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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI ABY T VARKEY & SHRI GAGAN GOYALSmt. Riddhi Mishra, CIT-DR
Date of hearing : 10/11/2022 Date of pronouncement : 24/01/2023 ORDER PER GAGAN GOYAL, A.M:
These appeals by assessee and Revenue are directed against the order of Commissioner of Income Tax (Appeals)-9, Mumbai [for short ‘Ld. CIT(A)’] vide common order dated 26.12.2018 for common Assessment Year (AY) 2012-13. We shall first take up appeal of Revenue as lead case. The Revenue has raised the following grounds of appeal: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in directing to delete the disallowance made u/s.10AA of the IT Act, 1961 of Rs.14.84 Cr, without appreciating the fact that the assessee failed to discharge onus cast upon it to prove that the eligible SEZ unit was functioning during the relevant previous year.
2. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in directing to delete addition made u/s.41(1) of the IT Act, 1961 on account cessation of liability of Rs.6.39Crs., without appreciating the fact that the liability of the creditors were ceased as on the balance sheet date.
3. "On the facts and in the circumstances of the case and in law, the Ld.CIT (A) erred in directing to delete the addition made u/s.68 of the IT Act, 1961 of Rs.157.22 Crs. without appreciating the fact that the creditors shown by the assessee are non-existent/unproved since they failed to comply to the notices issued by the Assessing Officer at the time of assessment proceedings and even during the remand report proceedings.
4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in admitting the additional evidences filed by the assessee without appreciating the fact that assessee's case does not fall under any of the exceptions provided under Rule 46A of IT Rules in as much as sufficient opportunities were offered to the assessee during the course of assessment proceedings to adduce evidences relating to the issues in hand as also the assessee was not prevented by the sufficient cause from producing before the Assessing Officer any such evidence or the Assessing Officer never refused to admit evidence which ought to have been admitted at the time of assessment proceedings.”
The assessee has raised the following grounds of appeal: “1 Under the facts and in Law, the Hon. Commissioner of Income Tax (A) (CIT(A)] erred in confirming addition in respect of share application money and share premium received during the year of Rs. 156,030,565/- u/s 68 of the Income Tax Act, 1961. 1.01 The Learned CIT(A) failed to appreciate the submission made by the appellant during the course of appeal proceedings. 1.02 The Learned CIT(A) erred in stating that the appellant has not discharged the onus casted upon it u/s 68 of the Income Tax Act, 1961.”
Brief facts of the case are that assessee-company is engaged in the business of dealing in yarn as commission agent as well as a trader. The assessee is also procuring Diamond from International as well as local market and selling the same. Assessee filed its return of income on 28.09.2012 declaring total loss at Rs. (-) 9, 72, 00,884/-. The case was selected for scrutiny and following disallowances/additions were made to the income of assessee as under: (i) Disallowance under section 14A r.w.r. 8D. Rs. 21, 29,115/- (ii) Addition of prior period income. Rs. 41, 60,779/- (iii) Disallowance of exemption u/s 10AA. Rs. 14, 84, 78,993/- (iv) Share application money and share premium u/s 68. Rs. 15, 60, 30,565/- (v) Trade payables u/s 41(1). Rs. 6, 39, 80,954/- (vi) Addition on a/c of unverified creditors. Rs. 157, 22, 21,088/- Total Rs. 194, 70, 01,494/-
Against these additions /disallowances assessee approached the office of the Ld. CIT (A)-9, Mumbai. Ld. CIT (A) agreed with the contentions and submissions of assessee and given relief with respect to following heads of additions/disallowances: (i) Disallowance under section 14A r.w.r. 8D. Rs. 21, 29,115/- (ii) Addition of prior period income. Rs. 41, 60,779/- (iii) Disallowance of exemption u/s 10AA. Rs. 14, 84, 78,993/- (v) Trade payables u/s 41(1). Rs. 6, 39, 80,954/- (vi) Addition on a/c of unverified creditors. Rs. 157, 22, 21,088/- 5. Ld. CIT (A) sustained addition made by AO under section 68 of the Act as mentioned (supra) under column (IV) as under: Rs. 15, 60, 30,565/- (iv) Share application money and share premium u/s 68. 6. Revenue being aggrieved against relief given by Ld. CIT(A) as provided in para-4 above [except point (i)] is before us through this appeal and assessee is also in appeal before us for addition sustained by Ld. CIT(A) as mentioned in para- 5 above. 7. We have carefully considered the orders of AO, Ld. CIT (A) and submissions of assessee along with Paper Book. Assessee’s submissions before the AO during the assessment proceeding were absent or almost negligible, hence, based on partial submissions and evidences available on record, AO passed the assessment order under section 143(3) of the Act. A plethora of submissions and documents were filed by assessee only before the Ld. CIT(A), on which falls in the category of additional evidences as per Rule 46A of the I.T. Rules, 1962 (for short ‘the Rules’).
On these additional evidences, Ld. CIT (A) asked for AO’s remarks in the form of remand report. The communication between the AO and Ld. CIT (A) with reference to these additional evidences filed by assessee and remarks by the AO on the same is also part of Ld. CIT (A)’s order. Ground-wise observation and adjudication is as under: 8. Ground No.1 pertains to disallowance made under section 10AA of the Act amounting to Rs. 14.84 Cr. Issue of allowing deduction under section 10AA of the Act is a benefit granted to specific class of assessee situated at specific area notified under the Act and being governed by the provisions of the Special Economic Zones Act, 2005 and the Rules made there under. We have gone through various decisions of Hon’ble Jurisdictional High Court in the cases of CIT Vs. Western Outdoor Interactive Pvt. Ltd., CIT Vs. Paul Brothers (216 ITR 548) and M/s. Direct Information Pvt. Ltd. Vs. ITO dated 29.09.2011 in W.P. No. 1479/2011 relied upon by assessee wherein their Lordships has held that once deduction under section 10AA of the Act is allowed in the first year and continued to an assessee then in subsequent years it cannot be withdrawn, unless to the facts of the case have changed. We are bound by the ratio decidendi of the Hon’ble High Court and Apex Court and in normal/ordinary course we would have followed the decision of the Hon’ble High Court, but in this case the AO based on Spot/field verification came to know that there was no activity of assessee in the SEZ. So the AO called upon the assessee to produce any evidence to substantiate the eligible activity carried out by the assessee in SEZ which could have earned him the benefit of section 10AA of the Act. However, the AO noticed that assessee failed to even produce the basic documents like electricity bills, muster roll of employees, etc. to given indications of assessee involving in some eligible activities at its SEZ. Therefore, AO on the facts on record, was inclined not to accept the claim of assessee, which action of AO cannot be faulted, unless assessee was able to bring evidence to prove that assessee was infact carrying out the eligible activities as defined in section 10AA of the Act in the relevant year under consideration. Even their Lordship in the cases cited before us (supra) has qualified the direction once deduction is allowed under section 10AA of the Act, then it cannot be withdrawn in the subsequent years, Provided there was no change in facts (Emphasis given by us). However, as noticed (supra) the AO on enquiry has given a finding of fact that the assessee failed to prove that it was carrying out the eligible activity in the SEZ as claimed by it by observing as under: “5.5 When assessee was confronted with findings of field verification by the Inspector assessee had no choice but to concede that no activities are being carried out at the SEZ premises. But assessee has conveniently stated that the assessment is related to three year back and that time business activities were being carried out there. Assessee has merely stated that there is no activity in the alleged premises currently. However, it has furnished no positive documentary evidence to prove that there was an activity actually carried out during the FY.2011-12 and not in current year. The assessee though admits that the entire activities are stopped since more than a year, it has not made available the exact period from which such activities were stopped. Ideally, if it is the contention of the assessee that the activities were stopped only subsequent to F.Y.2011-12, it must have filed evidence to support this statement. A mere statement in writing without corroborative evidence would not justify the assessee’s stand. The assessee has failed to furnish details/evidences, which are essential for justification of the allowability of deduction u/s.10AA. No evidences were brought on record to demonstrate that there was an activity- either manufacturing or trading carried out in the alleged premises during the relevant previous year. Evidences, like electricity bill to evidence the consumption of power, muster rolls to evidence the fact that labourers were engaged to carry out the work in the alleged premises and records maintained for and certified by other authorities namely Customs, Excise and SEZ.”
It has to be borne in mind that the issue of allowability of deduction for the eligible assessee under section 10AA of the Act as held by the Hon’ble Jurisdictional High Court provided the facts of the case have not changed. In normal course once assessee has been granted deduction u/s 10AA of the Act, it ought not be withdrawn unless there is change of facts which could show that conditions prescribed under section 10AA of the Act has not been fully complied with by assessee in the relevant year. In this year, it is seen that assessee when called upon by the AO to discharge the burden to prove that it was involved in carrying out the eligible activity and demonstrate that the conditions prescribed under section 10AA of the Act was satisfied have not contested the finding of fact recorded by the Inspector that assessee was not doing any activity in the SEZ. Even though the assessee asserted that it was doing eligible activity in the relevant year under consideration, again failed to produce any evidence like electricity bills, muster rolls, movement of stock, certificate from Excise/Customs, etc. And if the assessee was merely relying on the earlier order of deductions allowed to it then it has to prove that the facts have not changed vis-a-vis the earlier assessment year when it was allowed. Unless that burden is discharged the AO cannot be faulted from denying the claim of deduction.
However, after carefully going through the impugned order of Ld. CIT(A) and taking note of assessment order, we are of the opinion that the relevant facts for claiming deduction under section 10AA of the Act have not been properly examined neither by Ld. CIT (A) nor AO For making such an observation, during hearing before us we asked the Ld. AR few relevant questions and for answering that query the assessee has filed additional evidences before (refer page no. 6 to 119 of the Paper Book). A perusal of Form No. 56F under Rule 16D duly signed by Chartered Accountant vide Annexure-A, column no. 15(i), (ii) and column no. 16 it is noted that assessee was not able to realize convertible foreign exchange into India within a period six months from the end of the previous year. Further. We note that assessee has not taken any permission for extension of time from the appropriate authority. Moreover, it was reported by Chartered Accountant that he is not able to comment about the realization of the convertible foreign exchange in India. When this observation was confronted with the Ld. AR of assessee during the hearing he even though assured that he will give clarity on this issue, but failed to do so which costs serious doubts about the genuineness of the exports. It should be borne in mind that Legislative intention for giving deduction under section 10AA is primarily for encouraging assessee’s to earn foreign exchange for the country. So realizing convertible foreign exchange within the time prescribed (or may be within the extended period), is of paramount condition to get deduction. Although on this fact itself the claim of assessee can be denied but to be just and fair with the matter, we are restoring the matter back to the file of AO for two reasons i.e. (i) to substantiate that eligible activity was infact carried out by the assessee in the relevant AY (ii) deficiency found as discussed about From No. 56F need to be clarified by the assessee which needs to be enquired. Therefore we restore the matter back to the file of AO with following directions to be complied with and complete the assessment preferably within six months as under: (i) Issue appropriate questionnaire keeping in view the provisions of section 10AA of the Act to the assessee; (ii) Proper opportunity in terms of time and documents relied upon against the assessee if any is to be given by the AO; (iii) Assessee is directed to participate in the proceeding diligently and file relevant evidences to demonstrate that eligible activity was actually undertaken by the assessee and in terms of section 10AA of the Act. (iv) Verification of the fact whether the convertible foreign exchange against export was realize or not. If so, within which time period and whatever it was within the time prescribed under section 10AA of the Act.
The AO is directed to undertake the enquiries required as directed (supra) and pass a reasoned order. In the result, Ground No.1 raised by the Revenue is allowed for statistical purposes.
