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Nusli N. Wadia Vs. Assistant Commissioner of - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1993)46ITD31(Mum.)
AppellantNusli N. Wadia
RespondentAssistant Commissioner of
Excerpt:
1. the assesses, an individual, resident/non-citizen, is in appeal for the assessment year 1984-85, for which the valuation date shown is march 31, 1984. assessment has been framed under section 16(3) of the wealth-tax act, 1957. the return was filed by the assessee on september 28, 1984, declaring a wealth of rs. 16,26,200, while the assessment stood framed at rs. 1,20,42,441. the assessee appealed and the learned first appellate authority, the commissioner of income-tax (appeals), central-i, bombay, dismissed the appeal, vide orders of january 3, 1990. the assessee is as yet aggrieved, hence this second appeal and we have heard the parties at length, since the hearing was spread over three days. the addition being agitated upon by the assessee amounts to rs. 1,01,61,850 and it has the.....
Judgment:
1. The assesses, an individual, resident/non-citizen, is in appeal for the assessment year 1984-85, for which the valuation date shown is March 31, 1984. Assessment has been framed under Section 16(3) of the Wealth-tax Act, 1957. The return was filed by the assessee on September 28, 1984, declaring a wealth of Rs. 16,26,200, while the assessment stood framed at Rs. 1,20,42,441. The assessee appealed and the learned first appellate authority, the Commissioner of Income-tax (Appeals), Central-I, Bombay, dismissed the appeal, vide orders of January 3, 1990. The assessee is as yet aggrieved, hence this second appeal and we have heard the parties at length, since the hearing was spread over three days. The addition being agitated upon by the assessee amounts to Rs. 1,01,61,850 and it has the following components : (i) Rs. 93,02,545 being the market value of shares of the Bombay Dyeing and Mfg. Ltd. ; (ii) Rs. 2,00,000 representing advances to the two minor sons of the assessee ; (iii) Rs. 5,90,000 loans to M/s. Sunflower Investment and Textiles Ltd. ; and All these items related to one company known as "SIAL"--M/s. Sterling Industrial Agencies Pvt. Ltd., Kathmandu.

2. The feedback of the case along with the reasonings of the Assessing Officer stands reproduced hereunder for ready reference since it is thought expedient : "The focal and contentious issue under consideration is the assessee's investment in a Nepal based concern named Sterling Industrial Agencies Pvt. Ltd. The relevant facts are as under : The assessee declared net wealth of Rs. 25.27 lakhs in his return of wealth for the assessment year 1974-75, the valuation date being March 31, 1974. This included 27,536 shares of the Bombay Dyeing and Mfg. Ltd. (hereinafter referred to as "BDMC"), valued at Rs. 16,79,696. In the next year, i.e., 1975-76, the returned asset of the assessee dwindled to Rs. 11,70,900 on March 31, 1975, relevant to the assessment year 1975-76. The reason for the sharp drop is seen to be on account of advance of Rs. 22,26,000 made by the assessee to a concern called M/s. Sterling Industrial Agencies Pvt.

Ltd. (hereinafter referred to as "SIAL"), a concern which is shown to be incorporated in Kathmandu, Nepal. This advance was financed primarily by sale of 26,965 shares of BDMC out of 27,536 shares held by the assessee in earlier years to SIAL itself. This means that 26,965 shares of BDMC were purchased by SIAL from the assessee by the finances provided by the assessee himself. With the above sale, the shareholding of the assessee in BDMC came down to 571 shares, which has been increased to 1,672 shares at the end of the relevant previous year, helped by two bonus issues in the intervening period.

It is clear that the assessee had divested himself of 26,965 shares of BDMC, earlier held by him, in favour of a Nepal based company, by providing finances to the said company to purchase the shares. The finances advanced by the assessee to the above Nepal based concern were not disclosed by him in the wealth-tax returns of the assessment year 1975-76 and afterwards, presumably because of the assessee's claiming the status as a non-citizen, whereby his assets located outside India will not be brought to wealth-tax. However, no indication about this investment in the Nepal based concern was at any time given by the assessee in the course of his income-tax and wealth-tax proceedings of different years. That the entire exercise of transferring funds to the Nepal based concern and bringing the same funds back to India to purchase shares of BDMC and make different investments was a colourable attempt in tax avoidance can be further reinforced from enumeration of the facts available in the records of SIAL.

SIAL was incorporated in Nepal some time in 1970 with two initial subscribers, Smt. Vimladevi and Shri Shantadev Pathak, with its registered office at 21/639 Kamal Polhadi, Kathmandu, Nepal. The activities of this company between 1970 to February, 1975, are not known. It, however, was suddenly galvanised into action from March, 1975, when the assessee sent from his bank account with the Grindlays Bank Ltd., Fort, Bombay, to SIAL's bank account with the Bank of Nepal in Kathmandu, a sum of Rs. 3,18,000 in Nepalese currency towards contribution as his share capital in the said company and Rs. 32,08,250 in Nepalese currency as interest-free advance to SIAL. Two other persons, Shri Jagannath Upadhyay and Shri Shankar Aryal, contributed Rs. 53,000 in Nepalese currency towards their share capital in the above company. With these funds SIAL purchased shares of BDMC. A part of these funds was transferred by SIAL to a bank account in the Grindlays Bank Ltd., Fort, Bombay, where the assessee also had an account, as mentioned earlier. It has been found that this bank account of SIAL in the Grindlays Bank Ltd., Fort, Bombay, was introduced and opened by the assessee as chairman of SIAL. Out of the funds transferred to the Grindlays Bank Ltd., Fort, Bombay, SIAL purchased some further shares of BDMC. All these shares of BDMC were purchased within a span of a few days in 1975. The total number of shares in BDMC purchased by SIAL with the above funds was 52,865 worth Rs. 35,23,951 in Nepalese currency. As mentioned earlier, out of 52,865 shares of BDMC purchased by SIAL, 26,965, shares were sold by the assessee himself to SIAL. The total funds placed at the disposal of SIAL was 35,79,250 in Nepalese currency, out of which Rs. 35,26,250 in Nepalese currency was contributed by the assessee, which accounted for 98.5 per cent, of the total funds available and the balance of Rs. 53,000 in Nepalese currency was contributed by two other persons, viz., Jagdish Upadhyay and Shankar Aryal, which accounted for only 1.5 per cent.

of the total funds available. The share capital of SIAL, which continued till date, was Rs. 3,71,000 in Nepalese currency, out of which Rs. 3,18,000 in Nepalese currency was given by the assessee and Rs. 53,000 in Nepalese currency was given by the Other two persons. Besides these three persons including the assessee, there has been no other shareholder of SIAL at any time. The assessee has been acting as chairman of the company, while the other two persons are acting as directors. While the assessee has not got any salary from the above company, the other two directors have been paid measly sums of salary of around Rs. 3,600 Nepalese currency yearly.

Though the registered office of the company as shown in its income-tax return was at 6/94 Dharmpeth, Kathmandu, the entire activity of the company was confined to India. In the income-tax returns of the company, the Indian address was given as c/o Shri Nusli Wadia, Neville House, Bombay. From the assessment year 1981-82, SIAL in its income-tax returns is only showing the above Indian address and is not mentioning its registered office address which is supposed to be in Kathmandu. The income-tax returns of SIAL, which have been filed from the assessment year 1976-77 onwards, with the status as a foreign company, have been signed mostly by the assessee or his constituted attorney who have also signed the dividend warrants. SIAL in its income-tax return disclosed income from dividend from shares of BDMC, which constituted the only source of income of the company in most of the years, except in some years when some interest income was disclosed from the investments made by SIAL with BDMC and its other sister concern. This investment was also made out of the income generated from the dividend income arising out of the shareholding of SIAL in BDMC. The initial shareholding of 52,865 shares in BDMC by SIAL, purchased in 1975 as mentioned above, increased to 1,26,876 shares by July, 1979, helped by two bonus issues in October, 1976, and July, 1979, for which no investment was required to be made by SIAL.

In April, 1983, SIAL purchased 5,075 convertible debentures of BDMC with its funds generated out of dividend income earned over the years. Conversion of 5,075 debentures to shares in October, 1983, made the total shareholding at 1,31,951 shares in BDMC, which were shown to be held by SIAL as on March 31, 1984, which is the valuation date of the assessee in the present assessment.

