9911796707
TMI Blog2015 (5) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... correct in law in arriving at a conclusion that the amount of Rs. 10.65 crores was a loan in the hands of the assessee and not a trade advance and consequently its forfeiture did not constitute income chargeable to tax under the Income Tax Act, 1961? (AY1996-97 - ITA 1342/2009) 2. The facts are that one M/s. Comecom Overseas (P.) Ltd. ("COPL") having its registered office at D-5, Kalindi, New Delhi and M/s. Sovfin-trade Overseas Ltd. (hereafter "SFT", a Company in the erstwhile USSR), entered into an agreement on 14-11-1991 to form a joint venture (JV) company called M/s. Eurolink Overseas (P.) Ltd. The purpose of the joint venture was production and development of computer software in India with equity participation of Rs. 70 lakhs, by both companies. M/s. Eurolink Overseas (P) Ltd's name was later changed to M/s. Velocient Technologies (P.) Ltd, the assessee. Besides equity participation, the Russian company had to advance a sum of Rs. 10.65 crores to the proposed joint venture. This amount was paid on two dates, by five remittances, i.e 20-11-1991 (3 payments aggregating Rs. 6.65 crores) and 27-11-1991 (two payments to the tune of Rs. 4 crores). The assessment was completed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on your assurance about the buy-back and assured market concept. However, due to your failure to provide us software development opportunities we have landed ourselves in a situation whereby we may have to incur heavy loss during the current year and coming year, as we are constrained to look to other untapped markets, namely, USA and Far East. We, therefore, once again request you to kindly get as some valuable contracts from your associates and acquaintances. This way at least we will be able to sustain ourselves and your efforts will help us to make this project a grand success." Further, on 7-09-1993, 11-11-1993, January, 1994 and 07-03-1994 similar letters were written asking for business. In earlier years the assessee-company had also made export sales to SFT, the Russian company, indicative of trading transactions between the two companies. SFT however, did not respond to the letters of the assessee-company. The assessee stated that there was no communication from the side of SFT after the date of forfeiture of the loan. In view of these facts, the AO asked the assessee to explain why it should not be treated as business income under Section 28 of the Act since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the assessee without any interest. It was also observed that the assessee could not establish that SFT existed or even furnish its address in the reassessment proceedings. The sum of Rs. 10.65 crores was received by COPL; the circumstances under which it was credited to the assessee were not established satisfactorily. It was therefore held that the amount was an unexplained receipt; the AO added it for AY 1993-94 and brought it to tax under Section 68 of the Income Tax Act, 1961 ("Act"). 8. The regular assessment for AY 1996-97 and re-assessment order for AY 1993-94 were challenged before the Commissioner (Appeals) - i.e CIT (A). The CIT (A) by order dated 25-1-2006 rejected the appeal and held that the forfeited amount was to be brought to tax. For the earlier period (AY 1993-94, i.e the reassessment order) the inclusion under Section 68 was likewise challenged in appeal to CIT (A), who rejected it. The revenue is in appeal, aggrieved by the ITAT's order in respect of the reassessment proceedings (on merits, which deleted the inclusion under Section 68 for AY 1993-94) and disallowance of forfeiture, for AY 1996-97. The assessee is aggrieved - not by the ITAT's findings on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conditions for satisfying the onus placed on the assessee, as held in Commissioner of Income Tax v. Lovely Exports P. Ltd. [2009] 319 ITR 5 (SC) are not only the proof of identity of the share applicant or creditor, but also his creditworthiness and genuineness of the transaction. The facts shrouding the present case clearly highlighted that at the time the so-called loan was obtained, only the identity of SFT could be said to have been proved; no other material to establish the genuineness of the transaction or the creditworthiness of the party had been placed. Consequently, the ITAT fell into error in holding that Section 68 did not apply. 11. The revenue points out that Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28 (Delhi) and Video Electronics v Joint Commissioner of Income Tax 2013 (353) ITR 073 are authorities for the proposition that material discerned by the assessing officer during the course of proceeding for subsequent years can be relevant and their sufficiency or adequacy (for completion of re-assessment) cannot be gone into while judging the validity of reassessment notice. Phool Chand Bajrang Lal v Commissioner of Income Tax 203 ITR 456 (SC) was particularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials furnished by the assessee, including the clearances obtained from the statutory authorities for the purpose of the foreign company's joint venture, in the form of Reserve Bank clearance, approval by the authorities administering the laws relating to foreign exchange, etc. The money had been remitted through banking channels. All these were known; if there was anything wanting, it was not on the part of the assessee. Counsel relied on Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and stated that primary obligation of the assessee is to disclose fully and truly all material and relevant facts. The obligation being only to disclose basic facts but that would not include an obligation to disclose what inferences had to be drawn from such facts by the authorities. It was further observed that the production of all evidence before the AO was sufficient and it was not established that there was any omission or failure to make a full and true disclosure. The assessing officer had to make the necessary inferences (which too had been done at the original stage when a searching scrutiny was resorted to) but no further duty was cast on the assessee. 