE FACTS, IT IS CLEAR THAT THE ASSESSE E DID NOT ENTER INTO ANY INDEPENDENT TRANSACTION DURING THE YEAR UND ER CONSIDERATION. ALL THE TRANSACTIONS WERE MADE THROUGH PORTFOLIO MA NAGERS. IF IT IS SO, THE NATURE OF TRANSACTIONS WOULD DEPEND ON THE TERMS OF PMS AGREEMENTS. WE FIND THAT COPIES OF PMS AGREEMENTS WERE FURNISHED BY THE ASSESSEE ONLY BEFORE THE LD CIT. THUS, THE SUBMISSION OF THE LD AR ITA NO1779/DEL/11 24 FOR THE ASSESSEE THAT THE ASSESSING OFFICER HAD MADE ALL RE QUISITE ENQUIRY AS PER BOARDS CIRCULAR NO.4 / 2007 DOES NOT APPEAR TO BE BORNE OUT OF THE RECORD. 34. ALSO FROM THE PROFIT & LOSS ACCOUNT OF THE ASSESSE E AVAILABLE ON ASSESSEES PAPER BOOK PAGE 19 AND COMPUTATION OF INC OME AVAILABLE ON APB 17, WE FIND THAT THE ASSESSEE HAS REDUC ED PORTFOLIO MANAGEMENT FEE OF `.3,73,053/- FOR ARRIVING AT TAXA BLE CAPITAL GAIN. FROM THE ABOVE, IT DOES NOT APPEAR THAT THE ASSESSING OF FICER HAS APPLIED HIS MIND WHILE PASSING THE CRYPTIC ONE PAGE OR DER WHICH WE HAVE REPRODUCED EARLIER. 35. THE LD CIT ,IT APPEARS ,WAS OF THE PRIMA FACI E OPINION THAT EITHER THE INCOME OF THE ASSESSEE SHOULD BE ASSESSED UNDER T HE HEAD BUSINESS INCOME OR IF THE SAME IS ASSESSED UNDER THE HEAD C APITAL GAIN, THE PARTNERSHIP DEED ENTERED INTO BY THE PARTI ES WOULD AMOUNT TO A DEVICE FOR UTILIZATION OF THE FUNDS OF THE TWO PAR TNER COMPANIES BY THE SHARE HOLDERS WHO ARE PARTNERS IN THE ASSESSEE FIRM. THE ASSESSING OFFICER DID NOT ENQUIRE INTO THE ABOVE ISSUE AN D THEREFORE THE LD CIT SET ASIDE THE IMPUGNED ORDER WITH THE DIRE CTION THAT THE ASSESSING OFFICER SHOULD MAKE ALL NECESSARY ENQUIRIES AND COME TO A CONCLUSION AS PER LAW. THE ABOVE VIEW OF THE LD CIT APPEARS TO BE QUITE REASONABLE IN THE FACTS NARRATED BY US HEREIN A BOVE. IT IS UN- DISPUTED PROPOSITION OF LAW THAT NO PARTNERSHIP AS PER THE INDIAN PARTNERSHIP ACT, 1932 CAN COME IN TO EXISTENCE FOR AN Y PURPOSE OTHER THAN THAT OF CARRYING ON BUSINESS. IF THE PARTNERSHIP ON THE BASIS OF WHICH THE ASSESSEE CAME INTO EXISTENCE WAS NOT CARRYING ON ANY BUSINESS SUCH PARTNERSHIP DEED WOULD BE A INVALID DEED A ND IN SUCH CIRCUMSTANCES, AND THE FACTS OBTAINED IN THE PRESENT C ASE, POSSIBLY THE PRIMA FACIE OPINION OF THE LD CIT THAT THE PARTNERSH IP WAS ENTERED INTO ITA NO1779/DEL/11 25 ONLY TO UTILIZE THE FUNDS OF THE SO-CALLED PARTNER CO MPANIES BY THE OTHER PARTNERS OF THE ASSESSEE FIRM MAY BE CORRECT. EVEN OTHERWISE, AS PER THE PARTNERSHIP DEEDS, INITIAL CAPITAL CONTRIBUTI ON MADE BY KICIPL AND KPFS&EPL WERE TO BE 2000 LAKHS AND 500 LAKHS RESPE CTIVELY. THERE IS NO PROVISION FOR FIXED CAPITAL. AS PER COPY O F CAPITAL ACCOUNTS, THE MAXIMUM CREDIT BALANCE IN THE CAPITAL ACCOUNTS O F THE TWO COMPANIES DURING THE YEAR WERE RS.3000 LAKHS AND RS.107 3 LAKHS(APPROX) RESPECTIVELY( APB 119-120). WE HAVE NOT ICED THAT M/S KWALITY PROCESSED FOOD SERVICES & EQUIPMENTS PVT. LTD. CONTRIBUTED SHARES OF M/S KWALITY ICE CREAM INDIA PVT. LTD. AT `.4 ,88,00,000/- AS ITS CAPITAL IN THE ASSESSEE FIRM. THE ASSESSING OFFICER DID N OT ENQUIRE INTO THIS ASPECT OF THE CASE. FROM THE DETAILS FILED BY THE ASSESSEE BEFORE THE LD CIT DURING THE 263 PROCEEDINGS, NAMELY, THE P HOTO COPY OF BALANCE SHEET, PROFIT & LOSS A/C OF M/S KWALITY ICE CRE AM INDIA PVT. LTD., AND M/S KWALITY PROCESSED FOOD SERVICES & EQUIPME NT LTD. AVAILABLE IN ASSESSEES PAPER BOOK PAGES 129 TO 154, IT I S NOTICED THAT THE TOTAL NUMBER OF SHARES ISSUED BY M/S KWALITY ICE CRE AM INDIA PVT. LTD. WERE 16000 OUT OF WHICH 6034 EQUITY SHARES WERE CONTRIBUTED BY M/S KWALITY PROCESSED FOOD SERVICES & EQUIPMENT PVT. LT D. AS ITS SHARE CAPITAL IN THE ASSESSEE FIRM. THUS, CLEARLY SECTION 2(22 )(E) WAS ATTRACTED IN ASSESSEES CASE IF THE [PARTNERSHIP DEED WA S HELD TO BE A MERE DEVICE. 36. IN VIEW OF THE DISCUSSION MADE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE LD CIT WAS JUSTIFIED IN COMING TO TH E CONCLUSION THAT THE IMPUGNED ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AS THE ASSESSING OFFICER HAS FAILED TO TAKE INTO CONSIDERATION CIRCULA R NO.4/2007 DATED 15.6.209097 AND INSTRUCTION NO.1527 DATED 31 ST AUGUST, 1989 OF THE ITA NO1779/DEL/11 26 CBDT WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. THUS GROUND NO.1 TAKEN BY THE ASSESSEE IS REJECTED. 37. AS REGARDS GROUND NO.2 & 4 TAKEN BY THE ASSESSEE ON THE ISSUE OF APPLICABILITY OF SECTION 2(22)(E)OF THE ACT, WE HAVE DISCUSSED THE IMPUGNED ISSUE IN THE EARLIER PART OF THIS ORDER. IT IS NOT DISPUTED BY THE ASSESSEE THAT THE ASSESSEE FIRM WAS HOLDING MORE THAN 10% VOTING POWER IN THE COMPANY M/S KWALITY ICE CREAM IN DIA PVT. LTD. THIS ASPECT WAS NOT AT ALL INVESTIGATED BY THE ASSESSING OFFICE R. THE LD CIT IN HIS ORDER U/S 263 OF THE ACT HAS DIRECTED THE ASSESSING OFFICER TO ENQUIRE AS TO WHETHER THE PARTNERSHIP DEED BY WHICH T HE ASSESSEE CAME INTO BEING WAS A DEVICE OR NOT AND IF IT WAS A D EVICE WHETHER SECTION 2(22)(E) OF THE ACT WAS ATTRACTED IN ASSESSEES CA SE. IN THE FACTS NARRATED BY US, WE ARE OF THE CONSIDERED OPINION THAT THE LD CIT WAS QUITE JUSTIFIED IN GIVING THE ABOVE DIRECTION. T HE ASSUMPTION OF JURISDICTION U/S 263 OF THE ACT ON THE ABOVE GROUND B Y THE LD CIT WAS ALSO JUSTIFIED. 38. WE HAVE NOT DISCUSSED THE CASE LAWS CITED BY BOTH THE PARTIES AS FACTUALLY WE ARE OF THE OPINION THAT THE ASSESSING OFFI CER DID NOT MAKE NECESSARY ENQUIRIES AS WERE REQUIRED TO BE MADE BY HIM AND WITHOUT APPLICATION OF MIND HAS ACCEPTED IN TOTO THE SUBMISSION S OF THE ASSESSEE. HOWEVER, WE FIND THAT THE LD. CIT HAS GIVEN SP ECIFIC FINDING ON CERTAIN ISSUES EVEN THOUGH HE HAS DIRECTED THE AO TO REFRAME THE ASSESSMENT AS PER THE CORRECT PROVISIONS OF LAW AND AFTER GIVING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD. WE ARE OF THE CONSIDERED OPINION THAT HE WAS NOT JUSTIFIED IN GIVING SUCH SPECIFIC FINDINGS. THE IMPUGNED ORDER U/S 263 OF THE ACT IS ACC ORDINGLY MODIFIED AND THE AO IS DIRECTED TO REFRAME THE ASSESSMENT AS PER L AW WITHOUT ITA NO1779/DEL/11 27 BEING BOUND DOWN BY SUCH FINDINGS OF THE LD. CIT. GRO UND NOS. 2,3 AND 4 TAKEN BY THE ASSESSEE ARE ALLOWED TO THE ABOVE EXTENT , 39. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED TO THE ABOVE EXTENT. 40. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH DAY OF NOVEMBER, 2011. SD/- SD/- (DIVA SINGH) (B.K. HALDA R) JUDICIAL MEMBER ACCOUNTANT MEMBER DT. 25.11.2011. HMS COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). ITA NO1779/DEL/11 28 DATE OF HEARING DATE OF DICTATION DATE OF ORDER SIGNED BY THE HON'BLE MEMBER. DATE OF ORDER SENT TO THE CONCERNED BENCH