ACIT 21(2), MUMBAI vs. KIRAN AGGARWAL, MUMBAI

अपीऱाथी की ओर से / Assessee by : Shri Arvind Sonde प्रत्यथी की ओर से/ Revenue by : Shri B Puresh सुनवाई की तारीख /Date of Hearing : 25.7.2017 घोषणा की तारीख /Date of Pronouncement : 5..10.2017 आदेश / O R D E R PER RAJESH KUMAR, A. M: The captioned are appeals by the assessees and the revenue pertaining to assessment year 2010-11 and 2011-12. The appeals bearing ITA

2 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s No.4591 and 4592/Mum/2016 are directed against the order of ld.CIT(A) dated 17.5.2016 and the appeal bearing No.1055/Mum/2016 is against the order of ld.CIT(A), dated 12.12.2015. Since the issues agitated in all these appeals are almost identical in nature, we shall take up the appeal relating to the assessment year 2010-11 filed by the assessee first as this being the lead case. The facts relating to the issues under consideration are discussed hereunder with reference to A.Y 2010-11.

3. On 28.4.2014 the assessee submitted before the AO that no income has escaped assessment as alleged and requested the AO to treat the return filed u/s 139 on 26.7.2010 as in compliance to the notice issued u/s 148 of the Act. Thereafter, the AO issued notice u/s 143(2) and 142(1) which were duly served on the assessee on 12.6.2014. It was submitted before the AO that the assessee has received the said amount during AY 2010-11 which was duly reflected in the balance sheet as capital receipt. It was further submitted before the AO that the said receipt by the assessee was out of distribution out of the income of the AADT earned in financial year 2008- 09 which was accumulated in that year by forming the same as part of the corpus of the trust and therefore can not treated as income in the hands of 4 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s beneficiary. In other words , the assessee has not received any income from the trust during financial year 2008-09 in which it was earned by the trust but in the subsequent financial year 2009-10. The assessee explained before the AO that an amount of Rs.59,55,59,630/- was received out of the corpus of the trust. The assessee was one of the beneficiaries of the trust and the amount received was shown as a capital receipt in the books of account of the assessee. However, the AO did not accept the contentions of the assessee and held that the income had accrued or arisen to the assessee outside India and his global income is taxable in India. The AO observed that the assessee was both a settler as well as beneficiary of the trust by referring to trust deed forwarded by the tax authority of Bahamas through Foreign Tax & Tax Research Division (FT&TR) , Ministry of Finance, Government of India, New Delhi. The AO observed that the transactions were routed in a way to bring in unaccounted money of the assessee through discretionary trust i.e AADT and therefore it should be treated as receipt from unexplained sources credited in the books of account of the assessee. Accordingly, the AO added the said receipt of Rs.59,55,59,638/- to the income of the assessee by framing assessment u/s 147 r.w.s 147 of the Act vide order dated 31.3.2015.

4. Aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT(A), who also dismissed the appeal of the assesses after taking into consideration the submissions and contentions of the assessee as 5 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s incorporated in para 15 of the appellate order by observing and holding vide para 16 to 19 of the said order as under : “16. I have carefully considered the submissions of the appellant, findings made in the assessment order and fats on record. Mu findings are as under : 16.1 The appellant has played twin role as one of the beneficiaries of Anil Agarwal Discretionary Trust formed on 11thDecember 2007 in Bahamas as well as settler of the trust with initial contribution of USD 1000 towards settlement of the Trust. Other two beneficiaries are Mrs. Kiran Agarwal and Mr. Agnivesh Agarwal, another settler. Apart from the contribution of USD 1000 by Shri Dwarka Prasad Agarwal, the two settlers also gifted shares of Volcan Investments Limited held by them into the Trust. The gifted shares of Volcan Investment Limited represented 100% of its issued and paid up capital. On the said investment of Volcan Investment Limited held by the Trust upon settlement by the two Settlers, it received a dividend of USD 200,00,000 from Volcan Investment Limited on 31st March, 2009. 16.2 It is also observed that Anil Agarwal Discretionary Trust is a discretionary trust and therefore, it is left to the discretion of the Trustees for the distribution of income among the beneficiaries keeping in view the provisions of sec. 164-166 of the IT. Act. Hon'ble Supreme Court, in the landmark case of CIT vs. Kamalini Khatau 209 ITR 101 (Se) has clearly laid down that the income of the trust is either taxable in the hands of the trust or beneficiaries since the said income will be treated as accrued or arisen in the hands of the beneficiaries once distribution of income takes place as the rights of beneficiaries in such income are indeterminate and uncertain.

