M/S. Xerces Technologies Pvt. Ltd.,, vs Department Of Income Tax

Xerces Technologies Pvt. Ltd., Dy. Commissioner of A-3/101, Camelot, Lohegaon, Income Tax, Vs. Viman Nagar, Pune-411014 Circle - 7, Pune (Appellant) (Respondent) PAN No. AAACX0419K

ITA No. 2243/PN/2013 Assessment Year : 2008-09

Dy. Commissioner of Income Tax, Xerces Technologies Pvt. Ltd., Circle - 7, Pune A-3/101, Camelot, Lohegaon, Vs. Viman Nagar, Pune-411014 (Appellant) (Respondent) PAN No. AAACX0419K

Revenue By: Shri Santosh Kumar Assessee By: Shri Pramod Shingte

Date of hearing : 29-04-2015 Date of pronouncement : 10-06-2015

ORDER

PER VIKAS AWASTHY, JM:-

These are cross appeals filed by the assessee and Revenue

assailing the order of Commissioner of Income Tax (Appeals)-III, Pune

dated 21-10-2013 for the assessment year 2008-09.

2. The assessee in its appeal has raised two grounds:

(i). Confirmation of the addition of Rs.40,00,702/- as unsecured

loan received from one of its Director.

2 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

(ii). Ad-hoc disallowance of Rs.2,00,000/- from total expenses of

Rs.21,18,054/-.

3. The Revenue in its appeal has raised three grounds. However, the

crux of grounds raised is, admission of additional evidence in violation of

Rule 46A of the Income Tax Rules, 1962.

4. The brief facts of the case as emanating from records are: The

assessee is a private limited company and is engaged in the business of

software development. The assessee filed its return of income for the

impugned assessment year on 29-01-2009 declaring total income of

Rs.9,58,520/-. During the course of scrutiny assessment the Assessing

Officer made certain additions/disallowance in the income returned by

the assessee.

Aggrieved by the assessment order dated 30-12-2010, the assessee

preferred an appeal before the Commissioner of Income Tax (Appeals).

Before the First Appellate Authority the assessee furnished certain

documents which were not produced by him before the Assessing Officer.

The Commissioner of Income Tax (Appeals) in order to comply with the

provisions of Rule 46A of the Income Tax Rules, sent the documents to

Assessing Officer for comments and report. The Assessing Officer vide

remand report dated 10-07-2013 inter alia objected to acceptance of

fresh evidence at the first appellate stage. After considering the

comments of the Assessing Officer in remand report, submissions of the

assessee and documents placed on record, the Commissioner of Income

Tax (Appeals) partly accepted the appeals of the assessee and deleted the

addition with respect to - (i) Disallowance of consultancy charges, (ii)

Disallowance of depreciation, (iii) Treating of unsecured creditors as 3 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

income u/s. 41(1) of the Act and (iv) Restricted disallowance of other

expenses to Rs.2,00,000/-. The Commissioner of Income Tax (Appeals)

confirmed the disallowance of unsecured loans Rs.40,00,702/- allegedly

extended by the Director of the assessee company.

Against these findings of the Commissioner of Income Tax

(Appeals) both, the assessee and the Revenue are in appeal before the

Tribunal.

5. Shri Pramod Shingte appearing on behalf of the assessee

submitted that Shri Xerces Mullan is the promoter Director of the

assessee company. Since, the operations of the assessee company had

just commenced the bank account of Shri Xerces Mullan was operated

like a current account on behalf of the assessee. From the said bank

account cheques were issued on behalf of the assessee company. The ld.

AR further submitted that balance outstanding represents accumulated

balance on account of series of transactions. The ld. AR in support of

his submissions placed on record ledger Loan account of Director Shri

Xerces Mullan in the books of the assessee. The ld. AR contended that

the Director of the company had furnished confirmation letter and copy

of PAN Card. With respect to second ground of appeal the ld. AR

contended that ad-hoc addition of Rs.5,00,000/- was made by the

Assessing Officer. The Commissioner of Income Tax (Appeals) has

reduced the same to Rs.2,00,000/-. The addition has been made

without any basis. The Commissioner of Income Tax (Appeals) ought to

have deleted the addition in the absence of any adverse material. With

respect to the appeal of the Revenue the ld. AR contended that the

documents furnished by the assessee before the Commissioner of

Income Tax (Appeals) were forwarded to the Assessing Officer. The 4 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

Commissioner of Income Tax (Appeals) after considering remand report

deleted the additions.

6. On the other hand Shri Santosh Kumar representing the

Department vehemently supported the findings of Commissioner of

Income Tax (Appeals) with respect to disallowance of unsecured loans

and confirming the disallowance of other expenses. The ld. DR

contended that the documents furnished by the assessee in respect of

unsecured loans of the director were all self serving documents.

Although the assessee had furnished the information of the persons who

had extended loan, however, creditworthiness of the Director was not

established. The Director had returned his total income for the

assessment year 2008-09 as Rs.1,50,820/- only. Whereas, the alleged

loan extended by him to the assessee is more than Rs.40,00,000/-. The

source for funding loan amount was not established.

In respect of appeal by the Revenue the ld. DR submitted that the

assessee had furnished certain documents for the first time before the

Commissioner of Income Tax (Appeals). The Assessing Officer had given

sufficient opportunity to the assessee to submit the documents in

support of its contentions. However, the assessee deliberately withheld

the information and relevant documents for the reason best known to it.

The Commissioner of Income Tax (Appeals) admitted the documents and

granted relief to the assessee in violation of Rule 46A of the Income Tax

Rules.

7. We have heard the submissions made by the representatives of

both the sides and have perused the orders of the authorities below. We

will first take the appeal of the Revenue. The Revenue has assailed the 5 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

order of Commissioner of Income Tax (Appeals) on the ground that the

additional evidence produced by the assessee was accepted without

recording the reasons and in violation of Rule 46A of the Income Tax

Rules.

8. It is an undisputed fact that the assessee for the first time had

furnished certain documents before the Commissioner of Income Tax

(Appeals) in support of its claim. The assessee ought to have furnished

said documents at the first instance before the Assessing Officer.

However, the Commissioner of Income Tax (Appeals) forwarded the entire

set of documents furnished by the assessee to the Assessing Officer for

his comments. The Assessing Officer filed remand report dated

10-07-2013 after examining the documents. Thus, the Commissioner of

Income Tax (Appeals) had granted reasonable opportunity to the

Assessing Officer to examine the documents produced by the assessee

before him. Thus, the contention of the Revenue that the provisions of

Rule 46A have been violated is not accepted. Therefore, the appeal of the

Revenue is dismissed being devoid of merit.

9. Now, we proceed to decide the issue raised in appeal of the

assessee. The first ground of appeal is with respect to disallowance of

Rs.40,00,702/- in respect of unsecured loan from the Director of the

company. The Commissioner of Income Tax (Appeals) rejected the

contentions of the assessee with the following observations:

"It is settled position of law that to accept a credit as genuine, the assessee has to necessarily establish the identity of the person, genuineness of the transaction and creditworthiness of the person. In the present case, the documentary evidence adduced establishes the identity of the person. However, merely because a creditor has been identified, it is not enough to show that the onus placed on the 6 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

appellant is discharged. What is further required is sufficient evidence to show the creditworthiness of the creditors and genuineness of loans. The copy of the return of income filed shows that the creditor has returned a mere total income of Rs.1,50,820/- for the A.Y. 2008-09 while the credit balance shown to be outstanding in his name is Rs.40,00,702/-. As per the ledger a/c extract furnished, the entire expenditure is incurred during the year itself. The appellant has also not furnished the bank account extract of the said person from whom the expenditure is claimed to be incurred nor the capital account or balance sheet to show his financial capacity to lend money to the extent being claimed. Thus, even though the creditor in question happens to be a Director of the company and his identity stands established, the appellant has failed to prove the creditworthiness of the creditor to advance money to the appellant to the extent being claimed with cogent evidence. In the circumstances, it would appear that the undisclosed income of the appellant was introduced in the name of the said person. At this juncture, reference can be made to the following decision of Calcutta High Court.

CIT Vs. Precision Finance Limited 208 ITR 465 (Cal) It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Mere payment by account payee cheque is not sacrosanct not can it make a non- genuine transaction genuine."

10. Before us the assessee has filed loan account of the Director in the

books of the assessee company. However, the question raised by the

Commissioner of Income Tax (Appeals) regarding the source of funding

the assessee company remained unanswered. The Commissioner of

Income Tax (Appeals) had raised a very valid doubt, that is, if the

Director has returned his income of Rs.1,50,820/- in the assessment

year 2008-09, how he can extend loan of Rs.40,00,702/- to the assessee

company. The ld. AR has not been able to place on record for any cogent 7 ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

evidence in the form of bank statement, statement of asset and liability

of the assessee etc. to dispel the shadow of doubts. It is a well accepted

principle that to accept a credit as genuine all the three conditions i.e.

identity of person who has accepted the loan, genuineness of transaction

and creditworthiness of the person extending loan has to be satisfied. If

any of the aforesaid conditions are absent the loan transaction comes

under cloud. In the present case the assessee has not been able to

establish the creditworthiness of the Director of the company who has

purportedly extended loan. We concur with the findings of the

Commissioner of Income Tax (Appeals) on this issue. Accordingly, this

ground of appeal of the assessee is dismissed.

11. The second ground raised by the assessee is with respect to ad-hoc

disallowance of Rs.2,00,000/- under the head 'Other Expenses'. The

assessee has claimed certain expenses total amounting to

Rs.21,18,054/-. The details of the same are as under:

Travelling expenses : Rs.9,57,869/-

Telephone expenses : Rs.3,04,604/-

Office expenses : Rs.6,55,415/-

Business promotion expenses : Rs.2,00,166/-

Total : Rs.21,18,054/-

In the absence of details of expenditure, the Assessing Officer

made ad-hoc disallowance of Rs.5,00,000/-. In the first appeal the

Commissioner of Income Tax (Appeals) examined each and every

expenditure and thereafter, reduced the disallowance to Rs.2,00,000/-.

We do not find any infirmity with the findings of the Commissioner of

Income Tax (Appeals). Accordingly, this ground of appeal of the assessee

is also dismissed.

8

ITA Nos. 2087 & 2243/PN/2013, A.Y. 2008-09

12. In the result, the appeal of the Revenue, as well as, assessee are

dismissed being devoid of merit.

Order pronounced on Wednesday, the 10th day of June, 2015

at Pune

Sd/- Sd/-

(R.K. PANDA) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 10th June, 2015 RK/PS

Copy to

1 Assessee 2 Department 3 The CIT(A)-III, Pune 4 The CIT-IV, Pune 5 The DR, ITAT, "B" Bench, Pune. 6 Guard file.

//True Copy//

By Order

Private Secretary, Income Tax Appellate Tribunal, Pune