DCIT, CIR-3(3)(1), MUMBAI vs. MOTECH SOFTWARE PVT LTD, MUMBAI

ITA 2295/MUM/2023Status: DisposedITAT Mumbai28 August 2024AY 2007-0858 pages

AI SummaryN/A

Facts

The Income Tax Department reopened assessments for AY 2006-07 and 2007-08 for Motech Software Pvt. Ltd. based on information from the French Government (Base Documents) alleging unexplained investments in HSBC Bank, Geneva, through linked entities. The AO made substantial additions to the assessee's income under sections 69/69A. The CIT(A) later deleted these additions, leading to the Revenue's appeals and the assessee's cross-objections challenging the validity of reopening.

Held

The Tribunal found that the AO's reliance on 'Base Documents' was flawed as subsequent clarifications from HSBC Bank and Swiss authorities consistently denied the assessee held any bank accounts or was a beneficial owner of assets in the specified entities. The internal notes used as corroborative evidence were found to be unsubstantiated and contradicted by external authorities. Consequently, the Tribunal ruled that the reopening of assessment was 'bad in law' as the AO lacked valid 'reason to believe' due to ignoring contradictory evidence, and upheld the deletion of additions by CIT(A).

Key Issues

1. Validity of reopening of assessment despite availability of contradictory evidence. 2. Whether the assessee was the beneficial owner of alleged foreign bank accounts/investments. 3. Admissibility and evidentiary value of unsubstantiated 'Base Documents' and internal notes.

Sections Cited

Section 69, Section 69A, Section 143(3), Section 147, Section 148, Section 151(1), Section 149(1)(b), Section 139(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI

Before: SHRI B.R. BASKARAN & SHRI PAVAN KUMAR GADALE

For Appellant: Shri F.V. Irani, &, Shri Devesh Vasavada

For Respondent: Smt. Sanyogita Nagpal &, Ms. Mahita Nair, Sr.DR

Hearing: 31/05/2024Pronounced: 28/08/2024

The appeals filed by the Revenue and the cross objections filed by the assessee for assessment years 2006-07 and 2007-08 are directed against the orders passed by Ld CIT(A)-57, Mumbai. Since the issues contested in these appeals arise out of common set of facts, they were heard together and are being disposed of by this common order.

2 Motech Software Pvt. Ltd.,

2. In the cross objection, the assessee is challenging the validity of reopening of assessment of both the years under consideration.

3. In the appeal filed by the revenue for assessment year 2006-07, following grounds of appeal have been raised:-

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 1858, 79, 48, 919/- made as 'Unexplained Investment u/s.69 & 69A' in the hands of the assessee company without appreciating the fact that the information in the form of Base Documents provided by the Government of France to the Government of India under the Exchange of Information under DTAA between India and France clearly indicate that the assessee, as beneficial owner, is holding unexplained investment/deposits in the bank accounts maintained with HSBC Bank, Geneva in the names of (i) Infrastructure Company Ltd, (ii) HRJ Holdings NV and (iii) Aberdeen Enterprises NV aggregating to Rs.1858, 79,48,919/-.

2. The Ld. CIT(A) erred in deleting the above addition by not taking cognizance of / the fact that the information received from the Government of France under DTAA ' is authentic and the same matched with the information received from the Swiss Banks and competent authorities of Foreign governments to the extent that the entities mentioned in the information received were holding Bank accounts in the HSBC Bank, Geneva and therefore, the AO had rightly relied on this information for making the addition.

