$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgement delivered on: 15.12.2016
18-20
+ ITA Nos.547, 549 & 555/2013
COMMISSIONER OF INCOME TAX (CENTRAL)-I .....Appellant
Through: Mr. Mayank Aggarwal, Advocate for
Mr.Ajit Sharma, Advocate.
Versus
M/S RUSSIAN TECHNOLOGY CENTRE (P) LTD...... Respondents
Through: Mr. Rudra Kahlon, Advocate.
21-26
+ ITA Nos.596, 597, 598, 599, 600 & 601/2015
PR. CIT ....Appellant
Through: Mr. Dileep Shivpuri and Mr. Vikrant A.
Maheshwari, Advocates.
Versus
CLARIDGES HOTELS (P) LTD. ..... Respondents
Through: Mr.Aryama Sundaram, Senior Advocate
with Mr. Sandeep Kapur and Mr. Ajay
Wadhwa, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
NAJMI WAZIRI, J.:-
1. These appeals have been preferred by the Revenue under Section 260-
A of the Income Tax Act, 1961 (hereinafter to be referred as `the Act')
against the common order dated 12.04.2013 passed in ITA Nos. 4932,4933,
5390 & 5391/Del/2011 and the common order dated 30.09.2014 passed in ITA
ITA Nos.547/2013 & other connected matters Page 1 of 13
Nos. 4629,4630,4631,4632,4633 & 4707/Del/2013, whereby the Income Tax
Appellate Tribunal (`the Tribunal') had allowed the assessee's appeal and
deleted the additions made by the Assessing Officer (`AO').
2. The relevant facts of the case pertaining to the appeals filed in 2013
are that pursuant to the search proceedings under Section 132 of the Act
conducted at the office and residential premises of the assessee, a
reassessment order was passed by the AO under Section 153A of the Act,
whereby inter alia additions of various amounts were made under Section
68 of the Act for Assessment Years (AYs) 2002-03, 2003-04, 2005-06 and
2007-08. These amounts, being primarily towards monies received from
various companies as well as disallowances of expenditure, were debited to
the profit & loss account for AYs 2002-03, 2003-04 and 2005-06. For AY
2007-08 disallowance of interest of `75,47,897/- on unsecured loans was
added under Section 68 of the Act and an amount of `1,51,200/- which was
expended on the foreign guests was added.
3. Apropos the appeals filed in 2015, a similar reassessment order was
passed pursuant to the search proceedings under Section 132, whereby inter
alia additions of various amounts were made under Section 68 of the Act for
Assessment Years (AYs) 2004-05, 2005-06, 2006-07, 2007-08, 2008-09 and
2009-10. These amounts were primarily towards share application money
received from various companies. The AO made additions/disallowance of Rs.
7,05,00,0001- on account of unexplained share capital/share application money
received by the assessee company from Paradigm Hotel Pvt. Ltd. (an Indian
company) and of Rs. 69,26,313/- on account of unexplained/unaccounted income
of the assessee company for the period under consideration pertaining to the
payments made to M/s Y2 Space Pte Ltd, with the total tax effect being 2.76
ITA Nos.547/2013 & other connected matters Page 2 of 13
Crore. The ITAT, while dismissing the appeals of the Revenue, had relied
upon its order in ITA Nos. 4932 & Ors./Del/2011, which too is in appeal in
these proceedings.
3. This Court had framed the following questions of law:-
"1. Did the Tribunal fall into error in holding that the
assessee had established the genuineness of the transaction
and the credit worthiness of the foreign investor, given the
circumstances of the case?; and
2. Are the findings of the Tribunal on this score perverse on
the face of the record?"
4. The assessee company is a subsidiary of M/s Russian Technology
Centre Holding Ltd. (for short `RTCHL'), based in Tortola BVI, which had
received various amounts towards share capital and increase in unsecured
loans from RTCHL and M/s Protex Trading Company Ltd. The latter
company is based in the Republic of Seychelles. The additions received
from the Russian based promoter company in AY 2002-03 amounted to
`24,44,300/-. The additions received from RTCHL and Protex Trading Co.
