The assessee submitted that the payments for raw material charges do not involve the deduction of TDS. Therefore, the applicability u/s.40(a)(ia) does not arise to these payments. These payments do not constitute any interest/commission for attracting the TDS provisions. Accordingly, the provision of section 40(a)(ia) and Section 194C are not applicable in this regard. Considering the said submission of the assessee, the CIT(A) granted relief and same is also been accepted by ITAT.
FULL TEXT OF THE ITAT JUDGMENT
These are the cross appeals filed by assessee and Revenue against the order of CIT(A)-2, Nashik dated 30.03.2014 for A.Y. 2010-11. We shall take up the assessee’s appeal first.
ITA No. 834/PUN/2014 (By assessee)
2. In the appeal filed by assessee, four grounds were raised and all of them revolve around the addition of Rs.1.5 Crore made on account of share prices and premium received from six companies. On the other hand, the Revenue raised the issue relating to not granting opportunity to the Assessing Officer when additional evidences were admitted by the CIT(A). This constitutes violation of Rule 46A of the Income tax Rules, 1962.
3. Briefly stated relevant facts includes that assessee is a private limited Company and engaged in trading activities, manufacturing of building materials with mineral like lime stone etc. Assessee filed return of income declaring income of Rs.20,05,940/-assessed u/s. 143 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The Assessing Officer assessed income of the assessee at Rs.5,81,13,480/- and made addition of Rs.1.5 Crore on account of share premium received from six companies as well as other additions made u/s. 40(a)(ia) of the Act. The contents/ the discussion given in para 5 and 6.2 of the assessment order are relevant.
4. In the First Appellate Proceedings, the CIT(A) confirmed the above said addition of Rs.1.5 Crore. However, he deleted the other additions made by the Assessing Officer invoking the provisions of Section 40(a)(ia) of the Act.
Aggrieved with the order of confirming addition of Rs.1.5 Crore, the assessee is in appeal before the Tribunal. On the other hand, aggrieved with the deletion of addition made u/s. 40(a)(ia) of the Act, the Revenue is in appeal before the Tribunal. Therefore, these present cross appeals are filed for adjudication of the issues raised in the appeals.
5. In connection with the assessee’s appeal, Ld. Counsel of the assessee submitted that the CIT(A) erroneously confirmed the said addition of Rs. 1.5 Crore despite the fact that all the subscribers of the premium confirmed their identity, credit-worthiness, source of payment and genuineness of transactions with six companies. It is merely a case of suspicion and presumption in the mind of the Assessing Officer that led the Assessing Officer to disbelieve the said transactions. Therefore, according to the Ld. AR such suspicion based addition should not have been confirmed by the CIT(A).
6.Explaining the facts relating to the subscription of share capital by six companies, Ld. Counsel submitted that during the year, the assessee issued additional share capital of 1,50,000 amounting to Rs.1.5 Crore (1,50,000 shares) at a premium of Rs. 90/- per share. The names of six companies are i) Matrix Systel Pvt. Ltd. ii) Octopus Infotel Private Limited iii) Fairmont Venture Private Limited iv) Nextgen Infotel Private Limited v) Microchip Infotel Private Limited vi) Blazer Venture Private Limited.
These six companies invested an amount of Rs. 25 Lakhs each totaling to Rs. 1.5 Crore. The Assessing Officer noticed that all these six companies share the common address i.e. 105, Sagar Shopping Centre, J.P Road, Andheri (West), Mumbai. All these six companies have reported meager total income in the range of Rs. 10,000/- to Rs. 20,000/-. After 55 days of holding period, the said shares were sold to Rajkumar Agarwal and Mrs. Sangeeta Rajkumar Agarwal at a face value of Rs. 15 Lakhs. They are specified persons in the company. Therefore, the shares with value of Rs. 100/- was purchased by Shri Rajkumar Agarwal and his wife at face value of Rs. 10/- after holding period of less than 2 months. With deep scrutiny undertaken by the Assessing Officer into these transactions involving the said six companies, Assessee Company etc, Assessing Officer held that Shri Rajkumar Agarwal was not cooperative as he resorted to take adjournment periodically. The contents of para 4.3 of the assessment order are relevant in this regard which reads as under:
“4.3 However, Mr. Rajkumar Agarwal sought adjournment for the reason that his counsel Mr. Ghate is out of city. Therefore the date of compliance was re-fixed on 11/02/2013 as per convenience of Mr. Rajkumar Agarwal. However, nobody attended on 11/02/2013. The next date of compliance was fixed at 22/02/2013. However, again the company sought adjournment and the hearing was again refixed on 25/02/2013. On 25th Feb CA, K. K Kabra submitted the information in tapal and attended with manager of the assessee company Mr. Rohit Chandak. The A.R of the assessee reiterated the contention that the said companies have made investment out of reserves, etc. The A.R also filed the working of share price, which comes to Rs.133/- per share and accordingly held that the shares offered @ Rs. 100/- are not excessive as compared with the fair market value as calculated by the A.R of the assessee at Rs. 133/-per share. I have considered the entire facts. Though the said share capital is shown to be received from above mentioned six companies, which are assessed to income tax, but it appears that the said companies are created for name lending purpose. The said investment is appeared to be made by the said companies out of similar investment shown to be received by the said companies. In view of above mentioned facts the amount of Rs.1,50,00,000/-shown to be raised by the assessee from the said six companies is treated as income of the assessee from undisclosed sources. Penalty proceedings u/s.271 (1) (c) of the Income Tax Act, 1961 is separately initiated.”
