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2013 (4) TMI 659 - AT - Income TaxProceedings initiated u/s 153A - search and seizure u/s 132 - Whether AO has all powers to go beyond the seized material during the search? - Addition in respect of share capital received - admission of additional evidence - 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 - Accrual of income - Held that - The availability of balance-sheet certificate of incorporation confirmations and 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. Merit in the contentions of assessee and reliance on the decisions of Finlay Corporation 2003 (1) TMI 266 - ITAT DELHI-D Smt. Sushila Ramaswamy 2009 (4) TMI 554 - ITAT CHENNAI and Saraswati Holding (2007 (7) TMI 345 - ITAT DELHI-F) and the import of CBDT Circular No. 5 in F. No. 73A/2(69)-IT (A-ll) dt. 20th Feb. 1969 that whenever remittances are made by the non- resident 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. In the absence of any evidence to show that the money remitted by the non-resident accrued 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 exigible 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. Thus the share application money as raised in the grounds of appeal cannot be held as non-genuine and added as income of the assessee u/s 68 - In favour of assessee. Disallowance of various expenses holding that no business activity was carried out - Held that - For A.Y. 2002-03 2003-04 the assessee was not granted registration as vendor by the Ministry of Defence as suppliers. Besides no supply had taken place. Thus the expenditure has been rightly disallowed as business of the assessee was not set up. Apropos A.Y. 2005-06 the assessee had obtained the registration and participated in the tenders invited by the Ministry of Defence for which necessary evidence has been referred in the form of correspondence demonstrating the negotiations at various stages. Thus in A.Y. 2005-06 the assessee was in a state of readiness to obtain the orders if found successful for tendering/ bidding and the expenditure incurred by it is to be allowed as revenue expenditure for the defined period. Addition on unsecured loans from M/s Claridges SEZ Pvt. Ltd. (CSEZ) as creditworthiness of M/s CSEZ was not established - Held that - Merit in the arguments of assessee that CSEZ also being searched on the same date and the seized record being with the department department could have verified the same from its record. The interest of justice will be served if the issue is remitted back to the file of AO to verify from the seized record about the bank statement of CSEZ and decide the issue after giving the assessee fair and reasonable opportunity of being heard. In favour of assessee for statistical purposes. Disallowance of Interest - Held that - In the absence of the details about disallowance of interest it will not be possible to adjudicate this ground. Therefore set aside the issue of interest back to the file of AO to decide the same afresh considering our conclusion on applicability of sec. 68 commencement of business in 2007- 08 after giving the assessee reasonable opportunity of being heard. Addition of US 3360 found at assessee s premises at the time of search - Held that - The contention of the assessee that the confirmation and statement of Sri Govind Singh director of M/s Alpcord Network being on record has not been denied by the department. The addition has been made on the basis that assessee could not produce necessary evidence if the record is available with the department and assessee pointed out towards it then as a principle of natural justice lower authorities should verify that evidence and decide about the allowability. In favour of assessee for statistical purposes.
The core legal questions considered in this set of appeals pertain to the validity of additions made by the assessing officer under section 68 of the Income-tax Act in respect of share capital and unsecured loans received by the assessee from foreign promoter companies, the admissibility of additional evidence under Rule 46A of the Income-tax Rules, the allowability of business expenditure in years where business activity was contended to be set up but not commenced, the disallowance of interest on unsecured loans, the treatment of cash found at the premises during search, and the imposition of costs under section 254(2B). Additionally, preliminary jurisdictional issues regarding the legality of search and seizure under section 132 and powers of the assessing officer under section 153A were raised but not pressed by the assessee.
Issue-wise detailed analysis is as follows: 1. Validity of Additions under Section 68 on Share Capital and Unsecured Loans: The legal framework involves section 68 of the Income-tax Act, which casts a burden on the assessee to explain the nature and source of any cash credit appearing in the books of account, including proof of identity, capacity, and genuineness of the creditors or shareholders. The assessing officer disallowed share capital received from foreign promoter companies, treating it as unexplained cash credits, and similarly disallowed unsecured loans for lack of proof of creditworthiness. The assessee produced extensive documentary evidence including Foreign Investment Promotion Board (FIPB) approvals authorizing raising of share capital, certificates of incorporation, foreign inward remittance certificates (FIRC), bank statements evidencing receipt through banking channels, confirmations from the remitting companies, and compliance with Registrar of Companies filings. The assessee argued that these documents discharged the primary onus under section 68 by establishing identity, genuineness, and creditworthiness of the foreign shareholders and lenders. The assessing officer and CIT(A) rejected the evidence primarily on the ground that bank statements of the foreign shareholders were not produced, relying on a Delhi High Court judgment which emphasized production of bank statements as essential to establish creditworthiness. The assessing officer also alleged, without material, that the assessee had routed funds through tax havens. The Tribunal examined precedents including Supreme Court judgments and various tribunal decisions which clarified that the burden on the assessee is to establish identity and genuineness and that the mere non-production of bank statements of foreign shareholders is not determinative if other credible evidence is furnished. The Tribunal also referred to CBDT Circular No. 5 dated 20-2-1969, which clarifies that money brought into India by non-residents through banking channels for investments is not taxable income and that inquiries into the origin of such money are only warranted if there is no evidence supporting the remittance. Further, the Tribunal relied on a decision of the Delhi Tribunal in Finlay Corporation and others, which held that section 68 applies only to income taxable under section 5(2), and if the money remitted by a non-resident is capital in nature and not income accruing or arising in India, it cannot be taxed under section 68. The proviso to section 68 inserted from A.Y. 2013-14 was also noted, which imposes additional burden only when the shareholder is a resident, not a non-resident. Applying these principles, the Tribunal concluded that the assessee had discharged the primary burden under section 68 as the foreign shareholders were legally incorporated entities, remittances were made through banking channels with FIPB approval, and statutory compliances were fulfilled. The additions made on account of share capital and unsecured loans were thus deleted. 2. Admissibility of Additional Evidence under Rule 46A: The assessee sought to admit additional evidence during the appellate proceedings, including attested copies of certificates of incorporation, good standing, and financial statements of the foreign shareholder companies. The CIT(A) initially rejected the admission of this evidence on the ground of insufficient explanation for non-production before the assessing officer, relying on precedent that new evidence without plausible explanation can be rejected. The assessee contended that the short time available to comply with requirements following search and seizure proceedings, and delay in receiving copies of seized documents, constituted sufficient cause under Rule 46A for admission of additional evidence. The Tribunal noted that the CIT(A) had called for remand report from the assessing officer and considered the evidence on merits, indicating technical admission. The Tribunal held that in the circumstances, the additional evidence ought to have been admitted, and allowed the grounds relating to admission of additional evidence. 3. Allowability of Business Expenditure in Years Where Business Was Set Up but Not Commenced: The assessing officer disallowed various business expenses for assessment years 2002-03, 2003-04, and 2005-06 on the ground that no business activity was carried out. The assessee contended that the business was set up though not commenced, and that expenses incurred during this phase are allowable under section 37(1). Evidence was produced showing registration as vendor with the Ministry of Defence, participation in tenders, correspondence with prospective customers and suppliers, and efforts to establish business operations. The Tribunal differentiated between setting up and commencement of business, and held that for 2002-03 and 2003-04, the business was not set up due to lack of registration and activity, so expenses were rightly disallowed. However, for 2005-06, the assessee had obtained registration and was actively participating in tenders and related activities, thus business was set up and expenses were allowable. The Tribunal relied on various High Court decisions supporting allowability of expenses during the business setup phase. 4. Addition of Rs. 5 Lacs Unsecured Loan in A.Y. 2005-06: The assessing officer disallowed Rs. 5 lacs unsecured loan received from M/s Claridges SEZ Pvt. Ltd. for failure to prove creditworthiness. The assessee argued that this company was also searched on the same date and relevant bank statements were seized by the department, which could have been verified by the assessing officer. The Tribunal found merit in the assessee's contention and remitted the issue to the assessing officer to verify the seized records and decide after giving the assessee a fair opportunity. 5. Disallowance of Interest Paid on Unsecured Loans in A.Y. 2007-08: The assessing officer disallowed interest payments on unsecured loans added under section 68 in earlier years, but did not specify details of the loans or parties. The CIT(A) upheld the disallowance summarily. The Tribunal noted the absence of particulars and the deletion of additions under section 68 on the principal amounts. It set aside the issue to the assessing officer for fresh adjudication in light of the Tribunal's conclusions on section 68 and business commencement, with opportunity to the assessee. 6. Addition of Rs. 1,51,200/- (US$ 3360) Found During Search in A.Y. 2007-08: The amount was explained as money handed over by a foreign guest to be transferred to his travel agent. The assessee produced confirmation and statements of the travel agent's director, which were on record with the department. The addition was confirmed without referring to this evidence. The Tribunal held that principles of natural justice require the department to verify such evidence before making additions and remitted the issue to the assessing officer for fresh consideration after hearing the assessee. 7. Imposition of Costs under Section 254(2B): The assessee sought imposition of costs on the department for alleged adversities caused, including refusal to admit additional evidence, non-consideration of submissions, and passing summary orders. The department opposed the claim, stating that authorities were performing statutory functions. The Tribunal recognized the importance of reasoned orders and adherence to natural justice but found no sufficient grounds to impose costs, dismissing this ground. Significant holdings and core principles established include: "The availability of balance-sheet, certificate of incorporation, confirmations and 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 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." "The 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." "Whenever remittances are made by the non-resident 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." "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." "For A.Y. 2005-06 the assessee had obtained the registration and participated in the tenders invited by the Ministry of Defence for which necessary evidence has been referred in the form of correspondence demonstrating the negotiations at various stages. Thus, in A.Y. 2005-06 the assessee was in a state of readiness to obtain the orders if found successful for tendering/ bidding. Thus, we hold that in A.Y. 2005-06 the assessee had set up its business and respectfully following the judgment of Hon'ble Delhi High court... the expenditure incurred by it is to be allowed as revenue expenditure." "It is trite law that the lower authorities should properly consider the explanations, submissions and evidences filed by the assessee and pass reasoned order meeting with the pleadings and evidences. This judicial practice is of universal acceptance and is bedrock of principles of natural justice and should be invariably adhered to by all the quasi judicial authorities." Final determinations:
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