10 Motech Software Pvt. Ltd., 6.4. We noticed that the above said letter is commenced by referring to a notice No. DCIT-8(2)/Mum/Scr./20/2012-13 dt. 02-07-2012. Hence, prima facie, it appears to be the reply given to the above said notice. Further, the Ld D.R has also furnished copy of order sheet noting made in the assessment folder and in our view, the same will through light on the present dispute. The noting made by the assessing officer in the order sheet is extracted below:- “02/07/12 : Notices under section 143(2) & 142(1) issued to the assessee. Hearing fixed on 17-07-2012 at 4.30 p.m. 28/8/12 : The case is discussed with Smt. Chitalongia. The submission of the assessee is kept on record. Next date 18/09/12. 30/8/12 : In view of the fact that no objection for reopening of the case was filed by the assessee pursuant to reasons for reopening been provided on 18/7/12, no order for refusing the objection is warranted.” “30/8/12 : In view of the fact that the “a” has not raised any objection for reopening of the assessment, even after providing the reasons for reopening were provided on 18/7/12 no order for disposal of objection is warranted.” The Ld. DR has furnished two noting that were made on 30-08-2012 in two different sheets. The first one is related to AY 2006-07, as the assessment year is mentioned on the top of the order sheet. The second noting was furnished in another sheet and hence it should be related to AY 2007-08, even though no assessment year is mentioned in that sheet. 6.5. We notice that the order sheet noting recorded on 02-07-2012 mentioned that the “hearing fixed on 17-07-2012 at 4.30 pm”. However, the next date of hearing was noted as “28/8/12”. The proceeding, if any, which took place on 17-07-2012 is not available. Be that as it may, the letter dated 17th August, 2012 has been filed by the 11 Motech Software Pvt. Ltd., assessee after receipt of notice u/s 142(1). As per the contents of the letter extracted above, it refers to the notice issued on 02-07-2012 and it proceeds to discuss about the activities of the assessee company. It concludes that the information referred to by the AO are not relatable to the assessee and further it states that the assessee does not have any connection whatsoever with the parties mentioned in the aforesaid notice and with the bank mentioned in the notice. Finally it is averred that no income has been undisclosed by the Company. These contents in the letters, in our view, only states the factual aspects as per the assessee and the same appears to be the reply given to the notice issued u/s 142(1) of the Act. It can be noticed that the assessee nowhere specifically mentions in these letters that it is objecting to the reopening of assessment. Further, in the order sheet noting made by the AO on 30-08-2012 for both the years, he specifically mentions that the assessee has not filed any objection. This was the understanding between the parties during the course of assessment proceedings. Accordingly, upon cumulatively considering the surrounding facts, we are of the view that the above said letters are only replies given to the notice dated 02-07-2012 issued by the AO. Accordingly, we are of the view that the contents of the above said letters cannot be considered as “objection filed by the assessee to re-opening of assessment. Accordingly, we reject this contention of the assessee. 6.6. The next contention on this legal issue is that the AO has reopened the assessment for the purpose of making fishing and roving inquiries, which is not permitted under the law. We notice that the assessing officer has stated the details of information received by him in the reasons recorded for reopening of assessment, viz., the deposits kept in HSBC bank in the name of concerns to which the assessee is linked to. It is well settled proposition of law that the AO is required to have reasons to believe that there was escapement of income, at the time of reopening of assessment. However, during the course of 12 Motech Software Pvt. Ltd., assessment proceedings, the AO may also come to the conclusion that no income has escaped assessment on the basis of materials examined by him. Hence the correctness or otherwise of the reasons entertained by the AO to believe that there was escapement of income can be known only when proper enquiries are made during the course of assessment proceedings. Such types of enquiries cannot be termed as fishing or roving enquiries. However, if the reasons for escapement of income are required to be found after making fishing or roving enquiry, the same is not permitted under the law. In the instant case, the belief arrived at by the AO is based on certain information received from the Investigation wing. Further, there is no requirement that the AO should have conclusive evidence at the time of reopening of assessment. The assessee is always entitled to furnish evidences against the reasons recorded by the AO, on which a decision will be taken by the AO after carrying out necessary examination. In this view of the matter, it cannot be said that the AO, in the instant cases, has reopened the assessment for making fishing or roving enquiry. Accordingly, we are of the view that the above said contention of the assessee is liable to be rejected. 6.7. The next two contentions of the assessee are that (a) the AO could not have reason to believe that income of the assessee has escaped assessment in both these years in view of the letter received from HSBC Bank by the AO before reopening of assessment, wherein it has been confirmed by HSBC Bank that the assessee did not hold bank account with HSBC Private Bank (Suisse) and further it is not beneficiary of assets in the entities noted by the tax authorities. (b) there is no credible material to support the belief entertained by the AO and hence there is no live link between the alleged materials and the reasons recorded by the AO.

11.2. We notice that the ld CIT(A) has examined this aspect in a detailed manner. The submissions made by the assessee with regard to the above said letter before Ld CIT(A) are summarized below:- Letter dated 08-07-2011 of Mr. James Walfenzao cannot be read selectively but must be read with other documents i) It was submitted that the AO has selectively considered only the letter dated 08-07-2011 of Mr. James Walfenzao and has conveniently ignored following documents shared by Curacao authorities. One needs to read all these documents together to appreciate the correct facts: a. A “Mandate Agreement” dated 24-10-2003 was entered into between Mr James Walfenzao and Mr Sandeep Tandon whereby Mr Tandon agreed to provide certain services to Mr James in relation to his investments. For the services to be rendered, Mr Tandon was promised a consideration of US$ 2 million plus a share of profits earned from the 25 Motech Software Pvt. Ltd., investments by Mr James Walfenzao. Through addendum dated 30.12.2003, it was clarified that share of profit of Mr Tandon would be 10% of the profits. The said addendum also provided that to protect the consideration due to Mr Sandeep Tandon, he will be designated as 10% beneficial owner of the assets in the Bank account of entities owned by Mr James Walfenzao. It was also clarified that Mr Sandeep Tandon would have only 10% in the profits of the entities owned by Mr James Walfenzao though he is shown as beneficial owner in the bank accounts. b. Another document dated 16-01-2007, clarifies and declares that since there was no profit on investment proposals, no monies were owed by either party and accordingly the mandate agreement was terminated. c. Mr James Walfanzao’s letter dated 08-07-2011 to HSBC Bank Geneva stating the following has to be read with above two documents which were direct evidence of the complete contours of the arrangement between Mr James Walfenzao and Mr Sandeep Tandon in his personal capacity:  Bank accounts of following entities were established by Mr James Walfenzao out of his own resources and he operated these accounts. o Infrastructure Company Ltd o Avila Structured Private Foundation o Aberdeen Enterprise N.V. o Stayer Corporation N.V. o Tremaine N.V. o Bartow Holdings N.V. o HRJ Holdings N.V. o Lasemo Holdings Inc.  As per his arrangement with Mr Tandon and in order to protect the profit share, Mr Tandon would be named as 10% beneficial owner of the assets in the bank accounts of these foreign entities. Since Mr. Tandon was Indian resident and was subject to Indian regulations, his

“7.3.8 From the plain readings of the provisions of the Agreement, it is very clear that (i) the code of conduct is unconditionally applicable to all accounts, savings books, securities accounts and safe deposit boxes identified by number or code word, (ii) the Code mandated the banks to establish the identity of the beneficial owner of assets and obtain from its contracting partner a statement in ‘Form A’ concerning the beneficial ownership of the assets and (iii) the concept of ‘Domiciliary Companies’ was defined. This code of conduct for Swiss Banks came into effect from 13.06.2018, i.e., from the signing of the agreement between the ‘Swiss Bankers Association’ and ‘Swiss banks’. In the case of Infrastructure Company Ltd., HRJ Holdings N.V. And Aberdeen Enterprises NV, the bank accounts with HSBC bank were opened and those bank account ceased to operate from F.Y. 2010-11 due to dissolution of those entities. Prior to 13.06.2018, it was not mandatory for the HSBC bank to obtain a statement in ‘Form A’ from those entities for disclosure of Beneficiary holders of the accounts held by such entities. Therefore, the rules/provisions of ‘Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB 20)’ are not applicable to the case appellant for F.Y. 2005-06 and 2006-07. 7.3.9. In Switzerland, sometimes the professional notaries and lawyers, banks and other financial intermediaries (FI) hold and administer assets on behalf of clients. Under Swiss law, relationships in which "one party holds assets for the benefit of another" are contractual. Such relationship is ruled by the "Law of Obligations", SR 220, Part V of the Civil Code. It is also governed by the position of a guardian in the ‘Law of Tutelage, Article 360 et seq. of the Civil Code, SR 210. Swiss law has no equity, therefore, relationship between the client and who hold and administer the assets cannot have equitable relationships. Therefore, such relationships do not qualify as "trusts". Prior to 13.06.2018, at 31 Motech Software Pvt. Ltd., the time of opening of the bank account in Switzerland, standard 'profiling' of clients generally established how the assets were obtained and whether he could reasonably be expected to be the owner of the assets in question. Thus, the legal title or the contractual claim to assets was normally an indicator of legal owner or beneficial owner of the assets. Trust deed, documentation used when the trust was created, a letter of wishes provided clues and formed the basis to determine the beneficial owner of the trust. 7.3.10 The information contained in the ‘Base Note’ provided by the French government mentioned the appellant company as beneficiary holder/beneficiary of the assets held in bank in the bank accounts of Lasemo Holdings Inc., Infrastructure Company Ltd., HRJ Holdings NV, Stayer Corporation NV, Tremaine NV, Aberdeen Enterprises NV, Bartow Holdings NV, Alloy International Management Limited and Antalis Management Limited. Therefore, evidences such as client profiling and documents collected by the bank at the time of opening of bank account, trust deed, letter of wishes, etc. have to be taken into consideration to prove the fact that the appellant company was ‘Beneficial holder/Beneficiary’ of assets held in the bank accounts of those entities with the HSBC Bank. Apart from the ‘Base Note’ received from the French Government, the information provided under FT & TR reference by various foreign governments, such as (i) letter dated 08.07.2011 written by Shri James Walfenzo to HSBC Bank and (ii) files notes submitted by the executives of HSBC Bank Geneva, including note dated 19.12.2003 submitted by Shri Raj Parmar, indicated the appellant company was the beneficial owner/ beneficiary of the assets in the bank accounts of the above mentioned foreign entities.”

37 Motech Software Pvt. Ltd., recommendation to establish new relationship of Shri Damani with the Geneva office of HSBC Bank. The fourth note was written by D.A. Whitefield on 19.02.2004. In this note, with respect to Capital Investment Trust, he stated that it was introduced to HFSC during the visit to HSBC, Geneva in November 2003 by Bob Duplessis. It was stated in the note that due diligence in accordance with the usual requirement was completed normally. It was also mentioned that some of the issues and doubts were raised and were resolved. Further it was noted that the bank had no documentation, except a certification from Raj Parmar dated 19.12.2003. The above set of noting of employees of HSBC particularly that of Mr. Raj Parmar relied upon by the AO in the remand report is primarily based on the transaction initiated by Mr. Chimanlal J Damani, is in direct contradiction of the unambiguous letter issue by HSBC Bank Geneva, the authenticity and validity of which has remained unquestioned by the AO and even after repeated references to the foreign governments, position that the appellant was not having any account with the Bank and was not beneficial owner of any account with HSBC Geneva, remains unchanged. It is noteworthy that the appellant has asserted and produced evidence to substantiate that said Chimanlal J Damani had no relationship with the leading business house. Mr Trambaklal Anderjee Damani was the real relative and business associate of Ambani family. The name of Chimanlal Jivandas Damani as a relative and business associate of Dhirubhai Ambani was wrongly impersonated in place of Mr Trambaklal Anderjee Damani. 7.3.18. As notied earlier, the members of Management Committee of the Capital Investment Trust were M K Shetty, James Walfenzao and Catharine Walfenzao. Further members of Enforcer Committee were M K Shetty, JairajSampat and Sandeep Tandon. The Trust deed of Capital Investment Trust provides that the Trustees had no investment powers or functions as same were vested with the Management Committee and the trustees were guided by the enforcer committee in relation to distribution of the assets of the Trust. These documents and presence of James Walfenzao and Sandeep Tandon in the two committees lends credence to the submission of the appellant that the background of the transaction was purported arrangement between James Walfenzao and Sandeep Tandon. The set of documents already referred provide enough evidence that these intended transactions to be undertaken under the mandate agreement could not succeed and were abandoned. In any case, the role of Management committee and Enforcer Committee does not have any relevance for the year under consideration as the document in the form of Distribution receipt issued by Bartow Holdings NV and share certificate of Infrastructure Company Limited issued in the name of Bartow Holdings NV shared by BVI Government vide its reply dated 11.06.2015 as part of attachment 26, shows that the Trust had already distributed its assets to Bartow Holdings in 2005.”

“7.3.16. In the remand report, the AO has stated that the ultimate legal and beneficial owner of investment of US$ 400 million was the appellant company. The underlying asset was investment of US$ 400 million in Capital Investment Trust. Therefore, it is relevant to examine the entire facts of the case and determine whether the appellant is ultimate beneficiary of such investment or not. Entire case of the AO that the Appellant company is ultimate beneficiary of the investment of US$400 million hinges on the following documents: a. Base document received from French Authorities b. File / internal noting of HSBC officials including of Shri Raj Parmar c. Letter dated 08.07.2011 written by James Walfenzao to HSBC Private Bank, Geneva After going through all the documents received from different Governments, it is not in dispute that ultimate beneficiary of the investment in Capital Investments Trust is Bartow Holding NV. Share holder register of Bartow Holdings NV shows that the Appellant was never its legal or beneficial share holder. Structure chart as depicted in earlier paras clearly shows that Bartow Holdings NV, Infrastructure Company Limited and all entities mentioned in letter of HSBC Geneva are legally and beneficially owned by Mr. James Walfenzao, a foreign national. Annual accounts of the appellant company do not show appellant holding any bank account with HSBC Bank, Geneva or any interest in any of the alleged foreign entities. The base document received from French Government alleges that the Appellant is beneficiary of assets of various foreign entities. The linkage of the Appellant with these foreign entities comes from the correspondence with James Walfenzao, which will be dealt with in later paragraphs. At this point, it is useful to refer to the HSBC Bank letter dated 10.08.2011, where in it confirmed that (i) Appellant company did not hold bank account with HSBC Private Bank (Suisse) SA, (ii) Appellant company was not a beneficiary of assets of Aberdeen Enterprise N.V., Stayer Corporation N.V., Tremaine N.V., Bartow Holdings N.V., HRJ Holdings N.V., Infrastructure Company Ltd. and Lasemo Holdings Inc., (iii) Appellant company never transacted any business with the HSBC Bank or received any distributions, and (iv) No Indian citizen was beneficiary of these entities. On further inquiry by the Investigation wing of the income tax department, HSBC Bank confirmed vide letter dated 18.10.2011 that the letter dated 10.08.2011 was duly issued by the bank. Later, in response to FT&TR request dated 02-07-2016, Swiss Government Authorities vide letter dated 03.11.2016 confirmed the authenticity and validity of the aforesaid letters dated 10-08-2011 and 18-10-2011 to the Indian

Competent Authority. Thereafter, in response to one more FT&TR reference vide letter dated 23.05.2019, the Swiss Government replied vide its communication dated 17.01.2020 that after a new and thorough research that was conducted by the Swiss Authorities and HSBC Bank, the statement made in their reply of 03-11-2016 still applies. It also confirmed that Appellant was mistakenly mentioned as a beneficial owner of certain bank accounts and the appellant never had any bank accounts at the HSBC Bank as holder or beneficial owner. Thus, the above correspondence from the Swiss Government and the HSBC Bank clearly spells out that Appellant never held any bank accounts with the HSBC Bank directly or indirectly and it also was never a beneficial owner of any of the Bank accounts of the entities specified including Bartow Holdings NV. This also shows that sole reliance of the AO on the base document to allege the appellant as beneficiary of foreign bank accounts is uncalled for when the Bank where the account is held as well as the foreign government where the Bank is situated have not once, twice but four time unambiguously and consistently held that the appellant never had any bank account with the HSBC Bank nor it was beneficiary of any account maintained with the HSBC Bank. This conclusion gets further support from the other documents shared by the Curacao Government in the form of mandate agreement dated 24.10.2003 between James Walfenzao and Sandeep Tandon read with Addendums there to and other correspondence by James Walfenzao with the HSBC Bank. As dealt with in detail in earlier paras of this order, as per these documents, Sandeep Tandon was to provide services related to investments to be made by James Walfenzaoand also in international taxation matters related to such investments. For these services, final consideration was determined in the form of 10% profit share earned from investment in various companies by James Walfenzao. Further to protect the consideration due to Sandeep Tandon, for providing his services, he was designated as beneficial owner in the bank account of those entities. It was also clarified that even though Sandeep Tandon was shown as beneficial owner in the bank account of those entities, it was understood that he had only 10% share in the profits of the above-mentioned entities. Another document dated 16-01-2007 clarified that since there was no profit on investment proposals, no monies were owed by either party and accordingly the mandate agreement was terminated. Mr James Walfenzao’s letter dated 08-07-2011 to HSBC Bank Geneva stating the following has to be read with above two documents which were direct evidence of the complete contours of the arrangement between Mr James Walfenao and Mr Sandeep Tandon in his personal capacity. Mr James Walfenzao in his letter dated 08-07-2011 to HSBC Bank Geneva had 43 Motech Software Pvt. Ltd., stated that Bank accounts of Infrastructure Company Ltd., Avila Structured Private Foundation, Aberdeen Enterprise N.V., Stayer Corporation N.V. Tremaine N.V., Bartow Holdings N.V., HRJ Holdings N.V. and Lasemo Holdings Inc. were established by James Walfenzao out of his own resources and he operated these accounts. In the said letter, James Walfenzao has stated that as per his arrangement with Sandeep Tandon and in order to protect the profit share, Mr Tandon would be named as 10% beneficial owner of the assets in the bank accounts of these foreign entities. On a temporary basis, instead of Mr Tandon, name of the Appellant, Motech Software was intended to be shown as beneficial owner. It is also mentioned that as the investments did not yield any profit, it was decided to discontinue business through these entities. Thus, the above documents clearly demonstrates the Appellant was intended to be designated as beneficial owner for a temporary period in the bank accounts of foreign entities owned by Mr James Walfenzao to the extent of 10% to protect Mr Sandeep Tandon’s profit share from the investment advisory services to be rendered by him. However, since there was no profit earned from these activities, neither Mr Sandeep Tandon nor the Appellant earned even a single penny from the same. Said entities were always owned by Mr James Walfenzao and Appellant never earned any income therefrom. Further the statement by the HSBC Bank and Swiss Government that Appellant’s name was result of a mistake gets duly supported and corroborated by the above referred correspondence of James Walfenzao as shared by another Government i.e Government of Curacao. It is imperative under the circumstances that the documents received from Swiss Government must be relied upon their face value. These documents on one hand establishes that the Appellant never held any account in HSBC Bank Geneva, on the other hand, documents received from Government of Curacao establishes that the investments in the impugned foreign entities were made by and owned by and their bank accounts were operated by James Walfenzao.”