Brief of the case
In the present case, the Hon’ble High court held that the proceedings of re-assessment could be made if full and true facts have not been disclosed earlier. Also, it was held that section 68 could be invoked if the genuineness of parties are not proved. At the last the Hon’ble High Court held that a loan after forfeiture doesn’t become trading receipt.
Facts of the Case
The facts are that a joint venture company (assessee) was formed for production and development of computer software in India with equity participation of Rs. 70 lakhs. Besides equity participation, the Russian company had to advance a sum of Rs. 10.65 crores to the proposed joint venture. This amount was paid on two dates, by five remittances. The assessment was completed for 1993-94 after examining the materials placed on record, on 29-03-1996 under Section 143 (3) by the Assessing Officer (AO). The money was advanced by the Russian company for setting up of software development facility in India. According to the terms of the agreement, the Russian company was required to help the proposed joint venture company to: (a) set-up software development facility in India, (b) provide technical assistance (c) procure the orders for software development. During financial year 1995-96, the assessee forfeited the loan and credited the amount to Reserve Account. During the course of assessment the AO noticed that the JV company was incorporated in July 1991 i.e. even before the agreement. The Russian company never contributed any equity capital and the Indian partner only contributed only Rs. 2000 in the equity capital of the assessee-company as against the amount of Rs. 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 Rs. 2,000, i.e., the joint venture never came into existence. There was no business of software development. Even the loan amount of Rs. 10.65 crore was never utilized. Assessee showed AO the letters which they have written to Russian company in which they have seek co-operation which was never provided. In view of these facts, the AO asked the assessee to explain why it should not be treated as business income under Section 28 of the Act since the alleged loan was in the nature of trade account, as it acquired the nature of trade surplus of the assessee-company with the efflux of time. The AO held that Rs. 10.65 crores was income of the assessee under the head “Profit and gains of business or profession” chargeable to tax under Section 28 of the Act, by his order dated 28-03-2002. Noting that the foreign company 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 Rs.10.65 crores to the assessee without any interest. It was also observed that the assessee could not establish that the foreign company existed or even furnish its address in the reassessment proceedings. The sum of Rs. 10.65 crores was received by the Indian Company; the circumstances under which it was credited to the assessee were not established satisfactorily. It was therefore held that the amount was an unexplained receipt; the AO added it for AY 1993-94 and brought it to tax under Section 68.
Contentions of the Revenue
The revenue argues that in the facts of this case, that the AO was justified in invoking Section 68 of the Act. The assessee never furnished relevant particulars which could be reasonably verified as to the manner of transfer of funds. One of the equity partners, COPL contributed share capital only to the extent of Rs. 2,000/-; secondly, contrary to requirements of the Union Government, there was no equity payment in hard currency; thirdly, the foreign company again contrary to the approval given by the Union Government, nowhere indicated that the remittance was for purposes of loan. The Reserve Bank‟s approval letter had directed the assessee to give details of utilization and the necessary details within a specified period, which was not followed; fourthly, equity infusion had not taken place by any of the parties, and certainly not to the extent of Rs. 70 lakhs by the two parties. Lastly the money had been diverted for other use by the assessee. 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 assessees’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. The facts shrouding the present case clearly highlighted that at the time the so-called loan was obtained, only the identity of the foreign company could be said to have been proved; no other material to establish the genuineness of the transaction or the creditworthiness of the party had been placed. On the merits, it was argued that the revenue was entirely justified in reassessing 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.
Contention of the Assessee
The ld. Counsel of the assessee argued that firstly, 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 authorities for the purpose of the foreign company’s joint venture, in the form of Reserve Bank clearance, approval by the authorities administering the laws relating to foreign exchange, etc. The money had been remitted through banking channels. Counsel relied on Calcutta Discount Co. Ltd. v. ITO  41 ITR 191 and stated that primary obligation of the assessee is to disclose fully and truly all material and relevant facts. The obligation being only to disclose basic facts but that would not include an obligation to disclose what inferences had to be drawn from such facts by the authorities. The assessee relied on Income Tax Officer v Lakhmani Mewal Dass (1976) 103 ITR 437 (SC) where it was observed that 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.
He relied on the joint venture agreement, MOU, copy of foreign collaboration approval by Department of Industrial Development; copy of approval given by Department of Economic Affairs on 29-10-1992 and the Reserve Bank Exchange Control Department approval dated 11-12-1992. All these clearly established that the foreign comapany was a genuine Soviet Government undertaking which had remitted the money to the Indian company. Most importantly the Certificate of Foreign Inward Remittance issued by the Bank. Evidence of export, in the form of airway bills, whenever goods were consigned abroad too were relied upon. There was extensive material establishing its genuineness, the addition under Section 68 based on a later unrelated event, i.e. premature forfeiture of the loan, was not justified. On merits too, the assessee contends that there is no valid basis for holding that the source of the funds was unknown, or doubting the credibility of the source. It is argued that the assessee cannot be placed in an impossible situation of having to prove or establish the “source of the source” as has been done by the revenue in this case.
Held by CIT(A)
The original assessment order was set aside on the ground of denial of proper opportunity. When the reassessment order was challenged before CIT(A), the CIT(A) by its order rejected the appeal and observed that forfeited amount will be brought to tax. CIT(A) also upheld inclusion of amount u/s 68.
Held by ITAT
The Hon’ble ITAT have upheld the contentions of the revenue regarding reassessment but was not justified with the inclusion of amount under section 68. Whereas, on the issue of amount being treated as trade receipts, it was ultimately forfeited by the assessee and transferred to the reserve account. 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 contention of the department that the assessee had received the sum of Rs.10.65 crore as a trade advance in the course of trading transactions was rejected. The loan so received by the assessee was for the purpose of setting up a business of software development in India and was not at all related or connected to any trading transactions of the assessee company.
Held by High Court
The Hon’ble High court while relied on the Judgment of Phool Chand Bajrang Lal v Commissioner of Income Tax 203 ITR 456 (SC) where it was observed that “the mere disclosure of that transaction at the time of original assessment proceedings, cannot be said to be disclosure of the “true” and “full” facts in the case and the I.T.O. would have the jurisdiction to reopen the concluded assessment in such a case.” Further, the Hon’ble High Court observed that the assessee before CIT(A) failed to establish the truthfulness of its claim of the receipt of loan of Rs. 10.65 crores despite being afforded specific opportunities. The assessee was not able to establish the fact that this money indeed belonged to the Russian Company. As the facts were sufficient in the light of the ruling of Phool Chand Bajrang Lal v Commissioner of Income Tax 203 ITR 456 (SC) therefore, the Hon’ble High Court held that the reassessment was necessary. Accordingly, this issue was in the favour of revenue.
Regarding the second question of adding Rs. 10.65 crores, the Hon’ble High Court while relying on the Judgment of CIT v. Lovely Exports 2010 (14) SCC 761, where it was held 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 individual/entity advancing the amount. 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). 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. Therefore, the onus to prove that the amounts came from credible sources and creditworthiness of the entity or the source, was never discharged.
Accordingly, this issue was in the favour of Revenue.
Now coming to the final issue where the amount of Rs. 10.65 crores was treated as a Trading Receipt, it was held by the Hon’ble High Court that once amounts are shown as trading receipts, they contain a profit making element within them. The subsequent treatment, therefore, could well attract compulsion dictated by law, i.e. their inclusion for the later year. In the present case, the amounts were never treated as trading receipts but as unsecured loans. Accordingly, the amount was termed as loans and not trading receipts. Hence, the final issue was in the favour of Assessee.