DCIT 1(1), MUMBAI vs. AMI INDUSTRIES (I) P.LTD, MUMBAI

These three appeals, two by Revenue and one by assessee are against the orders of Commissioner of Income Tax (Appeals)-1, Mumbai, dated 18.06.2014 for A.Y. 2010-11 and 29.10.2014 for A.Y. 2011-12. Since, all three appeals pertain to same assessee and on mostly similar issue, so they are being disposed of by common order for the sake of convenience.

& 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 3

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s.68 of I.T. Act, without appreciating the fact that assessee failed to discharge its onus to establish identity, genuineness and creditworthiness of companies, which had invested in share application money and the Assessing Officer established these to be non genuine.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in holding that the Assessing Officer was not right in disallowing 80% of the expenses claimed as interest repayment, professional fees and administrative expenses and deleting the addition of Rs.5,05,87,952/- without appreciating the fact that these expenses have no relevance for business of the assessee, during the year.”

3. Assessee filed its return of income at a loss of Rs.5,04,64,311/-. Assessment was completed u/s.143(3) of the Act dated 28.03.2013 at income of Rs.34,01,23,640/- where addition u/s.68 amounting to Rs.34 crores and addition of Rs.5.05 crores on account of expenditure of capital nature was made. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) granted relief to the assessee.

4. Same has been opposed before us on behalf of Revenue inter alia submitted that CIT(A) erred in deleting the addition made u/s.68 of the Act without appreciating the fact that assessee failed to discharge its onus to establish identity, genuineness and creditworthiness of companies, which had invested in share application money and the Assessing Officer & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 4 established these to be non genuine. Further, ld. Departmental Representative submitted that in the circumstances of the case, CIT(A) erred in holding that Assessing Officer was not right in disallowing 80% of the expenses claimed as interest repayment, professional fees and administrative expenses and deleting the addition of Rs.5,05,87,952/- without appreciating the fact that these expenses have no relevance for business of assessee, during the year under consideration. Accordingly, the order CIT(A) be set aside and that of Assessing Officer be restored. On the other hand, ld. Authorized Representative supported the order of CIT(A) and reiterated the submission before CIT(A) as detailed in submission filed by learned Authorized Representative of assessee were relied.

5.1 First issue is with regard to addition u/s.68 of the Act in respect of share application money received, which was deleted by CIT(A). As stated above, assessee company is manufacturing AMR and other hardware materials, which were supplied to its various clients. This business was started from A.Y. 2009-10 onward. Earlier, assessee company was manufacturing various types of automobile parts as per the requirement of customer from its factory, Pune, which was & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 5 closed. Subsequently, assessee company has started manufacturing of AMR and other hardware material which supplied to various clients and having its head office at Mumbai and branches at Hyderabad, Secunderabad, Kolkata, Baroda, Jaipur, Delhi, Pune etc. Assessee company has employed more than 250 employees during year, mainly IT Engineers and professionals. During year assessee company received share application money of Rs.34 crore from three Kolkata based companies viz. Parasmani Merchandise Pvt. Ltd. Rs.13.50 crore, Ratanmani Vanjijya Pvt. Ltd. Rs.2 crores and Roseberry Merchant Pvt. Ltd. Rs.18.50 crores. Assessing Officer issued show cause notice to these companies on the address given by him and in their return of income. These notice remained unserved by postal authorities.

5.2 Vide letter dated 02.03.2013, assessee company submitted new addresses of these three companies together with fresh copy of Form No.18 filed with the Registrar of Companies for shifting their registered office w.e.f. 21.02.2013 and according to which, the new address was as under:

7/1A, Grant Lane, 1st Floor, Room No.25, Kolkata, West Bengal – 700012.

Notices issued thereafter were served on these three companies on new address. & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 6 5.3 Assessee company submitted before Assessing Officer following documents in respect of these three companies from whom share application money was received: a) PAN Number of the companies, b) Copies of Income Tax return filed by these three companies for assessment year 2010-11 c) Confirmation Letter in respect of share application money paid by them; and d) Copy of Bank statement through which cheques were issued. In the meantime, Assessing Officer referred the matter to the Investigation Wing at Kolkata for making inquiries of the three companies from whom share application money has been received. As mentioned by Assessing Officer in assessment order, he has received report from Investigation Wing of Kolkata together with the documents collected from these three companies and also copy of statement of Director recorded by them. Vide letter dated 20.03.2013, it was informed by assessee company through its Chartered Accountant that Investigation Wing at Kolkata had already summoned these three companies, recorded the statement of their Director and obtained the required documents in respect of investment as share application money by these companies and report of their inquiry was already sent. Copy of letter has been enclosed at page 48 of paper book filed by assessee. In view of this, said companies have not separately sent their reply to Assessing Officer’s notices. & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 7 5.4 In reply to the show cause notice as to why share application money should not be treated as unexplained credit u/s.68 of the Act, assessee company’s representative submitted on behalf of assessee vide letter dated 26.03.2013, copy of same is placed on page nos. 45 to 47 of paper book. However, Assessing Officer has taken part cognizance of the said letter. Assessing Officer has not considered the report sent by Deputy Director of Income Tax (Investigation), Unit 1(4), Kolkata though he has mentioned the same in his order. However, he has drawn his own conclusion without appreciating any evidence on record and treated the share application money as undisclosed income of assessee company.

5.5 Assessing Officer has not given copy of report of DDI (Investigation)-Unit 1(4), Kolkata to assessee for its comments and explanation. When there was nothing against said three companies with regard to share application received from said three companies, Assessing Officer has not called for comments, explanations of assessee company on the facts and documents sent by Investigation Wing of Kolkata. In view of above, addition of Rs.34 crores made by Assessing Officer by treating the share application money as unexplained credit u/s. 68 of the Act, was unwarranted in law and same was not based on reasoned finding. As mentioned above, it is clear that assessee company has filed the documents regarding share application money received from said three companies before Assessing Officer. Filing of these documents were again & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 8 confirmed by Assessing Officer vide letter dated 28.12.2012 which is placed on page no.28 to 41 of the paper book inter alia submitted that further finance was required for putting additional capacity of manufacturing AMR etc. and for buying own premises at various places for the business and for that purpose, the share application money was taken from these three companies. Vide letter dated 20.03.2013, it was intimated to the Assessing Officer that the enquiries were conducted by Investigation Wing, Kolkata and they have summoned the parties, recorded their statements and obtained the required documents and evidence including the ledger account of assessee as appearing in their books in support of the share application money paid by them. It was also informed that in view of these, it was not necessary for the assessee company to submit further evidences/ documents regarding share application money received by it. Assessing Officer has given its final finding that; i. These companies were merely entities on paper without proper address of their functioning and a single person controlling its affairs. ii. These companies have no funds of their own to make huge investment. iii. These companies have not responded to the letter written to them, which could have established their creditworthiness and held that the funds of Rs.34 crores introduced by assessee company in the grab of share application money, as money ITA Nos.5181 & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 9 from unexplained sources and, therefore, treated the same as unexplained cash credit u/s.68 of the Act.

5.6 We find that in respect of share application money received by assessee company, the assessee company has filed the following documents before the Assessing Officer – (i) PAN of the said three companies; (ii) Copies of income-tax returns filed by these companies for asst. year 2010-11; (iii) Confirmation letter in respect of share application money paid by them; and (iv) Copy of bank statement of these three companies from where the cheques were issued Since the DIT - Investigation, Kolkata has already conducted full enquiry of these three companies, collected the required documents and recorded the statements of Director of these three companies. Further, assessee company filed copies of following documents: (i) Share application form duly received with the share application money from these three companies. (ii) Board Resolution passed by these three companies for investment in the appellant company; and (iii) Memorandum and Articles of Association of these three companies. Assessee also filed petition under Rule 46A dated 06.01.2014 with request to admit these three documents mentioned above, which were not filed before Assessing Officer. CIT(A) forwarded these documents vide letter dated 10.01.2014 to Assessing & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 10 Officer for comments on merit and report regarding admissibility of the evidence, which was incorporated in para 4.6 of his order. Assessing Officer reported vide letter dated 12.06.2014, which was also incorporated in para 4.6 of CIT(A)’s order. Assessee in reply, on submission given to Assessing Officer during course of assessment proceedings, the contents of which have been dealt above and copies of letters enclosed in compilation, which are detailed as under: (i) Copy of letter dated 28.12.2012 (as detailed on page nos. 56 & 57 of the Paper Book filed by assessee. (ii) Copy of letter dated 07.01.2013 as mentioned on page no. 55 of the Paper Book filed by assessee. (iii) Copy of letter dated 02.03.2013 along with enclosures i.e. Form No. 18 of these three companies as detailed on page nos. 49 to 54 of the Paper Book filed by assessee. (iv) Copy of letter dated 20.03.2013 as placed on page no. 48 of Paper Book filed by assessee. (v) Copy of letter dated 26.03.2013 as placed on page nos. 45 to 47 of Paper Book filed by assessee. From the assessment order, it is obvious that after receiving report from the Investigation Wing, Kolkata dated 18.03.2013, Assessing Officer has drawn his own conclusion which was not based on any facts and figures as Assessing Officer has not mentioned anything in the order on what basis the conclusion was arrived on and what were the facts and materials available with him. Therefore, the addition made by him u/s.68 of the Act on account of share application money received without & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 11 considering the various facts brought to the knowledge of Assessing Officer, which is not justified.

5.7 As per the provisions of Section 68 of the Act, for any cash credit appearing in the books of assessee, the assessee is required to prove the following- (a) Identity of the creditor (b) Genuineness of the transaction (c) Credit-worthiness of the party (i) In this case, the assessee has already proved the identity of the share applicant by furnishing their PAN, copy of IT return filed for asst. year 2010-11. (ii) Regarding the genuineness of the transaction, assessee has already filed the copy of the bank account of these three share applicants from which the share application money was paid and the copy of account of the assessee in which the said amount was deposited, which was received by RTGS. (iii) Regarding credit-worthiness of the party, it has been proved from the bank account of these three companies that they had the funds to make payment for share application money and copy of resolution passed in the meeting of their Board of Directors. (iv) Regarding source of the source, Assessing Officer has already made enquiries through the DDI (Investigation), Kolkata and collected all the materials required which proved the source of the source, though as per settled legal position on this issue, assessee need not to prove the source of the source. & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 12 (v) Assessing Officer has not brought any cogent material or evidence on record to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represent company’s own income from undisclosed sources. Accordingly, no addition can be made u/s.68 of the Act. In view of above reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same.

6.1 Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same CIT(A) granted relief to the assessee by observing as under: “6.3 I have considered the facts and circumstances of the case, assessment order and submission of the appellant. It is noticed that the A.O. has disallowed the amounts as pre- & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 13 operative expenses by allowing 1/5th and remaining 4/5th has been disallowed. Therefore, it is not the case of the A.O. that some particular expenses are disallowable for disqualifications u/s.37 of the I.T. Act because 1/5th of the expenses are allowed as in the manner of section 35D of the I.T. Act. There is no question on the nature of expenses for being for non business purpose or in the nature of capital expenditure as such, liable to be disallowed. There is no specific discussion to the effect that the expenses under question are disallowable for any of the specific reasons applicable under section 37 of the I.T. Act for this purpose, which have been claimed by the appellant in that manner. The grouping and description of expenses in the Books of accounts of the appellant is prima facie Revenue in nature as same have been recorded in the books and final accounts in that manner and also accepted in the Audit Report. It is also on record that the appellant has ongoing business and the expenses are stated to be relating to such ongoing business. The AC. has not brought on record any reason or material to contradict the nature of expenses, the entries in the account books as made and any cogent material that same are related to a different business of the appellant in a pre-operative stage. Under the circumstances, the AC. having allowed 1/51h of such expenditure acted erroneously, without basis and contrary to law as there is no dispute that assessee had commenced its business in earlier years. The decisions relied upon by the appellant on this issue are applicable to the facts and circumstances of the case. The decision in the case of CIT vs. Mahindra Ugine & Steel Company Ltd. (2002) 120 Taxman (Born.) is relevant in the present context where it was held that 'section 35D would apply only in respect of expenditure which is otherwise not allowable under the law, for example Capital expenditure’. It is on record that the A.O. has not held that the expenses under question are not allowable u/s.37 of the I.T. Act as claimed by the appellant neither has given any of the reasons attracting disallowance u/s.37 of the I.T. Act.

