TMI Blog2015 (5) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and not a trade advance and consequently its forfeiture did not constitute income chargeable to tax - Held that:- 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. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . - ITA 983/2006, ITA 1406/2006, ITA 1342/2009 - - - Dated:- 14-5-2015 - S. Ravindra Bhat And R. K. Gauba,JJ. For the Petitioner : Sh. Kamal Sawhney, Sr. Standing Counsel and Sh. Sanjay Kumar, Jr. Standing Counsel For the Respondent : Sh. Salil Aggarwal and Sh. Prakash Kumar, Advocates, for Velocient Technologies Ltd. JUDGMENT Mr. Justice S. Ravindra Bhat 1. The following questions of law arise in these three appeals: (a) Whether the Income Tax Appellate Tribunal was correct both on facts and in law in upholding the assumption of jurisdiciton by the Assesing Officer to frame an assessment by taking recourse to the provisions of Section 147 of the Income Tax Act, 1961? (AY 1993-94 - ITA 1406/2006) (b) Whether the Income Tax Appellate Tribunal was correct both on facts and in law in deleting the addition of ₹ 10.65 crores made on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961? (AY 1993-94 - ITA 983/2006) (c) Whether the ITAT was correct in law in arriving at a conclusion that the amount of ₹ 10.65 crores was a loan in the hands of the assessee and not a trade advance and consequently its forfeiture did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. had already been incorporated in July 1991, i.e., even before the agreement was made. (ii) SFT never contributed any equity capital in the assessee-company. The Indian partner, i.e., COPL also contributed only ₹ 2,000 towards the equity capital of the assessee-company as against the amount of ₹ 70 lakhs, i.e., the amount mentioned in the joint venture agreement. In fact, the total paid-up capital, till date, of the assessee-company is only ₹ 2,000, i.e., the joint venture never came into existence. (iii) The assessee-company hardly ever carried on the business of software development. (iv) The money received by way of loan of ₹ 10.65 crores was not utilized for the purpose of setting up of software development unit in India. Instead, the money was invested in another group concern, namely, M/s. Milestone Leasing Finance (P.) Ltd. in the form of share capital. 5. A letter was written by the assessee-company on 23-6-1993. The gist of the letter is as under: You will appreciate that the project was put together based on your assurance about the buy-back and assured market concept. However, due to your failure to provide us software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains of business or profession chargeable to tax under Section 28 of the Act, by his order dated 28-03-2002 (the original assessment order was set aside by the Commissioner (Appeals) (hereafter CIT (A) ) on the ground of denial of proper opportunity). 7. During the pendency of the later assessment (AY 1996-97), in the light of the materials including correspondence between SFT and COPL the fact that SFT did not object or protest against forfeiture of liability - especially in the light of the statement of assessee s director Shri Nalin Aggarwal, a notice under Sections 147/148 was issued to the assessee, proposing to re-open the assessment for AY 1993-94. The assessee objected. In the re-assessment order the AO was of the opinion that the credibility of the agreement dated 14-11-1991 by which the advance was obtained itself was not explained satisfactorily. Noting that SFT did not participate in the equity capital of the assessee which had in fact been incorporated earlier, the AO held that there was no rationale for it to lend a huge amount of ₹ 10.65 crores to the assessee without any interest. It was also observed that the assessee could not establish that SFT existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity infusion had not taken place by any of the parties, and certainly not to the extent of ₹ 70 lakhs by the two parties. Lastly the money had been diverted for other use by the assessee. All these according to the counsel established that the loan transaction was never genuine to start with; consequently the AO was justified in re-opening the assessment, and adding the amount to the assessee s income. 10. Learned counsel relied on Sumati Dayal v Commissioner of Income Tax 214 ITR 801 (Del) to say that in view of section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, may be charged to tax as the assessee s income for that previous year if the explanation offered by him or her about the nature and source thereof is, in the opinion of the Assessing Officer, unsatisfactory. In such a case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut it, the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. He also submitted that the conditions for satisfying the onus placed on the assessee, as held in Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing the amounts received under Section 68 because the so-called foreign investor did not respond to any queries and no attempt or effort was made to secure its presence or view. Contending that reliance on the clearances received by other statutory authorities did not amount to establishing the genuineness or creditworthiness of the investor, counsel submitted that the infusion of a huge amount as loan on the one hand, not using it for the purpose declared in the first instance, and not complying with the joint venture conditions clearly revealed that the amount bore the character of a receipt from undisclosed sources, liable to be assessed under Section 68. 13. Mr. Salil Agarwal who appeared for the assessee, in its appeal (ITA 1406/2006) impeached the reassessment notice, contending that firstly at no stage was the assessee furnished with the reasons that necessitated the re-opening of an assessment which had considered all the relevant materials, through searching enquiry. It was contended that the original assessment was completed in scrutiny proceedings; reliance was placed on the materials furnished by the assessee, including the clearances obtained from the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are reason to believe and not reason to suspect . The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d furnished all relevant particulars in a letter dated 22-08-1995. Apart from RBI approval for the foreign exchange transaction, the Department of Electronics clearance through letter dated 24-12-1991 was also shown. The details of remittances received towards the loan, on various dates, i.e 20-11-1991 and 27-11-1991 were also shown. In these circumstances, the question of re-opening of assessment could not arise. Lastly counsel relied on Note 7 to the Notes on Account, to say that proper and true disclosure had been made which enabled the AO to make inquiries. The said Note reads as follows: An Unsecured Loan of ₹ 10.65 crores has been received from a foreign company pursuant to an Agreement for setting up a joint venture Project in India for export of Computer Software. Necessary Permission and licenses have been obtained for setting up of the Project from concerned authorities. Also, the lower authorities erred in holding that the amount deserved to be brought to tax, on the merits. The ITAT's order, however is sound, as it held that the addition could not have been made on the merits. Analysis Findings 17. The AO, framed the original order, under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons to believe ) dated 30-03-2001 which noted that for AY 1996-97, the forfeiture of the loan was treated as cessation of trading liability and that even in its submissions before CIT (A) the assessee failed to establish the truthfulness of its claim of the receipt of loan of ₹ 10.65 crores despite being afforded specific opportunities. The CIT (A) also in his order has not commented on the veracity of the evidence furnished by the assessee in this regard the assessee was not able to accurately and specifically establish the fact that this money indeed belonged to the Russian Company nor the reason for the unilateral forfeiture as discussed in the earlier paras. Now, these facts facially were sufficient, in the light of the ruling in Phool Chand and Kelvinator (supra) for the AO to form a valid opinion that reassessment was necessary. The judgment in Honda Siel Power Products v. Dy. CIT (2012) 340 ITR 53 (Del) of this court is authority to say that the term failure on the part of the assessee is not restricted to the income-tax return and the columns of the income-tax return or the tax audit report. The court held that the expression failure to fully and truly disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement of issue of notice is satisfied when a notice is actually issued. In this case, admittedly, the notice was issued within the prescribed period of limitation as March 31, 1970, was the last day of that period. Service under the new Act is not a condition precedent to conferment of jurisdiction in the Income-tax Officer to deal with the matter but it is a condition precedent to making of the order of assessment. The High Court in our opinion lost sight of the distinction and under a wrong basis felt bound by the judgment in 53 ITR 100. As the Income-tax Officer had issued notice within limitations, the appeal is allowed and the order of the High Court is vacated. Thus, we are of the opinion that the assessee s arugments with respect to justification for re-opening of assessemnt in this case are unmerited. The question of law argued by it in that context is answered against it. ITA No. 1406/2006 consequently fails. 21. The next question concerns the merits of the addition of ₹ 10.65 crores made during reassessment proceedings. The AO s order was upheld by the CIT (A) and disturbed by the ITAT. The revenue contends here that the ITAT was considerably taken in by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting up a joint venture , i.e Eurolink. SFT could unilaterally withdraw the credit after 5 years. (iv) The assessee contended that SFT pre-empted all Central Government approvals by remitting ₹ 35 lakhs towards equity and ₹ 10.30 crores as loan on 20-11-1991 and subsequent dates. This was followed by another agreement for repayment with interest @ 6 % per annum. (v) On 15-06-1992, the Secretariat for Industrial Approval, Union Finance Ministry approved foreign collaboration subject to condition that equity contributed loan was to be made in hard currency only. Later, EC Division approved the entire loan of ₹ 10.65 crores. 