2021 (12) TMI 551 - AT - Income Tax

Addition of payment made to subsidiary company - Whether 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 fa ade was created by the assessee and effective management and control of the subsidiary company was in India? - HELD THAT - As 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. Reading of the assessment order 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 ₹ 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. Addition u/s 69C - unexplained purchases - addition based on document found in search from third party - HELD THAT - Addition was made on the basis of the documents not found from the assessee s possession and control but were made on the basis of the documents founds from Shri R.P.Yadav and these documents were owned up by him. This admission that these documents were owned and belonged to him only was admitted by Shri Yadav during the course of search and also in his statement recorded in the assessment. Name of another entity namely Jas Impex too is appearing on these documents and thus merely on some papers the name of the assessee is appearing does not mean that these documents or contents of these documents relate to the assessee. Statement of Vice President of the assessee company reproduced in the assessment order also mentions that 90% of the total purchases of the assessee company are through Jas Impex. No enquiry has been made from M/s Jas Impex and nothing has been shown to that effect to us. Statement of the son of Mr. R P Yadav has also been reproduced by the AO in the assessment order and there is nothing that he was made available for assessee s cross examination. To rely on the statement of the son of Mr. Yadav more than on the statement of Mr. Yadav him self is quite strange. In our considered opinion, the addition made on the basis of the notings on the loose documents of Mr. R P Yadav in the hands of the assessee company cannot be sustained and was rightly deleted by the learned first appellate authority. Addition as prior period expense - Assessment u/s 153C - HELD THAT - We do not have any good reason to deviate from the decision of the learned first appellate authority, more particularly the smallness of the among involved and the tax rate being identical. Also, there is nothing which was found in this regard as a result of search as can be seen from the reading of the assessment order and hence in view of Hon ble Delhi High Court s decision in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT also, the disallowance made by the assessing officer could not be sustained and was rightly deleted by CIT(A). We therefore dismiss this ground of appeal of the revenue.

Issues Involved:
1. Addition of ?1,21,84,826/- related to the Hong Kong subsidiary.
2. Addition of ?31,69,91,238/- on account of unexplained purchases under Section 69C.
3. Addition of ?3,03,704/- on account of prior period expenses.
4. Jurisdiction under Section 153A and the applicability of Section 153C.

Detailed Analysis:

1. Addition of ?1,21,84,826/- related to the Hong Kong subsidiary:
The primary issue was whether the profits of M/s Alchem International (HK) Ltd., a 100% subsidiary of the assessee, should be considered the profits of the assessee. The AO contended that the subsidiary was a legal façade created to divert profits to a tax haven, with its effective management and control in India. The CIT(A) deleted the addition, stating that the subsidiary was a separate legal entity registered in Hong Kong, conducting its business activities independently, and subject to Hong Kong laws, including taxation. The CIT(A) also noted that the transactions between the assessee and its subsidiary were at arm's length, as confirmed by the Transfer Pricing Officer (TPO). The Tribunal upheld the CIT(A)'s findings, emphasizing that no evidence was provided to prove that the control and management of the subsidiary were wholly in India or that the transactions were sham. The Tribunal concluded that even if the subsidiary were considered a resident in India, its profits could not be clubbed with the assessee's income without conclusive proof of sham transactions.

2. Addition of ?31,69,91,238/- on account of unexplained purchases under Section 69C:
The AO made this addition based on documents seized from Shri R.P. Yadav, a consultant of the assessee. The CIT(A) deleted the addition, noting that the documents were not found at the assessee's premises and no corroborative evidence was provided to prove that the purchases were unaccounted. The CIT(A) highlighted that the assessee's books of accounts, subject to excise and drug control rules, were found proper during the search, with no defects or unaccounted purchases detected. The Tribunal upheld the CIT(A)'s decision, stating that the addition was based on conjecture and surmises without any substantive evidence. The Tribunal also noted that the seized documents were owned by Shri Yadav, and no inquiry was made from M/s Jas Impex, the entity mentioned in the documents.

3. Addition of ?3,03,704/- on account of prior period expenses:
The AO added this amount as prior period expenses. The CIT(A) deleted the addition, considering the smallness of the amount and the identical tax rate. The Tribunal upheld the CIT(A)'s decision, noting that no evidence was found during the search to support the addition, and referencing the Delhi High Court's decision in Kabul Chawla, which stated that no addition could be made without incriminating material found during the search.

4. Jurisdiction under Section 153A and the applicability of Section 153C:
The assessee challenged the jurisdiction under Section 153A, arguing that the assessment should have been made under Section 153C as the documents were seized from a third party, Shri R.P. Yadav. The Tribunal noted that the search on the assessee and Shri Yadav took place simultaneously, but the documents seized from Shri Yadav could not be used in the assessee's assessment without following the due process of Section 153C. The Tribunal cited a coordinate bench decision, emphasizing that the AO must follow the procedure laid down in the Act, and the addition could not be made without observing the jurisdictional conditions of Section 153C. The Tribunal allowed the assessee's grounds, holding that the addition of ?31,69,91,238/- could not have been made for this reason.

Conclusion:
The Tribunal dismissed the departmental appeal and partly allowed the assessee's cross-objection, affirming the CIT(A)'s decisions on all counts. The Tribunal emphasized the importance of following due process and providing substantive evidence for any additions made during assessments.

← Previous Next →