M/s. E- Smart Systems Pvt. Ltd., Delhi V. ITO, New Delhi

ITA 1869/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5223 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 06-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 29-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Capital asset; Gift; Depreciation; Income from undisclosed sources; Source of fund; Additional evidence; Advance ruling; Question of law; Non-deduction of tax; Corroborative evidences; Capital receipt; Commercial expediency; Unabsorbed depreciation; Capital expenditure
• Section: 143(3); 142(1); 68; 69; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI D BEN CH, NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI K.N. CHARY, JUDICIAL MEMBER. ITA NO. 1869/DEL/2017 [ASSESSMENT YEAR: 2012-13] M/S E-SMART SYSTEMS PRIVATE LIMITED VS. ITO 483, PATPARGANJ INDUSTRIAL AREA WARD - 8(3) DELHI NEW DELHI PAN : AADCM 8942 P [APPELLANT] [RESPONDENT] DATE OF HEARING : 02.08.2017 DATE OF PRONOUNCEMENT : 16.08.2017 ASSESSEE BY : SHRI C.S. AGGARWA L, SR. ADV SHRI RAVI PRATAP MALL, ADV REVENUE BY : SHRI ANSHU PRAKASH , CIT-DR ORDER PER B.P. JAIN, ACCOUNTANT MEMBER, THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER OF THE LD. CIT(A) - 37, NEW DELHI VIDE ORDER DATED 14.03.2017 FOR ASS ESSMENT YEAR 2012- 13. 2 ITA NO. 1869/D EL/2017 2. THE ASSESSEE HAS RAISED AS MANY AS NINE GROUNDS OF APPEAL WHICH ARE LISTED HEREINBELOW: 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED ON FACTS AND IN LAW IN SUBSTANTIA LLY UPHOLDING THE ADDITIONS/DISALLOWANCES MADE IN THE ORDER OF AS SESSMENT DATED 16.03.2015 FRAMED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) GROSSLY ERRED ON FACTS AND IN LAW IN UPHOLDING THE ADDITION OF RS. 4,16,18,889/- MADE BY THE LEARNED ASSESSING OFFICER UNDER SECTION 68 OF THE ACT WHICH SUM HAD BEEN RECEIVED B Y THE APPELLANT THROUGH BANKING CHANNELS FROM MR. PATRICK BRIAN JOSEPH CURRAN (AN UK CITIZEN) AND MR. GREGORY DOUGL AS STROHFELDT (AN AUSTRALIAN CITIZEN) AGAINST FRESH AL LOTMENT OF PREFERENCE SHARES AND BOTH THE PERSONS HAVE ALSO CO NFIRMED THE FACTUM OF INVESTMENT IN THE APPELLANT COMPANY, AS S UCH, ADDITION MADE BY THE LEARNED ASSESSING OFFICER AND SUSTAINED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS UNSUSTAINABLE IN LAW. 2.1 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND ASSESSING OFFICER HAS GROSSLY ERRED IN FAILING TO APPRECIATE THAT ASSESSEE HAD OBTAINED NECESSARY APPROVAL FROM THE RESERVE BANK OF INDIA FOR MAKING INVESTMENT IN THE APPELLAN T COMPANY BY MR. PATRICK BRIAN JOSEPH CURRAN AND MR. GREGORY DOUGLAS STROHFELDT AND ASSESSEE HAS ALSO DULY INTIMATED TO THE REGISTRAR 3 ITA NO. 1869/D EL/2017 OF COMPANIES IN RESPECT OF SUBSCRIPTION OF SHARES O F THE APPELLANT COMPANY, AS SUCH, ADDITION MADE AND SUSTA INED IS WHOLLY UNWARRANTED IN LAW. 2.2 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND ASSESSING OFFICER HAS GROSSLY ERRED IN FAILING TO APPRECIATE THAT MR. PATRICK BRIAN JOSEPH CURRAN AND MR. GREGOR Y DOUGLAS STROHFELDT BOTH ARE TECHNOCRATS AND WELL VERSED IN THE LINE OF BUSINESS OF THE APPELLANT COMPANY, AND AS SUCH, IN FURTHERANCE OF THEIR BUSINESS INTEREST, THEY MADE INVESTMENT IN THE APPELLANT COMPANY. 2.3 THAT THE LEARNED AUTHORITIES HAVE GROSSLY E RRED IN FAILING TO APPRECIATE THAT THE PREFERENCE SHARES ALLOTTED T O SUCH SHAREHOLDERS WERE SUBSEQUENTLY CONVERTED IN TO EQUI TY SHARES AND BOTH THE SHAREHOLDERS ALSO BECAME DIRECTOR IN T HE APPELLANT COMPANY, AS SUCH, ONCE IDENTITY OF THE PERSONS IS U NDISPUTED, AND SUCH SHAREHOLDERS HAVE MADE INVESTMENT IN APPEL LANT COMPANY THROUGH BANKING CHANNELS TOWARDS THE FURTHE RANCE OF THEIR BUSINESS INTEREST, ADDITION MADE AND SUSTAINE D BY DOUBTING THE CREDITWORTHINESS OF SHAREHOLDERS AND GENUINENES S OF THE TRANSACTION IS WHOLLY MISCONCEIVED AND HENCE DESERV ES TO BE DELETED. 2.4 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN FAILING TO APPRECIATE THAT DUR ING THE COURSE OF THE ASSESSMENT PROCEEDINGS, APPELLANT HAS PROVID ED THE COMPLETE DETAILS WITH RESPECT TO IDENTITY OF THE BO TH THE SHARE APPLICANTS AND HAS ALSO PROVIDED THE COPY OF THE BA NK ACCOUNT, 4 ITA NO. 1869/D EL/2017 AND BOTH THE SHARE APPLICANTS HAVE ALSO CONFIRMED T HE FACTUM OF INVESTMENT IN THE APPELLANT COMPANY, AS SUCH, APPEL LANT HAS DISCHARGED ITS BURDEN U/S 68 OF THE ACT. 2.5 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED IN FAILING TO APPRECIATE THAT ONC E THE IDENTITY OF THE SHAREHOLDERS HAVE NOT BEEN DISPUTED AND SUM HAVE BEEN RECEIVED THROUGH BANKING CHANNELS AND HAVE ALSO BEE N CONFIRMED BY SUCH PERSONS, BURDEN LIES ON THE REVENUE TO BRIN G SOME ADVERSE MATERIAL, AND IN THE INSTANT CASE, NOT AN I OTA OF MATERIAL HAS BEEN BROUGHT ON RECORD EVEN REMOTELY S UGGESTING THAT THE SUM RECEIVED BY THE APPELLANT IS UNEXPLAIN ED CASH CREDIT AS SUCH, ADDITION SUSTAINED BY THE LEARNED C OMMISSIONER OF INCOME TAX (APPEALS) IS UNSUSTAINABLE IN LAW. 2.6 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN DOUBTING THE CREDITWORTHINESS OF THE SHAREHOLDERS PURELY ON SUSPICION, SURMISES AND CONJ ECTURES AND WITHOUT APPRECIATING THE FACTUAL SUBSTRATUM OF THE CASE, AS SUCH, ADDITION MADE BY THE LEARNED ASSESSING OFFICE R AND SUSTAINED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS WHOLLY UNWARRANTED IN LAW AND ON FACTS AND DESER VES TO BE DELETED. 3. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED NOT ADMITTING THE ADDITIONAL EVID ENCES FURNISHED BY THE APPELLANT UNDER RULE 46A OF THE IN COME TAX RULES FAILING TO APPRECIATE THAT NO PROPER, VALID A ND MEANINGFUL OPPORTUNITY WAS GRANTED TO THE APPELLANT DURING THE COURSE OF 5 ITA NO. 1869/D EL/2017 THE ASSESSMENT PROCEEDINGS. 4. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS GROSSLY ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF EXPENDITURE OF RS. 89,114/- OUT OF TOTAL RENT EXPENDITURE OF RS. 27,89,114/- INCURRED DURING THE YEAR ON THE GROUND THAT THE SAME WAS EXCESSIVE, HAVING REGARD T O THE AMOUNT OF RENT AGREED IN THE RENT AGREEMENT, WITHOU T CORRECTLY APPRECIATING THE DETAILS OF THE TOTAL RENT EXPENDIT URE CLAIMED AS DEDUCTION DURING THE RELEVANT PREVIOUS YEAR. 5. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE ADDI TION OF RS. 4,40,050/- TO THE TOTAL INCOME ON THE GROUND THAT T HE APPELLANT DID NOT FULLY DISCLOSE RENTAL INCOME QUA SOME PORTI ON OF THE LEASEHOLD PROPERTY GIVEN ON RENT TO SISTER CONCERNS , VIZ., MAGNUM TECHNOLOGY SOLUTION PVT. LTD. AND BELL SECUR ITECH PVT. LTD. ON THE BASIS OF THE TOTAL RENT AGREED IN THE R ENT AGREEMENT ENTERED WITH THE SAID TWO PARTIES. 6. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE ADDI TION OF RS. 99,72,783/- TO TOTAL INCOME ON ACCOUNT OF EXCESS PU RCHASE CONSIDERATION PAID OVER THE BOOK VALUE OF ASSETS/LI ABILITIES FORMING PART OF THE BUSINESS ACQUIRED FROM M/S KAIZ EN ENGINEERING SYSTEMS PVT. LTD., VIDE MOU DATED 24.06 .2011, FOR A TOTAL LUMPSUM CONSIDERATION OF RS. 1.70 CRORES, AND CAPITALIZED IN THE BOOKS OF ACCOUNTS UNDER THE HEAD INTANGIBLE ASSETS/GOODWILL ON THE GROUND THAT THE AFORESAID E XCESS CONSIDERATION CONSTITUTED ROYALTY WITHIN THE MEANIN G OF SECTION 6 ITA NO. 1869/D EL/2017 9(L)(VI) OF THE ACT AND THEREFORE, THE APPELLANT FA ILED TO DEDUCT TAX AT SOURCE THEREFROM U/S 194 J OF THE ACT. 6.1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THAT EXC ESS CONSIDERATION OF RS. 99,72,783/- PAID OVER THE BOOK VALUE OF ASSETS/LIABILITIES FORMING PART OF THE BUSINESS ACQ UIRED FROM KAIZEN ENGINEERING SYSTEMS PVT. LTD. IS ROYALTY WIT HIN THE MEANING OF U/S 9(L)(VI) OF THE ACT. 6.2 WITHOUT PREJUDICE TO THE AFORESAID GROUNDS TH AT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN ASSU MING THAT THE APPELLANT WAS LIABLE TO DEDUCT TAX AT SOURCE FROM T HE AFORESAID PAYMENT, SINCE THE APPELLANT DID NOT CLAIM ANY DEDU CTION OF THE AFORESAID AMOUNT FROM THE INCOME, NO ADDITION TO TO TAL INCOME COULD HAVE BEEN MADE ON ALLEGED FAILURE TO DEDUCT T AX AT SOURCE UNDER ANY PROVISION OF THE ACT. 7. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISA LLOWANCE OF EXPENDITURE AGGREGATING TO RS. 55,000/- INCURRED ON ACCOUNT OF STAMP DUTY PAID ON REGISTRATION OF RENT AGREEMENTS. 8. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED ON FACTS AND IN LAW IN NOT ALLOWING BENEF IT OF SET OFF OF CARRIED FORWARD UNABSORBED DEPRECIATION RELATING TO PREVIOUS ASSESSMENT YEARS AMOUNTING TO RS. 7,07,187/- ON THE GROUND THAT SUCH DISALLOWANCE IS NOT ARISING FROM THE ORDE R OF ASSESSMENT, IGNORING THE COMPUTATION OF INCOME PROV IDED 7 ITA NO. 1869/D EL/2017 ALONGWITH THE ORDER OF ASSESSMENT. 9. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED ON FACTS AND IN LAW IN DIRECTING THE AO T O CHARGE INTEREST U/S 234B/234D AND WITHDRAW INTEREST U/S 24 4A OF THE ACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE COMPANY WAS INCORPORATED ON 4 IH FEBRUARY 2004, UNDER THE COMPANIES ACT, 1956. THE AUTHORIZED SHARE CAPITAL OF THE ASSE SSEE COMPANY IS OF RS. 6,00,00,000/- (SEE PG. 28) THE ASSESSEE COMPANY HAD ISSUED EQUITY SHARES TILL THE END OF THE PRECEDING ASSESSMENT YEA R OF THE VALUE OF RS. 85,47,000/-. SUCH EQUITY SHARES WERE SUBSCRIBED BY THE TEN SHAREHOLDERS NAMED BELOW: EQUITY SHARES THUS ALLOTTED WERE 8,54,700 OF RS. 10 /- EACH. DURING THE INSTANT YEAR IT FURTHER ALLOTTED PREFERENCE SHA RES OUT OF SI. NO. NAME OF THE SHAREHOLDER NUMBER OF SHARES ISSUED AMOUNT 1. ANURAG ASHOK 8,06,000 RS. 80,60,000/ - 2. KAVITA ASHOK 5,000 RS. 50,000/ - 3. ALOK SINGH 3,700 RS. 37,000/ - 4. AVINASH DIXIT 5,000 RS. 50,000/ - 5. KUL TARAN SINGH 5,000 RS. 50,000/ - 6. RISHABH KUMAR 5,000 RS. 50,000/ - 7. NITIN KUMAR 5,000 RS. 50,000/ - 8. SHRINIWAS SHARMA 2,500 RS. 25,000/ - 9. PARMEET CHAWLA 2,500 RS. 25,000/ - 10. SANJEEV MATHUR 15,000 RS. 1,50,000/ - 8 ITA NO. 1869/D EL/2017 AUTHORIZED SHARE CAPITAL OF RS. 4,16,90,600/-. THE SAID SHARE CAPITAL HAD BEEN CONTRIBUTED BY THE FOLLOWING SHAREHOLDERS: SL. NO NAME OF THE SHAREHOLDER NO OF SHARES HELD DATE OF ALLOTMENT AMOUNT [RS.] 1. PATRICK BRIAN JOSEPH 2,97,071 27.11.2011 2,97,07,077 2. GREGORY DOUGLAS STROHEFLDT 1,19,835 27.01.2012 1,19,83,520/- 4. DETAILS OF REMITTANCES RECEIVED BY THE ASSESSEE COMPANY FROM THE AFORESAID TWO T SHAREHOLDERS ARE AT PAGES 254 OF PAPER BOOK, VOLUME - 2. SAID SHARES ALLOTTED TO THE AFORESAID T WO SHAREHOLDERS WERE PREFERENCE SHARES, WHO HAD MADE REMITTANCES FR OM THE RESPECTIVE COUNTRIES NAMELY UK AND AUSTRALIA. THE A FORESAID TWO SHAREHOLDERS WERE WELL KNOWN TO MR. ANURAG ASHOK AN D WERE CARRYING ON THEIR INDEPENDENT BUSINESS IN THEIR RESPECTIVE C OUNTRIES. THESE TWO SHAREHOLDERS WERE ALSO TAKEN AS DIRECTORS BY THE BO ARD OF DIRECTORS IN THE FY 2012-13 (SEE PG. 70-74). IT IS ENGAGED IN TH E BUSINESS OF PRINTING PAN CARDS, DRIVING LICENSES, VEHICLE REGISTRATION C ERTIFICATES, PROVIDING SERVICES FOR ISSUANCE OF DRIVING LICENSES AND VEHICLE REGISTRATION CERTIFICATES AND PROVIDING TIME AND AT TENDANCE SERVICES 9 ITA NO. 1869/D EL/2017 USING BIOMETRIC TECHNOLOGY. THE AFORESAID BUSINESS IS BEING CARRIED ON BY THE ASSESSEE SINCE INCEPTION. IT IS MAINTAINING COMPLETE RECORD OF ITS INCOME AND EXPENDITURE AND THE INCOME EARNED BY THE APPELLANT HAS DULY BEEN REFLECTED IN THE RETURNS OF INCOME FILED FOR EACH OF THE ASSESSMENT YEAR. THE DETAILS OF THE INCOME RETURNED AND INCOME ASSESSED IS TABULATED HEREUNDER: S.NO. ASSESSME INCOME RETURNED INCOME ASSESSED 1. 