Ltd in AYs 2005-06 and 2007-08 amounted to `55,44,000/- and
`1,17,72,500/- respectively. For the said receipts, the AO had sought details
of the depositor's bank accounts along with the cheque number and date;
copy of the acknowledgment of return of income etc. The assessee by its
letter dated 23.12.2008 had replied that the shares had been allotted to
foreign companies as per the chart detailing the addresses, shares allotted
and amounts paid, which was annexed as Annexure-I to the said letter. To
prove the genuineness and identity of the shareholders, the assessee also
furnished the following documents:-
ITA Nos.547/2013 & other connected matters Page 3 of 13
"1. FIPB Approval dt. 16 September 1998 received by
the Company authorizing to raise share capital up to (USD
3 lakhs.)
2. Copy of certificates of incorporation of share holders
3. Copy of bank statement
4. Copy of Form 2 filed before ROC"
5. The assessee also submitted that apropos squared-up loans, it accepted
a loan of `5,00,000/- from M/s Tsunami Technologies India P. Ltd by a
Demand Draft drawn on Union Bank of India, Vasant Vihar. The relevant
documents in this regard were furnished. However, the AO, for reasons best
known to him, was not satisfied by the aforesaid details and proceeded to
add `5,00,000/- towards the unsecured loans and `55,44,000/- towards
capital loss as being unexplained. Thereafter, in his appeals against the
aforesaid additions, as well as in respect of AY 2007-08, the assessee
produced the following additional documents under Section 46 of the IT
Rules:-
"(i) Attested copy of Certificate of Incorporation of M/s
Russian Technology Centre Holding Ltd.
(ii) Attested copy of Certificate of Incumbency of M/s
Russian Technology Centre Holding Ltd.
(iii) Attested copy of Certificate of Good Standing of M/s
Russian Technology Centre Holding Ltd.
(iv) Director Certificate of M/s Russian Technology Centre
Holding Ltd.
(v) Balance Sheet of M/s Russian Technology Centre
Holding Ltd. for the calendar year 2004 and 2005"
ITA Nos.547/2013 & other connected matters Page 4 of 13
6. The Commissioner of Income Tax (Appeals), [CIT(A)] had
disallowed the additional documents and the appeal. In doing so he relied
upon the decision of the Gujarat High Court in N.B. Surti Family Trust Vs.
CIT [2007] 288 ITR 523 to hold that when the evidence is new and the
assessee could not give any explanation as to why the additional documents
could not be produced at the earlier stages, the Tribunal would be justified in
sifting out of all such evidence. Hence, he declined to admit the additional
evidence furnished by the assessee. The Tribunal, however, held that the
issue of additional evidence was treated by the CIT(A) in a strange and
unjustified manner because on the one hand the CIT(A) had held that
although the evidence was sought to be filed without prejudice nevertheless
the CIT(A) went on to hold that the additional evidence neither explained
the creditworthiness of the shareholders nor the genuineness of the
transactions. Hence, in a way, the CIT (A) had given a finding on the merits
of the additional evidence which itself would lead to the conclusion that the
additional evidence had been admitted by the CIT(A). The relevant portion
of the impugned order reads as under:-
"7. Apropos the grounds about additional evidence,
we have heard rival contentions and perused the relevant
material on record. The assessee had already filed various
documents in respect of identity, genuineness and
creditworthiness of the shareholders. In our considered
view when the assessee is able to make out a case of
insufficient time for complying with the requirement, the
additional evidence is to be admitted as per the prescription
of Rule 46A. Besides, the remand was called by CIT(A)
from assessing officer and further assessee was asked to file
the rejoinder thereon. After consideration of entire material
ITA Nos.547/2013 & other connected matters Page 5 of 13
in this behalf, the CIT(A) has given findings on the contents
of the additional evidence. In our view, all these
circumstances lead to a conclusion that CIT(A) considered
the additional evidence and gave a finding on merits against
assessee. Thus, the consideration of additional evidence by
CIT(A) appears to be inbuilt in the order. In any case to
avoid any controversy in facts and circumstances of this
case, we are of the view that assessee was prevented by
sufficient cause in filing the additional documents before
assessing officer and they should have been admitted by
CIT(A) as additional evidence under Rule 46A. In view of
these facts and circumstances, though in our view the
additional evidence has been technically admitted by CIT(A)
by commenting on the merits of the additional evidence,
however, we accept the plea of the ld. Counsel for the
assessee that as a matter of abundant caution, the
additional evidence be admitted, more so when the
comments of both the lower authorities i.e. assessing officer
and CIT(A) are on record. Thus, these grounds of the
assessee in respect of admission of additional evidence are
allowed."