As mentioned earlier, the entire activity of SIAL was located in India, though its registered office was shown to be located in Kathmandu, Nepal. Its only activity in most of the years was only receiving dividend income out of shares of BDMC, which as mentioned earlier was initially acquired almost with the funds provided by the assessee. SIAL has also advanced money to the minor sons of assessee and to concerns in which the relative/associates of the assessee are substantially interested. The principal expenditure of SIAL in all the years was payment of salary of Rs. 7,000 approx. in Nepalese currency to directors, Shri Jagannath Upadhyay and Shankar Aryal.

Since the expenditure incurred for the running of the company was extremely small, almost the entire dividend income (and interest income in some years) has constituted the net income declared by the company. However, the company has paid tax at concessional rate of 25 per cent. on dividend income, as per the rate applicable to a foreign company. No dividend has been declared by the company in any year, which has resulted in creation of a large amount of reserves and surplus. The surplus funds available with the company were cycled among different concerns in which relatives/associates of the assessee were substantially interested, apart from providing loans to the minor sons of the assessee, as mentioned earlier. The funds of SIAL have never travelled to any concern or person not connected with this group. Its bank account with the Girndlays Bank, Fort, Bombay, was mostly operated by the assessee or his constituted attorney. Its main asset, namely, the shares of BDMC, has been pledged against the interest-free loan provided by the assessee as mentioned earlier." The crux of the matter is that the Assessing Officer reasoned that the assets which were ostensibly held by SIAL should be considered in the hands of the assessee. For the purpose, he relied on and invoked the ratio of the decision of the Supreme Court in the now well known and famous case of McDowell and Co. Ltd. [1985] 154 ITR 148. He further held that SIAL was used as a device and a front by the assessee to reduce his income-tax/wealth-tax liability since the assessee has transferred his assets to a Nepal-based company, which funds were subsequently brought back to India for purchase of shares of BDMC including some shares which were held by the assessee earlier, and again these shares were pledged against the loan given by the assessee.

Yet further the Assessing Officer reasoned and concluded that almost the entire initial funds of SIAL were contributed by the assessee, though the company is shown to have been located in Nepal, yet its entire activity is in India and conducted from the assessee's premises.

The assessee has maintained complete control over the affairs of the company including giving of surplus funds of the company as loans to the assessee's two minor sons.

3. In appeal by the assessee, the learned first appellate authority upheld the reasoning and conclusions of the Assessing Officer, As a rider, he observed, "that in the event of the appellant getting Indian citizenship as a result either of the order of the Bombay High Court or the decision of the Government of India upon the application of the appellant, the protection of Section 6 will not be available to the appellant in respect of valuation dates following on or after the date of citizenship. In the impugned assessment order, the value of the foreign assets has not been included because of Section 6, as the appellant had declared himself to be a non-citizen. If citizenship is granted to him, the market value of these assets will have to be included in the net wealth and relief claimed in the present appeal will be whittled down".

4. He yet further put a rider that the present order of his has to be read within the above understanding and further that his order is subject to the order which will be passed by the Bombay High Court eventually on the issue of citizenship.

6. The assessee is aggrieved and so naturally, hence this appeal and we have heard the learned authorised representatives of the parties at length on three dates, viz., March 4, 1991, March 5, 1991, and March 6, 1991. We have also gone through the bulky paper book placed on file on behalf of the assessee and the Department. The learned authorised representative of the assessee has argued that since there was no restriction on remittance of Indian currency between India and Nepal and further that there was a specific notification under the Foreign Exchange Regulation Act to that effect, the assessee, a non-resident, could have remitted amounts to Nepal and there is nothing illegal in that. He further contended that the company which is registered in Nepal is a separate entity by itself and by itself being a company registered in a foreign country and that company's holding of shares in India could, by no stretch of imagination, be clubbed as assets in the hands of the assessee while computing the assessee's net wealth for being charged under the provisions of the Wealth-tax Act. Yet further, he contended that the assessee was a non-citizen, although resident in India since, in that case, what is located outside India cannot be taken into account, the holding of shares as also the loans due from the assessee's sons in the case of the foreign company, viz., the company registered in Nepal, could not be subjected to tax for the simple reason that the said company is being assessed in India under the provisions of the Income-tax Act, 1961, on its dividend income, hence a recognition by the Department of its separate entity. For the sake of argument, conceding that the company registered in Nepal was an investment company of the assessee, yet it was an investment company and not a front company and it being located in Nepal, its holding of shares as an investment could not be assessed in the hands of the assessee. Yet further, he has contended that the spirit and ratio of the decision of the Mc Dowell's case [1985] 154 ITR 148 (SC) could not be invoked on the facts of the assessee's case because of the above reasoning. He has referred to the paper book pages 651 and 657, specific paras 2 and 17 and has relied on the decisions reported as Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219 (Bom), CWT v. Arvind Narottam [1988] 173 ITR 479 (SC), M.V. Vallaippan v. ITO [1988] 170 ITR 238 (Mad), 15 ITD 711 (a decision of the Income-tax Appellate Tribunal) and a decision of the Income-tax Appellate Tribunal, Bombay Bench, a copy of which has been placed on our file as assessee's paper book page 342. In a nutshell, what the learned representative of the assessee has said is that since the assessee is having the status of resident/non-citizen, though resident in India, under Section 6 of the Wealth-tax Act, 1957, his assets located abroad in a company, though that company is having interest and investment in India, could not be subjected to tax in the hands of the assessee.

