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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’
PER BENCH : This appeal by the Revenue is directed against the order of the CIT(A)-11, Bangalore dated 22.5.2015 for Assessment Year 2010-11. The assessee has also preferred cross-objections (C.O) in respect of the aforesaid order of the CIT(A). 2. Briefly stated, the facts of the case are as under:-
ITA No.1109/B/15 CO No.206/B/15 2 2.1 The assessee filed its return of income for asst. year 2010-11 on 15/10/2010 declaring Nil income. The return was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’). There was a search u/s 132 of the Act conducted on 19/7/2010 in the cases of M/s Bharat Mines and Minerals, M/s BMM Ispat Ltd., which are group companies of the assessee. In the course of search it was found that the assessee has received share application money from M/s BPO Finance & Investments Pvt. Ltd., and M/s Panchmukhi Properties Pvt. Ltd., amounting to Rs.26 crores and Rs.30.40 respectively. On the basis of evidence found in the course of search, the AO was of the view that the share application money was routed through shell companies of the promoters and the share application money was from unaccounted sources. After initiating proceedings u/s 147 of the Act and recording reasons in this regard, the AO issued notice u/s 148 of the Act to the assessee on 22/11/2012. In response thereto, the assessee vide letter dated 19/12/2012 submitted that the return of income filed on 15/10/2010 for asst. year 2010-11 be treated as filed in response to the notice u/s 148 of the Act. On the request of the assessee, the reasons recorded for initiation of proceedings u/s 147 of the Act were supplied to the assessee. The assessee filed its objections to the proceedings u/s 148 of the Act vide letter dated 12/8/2013 and the said objections were disposed off by the AO vide letter dated 28/2/2014. The assessment proceedings were concluded u/s 143(3) r.w.s 147 of the Act vide order dated 17/3/2014, wherein the income of the assessee was determined at Rs.56.40 crores in view of the additions of unexplained cash credits u/s 68 of the Act. On appeal, the ld CIT(A) vide the CO No.206/B/15 3 impugned orders dated 22/5/2015 (i) upheld the AO’s action re-opening of assessment u/s 147 of the Act and (ii) deleted the protective addition of Rs.56.40 crores made as unexplained cash credits u/s 68 of the Act.
REVENUE’S APPEAL FOR ASST. YEAR 2010-11 3.0 Aggrieved by the order of the CIT(A)-11, Bangalore dated 22/5/2015 for asst. year 2010-11, Revenue has filed this appeal wherein it has raised the following grounds:- “i The Ld CIT(A) has erred in deleting the addition made protectively towards unexplained cash credits/ unaccounted payments. ii. For the above and other grounds that may be agitated during the course of appeal, the order of the Ld CIT(A) may be set aside and that of the Assessing Officer restored.”
4. Grounds (i) and (ii) – Cash Credits/unaccounted payments Rs.56.40 crores 4.1 The only issue raised by Revenue in this appeal challenges the action of the ld CIT(A) in deleting the addition of Rs.56.40 crores made protectively towards unexplained cash credits u/s 68 of the Act. The ld standing counsel pleaded for confirmation of the aforesaid addition made by the AO and filed written submissions in support of Revenue’s contentions which are extracted hereunder:- CO No.206/B/15 4 1. Search under section 132 of the Act was conducted in the case of Shri.Dinesh Kumar Singhi, Bharat Mines and Minerals and BMM ISPAT Ltd on 19/7/2010. The assessee is one of the companies of the above group.
During course of search, it was found that the assessee has received share application money from M/s. BPO Finance and Investments Private Limited and M/s. Panchamukhi Properties Private Limited amounting to Rs.26 crores and Rs.30.40 crores respectively. The evidence found in the search revealed that the share application money was routed through shell company of the promoters and the share application money credited was from the unaccounted source. Assessment was reopened by issue of notice under section 148 of the Act. The assessee filed objection and the same was disposed off.
The examination and verification found that M/s. BPO Finance and Investments Private Limited and M/s. Panchamukhi Properties Private Limited were shell companies without any fixed assets or business activities for several years and CO No.206/B/15 5 only involved in fund transfer acting as conduit to plough unaccounted money back into the assessee company. It was also found that the substantial amount have been shifted from Karnataka. Show cause notice was issued to the assessee for treating as unexplained income. Shri Dinesh Kumar Singhi and Mrs Snehalatha Singhi are the only two shareholders of M/s. BPO Finance and Investments Private Limited and M/s. Panchamukhi Properties Private Limited.
The assessee relied on the submissions made in the case of Dinesh Kumar Singhi for the Assessment Year 2010–11. The Assessing Officer also adopted the reasons assigned in the case of Sri Dinesh Kumar Singhi for the Assessment Year 2010–11. The detailed submissions made in the case of Sri Dinesh Kumar Singhi for the Assessment Year 2010-11 is adopted and the same is extracted below for convenience. “UNEXPLAINED INVESTMENT IN SHARES APPLICATION MONEY i. During search it was found that company by name M/s.BPO Finance and Investments Private Limited (BPO), Kolkatta has issued and CO No.206/B/15 6 subscribed shares of Rs 10 per share aggregating to Rs.1,99,98,700/–. Further it was found that during the year the assessee and is wife have acquired 100% of the above issued and subscribed share capital. The shares were purchased from various parties by the assessee as listed in page 2 to 4 of the assessment order. The assessee in total has acquired 60% of the total shares issued and subscribed. In view of the acquisition of 100% of the issued and subscribed share capital of the above company, took over reserves and surplus of the above company at Rs.125,40,64,500/– as on 31/3/2010. ii. Similarly another company by name M/s.Panchamukhi Properties Private Limited (PPPL) Kolkatta issued and subscribed shares of Rs10 per share aggregating to Rs.2,22,91,950/–. The assessee purchased 60% of the shares and his wife purchased remaining 40% of the issued and subscribed shares. The details are tabulated in page 5 and 6 of the assessment order. In view of the acquisition of 100% of the issued and subscribed share capital of the above company, ITA No.1109/B/15 CO No.206/B/15 7 took over reserves and surplus of the above company at Rs .101,39,38,050/– as on 31/3/2010. iii. The close relatives of the assessee acquired 50 shares out of 22,29,195 shares. iv. The assessee and his wife by acquiring hundred percent of shares by paying a sum of Rs.1,99,98,700/– acquired control over an amount of Rs.125,40,64,500/– in respect of M/s.BPO Finance and Investments Private Limited. Similarly by paying a sum of Rs.2,22,91,450/– acquired control over an amount of Rs.101,39,38,050/–. v. In view of the disproportionate cost of purchase, enquiries were conducted regarding genuiness of the above transactions. During the course of search proceedings it was found that four companies owned and controlled by the assessee and his wife received share application money from M/s.BPO Finance and Investments Private Limited and M/s.Panchamukhi Properties Private Limited during the financial years 2009– 10 and 2010–11 totalling to Rs 142.45 crores. vi. During the search proceedings the assessee was requested to give details of the companies which ITA No.1109/B/15 CO No.206/B/15 8 provided the share application money and the directors of the companies. The assessee failed to provide details of the companies and the directors. Summons issued to the assessee did not yield any result. Despite the assessee and his wife being 100% shareholders of the above two companies, the same was not revealed at any point of investigation. The post-search investigation revealed 100% shares being owned by the assessee and his wife. vii. The enquiries conducted by the revenue regarding genuiness of the about two companies has resulted as under: – a) companies are not located in the address given b) Companies were not existing at the registered address for mission to ROC. c) No directors of the companies were available at the given address. d) No books of accounts found at the address. e) No director of the companies appeared during course of survey proceedings. f) From the balance sheets obtained from the ROC about two companies revealed that companies do not have any fixed assets, no business activities CO No.206/B/15 9 for number of years and are involved only in fund transfer. viii. On the basis of the above material the companies BPO and the PPPL were considered as shell entities with no independent business. The above companies were merely used as conduits to plug back unaccounted funds into the four group companies named above. The result of enquiries demonstrated BPO and PPPL are not genuine investors and is modus of bringing in share application money is only a smoke screen. ix. Though assessee did not cooperate in providing details of the directors of the above said to companies, the Department obtained the same from the ROC and it was found that Ms.Soma Dutta, Mr.Ranjeet Singh Kothari and Nemichand Jain are directors of the PPPL and Mr.Radhakant Tiwari and Ms.Soma Dutt are directors of BPO. The assessee and his wife were also directors in both the companies during the Assessment Year 2010–11. The enquiries revealed that some of the directors or employees of Mr.Sagarmal Nahata was arranging funds at Kolkatta. One of the director was found to be watchmen. The directors were not residing at the ITA No.1109/B/15 CO No.206/B/15 10 addresses provided. The signed blank cheques of the companies were found in the possession ofMr.Sagarmal Nahata. x. In view of the disproportionate investment of acquiring to companies worth Rs 226 crores by paying a sum of Rs 4.02 crores the circumstantial evidence was considered by the Assessing Officer. At the time of search a document containing notings regarding payments made to various parties including Kolkatta a/c was seized from the residence of the assessee. The details reflected at page 18 of the assessment order. In total sum of Rs.5,02,00,000/– has been shifted from Karnataka to some accounts in Kolkatta and the assessee failed to offer an explanation about the nature and source of the entries. Ledger accounts of the share application money received from BPO and PPPL in the books of M/s.BMM Ispat were obtained and examined. xi. On examination of the seized material and the Ledger accounts of BPO and PPPL the Assessing Officer arrived at a conclusion that the assessee has shifted money to the about two companies at Kolkatta to facilitate the investment of the Rs 5 crores into M/s.BMM ISPAT Ltd through the CO No.206/B/15 11 above shell companies. Further examination of the bank account of BMM Ispat Ltd revealed that Rs.5 crores has been received by the assessee and that establishes clear link to the content’s recorded in the the seized page. The cash of Rs.5 crores is sent to Kolkatta along with commission of Rs.2 lakhs during 8th to 12th April 2010 and the amounts received by way of cheque in the bank accounts of BMM Ispat Ltd on 13/4/2010. This clearly indicates that the assessee own cash has been routed back to family owned four companies through BPO and PPP L and other associate companies in the form of share application money. xii. The notices issued to BPO and PPPL and to the parties who have sold shares to the assessee and his wife were returned by postal authorities unserved. The above aspect would clearly demonstrate the dubious nature of the purchase of shares by the assessee and his wife. The assessee was issued show cause notice proposing to treat share application money paid into four companies belonging to the assessee’s group to be treated as money introduced by the assessee. The assessee merely submitted that the entire ITA No.1109/B/15 CO No.206/B/15 12 transaction is taken place through cheque and at arms length price.
xiii. The Assessing Officer considering the entire transaction treated 60% of share application money in BPO and PPPL as unaccounted investment by the assessee under section 69 of the Act. xiv. The Assessing Officer was correct in looking at the real transaction with respect to the share application money by lifting the veil and creating nexus with the investment to the payments made by the assessee as found and reflected in the seized documents. The failure on the part of the assessee to demonstrate the issues raised by the Assessing Officer in the course of post-search investigation or during the assessment proceedings would further justify the devise adopted by the assessee for investing his own unaccounted money into the subsidiaries. A. REPLY TO ASSESSEE CONTENTIONS i. The contention of the assessee that the existence of BPO and PPPL cannot be doubted in view of the long existence before the assessee acquired the shares and the bank accounts maintained by the CO No.206/B/15 13 said companies. The failure on the part of the assessee being holder of 60% of the shares and 40% of shares by his wife to identify the genuiness of the company and also the directors of the company would demonstrate the object of the said two companies owned by the assessee and his wife. The Hon’ble Supreme Court in the case of Vodafone has clearly held that the companies without any business being carried out, being used as a conduit for device for avoidance of tax to be treated as shell companies and direct nexus to be created. ii. In view of the seized material reflecting payments towards Kolkatta account and the same amounts being reflected in BMM Ispat private limited and the same amounts being reflected as investment by the BPO and PPPL in the group companies of the assessee would establish the nexus beyond doubt and the same has been rightly taxed as an investment of the assessee. iii. As admitted by the assessee at page 16 of the written submissions, share application money has been considered in the hands of the ITA No.1109/B/15 CO No.206/B/15 14 shareholders, the assessee and his wife being 100% shareholders as unexplained investment.” The above addition has been made on protective basis in the hands of the assessee and on substantive basis in the case of Shri Dinesh Kumar Singhi and Mrs Snehalatha Singhi for the Assessment Year 2010 – 11. The Appellate Commissioner in view of the conforming of the same in the hands of Shri Dinesh Kumar Singhi and Mrs Snehalatha Singhi deleted the protective addition in the hands of the assessee company. It is submitted that the above controversy is involved before this Hon’ble Tribunal in the batch of appeals which have been heard along with this appeal. Subject to result of appeal in the case of Sri Dinesh Kumar Singhi and Mrs Snehalatha Singhi for the Assessment Year 2010– 11 pending before this Hon’ble Tribunal, it is prayed to confirm the addition. CO No.206/B/15 15 4.2 Per contra, the ld AR for the assessee submitted that the addition in this case should not be made/upheld either on substantive or protective basis and has placed reliance on submissions and arguments put forth in the case of Singhi Holdings Pvt. Ltd., (ITA No.1112/B/2015). It was contended that it has been held by the Hon’ble Apex Court in the case of Lovely Exports (216 CTR (SC) 195) and a host of other decisions that no undisclosed income can be assessed in the hands of the recipient of the share application money. 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. From the appraisal of the records before us, it emerges that the assessee received share application money from two companies M/s BPO Finance & Investment Pvt. Ltd., Kolkata of Rs.26.00 crores and Rs.30.40 crores from M/s Panchmukhi Properties Pvt. Ltd., Kolkata, totaling to Rs.56.40 croers routed through normal banking channels. Investigations by the Departments authorities below reveal that Shri Dinesh Kumar Singhi and Snehalatha Singhi are owners and 100% share holders of the aforesaid two companies who introduced the share application money in the assessee company and it was in this context that the investments in the assessee company and its 4 group companies i.e M/s BMM Ispat Ltd., M/s BMM Cements Ltd., M/s Ranjitpura Infrastructure Pvt. Ltd., and M/s Singhi Holdings Pvt. Ltd., was brought to tax in the hands of Smt. Snehalatha Singhi and Shri Dinesh Kumar Singhi in the ratio of their share holding in the two aforesaid companies M/s BPO Finance & Investments Pvt. Ltd., and M/s Panchmukhi Properties Pvt. Ltd., on CO No.206/B/15 16 substantive basis u/s 69 of the Act. It is in this factual matrix of the case that the ld CIT(A) deleted the protective additions made u/s 68 in the case on hand. 4.3.2 With regard to the issue of share application money while dismissing the SLP filed by the Revenue, the Hon’ble Apex Court in the case of CIT Vs. Lovely Exports Pvt. Ltd., (Supra) has observed that:- “Can the amount of share application money be regarded as undisclosed income u/s 68 of the IT Act, 1961? We find no merit in the Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to re-open their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.” 4.3.3 The Hon’ble Karnataka High Court in the case of CIT & Another Vs. Arunananda Textiles Pvt. Ltd., (33 ITR 116) held as under at paras 5 and 6 of its order:- “5. The short question that arises for our consideration in this appeal is "If the company has received share amount from the intending shareholders, is it required for the respondent- assessee to identify and establish the creditworthiness of the depositors."
ITA No.1109/B/15 CO No.206/B/15 17 The question raised in this appeal is squarely covered by several judgments of the Supreme Court and also the judgment of this court passed in CIT v. ASK Brothers Ltd. [2011] 333 ITR 111 (Karn) wherein this court following the judgments of the Supreme Court in the case of CIT v. Lovely Exports P. Ltd. reported in [2008] 216 CTR (SC) 195; [2009] 319 ITR (St.) 5 (SC) and also in the case of CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC) has ruled that it is not for the assessee to place material before the Assessing Officer in regard to the creditworthiness of the shareholders. If the company has given the addresses of the shareholders and their identity is not in dispute, whether they were capable of investing, the Assessing Officer shall investigate. It is not for the assessee -company to establish but it is for the Department to enquire with the investors about their capacity to invest the amount in the shares. Therefore, we are of the view that the substantial questions of law framed in this appeal are to be answered against the Revenue and in favour of the assessee. Accordingly this appeal is dismissed.” 4.3.4 Respectfully following the decision of the Hon’ble Apex Court in the case of Lovely Exports Pvt. Ltd., (Supra) which was followed by the jurisdictional High Court in the case of CIT Vs. Arunananda Textile Pvt. Ltd., (Supra), the addition made by the AO in respect of share application money on protective basis as unexplained cash credits u/s 68 of the Act CO No.206/B/15 18 and deleted by the ld CIT(A) in the impugned order cannot be treated as unexplained cash credits in the hands of the assessee. Consequently, the grounds (i) and (ii) raised by Revenue are dismissed.
In the result, Revenue’s appeal for asst. year 2010-11 is dismissed. Assessee’s Cross Objections (Asst. Year 2010-11) 6. The assessee has raised the following grounds in the Cross- objections (‘CO’) filed:-
1. That the order of the Assessing officer in so far as it is against the assessee is against the law, facts, circumstances, natural justice, equity, without jurisdiction and all other known principles of law.
2. The CIT (A) erred in upholding the notice, initiation and subsequent all proceedings u/s 148 which is bad in law, barred by limitation, without jurisdiction and all other principles of law.
3. That the notice u/s 148 and service thereof is bad in law and the reassessment requires to be cancelled.
4. The conditions precedent to justify the reopening of the assessment u/s 147 of the Act being absent, the reopening of assessment is bad in law and the reassessment requires to be cancelled.
5. That the order u/s 143(3) r.w.s 147 of the Act is bad in law, as the appellant had disclosed the primary material facts fully and truly necessary for assessment ITA No.1109/B/15 CO No.206/B/15 19 and there is no new or fresh information or evidence warranting the reopening of the assessment.
That the entire reassessment proceeding is not as per law and violates the procedure prescribed by the Supreme Court in 259 ITR 19.
7. The order is based on surmise, suspicion and conjuncture and is in blatant disregard to the evidence on record, law, fact and judicial pronouncement of higher authorities and courts, requires to be cancelled.
8. The appellant denies the liabilities for interest u/s 234A and 234B of the Act. Further prays that the interest if any should be levied only on returned income.
No opportunity has been given before levy of interest u/s 234A and 234B of the Act.
Without prejudice to the appellant’s right of seeking waiver before appropriate authority, the appellant begs for consequential relief in the levy of interest u/s 234A and 234B of the Act.
For the above and other grounds and reasons which may be submitted during the course of hearing of the CO No.206/B/15 20 appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered."
Grounds 1 to 7 – Validity of initiation of proceedings u/s 147 7.1 In these grounds (Supra), the assessee challenges the validity of initiation of reassessment proceedings. According to the assessee the initiation of proceedings was based on mere surmise and suspicion as it had already disclosed the share application money in its books of accounts and there was no failure on the part of the assessee to disclose all material facts in this regard. It was merely a case of change of opinion by the AO. In support of its contentions, the assessee, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of DHFL Vysya Housing Finance Ltd., in ITA No.1416/Bang/2010. 7.2 Per contra, the ld standing counsel vide written submission contended as under:- “The asst. year involved in asst. year 2010- 11. The return was accepted u/s 143(1) of the Act. Hence the contention of the assessee that there was no failure on the part of the assesee to disclose fully and truly all material facts, not being alleged, is incorrect and inapplicable. It is further submitted that the proviso to sec. 147 of the Act is also not applicable as the assessment is re-opened within four years. Further as the assessment was completed u/s 143(1) of the Act, change of CO No.206/B/15 21 opinion does not arise. As held by Supreme Court in the case of Rejesh Jhaveri Stockbrokers Ltd.” Hence, the re-opening of assessment on the basis material found as course of search in the premises of the group companies is justified and is strictly in accordance with law.” 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. From the record before us it is seen that the AO acted on the basis of information pursuant to search operations that the assessee had received share application money of Rs.56.40 crores which was allegedly routed through shall companies from out of unaccounted sources, initiated proceedings u/s 147 of the Act. After recording reason leading to the formation of belief that income of the assessee had escaped assessment in respect of the above transactions, notice u/s 148 of the Act dated 22/11/2012 was issued to the assessee. In response thereto, the assessee vide letter dated 19/12/2012 stated that the return of income filed for asst. year 2010-11 on 29/9/2011 be treated as filed in response to notice issued u/s 148 of the Act and sought the reasons recorded by the AO in this regard which were furnished. The objections filed by the assessee on 12/8/2013 were disposed off by the AO vide letter dated 26/2/2014. Since, prior to the initiation of proceedings u/s 147 of the Act in the case on hand for the year under consideration, the return of income asst. year 2010-11 was only processed u/s 143(1) of the Act, therefore, the assessee’s contention that there was no failure on the part of the CO No.206/B/15 22 assessee to disclose fully and truly all material facts required would not hold good as no such view was taken and also since the proviso to sec 147 of the Act is not applicable, since the assessment was reopened within the period of 4 years. Further, since the assessment was processed u/s 143(1) of the Act, it is not a case of change of opinion by the AO as held by the Hon’ble Apex Court in the case of Rajesh Jhavari Stockbrokers Ltd., (264 ITR) (SC). In our view, the AO followed the procedure laid down and prescribed under the Act while initiating proceedings u/s 147 of the Act for formation of belief, on the basis of material before him that any normal person would do in such circumstances to come to the reasonable belief that income of the assessee liable to tax had escaped assessment. In this view of the matter, we uphold the impugned order of the ld CIT(A) on this issue and consequently dismiss the grounds 1 to 7 raised in the assessee’s C.O.
Grounds 8 to 11 : Charging of interest u/s 234A and 234B of the Act 8.1 In these grounds (Supra), the assessee denies itself liable to be charged interest u/s 234A and 234B of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) (SC) and we therefore uphold the AO’s action is charging the assessee the said interest. The AO is, however, directed to re-compute the interest chargeable u/s 234A and 234B of the Act while giving effect to this order.