2004 - 05 NIL NIL ' 2. 2005 - 06 NIL NIL 3. 2006 - 07 ( - )RS. 1,64,264/ - ( - ) RS. 1,64,264/ - 4. 2007 - 08 ( - ) RS. 57,20,696/ - ( - ) RS. 57,20,696/ - 5. 2008 - 09 ( - )RS. 31,10,073/ - ( - ) RS. 31,10,073/ - 6. 2009 - 10 NIL TAX WAS PAID UNDER MAT AT THE BOOK PROFIT OF RS. 31,42,995 NIL ASSESSED UNDER MAT AT THE BOOK PROFIT OF RS. 31,42,995 7. 2010 - 11 ( - ) RS. 35,68,807/ - ( - ) RS. 35,68,807/ - 8. 2011 - 12 ( - ) RS. 23,06,747/ - ( - ) RS. 23,06,747/ - 9. 2012 - 13 ( - ) RS. 51,34,798/ - RS. 4,77,27,610/ - 10. 2013 - 14 ( - ) RS. 13,65,2927 - ( - ) RS. 13,65,292/ - 11. 2014 - 15 NIL 12. 2015 - 16 RS. 99,44,120/ - RS. 99,44,120/ - 13. 2016 - 17 RS. 3,09,09,5807 - - 10 ITA NO. 1869/D EL/2017 5. AFTER THE TWO AFORESAID SHAREHOLDERS HAD BEEN AL LOTTED PREFERENCE SHARES WHEN SAID SHAREHOLDERS HAD SHOWN THEIR INTEREST HAVING REGARD TO THE POTENTIALLY AND FUTURE PROSPEC TS AND HAD BEEN TAKEN AS DIRECTORS THE COMPANY TURNED THE TABLE AND NOT ONLY WIPED OFF THE LOSSES BUT PAID TAX ON BOOK PROFIT FOR THE AY 2014-15 AND INCOME HAS SUBSTANTIALLY BEEN EARNED BY THE COMPANY . IT WOULD BE SEEN THAT AFORESAID COMPANY THOUGH HAD BEEN INCORPO RATED ON 4 TH FEBRUARY 2004, YET, TILL THE CLOSE OF THE ACCOUNTIN G YEAR RELEVANT FOR THE INSTANT ASSESSMENT YEAR, IT HAD BEEN INCURRING LOSSES AND SUCH LOSS SO SUFFERED HAS DULY BEEN ACCEPTED, BUT SOON THE AF ORESAID TWO DIRECTORS WERE TAKEN AS BOARD OF DIRECTORS AND HAD CONTRIBUTED CAPITAL WHO WERE ALLOTTED PREFERENCE SHARES, THE APPELLANT COMPANY STARTED MAKING PROFIT. IN FACT THE EXPENDITURE INCURRED ON THEIR TRAVELLING AND STAY HAS BEEN ALLOWED BY THE CIT(A) (DETAILS PG. 8 - 92, PARA 7 OF CIT(A)S ORDER). 6. THE BRIEF FACTS AND SEQUENCE OF EVENTS IN RESPEC T OF THE AFORESAID APPEAL ARE AS UNDER: 23.9.2012: FOR THE YEAR UNDER CONSIDERATION, THE APPELLANT COMPANY HAS FILED ITS RETURN OF INCOME DECLARING A LOSS OF RS. 51,34,798/-. A COPY OF THE RETURN OF INCOME ALONGWI TH COMPUTATION OF 11 ITA NO. 1869/D EL/2017 INCOME AND AUDITED FINANCIAL STATEMENT HAS BEEN PLA CED AT PAGES 1-32 OF THE PB. A STATEMENT OF PROFIT AND LOSS ACCOUNT IS AT PAGE 2 7 OF THE PB WHEREAS THE BALANCE SHEET IS AT PAGE 27 OF THE PB. THE PROFIT AND LOSS REFLECTS A NET LOSS OF RS. 27,51,235. 10.10.2014: THAT TOSCRUTINIZETHE AFORESAID RETURN OF INCOME, A NOTICE U/S 143(2) AND 142(1) OF THE ACT WAS ISSUED TO THE APPELLANT ( PAGE 33-34 OF PB). 17.10.2014: INRESPECTTO THE AFORESAID NOTICE, APP ELLANT FILED IN PART COMPLIANCE ITS REPLY (PLACED AT PAGE 35 OF PB). 17.12.2014: THAT A GENERALQUESTIONNAIRE WAS ISSUED TO THE APPELLANT (PLACED AT PAGE 36-38 OF PB). 09.01.2015: IN RESPONSE TOTHE AFORESAID NOTICE, APP ELLANT FILED ITS REPLY PROVIDING THE PART DETAILS AS REQUIRED IN THE NOTICE (PLACED AT PAGE 39-40 OF PB) WITH COPIES OF THE ANNEXURES. 20.01.2015: APPELLANT FILED FURTHER REPLY PROVIDIN G THE REMAINING DETAILS AS REQUIRED INTHE NOTICE (PLACED AT PAGE 41 OF PB). ALONGWITH THIS REPLY APPELLANT FURTHER PROVIDED THE COMPLETE DETAILS OF THE 12 ITA NO. 1869/D EL/2017 NON RESIDENT INVESTORS WHO HAD INVESTED IN THE PREF ERENCE SHARES OF THE APPELLANT COMPANY ALONGWITH THE COPY OF THE FIRC. COPIES OF FIRC ISSUED BY HSBC BANK. COPIES OF FC GPR FORM FILED WITH RBI 02.03.2015: APPELLANT FILED REPLY (PLACED AT PAGE 45 OF PB). ALONGWITH THE REPLY, APPELLANT ALSO PROVIDED THE FO LLOWING DOCUMENTARY EVIDENCES: I. COPY OF THE RENT AGREEMENT WITH M/S BELL SECURI TECH PVT. LTD. AND M/S MAGNUM TECHNOLOGY SOLUTION PVT. LTD. II COPY OF THE CONFIRMATION FROM MR. GREGORY DOUG LAS STROHFEIDT IN SHARES IN RESPECT OF INVESTMENT MADE IN THE APPELLANT COMPANY ALONGWITH THE COPY OF THE PASSPOR T. I. COPY OF CONFIRMATION (PAGE 50 OF PB) II. COPY OF PASSPORT (PAGE 49 OF PB) III. CERTIFICATE OF FOREIGN INWARD REMITTANCES (PAGE 51- 54 OF PB) IV. DETAILS OF THE TAX PARTICULARS (PAGE 56-59 OF PB). 16.03.2015: THAT AO HOWEVER FRAMED AN ORDER OF ASSESSMENT DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 4,77,27,610 (BEFORE THE SET OFF OF THE CARRIED FORWARD LOSS) BY MAKING AN AGGREGATE ADDITION OF RS. 5,28.62,408/-. THEREAFTER, THE AO A LLOWED A SET OFF OF BUSINESS LOSS AND DEPRECIATION CARRIED FORWARD OF R S. 1,17,27,592/- 13 ITA NO. 1869/D EL/2017 HOWEVER HE DISALLOWED A SUM OF RS. 7,07,187/- BEING THE LOSS FOR THE AY 2009-10. 15.04.2015: AGGRIEVED AGAINST THE AFORESAID ORDER OF ASSESSMENT , ASSESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT (A). 17.08.2016: ASSESSEE ALSO FILED AN APPLICATION U/R 46A OF THE INCOME TAX RULES BEFORE THE LEARNED CIT(A) ALONGWIT H FOLLOWING ADDITIONAL EVIDENCES (SEE PAGE 245-254 OFPB): A. MR. PATRICK BRIAN JOSEPH (TAX RESIDENT OF UK): 1. COPY OF THE INCOME TAX RETURN FILED IN THE SOURC E COUNTRY I.E. UK ALONGWITH COMPUTATION OF INCOME FOR THE FOL LOWING TAX YEARS: 06.04.2011 TO 05.04.2012 256-289 06.04.2010 TO 05.04.2011 290-325 2. COPY OF THE CONFIRMATION FROM UBS WEALTH 32 6-328 MANAGEMENT SHOWING SOURCE OF FUNDS BEING EXTENSION OF BANK OVERDRAFT. B MR. GREGORY DOUGLAS (TAX RESIDENT OF AUSTRALIA): 1. COPY OF THE INCOME TAX RETURN FILED 329-341 IN THE COURSE COUNTRY I.E. AUSTRALIA ALONGWITH COMPUTATION OF INCOME FOR THE 01.07.2008 TO 30.06.2009 WHICH HAD ELECTRONICALLY BEEN FILED. 14 ITA NO. 1869/D EL/2017 4. COPY OF THE FINANCIAL STATEMENTS OF FIWIAN 342-401 SUPERANNUATION FUND ALONGWITH TAX RETURN FOR THE YEARS ENDED 30.06.2011 AND 30.06.2012 5.COPY OF THE WRITE UP FROM FINANCIAL ADVISOR .402-408 OF GREGORY STOFHFELDT ABOUT WITHDRAWAL OF FUNDS FROM SUPERANNUATION FUND. 6. COPY OF STATEMENT SHOWING MOVEMENT OF FUNDS 409-413 AND WITHDRAWALS THERETO DURING THE RELEVANT PERIOD RELEVANT PERIOD. RBI APPROVALS: 7. COPY OF FCGPR DATED 12.02.2016 ISSUED BY RBI FOR 414-415 ACCEPTANCE OF REMITTANCES FROM MR. DOUGLAS 8. COPY OF FCGPR DTD 16.06.2015.2016 ISSUED BY RBI 416418 FOR ACCEPTANCE OF REMITTANCES FROM MR. CURRAN AND MR.DOUGLAS. 10.10.2016: THAT THE AO FURNISHED HIS REMAND REPORT WHEREIN AO OBJECTED THE ADMISSION OF THE ADDITIONAL EVIDENCE O N THE GROUND THAT SUFFICIENT OPPORTUNITY WAS PROVIDED TO THE APPELLAN T. HOWEVER, ON THE MERITS OF THE DOCUMENTS, HE DID NOT DISPUTE THE GEN UINENESS OR UNVERIFIABILITY OF THE DOCUMENTS. HE. HOWEVER STATED IN HIS REMAND REPORT THAT INCOME SHOWN BY MR. CURRAN OF 1,52,28 9/- (EQUIVALENT TO RS. 1,21,83,120/- @RS. 80 PER ) AND MR. GREGORY STOFELDT OF AUD 80,217/- (EQUIVALENT TO RS. 32,08,680/- (A) RS. 40 PER AUD) IS JUST ENOUGH TO MEET THE DAY TO DAY EXPENSES OF THE SHARE APPLICANTS IN THEIR COUNTRY. THE AO FURTHER STATED THAT SINCE THE ASSESSEE IS A LOSS MAKING COMPANY, AS SUCH, IT RAISES A SUSPICION ABOU T MAKING OF AN 15 ITA NO. 1869/D EL/2017 INVESTMENT BY A NON RESIDENT INDIVIDUAL WOULD MAKE HUGE INVESTMENT IN A LOSS MAKING COMPANY. FINALLY IT WAS CONCLUDED THAT SINCE THE ASSESSEE HAS NOT PROVED THE CREDITWORTHINESS OF T HE SHARES APPLICANTS, AS SUCH, ADDITION HAS RIGHTLY BEEN MADE IN THE ORDER OF ASSESSMENT (PLACED AT PAGE 419-422 OF THE PB). THE AO HOWEVER DID NOT DISPUTE THAT THE ASSESSEE HAD ISSUED SHARES WHE N HE SO STATED IN HIS COMMENTS AND HE COMPLETELY IGNORED THE SAID PRE FERENCE SHARES HAD PROVIDED FUNDS FOR ACQUIRING PREFERENCE SHARES BY RAISING BANK OVERDRAFT AND BY WITHDRAWING FUNDS FROM SUPERANNUAT ION FUNDS. 27.02.2017: APPELLANT FILED ITS REJOINDER SUBMISSIONS. IN RESPE CT OF THE CONTENTION OF THE AO THAT SUFFICIENT AND PROPER OPPORTUNITY WAS GRANTED TO THE APPELLANT DURING THE COURSE OF THE A SSESSMENT PROCEEDINGS, IT WAS SUBMITTED THAT SUCH A STATEMENT IS FACTUALLY INCORRECT AS DURING THE COURSE OF THE ASSESSMENT, I T WAS ONLY ON 18.02.2015 FOR THE FIRST TIME, THE AO REQUIRED THE ASSESSEE TO FILE THE CONFIRMATION AND TO PROVE THE CREDITWORTHINESS OF THE SHAREHOLDERS AND ASSESSMENT HAD BEEN MADE WITHIN ON E MONTH ON 16.03.2015, WHICH CLEARLY SHOWED THAT NO PROPER AND MEANINGFUL OPPORTUNITY WAS GRANTEDTO THE APPELLANT. IT WAS SUB MITTED THAT THE APPELLANT NEITHER HAD OR IS EXPECTED TOHAVE THE DET AILS OF SOURCES OF 16 ITA NO. 1869/D EL/2017 INVESTORS FUNDS OF THE AFORESAID SHAREHOLDERS AND T HE SUMS CREDITED REPRESENTED THE AMOUNT OF THE SHARE CAPITAL AGAINST THE ISSUE OF SHARES. THAT APPELLANT IN REJOINDER, ALSO MADE ITS DETAILED COUNTER SUBMISSIONS IN RESPECT OF EACH OBJECTION OF THE AO MADE IN HIS REMAND REPORT (PLACED AT PAGE 423-439 OF THE PB). 27.02.2017: APART FROM THE REJOINDER SUBMISSIONS, APPELLANT ALS O FILED ITS DETAILED WRITTEN SUBMISSIONS IN RESPECT O F EACH OF THE ADDITION MADE IN THE ORDER OF ASSESSMENT (SEE PAGE 440-480 OF THE PB). 14.03.2017: THAT THE LEARNED CIT(A) DISPOSED OFF THE APPEAL OF THE APPELLANT WHEREIN LEARNED CIT(A) DID NOT ADMIT THE ADDITIONAL EVIDENCES WHICH WAS MERELY SUPPORTING EVIDENCES AND SUBSTANTIALLY UPHELD THE ADDITION MADE IN THE ORDER OF ASSESSMENT . AGGRIEVED AGAINST THE AFORESAID ORDER OF ASSESSMENT, ASSESSEE HAS FILED THE INSTANT APPEAL. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ISSUES INVOLVED IN THE INSTANT APPEAL ARE AS UNDER: 17 ITA NO. 1869/D EL/2017 8 GROUND NO. 2 TO 2.6 OF THE GROUNDS OF APPEAL IS IN RESPECT OF THE ADDITION MADE U/S 68 OF THE ACT OF RS. 4.16.18.889/- BEING T HE SUM RECEIVED BY THE ASSESSEE FROM TWO NON RESIDENT INDI VIDUALS TOWARDS ALLOTMENT OF PREFERENCE SHARES, WHICH SHAREHOLDERS ALSO BECAME DIRECTORS OF THE APPELLANT COMPANY W.E.F. 01.04.201 2. S.NO PARTICULARS AMOUNT (IN GROUND 1. ADDITION U/S 68 OF THE ACT IN RESPECT OF AMOUNT RECEIVED FROM 17 ON-RESIDENT INVESTORS TOWARDS ALLOTMENT OF PREFERENCE SHARES, WHICH SHARESHOLDERS ALSO BECAME DIRECTORS OF THE RS .4,16,18, 889 2 - 2.6 1. APPELLANT COMPANY W.E.F. 01.04.2012. 2. REJECTION OF THE PRAYER OF ADMISSION OF ADDITIONAL EVIDENCES WHICH EVIDENCES WERE FILED U/S 46 A OF THE INCOME TAX RULES. 3 3. DISALLOWANCE OF EXPENDITURE ON RENT HOLDING THE SAME TO BE EXCESSIVE. RS.89,114 4 4 ADDITION OF NOTIONAL AMOUNT ON THE GROUND OF NON- DISCLOSURE OF CORRECT RENTAL INCOME. RS.4,40,050 5 5. ADDITION ON ACCOUNT OF ALLEGED FAILURE TO DEDUCT TAX AT SOURCE FROM AMOUNT OFGOODWILL. RS. 99,72,783 6 - 6.2 6. DISALLOWANCE OF STAMP DUTY CHARGES PAID AT THE TIME OF REGISTRATION OF RENT AGREEMENT. RS.55,000 7 7. DISALLOWANCE OF SET - OFF OF CARRIED FORWARD UNABSORBED DEPRECIATION RELATING TO AY 2009-10. RS. 7,07,187 8 18 ITA NO. 1869/D EL/2017 9. AS WAS SUBMITTED HEREINABOVE, THE APPELLANT I S ENGAGED IN THE BUSINESS OF PRINTING PAN CARDS, DRIVING LICENSES, V EHICLE REGISTRATION CERTIFICATES, PROVIDING SERVICES FOR ISSUANCE OF DR IVING LICENSES AND VEHICLE REGISTRATION CERTIFICATES AND PROVIDING TIM E AND ATTENDANCE SERVICES USING BIOMETRIC TECHNOLOGY. HOWEVER TILL T HE PRECEDING ASSESSMENT YEAR, APPELLANT WAS INCURRING LOSSES AS SUCH, TO EXPAND THE BUSINESS OPERATIONS AND TO AUGMENT THE FUNDS OF THE PURPOSE OF ITS BUSINESS, APPELLANT APPROACHED TWO NON RESIDENTS MR . GREGORY DOUGLAS STROHFELDT (AN AUSTRALIAN CITIZEN) AND MR. PATRICK BRIAN JOSEPH CURRAN (AN UK CITIZEN) WHO ARE TECHNOCRATS AND ARE WELL VE RSED IN THE LINE OF THE BUSINESS OF THE APPELLANT COMPANY, FOR MAKING I NVESTMENT IN THE APPLICANT COMPANY AND IT WAS ALSO AGREED THAT AFTER THE APPELLANT WILL RECEIVE THE INVESTMENT, SUCH PERSON WILL ALSO BECOM E THE DIRECTORS OF THE APPELLANT COMPANY W.E.F. 01.04.2012. IN ACCORDA NCE WITH THE AFORESAID UNDERSTANDING, DURING THE YEAR UNDER CONS IDERATION, ASSESSEE HAS RECEIVED A SUM OF RS. 1,19,83,500/- FROM MR. GR EGORY' DOUGLAS STROHFELDT (AN AUSTRALIAN CITIZEN) AND RS. 2,97,07, 100/- FROM MR. PATRICK BRIAN JOSEPH CURRAN (AN UK CITIZEN) FROM BA NKING CHANNELS TOWARDS THE INVESTMENT IN THE CUMULATIVE PREFERENCE SHARES OF THE APPLICANT COMPANY. THE AFORESAID SUM HAS BEEN RECEI VED BY THE ASSESSEE IN THE FOLLOWING MANNER: 19 ITA NO. 1869/D EL/2017 10. THE AFORESAID SUM HAS BEEN RECEIVED BY THE ASSE SSEE FROM THE RESPECTIVE BANK ACCOUNTS OF THE AFORESAID INDIVIDUA LS AND HAS DULY BEEN CREDITED IN THE BANK ACCOUNT OF THE APPELLANT COMPANY. THAT AFTER THE RECEIPT OF THE AFORESAID SUMS, APPELLANT COMPANY HAS ALSO ALLOTTED THE CUMULATIVE PREFERENCE SHARES TO SUCH S HAREHOLDERS. IT IS SUBMITTED THAT AFTER THE SHARES WERE ALLOTTED TO SU CH PERSONS, BOTH MR. GREGORY DOUGLAS STROHFELDT AND MR. PATRICK BRIAN JO SEPH CURRAN WAS APPOINTED AS DIRECTOR OF THE APPELLANT COMPANY W.E. F. 01.04.2012. DURING THE COURSE OF THE ASSESSMENT, APPELLANT VIDE ITS REPLY DATED 09.01.2015 (PLACED AT PAGE 39-40 OF PB) DULY PROVID ED THE DETAILS OF THE CUMULATIVE PREFERENCE SHARES ISSUED DURING THE YEAR. ALONGWITH THE AFORESAID REPLY, APPELLANT FILED THE BANK REMITTANC E CERTIFICATES FOR S.NO. NAME OF THE SHAREHOLDER FIR C PAGE OF PB AMOUNT AMOUNT IN RS. NO OF PREFER EN CE SHARES ALLOTTE D (SEE PAGE 48) DATE OF ALLOTME NT OF SHARES 1. MR. GREGORY 62 17,00,000 1,19,83 21.11.20 DOUGLAS 63 AUD 84,47,400 STROHFELDT 64 AUD 39,000 18,36,120 TOTAL 1,19,83,52 Z. MR PATRICK 52 USD 79,250 35,68,627 2,97,07 27 .01.20 BRIAN JOSEPH 53 USD 2,01,88,35 CURRAN 54 USD 59,50,100 TOTAL 2,97,07,07 20 ITA NO. 1869/D EL/2017 THE SUMS RECEIVED BY THE APPELLANT COMPANY. THE ASS ESSEE HAD THUS DISCHARGED ITS INITIAL ONUS OF ESTABLISHING THAT THE AMOUNTS CREDITED IN ITS BOOKS REPRESENTED SHARE CAPITAL, WHICH INDEED H AS NOT BEEN DISPUTED THAT THE ASSESSEE HAD DULY ESTABLISHED THE IDENTITY OF THE SHAREHOLDERS WHO HAD DULY CONFIRMED. IN FACT, THE A O NEVER MADE ANY ATTEMPT EVER TO SEEK A RESPONSE FROM SUCH SHAREHOLD ERS DIRECTLY OR EVEN REQUIRED THE APPELLANT TO PRODUCE THEM FROM TH EIR STATEMENT. HOWEVER, THE AO FOR THE FIRST TIME VIDE ORDER SHEET ENTRY DATED 18.02.2015 REQUIRED THE APPELLANT TO FURNISH THE CO NFIRMATION AND ALSO PROVE THE CREDITWORTHINESS OF SUCH SHAREHOLDERS. SU CH CONFIRMATION IN FACT HAD BEEN FILED ON 02.03.2015 AND 09.03.2015 BE FORE FRAMING OF THE ASSESSMENT (PLACED AT PARA 6.8 AND 6.9 ABOVE). 11. IN RESPONSE TO THE AFORESAID VIDE ITS REPLY DAT ED 02.03.2015, THE APPELLANT FILED REPLY (PLACED AT PAGE 45 OF PB), ALONGWITH CONFIRMATION, COPY OF THE BANK FROM WHERE SUCH SUM HAS BEEN REMITTED AND THE COPY OF THE PASSPORT OF MR. GREGOR Y DOUGLAS STROHFEIDT. FURTHER VIDE REPLY DATED 09.03.2015 (PL ACED AT PAGE 46 OF PB), PROVIDED THE FOLLOWING DOCUMENTARY EVIDENCES I N RESPECT OF MR. PATRICK BRIAN JOSEPH FROM WHOM IT HAS RECEIVED INVE STMENT IN CUMULATIVE PREFERENCE SHARES: 21 ITA NO. 1869/D EL/2017 I. COPY OF CONFIRMATION II. COPY OF PASSPORT III. COPY OF BANK STATEMENT 12. AFTER THE AFORESAID DOCUMENTARY EVIDENCES, NO F URTHER QUERIES WERE RAISED FROM THE APPELLANT AND AO PURELY ON SUS PICION, SURMISES AND CONJECTURES MADE THE ADDITION OF THE SUMS RECEI VED BY THE APPELLANT FROM THE AFORESAID INVESTORS UNDER SECTIO N 68 OF THE ACT. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHILE M AKING THE ADDITION, AO DID NOT DISPUTE THE AUTHENTICITY OF THE DOCUMENT ARY EVIDENCES FURNISHED BY THE APPELLANT, NOR HE DISPUTED THE IDE NTITY AND GENUINENESS OF THE TRANSACTION. HOWEVER AO DOUBTED THE CREDITWORTHINESS OF THE AFORESAID INDIVIDUALS BY DO UBTING THE SOURCE OF THE CREDITS IN THE BANK ACCOUNT OF THE AFORESAID SH AREHOLDERS. 13. IT HAS NOT BEEN DISPUTED BY THE AO THAT SUM HAS BEEN RECEIVED BY THE ASSESSEE FROM THE AFORESAID TWO INDIVIDUALS FOR THE ALLOTMENT OF THE CUMULATIVE PREFERENCE SHARES AND SAME IS ALSO E VIDENT FROM THE COPY OF THE FIRC SUBMITTED BY THE APPELLANT WHEREIN IT HAS SPECIFICALLY BEEN STATED THAT THE PURPOSE OF THE REMITTANCES ARE TOWARDS THE SUBSCRIPTION OF THE SHARES IN THE APPELLANT COMPANY . AO HAS ALSO NOT DOUBTED THE IDENTITY OF THE AFORESAID TWO INDIVIDUA LS NOR HAD DISPUTED THE GENUINENESS OF THE TRANSACTION. HOWEVER IN RESP ECT OF MR. GREGORY' 22 ITA NO. 1869/D EL/2017 DOUGLAS STROHFEIDT, HE HAS DOUBTED THE SOURCE OF THE CREDITS IN HIS BANK ACCOUNT AND IN RESPECT OF MR. PATRICK BRIAN JO SEPH, IT WAS STATED THAT SUM HAS BEEN RECEIVED BY APPELLANT FROM HIS BA NK ACCOUNT, AND AT THE TIME OF REMITTANCE HE HAS DEBIT BALANCE AS SUCH , HIS SOURCE IS ALSO DOUBTED. IT IS SUBMITTED THAT DURING THE COURSE OF THE APPELLATE PROCEEDINGS, APPELLANT FILED AN APPLICATION U/S RUL E 46A OF THE INCOME TAX RULES, AND ALONGWITH THE APPLICATION, APPELLANT FILED THE TAX RETURNS OF BOTH THE INDIVIDUALS. THAT FROM THE PERU SAL OF THE AFORESAID RETURN OF INCOME, IT WOULD BE SEEN THAT FOR THE PER IOD 06.04.2011 TO 05.04.2012, MR. CURRAN HAS SHOWN AN INCOME OF 1,52 ,289/- (PLACED AT PAGE 287-289 OF PB) AND MR. GREGORY STOFELDT OF AUD 80,217/- WHICH CLEARLY SHOW THAT SUCH PERSONS ARE MAN OF MEANS AND HAVE SUFFICIENT CREDITWORTHINESS FOR MAKING INVESTMENT IN THE APPEL LANT COMPANY. IN RESPECT OF MR. PATRICK BRIAN JOSEPH, APPELLANT ALSO FILED THE CONFIRMATION FROM THE BANK (PLACED AT PAGE 326-328 OF PB) SHOWING THAT OVERDRAFT FACILITY HAS BEEN GRANTED TO HIM AGA INST THE INVESTMENT HELD BY BANK AND HE HAS USED ONLY 30% OF THE OVERDR AFT FACILITY, WHICH CLEARLY INDICATES THAT INVESTMENTS ARE FAR GREATER THAN THE OVERDRAFT. 14. IN RESPECT OF MR. DOUGLAS, APPELLANT FILED THE FINANCIAL STATEMENT OF FIWIAN SUPERANNUATION FUND, A COMMUNICATION FROM THE FINANCIAL 23 ITA NO. 1869/D EL/2017 ADVISOR CONFIRMING THAT FUNDS CREDITED IN THE AFORE SAID SUPERANNUATION FUND BELONG TO MR. DOUGLAS AND ALSO STATEMENT SHOWI NG THE MOVEMENT OF FUNDS FROM THE SUPERANNUATION. IT IS SUBMITTED T HAT IN ACCORDANCE WITH THE AUSTRALIAN LAWS, MR. DOUGLAS HAS FOUNDED T HE SUPERANNUATION FUND, IN WHICH, AT THE RELEVANT TIME, HE WAS THE PR OVISIONS OF THE SUPERANNUATION FUND DEED. ACCORDINGLY, FROM THE SUP ERANNUATION FUND, MR. DOUGLAS HAD REMITTED HIS CONTRIBUTION DIR ECTLY TO THE APPELLANT COMPANY, IN RELATION TO THE AMOUNT OF INV ESTMENT MADE. IT IS REITERATED THAT THE AFORESAID APPROACH HAD BEEN ADO PTED BY MR. DOUGLAS TO AVOID TWO-WAY TRAFFIC OF THE FUND OF FIR ST RECEIVING THE FUNDS TO HIS ACCOUNT AND THEREAFTER REMITTING THE F UNDS TO THE APPELLANT COMPANY FROM HIS ACCOUNT. HOWEVER, LEARN ED CIT(A) FIRSTLY DID NOT ADMIT THE ADDITIONAL EVIDENCES FURNISHED BY THE APPELLANT ON THE GROUND THAT SUCH DOCUMENTS WERE NOT ATTESTED AS PER THE PROVISIONS OF DIPLOMATIC AND CONSULAR OFFICE (OATHS AND FEES) ACT. 1948. IT IS RELEVANT TO STATE THAT AO IN HIS REMAND REPORT DATED 10.10.2016 DID NOT DISPUTE THE VERACITY OF THE ADD ITIONAL EVIDENCES FURNISHED BY THE ASSESSEE AND FURTHER LEA RNED CIT(A) DID NOT ADMIT THE ADDITIONAL EVIDENCES PURELY ON TE CHNICAL GROUND WHICH IS WHOLLY UNWARRANTED IN LAW. IN FACT, ADDITI ONAL EVIDENCES WERE COMPUTERIZED DOCUMENTS AND HAVE EVIDENTIARY VA LUE. IT IS 24 ITA NO. 1869/D EL/2017 SUBMITTED THAT IT IS SETTLED LAW THAT WHEN SUBSTANT IAL JUSTICE AND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OT HER, CAUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED. IT IS FURTHER SUBMITTED THAT IT IS ALSO SETTLED LAW THAT THE RIGOR OF THE R ULE OF EVIDENCE CONTAINED IN THE EVIDENCE ACT DID NOT APPLY TO THE PROCEEDINGS UNDER INCOME TAX ACT. IN SUCH CIRCUMSTANCES, THE ADDITION AL EVIDENCES FURNISHED BY THE APPELLANT AND REJECTED BY THE LEAR NED CIT(A) WHICH MERELY SUPPORTS THE CLAIM OF THE APPELLANT THAT THE INVESTORS HAD SUFFICIENT CREDITWORTHINESS IS WHOLLY MISCONCEIVED. 15. IN ANY CASE, IT WAS SUBMITTED THAT IN THE INST ANT CASE, IDENTITY OF THE SHAREHOLDERS ARE NOT IN DISPUTE AND FROM THE PE RUSAL OF THEIR BANK STATEMENTS IT IS EVIDENT THAT THE SUM HAS BEEN RECE IVED BY THE APPELLANT FROM THE BANK ACCOUNT OF THE SHAREHOLDERS AND SUCH SHAREHOLDERS HAVE ALSO CONFIRMED THE FACTUM OF INVE STMENT IN THE APPELLANT COMPANY IN SUCH CIRCUMSTANCES, AND THE BU RDEN OF THE APPELLANT HAS DULY BEEN DISCHARGED. IT MAY BE STATE D HERE THAT, IN THE INSTANT CASE, THE ASSESSEE HAS LED COMPLETE EVIDENC E, TO ESTABLISH THAT, THE SHAREHOLDERS WERE IDENTIFIABLE AND, GENUI NE, WHICH IS THE ONLY TEST WHICH HAS TO BE APPLIED IN THE CASE WHERE AN EXAMINATION PERTAINS TO AN ADDITION IN RESPECT OF CREDITS APPEA RING AS SHARE 25 ITA NO. 1869/D EL/2017 APPLICATION MONEY, AS HAS BEEN HELD BY FULL BENCH I N THE CASE OF SOPHIA FINANCE REPORTED IN 205 ITR 98 (FB) AND, CIT VS. DIVINE LEASING & FINANCE LTD. REPORTED IN 299 ITR 268 AT P AGE 275. IN THE AFORESAID CASE OF SOPHIA FINANCE REPORTED IN 205 IT R 9S (FB), THEIR LORDSHIPS OF FULL BENCH AT PAGE 104 HAS HELD AS UND ER: IF THE AMOUNT CREDITED IS A CAPITAL RECEIPT THEN I T CANNOT BE TAXED BUT IT IS FOR THE ITO TO BE SATISFIED THAT TH E TRUE NATURE OF THE RECEIPT IS THAT OF CAPITAL. MERELY BECAUSE THE COMPANY CHOOSES TO SHOW THE RECEIPT OF THE MONEY AS CAPITAL DOES NOT PRECLUDE THE ITO FROM GOING INTO THE QUESTION WHETH ER THIS IS ACTUALLY SO. SECTION 68 WOULD CLEARLY EMPOWER HIM T O DO SO. WHERE, THEREFORE, THE ASSESSEE REPRESENTS THAT IT H AS ISSUED SHARES ON THE RECEIPT OF SHARE APPLICATION MONEY TH EN THE AMOUNT SO RECEIVED WOULD BE CREDITED IN THE BOOKS O F ACCOUNT OF THE COMPANY. THE ITO WOULD BE ENTITLED TO ENQUIRE, AND IT WOULD INDEED BE HIS DUTY TO DO SO, WHETHER THE ALLEGED SH AREHOLDERS DO IN FACT EXIST OR NOT. IF THE SHAREHOLDERS EXIST THE N, POSSIBLY, NO FURTHER ENQUIRY NEED IRE MADE,.. 16. IT WAS SUBMITTED THAT AFORESAID JUDGMENT OF THE FULL BENCH HAS BEEN FOLLOWED TILL DATE UNIVERSALLY AND ALSO BY THE APEX COURT IN ITS JUDGMENT IN THE CASE OF CIT VS. LOVELY EXPORTS (P.) LTD. REPORTED IN 216 CTR 195 HAS ADOPTED THE SAME LINE OF REASONING. IT WAS FURT HER SUBMITTED THAT THE AFORESAID JUDGMENTS OF THE DELHI HIGH COURT HAS ALSO BEEN ALSO FOLLOWED IN THE CASE OF CIT VS. PEOPLES GENERAL 26 ITA NO. 1869/D EL/2017 HOSPITAL LTD. REPORTED IN 356 ITR 65 (MP) WHEREIN THE HONBLE COURT RELYING ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF LOVELY EXPORTS (P.) LTD. (SUPRA) HAS HELD AS UNDER: IT IS NOT THE CASE OF ANY OF THE PARTIES THAT M/S A LLIANCE INDUSTRIES LIMITED, SHARIAH IS A BOGUS COMPANY OR A NONEXISTENT COMPANY AND THE AMOUNT WHICH WAS SUBSCRIBED BY THE SAID COMPANY BY WAY OF SHARE SUBSCRIPTION WAS IN FACT TH E MONEY OF THE RESPONDENT ASSESSEE. IN THE PRESENT CASE, THE ASSESSEE HAD ESTABLISHED THE IDENTITY OF INVESTOR WHO HAD PROVID ED THE SHARE SUBSCRIPTION AND IT WAS ESTABLISHED THAT THE TRANSA CTION WAS GENUINE THOUGH AS PER CONTENTION OF THE RESPONDENT THE CREDITWORTHINESS OF THE CREDITOR WAS ALSO ESTABLISH ED. IN THE PRESENT CASE, IN THE LIGHT OF THE JUDGMENT OF LOVELY EXPORTS (P.) LTD. (SUPRA) WE HAVE TO PLACED AT ONLY IN RESPECT OF THE ESTABLISHMENT OF THE IDENTITY OF THE INVESTOR. THE DELHI HIGH COURT ALSO IN DIVINE LEASING & FINANCE LTD. 