7. On his part, learned senior standing counsel, appearing for the Department, contended while relying upon the orders of the learned lower authorities that it was a colourable form of tax avoidance amounting to tax evasion and, relying on Rule 27 of the Income-tax (Appellate Tribunal) Rules, he wanted the Income-tax Appellate Tribunal to apply the ratio of Mc Dowell's case [1985] 154 ITR 148 (SC) since, according to learned standing counsel, the learned Commissioner of Income-tax (Appeals) has decided this issue in favour of the assessee incorrectly/wrongly. He further contended that the company in Nepal was a puppet company--a sham one--and recent confidential enquiries made by the Department prove it to be so. He has also contended that the assessee has been waiting since the year 1975 to pick up from the shelf a device to avoid tax, which, on these facts, amounts to tax evasion inasmuch as the company in Nepal has two local directors who were being paid petty sums of Rs. 300 each per month as directors because, in substance and in reality, the assessee is the sole owner of the company. The assessee having remitted amounts from his accounts in India to Nepal and then having brought the same back to India to make investment in the Bombay Dyeing and Manufacturing Ltd., the natural inference is that it is a device and a colourable one at that and covered by the Mc Dowell decision [1985] 154 ITR 148 (SC), since bona fides cannot be proved. Pure and simple, the assessee remits the amount to Nepal and then again the remittance is brought back to India and invested in a company wherein the assessee has eye and life stakes, thus avoiding income-tax/wealth-tax on the holding and the income. He has further contended that vis-a-vis the Nepal company, though numerically it is not so, on record it is a minority shareholder and the assessee has never participated in any proceeding/meeting of that company in Nepal, though he was the chairman. The holding of the shares of Bombay Dyeing and Mfg. Ltd. in India by the Nepal company is a benami holding of the assessee, a colourable transaction having given a practical slang to it, hence no single bona fide transaction but a series of integrated transactions premeditated and preordained to hoodwink the Revenue and the Department vis-a-vis income-tax and wealth-tax liability. Paper book page 14 has been pressed into service along with Craven v. White (Stephen) [1990] 183 ITR 216 (HL). Yet further, it has been contended that dividend received in India by that Nepal company has been reinvested as loans and to buy shares of BDMC to evade tax and it is a pure and simple case of tax planning, illegal tax avoidance, which amounts to tax evasion because it is a device and a colourable transaction. In fact, no genuine company is in existence in Nepal because it has no transactions other than investment in India in shares of Bombay Dyeing and Manufacturing Ltd. Yet further, it has been contended that there being no other activity and although the assessee was chairman for 14 years, he did not attend a single meeting of the board of directors in Nepal, but is controlling the activities of the said company from India through an authorised attorney. The two local directors who have been paid Rs. 300 each per month have all along been dancing to the tune of the assessee and we have to consider this in the context of normal human conduct, circumstantial evidence and the shamness and non-genuineness of the company and the device and safety wall, if any, has to be exploded and the veil of corporate entity has to be pierced. Referring to page 56 of Volume I of the Commentary by the learned author Palkhivala, he has supported the orders of the learned lower authorities and said that the funds remitted from India with permission of the Reserve Bank of India is not that relevant but relevant in the context and circumstantial evidence to be read with the fact that the said company in Nepal has had no commercial transaction and the sole investment is in India through the assessee in the assessee's company. Sri Meenakshi Mills' case [1967] 63 ITR 609 (SC) has been relied upon and the transactions of the Nepal company with the assessee's company BDMC and the sons of the assessee to whom loans have been given. Concluding, he said it is a manipulation, most non-genuine, covered by Mc Dowell's case, [1985] 154 ITR 148 (SC) since there are circular integrated transactions and to appreciate the facts, circumstantial evidence has to be taken into account along with normal human conduct while piercing the corporate veil. CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) is relied upon along with B.R. Bamasi v. CIT [1972] 83 ITR 223 (Bom) and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC). Of course, McDowell's case [1985] 154 ITR 148 (SC), has been strongly relied upon. Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) at page 704 has also been taken into reliance. Paper book page 2, pages 7 to 11, 21, 25, 28, 46, 47 and 51 have also been relied upon. H.A.Shah and Co. v. CIT [1956] 30 ITR 618 (Bom) has been pressed into service. Yet further, it has been contended that the Income-tax Appellate Tribunal should get behind the smokescreen, appreciate the facts as these really are and look to the series of integrated transactions and decide the issue piercing the corporate veil and appreciating the facts in the correct perspective, apply the law as stands enunciated in McDowell's case [1985] 154 ITR 148 (SC), and Workmen of Associated Rubber Industry Ltd. v. dissociated Rubber Industry [1986] 157 ITR 77 (SC). He has also contended that, on the facts and in the circumstances of the case, the assessee has manipulated the non-genuine and sham company in such a manner which borders on tax avoidance/evasion and total investment is made in shares of BDMC so that the assessee could maintain its hold on the said BDMC.Also, it has been contended that the transaction is absolutely colourable, since the company in Nepal has no financial involvement but is a paper company, a puppet company and although the assessee claims to have resigned as chairman, yet he is controlling that Nepal company through his personal agent--authorised person--in Bombay, at his office. Taking a cue from Sri Meenakshi Mills' case [1967] 63 ITR 609 (SC) and referring to pages 610 and 616 and further Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC), he has contended that the facts and circumstances of the case go a long way ,to draw an inference that this is a case of tax evasion inasmuch as the company in Nepal is a personal entity of the assessee and he has given power of attorney on behalf of the company to one of his own men, Mr. Golpuria, and though the assessee claims that he has resigned as chairman, yet for all intents and purposes he is managing the affairs of the company through power of attorney--his own man--and this proves that the Nepal company is a puppet company and is still controlled by the assessee. Relying upon H.A. Shah and Co. v. CIT [19561 30 ITR 618 (Bom), he argued that if for the earlier years, the corporate veil has not been pierced, there being no res judicata and estoppel, the reasoning for this year in the orders of the learned lower authorities have to be upheld inasmuch as the latest enquiries reveal that the company in Nepal is a non-existent company. In conclusion, he argued that vis-a-vis the earlier orders and the presently impugned orders, the presently impugned orders be upheld inasmuch as the Nepal company is a puppet company. The board meetings were sham, income-tax/wealth-tax has been evaded, the transactions are preordained, not a case of tax planning but a colourable tax avoidance and bordering on tax evasion since all the activities are in Bombay and controlled by the assessee and all these features prove that the Nepal company is not geniune and sham. There are no minutes of the proceedings of any meeting, since nothing has been proved and nothing has been placed on record. There has been no commercial activity and no commercial advantage. Piercing the veil of corporate entity, McDowell's [1985] 154 ITR 148 (SC) ratio applies since the entire course of conduct is ordained and controlled by the assessee who is responsible for channelising the investment to his benefit, hence all is mala fide and there are no bona fides. He accordingly wants the Income-tax Appellate Tribunal to uphold the impugned orders and hold against the assessee.

8. In reply, on behalf of the assessee, it has been contended that the fact that the Nepal company was not at the address located is not an aspect discussed by the Commissioner of Income-tax (Appeals); the Nepal company is not a sham and non-genuine company because it was incorporated in Nepal as per Nepal's laws ; there is no prohibition in law that the Nepal company could not invest as an investment company in the shares of BDMC ; suffering of loss as a dealer in shares was there as a transaction and the Wealth-tax Officer accepts it. As such, there was a business transaction and these can go like that--there is every likelihood--and even if it is not there, there is no illegality attached to that ; that there is not one transaction but an integrated series of transactions is incorrect and after 1975, there has been no transaction. Craven v. White (Stephen) [1990] 183 ITR 216 (HL) has been relied upon to support the case that if avoidance of wealth-tax/income-tax is legal and the transactions are legal, it is not bad in law ; the Nepal company has no commercial transaction since it is not a trading company but an investment company and Section 109 of the Act, i.e., the law itself recognises such company ; learned counsel for the assessee conceded that the Nepal company is an investment company of the assessee and even if one pierces the corporate veil, the transactions are genuine since the investment company has to make investments as advised and not to the dictates of the Department ; that the assessee has not attended any board meeting is correct not even as a chairman because he always acted as a non-working--simple director--in the manner. Learned counsel further contended that the Nepal company being an investment company and since Nepal is not a financial centre, the investment has to be in other countries and it was made in India since free flow of funds between India and Nepal is legally permissible under the laws of both the countries ; assessee as a prudent businessman thought it advisable and as a practical proposition incorporated a company in Nepal, which is an investment company, since, at the relevant time, the assessee was a non-citizen and wanted to have the benefit of Section 6 of the Wealth-tax Act; that there is no harm in tax planning, if it is legal, and the facts prove that it is not illegal that a non-Indian non-citizen having the right to a flow of free remittance between India and Nepal thought it fit, and, as per the permission of the Reserve Bank of India, to have an investment company in Nepal; that McDowell's case [1985] 154 ITR 148 (SC) ratio may be good law but the facts of the assessee's case do not come within the mischief of that ratio, since tax planning within the framework of the permissible provisions of the law is legal and having an investment company in Nepal and making investment in India is not illegal; that it is a general practice that total payment is made to a chartered accountant who manages a company on behalf of the shareholders/directors and finally that the Revenue has not made enquiries at the correct address because the previous address was changed and it was notified to the Nepal company law authorities. In conclusion, he says that the assessee's case squarely fell within Section 6 since he is a non-Indian non-citizen, though resident and the orders of the learned lower authorities are required to be modified in terms of the relief prayed for by the assessee.

9. In a nutshell, the assessee's case is that since the assessee is a non-Indian non-citizen, though a resident one, his assets being located in Nepal--out of India--Section 6 of the Wealth-tax Act, 1957, applies and the Nepal company being an investment company of the assessee, to reiterate, a non-citizen non-resident, the arrangements were perfectly valid in law. The assets as such were not includible under Section 6 of the Wealth-tax Act, 1957, for assessment purposes.

10. The case of the Revenue is that, in view of the ratio of the decision of the Supreme Court in McDowell's case [1985] 154 ITR 148, the assessee has devised a systematic transaction--a series of transactions--a scheme--whereby capital has been flown from India to Nepal to float a dummy company--a non-genuine sham entity--and as such the investment by that Nepal company in India has to be held as an investment of the assessee because for all intents and purposes, the assessee is managing that show and has disguised the same as belonging to the Nepal company, which action borders on tax evasion.

11. We have heard the parties at length. The assessee has been granted a "Certificate of Registration" by the Ministry of Home Affairs, Government of India, registering the assessee as a citizen of India under the provisions of Section 5(1)(a) of the Citizenship Act, 1955.

The certificate is numbered 1880 and bears the date November 5, 1990.

12. Section 5(1)(a)/(d) provides for "citizenship by registration" of (i) persons of Indian origin who are ordinarily resident in India and have been so resident for five years immediately before making an application for registration and (ii) minor children of persons who are citizens of India. The assessee has placed a photostat copy of the certificate of registration on our file as page 509 of the assessee's paper book (volume IV).

13. The Government of India, in the Ministry of Home Affairs, vide letter No. 26013.233.89-IC/III of March 5, 1990, informed the Government of Maharashtra, Central Administration Department, Bombay, that the assessee was to be registered as a citizen of India under Section 5(1)(a) of the Citizenship Act, 1955, and vide this communique, the assessee was asked to renounce his present nationality by applying to the British Mission in India/British High Commission in India in accordance with the law of the country concerned (this is at page 505 of the assessee's paper book). Page 507 is the photostat copy of the assessee's "declaration of renunciation" of British citizenship, British overseas citizenship, British subject status. Here, the assessee, while renouncing his British citizenship, also declared that, "I am about to acquire the following citizenship or nationality after making this declaration of renunciation". Hereunder, there is a mention of "Indian citizenship". This declaration bears the date April 5, 1990.

14. In the face of the above evidence, it can safely be said that in relation to the accounting period relevant to the assessment year under appeal, the assessee was not a citizen of India. The status of the assessee, as such, is, "resident but not a citizen of India" and as a natural consequence thereto, the foreign assets of the assessee are not includible in the hands of the assessee for assessment purposes since Section 6 of the Wealth-tax Act, 1957, specifically provides for, "exclusion of assets and debts outside India". The said section reads as under : "In computing the net wealth of an individual who is not a citizen of India or of an individual or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date- (ii) the value of the assets in India represented by any loans or debts owing to the assessee in any case where the interest, if any, payable on such loans or debts is not to be included in the total income of the assessee under Section 10 of the Income-tax Act ; Explanation 1.-- An individual or a Hindu undivided family shall be deemed to be not resident in India or resident but not ordinarily resident in India during the year ending on the valuation date if in respect of that year the individual or the Hindu undivided family, as the case may be, is not resident in India or resident but not ordinarily resident in India within the meaning of the Income-tax Act.

Explanation 1A.-- Where in the case of an individual the value of an asset in India is represented by any debt owing to him, being any moneys to his credit in a Non-resident (External) Account, the interest payable on which is not to be included in his total income under Clause (4A) of Section 10 of the Income-tax Act, the provisions of this section shall, in relation to such asset, apply subject to the modification that the reference in this section to an individual not resident in India shall be construed as a reference to a person resident outside India as defined in Clause (q) of Section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973).

Explanation 2.--A company shall be deemed to be resident in India during the year ending on the valuation date, if,-- (a) it is a company formed and registered under the Companies Act, 1956 (1 of 1956), or is an existing company within the meaning of that Act ; or (b) during that year the control and management of its affairs is situated wholly in India." Now coming to the Nepal company, the same was incorporated under the Nepal's Companies Act in December, 1970. The Nepal company received Rs. 25,76,000 in Indian currency by way of advance from the assessee and this is said to be within the general permission granted by the Reserve Bank of India, vide its notification of January 1, 1974.

15. The said notification No. F.E.R.A.7/74-R.B. dated January 1, 1974, under G.S.R. No. 89 provides, inter alia, that, "in pursuance of Sub-section (1) of Section 9 of the Foreign Exchange Regulation Act, 1973 (46 of 1973), the Reserve Bank hereby directs that none of the prohibitions imposed by the various clauses of that sub-section shall apply to any transaction entered into in Indian rupees by or with, Indians, Nepalese or Bhutanese resident in Nepal or Bhutan." It also provides further for the same exemption in relation to a branch situated in Nepal or Bhutan of any business carried on by a company or a corporation incorporated or established under any law in force in India, Nepal or Bhutan and yet further in relation to a branch situated in Nepal or Bhutan of any business carried on as a partnership firm or otherwise by Indians, Nepalese or Bhutanese.

16. [Extract taken from pages 80 and 81 of the assessee's paper book (volume I), which, in terms, is a photostat copy of the notification taken from the Foreign Exchange Regulation Act, 1973. Reference is to Section 9 of the said enactment.] 17. The Nepal company, hereinafter to be called "SIAL" (the Sterling Industrial Agencies Pvt. Ltd.), on March 7, 1975, purchased 5,000 equity shares of BDMC from the open market at the then prevailing market rate. Again 5,000 more shares were purchased on March 10, 1975.

12,000 + 16,965 on March 12, 1975. 1,100 on March 25, 1975, 800 on April 11, 1975, 12,000 on April 29, 1975. These were purchased after taking permission of the Reserve Bank of India. On its part, BDMC (Bombay Dyeing and Manufacturing Co. Ltd.) had also obtained permission of the Reserve Bank of India for issuing bonus shares to its non-resident shareholders. The said Nepal company, SIAL, had two other shareholders who were holding 53,000 ordinary shares of Rs. 10 each out of which Re. 1 each share was paid up. These two were directors of SIAL--the Nepal company. SIAL is a regular income-tax assessee in India and has been assessed under the provisions of the Income-tax Act, 1961, since the assessment year 1976-77. Assessments stand completed from the assessment year 1976-77 onward ending with the assessment year 1987-88.

Enquiries about the income of the said Nepal company SIAL have since been made by the Indian income-tax authorities from time to time. The assessee was a director of the Nepal company and resigned on January 6, 1989.

18. The assessee has also been filing his income-tax returns as also wealth-tax returns under the relevant Indian enactments and he has been assessed accordingly. Page 63 of the assessee's paper book details the approvals granted by the Reserve Bank of India and these relate to approval of November 10, 1976, for issuance of bonus shares to non-resident shareholders by BDMC ; of June 24, 1983, from the Reserve Bank of India to SIAL, the Nepal company, in connection with the reckoning of the above purchase of debentures ; of October 10, 1983, from the Reserve Bank of India to SIAL, the Nepal company, for the sale of the non-convertible portion of debentures and approval of September 24, 1987, from the Reserve Bank of India to SIAL, the Nepal company, stating that there was no question of issuing holding licence in respect of 52,865 shares of BDMC by the Nepal company. The said (last) letter being very relevant, stands reproduced hereunder : Request for issuance of holding licence in respect of 52,865 shares of the Bombay Dyeing and Mfg. Co. Ltd. (BDMC) Please refer to the correspondence resting with your letter dated January 6, 1987, on the captioned subject.

2. We advise that in terms of the Reserve Bank Notification No. FERA 110/51-RB, dated 17th August, 1951 (as amended up to 13th March, 1963), Indian rupee securities and shares could be freely issued or transferred to persons resident in Nepal without the Reserve Bank of India's approval. This notification was, however, rescinded in 1977, vide Notification No. FERA 42/77-RB, dated 24th February, 1977. As your company had purchased the above shares of BDMC in 1975, the same was covered by the above notification of 17th August, 1951, and as such there is no question of issuing any holding licence to you for your shareholding mentioned above.

The assessee has been placing on the file of the Income-tax Department an analysis of his bank account right from the assessment year 1975-76, he has also placed information on the file of the Department about his shareholding-sales and purchases. Pages 240 to 249 of the assessee's paper book are copies of the assessment orders of SIAL under the provisions of the Income-tax Act, 1961, and these relate to the assessment years 1978-79 onwards up to 1983-84. Copies of the assessment orders of the Nepal company for the assessment years 1984-85 to 1987-88, have also been placed on our file as the assessee's paper book pages 252 to 258 and 261 to 264.

19. The Nepal company, as mentioned earlier, is a company incorporated in Nepal in the Ministry of Industries and Commerce and the certificate of incorporation has been placed on our file as the assessee's paper book page 293. It bears the date December 23, 1970.

20. The assessee's paper book pages 294 and 295 are the copies of the approval granted by his Majesty's Government of Nepal authorising Mr.

Nusli Wadia, the assessee, to make investment in the Nepal company, SIAL. The assessee holds 18,000 ordinary shares of Nepal currency of Rs. 10 each out of which Nepal currency Re. 1 is paid up, i.e., investment amounts to Rs. 18,000. He further holds 30,000 ordinary shares of Nepal company currency of Rs. 10 each fully paid up. The total investment, as such, stands at Rs. 3,18,000. The shareholding by two Nepalese directors is Rs. 53,000 in Nepalese currency since they hold 53,000 ordinary shares of Rs. 10 each in Nepalese currency but the paid up amount is Re. 1 per share. In terms of voting rights, the Nepalese shareholding is 53,000 shares and the assessee's is 48,000 shares. The resultant voting pattern is Nepalese shareholding is 52.48 and the assessee's is 47.52. Since, under the Nepalese company law, partly paid-up shares have equal voting rights as in the case of fully paid-up shares. Page 306 of the assessee's paper book is a certificate dated May 19, 1989, issued by N. Krishnaswamy and Co., chartered accountants of Kathmandu, Nepal, and this certificate certifies that the assessee has not attended any board of directors' meeting ever and further that the assessee is only a director and not a permanent chairman of the company.

