Income Tax Appellate Tribunal - Hyderabad
Madhusudan Rao Lagadapati, Hyderabad vs Department Of Income Tax on 18 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
Smt. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 1482/HYD/2014
Assessment Year: 2011-12
The Deputy Sri Madhusudan Rao
Commissioner of Income Vs Lagadapati, Chairman,
Tax, M/s.Lanco Infratech Ltd.,
Circle-16(1), Madhapur,
HYDERABAD HYDERABAD
[PAN: AAFCM1756R]
(Appellant) (Respondent)
For Revenue : Smt. G.Aparna Rao, DR
For Assessee : Shri P. Murali Mohan Rao, AR
Date of Hearing : 18-02-2015
Date of Pronouncement : 18-03-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is a Revenue's appeal filed against the order of the Commissioner of Income Tax(Appeals)-V, Hyderabad dated 30-05-2014.
2. The only issue in this appeal is with regard to addition of Rs.78,04,58,374/- made u/s.68 / 69 / 69A / 69C of the Income Tax Act (Act) in the assessment completed u/s.143(3) on 28-03-2014 by Dy.
Director of Income Tax-I, International Taxation, Hyderabad. On the
I.T.A. No. 1482/Hyd/2014
:- 2 -: Sri Madhusudan Rao Lagadapati,
Chairman, M/s.Lanco Infratech Ltd.,
basis of the enquiries done by CIT(A) and considering the submissions of assessee, entire addition was deleted by CIT(A), on which Revenue is aggrieved.
3. The facts of the case are that, assessee is a non-resident Indian, generally resident of Dubai. He has various investments in India and has filed his return of income mainly disclosing salary income in the capacity as Chairman of M/s.Lanco Infratech Limited, Hyderabad and claiming the status as non-resident. Total income declared by assessee was to the tune of Rs.3,84,87,850/-. Assessing Officer noticed from the capital account that assessee has shown an amount of Rs.78,04,58,374/- as credit to the capital account under the head 'NRI A/c'. He has made enquiries as there is increase in the liabilities side to the same extent. Assessing Officer noted that assessee applied the funds as under:
i. Investment of shares of M/s. Lanco Infratech Limited, M/s.
Lanco Group Services Limited to the tune of Rs.44 Crores (approximately);
ii. Gifts to relatives to the tune of Rs.21 Crores (approximately); iii. Cash in Bank is about Rs.9 Crores (approximately); and iv. Personal expenses to the tune of Rs.4 Crores (approximately)
4. Assessing Officer asked for the source of the above credit. Assessee explained and also accepted by the Assessing Officer that assessee has received US $1,74,00,000 valued at Rs.78,04,58,374/- as a credit into his NRI A/c. Assessee provided bank transcripts from Indus Ind Bank, Secunderabad as well as Axis Bank, Hyderabad explaining the foreign inward remittance. These remittances were under the heads family maintenance, personal use/savings. Assessing Officer admits I.T.A. No. 1482/Hyd/2014 :- 3 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., that such transcripts indicate that the remittal was by assessee himself. Assessing Officer issued a show cause notice calling for details of various remittances and sources thereof. Assessee has explained that the moneis remitted into the above banks were his own funds from abroad. He further submitted that the source of the above funds abroad were from M/s.Vitrual International Ltd., Mauritius who has provided loan of US $1,74,00,000 and a certificate from the above company was filed in support of the claim that the said company has provided the above sum during the period 01-04-2010 to 31-03-2011 as a loan to assessee. Assessing Officer did not accept the same on the reason that it is not an original certificate, no mention of tax residency, no seal of company and no date on the certificate nor other details. Even though he doubted the existence of the above company, subsequently, Assessing Officer verified the internet and found out that the above said company was registered in Mauritius and assessee is a single shareholder. As per the annual financial statements published by M/s. Lanco Infratech Limited, this company M/s.Vitrual International Ltd., was shown as 'persons constituting group' as defined under MRTP Act, 1969 as on 31-03-2011. Assessing Officer also verified the website of SEBI and noted that in the 'red herring' prospectus of M/s. Lanco Infratech Limited, the above said company was shown as a single person company in which assessee is the sole shareholder of single share available as on 29-07-2006. Based on the above, Assessing Officer came to the conclusion that the above said company is nothing but an alter ego of assessee and therefore funds, if at all proved to be transferred from M/s.Vitrual International Ltd., Mauritius to the bank account of assessee in Mauritius, still do not explain the source of funds in the hands of assessee. Considering the above and also the legal position as discussed by him in para 6 of the assessment order, he came to the conclusion vide para 8 of the assessment order as under:
I.T.A. No. 1482/Hyd/2014 :- 4 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., "8. The assessee who is a high net worth individual and who has significant business interest in India, as can be seen from the Statement of Affairs, has failed to furnish sufficient evidence with regard to nature and source of Rs.78,04,58,374/- credited in the NRI Ledger. The assessee has merely relied on a copy of a certificate of loan from a company in Mauritius in which assessee has 100% ownership and claimed that to be sufficient explanation for the purpose of Sec.68 / 69 / 69A /and Sec.5(2)(b) of the I.T.Act, 1961. In such circumstances, a fair analysis of factual evidences and legal position was done by the undersigned and accordingly, I am of the considered view that Rs.78,04,58,374/- credited in the NRI Ledger Account of the assessee shall be treated as the income of the assessee for AY.2011-12 as per Sec.68 / 69 / 69A / 69C of the I.T.Act, 1961."
