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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI SANDEEP SINGH KARHAIL
The appeals being ITAs No. 1794/Mum./2022 and 1795/Mum./2022 are against impugned orders passed by the learned CIT(A), which in turn, arose from orders passed by the Assessing Officer (‘AO’) under section 147 r/w section 144 of the Act, for assessment years 2010–11 and 2011–12. While, appeal being ITA No. 1793/Mum./2022 is against the impugned order passed by the learned CIT(A), which in turn, arose from order passed by the AO under section 271(1)(c) of the Act, for assessment year 2010–11.
When these appeals were called for hearing, neither anyone appeared on behalf of the assessee nor was any application seeking adjournment filed. Therefore, we proceed to dispose off these appeals ex–parte, qua the assessee after hearing the learned Departmental Representative (“learned DR”) and on the basis of material available on record.
Since both the quantum appeals pertain to the same assessee and issues involved are also common, therefore, the quantum appeals are taken up together for the sake of convenience. In both the quantum appeals, being ITAs No. 1794/Mum./2022 and 1795/Mum./2022, grounds raised by the Revenue are also identical. The appeal of the Revenue for the assessment year 2010-11 was taken up as the lead case and the decision rendered therein would apply mutatis mutandis to appeal for assessment year 2011-12. Revenue’s Appeal – A.Y. 2010-11
5. In this appeal, the Revenue has raised following grounds:
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 “1. Whether on facts and circumstances of the case and in law, Ld. CIT(A) has not erred in arriving at a conclusion that no trade was booked in the name of Principal Investors Fund Inc. International Growth Fund, when in fact trades were booked on its PAN and profits accrued to it.
2. Whether on facts and circumstances of the case and in law, the Ld CIT(A) has erred in not recognising that the assessee has presented untruthful details and repeatedly misrepresented facts and misled Revenue authorities 3. Whether on facts and circumstances of the case and in law, the Ld.CIT(A) has erred in ruling in favour of the assessee as the assessee has not provided any documentary proof to substantiate its claims, even those claims that pertain to its own group entities.
4. Whether on facts and circumstances of the case and in law, Ld.CIT(A) has erred in ignoring the facts brought out in Remand Report.
5. Whether on facts and circumstances of the case and in law, the Ld CIT(A) has erred in not giving opportunity to AO to cross examine the representatives of the broker Macquarie Capital who appeared before the CIT(A).
6. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are: The assessee was a resident of USA. In India, the assessee was registered with Securities and Exchange Board of India (‘SEBI’) as a sub-account of Foreign Institutional Investor (‘FII’) to undertake investment in accordance with SEBI (FII) Regulations, 1995. For the assessment year 2010–11, assessee has not filed its return of income. Since the case of the assessee was appearing as non-filler under NMS for assessment year 2010–11 and information was available with the Department that share transactions were made by the assessee in the relevant financial year, letter was issued to the assessee for verification of information available with the Department. However, no response was received from the assessee. Consequently, the case of the assessee was reopened after recording reasons and notice under section 148, was issued and sent by speed post. But the said Page | 3
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 notice was returned unserved and ultimately the notice under section 148 of the Act was served by affixture at the last known address of the assessee. Thereafter, notice under section 142(1) was also issued to the assessee, which was also served by affixture. In absence of any response from the assessee and also on account of non-filing of return of income, the assessment in the case of the assessee was completed under section 144 of the Act on the basis of the material available on record vide order dated 27/12/2017, passed under section 144 r/w section 147 of the Act. The AO also directed initiation of penalty under section 271F as well as section 271(1)(b) and 271(1)(c) of the Act. Vide aforesaid order, the AO made an addition of Rs.16,36,86,460, on account of transaction by the assessee in shares of Grasim Indus and Cipla Ltd.
Upon receipt of the aforesaid order, assessee filed appeal before the learned CIT(A). In appeal before the learned CIT(A), assessee submitted that notices during the assessment proceedings were sent to the earlier address of its consultant and thus could not be responded by the assessee. The assessee further submitted that pursuant to its application, the SEBI had cancelled its FII license vide letter dated 08/02/2008. Subsequently, the local custodian of the assessee, Deutsche Bank AG, had also closed the DEMAT account of the assessee on 13/02/2008. Accordingly, it was submitted that assessee did not have any investment activities in India during financial year 2009–10. The assessee also furnished confirmation from the broker, viz. Macquarie Capital Securities (India) Private Limited, whose code was appearing in the AIR Page | 4
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 information. As per the broker, transactions of a particular group were executed using a single client code of one of the SEBI registered FII/sub- accounts of the group and allocating the same to the individual sub-account post closing session on the basis of the information subsequently received from the group/client. In this regard, assessee filed the confirmation from the broker that all the sale and purchase transactions are reported in AIR had been executed using PAN of the assessee first and subsequently booked to another PANs on National Stock Exchange and Bombay Stock Exchange. Before the learned CIT(A), the assessee furnished aforesaid documents by way of additional evidence. The learned CIT(A) sought remand report from the AO, which was duly furnished and the reply of the assessee was also sought on same. The learned CIT(A), during the appellate proceedings, also issued summons under section 131 of the Act to Head of Compliance-India and Head of Operations of the aforesaid broker viz. Macquarie Capital Securities (India) Private Limited. The said summons was duly responded by the concerned persons of the Broker Company and details / affidavit was filed. After considering the affidavit of Director of the broker company, the learned CIT(A) vide impugned order came to the conclusion that no trade was booked in the name of the assessee during the year under consideration and accordingly addition made by the AO was directed to be deleted. The relevant findings of learned CIT(A), in this regard, are as under:
“5.1.6 To resolve the issue, summons us 131 were issued to Macquarie Capital Securities (India) Pvt. Ltd. Ms. Ganjal Mehta (Head of Compliance-India) and Shri Sanjay Gupta (Head of Operations) attended on behalf of Macquare Capital Securities (India) Pvt Ltd. Page | 5
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 5.17 Before me, they submitted as under:– 1. No trade under inquiry was done on behalf of Principal Investors Fund Growth Fund (A) (assessee) 2. Details of any trade on behalf of 'A' will be furnished by 30.03.2022 3. Why the PAN of 'A' was used:- they stated that one PAN is used for a group & entities traded through Group They will submit details & a note on the same.
4. They will furnish complete details of trades undertaken by them under A's PAN & to which entities these trades were allocated.
Will submit the details in the form of affidavit from Principal Officer of Company. 5.1.8 Subsequently, an affidavit from Shri Sandeep Bhatia, Director of Macquarie Capital Securities (India) Pvt. Ltd. was submitted stating as under:– • MCSIPL had not booked any trades to Principal Investors Fund Inc International Growth Fund having PAN-AADCP6771H during the A.Y 2010-11. • We refer to earlier confirmation to the Principal Investor Group ("PG") on captioned matter dated 12 July 2019 wherein we had mentioned that data provided to MCSIPL was incomplete as we noticed that in few cases, the total quantity mentioned was less than the actual quantity we executed for two scrips namely Cipla and Grasim for the Financial Year (FY) 2009-10. This discrepancy has now been resolved through the PG sharing of the copy of AIR data for the concerned trades, which we note excluded any trade with transaction value of less than Rs.20,000 Previously we reconciled that data for all the trades including those with transaction value of less than Rs.20,000. We therefore confirm that our submitted data is accurate and have complete details of all trades executed by PG in FY 2009-10 for the scrips Cipla and Grasim. • We re-confirm that the trades listed in Exhibit 1, were executed using the PAN of Principal Investors Fund Inc. International Growth Fund (AADCP6771H) at the order entry level and post execution of the order, the trades were subsequently allocated and booked out to other Fil/ FPIs managed by PG to which the trade pertains to in accordance with the PG's instructions • Accordingly, confirm that the trades listed down in Exhibit 1 do not pertain to Principal Investors Fund Inc. International Growth Fund • As requested, we attach herewith a Process note of setting up of an accounts and allocation process for FIl attached as Exhibit 2. 5.1.9 For ready reference. Exhibit 1 is enclosed herewith. Exhibit 2 is reproduced below:– Exhibit 2: Account set up process:
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022
When a new group relationship is established, clients send a list of accounts (funds that they manage / sub accounts) in which they would tentatively be trading India with Standard Settlement Instructions (SSIs) along with PAN details or we would extract SSI details of the client group's sub accounts from a global system - DTCC Alert. The PAN of any one of the given / available accounts is required to be mapped while registering a UCC or trading code of that group Typically, UCC of the Parent Group would be mapped to the first sub account of the group opened with us based on SSI. Subsequently that trading code is used for as long as the group has an active relationship with the Stockbroker. On a routine basis there is no information flow either form custodian or exchanges or client on surrendered /cancelled FIL/FPI accounts that could be used for checking the status of any mapped accounts. However, on an exception basis the Stockbroker may come across the fat that an account has been deactivated or surrendered when it encounters a mismatch between a client's allocation details and the custodian's details (although this scenario is not commonly encountered). Execution On receipt of an order from a