Income Tax Appellate Tribunal - Delhi
Russian Technology Centre (P) Ltd., New ... vs Assessee on 23 December, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "H" NEW DELHI
BEFORE SHRI R.P. TOLANI : JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR : ACCOUNTANT MEMBER
ITA Nos. 4932, 4933, 5390 & 5391/Del/2011
A. Yrs: 2002-03, 03-04. 05-06 & 07-08
M/s Russian Technology Vs. Dy. CIT, Central Circle-13,
Centre (P) Ltd. New Delhi.
A-1/20, Safdarjung Enclave,
New Delhi.
PAN: AACCR7102D
( Appellant ) ( Respondent )
Appellant by: Shri Ajay Wadhwa Adv.
Respondent by: Dr. Sudha Kumari CIT DR
ORDER
PER R.P. TOLANI, JM :
This is a set of four appeals, filed by the assessee against separate orders of CIT(A) relating to A.Y. 2002-03, 2003-04, 2005-06 & 2007-08. Issues being common, same are disposed of by this common order for the sake of convenience.
2. Grounds of appeal no. 1 & 7 in A.Y. 2002-03; 1 & 6 in A.Y. 2003- 04; 1 & 9 in A.Y. 2005-06; and 1 & 9 in A.Y. 2007-08 are general in nature, requiring no adjudication.
2.1. Following two grounds on jurisdiction have been raised in all the appeals:
"2. That the search and seizure u/s 132 conducted on 28-02- 2007 in the office premises of the assessee at A-1/20, safdarjung Enclave, New Delhi is illegal as the requisite 2 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
condition laid down in section 132 were not satisfied in the assessee's case.
3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in saying that in the proceedings initiated u/s 153A, the AO has all powers to go beyond the seized material during the search?"
2.2. Ld. Counsel for the assessee at the time of hearing, did not press these grounds. Therefore, they are dismissed accordingly.
3. The other common grounds are as under:
(i) Addition in respect of share capital received by the assessee as under:
- A.Y. 2002-03 - Rs. 24,44,300/- received by the assessee from the promoter company based in Russia.
- A.Y. 2003-04 - Nil
- A.Y. 2005-06 - Rs. 55,44,000/- - received from promoter companies Russian Technology Centre Holdings Ltd. (RTCHL) & Protex Trading Co. Ltd.
- A.Y. 2007-08 - Rs. 1,17,72,500/- received from promoter companies Russian Technology Centre Holdings Ltd. (RTCHL) & Protex Trading Co. Ltd.
(ii) disallowance of the expenditure debited to the P& L A/c (except audit fee), relating to A.Y. 2002-03, 2003-04 & 2005-06.
(iii) Awarding of suitable cost u/s 254(2B) in all the appeals.
(iv) CIT(A)'s rejection for admission of additional evidence u/s 46A of the Act for A.Y. 2005-06 and 2007-08.
(v) A.Y. 2005-06 - Addition u/s 68 on account of unsecured loan of Rs. 5 lacs.
3 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
(vi) A.Y. 2007-08: Disallowance of interest of Rs. 7,54,797/- paid on unsecured loans added u/s 68 of the Act in earlier years.
(vii) A.Y. 2007-08: Addition of US$ 3360(Rs. 1,51,200/-) representing the money handed over by foreign guest for onward handing over to his travel agent.
4. Brief facts are: The assessee is a subsidiary of M/s Russian Technology Centre Holding Ltd (RTCHL in short) which is based in Tortola BVI. The assessee company was set up to carry out the business of buying, selling, manufacture of machinery, equipments and spares in India. During the years under consideration various amounts as mentioned in the grounds of appeal were received by the assessee company from its holding company RTCHL and M/s Protex Trading Company Ltd both based in Tortola BVI and Republic Seychelles.
4.1. Ld. Counsel for the assessee contends that facts and circumstances are similar in all the years and detailed facts and arguments are contained in the appeal file for A.Y. 2005-06, which shall be taken as leading facts and arguments for all the years.
4.2. During the course of assessment for A.Y. 2005-06 the assessing officer asked the following requirements in respect of receipt of share capital from promoter company:
"Produce the evidence to prove the identity, capacity and genuineness of the persons related with the increase in the share capital and increase in unsecured loans. Please furnish the details of the bank accounts of the depositor with Cheque No. and date, copy of the acknowledgment of return of income. Give the details of the Cheque numbers through which the repayment, if made along with the copy of your bank account showing the withdrawal such Cheque. (Details related to unsecured loans/Advances as well as share capital addition, if, 4 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
any). Furnish the same details in respect of increase in unsecured loads including squared up loans also".
4.3. Assessee vide letter dated 23-12-2008 replied as under:
"The persons to whom shares have been allotted are foreign companies. The complete details showing addresses, shares allotted amount paid are given as per Annexure 1.
Apart from the above the following details are also enclosed herewith for your ready reference in support of the genuineness and to-provide identity of shareholders.
1. FIPB Approval dt. 16 September 1998 received by the Company authorizing to raise share capital up to (USD 3 lakhs.)
2. Copy of certificates of incorporation of share holders
3. Copy of bank statement |
4. Copy of form 2 filed before ROC In respect of squared up loans , assessee has furnished that"
during the year the assessee company has accepted loan of Rs. 5,00,000 from M/s Tsunami Technologies India P. Ltd by DD no. 080863 dtd 12-04-2004. The sum has been repaid vide cheque no. 211661 drawn on Union bank, of India, Vasant Vihar. Copy of confirmation is attached herewith."
4.4. Assessing officer, however, was not satisfied and was of the view that the share capital provided by the appellant company was not genuine and the amount was channelized by assessee through tax haven. Assessing officer held that assessee has not established the financial capacity and creditworthiness of the share holders by following observations:
"Therefore, in view of the partial details furnished by the assessee company, the unsecured loan taken by the assessee amounting to Rs. 5,00,000/- and share capital addition amounting to Rs. 55,44,000/- is treated as unexplained and
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added to the income of the assessee company. Further, I am also satisfied that the assessee company has concealed income and has furnished inaccurate particulars of its income, hence penalty proceedings u/s 271(1)(c) of the IT Act, are initiated separately".