5. Before the Ld.CIT(A), assessee had filed detailed submissions and contended point-wise observations of Assessing Officer which was extracted by the CIT(A) in the order. Ld.CIT(A) also directed assessee to furnish further evidence with reference to the creditworthiness of the said company and on examination, came to the conclusion that action of Assessing Officer in treating the amount as income of assessee is not correct, not only on facts but also on legal principles. Vide para 5.2 of the CIT(A)'s order, he has recorded that he has directed the AR to submit the financial statements of M/s.Vitrual International Ltd., in order to verify the creditworthiness and nature of business activities and the written submissions were extracted therein. Thereafter, vide para 6 to 12 of the order as discussed various factual as well as legal principles to hold that the amount of Rs.78,04,58,374/- does not become an income under the sections stated by Assessing Officer. He accordingly, deleted the same. His detailed order from para 6 to 12 is as under:
"6. I have carefully gone through the above submissions of the appellant. As noted in para no.5 above, the AO has made the addition of Rs.78,04,58,374/- u/s.68/69/69A/69C of the Act by observing that the assessee has not discharged the burden of satisfactorily explaining the source of Rs.78,04,58,374/- credited in his NRI Ledger Account. On the other hand, the I.T.A. No. 1482/Hyd/2014 :- 5 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., appellant explains that the amount of Rs.78,04,58,374/- has been received from Barclays Bank, Mauritius into NRI A/e. held in Axis Bank, Hyderabad and Indusind Bank, Hyderabad. The appellant has further explained that the amount of Rs.78,04,58,374/- has been received in Barclays Bank, Mauritius from the amount of loan obtained from M/s.Vitrual International Limited, Mauritius in support of which, he has filed before the Assessing Officer, a copy of the confirmation letter from M/s.Vitrual International Limited, Mauritius.
6.1 In order to examine the correctness or otherwise of the assessee's claim, I have called for the Balance Sheet and other details of M/s.Vitrual International Limited, Mauritius, in response to which the appellant has filed before me, copies of the following documents so as to prove the identity, credit worthiness and qenuineness of the creditor-company (M/s.Vitrual International Limited, Mauritius)
(a) Certificate of Incorporation of Mls Vitrual International Limited, Mauritius.
(b) Annual report of M/s.Lanco Infratech Ltd for the financial year 2009-10.
(c) Loan confirmation from Vitrual International Limited, Mauritius.
(d) Copy of audited financial statements for year ended 31-3-
2011 of M/s. Vitrual International Limited, Mauritius,
(e) Copies of documents in support of substantial share holding of the creditor company viz, M/s Vitrual International Limited in M/s Lanco Infratech Lir1ited (LITL).
6.2 On examination of the above documents, I find that the identity of the creditor company, viz., Vitrual International Limited, Mauritius is proved.
6.3 It is clear from the above documents that the loan given to the appellant for USD 1,74,00,000 (Rs.78,04,58,374) is shown under the head "Non Current Assets" in the statement of Financial position of M/s.Vitrual International Limited, Mauritius as at 31.3.2011 where in the capital and Reserve amount to USD 2,37,33,247 and the current liabilities amount to USD 59,50,478. Hence, creditworthiness of the creditor-company is also proved in the I.T.A. No. 1482/Hyd/2014 :- 6 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., appellant's case.
6.4 After the examination of the above mentioned documents, I am of the considered view that the whole transaction is a genuine transaction. Since these documents were not furnished before the AO, he had no alternative except to deny the assessee's claim in this regard. However, I also agree that the appellant has satisfactorilv explained as to how the amount of Rs.78,04,58,374/- has reached his hands. Since the appellant has proved the Identity, creditworthiness of the creditor and the genuineness of the transaction, the addition made u/s. 68/69/69A/69C of the Act for Rs.78,04,58,374/- is not warranted.
7. With regard to the observations and inference drawn by the AO in para nos. 4.4 and 4.5 of the assessment order, I found them as baseless because of the fact that the appellant has explained the source of the impugned credit satisfactorily.
7.1 The observation of the AO at para 4 of the assessment order that the amount should have been disclosed as liability/loan in the Statement of Affairs is not correct because the assessee has not received any loan in India; he has received his own money from the bank account outside India and the same is credited to the capital account of the assessee for the year under consideration which is found to be correct. Since the assessee has explained the source of Rs.78,04,58,374/-, the observation of the AO that it is unreasonable to presume that such income necessarily comes/arises outside India in view of the decisions of Seth Kale Khan Md. Hanif Vs. CIT(1958) 34 ITR 669,673,674(MP), affirmed in 50 ITR 1 (SC) and CIT V. Krishna Mining Co. (1972) 83 ITR 860 (AP) is not correct. I also agree with the appellant's contention that the AO's observation at para no.4.7 of the assessment order relying on the Supreme Court's decision in the case of Vodafone International Holdings B.V vs. Union of India [341 ITR I (SC)] has no relevance to the facts of the appellant's case. I agree with the contention of the appellant that there is no "Round-Tripping" in respect of the source of funds of M/s. Vitrual International Limited, Mauritius. Further, the Assessing Officer's observation that the purpose of the remittance as per FIRC is family maintenance / personal use / savings and the remitter is assessee himself, has no relevance when once the same is explained. Also, the AO's observations that the confirmation letter is not an original certificate, that the relationship between the assessee and the company is not I.T.A. No. 1482/Hyd/2014 :- 7 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., stated therein, that there is no mention of tax residency of the company, that there is no seal of the company on the copy of certificate submitted, that there is no date on the certificate and that there are no contact details on the certificate except for the postal address have no merit in view of the above mentioned evidence. Since the appellant has satisfactorily explained the source for the amount of Rs.78,04,58,374/-, no separate explanation for the investment in shares, monies in the bank account and expenses incurred is needed.
