SYNTENSIA NETWORK SECURITY INDIA P.LTD,MUMBAI vs. ITO 11(2)(4), MUMBAI

This is an appeal filed by the assessee against the order of CIT(A)- 18, Mumbai dated 17/01/2017 for the A.Y.2012-13 in the matter of order passed u/s.143(3) of the IT Act.

In this appeal, assessee is aggrieved for addition made u/s.68 of the IT Act in the A.Y.2012-13 3. Rival contentions have been heard and record perused.

Facts in brief are that the assessee is a closely held company engaged in the business of marketing of public issue for Indusind Bank M/s. Syntensia Network Security India Pvt. Ltd., Ltd., During the year under an appeal, the assessee filed his return of income for A.Y.2012-13 on 29.09.2012 after declaring NIL income therein after claiming brought forward losses of A.Y. 2008-09. The Ld. AO made an addition of Rs.2,02,79,380/- u/s. 68 of the Income Tax Act (in short "the Act") on account of unexplained cash credit of share allotment. The assessee has received share application money of Rs. 14624696/- during the Financial Year 2007-08 and share application money of Rs. 5654634/- during the Financial Year 2008-09 and thereafter made allotment of shares against the said receipt of share application money during the Financial Year 2011-12 relevant to A.Y.2012-13 under consideration. The AO taxed the entire receipt during the year under consideration u/s.68.

Assessee has also raised an alternate argument as to allow set off of brought forward losses against addition so made.

We have heard the rival contentions and carefully gone through the orders of the authorities below. From the record, we found that the assessee company has received an amount of Rs,2,02,79,380/- against the share application money in A.Y.2008-09 and 2009-10. Thus in the A.Y.2012-13, there was a opening balance of Rs.2,02,79,380/- under the head of share application money pending for allotment against which the assessee company has transferred an amount to share capital account after allotment of shares. The assessee has not received any single amount in A.Y.2012-13 under consideration for the allotment of shares.

[2016] 157 ITD 924 (Kolkata • Trib.) DCIT vs. Global Mercantiles (P.) Ltd. [Identical issue.] IT: Where assessee received share application monies in earlier year and only shares were allotted to applicants during assessment year under appeal, provisions of section 68 could not be invoked to make addition III. Section 68 of the Income-tax Act, 1961 - Cash credits (Share application money) - Assessment year 2006-07 - During assessment year 2005-06 assessee received share application monies from 20 individuals but shares were allotted to them during assessment year under appeal - Whether since no monies were received during assessment year under appeal there was no scope for invoking provisions of section 68 - Held, yes [Para 4.4.1] fin favour of assessee 2. [2014] 225 Taxman 190 (Gujarat)(MAG.) CIT vs. Jagatkumar Satishbhai Patel Akil Kureshi, J – 1. Revenue is in appeal against the judgment of the Income-tax Appellate Tribunal, Ahmedabad [hereinafter referred to as, "the Tribunal"] dated 16th November, 2011, raising following substantial question of law for our consideration :— "Whether on the facts and circumstances of the case, the Hon'ble Tribunal was justified in reversing the order of CIT (A) in deleting the addition of Rs. 10,09,000/= on account of unexplained cash credit under Section 68 of the Act considering major amount of cash credit as opening balance even though no return was filed in earlier year and books of account were not maintained by the assessee?" 3. Having perused the documents on record, we notice that the Commissioner (Appeals) had confirmed the Assessing Officer's order making an addition of Rs. 10,09.000/= under Section 68 of the Income- tax Act, 1961. The Tribunal, however, deleted such addition in the following manner:— M/s. Syntensia Network Security India Pvt. Ltd., "10. The order issue in A.Y 2000-01 is addition made by the Assessing Officer of Rs. 10,09,000/= on account of unsecured loan. In this regard, we find that out of these loan of this amount, only Rs. 50,000/= was received in the present year and the balance is on account of opening balance. Hence, only this amount of Rs. 50,0007= can be considered for addition under Section 68 in this year. We, therefore, delete the balance addition. Now on account of the loan of Rs. 50,000/= received by the assessee in the present year, we feel that although the assessee could not properly explain the same but the assessee deserves the benefit of telescoping against the addition in the income made by the Assessing Officer, which is confirmed by us. As against a loss of Rs. 1,22,1007= declared by the assessee in the ROI, income assessed by the A.O is Rs. 36,5067= which means that total addition made by the A.O which is confirmed by us also is Rs. 1,58,6067= whereas the fresh loan is only Rs. 50,0007= only. Hence, this addition, of Rs 50 0007= is also deleted Ground No. 3 is allowed. Ground No. 1 was not pressed and hence, rejected as not pressed. Ground No. 4 is consequential and Ground No. 5 is General."

ITA No. 305/Mum/2016 - Soorai Leathers (ITAT Chennai) In a recent judgment, ITAT Chennai has stated that consent/acceptance given by assessee could not give jurisdiction and a right to the assessing authority to make an addition. The taxing authority can act only if there is power under the statute to do so. It further held that if the liabilities are old representing opening balances only, Section 68 cannot be applied. 6. [2008) 21 SOT 22 (DELHIUURO) SURAJ BHAN BAJAJ vs. ITO Section 68 of the Income-tax Act, 1961 - Cash credits - Assessment year 1995-96 - Assessee constructed a residential house during period from July 1994 to April 1996 - Whether while invoking deeming provisions for making addition, Income-tax Act does not empower revenue authorities to include certain receipt as income of year which actually pertains to some other years - Held, yes -Assessing Officer asked assessee to explain source of investment in house -Assessee explained that gifts and loans were received in earlier years from his close relations and family friends - Assessee furnished cash flow statement and explained receipt of gifts in each assessment year - He also produced affidavits from all donors who categorically accepted M/s. Syntensia Network Security India Pvt. Ltd., fact of giving gift, reason for giving gift and their source of income - However, Assessing Officer made addition of whole of gifted amount in assessment year in question - On appeal. Commissioner (Appeals) deleted gifts and loans which were not pertaining to year under consideration and were received by assessee in earlier years - Whether Commissioner (Appeals) correctly deleted addition - Held, yes 7. [2006) 6 SOT 301 (DELHI) Parmod Kumar Dang vs. JCIT Section 68 of the Income-tax Act, 1961 - Cash credits - Assessment year 1996-97 - Assessee received amounts of Rs. 2,50,000 and Rs. 2 lakhs on 28-9-1995 and 3-10-1995, respectively, by way of cash credit from one R - He also received amount of Rs. 97,886 on 28-9-1995 by way of cash credit from one P -Assessing Officer treated said amounts as unexplained cash credits under section 68 and added same to income of assessee - Account statement of R revealed that there was an opening credit balance of Rs. 4.50.000 which was repaid in cash on 15-4-1995 and 26-4-1995 and same had been received back by assessee in cash on 28-9-1995 and 3-10-1995 - Further account statement of P revealed that there was an opening credit balance of Rs. 5,34,000 out of which Rs. 97.886 was repaid in cash on 4-4-1995 and 1O-4-1995 and same had been received back by assessee on 28-9-2005 - Assessing Officer had chosen to treat unexplained only amounts received back by assessee and had not doubted amounts repaid although evidence available with assessee for both transactions was same - Whether if receipt of money was doubted, payment also had to be disregarded - Held, yes - Whether in any case since starting points of cash credits were opening balances in both accounts which had been brought forward from earlier years, no addition was merited under section 68 - Held, yes

It was also argued by learned AR that Cash Credit on account of Share Application money received from non-resident company is not subject to deemed addition u/s. 68 of the Act. In this respect, it is better to produce the verdict of Section 68 which reads as under:- "Where any sum is found credited in the books of an assessee 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: Provided that where the assesee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount M/s. Syntensia Network Security India Pvt. Ltd., by whatever name called, any explanation offered by such assessee- company shall be deemed to be not satisfactory, unless - a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and b) Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company referred to in clause (23FB) of section 10.

As per learned AR after going through the above provision, the law is very clear that the addition cannot be made under section 68 of the Act, as the amount was received from Synthensia AB which is a foreign company. Hence, amount received from foreign company is not subject to tax under deeming provision of section 68 of the Act. 10. Furthermore, it was argued that the law of section 68 can not be applied to remittances made in India by non-resident is strengthened by the proviso to u/s.68 inserted w.e.f. asst. yr. 2013-14. According to the said proviso, if an assessee company, in which public are not substantially interested, receives money by way of share capital, then the source of funds of resident shareholder has to be established by the assessee in order to get out of the kin of the deeming provision under section 68. Hence, the proviso talks of the source being established only when the shareholder is a resident of India. There is no such requirement if shareholder is a non-resident. Therefore, the creditworthiness of the shareholders as per learned AR, if he is a non-resident, does not have to be established by the assessee in respect of remittance received by him.

If the money has been brought into India through banking channels or in the form of assets like plant and machinery or stock-in-trade, for which the necessary import permits had been obtained, no questions at all are asked by the ITOs as to the origin of the money or assets brought in. It is only in cases where the money is claimed to have been brought from outside otherwise than through banking channels and there is no evidence regarding the transfer of money that the Department has to make enquiries about the source thereof. Even in these cases, having regard to the difficulties experienced by persons migrating from Pakistan, Burma and East African countries, instructions have been issued to the ITOs that such claims should be freely admitted up to the limit of Rs. 50,000 in each case provided the following conditions are satisfied : (a) The assessee migrated to India on or after the dates mentioned below from the countries shown against each and had no source of income in India : (/) 30th July, 1962-Mozambique (vide Ministry of Finance Press Note dt. 22nd May, 1967); (/'/) 1st Nov., 1963 (sic.)-Zanzibar, Kenya, Tanzania and Uganda (vide Ministry of Finance Press Note dt. 22nd May, 1967); (///) 1st Jan., 1964-East Pakistan and Burma (vide Ministry of Finance Press Note dt. 25th June. 1964722nd May. 1965); (iv) 1st Oct.. 1965-West Pakistan (vide Ministry of Finance Press Note dt. 3rd Feb.. 1969). (b) He had sufficient resources in the foreign country.

In support of the contention that above addition is not justified, reliance was also placed on the following judicial pronouncements:- 1. (2013) 25 ITR(T) 521 (Delhi - Trib) Russian Technology Centre (P.) Ltd. DCIT IT: If identity of non-resident remitter is established and money has come in through banking channels, it cannot be treated as deemed. Section 68, read with section 69, of the Income-tax Act, 1961 - Cash credit [Share application money] - Assessment years 2002-03, 2003- 04, 2005-06 and 2006-07 - Whether moneys remitted by non- residents, whose identity is not in question, through their bank accounts outside India have to be held as. capital receipts not eligible to tax, and cannot be treated as deemed income under section 68 or section 69 - Held, yes [Para 11.7] [In favour of assessee]. 2. (2003) 86 ITD 626 (DELHI) DCIT vs. Finlay Corporation Ltd. Section 5 of the Income-tax Act, 1961 of the Income-tax Act, 1961 - Income -Accrual of - Assessment year 1996-97 - Whether under section 5(2), if any income is already received outside India, same cannot be taxed in India merely on ground that it is brought in India by way of remittances - Held, yes - Whether there is a conflict between provisions of section 5(2) on one hand and section 68 or 69 on other hand only with regard to burden of proof and not on issue of taxability of income - Held, yes - Whether issue as to whether income of a nonresident is taxable or not is to be decided with reference to provisions of section 5(2) and provisions of section 68 or 69 cannot enlarge scope of section 5(2) and, therefore, what is not taxable under section 5(2) cannot be taxed under section 68 or 69 - Held, yes - Whether, consequently, section 68 or 69 would be applicable in case of a non-resident only with reference to those amounts whose origin of source can be located in India - Held, yes - M/s. Syntensia Network Security India Pvt. Ltd., Whether where bank certificates in respect of remittances from abroad credited in NRE account in India were in prescribed form and showed that amounts were remitted from assessee's own bank account with banks at New York, Commissioner (Appeals) was justified in coming to conclusion that income, if any, was already received in New York and, consequently, it could not be said that such income was received in India again - Held, yes Section 68 of the Income-tax Act, 1961 - Cash credits - Assessment year 1996-97 - Whether what is not taxable under section 5(2) cannot be taxed under section 68 or 69 - Held, yes - Whether provisions of section 68 or 69 would be applicable in case of non- resident only with reference to those amounts whose origin of source can be located in India and therefore, provisions of section 68 or 69 have limited application in case of a non-resident-Held-Yes. Prayer; After going through the above mentioned proviso, the law is very clear that amount received from the non-resident is cannot be taxed u/s. 68 of the Act. Therefore, we would request the hon'ble bench to delete the addition made on this ground.

It was also argued that amount transferred through journal entry is not liable to tax under section 68 of the Act. M/s. Syntensia AB (Sweden company) wanted to set-up new business of internet security system with administrative office set-up at Pune & Mumbai and hence subsidy company, i.e. assessee company, was formed and incorporated on 30.O7.2007 with Paid up share capital of Rs.1,00,000/-. Since the assessee company was formed with low paid up capital, the entire long term financial obligation by way of share application were met by its holding company, i.e. M/s, Syntensia AB (Sweden company), on behalf of the assessee company in A.Y.2008-09 and A.Y.2009-10. The assessee company and its holding company, i.e. M/s. Syntensia AB (Sweden company) has mutually decided to allot shares against such share application money. And hence, after completion of RBI procedure, the M/s. Syntensia Network Security India Pvt. Ltd., assessee company has issued shares to M/s. Syntensia AB (Sweden company). Under these facts and circumstances of the case, as per learned AR, the amount of share application money [the amount which transferred through journal entry / book entry during the year, should not be treated as unexplained cash credit in the hands of the assessee company. Therefore, amount transferred through journal entry should not be treated as unexplained cash credit in the hands of the assessee company during the A.Y.2012-13 under consideration.

In support of above proposition, reliance was placed on the decision of Calcutta High Court in case of Jatia Investment Co. 206 ITR 718 wherein Court observed as under:-

On the other hand learned DR relied on the order of lower authorities.

We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. From the record we found that the assessee company was incorporated on 30.07.2007. M/s. Syntensisa Asia Pte. Ltd. - Singapore [foreign company] was the holding company of the assessee company and M/s. Syntensisa AB -Sweden [foreign company registered at Sweden] was the ultimate holding company of the assessee company. During the A.Y. 2008-09, the assessee has received further share application money of Rs.1,46,24,695/- ($366749.52)from M/s. Syntensia AB (Sweden company - Ultimate Holding Company), i.e. share applicant. During the A.Y. 2009-10, the assessee has received share application money of Rs.56,54,634/- ($137580.19) again from M/s. Syntensia AB (Sweden company), [page 25,30,36 & 37] and the aggregate amount of Rs.2,02,79,329/- was brought forwarded till A.Y.2011-12 as the application for allotment of shares to foreign company was not approved by RBI. From the record we found that M/s. Syntensia Network Security India Pvt. Ltd., the assessee company has submitted following documents before the lower authorities. i. Incorporation Certificate of Share Applicant Company ii. Bank statement iii. Form No.20B for year end on 31.03.2012 iv. Form No. 2 v. Board Resolution passed by assessee company to allot shares 17. During the A.Y. 2012-13, i.e. the assessment year under an appeal, The assessee company has allotted 10,13,969 shares at face value of Rs.10/- per share with premium of Rs.10/- per share amounting to Rs.1,01,39,690/- share capital and Rs.1,01,39,690/-share premium on 13.12.2011. The entire amount of share application money of Rs.20279380/- (i.e. Rs.1,46,24,696/- plus Rs.56,54,634/-) was transferred through a journal entry of Rs.2,02,79,380/- to share capital account and share premium account respectively. Thus, the assessee has not received any single amount in A.Y.2012-13 for the allotment of shares. Under section 68, the amount which represents credit of the year that can be added as unexplained credit for that year. Opening balance is not subject to tax u/s. 68 of the Act as the same is representing the credit of another previous year. Shares were allotted by the assessee company to its holding company at 100% premium in expectation of good future earnings and prospectus. Hon’ble Calcutta Tribunal in the case of Global Mercantiles (P) Ltd., 157 ITD 924 held that where assessee received M/s. Syntensia Network Security India Pvt. Ltd., share application monies in earlier year and only shares were allotted to applicants during assessment year under appeal, provisions of section 68 could not be invoked to make addition.

In view of the above judicial pronouncements as the amount Rs.2,02,79,380/- representing credit of earlier years, i.e. A.Y.2008-09 & 20O9-10, addition cannot be made in assessment year under an appeal merely because of allotment is made in A.Y.2012-13. [Opening balance cannot be added in A.Y.2012-13).

Furthermore, the law is section 68 is not apply to remittances made in India by non-resident is strengthened by the proviso to u/s.68 inserted w.e.f. asst. yr. 2013-14. According to the said proviso, if an assessee company, in which public are not substantially interested, receives money by way of share capital, then the source of funds of resident shareholder has to be established by the assessee in order to get out of the kin of the deeming provision under s.

Hence, the proviso talks of the source being established only when the shareholder is a resident of India. There is no such requirement if shareholder is a non-resident. Therefore, the creditworthiness of the shareholders, if he is a non-resident, does not have to be established by the assessee in respect of remittance received by him.

From the record, we also found that the assessee company has received 2 letters of confirmation in respect of money paid by Syntensia AB (Sweden Company) towards share application for investment in shares M/s. Syntensia Network Security India Pvt. Ltd., of the assessee company i.e. one confirmation of US $ 369249.52 as on 31.03.2008 and another confirmation of US $ 137580.19 as on 03.06.2008, a copy of which are placed on record.US $ 369249.52 as on 31.03.2008 in Indian currency comes Rs 14624695.40 and US $ 137580.19 as on 03.06.2008 in Indian currency comes Rs 5654634.01. Furthermore, the assessee company cannot allot shares to the non- resident without prior permission of RBI. The assessee company has filed an application dated 3rd December 2008 with Yes Bank Limited on 26th December 2008 with enclosure of the required documents and FIRC received by the company and a letter dated 3rd December 2008 to Reserve Bank of India. At para no.5 of the Assessment order the Assessing officer further discussed about the excessive premium charged by the assessee. In this regard we observe that basis of premium was not required till AY 2012-13 and amendment about basis of premium on allotment of shares came thereafter. Moreover the Assessee was a subsidiary of the company to whom shares were allotted. Reasons for premium has been elaborated vide page 2 of the letter dated 10.03.2015 filed with the Assessing Officer during the assessment proceedings. We observe that there was property justification for the shares issued to holding company at premium of Rs.10.00 per share.

In view of the above discussion and considering the totality of facts and circumstances of the case, we do not find any merit for the addition so made by the AO.