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TMI Blog2020 (9) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and in law, the learned CIT (A) and learned Assessing officer has erred in not providing cross examination, without considering the facts of the case. 4. The Appellant craves, leaves to add, alters, amends or deletes any grounds of Appeal at the time of hearing. 3. The brief facts of the case are that the assessee company is engaged in the business of trading of Minerals, filed its return of income for AY 2010-11 on 26/09/2010, declaring total income of Rs. 2,81,842/- and said return was processed u/s 143(1) of the I.T.Act, 1961. Subsequently, a survey u/s 133A of the I.T.Act 1961 was conducted on 29/09/2016 on the business premises of the assessee. During the course of survey and post survey enquiry, it was gathered that the assessee company had claimed to have converted outstanding trading liability into share application money and later on was claimed to have alloted equity shares of Rs. 10/- with premium of Rs. 90/- per share to 174 persons. During the course of survey, a statement was recorded from M/s Sanjeev Khandelwal, Managing Director of the company on 29/09/2016 and in response to question No.31, the Director of the company stated that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 31/03/2009, consequently, the same become opening balance for AY 2010-11. Further, the assessee has failed to furnish any evidences to prove that trading liability has been converted in the FY 2008-09 relevant AY 2009-10, but on the other hand the evidences collected during the course of survey, including statement recorded from the Director clearly indicates that the creditors are very much existed in the books of accounts of the assessee in the FY 2009-10 relevant AY 2010-11 and only on 14/06/2010, the same has been treated share application money for allotment of equity shares. The ld. AO, further noted that one more important aspect of the case is that all these shareholders have gifted their shares to the Directors and their relatives in subsequent financial year and from the above, it is very clear that the liability shown in the books of accounts of the assessee is non-genuine and which became non-existence or ceased to exist. Accordingly, he opined that an amount of Rs. 15.15 crores become cessation of trading liability u/s 41(1) of the I.T.Act, 1961 and hence, made addition of Rs. 15.15 crores to the total income of the assessee. The relevant findings of the Ld. AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere allotted shares of the company for the work carried out during the year. The shares of the company signifies the ownership of the company. The assessee transferred the shares to these creditors who just entered as one time contract that too at a premium of Rs. 90/- These shareholders then subsequently gifted these shares to the 6 persons without any cost. In effect these so called creditors did the job for the assessee without any consideration is an undisputed fact. vi) As has been discussed above in various points of the order that the genuineness of the creditors/ share applicants is not established. The same are produced at the cost of repetition: -Notice u/s 133(6) returned un-served twice. - 23 persons had categorically denied that they had applied for the shares of the company which are appearing in the share applicant list produced by the assessee. Thus - These shares issued at premium were gifted to the 6 persons who are all existing share holders of the company. On the basis of the above points it can be established that the creditors are not genuine. On verification during the reopening assessment it is discerned that the same are not existing and thus be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had reiterated its submissions made before the Ld. AO to argue that additions made by the Ld. AO towards cessation of trading liability u/s 41(1) of the Act, for the impugned assessment year is incorrect, because the liability had been ceased to exist for AY 2009-10, when the assessee has converted trading liability into share application money on 31/03/2009. The Ld.CIT(A) after considering relevant submissions of the assessee and also, by relied upon certain judicial precedents, including the decision of Hon'ble Supreme Court in the case of Sumati Dayal vs. CIT [1995] 214 ITR 801, came to the conclusion that claim of the assessee company that it has converted trading liability into share application money was part of a surreptitious design transactions, in order to create fictitious liability, which is converted into share application money, finally gifted back to the existing shareholders. He, further noted that claim of the assessee that the so called share applicants have gifted their shares to the director of the assessee company in succeeding year, nothing less than an attempt made to convert non-existed liability into shareholders funds. He, further noted that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umentary support. Can it be logical and palatable that a small time creditors have gifted their hard earned money, converted into so called shares totaling too Rs. 15.15 crores to the existing shareholders. In other words, ownership in the form of share capital arid share premium totaling to 15.15 cores has come back to the existing shareholders without any consideration. Such claim is a bizarre claim, which is factually and legally not tenable. Such surreptitious arrangements and claims should be examined on the basis of human behavior and conduct. Hon'ble Supreme Court's observation, in the case of CIT v. Durga Prasad More f1971] 82 ITR 540, to the effect that "Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and Tribunals have to judge the evidence before them by applying the test of human probabilities". Similarly, in a later decision in the case of SumatiDayal v. CIT 1995l 214 ITR 801/80 Taxman 89 (SC),Hon'ble Supreme Court rejected the theory that it is for alleger to prove that the apparent and not real, and observed that, "This, in our opinion, is a superficial approach t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples. There may be difference in subjective perception on such issues, on the same set of facts, but that cannot be a reason enough for the fact finding authorities to avoid taking subjective calls on these aspects, and remain confined to the findings on the basis of irrefutable evidences. The Hon'ble Supreme Court has, in the case of Durga Prasad More (supra), observed that "human minds may differ as to the reliability of a piece of evidence but in that sphere the decision of the final fact finding authority is made conclusive by law". 