T C Software Consultancy Pvt Ltd Vs PCIT (ITAT Mumbai)
ITAT Mumbai held that revisionary powers under section 263 of the Income Tax Act rightly invoked by PCIT as order of assessing officer is erroneous and prejudicial to the interest of revenue.
Facts- During the proceedings AO noticed that the assessee has issued 262250 equity shares of face value of Rs.490/- aggregating to Rs.12,99,72,500/-. The assessee out of the amount received has advanced loan of Rs.6,45,03,125/- to one M/s Empower Industries India Ltd. AO further noticed that the assessee and the Empower group are part of entry provider group i.e. Shirish Chandrakant Shah group. AO called on the assessee to provide the basis for the share premium.
AO concluded the assessment u/s 143(3) in which he has estimated the commission @1% on the entire amount of share capital and accordingly made an addition of Rs. 13,06,255/-. Subsequently the PCIT has observed that AO has computed the assessment without proper verification of facts & without correct appreciation of law and accordingly invoked the revisionary provisions under section 263.
Conclusion- Held that AO has not carried out any enquiry with regard to in whose hands the income is to be assessed and no finding recorded as per the directions of the Tribunal to hold in whose hands the income is to be assessed. AO has recorded that the estimated commission is already taxed as income in the hands of Shirish Shah based on the submissions of the assessee whereas the direction was to decide in whose hands the entire income is to be assessed not just commission. Even in the decision relied on by the Tribunal i.e. M/s. Nishottam Traders Pvt Ltd while remitting the case, the issue was sent back to AO to decide in whose hands income is to be assessed and there is no direction about taxing only the commission income. This would mean that AO has travelled beyond the directions of the Tribunal and proceeded to assess 1% of the entire transaction value as commission income in the hands of the assessee. Therefore from this perspective also, we are of the considered view that the order of AO is erroneous and prejudicial to the interest of the revenue.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal of the assessee is against the order of the Principal Commissioner of Income-tax-1, Mumbai (in short, „PCIT‟) passed under section 263 of the Income-tax Act, 1961 (“the Act”) dated 16/03/2022 for A.Y. 2011-12.
2. The assessee raised the following grounds of appeal:-
“1 . That the Ld. PCIT grossly erred in law and in facts of the case in holding the order passed by Ld. AO u/s 143(3) r.w.s. 254 of the Act to be erroneous and prejudicial to the interest of revenue.
2. That the Ld. PCIT grossly erred in law and in facts of the case in holding that the Ld. AO has not conducted proper enquiries before passing the orders u/s 143(3) r.w.s. 254 of the Act.
3. That the Ld. PCIT grossly erred in facts of the case in holding that the appellant company has not furnished necessary evidence required to substantiate its case.
4. That the order passed by Ld. PCIT u/s 263 of the Act is further illegal and not tenable under the law because of mechanically holding it to be prejudicial to the interest of revenue because the Ld. AO has accepted one of the two possible legal ”
3. The assessee is a company and filed the return of income for A.Y. 2011-12 declaring a loss of Rs.563/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the proceedings the AO noticed that the assessee has issued 262250 equity shares of face value of Rs.490/- aggregating to Rs.12,99,72,500/-. The assessee out of the amount received has advanced loan of Rs.6,45,03,125/- to one M/s Empower Industries India Ltd. The AO further noticed that the assessee and the Empower group are part of entry provider group i.e. Shirish Chandrakant Shah group. The Assessing Officer called on the assessee to provide the basis for the share premium. The Assessing Officer also issued notice under section 133(6) to parties who have subscribed to the shares of the assessee company. The Assessing Officer concluded the assessment by making an addition under section 68 treating the entire share capital subscribed for rs.13,26,25,000/- as unexplained cash credit. Without prejudice, the Assessing Officer held that even otherwise, the share premium which is not substantiated by the assessee should be brought to tax under section 56(1) of the Act.