21. There is no prohibition under the Nepalese company law on investment made in India by any Nepali company and this stands proved by page 309 of the assessee's paper book, which is again a certificate from the above-mentioned chartered accountant, N. Krishnaswamy and Co.

22. Pages 495 to 504 of the assessee's paper book and 505 to 509 were not before the learned lower authorities and we have admitted this evidence in the interest of justice for proper adjudication of the issue inasmuch as these are letters from the Central Government including the certificate of registration and correspondence, etc.

23. Coming to the Revenue's stand, they have placed on our file two paper books pages 1 to 71 and 1 to 55. Here also, some evidence is absolutely fresh and we have admitted the same also, as in the case of the assessee, being absolutely necessary for proper adjudication of the issue involved which is thought to be in the interest of justice. The Revenue says that the company is not in existence at the address mentioned earlier in the returns and as given to the Income-tax Department either by the assessee or by the Nepal company during the assessment proceedings. The Revenue also wants the Income-tax Appellate Tribunal to pierce the corporate veil, i.e., to lift the veil of the Nepal company and to hold the transactions to be individual transactions of the assessee but, in our considered opinion, it is too late in the day inasmuch as the Nepal company has since been assessed on its income under the provisions of the Income-tax Act, 1961, since the assessment year 1976-77, and that income was income from dividend earned on shares held by the Nepal company in BDMC. That apart, the assessee has all along been placing on the file of the Department an analysis of his vis-a-vis his shareholding with the Nepal company and the remittances. Yet that apart, the sale and purchase of the shares of the Nepal company are perfectly legal in law and the bonus shares, etc., issued to the Nepal company by BDMC were in accordance with the approval of the Reserve Bank of India. Remittance from India to Nepal is also permissible and is in accordance with the Indian laws as per notification issued under the Foreign Exchange Regulation Act, which notification has been referred to above in the body of this order.

24. Now, if all the transactions are within the permissible limits of the law of the lands, India and Nepal, and if the assessee a non-citizen has been advised so to have a company in Nepal, which he concedes to be his investment company, the ratio of McDowell's case [1985] 154 ITR 148 (SC) will not apply, particularly when those transactions have been approved by the Income-tax Department itself by assessing the income of the Nepal company as also the income/wealth of the assessee under the provisions of the Income-tax Act and Wealth-tax Act as prevalent in India. If these transactions were valid and genuine right from the assessment year 1976-77 onward, then for the first time in relation to the assessment year under appeal, these cannot be said to be hit by the ratio of the decision of McDowell's case [1985] 154 ITR 148 (SC). The ratio of the decision of McDowell's case [1985] 154 ITR 148 (SC) cannot be applied on whims and choice and, in this case, it is too late in the day because of the past history dating back to assessment year 1976-77. We hold accordingly.

25. Now coming to Section 6, which deals with "exclusion of assets and debts outside India". The assessee is an individual and, admittedly, not a citizen of India and his assets are his shareholding in the Nepal company and credit balance (if any) due from the said company. The said company had invested in India and that investment cannot be held to be that of the assessee inasmuch as the company in Nepal and the assessee are certainly two different entities--assessees. The assessee is an individual and his shareholding in the Nepal company as also other credit balances, if any, are certainly assets outside India since his shareholding is in the Nepal company and the investment of the Nepal company in India cannot be said to be assets of the assessee. In this view of the matter, the protection under Section 6 of the Wealth-tax Act 1957, is allowable to the assessee and his shareholding in the Nepal company as also credit balance (if any) is not includible in the hands of the assessee while computing the assessee's net wealth. The resultant effect is that assets shown in the name of SIAL, the Nepal company, and advances by the said company to the minor sons of the assessee, the loans advanced by the said Nepal company, SIAL, to the Sunflower Investment and Textiles Ltd. as also cash and bank balances of the said company could not have been assessed in the hands of the assessee.

26. In the net result, the assessee's appeal stands allowed in the above terms and to the above extent.

27. My learned brother has very concisely condensed and capsulised very complex and complicated issues in this order. One cannot but appreciate the deep and penetrating yet simple and clear exposition of law in so far as it relates to matters of Indian citizenship and incorporation of companies and its effects on taxation matters.

28. The only point which I intend to put forward is in regard to the question of exclusion of movable assets located outside India as per the provisions of Section 6{i) of the Wealth-tax Act which reads as follows.

"Section 6. In computing the net wealth of an individual who is not a citizen of India or of an individual or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date,-- The Wealth-tax Act and the Gift-tax Act do not contain specific provisions for determination of the location of the assets. For the purposes of the Estate Duty Act, Rules 7 and 8 of the Estate Duty Rules, 1953, provide relevant procedures for determination of the locality of movable assets. In line with these provisions, the Central Board of Direct Taxes issued guidelines in the form of instructions for ascertaining the location of shares, etc., for the purposes of the Wealth-tax Act as follows : "The shares, stock, debentures, stock in a company are located at the place where the company is incorporated." This instruction has been issued in the aforesaid manner for the simple reason that the term "incorporation" under the Companies Act, 1956, fully covers all the relevant issues required for determination of the location of both movable and immovable assets including the domicile of the company itself. Section 146 of the Companies Act, 1956, stipulates that the company shall, from the day on which it begins to carry on its business or within 30 days of its incorporation, whichever is earlier, have a registered office to which all the communications and notices may be addressed. Special procedures also have been prescribed in a case where the company intends to run its business from a place other than its registered office or when it changes or removes the registered office to another locality within the same geographical limit and within the territory of India.

29. The situation or the location of the registered office of a company is important as it determines its domicile for all purposes. The following primary documents are to be maintained in the registered office : (v) Register of mortgages and charges and copies of registered documents (Section 143) (vi) Statement of account (in case of banking and insurance companies), published from registered office (Section 223) (viii) As per amended Section 147 full address of the registered office is to be published outside various offices and places of business of the company and also in all letter heads, bills and documents as specified in the section.

Keeping in view these detailed provisions, the Board issued instructions for determination of the location of shares and stocks under the Wealth-tax Act by simply stating that they are located at the place where the company is incorporated.

30. Sterling Industrial Agencies P. Ltd. was incorporated sometime in 1970 with its registered office at Kamalpokhari, Kathmandu, Nepal. The real activities of the company commenced around the year 1975, when the assessee entered into certain transactions with it. The registered office by that time was changed to 6/94, Dharampath, Kathmandu, Nepal.

According to the assessee, the registered office was shifted again to 20/ 103, Gyaneswar, Kathmandu, with effect from April 7, 1989.

31. The apparent is normally presumed to be the real unless otherwise proved. The status of the company and its credentials as also the shares held by the assessee should have been accepted as such as apparent from the record. But that presumption cannot be easily drawn in this case. As pointed out earlier by my learned brother, the Revenue have tendered before us some evidence which is absolutely fresh. Even so, having accepted the same, it cannot be easily brushed aside unless the same is disproved or totally overturned. This obligation is all the more pronounced in our case as we are fact-finding Tribunals and our finding on fact is final. Moreover, the question as to where the asset is located is essentially one of fact and will have to be decided in the light of evidence. Therefore, the Tribunal has to refrain from deciding the question by presuming facts.

32. The Revenue have claimed that the company alleged to be having its registered office at 6/94, Dharampeth, has not actually existed at the address. It is further reported that no such company existed in the address at Sabitri Niwas, Dugambhil, behind Mercantile Corporation, New Rock, Kathmandu, Nepal, where the company is stated to have been shifted. It is, therefore, urged in this background and keeping in view that no rent has also been paid nor debited in the profit and loss account of the assessee-company for the year, the corporate veil be lifted and the assessee be treated as the real owner. Since these allegations made by the Revenue are quite serious and are likely to have far reaching consequences, if correct, learned counsel for the assessee was given time to rebut the same. Learned counsel Sri D.N.Harish by a written statement dated March 5, 1991, avers that the company has since shifted its registered office to 20/103, Gyaneswar, since April 7, 1989, and that there is no element of truth in the allegations of the Revenue. He also seeks reliance on other documentary evidence filed along with statement.

