Russian Technology Centre Pvt. Ltd., ... vs Assessee

ITA NOS. 4635 & 4708/Del/2013 & ITA NO. 4718/DEL/2013

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "F", NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. Nos.4635 & 4708/Del/2013 A.YRS. : 2004-05 & 2008-09 ACIT, M/S RUSSIAN CENTRAL CIRCLE-13, TECHNOLOGY CENTRE Room No. 332, ARA PVT LTD., Centre, A-1/20, Safdarjung Jhandewalan Extension, Enclave, New Delhi New Delhi (PAN:AACCR7102D) (APPELLANT) (RESPONDENT) AND I.T.A. NO. 4713/Del/2013 A.Y. : 2008-09 M/S RUSSIAN DCIT, TECHNOLOGY CENTRE CENTRAL CIRCLE-13, PVT LTD., Room No. 332, ARA A-1/20, Safdarjung Centre, Enclave, New Delhi Jhandewalan (PAN:AACCR7102D) Extension, New Delhi (APPELLANT) (RESPONDENT)

Department by : Sh. Vivek Wadekar, CIT(DR) & Sh. Vikram Sahay, Sr. DR Assessee by : Sh. Ajay Wadhwa, Advocate

Date of Hearing : 15-1-2015

Date of Order : 19-1-2015

ORDER

PER H.S. SIDHU : JM

These are the Cross Appeals filed by the Revenue as well as Assessee emanate out of separate Orders dated 23.5.2013 passed by the

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Ld. CIT(A-I)- New Delhi pertaining to assessment years 2004-05 & 2008-

09.

2. The grounds raised in the Revenue's Appeal 4635/Del/2013 (AY. 2004-05) reads as under:-

"1. The order of Ld. CIT(A) is not correct in law and facts.

2. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 10,50,000/- made by the AO on account of unexplained unsecured loan received by assesee company without appreciating the fact that the creditworthiness of the lendor of the loan could not be proved by the assessee and the assesee has not produced any documentary evidence to prove the capacity of M/s Ahura Exports Pvt. Ltd. to pay such loan.

3. The appellant craves leave to add, amend any / all the grounds of appeal before or during the course of hearing of the appeal."

3. The grounds raised in the Revenue's Appeal 4708/Del/2013 (A.Y. 2008-09) read as under:-

"1. The order of the Ld. CIT(A) is not correct in law and facts.

2. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 2,18,74,410/- made by the AO on a/c of unexplained share capital received by assessee company without appreciating the fact that the creditworthiness of the investors could not be proved by the assessee.

3. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.

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12,20,000/- made by the AO on a/c of unexplained unsecured loan received by the assessee company without appreciating the fact that the creditworthiness of the lenders and the genuineness of the transaction could not be proved by the assessee.

4. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 30,51/- made by AO on a/c of disallowance of interest on loan as claimed by assessee without appreciating the fact that the creditworthiness of the lenders of the loan and the genuineness of the transaction could not be proved by the assessee.

5. The appellant craves leave to add, amend any / all the grounds of appeal before or during the course of hearing of the appeal."

4. The grounds raised in the Assessee's Appeal 4713/Del/2013 (A.Y. 2008-09) read as under:-

"1. On the facts and in the circumstances of the case the Ld. CIT(A) is not justified in treating the fee paid to ROC as capital expenditure when the increase in authorize capital was of the purpose of raising money to meet working capital needs of the company.

2. The appellant craves leave to alter, amend or add any other ground of appeal either before or during the hearing."

REVENUE'S APPEAL (ITA NO. 4635/DEL/2013)

5. Briefly stated the facts are that a search and seizure operation u/s. 132(1) of the I.T. Act, 1961 was carried on 28.2.20078 at the premises of Sh. Suresh Nanda and Associate companies. The office / residential premises of M/s Russian Technology Centre Pvt. Ltd., at A-1/20,

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Safdarjung Enclave, New Delhi was also covered under search proceedings. The case was centralized in this charge by order passed by CIT-5, New Delhi dated 6.11.2007. Notice u/s. 153A of the I.T. Act dated 9.9.2008 was issued and served upon the assessee to file income tax return for the year under consideration being one of the six assessment years proceeding to the asstt. year relevant to the previous year in which the search was conducted in respect of which, the assessee is assessable. In response to the notice issued u/s. 153A, the assessee filed its return of income on 8.12.2008 declaring NIL income. Notice u/s. 143(2) of the I.T. Act, 1961 dated 10.12.2008 was issued and served to the assessee fixing the case for hearing on 12.12.2008. Another notices u/s. 142(1) dated 8.12.2008 and 19.12.2008 were issued and served to the assessee. In response assessee's counsel filed the details. From the perusal of the balance sheet filed by the assesee, AO found that assessee has taken unsecured loans of Rs. 10,50,000/- during the year. AO asked the assessee to furnish some more details and he has examined the same and noticed that details does not prove the credit worthiness of the persons i.e. M/s Ahura Exports P. Ltd., a company owned by Mr. Bipin B. Shah, from whom the unsecured loan has been taken. AO observed that the onus is on the assesse to prove that the said party have the financial capacity and the credit worthiness. By not filing the complete details called for, the assessee company has not discharged its onus. Therefore, in view of the partial details furnished by the assessee company, the unsecured loan taken by the assessee amounting to Rs. 10,50,000/-. AO treated as unexplained and added to the income of the assesee company vide his order dated 29.12.2008 passed u/s. 143(3) r.w.s. 153A and 153B of the I.T. Act, 1961.

6. Against the aforesaid assessment order dated 29.12.2008 passed under section 143(3) r.w.s. 153A and 153B of the I.T. Act, 1961, assessee appealed before the Ld. First Appellate Authority, who vide impugned Order dated 23.5.2013 partly allowed the appeal of the assessee wherein he deleted the addition of Rs. 10,50,000/-.

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7. Against the order dated 23.5.2013 of the Ld. CIT(A), Revenue filed an appeal before us.

8. We have heard both the parties and perused the records. We find that Ld. CIT(A) while deciding the issue has observed that assessee filed certain supporting documents which were sent to the AO for comments. The AO has objected to the admission of these documents vide a Report dated 18.3.2011 stating that the assessee had been provided sufficient opportunity during the assessment proceedings and it was for the assessee to establish its claim which it failed to do. He further observed that as per Para 3 of the assessment order, the assessee was required to furnish the following details:

"Procedure the evidence to prove the identity, capacity and genuineness of the persons related with the increase in the share capital and increase in unsecured loans. Please furnish the details of the bank accounts of the depositor with cheque no. and date copy of the acknowledgement of return of income. Give the details of the cheque numbers through which the repayment, if made along with the copy of your bank account showing the withdrawal such cheque. (details related to unsecured loans/ advances as well as share capital addition, if any.) Furnish the same details in respect of increase in unsecured loans including squared up loans also.

8.1 He further observed that as per Para 3.1 of the assessment order, the following reply was filed by the assessee:

"During the year the assessee company has accepted loan of Rs. 10,50,000/- from M/s Ahura Exports P Ltd. by DD No. 080587 dated 23.2.2004, interest of Rs. 87413/- has been paid during the FY

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2014-15. The loan has been repaid during the FY 2004-05. TDS has been duly deducted and deposited in Government Account. The sum has been repaid vide cheque no. 211662 dated 14.9.2004 drawn on Union Bank of India. Ledger account and confirmation letter are enclosed for ready reference."

8.2 We further find that Ld. CIT(A) has elaborately discussed the matter and has observed that aforesaid amount was borrowed during FY 2003- 04 and repaid during FY 2004-05. Interest was duly paid for the period of borrowing on which TDS was duly deducted and paid to the Government Account. The amount was taken through DD and returned by cheque. We find that Ld. CIT(A) has observed that in view of these details, no further evidence was required to establish the transaction. These facts are not disputed. There is no evidence in the search conducted on the assessee, no evidence could be unearthed to this effect. Therefore, we find that Ld. CIT(A) has rightly observed that the addition made is not legally sustainable and the same was deleted. In view of the above, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the impugned order dated 23.5.2013 passed by Ld. CIT(A) by dismissing the Appeal filed by the Revenue.

REVENUE'S APPEAL (ITA NO. 4708/DEL/2013)

9. The brief facts of the case are that the assessee company is engaged in the business of supply of spares to government, PSUs and others. It also undertakes small repair works including AMC in its office at Goa. The return of income was filed on 30.9.2008 declaring a total loss of Rs. 1,18,21,587/-. The notice u/s. 143(2) was issued on 25.9.2009 and served on the assessee. A notice u/s. 142(1) and a detailed questionnaire was issued on 13.9.2010. In response Sh. Aran Ahuja, a Director of the company attended the proceedings from time to time and filed the necessary details. After considering the details, the AO completed the

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assessment u/s. 143(3) of the I.T. Act, 1961 vide its order dated 11.11.2010 and made the various additions.

10. Against the aforesaid assessment order dated 11.11.2010, assessee appealed before the Ld. First Appellate Authority, who vide impugned Order dated 23.5.2013 partly allowed the appeal of the assessee wherein he deleted the some additions.

11. Against the order dated 23.5.2013 of the Ld. CIT(A), Revenue filed an appeal before us.

12. We have heard both the counsel and perused the records.

12.1 With regard to deleting the addition of Rs. 2,18,74,410/- made by the AO on account of unexplained share capital received by the assessee company is concerned, we find that AO has noticed that these details submitted by the AO do not prove the creditworthiness of the investors. The onus is on the assessee to prove that the said parties, have the financial capacity and the creditworthiness to give such a huge amounts. By not filing the complete details called for, the assessee company has not discharged its onus. Therefore, in view of the partial details furnished by the assessee company, the share capital addition amounting to Rs. 2,18,74,410/- is treated as unexplained and added to the income of the assessee company. We also find that during the appellate proceedings Ld. AR drawn attention to the Ld. CIT(A) towards the decision of the ITAT, Delhi dated 12.4.2013 in assessee's own case in Appeal Nos. 4923, 4933, 5390 & 5391/Del/2011, wherein various aspects of the matter have been examined by the ITAT, as under:-

(i) Whether the evidence adduced by the Appellant as mentioned in comparative chart attached in support of identity of the lender/investor, genuineness of the transaction and ability has been established and appellant has discharged its onus?

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(ii) Whether the pre-condition in section 68 regarding establishing "source" is mandatory only in the case of money received from "resident" and not necessary in the case of "non-resident" particularly in view of the amendment to section 68 effective AY 2013-14.

(iii) Whether section 68 or 69 would apply only when the income is otherwise taxable uls 5(2) in the hands of non- residents who remits the money.

1. RTCPL is a subsidiary of Russian Technology Centre Holding Ltd. (RTCHL) based in Tortola BVI, the shares of RTCPL being held by the holding company RTCHL and M/s Protex Trading Company Ltd., (PTCL) Seychelles. During the year under appeal various amounts were received by the Indian company from its holding company and PTCL towards share capital. The AO was not satisfied with the explanation and was of the view that the share capital provided by the appellant company was not genuine and the amount was channelized by RTCPL through tax haven. The AO held that the assessee has not established the financial capacity and creditworthiness of the shareholders. The Commissioner of Income Tax (Appeals) upheld the addition made by the AO concluding that creditworthiness or the financial strength of the creditor/subscriber has not been established in the absence of relevant bank statements of the subscriber and bank certificates are not sufficient to establish source.

2. The Hon"ble ITA T decided the first issue vide para no.11, pg.no.18 as under:-

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"The availability of balance-sheet, certificate of incorporation, confirmations and certificates of good standing etc. filed by the assessee in respect of shareholders establish that they are non- resident entities having independent and legal existence. The moneys have come to assessee through banking channels as is 'evident from FIRC, which also mentions the purpose of remittance and also the particulars of the remitting bank. FIPB approval that too with a liberty to collect share capital up to 600 crores and ROC compliance, etc., clearly indicate the stand of the assessee. In our considered view, the plethora of the evidence filed by the assessee amounts to discharge of primary burden cast on the assessee in terms of sec.68 of the LT. Act for identity and creditworthiness of the creditors and genuineness of transaction. "

3. The second issue regarding applicability of section 68 to receipt of money towards share capital from non-resident was discussed in para no.l1.4, 11.5 at pg.22 as under:-

"11.4 The proviso of section 68 though inserted with effect from 1.4.2013 also reveals legislative intent that if the share holder is a non-resident and the money is by way of remittance from his account, the rigor of section 68 would not be applicable."

"11.5 We find merit in the contentions of Id. Counsel and reliance on the decisions of the ITAT in the cases of Finlay Corporation, Smt. Sushila Ramaswamy and Saraswati Holding (supra) and the import of CBDT Circular referred to above.

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Whenever remittances are made by the non- resident holding company for purchase of shares of its subsidiary in India, the money undoubtedly is capital in the nature and, if documents like FIRC etc. are produced, it can safely be stated that the said money came in through banking channels.

11.6 In the absence of any evidence to show that the money remitted by the non-resident accrued in India, it cannot be held to be taxable in India. Hence, moneys remitted by non-residents whose identify is not in question through their bank accounts outside India have to be held as capital receipts not exigible to tax. It therefore naturally follows that if the identity of the non-resident remitter is established and the money has come in through banking channel, it would constitute a capital receipt and ordinarily cannot be treated as deemed income under section 68 or 69 of the Act. This is clarified by the CBDT Circular itself."

4. The third issue regarding applicability of section 68 to receipt of money towards share capital from non-resident was discussed in para no.13 at pg. 20 to 21 as under:-

"In our considered opinion, the conflict between the provisions is only with reference to the onus and not to the issue of taxability of income. The onus is shifted under ss.68 or 69 only with reference to the income which is otherwise taxable in the hands of non-resident under s.5(2). Therefore, the issue whether the income of non-resident is taxable or not is still to be decided with reference to the provisions of s. 5(2) and, the provisions of s.68 or 69 cannot enlarge the scope of s. 5(2). What is

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not taxable under s. 5(2) cannot be taxed under the provisions of s.68 or s.69. Under s. 5(2), the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought in India by way of remittances. For example, there may be appearing an entry of cash credit in the name of a person of USA by way of loan received through cheque and deposited in the bank account maintained at any city in USA. Such money, being. received outside India, cannot be taxed under s. 5(2) unless it is proved that such money is relatable to the income accrued or arising in India. Therefore, the same cannot be taxed under s.68 merely on the ground that assessee fails to prove the genuineness and source of such cash credit. Therefore, we are of the considered view that provisions of s. 68 or 69 would be applicable in the case of non- resident only with reference to those amounts whose origin of source can be located in India. Therefore, the provisions of s. 68 or 69, in our opinion, have limited application in the case of non-resident".

5. The Tribunal concluded in para nO.l1.7 at pg.no.23/24 as under:-

"Taking into consideration of all the above, we find merit in the argument of the Id. Counsel for the assessee that the primary burden cast on the assessee was duly discharged. The issue of primary onus is to be weighed on the scale of evidence available on the record and the discharge of burden by the assessee is also to be decided on the basis of documents filed by the assessee and facts and circumstances of each case and on that

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basis a reasonable view is to be taken as to whether the assessee has discharged the primary onus of establishing the identity of share applicant, its creditworthiness and genuineness of the transaction. From the documents filed during the course of assessment and before CIT(A), the independent existence of the share applicants in Russia .is clearly established. The assessee's application to FIPB for raising the capital contains all the relevant details which is favourably accepted by the Board, particularly by allowing the assessee to raise further the capital without approaching the FIPB. The transactions are through banking channels. Thus the gamut of evidence does not leave any doubt in the discharge of primary burden of the assessee. On the issue CBDT Circular and Finlay Corporation judgment (supra) also we are in agreement with the Id. Counsel for the assessee that in these circumstances of the case moneys remitted by non- residents through banking channel outside India has to be held as capital receipts, not exigible to tax and cannot be treated as deemed income on the fictions created by sections 68 and 69 of the Act."

Respectfully following decision of Hon'ble ITAT Delhi in appellant's own case, the addition of Rs.2,18,74,410/- on account of share capital infused into the appellant m any by its non-resident company is deleted."

12.1.1 We have gone through the issue in dispute as well as above said order passed by the ITAT, Delhi Bench 'G', we are of the view that Ld. CIT(A) has decided the issue in dispute by respectfully following the order of the ITAT, Delhi Bench and deleted the addition in dispute, hence, we do not find any infirmity in the impugned order of Ld. CIT(A) and, hence, we uphold the same.

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12.2 With regard to deleting the addition of Rs. 12,20,000/- made by the AO on account of unexplained unsecured loan received by the assessee company is concerned, we find that AO has observed that assessee has only submitted a confirmation from Sh. S. Sreekanth regarding the loan and no details have been submitted by the assessee in respect of the unsecured loans, the amount of Rs. 12,20,000/- and he treated the same as unexplained and added to the taxable income of the assessee. We also find that Ld. CIT(A) has observed that he did not find that any evidence was unearthed during the search conducted on the assessee to indicate that these amounts were not genuine. Having searched the assessee and failed to get any evidence, it is not legally tenable for the Revenue to allege that the assessee has failed to prove the transactions. Ld. CIT(A) has further observed that once assessee gives some details the burden shifts on the Revenue to disprove the claim made. Else, the claim has to be accepted. When loans / advances taken through the banking channel and returned through the banking channel it cannot be doubted in the absence of evidence to the contrary. We find force in the conclusion drawn by the Ld. CIT(A) that as there is no evidence to the contrary, the additions made are not legally sustainable and are rightly deleted. In view of the above, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the same.

12.3 With regard to deleting the addition of Rs. 30,511/- made by the AO on account of disallowance of interest on loan as claimed by the assessee company is concerned, we find that AO on perusal of the profit and loss accounts and the other details submitted by the assessee has observed that the assessee has paid Rs. 3200/- as interest to M/s United Marketing and Rs. 27311/- as interest to Mr. S. Sreekanth. Since the loans received from these parties have already been treated as unexplained, the interest on the same cannot be allowed as an expenses. Hence, a total amount of Rs. 30,511/- he disallowed. We find that Ld. CIT(A) has concluded that this ground of appeal is consequential to the fourth ground of appeal dealt while deleting the addition of Rs. 12,20,000/- above. Since relief has been

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allowed in the main ground, the consequential ground as to allowed. The disallowance of interest paid he deleted. In view of above, we do not find any infirmity in the order of the Ld. CIT(A) and hence, we uphold the same. In the result, the appeal filed by the Revenue stands dismissed.

ASSESSEE'S APPEAL (ITA NO. 4713/DEL/2013)

13. With regard to addition of Rs. 1,26,556/- treating the fee paid to

ROC as capital expenditure when the increase in authorize capital was for

the purpose of raising money to meet working capital needs of the

company is concerned, we find that during the assessment proceedings

AO has noted that assesee has charged Rs. 1,26,556/- to profit and loss

account as "Filing Fees. After submitting the explanation by the assesee

to the AO, the Assessing Officer noted that the expenditure on issue of

shares and the fees paid to the Registrar of the Company is capital in

nature. Expenditure incurred by a company in connection with issue of

share with a view to increase its share capital, is directly related to the

expansion of the capital base of the company, and is capital expenditure,

even though it may incidentally help in the business of the company and

in the profit making. Hence, the same cannot be allowed as revenue

expense. In support of this decision Ld. AO has relied upon the various

judicial decisions. We find that Ld. CIT(A) on this issue has concluded that

the matter is judicially well settled in Revenue's favor by rulings of the

Apex Court in PSIDC vs. CIT 225 ITR 792, Brooke Bond vs. CIT 225 ITR

798 and CIT vs. Kodak India Ltd. 229 ITR 445. After hearing the both

parties and perusing the orders passed by the revenue authorities on the

issue in dispute, we are of the view that Ld. First Appellate Authority has

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rightly decided the issue in dispute against the assessee in view of the

aforesaid decisions of the Hon'ble Supreme Court, hence, we uphold the

impugned order on this issue and dismiss the Appeal filed by the

Assessee.

14. In the result, all the Appeals filed by the Revenue as well as Assessee stand dismissed.

Order pronounced in the Open Court 19-1-2015.

Sd/- Sd/-

[T.S. KAPOOR] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 19/1/2015

"SRBHATNAGAR"

Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT

TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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