Thus, Assessing Officer proceeded to make addition of Rs. 1.5 Crore as per the discussion given in para 4.3 above.
7. During First Appellate Proceedings, assessee filed written submissions. He submitted that the fact of allotting Rs. 25 Lakhs worth shares to each of the said six companies and informed the fact of issuing/allotting them the shares with the face value of each share at Rs. 10/- and with the premium collected for each share at Rs. 90/-. He also furnished the fact relating to allotting the share certificates to the said six companies. Share certificate numbers and dates were also mentioned on the said document. Other documents relating to confirmation of the investment by the six Companies, the cheque or the banking details etc. were also submitted to the Assessing Officer. Assessee put forward various arguments in support of genuineness of transactions and they include that by Net Asset Valuation Method, the value of each share works out to Rs.256/-. Therefore, as per the assessee collecting the premium of Rs.90/- per share is convincingly justifiable. He also explained the reasons for going for the fresh subscription of the additional share capital. In this regard, assessee mentioned that the same was necessary for the purpose of financing a new business venture in the area of Mining activities. He also mentioned that the said proposed new business venture did not take off due to problems relating to clearances from Government, the Department of Environment. The assessee reasoned that when the identity of the six companies and their capacity to finance are demonstrated, where payments are made through banking transactions, the addition made by Assessing Officer u/s.68 ofthe Act, is not sustainable in law. Argument raised by the assessee are detailed at length (in the order of CIT(A) in para 6.2).
8. On consideration of the said written submission and legal arguments made by the assessee, the CIT(A) came to the conclusion that the explanation of the assessee is unsustainable as the said six companies conducted their business operation from the common business location in Bombay. This fact creates the fakeness of the said six Companies. With nominal or meager income returned by them and clubbed with their insignificant business activities, the said companies were not to be considered as genuine companies. The CIT(A) is of the opinion that the said companies constitutes the ones with the accommodation entries only and therefore, they are not genuine companies. Accordingly, he confirmed the addition made by the Assessing Officer as per the discussion given in para 6.5 of assessment order and the same is reproduced as under:-
“6.5 I have also examined the so-called joint venture agreement entered between the appellant and the six investors. The said terms and conditions of the agreement are such that the joint venture would not take place. For instance, the six investors had to obtain the environment clearance from the Mantralaya/Govt. Of Maharastra Within no time, it was declared that the said six companies had failed to fulfill the terms and conditions of the agreement. Therefore, these six companies had no option, but to accept the offer made by the appellant. The offer was that the appellant company was to buy back the shares at the face value. The six companies had to forgo/forfeit the premium/investment. The joint venture agreement itself is sham agreement meant to be discarded as soon as its purpose is served. The terms and conditions of the said agreement are such that the onus of obtaining environment clearance from the state Government is put on the six companies and not on the appellant company. Why these six companies would take this impossible responsibility and put themselves in a condition where there monies are surely to be lost? Why the investors risk their investment doubly when the company itself is struggling to survive. That is because the said agreement is not meant to be implemented for business purpose, but for accommodation entries only. The entire transactions starting from the joint venture agreement dated 15/02/2010 to the date of re-purchase of said shares at the value of Rs. 10/- per share by the directors of the appellant are colourable devices to introduce capital funds in the appellant company through fraudulent means. The cases cited by the appellant are not applicable to the facts of this case.”
9. Before us, regarding this addition of Rs. 1.5 Crore, Ld. Counsel of the assessee submitted that the said addition is unsustainable in law considering the documents filed by the assessee before the Assessing Officer and the First Appellate Authority. Relying on various decisions, Ld. Counsel of the assessee submitted that the addition made by Assessing Officer needs to be deleted.
