RAJKUMARI SINGH,NAVI MUMBAI vs. DCIT CEN CIR 8, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”, MUMBAI

Before Shri JOGINDER SINGH (VICE PRESIDENT) AND Shri G MANJUNATHA (ACCOUNTANT MEMBER)

ITA No 946/Mum/2016 - AY 2005-06 ITA No 947/Mum/2016 - AY 2008-09 ITA No 948/Mum/2016 - AY 2009-10

Rajkumari Singh vs Dy.CIT, Cent.Cir.8, Mumbai A-1201, Building No.2 12th Floor, Seawoods Estate NRI Complex, Nerul, Navi Mumbai PAN : AMJPS2625N APPELLANT RESPONDEDNT

ITA No 847/Mum/2017 - AY 2008-09

Shri Harbhajan Singh vs Dy.CIT, Cent.Cir.8, Mumbai A-1201, Building No.2 12th Floor, Seawoods Estate NRI Complex, Nerul, Navi Mumbai PAN : AANPS8492B APPELLANT RESPONDEDNT

ITA No 3095/Mum/2016 - AY 2005-06 ITA No 3096/Mum/2016 - AY 2006-07 ITA No 3097/Mum/2016 - AY 2007-08 ITA No 3098/Mum/2016 - AY 2009-10

Dy.CIT, Cent.Cir.2(1), Mumbai vs Shri Harbhajan Singh A-1201, Building No.2 12th Floor, Seawoods Estate NRI Complex, Nerul, Navi Mumbai PAN : AANPS8492B APPELLANT RESPONDEDNT

2 Hydroair Tectonics (PCD) Ltd ITA No 4172/Mum/2016 (Assessment year : AY 2007-08)

Dy.CIT, Cent.Cir.2(1), Mumbai vs Shri Ashish Harbhajan Singh Representative Assessee Shri Harbhajan Singh A-1201, Building No.2 12th Floor, Seawoods Estate NRI Complex, Nerul, Navi Mumbai PAN : AHCPS2709P APPELLANT RESPONDEDNT

ITA No 3949/Mum/2017 - AY 2005-06 ITA No 3950/Mum/2017 - AY 2006-07 ITA No 3951/Mum/2017 - AY 2007-08 ITA No 3952/Mum/2017 - AY 2008-09 ITA No 3953/Mum/2017 - AY 2009-10 ITA No 3954/Mum/2017 - AY 2010-11

Hydroair Tectonics (PCD) Ltd Dy.CIT, Cent.Cir.2(1), Mumbai Office No.106, Concorde Premises Co-op. Society Ltd, Plot No.66A, Sector-11, CBD Belapur, Navi Mumbai 400 614 PAN : AAACH9686C APPELLANT RESPONDEDNT

ITA No 3420/Mum/2016 - AY 2010-11 ITA No 3421/Mum/2016 - AY 2011-12

M/s Pria CETP (India) Ltd vs Dy.CIT, Cent.Cir. 2(1), Mumbai 115/116, Raheja Arcade, Plot (Erstwhile DCCC-08, Mumbai) No.61, Sector 11, CBD Belapur, Navi Mumbai PAN : AACCP2696L APPELLANT RESPONDEDNT

3 Hydroair Tectonics (PCD) Ltd ITA No 4167/Mum/2016 - AY 2005-06 ITA No 4168/Mum/2016 - AY 2006-07 ITA No 4169/Mum/2016 - AY 2007-08 ITA No 4170/Mum/2016 - AY 2009-10 ITA No 4196/Mum/2016 - AY 2008-09 ITA No 4304/Mum/2016 - AY 2011-12 ITA No 4291/Mum/2016 - AY 2010-11 Dy.CIT, Cent.Cir.2(1), Mumbai vs M/s Pria CETP (India) Ltd., Dy.CIT, Cent.Cir.2(3), Mumbai 106, Concorde Premises Co.op Society Ltd., Plot No.66-A, Sector 11, CBD Belapur, Navi Mumbai PAN : AACCP2696L

Shri Harbhajan Singh, A-1201, Building No. 2, 12th Floor, Nerul APPELLANT RESPONDEDNT

ITA No.4171/Mum/2016 (Assessment year : 2007-08) Dy.CIT, Cent.Cir.2(1), Mumbai vs Smt. Rajkumari Singh A-1201, Building No.2 12th Floor, Seawoods Estate NRI Complex, Nerul, Navi Mumbai PAN : AMJPS2625N APPELLANT RESPONDEDNT

ITA No 3926/Mum/2017 - AY 2005-06 ITA No 3927/Mum/2017 - AY 2006-07 ITA No 3928/Mum/2017 - AY 2007-08 ITA No 3929/Mum/2017 - AY 2008-09 ITA No 3930/Mum/2017 - AY 2009-10 ITA No 3931/Mum/2017 - AY 2010-11

Dy.CIT, Cent.Cir.2(1), Mumbai vs M/s. Hydroair Tectonics (PCD) Ltd 106, Concorde Premises Co-op. Society Ltd, Plot No.66A, Sector-11, CBD Belapur, Navi Mumbai 400 614 PAN : AAACH9686C APPELLANT RESPONDEDNT

4 Hydroair Tectonics (PCD) Ltd ITA No 1442/Mum/2017 - AY 2005-06 ITA No 1434/Mum/2017 - AY 2006-07 ITA No 1435/Mum/2017 - AY 2007-08 ITA No 1436/Mum/2017 - AY 2008-09 ITA No 1437/Mum/2017 - AY 2009-10 Dy.CIT, Cent.Cir.2(1), Mumbai vs M/s. Hydroair Envirotech Pvt. Ltd., 115/116, 1st Floor, Raheja Archade, Sector-11, Plot No. 61, CBD Belapur, Navi Mumbai 400 614 PAN : AABCH1153R APPELLANT RESPONDEDNT

Assessee by Shri Rajkumar Singh Revenue by Shri Abi Rama Kartikeyan

Date of hearing 18-01-2019 Date of pronouncement 30 -01-2019 O R D E R Per G Manjunatha, AM : This bunch of 36 cross appeals filed by different assessee’s belonging to

Hydroair Tectonics (PCD) Ltd group of companies and its promoters and the

Revenue are directed against separate, but identical and inter-related orders

passed by the CIT(A)-48, Mumbai dated 28-12-2015 for the assessment years

2005-06 to 2010-11. Since facts and issues involved in these appeals are

identical and also inter-connected, for the sake of convenience, these appeals

were heard together and are disposed of by this consolidated order.

2005-06 are that a search & seizure action u/s 132 of the Income-tax Act, 1961

5 Hydroair Tectonics (PCD) Ltd was carried out on M/s Hydroair Tectonics (PCD) Ltd and its promoters. During

the course of search & seizure, Smt. Rajkumari Singh, director and promoter of

Hydroair Tectonics (PCD) Ltd confessed in her statement recorded u/s 132(4)

of the Act, that the group was indulging in procuring bogus purchase bills in

order to siphon off money from the business to facilitate payment to various

persons for getting contracts / orders and accordingly surrendered an amount

of Rs.60.39 crores as additional income spread over for AYs 2007-08 to 2010-

11 in the hands of M/s Hydroair Tectonics (PCD) Ltd. During the course of

search, document containing information about bogus purchases and sales

were found and seized. When the said document was confronted to the

director, she admitted that the group was indulging in obtaining

accommodation entries in form of purchases and also indulged in booking

fictitious sales in order to show more turnovers in books of account for the

purpose of getting loans from banks and financial institutions. Consequent to

search, the case of the assessee along with other group cases have been

centralised. Thereafter, notices u/s 153A have been issued calling for returns

of income in respect of six assessment years immediately preceding the year in

which search took place. In response to the said notice, the assessee has filed

return of income on 06-01-2012 declaring total income of Rs.13,68,435. The

case has been selected for scrutiny and notices u/s 143(2) and 142(1) of the

6 Hydroair Tectonics (PCD) Ltd Act, were issued. In response to notices, the authorised representative of the

assessee appeared from time to time and filed various details, as called for.

The assessment has been completed u/s 144 r.w.s. 153A of the Act, on 28-03-

2013 determining total income at Rs.29,60,160 by making various additions

including addition towards cash deposits in bank account, adhoc disallowance

of expenditure, addition towards deemed dividend u/s 2(22)(e) of the Income

Tax Act, 1961. The AO also made addition towards bogus purchases and

fictitious sales booked by the assessee in its books of account on the ground

that although the assessee claims to have booked fictitious sales in its books of

account in order to enhance sales turnover for the purpose of obtaining bank

finance, but failed to file necessary evidence to prove that sales turnover

booked in books of account is fictitious except passing journal entries in books

of account in subsequent years for reversal of sales turnover as well as

purchase turnover. The AO has also made addition towards unexplained cash

credits in form of share capital in certain cases on the ground that the assessee

has failed to prove identity, genuineness of transactions and creditworthiness

of the parties. Similarly, the AO has made addition towards various payments

made to certain persons on the basis of seized document found during the

course of search.

7 Hydroair Tectonics (PCD) Ltd 3. Aggrieved by the assessment order, the assessee preferred appeal

before the CIT(A). Before the CIT(A), the assessee has taken a legal plea

challenging addition made by the AO in all cases without reference to any

seized material found during the course of search in light of certain judicial

precedents including the decision of Hon’ble jurisdictional High Court in the

case of CIT vs Continental Warehousing (Nava Sheva) Corporation Ltd 374 ITR

645 (Bom) and also the decision of Hon’ble Delhi High Court in the case of CIT

vs Kabul Chawla 388 ITR 573(Delhi). The main contention of the assessee

before the Ld.CIT(A) are that in absence of any seized material, no addition can

be made in respect of assessments which have been concluded / unabated as

on the date of search. In this case, search took place on 28-01-2011 and by

that time, the assessments for AYs 2005-06 to 2009-10 were either completed

u/s 143(3) or u/s 143(1) and also time limit for issue of notice u/s 143(2),

where assessment has been completed u/s 143(1) was expired. Therefore, in

absence of any incriminating material found as a result of search, no addition

can be made. As regards addition made by the AO in respect of deemed

dividend u/s 2(22)(e), adhoc disallowance of expenses, cash deposits in bank

account and also various addition made u/s 68 of the Income-tax Act, 1961,

the issues have been contested on merits by filing elaborate written

8 Hydroair Tectonics (PCD) Ltd submissions. The assessee also challenged addition made by the AO towards

reversal of fictitious sales in some cases.

also by following certain judicial precedents including the decision of Hon’ble

Bombay High Court in the case of CIT vs Continental Warehousing (Nava

Sheva) Corporation Ltd (supra), deleted addition made by the AO in all cases

where the assessment for those assessment years has been completed /

unabated as on the date of search by holding that in absence of any

incriminating material found as a result of search, no addition could be made

where the assessment has been unabated. Insofar as addition made by the AO

towards unexplained cash credit u/s 68 and other additions, the Ld.CIT(A)

confirmed addition made by the AO in some cases; however, allowed the

benefit of telescoping out of income estimated from sales turnover against

addition made towards cash credits and other disallowances. Insofar as

addition made by the AO towards fictitious sales turnover reversed by the

assessee in its books of account, the Ld.CIT(A) has determined sales turnover

of the assessee by taking into account sales declared in regular books of

account + 25% of sales turnover reversed by the assessee and then estimated

net profit of 30% on sales turnover to make addition towards undisclosed

income.

9 Hydroair Tectonics (PCD) Ltd 5. Aggrieved by the order of Ld.CIT(A), the assessee as well as the revenue

are in appeal before us. In this bunch of appeals, there are about 36 appeals

filed by both revenue as well as the assessee. The assessee has filed appeal

against orders of the Ld. CIT(A), wherever the CIT(A) confirmed

additions/disallowances made by the AO. The Revenue has challenged order of

the CIT(A), in all cases mainly on the issue of deletion of all additions made in

assessments framed u/s 153A, in absence of any incriminating materials, on

technical ground, i.e. where assessments are unabated no addition could be

made in absence of any incriminating materials. The revenue also agitated

several other issues wherever the ld. CIT(A) deleted additions made by the AO.

Both, Revenue as well as the assessee had taken several grounds of appeal in

their respective appeals for all assessment years. Therefore, we deem it not

necessary to reproduce grounds of appeal taken in each appeal by both

parties, rather proceed to dispose of appeals on the basis of issues involved in

these appeals which we felt more convenient.

appeal and also from assessee’s appeal is addition made by the AO towards

certain disallowances/additions in absence of incriminating material found as a

result of search where the assessments have been completed / unabated as on

the date of search. The primary issue which is required to be adjudicated in

10 Hydroair Tectonics (PCD) Ltd majority of these appeals is about the scope of assessments u/s 153A of the

Act.

of the Act, submitted that consequent upon search, the AO is required to issue

notice to the persons searched and also required to assessee or re-assess the

total income of that person for six assessment years immediately preceding

the assessment year relevant to the previous year in which such search is

conducted. The Ld.AR further submitted that in cases, where the assessments

are pending as on the date of search, those assessments shall abate and the

AO shall have the power to assess or re-assess the total income of those

assessment years which are abated as on the date of search on the basis of

books of account and other incriminating materials found as a result of search.

In a case, where the assessment is concluded / unabated as on the date of

search, then the AO shall have powers to assess or re-assess the total income

of those assessment years on the basis of incriminating material found as a

result of search. In this case, if the addition made by the AO in certain cases is

looked into, it was clear that there is no reference to any incriminating

material found as a result of search. Therefore, the addition made by the AO

on the basis of regular books of account in absence of any incriminating

material found as a result of search in assessments framed u/s 153A is

11 Hydroair Tectonics (PCD) Ltd unjustified. The Ld.AR further submitted that though the Ld.DR has mentioned

in his submission that no such classification exists under the law, the second

Proviso to sub section (1) of section 153A makes such demarcation by limiting

the abatement of the assessment only where it was pending as on the date of

initiation of search. The Ld.AR further submitted that if one go through the

assessment made by the AO and related documents, there is no dispute with

regard to the fact that all the additions / disallowance made in all assessments

are not based on any incriminating materials or even a whisper regarding any

incriminating material as basis of making addition / disallowance. The Ld.AR

further submitted that even if one go through the grounds of appeal taken by

the revenue challenging order of Ld.CIT(A), nowhere the revenue states that

addition / disallowance made by the AO are based on incriminating material.

The revenue mainly challenged the judgement of Hon’ble jurisdictional High

Court in the case of CIT vs Continental Warehousing (Nava Sheva) Corporation

Ltd (supra) by stating that the department has not accepted the judgement

rendered by the Hon’ble Bombay High Court and SLP has been filed which has

been admitted by the Apex Court. Therefore, when the matter is pending

before the Hon’ble Apex Court for adjudiciation, the issue needs to be decided

on merits, rather than going on the issue of abatement / un abatement when

the statute does not provide for the words “unabated assessments”. The Ld.AR

12 Hydroair Tectonics (PCD) Ltd further referring to plethora of judgements including the decision of Hon’ble

Delhi High Court in case of CIT vs Kabul Chawla (supra) argued that the issue is

no longer res integra and various High Courts and Tribunals have consistently

held that in a case where the assessment has been unabated as on date of

search, no addition could be made in absence of incriminating material found

as a result of search. In this regard, he relied upon the following judgements:-

of his elaborate arguments on the technical issue of the Ld.CIT(A) cancelling

the assessment in case of unabated assessments on being bad in law, where

13 Hydroair Tectonics (PCD) Ltd order u/s 153A was passed in absence of seized / incriminating documents

found during the course of search. The DR further submitted that the Ld.CIT(A)

failed to appreciate the vital fact that in some cases, there were only orders

u/s 143(1) and there was no scrutiny assessments and hence, there was no

occasion to produce the books of account and other relevant documents and

hence, it is incorrect to say that merely for the reason the time limit for issue

of notice u/s 143(2) has been expired, the assessments have been unabated

and no further action can be initiated including assessments cannot be made

u/s 153A in absence of any incriminating material. The Ld. DR further referring

to the provisions of section 153A(1)(b) of the Act, submitted that in case where

search carried out u/s 132, the AO is mandated to assess or re-assess total

income of six assessment years immediately preceding the year in which the

search is carried out. It may be noted that the text of the provision only talks

of the AO being duty bound to assess or re-assess the income of six assessment

years immediately preceding the search, however, nowhere the legislature has

stated or intended that the scope of other category of assessments, i.e., that

did not abate should be restricted to addition based on seized / incriminating

materials. The Ld.DR further submitted that any provision of law should be

interpreted by adopting the ‘rule of literal construction’, i.e. to read the

provisions as it is, by neither adding nor subtracting anything from it and by

14 Hydroair Tectonics (PCD) Ltd not reading something extra in it which was never intended by the legislature.

On this issue as well, it is amply clear that going by the above rule and the plain

reading of the provision, the AO has to assess or re-assess the total income of

the assessee as provided and there is no mention in the section about any

incriminating material. The moment search takes place, the AO is bound to

assess or re-assess the total income of the assessee including any income

unearthed during the course of search on the basis of incriminating material,

and therefore, there is no merit in the contention of the assessee that no

addition can be made in absence of any seized material. The Ld.DR further

referring to the decision of Hon’ble Kerala High Court in the case of E.N.

Gopakumar vs CIT (2015) 75 taxman.com 215 submitted that the Hon’ble High

Court held that assessment proceedings generated by issuance of a notice u/s

153A can be concluded against interest of the assessee including making

addition even without any incriminating material being available against the

assessee in search u/s 132 on the basis of which notice was issued u/s 153A of

the Act. The Ld.DR filed elaborate written submissions on the issue and also

tried to distinguish the case laws in favour of the assessee. The Ld.DR also

relied upon the decision of Hon’ble Supreme Court in the case of Rajesh

Jhaveri Stock Brokers Pvt Ltd vs CIT 161 Taxman.com 316 to distinguish

assessments u/s 143(3) and intimation u/s 143(1) and argued that the Hon’ble

15 Hydroair Tectonics (PCD) Ltd Supreme Court clearly held that 143(1) intimation is not an assessment. In

these cases many of the assessments have been completed u/s 143(1) without

scrutinising the books of account of the assessee. Therefore, merely for reason

that there was search action and no incriminating material in respect of certain

addition, though there is real issues which needs to be considered by the AO in

the interest of revenue, the AO cannot look into those issues if the argument

advanced by the assessee are accepted that no addition can be made where

there is no incriminating material found as a result of search. The Ld.DR

further referring to the decision of ITAT, Mumbai Special Bench in the case of

M/s All Cargo Global Logistics Ltd vs DCIT 23 taxmann.com 103 submitted that

books of account, other documents found in the course of search, but not

produced in the original assessment has been explained by the Tribunal that

where in cases assessments have been completed u/s 143(1), the question of

producing books of account before the AO did not arise and hence, if one go by

the rationale of the judgement of Special Bench of the Tribunal, then where

the assessment has been completed u/s 143(1), it cannot be said that the

assessment has been unabated merely for the reason that time limit for issue

of notice u/s 143(2) has been expired. The Ld.DR further referring to the

provisions of section 148 submitted that wherever time limit is available, the

AO can issue 148 notice where the assessment has been completed u/s 143(1),

16 Hydroair Tectonics (PCD) Ltd

but if we accept the analogy of the judgements relied upon by the assessee,

then there is no meaning for the word ‘re-assessment’ as the provision

specifically states that all pending assessments as on date of search are abated

and the AO shall have power to assess or re-assess total income of these

assessment years. If we curtail the power of the AO in assessment framed u/s

153A, then obviously, the revenue will have no chance to assess the income

which is escaped from tax even by reopening the assessment u/s 148 because

the law specifically provides in a case of search for abatement of assessment

till the date of search. Therefore, he submitted that there is no merit in the

arguments of the assessee that no addition could be made in absence of any

incriminating material.

filed his rejoinder distinguishing arguments of the ld. DR in light of certain

judicial precedents. The relevant extract of written submission is reproduced

below.

