2020 (9) TMI 906 - AT - Income Tax

Stay petition - authorised representative submitted that assessee did not have any assets available with it for furnishing of the security and therefore same cannot be given - HELD THAT - Total net worth of the company is invested in government dues. The main reason of the negative net worth of the company is apparent from the balance sheet of 2017 wherein cumulatively assessee has written of the investment in subsidiaries of ₹ 1772 crores. Along with the audited accounts, the financial statement or audited financial statements of subsidiaries were not provided. But, according to the words of the assessee, total investment in the subsidiary of ₹ 1772 crores is worthless. Without having the financials of the subsidiary company and mainly the loss arising on account of writing of the permanent diminution in the value of the investment in the subsidiaries of the company of ₹ 1772 crores, it cannot be measured whether the assessee has anything to pay to the government of India towards this tax dues. In this situation, as per the order of the coordinate bench dated first of January 2020, the interest of the revenue is grossly hampered if the assessee is granted further stay of demand, despite assessee paying further ₹ 5 crores towards the outstanding dues. In view of the above situation, it is not even worth mentioning state of affairs of the assessee and further litigations shown to us by the learned authorised representative for extension of the stay. Even assuming while denying, the assertions made by the learned authorised representative that assessee has a strong prima facie case, we are not inclined to grant further stay of the above demand advocate the stay already granted forthwith. It is further to note that subsequent to the order of the coordinate bench dated first of January 2020, of all these financial affairs were not brought to the notice of the coordinate bench either by the assessee or by the revenue. Therefore on looking at the overall compactus of the fact of the issue involved in the appeal, the financial status of the company appellant petitioner, the present status of the working of the company, known disclosure of the financial statements of the subsidiaries whose investments have been written of, known provision of the names of the present directors, we are not in a position to extend the stay. Further so far as the interest of the revenue is concerned it is our prime and foremost duty to safeguard it when the stay is granted. Subsequent statement of affairs presented before us do not show that we are in any way be keeping the interest of the revenue safeguarded. Despite declining the stay on the merits of the issue but we are extending the Stay till 31st August, 2020, only for Covid-19 reasons.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of corporate guarantee.
2. Addition of unexplained cash credit under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Corporate Guarantee:
The first issue in the appeal concerns a transfer pricing adjustment of ?4.27 crores. The applicant, a Category-I Merchant Banker, engaged in various financial services, faced this adjustment during the assessment for the year 2011-12. The original return filed declared a loss, which was revised slightly. However, the draft assessment order proposed a significant increase in the assessed income, leading to the dispute. The applicant contested this adjustment before the Dispute Resolution Panel (DRP), which confirmed most of the additions without adequately considering the applicant's objections. The matter remains under appeal before the Tribunal, and the stay on the outstanding demand has been extended multiple times due to various procedural delays and the COVID-19 pandemic.

2. Addition of ?186 Crores as Unexplained Cash Credit under Section 68:
The second and more substantial issue involves an addition of ?186 crores under Section 68 of the Income Tax Act. This addition pertains to the subscription of preference shares by a Mauritius-based company, Cresswell Investments Ltd. The Assessing Officer (AO) added this amount as unexplained cash credit due to the applicant's failure to provide a direct confirmation, relying instead on a photocopy of a letter. The AO questioned the authenticity and genuineness of the transaction, citing doubts about the identity and creditworthiness of the investor and the rationale behind investing at a 400% premium in 1% preference shares. The DRP upheld this addition, leading to a significant disputed demand. The applicant has challenged this addition before the Tribunal, arguing that the delay in the appeal's disposal is not attributable to them.

Procedural History and Stay Orders:
The applicant initially paid ?15 crores towards the disputed demand as directed in the original stay order dated 02.03.2016. The balance demand of ?93 crores remains contested. The Tribunal granted and extended the stay multiple times, considering the applicant's financial constraints and the procedural delays exacerbated by the COVID-19 pandemic. The stay was extended periodically through various orders, with the latest extension granted till 31st August 2020, primarily due to the pandemic.

Financial Condition and Tribunal's Observations:
The Tribunal noted the applicant's deteriorating financial condition, highlighted by substantial losses and a negative net worth due to significant write-offs in subsidiary investments. The Tribunal emphasized the need to balance the interests of the revenue and the applicant, expressing concerns about the recoverability of the tax dues. Despite the applicant's claims of having a strong case on merit, the Tribunal declined to extend the stay further on merits but extended it till 31st August 2020, considering the COVID-19 situation and the directions from higher courts.

Conclusion:
The Tribunal disposed of the stay petition with the direction to extend the stay till 31st August 2020 due to the COVID-19 pandemic, while emphasizing the importance of safeguarding the revenue's interest and noting the applicant's financial difficulties and procedural delays.