FIREFLY ENERGY LIMITED,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-2(1)(3),, AHMEDABAD

(Applicant) (Respondent) Assessee by : Shri PD Shah, AR Revenue by : Shri Kamlesh Makwana, CIT. DR सुिवाईकीतारीख/Date of Hearing : 18/03/2024 घोरणाकीतारीख/Date of Pronouncement: 28/03/2024 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income tax (Appeals)-2, Ahmedabad, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2012-2013.

1. That the order passed by the learned CIT(A) is bad in law and against the facts of the case and therefore the learned AO be directed to accept the returned income of Rs Nil.

2. That the learned CIT(A) has erred in law and facts by confirming the addition of Rs 8,44,00,000/-of unsecured loans under section 68 of the Act and therefore the learned AO should be directed to delete the addition while computing the total income. 3. That the learned CIT(A) has erred in law and facts by confirming the addition of Rs 4,38,90,000/-of share capital under section 68 of the Act and therefore the learned AO should be directed to delete the addition while computing the total income. 4. That the learned CIT(A) has erred in law and facts by confirming the addition of disallowance of interest expenses of Rs 4,06,19,505/- and therefore the learned AO should be directed to delete the addition while computing the total income. 5. That the appellant craves liberty to add, amend, alter and delete any grounds of appeal

before the final hearing.

3. The assessee vide letter dated 11/07/2019 has raised the additional ground of appeal. That the Ld. CIT(A) ought that the order passed by the learned AO is bad in law as the notice under section 143(2) of the Act, has not been issued by the assessing officer who has jurisdiction over the assessee and therefore the order passed by the learned AO is required to be quashed.

4. At the outset, the Ld. Counsel before us submitted that he has been instructed not to press the additional ground of appeal raised by the assessee. Hence, the same is dismissed as not pressed.

5. The first issue raised by the assessee is that the Ld. CIT(A), erred in confirming the addition made by the AO for Rs. 8.44 crores representing the unsecured loan u/s 68 of the Act.

6. The necessary facts are that the assessee is a limited company and engaged in the business of manufacturing of machinery part, machine items and steel trading. The assessee in the year under consideration has taken unsecured loan from various parties amounting to Rs. 8.44 crores but failed to furnish the necessary details during the assessment proceedings to justify the identity/creditworthiness of the parties and genuineness of the transaction. Thus, the AO treated the same as unexplained cash credit u/s 68 of the Act and added to the total income of the assessee.

7. Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A), filed the additional documents to justify the unsecured loan received in the year under consideration. The Ld. CIT(A) also called for the remand report from the AO on the additional evidence filed by the assessee. The Ld. CIT(A) finally admitted the additional documents filed by the assessee under Rule 46A of Income-tax Rules. However, the Ld. CIT(A) on merit of the case has observed certain fact as reproduced hereunder:

3.13. In view of the aforesaid discussion, it is found that in the case of Abhinandan Industries the confirmation has been submitted by the appellant with regard to the loans taken during the during year under consideration at Rs.3.31 crores out of which the payment of Rs.14 lakhs only have been made in the year under consideration leaving the outstanding balance at Rs.3.17 crores. Further the reasons for not charging any interest upon such huge loans have not been explained by the appellant more particularly when the lender parly was not related to the appellant. Even no details about the repayment of the loans if any made in the subsequent years is produced to justify the loan transactions. Further the returned income of the lender was Rs.91,158/- only with the current losses of Rs.38,17,159/- and no full copy of the returns of income of Shri Suresh H. Shah - HUF may be proprietor of M/s. Abhinandan Industries have been produced so as to know the details of the business activities of the appellant. Thus, the huge unsecured loans granted are no way commensurating to the returned income of the lender. Even no details of the sources of the immediate deposits before granting the loans to the appellant by the lender from his bank account have been explained to prove the genuineness of the loans. 3.14. Further with regard to M/S.J.S. Corporation also the facts are similar to the extent that no interest has been charged upon the lendings to appellant at Rs.1.96 crores during the year with no details of the repayement of the loans in the subsequent years. No full copy of the return of income has been submitted so as to know the details of the 3.15. Further with regard to M/S.J.S. R. Trading Corporation also the facts are similar to the extent that no interest has been charged upon the lendings to appellant at Rs.7 lakhs during the year with no details of the repayement of the loans in the subsequent years. No full copy of the return of income has been submitted so as to know the details of the business activities and source of accumilation of funds to the appellant. 3.16. Further with regard to M / s s.Logix Infosoft Pvt.Ltd.also the facts are similar to the extent that no interest has been charged upon the lendings to appellant at Rs.1 crore during the year with no details of the repayement of the loans in the subsequent years. No full copy of the return of income has been submitted so as to know the business activities and source of accumilation of funds to the appellant. Even no bank statement copy of the lender has been submitted to prove the genuineness of the the loans. Even the lender company has submitted its Nil returned income which do not establish the creditworthiness of the party. Moreover the fact that the reply of the notice issued u / s * 0.133(6) of the I.T. Act sent through the speed post from Ahmedabad although the said party stationed at Dalhi itself does not establish the veracity of the lending transactions by the said party. 3.17. Finally, in the case of Rudra Tech the appellant has not even submitted the confirmations of the said party more over no bank statement copy and copy of return of income besides details of sources of the loans granted to the appellant have been submitted therefore the identity, genuineness and creditworthiness remained totally unproved by the appellant.

is dismissed.

9. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

12. On the other hand, the Ld. D.R did not raise any serious objection if the matter is set aside to the file of the AO for fresh adjudication as per the provision of law. However, the Ld. DR pointed out that the assessee has already been given sufficient opportunities to set up his case but the assessee time and again has failed to do so. The Ld. DR vehemently supported the order of the authorities below.

14. The next issue raised by the assessee is that the ld. CIT(A) erred in confirming the order of the AO by treating the share capital of Rs. 4,38,90,000 as unexplained cash credit u/s 68 of the Act.

15. The assessee during the year has received share capital along with the premium of Rs. 4,38,90,000/- from the company namely M/s Maple Capital Holding Pvt. Ltd. based in Singapore. On enquiry by the AO to furnish the necessary details about the share capital receipt from Maple Capital Holding Pvt. limited, the assessee failed to furnish the necessary details as specified u/s 68 of the Act. Accordingly, the AO treated the same as unexplained cash credit and added to the total income of the assessee.

16. On appeal the Ld. CIT(A) also confirmed the order of the AO by observing as under:

I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the addition on account of introduction of share capital to the tune of Rs.4,38,90,000/- claimed to have been received from Maple Capital Holding Pvt. Ltd., Singapore. In spite of various notices issued by the AO the appellant did not submit the required details and hence the AO observed that the appellant has failed to prove the identity, Certified True Copy creditworthiness and genuineness of the transactions towards the share capital in the name of the aforesaid party. It is worth here to mention that. shares to the aforesaid party were issued at the premium of Rs.90/- per share having the face value of Rs.10/-. 4.4. During the course of appellate proceedings the appellant in the assessment proceedings vide its letter dtd. 16.3.2015 to the AO has submitted the name and address of the party, form No.5, form No.23, FIRC certificate and allotment of UIN letter of RBI and company certificate for FEMA Notification, form No.2 and special resolution and list of allottees thus, the details have been submitted to the A.O. Further submissions have been made by the appellant in the present appellate proceedings which have been reproduced in the preceding paras of this order. 4.5. Having considered the facts and submission, it is noticed that the identity of the party is proved from the fact that a copy of certificate of foreign inward remittance issued by Central Bank of India dtd. 6.4.2011 has been submitted for the inward US Dollars of 989725.62 which were equivalent to Rs.4.38.94.331/- towards the subscription of the equity shares on behalf of Maple Capital Holding Ltd. Singapore. Further a copy of the allotment of UIN Number has also been issued by the RBI vide its letter dtd. 18.5.2011. From the copies of documents submitted, the identity of the party is established. 4.6. However, the appellant has not submitted the copy of bank account of the share subscriber company to establish the flow of funds from its bank account to the bank account of the appellant. Therefore, the genuineness of the share subscription does not get established. Moreover, the appellant has also not submitted any details and copies of documents in support of the source of such a huge amount as share capital including premium to the appellant company. Therefore, the creditworthiness of the same party is also not established. Even no copy of the balance sheet of the aforesaid company has been submitted showing that the aforesaid share investment has been recorded therein. Mere submission of the certificates from RBI, Central Bank of India and Form No.2 etc. would not fulfill the ingredients/requirements of Section 68 of the I.T. Act. Therefore, the addition made by the AO of the unexplained share capital is found correct and justified and hence the same is confirmed. Reliance is placed on the recent judgment of the Hon'ble ITAT Ahmedabad in the case of ACIT, Cir.5, Ahmedabad Vs. Nakoda Fashions Pvt. Ltd. in dtd. 18.8.2016 and other judgements/decisions of Hon'ble Courts discussed in the preceding ground of appeal

. Thus, the ground of appeal is dismissed.

17. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The ld. AR before us submitted that the amount of share capital was received from the party based in foreign country after taking due approval from the RBI which is placed on page 29 of the paper book. The Ld. AR also submitted certificate of Foreign Inward Remittance dated 06/04/2011, issued by the Central bank of India which is placed on page 30 of the paper book. Accordingly, the Ld. AR contended that the onus cast u/s 68 of the Act has been discharged.