7. The Tribunal further noted that:-
"8.1. The FIPB further authorized the assessee company
to raise capital upto Rs. 600 crores without approaching it
for further approvals. This approval was given vide letter
dated 20.12.2005. The assessee also, filed the Certificate of
Incorporation of RTCHL and a detailed confirmation by
RTCHL and M/s Protex Trading Company Ltd confirming
the remittance of Rs.54,44,000/- towards share capital of
the assessee company. The assessee contended that the
money came in through banking channels and a copy of the
Foreign Inward Remittance Certificate was also filed
wherein it was specifically stated that the money's have
come in towards share capital in the assessee company and
the same had been remitted by RTCHL. The name of the
banks involved was also given in the Certificate. The
ITA Nos.547/2013 & other connected matters Page 6 of 13
assessee company filed documentary evidence to show that
the increase in share capital was intimated to the Registrar
of Companies in the requisite form.
8.2. This was sought to be explained by the assessee by
submitting following documents before the assessing officer:
(i) FIPB approval dt 16 September 1998 authorising the
company to raise share capital upto USD 3 Lakhs.
(ii) Amendment to FIPB approval dt 09-06-2004
(iii) FIPB approval dtd 20-12-2005 received by the
company authorizing to raise share capital upto Rs. 600
Crores
(iv) Copy of certificates of incorporation of shareholders
(v) Confirmation given by remitter towards remittance for
share capital
(vi) Copy of FIRC
(vii) Copy of bank statements
(viii) Copy of Form 2 filed with ROC"
8. The Tribunal considered the contentions of the assessee that:-
"(ii) The assessing officer has failed to consider the
Hon'ble Supreme Court judgment in the case of Lovely
Exports and various other judgments which describe the
primary burden cast on the assessee while proving the share
application money. Ignoring various documents procured
from FIPB confirmations, ROC records, vehement
insistence has been made only on the bank statements of the
shareholders. According to ld. Counsel when the burden of
the assessee can be amply proved from the documents filed
by it, cash credit/share application money cannot be held to
be non-genuine without adjudicating them and picking up
ITA Nos.547/2013 & other connected matters Page 7 of 13
the non-filing of bank statements of shareholders. The
assessing officer has a quasi judicial duty to weigh the
quality of evidence produced before it and if it is sufficient
to discharge the burden of assessee, the same cannot be
cryptically disregarded in the pretext of document which
was not filed by the assessee."
9. It then concluded that:-
"11.7 Taking into consideration of all the above, we find
merit in the argument of the ld. Counsel for the assessee
.that the primary burden cast on the assessee was duly
discharged. The issue of primary onus is to be weighed on
the scale of evidence available on the record and the
discharge of burden by the assessee is also to be decided on
the basis of documents filed by the assessee and facts and
circumstances of each case and on that basis a reasonable
view is to be taken as to whether the assessee has
discharged the primary onus of establishing the identity of
share applicant, its creditworthiness and genuineness of the
transaction. From the documents filed during the course of
assessment and before CIT(A), the independent existence of
the share applicants in Russia is clearly established. The
assessee's application to FIPB for raising the capital
contains all the relevant details which is favourably
accepted by the Board, particularly by allowing the
assessee to raise further the capital without approaching the
FIPB. The transactions are through banking channels.
Thus the gamut of evidence does not leave any doubt in the
discharge of primary burden of the assessee. On the issue
CBDT Circular and Finlay Corporation judgment (supra)
also we are in agreement with the ld. Counsel for the
assessee that in these circumstances of the case moneys
remitted by non-residents through banking channel outside
India has to be held as capital receipts, not exigible to tax
and cannot be treated as deemed income on the fictions
created by sections 68 and 69 of the Act. In consideration of
all these observations, we are inclined to hold that the share
application money as raised in the grounds of appeal
ITA Nos.547/2013 & other connected matters Page 8 of 13
cannot be held as non-genuine and added as income of the
assessee u/s 68 of the Act. Consequently, additions made on
this count, as raised in grounds of appeal, are deleted.