“The learned CIT (DR) has filed a detailed submission dated 23-3-2018 with regard to the legal issue about scope of assessment under Section 153A in respect of those cases where no assessment was pending as on the date of search. In his submission, learned CIT (DR) has mentioned that the CIT (A) has cancelled the assessments made u/s. 153A as being bad in law in case of unabated assessments i.e. where no assessment was pending as on the date of search. At the outset, we would like to clarify that the CIT (A) has not annulled or cancelled any of the assessments as bad in law but deleted the additions made by the AO in the absence of any incriminating materials found related to such additions. There is a material difference between annulling the assessment as bad in law and deleting certain additions made in such assessment without disturbing its validity. Therefore, the issues and contentions raised should be considered with this clarity.

17 Hydroair Tectonics (PCD) Ltd

The learned CIT (DR) has mainly raised following two contentions: 1. Even in respect of assessment years for which no assessment was pending as on the date of search, the scope of assessment u/s. 153A is not limited to the incriminating materials found as a result of search but wide enough to cover any issues. Though Honourable Bombay High Court has held contrary, the learned CIT (DR) has relied upon decisions of several other High Courts. 2. The completion of assessment u/s. 143(3) and acceptance of return of income u/s. 143(1) prior to the date of search should be viewed differently while interpreting the decisions of Tribunals & Courts1 which are contrary to the first contention and have not permitted the AO to make additions sans any incriminating materials. The learned CIT (DR) has attempted to draw support from the Supreme Court's decision in the case of ACIT vs. Rajesh Jhaven Stock Brokers (P) Ltd. and claim that this decision of Supreme Court has not been dealt with by the lower Courts and Tribunals while adjudicating the issue under consideration. Firstly, we would like to submit that both the above contentions are not sustainable in view of the following decisions of Honourable Bombay High Court: i. CIT vs. Continental Warehousing Corporation 374 ITR 645 (Bom) - It is a leading decision on the issue regarding scope of assessment which is the first contention raised by learned CIT (DR). ii. CIT vs. Gurinder Singh Bawa 386 ITR 483 (Bom) - In a later case, the High Court dealt with the case where return was accepted u/s. 143(1) and no assessment was made u/s. 143(3) prior to the date of'search. Thus, the attempt made learned CIT (DR) in distinguishing the earlier decision of Continental Warehousing (supra) is futile and contrary to the view taken by Hon'ble Bombay High Court. iii. CIT vs. SKS Ispat & Power Ltd. 398 ITR 584 (Bom) - reaffirming both the above decisions. iv. Pr. CIT vs. Marytime Suppliers Pvt. Ltd. - ITA No. 50/2017 - Bombay High Court, Nagpur Bench v. Pr. CIT vs. Dharampal Agrawal - ITA No. 52/2017 - Bombay High Court, Nagpur Bench vi. CIT vs. Deepak Kumar Agarwal 398 ITR 586 (Bom) - In this case, Bombay High Court has discussed the Supreme Court's decision in the case of Rajesh Jhaveri Stock Brokers (supra) which has been relied upon by learned CIT (DR). Thus, the issues raised by learned CIT (DR) are directly covered by the decisions pronounced by Hon'ble jurisdictional Court. Accordingly, the additions made by the AO in respect of completed assessments which are not based on any incriminating materials may please be deleted In addition to placing reliance on the binding precedents, we would also like to submit the following explanation on merits of the contentions raised by learned CIT (DR): I. Limitation on Scope of Assessment u/s. 153A [Para 3 & 4 of CIT (DR)'s submission]: 1.1 Vide Para 3 & 4, the learned CIT (DR) has contended that no limitation can be placed on the scope of assessment u/s. 153A and the AO is empowered to assess or reassess the total income even over and above the seized materials / documents in case of the unabated assessments. 1.2 It is claimed that the legislature never intended that the scope of assessment which does not abate should be restricted to addition based on seized / incriminating materials / documents. However, Gujarat High Court has considered the intention of legislature as far as provisions of Section 153A are concerned in Para 16 and held as follows:

18 Hydroair Tectonics (PCD) Ltd

19 Hydroair Tectonics (PCD) Ltd

Pr. CIT vs. Saumya Construction P. Ltd. 387 ITR 529 (Guj) Pr. CIT vs. Devangi alias Rupa 98 CCH 51 Pr. CIT vs. Dipak J. Panchal 98 CCH 74 Pr. CIT vs. Desai Construction (P) Ltd. 81 taxmann.com 271

CIT vs. Kabul Chawla 380 ITR 573 (Del) Principal CIT vs. Lata Jain - ITA No 274/2016 (Del) Pr. CIT vs. Meeta Gutgutia 395 ITR 526 (Del) Pr. CIT vs. Best Infrastructure (India) Pvt. Ltd 99 CCH 163 (Del)

CIT vs. AMR India Ltd. - ITA No. 357 of 2014 CIT vs. Hyderabad House Pvt. Ltd. - ITA No. 266 of 2013 CIT vs. M/s. Sree Lalitha Constructions - ITA No. 368 of 2014

CIT vs. Lancy Constructions 66 taxmann.com 264

E.N. Gopakumar vs. CIT 75 taxmann.com 215 CIT vs. St. Franscis Clay Decor Tiles 385 ITR 624

CIT vs. Raj Kumar Arora 367 ITR 517 CIT vs. Kesarwani Zarda Bhandar Sahson - ITA No. 270 of 2014

Canara Housing Development Co. vs. DCIT 49 taxmann.com 98

Dayawanti vs. CIT 390 ITR 496 CIT vs. Anil Kumar Bhatia 352 ITR 493

1.8 In view of the fact that majority of the High Courts have taken a view favouring the assessee on the issue under consideration, that view is required to be followed. Also, in case where two views prevail, the view favourable to the assessee should be adopted in preference to the view against the assessee. II. Differentiation between completion of assessment u/s. 143(3) and acceptance of return u/s. 143(1) without making any assessment: 2.1 At the outset, it is clarified that all the cases in which C!T (A) has given relief on account of above discussed limitation on scope of assessment are not 143(1) cases but some of them are 143(3) cases as well. For further details, the detailed given in respect of each assessee in its respective Paper-Book as well as written synopsis dated 27-3-2018 may please be seen. 2.2 In Para 5.2 to 5.4, the learned CIT (DR) has made a critical analysis of Delhi High Court's decision in the case of Kabul Chawla (supra) which is in fact in favour of the assessee. However, the following inference has been drawn from this decision as stated in Para 5.5: "// may be pointed out here that the decision of Delhi Hon'ble High Court was against Revenue only on the basis of the facts being different in so far as there was a categorical finding that no seized material was found in search and hence will not affect the position where no books of accounts were produced in the original assessment." 2.3 Thus, in opinion of the learned CIT (DR), the aforesaid decision will not apply to the case where only the return was processed u/s. 143(1) and no assessment was

20 Hydroair Tectonics (PCD) Ltd

made u/s 143(3). This is because, in the absence of any assessment, books of accounts were never produced prior to the search. 2.4 However, in the case of Kabul Chawla itself, the High Court was dealing with a case where returns were processed u/s. 143(1) only and no assessments u/s. 143(3) were made. Refer Para 3 of the decision for these facts. The High Court deleted the addition made u/s. 2(22)(e) which must have arisen from the books of accounts and those books must not have been produced before the search in the absence of assessment u/s. 143(3). 2.5 How the addition made on account of deemed dividend u/s. 2(22)(e) in the cases under dispute (Rajkumari Singh and Harbhajan Singh) be sustained by relying upon the decision in the case of Kabul Chawla in which the same addition has been deleted7 The view canvassed by learned CIT (DR) in Para 5.5 is certainly not the one which can even remotely be inferred from the decision of Delhi High Court. 2.6 Thereafter, referring to Bombay High Court decision in the case of Continental Warehousing Corp. (supra) and Mumbai Special Bench decision in the case of All Cargo Global Logistics (supra) in Para 5.6 & 5.7, it has been mentioned that the assessment was allowed to be made in these cases by relying upon the books of account or other documents not produced in the course of original assessment but found in the course of search. 2.7 It is worth mentioning that in the case of All Cargo Global Logistics (supra), for A.Y. 2005-06 & 2006-07, the returns were process u/s. 143(1). It was only for A.Y. 2004-05 the assessment was made u/s. 143(3). These facts can be noticed from Para 5 of the Special Bench's order. Thus, the very case which has been referred was the case where books of accounts must not have been produced before the search and deduction u/s. 80-IA was denied by the AO while assessing u/s. 153A. The Court and Tribunal held that deduction which stands allowed cannot be disturbed in the absence of any incriminating materials 2.8 The phrase "books of accounts or other documents not produced in the course of original assessment but found in the course of search" cannot be interpreted to include those books of accounts or documents which have been maintained in the regular course of business, to which provisions of Section 44AA / 44AB are applicable, on the basis of which the return of income has been submitted but were never called from the assessee as no assessment was made. It should be only those books of accounts which have been called for verification but not produced by the assessee. If the AO has consciously taken a decision to not to make the assessment and, hence, not to verify the books of account or documents in support of the return of income filed by the assessee, then how can it be said that the assessee has not produced such books of accounts or documents before the search? While referring to books of accounts or other documents not produced, the Court was referring to the deliberate attempt on the part of the assessee to hide them from the AO and for which the search u/s. 132 has been conducted. 2.9 In Para 5.8 & 5.9, the learned CIT (DR) has pointed out the Supreme Court's decision in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) wherein it was held that intimation u/s. 143(1) cannot be equated with the assessment. It has been claimed that this decision of Supreme Court has not been discussed in any of the cases favouring the assessee as far as scope of assessment u/s, 153A is concerned. However, in the case of CIT vs. Deepak Kumar Agarwal 398 ITR 586 (Bom), the Revenue had placed reliance of this Supreme Court decision and the same was considered by Hon'bfe Bombay High Court vide Para 20 to 25 and it was held that there would not have been any difference even if this judgment had been brought to the notice of the Court 2.10 Apart from the decision in the case of Deepak Kumar Agarwal (supra), in number of other cases, Bombay High Court has held that the scope of

21 Hydroair Tectonics (PCD) Ltd

assessment u/s. 153A is limited to the incriminating materials only irrespective of whether the assessment has been completed u/s. 143(3) or return has been accepted u/s. 143(1) without making any assessment. These cases are. i. CIT vs. Gurinder Singh Bawa 386 ITR 483 (Bom) ii. CIT vs. SKS Ispat & Power Ltd. 398 ITR 584 (Bom) iii. Pr. CIT vs. Marytime Suppliers Pvt. Ltd. iv. Pr. CIT vs. Dharampal Agrawal 2.11 The reliance placed by learned CIT (DR) on the decision of Indulata Rangwala vs. DCIT 384 ITR 337 (Del) is misplaced because it related to reassessment u/s. 147 and not the assessment u/s. 153A, the one with which we are concerned about in the cases under consideration. 2.12 In Para 5.11, it has been pleaded that effectively no assessment would take place because of such an interpretation if no incriminating materials are found during the course of search. There cannot be any grievance about this on the part of Revenue, This is because if the search has not yielded anything then the Revenue should not be allowed to gam out of the resultant proceeding of assessment which would not have been possible otherwise Further, the Revenue may take recourse to other remedies which are available under the Act. 2.13 In Para 5.12, it has been mentioned that there is no classification like abated and non-abated assessment. The Second Proviso to sub-section (1) of Section 153A provides for abatement of assessment if the applicable conditions are satisfied. Therefore, the assessment which does not abate as per Second Proviso is the un-abated assessment. This demarcation is very clear from the reading of provisions of Section 153A and they are also required to be handled differently. 2.14 The usage of two different words i.e. "assess or reassess" has been explained by Delhi High Court in the case of Kabul Chawla (supra). In no way such different words used in the provisions of Section 153A supports the argument raised in the submission that the assessment can be made without any fetters u/s, 153A if no assessment has taken place earlier u/s. 143(3). 2.15 The Second Proviso to sub-section (1) and also sub-section (2) of Section 153A are applicable only to the abated assessment. They do not conflict in any manner whatsoever with the interpretation of the provisions relating to the scope of assessment where no abatement takes place. The difficulty expressed in Para 5.14 regarding harmonious interpretation does not arise at all. 2.16 In concluding Para 6.1, it has been claimed that 'incriminating material' would also include books of accounts found during the search, but not produced at the time of the original assessment, there being only 143(1). The position with regard to this contention has already been explained in this rejoinder at Para 2.8. At the cost of repetition, we would like to submit that the "books of account or other document found in the course of search but not produced in the course of original assessment" cannot be extended to include those books of accounts which have been maintained in the regular course of business, on the basis of which the return of income has already been filed. Merely because such books of accounts have not been verified as no assessment had been made u/s. 143(3) cannot make them as 'incriminating material'. The word 'found' used therein indicates that it is intended to apply to only those books of account or documents which the assessee has attempted to hide them so as to evade the tax. 2.17 It is but obvious that the books of accounts maintained by the assessee in the regular course of business would be available in his premises at the time of search. If such books are allowed to be considered as 'incriminating materials' only because they were not verified earlier, then the whole issue of limiting the scope of assessment u/s. 153A would become redundant. The view taken by

22 Hydroair Tectonics (PCD) Ltd Bombay High Court in the cases mentioned in Para 2.10 above would not be a possible view at all as no books of account must have been produced by the assessees in those cases as they were 143(1) cases and not 143(3).”

record and gone through the orders of authorities below. We have also

carefully considered case laws relied upon by both counsels. In these cases,

search took place on 28-01-2011. Admittedly, during the course of search,

certain incriminating material was found as per which, the assessee group was

indulging in booking bogus purchases in order to siphon off money for making

gracious payments to various persons for securing contracts / work orders.

During the course of search, a tabular presentation of several amounts of

purchases and sales giving year-wise break-up as well as broker-wise break-up

was found as per page 27 of Annexure A1. The statement of the brokers,

whose names were mentioned in the tabular information were obtained by

the search officers. When these documents were confronted to the assessee,

the director of M/s Hydroair Tectonics (PCD) Ltd, Smt. Rajkumari Singh in her

statement recorded u/s 132(4) dated 29-01-2011 admitted that the assessee

group had booked entries of accommodation purchases as well as for

accommodation sales. During the course of assessment, the AO has made

various additions including addition towards adhoc disallowance of expenses,

cash deposits in bank account, addition towards deemed dividend u/s 2(22)(e)

23 Hydroair Tectonics (PCD) Ltd of the Act, along with addition towards bogus purchases as well as bogus sales.

It was the contention of the assessee before the lower authorities that no

addition could be made in cases where the assessments have been unabated

as on date of search, in absence of any incriminating material found as a result

of search. The assessee has relied upon plethora of judicial precedents

including the decision of Hon’ble Bombay High Court in the case of CIT vs

Continental Warehousing (Nava Sheva) Corporation Ltd (supra). Admittedly,

the issue, i.e. whether the AO can make addition in assessments framed u/s

153A in absence of any incriminating material found as a result of search

where the assessment has been unabated is no longer res integra. The

jurisdictional High Court in case of CIT vs Continental Warehousing (Nava

Sheva) Corporation Ltd (supra) has held that in absence of any seized material

found during search, no addition can be made in respect of assessments which

have unabated / concluded as on the date of search. This legal proposition is

further supported by the decision of Division Bench of Hon’ble Bombay High

Court in the case of Murli Agro Products Ltd (supra) wherein it was held that

no addition could be made in respect of unabated assessments which have

become final if no incriminating material is found during search. A series of

judgements rendered by various High Courts and Tribunals have consistently

held that to make addition in an assessment framed u/s 153A, where the

24 Hydroair Tectonics (PCD) Ltd assessments have been unabated, there should be a reference to incriminating

material found as a result of search. In absence of any incriminating material,

no addition can be made and the assessment should not be disturbed where

the assessment has been unabated / concluded as on the date of search. This

proposition is re-iterated by the Hon’ble Delhi High Court in case of CIT vs

Kabuli Chawla (supra), where it was categorically held that in absence of any

incriminating material, the completed assessment reiterated and the abated

assessment or re-assessment can be made. The word ‘assess’ in section 153A

is relatable to abated proceedings (i.e. that is pending as on the date of search)

and the word ‘re-assess’ to completed assessment proceedings. It was further

held that completed assessment can be interfered with by the AO while

making the assessment u/s 153A only on the basis of some incriminating

material unearthed during the course of search or undisclosed income or

property discovered in the course of search which were not produced or not

already disclosed or made known in the course of original assessment. The

relevant observations of the court are extracted below:-

On a conspectus of section 153A(1), read with the provisos thereto, and in the light of the law explained in various decisions, the legal position that emerges is as under:

(i) Once a search takes place under section 132, notice under section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six assessment years immediately preceding the previous year relevant to the

25 Hydroair Tectonics (PCD) Ltd

assessment year in which the search takes place. (ii) Assessments and reassessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the Assessing Officers as a fresh exercise. (iii) The Assessing Officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The Assessing Officer has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six assessment years 'in which both the disclosed and the undisclosed income would be brought to tax'. (iv) Although section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment 'can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this section only on the basis of seized material.' (v) In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in section 153A is relatable to abated proceedings (i.e., those pending on the date of search) and the word 'reassess' to complete assessment proceedings. (vi) Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under section 153A merges into one. Only one assessment shall be made separately for each assessment year on the basis of the findings of the search and any other material existing or brought on the record of the Assessing Officer. (vii) Completed assessments can be interfered with by the Assessing Officer while making the assessment under section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. [Para 37] ■ The present appeals concern assessment years 2002-03, 2005-06 and 2006-07. On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. [Para 38]

Hon’ble Supreme Court in the case of CIT vs Rajesh Jhaveri Stock Brokers Ltd

(supra) where it was held that 143(1) intimation is not a assessment and

26 Hydroair Tectonics (PCD) Ltd hence, where the assessment has been completed u/s 143(1), the AO did not

have an occasion to go through the books of account and also the question of

assessee being producing those books of account before the AO does not arise

and hence, the AO can very much make assessment on the basis of regular

books of account and other incriminating material found as a result of search

in assessment framed u/s 153A. Having considered arguments of both the

sides, we do not find any merits in the arguments of Ld.DR for the reason that

the Hon’ble Bombay High Court in case of CIT vs Gurinder Singh Bawa 386 ITR

483 (Bom) has considered similar issue in light of assessments completed u/s

143(1) and held that even if assessment has been completed u/s 143(1), if time

limit for issue of notice u/s 143(2) has been expired as on the date of search,

then those assessments are unabated and the AO cannot make any addition in

absence of any incriminating material found as a result of search. Insofar as

the Ld.DR’s argument in light of decision of Hon’ble Kerala High Court in the

case of N.E. Gopakumar vs CIT (supra), we find that though the Hon’ble Kerala

High Court has taken a contrary view and held that u/s 153A, the AO can make

addition even without any incriminating material being available against the

assessee in the search u/s 132 of the Act, but fact remains that the Hon’ble

Supreme Court has dismissed SLP filed by the revenue against the judgement

of Hon’ble Delhi High Court in the case of CIT vs Kabul Chawla (supra).

27 Hydroair Tectonics (PCD) Ltd Therefore, it could be safely concluded that the decision of Hon’ble Delhi High

Court needs to be considered on the main issue where it was categorically held

that no addition can be made in assessments which are unabated as on date of

search in absence of any incriminating material. Further, the jurisdictional

High Court, in number of case has consistently held that even if assessment has

been completed u/s 143(1), if time limit for issue of notice u/s 143(2) has been

expired as on date of search, then no addition could be made in absence of any

incriminating material found as a result of search. On analysis of judgements

cited by both parties, we find that although divergent views had been

expressed by different High Courts, yet, majority of High Courts including

jurisdictional High Court, Division Bench in CIT vs Murli Agro Products Ltd

(supra) has ruled in favour of the assessee. It is a settled law that when there

are contradicting judgements of different High Courts, the view which is in

favour of the assessee should be considered. Further, judicial discipline

demands that the lower court in the jurisdiction of High Court is bound to

follow the jurisdictional High Court. Therefore, by following the jurisdictional

High Court decision in the case of CIT vs Continental Warehousing (Nava

Sheva) Corporation Ltd (supra), we are of the considered view that no addition

could be made in absence of any incriminating material found as a result of

search, where the assessment has been unabated as on the date of search.

28 Hydroair Tectonics (PCD) Ltd 12. In this case, on perusal of materials available on record, it is abundantly

clear that in some cases and on some issues, the AO has made additions which

are not based on any incriminating material found as a result of search. The

AO has made addition towards cash deposits in bank, adhoc disallowance of

expenses, deemed dividend u/s 2(22)(e) of the Act and other similar

disallowance / additions on the basis of regular books of account and return

filed by the assessee u/s 153A of I.T. Act, 1961. There is no iota of discussion

of any seized / incriminating materials. Even during remand proceedings, the

AO has not brought on record any incriminating material to support various

additions made in assessments which are unabated as on date of search.

Admittedly, search took place on 28-01-2011 and by that time, the assessment

for AYs 2005-06 to 2009-10 have been unabated. The time limit for issue of

143(2) notice has been expired. Therefore, we are of the considered view that

the AO was erred in making various additions in assessments framed u/s 153A

in absence of any incriminating material found as a result of search. The

Ld.CIT(A), after considering relevant facts has rightly held that no addition

could be made without any incriminating material. Hence, we are inclined to

uphold the findings of Ld.CIT(A) and reject ground taken by the revenue

challenging the action of the Ld.CIT(A) in deleting addition wherever there is

no incriminating material found as a result of search to support those

29 Hydroair Tectonics (PCD) Ltd additions. However, this issue is involved in number of cases and the fact that

whether those additions are supported by any incriminating material found

during search or not has to be examined with reference to each and every

addition made by the AO. Although the assessee claims that none of additions

are supported by any incriminating material found during the course of search,

yet, we are of the considered view that for the limited purpose of verification,

whether these additions are based on any incriminating material found during

the course of search or not, the issue needs to be set aside to the file of the

AO. If, the AO finds that the addition made in unabated assessments is not

based on any incriminating material found as a result of search, then the AO is

directed to delete those additions, which are not supported by any

incriminating material found as a result of search in all assessments and in all

assesses where the assessments have been unabated / concluded as on the

date of search in terms of our discussion hereinabove.

(INDIA) LTD for AYs 200-11 and 2011-12 is with regard to deduction claimed

u/s 80IA of the Income-tax Act, 1961. The factual matrix of the impugned

dispute are that the assessee company is engaged in the business of operation

and maintenance of a common effluent treatment plant at MIDC, Patalganga

and Rasayani industrial area for collection and treatment of effluents

30 Hydroair Tectonics (PCD) Ltd discharged by industrial units. Since the activities carried out by the assessee is

in the nature of infrastructural facility and the said infrastructural facility

qualifies for deduction u/s 80IA, the assessee has claimed deduction towards

profit derived from the business. The AO has disallowed deduction claimed u/s

80IA of the Act, on the ground that certain defects were noticed in the audit

report as per which, the assessee is not entitled for deduction. The Ld.CIT(A)

allowed the claim of deduction u/s 80IA on the ground that the AO never

disputed the eligibility of the assessee to claim deduction as it has fulfilled all

conditions prescribed under the said section, but only denied on technicalities

for incorrect details in audit report. Accordingly, he directed the AO to re-

examine the claim of deduction u/s 80IA. The Ld.AO, in accordance with the

directions of the Ld.CIT(A) regarding deduction u/s 80IA, re-verified the claim

and granted deduction vide her order dated 15-12-2017 in order giving effect

to the order of Ld.CIT(A). Insofar as disallowance of certain expenses, the

Ld.AO has denied the benefit of deduction, but the Ld.CIT(A) has deleted

certain disallowances and affirmed disallowances made by the AO for certain

expenses. The assessee, as well as the revenue has challenged the finding of

Ld.CIT(A) insofar as setting aside the issue to the file of the AO for re-

verification of facts. The assessee agitated on the findings of Ld.CIT(A) by

stating that the Ld.CIT(A) ought to have decided the issue on the basis of facts

31 Hydroair Tectonics (PCD) Ltd available on record. The revenue has challenged the findings of the Ld.CIT(A)

in allowing deduction u/s 80IA of the Income Tax Act, 1961.

record. There is no dispute with regard to the fact that the assessee has

fulfilled all conditions prescribed u/s 80IA so as to get the benefit of deduction

for eligible profit of an undertaking of developing and maintaining

infrastructure facility. The Ld. CIT(A) has negated observations of the AO

insofar as defects in audit report and allowed the benefit of deduction on

enhanced income on account of disallowance of certain expenses by holding

that once the profit of an undertaking is eligible for deduction, then the

enhanced profit on account of disallowance of certain expenses is also eligible

for deduction. We further notice that the AO in order giving effect to the order

of Ld.CIT(A), has allowed the benefit of deduction u/s 80IA. The only question

remains is whether the enhanced profit on account of disallowance of certain

expenditure is eligible for deduction u/s 80IA of the Act or not is to be decided.

The issue of deduction of enhanced profit is no longer res integra. The Hon’ble

jurisdictional High Court in the case of CIT vs Sunil Bishamber Tiwari 63

Taxman.com 241 has considered the issue and after referring to the circular

No.37 of 2016 dated 02-11-2016 issued by CBDT, held that disallowance made

u/s 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances

32 Hydroair Tectonics (PCD) Ltd related to the business activity against which Chapter VIA deduction has been

claimed resulting in enhancement of the profits of the eligible business and

that deduction under Chapter VIA is admissible on the profit so enhanced by

the disallowances. The circular further stated that henceforth appeals may not

be filed on this issue by officers of the department and appeals already filed in

Courts / Tribunals may be withdrawn / not pressed upon. Therefore, we are of

the considered view that there is no grievance from the revenue side and

accordingly, we reject the grounds taken by the revenue for both the

assessment years challenging the findings of Ld.CIT(A) in allowing deduction

u/s 80IA on the enhanced profits. Since the assessee has got relief from the

AO, the appeals filed by the assessee against the order of the Ld.CIT(A) become

infructuous and hence, the same are dismissed.

the assessee are dismissed.

as revenue’s appeal in case of M/s Hydroair Tectonics (PCD) Ltd for AYS 2006-

07 to 2010-11 is exclusion of bogus sales / purchases and estimation of profits.

The root cause of this issue is page 27 of Annexure A-1 found during the course

of search wherein year-wise data related to accommodation entries of

purchases and sales was recorded. During the course of search action, the

33 Hydroair Tectonics (PCD) Ltd director of assessee, Smt. Rajkumari Singh admitted in her statement recorded

u/s 132(4) that the assessee company had booked entries for accommodation

purchases as well as for accommodation sales. During the course of search, on

the basis of document found and seized as Annexure A1, additional income of

Rs.60.39 crores representing excess of purchases over sales has been

quantified. The assessee, while filing return of income u/s 153A reworked the

amount of bogus purchases and sales in all 5 years. The assessee has

eliminated total purchases for 5 years at Rs.771,38,43,203. The assessee has

also eliminated sales for 5 assessment years at Rs.862,57,89,04. As a result of

elimination of purchases and sales, it has re-worked its income which resulted

into reduction of income admitted in return filed u/s 139(1) of Rs.91.19 crores.

Although, the assessee has eliminated income by Rs.91.19 crores, but in its

submission before the Ld.CIT(A), the assessee had agreed to ignore such

reduction because income cannot be reduced in the returns filed u/s 153A of

the Act. The AO ignored reversal of bogus purchases, however, reversal of

bogus sales was denied and the income of the assessee has been enhanced to

the extent of Rs.771,38,43,203. On appeal before the CIT(A), the Ld.CIT(A) has

upheld the findings of the AO in rejection of books of account u/s 145(3) of the

I.T. Act, 1961. However, he re-worked the total turnover of the assessee by

eliminating 75% of bogus sales claimed, by retaining 25% of bogus sales to

34 Hydroair Tectonics (PCD) Ltd arrive at net sales figure for all 5 assessment years at Rs.610,29,18,093.

Further, the Ld.CIT(A) has estimated net profit of 30% on the revised sales

turnover of each year and confirmed addition to the extent of Rs.69.97 crores.

The assessee, as well as the revenue challenged the findings of the Ld.CIT(A) of

exclusion of 75% of bogus sales on adhoc basis. Neither of the party is

disputed rejection of books of account.

found during the course of search, which contained year-wise data related to

accommodation entries of purchase and sales, the Ld.CIT(A) ought to have

accepted exclusion of bogus purchases and bogus sales made by the assessee

in the revised return filed pursuant to search conducted u/s 132 of the Act.

The Ld.AR further submitted that the revenue is not disputing the fact that the

said document found during the course of search marked as Annexure A1

contained bogus purchases and bogus sales for FYs 2006-07 to 2010-11. The

total purchases for 5 years is at Rs.81.41 crores and total sales for the above 5

years is at Rs.21.02 crores and as a result of which the net bogus purchases for

the above 5 years is at Rs.60.39 crores. The Ld.AR further submitted that it

may be noted that such admission made was not only in respect of bogus

purchases, but also in respect of bogus sales. It is further submitted that the

assessee has booked two types of bogus purchases and sales. The first type

35 Hydroair Tectonics (PCD) Ltd was accommodation bills which were procured from bogus parties through

agents, like Shri Kishore jain, etc. It was confessed by the assessee that such

accommodation bills were obtained in order to generate cash, which, in turn

was paid as kickback to several persons for procuring orders and contracts.

The second type was mere fictitious entries of purchases and sales recorded in

the books of account having no corresponding banking transactions at all. It

was done to get bank finance and foreign equity. The assessee further

submitted that the Ld.AO has made addition of bogus sales in all five years,

which resulted in astronomical amount aggregating to Rs.862.58 crores over a

period of 5 years. Had it been genuine sales, then it would have been reflected

in the form of some assets in the hands of assessee. However, the fact is that

the net worth of the assessee has become negative immediately after reversal

of the bogus purchases and sales entries during financial year 2010-11 as per

which, the net worth of the assessee as on 31-03-2010 is at (-

Rs.225,16,90,041). The Ld.AR further submitted that it is not the case of the

lower authorities that the search party unearthed huge unaccounted income in

form of money, bullion, jewellery or any other valuable assets. In fact, nothing

has been pointed out during the course of search except certain loose slips on

the basis of which the assessee has given declaration of additional undisclosed

income of Rs.60.39 crores. There is no allegation of the AO that the assessee

36 Hydroair Tectonics (PCD) Ltd or its related party owns any assets which has not been disclosed to the

department. Also there is no allegation that the money represented of bogus

sales has been siphoned off from the company and invested somewhere in the

form of undisclosed assets. Not an iota of evidence is found during the course

of search which can indicate that the assessee or any of its related party has

amassed any wealth whether in the books or outside the books.

worth considering is that the assessee has availed loans from several banks in

consortium finance with Vijaya Bank, as the lead bank. The assessee has

defaulted in repaying the finance and the amount due to the banks as on 01-

10-2011 was at Rs.196,36,13,596. The banks have filed suit against the

assessee as its account become NPA and possession of several assets of the

assessee as well as the guarantors have been taken by the bank under Sarfarsi

Act, 2002. The Ld.AR further submitted that majority of the bogus entries

passed for the impugned bogus purchases and sales were unilateral entries

passed by the assessee in its books. The corresponding debtors and creditors

raised on account of passing of such unilateral entries were squared up against

each by passing journal entries in the books. Thus, such entry booked in the

books of the assessee was not having any monetary involvement to that

extent. Neither money was received by the assessee against such sales nor

37 Hydroair Tectonics (PCD) Ltd was money paid by the assessee against the corresponding purchases. The

aggregate amount of such entries is approximately Rs.666.76 crores. Further,

it was submitted that during the course of remand proceedings, the Ld.AO

made enquiries with the parties in whose account the assessee had booked

bogus sales. It may be noted that a difference of Rs.145.07 crores has been

found only from verification of 12 parties. The balance of about 56 parties

were yet to be verified as on the date of issue of remand report either because

they did not reply or because the notices were returned back. The Ld.AR

further submitted that one more important aspect of the case which throw

light on the issue is subsequent business turnover of the assesssee. The

assessee’s business turnover in subsequent financial year has drastically

reduced which clearly indicates that the assessee was inflating its purchases as

well as sales in order to show huge turnover to be qualified for participating in

bids as well as for getting more finances from the bank. The Ld.AR has

extensively argued the issue and also countered the arguments of Ld.DR to

state that there is no monetary consideration involved except to the extent of

Rs.32.69 crores, which constitute 3.79% of total bogus sales. Therefore, there

is no reason to retain exclusion of bogus purchases as well as bogus sales. The

ld. AR also argued the case in light of provisions of section 153A and submitted

that it does not amount to fresh claim in return filed u/s 153A. The Ld.AR

38 Hydroair Tectonics (PCD) Ltd further submitted that in case of abated assessments, the assessee can very

well make a claim which was not made in original return filed u/s 139(1). This

is very clear from the provisions of the Act itself. In case of unabated

assessments, the assessee can make a claim if such claim is based on any

incriminating material found as a result of search. In this case, the assessee

has excluded sales as well as purchases on the basis of material found during

the course of search. Therefore, this cannot be considered as fresh claim and

also supported by the case law relied upon by the Ld.DR in case of Jayesh Steel

(India) Jodhpur vs ACIT 259 ITR 251 (Jodh).

submitted that the AO has made exorbitant estimation without there being

any comparable cases of similar line of business so as to prove that the

assessee is having 30% net profit in this kind of business. The Ld.AR referring

to plethora of judgements submitted that while making best judgement

assessment after rejection of books of account, the AO has to make a

reasonable estimate having regard to the facts of each case and such

estimation made by the AO should not be exorbitant. In this regard, he relied

upon various judicial precedents and argued that in this kind of business, the

profit element is only 2% to 3% and in fact the assessee never earned more

39 Hydroair Tectonics (PCD) Ltd

than 6% profit in any of the years, therefore, estimating profit of 30% is highly

incorrect. The relevant part of submissions of the assessee is extracted below:-

“3.34 The learned Assessing Officer has raised several issues in his assessment order as well as remand report with regard to the denial of reversal of bogus sales. Each of the contentions raised by the AO and the appellant's counter-arguments with regard to it have been dealt with in the following paragraphs. 3.35 Receipt of money: The first issue raised by the learned Assessing Officer is that the appellant has already received money from the concerned debtors. The learned Assessing Officer has relied upon wrong facts. The appellant has submitted the voluminous details of bogus sales which contain the information regarding how the bogus sales booked were reversed subsequently It can be notices that out of bogus sales booked amounting to ? 862.57 crores, the appellant has received money only to the extent of ? 32.69 crores which constitutes 3.79% of total bogus sales only. Majority of the bogus sales were reversed against the bogus purchases booked. Therefore, the Assessing Officer has wrongly alleged that the appellant has received entire money representing bogus sales of Rs. 862.57 crores. 3.36 Raisinq of share capital and ploughing back money - Balaji Fibre Re-inforce Pvt. Ltd.: The Assessing Officer has attempted to allege ploughing back of money in the form of share capital. However, he has not been able to support his contention on the basis of any evidences. He has referred to the transaction with M/s. Balaji Re-inforce Pvt. Ltd. The facts regarding the said transaction is that the appellant had booked bogus purchases of ^ 20,90,79,045 in the ledger of M/s. Balaji Fiber Reinforce Pvt. Ltd. during A.Y, 2010-11 without bringing it to the knowledge of that party. In fact, the same amount was booked as bogus purchases in two other parties also namely M/s. Ankita Enterprises & M/s. Pavitra Infrastructure In order to nullify the bogus liabilities standing to the credit of aforesaid three parties aggregating to ? 62,72,35,875, the appellant allotted its equity shares as on 31.3.2010 and squared up the outstanding liabilities. The details of equity shares shown to have been allotted by HTPL to the aforesaid three parties are as follows:

Name of No.of Face Premium Issue Total amount party Equity value per price (including shares per equity per premium) allotted equity share equity share share Ankita 6,63,741 10 305 315 20,90,78,415 Enterprises Pavitra 6,63,741 10 305 315 20,90,78,415 Infrastructure Balaji fiber 6,63,741 10 305 315 20,90,78,415 Reinforce Pvt Ltd

3.37 However, the fact was that these entries of purchases and thereafter allotment of shares against the outstanding liabilities were bogus entries made unilaterally by the appellant. None of these parties including M/s. Balaji Fibre Reinforce Pvt. Ltd. had sold any goods to the appellant or subscribed to the equity shares of the appellant shown as above. These facts have been confirmed by M/s. Balaji Fibre Reinforce Pvt. Ltd. in its reply to notice u/s. 133(6) vide letter dated 14.2.2013 as stated in the assessment order itself. 3.38 Howsoever fictitious it was but as a result of the above, the aforesaid three parties, which were outsiders, became entitled to 19,91,225 equity shares of the appellant, at least as per records, which constituted about 11.44% of total equity shares as on 31.3.2010 (i.e. 1,74,03,188 equity shares). In order to ensure that those parties do not claim ownership of such shares, the appellant immediately thereafter showed that those 19,91,225 equity shares were transferred by all three parties to the Hydroair Envirotech

40 Hydroair Tectonics (PCD) Ltd

Pvt. Ltd. as on 24.5.2010. Thereafter, in the immediate subsequent financial year i.e. F.Y. 2010-11, the appellant reversed the fictitious share capital and share premium aggregating to ? 62,72,35,875 in its books of accounts. 3.39 The above stated facts clearly indicate there was no monetary involvement between any of the parties i.e. appellant and M/s. Balaji Fibre Reinforce Pvt. Ltd. In spite of this, the learned Assessing Officer has drawn a wrong inference by stating that "it is very clear that the assessee under the directions of the Chairman had carried out all these financial transactions. So it is clear that the assessee's claim that there is no financial transaction is devoid of merit....." 3.40 Non-submissiun of details: In the assessment order, the Assessing Officer has stated that the appellant has not submitted any chart showing year-wise breakup of amount of bogus purchases and fictitious sales with amount received in cash, amount paid in cash, amount received by cheque, amount paid by cheque, how the ledger accounts of these bogus parties are spread over year-wise. However, voluminous details of bogus sales were submitted before the CIT (A) which contain all of the required details. The remand report was also called from the AO in this regard. Therefore, this contention of learned Assessing Officer is no more relevant. 3.41 Financial involvement of more than Rs. 193 crores: The learned Assessing Officer has made some calculation in his assessment order showing that financial transactions to the tune of ? 193,11,35,928 out of bogus sales of ? 862.57 crores. However, there was no monetary movement with respect to bogus sales except for receipt of ? 32.69 crores as stated in Para 3.35 above. The Assessing Officer has failed in considering the details in totality e.g. the creditors adjusted through shares capital & premium amounting to ? 62,72,35,875 as stated above in Para 3.38 above, the creditors adjusted through capital reserve amounting to ? 10,57,95,666. the creditors reversed due to recording purchase returns amounting to ? 1,25,00,000, the creditors reversed against general reserves amounting to Rs.9,44,90,819 etc. It is beyond any doubt that no such monetary transactions having magnitude of 1193 crores have been routed through the appellant's books of accounts. Does it tantamount to the fresh claim in the return filed u/s. 153A? 3.42 The Revenue is challenging the CIT (A)'s order on the ground that he has entertained the claim of the assessee of bogus sales without appreciating that the assessee cannot make the fresh claim in the return filed in response to notice u/s. 153A. For this purpose, reliance is placed on Jai Steel (India) Jodhpur vs. ACIT 259 ITR 281. 3.43 The assessee submits that this cannot be viewed as fresh claim due to following reasons: (i). The paper found during the course of search showed not only booking of accommodation entries in relation to purchases but also in relation to sales. (ii). The admission of the assessee in the statement was not regarding bogus purchases but also regarding bogus sales. (iii). It was only the excess of bogus purchases over bogus sales was offered to tax which is the basis for making the additions. (iv). What was found as a result of search was that the assessee indulged itself into booking of bogus purchases and sales both. (v). Therefore, only the net impact thereof is required to be considered while making the assessment u/s. 153A subject to the condition that it does not result into reduction of income otherwise declared in a return filed u/s. 139(1). (vi). The decision relied upon by the Revenue in the case of Jai Steel (India), Jodhpur is with respect to different facts as in that case the assessee sought to claim deduction of a particular item for the first time in a return filed u/s. 153A. 3.44 When the assessee claims a deduction, exemption or any such relief in the return filed u/s. 153A which was not claimed in the return filed u/s. 139, it can be considered as a 'fresh claim' made by the assessee. However, in the present case, the question is of determination of the correct amount of income taking into account the fact that several bogus / fictitious entries have been recorded in the books of the assessee. The assessee did not seek the reduction in its income which it has already declared in the return filed u/s. 139 by making any fresh claim. What has been claimed by the assessee is to

