ACIT CEN CIR 42, MUMBAI vs. INDERJEET ARYA, MUMBAI

PER RAVISH SOOD, JUDICIAL MEMBER :

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in deleting addition of Rs. 12,50,00,000/- made u/s 68 of the I.T. Act, 1961, by holding that the immediate source of funds is identified as M/s Rajat Pharmachem Ltd, without appreciating that the advances were not received directly from M/s Rajat Pharmachem Ltd, but were routed through dummy companies.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs. 12,50,00,000/- made u/s 68 of the I.T. Act, 1961, without appreciating that the nature and purpose of advances has not been explained. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any ground and/or add new grounds which may be necessary.”

3.1 That as stands gathered from the records of the lower authorities, the aforesaid group was visited by the Directorate of Revenue Intelligence, Enforcement Directorate and the Central Bureau of Investigation, and action under the respective laws of the land was thereafter initiated against the aforesaid group for violation of export laws, raising of fraudulent claims of DEPB Credits, as well as certain other financial infractions involving banking channels. The group was found to have resorted to certain bogus paper transactions pertaining to export of pharmaceutical products to/through certain entities, and the investigations revealed that the assessee and his brother Sh. Kishore Kumar Arya were actively engaged in siphoning off the funds from the company into their respective personal accounts by availing the services of Hawala operators and certain dummy concerns floated by them, both in India and abroad.

3.2 That pursuant to search conducted u/s 132 of the ‘Act’ in the hands of the assessee, who alongwith his brother Sh. Kishore Kumar arya were the key players managing the affairs of the group, notices u/s 153A of the ‘Act’ were issued to the assessee therein calling upon him to file his ‘Returns of income’ for A.Y(s) 2003-04 to 2008-09. The assessee who had filed his original ‘Return of income’ u/s 139 of the ‘Act’ for A.Y. 2005-06 as on 06.07.2006 declaring total income of Rs. 4,29,000/-, however failed to comply with the direction of the A.O and did not file any ‘Return of income’ u/s 153A of the ‘Act’, pursuant whereto the A.O being left with no other alternative, therein framed the assessment u/ss. 144 r.w.s. 153A of the ‘Act’. That during the course of the assessment proceedings, keeping in view the complexities involved in the accounts and the high stakes involved in the case, the assessee was directed to get his accounts audited u/s 142(2A) of the ‘Act’ for the A.Y(s) 2003-04 to 2009-10. Thereafter the special auditors after meticulously analyzing the material to the extent the same could be gathered by them, therein submitted the special audit report as on 15.04.2011.

3.3 That during the course of the assessment proceedings the A.O taking cognizance of the fact that the ‘Balance sheet’ of the assessee for the year ending 31.03.2005 reflected, inter alia, the following loans (liabilities) :-

Sr. No. Particulars Amount 1. Barco Pharmaceuticals Pvt. Ltd. Rs. 6,25,00,000/- 2. Blessings Bio Tech P. Ltd. Rs. 6,25,00,000/- Total Rs. 12,50,00,000/- , thereupon confronted the assessee with the findings as had emerged in the course of the investigations following the search proceedings conducted in the hands of the aforesaid group, which revealed that both of the aforesaid lendor companies, i.e. M/s Barco Pharmaceuticals Pvt. Ltd. (supra) and M/s Blessings Bio Tech P. Ltd. (supra) were dummy companies floated by the assessee alongwith his brother, therein projecting the petty employees of the group as the Directors of the aforesaid companies, with the ulterior motive to facilitate siphoning off the funds of the company, i.e. M/s Rajat Pharamachem Ltd., by routing the same through the aforesaid lendor companies. That despite the fact the assessee was categorically confronted by the A.O with a finding that the purported loans received by him from the aforesaid lendor companies, i.e. M/s Barco Pharmaceuticals Pvt. Ltd. (supra) and M/s Blessings Bio Tech P. Ltd. (supra), were as a matter of fact funds received by him from the company, i.e. M/s Rajat Pharmachem Ltd. (supra), however chose not to file any reply, pursuant whereto the A.O proceeded with and summoned the directors of the aforesaid lendor companies u/s 131 of the ‘Act’ and recorded their respective statements on Oath :-

Sr. No. Particulars 1. Sh. Satish Dikshit R/o Chitrakoot Society, Singh Estate, Cross Road No. 2, Kandivali(E), Mumbai-400 101. (a) Director of M/s Barco Pharmaceutical Pvt. Ltd., and (b) Director of M/s Blessings Bio-Tech P. Ltd. 2. Sh. Rakesh Sharma R/o 603, Varun Bldg, Vasant Leela Complex, Waghbil Naka, Godhbundar Road, Thane (W)-400 601. (a) Director of M/s Blessings Bio-Tech P. Ltd.

The A.O on being satisfied that both of the aforesaid persons who were petty employees of the company M/s Rajat Pharmachem Ltd., and were neither aware of the affairs of the aforementioned companies, as well as totally oblivious of the movement of funds into and out of the coffers of the aforementioned companies, were as a matter of fact dummies who had been planted by the assessee and his brother Sh. Kishore Kumar Arya to act as subterfuges for facilitating clandestine diversion of funds of the company for the personal benefit of the assessee and his brother Sh. Kishore Kumar arya.

