Case Law Details

Case Name : DCIT Vs. M/s Reliance Utilities P Ltd. & M/s Reliance Ports and Terminals Ltd. (ITAT Mumbai)
Appeal Number : ITA No.223/Mum/2016 and ITA No.224/Mum/2016
Date of Judgement/Order : 03/02/2017
Related Assessment Year : 2008-09
Courts : All ITAT (7804) ITAT Mumbai (2197)

Brief facts are that the Reliance Utilities Private Limited, the assessee, is a private limited company filed its return of income for the assessment year 2008-09 on 29.09.2008 declaring a total income of Rs. 1,69,52,9 19. The assessment was completed by an assessment order u/s. 143(3) of the Act dated 27.12.20 10.The assessee during the previous year relevant to the assessment year 2008-09 had credited a transaction in its books for the receipt of Rs. 700 crores from Biometrix Marketing Private Limited, Singapore (in short “Biometrix”) towards subscription of Compulsorily Convertible Preference Shares (in short “CCPS“) against which the assessee had allotted seven crores CCPS of Rs. 10 each at a premium of Rs. 90 per share to Biometrix. This transaction was investigated by the Investigation Wing of the Income Tax Department, Mumbai upon receipt of commercial intelligence report dated 10.08.2012 from the High Commission of India, Singapore. The AO has summarized the observations in the said report that the source of funds of Biometrix, which invested Rs 700 crores in the CCPS issued by the assessee and also in other group companies (in all aggregating to USD 1627.24 millions),needs further investigation considering that the said company incorporated under the laws of Singapore had a paid-up capital of Singapore Dollars 1,10,000 only and its shares were held by two corporate entities, of which one entity in Singapore held 91% of the shares. The ultimate owner of the two companies in Singapore i.e. Biometrix and its shareholder entity is an individual based in Mumbai holding 100% of the capital. The quantum of investment made by Biometrix which was the largest FDI from Singapore to India, given its small capital base and other facts such as a single room office in Singapore remaining closed most of the time which reinforced that Biometrix is a small company, made it highly probable that Biometrix may have raised loans from Singapore or from other countries mostly tax havens and hence the report stated that the ultimate source needs to be ascertained.

The investigation wing of the Income Tax Department, Mumbai carried out the investigation in the matter and the findings in its report dated 10.07.20 12 are extracted by the AO in para 10 of the assessment order. It was ascertained that the investment made by Biometrix in the CCPS of the assessee through the Foreign Direct Investment route was not out of equity capital of Biometrix but was out of a loan of USD 1700 million taken by Biometrix from ICICI Bank, Singapore. The said loan was secured by contractually binding a group company of the assessee to purchase the CCPS upon exercise of option to sell those shares by Biometrix. The investigation wing had also obtained copies of acknowledgements of the income tax returns and goods & services tax returns filed by Biometrix with the authorities in Singapore. It was also observed that Biometrix subsequently repaid the loan to ICICI Bank, Singapore by selling the investments it made in the CCPS to other group companies of the assessee and the said group companies which purchased the CCPS from Biometrix have provided the details and explained the sources for the monetary consideration paid to Biometrix. Upon receipt of the above investigation report from DGIT (Inv.), Mumbai, the AO recorded the reasons, which essentially are the findings in the reports of the High Commission of India, Singapore and the Investigation Wing mentioned hereinabove. Stating that the new information received clearly cast a doubt on the creditworthiness of Biometrix as well as the ultimate source of Rs 700 crores, based on the said information, the AO issued the notice u/s 148 dated 04.01.2013 with the reason to believe that income to the tune of Rs. 700 crores has escaped assessment for the assessment year under consideration. The assessee requested that the original return filed on 29.09.2008 be treated as the return filed in response to the notice u/s 148 of the Act. The AO provided a copy of reasons recorded as requested by the assessee on 19.08.2013. The assessment was taken up by issuing a notice u/s. 143(2) of the Act on 20.09.20 13. The Investigation Wing in Mumbai vide letter dated 10.09.20 13 requested that the assessment be kept in abeyance till further communication is issued to the AO. The Investigation Wing forwarded another report dated 05.02.20 14 to the AO, which apart from the findings in its first report dated 10.07.20 12, carried the details of the subsequent transactions of the purchase of CCPS from Biometrix by the group companies of the assessee and that the purchasers of CCPS have explained that the consideration was paid out of the proceeds from sale of units of mutual funds. The report stated that Biometrix had entered into separate Investment Agreement with the assessee and other group companies. It also stated that a Put & Call Option Agreement was entered into by Biometrix with a group company of the assessee, which gave Biometrix the right to sell the CCPS and that the loan from ICICI Bank was secured by assigning the rights in the Investment Agreement, the Put and Call Option Agreement and the charge was filed with the authority in Singapore. The report also stated how ICICI bank had sanctioned a loan of USD 1.2 billion on 28.06.2007 and a further sum USD 0.5 billion on 07.11.2007 and as per the documents filed by ICICI Bank, actual borrower was to be a SPY in a tax efficient jurisdiction. After reviewing the financial statements of Biometrix, the report also drew an inference that Biometrix is essentially a shell company. Further, Biometrix paid interest and loan repayment to ICICI Bank where as it received a lower consideration from the sale of CCPS it held in various group companies. There is also information gathered from Singapore regarding the identity of the shareholders of Biometrix, which are corporate entities, the individuals who had invested in one such shareholder entity in Singapore and the mode used for such investment. The report also states that the bank account statement of Biometrix, its financial accounts and KYC documents could not be obtained from the investee companies, which include the assessee. The report also narrated the failed attempts to obtain information about the identity of current shareholders and directors in the corporate entity in Singapore, which held substantial shares in Biometrix. These information and efforts of the Investigation Wing are outlined by the AO in the order in Para 16 to 32 of the Assessment Order.

Accordingly, assessment proceedings were conducted in view of the aforesaid information in the possession of the AO. The notice dated 09.06.20 14 had a questionnaire calling for complete details / supporting evidences in respect of receipt of investments amounting to Rs 700 crores from Biometrix and thus the assessee was required to prove the identity and creditworthiness of the investor and the genuineness of the aforesaid transaction. The assessee filed a reply on 24.11.2014 explaining that the assessee issued 7 crores CCPS of Rs. 10/- each at a premium of Rs. 90/- each to Biometrix. An Investment Agreement between the assessee, Biometrix and persons named as promoters dated 3 1.08.2007 was furnished. Copies of the share certificates issued to Biometrix for the CCPS allotted were also furnished. It was stated that the investment made by Biometrix fell under the automatic route of Foreign Direct Investment under the Foreign Exchange Management Act, 1999 (“FEMA”) and it was not necessary to obtain the approval of Foreign Investment Promotion Board. The assessee also submitted the form filed with Reserve Bank of India on the issue of CCPS along with the acknowledgment for filing the same. The terms of the issue of CCPS were explained and the valuation report of S.R. Batliboi & Co was furnished. The assessee explained its understanding that Biometrix had obtained a loan from ICICI Bank, Singapore for making the investment in the CCPS and stated that it is not in possession of any correspondence in this regard. The bank statements of the assessee were furnished and credit entries for the receipt of Rs. 700 crores from Biometrix were identified in the bank statements.

The AO also made reference through FT & TR Division of the CBDT to Inland Revenue Authority in Singapore (“IRAS”) on 13.03.2014. The reference was made as per requirement for exchange of information in relation to investments made by Biometrix in four reliance group companies including assessee. IRAS provided information pertaining to Biometrix, viz, the tax residency certificate, List of Directors and employees, Financial Statements and Income Tax Returns, Director’s resolutions/KYC documents, ICICI bank statements with details of inward credits, disbursement related documents, loan principal and interest related documents, credit appraisal note and facility documents. On finding that complete information as sought was not provided by IRAS including the bank statement of Biometrix tracing the receipt of loan amounts and the repayment of interest & principal. The AO made another reference through FT & TR Division to IRAS. IRAS provided further information that loan was disbursed by ICICI Bank, Singapore Branch to the bank account of Biometrix held in Overseas Chinese Corporation Bank, Singapore (“OCBC”). Following this a fresh reference was made to IRAS through the Competent Authority on 16.09.20 14. The bank statement of the account held by Biometrix in OCBC sent by IRAS contained entries only from 01.0 1.2008. It was not possible to obtain the bank statement pertaining to earlier period as per the India Singapore Exchange of Information Protocol. The AO made enquiries from assessee and issued summons under section 131 of the Act to directors of Biometrix who were resident in India, the shareholders of the parent entity of Biometrix and officials of ICICI Bank Limited. While the directors and shareholders of Biometrix omitted to attend and ICICI Bank Limited expressed inability to divulge information on account of restrictions imposed by Banking Secrecy Act of Singapore in respect of bank account statements and KYC documents of Biometrix. The AO also found that the receipt of share application money by the assessee for the issue of CCPS is an international transaction between two associated enterprises which the assessee failed to report in the prescribed form and with the prior approval of the CIT, the AO referred the transaction to Transfer Pricing Officer for determination of arm’s length price. The TPO issued an Order u/s 92CA of the Act dated 29.01.2015 confirming that the transaction has been done at arms length price. The TPO also suggested that the source of the loan has to be examined by the AO. The AO analysed the material gathered from ICICI Bank, the other group companies of the assessee and information received from IRAS through FT & TR division confirmed that loan amounts aggregating to USD 1700,000,000 were remitted by ICICI Bank, Singapore Branch on various dates between 18.09.2007 to 12.12.2007 to the bank account of Biometrix with OCBC. The audited financial statements of Biometrix as at 30th September 2008 showed entries for Secured Term Loan of USD 1700,000,000 obtained for financing its long term investments and the Long Term Investments available for sale amounting to USD 1650,125,325. From the Facility Agreement entered into between Biometrix and ICICI Bank, the AO inferred that the loan has been advanced to Biometrix by ICICI Bank Limited through its overseas branches and ICICI Bank, Singapore Branch had also acted as an agent for facilitating the loan. In other words, ICICI Bank, Singapore Branch handled the disbursements, collection of interest and principal repayments. After examining various documents in relation to the loan, the AO found that ICICI Bank, Singapore Branch had not monitored the loan it granted to Biometrix strictly as per the terms of the contract.

Hence, the AO added the amount of Rs. 700 crores received by the assessee and invested by Biometrix in the CCPS issued by the assessee as income of the assessee as unexplained cash credit u/s. 68 of the Act. According to the AO the nature and genuineness of the transaction of investment in the CCPS of the assessee was not explained as required in Section 68 of the Act. The AO has stated that the assessee, the investor i.e. Biometrix, shareholders and directors of the investor, ICICI Bank, Singapore and other group companies of the assessee have not provided information to his satisfaction. Aggrieved, assessee preferred appeal before CIT(A).


To sum up the whole issue in the present appeal by Revenue, is about the source, nature and genuineness of the transaction to determine whether the addition made by the AO under section 68 of the Act is sustainable. Admittedly, in this case, there is no dispute that the assessee issued Compulsory Convertible Preference Shares (CCPS) and the same was subscribed by Biometrix Marketing Private limited, Singapore (Biometrix). It is also not in dispute that for making this investment Biometrix borrowed the money from ICICI Bank, Singapore. All the documents relating to Biometrix were procured by the AO from Inland Revenue Authority of Singapore and ICICI Bank. At every stage, the conclusions reached by the Revenue and CIT(A) are based on these materials on record. We are now required to re-appreciate the very same materials on record. The authenticity of these materials on record is not in dispute before us. No new materials were relied upon either by the Revenue or by the assessee before us. The assessee argued before us and filed detailed submissions and brought out various aspects of the case based on the very same materials on record which stands undisputed during the entire proceedings viz.,

a) That Biometrix invested in the CCPS issued by the assessee;

b) That Biometrix borrowed from ICICI bank, Singapore;

c) That Biometrix secured the loan given by ICICI Bank, Singapore by assigning the investment agreement and put and call option agreement entered into with the investee companies and option obligors respectively;

d) That Biometrix has repaid the loan to ICICI Bank out of remittance from Mukesh Ambani group;

e) That the transaction in question can never be construed as bogus transaction;

f) That complete financial flow commencing from ICICI Bank finding its way to the assessee disclose the nature source and genuineness of the transaction;

g) That contemporaneous transactional documents also disclose the nature source and genuineness of the transaction;

h) That Biometrix genuinely existed in Singapore and was not a shell/conduit company;

i) That Biometrix maintained adequate debt cover ratio and fulfilled the various covenants under the Facility Agreement; and

j) That the assessee made all the filings with the relevant regulators viz., Registrar of Companies and Reserve Bank of India.

With this, we proceed to deal with the grounds of appeal raised by the Revenue. We will deal with the second and fourth ground of appeal first. The Revenue’s ground is that Biometrix is a shell/conduit company. The ld. DR argued before us that Biometrix was incorporated just few months before this investment transaction and was liquidated in 2011 and therefore Biometrix is a shell entity. The ld. Counsel for the assessee argued that Biometrix was a tax resident of Singapore and to ascertain whether an entity is a shell/ conduit company in Singapore, the various tests laid down in India Singapore DTAA is the only relevant factor and that all the positive and negative tests laid down therein is fulfilled by Biometrix during every year of its existence. The Revenue has not contested this position. The CIT (A) has upheld that Biometrix is not a shell/ conduit company. We concur with the finding of the CIT(A) though we are of the considered view, that that this issue is not at all relevant for the purpose of section 68 of the Act in the facts and circumstances of the case, since it is abundantly clear from the materials on record that Biometrix was to be an SPY. Next, we will deal with the fifth and sixth ground of appeal by the Revenue. It concerns as to how Biometrix sold the CCPS at lower than the market value disclosed by them to ICICI Bank. The CIT(A) has dealt with these and observed that the debt-cover ratio at all times was more than that prescribed in the Facility Agreement based on the higher of two different valuation reports furnished using different methods of valuation and that the loan has been repaid by Biometrix to ICICI Bank and hence these issues are not relevant for the purpose of section 68 of the Act. We are unable to fathom as to how these events that relate to periods post the investment are relevant for ascertaining the source nature and genuineness of the investment transaction under section 68 of the Act and hence concur with the finding of the CIT(A).

The third ground of appeal which was vehemently argued by the ld. DR is non-availability of bank statement of Biometrix from ICICI Bank was actually invested in the CCPS issued by the assessee. The ld. Counsel for the assessee on the other hand furnished a chart showing the flow of funds from ICICI Bank, Singapore to Biometrix and from Biometrix to the assessee based on evidence in the form of utilization requests, disbursal certificate, swift messages and foreign inward remittance certificate. It was also brought to our notice the AO in the assessment order has recorded reasons for the non-availability of bank statements of Biometrix viz., ICICI Bank has not furnished the statements due to banking secrecy laws under the Banking Act of Singapore and Inland Revenue Authority of Singapore has not furnished the bank statements since the exchange of information protocol was effective only for periods staring 01-01-2008 and not for earlier periods. The ld. CIT(A) has also linked the flow of funds from ICICI Bank, Singapore to the bankers of Biometrix viz., OCBC Bank, Singapore and from OCBC Bank, Singapore to the bankers of the assessee viz., HDFC Bank, India based on the swift messages and held that what can be ascertained by bank statements can as well be satisfactorily ascertained from the swift messages. It was also argued by the Revenue that due to non-availability of bank statement there is a possibility that monies other than the monies borrowed by Biometrix from ICICI Bank having been invested in the CCPS issued by the assessee. The ld. Counsel for the assessee brought to our notice the audited financial statements of Biometrix which is on record to prove that only one credit entry is found in the books of Biometrix proving the fact only once money entered Biometrix in the form of loan from ICICI Bank and the same borrowed money stands invested in the CCPS issued by the assessee. In our considered view, the bank statement of the assessee and the foreign inward remittance certificate issued by HDFC Bank, Mumbai showing the receipt of money from Biometrix is on record. What is not on record is the bank statement of Biometrix. However, the other materials on record viz., the swift messages and audited financial statements of Biometrix clearly prove that Biometrix borrowed from ICICI Bank and invested the same money in the CCPS issued by the assessee. We are convinced from the materials available on record that Biometrix borrowed from ICICI Bank and invested the same in the CCPS invested by the assessee. Regarding the first ground of appeal questioning the deletion of the addition made under section 68 of the Act, we hold that on review of the materials available on record, we are satisfied that the requirements of section 68 of the Act viz., nature, source and genuineness of the transaction including the identity and the creditworthiness of the investor, are fulfilled. Few questions of law raised by the Revenue are not dealt with for the reasons stated below:

a) The initial onus is upon the assessee to establish three things to obviate the mischief of section 68 of the Act viz., identity of investors; creditworthiness of investors and genuineness of the transaction. The assessee is in agreement with this proposition and has not contested the same. So, we do not find it necessary to record a finding on this.

b) The onus is on the assessee to prove the source of the source in case of receipt of share subscription to the satisfaction of the AO. The assessee has shown with the materials available on record the source of the source obviating the necessity to dwell on this question of law as well.

Now, we will go through precedents cited before us. We find that the burden of proving the source of cash credit is on the assessee. When a cash credit entry appears in the assessee’s books of accounts, it is assessee’s legal obligation to explain the source of such credit entry. This has been clearly held by Hon’ble Supreme Court in the case Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC). But, if the assessee offers an explanation about the cash credit, the department can put the assessee to proof of his explanation and if assessee fails to tender evidence or brukes an enquiry, then the AO is justified in the rejecting the explanation and holding the income from undisclosed sources or unexplained cash credit. But, Hon’ble Supreme Court in the case Parimisetti Seetharamanna vs. CIT (1965) 57 ITR 532 (SC) has held that the burden of proof casted upon the assessee to prove the source, the nature and the character and the credit would apply to a case where the source of receipt is disclosed by the assessee and there is no dispute about the truth of that disclosure and, in such event, the revenue would not be entitled to raise any inference that the receipt is assessable to tax as undisclosed income or unexplained cash credit on the ground that the assessee failed to lead all the evidences in support of his contention that it is not within the taxing provision. Similarly, Hon’ble Guwahati High Court in the case Nemi Chand Kothari vs. CIT (2003) 264 ITR 254 (GAUH) held that the assessee where established the identity of the creditor and also shown, in accordance with the burden, which rested on him u/s 106 of the Evidence Act, 1872 that the amounts had been received by him by way cheques from the creditors which was not in dispute. Once the assessee had established these facts, the assessee must have taken to have proved that the creditor had the credibility to advance the loan. Thereafter the burden shifted to AO to the contrary. The failure on the part of the creditor to show that their sub-creditor had credit worthiness to advance the said loan amount to the assessee, could not, under the law be treated as income from undisclosed sources particularly, when there was neither direct or circumstantial evidence on record that the said loan amount actually belong to, or were owned by, the assessee.

Further, Hon’ble Supreme Court in the case Sreelekha Banerjee (supra) has also held that if the explanation given by the assessee shows that the receipt was not of an income nature, the department cannot act unreasonably and reject the explanation to hold that it was income. If, however, the explanation is unconvincing one which deserved to be rejected, the revenue can reject it and draw inference that the amount represents income either from sources already disclosed by assessee or from some undisclosed sources. But in the present case before us the assessee has directly established the nexus of loan taken by Biometrix from ICICI Bank, Singapore and this was invested in the CCPS issued by assessee and this is proved by the swift messages (above reproduced) that the money has actually travelled to assessee. Here the assessee is able to prove the source of the source despite the fact the assessee cannot be presumed to have special knowledge about the source of source or the origin of origin. It is to be mentioned that the case is discussed in the above were almost all decided under the provisions of 1922 Act. But, we find that it was held in every case, where a person is sought to be taxed for something which, he claims, does not belong to him, the findings of fact and the material on record must support the claim of the revenue. Moreover there should be some direct nexus between the confusion of fact arrived at by the revenue and the primary facts upon which that conclusion is based. This view is taken by Hon’ble Supreme Court in the case CIT vs. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC). But in the present case this is not the case of revenue rather the assessee able to prove conclusively that the CCPS issued by it to Biometrix is directly financed by ICICI Bank, Singapore. In view of these facts and circumstance and precedents cited above, we are of the considered view that the Assessing Officer has made this addition of unexplained cash credit without any basis and CIT (A) has rightly deleted the same on the basis of evidences and facts. We confirm the order of CIT(A) and the appeal of Revenue is dismissed.

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