Sri Simhadri Ponnaluru Reddy, Bangalore V. Deputy Commissioner of Income Tax, Circle - 3(1)(1), Bangalore

ITA 1106/BANG/2019

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 0455 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 19-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Additional evidence; Sham transactions; Bogus
• Section: 131; 37; 133(6); 43; 13

Judgement Text

ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.1106/Bang/2019 Assessment Year: 2015-16 Sri Simhadri Ponnaluru Reddy 439, 11 th Main, 3 rd Cross, 3 rd Block Koramangala Bengaluru 550 034 PAN NO : ACHPK6145K Vs. Deputy Commissioner of Income-tax Circle-3(1)(1) Bengaluru APPELLANT RESPONDENT Appellant by : Shri Ravi Shankar, A.R. Respondent by : Smt. Priyadarshini Baseganni, D.R. Date of Hearing : 05.07.2022 Date of Pronouncement : 05.07.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of CIT(A) dated 19.3.2019. The assessee has raised various main grounds. However, he confined to his argument with regard to disallowance of Rs.43 lakhs with regard to payment to P. Bhavana Reddy and Meghana Reddy, who are the daughter of assessee and Hemanga P. Chappia, an employee with First Security Pvt. Ltd. of which the assessee was Managing Director towards professional fees paid. The other ground argued by assessee is with regard to addition made u/s 41(1) of the Income-tax Act,1961 ['the Act' for short] at Rs.45,61,240/-. Various other grounds raised by assessee were not ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 2 of 15 pressed before us and the Ld. A.R. made an endorsement to this effect. Accordingly, all the other grounds other than the above two grounds are dismissed as not pressed. 2. The assessee also raised additional grounds along with petition as follows:- 1. “Without prejudice, the addition under section 37 of the Act amounting to Rs. 43,00,000/- could not. have been made as the recipients have offered the sums received as their income and accordingly the transaction is tax neutral and there is no prejudice caused to the revenue on the facts and circumstances of the case. 2. The appellant craves leave to add, alter, modify, delete or substitute any or all of the grounds at the time of hearing the appeal. 3. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed and appropriate relief may be granted in the interest of justice and equity.” 3. The Ld. A.R. submitted that these grounds do not involve any investigation of any fresh facts, otherwise on record of the department and also pure question of law and prayed that the additional ground may be admitted and disposed of on merits in the advancement of substantial cause of justice and placed reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT reported in 229 ITR 383 and also the judgement of Hon’ble Karnataka High Court in the case of Gundathur & Ors. Vs. CIT 70 ITR 70. 4. We have heard both the parties and perused the materials available on record on the admission of additional grounds. In our opinion, there is a good and sufficient reason for not raising these additional grounds on earlier occasion and accordingly, in the .1` ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 3 of 15 interest of justice, we admit these additional grounds for adjudication. 4.1 The assessee also filed additional evidences along with petition for admission of additional evidence and submitted that these additional evidences were not filed before the lower authorities on the reason that the details are not pertaining to the impugned assessment year 2015-16 but was relating to the assessment year 2011-12 onwards and upto assessment year 2014-15. The submission of the assessee regarding additional evidences is as follows:- “Simhadri P Reddy, the assessee; residing at No. 439, nth Main Road, 3rd Cross, 3rd Block, Koramangala, Bangalore - 560034 , being conversant with the facts of the case do hereby solemnly affirm and state on oath as under:- 1. That being, aggrieved by the order of assessment passed by the learned assessing officer under section 143[3] of the Income Tax Act, 1961 dated 15/12/2017 passed by DCIT, Circle 3(1)(1) Bangalore, an appeal was preferred before the learned Commissioner of Income-tax [Appeals] — 3, Bangalore, in ITA No. 65/CIT(A)-3/BNG/2017-18 by the assessee. 2. That, the learned Commissioner of Income-tax [Appeals] — 3, Bangalore vide his order dated 19/03/2019 dismissed the appeal preferred by the assessee thereby confirming the additions made by the learned assessing officer. 3. That being aggrieved by the order passed by the learned Commissioner of Income-tax [Appeals] — 3, Bangalore the assessee has preferred an appeal before this Hon'ble Income-tax Appellate Tribunal, Bangalore Bench, Bangalore for the impugned assessment year 2015-16 in ITA No. 1106/Bang/2019. 4. That during the course of hearing proceedings before the first appellate authority and also before the learned Assessing Officer, certain details in support of the case could not have been filed or produced before the authorities below due to non-compilation and non-availability of certain relevant papers and documents in support of the case which are serially numbered from 01 to 07 of the accompanying paper book dated 15/06/2022. 5. That, the following are the additional evidences which are placed for the appreciation of facts and for adjudicating of the present appeals which has been preferred before this Hon'ble Tribunal: ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 4 of 15 i) Copy of open offer for purchase of shares in M/s. Shakti MFT- DOR Ltd., dated 28.1.2010. ii) Copy of delisting offer of M/s. Shakti MFT-DOR Ltd., from the stock exchange, dated 3.11.2010. (iii) Copy of mail correspondence, dt: 16/06/2011, discussing the terms of the Shareholders Agreement, with the related parties. (iv) Copy of Share Holders Agreement, with M V SS Subba Raju and others, dt: 12/07/2012 (v) Copy of Share Purchase agreement, with M V S S Subba Raju and others, dt: 12/07/2012. (vi) Copy of non-compete and non-solicitation agreement, dt:12/07/2012. (vii) Copy of email correspondence dt:24/07/2012, seeking confirmation of transfer of shares to the demat account. 6. That, the reason for not filing the above mentioned additional evidences before the authorities below was that the details were not pertaining to the impugned assessment year, i.e. AY 2015-16, but was relating to the AY 2011-12 onwards and up to AY 2014-15. The assessee, due to ignorance of the fact that the above said documents could easily demonstrate that the creditors have been assisting the assessee for over three years, has inadvertently not filed the above documents before the lower authorities. 7. The assessee submits that the above documents are not germane to the claim of expenditure in the AY 2015-16, rather only demonstrates that a large volume of documentation was done prior to the AY 2015-16, which has culminated in the earning of income in the AY 2015-16. The assessee submits that the creditors have assisted him primarily in drafting the documents, proof reading, verifying the particulars, etc and the assessee submits that the voluminous work would not have been possible by him alone. 8. The documents were also confidential in nature and was relating to the services rendered by the assessee, for assisting in an open offer for purchase of shares, delisting the said company from the stock exchange and also in acquisition of a higher share in the company, by the foreign entity, which could not have been outsourced to third parties. 9. The above tasks entailed constant verification of voluminous drafts for filing with the authorities, to comply with the statutory regulations, contractual interest of the parties, to ensure timely completion of the entire process up to the transfer of shares and payment of monies, which required constant assistance of the persons mentioned as creditors in the assessee’s financials. 10. The creditors were engaged from the AY 2011-12 and the payments have been made periodically upto 2018-19, which is available on record of the revenue, ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 5 of 15 by virtue of the income tax returns of the respective parties, which is not in dispute. 11. That, the failure to produce the above-mentioned additional evidences was neither willful nor deliberate and the above mentioned documents in the form of additional evidences fortify the case of the assessee which are very essential for appreciation of the facts of the case. Further the additional evidences produced now herein are verifiable. 12. That, therefore, it is humbly prayed that the details and documents produced now in the form of additional evidence may kindly be admitted as an additional evidence as per Rule 29 of the Income-Tax Appellate Tribunal Rules, 1963 and appeal be disposed off on the merits of the matter for the advancement of substantial cause of justice.” 4.2 The assessee due to ignorance of the fact that the said documents could easily demonstrate that the creditors have been assisting the assessee for over 3 years, has inadvertently not filed the below documents and before the lower authorities. The assessee submitted that these documents are not germane to the claim of the expenditure in the assessment year 2015-16, rather only demonstrate that large number of documentations was done prior to the assessment year 2015-16, which was culminated in the earning of income in the assessment year 2015-16. The assessee submitted that the creditors have assisted him primarily in drafting all the documents, proof reading, verifying the drafts, etc. and the assessee submitted that voluminous work could have been possible by him alone. The documents were also confidential in nature relate to the service rendered by the assessee, for assisting in an open offer for purchase of shares, de-listing the said company from the stock exchange and also in acquisition of higher shares in the company, by the foreign entity which could not have been dispensed to third parties. The above tasks entailed constant verification of voluminous drafts for filing with the authorities, to comply with the statutory authorities, contractual interest of the parties, ensure timely completion of entire process upto the transfer of shares and payment of monies, which required constant assistant of the persons ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 6 of 15 mentioned as creditors in the assessee’s financials. The creditors were engaged from the AY 2011-12 and the payments have been made periodically upto 2018-19, which is available on record of the revenue, by virtue of the income tax returns of the respective parties, which is not in dispute. 4.3 The failure to produce the above mentioned additional evidences was neither willful nor deliberate and the above mentioned documents in the form of additional evidences fortify the case of the assessee which are very essential for appreciation of the facts of the case. Further the additional evidences produced now herein are verifiable. Therefore, it was prayed that the details and documents produced now in the form of additional evidence may be admitted as an additional evidence as per Rule 29 of the Income-Tax Appellate Tribunal Rules, 1963 and appeal be disposed of on the merits of the matter for the advancement of substantial cause of justice. Accordingly, he prayed that additional evidence may be admitted. 4.4 The Ld. D.R. not put any serious objection on this issue. 4.5 We have heard the rival submissions and perused the materials available on record. On the admission of additional evidences, in our opinion, the additional evidences are very important to decide the issue fairly. Accordingly, these additional evidences are admitted for adjudication. 4.6 Coming to the main ground of appeal with regard to disallowance of Rs.43 lakhs, the facts are as follows. The grounds of appeal 1, 2 and 3 relate - to the common issue of action of the AO in disallowing an amount of Rs.43,00,000/-. In brief, during assessment proceedings this was observed by the AO that the ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 7 of 15 assessee had debited an amount of Rs.43,00,000/- to the profit and loss account by claiming the same to be professional fee paid by him. The assessee was asked by the AO to furnish requisite details of such fee along with the relevant agreements, invoices and work done by such persons, for which fee was paid to them. In response to the same, the assessee filed written submission dated 01.12.2017. The assessee submitted that he. had entered into a contract with M/s. Hormon Beteilingungs GMBH (HBG) for assisting and facilitating acquisition of majority share holdings in M/s Shakti Met Dor Limited. The assessee submitted that for delivering those services, he had engaged services of 3 individuals namely Ms P. Bhavna Reddy, Ms P. Meghna Reddy and Sh Hemang B. Chappia. The assessee submitted that total payment of Rs.43,00,000/- was accordingly made to those three persons. The assessee also provided details of educational qualification of these three persons. The AO noted that although the assessee was specifically asked to furnish copies of agreements, invoices and details of work done by the professionals, however no such details - were furnished by the assessee. The AO noted that merely providing details of educational qualifications of those persons was not sufficient to show that they had provided any professional services to the assessee. The AO noted that in absence of details of work contracts or terms of assignment of work it could not be ascertained as to how fees were determined for making such huge payment of Rs.43,00,000/-. The AO also noted that Ms P. Bhavna Reddy and Ms. P. Meghna Reddy were daughters of the assessee and Sh Hemang B. Chappia was an employee with Mis First Security Private Limited, of which the assessee was the Managing Director. The AO relied upon the decision of Hon'ble Bombay High Court in the case of Umakant B. Agrawal vs. DCIT 369 ITR 220 and held that proof of ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 8 of 15 rendition of services was a sine qua non for allowability of expenditure Since the assessee had failed to give any documentary evidence to prove that services were actually rendered by these three individuals, the AO treated the transactions as sham transactions and disallow0d the amount of Rs.43,00,000/-. 4.7 The Ld. CIT(A) observed that with regard to the professional services provided by these three persons, that these three persons were educationally qualified to render services to him. However, no evidence, whatsoever, was provided by the assessee either during the assessment proceedings or during the appellate proceedings tb show the details of services actually provided by these three persons. This no documentary evidence of rendering any services by these three persons to the assessee. Mere educational qualifications of a person in itself does not mean that such a person had provided certain services something positive is brought on record to show that such services were actually rendered. the assessee has claimed that he had got a contract from HBG and received service fee from them, however this aspect does not show that any services were provided by the above said three persons to the assessee. This only shows that some services were provided by the assessee to HBG. it is always possible that the assessee had himself provided all the requisite services to HBG and no external help was taken by him so as such this cannot be said that the assessee had discharged his onus of proving before the AO that the three persons had provided professional services to him, for which payment of Rs.43,00,0001- had been made to them. Mere submission of name, PAN or educational qualification cannot be considered as sufficient evidence regarding rendering, of services by these persons to the assessee. A perusal of details available on record shows that the addresses of Ms Bhavna Reddy, Sri Hemang ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 9 of 15 B Chappia and Ms Meghana Reddy were never disclosed by the assessee to the AO during assessment proceedings. Even during appellate proceedings such details have not provided by the assessee. The confirmations from these three persons as filed before the AO or during appellate proceedings do not contain the addresses of these three persons. So it cannot be ascertained as to who signed these confirmations. In the case of Commissioner of Income-tax v. N Turika Properties Investment (P) Ltd. [2013] 40 taxmann.com 525 (Delhi). the HC even held that mere furnishing of PAN does not divulge the identity of an individual as PANs are issued without de-facto verification. In the case under consideration the AO could not have made any verification in the absence of complete addresses of these persons being provided by the assessee. Thus by not providing, -the addresses and Email Ids of these three persons, although specifically asked by the AO, the assessee prevented the AO from carrying out any further investigation into the matter. 4.8 The Ld. CIT(A), thus not satisfied with the contention of the Ld. A.R. He confirmed the addition. Against this, assessee is in appeal before us. 4.9 We have heard the rival submissions and perused the materials available on record. In this case, assessee claimed an expenditure of Rs.43 lakhs as payment of professional fees to following persons:- Sl.No. Name Amount (Rs.) Remarks 1 P. Bhavana Reddy 15,00,000/- Daughter of assessee 2 P. Meghana Reddy 8,00,000/- Daughter of assessee 3 Hemanga P. Chappiya 20,00,000/- Employee of First Security Pvt. Ltd., ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 10 of 15 wherein assessee was the Managing Director 4.10 The assessee was asked to furnish agreement, invoice and work done with regard to professional fees paid to these persons. The assessee furnished no details before the lower authorities and merely stated that these 3 persons were involved in the assignment of acquisition of M/s. Shakthi Met Dor Ltd. by M/s. Hormon Beteilingungs GMBH and described their education qualifications. Neither agreements with persons who provided services nor invoices were furnished. The assessee has failed to produce any details of work done or service rendered by the persons whom professional fee has been paid. It is riot ascertainable the terms of work contracts, how the fees were determined for making such huge payments of Rs. 43 lakhs. The necessity of professional fee to these individuals was never substantiated by the assessee with any kind of evidence except mere description of educational qualification of individuals. Tangible materials are required to be furnished to substantiate that these payments were made solely and exclusively for the purpose of business. The taxpayer did not show what is the tangible and substantial commercial benefit derived by such payment of professional fee of Rs. 43 lakhs. Further, Ms. P Bhavana Reddy and Ms. P. Meghana Reddy are daughters of the assessee and Shri Hemang Chappia is an employee with M/s First Securities Pvt Ltd of which the assessee is the Managing Director. Onus lies on the assessee to furnish the proof of actual receipt of the services from the three individuals. The Hon’ble Bombay High Court in the case of Umakant Vs. DCIT 369 ITR 220 held that proof of rendition of services is a sine qua non for allowability of expenditure in the hands of the recipient of the services. When there was no proof of actual rendition of services by ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 11 of 15 the three individuals, the very transaction is a sham transaction. Therefore, the payment of professional fee is nothing but siphoning of the profits with the intention of evading tax and an amount of Rs.43,00,000/- is disallowed under section 37 of the IT Act as the assessee has failed to prove that the professional fees paid to the three individuals has been incurred solely and exclusively for the purpose of business. Before Ld. CIT(A) also, the same position continued. Hence, the addition was made. 4.11 Further, the assessee filed additional evidence before us as enumerated above and also assessee raised the additional ground that the respondents has paid the tax on the amount paid by assessee as professional fees. Being so, in our opinion, this issue has to be examined after considering the above facts and additional evidences. Accordingly, the issue is remitted to AO for de-novo consideration. This ground is partly allowed for statistical purposes. 5. Next ground is with regard to addition of Rs.45,61,240/- by invoking the provisions of section 41(1) of the Act. 5.1 The grounds of appeal 4 to 7 relate to the action of the AO in treating an amount of Rs.45,61,240/- as income of the assessee on account of cessation of liability. In brief during appellate proceedings this was observed by the AO that the assessee had shown an amount of Rs.45,61,240/- as sundry creditors in his books of accounts. The AO noted that the amount pertained to three persons. namely Ms Bhavna Reddy, Sri Hemang B. Chappia and Ms Meghana Reddy in relation to whom the claim of expenditure of Rs.43,00,000/- had been disallowed by him after observing that no services were actually rendered by such persons to the assessee. The AO asked the assessee to provide the details of sundry creditors ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 12 of 15 and confirmation from them. However, despite this. the address and Email ID of these sundry creditors were not furnished by the assessee. Accordingly, the genuineness of the sundry creditors could not be established in the absence of any supporting details, the AO noted that it was not possible to ascertain whether the amount were actually payable to these sundry creditors or not. In view of the above, the AO treated tie: sundry creditors as bogus and added the same to the income of the assessee by considering the amount as cessation of liability under Section 41 of the Act. The AO relied upon the decision of the jurisdictional ITAT, Bangalore in the case of Suresh Kumar T. Jain (2011) 128 ITD 74. Bangalore dated 08.01.2010. 5.2 During appellate proceedings the assessee has made detailed submissions and argued that he had furnished signed confirmation from creditors along with their name and PAN and as such he had discharged his onus of proving the genuineness of the sundry creditors existing in his books of account. The assessee submitted that the AO should have used either ITBA to find out the addresses of those sundry creditors or he should have issued notices u/s 133(6) of the Act or issued summons u/s 131 of the Act to gather more information or if he wanted to cross examine these creditors or if he wanted to ascertain the genuineness of the sundry creditors. The assessee submitted that by providing the name and PAN of the creditors and their confirmation he had discharged his onus of proving genuineness of the creditors. The assessee also submitted that the AO had wrongly invoked the provisions of Section 41(1) of the Act. The assessee submitted that the amount payable to sundry creditors was paid by him to such creditors in the subsequent years. The ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 13 of 15 assessee relied upon various decisions to support his contentions. 5.3 The Ld. CIT(A) noted that despite the fact that the two sundry creditors are daughters of the assessee and one sundry creditor is an employee of the assessee, he is not ready to provide the details of their addresses or their Email Ids. The assessee wants that the AO should have searched ITBA data or used his powers under the Act to trade these sundry creditors if he wanted to examine them or if he wanted to prove that the sundry creditors were not genuine. This argument of the assessee is devoid of any merit. The onus was on the assessee to provide the requisite details to the AO and by just providing Name, PAN and confirmations; the onus cannot be shifted to the AO. As discussed supra, in the case of N. Tarika Properties Investment (Supra). the HC even held that mere furnishing of PAN does not divulge the identity of an individual as PANs are issued without de-facto verification. By not providing the addresses and Email Ids of these persons the assessee has prevented the AO from carrying out any further investigation. Since the sundry creditors are not found to be genuine, the liability in relation to them cannot be said to exist. Section 41(1) of the Act is a deeming - fiction according to which an amount which does not have any trace of income is treated as income liable to suffer the brunt of tax. The first prerequisite for the applicability of Section 41(1) is there must be a trading liability in respect of which the deduction has been claimed and allowed: In the case under consideration the assessee has claimed the amounts as professional fee payment in the year under consideration as well as in the earlier years. So this condition is satisfied. The second condition is that of the cessation of the liability_ In the. case under consideration the A.O. has proved that these creditors had ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 14 of 15 not provided any services to the assessee and as such the claim of the assessee itself was found to be bogus. This has already been upheld supra. Further, as discussed supra, the assessee has failed to discharge its onus of proving the genuineness of these sundry creditors. So the liability cannot be considered to still exist. So the provisions of Section 41(1) are applicable. 6. We have heard the rival submissions and perused the materials available on record. As discussed above, the AO asked the assessee to prove the sundry creditors appeared in his books of accounts. According to the AO, assessee not proved the genuineness of the creditors and he was also of the opinion that these creditors seized to exist. Before us assessee submitted that assessee has paid these credits in subsequent assessment years and it cannot be considered as cessation of liability for these assessment years under consideration when the assessee has actually paid these credits in subsequent assessment years. The contention of the Ld. D.R. is that AO made enquiries and observed that brought forward alleged creditors were not genuine and these creditors are not verifiable even after being provided with ample opportunity to assessee to prove the credits. Since the assessee failed to discharge onus cast on him to substantiate his claim and therefore, AO invoked the provisions of section 41(1) of the Act. In our opinion, to apply section 41(1) of the Act, there should be waiver of loan in the course of carrying on day to day affairs of the assessee’s business and unless it was waived, it cannot be treated as income in revenue field. Hence, the AO has to examine this issue in the light of repayment made by assessee in subsequent assessment years. Accordingly, the issue is remitted to AO for fresh consideration. ITA No.1106/Bang/2019 Sri Simhadri Ponnaluru Reddy, Bangalore Page 15 of 15 7. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 5 th Jul, 2022 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 5 th Jul, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.