TaxTMI 
TaxTMI 
2017 (8) TMI 943
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....Act which sum had been received by the appellant through banking channels from Mr. Patrick Brian Joseph Curran (an UK citizen) and Mr. Gregory Douglas Strohfeldt (an Australian citizen) against fresh allotment of preference shares and both the persons have also confirmed the factum of investment in the appellant company, as such, addition made by the learned Assessing Officer and sustained by the learned Commissioner of Income Tax (Appeals) is unsustainable in law. 2.1 That the learned Commissioner of Income Tax (Appeals) and Assessing officer has grossly erred in failing to appreciate that assessee had obtained necessary approval from the Reserve Bank of India for making investment in the appellant company by Mr. Patrick Brian Joseph Curran and Mr. Gregory Douglas Strohfeldt and assessee has also duly intimated to the Registrar of Companies in respect of subscription of shares of the appellant company, as such, addition made and sustained is wholly unwarranted in law. 2.2 That the learned Commissioner of Income Tax (Appeals) and Assessing officer has grossly erred in failing to appreciate that Mr. Patrick Brian Joseph Curran and Mr. Gregory Douglas Strohfeldt bot....
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....eals) has grossly erred not admitting the additional evidences furnished by the appellant under Rule 46A of the Income Tax Rules failing to appreciate that no proper, valid and meaningful opportunity was granted to the appellant during the course of the assessment proceedings. 4. That the learned Commissioner of Income Tax (Appeals) has grossly erred on facts and in law in upholding the disallowance of expenditure of Rs. 89,114/- out of total rent expenditure of Rs. 27,89,114/- incurred during the year on the ground that the same was excessive, having regard to the amount of rent agreed in the rent agreement, without correctly appreciating the details of the total rent expenditure claimed as deduction during the relevant previous year. 5. That the learned Commissioner of Income Tax (Appeals) has erred on facts and in law in upholding the addition of Rs. 4,40,050/- to the total income on the ground that the appellant did not fully disclose rental income qua some portion of the leasehold property given on rent to sister concerns, viz., Magnum technology Solution Pvt. Ltd. and Bell Securitech Pvt. Ltd. on the basis of the total rent agreed in the rent agreement enter....
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.... 3. Briefly stated the facts of the case are that the assessee company was incorporated on 4Ih February 2004, under the Companies Act, 1956. The authorized share capital of the assessee company is of Rs. 6,00,00,000/- (see Pg. 28) The assessee company had issued equity shares till the end of the preceding assessment year of the value of Rs. 85,47,000/-. Such equity shares were subscribed by the ten shareholders named below: SI. No. Name of the shareholder Number of shares Amount 1. Anurag Ashok 8,06,000issued Rs. 80,60,000/- 2. Kavita Ashok 5,000 Rs. 50,000/- 3. Alok Singh 3,700 Rs. 37,000/- 4. Avinash Dixit 5,000 Rs. 50,000/- 5. Kul Taran Singh 5,000 Rs. 50,000/- 6. Rishabh Kumar 5,000 Rs. 50,000/- 7. Nitin Kumar 5,000 Rs. 50,000/- 8. Shriniwas Sharma 2,500 Rs. 25,000/- 9. Parmeet Chawla 2,500 Rs. 25,000/- 10. Sanjeev Mathur 15,000 Rs. 1,50,000/- Equity shares thus allotted were 8,54,700 of Rs. 10/- each. During the instant year it further allotted preference shares out of authorized share capital of Rs. 4,16,90,600/-. The said share ca....
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....hareholders had been allotted preference shares when said shareholders had shown their interest having regard to the potentially and future prospects and had been taken as directors the company turned the table and not only wiped off the losses but paid tax on book profit for the AY 2014-15 and income has substantially been earned by the company. It would be seen that aforesaid company though had been incorporated on 4th February 2004, yet, till the close of the accounting year relevant for the instant assessment year, it had been incurring losses and such loss so suffered has duly been accepted, but soon the aforesaid two directors were taken as Board of directors and had contributed capital who were allotted preference shares, the appellant company started making profit. In fact the expenditure incurred on their travelling and stay has been allowed by the CIT(A) (Details pg. 8 - 92, para 7 of CIT(A)'s order). 6. The brief facts and sequence of events in respect of the aforesaid appeal are as under: 23.9.2012: For the year under consideration, the appellant company has filed its return of income declaring a loss of Rs. 51,34,798/-. A copy of the return of income alongwith co....