5.4 Thus, from the aforesaid discussion it is absolutely clear that the claim of the appellant company were part of a surreptitious design transaction in order to create fictitious liability which is converted into a share application money finally gifted back to the existing shareholders. The AO has justifiably invoked the provision of section 41(1) of the Act. The reliance of appellant company on certain judgments are absolutely distinguishable on facts and law. The AO's detailed enquiry where the outstanding liability has not been explained /confirmed, conversion of outstanding payables into share application money has not been esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court) g) CIT vs Alvares & Thomas [2016] 69 iaxmann.com 257 (Karnataka HC) dated 24 march 2016. h) CIT v.v Sither India Ltd [2014] 369 ITR 717 (Bombay HC) i) CIT vs Kesaria Tea Co. Ltd[2002] 122 TAXMAN 91 (SC) j) CIT vs Smt. Sita Devi Juneja I. T.A. No. 619 of 2009(PUNJAB AND HARYANA HC) 9. The Ld. DR, on the other had strongly supporting order of the Ld.CIT(A) submitted that there is no merit in grounds taken by the assessee challenging reopening of assessment, because the reopening was not challenged before the Ld.CIT(A) and consequently, if at all the assesee wants to challenge reopening of assessment, the same should be by way of additional grounds of appeal. The Ld. DR, further submitted that even otherwise, the arguments of the assessee fails on reopening of assessment, because, the Ld. AO has reopened the assessment on sound footing, which is supported by fresh tangible material gathered during survey proceedings conducted u/s 133A of the Act, where escapement of income has been detected. In this regard, he relied upon the decision of Hon'ble Supreme Court, in the case of ACIT vs Rajesh Jhaveri Stock Brokers Pvt.Ltd. (2007) 291 ITR 500 and Raymond woolen Mills Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the department would reopen the case. It further held that the sufficiency or correctness of the material is not a thing to be considered at the stage of issue of notice. Therefore, we are of the considered view that there is no merit in arguments taken by the Ld. Counsel for the assesee challenging reopening of assessment and hence, we are of the considered view that the Ld. AO has reopened the assessment on valid grounds. Accordingly, the grounds taken by the assessee is dismissed. 12. As regards, additions made towards cessation of trading liability u/s 41(1) of the Act, for Rs. 15.15 crores, we find that the Ld. AO has invoked provisions of section 41(1) of the Act, on the ground that the liability had ceased to exist during FY 2009-10 relevant to AY 2010- 11. In order to come to above conclusion, the Ld. AO has taken support from information gathered during the course of survey conducted u/s 133A of the Act and consequent statement recorded from the Director of the company. The Ld. AO had also taken support from investigation carried out during the course of assessment proceedings, including information collected u/s 133(6) of the I.T.Act, 1961. According to the Ld. AO, out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver any amount in respect of such loss or expenditure or some benefit, in respect of such trading liability by way of remission or cessation thereon, the amount obtained or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly, chargeable to income tax as income of that previous year. Further, as per Explanation (1) to section 41(1) of the Act, the explanation 'loss or expenditure' or some benefit in respect of any trading liability by way of remission or cessation thereon shall include, the remission or cessation of any liability by way of unilateral act by the first mentioned person. A plain reading of section 41(1) of the Act, makes it very clear that in order to invoke said provisions, three conditions must be fulfilled i.e (i) there should be trading liability and deductions or allowances should be allowed towards said liability in the previous assessment years (ii) the assessee should derived benefit in cash or in any other form by remission or cessation of liability (iii) the said liability should be ceased to exist during relevant assessment year. In the background of above factual and legal background, if you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by issue of notice u/s 133(6) of the I.T.Act, 1961. The Ld. AO had also taken support from the fact that the so called shareholders have gifted their shares to the directors and relatives in subsequent financial years. No doubt, there may be no response from certain creditors in response to 133(6) notices, but non appearance or non response of the creditors cannot be a sole grounds to draw an adverse inference against the assesee, when the assessee has filed necessary evidence to prove that the liability is genuine in nature, which was subsequently paid back by converting said liability into share application money. As regards, the other allegations of the ld. AO that so called shareholders have gifted their shares to directors and relatives in subsequent financial year, said findings is not relevant in the context of additions made by the Ld. AO u/s 41(1) of the Act, because in order to invoke provisions of section 41(1) of the Act, three conditions enumerated therein should be fulfilled. Unless, the conditions prescribed therein are not fulfilled, the Ld. AO cannot make additions u/s 41(1) of the Act. In this case, on perusal of facts available on record, we find that none of ..... 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