Therefore, for the reasons discussed above, Ground No. 6 is allowed.”

& 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 14 Same has been opposed before us on behalf of Revenue as discussed above.

6.2 After going through rival submissions and perused the material on record, we find that Assessing Officer has disallowed 80% under the head administrative expenses same as pre-operative expenses of capital nature. Assess company already filed all the details regarding these expenses together with details of interest paid and received, copies of which were filed before us in respect of following major expenses which are as under: a) Details of interest paid & received as detailed at page no. 238 of Paper Book filed by assessee. b) Details of professional fees as mentioned at page nos. 239 to 241 of Paper Book filed by assessee. c) Details of travelling expenses as mentioned at page no.242 of Paper Book filed by assessee. d) Details of telephone/mobile expenses as mentioned at page Nos. 243 to 262 of Paper Book filed by assessee. It reveals that Assessing Officer has not given any reason why a particular expenditure was not incurred for the purpose of business and therefore not allowable. He has only estimated by stating that 80% of these expenses were not allowable. Assessing Officer has treated 80% of these expenses which were disallowed as pre-operative expenses of capital nature without assigning any reason and the basis of bifurcation on which he held that these are pre-operative expenses of capital nature.

ITA Nos.5181 & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 15 6.3 The business of assessee company was already explained to Assessing Officer vide letter dated 28.12.2013 which was incorporated by Assessing Officer in para 10.4 of his order inter alia submitted that earlier assessee company was manufacturing various types of automobile parts as per the requirement of customer from its factory at Pune, which is now closed and since A.Y. 2009-10, the assessee company has started manufacturing of AMR and other hardware material which were supplied to various clients and having its head office at Mumbai and branches at Hyderabad, Secunderabad, Kolkata, Baroda, Jaipur, Delhi, Pune, etc. Regarding the interest expenses also, full details were filed and explanation was given by letter dated 28.09.2013 which was partly incorporated in the assessment order in para 10.4. This being a specialized business wherein hardware and software both are required and it takes time to fully exploit the market and get the customers. Assessee company has got the fruits of these expenses and efforts in the subsequent years, which was clearly established from the following data of the sales, major expenses and net profit for last A.Ys. 2009-10, 2010-11 and subsequent A.Ys. 2011-12 and 2012-13 - statement showing Sales, Major Expenses and not profit are as under: PARTIULARS F.Y. 2008-09 F.Y. 2009-10 F.Y. 2010-11 F.Y. 2011-12 A.Y. 2009-10 A.Y. 2010-11 A.Y. 2011-12 A.Y. 2012-13 49,67,481 26,09,120 31,68,03,154 38,52,16,323 SALES & SERVICES 31,14,278 20,78,208 20,73,10,286 18,75,25,252 MANUFACTURING EXPENSES OTHER MAJOR EXPENSES - PROFESSIONAL CHARGES 1,34,52,155 1,34,72,831 1,04,57,280 2,26,27,948 2,30,000 5,63,250 99,45,182 4,50,11,226 & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 16

- SALARIES 7,27,464 10,35,095 35,89,422 1,18,53,624 - TRAVELLING EXPENSES 1,44,09,619 1,50,71,176 2,39,91,884 7,94,92,798 Subtotal of Major Expenses (1,21,90,112) (5,34,24,447) 8,72,82,400 9,73,01,945 NET PROFIT BEFORE TAX It shows that Assessing Officer has not given a reasonable finding that assessee company has almost not carried any manufacturing or trading activities during the year under consideration. Same is very clear from the following details of sales affected during the year and purchases made during the year. Details of sales and purchases have been enclosed by assessee at Page No. 263 and 264 respectively of the Paper Book. The Assessing Officer was not justified to observe that purchase articles mainly comprises renewable energy devices and spares which were having no linkage with the sales. In this regard, our attention was drawn towards the details of sales and purchases above and copies of same have been placed at page nos. 263 & 264 of paper book. During the year, assessee Company has claimed to purchase the item i.e. 'RTU Unit' from various suppliers as per the specification given to them which were eventually sold to Customers which has not been disputed by Assessing Officer.

