M/S NAHATA HOLDING & CONSULTANTS PVT. LTD.,KOLKATA vs. ACIT, CC-XXIV,, KOLKATA

ORDER Per Shri M. Balaganesh, AM:

This appeal by assessee is arising out of order of CIT(A), Central-III, Kolkata vide appeal No. 41/CC-XXIV/CIT(A)C-III/2006-07/Kol dated 26.03.2013. Assessment was framed by ACIT, CC-XXIV, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2003-04 vide his order dated 24.03.2006.

4.1. The brief facts of this issue is that the assessee is engaged in the business of trading in shares and securities. There was a search u/s 132 of the Act carried out in UIC group of cases on 7.5.2002. As a consequential proceedings, the block assessment for the block

2 Nahata Holdings & Consultants P. Ltd. AY 2003-04 period ending 7.5.2002 was completed u/s 158BD of the Act in the hands of the assessee on 30.11.2006 by making the following observations :- “28. But at the same time, one cannot overlook the fact that the assessee was acting as a name lender or merely acting as facilitators for the UIC Group to channel their unaccounted money through itself for which it was paid a commission amount which is evident from the complicit relationship of Mr. S. Singhi and Mr. Rajesh Jajodia with the directors of the UIC group of industries, Mr. B.L. Jajodia and Mr. Mahendra Jajodia and the entire process of channelizing the unaccounted money of the UIC group through the companies owned and managed by them. Taking into account many precedent search cases where similar accommodating cash transfers have been detected, it was seen that normally all the conduits involved in similar rackets were paid a commission at the rate of around 1%. Therefore, a commission rate of 1% is estimated to have been received b7 the assessee company from the UIC group which works out to Rs.2,65,300/- and this amount is added back to the income of the assessee for the block period and this amount is assessed in the hands of the assessee on substantive basis.”

In the said block assessment, the ld AO observed that the funds transferred from the bank accounts of four persons namely Shankar Lal (A/c No. 4934); Surendra (A/c No. 4933); Sunil (A/c No. 4914) and Rajendra (A/c No. 4886) to the bank account of the assessee towards sale of shares to the tune of Rs. 2,65,30,000/- is not the assessee’s actual income because the ultimate beneficiary is finally the UIC group. This was observed in Para 26 of the said block assessment order by the ld AO. The ld AO further observed that the entire purpose and rigmarole of share sale and purchase by the two to three layers of share transactions undertaken by the companies controlled by Mr. S. Singhi and Mr. Rajesh Jajodia is a clear, covert and conniving operation to channelize the UIC group’s own unaccounted money back to itself through this maze of cash deposits and share transactions when there were no actual share transactions but only accommodating book entries of the respective intermediary companies. Therefore, the amounts in question should be rather taxed on protective basis in the hands of the assessee company and on substantive basis in the hands of the UIC Group since the amount of Rs.2,65,30,000/- was not considered in the block assessment of the UIC Group. Hence, this amount is taxed on a protective basis in the hands of the assessee company.

Accordingly, the ld AO added a sum of Rs. 2,65,30,000/- on protective basis and gave a finding that the assessee was only in receipt of commission income @ 1% on the entire bank transactions of aforesaid four persons and added a sum of Rs. 2,65,300/- towards commission income.

4.2. The return of income for the Asst Year 2003-04 was regularly filed on 1.12.2003 disclosing loss of Rs. 3,428/- . This regular return was selected for scrutiny and during the 3 Nahata Holdings & Consultants P. Ltd. AY 2003-04 course of regular assessment proceedings, the ld AO observed that on verification of bank accounts maintained by Sunil Kr Jain , Rajendra Kr Surana, Shankar Lal Godh and S.K.Hirawat in Federal Bank, Burrabazar Branch, that huge cash were deposited in their respective accounts and then transferred from their accounts to the account of the assessee company during the relevant financial year as well as in earlier year. Accordingly the ld AO observed that the amounts were transferred only after depositing cash either on the same day or one day before. The details of the same are as below:-

Account No. Name of the holder Date of cash Amount of cash Date of transfer Amount deposit deposit (Rs.) to assessee’s (Rs.) bank a/c. CA 4934 Shankarlal Gudh & 17.04.02 4,50,000/- 18.04.02 4,50,000/- Babulal Baid 03.05.02 4,99,000/- 03.05.02 5,00,000/- 06.05.02 4,40,000/- 06.05.02 4,00,000/- 13,50,000/- CA 4886 Rajendra Kumar 19.04.02 3,00,000/- 19.04.02 3,00,000/- Surana 20.04.02 3,01,000/- 22.04.02 7,50,000/- 22.04.02 4,50,000/- 07.05.02 3,50,000/- 06.05.02 4,60,000/- 14,00,000/- CA 4933 Surendra Kumar 17.04.02 4,50,000/- 18.04.02 3,00,000/- Hirawat 04.05.02 5,01,000/- 19.04.02 1,50,000/- 06.05.02 1,50,000/- 06.05.02 5,00,000/- 07.05.02 1,60,000/- 07.05.02 1,00,000/- 10,50,000/- 4.3. Since the sources of such cash deposits and creditworthiness of the persons could not be proved ; summons u/s 131 of the Act could not be served by the Inspector deputed from his office ; even the watchman of the building could not identify the aforesaid persons , considering all these , the ld AO directed the assessee to produce the parties namely Shri Shankarlal Godh, Shri Rajendra Kumar Surana and Shri Surendra Kumar Hirawat for recording their statements. In its reply, the director of the assessee company Mr. Ashok Jha stated as under :- “The account of the aforesaid persons mentioned in your letter does not belong to our company. We have only sold our investments to these persons. In consideration thereof, the payment received has been accounted for on revenue account and shown as 'sale proceeds'. Thus, it is only substitution of one asset for other. It is not a case where assessee has obtained any cash credit. We having already accounted for these amounts as its income in its Profit & Loss Account, we have nothing more to explain. Undersigned therefore, is unable to comment upon the observation made by you in respect of the aforesaid accounts. The copies of the bills evidencing the sale of the shares duly credited in the Profit & Loss Account could be seen enclosed. As regards non-appearance / non-availability by / of the aforesaid parties, undersigned would like to submit that we owes no responsibility under the law to produce

4 Nahata Holdings & Consultants P. Ltd. AY 2003-04 them. You have all the plenary powers to conduct enquiry at your end in connection with these persons for fastening any liability on them".

4.4. The ld AO observed that since proceedings u/s 158BD of the Act have already been initiated in the name of the assessee and all the above deposits were within 7.5.2002 i.e the period covered under such proceedings , the above amount of Rs. 38,00,000/- was added on protective basis as unexplained cash credit u/s 68 of the Act in the regular assessment proceedings completed u/s 143(3) of the Act on 24.3.2006.

4.5. Before the ld CITA , it was argued that it is an accepted position that the amount of Rs 38,00,000/- was received by the assessee through account payee cheques against sale of investments. The said investment was duly disclosed in the books of accounts. The assessee had duly computed capital gains and offered it in its income tax return. Thus, there is substitution of one asset by another asset by way of sale. Investments belonging to the assessee were replaced by consideration received by way of sale to four persons. Investments had gone out of the possession of the assessee, which is duly evidenced by the balance sheet filed by the assessee for the relevant year. It was further argued that the ld AO had not doubted that the investment had gone out of the possession of the assessee. Since the assessee was no longer in possession of the said investment, the question of unexplained credit u/s 68 of the Act does not arise at all. In view of the above, the amount of rs. 38,00,000/- was nothing but conversion of investment into cash and hence cannot be treated as income from undisclosed sources and hence no question of applicability of section 68 of the Act arises in as much as an amount cannot be doubly taxed.

4.6. Without prejudice, it was also argued that in order to prove the cash credit , the assessee had to prove the three ingredients viz (i) identity of the creditor, (ii) genuineness of the transaction and (iii) creditworthiness of the creditor. In the instant case, the ld AO had only doubted the creditworthiness of the four persons. In this regard, it was submitted that the said persons had sufficient bank balance and the amount was received from them by account payee cheques and accordingly it was argued that the creditworthiness of the said persons have been proved. The ld CITA however not convinced with the arguments of the assessee confirmed the addition made by the ld AO. Aggrieved, the assessee is in appeal before us on the following ground no. 2:-

5 Nahata Holdings & Consultants P. Ltd. AY 2003-04 “2(a). On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the addition of the sum of Rs.38,00,000/- u/s 68 of the Income-tax Act, 1961, by considering the receipt of the said amount as unexplained in spite of there being ample evidences about the genuineness of the said receipt of money by the appellant by way of sale of shares. 2(b).Without any prejudice to above, the learned CIT(A) erred in upholding the addition of the sum of Rs.38,00,000/- separately u/s 68 of the Act, neglecting to take into account the fact that the amount had already been credited to the accounts of the appellant as 'sale proceeds of shares' thus leading to a position of double addition of the same amount.”