8. Further, I find that the credit appearing in the capital account of the appellant is the amount of Rs.78,04,58,374/- received into the NRI A/c held in Axis Bank and Indusind bank from the Barclays bank account No.7404418 held by him at Maurit us. The fact of receipt of the above said amount is supported by the .nward remittances certificates, bank statements and the certificate from the accountant from Mauritius [Quiyoom Dustogheer, FCCA, MIPA(M)]. I, therefore, agree with the explanation of the assessee that the amount of Rs.78,04,58,374/- is received by the assessee from his own bank account maintained outside India.
9. Since the appellant is a non-resident, Section 5(2) of the I.T.Act and Board Circular No.5 dated 20-2-1969 deal with the issue on hand. The provisions of sub section(2) of section 5 of the Act are extracted as under:
"Sec.5(2): Subject to the provisions of this Act the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises deemed to accrue is arise to him in India during such year.
Explanation 1. -Income accruing or arising outside India shall not be deemed to be received in lr'dia within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2. -For the removal of doubts/ it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have I.T.A. No. 1482/Hyd/2014 :- 8 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by in India.
Board Circular No.5 in F.No.73/A/2/69-IT(A-II), is extracted as under:
"475, Persons migrating from West/East Pakistan. Burma, East African countries, namely. Mozambique, Zanzibar, Kenya, Tanzania and Uganda - Claims as to origin of money/assets brought into India to be freely admitted up to limit of Rs. 50,000 subject to certain conditions
1. 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 investment or other purposes is not liable to Indian income-lax. 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 Income-tax Officer 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 permits had been obtained, no questions at all are asked by the Income-tax Officers as to the origin of the money or assets brought in. It is only in case 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 the money, that the department has to make enquiries about the source thereof. Even in these cases, having regard to the difficulties experienced persons migrating from Pakistan, Burma and East African countries, instructions have been issued to the lncome-tax Officers that such claims should be freely admitted up to the limit of Rs 50,000 in each case provided the following conditions are satisfied:
I.T.A. No. 1482/Hyd/2014 :- 9 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd.,
1.. The assessee migrated to India on or alter the dates mentioned below from the countries shown against each and had no source of income in India:
a. 30-7- Mozambique [vide Ministry of Finance Press Note. dated 1962 22-05-1967 (Circular No. 8, dated 22-5-1967 printed as Annex I) b. 1-1- Zanzibar Kenya, Tanzania and Uganda [vide Ministry of 1963 Finance Press Note. dated 22-5-1967 (Circular No. 8, dated 22-5-1967 printed as Annex I)] c. 1-1- East Pakistan and Burma [Vide Ministry of Finance Press 1964 Note dated 15-6-1964/22-5-1965 (Circular Nos. 16D dated 15-6-1964 and 11 dated 22-5-1965 printed as Annex 11 and Annex III respectively..
d. 1-10- West Pakistan [vide Ministry of Finance Press Note, dated 1965 3-2-1969.
2. He had sufficient resources in the foreign country.
3. 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.
4. The amount brought in has been duly introduced in the books regularly maintained in India and ill intimation of such introduction is given to the Income-tax Officer within two months of the migrant's arrival.
4. Cases not covered by preceding paragraph, namely :
a. where the money (in the case of Mozambique, Zanzibar, Kenya. Tanzania, Uganda, East Pakistan and Burma) and money and/or the personal jewellery in the case of West Pakistan claimed to have been brought exceeds Rs.50,000/- or b. where the assessee had some sources of income either in India or in any foreign country, other than the one from which he had migrated prior to migration: or I.T.A. No. 1482/Hyd/2014 :- 10 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., c. where the assessee was assessed as resident in India either for the assessment year preceding the year of his/her migration or in the earlier years, will not be entitled to any special concession. Thus, any claim by such migrants that the funds or the jewellery have been brought from the above mentioned countries will be accepted only if the person concerned produce adequate evidence to show that they had sufficient funds/ wealth in those countries and that the transfer of the cash/jewellery to India can directly be linked with the said funds or wealth. In other words, these migrants will have to lead proper evidence like any other assessees, about the source of the cash/jewellery alleged to have been brought by them from these countries. In support of the claim that they had sufficient funds in those countries. they might produce before the income-tax authorities in India their bank accounts in those countries as also copies of the assessment orders passed in their cases by the income-tax authorities of those countries. The migrants would also then be required to prove that the amounts brought Into India can directly be linked with the funds which they had possessed in those countries.".
9.1 A combined reading of Section 5(2) of the Act and Board Circular No.5 dated 20-2-1969 makes it clear that in a case of non-resident, remittances from aboard into India throuqh normal banking channels are not liable to Indian Income Tax, unless it is proved that they have accrued or arisen or received in India In the present case, it is found that the amount of Rs.78,04,58,324/- has been remitted into India from aboard through normal banking channels from the appellant's own bank account at Mauritius.
10. Further, I agree with the submissions of the appellant that the amount of Rs.78,04,58,324/- havl iq been received in India by the appellant from Mauritius through normal banking channels is not to be included in the total income of the assessee as per the provisions of Section 5(2) of the LT. Act, 1961. Board Circular No.5 dated 20/2/1969 also supports the view that the same is not liable to Indian Income tax. Mere bringing of own money into India from outside India by a Non-Resident Indian cannot be charged to tax in India. Hence, the receipt of Rs.78,04,58,374/- shall not be included in the total income of the non-resident as per the provisions contained in the Section 5(2)(b) of the Act.
I.T.A. No. 1482/Hyd/2014 :- 11 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd.,
11. I do not agree with the Assessing Officer's view that the provisions of Sec 68 or 69 of the I.T.Act prevail over the provisions of Sec 5(2)(b) of the Act. As claimed by the appellant, this issue is squarely covered by the decisions of Income Tax Appellate Tribunal in the case of DCIT Vs. Finlay Corporation Ltd[2003] 86 ITD 626 (Delhi ITAT) and Smt. Sushila Ramasamy Vs. ACIT, Central Circle-II(2), Chennai [2011] 008 ITR (trib) 18 (Chennai). In this regard, I don't agree with the observation of the Assessing Officer in the assessment order that the findings in these case laws are erroneous and they suffer from the infirmity of disregarding the ratio laid out by the Apex court in the case of Kale Khan Mohammad Vs. CIT (1963) 50 ITR l (S.C) as the facts of that case are distinguishable from the facts of the case of the appellant. In view of this, I hold that what is not taxable under section 5(2) of the Act cannot be taxed under section 68 or 69 of the Act.
12. To sum up, I have already held at Para No.10 of this order that bringing of his own money by the non-resident into India from outside India cannot be charged to tax in India and the provisions contained in section 5(2)(b) of the act are very clear in this regard. I have also held at Para No.11 of this order that the provisions of section 68 or 69 of the act cannot prevail over section 5(2)(b) of the act as the assessee is a Non-Resident Indian and income other than Indian income cannot be taxable in India. In view of this, section 68/69/69A/69C of the Act cannot be applied. Since the identity of the creditor company viz., M/s.Virtual International Limited, Mauritius, credit- worthiness of the creditor company and the genuineness of the impugned transactions are proved and in view of the provisions of section 5(2)(b) r.w. Board Circular No.5 dated 20.02.1969, the addition made by the AO for the year under consideration u/s.68/69/69A/69C of the Act for Rs.78,04,58,374/- is not in order. The AO is, therefore, directed to delete the addition. The appellant gets relief of Rs.78,04,58,374/- for the year under."
6. Aggrieved, Revenue has raised the following grounds:
(i) The order of the Ld. CIT(A) is erroneous on facts and in law
(ii) The Ld. CIT(A) erred in deleting the addition of Rs.78,04,58,374/- made in the assessment order u/s.68 of the I.T. Act as well as u/s.69, 69A and 69C of the I.T. Act.
I.T.A. No. 1482/Hyd/2014 :- 12 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd.,
(iii) The Ld. CIT(A) erred in admittinq additional evidences furnished by the assessee during the appellate proceedings though the conditions prescribed for such admission in Rule 46A(1) are not satisfied and without recording his reasons for admission as required under Rule 46A(2) of the I.T. Rules.
(iv) The Ld. CIT(A) erred in considering the additional evidences furnished by the assessee durinq the appellate proceedings without affording an opportunity to the Assessing Officer to examine such evidences and furnish his rebuttal as mandated under Rule 46A(3) of the I.T. Rules.
(v) The Ld. CIT(A) erred in accepting the veracity of the copy of certificate of incorporation of M/s.Vitrual International Ltd., Mauritius and the copies of the audited financial statements of the said company furnished by the assessee as additional evidences without causing verification of their genuineness from the tax authorities in Mauritius.
(vi) The Ld. CIT(A) ought to have noticed that the audited financial statements of M/s.Vitrual Internatioral Ltd. for the F.Y.2010-11 furnished as additional evidence by the assessee are dated 02/05/2014, which is subsequent to the date of completion of the assessment i.e., 28/03/2014 and that this fact raises a serious doubt regarding the genuineness of the said additional evidence.
(vii) The Ld. CIT(A) erred in holding that the identity of the creditor company M/s. Vitrual International Ltd. is considered to be proved without citing any supporting reasons and disregarding the fact that the assessee failed to furnish the tax residency certificate and copies of the income tax returns filed in Mauritius by the said company to prove its identity either during the assessment proceedings or the appellate proceedings.
I.T.A. No. 1482/Hyd/2014
:- 13 -: Sri Madhusudan Rao Lagadapati,
Chairman, M/s.Lanco Infratech Ltd.,
(viii) The Ld. CIT(A) erred In holding that the genuineness of the loan purported to have been advanced by M/s Vitrual International Ltd. to the assessee is considered to be proved without citing any supporting reasons and disregarding the fact that the assessee failed to furnish copies of the bank accounts of the creditor company and the assessee In Mauritius either during the assessment proceedings or the appellate proceedings in order to prove that the loan funds were transferred from the bank account of the creditor company to the bank account of the assessee in Mauritius.
(ix) The Ld. CIT(A) erred in holding that the creditworthiness of M/s. Vitrual International Ltd. is considered to be proved on the basis of the capital, reserves and current liabilities shown in the statement of financial position of the said company as on 31/03/2011 disregarding the fact that fresh capital of US$ 64 lacks is shown to have been contributed by the assessee himself to the said companv during the relevant year in his capacity as the sole shareholder in the statement of cash flows and the note-14 to financial statements.
(x) The Ld. CIT(A), while considering the creditworthiness of M/s.Vitrual International Ltd., also erred in disregarding the fact that a fresh borrowing of US$ 52,95,478 by the said company is shown to have been taken during the year in the statement of cash flows which formed one of the sources for the loan advanced to the assessee and that the genuineness of the same requires verification as the creditor company is a single shareholder company with assessee as the sole shareholder.
(xi) The Ld. CIT(A) erred in holding that the amount of Rs.78,04,58,374/- remitted by the assessee to India from his bank account in Mauritius stated to have been sourced OL t of loan borrowed from M/s. Vitrual International Ltd. is correctly depicted as a credit in the capital account of the statement of affairs of the assessee. The Ld. CIT(A) ought to have appreciated that the same should have been shown as a loan in the statement of affairs irrespective of whether it was received outside India or in India, if the claim of the assessee that the said amount was sourced out of loan I.T.A. No. 1482/Hyd/2014 :- 14 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., taken in Mauritius was true.
(xii) The Ld. CIT(A) erred in holding that there is no round tripping of funds without citing any supporting reasons and disregarding the fact that fresh capital of US$ 64 lacks was introduced into the creditor company in Mauritius by the assessee himself during the year as its sole shareholder to enable it to advance the loan to the assessee.
(xiii) The Ld. CIT(A) erred in holding that the decision of the Hon'ble Supreme Court in the case of Seth Kalekhan Mahomed Hanif (34 ITR 669) does not come to the aid of the AO in concluding that it cannot be presumed that the income represented by the unsubstantiated loan has accrued or arisen outside India to the assessee so as to take it outside the ambit of income chargeable to tax in the hands of a non-resident u/s.5(2)(b) of the I.T. Act.
(xiv) The Ld. CIT(A) erred in holding that the observation of the Hon'ble Supreme Court in the case of Vodafone International Holding (341 ITR 1) that in the case of a one man company the control over the company may be so complete that it is his alter ego is not relevant to the facts of the assessee's case. The Ld. CIT(A) ought to have appreciated that M/s. Vitrual International Ltd. being a one man company of the assessee represents his alter ego as per the said decision of the Hon'ble Supreme Court and consequently, the transfer of funds from the said company to the assessee does not explain the source of funds in the hands of the assessee.
(xv) The Ld. CIT(A) erred n placing reliance on Board's Circular No.5, dated 20/02/1969 in holding that the remittances made from the assessee's own bank account in Mauritius to his bank accounts in India through normal banking channels cannot be subjected to tax in India. The Ld. CIT(A) ought to have seen that the benefit of the circular will be applicable only when such remittances are sourced out of income which accrued to the non-resident outside India which is not taxable in India as per section 5(2)(b) of the Act and it will not be applicable to the assessee as the I.T.A. No. 1482/Hyd/2014 :- 15 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., remittance was made out of a loan purported to have been borrowed outside India from a company in which the assessee himself is the sole shareholder.
(xvi) The Ld. CIT(A) erred in relyinq on the decisions of ITAT, Delhi in the case of Finlay Corporation Ltd. (84 TTJ 788) and ITAT, Chennai in the case Susila Ramasamy (130 TTJ 363) to hold that the provisions of section 68/69 of the I.T. Act do not prevail over the provisions of section 5(2)(b) of the Act. The Ld. CIT(A) ought to have seen that the provisions of section 5 are subject to other provisions of the Act including section 68/69 in view of the presence of the specific phrase "subject to provisions of the Act" in section 5 of the I.T. Act.
(xvii) The Ld. CIT(A) ought to have appreciated that the above mentioned decisions of ITAT, Delhi and ITAT, Chennai, have been rendered without considering the ratio laid down by the Hon'ble Supreme Court in the case of Kale Khan Mohammad Hamf (50 ITR 1) that the onus of proving the source of a sum of money received by the assessee is on the assessee only and if he disputes his liability for tax, it is for him to show either that the receipt was not income or that if it is income, it is exempt from taxation under the provisions of the Act. The Ld. CIT(A) ought to have seen that in view of this ratio, merely establishing that the money was received outside India and was remitted to India through regular banking channels cannot be considered as amounting to discharging the onus cast on the assessee u/s.68/69 of the Act.
7. As can be seen from the above, Ground No.2 to 5 pertain to issue of additional evidence under Rule 46A(1) and Ground No.6 to 10 pertain to identity and creditworthiness of M/s. Vitrual International Ltd. Ground No.11 & 12 pertains to findings of CIT on the genuineness of the amount remitted. Ground No.13 to 18 pertain to various principles relied on by the Revenue on the basis of the judgments in various cases and Board's circular.
I.T.A. No. 1482/Hyd/2014
:- 16 -: Sri Madhusudan Rao Lagadapati,
Chairman, M/s.Lanco Infratech Ltd.,
8. Ld.DR relied on the detailed orders of Assessing Officer to submit that assessee has not furnished necessary evidences in support of the creditworthiness of the above amounts and his furnishing financial statements before the CIT(A) violates Rule 46A and decision of CIT(A) based on additional evidence is not correct.
9. Ld.Counsel, however, submitted that assessee has transferred his own funds from Mauritius to India and this fact was admitted by Assessing Officer. Not only that it was submitted that the remittance was with the permission of the RBI and funds were utilized for various investments in the group companies, gifts and loans to others including personal expenditure. Therefore, Assessing Officer's observation that remittances have come under three headings do not establish the amount as unexplained. It was further contended that assessee is a non-resident and Assessing Officer has jurisdiction only to the extent of taxing the incomes arising in India. The moneys obtained by assessee abroad and transmitted to India cannot be considered as income in India. It was further submitted that existence of M/s.Vitrual International Ltd., has been accepted by the other authorities like SEBI and FIPB and also the investments are through proper regulatory channels. It was further submitted that assessee being Chairman of the company and also promoter of the group companies has been investing funds in various years and no such problem arose in any of the years. It was further submitted that the sections under which Assessing Officer tried to consider assessee's own funds as income of assessee are not legally correct. He has given detailed written submissions countering the written submissions filed by the Revenue and his submissions can be summarized as under:
"a. The remittance of Rs.78,04,58,374/- has been made from the assessee's own Overseas Bank account and thus income, if any I.T.A. No. 1482/Hyd/2014 :- 17 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., had already been received in abroad. Consequently the question of receiving the same income again in India does not arise. Hence, such receipt shall not be taxed under Section 5(2) of the Act.
b. The assessee has merely transferred his own money from Mauritius to India and no credit has been obtained by the assessee as the money has been transferred from his Barclays Bank, Mauritius to NRI A/c. held in Axis Bank and Indusind bank. This tantamount to nothing but passing of money from right hand to left hand. Hence, no addition can be made as Unexplained Credit u/s.68/69/69A/69C of the act.
c. The assessee has received the above said amount from his Barclays Bank, Mauritius to NRI A/c. from the loan obtained from M/s.Vitrual International Limited, Mauritius in support of which the assessee has submitted confirmation letter from M/s.Vitrual International Limited, Mauritius.
d. Without prejudice to the above, the assessee has not only established the source of the money as also established the source to source by way of submitting the confirmation from M/s.Vitrual International Limited, Mauritius. As the assessee is a non-resident Indian and the source of money is raised from outside India, the application of 5(2) r.w.s. 9 of the Act is not valid.
e. In support of the submissions/arguments of the respondent here in, he relies on the order of the CIT(Appeals)-V, Hyderabad".
10. We have considered the rival contentions, perused the documents placed on record and the orders of the authorities. First of all we are unable to understand how Assessing Officer can consider inward remittance of moneys into NRI A/c of a non-resident Indian as income of assessee as unexplained. Assessee in the course of assessment proceedings furnished enough evidences in support of inward remittance of funds including a certificate from M/s.Vitrual International Ltd., about the source of funds being loan. If Assessing Officer has any doubt about the said company in Mauritius, he cannot reject the genuineness of the said company without making necessary enquiries either through the internal mechanism of foreign tax division of CBDT or by any other I.T.A. No. 1482/Hyd/2014 :- 18 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., means. Just because the certificate furnished does not have any seal, the same cannot be rejected outright. However, the matter did not end there. Assessing Officer took pains to verify from the internet and also from the website of the SEBI and came to the conclusion that the said company is one of the group companies of assessee listed as persons constituting group under Monopolies and Restrictive Trade Practices Act, 1969 and further noticed from the red herring prospectus of M/s.Lanco Infratech Limited, wherein this company was shown as single shareholder company of assessee as on 29-07-2006. This means the existence of the company is accepted by the authorities, not only by SEBI and other statutory authorities but even by the Assessing Officer, as can be seen from the enquiries conducted. We are unable to understand how the Revenue could raise ground on existence of the above company in Ground No.7 about the identity of the company when Assessing Officer himself acknowledged the same in the assessment order.
11. Coming to the creditworthiness of the amount, assessee's explanation is that the amounts were transferred from his own bank account in Mauritius to the NRI account in India. Therefore, the immediate source of funds is his own account from Mauritius which is not disputed. If funds are received into Mauritius account, then that becomes source of the source which cannot be examined by Assessing Officer, unless there is any incriminating evidence. Except presumptions and allegations, virtually there is no evidence against assessee that these funds received into his bank account in Mauritius are his own incomes from India or 'round trip' funds of assessee as alleged. Therefore, all the grounds raised on this issue, particularly Ground No.10 & 11 does not require any consideration on the facts of the case.
I.T.A. No. 1482/Hyd/2014
:- 19 -: Sri Madhusudan Rao Lagadapati,
Chairman, M/s.Lanco Infratech Ltd.,
12. Coming to the issue of creditworthiness of the above said company, there is no dispute with reference to the funds. It has its own funds and Ld.CIT(A) took pains to examine and hold that it is creditworthy. Nothing was brought on record to counter the findings of Ld.CIT(A), except contending that the order of the CIT(A) is not correct. Therefore, the ground regarding creditworthiness of the company particularly from Ground No.6 to 10 also does not require any consideration.
13. One of the issues to be considered is whether the admission of additional evidence by assessee at the directions of CIT(A) required to be sent to Assessing Officer under Rule 46A(1). It is not assessee who furnished the additional evidence. Therefore, it cannot be strictly considered as additional evidence under Rule 46A. CIT has co-terminus powers as that of Assessing Officer as far as appeals before him are concerned. In fact, he even had enhancement powers, if Assessing Officer has missed out bringing into tax any amounts. He also has powers of enquiry and investigation. Therefore, the CIT(A) if exercises his powers as an Assessing Officer, there is no need to give an opportunity to the Assessing Officer who passed the assessment order under Rule 46A. The action of the CIT(A) is completely justified and is in line with the judicial pronouncements in DCIT Circle-16(1), Hyderabad Vs. NE Technologies India (P) Ltd., [47 Taxmann.com, 405 (Hyderabad- Trib)] and ITO Vs. Industrial Road Ways [112 ITD 293 (Mumbai-Trib)]. In the case of ITO Vs. Industrial Road Ways (supra), the co-ordinate bench has held as under:
"Having regard to the provisions of Part A of Chapter XX relating to the appeals before the first appellate authority, a distinction has to be made between the evidence and material voluntarily furnished by an assessee in support of his appeal and the evidence/material requisitioned from an assessee by the first appellate authority with I.T.A. No. 1482/Hyd/2014 :- 20 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., a view to have proper disposal of proceedings before him. While the provisions of rule 46A apply to the former, the same have no application to the latter. {Para 4] Provision of rule 46A enjoins upon the first appellate authority not to admit any fresh evidence unless he records in writing his reasons for its admission. Further, rule 46A enjoins upon him to provide the Assessing Officer with a reasonable opportunity to examine the fresh evidence or to cross examine the witness produced by the assessee or to produce any evidence or document or any witness ill rebuttal of the additional evidence produced by the assessee. {Para 5} The provisions of section 250(4), cm the other hand, empower the first appellate authority to make such further enquiry as he thinks fit or to direct the Assessing Officer to make further enquiry and report the result of the same. There are many judgments to the effect that in view of the provisions of section 250(4), the first appellate authority is duty bound to make an enquiry even if such an enquiry was not made by the Assessing Officer if the facts and circumstances of the case warrant such an enquiry to be made. It, therefore, follows that the matters to be considered by the first appellate authority need not be confined to what was considered by the Assessing Officer while making the order appealed against. {Para 6] There are of course several judgments whcre it has clearly been laid down that the assessee on his own cannot produce any additional evidence not furnished before the Assessing Officer without meeting the various conditions provided under rule 46A for which satisfaction is to be recorded by the appellate authority in writing and with which the appellate authority is further required to confront the Assessing Officer and allow him a reasonable opportunity to have his say in the matter. [Para 9] From the various authorities of courts, the legal position is that the first appellate authority has wide powers over the order of assessment appealed against before him. In the course of exercise of such power the first appellate authority can direct the assessee to produce any evidence, information or material that was not produced before or was not considered by the Assessing Officer.
The purpose of rule 46A is to place fetters on the rights of an appellant to produce additional evidence before the first appellate authority and not on the rights of the first appellate authority to call I.T.A. No. 1482/Hyd/2014 :- 21 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., for production of any fresh evidence or information. This aspect of the provisions of rule 46A is clear from the provisions of sub-rule (4) of rule 46A itself that nothing contained in rule 46A shall affect the power of the first appellate authority to direct the production of any document or to examine any witness to enable him to dispose of the appeal or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the Assessing Officer).[(Para 13] In the instant case, the entire additional evidence had come on the record of the Commissioner (Appeals) because he had decided to examine the facts of the case in depth and then adjudicate upon the matter on the basis of evidence and material, thus, gathered. The Commissioner (Appeals) was empowered to do so under the provisions of section 250(4). The result of enquiry conducted by him could either go to further cement the case made out by the Assessing Officer or to help out the assessee against the findings of the Assessing Officer. The mere fact that the results of the enquiries thus conducted supported the case of the assessee and not that of the revenue, it has no bearing on the jurisdiction and powers of the Commissioner (Appeals). The Commissioner (Appeals) could have confronted the Assessing Officer with the evidence thus received and the material thus gathered and allowed the Assessing Officer to have his say in the matter and perhaps had he done so the dispute in question would not have arisen. But there is no requirement, in law, that the Commissioner (Appeals) should invariably consult or confront the Assessing Officer every time an additional evidence that was not before the Assessing Officer comes on the record of the Commissioner (Appeals). Where the additional evidence is obtained by the first appellate authority on its own motion, there is no requirement, in law, to consult/confront the Assessing Officer with such additional evidence. There may be cases where additional evidence is admitted by the first appellate authority on a request or application made by the assessee. In such cases sub-rule (2) of rule 46A requires the first appellate authority to allow the Assessing Officer a further opportunity to rebut the fresh evidence filed by the assessee. Even that requirement cannot be said to be a rule of universal application. If the additional evidence furnished by the assessee before the first appellate authority is in the nature of a clinching evidence leaving no further room for any doubt or controversy, in such a case no useful purpose would be served by performing the ritual of forwarding the evidence/material to the Assessing Officer to obtain his report. In such exceptional circumstances the requirement of sub-rule (3) may be dispensed with. [Para 14] I.T.A. No. 1482/Hyd/2014 :- 22 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., Therefore, there was no infirmity in the impugned order of the Commissioner (Appeals) who had taken pains to comprehensively examine the issue before him and arrive at a correct finding of fact and he should be congratulated for having done so. Therefore, his order was to be upheld and the appeals were to be dismissed. [Para 15].
14. In this case CIT(A) requisitioned the evidence to examine the contentions. Therefore, the grounds raised from Ground No.3 to 6 on the issue of additional evidence are infructuous and does not require any consideration.
15. Therefore, on the facts of the case, it is to be admitted that assessee having his own funds abroad has remitted the amount to India and this inward remittance cannot be considered as unaccounted income of assessee for the year under consideration.
16. Revenue has raised various grounds on the legal principles. We are of the opinion that these are all misplaced or wrongly applied to the facts of the case. First of all, assessee being a non-resident invoking the provisions of Section 68 & 69 has its own limitations. Even though, the credits are to be examined u/s.68 and 69, 69A or 69C prima facie these sections are not applicable in the case of assessee for the following reasons.
Section Explanation for non applicability of Section 68: Unexplained The assessee has merely transferred his own Cash Credit money from his account in Barclays Bank, Mauritius to NRI A/c held in Axis Bank and Indusind bank. As he transferred the amount from his own bank a/c. Therefore, the question of unexplained credit will not come.
69: Unexplained The amount of Rs.78,04,58,374/- does not Investment represent any investment, it is the assessee own money transferred from outside India a/c to Indian NRI A/c. Therefore, Unexplained Investment does I.T.A. No. 1482/Hyd/2014 :- 23 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., not attracts.
69A: Unexplained The amount of Rs.78,04,58,374/- is the credit Money appearing in the capital account of the assessee.
The money transferred from his own foreign bank a/c to his own NRI A/c in India. This will not attract unexplained money.
69C: Unexplained This section will not attract as no expenditure is Expenditure involved.
17. Reference to the Board circular by Assessing Officer is also not correct as the same was extracted and was discussed in detail by the Ld.CIT(A). One cannot quote out the context to take a different meaning of the general circular issued by the Board. Ld.CIT(A) having examined that the principles laid down by the Board circular are clearly applicable to the facts of the case, we do not see any merit in Ground No.15 raised by Revenue unless it is established that assessee has earned income in India or received in India. Provisions of Section 5 does not permit taxation of amounts remitted to India from sources outside India which are not incomes under the provisions of the Act. This issue was discussed elaborately by the co-ordinate bench in the case of DCIT Vs. Finlay Corporation Ltd., [86 ITD 626], Delhi, wherein it was held as under:
"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. V. CIT (1953) 23 ITR 230 (Supreme Court of India) 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 I.T.A. No. 1482/Hyd/2014 :- 24 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., 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 the assessee fails to prove the genuineness and source of such cash credit. Therefore, we are of the considered view that the 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."
18. Likewise, in the case of Smt. Susila Ramasamy V. ACIT, Central Circle -II(2), Chennai [008 ITR (Trib) 18 (Chennai)], Chennai Bench has held as under:
"A non-resident person having money in foreign country could not be called upon to pay income tax on that money in India. The reason is obvious because in respect of that money it will not be possible for the AO to say it was either received by him in India, or it was deemed to be received by him in India, or it accrued to him in India, or it arose to him in India, or it is deemed to accrue to him in India, or it is deemed to arise to him in India. [para 14.1]. if a non resident person, having money in a foreign country, brings that money to India, through a banking channel, he cannot be called upon to pay income tax on that money in India, firstly, for the reasons stated above and secondly, because the remittance of money into India through banking channel will make, the onus on the assessee under section 69, discharged. [Para 14.2]. Once an amount is received as income, any remittance or transmission of that amount to another place does not result in receipt once again at other place, within the meaning of section 5. Therefore, if certain income, profits or gains was received by the assessee outside India it does not become chargeable to income tax in India by reason of that money having been brought into India. This is because what is chargeable is the first receipt of the money and not a subsequent dealing by the assessee with the said money. In that event the money is brought by the assessee as his own money which he had already received and had control over it and it does not take the character of income, profits and gains after being brought into India. [Para 14.3]. There could, I.T.A. No. 1482/Hyd/2014 :- 25 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., of course be a situation where a non-resident has money in India, transmits it to a foreign country then brings it back to India through a banking channel. If this circular motion of the money is conclusively proved with evidence then the non resident will surely do the, explaining under section 69, despite the money having been brought into India through banking channel. But merely on suspicions or doubts, conjectures or surmises, no inference can be drawn against the assessee. It is trite law that there can be no presumption in favor of any illegality of a transaction. In fact the presumption is the other way about. [Para 14.4]. In the cases of remittances through banking channel the nature and source of the funds get explained and the onus on the assessee under section 69 gets discharged, and consequently such remittances cannot be taxed under section 5(2) (b). Therefore, the argument of the revenue that, in the present case, the impugned money was taxable under section 5(2)(b) read with section 69, on the facts, as no merit and cannot be accepted. [para 14.6]. But, the position will be entirely different if the money has been brought into India otherwise than through banking channel, because in that case the onus on the assessee under section 69 will not stand discharged. In such a case the provisions of section 5(2)(b) read with section 69 will surely be attracted. [Para
14. 7]. In the present case, the AO while relying on the CBDT circular, has committed an error of reproducing in his order from Para 4 of the circular, which does not apply to the remittances through banking channels. He should have applied the Para 2 and first part of Para 3 of the circular. In the circumstances, therefore, his order has no merit and cannot be sustained.[Para 15.4]. 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. It has been observed that because of the mode of banking channel, admittedly, used for the remittance in this case, the onus on the assessee under section 69 stood discharged, and therefore it was not taxable in India under section 5(2)(b). The CBDT circular 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 have been drawn in this case, as per law. [Para 16.2]"
I.T.A. No. 1482/Hyd/2014 :- 26 -: Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd.,
19. In view of the legal principles as stated above, provisions of Section 5(2) are also not applicable as the amount received is received from assessee's own account outside India and no income has accrued or arisen in India. These funds were also received through banking channels with necessary statutory approvals. Therefore, assessee has proved the sources of receipts and discharged the onus. It is the Revenue which failed in proving that this amount is unexplained income of assessee. In view of these facts of the case, we are of the opinion that various case laws relied by the Revenue does not apply and they are clearly distinguishable. In view of this, we have no hesitation in upholding the order of the CIT(A) and rejecting the Revenue's grounds.
20. In the result, appeal of Revenue is dismissed.
Order pronounced in open Court on 18th March, 2015 Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 18th March, 2015 TNMM Copy to :
1. The Deputy Commissioner of Income Tax, Circle-16(1), 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.
2. Sri Madhusudan Rao Lagadapati, Chairman, M/s.Lanco Infratech Ltd., Plot No.4, Software Unit Layout, Madhapur, Hyderabad.
3. CIT(Appeals)-V, Hyderabad
4. The DIT (IT & TP), Hyderabad
5. D.R. ITAT, Hyderabad