18. On careful examination of the facts of the instant case with the case of Mrs. Kiran Agarwal in appeal no. CIT(A) 33/ Rg.21/ 269/ 2013- 14 dated 21.12.2015, I find a no. of distinguishing features which will make the receipt of funds from the trust during F.Y.s 2009-10 and 2010-11 as taxable in the hands of Mr. Dwarka Prasad Agarwal when compared with the case of Mrs. Kiran Agarwal, wherein it was held to be tax free. This is further elaborated in the following paragraphs.

22. If the cases of two beneficiaries are examined in the light of the above observation it is clear that both of them stand on different footings. While in the case of Mrs.Kiran Agarwal, there are two written resolutions dated 03.01.2011 and 26.1.2011 passed in the meetings of trustees before distribution of the income of the USD 675,000 and USD 5,00,000 respectively. Thus passing over the trust's income to Mrs. Kiran Agarwal, each time, is fully backed by the resolutions passed in the meetings of the trustees as approved by the Protector Mr. Anil Agarwal keeping in view the terms and conditions of the trust deed. The scanned copies of the resolutions are as under- Anil Agar'wal Discretionary Trust Meeting of Trustees held at Loyalist Plaza. Don Mackay Blvd. and over the phone on 3rd January 2011 Present: E Isaac Colle (Chairman) Anil Agarwal (Protector by phone)

8 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s Apologies: D P Agawal Kiran Agarwal 1.Quorum Chairman confirmed tha a quorum being present the meeting started.

2. Purpose of the meeting Chairman of the meeting Informed the trustees that the meeting had been called to consider a distribution of $5675.nOO.O0 to Mrs. Kiran Agarwal. He further stated that the trustees had received the consent letter from the Protector.

3. Distribution After due discussion it was RESOLVED THAT the consent of the protector Mr.Anil Agawal having been received as per the trust deed. the trustees approved and consented to make distribution of USD675OOO to Kiran Agarwal. It was further noted that this distribution would be from the accumulated funds of the trust arising out of income of the earlier years.

9 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s

2. Purpose of the meeting Chairman of the meeting informed the trustees that the meeting had been called to consider a distribution of $500.000.00·to Mrs Kiran Agarwal. He further stated that the trustees had received the consent letter from the Protector-.

25. From the discussion made in the preceding paragraphs, it is clear that the income of the trust was received by Mr. Dwaraka Prasad Agarwal, the appellant without any mandate from the trustees or Protector i.e., the receipts in the hands of the appellant during F.Y.s 2009-10 and 2010-11 corresponding to A.Y.s 2010-11 and 2011- 12 can not be said as distribution of income or fund of the trust as laid down in the provisions of sec. 160-165 of the LT. Act or as decided in the judicial pronouncements cited above. Clearly, such receipts can only be termed as application of income of the trust received on 31.03.2009 and not diversion of income by overriding tile, as it is not authorized by 11 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s the trustees. In my considered opinion, since the trustee applied their discretion in the distribution of the income of the trust, the share of income and the year of distribution is not determinative or said to be crystallize in the hands of Mr. Dwarka Prasad Agarwal as a beneficiary, the ratio of the judgment in the case of Kamalini Khatau (SC) (supra) to the extent of "distributed and received by the beneficiaries" will not be applicable. Moreover, the appellant cannot claim that the receipts in his hands during F.Y.s 2Q09-10 and 2010-11 are capital receipts since it is just application of income of the trust received on 31.03.2009 and accrued and arisen to the appellant during the year under consideration.

26. Hon'ble Supreme Court in the cases of CIT vs Sitaldas Tirathdas (1961) 41 ITR 367 (Se) and Vibhuti Glass Works vs. CIT (1989) 177 ITR 439 (SC) have clearly held that where the income accrues to the assess.ee directly and is merely applied upon such accrual, it is a case of application of the income of the assessee. Hon'ble Supreme Court in another case of E.O. Sassoon & Co. Ltd. vs CIT (1954) 26 ITR 27 has ruled that an obligation to use the income in a particular manner does not remove it from the category of income-tax; this is even if the obligation is a part of the original contract.

Aggrieved by the order of the CIT(A), the assessee is in appeal before us.

(b) The amount of USD 7,000,000 was debited to the bank account of AADT n 24th Sep., 2009 in account no 2015075. (c) The Assessee received the amount of USD 7,000,000 in Indian Rupee on 25th Sep., 2009 in his bank account with ICICI Bank Account no. 000401556481. The amount in Indian Rupee was Rs.33,53,90,975/-. (ii) Receipt of USD 5,000,000 = INR 22,95,62,475 The Trustees in their meeting held on 12th Oct., 2009 resolved to a) make distribution of USD 5,000,000 to DP Agarwal (the Assessee). The Trustees also noted that this distribution would be from the accumulated funds of the trust arising out of income of earlier years. In 24 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s terms of the Trust Deed the Trustees received the consent of the Protector Anil Agarwal. b) The amount of USD 5000,000 was debited to the bank account of AADT on 14th Oct., 2009 in account no. 2015075 c) The Assessee received the amount of USD 5000,000 in Indian Rupee on 15th Oct., 2009 in his bank account with ICICI Bank Account no 000401556481. The amount in Indian Rupee was Rs.22,95,62,475/-.

