Deputy Commissioner Of Income Tax vs Alchem International P. Ltd.

“1.

Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in deleting the addition of Rs 18,89,70,893 made by the AO on the ground that M/s Alchem International (HK) Ltd., which is a 100% subsidiary of the assessee Company, without appreciating the fact that a legal façade was created by the assessee by forming the above Company at Hongkong, which is a tax heaven, with the purpose of diversion of its profit to its 100% subsidiary at Hongkong

2.

Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is right in deleting the addition of Rs 18,89,70,893 without appreciating the detailed evidences and reasoning discussed in the assessment order for holding that the effective management and control of M/s Alchem International (HK) Ltd., which is a 100% subsidiary of the assessee Company, was in India.

3.

Whether on the facts and in the circumstances of the case the Ld CIT (A) is right in deleting the addition of Rs 1,89,82,264 made by the AO on account of bogus claim of job work expenses after confronting the assessee with seized documents and various statements recorded which showed that job work was not done and after affording proper opportunity to the assessee to explain the seized document but the assessee failed to explain the same.

4.

Whether on the facts and in the circumstances of the case the Ld CIT(A) is right in deleting the addition of Rs2,48,67,000 made on account of unrecorded cash assessee failed to explain these entries when proper opportunity to explain these entries was afforded to it during the assessment proceedings.

5.

Whether on the facts and in the circumstances of the case the Ld. CIT(A) is right in deleting the addition of Rs 11,64,480 made by the AO on account of deemed interest on entries in page No 79, 87 & 88 of Annexure A-2 when the assessee could not explain the same during the course of assessment proceedings.

6.

Whether on the facts and in the circumstances of the case, the Ld CIT(A) is right in deleting the addition of Rs 58,42,50,000 made on account of unexplained entries on page nos 5, 7, 11 & 15 of Annexure A-14 without appreciating the fact that these documents were found and seized from the premises of the assessee and the assessee during the assessment proceedings was duly confronted with these documents but the assessee could not explain the entries on these pages

7.

That the order of the CIT(A) is erroneous and is not tenable on facts and in law.

8.

That the grounds of appeal are without prejudice to each other.”

“3.

Case of the Revenue made in the assessment order and argued by CIT(DR) is that profit earned by Hongkong Subsidiary of the assessee in fact is the profit of the assessee as the it was 100% subsidiary and this legal façade was created by the assessee and effective management and control of the subsidiary company was in India. Ld. CIT(DR) relied upon the assessment order and also raised the contentions contained in the departmental grounds of appeal. On the other hand, Ld. AR on behalf of the assessee relied upon the submissions made before CIT(A) and reproduced in the assessment order and supported with the documents contained in the paper book and also relied upon the findings recorded in the order of the learned first appellate authority.

4.

We have considered the entire material before us. Findings recorded by Ld. CIT (A) relating to these grounds of appeal are as under:

“14.13

—As discussed earlier, first of all it was not established that the control and management of AIHK is done wholly from India. AIHK is a separate legal entity, duly registered in Hongkong with an address at Hongkong. It is carrying out its activity of procurement of business and the goods are purchased through appellant and sent through appellant as per the business practice. Through exports to AIHK, there is a substantial growth in the business of the appellant.

Bills are raised by the appellant to AIHK, though consignment sent to third party. Payments are received from AIHK to the appellant through banking channels, duly recorded in the books of both the entities. Receipt of advance from AIHK is a business advance, looking to the running transactions between appellant and AIHK. AIHK is subject to the laws, including taxation laws of Hongkong. The exports of appellant has been recognized, on which deduction under section80HHC of the Act has been claimed and allowed. On referring the matter to TPO, no adverse view were received meaning thereby the transactions are at the arms length price and permissible. The AO has accepted this position. This also shows that they are two different entities.

14.14—In view of the above, and looking to the case laws relied upon by the appellant in the case of Radharani Holdings P. Ltd.(supra) and Saraswati Holdings Corporation Ltd.(Supra) etc, it is held that the appellant and AIHK are two different entities and control and management of AIHK is being done wholly from India is not established. Therefore, the provisions of section 6(3)(ii) are not applicable looking to the facts and circumstances of the case and law.

14.15—It is also to be mentioned that AO did not substantiated that how this profit of AIHK, even though being treated as resident in India under section 6(3)(ii), can be clubbed and added in the hands of the appellant. Simply because it is 100% subsidiary of appellant, all of its profit cannot be clubbed in the hands of holding company even if the subsidiary is a resident of India. Subsidiary company and holding company are two different persons for the purpose of tax assessments in Income tax parlance. So even if it is considered for the sake of argument that provisions of section 6(3)(ii) are applicable to the AIHK, meaning thereby that it is a resident in India, its profit cannot be clubbed with the income of appellant. AO has also not proved conclusively that how these transactions being sham, the income of AIHK can be clubbed in the hands of appellant, which is a separate legal entity. Further, the AO has taken only the profit part leaving the expenditure incurred by Hongkong company, thereby accepting the claim of expenditure incurred by AIHK. Even if AIHK is considered as Indian resident, separate proceedings are required in the hands of AIHK to assess its profit in India.

5.

It is evident that Hongkong entity was a separate legal entity and was registered in Hong Kong. There are enough evidences which show that the Hongkong entity was doing the business and was subject to Hongkong laws. Transfer Pricing Officer has found the transactions between the assessee company and Hongkong entity at arms-length which also establish that the transactions between the assessee company and Hongkong entity were genuine business transactions. There is no evidence brought on record to prove that the control and management of Hongkong entity was being done wholly from India. In any case, even if control and management of Hongkong entity had been found situated wholly in India, though this is not the proved case of Revenue, yet the profit of Hongkong entity could not be clubbed with the profits of the assessee company. There is no evidence brought on record by the revenue to prove that the transactions undertaken by Hongkong entity were sham transactions and were transactions of the assessee company. Hongkong entity was registered in Hongkong on 20.9.2002 and was working since then, independently. Revenue itself has accepted that the assessee company has made exports to Hongkong entity. Transactions between the assessee company and its Hongkong Subsidiary have taken place at arms length as found out by TPO also. Payments have been made& received by the assessee and Hongkong entity through banking channels only. All the factual matrix of the case have been captured and finding have been recorded by the first appellate authority. Merely because Hongkong may be a tax free or low tax jurisdiction, that alone does not prove that the Hong Kong entity was legal façade of the assessee company. CIT(A) has exhaustively discussed the issue at hand and has recorded his findings which are based on the material. It is the assessing officer who himself has accepted in para 4 of the assessment order that exports were made by the assessee company to Hong Kong entity. Reading of the assessment order para 9.1 suggests that it was the finding of DDI that Hong Kong entity was not doing any actual activity which unfortunately has been followed by the assessing officer without adverting to the facts available on record which prove that exports were made by the assessee company to Hong Kong entity. Even the finding of Transfer Pricing Officer in AY 2010-11 cannot be ignored when he records that exports executed by the assessee company to its associated enterprise was short of arms length price by Rs. 3,64,43,842/-. Had there been no activity done by Hong Kong Entity, how could such finding be arrived at by TPO in the first place? Exports were made under the government policies and as per Import Export regulations and this cannot be ignored. There is nothing on record to suggest that the statement of Ms. Chanchal Bhutani was given to the assessee even. Thus, there is nothing before us to take a view different from the view taken by Commissioner of Income Tax (Appeal) and thus we dismiss all these grounds raised by Revenue in this regard.”

“1.

Movement of goods from Alchem International Ltd., Ballabgarh to Lepro Herbals (P) Ltd., Panipat were duly recorded in the relevant records.

2.

That job work activities are duly recorded in the batch records maintained in Lepro Herbals Put. Ltd., Panipat.

3.

M/s Alchem International Ltd. is covered under Excise Rules, and all the statutory records are maintained for such movement of stocks, which were duly verified by the Search Party.

4.

During the course of search documents were found and seized being annexure A-12 and A-29 from the factory premises at Ballabgarh confirming the Job work done by Lepro Herbals Put. Ltd. for the assessee company.

5.

The evidence and documents supporting the job work done by Lepro Herbals Put. Ltd. for the assessee company in various years are being filed.

6.

Regular bills for job work charges raised by Lepro Herbals (P) Ltd., Panipat on Alchem International Ltd., Ballabgarh, were found during the course of search, which were duly accounted for in the regular books of account.

7.

All payments are made in the normal course of business activity by Alchem International Ltd. to Lepro Herbals (P) Ltd., Panipat by way of cross-cheques, which are duly recorded in the regular books of account.

8.

Assessment proceedings upto Ass. Year 2008-09 have been completed u/s 143(3) of the Income Tax Act in the hands of Alchem International Ltd., as well as, Lepro Herbals (P) Ltd., Panipat and the claims of job works were found to be in order and accepted by the department in assessment proceedings u/s 143(3) of the I.T.Act.

9.

Both the companies i.e. Alchem International Ltd and Lepro Herbals Put Ltd are tax paying companies and there is no justification to allege wrong claim of job work charges by the assessee company.

10.

That no incriminating documents were found during the course of search to suggest that transactions regarding job work charges were not duly accounted for.

11.

That Lepro Herbals (P) Ltd. included the amount of job work charges paid by Alchem International Ltd. as its income for all the relevant years which was duly accepted in the assessments framed u/s 153A of the Income Tax Act'1961 in the hands of Lepro Herbals Private Limited as business income from job work charges.

12.

That no adverse inference can be drawn on the basis of "raising of doubts" ignoring the documentary evidence on record and claim of jobwork charges being supported by seized documents.”

“9.6

I have gone through the submissions of the appellant on this ground as reproduced earlier and have considered the facts and evidences on record. I have also perused the case laws relied upon by the appellant.

9.7

It is stated that all the payments have been made cheques and no proof of the cash payment by appellant to Mr. Yadav has been found. The appellant argued that the documents are not related to it, but to Mr. R.P. Yadav and it is to be explained by him. Mr. R.P. Yadav has not categorically stated that these documents pertain to the unaccounted/ cash purchases of the appellant. It is true that Mr. R.P. Yadav who is working is behalf of the company is actively involved in the purchase of Gloriosa seeds for appellant form Southern India. No other corroborative evidence or material has been found either from the premises of Mr. R.P. Yadav or from the various premises of the appellant company during search to show that appellant is earning interest from farmers to whom cash was advanced.

9.8

Further, there is no mandate given by the appellant to Sh. R.P. Yadav to distribute cash to such farmers and nothing has been stated by Mr. R.P. Yadav in this regard. Sh. R.P. Yadav though working as consultant of the appellant and rendering services to other parties including the appellant has a limited role to play and no cash have been found to be given to him.

9.9

It is seen from the submissions that the addition has been made on the basis of stand alone document found and seized from Mr. R.P. Yadav, who is a consultant/employee of the appellant and the some and substance of the document is not proof by any corroborative evidence as books of account of the appellant has been found proper. The AO has not rejected the books of the appellant. In view of the provisions of law as explained in various judgements supra referred by appellant and in appellate order no. 42/13-14/CIT(A)-29 dated 29.02.2016 for the AY 2009-10 of ld. CIT(A)-29, New Delhi, I find no merit in the addition of Rs.11,64,480/-. Accordingly, this ground of appeal is allowed.”

“10.3

The appellant has submitted that these documents were nothing but the rough notings and did not represent any unaccounted transaction. There was no corroborative evidence brought on record by the Assessing Officer to substantiate that these notings were in respect of any transactions. It is to be noted that this issue has been agitated in appeal for the first time in AY 2010-11 since; it arose for the first time only in this assessment year. Hence, appellant is not justified in stating that findings in CIT (A) order for any earlier assessment year have any bearing on issue agitated in this ground of appeal and its sub-grounds.

10.4

It is further submitted by appellant that during the course of search, no document was found and seized to support any unaccounted purchases, sales or other transactions. It is submitted that there is no independent material to show that jottings on seized paper represented unaccounted transactions and in the absence of corroborative evidence no addition can be made in the hands of the assessee. The documents in question were dumb documents not representing any actual transaction. Appellant has relied on a plethora of judgements which have been quoted above in support of its claim that the rough jottings were made on a rough pad and do not pertain to any specific transactions. Among other cases, reliance was placed on the case of Sahitya Housing Pvt. Ltd. vs. DCIT (ITAT Hyderabad), ITA No. 246/ Hyd/2011, Date of pronouncement: 24.01.2014, according to which unsubstantiated material found in pen drive cannot be considered as conclusive evidence to make additions.

“... The unsubstantiated material found in the pendrive cannot be considered in the hands of the assessee as conclusive evidence so as to make additions towards unexplained credit. It was held by the Hon'ble Supreme Court in the case of CBI vs. V.C.Shukla [1998] 3 SCC 410 that file containing loose sheet of paper are not books' and entries therein are not admissible u/s 34 of the Evidence Act, 1872."

10.5

Appellant has also relied on the following case laws:

CIT Vs. Anil Bhalla 322 ITR 191. No independent material to show jottings on paper reprsented unaccounted transactions of assessee-transactions explained from books of company as relating to projects undertaken by it finding of tribunal that additions could not be sustained in absence of any other corroborative evidence, pure finding of fact-Income Tax Act, 1961, s. 69C.

•

The search party discovered some notings and jottings in the diaries and documents seized. Additions were made raising presumption under section 132(4A) about the notings. Additions were deleted by CIT (A) and ITAT. Held that, Tribunal had recorded a finding that there was no corroborative or direct evidence to presume that notings and jottings had materialized into transactions giving rise to income not disclosed in the books. There was no perversity in Tribunal's findings. CIT v. D.K. Gupta (2009| 308 ITR 230(Del.)

- Dumb documents or documents with no certainty have no evidentiary value for purpose of resorting to deeming provisions of sections 68, 69, 69A to 69D. In absence of adequate material as to nature and ownership of transaction, undisclosed income cannot be assessed in hands of assessee merely by arithmetically totaling various figures jotted down on loose documents found during search. Bansal Strips (P) Ltd. V. Asstt. CIT [2006] 99 ITD 177 (Delhi)

- Loose papers containing jottings of certain figures even if seized from the possession of assessee could not come within the compass of the word document and cannot be the basis for treating certain income as undisclosed income of the assessee. D.D.Malhan v. Dy. CIT [2004] 91 TTJ 947 (Del)

- No decoding is permissible on suspicion, surmise, conjecture and imagination. Amar Natarlal Shah v. Asstt. CIT [1997] 60 ITD 560, 564-565 (Ahd.)

- In absence of any evidence about the nature of figures noted on loose paper seized, date, name of party etc., no addition can be made merely upon suspicion. Asstt. CIT v. Shailesh S. Shah[1997]63 ITD 153(Bom)

- Additions based on jottings on paper found during the course of search could not be sustained in the absence of any corroborative material or evidence on record for rejecting the assessee's contention that jotting was an estimate and not actually expended amount. Addl.CIT v. Prasant Ahluwalia [2005]92 TTJ 464(Ctk.)

10.6

Following the above judicial pronouncements which hold that dumb documents or documents with no certainty have no evidentiary value for purpose of resorting to deeming provisions of sections 68, 69, 69A to 69D, I hold that the additions made by assessing officer of Rs. 58,42,50,000/- was not established through corroborative material or substantial evidence. Hence, it deserves to be deleted. Grounds of appeal 8(i) to 8(vi) are allowed."