ACIT,, NEW DELHI vs. M/S LIPI FINSTOCK LTD.,, NEW DELHI

This appeal is filed by the Revenue against the order dated 17/03/2017 passed by the CIT (A)-24, (hereinafter referred to ‘CIT(A)’)New Delhi for assessment year 2009-10.

2. The Revenue has raised the following grounds of appeal:-

1. “The order of Ld. CIT(A) is not correct in law and on facts.

2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of Rs. 54,59,00,000/- on account of unexplained share capital by holding that the additions other than those based on seized documents cannot be done in the assessment proceedings u/s 153C.

3. On the facts and circumstances of the case, the CIT(A) has erred in relying on the order of Hon’ble Delhi High Court in case of M/s RRJ Securities as Sec. 153C does not restrict the assessment to incriminating documents.

“3.15 In view of the above discussion, it is established beyond doubt that the share application money and share premium received by the assessee from various investors is nothing but unexplained cash credits in the books of accounts of the assessee company. The same has also been admitted by the assessee before the Settlement Commission. Further, it has also been established above that the assessee company is a paper company without any real business and has been created as a conduit to receive unaccounted income of flagship companies in the garb of investments, and pass it back to the flagship companies as investment. Such flagship company in this case is M/s. Rockland Hospital Limited and M/s. Rockland Hotels Limited. Hence the unaccounted investment is the unaccounted cash income generated by M/s. Rockland Hospital Limited and M/s. Rockland Hotels Limited. The case of Rockland Hospital Limited is pending before Settlement Commission and the outcome is awaited. It has already been stated in the preceding paras that out of investments received by the assessee in the relevant FY a sum of Rs. 1,15,00,000/- has been received back in Rockland Hotels Limited and Rs. 28,58,34823/- has been received back in Rockland Hospital Limited. The amount received by Rockland Hotels Limited has already been added on substantive basis in the assessment of Rockland Hotels Limited in AY 2011-12 & 2012-13. The case of Rockland Hospital Limited is before the Settlement Commission. Hence in total a sum of Rs. 29,73,34,823/- will be added on protective basis in the hands of the assessee and the remaining Rs. 24,27,44,823/- will be added on substantive basis u/s 68 of the IT Act to declared income of the assessee company. In case the Hon'ble Settlement Commission holds that this unaccounted income on account of unexplained investments does not belong to Rockland Hospital Limited, then the protective addition will be held as substantive in the hands of the assessee. Similarly if the appellate authorities in the case of Rockland Hotels Limited, hold that the unaccounted income on account of unexplained investments does not belong to Rockland Hospital Limited, then the protective addition will be held as substantive in the hands of the assessee. As the assessee has concealed the income to the extent of unexplained cash credit amounting. to Rs.297334823/- on protective basis and Rs.242744823/- on substantive basis, which clearly attracts provisions of penalty proceedings u/s 271(1)(c) of the IT Act. The penalty proceedings u/s 271(1)(c) of the IT Act has been initiated separately.

(Addition of Rs.297334823/- on protective basis) (Addition of Rs.242744823 on substantive basis).” 9. Since an amount of Rs.29,73,34,823/- has been made protective basis and and a sum of Rs. 24,27,44,823/- has been made on substantive basis a specific query has been raised with the Ld. Assessee's Representative regarding the outcome of addition made on protective basis. The Ld. Assessee's Representative brought to our notice that Rockland Hospital Group moved an application before the Income Tax Settlement Commission ("Ld. Settlement Commission"), and accordingly, the Ld. Settlement Commission vide its order dated 16.10.2015 accepted the contention of Rockland group that a sum of Rs. 8.73 crores were circulated on multiple occasion to introduced share capital. The Ld. Settlement Commission recorded its finding at para 4.2.3 of its order dated 16.10.2015 wherein it also dealt with share capital introduced by the assessee i.e., M/s Lipi Finstock limited.

The addition was confirmed in the hands of other assessees as listed out at para 4.2.3. of the Ld. Settlement Commission order in following manners:-

“4.2.3. Commission's observations and finding The Commission on 07.08.2015during the hearing, directed the Addl. DIT (Inv.) to verify the daim of the applicant about the rotation of entries for Introduction of share capital by RHL. On verification, it was found that the total circulating capital was Rs. 8.73 crores and not Rs. 7.73 crores. Out of this the applicant has declared Rs. 6.79 crore in 12 cases before us and the remaining Rs. 1.04 crore has been stated to be opening cash in hand. Later on, vide letter dated 6.10.2015 during the course of hearing in the cases of individuals, Rs. 1.04 crore also has been declared additionally in the case of Individuals as the source of Initial cash in hand could not be fully substantiated by the applicant on the plea of old records. It has been found on verification that the applicant's claim is correct with regard to repetition of accommodation entry and the initial amount was Rs. 8.73 crore.

The fund flow statement showing the manner of rotational increase in share capital and the investment in building as verified by Addl.

DIT(Inv.) is as under:-

From the above chart the investment of individuals have also been verified along with investment from 4 companies namely M/s Sukumar Enterprises Pvt. Ltd., M/s Vaibhav India Surgicals Pvt. Ltd., M/s Punendu Traders Pvt. Ltd. and M/s Sunskriti Tradex Pvt. Ltd. These 4 companies were assessed u/s 143(3) without any adverse Inference. The applicant has given copy of assessment order u/s 143(3) passed by respective A.O's.

The modus operandi admitted in the application and rotation of funds starting from Initial undisclosed investment of Rs. 8.73 crore in the hands of applicants in A.YS 2006-07 and 2007-08, use of such funds to obtain share capital from accommodation entry providers by 15 companies, investment by such companies to share capital of RHL, Inflation of cost of construction of hospital building by RHL through Somya Construction Pvt. Ltd., obtaining of share capital again through accommodation entry providers, rotation of such funds from A.Ys 2006-07 to 2012-13 has been found to be correct during the proceedings before us. The inflation In cost of hospital building by RHL and non-genuine share capital in RHL is found to be Rs. 82.34 crore. RHL has withdrawn depreciation claim on Inflated cost of hospital building.

During present proceedings, we Inquired of the AR as to the purpose of raising such share capital by way of inflated purchases bills/assets. The AR stated that the purpose was to obtain higher finance from banks/financial Institutions. He further added that the applicant is not a defaulter of any financial institutions.

Since the necessary verification has been done and found to be satisfactory, the additional amount of Rs. 1.04 crore over and above the amount of Rs. 6.79 crore in accordance with applicant's letter dated 06.10.2015 is directed to be added in their respective individual hands as- under:

Considering the above fact that the addition was confirmed in the hands of other Assessees and not on the assessee here in by the settlement Commission, the protective assessment made in the hands of the assessee does not survive.

“4.1.9. The first issue to address is that the preliminary objection of the appellant that the additions made by the A.O. are not emanating from the incriminating material unearthed during search. It is therefore necessary to examine whether the additions were made for A.Y. 2009-10 have their origin in material unearthed during search. The primary evidence in this regard is the statement of Sh. Anil Aggarwal, the hawala entry operator who admitted that he has provided accommodation entries to the appellant. However, closer look at the statement shows that his admission relates to entries provided during the period December, 2010 to August 2011, which is subsequent to the previous year relevant to the A.Y. 2009- 10 under consideration here. Secondly, the accommodation entries admitted by him to pertain to share capital entries provided by his companies Ankay Associates Pvt. Ltd., B.R. Gupta and Co. Pvt. Ltd. and Rachiyata Buildcon Pvt. Ltd. These are all Delhi-based companies which Sh. Anil Aggarwal controls. Sh. Anil Aggarwal is not connected to any of the Kolkata-based companies who have provided share capital to the appellant during the A.Y. 2009-10, nor has he admitted having facilitated the accommodation entries through these Kolkata-based companies. The statement u/s 132(4) of Sh. Anil Aggarwal is corroborated and admitted by the Rockland group (including the appellant-company) in its petition before the Hon’ble Settlement Commission. It has been admitted that the unaccounted income of Rs.7.73 crores made during A.Y. 2006-07, 2007-08 and 2008-09 by various companies, notably Sowmya Constructions P. Ltd. This income was introduced as share capital in the Rockland group companies. Sowmya Construction P. Ltd. offset its artificially inflated revenue by inflating cost of construction by booking bogus expenditure. The cash so generated was used to inflate the share capital of the Rockland group companies by converting the cash into cheques through the entry operator; this process was repeated many times, so as to increase the equity capital of Rockland Hotels Ltd and Rockland Hospitals Ltd, ultimately increasing their share capital (equity) by Rs.82.34 crores, for the purpose of raising finance (debt) from Financial Institutions. It would however be noticed that the share capital inflow of A.Y. 2009- 10 is not covered in this admission. There is no other evidence seen in the assessment order which indicates that any incriminating material has been unearthed during the search (including statement of the Directors or third parties), which would show that the additions are based on material unearthed during the search. Of course there is evidence to doubt the genuineness of the equity increase for this year, in the form of local enquiries at Kolkata, Lai Bazar, Post Office and the statements of the purported auditor of the investor companies as well as the Directors of the Investor companies. But the results of these enquiries cannot be said to be material unearthed during search. It appears that the results of these enquiries ( if it were indeed available during the search) were not even confronted to the Directors of the appellant company during the search. The fact that there is evidence of bogus share capital from the period 2006-07 to 2008-09 does not automatically constitute evidence regarding share capital for A.Y. 2009-10. The additions made by A.O., though based on vigorous activity in evidence collection, falls outside the scope u/s 153C as held by the Hon’ble Jurisdictional Delhi High Court in the case of CIT vs. RRJ Securities Ltd. (2015) 62 Taxmann.com 391 (Del), reproduced below, and which I am bound to follow: “21. As discussed hereinbefore, once the AO of the searched person is satisfied that the seized assets/documents belong to another person and the said assets/documents have been transferred to the AO of such other person, the proceedings for assessment/reassessment of income of the other person has to proceed in accordance with provisions of Section 153A of the Act. Section 153A requires that where a search has been initiated under Section 132 of the Act, the AO is required to issue notice requiring the noticee to furnish returns of income in respect of six assessment years relevant to die six previous years preceding the previous year in which the search is conducted. As discussed hereinbefore, by virtue of second proviso to Section 153A, the assessment/reassessment pending on the dale of initiation of search abate. In the context of proceedings under Section 153C of the Act, the reference to the date of initiation of the search in the second proviso to Section 153A has to be construed as the date on which the AO receives the documents or assets from the AO of the searched person. Thus, by virtue of second proviso to Section 153A of the Act as it applies to proceedings under Section 153C of the Act, the assessment/reassessment pending on the date on which the assets/documents are received by the AO would abate. In respect of such assessments which have abated, the AO would have the jurisdiction to proceed and make an assessment. However, in respect of concluded assessments, the AO would assume jurisdiction to reassess provided that the assets/documents received by the AO represent or indicate any undisclosed income or possibility of any income, that may have remained undisclosed in the relevant assessment years, this Court in CIT v. Kabul Chawla [2015] 61 taxmann.com 412 (Delhi) has held that completed assessments could only be interfered with by the AO on the basis of any incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. This Court had summarized the legal position in respect of Section 153A of the Act as under:— '37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. ii The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the. power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should he strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is re la table to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment. under Section 153.4 merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material! existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made, known in the course of original assessment.'