"11. We have heard rival contentions and perused the material available on record. The first and foremost question to be decided is whether on the basis of material furnished by the assessee and available on the record, the assessee has discharged its onus as cast by sec. 68 in terms of identity and creditworthiness of the shareholders and genuineness of the transaction. The availability of balance-sheet, certificate of incorporation, confirmations and M/s Russian Technology Centre (P) Ltd. 19 certificates of good standing etc. filed by the assessee in respect of shareholders establish that they are non-resident entities, having independent and legal existence. The moneys have come to assessee through banking channels as is evident from FIRC, which also mentions the purpose of remittance and also the particulars of the remitting bank. FIPB approval that too with a liberty to collect share capital up to 600 crores and ROC compliance etc. clearly indicate the stand of the assessee. In our considered view, the plethora sora of of the evidence filed by the assessee amounts to discharge of primary burden cast on the assessee in terms of sec. 68 of the I.T. Act for identity and creditworthiness of the creditors and genuineness of transaction. 11.1. It will be worthwhile to advert to the contentions raised by the Id. counsel on other counts also. Delhi ITAT in the case of Finlay Corporation (supra) on the issue of applicability of sec. 68 in the case of foreign remittance which touches on the assessee's facts also held as under: "11. Rival submissions of the parties have been considered carefully in the light of the material placed on record. The assessee before us is a non- resident. The total income of the non-resident which is taxable under the Act is defined in s. 5(2) which includes income which (a) is received or due to be received in India in the previous year by the assessee or on behalf of the assessee; or (b) accrues or arises or is deemed to accrue to arise to him in India during such year. Explanation 1 provides that income accruing or arising outside India shall not be deemed to received in India within the meaning of this section by reason only of the fact that it is taken into account in the balance sheet prepared in India. It is pertinent to note that such provisions of s. 5 (2) are subject to the other provisions of the Act. That means in case of any conflict between the provisions of s. 5(2) and any other provision of the Act, then the other provision in the Act would have overriding effect.

13. But that is not the end of the matter. In our considered opinion, the conflict between the provisions is only with reference to the onus and not to the issue of taxability of income. The onus is shifted under ss 68 or 69 only with reference to the income which is otherwise taxable in the hands of non-resident under s. 5(2) Therefore, the issue whether the income of non- resident is taxable or not is still to be decided with reference to the provisions of s. 5(2) and, the provisions of s. 68 or 69 cannot enlarge the scope of s. 5(2). What is not taxable under s. 5(2) cannot be taxed under the provisions of s. 68 or s.

69. Under s. 5(2), the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that in by way of remittances. Reference can be made to the judgment of Supreme Court in the case of Keshav Mills Ltd. (supra). If such income is shown in the books of account then it cannot be taxed in India merely because the assessee is unable to prove the source of such entry. For example, there may be appearing an entry of cash credit in the name of a person of USA by way of loan received through cheque and deposited in the bank account maintained at any city in USA. Such money, being received outside India, cannot be taxed under s. 5(2) unless it is proved that such money is relatable to the income accrued or arising in India. Therefore, the same cannot be taxed under s. 68 merely on the ground that assessee fails to prove the genuineness and source of such cash credit. Therefore, we are of the considered view that provisions of s. 68 or 69 would be applicable in the case of non-resident only with reference to those amounts whose origin of source can be located in India. Therefore, the provisions of s. 68 or 69, in our opinion, have limited application in the case of non-resident". 11.2. The decision in the case of Finlay Corporation (supra) has been followed in the case of Smt. Sushila Ramaswamy (supra), holding as under: "The assessee, who is a non- resident. brought money into India through banking channel and the manner in which this money was utilized in India is described in the Annexure. We have observed in the above paras that because of the mode of banking channel, admittedly, used for the remittance in this case, the onus on the assessee under s. 69 stood discharged, and therefore it was not taxable in India under s. 5(2)(b) of the Act. The CBDT circular (supra) squarely supports the case of the assessee. The fact that the transactions and events narrated in the Annexure look curious and suspicious makes no difference to the conclusions that we have drawn in this case, as per law, in the above paras". 11.3. Apropos applicability of CBDT Circular no. 5 dated 20-2-1969, the ITAT in the case of Saraswati Holding (supra), while examining the issue in question in the light of CBDT Circular no. 5 dated 20-2-1969 and the decision of Finlay Corporation (supra) held as under: "10. In the light of the above decision of the Tribunal, and Circular No. 5 of CBDT, we are of the view that the action of the Revenue authorities in bringing to tax the sum of Rs. 3,83,11,550 cannot be sustained. We have already held that the assessee is a tax resident of Mauritius. There is no basis for coming to the conclusion that any income of the assessee accrued, arose or was received in India. In these circumstances, we direct that the addition made be deleted. Ground Nos. 2 to 2.3 raised by the assessee, are allowed". 11.4. The provisions of section 68 though inserted w.e.f. 01.04.2013 also reveals the legislative intent that if the share holder is a non-resident and the money is hy way of mittance from his account, the rigor of section 68 would not be applicable. 11.5. We find merit in the contentions of Id. Counsel and reliance on the decisions of the ITAT in the cases of Finlay Corporation, Smt. Sushila Ramaswamy and Saraswati Holding (supra) and the import of CBDT Circular referred to above. Whenever remittances are made by the nonresident holding company for purchase of shares of its subsidiary in India, the money undoubtedly is capital in the nature and if documents like FIRC etc are produced, it can safely be stated that the said money came in through banking channels.