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....ee preferred an appeal before the learned CIT(A). 17.08.2016: Assessee also filed an application u/r 46A of the Income Tax Rules before the learned CIT(A) alongwith following additional evidences (see page 245-254 ofPB): A. Mr. Patrick Brian Joseph (Tax Resident of UK): 1. Copy of the income tax return filed in the source country i.e. UK alongwith computation of income for the following tax years: 06.04.2011 to 05.04.2012 256-289 06.04.2010 to 05.04.2011 290-325 2. Copy of the confirmation from UBS wealth management showing source of funds being extension of bank overdraft. 326-328 B Mr. Gregory Douglas (Tax Resident of Australia): 1. Copy of the income tax return filed in the course country i.e. Australia alongwith computation of income for the 01.07.2008 to 30.06.2009 which had electronically been filed. 329-341 4. Copy of the financial statements of Fiwian Superannuation Fund alongwith tax return for the years ended 30.06.2011 and 30.06.2012 342-401 5. Copy of the write up from financial advisor of Gregory Stofhfeldt about withdrawal of funds from superannuation fund. .40....
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....ant neither had or is expected tohave the details of sources of investors funds of the aforesaid shareholders and the sums credited represented the amount of the share capital against the issue of shares. That appellant in rejoinder, also made its detailed counter submissions in respect of each objection of the AO made in his remand report (placed at page 423-439 of the PB). 27.02.2017:Apart from the rejoinder submissions, appellant also filed its detailed written submissions in respect of each of the addition made in the order of assessment (see page 440-480 of the PB). 14.03.2017:That the learned CIT(A) disposed off the appeal of the appellant wherein learned CIT(A) did not admit the additional evidences which was merely supporting evidences and substantially upheld the addition made in the order of assessment. Aggrieved against the aforesaid order of assessment, assessee has filed the instant appeal. 7. We have heard the rival contentions and perused the facts of the case. The issues involved in the instant appeal are as under: 1. S.Noappellant company w.e.f. 01.04.2012. Particulars Amount (in Gr ound 1. Addition u/s 68 ....
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....m Mr. Gregory' Douglas Strohfeldt (an Australian citizen) and Rs. 2,97,07,100/- from Mr. Patrick Brian Joseph Curran (an UK citizen) from banking channels towards the investment in the cumulative preference shares of the applicant company. The aforesaid sum has been received by the assessee in the following manner: S.No. Name of the shareholder FIR C Page of PB Amount Amount in Rs. No of prefer en ce shares allotte d (see page 48) Date of allotment of shares 1. Mr. Gregory Douglas Strohfeldt 62 63 64 AUD AUD 39,000 17,00,000 84,47,400 18,36,120 1,19,83 21.11.20 Total 1,19,83,52 z. Mr Patrick Brian Joseph Curran 52 53 54 USD 79,250 USD USD 35,68,627 2.01.88.35 59,50,100 2,97,07 27.01.20 Total 2,97,07,07 10. The aforesaid sum has been received by the assessee from the respective bank accounts of the aforesaid individuals and has duly been credited in the bank account of the appellant company. That after the receipt of the aforesaid sums, appellant company has also allotted the cumulativ....
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....ction. However AO doubted the creditworthiness of the aforesaid individuals by doubting the source of the credits in the bank account of the aforesaid shareholders. 13. It has not been disputed by the AO that sum has been received by the assessee from the aforesaid two individuals for the allotment of the cumulative preference shares and same is also evident from the copy of the FIRC submitted by the appellant wherein it has specifically been stated that the purpose of the remittances are towards the subscription of the shares in the appellant company. AO has also not doubted the identity of the aforesaid two individuals nor had disputed the genuineness of the transaction. However in respect of Mr. Gregory' Douglas Strohfeidt, he has 'doubted' the source of the credits in his bank account and in respect of Mr. Patrick Brian Joseph, it was stated that sum has been received by appellant from his bank account, and at the time of remittance he has debit balance as such, his source is also doubted. It is submitted that during the course of the appellate proceedings, appellant filed an application u/s Rule 46A of the Income Tax Rules, and alongwith the application, appellant filed....
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....er, cause of substantial justice deserves to be preferred. It is further submitted that it is also settled law that the rigor of the rule of evidence contained in the Evidence Act did not apply to the proceedings under Income Tax Act. In such circumstances, the additional evidences furnished by the appellant and rejected by the learned CIT(A) which merely supports the claim of the appellant that the investors had sufficient creditworthiness is wholly misconceived. 15. In any case, it was submitted that in the instant case, identity of the shareholders are not in dispute and from the perusal of their bank statements it is evident that the sum has been received by the appellant from the bank account of the shareholders and such shareholders have also confirmed the factum of investment in the appellant company in such circumstances, and the burden of the appellant has duly been discharged. It may be stated here that, in the instant case, the assessee has led complete evidence, to establish that, the shareholders were identifiable and, genuine, which is the only test which has to be applied in the case where an examination pertains to an addition in respect of credits appearing as s....
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.... identity of the investor. The Delhi High Court also in Divine Leasing & Finance Ltd. 's case (supra), considering the similar question held that the assessee Company having received subscriptions to the public/rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented company's own income from undisclosed sources. The similar view has been taken by the other High Courts. 17. As the Apex Court has considered the law in Lovely Exports (P.) Ltd.'s case (supra) and in view of law laid down by the Apex Court, we find that the substantial questions framed in these appeals do not arise for our consideration. Accordingly, all these appeals are dismissed with no order as to costs." [Emphasis supplied]. 17. Similar view has also been expressed in the following judicial pronouncements: i.350 ITR 220(All) CIT vs. Jay Dee Securities and Finance Ltd. ii. 350 ITR 222 (AH) CIT vs. Misra Preservers (P) Ltd. ....
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....tworthiness of strangers. If the Revenue has any doubt with regard to their ability to make the investment, their returns may be re-opened by the department. In any case, what is clinching is the additional burden on the Revenue. It must show that even if the applicant does not have the means to make the investment, the investment made by the applicant actually emanated from the coffers of the Assessee so as to enable it to be treated as the undisclosed income of the Assessee. This has not been shown insofar as the present case is concerned and that has been noted by the Tribunal also." [Emphasis Supplied]" 20. The assessee also submits that the Hon'ble Delhi High Court in the case of CIT vs. Real Time Marketing (P) Ltd. reported in 306 ITR 55 has held that burden is on the Assessing Officer to show that money received originated from the coffers of the assessee company. The findings of the High Court are as under: "8. There is a finding of fact given by the two authorities namely CIT(A) and the Tribunal to the effect that:- The confirmation of M/s. ACL has been filed by the Assessee. The said company was assessed to tax. The source of ACL had been exp....
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.... 16.05.2012 CIT vs. Dalmia Bros Pvt. Ltd. iii) ITA No. 1257/2011 (Del) dated 20.07.2012 CIT vs. Expo Globe India Ltd iv) 357 ITR 146 (Del) CIT vs. Fair Finvest Ltd. v) 361 ITR 10 (Del) CIT vs. Gangestawari Metal (P) Ltd. vi) ITA No. 871/D/2010 A.Y. 2003-04 dated 25.05.2012 ITO vs. M/s Excellance Town Planner (P) Ltd. vii) ITA No. 1125/D/2012 A.Y. 2002-03 dated 01.06.2012 ITO vs. M/s Hi tech Accurate Communication (P) Ltd. viii) ITA No. 1177/D/2012 A.Y. 2001-02 dated 05.10.2012 ITO vs. India Texfab Marketing Ltd. ix) ITA No. 4498/D/2010 A.Y. 2003-04 dated 30.12.2010 Intimate Jewels (P) Ltd. x) ITA No. 1078/D/2013 A.Y. 2002-03 (Del) Mithiia Credit Services Ltd. vs. ITO xi) ITA No. 5656/D/2012 A.Y. 2004-05 (Del) Gulati Glass Industries (P) Ltd. xii) 367 ITR 217 (All) CIT vs. Vacmet Packaging (India) (P) Ltd. xiii) 44 taxmann.com 460 (Raj) CIT vs. Supertech Diamond Tools (P.) Ltd. xiv) 51 taxmann.com 198 (Mad) CIT vs. Pranav Foundation Ltd. xv) 50 taxmann.com 416 (Mad) Victory Spinning Mills Ltd. xvi) ITA NO. 2082/D/2011 dated 8.12.2014 A.Y. 2007-08 ACIT vs. Div....
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....ant case, there is no dispute that the amount received represented foreign remittances made which had duly been notified to the Reserve Bank of India. It is also not even alleged that there was any violation made under the provisions of Foreign Exchange Management Act and as such it is absolutely clear that the amount represented capital receipt a sum received against issue of the preference shares to such shareholders who have duly been debited and had been admitted by such shareholders that this have contributed towards share capital against the issue of preference shares to them. It was submitted that the investment has been received by the assessee through proper banking channels. It is submitted that while upholding the addition, learned CIT(A) has uphold the finding of the AO who has doubted the source of the investors. It is respectfully submitted that learned CIT(A) has completely failed to appreciate that it is settled law that it is not the business of the Assessee to find out the source of money of the creditor. That in a latest judgment, pronounced on 21.12.2015, Hon'ble High Court of Delhi in the case of CIT vs. M/s Shiv Dooli Pearls & Investment Ltd. reported in [2016....
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.... the Assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the Assessee and the creditor. What follows, as a corollary, is that it is not the burden of the Assessee to prove the genuineness of the transactions between-his creditor and sub-creditors nor is it the burden of the Assessee to prove that the sub-creditor had., the creditworthiness. To advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the Assessee. It, therefore, further logically follows that the creditor's creditworthiness has to be judged vis-a-vis the transactions, which have taken place between the Assessee and the creditor, and it is not the business of the Assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and subcreditor and/or creditworthiness of the sub-creditors, for, these aspects may not be within the special knowledge of the Assessee." (emphasis supplied) The above observations, far from supporting the case of the Revenue, does the opposite. In the....
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.... material placed on record, which was largely bank statements of the creditors and their income tax returns, it could gather the necessary information from the sources to which the said information was attributable to. No such exercise had been conducted by the A.O. In any event what both the A.O. and the ITAT lost track of was that it was dealing with the assessment of the company, i.e., the recipient of the loan and not that of its directors and shareholders or that of the sub-creditors. If it had any doubts with regard to their credit worthiness, the revenue could always bring it to tax in the hands of the creditors and/or sub-creditors. [See CIT v. Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Delhi) and CIT v. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC)]." In view of the legal position explained in the above decisions, the Court holds that as far as the present case is concerned, the Assessee has indeed discharged its onus of proving the creditworthiness and genuineness of the lender (TIL). There was no requirement in law for the Assessee to prove the genuineness and credit worthiness of the subcreditor, which is in this case was TCL. [emphasis supplied]" 2....
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....f CIT v. Dwarkadhish Investment (P.) Ltd, reported in [2011] 330 ITR 298 (Delhi) Hon'ble High Court has held as under: "8. In any matter, the onus of proof is not a static one. Though in section 68 proceedings, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors/share applicants by either furnishing their PAN number or Income-tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the revenue. Just because the creditors/share applicants could not be found at the address given, it would not give the revenue the right to invoke section 68. One must not lose sight of the fact that it is the revenue which has all the power and wherewithal to trace any person. Moreover, it is settled law that the assessee need not to prove the 'source of source'." 26. Further reliance was placed on the following judicial pronouncements: i. [2014] 361 ITR 220 (Delhi) CIT v. Kamdhenu Steel & Alloys Ltd. ii. [2015] 57 taxmann.com 176 (Gujarat) Sint. Neelamben Gopaldas Agrawal v. TTO ....
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....foresaid ground which is wholly unsustainable as has been held in the aforesaid judicial pronouncements. 29. Lastly, it was submitted that while making the impugned addition, AO/CIT(A) did not bring any evidence to rebut the evidences furnished by the assessee and made the addition on suspicion and speculations. It is settled law that, no addition can be made on the basis of surmises, suspicion and conjectures. Reliance for this proposition is placed on 37 ITR 271 (SC) Uma Charan Shaw & Bros. Co. v. CIT. It has been further held in the following cases that suspicion howsoever strong cannot take the place of proof: i) 26 ITR 775 (SC) at 782 (SC) Dhakeswari Cotton Mills Ltd. vs. CIT ii) 37 ITR 151(SC) Omar Salay Mohammad Sait v CIT iii) 37 ITR 288 (SC) Lai Chand Bhagat Ambica Ram v CIT iv) AIR 1977 SC 796 Krishnand vs. State of Madhya Pradesh v) AIR 1974 SC 171 Jayadaval Poddar vs. Mst Bibi Hazra vi) 242 ITR 133 ( Ker CIT vs. K. Mahim Ldma 30. Accordingly, the addition made by the Assessing Officer and sustained by the learned CIT(A) is directed to be deleted. 31. Ground No. 4 being disallowance of Rs. 89.114/- being the ....
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....en that the appellant had incurred rental expenses paid to Cepco Industries for Kalkaji properties, and apart from the aforesaid, it has also taken another premises on rent from Shri. Subhash Gupta in the month of March 2012 at a rental of Rs. 2.20,000/- per month (placed at page 99 to 103 of PB) and for the year under consideration, appellant had paid a sum of Rs. 2,42,600 to the lessor, being one month's rent along with miscellaneous charges of Rs. 22.600 for the execution of rental agreement. Since the premises were leased only for a period of 15 days in the relevant year, the appellant claimed an expenditure of Rs. 1,21,300, being the proportionate amount of rent for 15 days accruing in the previous year under consideration. Apart from the aforesaid sums, appellant has also incurred the expenditures tabulated at Sl. No. 3-6 of the aforesaid table, relevant details of which were submitted to the learned CIT(A) and is appearing at pages 464-475. 34. Accordingly the appellant has furnished the complete details of the expenditure, which expenditure has been incurred for the purpose of its business and there is not even any allegation that expenditure incurred by the appellant no....
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....al amount of Rs. 13,59,950/'- declared by the appellant. It was submitted that before the learned CIT(A), appellant filed its submissions and also enclosed the letter dated 31.08.2011 (placed at page 475 of the PB), however learned CIT(A) without considering the aforesaid letter, merely on suspicion that agreement with Magnum did not provide for variation of rent, upheld the addition. In fact he has failed to appreciate that no such income accrued to the appellant as has been taxed. It was submitted that in view of the letter dated 31.08.2011, appellant has accepted the proposal of reduced rent receivable from the sister concern on account of commercial expediency and it is not a case that appellant has received a higher sum but has not declared the correct sum. It is submitted that since the appellant has declared the actual rent received by it, and there is no material that appellant has received the higher sum over and above the declared sum, as such, addition made by the AO and sustained by the learned CIT(A) without taking cognizance of the factual substratum of the case and ignoring the commercial exigency be deleted. 37. As regards Ground No. 6 to 6.2 is in respect of....
