Virbhadreshwar Steels Private Limited, Latur, Latur V. Joint Commissioner of Income Tax (OSD), Latur Circle, Nanded, Nanded

ITA 486/PUN/2022

AI Insights

The case involves cross appeals by the Revenue and the assessee, M/s. Virbhadreshwar Steels Pvt. Ltd., against the common order of the CIT(A)-2, Aurangabad, dated 01-08-2019 for the assessment year 2015-16. The primary contention revolves around the addition of Rs. 12,38,35,000 as share capital introduced by the assessee, which was initially treated as bogus by the Assessing Officer under section 68 of the Income-tax Act, 1961. The CIT(A) had deleted this addition, which the Revenue contested, leading to the current appeals. The Tribunal noted procedural lapses in the acceptance of additional evidences by the CIT(A) without proper confrontation to the Assessing Officer, necessitating a remand for a comprehensive re-evaluation.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124524 (ITAT-PUNE)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-01-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 26-06-2022
• Other Referred Cases: CIT Vs Motor General Finance Ltd (254 ITR 449), Director of Income Tax Vs Bharat Diamond Bourse (259 ITR 280)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bogus Share capital; Principle of natural justice; Additional evidence; Set aside; Bogus
• Section: 68; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA No. 1667/PUN/2019 : A.Y. 2015-16 The Asstt. C.I.T. Nanded Circle, Nanded Appellant Vs. M/s. Virbhadreshwar Steels Pvt. Ltd., Plot No. E-5, Barshi Road, MIDC, Latur. PAN: AAECA 1984 D Respondent ITA No. 486/PUN/2022 : A.Y. 2015-16 M/s. Virbhadreshwar Steels Pvt. Ltd., Plot No. E-5, Barshi Road, MIDC, Latur. PAN: AAECA 1984 D Appellant Vs. The Jt. C.I.T. (OSD) Latur Circle, Nanded Respondent Department by : Shri J.P. Chandrakar Assessee by : None Date of Hearing : 30-01-2023 Date of Pronouncement : 31-01-2023 ORDER PER SHRI PARTHA SARATHI CHAUDHURY, JM These cross appeals preferred by the Revenue and the assessee emanates from the common order of the ld. CIT(A)-2, Aurngabad dated 01-08-2019 for assessment year 2015-16 as per the grounds of appeal appearing hereinafter. 2. The Revenue in its appeal in ITA No. 1667/PUN/2019 has raised the following grounds: 1. The Ld. Commissioner of Income-tax (A)-2, Aurangabad has erred in passing the order both on the facts of the case and in law. 2. The Ld. Commissioner of Income-tax (A)-2, Aurangabad erred in directing the assessing officer to delete the addition of Rs. 12,38,35,000/- being the share capital introduced by the assessee which was held as bogus and added under section 68 of the Income-tax Act, 1961 while passing the order under section 2 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 by the assessing officer 3. The Ld. Commissioner of Income-tax (A)-2, Aurangabad erred in holding that there were unsecured loans at Rs. 1,26,25,000/- converted into share capital and same are the brought forward balances of earlier years, as no evidence regarding this is available on record and the balances of the previous years of the unsecured loan creditors is not shown in the form 3CD of the audit report of the assessee. 4. The Ld. Commissioner of Income-tax (A)-2, Aurangabad has erred in deleting the addition of Rs. 12,38,35,000/- made by the AO on account of 'disallowance of bogus share capital introduced by the assessee' and added to the total taxable income of the assessee u/ s. 68 of the Act, without realizing the fact that the remaining amount of Rs. 3,78,35,000/ - has also remained to be taxed. 5. The Ld. Commissioner of Income-tax (A)-2, Aurangabad erred in failing to take cognizance of material available on record which AO has made part and parcel of the assessment order and which clearly indicates that the cash credits by the assessee were brought into its books of account amounting to Rs. 12,38,35,000/- during the year under consideration. 6. The order of the CIT(A) be vacated and the order of the AO be restored. 7. The appellant craves leave to add, amend or alter any other ground at the time of hearing.” 2. The Revenue has also filed an additional ground of appeal which reads as under: On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing the appellant’s ground of appeal that the department has already passed orders adding amounts under question as unexplained cash credits in case of shareholders who have introduced share capital in the company and therefore the addition made u/s 68of the IT Act in the hands of the appellant on account of share capital introduced has led to double addition, by ignoring and not appreciating the fact that there was no assessment made u/s 143(3) of the Act in the case of the shareholders for A.Y 2015-16.” 3. At the time of hearing, none appeared for the assessee. Notices of hearing have been duly served as per the registered address. The submissions of the ld. D.R considered. The assessee has also preferred an appeal and written submissions of the same were also considered along with the relevant documents on record and the case was heard. 