4.5. Aggrieved, assessee preferred first appeals and in respect of A.Y. 2005-06 and 2007-08 also filed application for admission of additional evidence under Rule 46A of the I.T. Rules in respect of following documents:
(i) Attested copy of Certificate of Incorporation of M/s Russian Technology Centre Holding Ltd
(ii) Attested copy of Certificate of Incumbency of M/s Russian Technology Centre Holding Ltd
(iii) Attested copy of Certificate of Good Standing of M/s Russian Technology Centre Holding Ltd
(iv) Director Certificate of M/s Russian Technology Centre Holding Ltd
(v) Balance Sheet of M/s Russian Technology Centre Holding Ltd for the calendar year 2004 and 2005"
4.6. Ld counsel for the assessee for admission of additional evidence, pleaded that consequent to search u/s 132(1) of the Act on 28.02.2007, notice u/s 153A was issued almost one and half year after i.e. on 09.09.2008. The assessee did not have the photocopies of the documents seized and sought the said copies from the AO vide letter dated 26.09.2008. The photocopies were finally received on 03.12.2008 and the return in response to notice u/s 153A was filed thereafter on 08.12.2008. According to the assessee, part reply was filed on 19.12.208 and finally on 23.12.2008 and everything possible in respect of share capital received was filed within the short time available. Hence according to the assessee, very short time was given to it to furnish the details and no show cause of any kind was issued 6 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
before huge additions u/s 68 were made. The assessee company, thus, was prevented by sufficient cause from furnishing the required evidence and also inadequate opportunity was not provided. Hence, the assessee's case fell under clauses (c) and (d) of Rule-46A of the Income-tax Rules, 1962, for which the assessee relied on various case laws.
5. Ld. Counsel for the assessee contends that the CIT(A) duly forwarded the copy of the application along with the additional evidence filed to assessing officer for furnishing his remand report vide his letter dated 18-7- 2011. Assessing officer submitted remand report to the following effect:
(a) assessee had attended the proceedings three times before. Therefore, sufficient opportunities were given before completing the assessment.
(b) On merits, the additional evidence proposed to be filed, did not prove the creditworthiness of the share holders.
5.1. The assessee was furnished with a copy of the remand report on which it filed a rejoinder dated 24-8-2011, reiterating the facts about the insufficiency of time and admissibility of additional evidence. CIT(A) however passed the following order on the admission of additional evidence as well as the merits of the evidence:
"5.2. At the appellate stage, the assessee has produced certain additional evidence under rule 46 A but has not given any satisfactory explanation as to why it could not produce these documents before the Assessing Officer. These documents are stated in page 5 and 6 of the paper book submitted on 02/09/2011.
5.3. I have gone through the contention of the appellant and it is observed that the fresh evidence furnished by the assessee cannot be admitted in the absence of a plausible explanation regarding the non production of these documents before the Assessing Officer. Reliance is placed on the decision of the Hon'ble Gujrat High in the case of N.B. Surti Family Trust Vs. 7 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
CIT [2007] 288 ITR 523 wherein it was held that where the evidence is new and the assessee could not give any explanation as to why it could not be produced at the lower stages, the Tribunal would be justified in shifting out such evidence. Thus, the fresh evidence furnished by the appellant are not admitted. Without prejudice to what is stated before these documents neither explain the credit worthiness of the alleged share holders nor are they able to establish the genuineness of the transactions.
5.2. Ld. Counsel for the assessee on the issue of additional evidence vehemently argues that ld. CIT(A) has not adhered to the prescriptions of Rule 46A which lay down that the additional evidence should be admitted in case sufficient opportunity of hearing is not given to the assessee, which was amply demonstrated from the facts and records. The additional evidence has been treated by CIT(A) in a strange and unjustified manner. On the one hand it has been held "without prejudice" that evidence sought to be filed neither explains the creditworthiness of the shareholders nor the genuineness of the transactions. Thus, a finding of merit has been given, which impliedly leads to a conclusion that the additional evidence was admitted. On the other hand, CIT(A) by cryptic finding has summarily rejected the contentions raised by the assessee and held that additional evidence is not admitted, leading to contradictory findings. The ld. CIT(A) has failed to appreciate that a fair opportunity of hearing and representing its case was not provided to assessee. The CIT(A) has taken ambivalent stand on the merits as well as admission of additional evidence. According to assessee, there is a clear finding on merits of additional evidence, therefore, the additional evidence stands technically admitted. However, as a matter of abundant caution, a ground has been raised urging that the additional evidence may be admitted, 8 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
more so, when the comments of assessing officer and CIT(A) both are on record.
6. Ld. DR on the other hand supported the order of CIT(A) and contends that the additional evidence has not been admitted and a mere reference of "without prejudice" based on the contents of the documents filed cannot be construed to be deemed admission of additional evidence.
7. Apropos the grounds about additional evidence, we have heard rival contentions and perused the relevant material on record. The assessee had already filed various documents in respect of identity, genuineness and creditworthiness of the shareholders. In our considered view when the assessee is able to make out a case of insufficient time for complying with the requirement, the additional evidence is to be admitted as per the prescription of Rule 46A. Besides, the remand was called by CIT(A) from assessing officer and further assessee was asked to file the rejoinder thereon. After consideration of entire material in this behalf, the CIT(A) has given findings on the contents of the additional evidence. In our view, all these circumstances lead to a conclusion that CIT(A) considered the additional evidence and gave a finding on merits against assessee. Thus, the consideration of additional evidence by CIT(A) appears to be inbuilt in the order. In any case to avoid any controversy in facts and circumstances of this case, we are of the view that assessee was prevented by sufficient cause in filing the additional documents before assessing officer and they should have been admitted by CIT(A) as additional evidence under Rule 46A. In view of these facts and circumstances, though in our view the additional evidence has been technically admitted by CIT(A) by commenting on the merits of the additional evidence, however, we accept the plea of the ld. Counsel for the assessee that as a matter of abundant caution, the additional 9 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
evidence be admitted, more so when the comments of both the lower authorities i.e. assessing officer and CIT(A) are on record. Thus, these grounds of the assessee in respect of admission of additional evidence are allowed.
8. Apropos the merits of the additions on account of cash credits/ share application money, ld. Counsel for the assessee contends that soon after its incorporation, the assessee company sought approval of the Foreign Investment Promotion Board (FIPB) for raising share capital upto USD 3 lacs. The approval was granted vide letter dated 16.09.1998 by FIPB. An amendment in the said approval was sought by the assessee for permitting RTCHL to acquire equity of the assessee company to the extent of 94.97% and also allow the foreign company called M/s Protex Trading Company Ltd to require 5% of the total capital in the assessee company. This approval was granted by FIPB on 09.06.2004.
8.1. The FIPB further authorized the assessee company to raise capital upto Rs 600 crores without approaching it for further approvals. This approval was given vide letter dated 20.12.2005. The assessee also filed the Certificate of Incorporation of RTCHL and a detailed confirmation by RTCHL and M/s Protex Trading Company Ltd confirming the remittance of Rs. 54,44,000/- towards share capital of the assessee company. The assessee contended that the money came in through banking channels and a copy of the Foreign Inward Remittance Certificate was also filed wherein it was specifically stated that the money's have come in towards share capital in the assessee company and the same had been remitted by RTCHL. The name of the banks involved was also given in the Certificate. The assessee company filed documentary evidence to show that the increase in share capital was intimated to the Registrar of companies in the requisite form.
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8.2. This was sought to be explained by the assessee by submitting following documents before the assessing officer:
(i) FIPB approval dt 16 September 1998 authorising the company to raise share capital upto USD 3 Lakhs.
(ii) Amendment to FIPB approval dt 09-06-2004 (iii) FIPB approval dtd 20-12-2005 received by the company
authorizing to raise share capital upto Rs. 600 Crores
(iv) Copy of certificates of incorporation of shareholders
(v) Confirmation given by remitter towards remittance for share capital
(vi) Copy of FIRC
(vii) Copy of bank statements
(viii) Copy of Form 2 filed with ROC 8.3. Thus the assessee before assessing officer provided all possible information which was humanly possible in the matter to discharge primary onus cast by Sec. 68. The moneys have undisputedly come through banking channels, approvals by the highest investment board i.e. FIPB has been sought before bringing capital in the country, all statutory compliances relating to share capital received from foreign company had been duly made and the source of the source had also been established in as much as the Balance Sheet of RTCHL clearly shows that the investment in the assessee company was funded out of loans from share holders.
8.4. According to the assessee, all the moneys received by way of share capital had been utilized for as establishment cost and towards selling and marketing expenses. Although the assessee had procured orders running into many crores of rupees, but the same could not fructify into to revenue because of various business exigencies.
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8.5. Thus, assessee had filed sufficient documents before assessing officer to discharge its onus of establishing identity, genuineness and creditworthiness of the shareholders. Assessing officer, however, added the amount holding that the assessee did not provide the bank statements of the shareholders To overcome the further inquiries of assessing officer, assessee filed following additional documents before CIT(A), which are referred to:
(i) Attested copy of the certificate of good standing M/s Russian Technology Center Holding Ltd
(ii) Director certificate of M/s Russian Technology Center Holding Ltd
(iii) Balance Sheet of M/s Russian Technology Center Holding Ltd 8.6. CIT(A) also did not consider the evidentiary value of the documents already furnished by the assessee and the discharge of initial burden cast on the assessee to prove the share application money. Instead, CIT(A) relied on Hon'ble Delhi High Court judgment in the case of CIT Vs. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Del.) that assessee had to produce the bank statements of the shareholders which only could establish their creditworthiness and as assessee did not produce the bank statements of shareholders, the additions were confirmed.
9. Ld. Counsel for the assessee contends that:
(i) assessing officer without any justification has leveled an allegation that assessee had taken a well known route of tax haven and has not proved the financial capacity of the shareholders. The observation is totally unjustified inasmuch as the assessing officer has not brought on record any material to substantiate his allegation that assessee had taken a route of tax haven to bring the share capital.
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(ii) The assessing officer has failed to consider the Hon'ble Supreme Court judgment in the case of Lovely Exports and various other judgments which describe the primary burden cast on the assessee while proving the share application money. Ignoring various documents procured from FIPB confirmations, ROC records, vehement insistence has been made only on the bank statements of the shareholders. According to ld. Counsel when the burden of the assessee can be amply proved from the documents filed by it, cash credit/ share application money cannot be held to be non-genuine without adjudicating them and picking up the non-filing of bank statements of shareholders. The assessing officer has a quasi judicial duty to weigh the quality of evidence produced before it and if it is sufficient to discharge the burden of assessee, the same cannot be cryptically disregarded in the pretext of document which was not filed by the assessee.
(iii) Coming to CIT(A)'s order, ld. Counsel contends that the Hon'ble Delhi High court in the case of Oasis Hospitalities Pvt Ltd. (supra) no where lays down that production of bank statement of a shareholder was a mandatory requirement for discharging the onus in respect of establishing the creditworthiness of the shareholders. Oasis Hospitalities Pvt Ltd. (supra) has been rendered on totally different facts and circumstances. The case law is decided on the facts of the case and this case has been applied to assessee's case without bringing even the factual parity. In the case of Oasis Hospitalities Pvt Ltd. (supra), there were peculiar facts in as much as there were serious allegations of accommodation entries and hawala transactions on the assessees leveled by the Investigation 13 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
Wing of the Department. Therefore, the decision of the Delhi High Court was case specific, did not lay down any law on the subject. Besides, the Hon'ble Delhi High Court, at the very inspection, held that the case before it was to find out whether the assessee company has introduced its own money in the form of share capital. According to the assessee, there was no evidence to even suggest that the assessee company was introducing its own money in the form of share capital. In fact, there was no allegation of any round tripping much less any evidence on the same. Hence, according to the assessee, the conclusion drawn by the Ld. CIT(A) had to be completely disregarded.