'S CASE (SUPRA), CONSIDERING THE SIMILAR QUESTION HELD THAT THE ASSE SSEE COMPANY HAVING RECEIVED SUBSCRIPTIONS TO THE PUBLIC/RIGHTS ISSUE THROUGH BANKING CHANNELS AND FURNISHED COMPLETE DETAILS OF THE SHAREHOLDERS, NO ADDITION COULD BE MADE UNDER SECTI ON 68 IN THE ABSENCE OF ANY POSITIVE MATERIAL OR EVIDENCE TO IND ICATE THAT THE SHAREHOLDERS WERE BENAMIDARS OR FICTITIOUS PERSONS OR THAT ANY PART OF THE SHARE CAPITAL REPRESENTED COMPANY'S OWN INCOME FROM UNDISCLOSED SOURCES. THE SIMILAR VIEW HAS BEEN TAKEN BY THE OTHER HIGH COURTS. 27 ITA NO. 1869/D EL/2017 17. AS THE APEX COURT HAS CONSIDERED THE LAW IN LOVELY EXPORTS (P.) LTD.S CASE (SUPRA) AND IN VIEW OF LAW LAID DO WN BY THE APEX COURT, WE FIND THAT THE SUBSTANTIAL QUESTIONS FRAME D IN THESE APPEALS DO NOT ARISE FOR OUR CONSIDERATION. ACCORDI NGLY, ALL THESE APPEALS ARE DISMISSED WITH NO ORDER AS TO COSTS. [ EMPHASIS SUPPLIED]. 17. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE FOL LOWING JUDICIAL PRONOUNCEMENTS: I.350 ITR 220(ALL) CIT VS. JAY DEE SECURITIES AND F INANCE LTD. II. 350 ITR 222 (AH) CIT VS. MISRA PRESERVERS (P) L TD. III.361 ITR 220(DEL) CIT VS. KAMDHENU STEEL AND ALL OYS LTD. IV. 320 ITR 619 BHAV SHAKTI STEEL MINES (P) LTD. VS. CIT V. ITA NO. 1497/2010,1518/2010 (DEL) CIT VS. DERB Y OVERSEAS (P) LTD. VI. ITA NO. 904/2010 (DEL) CIT VS. DHAWAN JEWELL ERS (P) LTD. VII. 329 ITR 110 (DEL) SARTHAK SECURITIES CO. P. L TD. VS. ITO VIII. 361 ITR 195 (DEL) CIT VS. NIPUAN AUTO (P) L TD 18. IT WAS FURTHER SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE HIGH COURT OF DELHI IN THE CASE OF CIT V DIVINE LEASING AND FINANCE LTD REPORTED IN 299 ITR 268 (DEL), HAS HELD THAT WHERE THE TRANSACTION IS THROUGH BANKING CHANNELS, THE GENUIN ENESS OF THE 28 ITA NO. 1869/D EL/2017 TRANSACTION IS DULY ESTABLISHED. IN THE CASE OF ADD!. CIT V. BAHRI BROS. (P.) LTD. REPORTED IN [1985] 154 ITR 244 (PAT.) IT HAS BEEN HELD THAT THE VERY FACT THAT ALL THE TRANSACTIONS WERE ENTERED IN TO BETWEEN THE PARTIES THROUGH ACCOUNT PAYEE CHEQUES MAKES THE QUE STION OF IDENTITY OF CREDITORS FALL INTO OBLIVION AND IT BECOMES ABSO LUTELY IRRELEVANT. THE SAME VIEW HAS BEEN EXPRESSED BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. MATHER AND PLATT REPORTED IN 168 ITR 493. IT WAS SUBMITTED THAT ONCE THE SHAREHOLDERS HAVE DULY CONF IRMED THE FACTUM OF INVESTMENT MADE IN THE APPELLANT COMPANY, ADDITI ON MADE UNDER SECTION 68 OF THE ACT IN THE HANDS OF THE APPELLANT IS WHOLLY UNWARRANTED, AS HELD BY THE APEX COURT IN THE JUDGM ENT REPORTED IN 292 ITR 682, CIT VS. K. CHINNATHAMBAN (SC), WHERE IT HAS BEEN HELD BY THEIR LORDSHIPS OF THE APEX COURT WHERE A TRANSACTION STANDS CONFIRMED BY THE THIRD PARTY OF AN INVESTMENT NO AD DITION COULD POSSIBLY BE MADE U S 68 OF THE ACT. IN THE HANDS OF THE ASSESSEE IN WHOSE , BOOKS OF ACCOUNTS CREDIT APPEARS . 19. IT WAS FURTHER SUBMITTED THAT BEFORE MAKING THE IMPUGNED ADDITION, IT HAS NOT EVEN BEEN ESTABLISHED THAT INV ESTMENT RECEIVED BY THE ASSESSEE HAS BEEN ORIGINATED FROM THE COFFERS O F THE ASSESSEE. IN SUPPORT OF THE AFORESAID, THE APPELLANT SEEKS TO PL ACE RELIANCE ON THE 29 ITA NO. 1869/D EL/2017 JUDGMENT OF THE HIGH COURT OF DELHI IN THE CASE OF CIT VS VALUE CAPITAL SERVICES (P) LTD. REPORTED IN 307 ITR 334, WHEREIN THEIR LORDSHIP'S HAVE HELD AS UNDER: LEARNED COUNSEL FOR THE REVENUE SUBMITS THAT THE CREDITWORTHINESS OF THE APPLICANTS CAN NEVERTHELESS BE EXAMINED BY THE ASSESSING OFFICER. IT IS QUITE OBVIOUS THAT IS VERY DIFFICULT FOR THE ASSESSEE TO SHOW THE CREDITWORTHI NESS OF STRANGERS. IF THE REVENUE HAS ANY DOUBT WITH REGARD TO THEIR ABILITY TO MAKE THE INVESTMENT, THEIR RETURNS MAY B E RE-OPENED BY THE DEPARTMENT. IN ANY CASE, WHAT IS CLINCHING IS THE ADDITIONAL BU RDEN ON THE REVENUE. IT MUST SHOW THAT EVEN IF THE APPLICANT DO ES NOT HAVE THE MEANS TO MAKE THE INVESTMENT, THE INVESTMENT MA DE BY THE APPLICANT ACTUALLY EMANATED FROM THE COFFERS OF THE ASSESSEE SO AS TO ENABLE IT TO BE TREATED AS THE UNDISCLOSED IN COME OF THE ASSESSEE. THIS HAS NOT BEEN SHOWN INSOFAR AS THE PRESENT CASE IS CONCERNED AND THAT HAS BEEN NOTED BY THE TRIBUNA L ALSO. [EMPHASIS SUPPLIED] 20. THE ASSESSEE ALSO SUBMITS THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. REAL TIME MARKETING (P) LTD. RE PORTED IN 306 ITR 55 HAS HELD THAT BURDEN IS ON THE ASSESSING OFFICER TO SHOW THAT MONEY RECEIVED ORIGINATED FROM THE COFFERS OF THE ASSESSE E COMPANY. THE FINDINGS OF THE HIGH COURT ARE AS UNDER: 30 ITA NO. 1869/D EL/2017 8. THERE IS A FINDING OF FACT GIVEN BY THE TWO AUT HORITIES NAMELY CIT(A) AND THE TRIBUNAL TO THE EFFECT THAT:- THE CONFIRMATION OF M/S. ACL HAS BEEN FILED BY THE ASSESSEE. THE SAID COMPANY WAS ASSESSED TO TAX. THE SOURCE OF ACL HAD BEEN EXPLAINED AS OUT OF TRANSFER OF FUNDS FROM THE ACCOUNTS OF M/S. BTL. THUS, THE ASSESSEE DISCHARGED ITS BURDEN OF PROVING IDENTITY, CAPACITY AND GENUINENESS OF THE TRANSACTI ON. THE ASSESSING OFFICER HAS NOT BROUGHT ANY MATERIAL TO SHOW THAT THE FUNDS TO ACL WERE PROVIDED BY THE ASSESSEE. UND ER THE CIRCUMSTANCES, IT CANNOT BE SAID THAT THE CASH CRED IT IN QUESTION HAS REMAINED UNEXPLAINED. THERE IS ABSOLUTELY NO MATERIAL TO LINK THE ASSESSE E WITH THE SUM OF RS.22,97,000/- DEPOSITED IN CASH IN THE BANK ACC OUNT OF M/S. FBSL. 9. IN VIEW OF THE CONCURRENT FINDINGS OF THE FACT GIVE N BY THE TWO AUTHORITIES THAT THERE IS NO MATERIAL TO LINK T HE ASSESSEE WITH A SUM OF RS.22,97,000/- DEPOSITED IN CASH IN T HE BANK ACCOUNT OF M/S. FBSL, AS SUCH, NO CASE IS MADE OUT FOR MAKING ADDITION UNDER SECTION 68 OF THE ACT, SINCE THERE W AS NO MATERIAL WITH THE ASSESSING OFFICER TO COME TO THE CONCLUSION REGARDING ANY GENUINENESS OR FICTITIOUS IDENTITY OF THE ENTRIES OR NON CAPACITY OF THE LENDER. 10. UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY INFI RMITY OR PERVERSITY IN THE ORDER PASSED BY THE TRIBUNAL AND IN OUR OPINION NO SUBSTANTIAL QUESTION OF LAW ARISES IN TH IS CASE. WITH 31 ITA NO. 1869/D EL/2017 THE RESULT, THE PRESENT APPEAL IS NOT MAINTAINABLE AND THE SAME IS HEREBY DISMISSED.[EMPHASIS SUPPLIED] 21. ACCORDINGLY, THE AO/CIT(A) HAVE FAILED TO APPRE CIATE THAT, ENTIRE FUNDS FOR MAKING THE INVESTMENT ORIGINATED FROM THE BANK ACCOUNT OF SHAREHOLDERS WHO ARE DULY IDENTIFIABLE AND HAVE ALS O CONFIRMED THE INVESTMENT MADE IN THE APPELLANT COMPANY, AS SUCH, ADDITION MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(A) IS UNSUS TAINABLE IN LAW. FURTHERR, IT IS SETTLED LAW THAT IF AN ASSESSEE HAS FURNISHED THE EVIDENCES/MATERIAL TO ESTABLISH THE TRANSACTION, AN D THE AO IS NOT INCLINED TO BELIEVE THE MATERIAL PLACED BY ASSESSEE . THEN BURDEN IS ON HIM TO BRING MATERIAL TO REBUT THE SAME AS HAS BEEN HELD BY THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT V GENESIS COMMET (P) LTD REPORTED IN 163 TAXMAN 482. THE ASSESSEE ALSO SUBMITS THAT WHERE NO ADVERSE MATERIAL HAS BEEN BROUGHT ON RECORD, NO ADD ITION CAN BE MADE IN RESPECT OF THE SHARE APPLICATION MONEY IN THE HA NDS OF THE ASSESSEE. RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRONOU NCEMENTS: I) ITA NO. 212/2012 (DEL) DATED 11.04.2012 CIT VS. GO EL SONS GOLDEN ESTATE (P) LTD II) ITA NO. 298/2012 (DEL) DATED 16.05.2012 CIT VS. DAL MIA BROS PVT. LTD. III) ITA NO. 1257/2011 (DEL) DATED 20.07.2012 CIT VS. EX PO GLOBE INDIA LTD 32 ITA NO. 1869/D EL/2017 IV) 357 ITR 146 (DEL) CIT VS. FAIR FINVEST LTD. V) 361 ITR 10 (DEL) CIT VS. GANGESTAWARI METAL (P) LTD . VI) ITA NO. 871/D/2010 A.Y. 2003-04 DATED 25.05.2012 IT O VS. M/S EXCELLANCE TOWN PLANNER (P) LTD. VII) ITA NO. 1125/D/2012 A.Y. 2002-03 DATED 01.06.2012 ITO VS. M/S HI TECH ACCURATE COMMUNICATION (P) LTD. VIII) ITA NO. 1177/D/2012 A.Y. 2001-02 DATED 05.10.2012 I TO VS. INDIA TEXFAB MARKETING LTD. IX) ITA NO. 4498/D/2010 A.Y. 2003-04 DATED 30.12.2010 I NTIMATE JEWELS (P) LTD. X) ITA NO. 1078/D/2013 A.Y. 2002-03 (DEL) MITHIIA CRED IT SERVICES LTD. VS. ITO XI) ITA NO. 5656/D/2012 A.Y. 2004-05 (DEL) GULATI GLASS INDUSTRIES (P) LTD. XII) 367 ITR 217 (ALL) CIT VS. VACMET PACKAGING (INDIA) (P) LTD. XIII) 44 TAXMANN.COM 460 (RAJ) CIT VS. SUPERTECH DIAMOND TOOLS (P.) LTD. XIV) 51 TAXMANN.COM 198 (MAD) CIT VS. PRANAV FOUNDATION LTD. XV) 50 TAXMANN.COM 416 (MAD) VICTORY SPINNING MILLS LTD . XVI) ITA NO. 2082/D/2011 DATED 8.12.2014 A.Y. 2007-08 AC IT VS. DIVINE (INDIA) INFRASTRUCTURE LTD. XVII) ITA NO. 1644/D/2012 DATED 28.11.2014 A.Y. 2003-04 A CIT VS. GULSHAN POLYOLS LTD. XVIII) ITA NO. 4122/D/2009 DATED 22.10.2014 A.Y. 2001-02 I TO VS. N.C. CABLES LTD XIX) ITA NO. 2821/D/2011 DATED 16.10.2014 ITO VS. RAKAM MONEY MATTERS (P) LTD. XX) ITA NO. 645/2012 DATED 13.1.2015 FUNNAY TIME FINVES T LTD 33 ITA NO. 1869/D EL/2017 22. RELIANCE IS ALSO PLACED ON THE ORDER OF THE TRI BUNAL IN THE CASE OF ITO VS. SHRI. KAILASH CHAND BANSAL REPORTED IN 1 SOT 485, WHEREIN THE ASSESSEE HAD RECEIVED GIFTS OUT OF DONORS NRE ACCO UNT WITH HONGKONG AND SHENGHAI BANK AND ANOTHER GIFT OUT OF HIS NRE ACCOUNT WITH THE INDIAN BANK. THAT AO MADE THE ADDI TION WHICH WAS DELETED BY THE CIT(A). IN THE APPEAL FILED BEFORE T HE HONBLE TRIBUNAL, IT WAS HELD AS UNDER: 5. AFTER HEARING BOTH THE PARTIES, WE DO NOT FIND MERIT IN THE APPEAL OF THE REVENUE. UNDOUBTEDLY, THE INITIAL BUR DEN IS UPON THE ASSESSEE TO PROVE THE IDENTITY AND CAPACITY OF THE CASH CREDITOR AND THE GENUINENESS OF THE TRANSACTION. IN THE PRESENT CASE, THE ASSESSEE HAD PRODUCED THE CONFIRMATION FR OM THE DONORS IN THE FORM OF AFFIDAVITS, THE GIFT DEEDS BE TWEEN THE DONORS AND THE ASSESSEE, COPIES OF NRE ACCOUNTS AND PASSPORT OF THE DONORS. THE ORDER OF CIT(A) REVEALS THAT ASSESS ING OFFICER MADE ENQUIRIES FROM THE BANKERS OF THE DONORS, WHO CONFIRMED THAT GIFTED AMOUNTS WERE GIVEN FROM THE ACCOUNTS OF THE DONORS. NO OTHER ENQUIRY WAS MADE BY ASSESSING OFFICER. ON THESE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE IN AGREEMENT WITH THE ORDER OF CIT(A) THAT THE INITIAL BURDEN WHICH LIES ON THE ASSESSEE HAS BEEN DISCHARGED AND THE SAME WAS SHIFTED TO THE ASSESSING OFFICER TO DISPROVE THE SAME BY BRINGING SUFFICIENT MATERIAL ON THE RECORD. AS OBSERVED BY THE CIT(A), THE ASSESSIN G OFFICER HAS NOT DOUBTED THE GENUINENESS OF ANY OF THE DOCUMENTS AND THE ADDITION CANNOT BE MADE MERELY ON THE BASIS OF SUSP ICION OR 34 ITA NO. 1869/D EL/2017 SURMISES. THE IDENTITY AND CAPACITY OF THE DONORS A RE WELL ESTABLISHED. SINCE THE MONEY HAD COME FROM NRE ACCO UNT, THE GENUINENESS OF THE TRANSACTION CAN ALSO NOT BE DOUBTED. THERE IS NO MATERIAL ON THE RECORD TO EVEN SUGGEST THAT ANY UNACCOUNTED MONEY OF THE ASSESSEE WAS SIPHONED TO T HE DONORS. THEREFORE, WE DO NOT FIND ANY ERROR IN THE ORDER OF CIT(A). THE ORDER OF CIT(A) IS, THEREFORE, UPHELD. [EMPHASIS SUPPLIED] 23. IT IS FURTHER ADDED HERE THAT IN THE INSTANT CA SE, THERE IS NO DISPUTE THAT THE AMOUNT RECEIVED REPRESENTED FOREIG N REMITTANCES MADE WHICH HAD DULY BEEN NOTIFIED TO THE RESERVE BA NK OF INDIA. IT IS ALSO NOT EVEN ALLEGED THAT THERE WAS ANY VIOLATION MADE UNDER THE PROVISIONS OF FOREIGN EXCHANGE MANAGEMENT ACT AND A S SUCH IT IS ABSOLUTELY CLEAR THAT THE AMOUNT REPRESENTED CAPITA L RECEIPT A SUM RECEIVED AGAINST ISSUE OF THE PREFERENCE SHARES TO SUCH SHAREHOLDERS WHO HAVE DULY BEEN DEBITED AND HAD BEEN ADMITTED BY SUCH SHAREHOLDERS THAT THIS HAVE CONTRIBUTED TOWARDS SHA RE CAPITAL AGAINST THE ISSUE OF PREFERENCE SHARES TO THEM. IT WAS SUBM ITTED THAT THE INVESTMENT HAS BEEN RECEIVED BY THE ASSESSEE THROUG H PROPER BANKING CHANNELS. IT IS SUBMITTED THAT WHILE UPHOLDING THE ADDITION, LEARNED CIT(A) HAS UPHOLD THE FINDING OF THE AO WHO HAS DOU BTED THE SOURCE OF THE INVESTORS. IT IS RESPECTFULLY SUBMITTED THAT LE ARNED CIT(A) HAS COMPLETELY FAILED TO APPRECIATE THAT IT IS SETTLED LAW THAT IT IS NOT THE 35 ITA NO. 1869/D EL/2017 BUSINESS OF THE ASSESSEE TO FIND OUT THE SOURCE OF MONEY OF THE CREDITOR. THAT IN A LATEST JUDGMENT, PRONOUNCED ON 21.12.2015, HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. M/S SHIV DOOLI PEARLS & INVESTMENT LTD. REPORTED IN [2016] 237 TAX MAN 104 (DELHI), HAS HELD AS UNDER: 12. THE COURT HAS EXAMINED THE DECISION OF THE GAU HATI HIGH COURT IN NEMI CHAND KOTHARI (SUPRA). THEREIN THE GA UHATI HIGH COURT REFERRED TO SECTION 68 OF THE ACT AND OBSERVE D THAT THE ONUS OF THE ASSESSEE TO TIRE EXTENT OF HIS PROVING THE SOURCE WHOM WHICH HE HAS RECEIVED THE CASH CREDIT. THE HI GH COURT HELD THAT THE AO HAD AMPLE 'FREEDOM TO MAKE INQUIR Y NOT ONLY INTO THE SOURCE(S) OF I THE CREDITOR, BUT ALSO OF H IS (CREDITORS) SUB-CREDITORS AND PROVE, AS A RESULT, OF SUCH INQUI RY, THAT THE MONEY RECEIVED BY THE ASSESSEE, IN THE FORM OF LOAN FROM THE CREDITOR, THOUGH ROUTED THROUGH THE SUB-CREDITORS, ACTUALLY BELONGS TO, OR WAS OF, THE ASSESSEE HIMSELF. THERE AFTER, THE HIGH COURT, ON A HARMONIOUS CONSTRUCTION OF SECTION 106 OF THE EVIDENCE ACT AND SECTION 68 OF THE ACT. HELD AS UND ER: WHAT, THUS, TRANSPIRES FROM THE ABOVE DISCUSSION I S THAT WHILE SECTION 106 OF THE EVIDENCE ACT LIMITS THE ONUS OF THE ASSESSEE TO THE EXTENT OF HIS PROVING THE SOURCE FROM WHICH HE HAS RECEIVED THE CASH CREDIT. SECTION 68 GIVES AMPLE FR EEDOM TO THE ASSESSING OFFICER TO MAKE INQUIRY NOT ONLY INTO THE SOURCE(S) OF THE CREDITOR, BUT ALSO OF HIS (CREDITOR'S) SUB CRED ITORS AND PROVE, 36 ITA NO. 1869/D EL/2017 AS A RESULT, OF SUCH INQUIRY, THAT THE MONEY RECEIV ED BY THE ASSESSEE, IN THE FORM OF LOAN FROM THE CREDITOR, TH OUGH ROUTED THROUGH THE SUB-CREDITORS, ACTUALLY BELONGS TO, OR WAS OF, THE ASSESSEE HIMSELF. IN OTHER WORDS, WHILE SECTION 68 GIVES THE LIBERTY TO THE ASSESSING OFFICER TO ENQUIRE INTO TH E SOURCE/SOURCES FROM WHERE THE CREDITOR HAS RECEIVED MONEY, SECTION 106 MAKES THE ASSESSEE LIABLE TO DISCLOSE O NLY THE SOURCE(S) FROM WHERE HE HAS HIMSELF RECEIVED THE CR EDIT AND IT IS NOT THE BURDEN OF THE ASSESSEE TO SHOW THE SOURCE(S ) OF HIS CREDITOR NOR IS IT THE BURDEN OF THE ASSESSEE TO PR OVE THE CREDITWORTHINESS OF THE SOURCE(S) OF THE SUBCREDITO RS. IF SECTION 106 AND SECTION 68 ARE TO STAND TOGETHER, WHICH THE Y MUST, THEN, THE INTERPRETATION OF SECTION 68 HAS TO BE IN SUCH A WAY THAT IT DOES NOT MAKE SECTION (06 REDUNDANT. HENCE, THE HARMONIOUS CONSTRUCTION OF SECTION 106 OF THE EVIDE NCE ACT AND SECTION 68 OF THE INCOME TAX ACT WILL BE THAT THOUG H APART FROM ESTABLISHING THE IDENTITY OF THE CREDITOR, THE ASSE SSEE MUST ESTABLISH THE GENUINENESS OF THE TRANSACTION AS WEL L AS THE CREDITWORTHINESS OF HIS CREDITOR, THE BURDEN OF THE ASSESSEE TO PROVE THE GENUINENESS OF THE TRANSACTIONS AS WELL A S THE CREDITWORTHINESS OF THE CREDITOR MUST REMAIN CONFIN ED TO THE TRANSACTIONS, WHICH HAVE TAKEN PLACE BETWEEN THE AS SESSEE AND THE CREDITOR. WHAT FOLLOWS, AS A COROLLARY, IS THAT IT IS NOT THE BURDEN OF THE ASSESSEE TO PROVE THE GENUINENESS OF THE TRANSACTIONS BETWEEN-HIS CREDITOR AND SUB-CREDITORS NOR IS IT THE BURDEN OF THE ASSESSEE TO PROVE THAT THE SUB-CREDIT OR HAD., THE CREDITWORTHINESS. TO ADVANCE THE CASH CREDIT TO THE CREDITOR FROM WHOM THE CASH CREDIT HAS BEEN, EVENTUALLY, REC EIVED BY THE 37 ITA NO. 1869/D EL/2017 ASSESSEE . IT, THEREFORE, FURTHER LOGICALLY FOLLOWS THAT THE CREDITOR'S CREDITWORTHINESS HAS TO BE JUDGED VIS-A- VIS THE TRANSACTIONS, WHICH HAVE TAKEN PLACE BETWEEN THE AS SESSEE AND THE CREDITOR, AND IT IS NOT THE BUSINESS OF THE ASS ESSEE TO FIND OUT THE SOURCE OF MONEY OF HIS CREDITOR OR OF THE G ENUINENESS OF THE TRANSACTIONS, WHICH TOOK BETWEEN THE CREDITOR A ND SUB- CREDITOR AND/OR CREDITWORTHINESS OF THE SUB-CREDITO RS, FOR, THESE ASPECTS MAY NOT BE WITHIN THE SPECIAL KNOWLEDGE OF THE ASSESSEE. ( EMPHASIS SUPPLIED) THE ABOVE OBSERVATIONS, FAR FROM SUPPORTING THE CAS E OF THE REVENUE, DOES THE OPPOSITE. IN THE SUBSEQUENT DECIS ION OF THIS COURT IN MOD. CREATIONS PVT. LTD. V. INCOME TAX OFFICER (201 3) 354 ITR 282 (DEL), THE POSITION WAS CLARIFIED BY THE COURT AND IT WAS HELD: IT WILL HAVE TO BE KEPT IN MIND THAT SECTION 68 OF THE I.T. ACT ONLY SETS UP A PRESUMPTION AGAINST THE ASSESSEE WHE NEVER UNEXPLAINED CREDITS ARE FOUND IN THE BOOKS OF ACCOU NTS OF THE ASSESSEE. IT CANNOT BUT BE GAINSAID THAT THE PRESUM PTION IS REBUTTABLE. IN REFUTING THE PRESUMPTION RAISED, THE INITIAL BURDEN IS ON THE ASSESSEE. THIS BURDEN, WHICH IS PL ACED ON THE ASSESSEE, SHIFTS AS SOON AS THE ASSESSEE ESTABLISHE S THE AUTHENTICITY OF TRANSACTIONS AS EXECUTED BETWEEN TH E ASSESSEE AND ITS CREDITORS. IT IS N PART OF THE ASSESSEE'S B URDEN TO PROVE EITHER THE GENUINENESS OF THE TRANSACTIONS EXECUTED BETWEEN THE CREDITORS AND THE SUB-CREDITORS NOR IS IT THE BURDE N OF THE ASSESSEE TO PROVE THE CREDIT WORTHINESS OF THE SUBC REDITORS. 38 ITA NO. 1869/D EL/2017 14. IN MOD. CREATIONS PVT. LTD. (SUPRA) THIS COURT NEGATIVED THE CASE OF THE REVENUE THAT THE ONUS WAS ON THE ASSESSEE TO PROVE THE SOURCE OF THE SUB-CREDITO R. IT WAS OBSERVED AS UNDER: WITH THIS MATERIAL ON RECORD IN OUR VIEW AS FAR AS THE ASSESSEE WAS CONCERNED, IT HAD DISCHARGED INITIAL O NUS PLACED ON IT. IN THE EVENT THE REVENUE STILL HAD A DOUBT WITH REGARD TO THE GENUINENESS OF THE TRANSACTIONS IN ISSUE, OR AS REGARDS THE CREDIT WORTHINESS OF THE CREDITOR S, IT WOULD HAVE HAD TO DISCHARGE THE ONUS WHICH HAD SHIF TED ON TO IT. A BALD ASSERTION BY THE A.O. THAT THE CREDIT S WERE A CIRCULAR ROUTE ADOPTED BY THE ASSESSEE TO PLOUGH BA CK ITS OWN UNDISCLOSED INCOME INTO ITS ACCOUNTS, CAN BE OF NO AVAIL. THE REVENUE WAS REQUIRED TO PROVE THIS ALLEG ATION. AN ALLEGATION BY ITSELF WHICH IS BASED ON ASSUMPTIO N WILL NOT PASS MUSTER IN LAW. THE REVENUE WOULD BE REQUIR ED TO BRIDGE THE GAP BETWEEN THE SUSPICIONS AND PROOF IN ORDER TO BRING HOME THIS ALLEGATION. THE ITAT, IN OUR VIE W, WITHOUT ADVERTING TO THE AFOREMENTIONED PRINCIPLE L AID STRESS ON THE FACT THAT DESPITE OPPORTUNITIES, THE ASSESSEE AND/OR THE CREDITORS HAD NOT PROVED THE GENUINENESS OF THE TRANSACTION. BASED ON THIS THE ITAT CONSTRUED THE INTENTIONS OF THE ASSESSEE AS BEING MALAFIDE. IN OU R VIEW THE ITAT OUGHT TO HAVE ANALYZED THE MATERIAL RATHER THAN BE BURDENED BY THE FACT THAT SOME OF THE CREDITORS HAD CHOSEN NOT TO MAKE A PERSONAL APPEARANCE BEFORE THE A.O. IF THE A.O. HAD ANY DOUBT ABOUT THE MATERIAL PLACED ON RECORD, WHICH WAS LARGELY BANK STATEMENTS OF THE CR EDITORS 39 ITA NO. 1869/D EL/2017 AND THEIR INCOME TAX RETURNS, IT COULD GATHER THE N ECESSARY INFORMATION FROM THE SOURCES TO WHICH THE SAID INFO RMATION WAS ATTRIBUTABLE TO. NO SUCH EXERCISE HAD BEEN COND UCTED BY THE A.O. IN ANY EVENT WHAT BOTH THE A.O. AND THE ITAT LOST TRACK OF WAS THAT IT WAS DEALING WITH THE ASSE SSMENT OF THE COMPANY, I.E., THE RECIPIENT OF THE LOAN AND NO T THAT OF ITS DIRECTORS AND SHAREHOLDERS OR THAT OF THE SUB-C REDITORS. IF IT HAD ANY DOUBTS WITH REGARD TO THEIR CREDIT WO RTHINESS, THE REVENUE COULD ALWAYS BRING IT TO TAX IN THE HAN DS OF THE CREDITORS AND/OR SUB-CREDITORS. [SEE CIT V. DIVINE LEASING & FINANCE LTD. (2008) 299 ITR 268 (DELHI) AND CIT V . LOVELY EXPORTS (P) LTD. (2008) 216 CTR 195 (SC)].' IN VIEW OF THE LEGAL POSITION EXPLAINED IN THE ABOV E DECISIONS, THE COURT HOLDS THAT AS FAR AS THE PRESE NT CASE IS CONCERNED, THE ASSESSEE HAS INDEED DISCHARGED ITS O NUS OF PROVING THE CREDITWORTHINESS AND GENUINENESS OF THE LENDER (TIL). THERE WAS NO REQUIREMENT IN LAW FOR THE ASSE SSEE TO PROVE THE GENUINENESS AND CREDIT WORTHINESS OF THE SUBCREDITOR, WHICH IS IN THIS CASE WAS TCL. [EMPHAS IS SUPPLIED] 24. THAT IN THE CASE OF CIT VS. DAULAT RAM RAWATMULL REPORTED IN 87 ITR 349 AT PAGE 359, HONBLE APEX COURT HAS HELD AS UNDER: THE EXPLANATION FURNISHED ABOUT THE SOURCE OF RS. 4,50,000 IN FIXED DEPOSIT IN THE NAME OF BISWANATH WAS THAT HE HAD KEPT AN AMOUNT OF RS. 4,50,000 WITH M/S . SOORAJMAL NAGARMAL AND RS. 50,000 IN DEPOSIT WITH C OMILLA 40 ITA NO. 1869/D EL/2017 BANK. THE AMOUNT OF RS. 4,50,000 WAS STATED TO HAVE BEEN WITHDRAWN BY BISWANATH FROM M/S. SOORAJMAL NAGARMAL IN JANUARY, 1941, WHILE THE OTHER AMOUNT OF RS. 50.000 WAS WITHDRAWN FROM COMILLA BANK IN MARCH, 1942. THE AMO UNT OF RS. 5,00,000 WAS THEN TRANSFERRED BY BISWANATH T O HIS NATIVE PLACE, RATANGARH (DESH) IN RAJASTHAN DUE TO BOMBING PANIC IN CALCUTTA. WHEN WAR SITUATION IMPRO VED, THE MONEY WAS TAKEN FROM DESH TO JAMNAGAR FOR DEPOS IT. THIS EXPLANATION WAS FOUND TO BE FALSE IN VIEW OF T HE ADMITTED POSITION THAT THE AMOUNT OF RS. 5,00,000 I N FIXED DEPOSIT IN THE NAME OF BISWANATH IN JAMNAGAR BANK H AD BEEN TENDERED AT BURRABAZAR CALCUTTA BRANCH OF THE CENTRAL BANK ON NOVEMBER 15, 1944, AND THEREAFTER W AS TRANSFERRED THROUGH BOMBAY HEAD OFFICE OF THE BANK TO JAMNAGAR. THERE WERE ALSO OTHER CIRCUMSTANCES WHICH POINTED TO THE FALSITY OF THE ABOVE EXPLANATION. TH E FALSITY OF THE ABOVE EXPLANATION OF BISWANATH, IN THE OPINI ON OF THE HIGH COURT, DID NOT WARRANT THE CONCLUSION THAT THE AMOUNT OF RS.5,00,000 BELONGED TO THE ASSESSEE. WE CAN FIND NO FLAW OR INFIRMITY IN THE ABOVE REASONING OF THE HIGH COURT. THE QUESTION WHICH AROSE FOR DETERMINATION I N THIS CASE WAS NOT WHETHER THE AMOUNT OF RS. 5,00,000 BEL ONGED TO BISWANATH, BUT WHETHER IT BELONGED TO THE RESPON DENT- FIRM. THE FACT THAT BISWANATH HAS NOT BEEN ABLE TO GIVE A SATISFACTORY EXPLANATION REGARDING THE SOURCE OF RS . 5,00.000 WOULD NOT BE DECISIVE EVEN OF THE MATTER A S TO WHETHER BISWANATH WAS OR WAS NOT THE OWNER OF THAT AMOUNT. A PERSON CAN STILL BE HELD TO BE THE OWNER OF A 41 ITA NO. 1869/D EL/2017 SUM OF MONEY EVEN THOUGH THE EXPLANATION FURNISHED BY HIM REGARDING THE SOURCE OF THAT MONEY IS FOUND TO BE NOT CORRECT. FROM THE SIMPLE FACT THAT THE EXPLANATION REGARDING THE SOURCE OF MONEY FURNISHED BY A, IN WH OSE NAME THE MONEY IS LYING IN DEPOSIT, HAS BEEN FOUND TO BE FALSE, IT WOULD BE A REMOTE AND FAR-FETCHED CONCLUS ION TO HOLD THAT THE MONEY BELONGS TO B. THERE WOULD BE IN SUCH A CASE NO DIRECT NEXUS BETWEEN THE FACTS FOUND AND TH E CONCLUSION DRAWN THEREFROM 25. IN THE CASE OF CIT V. DWARKADHISH INVESTMENT (P.) LTD, REPORTED IN [2011] 330 ITR 298 (DELHI) HON'BLE HIGH COURT HA S HELD AS UNDER: 8. IN ANY MATTER, THE ONUS OF PROOF IS NOT A STATI C ONE. THOUGH IN SECTION 68 PROCEEDINGS, THE INITIAL BURDEN OF PR OOF LIES ON THE ASSESSEE YET ONCE HE PROVES THE IDENTITY OF THE CRE DITORS/SHARE APPLICANTS BY EITHER FURNISHING THEIR PAN NUMBER OR INCOME-TAX ASSESSMENT NUMBER AND SHOWS THE GENUINENESS OF TRAN SACTION BY SHOWING MONEY IN HIS BOOKS EITHER BY ACCOUNT PAYEE CHEQUE OR BY DRAFT OR BY ANY OTHER MODE, THEN THE ONUS OF PRO OF WOULD SHIFT TO THE REVENUE. JUST BECAUSE THE CREDITORS/SH ARE APPLICANTS COULD NOT BE FOUND AT THE ADDRESS GIVEN, IT WOULD N OT GIVE THE REVENUE THE RIGHT TO INVOKE SECTION 68. ONE MUST NO T LOSE SIGHT OF THE FACT THAT IT IS THE REVENUE WHICH HAS ALL TH E POWER AND WHEREWITHAL TO TRACE ANY PERSON. MOREOVER, IT IS SE TTLED LAW THAT THE ASSESSEE NEED NOT TO PROVE THE SOURCE OF SOURCE. 42 ITA NO. 1869/D EL/2017 26. FURTHER RELIANCE WAS PLACED ON THE FOLLOWING JU DICIAL PRONOUNCEMENTS: I. [2014] 361 ITR 220 (DELHI) CIT V. KAMDHENU STEEL & ALLOYS LTD. II. [2015] 57 TAXMANN.COM 176 (GUJARAT) SINT. NEELAMBEN GOPALDAS AGRAWAL V. TTO III. [19971 224 ITR 180 (P&H) CIT VS. RAM NARAIN GOEL IV. [2014] 366 ITR 217 (RAJASTHAN) CIT V. JAI KUMAR BAKLIWAL V. [2013] 214 TAXMAN 440 (ALLAHABAD) ZAFA AHMAD & CO. V. CIT VI. 103 ITR 344 AT 349-350 ( PATNA) SARAOGI CREDIT CORPORATION V CIT VII. 59 ITR 632 AT 636 (ASSAM) TOLARAM DAGA V CIT VIII. 49 ITR 273 AT 279 (MAD) S. HASTIMAL V CIT IX. 151 ITR 150 AT 156-157 (PAT) ADDL. CIT, BIHAR V HANUMAN AGGARWAL X. 154 ITR 244 AT 247 (PAT) ADDL CIT V BAHRI BROS. (P) LT XI. 264 ITR 254 AT 261-266 (GAU) NEMICHAND KOTHARI V. CIT XII. 280 ITR 512 AT 518 (GUJ) MURLIDHAR LAHORIMAL VS. CIT XIII. [2008] 219 CTR (RAJ.) 571 AT 577 LABH CHAND BOHRA V. ITO XIV. 256 ITR 360 AT 369 (GUJ) DCIT VS ROHINI BUILDERS 27. THE APPELLANT BEFORE CONCLUDING WITH THE SUBMIS SIONS THAT THE AO/CIT(A) WHILE FRAMING THE ASSESSMENT HAS GROSSLY ERRED M INCLUDING IN THE TOTAL INCOME OF THE APPELLANT, THE CONTRIBUT IONS MADE BY THE SHAREHOLDERS AS REVENUE HAS FAILED TO APPRECIATE TH E PROVISIONS OF SECTION 69 OF THE ACT AND HAS MISAPPLIED THE PROVIS IONS OF SECTION 68 OF 43 ITA NO. 1869/D EL/2017 THE ACT. RELIANCE IS PLACED ON THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ADDL. CIT VS. PRECISION METAL WORKS REPORTED IN 156 ITR 693, WHEREIN AT PAGE 696, HONBLE COURT HAS HELD AS UNDE R: ...WHEN THE TRUE PICTURE WAS EXPLAINED TO THE ITO. WE THINK THAT HE WAS RIGHT IN ADDING THE INCOME TO THE PERSO NS TO WHOM IT BELONGED RATHER THAN TO TAX THE WRONG PERSONS WITH THE WRONG AMOUNT... 28. IT IS WELL SETTLED LAW BY THE JUDGMENT OF THE A PEX COURT IN THE CASE OF ITO VS. CH. ATCHAIAH REPORTED IN (1966)218 ITR 239 (SC) THAT THE ASSESSING OFFICER HAS TO ONLY ASSESS RIGHT PERS ON INSTEAD OF WRONG PERSON. THE APPELLANT EVEN AT THE COST OF REPETITI ON, SEEKS TO SUBMIT THAT DESPITE APPELLANT HAVING DISCHARGED ITS INITIAL ONUS TO ESTABLISH THAT THE IDENTITY OF THE CREDITORS, CREDI TWORTHINESS OF THE TRANSACTION AND GENUINENESS OF THE TRANSACTION, THE ADDITION HAS BEEN SUSTAINED PRIMARILY ON THE GROUND THE ASSE SSEE HAS FAILED TO ESTABLISH THE SOURCE OF THE SOURCE. IT IS SUBMITTED THAT IN THE INSTANT CASE, THE ASSESSEE HAS ESTABLISHED EVEN THE SOURCE OF THE SOURCE BY FURNISHING ADDITIONAL EVIDENCES, HOWE VER, SAME HAS BEEN REJECTED PURELY ON TECHNICAL CONSIDERATION AND THE ADDITION HAS BEEN MADE AND SUSTAINED ON THE AFORESAID GROUND WHICH IS WHOLLY UNSUSTAINABLE AS HAS BEEN HELD IN THE AFORES AID JUDICIAL PRONOUNCEMENTS. 44 ITA NO. 1869/D EL/2017 29. LASTLY, IT WAS SUBMITTED THAT WHILE MAKING THE IMPUGNED ADDITION, AO/CIT(A) DID NOT BRING ANY EVIDENCE TO R EBUT THE EVIDENCES FURNISHED BY THE ASSESSEE AND MADE THE ADDITION ON SUSPICION AND SPECULATIONS. IT IS SETTLED LAW THAT, NO ADDITION CAN BE MADE ON THE BASIS OF SURMISES, SUSPICION AND CONJECTURES. RELIANCE FOR THIS PROPOSITION IS PLACED ON 37 ITR 271 (SC) UMA CHARAN SHAW & BROS. CO. V. CIT. IT HAS BEEN FURTHER HELD IN THE FOLLOWING CASES THA T SUSPICION HOWSOEVER STRONG CANNOT TAKE THE PLACE OF PROOF: I) 26 ITR 775 (SC) AT 782 (SC) DHAKESWARI COTTON MILLS LTD. VS. CIT II) 37 ITR 151(SC) OMAR SALAY MOHAMMAD SAIT V CIT III) 37 ITR 288 (SC) LAI CHAND BHAGAT AMBICA RAM V CIT IV) AIR 1977 SC 796 KRISHNAND VS. STATE OF MADHYA PRADE SH V) AIR 1974 SC 171 JAYADAVAL PODDAR VS. MST BIBI HAZRA VI) 242 ITR 133 ( KER CIT VS. K. MAHIM LDMA 30. ACCORDINGLY, THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LEARNED CIT(A) IS DIRECTED TO BE D ELETED. 31. GROUND NO. 4 BEING DISALLOWANCE OF RS.89.114/- BEING THE EXPENDITURE ON RENT HOLDING THE SAME TO BE EXCESSIV E: THE APPELLANT COMPANY, DURING THE RELEVANT YEAR, HAD DEBITED AN A MOUNT OF RS. 27,89,114 TO THE PROFIT AND LOSS ACCOUNT AS RENTAL S, DISCLOSED IN NOTE 45 ITA NO. 1869/D EL/2017 20 (PLACED AT PAGE 31 OF PB) TO THE AUDITED FINANCI AL STATEMENTS UNDER THE HEAD OTHER EXPENSES. THE BREAK-UP OF THE AFOR ESAID EXPENSES IS AS UNDER: 32. HOWEVER, THE AO MADE A DISALLOWANCE OF A SUM OF RS. 88,114/- ON THE GROUND THAT UNDER THE RENT AGREEMENT WITH CE PCO INDUSTRIES PRIVATE LIMITED AND TOTAL RENT EXPENDITURE INCURRED DURING THE YEAR AGGREGATED TO RS.27.00 LACS RS.2,25,000/- PER MONTH FOR A PERIOD OF 12 MONTHS WHEREAS APPELLANT HAS DEBITED A SUM OF RS. 2 7,89,114/- AS SUCH IT WAS HELD BY HIM THAT A SUM OF RS. 89,114/- IS TH E EXCESS RENT (SEE PARA 5C OF THE ORDER OF THE AO). IT 4S SUBMITTED TH AT DURING THE COURSE OF THE ASSESSMENT NO SPECIFIC QUERY WAS RAISED REGA RDING ANY QUERY WHATSOEVER. THAT BEFORE THE LEARNED CIT(A), HOWEVER APPELLANT FILED ITS SUBMISSIONS DATED 27.02.2017 (PLACED AT PAGE 44 7-450 OF PB). S. NO MONTHLV RENTAL ANNUAL PAVMENT 1 MONTHLY RENTAL CHARGES OF RS. 2,13,500 RS. 25,62,000 2. MONTHLY RENTAL CHARGES PAID TO MR. RS. 1,21,330 3. AMOUNT PAID AGAINST SETTLEMENT OF RENTAL RS. 65,972 4. RENT PAID FOR COFFEE MACHINE AT RENTED RS. 9,000 5. RENT PAID IN RESPECT OF UIDAI PROJECT RS. 18,454 6. SERVICE TAX COMPONENT ADDED TO COST RS. 12,358 TOTAL RS. 27,89,114 46 ITA NO. 1869/D EL/2017 HOWEVER LEARNED CIT(A) WITHOUT APPRECIATING THE SUB MISSIONS OF THE APPELLANT REJECTED THE SUBMISSIONS OF THE APPELLANT . IN THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A) THE APPE LLANT HAD SUBMITTED THAT APART FROM THE RENT PAID TO M/S CEPC O OF RS. 25,62,000/- BEING THE REND PAYABLE UNDER THE AGREEM ENT (AND NOT RS. 27 LACS AS ALLOWED BY THE LEARNED AO), THE ASSESSEE HAS PAID RENT TO: I. MR. BHUSHAN GUPTA FOR A PERIOD OF 15.03.2012 TO31.0 3.2012 ALONGWITH EXPENDITURE INCURRED OF RS. 1,21,300/-. II. RENT PAID FOR COFFEE MACHINES AT RENTED PREMISES OF RS. 9,000/-. III. RENT PAID OF RS. 18,454/- IN RESPECT OF UIDAI PROJE CT FOR ARRANGING CONFERENCES AND SEMINARS. IV. SERVICE TAX COMPONENT AS RENT OF RS. 12,358/-. 33. IT WAS SUBMITTED THAT LEARNED CIT(A) HAS HOWEVE R FAILED TO CONSIDER THE AFORESAID DETAILS OF RENT EXPENDITURE INCURRED DURING THE YEAR IT WOULD BE SEEN THAT THE APPELLANT HAD INCURR ED RENTAL EXPENSES PAID TO CEPCO INDUSTRIES FOR KALKAJI PROPERTIES, AN D APART FROM THE AFORESAID, IT HAS ALSO TAKEN ANOTHER PREMISES ON RE NT FROM SHRI. SUBHASH GUPTA IN THE MONTH OF MARCH 2012 AT A RENTA L OF RS. 2.20,000/- PER MONTH (PLACED AT PAGE 99 TO 103 OF P B) AND FOR THE YEAR UNDER CONSIDERATION, APPELLANT HAD PAID A SUM OF RS. 2,42,600 TO THE LESSOR, BEING ONE MONTHS RENT ALON G WITH 47 ITA NO. 1869/D EL/2017 MISCELLANEOUS CHARGES OF RS. 22.600 FOR THE EXECUTI ON OF RENTAL AGREEMENT. SINCE THE PREMISES WERE LEASED ONLY FOR A PERIOD OF 15 DAYS IN THE RELEVANT YEAR, THE APPELLANT CLAIMED AN EXPENDITURE OF RS. 1,21,300, BEING THE PROPORTIONATE AMOUNT OF RENT FO R 15 DAYS ACCRUING IN THE PREVIOUS YEAR UNDER CONSIDERATION. APART FRO M THE AFORESAID SUMS, APPELLANT HAS ALSO INCURRED THE EXPENDITURES TABULATED AT SL. NO. 3-6 OF THE AFORESAID TABLE, RELEVANT DETAILS OF WHI CH WERE SUBMITTED TO THE LEARNED CIT(A) AND IS APPEARING AT PAGES 464-47 5. 34. ACCORDINGLY THE APPELLANT HAS FURNISHED THE COM PLETE DETAILS OF THE EXPENDITURE, WHICH EXPENDITURE HAS BEEN INCURRE D FOR THE PURPOSE OF ITS BUSINESS AND THERE IS NOT EVEN ANY ALLEGATIO N THAT EXPENDITURE INCURRED BY THE APPELLANT NOT GENUINE, AS SUCH, DIS ALLOWANCE MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(A) IS DIREC TED TO BE DELETED. 35. AS REGARDS GROUND NO. 5, ADDITION OF NOTIONAL A MOUNT ON THE GROUND OF NONDISCLOSURE OF CORRECT RENTAL INCOME: THE APPELLANT COMPANY HAD. DURING THE RELEVANT YEAR, EARNED A REN TAL INCOME OF RS. 13,59,950 FROM SUB-LETTING OF LEASED PREMISES AT KA LKAJI TO ITS TWO SISTER CONCERNS, VIZ. MAGNUM TECHNOLOGY SOLUTIONS P VT LTD AND BELL SECURITECH PVT. LTD VIDE SUB-RENT AGREEMENT(S) DATE D 01.08.2009 48 ITA NO. 1869/D EL/2017 (PLACED AT PAGE 105-108 OF PB). IN ACCORDANCE WITH THE ABOVEMENTIONED SUB LEASE AGREEMENTS, THE APPELLANT COMPANY WAS ENTITLED TO RECEIVE A MONTHLY RENTAL OF RS. 1,50,00 0 FROM MAGNUM TECHNOLOGY PVT. LTD AND A MONTHLY RENTAL OF RS. 50, 000 FROM BELL SECURITAS PVT. LTD. IT IS HOWEVER SUBMITTED THAT TH E RENTAL AGREEMENT WITH MAGNUM TECHNOLOGY SOLUTION PVT. LTD WAS TERMIN ATED AFTER NOVEMBER, 2011 I.E. DURING THE YEAR, LEASE CONTINUE D ONLY FOR A PERIOD OF 8 MONTHS, VIZ. FROM APRIL TO NOVEMBER, 2011, AN D THUS THE APPELLANT HAD ONLY RECEIVED RENTAL INCOME FROM MAGN UM FOR A PERIOD OF 8 MONTHS AND NOT THE ENTIRE YEAR WHICH HAD DULY BEE N SHOWN. IT IS SUBMITTED THAT UNLESS AN INCOME ACCRUES, NO INCOME CAN BE BROUGHT TO TAX. THUS IN THE ABSENCE OF ACCRUAL OF AN INCOME, T HE LEARNED AUTHORITIES HAD COMMITTED GROSS ERROR OF LAW TO BRI NG TO TAX A SUM WHICH HAS NOT ACCRUED TO IT AND AS SUCH THE ADDITIO N MADE IS CONTRARY TO SECTION 5 OF THE ACT WHICH IS A CHARGING SECTION . 36. IT IS RELEVANT TO STATE HERE ITSELF THAT MAGNUM TECHNOLOGIES, VIDE LETTER DATED 31.08.2011 (PLACED AT PAGE 475 OF PB), IN VIEW OF REDUCED BUSINESS ACTIVITIES AND CONSEQUENT INABILITY TO CON TINUE WITH RENTED PREMISES, SOUGHT FOR REDUCTION OF LEASE RENT PAYABL E UNDER THE AGREEMENT OF RS. 1,50,000/- TO RS. 50,000/- FOR A P ERIOD OF 3 MONTHS, FROM SEPTEMBER TO NOVEMBER, 2011, AND SUBSEQUENT TE RMINATION 49 ITA NO. 1869/D EL/2017 THEREOF. THUS, IN VIEW OF THE AFORESAID ARRANGEMENT WITH THE SISTER CONCERN, DURING THE RELEVANT YEAR, THE APPELLANT HA D ONLY RECEIVED AN AMOUNT OF RS. 9.00.000 TOWARDS RENT FROM MAGNUM TEC HNOLOGIES INSTEAD OF THE ALLEGED AMOUNT OF RS. 12,00,000/-CON SIDERED BY THE ASSESSING OFFICER WHILE MAKING NOTIONAL ADDITION IN THE HANDS OF THE APPELLANT. IT IS SUBMITTED THAT WITHOUT APPRECIATIN G THE AFORESAID FACTS, AO MADE AN ADDITION OF RS.4,40,050/-. BEING THE NOTIONAL AMOUNT OF DIFFERENTIAL RENT INSTEAD OF THE ACTUAL A MOUNT OF RS. 13,59,950/'- DECLARED BY THE APPELLANT. IT WAS SUB MITTED THAT BEFORE THE LEARNED CIT(A), APPELLANT FILED ITS SUBMISSIONS AND ALSO ENCLOSED THE LETTER DATED 31.08.2011 (PLACED AT PAGE 475 OF THE PB), HOWEVER LEARNED CIT(A) WITHOUT CONSIDERING THE AFORESAID LE TTER, MERELY ON SUSPICION THAT AGREEMENT WITH MAGNUM DID NOT PROVID E FOR VARIATION OF RENT, UPHELD THE ADDITION. IN FACT HE HAS FAILED TO APPRECIATE THAT NO SUCH INCOME ACCRUED TO THE APPELLANT AS HAS BEEN TA XED. IT WAS SUBMITTED THAT IN VIEW OF THE LETTER DATED 31.08.20 11, APPELLANT HAS ACCEPTED THE PROPOSAL OF REDUCED RENT RECEIVABLE FR OM THE SISTER CONCERN ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND IT IS NOT A CASE THAT APPELLANT HAS RECEIVED A HIGHER SUM BUT HAS NOT DEC LARED THE CORRECT SUM. IT IS SUBMITTED THAT SINCE THE APPELLANT HAS D ECLARED THE ACTUAL RENT RECEIVED BY IT, AND THERE IS NO MATERIAL THAT APPELLANT HAS 50 ITA NO. 1869/D EL/2017 RECEIVED THE HIGHER SUM OVER AND ABOVE THE DECLARED SUM, AS SUCH, ADDITION MADE BY THE AO AND SUSTAINED BY THE LEARNE D CIT(A) WITHOUT TAKING COGNIZANCE OF THE FACTUAL SUBSTRATUM OF THE CASE AND IGNORING THE COMMERCIAL EXIGENCY BE DELETED. 