33. On enquiry by the Bench, learned counsel could not give a very convincing reply about the non-payment and non-debit of rent by the company in its account as alleged by the Revenue. Learned counsel also could not immediately make available relevant evidence like the lease agreement or rent receipts in support of the lease of the premises for its registered office by the company. Since a company of such magnitude cannot set up and run its business without a proper registered office or head office in regular office premises and since the company would normally take any premises only after duly going through the formalities, it is very necessary and vital that the real state of affairs be brought on record and proved beyond any shadow of doubt by placing all relevant evidence on record and since learned counsel also cannot be expected to produce anything and everything instantly, it is only meet and proper that more opportunity be given to the assessee by setting aside the order of the learned Commissioner of Income-tax (Appeals) and restoring the case back to the Assessing Officer for fresh decision after giving full opportunity to the assessee to substantiate its claim. It is also necessary to bring on record and examine the provisions of the Companies Act, 2021 (1964) of Nepal in the context of the assessee-company and see how the company operates and conducts its business within the perimeter of this Act. These relevant and full facts are necessary to decide the location of the shares held by the assessee in terms of the provisions of the said Act and such finding should be based on material facts placed on the record.

34. The facts to be brought on record and the finding to be recorded has special significance in the present case, as the Bombay High Court, we are informed, is awaiting the order of the Tribunal and its finding for deciding the case of the assessee for the earlier assessment years pending before it. Only when the relevant and full facts are brought on record, their Lordships can adjudicate and decide the issue. It is, therefore, paramount that the full facts be placed on the record. We accordingly set aside the order of the learned Commissioner of Income-tax (Appeals) and restore the matter to the file of the Assessing Officer for fresh decision as indicated above.

This appeal filed by the assessee against the orders passed by the Wealth-tax Officer, Central Circle-10, Bombay, came before me as a third Member under Section 255(4) of the Income-tax Act, 1961, as applied to the Wealth-tax Act, 1957. The point of difference of opinion on which the learned Members of the Tribunal who heard this appeal could not agree was : "Whether the appeal should be allowed or set aside for fresh decision for the reasons advanced by each of the members ?" I have heard Shri D.M. Harish, for the assessee, and S/Shri T.U. Khatri and D.C. Pant, for the Department, and have perused the records, the orders passed by my learned brothers and considered the arguments addressed to me.

35. The assessee, an individual non-citizen for the purpose of the Wealth-tax Act, filed his return of net wealth declaring a wealth of Rs. 16,26,200 for the wealth-tax assessment year 1984-85. Thereafter, a revised return was filed making certain revisions in the valuation of shares and one or two other minor adjustments with which I am not directly concerned in this matter. The assessment was, however, made on a total wealth of Rs. 1,20,42,441, The main difference arose on account of the following additions which were in dispute : (i) Rs. 93,02,545 representing the market value of shares of Bombay Dyeing and Mfg. Ltd, added to the assessee's wealth ; (ii) Rs. 2,00,000 representing advances to the two minor sons of the assessee added to the assessee's wealth ; (iii) Rs. 5,90,000 being loans advanced to M/s Sunflower Investment and Textiles Ltd. ; and There was a company called Sterling Industrial Agencies Pvt. Ltd. (SIAL) registered in Kathmandu, Nepal, some time in the year 1970 relevant to the assessment year 1971-72, in which the assessee is directly and primarily interested. The relevance of this Nepal company will come a little later but before that I have to notice certain facts which have a direct nexus with this company. For that purpose, I have to go back to the assessment year 1974-75. In this assessment year 1974-75, the assessee declared a wealth of Rs. 25.27 lakhs which consisted of the value of 27,536 shares of Bombay Dyeing and Mfg. Ltd., valued at Rs. 16,79,696. For the immediately next assessment year 1975-76, the assessee had transferred a sum of Rs. 22,26,000 to the above named Nepal company, Sterling Industrial Agencies Pvt. Ltd. ("SIAL", for short). As a consequence, the wealth declared came down to Rs. 11,70,900. This advance of Rs. 22,26,000 made to SIAL was financed out of the sale proceeds of 26,965 shares of Bombay Dyeing and Mfg.

Ltd. to SIAL itself. The conclusion to be drawn was that the said SIAL purchased the shares of Bombay Dyeing and Mfg. Ltd. from out of the finances provided by the assessee himself. The amount advanced to the said Nepal Co. SIAL was not disclosed by the assessee in his wealth-tax returns thereafter because the status of the assessee has then become a non-citizen and for the purpose of the Wealth-tax Act a non-citizen is not obliged to disclose and pay wealth-tax on the assets located outside India. A significant observation made by the Wealth-tax Officer was that no indication about this investment in the Nepal concern was made by the assessee either in the course of income-tax or wealth-tax proceedings of any year. It was then pointed out that, with the money available in Nepal, the assessee was bringing the same back to India and was purchasing shares of the Bombay Dyeing and Mfg. Ltd. and was also making different investments and all this exercise was considered by the Wealth-tax Department as an attempt at tax avoidance.

36. Now, glancing at the affairs of SIAL, it would be seen that this company was incorporated in Nepal some time in 1970, with two initial subscribers, namely, Smt. Vimladevi and Shri Shantadeve Pathak, with registered office at 21/639, Kamal Polhadi, Kathmandu, Nepal. Though the activities of this company between 1970 and February, 1975, were not known, suddenly from March, 1975, it sprang into life and its activities began to surface when the assessee sent from his bank account with the Grindlays Bank Ltd., Fort, Bombay, to SIAL bank account Rs. 3,18,000 in Nepalese currency towards contribution of its share capital ; and also another sum of Rs. 32,08,250 in Nepalese currency as interest-free advance. Two other persons, Shri Jagannath Upadhyay and Shri Shankar Aryal, contributed between themselves Rs. 53,000 in Nepalese currency towards their share capital. It was with these funds thus provided by the assessee and share capital as mentioned above, that the SIAL purchased shares of Bombay Dyeing and Mfg. Co.

37. It was also found that SIAL opened a bank account in the Grindlays Bank Ltd., Fort, Bombay, where also the assessee had an account and it was the assessee who introduced SIAL to the Grindlays Bank Ltd. With the moneys that SIAL deposited in the Grindlays Bank Ltd., Fort, it purchased some further shares of Bombay Dyeing and Mfg. Co. The total value of the shares purchased with the above funds were 52,865 shares worth Rs. 35,23,951 in Nepalese currency. So, on an analysis, it was found that, out of the 52,865 shares that SIAL acquired, 26,965 shares were sold by the assessee itself to that company and out of the money of Rs. 35,79,250 available with that company Rs. 35,26,250 was contributed by the assessee himself (Nepalese currency). The amount contributed by the other two shareholders was very meagre and marginal.

38. Another fact that came to be noticed was that the assessee had been acting as the chairman of the said company while the two other persons were acting as directors. The assessee did not draw any salary from the said company while the others were paid nominal sums towards their salaries. Though the registered office of the company was shown as 6/94, Dharampeth, Kathmandu, the entire activity of the said company was carried on in India. In the income-tax return filed the Indian address was given as that of the assessee. Other than the dividend received from Bombay Dyeing and Mfg. Co., there was no other income in the hands of SIAL shown for purpose of income-tax, except some marginal income by way of interest on investments made and that too with Bombay Dyeing and Mfg. Co. and its sister concerns. These investments also were traced to the dividend income generated from the shares held in Bombay Dyeing and Mfg. Co. Gradually, by July, 1979, the initial shareholding of SIAL grew from 52,865 shares up to 1,26,876 shares. The subsequent increase was on account of two bonus issues declared by Bombay Dyeing and Mfg. Co., once in October, 1976, and, secondly, in July, 1979. In April, 1983, SIAL purchased 5,075 convertible debentures of Bombay Dyeing and Mfg. Co. with the funds generated out of dividend income. These debentures were later converted into shares in October, 1983, so that the total shareholding increased to 1,31,951 shares as on March 31, 1984, which is the valuation date of the assessee for the present assessment under dispute.

39. From the abovementioned facts gathered by the Wealth-tax Officer, it was concluded by the Department that the entire activity of SIAL was located in India though its registered office was shown to be located in Kathmandu, Nepal. That its activity in most of the years was only receiving dividend income out of the shares of Bombay Dyeing and Mfg.

Co. which were acquired by the assessee out of his own funds. Secondly, it also advanced money to the minor sons of the assessee and to concerns in which the relatives, associates of the assessee were substantially interested. Another fact found by the Department was that the principal expenditure of SIAL was payment of salary of Rs. 7,000 approximately in Nepalese currency in all these years. There was hardly any expenditure incurred for the running of the company in Nepal. No dividend was declared by the assessee in the year, by which it enabled itself to accumulate a large amount of reserve and surplus, and that reserve and surplus was recycled to make investments of the nature described above. Therefore, the Departments came to the conclusion that the company called SIAL registered as a separate company in Kathmandu was nothing but a facade created by the assessee to escape proper tax liability to wealth-tax and that being a device adopted by the assessee to reduce his wealth-tax liabilities, the corporate veil should be pierced and the assets of that company must be treated as the assets of the assessee.

40. Another conclusion drawn by the Department from the above facts was that the assessee manipulated the transfer his funds to Nepal through the medium of his company and brought the same back to India to purchase the shares of Bombay Dyeing and Mfg. Co. and in this process he made it appear that the shares acquired by him were in fact acquired by a foreign concern which was not a fact but only a facade. Applying the ratio laid down by the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, the Department included the value of those shares mentioned above as that of the assessee. The assessee tried to explain and establish that the said SIAL was a genuine company and that the assessee had nothing to do with it other than as a managing director or chairman and that those assets held by that company and belonging to that company could never be brought to tax in his hands as his own. The assessee also pleaded that these transactions, having been accepted as genuine in the earlier years, should not be viewed with suspicion in this year, there being no other fact or material coming into existence other than the change in opinion again based upon suspicion. Reliance was placed by the assessee upon a series of decisions to show that the ratio of the decision of McDowell and Co. Ltd. [1985] 154 ITR 148 (SC) does not apply but those decisions were all distinguished by the Revenue officers by giving their own reasons which are to be found well discussed in the assessment order passed by the Wealth-tax Officer. The argument that these transactions were done with the approval of the Reserve Bank of India, at the prevailing market rate did not find favour with the Revenue for the reason that the mere grant of approval by the Reserve Bank of India which was required in connection with the different provisions of the Foreign Exchange Regulation Act could not have any decisive bearing in these matters.

41. For these reasons, the value of 1,31,951 shares of Bombay Dyeing and Mfg. Co. held by SIAL as on March 31, 1984, valued at the market value of Rs. 93,02,545 was brought to tax in the hands of the assessee as his own wealth. That was how the addition of the first item mentioned above came to be made.

42. Then there were also advances made to the minor sons of the assessee amounting to Rs. 2 lakhs, which also were treated as the assessee's wealth so also the loans advanced to M/s. Sunflower Investment and Textile Ltd. amounting to Rs. 5,90,000. In this company, the Revenue noticed that the directors were the wife and the constituted attorney of the assessee. The cash and bank balances held by SIAL and shown in its balance-sheet were also treated as those of the assessee and that was how a further sum of Rs. 69,305, the last item mentioned above came to be added. Thus, the total addition of Rs. 1,01,61,850 was made to the disclosed wealth of the assessee which became the bone of controversy before the Tribunal.

43. A resume of the above facts show that the Department did not treat SIAL as a genuine company though registered in Nepal and that it existed only for the purpose and for the benefit of the assessee and that, therefore, the entire assets that were shown as belonging to SIAL in truth and in fact belonged to the assessee. It was on this premise that the above additions were made.

44. On appeal, the Commissioner of Wealth-tax, after a very thorough and exhaustive discussion of the issues involved, upheld the assessment made by the Wealth-tax Officer holding in particular that the Wealth-tax Officer was, for the purpose of taxation, entitled to lift the corporate veil of SIAL and look into the reality of the matter and having done so, he had rightly come to the conclusion that the assets of the assessee were hidden behind the facade of SIAL and it was, therefore, perfectly legitimate for the Assessing Officer to take the view that he had taken. Against this order, a further appeal was filed before the Tribunal.

45. The learned Judicial Member who wrote the leading order, after referring to all these facts in extenso and after considering the arguments addressed to the Bench, held that the assessee was an individual, his shares held in the Nepal company as well as other credit balances were certainly assets held outside India and those assets could not be said to be assets of the assessee in India and that the protection provided by Section 6 of the Wealth-tax Act, 1957, was available to the assessee and his shareholding in the Nepal company and also the credit balances were not includible in the hands of the assessee in computing his net wealth. Therefore, it was wrong to bring to tax the assets shown in the name of SIAL in its balance-sheet as those of the assessee and directed their exclusion in entirety. In other words, the Judicial Member believed the assessee's version that the Nepalese company was a genuine company and the assessee and the Nepalese company were two distinct and different entities and that the assets belonging to the Nepalese company which were exempt from tax by reason of the exclusion provided by Section 6 of the Wealth-tax Act could not be brought to tax, whereas the learned Accountant Member felt that to arrive at the conclusion that the learned Judicial Member had arrived at, some more enquiry was necessary into certain aspects which he listed in his order and, therefore, for that purpose, the matter should be set aside and should be sent back to the Assessing Officer for fresh decision after examining those aspects. The aspects which he adverted to for the purpose of fresh enquiry was a "note" sent by the Departmental Officers to the Departmental Representative to be placed before the Bench in which it was said that, on enquiry by the Department into the affairs of SIAL with the Nepal firm, it found certain glaring discrepancies which led him to believe and draw a certain conclusion that such a company did not exist or could not have existed in Nepal because the enquiries made at the address furnished by the assessee revealed that such a company did not exist there and that the books of the assessee-company and the balance-sheet, the profit and loss account and other statements did not show that any expenditure was incurred. This is the main reason for the learned Members to differ in their conclusions. While one Member held that, on the facts available on record, the assessee was entitled to succeed, the other Member felt that some more enquiry was necessary before the assessee could succeed and that, therefore, the assessment should be set aside.

46. Learned counsel for the assessee, Sh. Harish, submitted that none of the points mentioned by the Accountant Member in his order was right and correct and that no further enquiry was necessary and, therefore, for the reasons given by the learned Judicial Member in his order, the appeal must be allowed. Whereas the learned Departmental Representative, Shri Khatri, submitted that, in a case of this kind where the Department had shown almost conclusively by reference to the relevant facts and circumstances that the Nepalese company was only a simulated arrangement cleverly manipulated by the assessee to reduce the incidence of his tax liability in India, such an effort should not be allowed to go in smoke without enquiry into the evidence collected by the Department. If, after the enquiry made into the evidence collected by the Department, a conclusion was still reached that SIAL was a genuine company and the assets really belonged to it and not to the assessee, then nothing can prevent the assessee from succeeding but without enquiry into those aspects, he submitted that straightaway the matter should not be allowed in favour of the assessee.

47. After noticing the above facts and considering the arguments, I felt that even though it may mean a little delay in arriving at the final conclusion, nothing is lost if a further enquiry is made into the allegations made by the Department which were noticed by both the Members of the Tribunal who heard this appeal. In a case of this nature where a strong suspicion hovers around and over the arrangement of the assessee's affairs, notwithstanding the fact that several factors were in his favour, the causes of suspicion must be removed for ever. In order that the facts, legal and jurisdictional, are to be established, a further enquiry is necessary. A further enquiry can be made at the level of the Tribunal either by the Tribunal itself by remanding the case to the Departmental Officers by giving proper and definite directions and guidelines in which the enquiry is required to be made, or by setting aside the assessment and directing the Department to make further enquiries setting out the direction in which further enquiry is to be made. In fact, during the course of the hearing of this matter, learned counsel for the assessee, Shri Harish, submitted that the Tribunal could have opted for the first course, i.e., remand, rather than opting for the second course, namely, set aside. In my view, it is purely in the discretion of the Bench as to whether, in a particular given state of facts, the matter should be remanded or set aside. In either case, the purpose is to enquire into the evidence brought on record and to examine in the light of that evidence whether the claim of the contesting party is established or not. When learned counsel for the assessee suggested remand as a better and proper course, it follows that some more enquiry was necessary and the final conclusion of the Tribunal could not be recorded except after a further enquiry. Such being the case, there should not be any real and tangible objection to the setting aside of the assessment where the parties are free to let in a wide variety of evidence to prove their respective claims, which is not possible in the case of remand where the scope of consideration of evidence is restricted to the observations made by the Tribunal or to the directions given by it. Thus, the scope of setting aside is wider than the scope of remand. That apart, the forwarding letter of Senior Departmental Representative dated March 4, 1991, invoking Rule 29 of the Income-tax Appellate Tribunal Rules enclosing a letter written to him by the Commissioner of Income-tax, Central-I, Bombay, assumes importance in this regard and shows in my opinion an imperative need to make further enquiries into those aspects. I reproduce below the letter of the Commissioner of Income-tax, Central-I, Bombay, dated March 4, 1991, written to the Senior Departmental Representative, Income-tax Appellate Tribunal, Bombay : I understand that the hearing in respect of the above appeal is coming up before the Income-tax Appellate Tribunal on Monday, the 4th March, 1991.

2. The basic question in this case is the genuineness of the company called M/s. SIAL registered in Nepal. Confidential enquiries made in regard, to this company have led to the following information being collected.

3. The address of the Nepal company according to our records for the relevant assessment year is 6/94, Dharampeth, Kathmandu. The company is not in existence at the above address. A perusal of the later files of M/s. SIAL show it had an address at Savitri Niwas, Dugambhil, behind Mercantile, New Road, Kathmandu. Our enquiries reveal that that is the address of an advertisement company and there is no name plate of SIAL at the address.

4. Since the existence of the company itself is negatived by our enquiries and it is vital information that goes to the root of the matter, you may apprise the Bench of this confidentially. It is relevant to point out that the case of the assessee for the earlier years already reopened under Section 17 of the Act will turn on this crucial issue.

The Bombay High Court has, while disposing of the assessee's writ petition against the reopening of the assessments, referred to the pendency of this appeal before the Income-tax Appellate Tribunal which show that the proceedings for the other years are dependent on this.

This letter was placed by the Senior Departmental Representative before the Bench. The Bench gave an opportunity to the assessee to submit its reply which is as under (pages 90 and 91) : Rejoinder to the letter No. L/J/1/29-9/87-88 dated 4th March, 1991, from the Commissioner of Income-tax (Central-I), Bombay, to Sh.

Ashok Mansukhani, Senior Authorised Representative, Income-tax Appellate Tribunal, Bombay.

A copy of the abovementioned letter was given to the appellant's representative in the course of hearing on 4th March, 1991, with directions to file a rejoinder by 5th March, 1991.

1. The address of the registered office of the company known as Sterling Industrial Agencies Pvt. Ltd. (hereinafter referred to as SIAL) was originally 6/94, Dharampeth, Kathmandu. Subsequently, the registered office has been shifted to 20/103, Gyaneswar, Kathmandu, from 7th April, 1989. Annexed hereto and marked annexure A-1 is a fax copy of a letter addressed by SIAL to the Director-General, His Majesty's Government Department of Commerce, New Bhaneshwar, Kathmandu, intimating the fact of shifting of the registered office to 20/103, Gyaneswar, Kathmandu. Hereto annexed and marked annexure A-2 is also an English translation wherein the date has been given according to the English calendar.

2. Further annexed and marked as annexure B-1 is a fax copy of a letter addressed by SIAL to the Director-General, Commerce Department, New Bhaneshwar, Kathmandu, sending the minutes of the Nineteenth AGM held on 2nd October, 1989, balance-sheet for the year 1988-89, notice of the AGM and list of directors and shareholders.

Also annexed and marked is annexure B-2 is an English translation of the said letter dated 16th April, 1990, being the corresponding date on the English calendar.

3. Annexed hereto is a fax copy of the income-tax assessment order of SIAL addressed to it at 20/103, Gyaneswar, Kathmandu, marked as annexure C-1 and the envelope in which it was received bearing the postal marks, marked as annexure C-2.

4. It is, therefore, submitted that SIAL is a genuine company and its registered office is currently situated at 20/103, Gyaneswar, Kathmandu.

5. The address at Savitri Niwas, Dungambhi, New Road, Kathmandu, at which the Department has conducted its confidential enquiries behind the back of the appellant is not the correct address.

Now, whether the above reply given by the assessee to the queries raised by the Department requires further verification or not became the central question and the learned Accountant Member felt that the answers given by way of reply needed to be further examined. In para 24 of his order, the learned Accountant Member had pointed out (at page 49 supra): "On enquiry by the Bench, learned counsel could not give very convincing reply about the non-payment and non-debit of rent by the company in its account as alleged by the Revenue. Learned counsel also could not immediately make available relevant evidence like the lease agreement or rent receipts in support of the lease of the premises for its registered office by the company. Since a company of such magnitude cannot set up and run its business without a proper registered office or head office in regular office premises and since the company would normally take any premises only after duly going through the formalities, it is very necessary and vital that the real state of affairs be brought on record and proved beyond any shadow of doubt by placing all relevant evidence on record and since learned counsel also cannot be expected to produce anything and everything instantly, it is only meet and proper that more opportunity be given to the assessee by setting aside the order of the learned Commissioner of Income-tax (Appeals) and restoring the case back to the Assessing Officer for fresh decision after giving full opportunity to the assessee to substantiate its claim.

It is also necessary to bring on record and examine the provisions of the Companies Act, 2021 (1964) of Nepal in the context of the asses see-company and see how the company operates and conducts its business within the perimeter of this Act. These relevant and full facts are necessary to decide the location of the shares held by the assessee in terms of the provisions of the said Act and such finding should be based on material facts placed on the record." If I say that no further enquiry is needed, that amounts to saying that the doubts expressed by the learned Accountant Member are not real doubts and that they were mere fishing or roving enquiries without any significance or relevance. In other words, the Income-tax Appellate Tribunal, if it says that no further enquiry is needed by resorting to the process of setting aside the assessment, it will not be able to find the facts correctly which is the main purpose of its constitution.

On a careful reflection of this aspect, I felt persuaded to hold that, in a case of this nature, further enquiry into the aspects raised by the Revenue and the Accountant Member required to be looked into rather than brushing them aside as of no consequence nor can they be taken as fully explained by learned counsel for the assessee without further verification of those facts. It may be true as was submitted on behalf of the assessee by Shri Harish that the shares were acquired in 1975, that exemption was granted from the levy of wealth-tax till 1983-84 assessment year, that dividends were taxed in the name of SIAL, that SIAL was recognised as a non-resident Nepal company, that assessment orders were already passed, that there were two Nepalese directors holding 26,500 shares each, whereas the assessee's shareholding matches them or little less than that, that the assessee had advanced a loan of Rs. 25 lakhs in 1974 a part of which was only converted into capital and the balance was repaid through dividends in full by 1990-91. But yet that doubt about the genuineness of SIAL serving as a corporate veil to the assessee's affairs is to be examined and cleared, particularly when new and fresh facts have come into the possession at the level of the Tribunal for the first time making an enquiry into them a legal necessity. It is now well-settled that the power to set aside an assessment has to be exercised only when some irregularity in investigation into facts needs to be cured or when fresh facts have to be examined and verified or when fresh evidence has to be examined or fresh aspects or points required to be considered or some such like things but not when all the facts necessary to come to a final result are available on record. This does not appear from the facts narrated in the order of the learned Accountant Member to be a case where all the facts necessary to arrive at a final conclusion are available or brought on record. Thus, setting aside the order may be the appropriate order to be passed but not allowing the appeal without any further enquiry. The judicial process, as I understand, should never be an impediment into investigation of facts to arrive at the truth nor should they be used as a handmaid to scuttle a genuine enquiry. What was in the mind of the Accountant Member can be said to be a doubt but having sat on the seat of justice of a final fact-finding body, no fact can be taken to have been established or proved without making enquiries into all the facts and without getting all the doubts cleared, provided the doubts are genuine and are not in the nature of roving or fishing enquiries. In this case, the facts presented by the Departmental Representative to the Bench and the justification provided by the assessee do need enquiry and it cannot be said that they be taken as proved. I am, therefore, of the opinion that in a case of this nature when fresh material has come to light throwing doubts as to the real state of affairs, the enquiry should not be stopped. Therefore, getting aside the assessment is the only way by which the assessee can be asked to establish the facts it has mentioned in its letter. I may also state here that learned counsel for the assessee, Sh. Harish, had not objected to the power of the Department to pierce the corporate veil except to state that there was no case for such an unholy pierce in this case but as I had adverted to earlier, the facts referred to by the learned Accountant Member in his order and the doubts raised by him do show that an enquiry was called for.

48. I may also state here that, as a third Member, my role is confined only to express my opinion strictly in conformity to the point of difference of opinion raised and not to express my opinion on the merits of the matter.

49. Now, the matter will go before the regular Bench for disposal of the appeal in accordance with the opinion of the majority.


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