3 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 4. The revenue is aggrieved by the deletion of addition by the ld. CIT(A) of Rs. 12,38,35,000/- which is the share capital introduced by the assessee which was held as bogus and added u/s 68 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) while passing order u/s 143(3) r.w.s. 144C(3) of the Act. Even at the outset without going into the merits of the case, the ld. D.R vehemently submitted that in this case when the assessment proceedings were going on the assessee was required to furnish relevant details/evidences regarding genuinity of the share capital introduced in respect of addition of Rs. 12,38,35,000/-. However, inspite of giving several opportunities the assessee has not furnished even a single evidence in support of its case and in absence of any documentary evidence regarding source of capital introduced by the individual members of the assessee the addition was made by the ld. A.O. This is evident from para 3 of the assessment order which is as follows: (3) The assessee was given a questionnaire on dated 16.11.2018 but nobody attended on dt. 22-11-2018 and a penalty u/s. 271(1)(b) was initiated on dated 22-12-2018 which was levied on 28-12- 2018. “The assessee made submission dated. 26.11.2018, which was placed on record. The reply was cryptic without any documentary evidence regarding source of capital introduction by individual members. Again a questionnaire was issued on dated 27.11.2018 asking Bank Account statements of Mahesh Malang, Mangesh Malang, Shilpa Malang, Surekha Malang, Manisha patil (sister of Mahesh. Malang) who introduced capital in Virbhadreshwar Steel Pvt. Ltd. (VSPL) to verify genuineness of source and creditworthiness of these individuals who introduced capital. It was so asked in questionnaire dated 27.11.2018 that if share source was loan or sale of any assets, they should give loan confirmation and sale deed of property sold. No reply was received till date of passing this order. A show cause' notice was given on 20-10-2018 as to why share capital introduced by individuals should not be added to total income [a copy of show cause is reproduced here]. A last reminder was given on 24-12-2018 but no reply was received till' passing of this draft order.” 5. It was further contended by the ld. D.R that the ld. CIT(A) while giving relief to the assessee on this issue has accepted various additional evidences without giving the A.O an opportunity to confront the same. There has been gross violation of Rule 46A of Income-tax Rules 1962. The additional evidences were accepted by 4 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 the ld. CIT(A) and no remand report was called from the A.O to revert on such additional evidences. It was contended by the ld. D.R that the action of the ld. CIT(A) has been in contravention with the legal frame work of the Act. 6. We have gone through the respective orders of the ld. A.O and the ld. CIT(A) respectively and have also perused the written submissions placed on record by the assessee. Admittedly no evidences were submitted by the assessee before the ld. A.O regarding the sources of capital introduced by individual members of the assessee. The genuineness, identity and credit worthiness of those individuals who had introduced capital could not be verified by the ld. A.O since the assessee has not provided any documents/evidences in support of its claim. Suddenly in form of additional evidences were furnished before the ld. CIT(A) and even without calling for a remand report or confronting the ld. A.O regarding these additional evidences and asking for his comments and without this exercise the ld. CIT(A) gave relief to the assessee on this issue deleting the addition regarding the share capital introduced. We are of the considered view therefore, that the ld. CIT(A) should have provided an opportunity to the ld. A.O to give his comments on the additional evidences filed by the assessee. Accordingly, in the interest of justice we set aside the order of the ld. CIT(A) on this issue and remand the matter to the file of the ld. A.O to re-adjudicate as per law considering the additional evidences filed by the assessee at the first appellate stage and come out with a speaking order complying with the principles of natural justice. Therefore, without even going into the merits of this case the grounds of appeal by the Revenue are accordingly allowed for statistical purposes. 7. In the result, the appeal of the revenue in ITA No. 1667/PUN/2019 is allowed for statistical purposes. 5 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 8. The assessee had preferred an appeal in ITA No. 486/PUN/2022 as per the following grounds of appeal. 1) The order passed by the Hon’ble CIT(A) in regards addition of Rs. 1,57,78,649/- without giving any reason or explanation for the same and without verifying the same is erroneous in nature and prejudicial to the interest of revenue and to be set aside. 2) Allow our appeal with consequential relief and any other benefit in the interest justice.” 9. The assessee is aggrieved with the following decision of the ld. CIT(A) appearing at para 5 of his order which is as follows: “5. I have duly considered the submissions of the appellant. On perusal of the show cause notice dated 8-10-2018 issued by the TPO (DCIT Transfer Pricing-2(2), Pune), it is seen that though the appellant company had claimed itself to be a manufacturer of steel yet it was evident from form 3CEB and tax audit report that the appellant was engaged only in the trading activities. The appellant company had made purchases of Rs. 52.44 crores from its associate concern namely MSM Steel Pvt. Ltd. and selected the CUP method for benchmarking its domestic transactions. The TPO directed the appellant company to explain as to how the CUP method was the most appropriate method in the present case however in spite of repeated opportunities in this regard, there was non-compliance by the appellant company, In light of above fact~., .the TPO rejected the CUP method selected by the appellant company and applied RPM as the most appropriate method for benchmarking the domestic transactions. The TPO thereafter chose the local comparable companies/entities from Prowess database that performed similar functions as carried out by the appellant company. The TPO selected ten comparables wherein the trading: activities had been carried out in steel products. The weighted average GPM of the comparable companies for A.Y. 2015-16 was worked out at 8.92% as against weighted average GPM OF 7.71% in the case of appellant company. The appellant company was accordingly directed by the TPO vide show-cause letter dated 18.10.2018 to explain as to why an upward adjustment of Rs.l,57.,78,649/- should not be made in its case. However the appellant company again chose not to comply with the show-cause notice and these facts "and circumstances, the TPO requested the AO to make au addition of Rs,1,57,78,649/- to the returned income of the appellant company. During the course of appellate proceedings, the counsel of appellant has argued that nowhere in the show-cause notice-Issued by TPO, he had mentioned the amount of upward adjustment. 'Further the companies chosen for comparison were large corporations, based in metro-cities and also part of a large conglomerate having varied business interests, 'Hence these companies were not appropriate as comparable companies. It was stated that the basis of weigh ted GPM of assessee mentioned at 7.71% by the TPO was not explained. Due to the above limitations, the upward adjustment suggested by AO was not sustainable. On careful consideration of facts of the present case, 1 hold that the appellant: has not discharged its obligation to properly explain the method of benchmarking of domestic transactions with the associate concern. No attempt has been made during the course of appellate proceedings to explain as to how the CUP 'method was the most appropriate method in the present case. No attempt has been made to show as to how the turnover' of the' comparable companies was large vis-a-vis that 'declared by the appellant company, Hence no fault. Can be found With the action of the AO to apply RPM as the most appropriate method to benchmark the domestic transactions since the appellant company is engaged in the trading activities, It was held by Honourable Delhi High Court in the case of CIT Vs Motor General Finance Ltd (254 lTR 449) that since the assessee, despite several opportunities granted. did not produce the relevant documents, an adverse inference had to be . drawn-against it. As the assessee could not produce the documents, an adverse inference in terms of section 114 of the Evidence Act, 1872, had to be drawn 6 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 to the effect that, had that document been. produced, it would have gone against the interests, of the assessee. ,If there 1:5 a mere claim without being supported by the documents in favour of that claim, the Assessing Officer has no power to entertain such claim, The Hon'ble Supreme Court in the case of Director of Income Tax Vs Bharat Diamond Bourse (259 ITR 280) has stressed the fact that any facile explanation given by the assessee, perhaps manufactured post facto the assessment order, without critical appraisal should not be accepted. In fact under the facts and circumstances of the case, the Hon'ble Supreme Court observed that, the story did not ring true and could not have been accepted by· any reasonable person, instructed in law. The Hon”ble Supreme Court further stressed the point that the explanation of the assessee should nor be un-discerningly accepted especially when it was teeming with improbabilities and strenuous on credulity. These observations of the Hon'ble Supreme Court are equally applicable to the facts of the present case. In view of above facts, the addition of Rs.l,57,78,649/- made by the AO is confirmed and this ground of appeal is accordingly dismissed.” 10. Since the aforesaid issue emerges from the same common order of the ld. CIT(A), part of which regarding the issue of share capital introduced in case of revenue‟s appeal has been remanded back to the file of the ld. A.O., consequently this issue is also remanded to the file of the ld. A.O so that he can take a holistic approach and re-adjudicate the case as per law. In order that the ld. A.O may have access to the totality of the facts and circumstances this issue is also remanded back to the file of the ld. A.O to re-adjudicate as per law while complying with the principles of natural justice. Accordingly, the order of the ld. CIT(A) on this issue is set aside and the grounds raised by the assessee are allowed for statistical purposes. 11. In the result, appeal of the assessee is allowed for statistical purposes. 12. In the combined result, both the appeals of the revenue as well as the assessee are allowed for statistical purposes. Order pronounced in the open court on 31 st January 2023 Sd/- sd/- (R.S. SYAL) (PARTHA SARATHI CHAUDHURY) VICE PRESIDENT JUDICIAL MEMBER Pune; Dated : 31 st January 2023 Ankam 7 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 Copy of the Order forwarded to : 1. The Assessee 2. The Respondent 3. The CIT(A)-12 Pune 4. The Pr. CIT Central Nagpur. 6. DR, ITAT, „B‟ Bench Pune Guard File. BY ORDER, Sr. Private Secretary ITAT, Pune //सत्यापित प्रपत// True Copy// 8 ITA 1667/PUN/2019 & 486/PUN/2022 Virbhadreshwar Steels A.Y. 2015-16 Date 1 Draft dictated on 30-01-2023 Sr.PS 2 Draft placed before author 31-01-2023 Sr.PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on 31-01-2023 Sr.PS/PS 7 Date of uploading of order 31-01-2023 Sr.PS/PS 8 File sent to Bench Clerk 31-01-2023 Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order