(iii) Receipt of USD 350,000 = INR 1,63,61,667/- a) The Trustees in their meeting held on 14th Dec., 2009 resolved to make distribution of USD 350,000 to DP Agarwal (the Assessee). The Trustees also noted that this distribution would be from the accumulated funds of the trust arising out of income of earlier years. In terms of the Trust Deed the Trustees received the consent of the Protector Anil Agarwal. b) The amount of USD 350,000 was debited to the bank account of AADT on 16th Dec., 2009 in account no 2015075. c) The Assessee received the amount of USD 350,000 in Indian Rupee on 17th Dec 2009 in his bank account with ICICI Bank Account no 000401556481. The amount in Indian Rupee was Rs.1,63,61,667/-.

25 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s (iv) Receipt of USD 200,000 = INR 92,16,446/- a) The Trustees in their meeting held on 4th Jan., 2010 resolved to make distribution of USD 200,000 to DP Agarwal (the Assessee). The Trustees also noted that this distribution would be from the accumulated funds of the trust arising out of income of earlier years. In terms of the Trust Deed the Trustees received the consent of the Protector Anil Agarwal b) The amount of USD 200,000 was debited to the bank account of AADT on 6th Jan., 2010 in account no 2015075. c) The Assessee received the amount of USD 200,000 in Indian Rupee on 6th Jan., 2010 in his bank account with ICICI Bank Account no 00401556481. The amount in Indian Rupee was Rs.92,16,446 (Rs.91,64,554 9plus 51,892/-)

(v) Receipt of USD 11 0,000 = INR 50,28,075/- a) The Trustees in their meeting held on 29th Jan., 2010 resolved to take distribution of USD 110,000 to DP Agarwal (the Assessee). The Trustees also noted that this distribution would be from the accumulated funds of the trust arising out of income of earlier years. In terms of the Trust Deed the Trustees received the consent of the Protector Anil Agarwal.

26 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s b) The amount of USD 110,000 was debited to the bank account of AADT on 2nd Feb., 2010 in account no 2015075. c) The Assessee received the amount of USD 110,000 in Indian Rupee on 3rd Feb., 2010 in his bank account with ICICI Bank Account no 000401556481 . The amount in Indian Rupee was Rs.50,28,075/-. The necessary details qua amounts in Indian Rupee are extracted below to give a compact view of the money received which are as under:- S.No. Date of Amount Date of Date of Amount in Resolution USD ($) payment Receipt INR (Rs.) Deutshe ICICI Bank Bank 1 22-9-2009 7,000,000 24-9-2009 25-9-2009 33,53,90,975 2 12-10-2009 5,000,000 14-10-2009 15-10-2009 22,95,62,475 3 14-10-2009 350,000 16-12-2009 17-12-2009 1,63,61,667 4 4-1-2010 2,00,000 6-1-2010 6-1-2010 92,16,446 5 29-1-2010 1,10,000 2-02-2010 3-02-2010 50,28,075 Total 12,660,000 59,55,59,638

In the case of Vikramsinghji Gondal (supra) it has been held as under :  “18. A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.”

In the case of Jyothirsinhji Gondal the Hon’ble (Gujarat High Court)  held as under:. PG-23 In this case the following questions were adjudicated: “i) Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in its interpretation and/or application of Clauses 3(2) and 4 of the UK Trusts in holding that the same are specific trusts and not discretionary trusts?

31 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s (ii) Whether on the facts and circumstances of the case, the Tribunal has erred in holding that even if UK settlements are to be treated as discretionary trusts, assessee shall be liable to be taxed under Section 166 of the IT Act for the income not distributed or receivable on his behalf, entire income of the trust having been retained by the trustees? (iii) Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order of Settlement Commission as well as the Hon'ble Supreme Court for earlier assessment years in spite of the fact that the appellant has not received any income from any of the trusts for the year under appeals? The High Court held as under : “The trustees have exercised. their discretion by retention. The UK Trusts are discretionary trusts and not specific trusts as the net income of the trusts by positive act retained by the trustees and carried forward and brought forward from year to year. This positive act taken by the trustees sufficiently establishes that the trusts are discretionary trusts. (i) The dictionary meaning of word 'retain' is relevant to decide the issue. International Webster New Encyclopedic Dictionary defines the word 'retain' as hold back, keep, to keep possession of; to continue to use or practice; as, to retain a system; to continue to hold or have; as, to retain heat or moisture; to keep in mind; remember; to hold in place or position; to engage, especially, by the payment of a preliminary fee, as a lawyer. More or less same meanings are assigned to the word 'retain' in Chamber's Twentieth Century Dictionary, The Random House Dictionary, The New Oxford Illustrated Dictionary, Black's Law Dictionary, Bouvier's Law Dictionary and Webster's New World Dictionary. (j) Nothing is receivable in these years by any of the beneficiaries and hence, option under Section 166 is not available to Revenue. For this purpose, reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Smt. Kamalini Khatau : [1994]209ITR101(SC) wherein it is held that Section 166 of the Act is not applicable as the word used in Section 166 of the Act is 'receivable' which cannot be applied to discretionary trust.”