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....sessee company. Before the learned CIT(A) appellant made its detailed submissions, which explaining that such sum cannot be held to be royalty. For the sake of convenience, such submissions are reproduced hereunder: "At the outset, it is submitted that there has been a gross error in the assessment order to hold that the aforesaid amount of excess consideration paid for acquisition of business constituted 'royalty ' for obtaining right to use an intangible asset from the seller Kaizan. As submitted above, Kaizan, pursuant to contract entered with DIMTS, was carrying on the business of executing DL Project comprising of related assets and liabilities. Pursuant to MOU dated 24.05.2011 entered between Kaizan and the appellant company, Kaizan sold the aforesaid entire business along with related assets and liabilities to the assessee company for an agreed lumpsum consideration of Rs. 1.70 crores. The aforesaid arrangement conferred entire ownership right in the business along with related assets and 'liabilities in the assessee company and was not a mere arrangement of granting Invited right to use any asset fowling part of such business, much less i....
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....cter. Lump sum consideration is not decisive of the matter. That sum may he agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus. the definition of term royalty in respect of the copyright, literary, artistic or scientific work, patent. invention. process, etc. does not extend to the outright purchase of the right to use an asset In case of royalty, the ownership on the properly or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence. alienation of all rights in the property is necessary. ....... "(emphasis supplied) Similarly, the Delhi Tribunal in the case of in the case of Parsons Brinckerhoff India (P) Ltd. v. ADIT: IIS TTJ 214, elaborately dealt with the aforesaid provisions ofExplanation 2 to section 9(1)(vi) of the Act and held that consideration paid towards outright purchase of intangible asset would not fall wi....
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....notes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may' be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty was paid should be with the grantor of that right. The mere passing on of information concerning the design of a machine which is tailor-made to suit the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty. The above cases bring out the distinction between an outright sale of property and a transfer of right to use the property, retaining the ownership right with the grantor. In the former case. The consideration received would be business profits and in the latter, it would be royalty. It is no doubt true that both in section 9(l)(vi)(b) read with clause (i) of Explanation 2 and in Article 12.3 of the treaty between India and Thailand, the language employed appears at first blush to take within its sweep even a sale of the property But a closer look at the section shows that the transfer of all the rights....
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....Dv. CIT [2015]:54 taxmann.com 154 (Mumbai - Trib.) In light of the aforesaid decisions, where all rights in respect of property' are transferred to the transferee and the transferee can exercise such rights against the rest of the world, in other words, it is a case of outright sale alienation of rights in rem, then, payment against such right does not fall within the provisions of Explanation 2 to section 9(l)(vi) of the Act, even if the said transfer is in respect of various intangible assets, specified therein. The case of the appellant is on a much better footing in as much as, in the present case there is a transfer/slump sale of business, as opposed to transfer of any piecemeal transfer of intangible asset, involving application of section 9(l) (vi) of the Act. In view of the above, the assessing officer completely failed to understand the true nature of aforesaid transaction entered between the appellant company and Kaizan during the relevant previous year and consequently erred in holding that the excess consideration paid was towards obtaining right to use an intangible assets. The aforesaid right, it is respectfully reiterated, was the value of ....
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....ition of business. The difference between the total agreed lumpsum consideration of Rs. 1.70 crores and the aforesaid book value (Rs.70,27,217) of assets amounting to Rs. 99,72,783 was capitalized in the books of account under the head "intangible assets" as such, payment of Rs. 99,72,783/- cannot by any stretch of imagination be termed as fee for technical services obliging the assessee company to deduct tax at source. The disallowances this made by invoking section 40(a)(ia) is wholly erroneous. 42. Apart from the aforesaid, the fundamental contention of the assessee is that even assuming without admitting that the impugned amount was subject to TDS u/s 194J, it is submitted that, as pointed above, the appellant did not claim any deduction for the aforesaid amount in the books of accounts or return of income for the relevant previous year, since the same was capitalized as intangible assets. Therefore, even assuming on the aforesaid sum, appellant was required to deduct tax at source, no addition can be made and at best a disallowance can be made by invoking section 40(a)(ia) of the Act, however such provision is wholly inapplicable, as aforesaid provision presupposes a deduct....