14. Learned counsel relied on I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment." 15. The assessee's counsel argued that in the circumstances, the addition on the ground of unexplained income was unsustainable. He relied on the joint venture agreement dated 14-11-1991; MOU of the same date, copy of foreign collaboration approval by Department of Industrial Development dated 15-06-1992; copy of approval given by Department of Economic Affairs on 29-10-1992 and the Reserve Bank Exchange Control Department approval dated 11-12-1992. All these clearly established that SFT was a genuine Soviet Government undertaking which had remitted the money to COPL. Most importantly the Certificate of Foreign Inward Remittance issued by the Punjab National ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s & Findings 17. The AO, framed the original order, under Section 143 (3) after observing as follows: "M/s SFT agreed to grant loan to the joint venture, called Eurolink by mutual consent and both parties agreed that SFT shall transfer the loan amount to COPL account in India prior to the commencement of filing for any approvals from Dept. Electronics & RBI for this business." 18. The matter had been remanded by the CIT (A) when the AO became aware of the forfeiture of the loan. This led to the opinion formation- for the purpose of reassessment. The re-opening has been questioned by the assessee, contending that there was no material, that it was not informed about the reasons and that even otherwise, there was no failure to disclose material facts in the first instance, which could have led to a valid re-opening of the assessment for the year. On merits too, the assessee contends that there is no valid basis for holding that the source of the funds was unknown, or doubting the credibility of the source. It is argued that the assessee cannot be placed in an impossible situation of having to prove or establish the "source of the source" as has been done by the revenue in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the expression "failure to fully and truly disclose material facts" also relates to the stage of the assessment proceedings and that there can be omission and failure on the part of the assessee to disclose material facts fully and truly during the course of the assessment proceedings. 20. As far as the assessee's complaint of not being made aware of the "reasons to believe" or opinion for reassessment is concerned, the argument proceeds on a misconception. The Act does not stipulate furnishing of reasons to the assessee; this condition was superadded, when the assessee, seeks such opinion and wishes to represent against it, after furnishing his/her returns upon the receipt of notice, by virtue of the order of the Supreme Court in GKN Driveshafts (India) Limited v. Income Tax Officer and Others (2003) 1 SCC 72. In the facts of the present case, such condition did not exist nor was sought for when the reassessment notice was issued to the assesse in 2001. The law, in this context was stated by the Supreme Court, as follows, in R.K. Upadhyaya v Shanabhai P. Patel AIR 1987 SC 1378: "Section 34, conferred jurisdiction on the Income-tax Officer to reopen an assessment subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here that the ITAT was considerably taken in by the assessee's submission that no fresh materials were used in the reassessment proceedings which was premised primarily upon a subsequent event, i.e forfeiture of loan by the Russian company during a later assessment year. It is submitted that the original returns did not disclose how the Russian creditor had genuinely loaned a substantial amount. Though the assessee had obtained and placed on record clearances from statutory bodies and authorities, based on the Joint Venture agreement dated 14-11-1991 between COPL and SFT, the preconditions for use of such amount were never fulfilled. Thus, the assessee was already incorporated before the date of that agreement - in fact, in July, 1991. It had a subscribed share capital of Rs. 2,000/- and the agreement provisions requiring infusion of Rs. 70 lakh share capital by the Russian company were in fact never fulfilled. Also, significantly the assessee never revealed that the share participation proposal was not given sanction by the RBI- which had turned it down in the original terms. Had these materials been truthfully revealed, the AO would have undertaken a detailed scrutiny and not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al after specific approval, the arrangement could be transformed into one where the amount was received not by the assessee, but by COPL which handed it over to the assessee. 24. In the original assessment proceedings, the returns filed included a confirmation from COPL for the money received as advance towards share application money (in respect of four payments made by cheque to the tune of Rs. 19,50,000/-); a copy of the joint venture agreement between COPL and SFT dated 14.11.1991, the memorandum of understanding between the said two parties, again dated 14.11.1991 and the addendum to the agreement dated 28.11.1991. Besides, the copy of the approval from the Government of India dated 15.06.1992 which was valid for two years and required the assessee to furnish the collaboration agreement with the RBI subsequently, and the Union Ministry of Finance's approval dated 29.10.1992, permitting the loan for Rs. 10.65 crores was made part of the record. In the letter dated 29.09.1994, the assessee's auditor stated that the said amount was received from a foreign company pursuant to agreement for setting-up joint venture project in India for export of computer software and that necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity advancing the amount. In the present case, the facts reveal that the assessee no doubt was able to secure the clearances of the Department of Economic Affairs as well as the Reserve Bank of India (RBI) towards its software technology project. These were based upon its assertion that Russian joint venture partners were involved. Likewise, the Department of Economic Affairs appear to have approved the setting-up of the project. Nevertheless, such clearances did not in any way undermine or displace the onus which it continued to labour under, to primarily satisfy the revenue that the amounts came from a genuine party. There were no particulars with respect to SFT or COPL, the documents incorporating these entities or even describing their identities (especially important since the assessee argued that SFT was a Govt. of USSR enterprise) was ever revealed. Those two companies' shareholding pattern, trading or manufacturing activities, decision of Board of Directors was kept in the dark. In short, the assessee made no attempt to reveal the true identity of these two concerns. Furthermore, the credibility of these transactions too stood undermined from the very beginning consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) ITR 324, to say that where in the books, the assessee claims a trading receipt, its subsequent conversion is impermissible but that in the present case, what was received was a loan and could not be treated as income. 29. The ITAT noted that in the assessee's books of accounts for 1993-94, the said amount of Rs. 10.65 crores was shown to be a loan from SFT but in the year under consideration, the amount was forfeited by transferring it to the reserve account. The ITAT noted that even while remanding the order, the CIT(A) on 31.03.2000 had rejected the AO's original action treating profit as chargeable tax under Section 41(1) on the ground that it had never been allowed as deduction or allowance in the earlier year which was a pre-condition for application of that provision. After discussing various decisions, rendered prior to T.V. Sundaram Iyengar (supra), the ITAT held that the principle which emerged was that the amount received by assessee as part of its trading operations or transactions though it is not taxable in the year of receipt being a revenue character it would undergo a change in character when it becomes that of the assessee, due to operation of law of limitation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade advance received in this course of any trading transaction, or as the money arising out of ordinary trading transactions. In the light of the above, the contention of the department that the assessee had received the sum of Rs. 10.65 crore as a trade advance in the course of trading transactions is rejected. The loan so received by the assessee was for the purpose of setting up a business of software development in India and was not at all related or connected to any trading transactions of the assessee company. Thus, the basic and primary criteria laid down in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. (SC) (supra), that the money should be received in the course of trading transactions or the money had arisen out of ordinary trading transactions for treating the same as income of the assessee because of limitation or any other statutory or contractual right or forfeiture or waiver, is not satisfied in the present case. Merely because of the reason that the money has been forfeited by the assessee by transferring the same to its reserve and surplus account with satisfying the primary and basic condition that the money when it was received was received in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision in Morley v. Tattersall 1938 (22) Tax Cas 51. The Supreme Court however, held that once amounts are shown as trading receipts, they contain a profit making element within them. The subsequent treatment, therefore, could well attract compulsion dictated by law, i.e. their inclusion for the later year. In the present case, the amounts were never treated as trading receipts but as unsecured loans - no doubt for the purpose of establishing or furthering a business, yet they were loans and not trading receipts or loss from expenditure - the other instances attracting Section 41(1). 31. For AY 1996-97, independent of the findings with respect to treatment for earlier year as unaccounted receipt under Section 68, given the phraseology and wording of Section 41(1), the Revenue's arguments for the latter's applicability are without substance and merit. 32. In view of the foregoing conclusions, the ITAT's impugned order for AY 1996-97 (in ITA 1342/2009) does not call for interference. The question of law framed in ITA 1342/2009 is answered against the revenue and so the appeal has to fail. 33. In view of the above discussion, ITA 983/2006 has to succeed and is accordingly allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