41 Hydroair Tectonics (PCD) Ltd

reconsider its sales and purchases while determining its income subject to the condition that income finally determined should not be less than what has been already offered. Percentage of bogus sales to be retained and percentage of profits to be estimated 3.45 The CIT (A) has retained 25% of bogus sales in order to cover up several deficiencies noticed by him in the details furnished to him. It means that, out of total bogus sales of ? 862.57 crore, sales of ? 215-64 crore has been retained for the purpose of estimating of profits thereon. 3.46 One of the important reasons mentioned by the CIT (A) for retaining 25% of these sales is that the assessee has received payments aggregating to ? 32,69,34,601 against them as mentioned in the detailed working submitted by the asssessee. As against the receipts of ? 32.69 crore, the sales of ? 215.64 has been retained which is not justified. There are few other discrepancies which have also been noted by the CIT (A) but they are not having any economic impact. 3.47 In view of this, to cover up the amount actually received and several other discrepancies, Your Honour may direct to retain 5% to 10% of the aggregate bogus sales amounting to ? 862.57 crore. 3.48 Regarding the estimation of profits @ 30%, the assessee submits that it is too high as compared to what has been earned by the assessee in the earlier and subsequent years. The comparative position of turnovers and profitability in earlier years, years under consideration and subsequent years is given in Annexure 4 to the Synopsis. 3.49 The Courts have laid down various principles with regard to making of best judgment assessment after rejection of books of accounts. Such best judgment assessment cannot be made disregarding the materials available on record. As emphasized by the Supreme Court in State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC) though there is an element of guess-work in best judgment assessment, it should not be a wild one and should have a reasonable nexus to the available material and the circumstances of each case. Likewise, it has been laid down by the Supreme Court in the case of State of Orissa vs. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC) : TC11R.251 that "The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities." 3.50 In Brij Bhusan Lal Parduman Kumar vs. CIT (1962) 46 ITR 262 (Assam) : TC11R.266 the Supreme Court once again observed that even though arbitrariness cannot be avoided in a best judgment assessment, the same must not be capricious but should have a reasonable nexus to the available material. 3.51 In S.M. Hassan vs. New Gramaphone House AIR 1977 SC 1788, the Supreme Court opined that an assessing authority while making a best judgment assessment, instead of launching upon pure premises, should make an intelligent well-grounded estimate. Where, therefore, it is not possible to discover any basis, rational or otherwise, from the order of the assessing authority, the estimate made cannot be anything but arbitrary, and, so, cannot be sustained. 3.52 In the case of CIT vs. Inani Marbles (P) Ltd. 316 ITR 125, Rajasthan High Court held that the authorities do not get unfettered powers to apply any GP rate of their choice. In absence of any change in factual position, profit rate declared and accepted in preceding years constituted a good basis for working out gross profit rate. 3.53 Once the books of account of assessee are rejected, then, profit has to be estimated on the basis of proper material available. An Assessing Officer is not flattered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in Court of law. Neverthless, the AO is not entitled to make a pure guess and make an assessment with reference to any evidence or any material at all. There must be something more than mere suspicion to support an assessment under Section 143(3) of the Act. The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Sheth Gurmukh Singh v/s.

42 Hydroair Tectonics (PCD) Ltd

CIT (1944) 12 ITR 393 and the Supreme Court in the case of Dhakeswari Cotton Mills Ltd., v/s. CIT (1954) 26 ITR 775. 3.54 The estimate of turnover and fixation of gross profit rate are two important parameters which affect the assessment. If these are fixed or calculated in such a way that they adversely affect the assessee's case, then he is entitled to know the basis and to be given an opportunity to rebut the same. The rule of law on this subject has been well settled that estimates framed without giving the basis for their fixation or without furnishing to the assessee the material on which the rate of gross profit is arrived at or without giving an opportunity to the assessee to rebut it are bad. [Dhakeswari Cotton Mills Ltd., v/s. CIT (1954) 26 ITR 775]. 3.55 The rate of gross profit in a particular year depends on many factors namely the general market conditions based on demand and supply position, the rise or fall in market rates, specially abrupt ones, the capital position viz-a-viz the turnover acheived and many others. It is for the assessee to explain the fall, if so happens and to substantiate the reasons. Even if, thereafter, the Assessing Officer considers the material placed before him by the assessee to be unreliable, keeping in view the comparative statement of accounts of the earlier years, he cannot proceed to make an arbitrary addition and base his conclusion purely on guess work. He can do so only if he relates to some evidence or material on the record. The Courts have held that if the profit shown by the assessee in his return is not accepted, it is for the taxing authorities to prove that the assessee made more profits. [International Forest Company v/s. CIT (1975) 101 ITR 721 (J & K)]. 3.56 In view of the above, the assessee humbly submits that the profits of 30% is too high. The assessee is engaged into undertaking projects of effluent treatment which are mainly awarded by the Government authorities. Nobody can earn the profits of 30% and that too net profits of 30% from such Government contracts. Section 44AD {as it stood earlier) itself had provided the profit rate of 8% for civil construction contracts. The kind of contracts undertaken by the assessee is akin to civil construction. Considering the usage of technical expertise, the profitability can be estimated to be little higher than 8% but it can never be 30%. 3.57 The analysis of past year's profitability shows that the assessee never earned more than 6%. In the subsequent years, the assessee had incurred losses. 3.58 Considering the facts of the case, additional profits @ 2% to 3% of the revised turnover of sales (after allowing due relief in respect of bogus sales) may be added to the taxable income of the assessee over and above what has already been declared.” 20. The Ld.DR, on the other hand, vehemently argued the issue in light of

provisions of section 153A and submitted that there is no provision in the Act

to make a fresh claim in return filed u/s 153A. The said provision is only for the

benefit of the revenue, consequent upon a search. Therefore, the Ld.CIT(A)

was erred in excluding 75% of bogus sales. The Ld.DR further submitted that

the Ld.CIT(A) has adopted an adhoc method to exclude 75% of alleged bogus

sales without there being any finding as to how the remaining 25% is bogus

and 75% is genuine sales turnover made by the assessee. The fact that the

43 Hydroair Tectonics (PCD) Ltd director of the company has admitted booking bogus purchases and bogus

sales in the books of account so as to siphon off money from the books to give

kickbacks to various persons for obtaining contracts stands uncontroverted. It

is also admitted fact that the document seized during the course of search

clearly indicated that the assessee has booked bogus sales and bogus

purchases and the net result of which is excess bogus purchases of Rs.60.39

crores and the same has been admitted as undisclosed income. These facts

have been unequivocally accepted in their statement on oath dated 29-01-

2011 and 22-03-2011. The Ld.DR further referring to the decision of Hon’ble

Rajasthan High Court in the case of Jayesh Steel, Jodhpur vs ACIT 36

taxmann.com 323 submitted that the Hon’ble Court categorically held that it is

not open for the assessee to seek deduction or expenditure not claimed in

original assessment which stands completed. The Ld.DR further referring to

the findings of Ld. CIT(A) in excluding 75% of the bogus sales, submitted that

there is no sound rationale behind exclusion of such bogus sales as the

verification carried out during the remand proceedings clearly indicate that

only few parties have accepted the fact that they have not transacted with the

assessee as against only 17% of total bogus sales claimed to have booked by

the assessee. Therefore, excluding 75% of bogus sales is highly incorrect and

without any basis. The addition made by the AO on account of bogus

44 Hydroair Tectonics (PCD) Ltd purchases is absolutely valid in law since the assessee has failed to adduce

evidence regarding the genuineness of such transactions. The assessee’s

argument that not enough accounted / unaccounted assets were found during

search is outside the issue at hand since the assessee has failed to either

demonstrate the modus operandi of bogus sales or even to get confirmation

from parties in most of the cases that the sales are indeed bogus. Moreover, it

is highly incorrect to say that the government agencies were indulging in

obtaining accommodation entries from the assessee. The Ld.DR further

submitted that the assessee cannot debunk the above working based on the

AOs report as to the party-wise position had really confirmed bogus sales since

the AO diligently made the enquiries but got little response from the parties.

Therefore, the assessee’s stand on this issue falls way short of meeting the

requirement of proof. The Ld.CIT(A), without appreciating these facts, simply

excluded 75% of bogus sales without giving any reason as to how the exclusion

was supported by any material or which was based on a single yardstick for

arriving at the same. Therefore, he submitted that the addition made by the

AO towards bogus sales needs to be confirmed.

record and gone through the orders of authorities below. We have also

carefully considered various case laws cited by the assessee and also few cases

45 Hydroair Tectonics (PCD) Ltd cited by the Ld.DR. First of all, we admit that determination of turnover and

estimation of profit under the fact of present case totally stand in a different

footing and this cannot be considered as an issue which can be compared to

certain judgements rendered either to make estimation of profit or

determination of turnover for the reason that the facts of the present case is

unique where the assessee is a habitual offender of falsification of its books of

account by inflating purchases as well as sales to window dress its accounts for

various reasons as claimed by the assessee, itself. Therefore, except for the

limited purpose of certain degree of guess work in estimating net profit, the

case laws relied upon by the assessee as well as revenue in total not

considered while arriving at a conclusion in the subsequent paragraphs.

on which the AO made huge addition towards bogus sales in assessment for all

these years is a document found during the course of search marked as

Annexure A1 which contained year-wise data of accommodation entries of

bogus purchases as well as bogus sales. During the course of search, the

details have been worked out as per which, the net result of excess of

purchases over bogus sales is at Rs.60.39 crores and the same has been

admitted as undisclosed income. Taking a clue from the above said document,

the assessee has recasts its books of account by excluding bogus purchases as

46 Hydroair Tectonics (PCD) Ltd well as bogus sales and the net result of which comes to Rs.91.19 crores. The

AO has ignored exclusion of bogus purchases in the return filed u/s 153A of the

Act. However, he retained bogus sales excluded by the assessee in the return

filed u/s 153A which resulted in huge addition of Rs.862,57,89,204. The AO

has given various reasons to come to the conclusion that the conduct of the

assessee in excluding bogus sales in return filed u/s 153A is an afterthought to

circumvent admission of additional income of Rs.60.39 crores during the

course of search. The assessee had given various reasons to argue that when

document found during the course of search itself clearly showed bogus

purchases as well as bogus sales, there is no reason for the AO to ignore

reversal of bogus purchases and consider reversal of bogus sales to make such

a huge addition. According to the assessee, it has booked two types of bogus

purchases as well as bogus sales, as per which hardly about 10% of bogus

purchases booked by obtaining accommodation entries from entry providers.

The remaining 90% of bogus purchases as well as 100% of bogus sales is

booked in books of account by passing unilateral entries without even bringing

these facts to the concerned parties so as to increase the turnover for two

reasons, i.e. for the purpose of getting contracts and also for the purpose of

getting better finance from banks. The assessee has also taken support from

the verification conducted by the AO during remand proceedings, where it was

47 Hydroair Tectonics (PCD) Ltd proved that when enquiries were conducted in case of 12 parties, none of the

parties have responded to the notices issued by the AO and the sum total of

which worked out to about Rs.145 crores. All these facts go to prove an

undoubted or undisputed inference that the books of account of the assessee

contain bogus purchases as well as bogus sales. When such being the case, in

order to clean up its books of account and to arrive at true profit for the

purpose of taxation, the assessee has eliminated bogus purchases as well as

bogus sales which resulted in reduction of income declared in the original

return file u/s 139(1) to the tune of Rs.91.19 crores. But such financial results

are true and correct which are based on relevant materials on record.

However, the AO has proceeded on a wrong premise that the assessee has

recasted its books of account to circumvent additional income disclosed during

the course of search.

purchases eliminated by the assessee cannot be accepted because the

assessee could not adduce any evidence except taking a clue from the seized

document marked as Annexure A1 which contained limited data of bogus

purchases whereas the assessee has eliminated huge bogus purchases of

Ras.774.67 crores. Insofar as elimination of bogus sales, the Ld.CIT(A) has

accepted the fact that there appears bogus sales in the books of account of the

48 Hydroair Tectonics (PCD) Ltd assessee because, if the disallowance of bogus purchases has been

incorporated, then the proportion of sales to purchases would be very high

and unrealistic. The Ld.CIT(A) has given details in a tabular form for all 5 years,

as per which, the assessee has declared total sales at Rs.1,257 crores as against

genuine purchases at Rs.222 crores (after excluding bogus purchases of

Rs.774.67 crores). This leads to an unrealistic figure which would not be

possible except where it is a monopolistic business which is not the case of the

assessee. The Ld.CIT(A) has recorded another important point so as to reach

to a conclusion that there is an element of bogus sales in the books of account

of the assessee, as per which, it had taken into account investigation carried

out by the AO during remand proceedings by issuing notices u/s 133(6) where

none of the 12 parties either responded to notices or filed any details and

amount involved in 12 cases which is at Rs.145 crores. The Ld.CIT(A) also took

note of the fact that the assessee, in order to window dress its accounts by

passing journal entries between sundry creditors and sundry debtors to retain

only purchases and sales as per which there is no element of monetary

consideration is involved. However, the Ld.CIT(A) did not accept the

contention of the assessee that sales to the extent of Rs.862,.57 crores

eliminated by the assessee from its books of account while filing return of

income for the reason that although there is a truth in the claim of bogus sales,

49 Hydroair Tectonics (PCD) Ltd but it is very difficult to ascertain what would be the extent of bogus sales,

therefore, by adopting various parameters of the case including the conduct of

the assessee subsequent to reversal of bogus purchases as well as bogus sales,

reversal of sundry debtors and sundry creditors and also passing journal

entries to create share capital, the only best way to determine the turnover

and profit of the assessee by making some adhoc estimation. The Ld.CIT(A)

has taken support from the fact that even the assessee could not file necessary

details to reconcile every purchase and sales and also the AO has categorically

accepted that this exercise could not be done. Therefore, he has rejected

books of account of the assessee u/s 145(3) of the Act and estimated sales

turnover by retaining 25% of bogus sales eliminated by the assessee from its

books of account, thereby retaining total sale for all 5 years @25% of sales

declared in normal returns filed u/s 139(1) and thereafter determined net

profit of the business by estimating 30% profit from the business. While doing

so, the Ld.CIT(A) has taken support from the decision of Hon’ble Supreme

Court in the case of Kanchwala Gems vs CIT 288 ITR 10 (SC) where the Hon’ble

Supreme Court observed that in a best judgement assessment, there is always

a certain degree of guess work. No doubt, the authorities concerned should

try to make an honest and fair estimate of the income even in a best

judgement assessment and should not go totally arbitrary, but there is

50 Hydroair Tectonics (PCD) Ltd necessarily some amount of guess work involved in a best judgement

assessment and it is the assessee himself, who is to blame as it did not submit

proper account. In this case, there is no doubt with regard to the facts that the

books of account of the assessee are falsified and the assessee claims to have

passed unilateral entries of bogus purchases, bogus sales and fictitious share

capital. Therefore, the books of account of the assessee could not be relied

upon at all, so as to determine net profit from the business. Under these facts,

the only possible way out is to go for best judgement assessment to determine

profit from the business. In this case, the Ld.CIT(A) has done the same thing

which is supported by the decision of the Hon’ble Supreme Court. Although

the best judgement assessment made by the Ld.CIT(A) might have some guess

work, but under the facts of present case, it is the only way out to determine

the profit and accordingly, we do not find any error in the findings of Ld.CIT(A)

in estimating sales turnover.

percentage of profit adopted by the Ld.CIT(A) is at higher side when compared

to the nature of business, we do not find any merits in arguments of the

assessee for the reason that it appears from the findings of fact recorded by

the Ld.CIT(A) that although, the ld. CIT(A) has adopted little higher net profit

percentage but, it is again based on the fact that the director of the assessee

51 Hydroair Tectonics (PCD) Ltd company has quantified undisclosed income of Rs.60.39 crores on the basis of

seized materials. The Ld.CIT(A), taking a clue from the above fact, has arrived

at a fair method of determination of turnover and then applied 30% profit

which is almost equal or little higher than the amount of undisclosed income

declared by the assessee in the statement recorded u/s 132(4) of the Act.

Therefore, we are of the considered view that there is nothing wrong in the

method adopted by the AO to determine the turnover and also in applying

30% profits from the business. Even before us, the assessee, except stating

that the method followed by the lower authorities in determining the turnover

is not based on any scientific method or any evidence, and also the profit

percentage applied by the authorities is on higher side, failed to demonstrate

that how it could establish the fact of booking bogus sales to the extent of

Rs.862.57 crores, when investigation carried out during the course of remand

proceedings did not yield desired results. Further, we are of the considered

view that when the assessee is a habitual offender of falsification of its books

of account by booking bogus purchases as well as bogus sales, so as to siphon

off the money from the business to make gracious payments to various

persons for obtaining contracts, it is highly impossible to rely upon the books

of account of the assessee and profit declared in its books of account. Hence,

we are of the considered view that there is no error in the findings of the

52 Hydroair Tectonics (PCD) Ltd Ld.CIT(A) in determining total turnover as well as estimation of profit and

hence, we are inclined to uphold the finding of the Ld.CIT(A) and reject

arguments of assessee as well as the revenue.

revenue appeal in ITA 3930/Mum/2017 in case of Hydroair Tectonics (PCD) Ltd

is addition of closing stock difference of Rs.60 crores. The assessee, while filing

return u/s 153A had claimed that its closing stock as appearing in P&L Account

was overvalued of Rs.60 crores. Therefore, it has claimed reduction to that

extent. The AO added back the amount of Rs.60 crores as the assessee has not

justified its claim. The Ld.CIT(A) deleted addition made by the AO because, he

had estimated profit from the business by rejecting books of account u/s

145(3) and once books of account are rejected, the value of closing stock as

appearing in the books of account is of no relevance.

books of account was that they were incorrect and unverifiable. Having

considered the books as unreliable, how could the value of stock recorded in

the same books, be relied to compute the income. The Ld.CIT(A), after having

estimated profit from the business ignored addition made by the AO towards

difference in stock. Therefore, we are of the considered view that there is no

error in the finding of the Ld.CIT(A) in deleting addition made by the AO

53 Hydroair Tectonics (PCD) Ltd towards difference in value of closing stock as once books of account are

rejected to estimate profit from business on the basis of turnover, the value of

stock as appearing in the same books of account has no relevance in

computation of income of the assessee. Accordingly, we reject the ground

taken by the revenue.

crores on account of revaluation of opening and closing stock for AY 2010-11 in

ITA No. 3931/Mum/2017. This issue has been raised in the revenue’s appeal in

the case of M/s Hydroair Tectonics (PCD) Ltd for AY 2010-11. In addition to the

claim of the assessee regarding valuation of closing stock for AY 2009-10, the

assessee made similar claim of over valuation of closing stock as on 31-03-2010

pertaining to AY 2010-11. The difference between closing stock and opening

stock has been reduced from the profit while filing return u/s 153A of the Act.