Ground No.2 pertains to deletion of addition made under section 41(1) of the Act on account of cessation of liability of Rs. 6.39 Cr. We have considered the order of the AO, order of the Ld. CIT (A) and submissions of assessee along with Paper Book filed. We have considered the contentions of both the sides and found that both the sides have their own logics and contentions but necessary verification to establish the authenticity of the amounts shown by assessee and claim made by AO under section 41(1) of the Act was not carried out. Again both the sides heavily emphasized on the judicial pronouncements suitable to respective sides. For reference, we are reproducing the relevant extracts out of the orders of AO and Ld. CIT(A) as under: “AO’s order
7.1 From a perusal of the Belance Sheet, it is noticed that the assessee has shown Trade Payable outstanding as on 31.03.2012 at Rs.53,296.53 Lakhs. With a view to verify the genuineness of the items shown under Trade Payables, the assessee was asked to furnish the following details, by virtue of notice u/s 142(1) dated 03.03.2015. a) Kindly submit statement with Opening Balance 1-Apr-2011 + Purchases – Payment= Closing Balance with Name, Address, PAN, Related party. b) You are requested to submit data as asked above only. c) You are again requested to submit followings- Provide details of parties to whom payment is outstanding for more than 1 year as on 31-Mar-2012. For all the above parties, Provide Name, Address, PAN, Amount, date of Payment. Kindly provide justification and reason that why the unpaid creditors for more than 1 year not are treated as income. For overseas creditors, kindly explain what the exchange rate was provided on 30-Mar-2011 and 31-Mar-2012. For above also explain how Foreign Exchange Gain/Loss was considered at the year end on FY 2010-11 and FY 2011-12. d) Submit ledger account and invoice copy of major 20 parties of Creditors. e) Kindly provide details to prove genuineness and correctness of your claim for creditors. 7.2 In response, vide its letter dated 06.03.2015, the assessee has furnished its submissions, the relevant part of which is reproduced herein under:- “a. Called upon: Kindly submit statement with Opening Balance 1- April-2011 Purchases Payment Closing Balance with Name, Address, PAN, Related Party Submission: We are enclosing here with statement of Trade Payables as desired by your good office. b. Called upon: You are requested to submit data as asked above only.
Submission: As mentioned above, we are enclosing here with statement of Trade Payables as desired by your good office. c. Called upon: Provide Details of parties to whom payment is outstanding for more than 1 year as on 31st March, 2012. For all the above parties, provide Name, Address, PAN Amount, date of payment. Kindly provide justification and reason that why the unpaid creditors for more than 1 year not are treated as income. For overseas creditors, kindly explain what the exchange rate was considered on 31-March- 2011 and 31-March- 2012. Submission: The list of parties with Name, Address, PAN No. (Where ever possible). Amount and date of payment are already submitted to your good office vide letter dated February 16, 2015. The same statement also contains the exchange rate considered on 31- March- 2011 and 31-March-2012. The Foreign Exchange Gain/Loss is recognised by monetising the Trade Payables in this case to the exchange rate as on March 31, 2011 and March 31 2012 respectively at the exchange rates $1 = Rs. 44.75 and $1: Rs. 50.87 respectively. The same is done as per the Accounting standard-11 The Effects of Changes in Foreign Exchange Rates, which are to be followed by the companies in preparation of the Final Accounts. The company's Bank Accounts are declared as "Non-performing Assets" by the consortium Bankers. Bankers have initiated recovery process against the company. This process had a very bad impact on the credibility of the company. Since more than a year all the business activities of the company are on halt. The Debtors are taken advantage of the weak financial conditions and are delaying the payment or not making the payment at all. All these have affected the cash flow of the company. Hence, company could not honour its financial obligations. This has resulted into Non-payment of Sundry Creditors However; whenever some funds are realised company has tried to discharge its debts and is still trying to recover the fund wherever they are due. The company is facing genuine financial crisis and which is not allowing it to make the payments to its creditors. Considering the above facts the creditors remains outstanding are the genuine liability of the company and hence, should not be added back to the income of the company. d. Called upon: Submit ledger account and invoice copy of major 20 parties of creditors.
Submission: We are enclosing here with ledger copies and invoice copy of 20 major parties of creditors. e. Called upon: Kindly provide details to prove genuineness and correctness of your claim for creditors Submission: The business relationship with the Trade payable parties are over a few years. During all these years the transactions were running smoothly. Only due to the weak financial conditions as explained earlier the amount remain overdue. Considering the long relationship the question of doubting its genuineness shall not arise. However, you are requested to specify what details shall be provided with your good office, which will satisfy you to consider the said transactions, and we shall submit the same at the earliest to the extent it is feasible". 7.3 The aforesaid submissions of the assessee have been carefully perused. However, the same are not found to be acceptable in view of the reasons discussed in subsequent paragraphs. 7.3.1 From a perusal of the details furnished, it is prima facie, noticed that the details furnished by the assessee are highly inadequate. On verification of the age- wise analysis, it is further noticed that the following amounts outstanding for a long period in respect of following creditors. Amount in respect of these creditors were shown to be unpaid even as on date: Sr. Name of the Creditor Amt. No. Outstanding (Rs.) 1. Excel Synthetics Pvt. Ltd. 5,88,412 2. Excel Synthetics Pvt. Ltd. Unit-2 1,01,040 3. Microsynth Fabrics (India) Ltd. 4,87,104 4. Siddhi International 1,66,098 5. Bin Karam Jewellery (UAE) 15,32,105 6. Bin Sabt Jewellery LLC UAE 5,09,31,259 7. Al Salami Diamonds LLC UAE 96,42,987 8. Bin Karam Jewellery (UAE) 4,24,302
9. S.K.Kabra & Company 12,408 10. Shyam General Trading Co. (UAE) 16,952 11. Sai Shipping Service Pvt. Ltd. 10,299 12. Resurge Energy Pvt. Ltd. 67,988 Total 6,39,80,954
7.3.2 These amounts were remained unpaid even till the date of passing this order. The above amounts cannot be allowed within the meaning of section 41(1) of the Income Tax Act, for the following reasons: (i) The above party is very old for 3 years or more as submitted by the assessee. (ii) The assessee has neither repaid any outstanding amount nor paid any interest on the same to the creditors since its inception. (iii) Further, all these liabilities are undisputed and they are being withhold by the assessee on adhoc basis i.e, without any proof/details/basis of withholding these amount. 7.3.3 Considering the above facts of the case, it appears that there is absolutely no liability on the part of the assessee to pay back the said amount. The amount is just lying idle in the books of account as liability. Had there been any liability to pay back the outstanding amount, the assessee would have at least returned a portion of the same to the creditors at any point of time in the past period. However, no part repayment has been made by the assessee. There is no guarantee that the outstanding amounts would be paid back in future. As observed by the co-ordinate bench of the Tribunal in the case of "Yusuf R. Tanwar, vs. ITO" (ITA No.8408/Mum/2010) decided on 28.02.13 that the proposition of law laid down by the Hon'ble Delhi High Court in "Chipsoft Technology (P) Ltd." is not contrary to that of laid down by the Hon'ble Delhi High Court in the case of "Shri Vardhaman Overseas Ltd.". The proposition of law laid down in "Chipsoft Technology (P) Ltd. supplements but not supplants the proposition of law laid down by the Hon'ble Delhi High Court in "Shri Vardhaman Overseas Ltd.". "When we read both the authorities In harmony with each other, then it can be observed that the assessee cannot be allowed to show an amount as a liability even though he has no intention to pay it back but to enjoy the same for unlimited period without being added to his income only on the excuse that he has not written off the same in his books of accounts." 