3.4 The A.O thus on the basis of the aforesaid inescapable factual position as stood gathered by him, therein concluded that as the amount aggregating to Rs. 12.50 crore each was in fact drawn by the assessee and his brother Sh. Kishore Kumar Arya directly from the funds of the company, i.e. M/s Rajat Pharmachem Ltd., he therefore proceeded with and added the entire amount of Rs. 12.50 crore as income in the hands of the assessee, on the following grounds : i. That as the amount of Rs. 12.50 crore siphoned off by the assessee from the funds of the company M/s Rajat Pharamachem Ltd., leading to credit of the said amount in the Capital A/c of the assessee, the same was thus held by the A.O as taxable being in the nature of revenue receipt in the hands of the assessee. ii. That alternatively the A.O observing that as the assessee was holding 47.5% beneficial ownership of shares in the company, i.e. M/s Rajat Pharamachem Ltd. which was a closely held company, therefore the advances taken by the assessee through the dummy companies was as a matter of fact funds received by him directly from the aforesaid company, i.e. M/s Rajat Pharamachem Ltd., and the same therefore took the color and character as that of ‘Deemed dividend’ u/s 2(22)(e) of the ‘Act’. However, the A.O taking cognizance of the fact that the accumulated profits available with the company amounted to Rs. 9,96,43,053/-, and both the assessee and his brother Sh. Kishore Kumar Arya had equally drawn an amount of Rs. 12.50 crore each from the aforesaid company, he therefore restricted the addition to the total income of the assessee at Rs. 4,98,21,526/-, being half the amount of the reserves available in the balance sheet of the company.

Thus in light of the aforesaid observations the A.O made an addition of Rs. 12.50 crore (i.e. the higher of the aforesaid two additions) in the hands of the assessee, and thereafter deliberating on certain other issues assessed the income at Rs. 41,30,96,830/-.

“Cash Credits. 68. 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.”

, therein reveals that as per the statutory requirements contemplated u/s 68 of the ‘Act’, a statutory obligation is cast upon an assessee to put forth a satisfactory explanation, both as regards the ‘Nature’ and ‘Source’ of any sum which is found credited in his books of accounts, and in the absence of a cumulative satisfaction of both of the said statutory requirements, the said sum is liable to be charged to income-tax as the income of the assessee u/s 68 of the ‘Act’. That construing the scope and gamut of Sec. 68 by adhering to the rule of strict literal interpretation’, we are of the considered view that mere putting forth of an explanation by the assessee as regards the ‘Source’ of the amount found credited in his books of accounts, with no satisfactory explanation as regards the ‘Nature’ of the said receipt/credit, would be sufficient to inescapably justify addition of the said amount as an unexplained credit in the hands of the assessee u/s 68 of the ‘Act’. We find that in the present case though the immediate source of the amount of Rs. 12.50 crore received by the assessee stands established, being the amounts received from the funds of the company, i.e. M/s Rajat Pharmachem Ltd., however the same in the absence of any explanation by the assessee as to what was the ‘Nature’ of the said receipt, could thus safely be concluded as a failure on the part of the assessee to discharge the ‘Onus’ cast upon him as per the clearly worded Sec. 68 of the ‘Act’, pursuant whereto the said amount was rightly assessed by the A.O as a revenue receipt in the hands of the assessee. We find that the CIT(A) though not being in agreement with the A.O as regards the addition of Rs. 12.50 crore so made by him, had thus vacated the same, but while so doing the CIT(A)) had absolutely failed to record a specific finding for holding a different view which therein could go to justify the deletion of the aforesaid amount on his part. We have given a thoughtful consideration to the facts of the case and are of the considered view that the CIT(A) while vacating the addition of Rs. 12.50 crore had whimsically dispensed with and failed to appreciate the statutory obligation so cast upon an assessee for effecting cumulative satisfaction of the two fold statutory requirements contemplated u/s 68 of the ‘Act’, i.e. explanation as regards both the ‘Nature’ and ‘Source’ of the amount found credited in the books of accounts, and despite the fact that the assessee had failed to put forth any explanation, much the less a satisfactory explanation as regards the ‘Nature’ of the receipt in his hands, which fact as regards the failure on the part of the assessee to put forth an explanation as regards the ‘Nature’ of the said receipt/credit was discussed by the A.O in the body of the assessment order, had thus gravely erred in loosing sight of the said factual position r.w. the settled position of law. We are afraid to say that the order of the CIT(A) in the absence of recording of any specific reasoning which could go to justify the deletion of the addition of Rs. 12.50 crore by him, can safely be held to be a cryptic order, which thus cannot be allowed to sustain as such. We thus being of the considered view that as the assessee had failed to put forth a satisfactory explanation as regards the nature of the amount of Rs. 12.50 crore (supra) so received by him, and as a result thereof had failed to carry out cumulative satisfaction of the conditions contemplated u/s 68 of the ‘Act’, therefore the said amount of Rs. 12.50 crore (supra) was rightly held by the A.O as a revenue receipt liable to be assessed as income in the hands of the assessee. Thus in light of our aforesaid observations, we herein set aside the order of the CIT(A) and restore the addition of Rs. 12.50 crore made by the A.O. The grounds of appeal

No. 1 & 2 are thus allowed. 17. In the result the appeal of the department is allowed. Order pronounced in the open court on 26/10/2016.