SAFEFLEX INTERNATIONAL LTD.,JAIPUR vs. ITO, JAIPUR

PER BHAGCHAND, AM

Both these appeals have been filed by the assessee against separate

orders of the ld. CIT(A)-2, Jaipur dated 10-09-2014 and 04-04-2016 for

the Assessment Years 2010-11 and 2011-12 respectively.

2.1 At the outset of the hearing, the Bench observed that the appeal for

the Assessment Year 2011-12 is filed by the assessee is late by 22 days for which the assessee filed the application dated 08-07-2016 for

condonation of delay with following prayers.

‘’As assessment order u/s 143(3) for the A.Y. 2011-12 was passed vide order dated 17-02-2014. The first appeal was preferred on 18-03-2014 before the ld. CIT(A)-2, Jaipur. Appeal against the order u/s 143(3) was partially dismissed by ld. CIT(A)-2, Jaipur vide order dated 04-04-2016. The said order was received by the company on 17-04-2016 and accordingly, it was supposed to file the appeal within 60 days i.e. by16-06-2016. The present appeal is delayed by 22 days.

It is further submitted that age of my father is above 80 years. His health is not well since March 2016 and therefore, he is bed ridden. He is staying in Udaipur right now and I have to frequently visit Udaipur to take care of him. As the health issue of my father occupied my mind, the time limit of filing the appeal skipped my attention.

I therefore, make a humble prayer that on account of the above reason delay in filing appeal may please be condoned. Reliance is placed on the following judicial pronouncements.

(i) Collector, Land Acquisition vs Mst. Katiji[1987]167 ITR 471 (SC)

(ii) M/s. GMG Engineer Industries vs Issa Green Power Solution (Civil Appeal No.4473/2015) with A.C. Govindaraj and Ors vs M. Krishnamoorthy & Ors.(Civil Appeal No.4473/2015): ‘’

To this effect, the assessee has also filed the affidavit giving the reason

for such delay in late filing the appeal before ITAT.

2.2 We have heard the rival contentions and perused the materials

available on record. Taking into consideration the facts and circumstances

of the case, Affidavit of the assessee and also the case laws (supra), it is

observed that there is sufficient cause in preventing the assessee to file

the appeal in time. Hence, the delay in filing the appeal by the assessee is

condoned.

3.1 Now we take up both the appeals of the assessee for the

Assessment Year 2010-11 and 2011-12 for adjudication in which the

assessee has raised the following grounds of appeal.

ITA No. 696/JP/2014- A.Y.2010-11

‘’1. Under the facts and circumstances of the case the ld. CIT(A) has erred in confirming the addition of Rs. 15.00 lacs u/s 68 of the I.T. Act, 1961 on account of share capital subscribed.

‘’1. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the AO in treating the interest on FDR of Rs. 3,32,342/- as ‘’Income from other sources’’ and thereby restricting the deduction u/s 10AA of I.T. Act, 1961 amounting to Rs. 4,43,59,235/- as against claimed deduction of Rs. 4,46,88,897/-. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted deleting the said addition of Rs. 3,32,342/- allowing deduction u/s 10AA at Rs. 4,46,88,897/- as claimed by the assessee company.’’

4.1 Apropos Ground No. 1 and 2 of the assessee for the

Assessment Year 2010-11, the facts as emerges from the order of the ld.

CIT(A) are as under:-

‘’2.4.1 I have examined the facts of the case, assessment order, the submissions of the appellant and the case laws cited by the appellant and the Assessing Officer, the appellant has stated that in the statements of Directors of the share applicant companies, there is no mention of transactions with the appellant being in the nature of accommodation entries. It has further been submitted that if the share applicant companies have provided accommodation entries to one does not necessarily imply that accommodation entries have also been provided to the appellant. A perusal of the statements of Shri S.N. Gadia and Smt. Laitha Chauhan shows that the 4 modus operandi of these companies was to collect cash, deposit the cash in the personal bank accounts directors, employees or known persons; thereafter issue the cheques in the name of M/s. Convient Housing Finance Ltd. and M/s. Mewad Equipment Pvt. Ltd who in turn would issue the cheques for the share application money to the concerns desirous of obtaining the accommodation entries. Copies of bank statements showing huge deposit of cash in bank from where cheques have been issued to the share applicants support the statements made by the directors. It was also stated that for providing these accommodation entries, commission @ 1.5% of the share application money was charged. It has further been stated by Shri S.N. Gadia that the above mentioned two concerns do not conduct business activity (answer to Q. No. 3 of the statement u/s 131(1) recorded on 18-03-2013). Also they have not filed any return of income. In such a situation, the only inference that can be drawn is that these companies are engaged only in the business of providing accommodation entries by accepting cash, depositing it in the bank accounts and issuing cheques to the desirous persons in lieu of commission. Therefore, it would not make a material difference whether the name of the appellant has not been specifically mentioned by the directors of the share applicant in the statements recorded by the Income Tax Department.

