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Facts
The case involves a search and seizure operation conducted in 2012, leading to a reassessment for AY 2009-10. Key issues include disallowance of interest on an advance and the treatment of share application money. The assessee applied for withdrawal of the appeal.
Held
The Tribunal found that the CIT(A) had not properly considered the remand report based on inquiries made with US authorities regarding share application money. The Tribunal decided to remand the issue of share application money back to the AO for a fresh order.
Key Issues
Whether disallowance under Section 36(1)(iii) for interest on advances is justified, and whether the share application money received from an NRI investor is properly accounted for.
Sections Cited
132, 133, 153A, 143(2), 142(1), 36(1)(iii)
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Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI LALIET KUMAR & SHRI KRINWANT SAHAY
O R D E R PER KRINWANT SAHAY, AM The appeal in this case has been filed against the order dated 29.04.2016 passed by Commissioner of Income Tax (Appeals)-5 Ludhiana [in short ‘the CIT (A)’] for assessment year 2009-10. The grounds of appeal are as under : A.Y.2009-10 2
That the order of learned Commissioner of Income Tax (Appeals) -5, Ludhiana dated 03.10.2018 is wrong and against law and facts of the case.
2. That the learned Commissioner of Income Tax (Appeals)-5, Ludhiana erred in confirming addition of Rs. 71,257/- on account of disallowance u/s 36 (1) (iii) of the Income Tax Act, 1961. 3. That the learned Commissioner of Income Tax (Appeals)-5, Ludhiana erred in confirming addition of Rs. 5,00,00,000/- treating the share application money as unaccounted money. 4. That the appellant craves to add, amend, alter, delete or supplement any ground of appeal before the appeal is finally heard and disposed off.
The brief facts as per the assessment order are as under:
“A search & seizure operation u/s 132 of the income Tax Act, 1961 [The Act), was conducted at the residential premises of the assessee/ Directors on 28.08.2012. Simultaneously, survey operations u/s 133 of the Income Tax Act, 1961 were also conducted at several business and office premises of M/s Saber Group of companies including assessee company, M/s Saber Packaging Pvt. Ltd. Accordingly. Notice u/s I53A of the Act was issued on 07.03.2013 and was duly served upon the assessee on 11.03.2013.
2. In response to this Notice under Section 153A of the Act, the assessee filed return of income on 31.07.2013, declaring total income of Rs.11,50,740/-. Notices under Section 143(2) &142(1) of the Act were issued on 25.04.2014 along with detailed questionnaire for which reply was filed by the assessee after issuance of Show Cause Notice. Further specific questionnaire as per the appraisal report alongwith notices under Section 142(1) of the Act was issued on 29.01.2015, which were duly served upon the assessee. 3…….. 4…….. 5……..
6. On perusal of the Balance Sheet of the assessee it was seen that the assessee has given advances to some parties. The assessee was asked to show the business purpose of these advances. The assessee explained that all the advances were made in the normal course of business for business purposes and for making purchases for the business. The details of purchases made from these parties and work executed by them for the company in next year have also been explained in detail by assessee. However, in case of one party that is M/s Walaiti Lai & Sons, an advance of Rs. 593811/- was given against agreement to purchase property. The assessee explained that the deal was cancelled later on and the amount was returned back. He also A.Y.2009-10 3 showed the copy of agreement. No interest on this balance has been charged. The assessee was asked to explain why disallowance u/s 36(l)(iii) should not be made on this advance since this is not in line with the business of the assessee which is manufacturing of packaging products. The assessee did not submit any explanation pertaining of business purpose of this advance.
The fact remains that debit balance was outstanding in the books of the assessee for long time against the above mentioned party. Also there is no regular business dealing of sale/purchase of raw material or finished goods with this party. These transactions with the above mentioned party is different from the business of the assessee and hence, any debit balance outstanding against this party is in the nature of loans and advances without any commercial expediency. Section 36(1)(iii) of the Act, 1961 categorically says that interest expenses incurred for capital borrowed for business purposes only will be allowable. The assessee has borrowed funds on which huge interest expense is being incurred. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capita', loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business that have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. When the assessee had liabilities on which interest expenditure is being incurred, there can be no justification for providing interest free advance as apparent from the books.
Reliance is also being placed on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. 286 ITjRJ (2006) in which the theory of direct nexus was not subscribed to by the Court. The court has also said:- ''Once it is borne out from the record that the assessee has borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without "carrying any interest is to be disallowed under section 36(1} (Hi) of the Act" Thus, based on the above argument, Interest expense on the advance to the above mentioned party is commensurately disallowed as below:
Name of Party Amount of No. of days Disallowance advance ©12% Walati Lal & Sons 5,93,811 365 71,257 Total 71,257 Total disallowance u/s 36(1){iii) of Rs.71.257/- is being made and added back to the total income of the assessee.