(iv) Reliance is placed by ld. Counsel on following judgments in respect of nature of burden on assessee in cases of receipt of share applications:
- CIT Vs. Lovely Exports Pvt. Ltd. 216 CTR 195 (SC);
- CIT vs. Sophia Finance Ltd. (1993) 205 ITR 98 (Del.)(FB).
- CIT v. Gujarat Heavy Chemicals Ltd. (2002) 256 ITR 795 (SC);
- CIT Vs. Value Capital Service Pvt. Ltd. 221 CTR 511 (Del.);
- ITO v. Orbital Communications (P) Ltd. (2009) 125 TTJ (Del) 484.
- Anu Industries Ltd. Vs. CIT 19 DTR 465 (Del. Trib);
- CIT Vs. Gangour Investments Ltd. (2009) 18 DTR 242 (Del);
- Bhav Shakti Steels Mines Pvt. Ltd. Vs. CIT 320 ITR 619 (Del.);
- CIT Vs. Samir Bio Tech. Pvt. Ltd. 325 ITR 294 (Del.). 9.1. Ld. Counsel relied on judgment of the Hon'ble Supreme Court in P. K.Noorjahan 237 ITR 570 (SC) to bring home the point that every case of cash credit does not have to be taxed u/s 68 of the Act. The word used in the section is 'may' and section 68 cannot be applied mechanically in the case of
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the every cash credit. The Assessing Officer must also consider the attending circumstances before pressing into service section 68. In the case of the assessee, there could possibility be no allegation that the assessee was earning money outside the books of account and bringing it as its share capital. The assessee company was subsidiary of RTCHL and it used up what ever share capital it had received over a period of 5 to 6 years. No revenue could be generated by the company and no material could be imported due to the paucity of funds and other circumstances. Hence, according to the assessee, in such a case, section 68 would not apply.
9.2. Ld. Counsel for the assessee Shri Ajay Wadhwa further contends that the law itself provides that section 68 cannot apply to remittance made by the non-resident into India for deposit in bank account or for purchase of shares etc. The assessee contended that section 68 or 69 would apply only when the income is otherwise wise taxable u/s 5(2) in the hands of non- resident who remits the money. According to the assessee, section 5(2) states that in the case of non-resident, income which accrues or arises in India or is received in India would be taxable in India. When the non- resident remits money from his bank account abroad then, the said remittance is treated as capital receipt and cannot be said to be income. This is because the money must have been first received by the non-resident outside India in his bank account and what is being remitted is only his capital. Hence, according to the assessee, the remittance made by RTCHL was out of the moneys in its bank account outside India and there was no evidence to show that the amount was even received in India or accrued in India. Hence, the remittance would be a capital receipt and if the same is not taxable u/s 5(2) of the Act, it cannot be taxed u/s 68 or 69 of the Act. For 15 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
this proposition, the Ld. Counsel of the assessee relied upon the decision of Delhi Tribunal in the case of DCIT v. Finlay Corporation, 84 TTJ 788 (DEL); Smt Sushila Ramaswamy 37 SOT 146 (Chennai) and Saraswati Holding 111 TTJ 334 (Del).
9.3. The assessee further relied upon CBDT Circular No. 5 in F. No. 73A/2(69)-IT (A-ll), dt. 20th Feb., 1969, which reads as under :
"Migrant assessees -- Money remitted to India through banks - Enquiries by ITOs regarding origin of money - instructions regarding It has been represented to the Board that persons of Indian origin residing abroad but intending to return to India and settle here permanently, apprehend that the money brought in or remitted from abroad by such persons might be subjected to income-tax in India. The apprehension appears to be due to lack of information regarding the correct legal position about the taxability of the remittances of money from abroad. The general position, in this regard, is clarified below :
2. Money brought into India by non-residents for investments or other purposes is not liable to Indian income-
tax. Therefore, there is no question of a remittance into the country being subjected to income-tax in India. The question of assessment to tax arises only when there is no evidence to show that the amount, in question, in fact represents such remittance, in other words, in the absence of proper supporting evidence, the taxpayers' story that the money has been brought into India from outside may be disbelieved by the ITO who may then proceed to hold that the money had in fact been earned in India.
3. If the money has been brought into India through banking channels or in the form of assets like plant and machinery or stock-in-trade, for which the necessary import 16 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
permits had been obtained, no questions at all are asked by the ITOs as to the origin of the money or assets brought in. It is only in cases where the money is claimed to have been brought from outside otherwise than through banking channels and there is no evidence regarding the transfer of money that the Department has to make enquiries about the source thereof. Even in these cases, having regard to the difficulties experienced by persons migrating from Pakistan, Burma and East African countries, instructions have been issued to the ITOs that such claims should be freely admitted upto the limit of Rs. 50,000 in each case provided the following conditions are satisfied.
(a) The assessee migrated to India on or after the dates mentioned below from the countries shown against each and had no source of income in India :
(i) 30th July, 1962 Mozambique (vide Ministry of Finance Press Note dt. 22nd May, 1967);
(ii) 1st Nov., 1963 (Sic.) Zanzibar, Kenya, Tanzania and Uganda (vide Ministry of Finance Press Note dt. 22nd May, 1967);
(iii) 1st Jan., 1964 East Pakistan and Burma (vide Ministry of Finance Press Note dt. 25th June, 1964/22nd May, 1965);
(iv) 1st Oct., 1965 West Pakistan (vide Ministry of Finance Press Note dt. 3rd Feb., 1969).
(b) He had sufficient resources in the foreign country.
(c) He had no source of income either in India or in any foreign country, other than the country from which he migrated, prior to migration, and he was not assessed as 'resident' in India, either for the assessment year preceding the year in which he migrated or for earlier years: and
(d) The amount brought in has been duly introduced in the books regularly maintained in India and an intimation of such
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introduction is given to the ITO within two months of the migrant' s arrival"
9.4. According to assessee's ld. counsel, the CBDT Circular itself directs that money brought into India by non-resident for investment or other purpose is not liable to Indian income tax if the same is brought in through banking channels. The assessee submitted that the circular has been considered by the Hon'ble Tribunal in the case of Smt Sushila Ramaswamy (supra) and it has been held that the same clearly applies to the facts of the case of the assessee.
