Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Finlay Corporation Ltd. on 22 January, 2003
Equivalent citations: [2003]86ITD626(DELHI), (2004)84TTJ(DELHI)788
ORDER
K.C. Singhal, J.M.
1. The appeal by the Department and the cross-objection by the assessee were heard together and are being disposed of by the common order for the sake of convenience. The following grounds have been raised by the Revenue in this appeal :
"On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that no income accrued, arose or was received by the assessee with the meaning of Section 5(2) of the IT Act, 1961.
2. The learned CIT(A) erred deleting an addition of Rs. 5.73 crores made under Section 68 or alternatively under Section 69 despite (1) finding of fact recorded by the CIT(A) that assessee had failed to discharge onus of proof contained in Section 68 or 69.
(2) finding of fact recorded by the CIT(A) that it is baffling as to why the assessee is not willing to file direct evidence which is under his possession or control."
The objection raised by the assessee in the cross-objection are as under :
"1. CIT(A) erred in holding that the investments remained unexplained in the context of its taxability in India.
2. CIT(A) erred in holding against the appellant in the matter of compliance of legal requirements and cooperation."
2. Briefly stated, the facts as gathered from the orders of lower authorities and material placed on record are these : The assessee is an overseas corporate body incorporated in Bahamas having status of non-resident. According to the AO, its authorized capital was $ 5,000 and paid up capital of $ 2 only. No business was ever carried on in India and consequently, the assessee had neither any office nor any permanent establishment in India. However, the assessee had brought inward remittances from abroad in the year under consideration amounting to Rs. 5,23,24,500. These amounts were received through banking channels and with prior approval of the RBI. The remittances so received were deposited in an NRE account with Sanwa Bank, New Delhi. These amounts were invested in acquiring assets in India like shares of certain companies and fixed deposits, etc. The income of Rs. 41,430 by way of dividend and interest on such investments was duly declared by the assessee in its return for asst. yr. 1996-97.
3. In the course of assessment proceedings, the assessee's representative was asked to produce the bank certificates regarding remittances from abroad, copy of the bank account in Bahamas as well as Manjula Devi, who was holder of general power of attorney for the assessee in India. In response to the same, the assessee produced bank certificates of inward remittances from abroad during the year under consideration but, according to the AO, the assessee could not establish the source of such huge money. Accordingly, he made an addition of Rs. 5,73,48,000, being the investment in assets as unexplained investment under Section 69.
4. The matter was carried before the CIT(A) before whom various contentions were raised. Firstly, it was contended that Section 69 was inapplicable since (a) all the investments were duly disclosed in the balance sheet filed along with the return; (b) the investments were made in accordance with the guidelines of RBI and after getting prior permission; (c) investments were duly supported by foreign inward remittance certificates; (d) that the creditworthiness of the assessee was established as it was having assets exceeding 2 million $ as per the certificate dt. 30th Nov., 1999, from a well-known firm of public accountants--M/s Deloitte & louche which was filed before the CIT(A). Secondly, it was contended that the taxability of non-resident was to be seen only under Section 5(2) and the provisions of Section 69 could not be pressed into service since such provisions do not override the provisions of Section 5(2). Thirdly, it was contended that all the remittances were made from its own bank account overseas and thus income, if any, had already been received abroad. Consequently, the question of receiving the same again in India did not arise. Hence, such receipts could not be taxed under Section 5(2) in view of the Supreme Court judgment in the case of Keshav Mills Ltd. v. CIT (1953) 23 ITR 230 (SC) and the decision of the Tribunal in the case of S. Ayyakannu (ITA No. 2394/Mad/1996). Reliance was also placed on the Circular No. 5, dt. 20th Feb., 1969, for the proposition that remittances from abroad into India for investment is not liable to Indian income-tax. Fourthly, it was contended that the burden was on the Revenue to prove that the amount received was taxable in the hands of assessee as income. Reliance was placed on the judgment of Bombay High Court in the case of Dalmia Dadri Cement Ltd. v. CIT (1974) 94 ITR 303 (Bom). Lastly, on facts, it was contended that finding of the AO that assessee-company's paid up capital was only $ 2 was factually incorrect since in fact the paid up capital was $ 50,000. Reliance was placed on OAC form filed with RBI and placed on record.
5. In the course of appellate proceedings, the CIT(A) thought that provisions of Section 68 could also be made applicable to the facts of the case. Hence, it was put to the assessee as to why the addition could not be sustained under this section. In response, it was contended and reiterated that income of nonresident is chargeable only under Section 5(2) and the provisions of Section 68 could not override the provisions of Section 5(2). According to the assessee, Section 68 gives statutory recognition of the principle that the amounts credited in the books of account, in the absence of explanation, may be deemed to be the income of assessee but it cannot tax what is not taxable under the charging provisions of Section 5(2).
6. The CIT(A) considered the contentions of the assessee in the light of the evidences produced before him. He found that no direct evidence in the form of bank account of the assessee in Bahamas and the books of account maintained outside India were produced to prove the inward remittances despite the fact that such evidence was within the control and possession of the assessee. According to him, no reason was adduced for non-production of direct evidence. According to him, such evidence was not produced perhaps because such money at Bahamas was tainted with illegality. He also noted a notorious fact that havala market flourishes in India through which persons are able to send their unaccounted or illegal money outside India and repatriate the same as clean money through normal banking channels on payment of some commission. According to him, any of these things could have happened in this case also particularly when no enquiry was possible in the absence of any treaty with a, country like Bahamas which is considered as tax heavens. However, proceeding further, it was observed by him that conjectures could not be the basis for making any addition in view of the Kerala High Court judgment in the case of Commr. of Agrl. IT v. M.J. Cherian (1979) 117 ITR 371 (Ker) and in the case of AS. Sivan Pillai v. CIT (1958) 34 ITR 328 (Mad) where it was held that there was no presumption of illegality of any transaction. In fact, the presumption is other way round. Illegality, if any, can be proved only on the basis of material or evidence placed on record. He then proceeded to examine the material on record and found that there was evidence on record that moneys were received by way of inward remittances from abroad through normal banking channels. He also observed that there was no direct evidence to prove that any income accrued or arose or received in India. Mere transfer of money by assessee from abroad to India did not constitute accrual or receipt of income in India. Accordingly, it was held that such remittances were not taxable in India under Section 5(2).
7. However, the CIT(A) did not stop there and proceeded further to examine as to whether the assessee was able to explain the source of such money under Section 68 or 69. It was noted by him that the statement of fact showed that assessee was maintaining books of account on the basis of which balance sheet was prepared. Therefore, assessee could not be allowed to change its stand orally before him. Accordingly, he was of the view that assessee was required to explain the source of the credit by way of inward remittances. On merits, he rejected the contention of the assessee that the source stood explained since it was shown that money was brought, from abroad from its own account. According to him, transferring of money from one pocket to another would not make the unexplained money into explained money. It was incumbent upon the assessee to produce books of account at Bahamas and copy of the bank account to show that he was really in possession of that money. This requirement was pertinent in view of the finding of the AO that assessee was merely a company having paid up capital of $ 2. Even the assertion of assessee that it was US $ 50.000 company did not make significant difference. Hence, capacity of the assessee was not only suspect but was unproved since receiving of money through normal banking channels was not sufficient to discharge the onus under Section 68 in view of the Calcutta High Court judgment in the case of CIT v. Precision Finance (P) Ltd (1994) 208 ITR 465 (Cal).
8. He then examined the applicability of Section 69. In this regard, he rejected the contention of the assessee that Section 69 could not be invoked in the absence of books of account. The words "if any" show that the maintenance of books of account is not the condition precedent for invoking Section 69. Accordingly, it was held by him that even in the absence of books of account, assessee was required to explain the investment under Section 69. Since assessee was not able to prove the source of investment by direct evidence, it was held by him that unexplained investment was chargeable under Section 69 also.
9. Despite the above findings under Section 68 or 69, he was of the view that assessee could not be assessed because of his finding under Section 5(2). Accordingly, he allowed the appeal of the assessee.
10. Aggrieved by the above order of the CIT(A), the Revenue has preferred this appeal before the Tribunal on the grounds already mentioned by us. The assessee has also filed cross-objection challenging the findings of CIT(A) under Section 68/69. The contention of the learned Departmental Representative is that the provisions of Sections 68 and 69 have overriding effect over the provisions of Section 5(2) since the provisions of Section 5(2) start with the words "Subject to the provisions of the Act". Therefore, the CIT(A), having held that assessee had failed to discharge the onus under Section 68/69 was not justified in allowing the appeal of the assessee merely on the ground that the remittances could not be taxed under Section 5(2). It was further argued by her that assessee having not produced any direct evidence in the form of books of account or the bank account maintained abroad, it could not be held by the CIT(A) that the income had not been received in India. On the other hand, the learned counsel for the assessee has reiterated the arguments taken before the lower authorities which have been narrated by us in extension and, therefore, need not be repeated. His arguments would also cover the objections raised in the cross-objection.
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 Section 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 Section 5(2) are subject to the other provisions of the Act. That means in case of any conflict between the provisions of Section 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 Section 5(2) and the provisions of Section 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 v. CIT (1965) 57 ITR 532 (SC). Section 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 Section 68 or Section 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 Section 5(2) on one hand and the provisions of Section 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 Sections 68 or 69 only with reference to the income which is otherwise taxable in the hands of non-resident under Section 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 Section 5(2) and, the provisions of Section 68 or 69 cannot enlarge the scope of Section 5(2). What is not taxable under Section 5(2) cannot be taxed under the provisions of Section 68 or Section 69. Under Section 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 Section 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 Section 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 Section 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 Section 68 or 69, in our opinion, have limited application in the case of non-resident.
14. Now let us examine the facts of the case in the light of the material on record. Let us first examine whether the provisions of Section 68 are applicable to the present case. Such provisions are applicable where any sum is found credited in the books of account maintained by the assessee for the previous year. That means the maintenance of books of account is a condition precedent in application of such section. The CIT(A) has proceeded on the basis of statement of facts which had been denied by the assessee before the CIT(A). Admittedly, there is no evidence on the record that any books of account were maintained by the assessee. On the other hand, the perusal of the assessment order shows that books of account were never produced before him. We have also gone through the statement of facts filed before the CIT(A) but we do not find anything to suggest that books of account were maintained by the assessee. The written submissions filed before the CIT(A) clearly states in para 5 that no books of account were maintained by the assessee in India. Therefore, the assumption of the CIT(A) that books of account were maintained by the assessee, is not based on any evidence. Accordingly, it is held that provisions of Section 68 could not be invoked in the present case.
15. As far as Section 69 is concerned, we are of the view that in the absence of books of account such provisions can be invoked in respect of investments made by non-resident in India. We are unable to accept the contention of the assessee that such provisions can be applied only where investment is recorded in the books of account. The words "if any" used by the legislature itself shows that maintenance of books is not a condition precedent for application of Section 69. Admittedly, the assessee had made investments in India. Therefore, the assessee was duty bound to prove the source of such investments. The material placed before the lower authorities reveals that investments were made out of the money deposited in NRE account with Sanwa Bank at New Delhi and the deposits in Sanwa Bank were out of the inward remittances received from abroad. These remittances are duly supported by the bank certificates. There is no dispute about these facts. Hence, in our opinion, the onus on assessee under Section 69 stands discharged and the same was shifted to the Revenue to prove to the contrary. No material has been brought on record to prove to the contrary.
16. The only issue remains to be considered is whether the amount received by the assessee by way of inward remittances can be said to be the income falling within the scope of Section 5(2). It is not the case of the Revenue that such amount accrued or arose as income in India. Therefore, the only issue remains whether the amount in dispute can be said to be received in India as income. In the present case, the assessee had placed before the lower authorities the certificates of foreign inward remittances, copies of which are placed in the paper book at p. 71 onwards. The perusal of these certificates clearly shows that these amounts were remitted from the bank account of the assessee in the foreign country, i.e., Barclays Bank and Sanwa Bank at New York. The genuineness of these certificates are not in doubt since these are in Form No. 10H prescribed under Rule 27A of IT Rules, 1922 as approved by the RBI for this purpose. These certificates have been accepted by the CIT(A). The perusal of these certificates clearly shows that all the amounts were remitted through assessee's own bank account. Once it is shown that the remittances were made from assessee's own bank account with banks at New York, the CIT(A) was, in our opinion, justified in corning to the conclusion that income, if any was already received in New York and consequently, it could not be said that such income was received in India again. This conclusion is fortified by the decision of Supreme Court in the case of Keshav Mills Ltd. (supra) wherein it has been held that income can be said to be received for the first time and if any amount is remitted out of such money then assessee cannot be said to have received the same as income again in India when it is so received. The relevant observations appearing at pp. 241 and 242 of 23 ITR are quoted below for the benefit of this order :
"It is true that the words used in Section 4(1)(a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount it cannot be said to be "received" as income on that occasion (Per Kama, J., in B.M. Kamdar, In re (1946) 14 ITR 10 (Bom) at p. 39). The "receipt" of income refers to the first occasion when the recipient gets the money under his own control Once an amount is received as income, any remittance or transmission of the amount to another place does not result in "receipt", within the meaning of this clause at the other place. This was definitely established by the Privy Council in Pondicherry Railway Co. v. CIT (1931) 58 I.A. 239 and in CIT v. Mathias (1939) 66 I.A. 23. If therefore the income, profits or gains have been once received by the assessee even though outside British India they do not become chargeable by reason of the moneys having been brought in British India, because what is chargeable is the first receipt of the moneys and not a subsequent dealing by the assessee as his own moneys which he has already received and had control over and they ease to enjoy the character of income profits its or gains."
In view of the above discussion and material placed before us, it is held that money brought into India by way of inward remittances from abroad out of assessee's own money in bank account at New York. That means such money was in the control of assessee outside India and, therefore, income, it any, was first received outside India. There is no evidence that such income accrues or arise in India or was deemed to accrue or arises in India particularly when no activity was being carried on by the assessee before making any investment. Hence, in view of the Supreme Court judgment mentioned above, the provisions of Section 5(2) could not be invoked in respect of the remittances from abroad. Accordingly, we uphold the order of CIT(A) on this issue.
17. In the result, appeal of the Revenue is dismissed while the cross-objection filed by the assessee is partly allowed pro tanto.