2017 (2) TMI 1007 - AT - Income Tax

Addition of unexplained cash credit u/s 68 - whether nature and genuineness of the transaction of investment of Compulsorily Convertible Preference Shares ( CCPS ) in the assessee Company is explained in the given facts and circumstances of the case - Held that - The ld. Counsel for the assessee brought to our notice the audited financial statements of Biometrix which is on record to prove that only one credit entry is found in the books of Biometrix proving the fact only once money entered Biometrix in the form of loan from ICICI Bank and the same borrowed money stands invested in the CCPS issued by the assessee. In our considered view, the bank statement of the assessee and the foreign inward remittance certificate issued by HDFC Bank, Mumbai showing the receipt of money from Biometrix is on record. What is not on record is the bank statement of Biometrix. However, the other materials on record viz., the swift messages and audited financial statements of Biometrix clearly prove that Biometrix borrowed from ICICI Bank and invested the same money in the CCPS issued by the assessee. We are convinced from the materials available on record that Biometrix borrowed from ICICI Bank and invested the same in the CCPS invested by the assessee. As assessee able to prove conclusively that the CCPS issued by it to Biometrix is directly financed by ICICI Bank, Singapore. In view of these facts and circumstance and precedents cited above, we are of the considered view that the Assessing Officer has made this addition of unexplained cash credit without any basis and CIT (A) has rightly deleted the same on the basis of evidences and facts. We confirm the order of CIT(A) and the appeal of Revenue is dismissed.we hold that on review of the materials available on record, we are satisfied that the requirements of section 68 of the Act viz., nature, source and genuineness of the transaction including the identity and the creditworthiness of the investor, are fulfilled. - Decided in favour of assessee

Issues Involved:
1. Deletion of addition of unexplained cash credit under Section 68 of the Income Tax Act.
2. Lifting the corporate veil to determine the true nature of the transaction.
3. Non-submission of crucial documents like Biometrix's loan account and OCBC account.
4. Ignoring the fact that Biometrix is a subsidiary of a Reliance group company.
5. Valuation of Compulsorily Convertible Preference Shares (CCPS).
6. Monitoring of loan terms by ICICI Bank.

Detailed Analysis:

1. Deletion of Addition of Unexplained Cash Credit:
The primary issue was whether the CIT(A) erred in deleting the addition of unexplained cash credit made by the AO under Section 68 of the Income Tax Act. The AO had added ?700 crores received by the assessee from Biometrix, Singapore, as unexplained cash credit. The CIT(A) deleted this addition, observing that the source of funds was a loan from ICICI Bank, Singapore, which was used to invest in the CCPS of the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the identity of the investor, the nature of the transaction, and the source of funds were satisfactorily explained through various documents, including swift messages, financial statements, and investment agreements.

2. Lifting the Corporate Veil:
The AO argued that lifting the corporate veil revealed that Biometrix was a mere shell company created to avoid liability. However, the CIT(A) and the Tribunal found that Biometrix was a tax resident of Singapore and not a shell company. The financial statements and other regulatory filings of Biometrix demonstrated that it was a genuine entity with substantial business operations and expenditures, satisfying the tests laid down in the India-Singapore DTAA.

3. Non-submission of Crucial Documents:
The AO contended that the non-submission of Biometrix's loan account and OCBC account statements cast doubt on the transaction's genuineness. The CIT(A) and the Tribunal noted that while these documents were not available due to banking secrecy laws and limitations in the exchange of information protocol, the swift messages and other evidence provided a clear link between the loan from ICICI Bank and the investment in the assessee's CCPS. The Tribunal held that the non-receipt of these documents did not diminish the overwhelming evidence supporting the transaction's genuineness.

4. Ignoring the Subsidiary Relationship:
The AO argued that the CIT(A) ignored the fact that Biometrix was ultimately a subsidiary of a Reliance group company. The CIT(A) and the Tribunal found that the structuring of the transaction through a tax-efficient jurisdiction did not affect the genuineness of the investment. The Tribunal noted that the investment was made through proper banking channels, and the regulatory filings with the RBI and ROC confirmed the transaction's authenticity.

5. Valuation of CCPS:
The AO questioned the valuation of the CCPS, noting that Biometrix sold the CCPS at a lower price than the market value shown to ICICI Bank. The CIT(A) and the Tribunal observed that the debt cover ratio was maintained as per the Facility Agreement, and the sale of CCPS at a lower value did not impact the transaction's genuineness. The Tribunal held that the valuation issues were irrelevant for determining the source and nature of the investment under Section 68.

6. Monitoring of Loan Terms by ICICI Bank:
The AO argued that ICICI Bank did not monitor the loan terms diligently, raising doubts about the transaction's genuineness. The CIT(A) and the Tribunal found that the loan was repaid by Biometrix, and the debt cover ratio was maintained. The Tribunal held that the monitoring of loan terms by ICICI Bank was not relevant for determining the source of funds under Section 68.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?700 crores as unexplained cash credit under Section 68. The Tribunal found that the identity of the investor, the nature of the transaction, and the source of funds were satisfactorily explained through various documents, including swift messages, financial statements, and investment agreements. The Tribunal also held that the issues raised by the AO regarding the corporate veil, non-submission of certain documents, subsidiary relationship, valuation of CCPS, and monitoring of loan terms were either irrelevant or adequately addressed.

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