10. On the other hand Ld. DR for the Revenue brought our attention to the contents of paper book and submitted that the said six Companies constitute “Shell Companies”. Elaborating the same, Ld. DR submitted that Shri Pradeep Gupta, was common Chartered Accountant for all these six companies. The Directors of the six companies are also common as evident from the signatures appearing on financial statement of six companies. Further, the premises of all six companies are also common. Further, Ld. DR for the Revenue submitted that the common address of all these six companies shares the address of the entry operator, Shri Jagdish Purohit. Eknath Mandavkar and Shri Praveen Sawant are the common directors with Shri Pradeep Gupta as an auditor. According to the Ld.D.R the six companies figured in the list of “Shell Companies” floated by Shri Jagdish Purohit and his chronics. These companies received money from paper companies managed and controlled by Shri Jagdish Prasad Purohit. Shri Jagdish Prasad Purohit floated more than 300 such Shell companies which were to be considered as “Shell Companies”. The outflow and inflow of the funds involved with these companies do not consider as genuine business transactions.
11. Further, Ld. DR submitted that there was search and seizure action conducted on M/s. Eshan Minerals Pvt. Ltd. on 12.09.2013 which resulted in seizure of pre-signed blank application form for allotment of equity shares, pre-signed blank sales bills, pre-signed blank receipts, pre-signed blank transfer forms and pre-signed blank declaration etc. It is inference of the Ld. DR that these six companies are involved inproviding bogus accommodation entries under the garb of investing in share capital. Shri Jagdish Purohit is the key person in orchestrating these transactions involving dummy directors and Shri Pradeep Gupta. Mentioning about Shri Jagdish Purohit, Ld. DR submitted that he is an entry operator who operated and managed a number of companies for the purpose of providing accommodation entries. The facts of Shri Jagdish Purohit to the extent of convincing that these six companies under consideration are mere paper companies, Ld. DR referred to the statement recorded on oath in certain seizure action u/s. 131 of the Act in the case of Pride Group of Pune, M/s. Benco Finance of Mumbai and M/s. Spectrum Vintrade Pvt. Ltd of Mumbai etc. Referring Shri Pradeep Gupta, CA, Ld. DR submitted that he confessed to the Department about the fact of providing professional services to float such companies on the instructions given by Shri Jagdish Prasad Purohit. Ld. DR for the Revenue further submitted that the facts relating to the “Shell Companies” and how they fall within the scope of the “Shell Companies”. Ld. DR mentioned that Assessing Officer has not given a finding of the fact that these companies constitute as “Shell Company”. Referring to various subscribed defaults in the details of these six companies who are floated by a team of Shri Pradeep Gupta and as well as Directors of these six companies, Ld. DR submitted that a comprehensive enquiry in to the facts is required in order to go into the root of the transactions involved in raising of the said Rs. 1.5 Crore in this case.
12. Replying to the above submission of Ld.D.R for Revenue, Ld. AR submitted that addition should not only be deleted in full but also it cannot be remanded to the file of Assessing Officer as Ld. DR proposed. Further, Ld. Counsel for the assessee submitted that there is no need forremanding the issue back to the file of the Assessing Officer when the entire facts are already available on the records. In this regard, he made various legal submissions and relied on various decisions. Further, explaining the income of these six companies, Ld. Counsel submitted that there are no significant business activities and therefore, income of these companies is also meager. According to the Ld. AR, the addition made by the AO involving the provisions of Section 68 of the Act is unsustainable and therefore, the same needs to be deleted. Ld. AR for assessee argued vehemently stating that all the ingredients of Section 68 of the Act are fulfilled by the assessee and in that case, invoking of the said provisions are illegal and invalid. He labored to explain on how each of the condition specified in the said provisions are met by the assessee in respect of contribution of each of the six companies.