23. Both the AO and the CIT (A) noted that the assessee company had already been incorporated in July 1991, before the Agreement between SFT and COPL. Furthermore, the assessee company had a meagre share capital contribution of ₹ 2000/- by COPL and none by SFT. Its books, when the amounts were transferred, showed the liability (for 1993-94 and the next year). However, what was not revealed was how, with the limited RBI approval on 17-01-1991 for a term loan to be kept in a separate account from which there could be withdrawal after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity was never revealed. COPL in fact was described as a private company incorporated in Delhi with registered office at D-5, Kalindi, New Delhi. No attempt was made to explain the inter se relationship between COPL and SFT, and why the former was convenient as a source for financing the software development project of an already established company. If indeed, the money came in through because of the joint ventureagreement, why SFT and COPL could not name M/s Eurolink Overseas Private Ltd (an existing and incorporated company) as the recipient, was never explained. The materials on record and submissions made, both in the course of assessment and re-assessment proceedings, do not, in any way satisfactorily explain the identities of these Russian companies and whether they genuinely lent monies as claimed by the assessee. 26. The Supreme Court s ruling in CIT v. Lovely Exports 2010 (14) SCC 761 affirms the ruling of this Court that to pass the test of Section 68 which empowers the income tax authorities to add back amounts as receipts from undisclosed sources, the assessee is under the initial onus of proving the genuineness of the transaction and the creditworthiness of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding ₹ 10,65,00,599/-. The assessee s appeal was allowed and the matter was remitted by the CIT(A) directing AO to grant sufficient opportunity (to the assessee). In the assessment subsequently completed on 28.03.2002, the AO noticed the previous facts leading to the advancement of the amount, the change of name of M/s. Euro Link Private Limited to M/s. Velocient Technologies Private Limited, the various dates of receipt of the amount towards software development facilitation through a project in India etc. The AO relied upon a letter written by the assessee, dated 23.06.1993, soliciting contracts; he also noted that as against commitment to contribute equity capital to the tune of ₹ 70 lakhs, COPL had originally paid only ₹ 2000 and that the amount of ₹ 10.65 crores was not utilized for the original purpose but was invested in another concern, M/s. Milestone Leasing and Finance Company. Doubting the forfeiture claimed by the assessee, the AO observed that in fact he never responded to the letters and was consequently asked why such forfeiture should not be treated as business expenditure under Section 28. The assessee relied upon the Supreme Court s ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards share capital on the assessee. The India partner to the joint venture agreement contributed only ₹ 2000/- as against the amount of 70 lac in the share capital of the assessee company. The AO has also given a finding that the assessee company hardly ever carried on the business of software development and the money received towards alleged loan of ₹ 10.65 crore was not utilized for the purpose of software development of India. The AO and the CIT(A) has treated the alleged loan amount as a trade advance, and, in this connection, they made a reference to the correspondence made by the assessee company with SFT in its letter dated 23-06-1993..... XXXXXXX XXXXXX XXXXXX .............The crux of the requirement to treat the alleged loan as assessee s income on its forfeiture that the money must be received in the course of trading transaction or the money had arisen out of ordinary trading transactions is totally lacking in the present case. The assessee s subsequent reminders given to SFT to provide it some software development opportunities by giving some valuable business contracts from prospective buyers do not alter the original character being of loan grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... native as to whether it can be brought to tax under Section 41(1). T.V. Sundaram (supra) was a case where unclaimed sundry balances lying with the assessee could have been treated as trading receipts. There the amounts were lying with the assessee and the customer s claims were barred by limitation. The amounts were transferred to the P L account. The revenue held that the moneys were received in the course of trading transactions. The crucial difference was that though the original amounts received were not income, by lapse of time, the depositors claims had become time-barred and due to this statutory interdict, the amount acquired a different character. In the present instance, no such supervening event took place. By no stretch of imagination could the initial amount of ₹ 10.65 crores have been treated as loss, expenditure or trade liability incurred during the previous year. No doubt, the circumstances whereby the assessee forfeited the amounts raised certain suspicions. As explained earlier, those suspicions led to the reopening of the previous year s assessment and completion of reassessment by adding those amounts under Section 68. Both T.V. Sundaram (supra) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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