The AO had rejected the claim of the assessee in reducing the amount of

closing stock. Accordingly, he made addition of Rs.10 crore. The Ld.CIT(A) has

deleted addition by holding that when books of account are rejected for

determining the income from the business on the basis of turnover, the value

of stock as appearing in the books of account has no relevance in computation

of income. We find that the Ld.CIT(A) has rightly apprised the facts in light of

facts of present case, while deleting addition made by the AO towards

54 Hydroair Tectonics (PCD) Ltd difference in stock of Rs.10 crore as the income for the year has been

determined on the basis of turnover. Therefore, any other expenses including

value of closing stock is not at all relevant for the purpose of determination of

income. Accordingly, we affirm the findings of Ld.CIT(A) and reject ground

raised by the revenue.

appeal as well as revenue’s appeal for AYs 2006-07 to 2010-11 is telescoping of

certain additions against profits estimated from the business. This issue is

regarding two types of additions made by the AO. The AO has made addition

of Rs.3.85 crores in 5 years towards possible expenditure incurred for

obtaining bogus purchase bills from various parties. The AO has estimated

0.5% of bogus purchases towards possible expenditure incurred on

commission payments to accommodation entry providers. Further, the AO has

made various additions on the basis of certain noting found on loose papers /

diaries for the reason that they represent payments made by the assessee out

of books of account and aggregate of such payments is at Rs.30.07 crores.

These payments include payments to certain individuals in relation to certain

project executed by the assessee. The details have been furnished by the

assessee in paper book at Annexure 5. The Ld.CIT(A) did not discuss these

additions on merits. However, he had allowed relief to the assessee by

55 Hydroair Tectonics (PCD) Ltd telescoping the said additions against addition made on account of estimation

of profit from business.

record. There is no dispute with regard to the fact that the assessee, in its

statement recorded u/s 132(4) has categorically admitted that the company

has generated cash by booking various expenditure and the same has been

used to make certain payments to get the contracts. Further, on perusal of

details of payments given in Annexure 5, we find that all these payments have

been made to certain individuals in relation to certain projects executed by the

assessee at various places. Further, said addition is also based on loose sheets

/ diary entries found during the course of search. The Ld.CIT(A), after

considering relevant facts and also by taking into account the statement given

by the director of the assessee during the course of search, held that there is a

direct nexus between booking bogus purchase entries and various payments

made to certain individuals, hence he came to the conclusion that since source

is available to the assessee on account of estimation of profits on the

appropriate amount of turnover and the same has not been brought into the

books of account, even if certain additions are made on the basis of loose slips

could be explained out of additional income. The assessee has also accepted

the fact that money was siphoned off from the books of account through

56 Hydroair Tectonics (PCD) Ltd booking of bogus purchases and sales. Therefore, he came to the conclusion

that various additions made by the AO on the basis of loose papers / diary

entries on the ground that these are payments made outside books of account

shall be telescoped against additional income estimated on the total turnover.

We further notice that once a source of income is available on account of

estimation of higher income over and above income declared by the assessee

in its books of account, then obviously, the additional income worked out

needs to be telescoped against various additions made on the basis of loose

sheets / dairy entries because there is a direct nexus between additional

income estimated on total turnover and payment made outside books of

account. This legal proposition is supported by the decision of Hon’ble Madras

High Court in the case of CIT vs K Guruswamy Nadar & Sons (1984) 19 Taxman

533 (Mad), where the Hon’ble Court observed that the additional income

worked out on the basis of estimation of profit needs to be telescoped with

the additions made for cash credits. Therefore, we are of the considered view

that there is no error in the findings of the Ld.CIT(A) in directing the AO to

allow the benefit of telescoping towards various additions made in respect of

commission expenditure of rs.3.85 crores and other payments of Rs.30.07

crores against additional income estimated from the business. Hence, we are

57 Hydroair Tectonics (PCD) Ltd inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the

Revenue and also allowed ground taken by the assessee.

appeal for AY 2009-10 is addition of Rs.1.6 crores on account of alleged

payment to one Shri Avde Saheb. The AO has added an amount of Rs.1.6

crores on the basis of noting made by Shri Harbhajan Singh. The assessee

claims that though similar other addition made has been disputed, this

addition remained to be disputed before the Ld.CIT(A) due to an inadvertent

error.

made various additions in relation to payment made to certain persons in

respect of various projects. The assessee has challenged all additions made by

the AO before the Ld.CIT(A), but this addition was not challenged. The

assessee claims that said addition was not challenged before the Ld.CIT(A) due

to an inadvertent error. We find merit in the argument of the assessee for the

reason that when assessee has challenged all additions of similar nature, there

is no reason to purportedly ignore said addition. Therefore, we are of the

considered view that there is merit in the argument of the assessee that due to

an inadvertent error, the same was not challenged before the CIT(A).

Therefore, we admit the ground taken by the assessee challenging above

58 Hydroair Tectonics (PCD) Ltd addition. Further, we note that this addition is also akin to various other

additions made by the AO. The Ld.CIT(A) has allowed the benefit of telescoping

against those additions. Therefore, we direct the AO to consider this addition

also for the purpose of telescoping against income estimated from the

business for the year under consideration. However, we make it very clear

that the benefit of telescoping should be allowed to the assessee to the extent

of additional income estimated over and above the normal profit declared in

the books of account.

appeal in the case of M/s Hydroair Tectonics (PCD) Ltd for AY 2010-11 is

disallowance of certain expenses u/s 40(a)(ia) vis-a-vis rejection of books of

account and estimation of income. The assessee has deducted TDS in respect

of above expenses and the same was paid in the month of February, 2011, i.e.

subsequent to the due date for furnishing return of income u/s 139(1). Though

this amount was not disallowed while filing return of income u/s 139(1), it was

disallowed while filing return u/s 153A. The AO has added this amount on the

basis of disallowance offered by the assessee. Before the CIT(A), though the

assessee has taken a ground relating to this disallowance, it was not pressed

subsequently as it was offered voluntarily by the assessee, itself. The Ld.CIT(A)

has rejected books of account of the assessee on the ground that they are

59 Hydroair Tectonics (PCD) Ltd incorrect and unverifiable and estimated profit from the business. Since the

assessee has not challenged the disallowance made by the AO, the Ld.CIT(A)

has confirmed this disallowance.

about the fact of rejection of books of account upon receipt of order of

Ld.CIT(A). Though the assessee did not dispute this disallowance before the

Ld.CIT(A), has taken a ground before the ITAT for the first time challenging

disallowance made by the AO u/s 40(a)(ia) in the light of rejection of books of

account and estimation of profit. The Ld.AR further submitted that when

books of account are rejected and income has been determined on estimation,

then section 40(a)(ia) cannot be invoked to make further addition. This is

because the estimation of income takes care of the irregularities committed by

the assessee. In this regard he relied upon the decision of Hyderabad Bench of

ITAT in case of Teja Construction vs ACIT 39 SOT 13 (Hyd).

arguments of the assessee for the reason that when books of account are

rejected for estimation of profit from the business, then the same books of

account could not be relied upon to make addition towards disallowances u/s

40(a)(ia) for failure to deduct tax at source under respective Acts. Further,

even though the assessee, by mistake disallowed certain payments in its

60 Hydroair Tectonics (PCD) Ltd statement of total income, it is for the assessing officer to compute correct

income for the purpose of taxation by correcting mistakes or omissions

committed by the assessee. In this case, the books of account have been

rejected and income has been estimated on the basis of total turnover by

applying certain percentage. Therefore, we are of the considered view that no

expenditure could be disallowed even u/s 40(a)(ia) once the books of account

have been rejected for the purpose of estimation of profit. Accordingly, we

direct the AO to delete addition towards disallowance of certain payments u/s

40(a)(ia) of the Act.

department’s appeal in case of M/s Hydroair Tectonics (PCD) Ltd is

disallowance of expenses on adhoc basis vis-a-vis rejection of books of account

and estimation of income. We have already noted in the preceding paragraphs

that once books of account have been rejected, then the same books of

account could not be used to make any disallowance of expenditure and the

findings given by us in the preceding paragraphs is equally applicable to this

ground. The Ld.CIT(A), after considering relevant facts, has rightly deleted

addition made by the AO towards adhoc disallowance of expenses. We do not

find any error in the finding of Ld.CIT(A); hence, we are inclined to uphold the

findings of Ld.CIT(A) and reject ground taken by the revenue.

61 Hydroair Tectonics (PCD) Ltd 36. The next issue that came up for our consideration for AY 2007-08 from

assessee’s appeal in the case of M/s Hydroair Tectonics (PCD) Ltd is addition of

share application money of Rs.16 crores and addition of expenses on estimate

basis @4% of Rs.64 lakhs on said share application money. The factual matrix

of the impugned dispute is that the assessee has received share application

money from certain companies. The AO has made addition towards share

application money of Rs.16 crores on the ground that the assessee has failed

to file necessary details to prove identity, genuineness of transactions and

creditworthiness of the parties. Further, the AO also made disallowance of

expenses @4% on total share application money received and made addition

of Rs.64 lakhs for possible expenditure incurred in getting share application

money from various parties. Initially, out of the aggregate amount of Rs.16

crores, the amount of Rs.12 crores was added u/s 68 in AY 2008-09 vide

assessment order u/s 143(3) dated 24-12-2010. Though, the share against

receipt of Rs.12 crores were allotted during the previous year relevant to AY

2008-09, the said amount was not received during that year but was received

during the year 2007-08. When this fact was pointed out to the CIT(A) during

the appellate proceedings, the Ld.CIT(A) deleted addition of Rs.12 crores made

for AY 2008-09 and directed the AO to take necessary action in the year in

62 Hydroair Tectonics (PCD) Ltd which the said sum was received, i.e. AY 2007-08. This direction was given

under the provisions of section 150(1) of the Act.

in the absence of any incriminating material relating to these transactions,

found as a result of search, as the assessment u/s 153A is made pursuant to

search action carried out u/s 132 of the Act and such assessment should be

solely on the basis of incriminating material found, as a result of search. Since

the addition made by the AO is on the basis of regular books of account, no

addition could be made when the assessment has been abated. The Ld.AR, on

merits, further submitted that assessee has filed various details to prove

identity, genuineness of transactions and creditworthiness of the parties.

When the identity has been proved and also various details have been filed to

prove genuineness of transactions, the AO cannot make addition towards

credits u/s 68 in the hands of the assessee company. If at all the AO doubts

the creditworthiness of the parties, then he is free to reopen the assessment

of individual creditors, but addition cannot be made in the hands of the

assessee. The assessee has filed elaborate written submissions on the issue

including on the legality of addition u/s 153A, which is reproduced hereunder:-

“10.7 This contention may sound to be irrelevant on account of the fact that the CIT (A) has issued the direction u/s. 150(1) to consider the taxability of this amount in A.Y. 2007-08 while adjudicating the appeal filed by the assessee for A.Y. 2008-09. However, it would be unjustified lo brush aside this contention merely on account of this reason without appreciating that -

63 Hydroair Tectonics (PCD) Ltd

(i). The direction of the CIT(A) is restricted to the amount of Rs. 12 crore and not fully for Rs 16 crore. (ii). It has been given u/s. 150(1} which is linked with the reassessment to be made u/s. 147. In the present case, the Assessing Officer has considered this issue while "making the assessment u/s. 153A. The direction issued u/s. 150(1) would not have any relevance while making the assessment u/s. 153A. 10.8 At the outset, it is clarified that this contention (absence of incriminating materials) was raised by the assessee before the CIT(A) in the appellate proceeding against the assessment u/s. 153A. However, the CIT (A) has failed to consider this contention and he has directly dealt with the merits of this issue. 10.9 The appellant would like to submit that the assessment for the year under consideration (i.e. A.Y. 2007-U8) was already completed vide order passed u/s. 143(3) dated 16.11.2009 wherein no additions were made with regard to the aforesaid amounts. This assessment has attained finality as it has not been abated as a result of initiation of search proceedings u/s. 153A. As a result, no addition can be made u/s. 68 in the absence of any incriminating 'material regarding these transactions. 10.10 For the reasons as to why no such addition can be made in the absence of any incriminating materials, the appellant relies upon its detailed explanation made in this submission at Para No. 1. 10.11 The appellant also relies upon a direct decision Kolkata ITAT in the case of Mridul Commodities (P.) Ltd. vs. DCIT 78 taxmann.com 337 wherein it has been held that where pursuant to notice issued under section 153A, assessee-company filed its returns for relevant years, since assessment for said years had already completed and no incriminating material had been found in course of search proceedings, impugned addition made by Assessing Officer under section 68 in respect of share application money received from non-existent subscribers, was to be set aside. 10.12 For the purpose of making this addition, the Assessing Officer has relied upon Page No. 13 of a Note Pad (marked as Annexure - 3) found and seized in the course of search at the premjsssof Mr. Harbhajan Singh (the director of the appellant). This page is available at Page No. 68 of he Paper-Book No.4. 10.13 The Assessing Officer has alleged that it depicts how one Mr. Jain of Calcutta will infuse funds in the appellant company, how the money will come, then how the shares will be transferred to the promoter's family. It may be noticed that there is no such mention on the \ said page as alleged by the learned Assessing Officer. Nowhere has it been stated about how the shares allotted can be transferred back to the promoter's family. It merely summarises the arrangement of financing in the form of share capital which was arranged by the investors. It mentions the names of the same parties from whom the share capital was received by the appellant. Thus, the learned Assessing Officer's allegations are baseless and contrary to the facts. 10.14 This particular page cannot be considered as "incriminating material" as nowhere it shows that the assossee has introduced its own money in the form such share application money / share capital. On perusal of this page, it can be seen that it does not contain any additional information which is not tallying with the books of account or the facts as submitted by the appellant regarding these transactions. 10.15 The Assessing Officer has observed that on this page there is a mention of amount of 4 to 3 which clearly shows the percentage of amount to be spent for doing this work. However, the appellant submits that the said noting as appearing on the concerned page is "4 - 3" and not "4 to 3". Further, a box has been drawn around "4" and "3" respectively and several other names have also been written around that box. The names written around first box having 4 are NV, Delcorn, Mr. N. Doshi & S. The letters written around second box of 3 are A, O & M. 10.16 The meaning of these noting is as under: • First box of 4: Four different entities would be investing in the appellant company which were Naswar Vanijya (written as NV), Destiny Dealcom Pvt. Ltd. (written as Delcom), Mr. Neetish R Doshi (written as Mr. N. Doshi) and Sweet Solutions Ltd. (written as S).

64 Hydroair Tectonics (PCD) Ltd

• Second box of 3: Three different entities would be investing in the appellant company which were Astor Tradecom Pvt. Ltd. (written as 'A'), Orbit Vyapaar Pvt. Ltd. (written as 'O') and Mahad Synthetics Processors Ltd. (written as 'M'). 10.17 These facts are exactly tallying with the agreed terms as per MOD made with the investors (as explained in detail in the subsequent paragraphs) and corresponding investments made by them. Thus, the learned Assessing Officer has drawn a wrong inference of "4 to 3" as a commission / cost incurred by the appellant of raising the share capital. 10.18 Thus, the page on which the Assessing Officer has placed reliance cannot be considered as "incriminating material" as it does not reveal any hidden facts about the impugned transactions on the basis of which any adverse inference can be drawn. In the absence of any incriminating materials related to the impugned transactions of share application money / share capital, no addition can be made while making the assessment u/s. 153A. 10.19 In order to appreciate the nature and source of the aggregate amount of ? 16 crore received during the year under consideration, the Memorandum of Understanding dated 12.12.2006 executed between the appellant, its director Mr. H. B. Singh, one Mr. Samir Thakkar and Naswar Vanijya Pvt. Ltd. is very relevant. The copy of this MOD is available at Pages 120 to 129 of the Paper-Book No. 6. 10.20 The salient features of this MOD are as follows: (i). Mr. Samir Thakkar and Naswar Vanijya Pvt. Ltd. have agreed to raise equity funding to the tune of t 112 crores for the appellant in three different tranches which included coming out with public issue of shares eventually, (ii). Naswar Vanijya Pvt. Ltd. agreed to subscribe for certain equity shares of the appellant company and bring share capital to the following extent immediately: a. Share capital of T 1 crore against allotment of 10,00,000 shares at a price of ? 10 each b. Share capital of ^ 12 crores against allotment of 10,00,000 shares at a price of ^ 120 each (iii). It was agreed that the aforesaid money to the extent of Rs. 13 crores would be brought by Naswar Vanijya Pvt. Ltd. on its own or through other strategic investors, (iv). Accordingly, the first lot of ? 1 crore was received from Destiny Dealcom Pvt. Ltd. (another strategic investor as arranged by Naswar Vanijya Pvt. Ltd.) and second lot of ^ 12 crores were received from a group of three persons including Naswar Vanijya Pvt. Ltd. and another two strategic investors namely Sweet Solutions Ltd. and Neetish R. Dosni. (v). The appellant agreed to allot 30,00,000 equity shares (at par) as 'incentive shares' to three different companies - 9,00,000 shares to Astor Tradecom Pvt. Ltd., 9,00,000 shares to Orbit Vyapaar Pvt. Ltd. and 12,00,000 shares to Mahad Synthetics Processors Ltd. Accordingly, the appellant received total amount of t 3 crores from these three companies (vi). The ownership and directorship of three companies as stated above was to remain with the promoters (H B Singh & family) till the time Samir Thakker and Naswar Vanijya Pvt. Ltd. could arrange the equity finance for the appellant in second and third tranches. (vii). Upon arrangement of second tranche of equity finance amounting to ? 25 - 35 crores, the ownership of Astor Tradecom Pvt. Ltd. was to be transferred to Naswar Vanijya Pvt. Ltd. (viii). Upon arrangement of second tranche of equity finance amounting to ? 65 - 75 crores, the

65 Hydroair Tectonics (PCD) Ltd

ownership of Orbit Vyapaar Pvt. Ltd.. was to be transferred to Naswar Vanijya Pvt. Ltd. and ownership of Mahad Synthetics Processors Ltd. was to be transferred to Mr. Samir Thakker. 10.21 Thus, an exhaustive plan for raising finance through issue of equity shares was chalked out in the said MOU. The appellant was in the acute need of such finance as it was about get huge orders from various agencies. 10.22 The appellant had received the said sum towards equity capita! which is in dispute from different entities as per the agreed terms of the MOU. 10.23 The appellant has also submitted the various documents in order to prove identity, creditworthiness and genuineness of the transactions. The important documents out of all documents submitted are as follows: (i). Certificates of Incorporation of all subscriber companies fii). Copies of PAN cards of all subscribers (iii). Copies of Share Application Forms (iv). Copies of cheques which were received against the share capital (v). Copies of bank statement of the appellant reflecting the impugned receipts (vi). Copies of audited Balance Sheets of subscriber companies reflecting the investment made by them in the shares of the appellant company These documents are available at Pages 154 to 275 of the Paper-Book No. 6. 10.24 Though the appellant is not required to explain the source of source i.e. source of money invested in the hands of the respective shareholders, the appellant would like to present the details of source of source of few shareholders as can be seen in the audited balance sheet submitted for Your Honour's kind reference:

Name of the party Share capital Details of source received Sweet Solutions Ltd 5,40,00,000 Net worth as on 31.3.2006 was Rs.80.84 crores consisting of share capital of Rs.3.85 crores and reserves & surplus of Rs.76.99 crores Naswar Vanjiya Pvt 3,00,00,000 Advances o Rs.3 Ltd crores from Sweet Solutions Ltd., Doyen Marketing (P) Ltd and Pentium Investments & Infrastructure Ltd Destiny Dealcom 1,00,00,000 Advances of Rs.1 Pvt Ltd crore from Khazana Tradelinks Ltd Orbit Vyapaar Pvt 90,00,000 Unsecured loan of Ltd Rs.90,00,000 taken from Khazana Tradelinks Ltd Astor Tradecom Pvt 90,00,000 Unsecured loan of Ltd Rs.90,00,000 taken from Khazana Tradelinks Ltd 10.25 As the investors failed to arrange for further equity finance as it was agreed, the appellant was unhappy with them and it entered into a Termination Agreement dated 15.11.2008 (Pages 276 tO 283 of Paper-Book No.6) and repurchased all the shares allotted to them through another sister concern namely Hydroair Envirotech Pvt. Ltd. The appellant only gave money of ? 16 crores to Hydroair Envirotech Pvt. Ltd. which was