13. We have heard both the parties and perused orders of Revenue along with case laws furnished by the both the Counsels. We also examined if all the facts relating to the nature of those six companies and the nature of transactions are on records. We also examined if the said companies constitute “Shell Companies” as alleged by the Ld. D.R for the revenue. Further, we examined the requirement of remanding the issues to the file of Assessing Officer. In our view, the enquiries undertaken by the Assessing Officer in the first round do not indicate that the Assessing Officer successfully examined if all the Directors of all these six companies along with all the Directors of assessee Company are financially interfaced. The financial activities of six companies were not deeply probed by the Assessing Officer. Assessing Officer merely spoken about meager income of the six companies. Assessee’s submissions relates to the floating of joint venture was not thoroughly examined.Assessing Officer never examined the details of the violations if any in clearing the new business venture. The fact relating to inflow of funds amounting to Rs. 1.5 Crore proposed involving the said companies were not examined by Assessing Officer. Therefore, we are of the view that Assessing Officer failed to bring out the facts for deciding if the said six companies constitutes “Shell Companies”. Assessing Officer is directed to gather relevant facts and examine the persons involved in these transactions involving the inflow of Rs. 1.5 crore. These enquiries are necessary to arrive at the correct judgment on the genuineness of the transactions. Assessing Officer shall grant reasonable opportunity of being heard to the Assessee. Without going into merit of documents placed by assessee and without going into the correctness of the addition of the said amount of Rs.1.5 Crore, we are of the view that the grounds raised by the assessee are required to be remanded to the file of Assessing Officer for fresh adjudication. Assessing Officer shall give reasonable opportunity of hearing to the assessee in accordance with law. Accordingly, grounds raised by the assessee are allowed for statistical purposes.
14. In the result, appeal of the assessee is allowed for statistical purposes.
ITA No. 1242/PUN/2014 ( By Revenue) :-
15. The Revenue raised the following grounds and the same reads as under :
“1. On the facts and in the circumstances of the case, the Hon’ble CIT(A), Nashik has erred in not granting an opportunity to the Assessing Officer under Rule 46A of the Income Tax Rules, 1962 for the additional evidences produced by the assessee before the Appellate Authority.
2. The appellant craves leave to add, alter, modify, delete amend any of the grounds with prior permission of the Hon’ble CIT, as per the circumstances of the case.
3. The appellant prays to file any of the additional evidence appropriate to the grounds taken in appeal.”
16. The facts relating to the Revenue appeal includes that Assessing Officer made addition of Rs.9,00,000/- u/s. 40(a)(ia) of the Act r.w.s194C of the Act. Assessing Officer invoked the said provisions for making addition of Rs.9,00,000/- for want of details. Assessing Officer also made another addition of Rs.4,02,07,541/- u/s.40(a)(ia) of the Act for violation of the Provisions relating to TDS. These are payments involved in purchasing raw materials.
17. In the First Appellate proceedings, the CIT(A) granted relief on both accounts. To elaborate, regarding addition of Rs. 9,00,000/-, assessee submitted that this is a case of short payment of TDS and the short payment is relatable to the sum of Rs. 90,000/- and not Rs.9,00,000/-as erroneously made out by the Assessing Officer. The CIT(A) considered the same and held that assessee defaulted only to the extent of Rs.90,000/- and, as a result the addition of Rs. 90,000/- is proper and notRs.9,00,000/-. Accordingly, CIT(A) restricted the addition of Rs.90,000/-and granted relief of Rs.8,10,000/-. After hearing both the parties, we find that the same is reasonable and it does not recall any interference. Accordingly, relevant ground of Revenue is dismissed.
18. Coming to the other addition of Rs.4,02,07,541/-, assessee submitted that he purchased raw material from M/s. Shreeya Industries and M/s. Viana Lime Industries. Assessee made all these payments and made the TDS in respect of the payments of job processing charges. However, no TDS was done on the payments for raw materials purchased. Assessing Officer invoked the provisions of Section 40(a)(ia) in respect of these payments for purchase.
19. Before CIT(A), the assessee submitted that the payments for raw material charges do not involve the deduction of TDS. Therefore, the applicability u/s.40(a)(ia) does not arise to these payments. These payments do not constitute any interest/commission for attracting the TDS provisions. Accordingly, the provision of section 40(a)(ia) and Section 194C are not applicable in this regard. Considering the said submission of the assessee, the CIT(A) granted relief.
20. We heard both the parties and we find that the CIT(A) granted relief to the assessee as per discussion given in para No. 8.2 to 8.5 of the order of CIT(A). In the said paragraph, the CIT(A) discussed the fact of non-requirement of effecting the TDS on the payments made for purchasing raw materials/finished goods from Shreeya Industries and Viana Lime Industries. The CIT(A) also gave findings that the provisions of section 194C of the Act are not applicable to the transactions of purchased goods from the said two vendors. He accordingly granted relief to the assessee on this count. We find that the same is reasonable and it does not recall for any interference. As such, we proceed to dismiss grounds of appeal raised by the Revenue and accordingly, the same is dismissed.
21. In the result, appeal of the Revenue is dismissed.
22. To sum up, the appeal of the assessee is allowed for statistical purposes and appeal of Revenue is dismissed.
Order pronounced 18th day of October, 2017.