Deputy Commissioner of Income Tax, Range-7(2), Mumbai Versus M/s Rank Shipping Agency Pvt Ltd.
Ruling by: ITAT MUMBAI
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Deputy Commissioner of Income Tax, Range-7(2), Mumbai Versus M/s Rank Shipping Agency Pvt Ltd.

 

No. - ITA No.5946/Mum/2008 & ITA No.5805/Mum/2008

Dated - November 21, 2012

 

B.R. Mittal and P.M. Jagtap, JJ.

 

Appellants Rep by: Shri S.C. Tiwari & Natasha Mangat

Respondent Rep by: Smt Rupinder Brar

 

 

ORDER

Per: B.R. Mittal:

These cross appeals are filed by department as well as assessee for assessment year 2005-06 against order dated 18.7.2008 of ld CIT(A).

 

2. Grounds taken by department are as under:

 

    “1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 18.79 crores made by the A.O. on account of the fact the said sum was not expended wholly and exclusively for the purposes business of the assessee ignoring, inter-alia, the following :-

 

        i) The assessee never produced before the A.O. the details of the said amount, except small bills, in support of the above amount claimed to be reimbursement of expenditure on behalf of the clients.

 

        ii) Failed to produce the books of accounts before the A.O. stating that the same were voluminous which can never be a fact as the books of account can never be voluminous it is only the supporting details which can run into volumes.

 

        iii) The assessee’s claim of reimbursement of the said amount from its clients not correct as is apparent from the summary of the payments given in sub-item 8 of para 6.lof the order of CIT(A)whereby it is clear that out of the said amount, an amount of Rs. 4,70,58,697/- has been debited by the assessee to its own P a L A/c.

 

        iv) Ignoring the fact that the payments as listed in Sl.No.1 to 5 of sub-item 8 as aforesaid were payments to private parties except the element of customs duty under SLNo.1 and, therefore, the expenses were liable to TDS.

 

        v) The assessee’s claim that it had deducted TDS of Rs. 7,96,68,298/- was supported by any details before the A.O. or the CIT(A). The CIT(A) relied upon the paper books submitted before her and the details contained therein were never made available to the A.O. for scrutiny in view of the fact that the assessee had not produced any details or the primary records before the A.O. which was. in contravention of the provisions of Rule46A of the Income-tax Rules, 1962.

 

        vi) Without prejudice to the above, the claim of the assessee that the question of disallowance of the amount of Rs. 18.79 crores approximately in the case of assessee did not arise as the assessee had not claimed any part of the expenses in its P & L a/c. is factually not correct as the CIT(A) herself has mentioned in sub-item 8 of para 6.1 that out of Rs. 18.79 crores, an amount of Rs.4.70 crores were debited in the assessee’s P & L A/c. which consisted of entire amount of transport and other charges of Rs.2.78 crores approximately, Container freight station expenses of Rs. 38.70 lakhs, Customs duty and Dock expenses of Rs.3.41 lakhs approximately, Shipping companies payments of Rs.1.37 crores approximately and Customs duty and others of Rs. 13.12 lakhs approximately.

 

    2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 18.79 crores on vague, unsubstantiated and incorrect claim by the assessee before the A.O. as well as the CIT(A) and the CIT(A) should have given a clear cut factual finding that if Rs. 18.79 crores was not disallowable in entirety then, what was the amount which was disallowable on the basis of the scrutiny of the details filed by the assessee.

 

    3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 22.28 lakhs claimed as bad debt which was explained to be unrealizable amount from the clients remitted by way of discount without satisfying herself as to the manner in which the amount claimed as bad debt had been offered as income so as to fulfill the requirement of section 36(2) of the Income-tax Act, 1961 and also without examining the full facts and details in this respect and solely relying on certain case laws which was not sufficient in the given circumstances.”

 

3. Grounds of appeal raised by assessee are as under:

 

    “Being aggrieved by the Order u/s.250 of the Income-tax Act, 1961 (“Act”) dated 8 July, 2008. passed by the learned Commissioner of Income-Tax (Appeals) VII, Mumbai, your appellant prefers this appeal among others, on the following grounds of appeal, each of which is independent of and without prejudice to, the others:

 

    1. On the facts and in the circumstances of the case, and in law, the learned CIT (A) erred in sustaining the addition of Rs. 72.00.000/- made by the Assessing Officer on account of share premium amount received b the appellant on allotment of shares, holding the same to be a non-genuine transaction, even though there as adequate documentary evidence on record that established beyond doubt genuineness of the transaction.

 

    2. The learned CIT(A) erred in sustaining the above addition on the basis of the statement of the Managing Director of the appellant recorded during the survey u/s. 133A, which statement was later retracted. The learned CIT(A) also erred in ignoring the uncontroverted documentary evidence on record.

 

    3. The learned CIT (A) further erred in sustaining the addition of Rs. 72,00,000/- on the basis of the retracted statement u/s. 133A even though additional income offered in that statement was Rs. 25,00,000 only.

 

    4. The learned CIT(A) also erred in not allowing set off of the additional income of Rs. 21,14,761 declared by the appellant against the above addition.”

 

4. The assessee is engaged in the business of clearing and forwarding agent. Relevant facts giving rise to these appeals are that assessee filed the return of income on 26.10.2005 declaring income of Rs. 62,41,270. There was a survey operation on the assessee company on 23.2.2006. The assessment was completed assessing the total income of the assessee at Rs. 20,80,65,550. The CIT(A) allowed the appeal of assessee in part. Hence, these appeals by the department as well as assessee.

 

5. Firstly, we take up the appeal of department being I.T.A. No.5946/M/2008.

 

6. In respect of Ground Nos.1 & 2 of appeal disputing the deletion of addition of Rs. 18.79 crores, relevant facts are that there was a survey operation on 23.2.2006. The AO has stated that assessee received a sum of Rs. 26.70 crores from the clients but had credited only Rs.Rs.7.91 crores in the profit and loss account. The balance sum of Rs. 18.79 crores has been alleged to have been paid by the assessee on behalf of the clients. AO has stated that assessee has not been able to prove that services were rendered and no TDS has been deducted either by the assessee or by its clients as per provisions of section 40(a)(ia) of the Act. In view of above, AO has added a sum of Rs. 18.,79,38,741 to the income of the assessee. Being aggrieved, assessee filed appeal before ld CIT(A). The submissions made by the assessee before ld CIT(A) are mentioned in para 6 of the order of ld CIT(A) at pages 5-7 as under:

 

    (1) That the appellant acts as clearing and forwarding agent to clear the import consignments. In the process he has to make various payments on behalf of the clients such as shipment charges, customs duty, port charges, container freight charges, loading unloading, transportation etc. The appellant collects the charges from the clients and makes the payments to various authorities in connection with clearing the consignment. The appellant charges its agency fees for rendering the services to its clients.

 

    (2) The Assessing Officer noted that appellant had received Rs. 18,79,38,741/- from its clients towards such expenses apart from agency commission, while the agency commission forms part of appellant income. Various expenses collected and paid on behalf of the client will be reflected in the separate accounts mentioned in the ledger account of each client.

 

    (3) During the year, the appellant handled 2351 jobs resulting in voluminous business transactions. On 24.12.2007, the Assessing Officer called for various details of these payments in less than 5 working days. It was humanly impossible to compute the details in such short span of time due to sheer volume of transactions.

 

    (4)The appellant had not claimed these expenses as they did not constitute the appellant’s expenses.

 

    (5) That the books of accounts are maintained as per the accounting standards and they are audited U/s 44AB.

 

    (6) That the appellant’s case was scrutinized in the past and the books of accounts and the accounting procedure adopted by the assessee was accepted by the Department for earlier years.

 

    (7) Due to sheer volume of the business, only the income and expenses of appellant are reflected in the books of accounts and the expenses incurred on behalf of the clients are maintained separately. Such system is adopted by solicitors, advocates as per the accounting standards.

 

    (8) The summary of payments is as under:

 

Sr. No.

Nature of payments

Total

Charged to clients

Debited to the P&L A/c.

1

Customs duty & others

5,75,12,466

5,61,99,560

13,12,906

2

Shipping companies payments

7,49,87,000

6,12,56,857

1,37,30,143

3

Customs & Dock expenses

23,85,977

20,44,222

3,41,755

4

Container freight Station Exp.

2,152,49,731

2,13,79,405

38,70,326

5

Transport & other charges

2,78,03,567

0

2,78,03,567

 

Total

18,79,38,741

14,08,80,044

4,70,58,679

   

(9) That the question of disallowance does not arise when the expenses were not claimed at all. The Assessing Officer proceeded fundamentally on wrong presumption that the appellant claimed these expenses.

 

    (10) The provisions of Section 40(a)(ia) do not apply to any of the payments listed in the table above except the transport and other charges.

 

    (11) The TDS was deducted wherever applicable. The details are submitted in paper book.