37. AS REGARDS GROUND NO. 6 TO 6.2 IS IN RESPECT O F SUSTENANCE OF THE ADDITION MADE ON ACCOUNT OF ALLEGED FAILURE TO DEDU CT TAX AT SOURCE FROM AMOUNT OF GOODWILL, WE FIND THAT DELHI INTEG RATED MULTI MODAL TRANSIT SYSTEM (DIMTS) LTD. HAD AWARDED A CONTRAC T FOR DESIGNING, DEVELOPMENT, OPERATIONS, INSTALLATION, MAINTENANCE AND MANAGEMENT OF DRIVING LICENSES ISSUE SYSTEM (HEREINAFTER REFER RED TO AS DL PROJECT), VIDE AGREEMENT DATED 27.8.2008 TO KAIZAN ENGINEERING SYSTEM PVT. LTD. (KAIZAN). THE SAID DL PROJECT WA S OPERATIONAL WITH 13 ZONAL TRANSPORT AUTHORITIES IN DELHI. FOR THE PU RPOSE OF THE SAID PROJECT, KAIZAN HAD PROVIDED ALL NECESSARY INFRASTR UCTURE INCLUDING OPERATIONAL, SUPERVISORY, MAINTENANCE, MANPOWER AND INVENTORY OF SMART CARDS, PRINT MEDIA AND STATIONERY, ETC. 38. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE PURSUANT TO MOU DATED 24.05.2011 (PLACED AT PAGES 143-156 OF THE PB), ACQUIRED THE AFORESAID BUSINESS OF KAIZAN, ALONG WITH ALL THE RE LATED ASSETS AND LIABILITIES; LOCK STOCK AND BARREL, FROM KAIZAN AT A TOTAL LUMPSUM 51 ITA NO. 1869/D EL/2017 CONSIDERATION OF RS. 1.70 CRORES. THE BOOK VALUE OF ASSETS FORMING PART OF THE AFORESAID BUSINESS IN THE HANDS OF KAIZAN AG GREGATED TO RS. 70,27,217, WHICH WAS INCORPORATED AS SUCH IN THE BO OKS OF THE ASSESSEE COMPANY, POST ACQUISITION OF BUSINESS. THE DIFFEREN CE BETWEEN THE TOTAL AGREED LUMPSUM CONSIDERATION OF RS. 1.70 CROR ES AND THE AFORESAID BOOK VALUE (RS.70.27.217) OF ASSETS AMOUN TING TO RS.99,72,783 WAS CAPITALIZED IN THE BOOKS OF ACCOUN T UNDER THE HEAD INTANGIBLE ASSETS (PLACED AT PAGE 26 OF PB). IT WOULD BE PERTINENT TO POINT OUT THAT NEITHER ANY DEPRECIATION ON THE AFOR ESAID CAPITALIZED VALUE UNDER THE HEAD INTANGIBLE ASSETS WAS CLAIME D, NOR ANY DEDUCTION FOR THE AFORESAID AMOUNT WAS CLAIMED IN T HE BOOKS OF ACCOUNTS OR RETURN OF INCOME FOR THE RELEVANT PREVI OUS YEAR. 39. IN THE ASSESSMENT ORDER, THE AFORESAID EXCESS A MOUNT OF CONSIDERATION OF RS.99.72,783 CAPITALIZED UNDER THE HEAD INTANGIBLE ASSETS HAS BEEN HELD TO BE ROYALTY, BEING A PRICE PAID FOR OBTAINING RIGHT TO USE AN INTANGIBLE ASSET WITHIN THE MEANI NG OF SECTION 9(L)(VI) OF THE ACT. CONSEQUENTLY, THE ASSESSING OFFICER HEL D THAT THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE THEREFROM U/S 19 4J OF THE ACT. IN VIEW OF FAILURE ON THE PART OF THE ASSESSEE TO DEDU CT TAX AT SOURCE FROM THE AFORESAID PAYMENT U/S 194J, THE AFORESAID AGGRE GATE AMOUNT HAS 52 ITA NO. 1869/D EL/2017 BEEN ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMP ANY. BEFORE THE LEARNED CIT(A) APPELLANT MADE ITS DETAILED SUBMISSI ONS, WHICH EXPLAINING THAT SUCH SUM CANNOT BE HELD TO BE ROYAL TY. FOR THE SAKE OF CONVENIENCE, SUCH SUBMISSIONS ARE REPRODUCED HEREUN DER: AT THE OUTSET, IT IS SUBMITTED THAT THERE HAS BEEN A GROSS ERROR IN THE ASSESSMENT ORDER TO HOLD THAT THE AFORESAID AMOUNT OF EXCESS CONSIDERATION PAID FOR ACQUISITION OF BUSINE SS CONSTITUTED ROYALTY FOR OBTAINING RIGHT TO USE AN INTANGIBLE ASSET FROM THE SELLER KAIZAN. AS SUBMITTED ABOVE, KAIZAN, PURSUANT TO CONTRACT EN TERED WITH DIMTS, WAS CARRYING ON THE BUSINESS OF EXECUTING DL PROJECT COMPRISING OF RELATED ASSETS AND LIABILITIES. PURSUANT TO MOU DATED 24.05.2011 ENTERED BETWEEN KA IZAN AND THE APPELLANT COMPANY, KAIZAN SOLD THE AFORESAID EN TIRE BUSINESS ALONG WITH RELATED ASSETS AND LIABILITIES TO THE AS SESSEE COMPANY FOR AN AGREED LUMPSUM CONSIDERATION OF RS.1.70 CROR ES. THE AFORESAID ARRANGEMENT CONFERRED ENTIRE OWNERSHI P RIGHT IN THE BUSINESS ALONG WITH RELATED ASSETS AND LIABILI TIES IN THE ASSESSEE COMPANY AND WAS NOT A MERE ARRANGEMENT OF GRANTING INVITED RIGHT TO USE ANY ASSET FOWLING PART OF SUCH BUSINESS, MUCH LESS INTANGIBLE ASSETS. THE LUMPSUM CONSIDERATION P AID BY THE ASSESSEE WAS THUS FOR ACQUISITION OF BUSINESS/ASSET S AND NOT FOR OBTAINING ANY LIMITED RIGHT TO USE ASSETS, MUCH LES S INTANGIBLE ASSETS, TO BE REGARDED AS ROYALTY WITHIN THE MEANIN G OF SECTION 9(L)(VI) OF THE ACT. 53 ITA NO. 1869/D EL/2017 REFERENCE IN THIS REGARD CAN BE MADE TO THE FOLLOWI NG DECISIONS, WHEREIN IT HAS BEEN HELD THAT THE PRICE PAID FOR AC QUISITION OF OWNERSHIP IN ANY INTANGIBLE ASSETS IS NOT COVERED W ITHIN THE MEANING OF ROYALTY US 9(L)(VI) OF THE ACT: RELIANCE, IN THIS REGARD, IS PLACED ON THE RECENT D ECISION OF DELHI HIGH COURT IN THE CASE OF ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. VS DIT: 332 ITR 340. WHERE, WHILE SUCCINCTLY EXPLAINING THE PROVISIONS OF AFORESAID EXPLANATION TO SECTION 9(1) (VI) OF THE ACT, THE HIGH COURT HELD THAT CONSIDERATION PAID TO WARDS OUTRIGHT PURCHASE OF ASSET, AS OPPOSED TO ACQUIRING A RIGHT TO USE SUCH ASSET, DOES NOT FALL WITHIN THE MEANING OF 'RO YALTY' UNDER THE AFORESAID SECTION: 55. KEEPING IN VIEW THE AFORESAID PRINCIPLES, WE N OW EMBARK UPON THE INTERPRETATIVE PROCESS IN DEFINING THE AMB IT AND SCOPE OF TERM 'ROYALTY' APPEARING IN EXPLANATION 2 TO SUB -CLAUSE (VI) OF SECTION 9(1) OF THE ACT. SUB-CLAUSE (I) DEALS WITH THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICE NCE) IN RESPECT OF A PATENT, ETC. THUS, WHAT THIS SUB-CLAUSE ENVISA GES IS THE TRANSFER OF 'RIGHTS IN RESPECT OF PROPERTY AND NOT TRANSFER OF 'RIGHT IN THE PROPERTY. THE TWO TRANSFERS ARE DISTINCT AND HAVE DIFFERENT LEGAL EFFECTS. IN FIRST CATEGORY, THE RIGHTS ARE PURCHASED , WHICH ENABLE USE OF THOSE RIGHTS, WHILE IN THE SECOND CATEGORY, NO PURCHASE IS INVOLVED , ONLY RIGHT TO USE HAS BEEN GRANTED . OWNERSHIP DENOTES THE RELATIONSHIP BETWEEN A PERSON AND AN OBJECT FORMING THE SUBJECT MATTER O F HIS OWNERSHIP. IT CONSISTS OF A BUNDLE OF RIGHTS, ALL O F WHICH ARE 54 ITA NO. 1869/D EL/2017 RIGHTS IN REM, BEING GOOD AGAINST THE ENTIRE WORLD AND NOT MERELY AGAINST A SPECIFIC PERSON AND SUCH RIGHTS AR E INDETERMINATE IN DURATION AND RESIDUARY IN CHARACTE R AS HELD BY THE SUPREME COURT IN THE CASE OF SWADESHI RAN/AN SI NHA V.V. HARDEV BANERJEE [AIR 1992 SC 1590J. WHEN RIGHTS IS NO TRANSFER OF THE RIGHTS IN REM WHICH MAY BE GOOD AGAINST THE WORLD BUT NOT AGAINST THE TRANSFEROR. IN THAT CASE, THE TRANS FEREE DOES NOT HAVE THE RIGHTS WHICH ARE INDETERMINATE IN DURATION AND RESIDUARY IN CHARACTER. LUMP SUM CONSIDERATION IS N OT DECISIVE OF THE MATTER. THAT SUM MAY HE AGREED FOR THE TRANSFER OF ONE RIGHT, TWO RIGHTS AND SO ON ALL THE RIGHTS BUT NOT THE OWNERSHIP. THUS. THE DEFINITION OF TERM ROYALTY IN RESPECT OF THE COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK, PATENT . INVENTION . PROCESS, ETC. DOES NOT EXTEND TO THE OUTRIGHT PURCHASE OF THE RIGHT TO USE AN ASSET IN CASE OF ROYALTY, THE OWNERSHIP ON THE PROPERLY O R RIGHT REMAINS WITH OWNER AND THE TRANSFEREE IS PERM ITTED TO USE THE RIGHT IN RESPECT OF SUCH PROPERTY. A PAYMENT FOR THE ABSOLUTE ASSIGNMENT AND OWNERSHIP OF RIGHTS TRANSFE RRED IS NOT A PAYMENT FOR THE USE OF SOMETHING BELONGING TO ANOTHER PARTY AND, THEREFORE, NO ROYALTY. IN AN OUTRIGHT TRANSFER TO BE TREATED AS SALE OF PROPERTY AS OPPOSED TO LICENCE . ALIENATION OF ALL RIGHTS IN THE PROPERTY IS NECESSARY . ....... (EMPHASIS SUPPLIED) SIMILARLY, THE DELHI TRIBUNAL IN THE CASE OF IN THE CASE OF PARSONS BRINCKERHOFF INDIA (P) LTD. V. ADIT: IIS TTJ 214, ELABORATELY DEALT WITH THE AFORESAID PROVISIONS OFE XPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT AND HELD THAT CONSID ERATION PAID 55 ITA NO. 1869/D EL/2017 TOWARDS OUTRIGHT PURCHASE OF INTANGIBLE ASSET WOULD NOT FALL WITHIN THE MEANING OF ROYALTY UNDER THE SAID SECT ION. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER: 14 IN THE PRESENT CASE, THE DRAWINGS AND DESIGNS WERE SOLD TO THE ASSESSEE AND THE INTENTION OF THE PARTIES, WHEN THEY PROVIDE D FOR VISITS OF THE PERSONNEL OF THE THAILAND COMPANY TO INDIA, SEEMS TO BE ONLY TO ENSURE THAT THE DRAWINGS AND DE SIGNS ARE PROPERLY UNDERSTOOD AND PUT TO USE BY THE ASSESSEE IN CONNECTION WITH THE SVBT. IN PRO-QUIP CORPORATION VS. CIT (255 ITR 354), THE AUTHORITY FOR ADVANCE RULING (AAR) BROUGHT OUT THE DISTINCTION BE TWEEN A SALE OF PROPERTY AND THE TRANSFER OF THE RIGHT TO USE TH E PROPERTY IN THE FOLLOWING WORDS : 'THERE IS A WELL-KNOWN DISTINCTION BETWEEN THE OUT AND OUT SALE OF PROPERLY AND ALLOWING USE OF THE PROPERTY OR TEC HNICAL KNOW- HOW. IN THE FORMER CASE PROPERTY, WHICH MAY INCLUDE PERSON'S BUSINESS TRANSFERRED UNCONDITIONALLY, BECOMES PROPE RTY OF THE PURCHASER. IN THE LATTER CASE THE PURCHASER ONLY GE TS THE RIGHT TO USE THE PROPERTY. THE PAYMENT IN THE LATTER CASE MA Y BE TREATED AS LICENSING FEE OR ROYALTY BUT THE PAYMENT IN THE FIRST CATEGORY OF CASES CANNOT BE TREATED AS ROYALTY...' SIMILARLY, IN CIT VS. DAVY ASHMORE INDIA LIMITED (1 990) (190 ITR 626), THE CALCUTTA HIGH COURT HELD (AT PAGE 635) TH AT THE IMPORT 56 ITA NO. 1869/D EL/2017 OF DESIGNS AND DRAWINGS POSTULATES AN OUT AND OUT T RANSFER OR SALE OF SUCH DESIGNS AND DRAWINGS AND THE NON-RESID ENT COMPANY DOES NOT RETAIN ANY PROPERTY IN THEM LEAVING THE GR ANTEE TO USE OR EXPLOIT THEM. IT WAS HELD THAT THE CONSIDERATION PAID FOR THE TRANSFER OF THE DESIGNS AND DRAWINGS CANNOT BE TREA TED AS ROYALTY FALLING UNDER ARTICLE XIII OF THE DOUBLE TA X AVOIDANCE AGREEMENT BETWEEN INDIA AND U.K. IN CIT VS. KLAVMAN PORCELAINS LIMITED (1998) (229 ITR 735), THE ANDHRA PRADESH HI GH COURT WAS CONCERNED WITH THE SUPPLY OF DESIGNS AND DRAWINGS F OR ERECTING AND COMMISSIONING A KILN IN INDIA. THE FOREIGN COMP ANY WAS TO SEND AN EXPERT TO SUPERVISE THE ERECTION OF THE KIL N. THE MATERIALS AND KNOW-HOW WERE SUPPLIED FROM ABROAD. T HE ENTIRE PAYMENT, ACCORDING TO THE ANDHRA PRADESH HIGH COURT , WAS TO BE CONSIDERED AS THE COST OF THE KILN BY THE INDIAN TA XPAYER AND REPRESENTED BUSINESS PROFITS IN THE HANDS OF THE FO REIGN COMPANY. IN THE CASE OF CIT VS. NEYVELI LIGNITE COR PORATION LIMITED (2000) (243 ITR 459) (MADRAS), IT WAS HELD THAT THE TERM 'ROYALTY' NORMALLY CONNOTES THE PAYMENT MADE BY A P ERSON WHO HAS EXCLUSIVE RIGHT OVER A THING FOR ALLOWING ANOTH ER TO MAKE USE OF THAT THING WHICH MAY BE EITHER PHYSICAL OR INTELLECTUAL PROPERTY OR THING. THE EXCLUSIVITY OF THE RIGHT IN RELATION TO THE THING FOR WHICH ROYALTY WAS PAID SHOULD BE WITH THE GRANTOR OF THAT RIGHT. THE MERE PASSING ON OF INFORMATION CONC ERNING THE DESIGN OF A MACHINE WHICH IS TAILOR-MADE TO SUIT TH E REQUIREMENT OF A BUYER DOES NOT BY ITSELF AMOUNT TO TRANSFER OF ANY RIGHT OF EXCLUSIVE USER, SO AS TO RENDER THE PAYMENT MADE TH EREFOR BEING REGARDED AS ROYALTY. 57 ITA NO. 1869/D EL/2017 THE ABOVE CASES BRING OUT THE DISTINCTION BETWEEN A N OUTRIGHT SALE OF PROPERTY AND A TRANSFER OF RIGHT TO USE THE PROPERTY, RETAINING THE OWNERSHIP RIGHT WITH THE GRANTOR. IN THE FORMER CASE. THE CONSIDERATION RECEIVED WOULD BE BUSINESS PROFIT S AND IN THE LATTER, IT WOULD BE ROYALTY. IT IS NO DOUBT TRUE THAT BOTH IN SECTION 9(L)(VI)(B ) READ WITH CLAUSE (I) OF EXPLANATION 2 AND IN ARTICLE 12.3 OF THE TREATY BETWEEN INDIA AND THAILAND, THE LANGUAGE EMPLOYED A PPEARS AT FIRST BLUSH TO TAKE WITHIN ITS SWEEP EVEN A SALE OF THE PROPERTY BUT A CLOSER LOOK AT THE SECTION SHOWS THAT THE TRA NSFER OF ALL THE RIGHTS OR THE ALIENATION SHOULD BE WITH REGARD TO C ERTAIN NAMED RIGHTS/PROPERLY SUCH AS A PATENT, INVENTION, MODEL , DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; IN THE CASE OF THE TREATY, ARTICLE 12.3 REFERS TO ALIE NATION OF ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, PHONOGRAPHIC RECORDS, FILMS OR TAPES OR ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECR ET FORMULA OR PROCESS OR FOR THE USE OR RIGHT TO USE ANY INDUSTRI AL, COMMERCIAL OR SCIENTIFIC EQUIPMENT OR FOR INFORMATION CONCERNI NG INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. THE CTT(A) HAS STRESSED ON THE WORDS MODEL OR DESIGN. IT MUST BE NOTICED T HAT THERE ARE A NUMBER OF WORDS USED BOTH IN THE SECTION AND IN THE TREATY. ALL THE WORDS SIGNIFY A FORM OR KIND OF INT ELLECTUAL PROPERTY. THE WORDS MODEL OR DESIGN HAVE TO BE U NDERSTOOD IN THE CONTEXT. WHEN THESE TWO WORDS ARE SURROUNDED BY WORDS MEANING OR REFERRING TO INTELLECTUAL PROPERTY RIGHT S, IT MAY NOT BE PROPER, HAVING REGARD TO THE WELL-SETTLED RULES OF 58 ITA NO. 1869/D EL/2017 INTERPRETATION, TO HOLD THAT THESE TWO WORDS WILL H AVE TO BE UNDERSTOOD IN A DIFFERENT SENSE. ..IF THIS PRINCIPLE OF INTERPRETATION IS APPLIED TO CLASUE (I) OF EXPLANATION 2 TO SECTION 9(1)((VI) OF THE ACT, IT S EEMS TO US THAT THE WORDS SUCH AS, PATENT, INVENTION, SECRET FORMUL A OR PROCESS OR TRADE-MARK, WHICH ARE ALL SPECIES OF INTELLECTUA L PROPERTY, AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE AS SESSEE. THESE TWO WORDS CANNOT THEREFORE REFER TO DRAWINGS AND DE SIGNS WHICH ARE SOLD OUTRIGHT, WITHOUT THE SELLER RETAINING ANY PROPRIETARY RIGHTS OVER THEM THE MODEL OR DESIGN IN ORDER TO BE ROPED IN BY THE PROVISION. SHOULD BE A SPECIE OF INTELLECTUAL PROPERTY IN THE SAME MANNER AS A PATENT OR INVENTION OR SECRET FORM ULA OR PROCESS OR A TRADE-MARK. IN THIS VIEW OF THE MATTER . AN OUTRIGHT SALE OF THE DRAWINGS AND DESIGNS CANNOT FALL UNDER THE DEFINITION OF ROYALTY UNDER EXPLANATION 2 TO SECTION 9(1 )(VI) OF THE INCOME- TAX ACT. SINCE THE OUTRIGHT SALE OF DRAWINGS AND DESIGNS BY THE THAILAND COMPANY (PBAT) DOES NOT GIVE RISE TO INCOME BY WAV OF ROYALTY. PBAT IS NOT CHARGEABLE TO TAX IN INDIA UNDER SECTIO N 9(1 )(VI) OF THE INCOME-TAX ACT. ... '(EMPHASIS SUPPLIED) TO THE SAME EFFECT ARE THE FOLLOWING DECISIONS: K.BHAGYALAKSHMI V DC IT: (2013) 87CCH031 (CHENN.) FLAG TELECOM GROUP LTD. V. DV. CIT [2015]:54 TAXMAN N.COM 154 (MUMBAI - TRIB.) 59 ITA NO. 1869/D EL/2017 IN LIGHT OF THE AFORESAID DECISIONS, WHERE ALL RIGH TS IN RESPECT OF PROPERTY ARE TRANSFERRED TO THE TRANSFEREE AND THE TRANSFEREE CAN EXERCISE SUCH RIGHTS AGAINST THE REST OF THE WO RLD, IN OTHER WORDS, IT IS A CASE OF OUTRIGHT SALE ALIENATION OF RIGHTS IN REM, THEN, PAYMENT AGAINST SUCH RIGHT DOES NOT FALL WITH IN THE PROVISIONS OF EXPLANATION 2 TO SECTION 9(L)(VI) OF THE ACT, EVEN IF THE SAID TRANSFER IS IN RESPECT OF VARIOUS INTANGIB LE ASSETS, SPECIFIED THEREIN. THE CASE OF THE APPELLANT IS ON A MUCH BETTER FOOTI NG IN AS MUCH AS, IN THE PRESENT CASE THERE IS A TRANSFER/SLUMP S ALE OF BUSINESS, AS OPPOSED TO TRANSFER OF ANY PIECEMEAL T RANSFER OF INTANGIBLE ASSET, INVOLVING APPLICATION OF SECTION 9(L) (VI) OF THE ACT. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER COMPLET ELY FAILED TO UNDERSTAND THE TRUE NATURE OF AFORESAID TRANSACTION ENTERED BETWEEN THE APPELLANT COMPANY AND KAIZAN DURING THE RELEVANT PREVIOUS YEAR AND CONSEQUENTLY ERRED IN HOLDING THA T THE EXCESS CONSIDERATION PAID WAS TOWARDS OBTAINING RIGHT TO U SE AN INTANGIBLE ASSETS. THE AFORESAID RIGHT, IT IS RESPE CTFULLY REITERATED, WAS THE VALUE OF THE BUSINESS ALONG WIT H RELATED ASSETS AND LIABILITIES ACQUIRED FROM KAIZAN. IT WAS SIMPLY THAT THE AMOUNT OF CONSIDERATION AGREED FOR THE AFORESAI D BUSINESS BETWEEN THE ASSESSEE AND KAIZAN OVER AND ABOVE THE BOOK VALUE OF THE ASSETS, INSTEAD OF BEING SPREAD OVER THE VAR IOUS ASSETS ACQUIRED FROM KAIZAN WAS COMPENDIOUSLY CAPITALIZED UNDER THE HEAD INTANGIBLE ASSETS' IN THE BOOKS OF ACCOUNT AN D WAS NOT AN 60 ITA NO. 1869/D EL/2017 AMOUNT SEPARATELY PAID FOR ACQUISITION OF ANY INTAN GIBLE ASSETS, MUCH LESS TO BE REGARDED AS A PAYMENT MADE FOR GF T AMING A RIGHT TO USE SUCH ASSETSIN VIEW OF THE ABOVE, IT IS SUBMITTED THAT SINCE THE AFORESAID PAYMENT DID NOT FALL WITHIN THE MEANING OF ROYALTY U/'S 9(1) (VI), THE SAME WAS NOT SUBJECT TO TDS U S 194J AND, THEREFORE, THERE WAS NO DEFAULT ON THE PART OF ASSESSEE IN DEDUCTING TAX AT SOURCE UNDER THE SAID SECTION. 40. IT WAS SUBMITTED THAT DESPITE THE AFORESAID SUB MISSION LEARNED CIT(A) IN A WHOLLY ARBITRARY MANNER UPHOLD THE ADDI TION BY HOLDING THAT PAYMENT MADE BY THE APPELLANT IS FOR TECHNICAL SERV ICES AS DEFINED UNDER EXPLANATION 9(1 )(VII) OF THE ACT. IT IS SUBM ITTED THAT PAYMENT MADE BY THE APPELLANT CANNOT BE TERMED AS FEE FOR T ECHNICAL SERVICES AS PER EXPLANATION 2 OF SECTION 9(1 )(VII) OF THE A CT. FOR THE SAKE OF CONVENIENCE, AFORESAID PROVISION IS EXTRACTED HEREI NBELOW: EXPLANATION [2], FOR THE PURPOSES OF THIS CLAUSE, 'FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUD ING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGER IAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PR OVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MININ G OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATIO N WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER T HE HEAD 'SALARIES'. 61 ITA NO. 1869/D EL/2017 41. IT WOULD BE SEEN THAT PAYMENT MADE BY THE APPEL LANT IS NOT FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTAN CY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL O R OTHER PERSONNEL), BUT PAYMENT HAS BEEN MADE FOR THE PURCHASE OF BUSIN ESS OF KAIZAN, ALONG WITH ALL THE RELATED ASSETS AND LIABILITIES L OCK STOCK AND BARREL, AT A TOTAL LUMPSUM CONSIDERATION OF RS. 1.70 CRORES. T HE BOOK VALUE OF ASSETS FORMING PART OF THE AFORESAID BUSINESS AGGRE GATED TO RS 70,27,217, WHICH WAS INCORPORATED AS SUCH IN THE BO OKS OF THE ASSESSEE COMPANY, POST ACQUISITION OF BUSINESS. THE DIFFEREN CE BETWEEN THE TOTAL AGREED LUMPSUM CONSIDERATION OF RS.1.70 CRORE S AND THE AFORESAID BOOK VALUE (RS.70,27,217) OF ASSETS AMOUN TING TO RS.99,72,783 WAS CAPITALIZED IN THE BOOKS OF ACCOUN T UNDER THE HEAD INTANGIBLE ASSETS AS SUCH, PAYMENT OF RS.99,72,78 3/- CANNOT BY ANY STRETCH OF IMAGINATION BE TERMED AS FEE FOR TECHNIC AL SERVICES OBLIGING THE ASSESSEE COMPANY TO DEDUCT TAX AT SOURCE. THE D ISALLOWANCES THIS MADE BY INVOKING SECTION 40(A)(IA) IS WHOLLY ERRONE OUS. 42. APART FROM THE AFORESAID, THE FUNDAMENTAL CONTE NTION OF THE ASSESSEE IS THAT EVEN ASSUMING WITHOUT ADMITTING TH AT THE IMPUGNED AMOUNT WAS SUBJECT TO TDS U/S 194J, IT IS SUBMITTED THAT, AS POINTED ABOVE, THE APPELLANT DID NOT CLAIM ANY DEDUCTION FO R THE AFORESAID 62 ITA NO. 1869/D EL/2017 AMOUNT IN THE BOOKS OF ACCOUNTS OR RETURN OF INCOME FOR THE RELEVANT PREVIOUS YEAR, SINCE THE SAME WAS CAPITALIZED AS IN TANGIBLE ASSETS. THEREFORE, EVEN ASSUMING ON THE AFORESAID SUM, APPE LLANT WAS REQUIRED TO DED UCT TAX AT SOURC E, NO ADDITION CAN BE MADE AND AT BEST A DISALLOWANCE CAN BE MADE BY INVOKING SECTION 40(A )(IA) OF THE ACT, HOWEVER SUCH PROVISION IS WHOLLY INAPPLICABLE, AS A FORESAID PROVISION PRESUPPOSES A DEDUCTION SHOULD HAVE BEEN CLAIMED BY THE ASSESSEE ON WHICH EXPENDITURE NO TDS HAS BEEN DEDUCTION UNDER C HAPTER XVI1-B OF THE ACT. ACCORDINGLY, THE AFORESAID ADDITION MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(A) FOR ALLEGED FAILURE TO DEDUCT TAX AT SOURCE IS BEYOND JURISDICTION , AND IS DIRECTED TO BE DELETED . 43. AS REGARDS GROUND NO. 7 BEING DISALLOWANCE OF S TAMP DUTY CHARGES PAID AT THE TIME OF REGISTRATION OF RENT AG REEMENT,THE APPELLANT HAD, DURING THE YEAR, PAID STAMP DUTY CHA RGES AMOUNTING TO RS. FOR EXECUTION OF VARIOUS RENTAL AGREEMENTS. AS DISCUSSED IN DETAIL SUPRA, THE APPELLANT HAD LEASED OFFICE PREMISES AT KALKAJI AND PATPARGANJ AND SUB-LET PART THEREOF TO SISTER CONCE RNS. THAT LEARNED DISALLOWED THE AFORESAID SUMS BY HOLDING THAT SUCH AN EXPENDITURE IS CAPITAL EXPENDITURE. LEARNED CIT(A) THOUGH ADMITTED THAT REGISTRATION CHARGES PAID ON LEASE AGREEMENTS CANNOT BE HELD TO BE CAPITAL 63 ITA NO. 1869/D EL/2017 EXPENDITURE, HOWEVER ARBITRARILY UPHOLD THE ADDITIO N. IT WAS SUBMITTED THAT SINCE THE STAMP DUTY CHARGES WERE PAYABLE IN C ONNECTION WITH THE RENTAL AGREEMENT, THE SAME WERE IN THE NATURE OF RE VENUE EXPENSES IN THE ABSENCE OF ANY CAPITAL ASSET COMING INTO EXISTE NCE IN THE HANDS OF THE APPELLANT COMPANY AS SUCH, DISALLOWANCE MADE BY THE AO AND SUSTAINED BY THE LD. CIT(A) IS DIRECTED TO BE DELE TED. 44. AS REGARDS GROUND NO. 8 BEING UNABSORBED DEPREC IATION RELATING TO AY 2009-10 WE FIND THAT FOR THE PREVIOUS YEAR, R ELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE APPELLANT HAD BROUGHT FORWARD, INTER-ALIA , UNABSORBED DEPRECIATION OF ASSESSMENT YEAR 2009- 10 AMOUNTING OF RS.7,07,187 AND CLAIMED SET-OFF THE REAGAINST IN THE RETURN OF INCOME FOR THE RELEVANT YEAR. THE COPY OF COMPUTATION OF INCOME FOR AY 2009-10 IS PLACED AT PAGES 478-480 OF PB. FURTHER, THE AFORESAID DEPRECIATION WAS SUCCESSFULLY EARNED FORW ARD BY THE APPELLANT IN AY 2010-11 AND 2011-12. HOWEVER, THE A SSESSING OFFICER, HOWEVER, DID NOT ALLOW THE SAID CLAIM OF THE APPELL ANT REGARDING CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION OF A SSESSMENT YEAR 2009-10, WITHOUT PROVIDING ANY BASIS FOR SUCH DISAL LOWANCE. THAT THE LEARNED CIT(A) ARBITRARILY UPHELD THE DISALLOWANCE ON THE GROUND THAT THERE IS NO SUCH FINDING IN THE ORDER OF ASSESSMENT . IT WAS SUBMITTED THAT THE PROVISIONS RELATING TO SET OFF, CARRY' FOR WARD AND SET OFF OF 64 ITA NO. 1869/D EL/2017 UNABSORBED DEPRECIATION ARE CONTAINED IN SECTION 32 (2) OF THE ACT. THE SAID SECTION PROVIDES THAT WHERE FULL EFFECT CANNOT BE GIVEN TO DEPRECIATION ALLOWANCE AS PER SUB-SECTION (1) IN AN Y PREVIOUS YEAR, THEN THE ALLOWANCE OR PART OF SUCH ALLOWANCE, WHICH CANNOT BE SO SET OFF, IS DEEMED TO BE PART OF THE DEPRECIATION ALLOW ANCE FOR THE SUBSEQUENT YEAR(S) AND IS ACCORDINGLY ALLOWED AS DE DUCTION IN SUCH SUCCEEDING PREVIOUS YEAR AND SO ON FOR THE SUCCEEDI NG YEAR(S). IT IS SUBMITTED THAT IN VIEW OF THE AFORESAID STATUTORY' PROVISION, THE UNABSORBED DEPRECIATION RELATING TO ASSESSMENT YEAR 2009-10 WHICH REMAINED UNADJUSTED ON 01.04.2011, WOULD MERGE WITH THE DEPRECIATION OF PREVIOUS YEAR RELEVANT TO THE ASSES SMENT YEAR 2012-13 AND THE AGGREGATE OF SUCH UNABSORBED DEPRECIATION W OULD BE CARRIED FORWARD TO SUCCEEDING YEARS FOR INDEFINITE PERIOD. 45. IN VIEW OF THE AFORESAID, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT(A) IS UNSUSTAI NABLE IN LAW AND SUCH UNABSORBED DEPRECIATION RELATING TO ASSESSMENT YEAR 2009-10 IS DIRECTED TO BE ALLOWED TO BE CARRIED FORWARD. ACCO RDINGLY, ALL THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 65 ITA NO. 1869/D EL/2017 46. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 16.08.2017. SD/- SD/- [K.N. CHARY] [B.P. JAIN] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 16 TH AUGUST, 2017 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI