Kapadia, J. - (1.) Leave granted.
(2.) A short question which arises for determination in this civil appeal filed by the Department: whether payments made by M. K. Shah Exports Pvt. Ltd. (for short, MKSEPL) during the Accounting Year ending 31.3.2000 (Assessment Year 2000-01) amounting to Rs.5.99 crores was made to the two firms M/s. M.K. Foundation (for short, MKF) and M/s. M.K. Industries (for short, MKI) for the benefit of respondent-assessee herein, Mukundrai K. Shah.
(3.) Department sought to tax the said amount of Rs.5.99 crores as undisclosed income in the hands of the assessee. On 24.8.2000, the Department searched the premises of the assessee under Section 132 of Income Tax Act, 1961(for short, the Act). During the search apart from cash and jewellery a diary titled "ML-20" was seized. On 16.11.2000, during the search the statement of Kalpesh Shah, son of the assessee, was also recorded under Section 132(4) of the said Act. Statement of the assessee was also recorded on that date. The diary indicated investment of Rs.26.35 crores by the assessee in 9% RBI Relief Bonds during the accounting year ending 31.3.2000. By the Assessment Order dated 29.11.2002, the said amount of Rs.5.99 crores was assessed as a deemed dividend under Section 2(22)(e) of the said Act. The A.O. took into consideration the income of the assessee for the block period, under Chapter XIV-B at Rs.65.77 crores. This was for the block period 1.4.90 to 24.8.2000 (for short, "block period"). The diary was seized from the premises of MKSEPL. It belonged to the assessee. The assessee was asked to explain the sources of investment of Rs.26.35 crores in purchase of 9% RBI Relief Bonds during Financial Year 1999-2000. The said Bonds were purchased between 17.11.99 and 11.2.2000. The A.O. found that the said Bonds were purchased from the money received from MKF and MKI (for short, two firms) in which the assessee was the partner. In the books of account the said two firms were shown to have received back the loans and advances from three companies M.K. Tea (P) Ltd. (for short, MKTPL), Safari Capital (P) Ltd. (for short, SCPL) and MKSEPL, which three companies were closely related companies, in which the assessee had controlling interest. All three companies were private limited companies in which the assessee had considerable voting power. However on the basis of the said diary and the cash flow chart, the A.O. concluded that Rs.5.99 crores was paid by MKSEPL (including SCPL) and Rs.94 lakhs by MKTPL in the Accounting Year 1999-2000 to MKF and MKI respectively for the purchase of 9% RBI Relief Bonds by the assessee. In the circumstances, by the Assessment Order, the Department assessed the said sum as deemed dividend in the hands of the assessee under Section 2(22)(e) of the Act. It was held that MKSEPL, SCPL and MKTPL (for short, three companies) were the companies in which the public was not substantially interested; that the assessee was one of the shareholders having more than 10% total voting rights of MKSEPL and SCPL; that in MKTPL the total shareholding of the assessee was 9.3% and, therefore, he was not the beneficial owner of the shares of the said companies. It was further held by the A.O. that SCPL stood merged with MKSEPL with effect from 18.5.98. This was by the Order of the Calcutta High Court dated 5.7.2001. Therefore, according to the Order of Assessment, the alleged repayments by MKSEPL including SCPL were not repayments but they were payments made by MKSEPL (including SCPL) to MKF and MKI for the individual benefit of the assessee amounting to Rs.5.99 crores which was held to be a deemed dividend under Section 2(22)(e) of the Act. Before the A.O. the assessee contended that during the financial year 1999-2000, his shareholding in MKTPL was only 9.3% and, therefore, he was not having substantial interest in the said company; that similarly he was not having substantial interest in SCPL in which his shareholding in the F.Y. 1999-2000 was only 0.2%; that the assessee was one of the partners in MKF and MKI and that the said two firms did not have substantial interest in MKSEPL, SCPL and MKTPL; that reserves and surplus of MKSEPL cannot be taken as reserves and surplus of SCPL which was merged with the company with effect from 18.5.98; that MKI had advanced loan to SCPL which was repaid; that payment made by MKSEPL to MKF was through the current account and that the withdrawal made by the assessee from the two firms were debited to his capital account in the books of MKF and MKI and, therefore, the assessee contended that the said payments were not made to the said two firms for his individual benefit. These arguments were rejected by the A.O. It was held that the assessee had substantial interest in MKSEPL in which SCPL stood merged with effect from 18.5.98; that there was no merit in the contention of the assessee that the two firms, in which he was the partner, were not beneficial owner of shares of MKSEPL and SCPL; that the only relevant criteria was whether payments made to the said two firms was for the individual benefit of the assessee, who was the shareholder in MKSEPL. This point, according to the A.O., became relevant since the only issue which arose for determination in this case was the issue of deemed dividend under Section 2(22)(e) of the Act. According to the A.O., the said two firms MKI and MKF, were the conduits enabling the assessee to take out the money from the company by using the said two firms as conduits. According to the A.O., payment of Rs.5.99 crores was not made directly to the assessee by MKSEPL but through the above-mentioned two firms MKF and MKI. At this stage, it needs to be mentioned that there is no dispute that 9% RBI Relief Bonds were purchased by the assessee out of the funds available with MKI and MKF who in turn were funded by MKSEPL including SCPL. It is also not in dispute that the assessee had the majority of the voting power in MKSEPL. It is not in dispute that the said company, MKSEPL, had accumulated profits but according to the A.O. the said company deliberately refused to distribute the said accumulated profits as dividends to its shareholders and instead adopted the device of advancing the said accumulated profits as loan to the assessee who was the shareholder of the said company. According to the A.O., it was a device to evade payment of tax on accumulated profits.;