4. Aggrieved, the assessee filed appeal before the CIT(A). Before the CIT(A), the assessee submitted that assessee is merely a conduit in the hands of entry provider Shrirish C Shah and that its accounts along with another 212 companies are used by Shirish C Shah for providing accommodation entries. The assessee also submitted that the amount received towards share premium is subsequently transferred to M/s Empower India Limited which again is controlled by Shirish C Shah and therefore, the assessee is only a conduit company. Accordingly, the assessee prayed that no addition could be made in the hands of assessee. The CIT(A) did not accept the submissions of the assessee and upheld the addition on the ground that the assessee has not discharged the onus of providing proper explanation and substantiation of the claim made.
5. The assessee preferred further appeal before the Tribunal. The assessee prayed before the Tribunal for restoration of the case back to the Assessing Officer for the reason that the co-ordinate bench in the case of Shirish C Shah has restored the issue back to Assessing Officer to look into the matter and assess the income in the right hand. The ITAT remanded the matter back to the Assessing Officer with the following observations where the Tribunal relied on the decision of co-ordinate bench in the case of M/s Nishottam Traders Pvt Ltd in ITA No.6874/Mum/2004:-
“5. It is clear from the above that, the Bench has observed that it has to be ascertained in whose hand the income is to be assessed whether in the hands of Shirish Chandrakant Shah or the assessee and it was also observed that the assessee company is only providing the accommodation entries whereas the real beneficiary of the of the income from the said transactions was Shirish Chandrakant Shah. We, therefore, respectfully following the ratio laid down by the co-ordinate bench of the Tribunal, restore the issue back to the file of the AO with the direction to decide the same for denovo after affording a reasonable opportunity to the assessee.”
6. During the remanded proceedings, the Assessing Officer called on the assessee to furnish the details by issue of notice under section 142(1) which is extracted below:-
“The Hon’ble ITAT vide order dated 28.01.2018 set aside the order of the Ld. CIT(A) and restored the matter to the file of the AC) with the direction to decide the issue after affording a reasonable opportunity of being heard. In this regard you are requested to furnish the following details:-
a) In your case the Hon’ble ITAT has set aside the issue observing that the co-ordinate bench of the Tribunal in the case of the M/s. Nishottam Traders Pvt. Ltd. has observed that it has to be ascertained in whose hand the income is to be assessed, whether in the hands of Shri Shirish Chandrakant Shah or the assessee. Since vou have claimed before the Hon’ble ITAT that your case is similar to the issue involved in the case of M/s. Nishottam Traders Pvt. Ltd You are requested to provide the evidences to prove that you were used as a conduit for providing accommodation entries and the real beneficial’}” of income from the transaction was Shri Shirish Chandrakant Shah.
b) If the funds received by as share capital/share application money and routed through you to the beneficiaries, please provide the namejof the ultimate beneficiaries.
c) Without prejudice, if your contention is that you have been used as a conduit, please explain as to why a commission of 1% of the entry provided by you should not be added to the total income.”
7. In response, the assessee filed the details by submitting that –
(i) The assessee is being used for routing of funds to M/s Empower India Ltd by Mr. Shirish Shah;
(ii) Out of the share capital received Rs.6,45,03,125/- is advanced as loan to M/s Empower India Ltd at the instruction of Shirish Shah;
(iii) The assessee and M/s Empower India Ltd operated out o the same premises and have same directors.
(iv) Copies of letters issued by DDIT(Inv) Unit IV(4), Mumbai to various banks to prohibit transactions in a particular group of companies;
(v) The CIT(A)-48, Mumbai, in the case of M/s Empower India Ltd has given a finding that the share capital & premium are part of layering process of entries through bank account of different companies;
(vi) The CIT in M/s Empower India Ltd has held that the amount received as part of accommodation entries cannot be taxed under section 68.
(vii) Reconciliation between the amount credited to the bank account of the assessee and the seized material by Shirish C Shah.
(viii) The list of ultimate beneficiaries as furnished before the DCIT Central Circle-2(2), by M/s Empower India Ltd;
(ix) The assessment of commission is already taxed on estimation basis in the hands of Shirish C Shah and that taxing again in assessee‟s hands would amount to double taxation.
8. The assessing Officer concluded the assessment under section 143(3) read with section 254 in which he has estimated the commission @1% on the entire amount of share capital an accordingly made an addition of Rs.13,06,255/-. The relevant observations of the Assessing Officer are extracted below:-
“4. From the details filed by the assessee, it is seen that the money received by the assessee company towards issue of share capital was immediately transferred to M/s. Empower India Limited. Also, it is pertinent to note that the assessee company is the group company of M/s. Empower Industries Limited. As the entire share capital received by the assessee company was deployed in M/s. Empower India Limited, the Ld. CIT(A) in the case of M/s. Empower India Limited has treated the assessee company as the conduit company and he further held that M/s. Empower India Limited was being used by Sh. Shirish C Shah for providing accommodation entries. Also from the reconciliation sheet submitted by the assessee of the amounts credited to its bank account and seized material of Sh. Shirish Shah during the search proceedings, it becomes evident that the assessee company is a conduit company monitored by Sh. Shirish C. Shah with the help of Sh. Devang Master who is the director in the said company.
5. On going through the details filed by the assessee, it is noticed that the assessee stated that as a part of layering process, the amount received by the assessee company was first transferred to M/s. Empower India Limited and thereafter transferred to the beneficiaries. Also, the assessee contended that the estimated commission income for such layering of funds has already been assessed as income of Shri Shirish C.Shah on actual basis.
From the above, it is apparent that the assessee company was a paticipangt of the pernicious practice of layering of funds for providing accommodation entries undertaken by Sh. Shirish C Shah. Also, it is widely known that in this stated practice of providing accommodation entries, the commission ranges between 1% to 2% and since several stakeholders/layerings are involved, I therefore, estimate the commission income at Rs.13,26,255/-, being 1% of the money routed through the assessee company’s account and add the same to the assessee’s total income. Penalty proceedings under section 271(1)(c) r.w. Explanation 1 thereto of the Income tax Act, 1961 are hereby initiated on this issue of conealing the particulars of the income.”
9. Subsequently the PCIT has observed that the Assessing Officer has computed the assessment without proper verification of facts & without correct appreciation of law and accordingly invoked the revisionary provisions by issuing a show cause notice under section 263. The assessee submitted before the PCIT that the assessee has furnished all the relevant details before the Assessing Officer to substantiate that the assessee was only a conduit company and that the Assessing Officer has after considering the submissions has applied his mind while deciding to tax 1% towards commission on the accommodation entries. Accordingly, the assessee submitted that there is no error in the order of the Assessing Officer which is prejudicial to the interest of the revenue.
10. The PCIT after considering the submissions of the Assessing Officer held that –
6. I have carefully considered the submissions made by the assessee and have also gone through the facts of the case. I have also perused the relevant assessment records. The main contention of the assessee is that the cash credits received by the assessee in its books of account should not be added to the Total Income since it is a conduit company. In order to establish itself as a conduit company, the assessee during assessment proceedings u/s 143(3) read with section 254, had relied on the order of Ld. CIT(A)-48 in the case of M/s Empower India Pvt. Ltd. The assessee has further stated that all the necessary enquires had been conducted by the AO during assessment proceedings based on which it was decided by the AO that the assessee is in fact a conduit company.
7. However, it is observed that assessee has made no independent submissions to support its claim of conduit company and has relied on the order of Ld. CIT(AJ-48 in the case of Empower India Pvt. Ltd. to prove itself as a conduit company. The AO also during assessment proceedings has merely accepted the claim of the assessee without conducting any independent enquiry and verification regarding how the assessee is a conduit company and if it is a conduit company then who is the ultimate beneficiary of the transactions being effected by the assessee. The assessee has stated that such cash credits have already been taxed in the hands of Shri Shirish C. Shah. But no such evidence is submitted and also no enquiry has been made by the AO to verify the claims of the assessee that whether such cash credits to the tune of Rs. 13,26,25,000/- have actually been assessed in the hands of the beneficiary of accommodation entries.