66 Hydroair Tectonics (PCD) Ltd

utilised to purchase the shares of the appellant company from all the parties mentioned above. 10.26 It may be noted that the shares were purchased at the same price at which they were allotted to all the parties mentioned above. Thus, it was not the case of introducing the appellant's own money under the garb of investment of share capital by third parties and then repurchasing shares from them at a very nominal or throwaway price. 10.27 In view of the above, the appellant submits that the nature and source of the impugned amount of 3 16 crores received on account of share capital has been duly explained which is required to be accepted. 10.28 In the remand proceedings, the learned Assessing Officer has failed to make inquiries of any sort in order to verify the genuineness of the appellant's claim. The learned Assessing Officer could have summoned the parties and their directors, could have inquired with their jurisdictional Assessing Officer or even obtained the bank statements of the parties from their bankers. In the remand report dated 3.3.2017 (Pages 176-177 of Paper-Book No. 3), the learned Assessing Officer has merely commented upon the profitability of some of the shareholder companies or existence of reserves in their hands and nothing more than that. The appellant humbly submits that it does not have control over the profitability of its shareholders. It cannot be expected from the appellant that it should have raised share capital only from those persons who are making good amount of profits. The learned Assessing Officer could have brought evidences to prove that the money invested by them was not really belonging to them but belonging to the appellant only. But the learned Assessing Officer has failed to do so. 10.29 The CIT(A) has confirmed this addition primarily by doubting genuineness of the aforesaid MOD. He has noted that the assessee started receiving funds even before the date on which this MOD was executed. The appellant is not denying this fact. In fact, it is only after the appellant gained confidence with the investors on account of the initial amount received from them, it went ahead and signed MOD with them. 10.30 It has also been stated by the CIT(A) that the ownership and directorship of three companies i.e. Astor Tradecom Pvt. Ltd., Orbit Vyapaar Pvt. Ltd. and Mahad Synthetics Processors Ltd. should have been with the promoters of the appellant company. However, documents of these three companies submitted to the CIT (A) were not endorsing this fact. Regarding this observation of the CIT (A), the appellant would like to submit that this was the very reason of disputes being created with the investors and which ultimately resulted into the Termination Agreement being executed with them. 10.31 Regarding the ClT(A)'s observation about the issuance of shares at two different prices to the same group of investors and that too during the same time period, it is submitted that it was one of the business tactics used in order to incentivise the investors. The lead investors which were parties to the MOU were also acting as facilitator to get more finance. The plan was to go for public issue of the shares of the appellant company eventually. So, in order to provide attractive incentive to them, some of the shares were issued to them at just face value whereby they can sell these shares after the appellant company's shares are listed in order to encash their efforts for mobilising the required finance. Without prejudice, the Honourable Bombay High Court in the case of CIT vs. Green Infra Ltd. (78 taxmann.com 340) has held that even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as "unexplained credit" if the identity of the payer, genuineness of the transaction and capacity of the subscriber are not disputed.”

once identity and genuineness of transaction has been proved, merely for the

67 Hydroair Tectonics (PCD) Ltd reason that creditworthiness has not proved to the satisfaction of the AO,

addition could not be made u/s 68 of the Act. The Ld.AR for the assessee has

also taken an alternative argument to the effect that if at all addition is

confirmed, then benefit of telescoping shall be allowed against enhancement

of income due to estimation of profits. In this regard, he relied upon the

decision of Hon’ble Madras High Court in the case of CIT vs KSM Guruswamy

Nadar & Sons 19 Taxman 533(Mad).

rights to make addition towards share application money u/s 68 of the Income-

tax Act, 1961 as said addition was based on incriminating material found as a

result of search, which is marked as Annexure 3 as per which the assessee had

obtained accommodation entries of share application money through one Shri

Jain of Calcutta to re-route its own funds into the books of account. Although,

the assessee has filed certain evidences to prove identity of the creditors, but

fact remains that genuineness of transaction and creditworthiness of the

parties are still doubtful as those parties are from Kolkata whereas the

assessee is doing its business in Mumbai and therefore, it is highly improbable

and improper to accept the arguments of the assessee that the companies

registered or operating from Kolkata are investing in assessee company doing

business in Mumbai with a huge premium without knowing each other. The

68 Hydroair Tectonics (PCD) Ltd Ld.CIT(A) has rightly appreciated these facts to confirm the addition made by

the AO towards share application money and his order should be upheld. As

regards telescoping, there is no merit in the argument of the assessee for the

reason that as per assessee’s admission itself, the bogus purchases have been

booked to inflate expenditure so as to siphon off money from books of account

to make various cash payments to certain persons to obtain contracts. When

the assessee itself has admitted that inflated expenditure has been used to

make payments, it is highly incorrect on the part of assessee to seek

telescoping benefit against cash credits found in the books of account from

additional income determined on the basis of estimation of profit.

and gone through the orders of authorities below. It is an admitted fact that

when the assessments have been unabated / concluded as on the date of

search, no addition could be made in absence of any incriminating material

found as a result of search. This legal position has been laid down by various

High Courts and Tribunals. It is also an admitted fact that the assessment for

the assessment year under consideration has been unabated as on the date of

search. But the fact remains that the addition made by the AO towards share

application money and consequent expenditure is on the basis of incriminating

material found as a result of search which is marked as Annexure A3. The said

69 Hydroair Tectonics (PCD) Ltd document was seized from the premises of Shri Harbhajan Singh, director of

the company as per which, the assessee was obtaining accommodation entries

from certain agents in Kolkata in form of share application money. Therefore,

we are of the considered view that there is no merit in the argument of the

assessee for the reason that said addition was not based on any incriminating

material. Consequently, we reject legal argument taken by the assessee.

application money received from certain parties for the reason that though the

identity of the parties has been proved by filing certain documents, yet, the

genuineness of transaction and creditworthiness of the parties are still in

doubt as the assessee failed to explain how they have come in contact with the

assessee when both are situated and doing their business from different places

and not known to each other. The AO had extensively discussed the issue in

the light of certain judicial precedents to come to the conclusion that mere

furnishing of names and addresses, their PAN would not be sufficient

compliance to discharge the identity. The identity means - both parties should

be known to each other and their transaction should be genuine in terms of

normal commercial transactions between an investor and investee. It is the

contention of the assessee that the assessee has received share application

money from those companies which was on the basis of memorandum of

70 Hydroair Tectonics (PCD) Ltd understanding as per which the companies were investing for purchase of

shares of assessee company. The assessee further contended that those

companies are having huge net-worth to explain source of investment in

shares of assessee company. The assessee has filed various details including

certificate of incorporation, copies of PAN, etc,.

that in order to overcome the shadow of provisions of section 68, it is for the

assessee to file complete details of credits found in its books of account to

discharge the onus cast upon u/s 68 of the Act. Mere furnishing of certain

documents including PAN would not be sufficient enough to discharge the

identity when the conduct of the parties is in doubtful. In this case, the AO has

brought out clear facts to the effect that those parties are registered in Kolkata

and the assessee failed to prove how both came in contact while making huge

investment in assessee company. Even the seized document found during the

course of search clearly indicate that the assessee has obtained

accommodation entries from entry providers and this fact has been admitted

by the director Shri Harbhajan Singh. Therefore, we are of the considered view

that it cannot be said that the assessee has discharged identity of the persons

to the satisfaction of the AO. As regards genuineness of transactions, we find

that although the assessee has filed bank statements to prove genuineness of

71 Hydroair Tectonics (PCD) Ltd transactions, when it comes to the conduct of the parties and their place of

business coupled with incriminating material found during the course of search

clearly proves the fact that these parties are entry providers involved in

providing accommodation entries. The assessee is the beneficiary of

accommodation entries provided by entry providers in form of share

application money. The lower authorities brought out clear facts to the effect

that in the bank statement of the parties, except debit / credits on the same

day no other entries in respect of genuine business transactions are found.

Even on perusal of financial statements of the subscribers, we find that those

companies are carrying huge reserves in their balance-sheets without there

being any business activity. When we go through the P&L account, they have

declared a meagre turnover and also that in some cases, negative profit.

When we compare the year of incorporation of the company with their

declared profit, there is a mismatch between reserves & surplus and profit

generated from the business. Under these facts, it is highly incorrect on the

part of the assessee to claim that transactions between creditors and the

assessee are genuine and it has passed the test of genuineness of transactions

as provided u/s 68 of the Act. Similar is the case with creditworthiness of the

parties, as none of the subscriber has credible business activity, which is

evident from the fact that those companies have not declared any profits or

72 Hydroair Tectonics (PCD) Ltd even considerable amount of turnover. Further, when we go through their

balance-sheets, it is noticed that in the balance-sheet they carry only share

capital and reserves in the liability side and loans and advances in the asset

side without there being any fixed assets, trade creditors, trade receivables

and stock in trade. Under these facts, the creditworthiness of the parties is

highly doubtful and accordingly, there is no merit in the contention of the

assessee that those parties are having creditworthiness to subscribe to the

capital of the assessee company. Therefore, we are of the considered view

that the assessee has failed to prove genuineness of transactions and

creditworthiness of the parties. Insofar as case laws relied upon by the

assessee, we find that although plethoras of judgements have been relied

upon by the Ld.AR for the assessee in support of his argument, none of the

case laws are applicable to the facts of the present case. Therefore, the case

laws relied upon by the assessee is summarily rejected.

Ld.AR for the assessee submitted that in case addition is confirmed, the benefit

of telescoping shall be allowed to the assessee against additional income

estimated from total turnover. We find that though the benefit of telescoping

is available to certain addition made on the basis of loose slips / diary entries

against estimation of additional income over and above profit declared from

73 Hydroair Tectonics (PCD) Ltd books of account, but in this case on perusal of facts we find that the assessee

has inflated bogus purchases so as to siphon off money to make various

gratuitous payments to certain persons for getting contracts and hence, it is

highly incorrect to say that the additional income estimated from turnover is

available to the assessee to explain source of credit found in its books of

account. Therefore, we reject the arguments of the assessee for telescoping

for addition made towards share application money against additional income

estimated from turnover.

unexplained share capital u/s 68 amounting to Rs.62,72,35,875 and

consequent expenditure of Rs.2,19,53,255 incurred to raise such bogus share

capital. This issue has been raised in the department’s appeal in the case of

M/s Hydroair Tectonics (PCD) Ltd for AY 2010-11. The factual matrix of the

impugned dispute are that during the financial year relevant to AY 2010-11,

the assessee claims to have booked bogus purchases amounting to

Rs.328,18,70,325. The assessee further claimed that out of total bogus

purchases, it has passed unilateral purchases entries from three parties, viz.

Ankita Enterprises, Pavitra Infrastructure and Balaji fibre Reinforce Ltd. The

assessee further claims that these purchases were second type of bogus

purchases as explained in the submission related to bogus purchases and sales,

74 Hydroair Tectonics (PCD) Ltd i.e. they are merely fictitious entries passed unilaterally in the books of the

assessee and without involving in monetary transactions. These bogus

purchases were credited to the respective parties account and in order to

nullify the credit appearing in the books of account, the assessee has passed

journal entries in the books of account to credit share capital and share

premium and debited trade creditors’ accounts. The AO has made addition

towards share capital on the ground that the assessee has failed to prove the

identity, genuineness of transactions and creditworthiness of the parties. It is

the contention of the assessee that the share capital is a unilateral entry

passed in the books of account to create fictitious share capital without any

monetary consideration. The said entries have been reversed in subsequent

financial year. The assessee further contended that it has filed complete

details including financial statements of Balaji fibre Reinforce Ltd as per which

there is no investment in the name of the assessee company in their balance-

sheet. Similarly, in respect of Ankita Enterprises, it has obtained the

confirmation as per which the party denied any investment in shares of the

assessee company. The Ld.AR further submitted that the Ld.AO has accepted

the admission of bogus purchases and also this fact has been confirmed during

remand proceedings, as per which, none of the parties have responded to

notices u/s 133(6). In view of the above, it is conclusively established that the

75 Hydroair Tectonics (PCD) Ltd

assessee never received share capital amounting to Rs.62,72,35,875 from the

aforesaid 3 parties. The assessee has filed elaborate written submissions on

the issue along with certain judicial precedents which are reproduced

hereunder:-

“11.1 This issue has been raised in the department's appeal in the case of Hydroair Tectonics (PCD) Ltd. for A.Y. 2010-11. Refer Ground No. (iv) of the departmental appeal (ITA No. 3931/Mum-2017). 11.2 For the year under consideration (i.e. A.Y. 2010-11), the appellant has admitted that it had booked bogus purchases amounting to ? 328,18,70,325. These bogus purchases as admitted by the appellant included the purchases booked in the name of following three parties. Party-wise details of bogus purchases booked in the year under consideration is available at Page 9-10 of the Paper-Book No. 7:

Sr.No. Name of the Party Amount of Bogus Purchases (in Rs.) 1. Ankita Enterprise 20,90,78,415 2. Pavita Infrastructure 20,90,78,415 3. Balaji fiber Reinforce Pvt Ltd 20,90,79,045 67,72,35,875 TOTAL

11.3 These purchases were the second type of bogus purchases as explained in the submission related to bogus purchases & sales i.e. they were merely fictitious entries passed unilaterally in the books of the assessee and without involving any monetary transactions. 11.4 These bogus purchases were credited to the aforesaid parties' accounts respectively. However, it was a bogus liability created in the books of accounts as no real and genuine transactions had taken place between the appellant and these companies. In order to nullify these bogus liabilities standing to the credit of aforesaid three parties aggregating to ? 62,72,35,875, the appellant showed in its books that it had allotted its equity shares as on 31.3.2010 to them. Accordingly, the fictitious liability was squared up by passing fictitious entries of allotment of shares. The details of equity shares shown to have been allotted by the appellant to the aforesaid three parties are as follows:

Name of Party No. of Equity Face Value Premium per Issue Price Total Amount Shares per equity equity share per equity (including allotted share share premium) Ankita 6,63,741 10 305 315 20,90,78,415 Enterprise Pavita 6,63,741 10 305 315 20,90,78,415 Infrastructure Balaji fiber 6,63,743 10 305 315 20,90,79,045 Reinforce Pvt Ltd TOTAL 19,91,225 62,72,35,875

11.5 The ledger accounts of all three parties in the books of accounts of the appellant for the F.Y. 2009-10 showing booking of bogus purchases and transferring the liability to share capital & share premium of that company are available at Pages 1-8 of Paper-Book

76 Hydroair Tectonics (PCD) Ltd

No. 7. The appellant also submitted Return of Allotment in Form 2 to Registrar of Companies reflecting allotment of shares to the aforesaid parties. 11.6 However, the fact was that these entries of purchases and thereafter allotment of shares against the outstanding liabilities were bogus entries made unilaterally by the assessee. None of these companies had sold any goods to the assessee as shown above or subscribed to the equity shares of the assessee shown as above. In fact, these three parties were not aware at all about all such entries made by the appellant in their ledger accounts. 11.7 In respect of Balaji Fiber Reinforce Private Limited, we are providing the copies of Form 23AC, which is a form for filing balance sheet with the Registrar of Companies, for the year ended 31st March, 2010 as well as 31s1 March, 2011 along with its audited balance sheets for both years. Its balance sheet as on 31.3.2010 shows that it has only investments in gold & silver coins amounting to T 8,39,006 and no other investments at all. Further, its balance sheet as on 31.3.2011 also shows that it has only investments in gold & silver coins amounting to ? 13,06,90 and no other investments at all. [Refer Pages 11-42 of the Paper-Book No. 7]. 11.8 In respect of Ankita Enterprises, the appellant has been able to obtain a confirmation that it had never invested in shares of the appellant company during the financial year 2009-10. The copy of confirmation is available at Page 43 of the Paper-Book No. 7. 11.9 Further, the learned Assessing Officer has accepted the admission of bogus purchases amounting to I 328,18,70,325 as stated above. Further, regarding the allotment of shares to the aforesaid three parties, the learned Assessing Officer made inquiries with them by issuing notices u/s. 133(6). It has been stated by the learned Assessing Officer himself that in response to notice u/s. 133(6) all the three parties denied being shareholders of the appellant company. 1110 In view of the above, it is conclusively established that the appellant never received share capital amounting to f 62,72,35,875 from the aforesaid three parties. It had passed the journal entries for transferring the outstanding liabilities in respect of bogus purchases to its share capital and share premium accounts. 11.11 Howsoever fictitious it was but as a result of the above, the aforesaid three parties, which were outsiders, became entitled to 19,91,225 equity shares of the appellant company, at least as per records, which constituted about 11.44% of total equity shares as on 31.3.2010 (i.e. 1,74,03.188 equity shares). In order to ensure that those parties do not claim ownership of such shares, the appellant immediately thereafter showed that those 19,91,225 equity shares were transferred by all three parties to one of its sister concern i.e. Hydroair Envirotech Pvt. Ltd. as on 24.5.2010. 11.12 The appellant merely recorded transfer of 19,91,225 equity shares from the names of aforesaid three parties to Hydroair Envirotech Pvt. Ltd. in its records like shareholder's register and annual return. There was no flow of consideration from Hydroair Envirotech Pvt. Ltd. to any of the aforesaid parties for acquiring shares of the appellant company. The aforesaid three parties never subscribed to the impugned shares of the appellant company, never paid any money to the appellant company against share capital, never sold/transferred any shares of the appellant company to Hydroair Envirotech Pvt. Ltd., never received any consideration for selling/transferring shares of the appellant company to Hydroair Envirotech Pvt. Ltd. 11.13 The appellant would like to submit that there were no other supporting documents which could be found during the course of search which can further support the fact that the appellant company has received share capital amounting to ? 62,72,35,875 from those three parties i.e. Ankita Enterprises, Pavitra Infrastructure or Balaji Fiber Reinforce Pvt. Ltd. The search team could not find any of the below mentioned documents which may substantiate the fact of receipt of share capital by the appellant company amounting to Rs. 62,72,35,875 - • Any communication between appellant and these three parties regarding raising of share capital of an amount more than ? 62 crores. • Share certificates issued by the appellant to aforesaid three parties. • Any bank account of the appellant wherein amount of t 62,72,35,875 got credited.