Assessee's grounds of appeal on this issue are allowed.
xxxx xxxx xxxx xxxx
14. We have heard rival contentions and perused the
relevant material available on record. For A.Y. 2002-03 &
2003-04 the assessee, was not granted registration as
vendor by the Ministry of Defence as suppliers. Besides, no
supply pad taken place. It appears that assessee was
making efforts to establish its business for which prior
registration from Ministry of Defence was necessary. Since
assessee could not get registration, it cannot be held that till
31-3-2003 the assessee had set up its business also. In view
thereof, we hold that for A.Y.2002-03 and 2003-04, the
expenditure has been rightly disallowed, as in our view
business of the assessee was not set up.
14.1. Apropos A.Y. 2005-06, the assessee had obtained the
registration and participated in the tenders invited by the
Ministry of Defence for which necessary evidence, has been
referred in the form of correspondence demonstrating the
negotiations at various stages. Thus, in A.Y. 2005-06, the
assessee was in a state of readiness to obtain the orders if
found successful for tendering/bidding. Thus, we hold that
in A.Y. 2005-06 the assessee had set up its business and
respectfully following the judgment of Hon'ble Delhi High
Court in the cases of ESPN Software India P. Ltd. (supra);
CIT Vs. Hughes Escorts Communications Ltd. (supra); and
Aspentech India (P) Ltd. (supra), the business of the
assessee for A.Y. 2005-6 was already set up and the
expenditure incurred by it is to be allowed as revenue
expenditure.
15. Next ground for A.Y.2005-06 pertains to addition
of Rs.5 lacs being unsecured loans received by the assessee
ITA Nos.547/2013 & other connected matters Page 9 of 13
from M/s Claridges SEZ Pvt. Ltd. (CSEZ), as assessing
officer held that creditworthiness of M/s CSEZ was not
established as the assessee had not produced the bank
statements.
xxxx xxxx xxxx xxxx
17. We have heard rival contentions and perused the
relevant material on record. We find merit in the arguments
of ld. Counsel that CSEZ also being searched on the same
date and the seized record being with the department,
department could have verified the same from its record.
The interest of justice will be served if the issue is remitted
back to the file of assessing officer to verify from the seized
record about the bank statement of CSEZ and decide the
issue after giving the assessee fair and reasonable
opportunity of being heard. The assessee may be allowed to
submit necessary evidence in this behalf. This ground of the
assessee is allowed for statistical purposes.
xxxx xxxx xxxx xxxx
22. We have heard rival contentions. From the orders
of both the lower authorities, the names of the persons
whose interest payment has been disallowed, has not been
given. Besides, we have deleted additions made u/s 68 in
respect of above parties. In the absence of the details about
disallowance of interest, it will not be possible for us to
adjudicate this ground. Therefore, we set aside the issue of
interest of Rs.7,54,797/- back to the file of assessing officer
to decide the same afresh, considering our conclusion on
applicability of sec. 68, commencement of business in 2007-
08, after giving the assessee reasonable opportunity of
being heard. In view of above, this ground is allowed for
statistical purposes."
10. The learned counsel for the assessee relied upon the judgment of this
ITA Nos.547/2013 & other connected matters Page 10 of 13
Court in Commissioner of Income Tax Vs. Divine Leasing & Finance Ltd.
2008 (299) ITR 268 (Del.) to contend that the assessee had furnished all
relevant documents which should have been considered to prove the
creditworthiness of the creditor/subscriber and the genuineness of the
transactions.