7.3.4 Hence, the amount of Rs.6,39,80,954/- is disallowed u/s 41(1) of the IT. Act, 1961 and the same is added back to the total income of the assessee treating the same as cessation of liability. CIT(A) order 9.4 I have perused the facts of the case and appellant's submissions carefully. The AO has observed that in the balance sheet, it was noticed that the assessee had shown trade payable outstanding as on 31.03.2012 at Rs.53,296.53 lakhs. The AO made disallowance u/s.41(1) of the Income-tax Act, 1961 of Rs.6,39,80,954/-. 9.5 I find that the A.O. has discussed this issue at para 7 of his order. The A.O. has treated the same as cessation of liability u/s 41(1) of the Act since the said amounts were outstanding for more than 3 years. Trading Liability in general terms can be understood as an obligation of a person (Debtor) to pay another (Creditor) for goods purchased or value received from that other person. A genuine Trading Liability incurred in the course of Business or Profession is a permissible expenditure, in the relevant financial year, under the applicable provisions of the Income Tax Act, 1961. However, when some benefit is derived by the Debtor in the form of remission or cessation of such trading liability, then, such benefit received by the debtor is to be considered as a Taxable Income under Section 41 (1) of the Income Tax Act, 1961. Section 41 (1) deals with considering ceased trading liability as deemed profits of business or profession. 9.6 In the case of The Commissioner of Income Tax-III Shri Vardhman Overseas Ltd, Date of Decision: 23.12.2011, Division Bench of Hon'ble High Court of Delhi, made the following Observation with regards to Section 41(1): "The provisions of Section 41 (1) have been specifically incorporated in the Act to cover a particular fact situation. The section applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability a later year by way of remission or cessation of the liability. In such a case the section says that whatever benefit has arisen to the assessee in the later year by way of remission or cessation of the liability will be brought to tax in that year. The principle behind the section is simple. It is a provision intended to ensure that the assessee does not get away with a double benefit once by way of deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction." Liability is barred by limitation but there are cases where a liability is being carried forward for years in the books of assessee. In such cases, the Income Tax Authorities have considered the liability as ceased/non-existent, because of the fact that the liability is being shown outstanding for many years and the assessee has not provided confirmations from the creditors or has failed to provide necessary details like PAN/Address of the creditors or there is no possibility of the creditors claiming their debts in future and applied section 41(1) of the Income Tax Act, 1961 by adding the liability to the taxable income of the debtor. However, the Judicial fora has consistently held that a liability cannot be treated as ceased merely because of the fact that the liability is being carried forward for years and the assessee is not completely able to prove the genuineness of the trading liability, at the time of application of Section 41(1) by the Income Tax Authorities. 9.7 In the Commissioner of Income Tax Delhi-11 v/s Jain Exports Pvt. Ltd, decided by division bench of Hon'ble Delhi High Court, the following observation was made with regards to Cessation of liability under Section 41(1) of the Income Tax Act, 1961. "It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanto Oil & Vanaspati Ltd. Can also not be considered as time barred as the period of limitation would stand extended It is well settled in order to attract the provisions of Section 41(1) of the Act, there should have been an irrevocable cessation of liability without any possibility of the same being revived. The assessee company having acknowledged itx liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/e Elephanta Oil & Vanaspati Ltd. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008-2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd are the opening balances which are being carried forward for several years. The Issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (appeals) to confirm the addition of the amount of 1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85." 9.8 In Shri Nitin S. Garg vs The A. C. I. T., Circle-4, Surat, and 172/Ahd/2009 decided by the Hon'ble Income Tax Appellate Tribunal, Ahmedabad Bench, the following observation was made with regards to Cessation of liability under Section 41(1) of the Income Tax Act, 1961. "Considering the facts of the case as noted above it is clear that theassessee had continued to show the admitted amounts as liabilities in its balance sheet. The liabilities reflected in the balance sheet cannot be treated as cessation of liabilities. Merely because the liabilities are outstanding for last many years it cannot be inferred that the said liabilities have ceased to exist. It is also a fact that the assessee has not written off the outstanding liabilities in the books of account and the outstanding liabilities are still in existence would prove that the assessee acknowledged his liabilities as per the books of account. Section 41(1) of the IT Act is attracted when there is cessation or remission of a trading liability The AO shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of deduction in the earlier years and balances are carried forward in the subsequent year, would not prove that the trading liabilities of the assessee have been non-existent. It may also be noted here that the assessee has not claimed any deduction of the expenditure in all the assessment years under appeal." 9.9 I find that the AO has not been able to controvert the contention of the appellant and has not been able to establish either remission or cessation of liabilities for the appellant as regards the parties mentioned in assessment order. I also find that the appellant company has clearly stated that it was not doing well financially. The business prospects were not good. In fact, some of the bank accounts of the appellant company were declared as Non-performing Assets (NPAs) by these banks. Various types of recovery proceedings were also being contemplated against the appellant company. This environment had a negative impact on the credibility of the company. The debtors took advantage of the situation and stopped making payment to the appellant company. This, in fact, has resulted into a situation where the appellant company also defaulted in making payments to its creditors. It was stated that the company was facing genuine financial crises because of which it was not able to make payment to its creditors. We have seen that the AO has himself observed that huge debts were outstanding in the case of the appellant company. In these clear-cut facts and circumstances of the case, there can be no doubt regarding the inability of the appellant company in making payments to its creditors. But, to think that by this, the creditors have written off their balances, would be highly unreasonable and unjustified. Therefore, I hold that there is no basis for application of s. 41(1) of the Act. Addition on account of cessation of liability u/s 41(1) of Rs. 6,39,80,954/- is therefore deleted. This ground of appeal is allowed.”
13. ITAT being final fact finding authority is more concerned about the facts to be established on record based on which a fair adjudication can be carried out. We are not satisfied neither with the order of AO nor with the contentions of assessee based on which Ld. CIT (A) decided the issue. Keeping in view our observation this issue also we restore back to the file of AO with following directions to be followed by the respective parties as under: (i) Exact ageing of the sundry creditors to be worked out by assessee and to be verified by AO; (ii) Movement in the accounts in terms of actual money received/paid by assessee; (iii) Any settlement between the assessee and creditors about payment/part payment/remission of the amount; (iv) Any civil/criminal suit filed by the creditor against the assessee; (v) Confirmations from the parties about the amount outstanding shown by the assessee and about their own existence; (vi) Position of the outstanding amounts in the ledger of assessee as on today; (vii) Verification of continuity of the business in which these creditors generated.
14. The AO to ensure that the points/directions mentioned (supra) are complied with and after enquiring the claim of assessee under section 41(1) may be allowed /disallowed in accordance to law. In the result, Ground No.2 raised by the Revenue is allowed for statistical purposes.
15. Ground No.3 pertains to additions made under section 68 of the Act amounting to Rs. 157.22 Cr. deleted by Ld. CIT (A). We have gone through the order of the AO, order of the Ld. CIT (A), contents of the remand report and submissions of assessee along with Paper Book.
During the course of assessment proceedings, AO’s findings are as under: “Notices u/s. 133(6) was also issued to some of the sundry creditors appearing under ‘Fabrics Division’. Notices were issued to the following 32 parties, pertaining to ‘Fabrics Division’:- Sl.No. Name of the creditors Sl.No. Name of the creditors 1 Abhed Enterprise 17 Priya Textiles 2 Amzon Fashion Fab 18 Sjeeta Fasjopm 3 Asmi Enterprise 19 Soham Fabrics 4 Baldaniya Corporation 20 Soleil Trading Pvt. Ltd. 5 Deeprekha Impex Pvt. Ltd. 21 Transparent Works 6 Divya International 22 Triangle Soultion 7 Four Square Future 23 Unitex Industries 8 Gauri International Pvt. 24 C.K. Synthetics Pvt. Ltd. Ltd. 9 Janvi Threads 25 Konark Synthetics Ltd. 10 Janvi Threads Pvt. Ltd. 26 Laser Filament Pvt. Ltd.
11 Karmeshwar Enterprises 27 Mansi Industries Pvt. Ltd. 12 Katariya Gar- Tex 28 Perfect Yarn 13 Kishan Prints 29 Darshna Gems 14 Labheswar Fabrics 30 Jay Enterprise 15 Mahi Enterprise 31 Bhilosa Industries Pvt. Ltd. 16 Narshi Textile 32 Starchem Polytrade Pvt. Ltd.
The information received in response to these notices was also analyzed in detail. The results of a thorough analysis made are tabulated herein under, for better understanding of the issue: -
On analysis of the aforesaid tabulated information, it is noticed that a) In the financials of all these creditors, certain parties were shown as Creditors, who are none other than the 'debtors in the assessee company. M/s. Raj International. b) Some of the creditors, though replied, have not furnished financial statements. c) It is evident that the money shown to be payable by the assessee company under the garb of 'creditors' are nothing but a fictitious liability. In these transactions Creditor of assessee is Debtor of assessee's debtor. The assessee has made sales to 'certain parties' and these parties in turn have made sales to 'certain other parties' and these 'certain other parties' have eventually made sales to the assessee company, i.e., M/s. Raj International. d) Thus there is no genuine liability in existence in respect of all these creditors. In view of the above, all such creditors (a) in whose financials common creditors/debtors were found; (b) no replies were received: (c) replies received but no financials are made available, are hereby considered for disallowance. However, the amount of addition is restricted to the extent of total amount of creditors shown in the books of account of assessee. Sr.No. Name of the Creditor Amt. (Rs.) 1 Baldaniya Corporation 14,18,78,871 2 Amazon Fashion Fab 2,33,35,506 3 Asmi Enterprise 4,58,24,561 4 CK Synthecis Pvt. Ltd 29,64,902 5 Deeprekha Impex 1,98,63,756 6 Divya International 7,10,65,741 7 Four Square Future 5,92,19,804 8 Janvi Threads 5,36,79,618 9 Janvi Threads Pvt. Limited 26,79,42,622 10 Mansi Industrie Pvt. Ltd 16,44,50,459 11 Laser Filament Pvt. Ltd. 17,41,563 12 Katariya Gar Tex 16,01,52,102 13 Karmeshwar Enterprises 9,00,64,692 14 Konark Synthecis Limited 51,606 15 Labeshwar Fabrics 1,92,41,405 16 Mahi Enterprises 10,05,23,004 17 Sheetal Fashion 9,00,18,189 18 Soham Fabrics 18,57,669 19 Priya Textile 11,36,32,357 20. Transparent Works 1,21,37,868 21 Triangle Solution 13,25,74,789 22 Total 157,22,21,088
7.5 In view of the above it is evident that the liability in the form of debtors is not genuine. The amounts so credited in the books of the assessee stands not explained satisfactorily. In my considered opinion these transactions in the form of sundry creditors are not genuine and the explanation offered by the assessee as to above named creditors to the extent Rs. 157,22,21,088 is not satisfactory Therefore above a sum of Rs.157,22,21,088/; is hereby added back to the total income of the assessee u/s 68 of IT Act 1961.”
As per assessee, the conclusion drawn by the AO is purely based on conjunctures, surmises and presumptions. As per the assessee it is not abnormal having debtors who are also creditors. So the action of AO was erroneous and the Ld. CIT(A) have rightly deleted the addition made by AO. But Ld. DR pointed that AO’s case is that it is intriguing fact that these debtors are also creditors in the books of assessee’s creditors and creditors which makes a circle and may be interpreted as circular trading and therefore action of AO ought not to have been reversed by the Ld. CIT(A).
We have considered the order of the Ld. CIT (A) vide page no. 149, Para- 10.7 of the order, the relevant extract is as under: “10.7 The A.O. had issued notices u/s. 133(6) to the creditors and it was found by him that majority of them have filed the details and confirmed the transactions with the appellant. They have also submitted their income tax returns as well as financial statements. Since the counterparties have confirmed the transactions, thus, it can be said that all the three limbs of Section 68 are satisfied and no addition can be made in respect of said creditors. Merely because there are common Debtors/Creditors between the appellant and the creditors, the same cannot possibly be treated as income of the appellant u/s 68 of the Income Tax Act, 1961. Both the appellant and creditors are in similar trading business and there can indeed be common debtors/creditors between them. There has to be a strong cogent evidence with the A.O. to prove the amounts written in the books of the appellant as creditors, to be taken as the income of the assessee, which has not been brought out by the A.0. The A.O cannot presume at the time of assessment that there are common debtors/creditors and therefore, the appellant is engaged in circular trading. At this point of juncture, it shall be worth-mentioning that there is a huge difference in amount outstanding of creditor's creditor and amount outstanding of that party in appellant's books as Debtors. For example, in the case of appellant's creditor Baldaniya Corporation, its creditor Harshita Metalic is at Rs 1,34,21.054/-, whereas the said Harshita Metalic is standing as Debtor in appellant's books at Rs 4,23,83,678/ So, there is a huge difference in amounts of both the parties. Had it been circular transaction as alleged by the Assessing Officer in the assessment order, there would not have been such a substantial difference in both the amounts. Therefore, in the light of principles of natural justice, it is clear that the Assessing Officer has made a sweeping and a highly high-pitched addition. The tone and tenor of the entire assessment order speaks volumes about the way he has proceeded in this case. Merely by raising some doubts here and there, the AO has made additions amounting to Rs. 157, 22, 21,088/- which is a way bit too much by any standards. The fact that the notices u/s. 133(6) has not been complied with in few cases cannot result in inflicting exorbitant punishment on the appellant company. There can be hundreds of reasons why these notices could not be complied with. In all such cases of non-compliance, the appellant company cannot be held responsible for a misconduct of a party with whom the appellant company has entered into transactions. If at all, the AO was of such a strong view that it was the burden of the appellant company to get replies from its creditors, he should have given an opportunity to the appellant company to do so. However, there is not even a whisper of any such opportunity having been given to the appellant company. Even during long remand proceedings, the reply of the Assessing Officer is ad nauseum bland. He has not been able to move beyond the notices u/s. 133[6] whereas he could have examined the books of accounts and bank statements etc. to find out the actual reality. Physical cross-checking of accounts through notices u/s.133(6) if at all resulting in some adverse finding, is at best a weak piece of circumstantial evidence, more so when the entire books, bills, vouchers, tax returns, audit reports, bank statements etc are crying to be examined but to no avail. The non-compliance of notices u/s 133(6) may act as a trigger for the Assessing Officer to launch a full-fledged enquiry into the business of the assessee. But, to conclude and make an addition of Rs. 157, 22, 21,088/-merely on non-compliance of notices u/s.133 (6) are going far beyond the limits of reasonableness and judicial propriety.”
Ld. CIT (A) in his order evaluated the order of AO as well as legal-cum- factual submissions of assessee also. Based on these, Ld. CIT (A) further came to a conclusion vide para-10.12 on page no. 167 as under: “10.12 It is also found here that the Assessing Officer in this case has not conducted even the proceedings u/s 133(6) in a proper manner. For example, he has not levied any penalty on any party for having not complied with the notice u/s 133[6) issued by him. In fact, it seems like he has not even initiated any penalty proceedings u/s 133(6) in any of the cases. This clearly shows that he has proceeded to conduct the proceedings u/s 133(6) in a half-baked and incomplete manner. He also does not seem to have deputed his Inspector to make field visits to find out the actual reasons for non-compliance of the notices issued u/s 133(6). There can be many reasons for a non-compliance of notice u/s 133(6) by any particular party. The business might have been closed. The business premises might have been shifted to some other place. The party concerned could altogether be a bogus party and might not have existed at all except on paper. There can be many such possibilities. A field visit by Inspector might have been able to throw much light on the same. However, the AO has wound up by only issuing notices u/s 133(6) without taking it to its logical conclusion. The right step should have been to take each of these proceedings to its logical conclusion either by passing a penalty order or by taking other suitable measures under the Act. He should also have confronted the appellant on the issue of non-compliance of notices issued by him u/s 133(6). Then, he should have recorded the statement of the appellant as well. A finding from the books of accounts and the bank statement of the appellant could also have helped the matter a lot. In fact, taking a clue from the bank statement of the appellant, the details of bank accounts of these non-compliant parties could also have been ascertained and thereafter, further enquiries could have been conducted in respect of those non- compliant parties. Further concrete findings could have been made in respect of these parties which could give the AO some basis for making additions in respect of the so-called unproved creditors. In the absence of any such exercise having been done by the AO, to make huge additions of Rs. 157,22,21,088/- is more an exercise in vanity than a well-deserved attempt at finding out a real case of tax evasion.”
In totality of the facts, we also agree with the Ld. CIT(A) that on the facts of the case AO failed to examine properly the issue of genuineness of the creditors. At the assessment stage, the assessee had not discharged the burden of proving the genuineness of the creditors by filing the details of creditors. In this regard the Ld. DR pointed out that a perusal of balance sheet and the schedules attached to its will reveal that the creditors are also the debtors of the asessee. The Ld. DR wondered as to how such transitions takes place. The assessee needs to prove the genuineness of the entries made in the books of account because assessee is duty bound to maintain the books in a true and fair manner in accordance to law. Even through during First Appellate Proceedings the assessee submitted documents in the form of additional evidence. But we find that AO has not carried out proper examination of the documents submitted by assessee during remand proceedings which are evident from the contents of remand report and the various communications between the office of AO and Ld. CIT (A).
And even the impugned action of Ld. CIT(A) cannot be appreciated. Even though the Ld. CIT(A) vide para-10.7 and 10.12 has pointed deficiencies in the action of AO while conducting enquiries/examination during remand proceeding, still he gave relief to the assessee without exercising his power which are co- terminus & co-extensive as that of AO, which action of Ld. CIT(A) cannot be countenanced. The ld. CIT(A) ought to have conducted in depth enquiries and dispelled the mystery of business model as un-ravelled by the AO before he gave relief to the assessee. In the light of the discussions, since facts need to be marshalled properly & examined & verified, in the interest of Justice and fair play we set aside the impugned order and refer the matter back to AO for denovo adjudication after conducting proper enquiry as pointed out by the Ld. CIT(A) in the impugned order in accordance with law. And the AO is directed to give proper opportunity to the assessee and the assessee to diligently participate in the assessment proceedings. Resultantly, Ground No.3 of Revenue’s appeal is allowed for statistical purposes.
In the result, appeal filed by the Revenue is allowed for statistical purposes. (A.Y. 2012-13)
This appeal of the assessee is against the order of Ld. CIT (A), wherein he has confirmed the addition made by the AO U/s. 68 of the Act in respect of Share Application and Share Premium received during the year amounting to Rs. 15,60,30,565/-. On this issue we have gone through the order of the AO, order of the Ld. CIT (A) and submissions of the assessee along with paper book.
During the year under consideration assessee received share capital and share premium from following subscribers: Sr.No. Party name Share Capital Share Premium 1 GauribenBodra (Non-Resident) 133,330 1,866,620 2 Kailash Bodra (Non-Resident) 20,000 180,000 3 Jagdish Bodra 3,590,930 50,273,020 4 Sangita Bodra 677,660 9,487,240 5 Rekha Bodra (Gurukrupa 1,999,990 27,999,860 Enterprise) 6 Sunil Bodra 1,393,200 19,504,800 7 Urmila Bodra (Four Square Future) 333,330 4,666,620 8 Gauri International Private Limited 266,660 3,733,240 9 KishorbhaiMangrolia 3,066,660 42,933,240 (HarshidaMetalic) 10 Jignesh Vyas (Nakshatra Fashion) 666,530 9,331,420 11. Maulik Desai (Narshi Textile) 2,333,330 32,666,620 12. C. H. Jadeja (Shubham Saree) 999,990 13,999,860 Total 15,481,610 216,742,540
Out of theses 12 parties, AO has not accepted Identity, Genuineness and Creditworthiness of parties mentioned at serial no. 4,5,7,8,9,10,11 and 12. Assessee furnished ITRs and financial statements of 8 person vide serial number mentioned (supra). On these 8 persons observations of the AO are as under: “Ongoing through these ITRS & financial statements the following peculiar features were observed, which makes the genuineness of share capital highly suspicious.
a) The business turnover of the Proprietorship Concern/Company is very high, but on the contrast net profit is very small. b) Nature of business of all the Proprietorship Concern/Company is of Fabrics/Textiles, c) The pattern of the transactions reported in the financial statements suggests that all these persons/Proprietorship Concern/Companies seems to be 'Entry Providers. This view also gets support from the fact that the amount of loan liabilities shown in the Balance Sheet is very high while the capital is astonishingly low. The value of fixed assets in the Balance Sheet is meager and generating huge turnover with this much of fixed assets appears to be impossible. d) All the transactions are, prima facie, circular transactions. e) The assessee, M/s. Raj International sold goods to these parties and substantial amounts were shown to be receivable by the assessee from these concerns as shown under 'Debtors. Further, against this outstanding money receivable, these concerns/persons gave share application money at exorbitant premium to the assessee, M/s Raj International. 6.7 Total Shares Capital of Rs. 10,33,315 and shares premium of Rs. 15.49,97,250 is received from above-mentioned parties. On the basis of data furnished by the assessee regarding these investors following information is arrived at. Sr.No. Name of share Name of the Prop. Remarks Applicant Concern 1 Shri Chandubhai H. M/s.Subham Amt, of Debtors in Jadeja Sarees the Books of Raj Intl 25,23,78,339 2 Shri Moulik Babulal M/s.Narshi Textiles Amt, of Debtors in Desai the Books of Raj Intl 25,16,21,201 3 Shri Jignesh S. Vyas M/s.Nakshatra Amt. of Debtors in Fashion the Books of Raj Intl 11,53,73,638 4 Shri Kishorbhai D. M/s.Harshada Amt. of Debtors in Mangolia Metallic the Books of Raj Intl 4,23,83,678 5 Ms. Urmila Bodra M/s. Four Square Jethava Industries is Future creditor by Rs 10,96,78,773 Which in turn Debtor of Raj International by Rs. 25,88,48,345 6 Ms. Rekhaben R. Bodra M/s.Gurukripa Subham Sharee is Enterprises creditor by 8,88,69,969 which is debtor of Raj International by 25.23 crores-- 7 Gauri International Pvt Nakshtra Fashion Ltd creditor by Rs. 4,91,12,731 which is Debtor of Raj by Rs. 11,53,73,638 8 Sangeetaben J. Bedro Unsecured Loan from Narshi Textiles of Rs. 1,00,00,000 which is debtor of Raj by Rs. 25,16,21,201 6.8 Thus it is very much clear that the money which come to assessee in the form of Share's premium and shores capital was lying with the applicants in the form of debtors. These are circular transactions. This is assessee's own money routed through these entities which apparently are entry providers. Thus these transactions are not genuine and credit in the form of Share capital and Shares premium from above parties is to be treated as income of the assessee u/s 68 of IT Act 1961.”
The view of the AO was confirmed by Ld. CIT(A) also vide para-8.5 to 8.27 of the order. In this matter, we have gone through the submissions of assessee and the judicial pronouncements relied upon. In our opinion the judicial pronouncements relied upon by the assessee are distinguishable on the facts of the case as assessee’s case is not of getting funds from various parties in the guise of unsecured loans, etc. Rather, assessee which is Private Limited company received money under the head “Share Subscription Account” (Share Capital + Share Premium). When closely held companies like assessee shows that it has received amount through Share Capital/Premium, then when called upon by AO has to prove the nature & source of the investor, then the burden of proving the identity, creditworthiness and genuineness of the investors are on the assessee company. If it fails to discharge it, the AO cannot be faulted for drawing adverse inference against the investors and then the deeming fiction of section 68 of the Act will be attracted and addition may be sustained. Its common knowledge that no unknown person will certainly not subscribe to the shares of a closely held company and assessee cannot simply by filing their ITRs, financial statements and ledger in assessee’s books can claim that burden casted upon it has been discharged.
Moreover, none of the subscriber’s bank statement had been furnished along with their ITR and financial statements. Without having bank statement, their creditworthiness at the relevant time cannot be properly examined. In that situation efforts of the assessee to prove the essential ingredients of section 68 of the Act with reference to subscription of share capital will be treated as half hearted attempt only. Moreover, the most interesting aspect in this case was that all the share subscribers were heavily indebted to the assessee-company and instead of clearing their debit balances, they are subscribing to the shares of assessee-company on heavy premium as pointed out by the AO in the assessment order.
In this regard, it is relevant to rely on Hon’ble Supreme Court decision in the case of CIT Vs. Durga Prasad More [(1971)82 ITR 540 (SC)] as under: “Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.”
On this issue the latest landmark judgment of Hon’ble Apex Court in the case of PCIT (Central) vs. NRA IRON & STEEL PVT. LTD. (2019) 412 ITR 0161 (SC) has observed as under:
“Income—Unexplained cash credit—Assessee filed original return of income which was assessed—Thereafter, AO sought to reopen assessee’s case u/s 147— AO found that assessee had received an amount through Share Capital/Premium during FY 2009-10 from companies situated at Mumbai, Kolkata, and Guwahati— Assessee submitted that said share capital was received through normal banking channels by account payee cheques/demand drafts and subsequently, filed income tax return acknowledgments to establish identity and genuineness of transaction—AO had issued summons to representatives of said investor companies however, nobody appeared on behalf of them—Department only received submissions through dak, which created a doubt about identity of investor companies—From field enquiries, AO recorded that at Mumbai, out of four companies, two companies were found to be non-existent at address furnished— With respect to Kolkata companies, response came through dak only, however, nobody appeared, nor did they produce their bank statements to substantiate source of funds—With respect to Guwahati companies, they were non-existent at given address—Thus, assessee failed to prove existence of identity of investor companies and genuineness of transaction—Consequently, AO made an addition to assessee’s income—CIT(A) deleted such addition on ground that assessee had filed confirmations from investor companies—ITAT confirmed order of CIT(A)—High Court dismissed Revenue’s appeal—Held, use of words “any sum found credited in books” in s. 68 indicates that section was widely worded, and includes investments made by introduction of share capital or share premium—Initial onus was on assessee to establish by cogent evidence genuineness of transaction, and credit-worthiness of investors u/s 68—AO had conducted detailed enquiry which revealed that there was no material on record to prove, or even remotely suggest, that share application money was received from independent legal entities—Survey revealed that some of investor companies were non-existent, and had no office at address mentioned by assessee—Enquiries also revealed that investor companies had filed returns for a negligible taxable income, which would show that they did not have financial capacity to invest funds in AY 2009-10, for purchase of shares at such a high premium—Furthermore, none of so-called investor companies established source of funds from which high share premium was invested—Thus, mere mention of income tax file number of an investor was not sufficient to discharge onus u/s 68—Lower appellate authorities had ignored detailed findings of AO from field enquiry and investigations carried out by his office—Lower authorities had erroneously held that merely because assessee had filed all primary evidence, onus on it stood discharged—Lower appellate authorities failed to appreciate that investor companies which had filed income tax returns with a meagre or nil income had to explain how they had invested such huge sums of money in assessee—Therefore, onus to establish credit worthiness of investor companies was not discharged hence, entire transaction seemed bogus, and lacked credibility—Practice of conversion of un-accounted money through cloak of Share Capital/Premium must be subjected to careful scrutiny—This would be particularly so in case of private placement of shares, where a higher onus was required to be placed on assessee since information was within its personal knowledge—Assessee was under a legal obligation to prove receipt of share capital/premium to satisfaction of AO, failure of which, would justify addition of said amount to income of assessee—Revenue’s appeal allowed.
The factum of the case decided by Hon’ble Apex Court as mentioned (supra) and issue under consideration is similar, wherein the Hon’ble Supreme Court has laid down the guidance to Appellate Authorities including this Tribunal as to how the nefarious practice adopted by the closely held companies are used to convert their unaccounted money through the cloak of Share Capital/Premium. The assessee failed to discharge the burden casted upon it about the Share Capital/Premium collected by it and the assessee failed to dispel the intriguing facts brought out by AO (Share Subscription but heavily debtors in the books of assessee). In view of above, respectfully following the decision of Hon’ble Apex Court in NRA Iron & Steel (supra) which was pertaining to Ay 2009-10 and this appeal related to assessment for Ay 2012-13 and the investors lack credibility as noted by both AO as well as Ld. CIT (A). So we sustain the orders of authorities below and appeal of assessee is dismissed. 31. In the result, appeal filed by assessee is dismissed. Order pronounced in the open court on 24th day of January, 2023.