4.1.10. This aspect is further noticed on a reading of the satisfaction note which is reproduced below:- M/S. ROCKLAND HOTELS LIMITED & M/S ROCKLAND HOSPITAL LIMITED During the course of search and seizure operation conducted on 06/09/2011 at Premises C-30, Panchsheel Enclave, New Delhi of M/s Rockland Hotels Limited and A-33-34, Qutub Institutional Area, New Delhi, of M/s Rockland Hospital Limited, documents marked as Annexure A-l to A-132 & Annexure AA-1 to AA-7 were found and seized.

It is seen that the above seized material contains following documents belonging to M/s Lipi Finstock Private Limited:-

P-127-128 P & L A/cyear ending on 31.03.2010 P-129 balance sheet year ending on 31.03.2010 P-158-169 trial balance ending on 31.03.2010

Hence the proceeding u/s 153C of the IT Act, 1961 is initiated in the case of M/s Lipi Finstock Limited.

(A L Prasad)

Deputy Commissioner of Income Tax Central Circle-11, New Delhi 4.1.11. It can be seen that the seized documents belonging to the appellant mentioned in the Satisfaction Note do not pertain to the assessment year 2009-10. Even otherwise, the documents mentioned in the satisfaction note have not been utilized by the A.O. in framing this assessment.”

“18. The ITAT permitted this additional ground by giving a reason that it was a jurisdictional issue taken up on the basis of facts already on the record and, therefore, could be raised. In this behalf, it was noted by the ITAT that as per the provision of Section 153C of the Act, incriminating material which was seized had to pertain to the Assessment Years in question and it is an undisputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four Assessment Years. Since this requirement under Section 153C of the Act is essential for assessment under the provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153C of the Act. Para 9 of the order of the ITAT reveals that the ITAT had scanned through the Satisfaction Not and the material which was disclosed therein was culled out and it showed that the same belongs to Assessment Year 2004 05 or thereafter. After taking note of the material in para 9 of the order, the position that emerges there from is discussed in para 10. It was specifically recorded that the counsel for the Department could not point out to the contrary. It is for this reason the High Court has also given its imprimatur to the aforesaid approach of the Tribunal. That apart, learned senio counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000-01 and 2001-02 was eve time barred.