32 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s Also in conclusion, the Gujarat High Court observed: “….a close and combined reading of Clauses 3 and 4 of the trust deed makes it abundantly clear that the sole trustee has every power or authority to take decision with regard to the trust property and since it has been decided by the trustee to retain the income of the trust, it cannot be said that such income is being received by the assessee.” While deciding Gondal’s case Gujarat High Court made the following observations with respect of Kamalini Khatau 201 ITR 101 (SC): “In CIT v. Kamalini Khatau (1994) 209 ITR 101(SC), the Hon'ble Supreme Court has held that Section 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that Sections 160 - 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in Section 166 is 'receivable', it cannot apply to a discretionary trust, for it cannot be said that the income thereon is receivable for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all”. The decision of Gujarat High Court was appealed by the revenue authorities in the Supreme Court. The Supreme Court in the case of Vikramsinh Ji Gondal’s (referred in para 5.3 above) affirming the view held as under : “19. Having regard to he above legal position about the discretionary trust which is also applied by this court in the earlier judgment and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed”.

33 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s In the case of Shanta Ben Patel (supra) the Tribunal held as under :  “7. We agree with the findings of the ld.CIT(A) that the distribution was made out of the income of the earlier years or out of corpus of the trust. As per section 5 the basis of chargeability is the receipt or accrual in the hands of the trust in the relevant previous years cannot be said to have accrued once again in the hands of the beneficiary in the year of is distribution..” The revenue also relied upon the following decisions wherein it has been held as under :

In the case of elide upMcDowell, it has been held by the Hon’ble  Supreme Court: “The change in rule 76 of the Distillery Rules, 1970 has clearly affirmed the position that liability for payment of excise duty is of the manufacturer. The other provisions of the Distillery Rules also do not detract from the position that payment of excise duty is the primary and exclusive obligation of the manufacturer and if payment be made under a contract or arrangement by any other person, it would amount to meeting of the obligation of the manufacturer and nothing more. The definition of 'turnover' given in section 2(5) of the relevant Sales Tax Act clearly indicates that the total amount charged as the consideration for the sale is to be taken into account for determining the turnover. Where a bill of sale is issued, the total amount set out therein is to be taken into consideration. Admittedly, the bills issued by the appellant, in the instant case, did not include the excise duty. Payment of excise duty is a legal liability of the manufacturer; its payment was a condition precedent to the removal of the liquor from the distillery and payment by the purchaser was on account of the manufacturer. According to normal commercial practice, excise duty should have been reflected in the bill either as merged in price or shown separately. As a fact, in the hands of the buyer the cost of liquor was what was charged by the appellant under its bill together with excise duty which the buyer had directly paid on seller's account. The consideration for the sale was thus the total amount and not what was reflected in the bill. Therefore, the excise duty though paid by the purchaser to meet the liability of the appellant, was a part of the 34 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s consideration for the sale and was includible in the turnover of the appellant. As regards the conclusion reached in Me Dowell & Co. Ltd.'s case (supra), on the aspect that when the excise duty does not go into the common till of the assessee and it does not become a part of the circulating capital, it does not constitute turnover, this is not the decisive test for determining whether such duty would constitute turnover or not. So far as the contention that it is open to every one to so arrange his affairs as to reduce the brunt of taxation to the minimum, was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. Accordingly, the High Court was right in the instant case in rejecting the appellant's claims”.

In the case of Twinstar Holdings Ltd (supra), the Bombay High Court  held as under : “16. In conclusion, we may refer to the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 1 in which it has been held that even if the transaction is genuine and even if it is actually acted upon, but if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device. That the Courts are now concerned, not merely with the genuineness of the transaction, but with the intended effect of the transaction on the fiscal purpose. That, the true principle in case of Ramsay was that one must consider fiscal consequences of a pre-planned series of transaction and one has not to dissect the scheme and consider individual stages separately. This judgment squarely applies to our case.

35 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s 17. We may add that our observations in this case on the merits of the matter are tentative and they are not binding on the Appellate Authority/Recovery Authority. They have been given only to explain the legal position on section 281.”

In the case of Nayantara G Agarwal (supra) the Hon’ble Bombay High  Court held as under: “The Tribunal was fully justified in coming to the conclusion that the firm in question was not genuine and that the interest in land got extinguished at least on the date, when the so-called deed of partnership came to an end by the deed of dissolution and it became the property of the other partner, i.e., the company, for a consideration of Rs. 10 lakhs which was paid to the assessee in the form of shares. The Tribunal was right in holding that the firm was not genuine and that there was a transfer of capital asset from the assessee to the company within the meaning of section 2(47) which was subject to capital gains tax under section 45. The facts clearly went to show that the various transactions including the creation of the partnership, transfer of land to the firm by way of capital contribution of the assessee and dissolution of the partnership were, in fact, only devices to evade capital gains tax that would arise as a result of transfer of the land in question by the assessee to the company. A careful perusal of the above transactions culminating in the transfer of land from the assessee to the company clearly went to show that the real nature of the transaction was transfer of land. The principles of construction of such transactions are well-settled and it is too late in the day to say that the Court should go strictly by the language of the documents prepared by the parties or the facts put forward by the parties and refuse to remove the veil to find out the real nature of the transaction. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provision should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation to expose the devices for what they really 36 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s are and to refuse to give judicial benediction. The courts in such a case should not lay undue emphasis on the language of each individual document as that is not determinative of the controversy. What is really necessary to be considered in such cases is the true nature and effect of the transaction. If on such a consideration, the court arrived at a finding that the true nature was 'transfer of land' and the various steps originating from the affidavit and formation of partnership and culminating into dissolution of the same, in the process leaving the land with the company, were nothing but a device to avoid capital gains tax leviable under section 45 on 'transfer of the land' to the company, such a device could not get the seal of approval of the High Court. In the light of the foregoing discussion, the firm was not genuine. Note : The case was decided against the assessee.”

In the case of Onam Agarbathi Co the Karnataka High Court held as  under :

“Though a taxpayer may resort to a device to divert the income before it accrues or arises to him, the effectiveness of the device depends upon its genuineness. The substance of the transaction has to be assessed by applying the taxing statute so as to ascertain whether it is a sham or make-believe transaction or one which is genuine and, therefore, is eligible for deduction under the Act. Hence, courts have to look into the form of the transaction to find out its substance so as to ensure that there is no avoidance of tax by a method impermissible in law. The assessee-firm paid commission to a firm and the partners of the assessee-firm and the payee-firm were the same. There was no evidence of any services being rendered by the payee-firm, except to the assessee-firm. The Assessing Officer held that it was an instance of a colourable device adopted by the assessee by creating the payee firm, as the two concerns were brought into existence with the sole object of diverting the profits of the assessee and thereby reduce the tax incidence of the firm. Under the circumstances, the Assessing Officer disallowed the entire expenditure claimed on account of marketing and sales promotion expenses paid to the payee firm as there was no marketing survey activity in that year and, therefore, the 37 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s entire amount was added back as excessive and unreasonable to the benefits accrued to the business of the assessee. Held that when the partners in both the firms were the same and there was nothing on record to indicate regarding any other services rendered by the payee-firm except to the assessee, section 40(b) was rightly invoked. The creation of the payee-firm was nothing but a device adopted by the assessee for siphoning off the profits in the form of commission as well as marketing and sales promotion expenses. The Assessing Officer was, therefore, right in not allowing the said expenses.” In the case of Pravinbhai M Kheni (supra), the Hon’ble High Court held  as under : “Conclusions • Conclusions therefore, are as follows: (1) The respondent authorities did establish that it was not possible to recover the tax dues from the company. (2) The petitioner neither pleaded nor succeeded in establishing that such non-recovery was not attributable to any gross neglect, misfeasance or failure in discharging duty on his part in connection with the affairs of the company. (3) Being a public company, ordinarily, provisions of section 179(1) cannot be applied. However, if the factors noted by the Assistant Commissioner in his impugned order dated 15-4- 2002 and highlighted in this judgment are duly established, it would certainly be a fit case where invocation of principle of lifting of corporate veil would be justified. (4) However, the Assistant Commissioner proceeded to record such findings without giving sufficient opportunity of hearing to the petitioner and without disclosing the necessary materials for coming to such a conclusion. (5) The impugned orders dated 15-4-2002 and revisional order dated 9-4-2003 are quashed. (6) The proceedings are however, placed back before the Assistant Commissioner for proceeding further in accordance with law 38 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s after giving a notice to the petitioner indicating his tentative grounds why he desires to invoke the concept of lifting of corporate veil, giving sufficient opportunity to the petitioner to meet with such allegations. After giving opportunity of hearing to the petitioner and following the principles of natural justice it would be open for the Assistant Commissioner to pass fresh orders in accordance with law as may be found appropriate on the basis of material on record. [Para 23] In the case of Rothman Cycle Ind. Pvt.Ltd (supra), the Hon’ble Punjab  and Haryana High Court held as under : “The import of sections 37(1)(iii ) and 57(iii) was considered by Hon'ble the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 . It was a case where difference of opinion on the subject between various judgments of the High Courts was considered as the Tribunal had directly referred the matter for opinion of Hon'ble the Supreme Court. The issue under consideration therein was whether interest on money borrowed for investment in shares which had not yielded any dividend is permissible under section 57(iii ). It was opined that even though the language of section 37(1) is a little wider than that of section 57(iii ), but that was of no effect, as the language of section 57(iii) being clear and unambiguous has to be considered according to its plain natural meaning. It should not be given narrow and constricted meaning. It does not provide that expenditure shall be deductible only if any income is made or earned. [Para 18] The issue as to whether an assessee, who had borrowed funds carrying interest and advanced part thereof to its sister-concern on interest free basis, can claim deduction to that extent was considered by the Supreme Court in SA Builders Ltd.'s case (supra). In the aforesaid case, the Supreme Court opined that the tax authorities must not look at the matter from their own viewpoint but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister-concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed. However, it was not laid down as a rule rather it was opined that each case will depend on its own facts and aspect of commercial expediency is to be examined by the Assessing Officer. [Para 20] The issue regarding jurisdiction of the Assessing Officer to go into the transaction and consider whether prerequisites for claiming deduction under section 57(iii ) have been complied with or not, was considered 39 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s by a Division Bench of Allahabad High Court in CIT v. Smt. Swapna Roy [2010] 192 Taxman 105and it was opined that though it is not unfair to borrow money or take loan from one concern and invest the same in another concern for the purpose of profit or income, but in the process the assessee must act bona fide . The words 'wholly and exclusively for the purpose of making or earning such income' have to be given its true meaning. In case, the dominant purpose for making such investment was not to earn income, the deduction under section 57 may not be available. To ascertain the purpose, the courts may lift the veil. Even the Assessing Officer has the jurisdiction to find out the dominant purpose with regard to investment of borrowed money in the sister-concern. [Para 22] In view of our aforesaid discussion and pronunciation of law, the question referred for consideration by the larger Bench can very well be answered by opining that the Assessing Officer or the appellate authorities and even the courts can determine the true legal relation resulting from a transaction. If some device has been used by the assessee to conceal true nature of the transaction, it is the duty of the taxing authority to unravel the device and determine its true character. However, the legal effect of the transaction cannot be displaced by probing into the 'substance of the transaction'. The taxing authority must not look at the matter from their own viewpoint but that of a prudent businessman. Each case will depend on its own facts. The exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe. [Para 23]” In the case of Bharti Devi Sarabhi (supra) the Hon’ble Supreme Court  held as under : “the decision which was relied on by the High Court had been reversed by the Supreme Court in CIT v. Kamalini Khatau [1994] 209 ITR 101. Accordingly, following the aforesaid decision of the Supreme Court, it was to be held that the Tribunal was not justified in law in holding that the sum received by the assessee from various discretionary trusts could not be taxed in the hands of the assessee under section 166. Note : The case was decided against the assessee.”  In the case of Moti Trust Kota (supra), the Hon’ble Supreme Court held as under :

40 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s “ Even if the trust in question was regarded as a discretionary trust inasmuch as the profits had during the relevant assessment years been credited to the respective accounts of the beneficiaries, therefore, in view of the decision in CIT v. Kamalini Khatau [1994] 209 ITR 101, it was the beneficiaries in whose hands the income would be assessed. That being so, the appeals were allowed and the questions of law referred by the Tribunal had to be answered in favour of the assessee. Note : The case was decided in favour of the assessee.”

12. The assessee in addition to the original grounds has also taken additional grounds which reads as under : “6. On the facts and circumstances of the case and law, the ld. CIT(A) erred in confirming the addition of Rs.72,92,100/- towards gift of shares received by appellant from M/s Volcan Investment Ltd on the pretext that company cannot be held to make gift out of natural love and affection is totally wrong, arbitrary unjustified and illegal and is liable o to be delete; 7. On the facts and circumstances of the case and law, the ld CIT(A) failed to considered that receipt cannot be taxed if receipt is not fall within the definition of income or it is not chargeable to taxed when it is received or accrued; 41 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s

is with regard to the confirmation of addition of Rs.72,92,100/- by the ld.CIT(A) as made by the AO.

14. Facts of the issue are that the assessee has received a gift of Rs.72,92,100/- from M/s Volcan Investment Ltd. The AO added the same to the income of the assessee on the ground that the company is a corporate body and cannot make gift out of natural love and affection to the assessee.

42 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s 17. After hearing both the parties on the issue of admission of additional ground and after examination of records, we find that the issue arising out of the AO as well as ld.CIT(A), who dismissed the appeal of the assessee on this issue. We find from the record that the issue is arising from the assessment record before the authorities below. The mere fact that the assessee did not raise the issue in memorandum of appeal could not deprive the assessee in its legitimate right to agitate the same before the higher forum which is against the principle of natural justice. Accordingly, we are inclined to admit the same for adjudication.

“ 11.1 In response to the above the assessee filed reply on 31.03.2015 as below: "We understand that you have raised a query the gift amounting to INR 72,92,100 received by the Assessee and recorded ill the balance sheet for the FY 2009-10. This is to clarify that this gift, comprising preference shares of Hare Krishna Packing Private Limited worth INR 72,92,100, was received from volcan Investments Limited by the Assessee on September 25, 2009. It is submitted that section 56(2)(vii) ( c ) of the Income Tax Act, 1961, 43 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s allowing for taxability of movable property (including shares) received by an individual as a gift was inserted only for transactions commencing from October 1, 2009. In light of this, it is submitted that the gift in the present case is not taxable in the hands of the Assessee since the gift was received prior to the entry into force of the concerned provision. The gift deed evidencing the aforementioned gift has been attached to this letter as an annexure."

19. The AO was not convinced with the reply of the assessee on the ground that the gift received from a M/s Volcan Investment Ltd cannot be held to be under love and affection and accordingly, treated the same as income from undisclosed sources and added the same in the hands of the assessee and added the same to the total income of the assessee. Aggrieved by the order of AO, the assessee preferred appeal before the ld.CIT(A), who vide para 35 of the appellate order dismissed as under : “35. I have carefully considered the submissions of the appellant in the light of the findings made in the assessment order. My observations are as under. 35.1 It is observed that the assessee has shown receipt of shares of Hare Krishna Packing Private Ltd. worth Rs. 72,92,1001- from M/s. Volcan Investment Ltd. without any consideration and shown it as gift during the year under consideration. According to the appellant, this gift was received on 25 September, 2009 i.e., 5 days before amendment to sec. 56(2)(vii)(c) of the I.T. Act when shares received by an individual without consideration was brought to tax effective from 1st Oct., 2009. As stated above, Mls Volcan Investment Limited was incorporated in Bahamas and fully controlled by the appellant and his other family members & group concerns. It is very clear that the amendment to sec. 56(2) was already announced by the Govt. at the time of making gift although effected from 1st Oct., 2009.

44 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s 35-.2 In this regard, I agree with the AO that a gift cannot be logically made by one artificial juridical entity because the basic condition of love and affection for making gifts does not exist being artificial entities lacking emotion neutral. Though the transfer of shares has been given the colour of a gift, nothing has been brought on record to suggest its genuineness and compliance with domestic or foreign laws. Gifting of shares of the company, which is controlled by the appellant and his family is nothing, but gifting to oneself, which is never the intention of I.T. Act even before amendment. The scheme of the Act that any income can only be exclude from the total income of the taxpayer if the Act specifically provides for such exemption and that, in the instant case no exemption is specifically provided for such transfer. 35.3 Apart from that I find the reliance of the AR of the appellant on various case laws are misplaced as facts are distinguishable. In the case of CIT VIs Nadatur Holdings and Investments (P.) Ltd. [2012) 26 taxmann.com 224 (Kar.), the issue before the Hon’ble Karnataka High Court was whether the gift from shareholders to the company was genuine and permissible while in the instant case the situation is just opposite and- involves a foreign company as donor. Based on the peculiar facts of the case, Hon' ble High Court held that there is no bar in receipt of a gift by a company from its shareholders. In the case of CIT VIs Groz-Beckert Sa boo Ltd. [1979] 116 ITR 125 (SC) the company was' set up in collaboration with a foreign company for fabrication and manufacture of hosiery needles. It received certain goods, raw material and semi- finished needles, free of cost from foreign company. The assessee company claimed that while calculating profits from sale of finished goods value of the said raw materials and semi-finished needles would be deducted. Based on the facts, the ITO held that since raw materials and semi finished needless were received by way of gift from foreign collaborators, no amount was deductible in respect of value of those goods. On reference, the High Court, however, accepted assessee's claim that since raw materials and semi- finished needles were introduced in the business and converted into stock, their market value on the date of conversion would represent cost to business. The aforesaid conclusion was upheld by the Hon'ble Supreme Court.Thus it is clear that the ratio of this case nowhere helps the appellant as the Hon'ble High Court, and approved by the Hon'ble Supreme Court, did not accept the action of the AO in considering the material received from foreign company as gift. In the case of Asst. CIT Vis Set India (P:) Ltd. [2010) 3 ITR(TRIB.) 454 (MUM.), the gift involved the assessee company and its holding company. The Hon'ble Tribunal, to the fact of the case, held that money received from a 45 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s holding company with which the assessee company does not have any trading or business transaction cannot be considered as trading receipt. When there is no contractual agreement or a right to receive, the amount is not taxable as income. In the instant case, facts are entirely different and the appellant cannot be said to have no trading or business relation with the donor company. Further, the appellant has not established that there was no contractual agreement or a right to receive the amount equivalent to the gift from the donor company. On careful study of CIT V/s Stewarts & Lloyds of India Ltd. [1986] 28 TAXMAN 381 (CAL.HC) too, it is observed that the facts are distinguishable too and involve donor as well as donee companies. 35.4 On the other hand, I find that recently the Authority for Advance Rulings (AAR) in the case of Orient Green Power Pte Ltd Orient Green Power Pte. Ltd [2012] 346 ITR human agency. 35.5. The citation of amendment in section 56(2)(vii)( c ) of the IT Act with effect from 1st Oct, 2009 will not have any effect considering the observations made in the preceding paragraphs that the appellant is otherwise taxable with respect to the gift received from the donor company.