7.1 By claiming itself to be a conduit company, assessee admits that it has no explanation for the identity of creditors, genuineness of the transactions and creditworthiness of the creditors. Unless the sum of Rs. 13,26,25,0007- is assessed in the hands of the beneficiary^ cannot be allowed to remain unassessed in the hands of the assessee by merely claiming itself to be a conduit company and without admission of benefits by the ultimate beneficiary. The failure on the part of the enquiries is erroneous and prejudicial to the interests of Revenue.
8. Without prejudice to the above, it is observed that in the Assessment Order, the Assessing Officer has taxed the receipts in the hands of the assessee at the rate of 1%. The Assessing Officer in his order dated 24-10-3019, has stated that generally the commission ranges between 1% to 2% for pass-through entities as his rationale for estimating the Total Income of the assessee. However, the Assessing Officer should have conducted enquiry to verify the commission income received by the assessee instead of estimating the same without any enquiry. The failure on the part of the Assessing Officer to carry out the necessary enquiries is erroneous and prejudicial to the interests of Revenue.
9. As per the amended law, Explanation 2 clause (a) below section 263(1) of the Act, any assessment made without conducting requisite enquiry and verification by the AO is erroneous in so far as it is prejudicial to the interests of Revenue. Even under pre-amended law, the Honourable Supreme Court in the case of Smt. Tara Devi Agarwal [88 ITR 0323] and also Rampyari Devi Saraogi [67 ITR 0084] have held that any assessment completed without necessary enquiries as warranted on facts of the case is erroneous in so far as it is prejudicial to the interests of Revenue.
9.1 Hence, considering the facts in totality, I am of the considered opinion that the AO in the instant case has failed to conduct all the necessary enquiries as warranted on facts of the case ad as discussed in the order supra. Hence the assessment order is erroneous in so far as it is prejudicial to the interests of Revenue. Accordingly, the same is set aside.
9.2 The AO is hereby directed to reframe the assessment order denovo after conducting all the necessary enquiries and verifications as warranted on the facts of the case and also after giving due opportunity of being heard to the assessee before passing the assessment order.”
11. The Ld.AR reiterated the submission made before the lower authorities. The Ld.AR drew our attention to the details submitted before the AO to submit that the assessee has clearly established the fact that assessee conduit company for providing accommodation entries. The Ld.AR also submitted that the list of ultimate beneficiaries to whom funds are transferred from M/s. Empower India Limited was also submitted which the Assessing Officer has recorded in his order as a finding to state that the assessee is a conduit of layering of funds. The Ld.AR also argued that the reconciliation statement submitted before the AO clearly explains the source of receiving funds by the assessee. Thus, the Ld.AR summarized that the Assessing Officer has applied his mind and took a conscious call to assess only the commission income in the hands of the assessee. The ld AR further relied on many judgments in this regard.
12. The Ld.DR, on the other hand, submitted that the direction of the Tribunal has not been properly followed by the Assessing Officer whereby the Tribunal remitted the issue with a direction to verify in whose hands the income is to be assessed whether in the hands of the assessee or Shirish C Shah. The Ld.DR also submitted that it is important for the assessee to explain the source which the assessee did not do. The Ld.DR further submitted that Assessing Officer did not conduct any enquiry but has simply accepted the submissions of the assessee and, therefore, the PCIT has rightly invoked the provisions of Explanation 2 to section 263.
13. We heard the parties and perused the material on record. In the remand proceedings, the Assessing Officer called on the assessee to furnish relevant details to prove that the assessee is being used as a conduit and the real beneficiary of the income from the transaction is Shri Shirish C Shah and also the name of the ultimate beneficiary. The Assessing Officer based on the details submitted, accepted the contention of the assessee that it is a conduit for layering of funds and accordingly added 1% of impugned accommodation entry as income of the assessee. From the perusal of the details submitted by the assessee it is noticed that the assessee has submitted a reconciliation linking the amount received as share capital to an excel sheet (of party .xls) seized during the search of Shri Shirish C Shah. The extract of the reconciliation is given below:-