2.4.2 The ratio of the various case laws cited by the appellant is that the burden of proof with respect to share application money received through banking channels lies on the assessee to the extent of proving the identity of the share applicants. Once the existence of the share applicant is proved, the burden shifts to the Revenue to establish that such investment has come from the assessee itself (Shree Barkha Synthetics Ltd. [2006] 155 Taxman 289 (Raj). In this case, the appellant has discharged his onus with respect to the identity of the share applicants who have given share application money to the applicant through banking channel. To this extent, the appellant has discharged his onus. Thereafter the onus has shifted to Revenue which has in this case shown that the share 5 applicants do not conduct any business activity and have no source of income except commission received from providing accommodation entries. In this case, the directors of the share applicant companies have stated that they are engaged in the business of providing accommodation entries by accepting cash from the desirous persons, depositing it in the bank accounts of the directors and employees and thereafter giving cheques for share application money in lieu of commission. The Revenue has therefore, established that the investment for the share application money has come from the assessee itself. Merely proving the identity of the share applicants who have given money thorough banking channels will not suffice in such a situation. The assessee has not been able to furnish any satisfactory explanation to counter the findings of the Assessing Officer that the source of the share application money has not come from the share applicant but from the assessee. In view of the above discussion, addition of Rs. 15,00,000/- made by the Assessing Officer on account of unexplained cash credit through share application money u/s 68 of the I.T. Act is confirmed. Also addition of Rs. 22,500/- made by the Assessing Officer on account of commission @ 1.5% given for obtaining the accommodation entries is confirmed. Ground No. 1 and 2 are dismissed.’’

4.2 During the course of hearing, the ld.AR of the assessee

submitted that the lower authorities have erred in confirming the addition

of Rs. 15.00 lacs u/s 68 of the Act on account of share capital subscribed

and further erred in confirming the addition of Rs. 22,500/- u/s 69 of the

Act on account of undisclosed commission payment which should be

deleted. The ld.AR of the assessee filed the written submission mainly

praying as under:- 6 ‘’3.17 Thus, once the existence of the subscribers was proved, the onus and heavy burden shifts on the Revenue to establish that either the share applicants were bogus or the money belonged to the assessee company itself. In view of this, no addition can be made in the hands of the assessee company. At best, if the AO was not satisfied, the addition could have been made in the hands of the companies/ individuals who had provided the entries’’.

4.3 We have heard the rival contentions and perused the materials

available on record. It is noted that the AO during the course of

assessment proceeding made the addition of Rs. 15.00 lacs u/s 68 of the

Act and Rs. 22,500/- u/s 69 of the Act respectively in the hands of the

assessee by observing as under:-

‘’8.4 In the assessee company’s case there is direct evidence in the form of statement of Shri Satya Narain Gadiya and Smt. Lalita Chauhan who were directors and share holders in the above mentioned companies and they have admitted that they are indulged in providing accommodation entries to the needy persons on commission basis. The modus operandi has also been admitted wherein they have stated that they have received cash from the beneficiary parties and then deposited the cash received in their individual Bank Accounts or the accounts of their staff and closely connected persons and thereafter cheques are issued in the names of the companies which are controller by Shri Satya Narain Gadiya as such these companies are indulged in providing accommodation entries to the needy persons. The submissions filed by the assessee has stated nothing about the source of deposit in the individual accounts which is the basis of the funds transferred to the assessee company’s account as share application money. As such I am convinced that the assessee company has received 7 share application money of Rs. 15,00,000/- as mentioned above which is nothing but the accommodation entry obtained through the aforementioned so called persons.

In view of the above discussion and clenching evidence available on record in respect of all the accommodation entries a sum of Rs. 15,00,000/- is added as unexplained cash credits within the meaning of section 68 of the I.T. Act, 1961.

In view of the above discussion and clenching evidence available on record in respect of all the accommodation entries a sum of Rs. 22,500/- is added as undisclosed commission payments within the meaning of Section 69B of the I.T. Act, 1961.’’

In first appeal, the ld. CIT(A) has confirmed the action of the AO. It is

also noted that the ld.AR of the assessee during the course of hearing

submitted hereunder that the lower authorities have violated the principles

of natural justice.