The ld. CIT(A) in his order has categorically mentioned that on this issue the AR has argued that the assessee has sufficient interest free funds and hence no disallowance is A.Y.2009-10 4 called for. However, nothing in support of this contention has been brought on record/filed either during the assessment proceedings or during the appellate proceeding before CIT(A). Over and above, we find the business purpose of such advance has not been substantiated either before the AO or in the proceeding before CIT(A). Even during proceedings before us no substantial material has been brought on record.
The ld. DR relied on the order of CIT(A).
We have considered the arguments of the counsel of the assessee and we find that apart from his claim, nothing has been brought on record to substantiate its claim. Therefore, we do not find any merit in the arguments of the counsel on this issue. Accordingly, assessee's appeal on the Ground is dismissed.
During the proceedings before us, the ld. Counsel for the assessee has submitted that the main addition of Rs.5 Crores was made on account of treating the share application money as unaccounted money. The counsel of the assessee submitted that Rs.5 Crore was invested in the A.Y.2009-10 5 company as share application by one Shri Nitin Khanna who is an NRI living in USA. During the course of assessment, the matter was referred to Foreign Tax Division of the CBDT to make enquiries with U.S. Authorities under DTAA.
The AO in the assessment order has given his finding on this issue as under : 7. During the course of assessment proceedings, it is noted that one Sh. Nitin Khanna had invested Rs.5,00,00,000/- during the F.Y.2008-09 relevant to A.Y. 2009-10 in M/s Saber Packaging Pvt. Limited, during the year under consideration whose source, identity and creditworthiness could not be established. Since the shares were allotted at huge premium of Rs.240/- per share therefore it was pertinent to enquire as to why a prudent businessman would invest in a company making very nominal profits. Therefore, to ascertain the identity, genuineness and source of the transaction, the case was referred to Foreign Tax and Tax Research Division (FT&TR) vide this office letter F.No. DCIT/CC-II/Ldh/2014- 15/1069 dated 05.03.2015, which was referred by the competent authority on 18.03.2015 to obtain information under DTAA between India & other countries. Since the case has to be decided within one year of reference made, therefore, it is being finalized after waiting for the year of reference made, therefore, it is being finalized after waiting for the information to be received from abroad. However, necessary action shall be taken as per relevant provision of Income Tax Act, 1961 if any adverse information received after completion of assessment proceedings.
The U.S. Authorities made enquiries and later on sent their report to the CBDT and that was sent back to the AO.
The AO has given a Report on this issue in the form of a Remand Report to the ld. CIT(A). In this case enquiry was made through the FT & TR division of the department from A.Y.2009-10 6 the U.S. Govt. Inland Revenue Department to verify the identity and creditworthiness of the investor and the genuineness of the transaction of share application money.
In this regard the report was received from the U.S Govt., vide reference No. 365 145 dated 24.10.2016, a copy of which has been supplied to this appellant. Perusal of this report shows as under:
(i) Sh. Nitin Khanna is an existing Income Tax assessee in U.S.A and as per .S tax record Sh. Nitin Khanna has shown following incomes years wise in his Returns of Income :
(ii) This report includes copy of statement of account of Sh. Nitin Khanna dated 31.12.2008 with Goldman Sachs Trust Company showing disbursement of U.S $ 50, 00,000 to him on 30.09.2008. iii) The report further includes copy of confirmation letter dated 11.01.2010 issued by State Street Bank, U.S.A confirming transfer of funds of US 50,00,000 from this US bank account of Sh. Nitin Khanna to his bank account in Yes Bank , Firozpur Road Branch, Ludhiana, Account No. 002390500000755, on 30.09.2008, by order of Goldman Sachs. iv) Further the report also includes copy of Bank account statement of Shri Nitin Khanna in Yes Bank, Ludhiana Branch, Account No. 002390500000755, showing credit of Rs. 23, 25, 50,000/- (equivalent US$ 50,00,000) on A.Y.2009-10 7 01.10.2008, as received from his US bank at and further transfer of funds of Rs 5,00,00,000/- to the assessee company as is evident of debit entry of this amount on 13.10.2008 in favour of the assessee company, in this account.”
The ld. CIT(A) has completely ignored the findings given by the U.S. Authorities and thus, in a way the CIT(A) has not dealt with the Remand Report submitted by the AO.
Accordingly, the counsel of the assessee requested for remanding this case back to the AO so that the matter may be considered on merit on the basis of record sent by the U.S. Authorities.
The ld. DR relied on the order of the CIT(A).
We have considered the findings given by the CIT(A) in his appeal order and we find that the ld. CIT(A) has not taken into consideration the Remand Report submitted by the AO on the basis of report obtained from the U.S.
Authorities. Therefore, keeping in view the element of natural justice, we are inclined to remand this case back to the file of AO to pass an order only on the issue of Share Application money invested by Shri Nitin Khanna and give a A.Y.2009-10 8 speaking order on this issue keeping in view all the aspects and issues in the case.
In the result, the appeal is partly allowed for statistical purposes.