 

    (12) Under the Customs Act, the liability to pay the duty is that of the importer and not of CHA, hence the payments made cannot be considered as expenses of the CHA.

 

    (13) That in the case of Rolls Royce India Vs. ITO (19881 (25 ITD 1361 (Del) it was held that the amount reimbursed and the amount spent towards expenditure on behalf of Rolls Royce were to be excluded from Rolls Royce India Ltd. The appellant charges its clients separately for the agency fee and the reimbursement of expenses. The appellant does not treat the amount reimbursed by the client as its own operational revenue nor does it take the corresponding expenses in its books of accounts.

 

    (14) That the Service Tax Dept. issued clarification to the effect that the collections made from the clients for meeting various expenses are not considered for the purpose of levy of Service- tax.

 

    (15) In the case of CIT Vs. Dunlop Rubber Co. Ltd. (142 ITR 493) (Cal) it was held that reimbursement of expenses were not income.

 

    (16) As per Circular No. 723, the freight and other charges made to foreign shipping lines or their resident agents are covered by Section 172(8) and the assessee is not obliged to deduct TDS. In any case, wherever the TDS provisions are applicable, the appellant deducted the TDS on Rs. 7,96,68,298/-.”

 

6. Ld CIT(A) vide para 6.2 of the impugned order deleted the said addition of Rs. 18.79 crores and stated that the said addition is devoid of any merit and contrary to evidence on record. Hence, department is in appeal before the Tribunal.

 

7. At the time of hearing, ld D.R. relied on order of AO.

 

8. On the other hand, ld A.R. relied on order of ld CIT(A). He further submitted that assessee is acting as clearing and forwarding agent to clear the import consignment. During the course of its activity, assessee made various payments on behalf of clients, such as shipment charges, custom duty and other incidental charges, etc, which assessee collected from the clients. Assessee charged its agency fees for rendering services to its clients. The agency commission is the income of the assessee which is reflected in profit and loss account as income and the amounts received towards various expenses paid by the assessee on behalf of clients got adjusted in the clients’ accounts on payments being made on their behalf to various persons/agencies, including the Government for custom duty. Therefore, the amounts paid for those expenses on behalf of the clients do not constitute assessee’s expenditure as the same are specifically incurred on behalf of, and recoverable from the clients. Ld A.R. submitted that during the course of assessment proceedings, AO asked for the details for such disbursements and the applicability of the provisions of section 40(a)(ia) of the Act. He submitted that assessee maintains complete accounts for the same as it is obliged to give details of such expenses to its clients and merely stated that it was humanly impossible to compile the details thereof before the Assessing Officer as the volume of the transaction was huge. He submitted that assessee never claimed those expenses in its profit and loss account because they do not constitute assessee’s expenses and, therefore, question of invoking provisions of section 40(a)(ia) of the Act does not arise. Ld A.R. also referred the decision of ITAT Delhi in the case of DCIT vs. Jay kay Freighters Pvt Ltd (I.T.A. No.3407/M/2011) order dated 1.8.2012, copy placed in the compilation of paper book at page 1-5 and specifically referred para 14 thereof, which reads as under:

 

    “14. It is not in dispute that the assessee firm is engaged in the business of clearing and forwarding agent. The goods of assessee’s client, who are exporter or importer, were exported or imported by the shipping companies. The shipping companies raised bill for various charges against the ultimate exporter or importer, who are the client of the assessee. The amount mentioned in the bill raised by shipping companies on ultimate consumer were initially paid by the assessee, and thereafter the assessee got reimbursed the said amount from its client including the charges of the assessee for services rendered. We have perused the various bills raised by various shipping companies and find that the shipping companies raised their bills on the ultimate customer, who is the exporter or importer of the goods. The assessee used to raise bills upon exporter or importer i.e. assessee’s client, including the charges payable to shipping lines, and as well the charges of the assessee on account of various services rendered by it. It has not been disputed by the AO that the bills issued by shipping companies were raised in the name of clients, whose goods were exported or imported, and the assessee thereafter raised the bill to its client separately indicating charges of the assessee as well as the charges paid by the assessee to shipping companies on behalf of its clients. Therefore, from the various details filed by the assessee and nature of the assessee’s business of clearing and forwarding agents, we find that the assessee is nothing but an intermediary between the exporters and the shipping lines. The assessee facilitates the contract for carrying goods for and on behalf of its client i.e. exporters or importers, and the principle contract for carrying goods is between the exporter/importer and the shipping lines. An identical issue has been considered by the Hon’ble High Court of Delhi in the case of Commissioner of Income Tax vs. Cargo Linkers (supra), where the Hon’ble High Court was in agreement with the order passed by the Tribunal, which mainly decided an issue of fact, namely, the nature of the contract between the parties concerned, and it was found as a matter of fact that the contract was actually between the exporter and the airline, and the assessee was only an intermediary. It was, therefore, held that the assessee is not a person responsible for deduction of tax at source in terms of sec. 194C of the Act. Relying on the aforesaid decision of Hon’ble Delhi High Court in the case of CIT vs. Cargo Linkers (supra) we hold that the present assessee, who is carrying on the business of clearing and forwarding agents, is not a person responsible for deducting the tax at source in terms of sec. 194C of the Act in as much as the assessee is only an intermediary between the exporters and the shipping lines and it merely facilitates the contract for carrying the goods. Since the assessee was not a person responsible for deduction of tax at source in terms of sec. 194C of the Act, the question of failure on the part of the assessee to deduct tax at source from the payment made to shipping lines for and on behalf of its client would not arise, and, consequently, provisions of sec. 40(a)(ia) cannot be invoked in respect of the payment made by the assessee to shipping lines for and on behalf of assessee’s client i.e. ultimate exporter or importer. We, therefore, reverse the order of authorities below and delete the disallowance of Rs. 2,04,72,855/- made u/s 40(a)(ia) of the Act by the AO.”

 

9. We have considered submissions of ld representatives of parties and orders of authorities below.

 

10. During the course of hearing, ld D.R. has not disputed the fact that assessee received the said payment aggregating to Rs. 18,79,38,741 on account of reimbursement of expenses from its clients apart from agency commission and the agency commission has been considered as assessee’s income and the same is reflected in its profit and loss account. Assessee has adjusted reimbursement of the expenses received on behalf of its clients and, therefore, we agree that the same do not constitute part of assessee’s income. We observe that similar issue was considered by the Delhi Tribunal by its order dated 1.8.2012 in the case of Jay Kay Freighters Pvt Ltd (supra) and it was held that the amount mentioned in the bill raised by shipping companies on ultimate consumer were initially paid by the assessee and, thereafter assessee got reimbursed the said amount from its client including the charges of the assessee for service rendered. Therefore, assessee was not a person responsible for deduction of tax at source in terms of section 194C of the Act and, accordingly, provisions of section 40(a)(ia) cannot be invoked in respect of the payments made by the assessee to shipping lines for and on behalf of assessee’s clients. Further, we also observe that department has not disputed the submissions made by the assessee before ld CIT(A) that assessee rendered 2351 jobs resulting in voluminous business transactions and the AO called for various details of the payments in less than 5 working days. We agree that it is not possible for computing the details in a short span of time and no adverse inference could be drawn for not able to furnish the same. Considering the facts of the case and the reasons as given by ld CIT(A), mentioned hereinabove, we hold that there is no reason to interfere with the order of ld CIT(A) in deleting the said addition of Rs. 18,79,38,741 made by the AO. Accordingly, Ground Nos. 1 & 2 taken by department is rejected.

 

11. In respect of Ground No.3 of appeal taken by department, relevant facts are that assessee claimed bad debts written off of Rs. 22,28,000. AO asked the assessee to produce all the details of the parties and the year in which such debt arose alongwith evidence of sales made to these parties and any correspondences, supporting documents to show that the debt has gone bad. AO has stated that assessee could not produce the details. He has further stated that there is no justification for writing off such bad debts as there is no such correspondence to the parties to indicate that the debt has gone bad. AO disallowed the claim of the assessee of bad debts amounting to Rs. 22,28,000 (in the computation of AO at page 16 of assessment order, the figure mentioned is Rs. 22,20,000, which is factually not correct) stating that there is no material supplied by the assessee which reveals the ir-recoverability of the debt. Being aggrieved, assessee filed appeal before ld CIT(A).