11. In Divine Leasing & Finance Ltd.'s case (supra), this Court had held
as under:-
"13. There cannot be two opinions on the aspect that
the pernicious practice of conversion of unaccounted money
through the masquerade or channel of investment in the
share capital of a company must be firmly excoriated by the
revenue. Equally, where the preponderance of evidence
indicates absence of culpability and complexity of the
assessee it should not be harassed by the Revenue's
insistence that it should prove the negative. In the case of a
public issue. the Company concerned cannot be expected to
know every detail pertaining to the identity as well as
financial worth of each of its subscribers. The Company
must, however, maintain and make available to the
Assessing Officer for his perusal, all the information
contained in the statutory share application documents. In
the case of private placement the legal regime would not be
the same. A delicate balance must be maintained while
walking the tightrope of sections 68 and 69 of the IT Act.
The burden of proof can seldom be discharged to the hilt by
the assessee: if the Assessing Officer harbours doubts of the
legitimacy of any subscription he is empowered, nay duty-
bound, to carry out thorough investigations. But if the
Assessing Officer fails to unearth any wrong or illegal
dealings, he cannot obdurately adhere to his suspicions and
treat the subscribed capital as the undisclosed income of the
Company.
xxxx xxxx xxxx xxxx
ITA Nos.547/2013 & other connected matters Page 11 of 13
16. In this analysis, a distillation of the precedents
yields the following propositions of law in the context of
Section 68 of the Income Tax act. The assessee has to prima
facie prove (1) the identity of the creditor/subscriber; (2) the
genuineness of the transaction, namely: whether it has been
transmitted through banking or other indisputable channels:
(3) the creditworthiness or financial strength of the
creditor/subscriber: (4) If relevant details of the address or
PAN identity of the creditor/subscriber are furnished to the
Department along with copies of the Shareholders Register,
Share Application Forms, Share Transfer Register etc. it
would constitute acceptable proof or acceptable explanation
by the assessee. (5) The Department would not be justified
in drawing an adverse inference only because the
creditor/subscriber fails or neglects to respond to its
notices: (6) the onus would not stand discharged if the
creditor/subscriber denies or repudiates the transaction set
up by the assessee nor should the Assessing Officer take
such repudiation at face value and construe it, without
more, against the assessee. (7) The Assessing Officer is
duty-bound to investigate the creditworthiness of the
creditor/subscriber the genuineness of the transaction and
the veracity of the repudiation"
12. The preceding enumeration of the circumstances of the case show that
the assessee had furnished all relevant data before the AO and the CIT(A),
which, however, were not inquired into by the AO. Instead he obdurately
adhered to his first impression and/or initial understanding that the entire
transaction was neither creditworthy nor genuine. The assessee relied upon
the documents to prove that the monies had been received through banking
channels from its principal and other related companies; it had submitted the
FIPB Approval dated 10.12.2005 authorizing the assessee company to raise
capital upto `600 crores, copy of certificates of incorporation of share
ITA Nos.547/2013 & other connected matters Page 12 of 13
holders, copy of bank statement, copy of Form 2 filed before ROC, copies of
Certificates of (i) Incorporation of RTCHL, (ii) Incumbency of RTCHL, (iii)
Good Standing of RTCHL, (iv) Director Certificate of RTCHL as well as
the Balance Sheet of RTCHL for the years 2004-05 and the confirmation
given by the remitters towards remittance of share capital etc. This was all
that the assessee could have furnished in the circumstances. It could not be
expected to prove the negative that the monies received by it were
suspicious or not genuine infusion of capital etc. The assessee had
discharged its burden of proof in terms of the settled dicta in Divine Leasing
(supra). It is only logical to expect that if the AO was not convinced about
the genuineness of the said documents, he would have inquired into their
veracity from the bank(s) to ascertain the truth of the assessee's claims.
Having not done so, he was not justified in disregarding the assessee's
contentions that the infusion of monies into its accounts was legitimate.
Consequently, the AO was not justified in making additions of the various
sums under Section 68 of the Act.
13. In view of the above, this Court is of the view that the conclusion of
the Tribunal in deleting the additions made cannot be faulted. Accordingly,
the questions of law are answered against the Revenue and in favour of the
assessee. The order of the Tribunal is, therefore, affirmed.
14. Resultantly, the appeals are dismissed.
NAJMI WAZIRI, J.
S. RAVINDRA BHAT, J.
DECEMBER 15, 2016/sb
ITA Nos.547/2013 & other connected matters Page 13 of 13
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