20. The ld.AR vehemently submitted that the company M/S Valcon Investments Ltd could validly gift shares to the assessee and the ld CIT(A) grossly erred in affirming the order of AO on this issue. In support of his contention, the ld.AR relied upon on series of decisions : a) DP World (P ) Ltd V/s DCIT (Mum) 140 ITD 694; b) Redington (I) Ltd V/ JCIT (2014) 49 taxmann.com 146 (Chennai-Trib); c) DCIT V/s KDA Enterprises (P)Ltd (2015) 57 taxmann.com 284 (Mumb trib)

46 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s The ld. AR submitted that in view of the above decisions, the addition made by the AO on account of gift and confirmed by the ld.CIT(A) should be deleted. 21. On the other hand, the ld. DR relied heavily on the orders of authorities below and prayed that the same be confirmed as the gift received by the assessee is a sham transaction a body corporate could not gift out of love and affection.

 In the case of Redington (I) Ltd (supra) the Tribunal held as under : “RGF Gulf is the wholly owned subsidiary of the assessee company. The assessee company has transferred its shares in RGF Gulf to RIHL Cayman which was a step down subsidiary located in Cayman Island. It is a fact that the transfer of shares was made without consideration. It is for this reason that the assessee company contended that the transfer was a gift. As it is a gift, it is the case of the assessee, that if at all it is treated as a transfer of capital asset for the purpose of capital gains taxation, it was exempt under section 47(iii) of the Income-tax Act, 1961. The case of the Revenue is that a company could not make a gift and also even if it was treated as a gift, it was not eligible for exemption provided under section 47(iii), as correct provision of law applied to the case of the assessee was section 47(iv) of which the condition had not been satisfied by the assessee company. [Para 71] Gift is definitely a transfer of property. The mother law governing  the subject matter of transfer of property is Transfer of Property Act, 1882. Section 5 of the Transfer of Property Act, 1882, defines the term 'transfer of property', as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and 'to transfer property' is to perform such act. This is the master definition of 'transfer of property'. Other forms of transfers like gift are subject to this master provision. The law provides in the same section 5 of the TP Act, 1882 that 'living person' includes a company or association or body of individuals, whether incorporated or not. Thus, TP Act,1882 considers a company not only as a person but literally speaking as a 'living person', a person with life. The same expression 'person' provided in section 5 is transplanted in section 122 of the TP Act, which defines a 'gift'. 'Gift' is the transfer of certain existing movable or immovable property made 49 I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s voluntarily and without consideration by one person, called the donor, to another, called the donee and accepted by or on behalf of the donee. When the provisions of law contained in sections 5 & 122 of the TP Act read together, it emerges that a company being a living person can transfer property by way of gift. [Para 72]” In the case of DCIT V/s KDA Enterprises (P) Ltd (2015) 57  taxmann.com 284 (Mumbai) it has been held “68. In view of the above discussion, assertions made by ld. AR and DR if kept in juxtaposition to the observation of the AO vis-à-vis findings recorded by the CIT(A) in the impugned order, an irresistible conclusion is that the amount of gift so received is neither taxable as income from other sources u/s. 56 nor as capital gain nor as income u/s.2(22)(e) nor u/s.115JB of the I.T.Act. The detailed findings recorded by the CIT(A) are as per material on record, which do not require any interference on our part. Accordingly, we do not find any infirmity in the order of CIT(A).

taken in this appeal are identical to that of ITA No.4591/Mum/2016. Since we have decided the issue in assessee’s favour in 50. I . T . A . N o . 4 5 9 1 / M u m / 2 0 1 6 a n d o t h e r t w o a p p e a l s ITA No.4591/Mum/2016, the decision taken therein would , mutatis mutandis, apply to this case as well. Accordingly, this appeal is also allowed.