3.6 (i) The AO failed to provide the copies of statements used against the assessee company. (ii) The AO should not have used the evidence without examining in chief Shri S.N. Gadia and Smt. Lalitha Chauhan by himself.

(iii) The AO was duty bound to allow cross examination of Shri S.N. Gadiya and Smt. Lalitha Chauhan whose statements were used against the assessee company because it is a pragmatic requirements of fair play in action.

The ld.AR of the assessee relied on the decision of Hon'ble Suprme Court

in the case of Andaman Timber Industries, Civil Appeal No. 4228 of

2006 dated 02-09-20156 wherein it was held that where opportunity for

cross examination is not given, it is violation of principles of natural

justice. In view of the orders of the lower authorities, submissions of the

ld.AR of the assessee and the present facts & circumstances of the case, it

will be in the interest of equity and justice to restore both the grounds to

the file of the AO to decide it afresh by providing adequate opportunity of

being heard to the assessee. The assessee is also directed to submit the

relevant documents/ details as to the case before the AO for resolving the

issues in question. Thus Ground No. 1 and 2 of the assessee are allowed

for Statistical purposes.

5.1 Apropos Ground No. 3 of the assessee, the facts as emerges from

the order of the ld. CIT(A) are as under:-

‘’3.1 The Assessing Officer has not included interest on bank FDRs amounting to Rs. 4,33,729/- as a part of the eligible profit for claiming exemption u/s 10AA. The Assessing Officer has held as under:- ‘’I would like to place reliance on the judicial pronouncement on the issue under consideration. The Hon'ble Delhi High Court in the case of CIT vs Sree Ram Honda Power Equipment 289 ITR 475 (Delhi) has held that the interest income earned on deposits is to be taxable as income form other sources u/s 56 of the Act. Similar view has also been expressed in other decisions particularly Apex Court’s decision in the case of Tuticorin Alkalies and Fertilizers and also in CIT vs Auto Kast Ltd 248 ITR 110 (SC), CIT vs V. Goppinathan, Consolidated Fibres vs CIT and K Ravindranatham v/s DCIT (Asstt.) 262 ITR 669. All the above judicial pronouncement support the view that the interest income is income from other sources. This issue was also raised during the scrutiny assessment proceedings for A.Y. 2009-10 wherein the AO has held that interest on FDRs is income from other sources. This issue was also raised during the scrutiny assessment proceeding for A.Y. 2009-10 wherein the AO has held that interest on FDRs is income from other sources. In view of the above facts as well as the past history of the case of the assessee and he is not eligible for claiming exemption u/s 10AA on this component of the income as shown in the profit and loss account.’’

3.2 The appellant has claimed that the interest income has been derived from the export business of the SEZ. 3.3 In view of the various judicial pronouncement, it is held that interest in bank FDR’s is income from other sources and this interest income has not been derived from export. Therefore, it cannot be included in the ‘profits & gains from export’. In view of the above, the action of the Assessing Officer in reducing the FDR interest from Profit & Gains from business and profession and including it under the head ‘Income from other sources is confirmed. No exemption u/s 10AA can be claimed on this interest income. Ground No. 3 is dismissed.’’

5.2 During the course of hearing, the ld.AR of the assessee submitted

that the ld. CIT(A) has erred in confirming the addition of Rs. 4,33,429/- by disallowing exemption u/s 10AA of interest on FDR. The ld.AR of the

assessee further vide letter dated 3-08-2017 prayed for admission of the

following additional evidence.

‘’The appellant most humbly prays for admission of the following additional evidence:-

S.N. Particulars Page No Quick Reference 1. Sanction letter of Additional Term 1 to 17 9 & 11 loan and working capital limit from Punjab National Bank

During the proceedings before AO and ld. CIT(A), the assessee company submitted that the investments in FDRs are incidental to the business of the assessee company and the said fact was not disputed byb the lower authorities. Thus the assessee company was under bona fide belief that the submissions alone will suffice and did not present the same before the AO and ld. CIT(A). However, the evidence is vital and goes to the root of the matter which is before the ITAT for adjudication. Thus in view of above, it is prayed that the evidence may kindly be taken on record, considered and obliged since it is crucial for deciding the appeal before the Bench. Reliance is placed on the following judicial pronouncement:- CIT vs Text Hundred India (P) Ltd. (2011) 239 CTR (Del) 263.’’ 5.3 On the other hand, the ld. DR supported the orders of the lower

authorities and objected to the admission of additional evidence filed by

the ld.AR of the assessee.