 

12. On behalf of assessee, it was contended that the amount of Rs. 22,28,774 was written off as bad debt out of sundry debtors because same was not recoverable. It was submitted that in order to maintain business relationship with the clients, assessee has written off small balances out of their accounts, which were not recoverable. The amounts thus written off were in substance discount allowed to them for various reasons e.g. where the party disputes the amount for some commercial reason etc. It was submitted that the total amount of Rs. 22.28 lakhs in relation to the gross operating collection is very reasonable and cannot be considered high, especially in a service oriented business where the clients can raise number of grounds to dispute the payments, like delays, quality of service etc. It was contended that keeping in view of small sums involved, it is also not practical to take recourse to legal remedies, which would cut off the business relationship with those parties permanently. Assessee also contended that commercial expediency would not justify taking such an aggressive stand but to write off the amount. It was contended that AO did not appreciate the practical aspect of the business, and rather insisted upon the demonstrative proof for the quality of the debts written off, which was not required to be given in the postamendment regime after 1/4/1989. It was contended that assessee had actually written off the said debt in the books and that it is no longer required to establish to the satisfaction of the AO that debt has actually become bad. It was further contended that if the amounts are recovered the same can be taxed under section 41(4) of the Act and placed reliance on the decision of ITAT Mumbai (SB) in the case of DCIT vs. Oman International Bank, 100 ITD 285(Mum)(SB). Ld CIT(A) considered the submission of assessee and deleted the disallowance of Rs. 22,28,000 made by the AO. Hence, this appeal by the department.

 

13. Ld D.R. relied on the order of AO and submitted that assessee could not furnish the details and no evidences were filed as to in which year the income actually credited by the assessee.

 

14. Ld A.R. made his submissions on the lines of submissions made before ld CIT(A). He submitted that AO disallowed the claim on the ground that details were not filed to demonstrate by the assessee that those debts become irrecoverable. He submitted that after the amendment in section 36(1)(vii) r.w.s 36(2), it is sufficient if assessee writes off bad debts in books of account to claim same as bad debts and it is not necessary to prove that debts have become bad. Ld A.R. referred the decision of Hon’ble Apex Court in the case of TRF Ltd Vs CIT (323 ITR 397) and submitted that after 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

 

15. We have considered the submissions of ld representatives of parties and orders of authorities below. We observe that AO disallowed the claim of bad debt on the ground that assessee could not demonstrate that debts which have been claimed as bad debts has actually become irrecoverable from the clients. The department has not disputed the fact that assessee has actually written off the said amount from its books of account. Similar issue has been considered by the ITAT Mumbai (SB) in the case of Oman International Bank (supra), wherein, it was held that as per existing provisions of section 36(1)(vii), after amendment w.e.f. 1.4.1989, it is not necessary for the assessee to prove that the amount written off as bad debt is indeed bad for the purpose of allowance under section 36(1)(vii) of the Act. The Apex court in the case of TRF (supra) held that after 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Considering the above decisions and the facts of the case, we hold that ld CIT (A) has rightly deleted the disallowance of bad debts of Rs. 22,28,000 as claimed by the assessee. Hence, Ground No.3 of appeal taken by department is rejected.

 

16. Now we take up appeal filed by assessee being I.T.A. No.5805/M/2008.

 

17. The only issue in the appeal filed by assessee is as to whether, on the facts and circumstances of the case, ld CIT(A) is justified to confirm the addition of Rs. 72,00,000/- on account of share premium amount.

 

18. Relevant facts are that assessee, in the assessment year under consideration, received share premium of Rs. 72,00,000 from following four parties on allotment of 900 equity shares of Rs. 100/- each at a premium of Rs. 8,000/- per shares:

 

Sr. No

Name of the company

No.of shares allotted

FV(Rs.)face value at Rs. 100 per share

Share premium (Rs.)

1.

JMD Telefilms Inds. Ltd.

300

30,000

24,00,000

2.

Warner Multimedia Ltd.

200

20,000

16,00,000

3.

Shresth Leasing & Fin. Ltd.

200

20,000

16,00,000

4.

Trio Mercantile and Trading Ltd.

200

20,000

16,00,000

 

Total:

900

90,000

72,00,000

 

19. AO has stated that during the course of survey, it was noticed that the shares were alloted in the financial year 2004-05 but no certificates were issued to the investors till the date of survey. Further, there was no resolution passed for allotment of those shares. AO has stated that statement u/s.133A of the Director of the assessee company Shri George Joseph was recorded on 23.2.2006, wherein, he admitted that the share premium account amounting to Rs. 72 lakhs is the unaccounted money of the assessee, which was routed with the help of the concerns against whose name, the share premium is shown. AO has further stated that during the course of post survey enquiries and in response to letter dated 25.4.2006, assessee informed vide his letter dated 6.5.2006 that the statement recorded during the survey was given under pressure and the share premium account is genuine. However, AO did not accept the said retraction from the statement and stated that assessee retracted the statement after 2 and ½ months till he received the questionnaire from the department. AO has further stated that it is highly unlikely that even after passage of more than one year of receiving the money shares are not dispatched. Further, assessee could not furnish any correspondences from the parties who have invested money in the assessee company asking for share certificates. Further, assessee has no business relationship with the above mentioned four companies. Assessee company has also not issued any dividend to these companies for the entire period. AO considering above facts, considered the said share premium of Rs. 72 lakhs as undisclosed income of the assessee. Being aggrieved, assessee filed appeal before ld CIT(A). Ld CIT(A) confirmed the action of AO to make the addition of Rs. 72 lakhs to the income of the assessee. Hence, this appeal by the assessee.

