Interplay of Portuguese Civil Code and Deemed Dividend: Bombay High Court's Landmark Ruling in Dattaprasad Kamat Case

The intersection of regional family laws and federal corporate taxation often creates complex legal paradigms. A prime illustration of this complexity is the recent judgment delivered by the Bombay High Court in the case of Dattaprasad Kamat Vs ACIT, dated 18/08/2023. The Court meticulously examined whether the unique provisions of the Portuguese Civil Code, which governs marriages in the State of Goa, can alter the interpretation of voting power and beneficial ownership under the Companies Act 1956 (and Companies Act 2013) for the purpose of computing deemed dividend under Section 2(22)(e) of the Income Tax Act 1961.

This comprehensive analysis delves into the factual matrix, the procedural history, the primary legal contentions, and the ultimate verdict of the Bombay High Court, which upheld the additions made by the tax authorities.

Factual Matrix of the Dispute

The core of the dispute revolves around three brothers—Shri Dattaprasad Kamat, Shri Uday Kamat, and Shri Ramesh Kamat—who are the primary assessees in this matter. Alongside them, appeals were also filed by their respective spouses: Anjali Kamat, Smitha Uday Kamat, and Sadhana Ramesh Kamat.

The brothers collectively held substantial shares, ranging between 30% to 33% each, in several closely held private limited companies operating within the construction and hospitality sectors. The key corporate entities involved in this matrix included:

  • Kamat Construction Pvt. Ltd. (KCPL)
  • Kamat Inns Pvt. Ltd. (KIPL)
  • Kamat Housing and Development (India) Pvt. Ltd. (KHDIPL)
  • Kamat Construction & Resorts Pvt. Ltd. (KCRPL)
  • Prajakta Investments & Trading Company Pvt. Ltd. (PIPTL)
  • AVC Investments & Trading Company Pvt. Ltd. (AVCPTL)

The assessees were governed by the Portuguese Civil Code of 1860, specifically the system of "Communiao Dos Bens" (Communion of Assets). Under this legal framework, in the absence of a prenuptial agreement, spouses hold a 50% right to their common estate. This principle is recognized under Section 5A of the Income Tax Act 1961, which mandates that income (excluding salaries) of a husband and wife governed by this Code shall be apportioned equally between them.

The Search and Seizure Operations

The genesis of the tax dispute traces back to a search operation conducted under Section 132 of the Income Tax Act 1961 on 31.01.2012 at the office premises of KCPL and the residential premises of its directors.

Prior to this, for the Assessment Year 2011-12, the individual assessees had filed their returns under Section 139(1) on 29.09.2011, declaring a total income of Rs. 26,18,704/-, which was processed under Section 143(1) on 27.09.2012. Following the search, the Revenue issued notices under Section 153C on 30.07.2012, requiring the assessees to file returns for the Assessment Years 2006-07, 2007-08, and 2009-10 to 2011-12.

The assessees responded on 29.08.2012, requesting that their original returns be treated as the returns filed in response to the Section 153C notices. Subsequently, statutory notices under Section 142(1) and Section 143(2) were issued.

Additions by the Assessing Officer

The Assessing Officer (AO) scrutinized various inter-company transactions and concluded that the financial advances between the group companies constituted "deemed dividend" under Section 2(22)(e). On 28.02.2014, the AO finalized the assessment under Section 153C read with Section 143(3).