5.4 We have heard the rival contentions and perused the materials

available on record. It is noted that the AO during the course of

assessment proceeding made the addition of Rs. 4,33,429/- by disallowing exemption u/s 10AA of the Act on account of interest on

FDR by observing as under:-

‘’4.2 The nature of the income as well as assessee's contention have been considered and before taking final view, I would like to place reliance on the judicial pronouncements on the issue under consideration. The Hon'ble Delhi High Court in the case of CIT vs Sree Ram Honda Power Equipment 289 ITR 475 (Delhi) has held that the interest income earned on deposits is to be taxable as income from other sources u/s 56 of the Act. Similar view has also been expressed in other decisions particularly Apex Court’s decision in the case of Tuticorin Alkalies and Fertilizers and also in CIT vs Auto Kast Ltd 248 ITR 110 (SC), CIT vs V. Goppinathan, Consolidated Fibres vs CIT and K Ravindranatham v/s DCIT (Asstt.) 262 ITR 669. All the above judicial pronouncement support the view that the interest income is income from other sources. This issue was also raised during the scrutiny assessment proceedings for A.Y. 2009-10 wherein the AO has held that interest on FDRs is income from other sources. This issue was also raised during the scrutiny assessment proceeding for A.Y. 2009-10 wherein the AO has held that interest on FDRs is income from other sources. In view of the above facts as well as the past history of the case the interest on FDR amounting to Rs. 4,33,729/- is assessed as income from other sources of the assessee and he is not eligible for claiming exemption u/s 10AA on this component of the income as shown in the profit and loss account.’’

In this case, the ld.AR of the assessee has filed the additional evidence

praying that it is a vital matter of the issue in question which goes to the

root of the matter. It is also noted that this additional evidence was not produced before the lower authorities. Looking to the present facts and

circumstances of the case, it will be in the interest of equity and justice to

restore the issue in question to the file of the AO to decide it afresh taking

into consideration the additional evidence (supra) and decide the issue by

providing adequate opportunity of being heard to the assessee. Thus

Ground No. 3 of the assessee is allowed for Statistical purposes.

6.1 During the course of hearing, the ld.AR of the assessee has not

pressed the Ground Nos. 4 and 5. Hence, the same are dismissed being

not pressed.

7.1 Now we take up the appeal of the assessee in ITA No. 702/JP/2016

raising the solitary ground as under:-

‘’In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the AO in treating the interest on FDR of Rs. 3,32,342/- as ‘’Income from other sources’’ and thereby restricting the deduction u/s 10AA of I.T. Act, 1961 amounting to Rs. 4,43,59,235/- as against claimed deduction of Rs. 4,46,88,897/-. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted deleting the said addition of Rs. 3,32,342/- allowing deduction u/s 10AA at Rs. 4,46,88,897/- as claimed by the assessee company.’’

8.1 Apropos solitary ground of the assessee for the Assessment Year

2011-12 (supra), the facts as emerges from the order of the ld. CIT(A) are

as under:- ‘2.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The Assessing Officer disallowed an amount of Rs. 3,32,342/- earned from Interest on FDR’s in the bank. The same was assessed as income from other sources and claim of exemption under section 10AA was not allowed on this amount. The issue is covered in the previous year by the order of my predecessor dated 10-09-2014 wherein it has been held as follows:- ‘’In view of the various judicial pronouncements, it is held that interest on bank FDRs is income from other sources and this interest income has not been derived from export. Therefore, it cannot be included in the ‘Profit & gain derived from export’. In view of the above, the action of the Assessing Officer in reducing the FDR interest from Profit & Gains from business and profession and including it under the head ‘income from other sources’ is confirmed. No exemption u/s 10AA can be claimed on this interest income.’’ In view of the above, this ground of the assessee is dismissed.’’

8.2 We have heard the rival contentions and perused the materials

available on record. It is pertinent to mention that the similar issue for the

Assessment Year 2010-11 has been restored to the file of the AO for

afresh adjudication. Since the facts and circumstances of the issue in

question are same, therefore, the decision taken in the Assessment Year

2010-11 shall apply mutatis mutandis in the appeal of the assessee for the

Assessment Year 2011-12 also. Thus the appeal of the for the Assessment

Year 2011-12 is allowed for Statistical purposes.

9.0 In the result, the appeal of the assessee for the Assessment Year 2010-11 is partly allowed for Statistical purposes and appeal for the Assessment Year 2011-12 is allowed for Statistical purposes. Order pronounced in the open Court on 04 -04-2018. Sd/- Sd/- ¼ fot; iky jko ½ ¼HkkxpUn½ (Vijay Pal Rao) (Bhagchand) U;kf;d lnL; /Judicial Member ys[kk lnL;@Accountant Member

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