 

20. At the time of hearing, ld A.R. submitted that AO has disputed the genuineness of the issuance of shares only on the basis of statement of Shri George Joseph, Director of the assessee made at the time of survey that the share premium amount is the unaccounted money of the assessee which had been routed with the help of the concerns whose names were shown as allottee of the shares. He submitted Shri George Joseph retracted his statement vide letter dated 6.5.2006, copy placed at pages 27-29 of PB that the said statement was made under pressure and hence stated that the share transactions were genuine. Ld A.R. submitted that assessee filed requisite details in respect of all the four share applicants viz share application form duly submitted by the said share applicants alongwith certified copy of board resolution, confirmation letter issued by the share applicants that they applied for equity shares of the assessee company at a premium of Rs. 8000/- each, bank statement of the respective share applicants alongwith details of the cheques evidencing that the payment of share application of money was received by account payee cheques. Ld A.R. submitted that all the share applicants are assessed to income tax and filed the copy of the income tax returns alongwith their annual returns and the copy of the certificate of incorporation and the Memorandum and Article of Association. Ld A.R. submitted that the relevant copies and details are placed in the paper book at pages 30 to 113 in respect of share applicant of JMD Telefilms Industries Ltd., at pages 114 to 175 of PB in respect of share applicant of Warner Multimedia Ltd., at pages 176 to 300 in respect of share applicant of Shresth Leasing and Finance ltd., and at pages 301 to 405 of share applicant of Trio Mercantile and Trading Limited. Ld A.R. submitted that assessee also filed return of allotment of shares before the Registrar of Companies and submitted that copy of the said return is placed at pages 407 to 409 of PB evidencing the allotment of 900 equity shares of the assessee company, filed on 21.11.2005. Ld A.R. submitted that book value of the share as on 31.3.2004 of the assessee company was Rs. 10,305 and the assessee company discounted its valuation of about 20% and arrived at the premium of Rs. 8000 per share. Ld A.R. submitted that assessee has filed requisite details before the authorities below establishing identity of the share applicants as well as their creditworthiness and the genuineness of the transaction but the AO disbelieved the genuineness of the allotment of shares merely relying on the statement made at the time of survey operation and ignoring that the statement was retracted by the assessee vide his subsequent letter dated 6.5.2006. Ld A.R. relying on the decision of ITAT Mumbai in the case of DCIT vs Premsons, (I.T.A. No.4698/M/2006), copy placed at pages 136 to 141 of PB submitted that CBDT Circular dated 10.3.2003 was considered and the Tribunal after considering the decision of Hon’ble Madras High Court in the case of CIT vs. S.Khader Khan son, 300 ITR 157(Mad) and decision of Hon’ble Kerala High Court in the case of Paul Mathew & Sons vs CIT, 263 ITR 101(Ker) held that no addition can be made or sustained simply on the basis of statement recorded at the time of survey/search. It was stated by the Tribunal that in order to make the addition on the basis of surrender during search or survey, it is sine qua non that there should be some other material to co-relate the undisclosed income with such statement. Ld A.R. submitted that similar view was also taken by Hon’ble Bombay High court in the case of CIT vs. Uttmchand Jain in Income tax Appeal No.634 of 2009 by order dated 2nd July, 2009, copy placed at pages 142 to 152 of PB. Ld A.R. also referred CBDT Instruction No.286/2/2003-IT(Inv.II), dated 10.3.2003, copy placed at page 135 of PB, wherein, it was observed as under:

 

    “Confession of additional income during the course of search and seizure and survey operation

 

    Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, such confessions during the course of search & seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-tax Department. Similarly, while recording statement during the course of search & seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

 

    Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/ survey operations or thereafter while framing the relevant assessment orders.”

 

21. Ld A.R. submitted that assessee filed requisite details to establish the genuineness of the transactions and, therefore, assessee discharged its burden which lay upon it and hence, addition made is not justified.

 

22. Ld A.R. also referred the decision of Hon’ble Supreme Court in the case of Lovely Exports Ltd., 216 CTR (SC) 195 and also the decision of Hon’ble apex Court in the case of CIT vs. Steller Investment Ltd., 251 ITR 263(SC) and submitted that if the assessee has proved identity of the share applicants and the AO considered that application money is received by the assessee from bogus shareholders whose names are given, AO could proceed to make the addition in the hands of the individual in accordance with law instead of making the assessment in the hands of the company who has issued the shares. Ld A.R. submitted that the addition made is not justified and same should be deleted.

 

23. On the other hand, ld D.R. supported the orders of authorities below. He referred para 7.10 of the order of ld CIT(A) and submitted that assessee received alleged share application money in financial year 2004-05 and survey had taken place in February, 2006 and it was found at the time of survey that share certificates of the shareholders were lying with the assessee company. There was no correspondence between the assessee and those share applicants, who applied for shares. Therefore, AO has rightly considered in view of the circumstantial evidence that receipt of so called share application money is not genuine. He submitted that the Director of assessee company also accepted in his statement that he received the money from the said share applicants and returned the share premium in cash. He submitted that the decision in the case of Lovely Exports Ltd., 216 CTR (SC) 195 relied by ld A.R. is not applicable to the facts of assessee’s case. Ld D.R. submitted that retraction made by the assessee has rightly not been accepted by the AO. He submitted that the addition confirmed by ld CIT(A) be sustained.

 

24. We have heard ld representatives of parties and orders of authorities below. We have also gone through cases relied upon as also the relevant pages of PB referred by ld A.R. at the time of hearing (supra).

 

25. We observe that assessee company in assessment year under consideration issued 900 equity shares of Rs. 100 each at a premium of Rs. 8000/- and received the amount aggregating to Rs. 72,00,000 as under:

 

Sr. No

Name of the company

No.of shares allotted

FV(Rs.)face value at Rs. 100 per share

Share premium (Rs.)

1.

JMD Telefilms Inds. Ltd.

300

30,000

24,00,000

2.

Warner Multimedia Ltd.

200

20,000

16,00,000

3.

Shresth Leasing & Fin. Ltd.

200

20,000

16,00,000

4.

Trio Mercantile and Trading Ltd.

200

20,000

16,00,000

 

Total:

900

90,000

72,00,000

 

26. There was a survey operation on 23.2.2006 and the statement of Shri George Joseph was recorded u/s.133A of the Act. In his statement, Shri George Joseph admitted that share premium account amounting to Rs. 72,00,000 is the unaccounted money of the assessee, which had been routed with the help of the concerns against whose name share premium is shown. He further declared a sum of Rs. 25,00,000 as undisclosed income of the assessee. We observe that at the time of assessment proceedings, assessee filed a letter dated 6.5.2006, copy placed at pages 27-29 of PB and stated that said statement was made by Shri George Joseph, Director under pressure without knowing the consequence of the same. AO did not accept the said retraction of statement of Shri George Joseph and relying on the statement made u/s.133A at the time of survey, considered the issuance of share capital as bogus and not genuine. Now the question arises as to whether, on the facts and circumstances of the case, the retraction of the statement made by Shri George Joseph is justified or not.

 

27. We observe that assessee filed copies of requisite details viz; copy of share application form from each of the above named four applicants’ along with copy of board resolution, their bank statement giving particulars of cheque nos. and the amount debited from their accounts, as also copy of confirmation letters. Assessee has also filed the copy of the income tax return of each of the applicants evidencing that they are assessed to tax establishing their identity. Assessee has also filed copy of the certificate of incorporation and the Memorandum and Article of Association in the paper book. The above documents are placed at pages 30 to 113 of PB in the case of JMD Telefilms Inds. Ltd, at pages 114 to 175 in the case of Warner Multimedia Ltd., at pages 176 to 300 in the case of Shresth Leasing & Fin. Ltd and at pages 301 to 405 in the case of Trio Mercantile and Trading Ltd. Further, assessee has also filed copy of the return of allotment of shares filed before the Registrar of Companies on 21.11.2005, copy placed at pages 407-409 evidencing the allotment of 900 equity shares of the company to the above named applicants. Considering above documents which were filed by the assessee even before the AO during the course of assessment proceedings and the said facts has not been disputed by ld D.R., we are of the considered view that assessee has established not only the existence of the share applicants but also established the identity of the applicants. We observe that AO has also not disputed the existence as well as identity of the share applicants. We also observe that AO has also not doubted the creditworthiness of the share applicants. The share application money has been duly recorded in assessee’s books of account and the payment of shares application money was also recorded in the accounts of each of the share applicants. Considering the above facts on record, we are of the considered view that assessee has not only proved the identity of the share applicants but also established the creditworthiness of the share applicants and the genuineness of the transactions.

 

28. Now the question arises that when all the ingredients contained in section 68 have been fulfilled establishing the genuineness of the transactions, can the AO treat the said share premium amount as unexplained u/s.68 of the Act merely on the basis of statement made by one of the Directors of assessee company u/s.133A of the Act without bringing any evidence on record to the contrary.

 

29. We observe that assessee vide letter dated 6.5.2006, copy placed at pages 27-29 of PB that the said statement u/s.133A at the time of survey on 23.2.2006 was made under pressure but the AO rejected the said retraction and also ignoring the evidence on record but proceeded to make the addition only on the basis of the said statement without bringing any evidence on record to controvert the evidence filed by the assessee. The CBDT in its Instruction dated 10.3.2003 (supra) stated that confessions, if not based upon credible evidence, are later retracted by the concerned assessee and, therefore, such confession during the course of search and seizure and survey operations do not serve any useful purpose. The CBDIT also advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income tax Department. It was also stated in the Instruction that while recording statement during the course of search & seizure and survey operation, no attempt should be made to obtain confession as to the undisclosed income. The ITAT Mumbai in the case of Presons (supra) has also held after considering the decisions of Hon’ble Hon’ble Madras High Court in the case of CIT vs. S.Khader Khan son (supra) and the Hon’ble Kerala High Court in the case of Paul Mathew & Sons vs CIT (supra) and also considering the CBDT Instruction dated 10.3.2003 (supra) that no addition can be made or sustained simply on the basis of statement recorded at the time of survey/search. Therefore, there should be some material to co-relate the undisclosed income with such statement. Considering the above decisions and the material on record, we hold that said statement made at the time of survey on 23.2.2006 cannot be the sole basis for making the addition by treating the issuance of share at a premium of Rs. 8000 as bogus.

 

30. Now coming to the question as to whether the assessee has discharged its burden which lay upon it to prove the genuineness of the issuance of shares. Hon’ble Rajasthan High Court in the case of Barkha Synthetics Ltd vs ACIT(2005) 197 CTR 432(Raj) held that the principle relating to burden of proof concerning assessee is that whether the matter concerns the money receipts by way of share application from investors, through banking channels, assessee has to prove existence of persons in whose name the share application is received. Once the existence of investor is proved it is no further burden on the assessee to prove whether that person itself has invested the said money or some persons made investments in the name of that person. The burden then shifts on revenue to establish that such investment has come from assessee company itself. The Hon’ble Apex Court has also held in the case of Daulat Ram Rawatmul, 87 ITR 349(SC) that onus to prove that the apparent is not the real is on the person who claims it to be so. Therefore, onus is on the department to prove that the share application money subscribed to the share capital of the assessee company by the above named share applicants is not the money of the share applicants but of the assessee company, is on the department. In the case before us, the department has not brought any material on record to establish the same. We are of the considered view that considering evidence on record, AO has doubted the receipt of share premium on surmises and conjectures and has not brought any cogent material on record to establish that it was the assessee’s own unaccounted money came back to it by way of fake introduction of share capital. The Hon’ble Apex Court has also considered similar issue in the case of Lovely Exports (supra) as under:

 

    “Can the amount of share money be regarded as undisclosed income under section 68 of the I.T.Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”

 

31. In the case under consideration before us, as stated above, assessee has furnished details of share application with PAN No. and bank statement. Further, said share applicants have also filed confirmation letters placed at page 34 in the case of JMD Telefilms Industries Ltd., at page 117 in the case of Warmer Multimedia Ltd., at page 179 in the case of Shrestha Leasing & Finance Ltd,. and at page 302 in the case of Trio Mercantile & Trading Ltd. In the said confirmation letters, bank details to make the payment to assessee company for allotment of shares is also stated. The transactions are admittedly recorded in the books of account both by the assessee company as well as aforesaid share applicants. Therefore, we are of the considered view that no addition on account of unexplained cash credit is warranted in the case of assessee on the given facts and circumstances as discussed above. Hence, we are of the considered view that the action of AO is contrary to the decision of Hon’ble apex Court in the case of Lovely Exports (supra). Accordingly, we delete the addition of Rs. 72 lakhs sustained by ld CIT(A) by allowing grounds of appeal taken by assessee.

 

32. In the result, appeal filed by department is rejected and whereas appeal filed by assessee is allowed.

 

(Pronounced in the open court on 21.11.2012)

 
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