77 Hydroair Tectonics (PCD) Ltd

11.14 Also, a group concern of the appellant, Hydroair Envirotech Pvt. Ltd. was also covered in search operation u/s. 132 simultaneously. Even in that concern's case, none of the below mentioned documents or evidences were found which can suggest that it had paid consideration to all three parties as mentioned above for reacquiring shares of the appellant company - • Communication between them negotiating transfer of shares of the appellant company. • Any bank account of Hydroair Envirotech Pvt. Ltd. reflecting payments made by it to three parties for purchasing shares of the appellant company. • Transfer forms duly signed by aforesaid three parties wherein they have agreed to transfer the shares in the name of Hydroair Envirotech Pvt. Ltd. and also stating the consideration received for transfer of shares. • Share certificates duly transferred in the name of Hydroair Envirotech Pvt. Ltd. • Payment of stamp duty on transfer of shares. 11.15 The very fact that none of the above documents were found either in the premises of the appellant company or in the premises of Hydroair Envirotech Pvt. Ltd. during the course of search proceeding suggests that the appellant company never received a share capital amounting to ? 62,72,35,875 at all. It was merely the book entries which were passed by the appellant unilaterally in order to cover up its own problems. 11.16 In the immediate subsequent financial year i.e. F.Y. 2010-11, the appellant reversed the fictitious share capital and share premium aggregating to ? 62,72,35,875 in its books of accounts. A reference can be made to Note No. 4 on "Share Capital" in the audited balance sheet as on 31.3.2011 (refer Pages 65-68 of Paper-Book No. 7) wherein it has been stated as follows: "The total paid up share capital as at March 31, 2011 is ?33,65,54,410. This does not include the erroneously filed form 2 with Ministry of Corporate Affairs for a total Equity Share capital of f 1,99,12,250 divided into 19,91,225 Equity Shares of f 10 each written back alongwith premium of ? 60,73,23,625 during the year as these are the shares issued erroneously without proper consideration during the previous year ended March 31, 2010." The share premium amounting to ^ 60,73,23,625 was written back and adjusted against General Reserve which can be seen from the detailed note on several adjustments made to General Reserves. 11.17 The appellant has also reversed/cancelled 19,91,225 equity shares standing in the name of Hydroair Envirotech Pvt. Ltd. in its subsequent annual return filed with Ministry of Corporate Affairs. 11.18 The following conclusion can be drawn on the basis of facts as explained above - • The appellant never received money to the extent of T 62,72,35,875 in any form. Even no evidences have been found during the course of search evidencing the receipt of money to that extent by the appellant. • The share capital (including share premium) shown to have been raised during the year is an outcome of web of bogus entries made by the appellant in its books of account. • The concerned parties were not having any knowledge of such bogus entries passed by the appellant in its books of accounts. They have not confirmed any of the entries which have been passed by the appellant in their accounts. They have also denied the fact of any investment made by them in the share capital of the appellant company. • The bogus entries which resulted into increase in share capital during the year under consideration have been reversed in the immediate subsequent year. • The net impact of passing bogus entries in the year under consideration and their reversal in the immediate subsequent year can be explained in the simple manner as follows:

Particulars Debit Credit Entry No.1: Purchases (Bogus) 62,72,35,875

78 Hydroair Tectonics (PCD) Ltd

To Ankita Enterprises 20,90,78,415 ToPavitra 20,90,78,415 Infrastructure To Balaji Fiber 20,90,79,045 Reinforce Pvt Ltd Entry No.2 Ankita Enterprises 20,90,78,415 Pavitra Infrastructure 20,90,78,415 Balaji Fiber Reinforce 20,90,79,045 Pvt Ltd To Share Capital 1,99,12,250 To Share Premium 60,73,23,625 Entry No.3 Share Capital 1,99,12,250 Share Premium 60,73,23,625 To General Reserves 62,72,35,875

11.19 The learned Assessing Officer has invoked the provisions of Section 68 in order to add the amount of Rs. 62,72,35,875 to the taxable income of the appellant. Section 68 reads as under: Where any sum is found credited in the books of an assesses maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. 11.20 The title of the Section i.e. "cash credits" itself implies that this Section can be invoked only if cash i.e. money is involved and not otherwise. In the appellant's case, it is crystal clear that no money is involved at all and the impugned amount of ^ 62,72,35,875 represented credit arising on account of mere journal entries passed which were bogus in nature, which were passed unilaterally without obtaining consent of the concerned parties and which were reversed in the immediate subsequent year. 11.21 Further, Section 68 provides that "where any sum is found credited......". Here, 'sum' is required to be interpreted as that sum which represents money. In this connection the word "sum" is of paramount importance. The words "any sum" cannot be taken as parallel to "any entry". Though an amount has been credited in the books, it cannot be covered within the purview of Section 68 if it does not represent any money. 11.22 The appellant relies upon the decision in the case of ACIT vs. Mahendra Kumar Agarwal [23 taxmann.com 285 - Jaipur ITAT] wherein upon similar facts, the ITAT held that the provisions o( Section 68 are not applicable. The facts of this case have explained in para 32 & 33 of the order which is reproduced below: "32. On perusal of accounts of M/s Rajesh Sales Corporation the AO found that M/s Rajesh Sales Corporation was standing as a creditor in the assessee's account for Rs. 1,31,74,265. That from the month of October onwards there were only receipts to the tune of Rs. 3,99,74,265 and on 31st March, 2007 a journal entry was passed. Mahendra Kumar Agarwal's current account was credited by Rs. 2,68,00,000 and Rajesh Sales Corporation's account was debited by the same amount. The AO has observed that out of receipts of Rs. 3,99,74,265, Rs. 2.68 crores was transferred to the current account of the assessee and balance Rs. 1,31,74,265 was carried forwarded to the next financial year. In the books of M/s Rajesh Sales Corpn. the same amount was credited to M/s Mohanlal Mahendra Kumar Jewellers and debited to M/s Amit Agency through a journal entry, Shri Kewal Chand Jain explained that the entry passed by M/s Rajesh Sales Corpn. was with a view to adjust accounts of both the parties with their consent. From the

79 Hydroair Tectonics (PCD) Ltd

statement of account of M/s Amit Agency in the books of assessee it was seen by the AO that there was an opening credit balance of Rs. 2,17,96,260 against which corresponding sales of the same amount were made and there was no outstanding balance. Considering the fact that journal entry was passed by assessee by debiting the account of M/s Rajesh Sales Corpn. and crediting the current account of the assessee, AO considered Rs. 2.68 crores as unexplained cash credit. 33. It was submitted by the assessee that the journal entry passed by debiting Rajesh Sales Corporation and crediting the assessee's current account was wrongly passed and wrong entry was rectified on 30th Sept., 2009. However, the assessee failed to provide copy of ledger account in which rectification entry was passed. The AO considered reversing of entry as an afterthought. That for two years Rs. 2.68 crores remained with the assessee and he could not rectify the entry. The accounts were audited and returns were filed. As the books of accounts of the current year were open and therefore, adjustment was made. During the year a survey was conducted on 2nd Sept., 2009 and adjustment entry was passed after the date of survey. In any case passing of rectification entry does not take away the basic nature of the transaction. That credits were transferred to the current account of Shri Mahendra Kumar for which no explanation was offered. The AO has further observed that M/s Rajesh Sales Corporation has not passed such rectification entry as informed by Shri Kewal Chand Jain vide his letter dt. 29th Dec., 2009. Further explanation of the assessee that it was not a real credit was not accepted by the AO as it was factually incorrect. Rs. 2.68 crores was not in the nature of journal entry but a consolidated entry of various bank credits which were transferred to the current account of Shri Mahendra Kumar. With this the AO made addition of Rs. 2.68 crores as unexplained cash credits." The decision of the IT AT in these facts as contained in para 38 onwards is reproduced below: "38. Contention of the Authorised Representative is considered. The issue to be decided is whether the journal entry passed for Rs. 2.68 crores can be added as unexplained cash credit under s. 68 of IT Act. 39. After considering the submissions and perusing the material on record, the learned CIT(A) observed that this issue is to be decided whether journal entry passed for Rs. 2.68 crores or odd can be added as unexplained cash credit under s. 68 of the Act. Thereafter the CIT(A) discussed the issue in detail at pp. 14 to 16 and gave following finding : "Rajesh Sales Corpn. made payment of Rs. 3,99,74,265 to the appellant in the proprietary concern of M/s Mohanlal Mahendra Kumar Jewellers and this payment received by the appellant is undisputed. On 31st March, 2007 a journal entry has been made in the books of accounts of the appellant by debiting M/s Rajesh Sales Corporation and crediting the current account of Shri Mahendra Agarwal by the aforesaid balance amount of Rs. 2.68 crores resulting no amount payable to Rajesh Sales Corpn. in the books of accounts of the appellant as on 31st March, 2007. In the logical sequence in the books of accounts of Rajesh Sales Corpn. the entry should have been made by crediting the account of the appellant and debiting the partner's current account by the aforesaid sum of Rs. 2.68 crores. However, in the books of accounts of Rajesh Sales Corpn. the appellant's account was correctly credited but it was debited to M/s Amit Agency. This entry has been made in the books of accounts of M/s Rajesh Sales Corpn. because the appellant was instructed to make the payment to M/s Amit Agency and therefore, with the mutual consent of all concerned parties these adjustment entries were to be made. Here it is important to note that as on 31st

80 Hydroair Tectonics (PCD) Ltd

March, 2007 no payment has been received or made by any of the parties namely the appellant, Amit Agency and by M/s Rajesh Sales Corpn. This factual situation is not in dispute and is also not challenged by the AO in his reports from time to time and in the discussion before me during the course of appellate proceedings- With these facts, it is absolutely clear that there is no credit which can be said as unexplained for the amount of Rs. 2.68 crores in the books of accounts of the appellant for which the addition has been made by AO under s. 68 of IT Act. In fact, in appellant's books there is debit entry of Rs. 2.68 crores debiting to Rajesh Sales Corpn. The AO is not found correct in making observation that any payment was due to M/s Amit Agency as appellant has not made any purchases directly from M/s Amit Agency. On the contrary sales were made by the appellant to M/s Amit Agency, Further, introduction of undisclosed income in the books cannot be made by passing journal entry because from journal entry cash cannot be introduced in the books. Further, the AO has not pointed out the introduction of undisclosed assets in the books of assesses corresponding to this journal entry. With this discussion it is clear that the AO has not understood the accounting sequence of aforesaid adjustment entry and wrongly considered the same as unexplained credit which was factually incorrect. Subsequently on being realized that there was wrong adjustment entry it was reversed by way of rectification entry on 30th Sept., 2009 and consequent to such reversal entry in the books of the appellant the another party namely, Rajesh Sales Corpn. has also passed an adjustment entry on 17th Feb., 2010 by reversing the earlier adjustment entry in which the appellant's account was debited and the account of Amit Agency was credited with the amount of Rs. 2.68 crores. The aforesaid mistake has been rectified on 17th Feb., 2010 in which the earlier entry was reversed. Subsequently, Rajesh Sales Corpn. has received the aforesaid amount of Rs. 2.68 crores through three different cheques of Rs. 70 lacs, Rs. 1.20 crore and Rs. 78 lacs. The same payment has been shown by the appellant in his books of accounts also. The journal entry has no consequence as far as application of s. 68 is concerned. In order to attract the provisions of s. 68 of IT Act it is primary condition that the appellant should have received amount in his books which obviously should have been paid by the creditor. If such credit is considered as unexplained then only it can be a case of making addition under s. 68 of IT Act as unexplained cash credit. Since there is no such credit of sum at all, there can be no question that whether such credit is satisfactory or unsatisfactory because this question will arise only when there is credit of sum in the books of accounts of the appellant. In fact there is no such credit of Rs. 2.68 crores as amount received in the books of accounts of the appellant. With this discussion it is clear that the AO was factually incorrect and wrong in making aforesaid addition of Rs. 2.68 crores under s. 68oflTAct. The AO is hereby directed to delete the same. The above findings find support from the decision of Hon'ble jurisdictional High Court in the case of CIT v. Hazarimal Milapchand Surana[2002] 178 CTR (Raj) 50 : [2003] 262 ITR 573 (Raj.) wherein the Hon'ble Court has held that mere book entry does not create income. The fourth ground of appeal is therefore, decided in favour of the appellant." 40. The learned CIT-Departmental Representative placed reliance on the order of AO. 41. On the other hand, learned counsel of the assesses placed reliance on the order of learned CIT (A). He further placed reliance on the written submissions which are in line of the submissions made before learned CIT(A). 42. After considering the orders of AO and learned CIT(A), we find no infirmity in the findings of learned CIT(A). The findings of learned CIT(A) are findings of fact which are reproduced somewhere above in this order. These findings could not be controverted nor any other material brought on record to establish otherwise. Therefore, in view of the reasoning given by learned CIT (A) we confirm his order on this issue."

81 Hydroair Tectonics (PCD) Ltd

11.23 Thus, ITAT has clearly held that no addition can be made u/s. 68 with regard to credit arising through "journal entries" especially when they have been reversed subsequently. This decision of I TAT is squarely applicable to the facts of the appellant. 11.24 We are also replying upon a decision of Calcutta High Court in the case of Jatia Investment Co. vs. CIT 206 ITR 718 wherein the facts of the case were even worse than the facts of the appellant's case. In this case, the partners of the assessee-firm were members of the 'J' family running several businesses and industries through numerous firms, concerns and companies commonly known as the 'J' Group. The account books of the assessee showed that it borrowed certain amount from GB, a proprietary concern of one of the partners JM. The money was invested in purchase of shares. On examination of books of account of GB, the ITO came to the conclusion that GB had no cash balance to advance said amount to the assessee. The ITO, thus, concluded that the source of funds for the purchase of shares by the assessee was not explained, and, accordingly, assessed the amount in question as income from undisclosed income. The assessee contended that actually no cash had passed but the entries were mere adjustment entries. It was contended by the assessee, inter alia, that the entire transactions were effected between the assessee-firm and the concerns belonging to the 'J' group only for the requirement of complying with the directions of the Reserve Bank of India that cast on the companies a statutory obligation to reduce their borrowing to maintain parity with the loan and capital ratio as prescribed. It was further urged that the transactions as also the creation of the assessee-firm were devices to avoid the mischief of the ceiling imposed by the Reserve Bank of India on the aforesaid three non-financial companies. The assessee-firm stepped into the shoes of the said three companies and the companies ceased to be debtors and, to that extent, the magnitude of its loan fell within the prescribed ratio. It was finally emphasised by the assessee that the ultimate result was that the firm became a debtor to GB and the three non-financial companies of the group not discharged and that, at the worst, it could be said that the assessee-firm had received valuable assets being the shares of the equivalent value of the debt taken over by it from the companies. Therefore, the question of cash credit did not come in there being no actual passing or receipt of cash. In other words, the transactions were mere book entries. In view of the said facts, the High Court held as under: "We have perused the assessment order carefully. We find that cash did not pass at any stage though entries were made in the cash book showing payments and receipts ; but since the entries made a complete round, no passing of cash was necessary for the purpose of making the entries. That there was no passing of cash is also admitted by the Income-tax Officer himself. We have already extracted the observation of the Income-tax Officer in paragraph 14 of his assessment order. The Income-tax Officer has clearly opined that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. The only point in the assessment order is that the entries not involving the passing of cash should not have found a place in the cash book, but in the ledger account through journal entries. There is another self-contradiction in the Income-tax Officer's finding that, if there was no real cash entry on the credit side of the cash book, but merely a notional or fictitious cash entry, as admitted by him, there is no real credit of cash to its cash book ; the question of inclusion of the amount of the entry as unexplained cash credit cannot arise. One of the grounds of the Tribunal for disbelieving the assessee's case is that the adjustment entries were made by notional cash entries with a view to bringing down the debt-and-capital ratio, i.e., that while being discharged of the debt the said companies also jettisoned their assets, i. e., the shares held by them of equivalent sum without achieving the avowed purpose. Here the

82 Hydroair Tectonics (PCD) Ltd

Tribunal certainly misdirected itself. The ratio to be reduced is of the loan in relation to the share capital and the reserves. Jettisoning the shares had the desired effect of reducing the borrowed capital. Again, as regards the Tribunal's refusal to take notice of the directions of the Reserve Bank, it is not correct for the Tribunal to hold that the said document was a new evidence in the true sense of the term. The assessee has been consistently pleading before the lower authorities that the entries had to be made in order to bring the companies in conformity with the said direction. Moreover, the direction of the Reserve Bank is a public document within the meaning of section 74 of the Evidence Act, 1872. Documents of a public nature and public authority are generally admissible in evidence subject to the mode of proving them as laid down in sections 76 and 78 of the Evidence Act. In our view, the effect and import of the transactions is that the assessee took over the liability of the aforesaid non-financial companies to GB and Co. in exchange for the shares as aforesaid." 11.25 Hon'ble Rajasthan High Court in the case of CIT v. Hazarima! Milapchand Surana [2003] 262 ITR 573 / [2002] 125 Taxman 115 (Raj) has held that mere book entry does not create income. Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 has also held that mere accounting entry would not give rise to income unless income has resulted in real terms. 11.26 The provisions of Section 68 are required to be applied in its true spirit. Considering the fact that the appellant had never received any money / benefit to the extent of ? 62,72,35,875 and there were bogus entries passed by the appellant in its books which were subsequently reversed as well, the addition made by the learned Assessing Officer in this regard has been rightly deleted by the CIT (A). 11.27 Since the addition of t 62,75,35,875 itself is devoid of merits, further addition made by the learned Assessing Officer on account of cost of 3.5% i.e. ? 2,19,53,255 alleged to have been incurred by the appellant cannot be sustained at all.”

appearing in the books of account of the assessee is never disputed. The

assessee did not prove identity, genuineness of transactions and

creditworthiness of the parties is also not disputed. The subsequent reversal

of entries suo moto by the assessee in its books of account by claiming that it

has passed unilateral entries in the books of account without any monetary

consideration is far from the truth and also to circumvent the addition made

by the AO. Therefore, no credence could be given to the arguments of the

83 Hydroair Tectonics (PCD) Ltd assessee that these are fictitious entries unilaterally passed in the books of

account. The Ld.DR further submitted that the assessee never disputed the

fact that it could not file any evidence to prove the credits. Therefore, there is

no reason for the Ld.CIT(A) to delete additions by relying upon the submissions

of the assessee subsequent to the date of search.

record. The assessee never disputed the fact that the credits in the form of

share capital and share premium appeared in its books of account for the

relevant financial year. It is also an admitted fact that the assessee could not

file any evidence to prove identity, genuineness of transactions and

creditworthiness of parties. The assessee’s arguments of fictitious entries and

reversal of such entries in subsequent financial year is not based on any

evidence. Once the assessee has taken a different stand subsequent to the

date of search, it could be safely concluded that it is an afterthought made to

overcome or circumvent the addition made by the lower authorities in respect

of credit found in the books of account. Therefore, there is no need to give

much credence to the subsequent submissions made by the assessee to argue

that these are fictitious entries unilaterally passed in the books of account,

rather, it needs to be considered in the light of facts gathered during the

course of search coupled with further enquiries conducted during the course

84 Hydroair Tectonics (PCD) Ltd of assessment proceedings where it was categorically proved that the assessee

is found with credit in the form of share capital and share application money in

the books of account for which no explanation has been offered including

identity, creditworthiness and genuineness of transactions. The Ld.CIT(A),

without appreciating these facts, simply on the basis of submissions of the

assessee, which is not based on any evidence, deleted addition made by the

AO. Insofar as case laws relied upon by the assessee, we find that these case

laws are rendered under different set of facts and hence, the same cannot be

considered in the light of facts of assessee’s case as the assessee has falsified

its books of account by making various entries including bogus purchases and

bogus sales alongwith share capital and share premium. Hence, the case laws

relied upon by the assessee is rejected.

circumstances of this case, we find that the AO was right in making addition

towards share capital and share premium as the assessee could not produce

any kind of evidence to come out of the shadow of provisions of section 68 of

the I.T. Act, 1961; hence, we reverse the findings of Ld.CIT(A) and confirm the

addition made by the AO.

assessee had taken a plea that in case addition is confirmed, the benefit of

85 Hydroair Tectonics (PCD) Ltd telescoping shall be allowed to the assessee against additional income

estimated from total turnover for the year under consideration. We have

already noted in the preceding paragraphs that there is direct nexus between

inflation of expenditure and siphoning off money for the purpose of making

various gratuitous payment for getting contracts, therefore, it is improbable

and inappropriate to accept the arguments of the assessee that the source is

available to explain the credits in the form of share capital and share premium.

Hence, we reject the arguments of the assessee.

appeal in the case of M/s Hydroair Tectonics (PCD) for AYs 2009-10 & 2010-11

is addition on account of capital subsidy and disallowance of depreciation. The

facts with regard to the impugned dispute are that the assessee is in the

business of setting up effluent treatment project at several locations in the

states of Haryana, Tamil Nadu and Uttar Pradesh. During the previous year

relevant to AY 2009-10, the assessee raised its claim over the relevant

authorities in respect of capital subsidy in respect of its various projects

aggregating to Rs.53,68,41,735. This amount was directly credited to the

capital reserve account in the books of account. As per the agreed terms with

the agencies, the assessee was required to execute the total project on its own

and thereafter, the concerned agencies were required to contribute /

86 Hydroair Tectonics (PCD) Ltd reimburse the portion of the contract cost, which they had agreed to

contribute. The cost incurred by the assessee was capitalised to capital work-

in-progress in its books of account and the contribution / reimbursement

received / receivable from all such agencies was separately accounted as

capital subsidy which was credited to capital reserve account. The AO has

alleged that 80% of the project cost is bogus and inflated. After reducing 80%

of the project cost, the Ld.AO calculated excess of capital subsidy over

remaining 20% of the project cost, which amounted to Rs.31,59,17,207. This

excess capital subsidy over 20% of the project cost has been added as income

of the assessee on the ground that the assessee has got benefit to that extent.

