GCV SERVICES LTD., GUJARAT V. DCIT, CC-2(2), MUMBAI

ITA 681/MUM/2023

AI Insights

The case involves M/s. GCV Services Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals) -48, Mumbai, concerning the assessment year 2013-14. The primary issues in the appeal were the disallowance made under section 14A and the addition made under section 68 of the Income Tax Act, 1961. The Tribunal found that the disallowance under section 14A should be limited to the amount of exempt income earned by the assessee. Regarding the addition under section 68, the Tribunal noted that the assessee claimed to be a conduit for funds and not the ultimate beneficiary, and thus the addition should not be made if the assessee could prove the complete trail of the money.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299373 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: G
• Next Hearing Date: 05-10-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 07-03-2023
• Other Referred Cases: Nirved Traders (P.) Ltd. v/s Dy. CIT, CIT v/s Alag Securities (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Earning of tax free income; Additional evidence; Accommodation entries; Documents seized; Rule 8D
• Section: 68; 132; 143(3); 153A; 14A; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA no.681/Mum./2023 (Assessment Year : 2013–14) M/s. GCV Services Ltd. A–Wing, 2 nd Floor, 28, Silver Rock Dairy Teen Rasta, Manjalpur Vadodara 390 004 PAN – AABCG1251H ................ Appellant v/s Dy. Commissioner of Income Tax Circle–2(2), Mumbai ................ Respondent Assessee by : Shri Neeraj Mangla Revenue by : Dr. Kishor Dhule Date of Hearing – 06/10/2023 Date of Order – 19/10/2023 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the assessee challenging the impugned order dated 17/01/2023, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)–48, Mumbai, [“learned CIT(A)”], for the assessment year 2013–14. 2. In its appeal, the assessee has raised the following grounds:– “That the assessment order passed u/s 143(3) r.w.s. 153A of the Income Tax Act, 1961 on 30/03/2016 is perverse to the law and to the facts of the case because of not following proper law and procedure while completing the assessment proceedings. M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 2 2. That the Ld. AO has grossly erred in law as well as on the facts of the case in making disallowance of Rs.16,70,250/- under Section 14A of the Act. 3. That the Ld. AO has further grossly erred in law as well as on the facts of the case in making addition of Rs.36,89,47,524/- under Section 68 of the Act. 4. That the appellant assails his right to amend, alter, change any grounds of appeal, or take any further ground at any time even during the course of hearing of instant appeal.” 3. Ground No. 1 raised in assessee’s appeal is general in nature and therefore the same needs no separate adjudication. 4. The issue arising in ground No. 2, raised in assessee’s appeal, is pertaining to disallowance under section 14A of the Act. 5. We have considered the submissions of both sides and perused the material available on record. Since the assessee had invested in investments that resulted in tax-free income and no amount was disallowed under section 14A of the Act, the Assessing Officer (“AO”) vide order dated 30/03/2016 passed under section 143(3) read with section 153A of the Act made a disallowance under section 14A read with Rule 8D(2)(iii) of Rs. 16,70,250, i.e. 0.5% of the average value of investment. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee on this issue and confirmed the disallowance made under section 14A of the Act. 6. In the present case, it is undisputed that during the year under consideration, the assessee has earned an exempt income of Rs. 39,589. We find that the Hon’ble jurisdictional High Court in Nirved Traders (P.) Ltd. v/s Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23/04/2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, respectfully following the aforesaid decision of the M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 3 Hon’ble jurisdictional High Court, we direct the AO to restrict the disallowance made under section 14A of the Act to the extent of exempt income earned by the assessee, during the year under consideration. As a result, ground no. 1 raised in assessee’s appeal is partly allowed. 7. The issue arising in ground No. 2, raised in assessee’s appeal, is pertaining to the addition of Rs. 36,8947,524 under section 68 of the Act. 8. The brief facts of the case pertaining to this issue, as emanating from the record, are: Search action under section 132 of the Act was carried out at various premises of Mr. Shirish C Shah. The search warrant was also executed at the bank account of the assessee bearing no.500011044563 maintained with ING Vysya Bank, Nariman Point, Mumbai on 11/06/2013, and cash of Rs. 67,98,179 was seized. Notice under section 153A of the Act was issued on 28/03/2014, however the same was returned unserved. Thereafter, a fresh notice under section 153A of the Act was issued on 15/09/2015, which was also received unserved. Thereafter, notice under section 153A of the Act was served on the assessee through Mr. Shirish C Shah. In response to the notice issued under section 153A of the Act, the assessee filed its return of income on 26/02/2016 declaring a total income of Rs. Nil after set off of brought forward loss. During the search and survey action, hard copies of various documents were seized. Similarly, soft copies of computer backup, etc. were also seized. The documents seized during the search include documents relating to various companies which were either associated with or under the direct or indirect control of Mr. Shirish C Shah. During the assessment proceedings, the assessee filed a letter stating that all the funds were brought in by Mr. Shirish M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 4 C Shah and he only deployed the same subsequently. The AO observed that during the year under consideration, share application money was received by the assessee from companies controlled by Mr. Shirish C Shah. It was further observed that the assessee received a total foreign investment of Rs. 36,89,47,524 from foreign parties, such as Lehman Diversified Fund, ITF Mauritius, and Davos International Funds. Further, it was observed that the funds were deployed either to the beneficiaries who had taken entries of the share capital at huge share premium or funds have been rotated within the group companies of Mr. Shirish C Shah. During the assessment proceedings, the assessee was asked to establish the identity of the persons, their capacity, and the genuineness of the transaction. Since the assessee could not submit any documents whatsoever in support of purported foreign investment in share application money, the AO vide order dated 30/03/2016 passed under section 143(3) read with section 153A of the Act treated the amount of Rs. 36,89,47,524 received as foreign investment as unexplained cash credit within the meaning of section 68 of the Act and added the same to the total income of the assessee. 9. In its appeal before the learned CIT(A), the assessee submitted that it is a shell/conduit company operated and maintained by Mr. Shirish C Shah. It was further submitted that the share application money received by the assessee was deployed to the beneficiaries and thus no addition under section 68 of the Act can be made in the hands of the assessee. The learned CIT(A), vide impugned order, did not agree with the submissions of the assessee and held that the assessee has failed to substantiate its claim with respect to additions made under section 68 of the Act being cash credit. The learned M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 5 CIT(A) further held that the assessee has failed to establish that in the case of Mr. Shirish C Shah for the assessment year 2013-14 such addition on a substantive basis has been made. Further, it was held that the assessee has failed to establish satisfactorily all the 3 aspects related to the genuineness of the unexplained foreign investment. Being aggrieved, the assessee is in appeal before us. 10. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the AO noted that the funds received by the assessee were either transferred to the beneficiaries or have been rotated within the group companies. The learned AR further submitted that insofar as the funds received from domestic companies are concerned, the AO made no addition after conducting extensive inquiries and enumerating the names of the ultimate beneficiaries of accommodation entries. However, in respect of funds received from the non-resident investors, which were also ultimately transferred to the beneficiaries, the addition was made under section 68 of the Act. The learned AR submitted that the assessee is merely a conduit in the entire transaction of providing accommodation entries to the beneficiaries and is not the beneficiary of this transaction. It was also submitted that the money received by the assessee belongs to the ultimate beneficiaries, and since the assessee is merely a conduit, no addition under section 68 of the Act can be made in its hands as it is not the real owner of the money, which has ultimately been transferred to the real beneficiary. 11. On the other hand, the learned Departmental Representative (“learned DR”) submitted that the entire money trail is not disclosed by the assessee as M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 6 it is not shown how money came to the non-resident investor and how the cash was deposited with the assessee. The learned DR further submitted that this link is required to be completed to prove that the assessee is not the owner of the money and rather it is a conduit company. The learned DR submitted that the documents pertaining to the entire routing of money were not submitted either before the AO or before the learned CIT(A). It was further submitted that the AO of the assessee is also the AO of the Indian investors and therefore had documents pertaining to them. However regarding the foreign investors, neither any details are available on record nor the same were furnished to the AO. Thus it was submitted that the assessee failed to satisfy the test of identity and creditworthiness of the creditor and genuineness of the transaction, therefore the addition has correctly been made in the hands of the assessee under section 68 of the Act. It was further submitted that till the entire audit trail of the money transaction is proved, the assessee cannot be considered to be merely a conduit company. 12. We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee raised share application money of Rs. 117,85,97,525 out of which Rs. 36,89,47,524 were received from foreign parties and the balance of funds was received from domestic companies. It is evident from the record that the share application money received from Indian companies was not disputed by the Revenue and all these companies were found to be controlled by Mr. Shirish C Shah. Insofar as the share application money received from the following foreign parties, the AO asked the assessee to establish the identity and creditworthiness of these parties and the genuineness of the transaction:- M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 7 Sl. No. Name of the party Amount (in Rs.) 1. ITF Mauritius 2,58,00,000 2. Leman Diversified Fund 12,14,34,170 3. Davos International Fund 22,17,13,355 Total 36,89,47,525 13. In the assessment proceedings, the AO found that the funds were deployed either to the beneficiaries who had taken entries of share capital at huge share premium or funds have been rotated within the group companies of Mr. Shirish C Shah. It was also found that Mr. Shirish C Shah has earned a commission and the same has been taxed in his hands. As per the assessee’s own admission, it is merely a shell/conduit company, which was operated and maintained by Mr. Shirish C Shah, and therefore the funds received by it belong to the ultimate beneficiary and not the assessee. Further, as per the assessee, the money received from the aforesaid foreign investors was also transferred to the ultimate beneficiary and therefore the same cannot be taxed in its hands. Upon specific query being raised, during the hearing, regarding the details of beneficiaries to whom the share application money received by the assessee from foreign investors was ultimately transferred, the learned AR provided the following details:- Name of the beneficiary Amount (in Rs.) PAN Goldstone Exim Pvt. Ltd. 4,00,00,000 AADCG8161E KPR Fertiliser Pvt. Ltd. 5,50,00,000 AADCK0257B KPR Industries India Ltd 1,25,00,000 AAECK6176E KPR Universal Holding Pvt. Ltd. 13,85,00,000 AAFCK0120K Megha Jewels 6,35,00,000 AAXFM5060D Sentosa Developers Pvt. Ltd. 4,90,00,000 AANCS3592F Shiromani Impex Pvt. Ltd. 95,00,000 AAOCS7393D Grand Total 36,80,00,000 M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 8 14. The learned AR submitted that the share application money received by the assessee from the non-resident investors was transferred to the companies which are controlled by Mr. Shirish C Shah and from them the money was transferred to the aforesaid ultimate beneficiaries. In order to support the aforesaid submission, the learned AR also placed on record the bank statements of companies controlled by Mr. Shirish C Shah. Thus, it was claimed that Mr. Shirish C Shah used the assessee to provide accommodation entries to various beneficiaries. The learned AR also placed on record the assessment order passed in the case of KPR Fertilisers Ltd for the assessment year 2013-14 and submitted that the money received through the accommodation entry transaction has been taxed in the hands of the beneficiary and therefore the same amount cannot be again taxed in the hands of the assessee as it is merely a conduit company. We find that even though the assessee has claimed it to be a conduit company, and further claimed that the share application money received by it always belongs to the ultimate beneficiary. However, the aforesaid details were not examined by the lower authorities. In its application seeking admission of aforesaid documents as additional evidence under Rule 29 of ITAT Rules, the assessee submitted that neither the AO nor the learned CIT(A) had ever required the assessee to furnish the details. Considering the submission made in the aforesaid application, we admit the additional evidence furnished by the assessee. In support of the submission that the share application money received from the foreign investors cannot be added in the hands of the assessee under section 68 of the Act, as it is a conduit company, the learned AR placed reliance upon M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 9 the decision of the Hon’ble jurisdictional High Court in CIT v/s Alag Securities (P.) Ltd. [2020] 425 ITR 658 (Bom.). 15. In view of the facts and circumstances as noted above, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. The assessee is directed to explain with sufficient detail the source of all the deposits in its accounts as well as the corresponding destination of all payments from its accounts before the AO. The Assessee should be able to show that money has been transferred through banking channels from the bank account of the beneficiaries to the bank account of the assessee, the identity of the beneficiaries, and that the money paid from the accounts of the assessee has returned to the bank accounts of the beneficiaries. The assessee has to discharge the primary onus of disclosure in this regard. In view of the aforesaid decision of the Hon’ble jurisdictional High Court, if the assessee is able to provide the complete trail of the transfer of money as noted above, the AO is directed to delete the addition to that extent in the hands of the assessee. 16. During the hearing, the learned DR submitted that if the assessee is able to prove that the money belonged to the beneficiary and the same was also transferred to the beneficiary, then a direction may be issued to initiate appropriate proceedings against the beneficiary as there may be a case wherein the bogus transaction of accommodation entry may not have been taxed in beneficiary’s hand. In this regard, it is pertinent to note that the subject matter of the present appeal by the assessee, inter-alia, is restricted to the addition made under section 68 of the Act, and the Revenue is neither in M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 10 appeal before us nor has filed any cross-objection. The Hon’ble Delhi High Court in Marubeni India (P.) Ltd. v/s CIT, [2010] 328 ITR 306 (Delhi) held that under section 254 of the Act, the power to pass such orders as the Tribunal thinks fit can be exercised only in relation to the matters that arise in the appeal and it is not open to the Tribunal to adjudicate on a question which is not in dispute and which does not form the subject-matter of the appeal. Therefore, we are of the considered view that the aforesaid submission of the learned DR is outside the purview of section 254 of the Act, wherein the Tribunal can pass orders only in respect of the subject matter of the appeal. However, at the same time, there is nothing in the law that precludes the Revenue from using the information made available in the present case against the beneficiaries and also from initiating the proceedings under the Act, if the same is otherwise permissible as per law. Thus, we are of the view that for the same no specific direction is required. Therefore, in terms of the aforesaid findings, ground no.3 raised in assessee’s appeal is allowed for statistical purposes. 17. In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 19/10/2023 Sd/- AMARJIT SINGH ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 19/10/2023 M/s. GCV Services Ltd. ITA no.681/Mum./2023 Page | 11 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai