ACIT, CIRCLE -17(1), HYDERABAD, HYDERABAD vs. M/S EAST COAST ENERGY PRIVATE LIMITED, HYDERABAD

Brief facts of the case are that the assessee-company, engaged in the business of power generation, filed its return of income on 27-09-2011 admitting total income of Rs.1,59,54,571/-.

During the assessment proceedings u/s.143(3) of the Income Tax Act [Act], the Assessing Officer (AO) noticed that there was a survey operation in the case of assessee’s business premises on 18-02-2014, wherein it was found that the assessee-company has received share application money from M/s.Cobalt Power P Ltd., which in turn received investments from various entities. A sworn statement was obtained from Shri Prabhu Mudigonda, S/o.Late M.Verabhadra Shastry, Director of M/s.Cobalt Power P Ltd., and M/s. East Coast Energy P Ltd., on 18-02-2014, wherein he confirmed that with regard to some of the investments received from M/s.Cobalt Power P Ltd., to the assessee-company, he was not in a position to establish the sources of the companies which have invested in M/s.Cobalt Power P Ltd., and most of these sources were arranged by him in his personal capacity and therefore requested to consider the un-explained investments of M/s.Cobalt Power P Ltd., into the assessee-company as ‘additional income’ in his individual hands.

3.1. The AO observed that the said Director did not have sources for making such huge investments into M/s.Cobalt Power P Ltd., and therefore, he did not have creditworthiness to make such payments. Therefore, he held that the said un- explained investments cannot be brought to tax in his individual hands. Further, he also observed that the companies which have allegedly invested in M/s.Cobalt Power P Ltd., are mere entry providers and therefore they are bogus companies. In view of the same, the sum of Rs.15.25 Crores, which is the share application money received by M/s.Cobalt Power P Ltd., by five companies and which in turn has been invested in the assessee-company is treated as ‘un-explained income of the company’ u/s.68 of the Act and brought it to tax.

Aggrieved, the assessee filed an appeal before the CIT(A), who allowed the appeal and granted relief to the assessee and deleted the entire addition made u/s.68 of the Act.

Any other ground that may be urged at the time of hearing the appeal”.

The case was taken up for hearing on 18-11-2020 through video conferencing and both the parties were heard.

Ld.DR submitted that pursuant to survey on the assessee-company on 18-02-2014, it was found that it has received a huge sum of share application money i.e., Rs.200,36,60,880/- from M/s.Cobalt Power P Ltd., which in turn had received the same as investments from various other companies. It has also found during the course of scrutiny that both the companies have the same address as their registered offices and also that the Director of assessee- company, M/s.Cobalt Power P Ltd., whose statement has been recorded was also the Director of M/s.Cobalt Power P Ltd. Therefore, according to him, the statement of the Director assumes importance. He submitted that the five companies i.e., - i) Empower Industries India Ltd., ii) Mahan Industries Ltd., iii) Prabhav Industries Limited, iv) Shri Ganesh Spinners Ltd., and v) Xanthu Developers Pvt. Ltd., are said to have invested Rs.15.25 Crores into M/s.Cobalt Power P Ltd., which in turn has been invested by M/s.Cobalt Power P Ltd., into the assessee-company, but neither the identity nor the creditworthiness of these five companies was proved. Therefore, according to him, all these companies are dummy companies, providing accommodation entries hence, the AO has rightly brought it to tax u/s.68 of the Act. He further submitted that by admitting income, the Director of both the companies, have prevented further probe into the matter by the Revenue authorities but when it came to filing the returns of income of both the companies, they have not offered the same to tax. He submitted that neither M/s.Cobalt Power P Ltd., nor the Director of the assessee-company have offered the said income to tax, therefore, AO has rightly brought the same to tax, in the hands of the assessee-company, which has received the share application money. He further submitted that the CIT(A), without verifying any of the facts submitted by the assessee, has granted relief to the assessee-company. He prayed that the assessment order be revived by setting aside the order of the CIT(A).

The Ld.Counsel for the assessee, on the other hand submitted that the assessee had proved the identity and creditworthiness of the company i.e., M/s.Cobalt Power P Ltd., by providing information with regard to sources of investment for around Rs.200 Crores and that the department has accepted the investment by M/s.Cobalt Power P Ltd., to the extent of Rs.185 Crores and disbelieved the investment of Rs.15.25 Crores only. Therefore, according to him, M/s.Cobalt Power P Ltd., cannot be considered as ‘dummy company’. He further submitted that all the relevant information with regard to sources of fund invested by M/s.Cobalt Power P Ltd., has been submitted before the CIT(A), who has verified the same and granted relief to the assessee-company. He submitted that the five companies, whose creditworthiness is not accepted by the AO, have invested in M/s.Cobalt Power P Ltd., which in turn had given the said amount to M/s.Navayuga Engg. Co. Ltd., and after some time, M/s.Navayuga Engg. Co., Ltd., had returned the money to M/s.Cobalt Power P Ltd., which has been invested in assessee’s-company. He submitted that all the transactions have been done through banking channels only and therefore the genuineness of the transaction and the identity and creditworthiness of the partners, who have made said investment have been proved beyond the doubt by the assessee. He therefore prayed for upholding of the order of CIT(A).

Having regard to the rival contentions and material on record, we find that before the survey party, the Director of both the companies i.e., assessee before us as well as M/s.Cobalt Power P Ltd., had admitted that the sources of investment to the tune of Rs.15.25 Crores could not be explained. He, in fact, had offered to tax it in his individual hands. However, neither the assessee-company nor M/s.Cobalt Power P Ltd., have offered the said income to tax in their hands. By admitting that the income would be offered to tax in their hands, assessee and its Director have prevented the AO from making further enquiries. The assessee has filed the evidence such as bank account statement etc., only before the CIT(A). However, we find that the CIT(A) had neither called- for a remand report from the AO nor he verified the veracity and authenticity of the evidence filed by the assessee. The powers of CIT(A) are co-terminus to the powers of AO and the CIT(A) can do what the AO has failed to do, we find that in this case, the CIT(A) has failed to do what he was supposed to do i.e., verifying the details filed by the assessee. He ought to have called for remand report from the AO before accepting the contentions of assessee. In view of the same, we deem it fit and proper to remand the issue to the file of AO with a direction to re-consider the same, after giving a fair opportunity of hearing to the assessee. The assessee is also directed to co-operate with the AO by filing all the necessary details as called for by the AO.