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TMI Blog2015 (7) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition could not have been made in the hands of the Appellant. 3. The Learned Commissioner (Appeals) erred in sustaining the addition of Rs. 6,51,93,703/- in respect of trade credits. The Commissioner (Appeals) failed to appreciate that the parameters applied for making addition under section 68 of the Income Tax Act, cannot be applied with equal force to the trade credits. 4. The Learned Commissioner Of Income Tax (Appeals) erred in sustaining the disallowance of the interest expenditure of Rs. 55,69,108/ - on the alleged ground that they are not advanced in the course of business. 5. The learned Commissioner Of Income tax(Appeals) erred in setting aside the addition an amount of Rs. 8,92,937/- being the payment made towards hire purchase installment on vehicles. Having regard to the Board Circular which was referred to in the appellate order, the learned CIT(A) ought to have deleted the disallowance made by the Assessing Officer". 2.1. In addition, assessee has also sought permission to raise the following additional grounds: ADDITIONAL GROUNDS 6. "Without prejudice to ground no.5 raised above, the learned Commissioner (Appeals) failed to appreciate that the above paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has challenged the addition made of an amount of Rs. 9,78,58,000 as unexplained cash credit u/s 68 of the Act. 6. Briefly, the facts relating to this issue are, assessee a company is in the business of manufacturing of earth boring and drilling equipments. For the impugned assessment year, assessee filed its return of income on 15.11.2007 declaring total income of Rs. 3,05,94,470. During the assessment proceeding, AO noticed that assessee, in the PY relevant to AY under dispute, has introduced an amount of Rs. 9,88,50,000 as share application money in its books of account. From the details furnished by assessee, AO found that the amount has been introduced in the names of 19 persons as under: Sl.No. Name of share applicant Amount 1. Rajeswari Enterprises 44,25,482 2. A Krishna Reddy 90,00,000 3. Prem Raj 50,00,000 4. Rupireddy Shantha 34,00,000 5. Vasanthi Kochar 5,00,000 6. Vani Mudha 30,00,000 7. R Rashmi Reddy 5,00,000 8. Vijay Kochar 5,00,000 9. Pedda Gollabab 34,30,000 10. Lachi Reddy 2,02,05,371 11. Ravi Reddy Laboratory 20,00,000 12. Rajadhani Sanjai 41,00,000 13. Madan Mohan Rao 42,65,909 14. Chakravardhan 40,00,000 15. A.V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are huge without verifying their source of income, amounts advanced by them cannot be treated as genuine. Further, AO observed that assessee did not furnish confirmation letters in respect of 12 creditors/share applicants for credit amounting to Rs. 7,44,17,609. Stating that onus is on assessee to substantiate the amounts introduced in its books of account, AO held that assessee having failed to discharge the onus of proving genuineness of credits, share application money amounting to Rs. 7,44,17,609 has to be treated as assessee's income for the AY under consideration. Assessee challenged the addition made before ld. CIT(A). 9. In course of hearing of appeal before ld. CIT(A), assessee submitted confirmation letters in respect of 12 share applicants/creditors for the amount of Rs. 7,44,17,609, which could not be produced at the time of assessment proceeding. On the basis of the confirmation letters submitted by assessee, Ld. CIT(A) called for remand report from A.O. After perusing the remand report of A.O, ld. CIT(A) found that in case of Shri R. Rashmi Reddy, advance of Rs. 5 lakh was made in AY 2005-06. Therefore, since the credit does not pertain to the year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these amounts have been invested by share applicants for buying shares of the company. He noted that the confirmation letters from the parties confirmed that the amounts are paid to Shri K.Laxma Reddy for the purpose of investment in the company and does not indicate that the amounts paid are share application money for the purpose of buying the shares of the company. Ld. CIT(A) observed that assessee even did not produce before A.O. personal agreements claimed to have been entered by the Directors with the parties in this regard. Thus, ld. CIT(A) by observing that onus is on assessee to prove that credits appearing in the books of account are share application money, which assessee has failed to discharge, confirmed the addition of Rs. 7,44,34,609. As far as the amount of Rs. 2,95,91,391 representing the investment made by seven persons in whose case confirmation letters were filed before AO, but, additions were not made, Ld. CIT(A) observed that in the remand report, AO has stated that genuineness of the transactions relating to the aforesaid amount is not established, hence, the amount of Rs. 2,95,91,391, though was not added at the time of assessment proceeding, also needs to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then, action has to be taken against them instead of assessee. As far as the allegation of ld. CIT(A) that though assessee has claimed the credits to be towards share application money whereas the confirmations show they as investments, ld. AR submitted, whether it is share application money or investment, addition cannot be made at the hands of assessee u/s 68 if the