9.5. Ld. Counsel further submits that the fact that section 68 would not apply to remittances made in India by non-resident is strengthen by the proviso to section 68 inserted w.e.f. A.Y. 2013-14. According to the said proviso, if an assessee company, in which public are not substantially interested, receives money by way of share capital, then the source of funds of resident share holder has to be established by the assessee in order to get out of the kin of the deeming provision under section 68. According to the assessee, the proviso talks of the source being established only when the share holder is a resident of India. There is no such requirement if share holder is a non-resident. Hence, the creditworthiness of the share holders, if he is a non-resident, does not have to be established by the assessee in respect of remittance received by him.
9.6. Reliance is placed upon the judgment of the Gauhati High Court in the case of Nemi Chand Kothari reported in 264 ITR 254 for the proposition that source of the source cannot be required into and once the creditor stated and 18 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
confirmed that it had invested money with the assessee, the assessee cannot be foisted with the responsibility of establishing the source of the funds of the creditors.
9.7. The ld. counsel further submitted that the judgment of the Hon'ble Supreme Court in the case of CIT v. Lovely Exports Pvt. Ltd 216 CTR 195 also applies to the facts of the case in as much as, the identity of the share holders has been established and there is no reasons to even suspect that the funds brought in belong to the assessee. The assessee placed further reliance on the decision of Delhi High Court in CIT v. Tulip Finance Ltd (2008) 15 DTR (Del) 185 and CIT v. Pondy Metals - ITA No. 788/2006 wherein confirmation from the non-resident remitter and the fact that remittance came in through banking channels was found to be sufficient compliance.
10. Ld. CIT (DR), on the other hand, relied on the order of assessing officer and CIT(A). She further relied on the judgment of Hon'ble Delhi High Court in the case of CIT Vs. Nova Promoters and vehemently argued that the share capital route has been misused by the assessee in laundering dubious money. The assessee failed to discharge its burden as cast by sec. 68 in terms of identity, creditworthiness and genuineness of transaction. In view thereof, additions have been made.
11. We have heard rival contentions and perused the material available on record. The first and foremost question to be decided is whether on the basis of material furnished by the assessee and available on the record, the assessee has discharged its onus as cast by sec. 68 in terms of identity and creditworthiness of the shareholders and genuineness of the transaction. The availability of balance-sheet, certificate of incorporation, confirmations and 19 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
certificates of good standing etc. filed by the assessee in respect of shareholders establish that they are non-resident entities, having independent and legal existence. The moneys have come to assessee through banking channels as is evident from FIRC, which also mentions the purpose of remittance and also the particulars of the remitting bank. FIPB approval that too with a liberty to collect share capital up to 600 crores and ROC compliance etc. clearly indicate the stand of the assessee. In our considered view, the plethora of the evidence filed by the assessee amounts to discharge of primary burden cast on the assessee in terms of sec. 68 of the I.T. Act for identity and creditworthiness of the creditors and genuineness of transaction. 11.1. It will be worthwhile to advert to the contentions raised by the ld. counsel on other counts also. Delhi ITAT in the case of Finlay Corporation (supra) on the issue of applicability of sec. 68 in the case of foreign remittance which touches on the assessee's facts also held as under:
"11. Rival submissions of the parties have been considered carefully in the light of the material placed on record. The assessee before us is a non-resident. The total income of the non-resident which is taxable under the Act is defined in s. 5(2) which includes income which
(a) is received or due to be received in India in the previous year by the assessee or on behalf of the assessee; or
(b) accrues or arises or is deemed to accrue to arise to him in India during such year.
Explanation 1 provides that income accruing or arising outside India shall not be deemed to received in India within the meaning of this section by reason only of the fact that it is taken into account in the balance sheet prepared in India. It is pertinent to note that such provisions of s. 5 (2) are subject to the other provisions 20 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
of the Act. That means in case of any conflict between the provisions of s. 5(2) and any other provision of the Act, then the other provision in the Act would have overriding effect.
12. So the question arises whether there is any conflict between the provisions of s. 5(2) and the provisions of s. 68 or
69. It is the settled legal position that burden is on the Revenue to prove that income of an assessee falls within the net of taxation. Once it is so proved then the burden is on the assessee to prove that such income is exempt from taxation. Reference can be made to the Supreme Court judgment in the case of Parimisetti Seetharamamma vs. CIT (1965) 57 ITR 532 (SC). Sec. 52 being charging section, the burden is on the Revenue to prove that the income of the non-resident falls within the ambit of such section. On the other hand, the legislature has cast the onus on the assessee to explain the source of money falling within the ambit of s. 68 or s. 69. These sections are of universal application and do not make any distinction between a resident or non-resident. Therefore, there is conflict between the provisions of s. 5(2) on one hand and the provisions of s. 68 or 69 on the other hand with reference to the burden of proof. Hence, in our opinion, if there is any cash credit in the books of account of the non-resident then the source and genuineness of the same will have to be proved by him. For the similar reasons, the non-resident would be required to prove the source of investment made by him in India. To that extent, we are in agreement with the contention of the learned Departmental Representative.
13. But that is not the end of the matter. In our considered opinion, the conflict between the provisions is only with reference to the onus and not to the issue of taxability of income. The onus is shifted under ss. 68 or 69 only with reference to the income which is otherwise taxable in the hands of non-resident under s. 5(2). Therefore, the issue whether the income of non-resident is taxable or not is still to be decided with reference to the provisions of s. 5(2) and, the provisions of s. 68 or 69 cannot enlarge the scope of s. 5(2). What is not taxable under s. 5(2) cannot be taxed under the provisions of s.
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68 or s. 69. Under s. 5(2), the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought in India by way of remittances. Reference can be made to the judgment of Supreme Court in the case of Keshav Mills Ltd. (supra). If such income is shown in the books of account then it cannot be taxed in India merely because the assessee is unable to prove the source of such entry. For example, there may be appearing an entry of cash credit in the name of a person of USA by way of loan received through cheque and deposited in the bank account maintained at any city in USA. Such money, being received outside India, cannot be taxed under s. 5(2) unless it is proved that such money is relatable to the income accrued or arising in India. Therefore, the same cannot be taxed under s. 68 merely on the ground that assessee fails to prove the genuineness and source of such cash credit. Therefore, we are of the considered view that provisions of s. 68 or 69 would be applicable in the case of non-resident only with reference to those amounts whose origin of source can be located in India. Therefore, the provisions of s. 68 or 69, in our opinion, have limited application in the case of non-resident".
11.2. The decision in the case of Finlay Corporation (supra) has been followed in the case of Smt. Sushila Ramaswamy (supra), holding as under:
"The assessee, who is a non-resident, brought money into India through banking channel and the manner in which this money was utilized in India is described in the Annexure. We have observed in the above paras that because of the mode of banking channel, admittedly, used for the remittance in this case, the onus on the assessee under s. 69 stood discharged, and therefore it was not taxable in India under s. 5(2)(b) of the Act. The CBDT circular (supra) squarely supports the case of the assessee. The fact that the transactions and events narrated in the Annexure look curious and suspicious makes no difference to the conclusions that we have drawn in this case, as per law, in the above paras".
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11.3. Apropos applicability of CBDT Circular no. 5 dated 20-2-1969, the ITAT in the case of Saraswati Holding (supra), while examining the issue in question in the light of CBDT Circular no. 5 dated 20-2-1969 and the decision of Finlay Corporation (supra) held as under:
"10. In the light of the above decision of the Tribunal, and Circular No. 5 of CBDT, we are of the view that the action of the Revenue authorities in bringing to tax the sum of Rs. 3,83,11,550 cannot be sustained. We have already held that the assessee is a tax resident of Mauritius. There is no basis for coming to the conclusion that any income of the assessee accrued, arose or was received in India. In these circumstances, we direct that the addition made be deleted. Ground Nos. 2 to 2.3 raised by the assessee, are allowed".
11.4. The provisions of section 68 though inserted w.e.f. 01.04.2013 also reveals the legislative intent that if the share holder is a non-resident and the money is by way of remittance from his account, the rigor of section 68 would not be applicable.
11.5. We find merit in the contentions of ld. Counsel and reliance on the decisions of the ITAT in the cases of Finlay Corporation, Smt. Sushila Ramaswamy and Saraswati Holding (supra) and the import of CBDT Circular referred to above. Whenever remittances are made by the non- resident holding company for purchase of shares of its subsidiary in India, the money undoubtedly is capital in the nature and if documents like FIRC etc are produced, it can safely be stated that the said money came in through banking channels.
11.6. In the absence of any evidence to show that the money remitted by the non-resident accrued in India, it cannot be held to be taxable in India. Hence, moneys remitted by non-residents whose identity is not in question through their bank accounts outside India have to be held as capital receipts 23 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
not exigible to tax. It therefore naturally follows that if the identity of the non-resident remitter is established and the money has come in through banking channels, it would constitute a capital receipt and ordinarily cannot be treated as deemed income under sections 68 or 69 of the Act. This is clarified by the CBDT Circular itself.
11.7. Taking into consideration of all the above, we find merit in the argument of the ld. Counsel for the assessee that the primary burden cast on the assessee was duly discharged. The issue of primary onus is to be weighed on the scale of evidence available on the record and the discharge of burden by the assessee is also to be decided on the basis of documents filed by the assessee and facts and circumstances of each case and on that basis a reasonable view is to be taken as to whether the assessee ha discharged the primary onus of establishing the identity of share applicant, its creditworthiness and genuineness of the transaction. From the documents filed during the course of assessment and before CIT(A), the independent existence of the share applicants in Russia is clearly established. The assessee's application to FIPB for raising the capital contains all the relevant details which is favourably accepted by the Board, particularly by allowing the assessee to raise further the capital without approaching the FIPB. The transactions are through banking channels. Thus the gamut of evidence does not leave any doubt in the discharge of primary burden of the assessee. On the issue CBDT Circular and Finlay Corporation judgment (supra) also we are in agreement with the ld. Counsel for the assessee that in these circumstances of the case moneys remitted by non-residents through banking channel outside India has to be held as capital receipts, not exigible to tax and cannot be treated as deemed income on the fictions created by sections 68 and 69 of the Act. In consideration of all these observations, we are 24 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
inclined to hold that the share application money as raised in the grounds of appeal cannot be held as non-genuine and added as income of the assessee u/s 68 of the Act. Consequently, additions made on this count, as raised in grounds of appeal, are deleted. Assessee's grounds of appeal on this issue are allowed.
12. The next ground pertains to disallowance of various expenses claimed to be incurred by the assessee for A.Y. 2002-03, 2003-04 and 2005-06 holding that no business activity was carried out by the assessee in these assessment years.
12.1. Ld. Counsel for the assessee contends that lower authorities have failed to appreciate the difference between setting up of business and commencement of business. The business expenditure incurred by the assessee is allowable if the business of the assessee is set up, though it may not actually commenced.
12.2. Ld. Counsel further submitted that assessee company was incorporated on 01.06.2000 under the Companies Act, with the following main objects:-
(a) To buy, sell, manufacture, export, import and to undertake development and promotion of machinery equipments and spares in India,
(b) To promote collaboration between foreign and Indian companies and also technology transfer between the countries.
12.3. During the course of assessment proceedings before the AO, the assessee vide its letter dated 26.12.2008 had explained that the company had started its business activities and hence these expenses are allowable u/s 37(1) of the Income-tax Act, 1961. Following explanation was furnished before the Assessing Officer:-
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A.Y. 2002-03:
"It is submitted that the assessee signed a Memorandum of Indents with the Committee of the Russian Federation for Military-Technical Cooperation with Foreign States on 25 December 2001. A copy of the same is enclosed herewith for your easy reference. Apart from this the assessee has carried out various business activities during the year by conducting meetings with prospective customers and suppliers. The company has acquired new office on hire to give a better ambience to its prospective customers and suppliers. The assessee carries sufficient records in support of all expenditures incurred by them. In view of the above it is humbly requested that the entire expenditure may be allowed."
A.Y. 2003-04 -
"Among the notable business activities, on 18 November 2002 assessee was able to obtain a certificate recognizing Russian Technology Center P Ltd as Established Source from CMTC, Russia. A copy of the same is enclosed herewith for your easy reference. There are a host of other correspondences to show various business activities and the same are produced herewith Apart from this the assessee has carried out various business activities during the year by conducting meetings with prospective customers and suppliers. The assessee carries sufficient records in support of all expenditures incurred by them. In view of the above it is humbly requested that the entire expenditure may be allowed".
A.Y. 2005-06- The assessee had participated in the tenders in bigger volume and had become L1 in few cases. As the volume of business activity increased the assessee had inducted necessary man power to carry out the work.
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We would like to further reiterate that the process of getting tender enquiries, furnishing of quotes, becoming L1, receiving of supply order, supply of items etc takes minimum 4 to 8 months time depending on the items asked and availability of the same. So it is not necessary that just by started receiving tender enquiries or by becoming l_1 the company can show income in the books of accounts. Your goodself can see that the sale booked by the company in the FY 2005-06 is pertaining to the tender enquiry floated on Feb 2005 and the same was executed towards the end of FY 2005-06. In the light of the above it is humbly requested that the entire expenditure claimed by the assessee may be allowed as they are genuine and had been incurred in the normal course of its business activity. The assessee carries sufficient records in support of all the expenditures.
The efforts of the assessee are self evident in as much as it became L1 in respect of huge volume of business which would not have been possible but for its efforts.
Further the assessee has continued its business activities during the year by conducting meetings with prospective customers and suppliers. Apart from this the assessee had started planning for the construction of a world class service center in Goa.
TDS compliance in case of expenditures incurred by the company had been duly complied with. The TDS returns are filed with the goodself on 19-12-2008.
Interest expenditure shown is pertaining to the unsecured loan received by the company. Interest had been accounted on accrual basis and TDS had been deducted and remitted.
From the above it is clear that the assessee was doing business even though sale had not taken place. Considering the nature business and on the basis of the documents enclosed herewith it is requested that the entire expenditure may be allowed and not a part of it".
12.4. Ld. Assessing officer failed to appreciate that as the assessee got itself registered as a vendor with the Ministry of Defence and was acting as an 27 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
authorized selling and manufacturing entity and it proceeded in numerous enquiries and procedures procured by the Ministry of Defence, the business of the assessee was already set up. For any supply it is mandatory that the assessee is first registered as an authorized entity and with multifarious activities connected with the registration tendering process, the assessee's business was already set up and activities had started and in tactical terms only the supplies had not started due to the lengthy procedure of the Ministry of Defence.
12.5. Assessing officer summarily held that expenses of the assessee cannot be allowed as no business activity was carried out in these years and nil receipt was shown in the P&L A/c. In A.Y. 2005-06 assessee booked a sale of Rs. 2,03,010/- which was not believed by the assessing officer. 12.6. Aggrieved, assessee preferred first appeal before CIT(A) where assessee reiterated its stand and filed detailed written submissions dated 2-9- 2011 for the activities undertaken and for allowability of expenses.
12.7. Before CIT(A), reliance was placed on following judgments:
- CIT v. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj.);
- CIT v. Electron India (2003) 241 ITR 166 (Mad);
- CIT Vs. ESPN Software India P. Ltd. (2008) 301 ITR 368 (Del.);
- CIT Vs. Hughes Escorts Communications Ltd. (2009) 311 ITR 253 (Del.);
- CIT Vs. Whirlpool of India Ltd. (2009) 318 ITR 347 (Del.).
- CIT v. Aspentech India (P) Ltd. (2010) 229 CTR (Del) 172.
- Dy. CITVs. Hazira Gas (P) Ltd. (2011) 8 ITR (Trib-Ahd.) 630.
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12.8. CIT(A) without adverting to the detailed submissions filed by the assessee, disallowed the expenditure by summarily holding that assessee failed to adduce any evidence to substantiate its claim that it has commenced the business and relied on Hon'ble Bombay High Court judgment in the case of Western India Vegetable Products Ltd. V. CIT 26 ITR 151. CIT(A) failed to consider plethora of evidence and case laws filed by the assessee. Further it was lost sight of that assessee had already set up its business. This being so, the expenditure was allowable.
13. Ld. DR supported the orders of lower authorities and contends that the alleged sale of Rs. 2,03,010/- shown in A.Y. 2005-06 was a make belief transaction as no sales-tax registration certificate was produced by the assessee. No purchases have been made and therefore the business cannot be said to have set up and commenced.
14. We have heard rival contentions and perused the relevant material available on record. For A.Y. 2002-03 & 2003-04 the assessee was not granted registration as vendor by the Ministry of Defence as suppliers. Besides, no supply had taken place. It appears that assessee was making efforts to establish its business for which prior registration from Ministry of Defence was necessary. Sine assessee could not get registration, it cannot be held that till 31-3-2003 the assessee had set up its business also. In view thereof, we hold that for A.Y. 2002-03 and 2003-04, the expenditure has been rightly disallowed, as in our view business of the assessee was not set up.
14.1. Apropos A.Y. 2005-06, the assessee had obtained the registration and participated in the tenders invited by the Ministry of Defence for which necessary evidence has been referred in the form of correspondence demonstrating the negotiations at various stages. Thus, in A.Y. 2005-06, the 29 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
assessee was in a state of readiness to obtain the orders if found successful for tendering/ bidding. Thus, we hold that in A.Y. 2005-06 the assessee had set up its business and respectfully following the judgment of Hon'ble Delhi High court in the cases of ESPN Software India P. Ltd. (supra); CIT Vs. Hughes Escorts Communications Ltd. (supra); and Aspentech India (P) Ltd. (supra), the business of the assessee for A.Y. 2005-06 was already set up and the expenditure incurred by it is to be allowed as revenue expenditure.
15. Next ground for A.Y. 2005-06 pertains to addition of Rs. 5 lacs being unsecured loans received by the assessee from M/s Claridges SEZ Pvt. Ltd. (CSEZ), as assessing officer held that creditworthiness of M/s CSEZ was not established as the assessee had not produced the bank statements. 15.1. Ld. Counsel for the assessee contends that CSEZ also was searched by the department on the same date i.e. 28-2-2007 and assessment u/s 153A was also framed in that case. All the records including the bank statements of CSEZ were seized by the department and the assessing officer instead of verifying its own record, has erroneously held that the assessee did not produce the bank statement.
16. Ld. DR relied on the order of lower authorities.
17. We have heard rival contentions and perused the relevant material on record. We find merit in the arguments of ld. Counsel that CSEZ also being searched on the same date and the seized record being with the department, department could have verified the same from its record. The interest of justice will be served if the issue is remitted back to the file of assessing officer to verify from the seized record about the bank statement of CSEZ and decide the issue after giving the assessee fair and reasonable opportunity of being heard. The assessee may be allowed to submit necessary evidence in this behalf. This ground of the assessee is allowed for statistical purposes.
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18. That leaves us with the issues for A.Y. 2007-08 i.e. disallowance of interest of Rs. 7,54,797/- paid on unsecured loans added u/s 68.
19. Ld. Counsel for the assessee contends that the assessing officer has not adverted to any details of the interest while disallowing the amount of Rs. 8,92,748/-. His observations are as under:
"In addition, the interest payment amounting to Rs. 8,92,748/- by the assessee company, is also disallowed to the persons who have already been considered, being not having the financial capacity/ creditworthiness in the year under consideration and also in earlier years."
19.1. Similarly, the CIT(A) also has not given any details and upheld the order of assessing officer by following observations:
"I have gone through the submissions filed by the appellant and as far as payment of interest on unsecured loan is concerned, the disallowance of Rs. 7,54,707/- has been correctly made by the assessing officer since the unsecured loans have been held to be taxable in the hands of the appellant u/s 68.
20. Ld. Counsel pleaded that the matter may be set aside, restored back to the file of assessing officer to decide the allowability of interest considering the ITAT judgments on the issue of identity of the above parties and setting up of business.
21. Ld. DR is heard.
22. We have heard rival contentions. From the orders of both the lower authorities, the names of the persons whose interest payment has been disallowed, has not been given. Besides, we have deleted additions made u/s 68 in respect of above parties. In the absence of the details about disallowance of interest, it will not be possible for us to adjudicate this ground. Therefore, we set aside the issue of interest of Rs. 7,54,797/- back to 31 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
the file of assessing officer to decide the same afresh, considering our conclusion on applicability of sec. 68, commencement of business in 2007- 08, after giving the assessee reasonable opportunity of being heard. In view of above, this ground is allowed for statistical purposes.
23. Apropos remaining ground for A.Y. 2007-08 in respect of addition of Rs. 1,51,200/- being US$ 3360 found at assessee's premises at the time of search, it was claimed that this the amount was left by a foreign guest with assessee's employee to be handed over to his travel agent M/s Alpcord Network. According to assessee, its explanation was further verified by the Investigation Wing by recording the statement of one Shri Govind Singh, director of M/s Alpcord Network, which is available on record. Besides, the said M/s Alpcord Network also filed confirmation with the department.
24. Ld. Counsel for the assessee claims that the addition has been confirmed without referring to the statement of the director and confirmation filed by M/s Alpcord Network. Any addition made without referring to the record available with the department cannot be sustained.
25. Ld. DR supported the order of lower authorities.
26. We have heard rival contentions and perused the relevant material on record. The contention of the assessee that the confirmation and statement of Sri Govind Singh director of M/s Alpcord Network being on record, has not been denied by the department. The addition has been made on the basis that assessee could not produce necessary evidence. In our view, if the record is available with the department and assessee pointed out towards it, then as a principle of natural justice, lower authorities should verify that evidence and decide about the allowability. Ends of justice will be met if this issue also restored to the file of assessing officer to verify the claim of the assessee 32 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
after proper opportunity of being heard. This ground is allowed for statistical purposes.
27. Adverting now to the last ground of assessee i.e. awarding of cost on the department u/s 254(2B) due to various adversities caused by the department without proper justification to the assessee, like -
(i) refusal of admission of additional evidence under Rule 46A though the remand report was called from the assessing officer.
(ii) Non-consideration of detailed submissions filed by the assessee and number of documents filed in the paper book.
(iii) Ignoring the non-advertence to the assessee's explanations and submissions and passing a summary order rejecting the assessee's claims.
28. It is pleaded by the ld. Counsel for the assessee that due to various difficulties faced by the assessee ultimately it had to wind up its business in India. It is pleaded that cost should be imposed on the department to set an example.
29. Ld. DR is heard who opposed the ground on the reason that lower authorities were performing their statutory functions and in doing so there is no question of imposition of any cost.
30. We have heard rival contentions and perused the relevant material on record. It is trite law that the lower authorities should properly consider the explanations, submissions and evidences filed by the assessee and pass reasoned order meeting with the pleadings and evidences. This judicial practice is of universal acceptance and is bedrock of principles of natural justice and should be invariably adhered to by all the quasi judicial authorities. However, we are of the view that assessing officer and CIT(A) 33 ITA 4932, 4933, 5390 & 5391/Del/2011 M/s Russian Technology Centre (P) Ltd.
were performing their statutory functions and we see no case for imposition of any cost. Therefore, this ground of the assessee is dismissed.
28. In the result, assessee's appeals are partly allowed for statistical purposes.
Order pronounced in open court on 12-04-2013.
Sd/- Sd/- ( T.S. KAPOOR ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 12th April 2013. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR