2022 (10) TMI 1284 - AT - Income Tax

Addition U/s.68 - treating investments made by a non-resident investor as unexplained cash credits - as alleged identity genuineness and creditworthiness of the investor were not proved - HELD THAT - To summarize assessee furnished all the supporting documents to prove the genuineness of the amount received by the assessee in the form of share capital and share premium. Madhya Pradesh High Court in the case of CIT vs M/s. Peoples General Hospital 2013 (7) TMI 453 - MADHYA PRADESH HIGH COURT wherein dismissed the appeals of the Revenue as to the matter of proving the identity and creditworthiness of the person providing share application money. Money has been credited into India through banking channel and the assessee as per Circular No. 5 dated 20.2.1969 the money brought into India by non-resident for investment or other purpose is not liable to Indian Income Tax in the hands of the present assessee. Onus on the assessee to prove the sources of sources of credit. The onus is shifted under Sections 68 or 69 of the Act only with reference to the income which is otherwise taxable in the hands of non-resident u/s 5(2) of the Act. Therefore the taxability of the income is to be decided with reference to section 5(2) of the Act and provisions of sections 68 or 69 of the Act cannot enlarge the scope of section 5(2) of the Act. What is not taxable u/s 5(2) of the Act cannot be taxed under sections 68 or 69 of the Act. Under section 5(2) of the Act 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 it is brought to India by way of remittance. If such income is shown in the books of accounts of the assessee as in the present case if the assessee is unable to prove the source of such credit cannot be taxed u/s 5(2) of the Act unless it is proved that such money is relatable to the income accrued or arising in India. In the present case it is not the case of department that such money has been accrued or arising in India. The only contention of the Ld. AO/DR is that the assessee has not proved the sources of sources of credit. Therefore in our opinion the said impugned amount in all these cases cannot be taxed u/s 68 of the Act merely on the ground that assessees herein failed to prove the sources of sources of such credit. AO/DR wanted to enlarge the scope of section 5(2) of the Act which cannot be permitted. Receipt of the above amount through banking channels remitted from foreign bank to bank in India. The receipt is supported by FIRC Certificates issued by the receiving bank. Sri Samyak Chandrakanth Veera is a non-resident and assessed to tax in United States of America. Confirmation dated 1.7.2008 from VP Bank confirming the KYC of Samyak Chandrakanth Veera. Copies of US Income Tax Returns of Mr. Samyak Chandrakanth Veera. The receipt above is through banking channels and the same was intimated to Reserve Bank of India by the Company. Copy of the bank account supporting the remittance was furnished during the course of assessment proceedings. Identity of person the genuineness of the transaction is established as assessee company has furnished that all transactions are though banking channel FIRC s and communication with Reserve Bank of India as per the RBI Guidelines under the FEMA. The department is harping on the investors source of investment in share capital who was a Non-Resident and Non-Citizen of India. The company has established the source of investment in share capital has come from Mr. Samyak Veera. This is not disputed by the Assessing Officer. The only issue on which the Assessing Officer is harping is that personal Balance Sheet and fund flow of Mr. Samyak Veera is not provided - It is not the responsibility of the company to call for such details from the investor in share capital. The transaction of investment is in the form of Foreign Currency which has been received through in banking channels. The receipt of foreign currency by the Indian Company is subjected to verification by the Reserve Bank of India as per the FEMA / FDI guidelines. As such expecting the company to prove beyond the source of source of Mr. Samyak Veera is not responsibility of the company. Under these circumstances the addition U/s. 68 of the Act deserves to be deleted. Section 68 is not applicable to remittance made in India by non-resident as seen from the proviso to section 68 which has been inserted w.e.f. assessment year 2013-14 by Finance Act 2012. According to the said proviso if an assessee company in which public are not substantially interested receives money by way of share capital or share premium or any such amount by whatsoever name called then the source of funds of resident shareholder has to be established by the assessee in order to get out of the kin of the deeming provision u/s 68 of the Act. Hence the proviso speaks of the source being established only when the shareholder is a resident of India. There is no such requirement if the shareholder is a non-resident therefore the creditworthiness of the shareholders if he is non-resident does not have to be established by the assessee in respect of remittance received by him or it. Being so in the present cases only identity and creditworthiness of investor and genuineness of the transactions for explaining the credit in the books of account of the assessee is sufficient and the onus does not extend to explain the source of funds in the hands of the investor. Thus the proviso to section 68 of the Act is applicable to residents only who are required to substantiate source of source of funds . This additional burden cast upon by the proviso was not applicable to non-resident investors. Accordingly we confirm the deletion of addition made by the Ld. CIT(A). Hence all the appeals filed by the revenue are dismissed.

Summary

The core legal issues considered by the Tribunal in these appeals and cross objections primarily revolve around the applicability and interpretation of Section 68 of the Income-tax Act, 1961, concerning unexplained cash credits, and the validity of reopening assessments under Section 147 of the Act. The key questions addressed include:

1. Whether the Assessing Officer (AO) was justified in making additions under Section 68 by treating investments made by a non-resident investor as unexplained cash credits, particularly when the identity, genuineness, and creditworthiness of the investor were contested.

2. The extent and nature of the onus on the assessee to prove the identity, genuineness, and creditworthiness of the investor, especially when the investor is a non-resident and non-citizen.

3. Whether the AO was correct in demanding the source of the source (i.e., the origin of the investor's funds) and cash flow statements from the investor, and whether such a requirement is legally tenable.

4. The legal effect of the investor's tax position in the United States, including the disallowance of claimed losses by the US Internal Revenue Service (IRS), on the assessment of creditworthiness and genuineness of the investment.

5. The applicability of the proviso to Section 68 introduced from assessment year 2013-14, which requires residents but not non-residents to establish the source of funds for share capital or share premium.

6. The validity of the reopening of assessments under Section 147, including whether the AO had a valid reason to believe that income chargeable to tax had escaped assessment, and whether reopening was based on tangible material or mere suspicion.

7. The procedural correctness of reopening assessments under Section 147 versus Section 153C when proceedings were initiated based on seized material.

Issue-wise Detailed Analysis:

1. Addition under Section 68 on Investments by Non-Resident Investor

Legal Framework and Precedents: Section 68 casts an onus on the assessee to explain the nature and source of any unexplained cash credit. The Supreme Court and various High Courts have held that the assessee must prima facie prove (i) identity of the creditor, (ii) genuineness of the transaction, and (iii) creditworthiness of the creditor. However, in the case of non-resident investors, the proviso to Section 68 (effective from AY 2013-14) limits the requirement to residents only, not non-residents. Leading judgments such as CIT v. Lovely Exports, Divine Leasing & Finance Ltd., and Russian Technology Centre (P) Ltd. emphasize that mere inability to prove the "source of source" is not fatal if the identity and genuineness are established.

Court's Interpretation and Reasoning: The Tribunal found that the assessee had discharged the onus by furnishing:

• Identity of the investor, Mr. Samyak Chandrakanth Veera, established through confirmation letters, US tax returns, and KYC documents.
• Genuineness of the transactions, evidenced by Foreign Inward Remittance Certificates (FIRCs), bank statements showing remittances through proper banking channels, and RBI intimation under FEMA guidelines.
• Creditworthiness, supported by the investor's income as per US tax returns, and importantly, the disallowance of claimed losses by the US IRS leading to a higher assessed income than initially reported.

The AO's insistence on cash flow statements and source of source was held to be legally untenable, especially since the investor was a non-resident and US tax laws do not require individuals to submit personal balance sheets. The Tribunal emphasized that it is not the assessee's responsibility to prove the source of source of funds of a non-resident investor.

Key Evidence and Findings: The Tribunal noted:

• Bank account statements of the investor showing the remittances.
• Certified Public Accountants' letter adjusting the investor's income after IRS disallowance of losses.
• FIRCs and RBI confirmations.
• US tax returns and IRS notices indicating the investor's substantial income despite tax disputes.

Application of Law to Facts: The Tribunal applied the principles from Supreme Court and High Court decisions, holding that the identity and genuineness were established and that creditworthiness was prima facie proved. The AO's failure to conduct independent inquiries into the bank accounts or investor's sources was a procedural lapse. The Tribunal also relied on the CBDT Circular No. 5/1969, which states that money brought into India by non-residents through banking channels is not liable to Indian income tax.

Treatment of Competing Arguments: The AO and Revenue argued that the investor's net income was insufficient to cover the investments and that the losses claimed (later disallowed by IRS) showed lack of creditworthiness. The Tribunal rejected this, holding that the disallowance of losses by IRS effectively increased the investor's income, thereby supporting creditworthiness. The AO's demand for cash flow statements was held to be beyond the scope of Section 68 requirements.

Conclusion: The addition under Section 68 was rightly deleted by the CIT(A), and the Tribunal upheld this deletion, dismissing the Revenue's appeals on this issue.

2. Onus to Prove Source of Source and Cash Flow Statements

Legal Framework and Precedents: It is settled law that the assessee is not required to prove the source of source of funds, especially for non-resident investors. The Supreme Court in CIT v. Daulat Ram Rawatmull and other cases have held that the burden is limited to proving identity, genuineness, and creditworthiness. The proviso to Section 68 clarifies that the additional burden of proving source of source is on residents only.

Court's Interpretation and Reasoning: The Tribunal observed that the AO's demand for cash flow statements and detailed source of source was unreasonable and not mandated by law. It was noted that US tax laws do not require personal balance sheets, and the investor's bank accounts and tax returns sufficiently established creditworthiness.

Key Evidence and Findings: The Tribunal relied on affidavits from US legal representatives, CPA letters, and IRS final notices to establish that the investor's income was substantial and that losses claimed were disallowed, increasing taxable income.

Application of Law to Facts: The Tribunal applied the principle that an assessee cannot be compelled to do the impossible and that the burden of proof does not extend to source of source for non-residents. The investor's remittances through banking channels and RBI compliance further reinforced the genuineness.

Treatment of Competing Arguments: The Revenue's argument that the investor was a tax defaulter and had insufficient funds was countered by evidence of IRS disallowance of losses and bank account statements. The Tribunal found no basis to reject the investor's creditworthiness on these grounds.

Conclusion: The Tribunal held that the assessee had discharged the onus and that the AO's demand for further proof was unwarranted.

3. Taxability of Foreign Income and Applicability of Section 5(2) of the Act

Legal Framework and Precedents: Section 5(2) of the Act deals with the scope of income taxable in India, providing that income accruing or arising outside India is not taxable unless received in India. The Tribunal and High Courts have held that remittances of income already received outside India cannot be taxed again merely because the money is brought into India.

Court's Interpretation and Reasoning: The Tribunal noted that the investor's income was earned and assessed in the US and that the remittance to India was from the investor's own foreign bank accounts. Thus, the amount credited to the assessee's account was not taxable income in India under Section 5(2).

Key Evidence and Findings: The Tribunal relied on the CBDT Circular No. 5/1969 and judgments such as Russian Technology Centre (P) Ltd. and Smt. Susila Ramasamy v. ACIT, which support the non-taxability of such remittances.

Application of Law to Facts: The remittances were made through proper banking channels with RBI intimation and approvals. The Tribunal held that Section 68 or 69 cannot enlarge the scope of Section 5(2) and that the income was not taxable in India.

Treatment of Competing Arguments: The Revenue's attempt to tax the remittance as unexplained income was rejected, as the remittance was from income earned and assessed outside India.

Conclusion: The Tribunal confirmed that the remittances were not taxable income in India and upheld the deletion of additions.

4. Validity of Reopening of Assessments under Section 147

Legal Framework and Precedents: Section 147 requires the AO to have a "reason to believe" that income chargeable to tax has escaped assessment. The reopening cannot be based on mere suspicion or opinion without tangible material. Courts have held that reopening must be based on independent application of mind and tangible material, not just on reports from investigation wings or audit parties.

Court's Interpretation and Reasoning: The assessee raised cross objections challenging the reopening on grounds that the AO had no valid reason to believe and that reopening was based on mere suspicion and information from investigation wing without independent inquiry.

Key Evidence and Findings: The Tribunal noted the legal precedents cited by the assessee, including Indian & Eastern Newspaper Society v. CIT and various High Court decisions emphasizing the need for tangible material for reopening.

Application of Law to Facts: The Tribunal observed that the CIT(A) had upheld the reopening, but the assessee did not press these grounds at the hearing. The Tribunal accordingly dismissed the cross objections as not pressed.

Treatment of Competing Arguments: Since the legal issue was not pressed, the Tribunal did not delve into the merits of reopening validity.

Conclusion: Cross objections on reopening were dismissed as not pressed.

5. Applicability of Section 153C versus Section 147 for Reopening Based on Seized Material

Legal Framework and Precedents: Section 153C applies when assessment proceedings are initiated based on material seized during search or survey operations. If proceedings are initiated based on seized material, Section 153C must be invoked rather than Section 147.

Court's Interpretation and Reasoning: The assessee contended that reopening under Section 147 was invalid as proceedings should have been initiated under Section 153C. However, this ground was not pressed at the hearing.

Conclusion: The Tribunal did not consider this issue further and dismissed the cross objections on this ground as not pressed.

Significant Holdings:

"The assessee had discharged its burden of proof in terms of the settled dicta in Divine Leasing (supra). It is only logical to expect that if the AO was not convinced about the genuineness of the said documents, he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company."

"The proviso to section 68 of the Act is applicable to residents only, who are required to substantiate 'source of source of funds'. This additional burden cast upon by the proviso was not applicable to non-resident investors."

"The provisions of section 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 section 68 or 69, in our opinion, have limited application in the case of non-resident."

"Money brought into India by non-resident for investment or other purposes is not liable to Indian Income-tax. Therefore, there is no question of a remittance into the country being subjected to Income-tax in India." (CBDT Circular No. 5/1969)

"The onus is shifted under Sections 68 or 69 of the Act only with reference to the income, which is otherwise taxable in the hands of non-resident u/s 5(2) of the Act. Therefore, the taxability of the income is to be decided with reference to section 5(2) of the Act and provisions of sections 68 or 69 of the Act cannot enlarge the scope of section 5(2) of the Act."

"The identity of the investor is established, the genuineness of the transaction is established, and the creditworthiness of the creditor is also established. There is no basis for the Assessing Officer to conclude otherwise."

"The Assessing Officer's demand for cash flow statement and source of source is not legally sustainable, especially in the case of a non-resident investor."

In conclusion, the Tribunal dismissed the Revenue's appeals and upheld the deletion of additions made under Section 68, holding that the assessee had satisfactorily proved the identity, genuineness, and creditworthiness of the non-resident investor. The Tribunal also confirmed that the provisions of Section 68 do not require the assessee to prove the source of source for non-resident investors, and that remittances through banking channels by non-residents are not taxable income in India under Section 5(2). The cross objections challenging the reopening of assessments were dismissed as not pressed.