client, we (the broker) execute the order under the relevant UCC code assigned to the Parent group that was mapped with PAN of one of the accounts managed by them. Post execution of the order, our trader will sent execution details such as total quantity, average price to the client Booking Allocation Contracting Post market close, our back-office sends the block confirms (aggregated executed quantity) to the client's back office for the trades executed during the day Subsequently, the client gives break up of quantities to be booked out to various sub accounts/ managed fund at the weighted average price ("Trade Allocations) based on which the trade settlement process takes place of the respective sub account level. The trade allocation details are sent through the electronic trade matching & confirmation system known as OMGEO/CTM. Once the allocations are received, Brokers issues contract note to the respective sub accounts /managed funds based on the Trade Allocation. The contract note is sent out using the Straight Through Process (STP) to the local custodian of the respective sub accounts. The Trade Allocation data is also reported to the exchange for custodial confirmation. The local custodian is required to confirm the trade with (i) the brokers contract note, (1) Broker reported trade allocation to the exchange; and (ii) based on the client's instructions for the trade. Based on all three way confirmation, the local custodian accept the trades for Direct Custody Settlement ("DCS), settles the trade (receives/delivers, funds/ securities with exchanges directly for the sub accounts). Based on client's order, we execute the trade at the present level and trades are booked out to respective sub-accounts as per the instructions received from Page | 7
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 the client at the weighted average price. Subsequently, by and large trades are directly settled by client's custodian with exchange.” 5.1.10 From the affidavit of Shri Sandeep Bhatia, it is clear that no trade was booked in the name of Principal Investors Fund Inc International Growth Fund (assessee) during the current assessment year. 5.1.11 It was also explained before me that as per the practice allowed by SEBI, PAN of one of the given accounts is used for all trades done on behalf of the group or section of the group entities. At the end of the day, these trades are allocated to the actual beneficiaries. 5.1.12 Considering the overall facts of the case, I am satisfied that no trade on behalf of the assessee are carried out during the year. 5.1.13 The A.O. is therefore, directed to delete the addition totalling Rs. 16,36,86,460/-.”
Being aggrieved, the Revenue is in appeal before us.
We have considered the submission of the learned DR and perused the material available on record. It is, inter-alia, the plea of the Revenue that though additional evidence filed by the assessee was provided to the AO for its comment and remand report in response thereto was also filed by the AO, however, the learned CIT(A) thereafter also issued summons under section 131 of the Act to the Head of Compliance-India and Head of Operations of broker company and certain more information/documents were furnished pursuant thereto. As per the learned DR, neither an opportunity of cross examination of the concerned persons of broker was granted nor were information/documents furnished pursuant to summons under section 131 of the Act provided to the AO, on the basis of which impugned addition was deleted by the learned CIT(A). From the perusal of findings of learned CIT(A), as noted above, we find merits in the submission of the learned DR.
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022
We find that Hon’ble Supreme Court in Andaman Timber Industries vs. Commissioner of Central Excise, [2015] 314 ELT 641 (SC), has observed as under:
“6. According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected.”
We further find that Hon’ble Supreme Court in I.C.D.S. Ltd. vs CIT, [2020] 273 Taxman 12 (SC) held that where issue involved was about not extending opportunity to appellant to cross-examine witnesses relied upon by Assessing Officer, entire matter would be considered by First Appellate Authority afresh by giving fair opportunity to both sides to espouse their claim. We are of the considered view that the principles of natural justice which applies in favour of assessee also equally applies in favour of the Revenue, since both are parties in appeal before the learned CIT(A). Accordingly, we deem it appropriate to restore the appeal before the learned CIT(A) for de novo adjudication. We further direct the learned CIT(A) to not only share the information received, pursuant to summons under section 131 of the Act, with the AO but also grant opportunity of cross examination of the concerned persons of the broker to the AO. We also direct the AO to file its report/response before the learned CIT(A) pursuant to the above. The assessee shall also be at liberty to file rejoinder, if any, in reply to the report/response of the AO. Needless to mention that no order shall be passed
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022 without affording opportunity of hearing to both the sides. Accordingly, grounds raised by the Revenue are allowed for statistical purpose.
In the result, appeal by the Revenue is allowed for statistical purpose. Revenue’s Appeal – A.Y. 2011-12
Since, in Revenue’s appeal for assessment year 2011–12, being ITA No. 1795/Mum./2022, the impugned addition was also deleted by the learned CIT(A) in similar manner as was done in assessment year 2010–11 and identical grounds have been raised, therefore, our findings / conclusions / directions in aforesaid appeal for assessment year 2010-11 shall apply mutatis mutandis to this appeal.
In the result, appeal by the Revenue is allowed for statistical purpose.
Revenue’s Appeal – A.Y. 2010-11
The learned CIT(A) vide impugned order deleted the penalty levied under section 271(1)(c) of the Act, for assessment year 2010-11, on the basis that the entire addition was deleted on merits of the case. Since, the quantum appeal for assessment year 2010–11, has been remanded to the learned CIT(A) for de novo adjudication, the penalty appeal filed by the Revenue, 2010–11 being consequential to quantum appeal, is also remanded to learned CIT(A) for de novo adjudication. Page | 10
M/s. Principal Investors Fund Inc. International Growth Fund 1974 & 1975/Mum./2022