COMMISSIONER OF INCOME TAX, KOLKATA versus MUKUNDRAY K. SHAH

Citation: [2007] 4 S.C.R. 1104 · Decided: 10-04-2007 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
c 
COMMISSIONER OF INCOME TAX, KOLKATA 
v. 
MUKUNDRA Y K. SHAH 
APRIL I 0, 2007 
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] 
Income Tax Act, 1961 
Section 2(22)(e)-Deemed dividend-
Diary belonging to assessee, seized by department during search of 
premises of a company, MKSEPL, indicating investment by him in bonds-
Assessing Officer finding that bonds were purchased from money received 
from two firms in which assessee was partner, and their books of accovnt 
D showed repayment of loans and advances from three companies, including 
MKSEPL, which were closely related private limited companies, wherein 
assessee had controlling interest and considerable voting power-Assessing 
Officer concluding that MKSEPL had accumulated profits but deliberately 
refused .to distribute them as dividends to its shareholders, and money paid 
by it to two firms was for purchase of bonds by assessee which was assessable 
E as deemed dividend in his hands under Section 2(22)(e)-Correctness of-
Held-Entries discovered during search had direct co-relation with payment 
by MKSEP L to two firms and payments by said two firms to assessee who used 
it to buy bonds; said funds were not repayment of loans.;_ Timing of so-called 
repayments by company to those firms and immediate withdrawal of funds by 
assessee and timing of purchase of bonds was around same time-It was 
F noteworthy that in MKSEPL assessee was not only a shareholder having 
more than 10% of total voting power, but was also its Director, and said 
company was partner in the two firms; also withdrawal of money by assessee 
were debited in capital account of firm leading to a debit balance. 
G 
Merger of companies-Effect of-Held-Reserves had to he taken on 
basis of merged account. 
Chapter XIV-B dealing with block assessment-Invocation of-
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Undisc/osed income in nature of deemed dividend detected wholly and 
A. ..-. 
exclusively as a result of a search by department and not from any scrutiny 
H 
1104 
I 
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COMMISSIONEROFINCOMETAX, KOLKA TA v. MUKUNDRA YK. SHAH 
1105 
proceedings, tax evasion petitions, surveys, information received from ext._rnal A 
agency etc.-Case of circular trading wherein funds were routed through 
conduits and clear picture emerged only after seeing cash flow statements-
Held-Department was right in invoking provisions of Chapter XIV-B. 
Section 260A-Appeal to High Court-Interference with fir.ding of 
facts of Tribunal-Held-Question as to whether payment by company is for B 
benefit of assessee is a question of fact-Conclusions of Tribunal that it was 
routed through other firms for benefit of assessee, on date of payment there 
existed accumulated profits and all withdrawals were debited in cupital 
account of firm leading to debit balance, were findings of facts-These were 
not perverse and could not be interfered by High Court-Section 2(22)(e). C 
Words and phrases-Circular trading-In the context of Chapter XIV-
B of Income Tax Act, 1961. 
Appellant, the Income Tax Department, searched the premises of a 
company, MKSEPL and seized a diary titled "ML-20" belonging to respondent- D 
assessee. The diary indicated investment ofRs.26.35 crores by the respondent 
in 9% RBI Relief Bonds between 17.11.99 and 11.2.2000 during the 
accountir.g year ending 31.3.2000. The Assessing Officer found that the said 
Bonds were purchased from the money received from two firms, MKF and 
MKI, in which the respondent was partner. In the books of account, the said 
two firms were shown to have received back the loans and advances from three E. 
companies viz. MKTPL, SCPL and MKSEPL, which were closely related 
private limited companies, wherein the respondent had controlling interest 
and considerable voting power. On the basis of the said diary and the cash 
flow chart, the Assessing Officer concluded that (i) MKSEPL had accumulated 
profits but deliberately refused to distribute them as dividends to its F 
Shareholders; (ii) Rs.Y.99 crores was paid by MKSEPL (including SCPL) in 
the Accounting Year 1999-2000 to MKF and MKI respectively for the 
purchase of 9% RBI Relief Bonds by the respondent, and assessed the said 
sum as deemed dividend in the hands of the respondent under Section 2(22)(e) 
of the Income Tax Act, 1961. It was more so as SCPL stood merged with 
MKSEPL with effect from 18.5.98 
G 
Aggrieved by the Assessment Order, the respondent filed an appeal 
before Commissioner of Income Tax (Appeals), which was allowed. Against 
this appellant appealed t

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