9911796707
TMI Blog2022 (6) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... f the principles of law. 4. The CIT(A)-3, Mumbai failed to understand the true meaning and purport of contracts of novation which can even be oral and need not be reduced into writing and what is required is the consent and concurrence of the parties by recording the transactions. 5. The CIT(A)-3, Mumbai failed to appreciate the substance and essence of the transactions and he was more concerned with the forms and frills. 6. The CIT(A)-3, Mumbai failed to appreciate when there is a perfect understanding between the contracting parties to the contract of novation, the external paraphernalia as adumbrated by him are totally immaterial. 7. The CIT(A)-3, Mumbai was more bothered about the stamping of the document instead of understanding and appreciating the consensus between the parties forgetting for a moment the collection of short fall in the stamp duty is the duty of the State Government. 8. The CIT(A)-3, Mumbai was more concerned about non-enforceability of contract between the parties instead of understanding and appreciating the true purport of the transactions and in the case of the appellant there was no dispute whatsoever between the parties. 9. The CIT(A)-3, Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anct for the CIT(A)-3, Mumbai. 18. The CIT(A)-3, Mumbai ought to have confronted the appellant with the true certified copy of the purported report of Enforcement Directorate instead of directing the appellant to refer to the newspaper story of India Today vide his letter at page 18 of 19 of the order and such newspaper reports cannot be the basis for assessment or appeal proceedings. 19. The CIT(A)-3, Mumbai failed to understand that undisclosed income introduced in the books either by way of cash or cheque is treated as income under section 68 and not journal, book, adjustment entries arising out of understanding and agreement between the parties. 20. The CIT(A)-3, Mumbai failed to appreciate the appellant took over the debts payable to Stephen Financial Services Pvt. Ltd, and Manali Properties & Finance Pvt. Ltd and in turn it was allotted equity shares of Dunlop India Ltd. and Falcon Tyres Ltd. which are listed and quoted in the Bombay Stock Exchange. 21. The case laws cited by CIT(A)-3, Mumbai at page 14 of 19 have no relevance to the facts and circumstances of the appellant's case. 22. The CIT(A)-3, Mumbai was wrong in confirming the order of DCIT-13)(1), Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 03. in case of M/s Manali properties and finance private limited, Falcon tyres Ltd had assigned the loan to assessee which is interest free loan of Rs. 21 crores without any mortgage or security pledged by the assessee with Manali properties and finance private limited. Assessee is also not a related party. The return of Manali properties and finance private limited shows current loss of Rs. 81.95 lakhs and meager share capital of Rs. 4.13 crores. Manali properties and finance Ltd was found to be a Calcutta-based party and does not have any business but carrying on share financing activity and merely an entry provider for these kind of unsecured loans. Learned AO also found that assessee has signed a tripartite agreement on non Judicil stamp paper of Rs 100/- which does not have any registration mark or even not notarized before any competent authority. Therefore the AO held that the amount of above loan of Rs. 21 crores assigned by Falcon tyres Ltd is non-genuine. Accordingly, addition u/s 68 was made. 04. Similarly, M/s Dunlop India Ltd had assigned a loan of Stephen financial services private limited to the assessee, being interest free in nature, without any mortgage or sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtinguishment of old contract; and (4) the validity of the new one. Since the novation is a new contract, it must possess the essential elements of a contract. b) Whether the contract of novation is chargeable to Stamp Duty: Sub-section (14) of Section 2 of the Indian Stamp Act, 1899, defines the term "Instrument" as under: "Instrument" includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded." In Novation, since a new contract is substituted for an old one and the new agreement extinguishes the rights and obligations that were in effect under the old agreement, it falls under the definition of the term "instrument" as defined under the Indian Stamp Act, 1899. Hence, a novation agreement is an 'instrument' under the Indian Stamp Act, 1899. Section 3 of the Indian Stamp Act, 1899 sets out the instruments chargeable with duty, the relevant part of which is as under: "Subject to the provisions of this Act and the exemptions contained in Schedule 1, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration of a sum of Rs. 50,41,57,505/- ((Rupees Fifty crore forty-one lacs fifty-seven thousand five hundred five Only) to be paid by the Assignee to the Assignor (which the Assignor hereby agrees and acknowledges), the Assignor as beneficial owner of the Loan hereby assigns and transfers to the Assignee, the Assigned Loan due and owing to the Assignor along with the rights, interest and obligations therein." A plain reading of above clauses shows that the consideration