6.4 Assessee company has already started its business. No factory premises were under construction. No plant and machinery were under installation at relevant point of time, hence no expenditure could be treated as pre-operative expenses of capital nature. As per the provisions of Sec. 37, there are three requirement for allowing the expenses – & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 17 (i) expenses are incurred for purpose of business; (ii) expenses are not of capital nature; and (iii) expenses are not of personal nature. Therefore, these expenses were neither of personal nature, nor of capital nature or of pre-operative nature. These were all of revenue nature which were incurred for the purpose of carrying on the business and therefore, same are obviously allowable as revenue expenses during the year. Assessing Officer has neither given any finding as to why any part of these expenses were to be disallowed, nor he has issued any show cause notice why he intends to disallow part of these expenses.

6.5 In view of above, CIT(A) was justified in granting relief to the assessee as discussed above. We are not inclined to interfere with the finding of CIT(A) on this issue. Same is upheld.

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s.68 of I.T. Act, without appreciating the fact that assessee failed to discharge its onus to establish identity, genuineness and creditworthiness of companies, which had invested in share application money and the Assessing Officer established these to be non genuine.

& 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 18 2. On the facts and in the circumstances of the case and in law, without prejudice to (1) above and in the alternative, the Ld. CIT(A) erred in deleting the addition made U/s 68 of the I.T. Act, without appreciating the fact that assessee failed to explain the nature of premium of Rs.290/- received by the assessee as part of share application money.”

“1. The learned CIT(Appeals) erred in confirming the disallowance u/s14A of the Income Tax Act, 1961 read with Rule 8D at Rs.12,69,980/-.”

& 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 19 13. In this ground, assessee company has challenged the action of Assessing Officer in making addition on account of disallowance u/s.14A of the Act r.w.Rule 8D amounting to Rs.12,69,980/-. During the year, assessee has earned dividend of Rs.1,88,900/- which is claimed as exempt u/s.10(34) of the Act while computing total income. Assessee company has claimed to have not used any borrowed funds for investment. According to assessee company, disallowance should be restricted to the extent of dividend income earned during year which is Rs.1,88,900/-.

13.1 We find that ITAT ‘D’ Bench in case of M/s. Daga Global Chemicals Pvt. Ltd. vs. ACIT in wherein similar set of facts held as under: “2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a limited company, engaged in trading of bulk and fine, chemicals, solvent and pharmaceutical raw materials declared its income at Rs.74,40,000/- on 26/09/2009. The assessee credited dividend income of Rs.1,82,262/- in its profit and loss account. The Assessing Officer while framing the assessment invoke section 14A r.w. Rule 8D by contending that assessee claimed various expenses which are related to exempt income in its profit & loss account and disallowed Rs.14,58,412/-. On appeal, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal before this Tribunal. The totality of facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only received Rs.1,82,362/- as dividend income, therefore, there is no question of ITA Nos.5181 & 7748/Mum/14 & 353/Mum/15 A.Ys. 10-11 & 11-12 [DCIT vs. M/s. Ami Industries (India) Pvt. Ltd.] Page 20 disallowance of Rs.14,58.412/- by invoking section 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. At best, if any disallowance could be made that can be restricted to Rs. 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed.”

Nothing contrary was brought to our knowledge on behalf of Revenue, facts being similar, so following same reasoning, we hold that any disallowance can be made that can be restricted to the exempt income claimed by assessee, so, disallowance u/s.14A r.w. Rule 8D is restricted to that extent. Assessing Officer is directed accordingly.

Pronounced in the open Court on this the 26th day of August, 2016.