The AO has come to the conclusion that 80% of cost of assets is bogus in

nature on the basis of assessee’s own conduct of reversal of 80% of cost of

assets during AY 2011-12 amounting to Rs.119 crores.

noted that subsidies are related to the fixed assets of project executed by the

assessee. therefore, primarily, amount of subsidy is required to be reduced

from the actual cost of the relevant asset, it is only because the aggregate of

the cost of the relevant asset has been reduced by the AO. Secondly, the AO

has lost the jurisdiction to decide the taxability on the issue on account of the

fact that the AO has accepted the claim of capital subsidy in the return filed u/s

87 Hydroair Tectonics (PCD) Ltd 139(1) and no notice u/s 143(2) had been issued before initiation of search.

Further, no incriminating material or evidence have been found during the

course of search which could lead to the conclusion that the assessee has

received benefit as the capital subsidy was higher than the cost of the relevant

project. The Ld.AR further submitted that certain purchases which were

capitalised were transferred back to capital work-in-progress during AY 2011-

12 as they were not ready for use and also certain projects were transferred to

a special purpose vehicle, viz. M/s Accord Hydraulics Pvt Ltd in accordance with

joint venture agreement. These facts have been duly explained in note 9 on

fixed assets in the audited financial statements. The Ld.AR further submitted

that even depreciation claimed on all such projects for the concerned

assessment years have also been reversed while filing returns u/s 153A of the

Act. The Ld.AR further submitted that out of total cost of Rs.116.30 crores only

an amount of Rs.52.90 crores has been treated as bogus / fictitious which

constitute 45.49% only. From the above analysis, it can be inferred that the

Ld.AO might have considered the amount of Rs.47.59 crores which represents

re-transfer from assets to capital work-in-progress and also the amount of

Rs.15.80 crores which represents transfer of projects to another entity while

determining the amount of Rs.119 crores as reversal of bogus / fictitious

assets. The Ld.AR further referring to the working furnished in its paper book,

88 Hydroair Tectonics (PCD) Ltd submitted that assessee has reversed capital subsidy by excluding bogus

purchases added to capital assets and after excluding reversal of capital

subsidy, the net amount of subsidy is Rs.23.59 crores only. As against this, the

assessee has incurred cost aggregating to Rs.63.39 crores after eliminating

bogus / fictitious purchases. In view of the above, it cannot be said that the

assessee has received any benefit out of capital subsidy as its amount is far

lesser than the aggregate cost of the concerned project.

reversed bogus purchase element involved in capital work-in-progress, on

which capital subsidy has been claimed and credited to capital account, such

unilateral reversal of entries in subsequent years may be at best, could be

considered as an attempt to circumvent addition, but not based on any

evidence. In this case, the assessee has inflated expenditure by obtaining

bogus purchase bills and which is extended to even capital work-in-progress

mainly for the purpose of making bogus claim of capital subsidy from the

agencies. There is no facts either in the order of the AO or in the order of the

Ld.CIT(A) with regard to the actual amount of subsidy received from the

agencies. Therefore, the issue may be set aside to the file of the AO to

ascertain the correct facts and to make appropriate computation of addition

towards capital subsidy as well as depreciation on such capital asset.

89 Hydroair Tectonics (PCD) Ltd 52. We have heard both the parties and perused the material available on

record. The whole controversy revolves around the issue of claim of capital

subsidy from certain state governments on project executed by the assessee

under the scheme ‘capital subsidy’ floated by various government

departments. In the original return filed u/s 139(1), the assessee has inflated

its capital work-in-progress by booking bogus purchases and made claim

before the authorities towards their share of contribution to the project. In

return filed u/s 153A, the assessee has eliminated bogus purchases by passing

reverse entries, in its books of account and such exercise has been done by

reversing capital work in progress and corresponding capital subsidy. The AO

has not accepted the workings furnished by the assessee for the reason that

such workings are not based on any evidence. Therefore, he went upon to

reduce the bogus purchase element in capital work-in-progress on adhoc basis

by applying 80% towards bogus purchase component and balance as genuine

purchases. From that, the AO has arrived at an excess amount of capital

subsidy claimed from government departments and accordingly, he made

addition towards excess amount of capital subsidy as income of the assessee.

It is the claim of the assessee that in AY 2011-12 it has reversed almost 40% of

bogus purchases involved in capital work-in-progress by reversing capital

subsidy credited in capital reserve account and also by crediting to concerned

90 Hydroair Tectonics (PCD) Ltd trade creditors’ account. After excluding reversal of capital subsidy, the net

amount of subsidy is Rs.23.51 crores. As against this, the assessee has incurred

project cost aggregating to Rs.63.40 crores, therefore, the question of deriving

benefit by claiming excess subsidy from the government department does not

arise and also making addition towards such excess capital subsidy is incorrect.

revised claim of capital subsidy by recasting its books of account after the date

of search to eliminate bogus purchases involved in capital work-in-progress

and such working made by the assessee in the return filed u/s 153A is not

based on any evidences. Further, the assessee is in the habit of falsification of

its books of account by window dressing financial statements so as to get

various benefits including finance from banks. This fact has been accepted by

the assessee even before us. Therefore, the possibility of inflating capital

work-in-progress for the purpose of making claim from the concerned

authorities cannot be ruled out. Although, the assessee has reversed bogus

purchases involved in capital work-in-progress in subsequent assessment year,

but such working is not based on any evidences. Though there is a possibility

of booking bogus purchases in capital work-in-progress so as to make higher

claim of capital subsidy, but what is the amount or what is the degree of bogus

purchases debited to capital work-in-progress to get the capital subsidy cannot

91 Hydroair Tectonics (PCD) Ltd be ascertained from the records. Even the AO has not made out any attempt

to find out what is the exact amount of claim made before the authorities.

This is very important because any amount of capital subsidy received from the

government against project executed by the assessee shall be either reduced

from the cost of the asset for the purpose of claiming depreciation or it should

be credited to P&L Account in equal instalments over the period of life of the

asset. In this case, the assessee has unilaterally reversed entries in subsequent

financial year to reduce the amount of capital work-in-progress in its books of

account. Although, the assessee has reversed capital subsidy credited to

capital reserve account, but there is no clear facts as to whether the assessee

has made a revised claim before the authorities or not. Further, even there is

no fact emerging from the orders of lower authorities regarding actual claim

made before the authorities and amount of subsidy received from the said

agencies. Unless we know these facts, it is very difficult to ascertain the exact

amount of depreciation needs to be allowed against such capital assets. Since

the lower authorities have failed to bring out clear facts on this aspect and also

the assessee is in the habit of falsification of its books of account by passing

fictitious entries for the purpose of inflating expenditure, we are of the

considered view that the whole issue including addition towards capital

subsidy as well as allowability of depreciation on capital asset needs to be set

92 Hydroair Tectonics (PCD) Ltd aside to the file of the AO for the purpose of detailed verification. Hence, we

set aside the issue to the file of the AO and direct him to cause necessary

enquiries in the light of reversal of entries passed by the assessee in

subsequent financial year in its books of account. We further, direct the AO to

cause necessary enquiries with the concerned agencies about exact claim

made before them for claiming capital subsidy. The AO is also directed to re-

work depreciation by reducing the amount of actual capital subsidy received or

receivable from the concerned authorities to the capital asset and re-work

depreciation allowable to the assessee. As a result, the ground raised by the

revenue for AYs 2009-10 & 2010-11 is allowed, for statistical purpose.

appeal in the case of M/s Hydroair Tectonics (PCD) Ltd for AYs 2009-10 & 2010-

11 is deduction u/s 80IA in respect of eligible profit. The assessee is engaged in

the business of waste water treatment or effluent treatment. It had

undertaken a project to develop, operate and maintain effluent treatment

plant at Roha and Ichalkaranji. The assessee has claimed deduction u/s 80IA in

respect of profits of the eligible units. The first year in which deduction u/s

80IA was claimed was AY 2008-09. The claim of the assessee was first

examined during assessment proceedings u/s 143(3) for AY 2008-09. The AO,

after considering relevant facts, has denied the deduction for Roha unit

93 Hydroair Tectonics (PCD) Ltd primarily on the ground that the assessee has not executed a valid agreement

with the Central Government or state government or a local authority as

required u/s 80IA(4) of the Act. In respect of Ichalkaranji unit, the AO allowed

deduction, but re-worked amount of deduction after reallocating several

expenses in addition to what was allocated by the assessee. The assessee

carried the matter in appeal before the CIT(A). However, the Ld.CIT(A)

confirmed the stand taken by the AO. Upon further appeal, the ITAT, vide its

order dated 02-03-2016, set aside the issue to the file of the AO for further

verification in the light of memorandum of understanding entered into

between the assessee and MIDC. In the meantime, the AO passed the

assessment order u/s 153A for AY 2008-09, wherein he completely disallowed

deduction u/s 80IA for the reason that in the original assessment proceedings

it was disallowed which was later on confirmed by CIT(A). While dealing with

the issue in the appeal against assessment order passed u/s 153A, the

Ld.CIT(A) took cognizance of the ITAT order setting aside the issue to the file of

the AO for fresh adjudication, in his order dated 14-03-2017, he directed the

AO to re-examine the issue in the light of observations of the ITAT.

u/s 80IA was accepted in initial year there is no reason to take different stand

for subsequent assessment year unless there is change in facts. The Ld.AR

94 Hydroair Tectonics (PCD) Ltd further submitted that the AO passed order giving effect to the ITAT’s order on

05-01-2018 wherein she has allowed deduction u/s 80IA in respect of both the

units. Since the issue has been thoroughly examined in the initial year and

allowed the claim, the assessee is automatically eligible for deduction for

subsequent assessment years. Therefore, the AO may be directed to do so. In

this regard, he relied upon certain judicial precedents including the decision of

Hon’ble Karnataka High Court in the case of CIT vs ACE Multitaxes Systems Pvt

Ltd (2009) 317 ITR 207 (Kar).

Ld.CIT(A) submitted that the assessee has not filed all evidences to prove

whether it is eligible for claiming deduction u/s 80IA in respect of two of its

purchases. Therefore, there is no error in the order of the lower authorities

and, hence their order should be upheld.

record. Admittedly, the Ld.AO has allowed deduction claimed u/s 80IA in

respect of both units in the order giving effect to ITAT’s order vide her order

dated 05-01-2018. It is also an admitted fact that the deduction claimed u/s

80IA has been mainly denied for the reason that the assessee has filed to file

agreement entered into with the concerned authorities. But, the observations

of the AO had been considered by the ITAT for the assessment year 2008-09

95 Hydroair Tectonics (PCD) Ltd and after considering relevant agreements submitted by the assessee restored

the matter back to the file of the AO for further verification of deduction

claimed. The Ld.AO, after considering relevant facts and after thoroughly

examining the facts, allowed the benefit of deduction u/s 80IA. Once the

deduction claimed u/s 80IA is allowed in the initial year, then the AO cannot

disallow such claim in the subsequent assessment years, unless there is change

in facts. In this case, on perusal of facts, we find that the AO has disallowed

the claim by following his findings for the AY 2008-09. But such finding has

been considered by the ITAT to allow the benefit. Therefore, we are of the

considered view that there is no reason for the AO to deny the benefit of claim

made u/s 80IA. This legal proposition is supported by the decision of Hon’ble

Karnataka High Court in the case of CIT vs ACE Multitaxes Systems Pvt Ltd

(supra). Further, the Ld.CIT(A) has denied the benefit on the ground that the

assessee has failed to submit audit report in form 10CCB. The assessee has

filed copies of audit report in form 10CCB which is enclosed in paper book

pages 85 to 98. Therefore, we are of the considered view that the assessee is

eligible for deduction u/s 80IA in respect of two units and accordingly, we

direct the AO to allow deduction as claimed by the assessee for AYs 2009-10 &

2010-11.

96 Hydroair Tectonics (PCD) Ltd 58. The next issue that came up for our consideration is addition of income

from undisclosed sources on the basis of noting made in the diary. The AO has

made addition of Rs.25,51,000 for AY 2008-09 in the hands of Shri Harbhajan

Singh on the basis of a noting found during the course of search. On the basis

of said noting, the AO inferred that the assessee has purchased a flat at

Kharghar for Rs.72,79,000 out of which, an amount of Rs.25,51,000 was paid in

cash on or before 29-01-2009. The Ld.AR for the assessee submitted that

these noting is neither in the handwriting of the assessee nor of his wife. The

property claims to have been purchased by the assessee was not appearing in

the list of properties submitted before the AO. It was explained before the AO

that one of the employees of the assessee, who proposed to purchase a

residential flat for him and wanted loan for the purpose for which he has made

noting in the diary. The AO has made addition purely on suspicion and

surmises only on the presumption that once a document is found in the

possession of the assessee, as per provisions of section 132(4A), it is presumed

that the document belongs to the assessee and contents of such document is

correct, without appreciating the fact that these are not belonging to the

assessee and the assessee neither purchased the flat nor made any payment.

that the AO has made addition of Rs.25,51,000 on the basis of a noting found

97 Hydroair Tectonics (PCD) Ltd in the diary without there being any corresponding evidence to show that the

assessee has in fact purchased a flat as claimed by the Ld.AO. On the other

hand, the assessee has made out a case that the property purportedly

purchased by assessee was neither appearing in the list of properties furnished

before the AO nor any payment has been made against such property.

Therefore, we are of the considered view that the AO was incorrect in making

addition only on the basis of noting found in the diary without there being any

corresponding evidence to prove that the assessee has, in fact, purchased the

property. In this case, there is no iota of discussion in the order of the AO

whether the assessee is in possession of the said property or not. Therefore,

we are of the considered view that there is no reason to make addition for the

AO when the assessee has proved that he has not purchased any property as

mentioned in the said diary. Accordingly we direct the AO to delete addition of

Rs.25,51,000.

case of M/s Hydroair Tectonics (PCD) Ltd. This addition has been made solely

on the basis of some scribbling made on page 4 of pocket telephone diary

found during the course of search at the office premises of the assessee. On

the basis of aforesaid nothing, the Ld.AO inferred that 5% commission was

paid for procuring Balgotra project.

98 Hydroair Tectonics (PCD) Ltd 61. The Ld.AR for the assessee submitted that except a piece of paper in

form of pocket telephone diary, nothing was in the possession of the AO to

infer that the assessee has paid money to one Mr. Sudhir Kumar for getting

Balgotra project. The AO has made addition purely on suspicion and surmise

without there being any corresponding evidence to prove that the assessee

has paid 5% commission to the said party for getting contract.

solely based on a noting found in pocket telephone diary, without any

corresponding evidence to prove that the assessee has paid 5% commission to

one Mr. Sudhir Kumar for getting Balgotra project. Although the provisions

made it mandatory for the assessee to prove that the document found in his

possession and its contents are incorrect, but merely on the basis of

presumptions drawn as per the provisions of section 132(4A), addition could

not be made unless there is corresponding evidence in the possession of the

AO to prove that the noting found in the diary represents undisclosed income

of the assessee. Therefore, we direct the AO to delete addition of

Rs.12,44,750.

expenditure incurred in relation to exempt income u/s 14A. This issue has

been raised in the departmental appeal in the case of M/s Hydroair Tectonics

99 Hydroair Tectonics (PCD) Ltd (PCD) Ltd for AY 2010-11. The AO has disallowed a sum of Rs.32,43,922 u/s

14A by applying rule 8D(2) of I.T. Rules, 1962. It is the claim of the assessee

that it has earned dividend income of Rs.2,000, therefore, if at all disallowance

is required u/s 14A, the same should be restricted to the amount of actual

exempt income earned for the year.

the assessee for the reason that this issue is no longer res-integra. The Hon’ble

Delhi High Court in case of Joint Investment Pvt Ltd vs. CIT(2015) 372 ITR 694

had considered similar issue and held that disallowances contemplated u/s

14A cannot shallow whole exempt income. The co-ordinate benches of ITAT,

have taken a consistent view that disallowance contemplated u/s 14A needs to

be restricted to the extent of exempt income earned for the year under

consideration. In this case, there is no dispute with regard to the fact that the

assessee has earned exempt income of Rs.2,000 only. Therefore, we are of the

considered view that disallowances contemplated u/s 14A cannot exceed the

amount of exempt income. The Ld.CIT(A), after considering relevant facts has

rightly deleted addition made by the AO. Hence, we are inclined to uphold the

findings of Ld.CIT(A) and reject ground taken by the revenue.

interest on account of interest free advances given to sister concern. This issue

100 Hydroair Tectonics (PCD) Ltd has been raised in the assessee’s appeal in case of M/s Hydroair Tectonics

(PCD) Ltd for AY 2010-11. The AO has disallowed interest expenditure of

Rs.1.92 crores on the ground that the assessee has diverted its interest bearing

funds to sister concerns. According to the AO, the assessee has given advances

of Rs.16 crores to M/s Hydroair Enviro Tectonics (PCD) Ltd without charging

any interest. It is the contention of the assessee that it has sufficient own

funds in the form of share capital and reserves. Therefore, once there is a

mixed fund, including borrowed funds, general presumption is that

investments are out of own funds. In this regard, the assessee relied upon the

decision of Hon’ble Bombay High Court in the case of Reliance Utilities Ltd vs

CIT 338 ITR 340 (Bom).

record. No doubt, the Hon’ble Bombay High Court in the case of Reliance

Utilities Ltd vs CIT (supra) has held that once the assessee has proved

availability of mixed funds including borrowed funds and also its own funds is

more than the amount of investments, then a general presumption is that

investments are out of own funds. Consequently, no disallowance can be

made towards interest expenditure. But, in this case, absolutely, there is no

facts with regard to the availability own funds. At the same time, the assessee

has borrowed huge funds from banks and diverted part of its funds to sister

101 Hydroair Tectonics (PCD) Ltd concerns without charging any interest. The fact that whether the assessee is

having own funds in excess of the amount of loan given to sister concerns at

the relevant point of time is a fact which needs to be ascertained from the

books of account. Therefore, we are of the considered view that the issue

needs to be re-examined by the AO in light of the claim of the assessee that it

has sufficient own funds in excess of loan given to sister concerns. Hence, we

set aside the issue to the file of the AO and direct him to consider the issue

afresh in light of decision of Hon’ble Bombay High Court in the case of Reliance

Utilities Ltd vs. CIT (supra).

948/Mum/2016, ITA.No. 4171/Mum/2016 ITA.No. 4172/Mum/2016 ITA.No.

3095/Mum/2016 ITA.No. 3096/Mum/2016 ITA.No. 3097/Mum/2016 ITA.No.

3098/Mum/2016 ITA.No. 1442/Mum/2017 ITA.No. 1434/Mum/2017 ITA.No.

1435/Mum/2017 ITA.No. 1436/Mum/2017 ITA.No. 1437/Mum/2017 ITA.No.

4167/Mum/2016 ITA.No. 4168/Mum/2016 ITA.No. 4169/Mum/2016 ITA.No.

4196/Mum/2016 and ITA No. 4170/Mum/2016 are dismissed. Further, ITA No.

3420/Mum/2016, 3421/Mum/2016, 4291/Mum/2016 and ITA.No.

4304/Mum/2016 is also dismissed. Further, Appeals filed by the assessee M/s

Hydroair Tectonics (PCD) Ltd in ITA.No. 3949/Mum/2017, ITA.No.

3950/Mum/2017, ITA.No. 3951/Mum/2017, ITA.No. 3952/Mum/2017, ITA.No.

102 Hydroair Tectonics (PCD) Ltd 3953/Mum/2017, ITA.No. 3954/Mum/2017, are partly allowed. The appeals

filed by the Revenue in ITA.No. 3926/Mum/2017, ITA.No. 3927/Mum/2017,

ITA.No. 3928/Mum/2017, ITA.No. 3929/Mum/2017, ITA.No. 3930/Mum/2017

and ITA.No. 3931/Mum/2017 are partly allowed. Similarly, ITA No.

847/Mum/2017 is allowed.

Order pronounced in the open court on 30-01-2019

Sd/- sd/- (Joginder Singh) (G Manjunatha) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai, Dt : 30th January, 2019 Pk/-

Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR

/True copy/ By order

Asstt. Registrar, ITAT, Mumbai