11.6. In the absence of any evidence to show that the money remitted by the non-resident uccrued in India, it cannot be held to be taxable in India. Hence, 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 exigihle to tax It therefore naturally follows that if the identity of the non-resident remitter is established and the money has come in through banking channels, it would constitute a capital receipt and ordinarily cannot be treated as deemed income under sections 68 or 69 of the Act. This is clarified by the CBDT Circular itself. 11.7. Taking into consideration of all the above, we find merit in the argument of the Id. Counsel for the assessee that the primary burden cast on the assessee was duly discharged. The issue of primary onus is to be weighed on the scale of evidence available on the record and the discharge of burden by the assessee is also to be decided on the basis of documents filed by the assessee and facts and circumstances of each case and on that basis a reasonable view is to be taken as to whether the assessee ha discharged the primary onus of establishing the identity of share applicant, its creditworthiness and genuineness of the transaction. From the documents filed during the course of assessment and before CIT(A), the independent existence of the share applicants in Russia is clearly established. The assessee's application to FIPB for raising the capital contains all the relevant details which is favourably accepted by the Board, particularly by allowing the assessee to raise further the capital without approaching the FIPB. The transactions are through banking channels. Thus the gamut of evidence does not leave any doubt in the discharge of primary burden of the assessee. On the issue CBDT Circular and Finlay Corporation judgment (supra) also we are in agreement with the Id Counsel for the assessee that in these circumstances of the case moneys remitted by non-residents through banking channel outside India has to be held as capital receipts, not exigible to tax and cannot be treated as deemed income on the fictions created by sections 68 and 69 of the Act. In consideration of all these observations, we are inclined to hold that the share application money as raised in the grounds of appeal cannot be held as non-genuine and added as income of the assessee w/s 68 of the Act. Consequently, additions made on this count, as raised in grounds of appeal, are deleted. Assessee's grounds of appeal on this issue are allowed. In view of the above submission also the addition made by the learned AO is bad in law and therefore the learned AO should be directed to delete the said addition." 20.1 The facts of the present case are identical to facts of the case as discussed above. Therefore, the ratio laid down by the Tribunal in the case cited above is squarely applicable to present facts of the case. Accordingly, respectfully following the ratio as discussed above, we set-aside the findings of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.

21. The next issue raised by the assessee is that the Ld. CIT(A) erred in confirming the addition made by the AO for Rs. 4,06,19,505.00 representing the amount of interest attributable on the diversion of interest-bearing fund for non- commercial purposes.

and reducing them from the interest free own funds of the year when the investment in shares have been made the comparison of the available funds vis-à-vis interest free lendings has to be made for which no details and copies of documents have been submitted by the appellant. In other words, the comparison of the interest free funds available has to be made on the date when the interest free lendings have been given reducing the share investments out of such interes free funds. Since the appellant has failed to provide such details and documents, therefore, the comparison made by the appellant with the interest free funds available in the year under consideration vis-à-vis the interest free lendings more particularly when both the items have t compared in the year when the interest free lendings have been given The submission made by the appellant is not sustainable. 6.8 In view of the above discussion and failure to establish the availability of the interest free funds on the dates of interest free lendings to the various concerns, the contention of the appellant that such interest free funds have been utilized for interest free lendings is not verifiable and hence the same is not accepted. Therefore, the disallowance of interest made by the AO is found correct and justified and hence the same is confirmed. Thus, the ground of appeal is dismissed.

24. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

28.1 Likewise, the Ld. AR has not produced its financial statement so as to justify that the own fund of the assessee exceeds the amount of investment. Thus, in the absence of necessary details, keeping in view the principle of justice, we are inclined to give one more opportunity to the assessee to raise its contention before the AO. Thus, we set-aside the issue to the file of the AO for fresh adjudication as per the provision of law. Hence, the ground of appeal is hereby allowed for statistical purposes.

Order pronounced in the Court on 28/03/2024 at Ahmedabad.