ingredients of the said provision are not attracted. He, therefore, submitted, no addition can be made u/s 68 of the Act. 12. Ld. CIT/DR on the other hand, defending the order passed by him submitted, the assessee though, introduced the amount in question as share application money but he failed to prove such credit through proper documentary evidence at any stage of the proceeding. Ld. D.R. submitted, though, assessee produced confirmation letters from the creditors and also furnished their income tax particulars, but, none of the creditors admitted of having advanced the amount as share application money. He submitted that onus is on assessee to prove cash credit appearing his books not only by establishing the identity and creditworthiness of creditors but also the genuineness of the transaction. He submitted, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has failed to substantiate through documentary evidence, the credits have been treated as unexplained cash credits under section 68 of the Act. It is evident from record, in course of proceeding before departmental authorities, it was explained by the assessee that the advances were actually obtained by the Director's from their known persons and on their advice it was shown as share application money in the books of the company since capital was required for the company to diversify its activities to real estate business. It is a fact on record that all the creditors have not only confirmed of having advanced the amount in question, but the entire transaction is through proper banking channel by way of cheque or DD. 13.1. It is a well known principle of law that for establishing a credit appearing in the books of accounts, the initial onus is on the assessee to prove such credit by establishing the identity of the creditor, the genuineness of the transaction and the creditworthiness of the creditor. In the facts of the present case, it is a matter of record that the assessee has produced confirmation letters in respect of all the creditors wherein not only the identity of the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been routed back to him through the creditors. 13.3. In our view, though, the assessee has discharged the primary onus cast upon it by establishing the identity of the creditors, the genuineness of the transaction and the source from which the credit has come, but the department has miserably failed to prove the fact that the creditors do not have the creditworthiness or the transaction is not genuine. Only because the credits have been shown as share application money in the books of accounts of the assessee, it will not automatically lead to the conclusion that the amount received is unexplained credit as the assessee has failed to establish its claim that the money advanced is towards share application money. Regardless, whether the advances were towards share application, as claimed by the assessee, or investment as stated by the creditors in the confirmation letters and affidavits, fact remains that the assessee has proved the source from which such credit has come to him. Moreover, it is not in dispute that in addition to the confirmation letters and other evidences filed, the assessee in course of proceeding before Ld. CIT(A) has also produced affidavits from the conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the aforesaid facts and circumstances, the assessee having proved the credits by establishing the identity of the creditors, genuineness of the transaction and creditworthiness of the creditors, through proper documentary evidence, he is not required to prove any further. As far as decision relied upon by Ld. D.R. is concerned, on careful analysis of the same, we fail to understand how it will apply to the facts of the present case. Therefore, on overall consideration of facts and materials on record, we are of the view that no addition under section 68 of the Act can be made in the present case. Accordingly, we delete the addition made by the departmental authorities and allow the ground of the assessee. 14. In ground No.3 of the revised ground, the assessee has challenged the addition made of Rs. 6,51,93,703 as unexplained credit under section 68 of the Act. 15. Briefly the facts are during the assessment proceedings, the A.O. while verifying the accounts of the assessee noticed that assessee has shown an amount of Rs. 12,41,93,703 as trade credits in the name of 11 persons. When called upon to explain the source of such credits, it was submitted by the assessee that during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment agreement entered with some of the parties. On perusal of assessment order, it is very much clear that the A.O. has disallowed the amount of Rs. 6,23,24,518 only for the reason that the assessee has failed to submit confirmation letters from the concerned creditors, whereas, he accepted the credits in respect of which, the assessee could submit confirmation letters. On going through the confirmation letters, it is very much evident that not only the creditors have confirmed of giving advance to the assessee, but it is also evident that all of them are income tax assessee's as well as the transaction is through proper banking channel. On a perusal of a sample copy of the registered development agreement between the assessee and M/s. Suchir India Developers P. Ltd., a copy of which is placed on record, the claim of the assessee that these are trade credits cannot be disbelieved. Even assuming that the credits are not trade advance, fact remains assessee has produced documentary evidence to establish the identity of the creditors by furnishing their postal address as well as PAN with income tax particulars. It is also not disputed that the advances were received through proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to acquire an industrial facility in a free trade zone with a view to facilitate assembly of equipment exported by assessee company and market the products as made in UAE. The A.O. observed that the assessee did not adduce any evidence to show that the investment made is for the purpose of assessee's business. Further he opined that even if it is accepted that assessee has utilized the investment for assembling equipment in an industrial unit in Dubai but the same is going to be a separate entity taxable under the tax laws of UAE. Therefore, for acquiring industrial facility in Dubai, which is going to be a separate entity, cannot be treated as funds utilized for the purpose of assessee's business. 19.2. As far as investment in KLR Mining Equipment is concerned, it was submitted by the assessee that the amount was advanced to clear/pay off the liability of the concerned party to bank and to pay for the personnel employed by it. It was explained by the assessee that investment was necessary to meet such liability as the assessee was operating from the same premises and in the event, the property is attached by the bank for recovery of their dues, then, the business of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to utilize its land, sheds and plant and machinery. The assessee also stood guarantee for some loans taken by the said company from bank. Therefore, if KLR Mining and Equipments Ltd., fails to meet its payment schedules, its assets will be put to auction by the Bank which will have serious repercussion on the business of the assessee company. It was submitted, to safeguard the interest of the assessee and its assets, the amount of Rs. 1,32,86,987 was advanced to the said company. Therefore, it cannot be said that the investment made is not for business purpose. As far as investment made in Dubai is concerned, it was submitted that the assessee has opened a branch in Dubai to facilitate its entry into the markets of Middle-East by way of export. As far as investments in SBI-ONE India Fund and Palaka are concerned, it is submitted by the learned A.R. that the investments are out of own account and has no nexus with the borrowed fund. As far as advances made to Mr. Sanjay Kumar and Mrs. Rashmi Reddy is concerned, learned A.R. submitted the investment was for purchase of land and out of own account (surplus fund). The learned A.R. submitted that the A.O. has not disallowed any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the Act. Learned CIT(A) after considering the submissions of the assessee and referring to CBDT Instruction No.1425 F.No.275/9/80-IT(B) dated 16.11.1981 directed the A.O. to re-examine assessee's claim. 26. The learned A.R. while challenging the disallowance of Rs. 8,92,937 has also challenged the disallowance of Rs. 3,78,909 being interest paid to banks Rs. 12 lakhs being interest paid to Mr. Rami Reddy and Rs. 75,000 to Mr. Premraj by raising additional ground. The learned A.R. submitted before us that as far as the amount paid to M/s. Sundaram Finance Limited towards vehicle loans is concerned, it is EMI paid under hire purchase agreement, hence, provisions of section 194A will not be applicable. He also submitted that provisions of section 194A will not be applicable to interest paid to banks amounting to Rs. 3,78,909.it was also submitted by learned A.R. since the entire interest amount was paid during the relevant previous year and nothing remained payable, no disallowance under section 40(a)(ia) can be made in view of the decision of the ITAT, Vizag Special Bench in the case of Merlyn Shipping and Transport 146 TTJ (1). 27. The learned D.R. however, supported the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure is not allowable. Accordingly, he disallowed the same. Assessee did not challenged the disallowance before the Ld. CIT(A) but has chosen to challenge the same before us through an additional ground. However, on going through the facts and materials on record as well as principle of law on the issue, we agree with the view of the A.O. that the fee paid to ROC for increasing authorized share capital is a capital expenditure, hence, cannot be allowed. This ground is dismissed. 33. The next issue as raised in ground No.10 is, with regard to the disallowance of an amount of Rs. 2,07,209 being employees contribution to ESI and PF. 34. The A.O. disallowed the expenditure claimed by observing that the assessee has not remitted the employees contribution to PF and ESI within the prescribed date as mentioned in section 36(1)(va). Though, the assessee did not challenge the disallowance before learned CIT(A) but he raised an additional ground before us challenging the said disallowance. It is the contention of the assessee that the employees contribution to ESI and PF though, was not paid within the due date as prescribed under section 36(1)(va) but such dues having been paid before ..... 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