2024 (1) TMI 973 - HC - Income Tax

Addition u/s 68 - assessee has failed to explain the nature and source of the fund/FCCB proceeds - AO has treated proceeds of FCCB as deemed income of assessee on the ground that assessee has not supplied information about details of actual bond holders and ultimate beneficiaries - HELD THAT - Tribunal in the case of Reliance Communication 2013 (2) TMI 387 - ITAT MUMBAI while deciding the issue came to a conclusion that assessee was only required to prove the identity, capacity and creditworthiness of the entity that subscribed to its issue of FCCB, which is not in doubt. Assessee having received the amount of subscription of the fund from the said entity, has also not been denied. The fact that global certificate in respect of the bonds was also issued to the said entity, is also not disputed and, therefore, the Tribunal accepted that assessee has adequately discharged the onus cast upon it in terms of Section 68 - Tribunal concluded that assessee did not have an obligation to prove the identity, capacity and creditworthiness of the actual subscriber, i.e., the sources source. The said order in the case of Reliance Communication Ltd passed by the Tribunal was impugned by the revenue in this court u/s 260A of the Act. The same issue as raised in case at hand was raised therein. The appeal was dismissed, against which an SLP was preferred by the revenue. The SLP also came to be dismissed. Tribunal in the case at hand has concluded and rightly so that the facts in the case of Reliance Communication Ltd are similar to assessee s case in the case at hand and the ground raised by revenue were also identical. Therefore, on facts the Tribunal correctly came to the conclusion that the nature and source of funds of FCCB is fully explained and the addition under Section 68 of the Act made by the AO in the reassessment proceedings was not correct. Decided in favour of assessee.

Summary

Issues involved:
The issues involved in the judgment relate to the deletion of addition of FCCB proceeds under section 68 of the Income Tax Act, 1961. The key questions of law proposed include the justification for deleting the addition of FCCB proceeds, failure to establish identity creditworthiness and genuineness of bondholders, non-production of subscriber register, adverse inference under the Indian Evidence Act, relevance of lead managers and bondholders, and allowance of issue and interest expenses.

Summary:

Issue 1: Deletion of FCCB proceeds under section 68 of the Act
The respondent raised funds through FCCBs with Barclays Bank as the lead manager. The appellant received proceeds of FCCB and transferred them as per the demerger scheme. The Assessing Officer initially accepted the funds but later applied section 68 of the Act during reassessment. The CIT(A) allowed the appeal, and the ITAT upheld the decision, concluding that the nature and source of the FCCB funds were adequately explained.

Issue 2: Failure to establish identity creditworthiness and genuineness of bondholders
The appellant was required to provide details of actual bondholders, but the Tribunal held that the appellant had discharged its onus by proving the identity, capacity, and creditworthiness of the entity that subscribed to the FCCB issue. The Tribunal rejected the argument that the appellant needed to prove the identity of individual bondholders.

Issue 3: Non-production of subscriber register
The appellant was criticized for not producing the subscriber register maintained by the Registrar. However, the Tribunal found that the facts were similar to a previous case where the appellant had adequately explained the source of funds without the need to prove the identity of actual bondholders.

Issue 4: Adverse inference under the Indian Evidence Act
The AO invoked section 68 of the Act due to the lack of information about bondholders. However, the Tribunal held that the appellant had sufficiently explained the source of funds, and adverse inference was not warranted.

Issue 5: Relevance of lead managers and bondholders
The Tribunal determined that the lead managers and bondholders were not crucial for the purposes of section 68 of the Act. The focus was on proving the identity, capacity, and creditworthiness of the entity that subscribed to the FCCB issue.

Issue 6: Allowance of issue and interest expenses
The Tribunal allowed issue and interest expenses to the extent they were deployed for business purposes. The appellant's failure to establish the genuineness of FCCB funds did not warrant disallowing all expenses.

In conclusion, the Tribunal correctly found that the nature and source of FCCB funds were adequately explained, leading to the dismissal of the appeal.