payable by the appellant to Manali is Rs. 50,41,57,505/- which is agreed to be paid by 31st October, 2012 or earlier. The appellant in his books has credited the above amount to Manali debited to Falcon. This entry by itself cannot be called the consideration paid to Manali for taking over its loan to Falcon, since the appellant has not got any additional incentive in passing such entry in its books. In fact the appellant has just undertaken to recover the loan from Falcon and pay the full amount to Manali. Hence, it cannot be said that the appellant has paid any lawful consideration to Manali, and therefore, the Deed of Assignment cannot be construed a valid contract under Indian Contract Act, 1872. The appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge the management in these companies. So to overcome this threat, PKR group had planned money laundering to the tune of Rs 200 crore. 7.8 Modus operandi was as usual. As per the investigation report, Manali Properties and Finance Pvt Ltd a PKR group company created a loan of Rs 165 crores in the book of accounts of FTL. Instead of asking the company to repay, PKR assigned this loan to three hawala companies i.e. Suncap Commodities Ltd, Regus Impex Private Ltd and Salputri Commerce Pvt Ltd. The deed of assignment had been induced with conversion clause wherein Falcon Tyres Ltd could issue new shares worth Rs 165 crores to these three companies instead of paying back the loan. As per the plan it reduced the collateral security pledged with ICICI bank to minority and simultaneously managed Rs 165 crores hawala and money laundering between Manali Properties and the three companies. 7.9 Later on, FTL made a preferential allotment of shares to these three companies upon an alleged conversion of outstanding loans. On Feb 9, 2012 - Manali Properties had assigned portions of the debt of Rs 144 crores as under i.e. Suncap Commodities Limited (Rs 50, 41, 57.505), Regus Impex Private Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment in the year under consideration. The virtual financing for such shares is made by Manali/ Stephen, to whom the appellant do not have to pay any interest and also no security is given by appellant to said companies. By any stretch of imagination, such an arrangement cannot be construed to be on any commercial terms, especially when the appellant do not have any relationship with Manali/ Stephen. Therefore, the genuineness of transaction with said parties is not proved. 7.14 Now coming to credit worthiness of Manali/ Stephen, the AO has discussed their financials in assessment order. Manali had shown current year loss of Rs. 81.95 lakhs and having a meager share capital along with reserves & surplus for year ended 31.03.2012 at Rs. 4.13 crores. It was a Kolkata based party and had shown trade payables of Rs. 155.96 crores which according to AO proved that the said party had no business but only a sham financial entity and appeared to be merely an entry provider for these kind of unsecured loans & advances transactions. Stephen had shown current year loss of Rs. 777/- and had share capital along with reserves and surplus for year ended 31.03.2012 at Rs. 190 crores, and in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The adjustment entries were made by notional cash entries with a view to bringing down the debt-and capital ratio. The said three companies discharged their debt on liability side and jettisoned their assets i.e. share held by them of equivalent sum on asset side. In these circumstances, it was observed by hon'ble High Court of Calcutta that the effect and import of the transactions was that the assessee took over the liability of the aforesaid non-financial companies to GB & Co. in exchange for the shares as aforesaid. Therefore, it was held that the amount of loan in question could not be treated as assessee's income from undisclosed sources. b) In the case of Kerala Transport Co. (supra), the sister concern had received the debit entry with corresponding credit to partners' accounts. In such case, it was observed that no cash came into the business or went out of the business by means of such entries. c) In the case of Mahendra Kumar Agarwal (supra), the assessee had made only a journal entry by debiting Rajesh Sales Corporation and credited the assessee's current account wrongly and this wrong entry was rectified later on. Also it was found that the identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Kumar Plaza, Kalina Kurla Road, Near Kalina Market, Santa Cruz East, Mumbai-400 020. Subject:- Show Cause notice Under Section 250 of the I.T. Act, 1961 PAN:-AACCN2950K AY. 2012-2013 CIT(A)-3/DCIT-1(3)(1)/IT-62/2015- 16- regarding - 1. In your precise Grounds of Appeal, you have termed the two Deed of Assignment as "Contract of Novation", as recognized by the Indian Contract Act, 1872. The essential feature of Novation of contract is that when a contract is substituted, the rights under the original contract are relinquished or replaced by the new contract. Since the Novation is a new contract, it must possess the essential elements of a contract. As per Section 10 of Indian Contract Act, 1872, "All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.....". In your case, it can be understood that the amount of Rs. 50,41,57.505/- & Rs. 21,00,00,000/- credited to M/s Manali Properteis and Finance Private Limited and M/s Stephens Financial Services Private Limited are not real consideration since equivalent debit entry in name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly a sham financial entity and appeared to be merely an entry provider for these kind of Unsecured Loans & Advances Transactions. Similarly, M/S Stephens Financial Services Private Limited had shown current year loss of Rs. 777/- crores and had share capital along with reserves and surplus for year ended 31.03.2012 at Rs. 190 crores, and in this case the reserves and suplus was made up of Share Premium Account worth Rs. 188.10 crores. It meant that said company had no means and no profits were generated out of business activities and appeared to be merely an entry provider for these find of Unsecured Loans & Advances transactions. The above facts do not prove the credit worthiness of M/s Manali Properteis and Finance Private Limited Manali and M/s Stephens Financial Services Private Limited. Please offer your comments to the above. 6. In relation the transactions covered under appeal, certain information about ED investigation is gathered from the news reports appearing in Public Domain (Internet), which states that Enforcement Directorate (ED) has found money laundering traces in Book of Accounts of M/s Falcon Tyres Ltd and M/s Dunlop India Ltd. "In 2008, ICICI Bank had giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs 60 crores (appox) were alloted to these three companies. Thus, the total transactions under ED investigation with the three companies amounted to Rs 204 crores. ED in its report said, "It needs to be enquired as to how the company with the paid up capital of Rs 1.11 crore could afford to give a loan to the tune of Rs 144 crores on interest free basis. Surprisingly, the loan is given to a group company. If the sources of funds at Manali Properties are investigated this whole transaction would prove to be a circular transaction.". As per the investigation details, it is also clear that the company chooses to issue preferential shares against the loan due to Manali, especially when there was no demand upon them to pay the loan, and the loan amount was not carrying any interest burden. On the contrary, by issue of shares of Rs 144 crores, the management (which has taken decision to issue shares) diluted their shareholding, wherein they become minority shareholder after the issue of shares. Whereas, the three unknown shell companies having no presence or expertise in the tyre industry held majority stake of the company, without claiming any seat on the board of the company. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds. Many times appeal has been called for hearing however none appeared before us on several of the occasions. Subsequently the revenue was asked to serve notice to the assessee. On 7 March 2022, the ld AO placed before the bench report stating that notice has been afixed on the last known address of the assessee. The report of the notice was also placed on record wherein it is stated that assessee is not available at the given address and staff of that office also did not accept the notice saying that the notice does not belong to them and they do not know the present whereabouts of this company. In view of this facts, we do not have any other option but to decide the appeal of the assessee on the merits of the case as per information available on record. 08. The learned departmental representative submitted that over and above the issue decided by the learned lower authorities, there is also an order passed by The Securities Exchange Board Of India [ SEBI] u/s 11 (1) 11 (4) and 11 B (1) of The Securities And Board Of India Act 1990 to read with Section 12 A of The Securities Contracts Regulation Act 1956 wherein it has been found in the matter of Falcon tyres Ltd and Dunlop I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower, was to the tune of Rs. 504,157,505/-. The fact shows that Dunlop India Ltd obtained loan of Rs. 623,946,000/- from Stephen financials Ltd which was also partly assigned to other companies other than the assessee. 010. Similarly Manali properties and finance private limited advanced loan to falcon tyres Ltd. Falcon tyres Ltd assigned the loan outstanding of Rs. 21 crores payable by it to Manali properties and finance Ltd to the assessee. Similar modus operandi was employed by executing a tripartite agreement on a stamp paper of Rs 100/-. The assessee did not place any security or loan was bearing any interest. Falcon tyres Ltd also obtained a loan of 144,40,50,000/- from the above company and part of which is assigned to the assessee and balance to other companies. 011. The above fact clearly shows that huge unsecured loans obtained by Dunlop Limited and Falcon tyres Ltd were assigned to the companies like assessee. In case of Dunlop and falcon Tyres Limited along with Mr pavan Kumar Ruia Suneel Bhansali, S. Ravi, Damodar Dani and Mohanlal Chauhan were found to be involved in violation of securities and exchange board of India regulations along with the assessee and several ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
