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TMI Blog2022 (6) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... . The complete history of transaction is also mentioned in the order of SEBI dated 24 March 2021. Over and above this, the finding of the learned CIT - A also notes in paragraph number 7.5 that Enforcement Director has also found money-laundering traces in the books of Falcon and Dunlop. Both these above companies are controlled by Mr Pawan Kumar Ruia. Therefore, amounts credited in the books of accounts of assessee lack genuineness. In view of above facts, we do not find any infirmity in the orders of the lower authorities in confirming the addition u/s 68 of the Act. Accordingly, we confirm the orders of the lower authorities.- Decided against assessee. - ITA No. 4953/Mum/2017 - - - Dated:- 7-6-2022 - Sri Prashant Maharishi, AM And Sri Sandeep Singh Karhail, JM For the Assessee : None For the Department : Sri Shekhar L. Gajbhiye, CIT DR ORDER PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by Suncap Commodities private limited (the appellant/assessee) against the order passed by The Commissioner of Income Tax (Appeals) 3, Mumbai [the LD CIT [A]] dated 22/05/2017 for assessment year 2012 13 raising following grounds of appeal. 1. The or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The CIT(A)-3, Mumbai intentionally ignored the facts that Dunlop India Ltd. and Falcon Tyres Ltd. borrowed monies from Stephen Financial Services Pvt. Ltd. and Manali Properties Finance Pvt. Ltd, during the period 2008 to 2011 and therefore cash credit if any under section 63 ought to have been in the books of Dunlop India Ltd /Falcon Tyres Ltd. and not in the hands of the appellant. 13. The CIT(A)-3, Mumbai failed to understand if there is any infraction/violation of law in any documentation, it is for the authorities concerned to take action and Income-tax Department has no role to play in such cases. 14. The CIT(A)-3, Mumbai failed to understand that if the transactions are null and void and having no legal effect and unenforceable then he should have completely ignored the transactions and should not have brought any amounts to tax by making astronomical additions. 15. The CIT(A)-3, Mumbai ought to have appreciated that violations of law if any would affect the parties to the contract and not the Income-tax Department. 16. Extraneous and irrelevant materials (paragraph 7.5 to paragraph 7.12 and paragraph 7.19 at page 18 of 19 of the order), being news re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies as repeatedly stated by the CIT(A)-3, Mumbai. 25. The CIT(A)-3, Mumbai in page 9 of 19 states that there was no lawful consideration for the contract of novation but in the same breath in page 11 of 19 states that the assessee has got valuable shares worth Rs.50.42 crores and Rs.21 crores which shows a complete dichotomy in his approach. 02. Brief facts of the case shows that assessee is a company dealing in various types of commodities and shares, mainly it trades in chili. It filed its return of income on 28/9/2012 declaring a total loss of ₹ 4,768,824/ . The return of income was processed u/s 143 (1) of the act. Subsequently the case of the assessee was picked up for scrutiny and notice u/s 143 (2) of the act was issued on 6/8/2013. During the course of assessment proceedings, the learned assessing officer found that M/s falcon Tyres Ltd had assigned a loan to the assessee company being interest free of ₹ 21 crores. Similarly Dunlop India Ltd has also assigned interest free loan of ₹ 50.41 crores without mortgage of security etc. Thus, there was a credit in the books of account of the assessee of ₹ 21 crores in the name of Manali Proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 4,768,824/ by an assessment order dated 27/3/2015 passed u/s 143 (3) of the act. 06. Assessee preferred an appeal before the learned CIT A who passed an order dated 22/05/2017 dismissing the appeal of the assessee. The learned CIT A who considered the whole issue as per paragraph number 7.2 onwards of his order as under:- 7.2 I have carefully considered the rival submissions and the facts of the case. The appellant has termed the two Deed of Assignment as contract of novation as recognized by the Indian Contract Act, 1872. To understand the term 'Novation' and its implications on appellant's case, following discussion would be helpful: a) Meaning of Novation : Novation is defined by the Black's Law Dictionary, 8th Edn., 2004 as The act of substituting for an old obligation a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party. As per Advanced Law Lexicon, P. Ramanatha Aiyar, 3rd Edition, 2005 at pp. 3253 54, A novation is new contractual relation. It is based upon a new contract by all the parties interested. Section 62 of the Indian Contract Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes non-enforceable in law. 7.3 Having discussed the above, it needs to be examined whether the appellant's Deed of Assignment is a Contract at all. All contracts are agreements but all agreements are not contracts. In order to become a contract, an agreement must possess the essential elements of contract. As per Section 10 of Indian Contract Act, 1872, All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. Consideration means 'something in return'. In every legal contract, there must be something in return. An agreement is legally capable to be enforced only when each of the parties to it gives something and gets something. The consideration should not be unlawful, illegal, immoral or opposed to public policy. As per Paper Book (Page 239-241) submitted by ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction company had been constituted in accordance with the provisions of securitization Act. Also, the AO has validly observed that the registration of charge was compulsory as per Section 125 135 of the Companies Act, 1956, and in absence thereof, the same would be void against the liquidator or any other creditor. Hence, from any angle, the appellant's Deed of Assignment has no sanctity in the eyes of law. 7.5 Now let's examine the factual intention of appellant behind passing such debit/credit entries in its books. It is in public domain that Enforcement Directorate (ED) has found money laundering traces in book of accounts of Falcon Dunlop, which is very much concentrated on the subject transactions under present appeal. Both these companies were controlled by Pawan Kumar Ruia, the chairman of Kolkata based Ruia group. 7.6 In 2008, ICICI Bank had given a loan to two Pawan Kumar Ruia companies - Shalini Properties and Developers Pvt. Ltd and SPR Resorts Ltd. against the mortgage of a 58.5 acre plot in Athipattu village near Chennai. Dunlop India Ltd (DIL) had sold this plot in 2007 to a subsidiary, Dunlop Properties Pvt. Ltd, which in turn mortgaged it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could afford to give a loan to the tune of Rs 144 crores on interest free basis. Surprisingly, the loan is given to a group company. If the sources of funds at Manali Properties are investigated this whole transaction would prove to be a circular transaction. As per the investigation details, it is also clear that the company chooses to issue preferential shares against the loan due to Manali, especially when there was no demand upon them to pay the loan, and the loan amount was not carrying any interest burden. On the contrary, by issue of shares of Rs 144 crores, the management (which has taken decision to issue shares) diluted their shareholding, wherein they become minority shareholder after the issue of shares. Whereas, the three unknown shell companies having no presence or expertise in the tyre industry held majority stake of the company, without claiming any seat on the board of the company. 7.11 As per the report, even in the case of a group company i.e. M/s Stephens Financial Services Pvt. Ltd, loans which were receivable from DIL were also assigned around the same time to the three said companies using the same modus operandi. 7.12 Report concludes, there has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the credit worthiness of Manali/ Stephen is not proved since their financials do not support the large funds in their respective hands. 7.15 It is not unknown that huge Trade Payables without carrying any corresponding revenue generating activity, or huge Share Premium grossly disproportionate to net-worth of a company are common phenomena noticed in books of accommodation entry providers. Normally some paper companies are floated by accommodation entry providers/ their associates, which give large amounts of finance to beneficiaries free of interest, and the source of such money is not generally not traceable from any genuine business activity. In such cases, it is not uncommon to presume that the source of money is the unaccounted money of the beneficiary himself, which must have routed through paper companies in various forms and finally the money reaches in books of beneficiaries as unsecured loan/ share premium etc. Since the credit worthiness of parties genuineness of transaction is never proved in such cases, the provisions of Section 68 can very well be invoked. 7.16 The appellant has contended that it has credited Manali/ Stephen by way of journal/ book adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case, there is no apparent consideration paid to loan creditors i.e. Manali/Stephen, and moreover such huge loans are interest-free and from a non related party. It seems to be a clear case of accommodation entry credited in appellant's books in name of Manali/Stephen. The non-use of banking channel while making the entry does not change the basic fact that the sum has been found credited in the books of assessee, and explanation offered by assessee is not found to be satisfactory. Such accommodation entries are used by the appellant as a tax evasion tool by way of bringing unaccounted money in books without payment of taxes. In the case of Mcdowell Co Ltd (1985) 154 ITR 148, the Hon'ble Supreme Court has held that Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. 7.18 In the case of CIT v Durga Prasad More 82 ITR 540, the Supreme Court has held that Taxing authorities are not required to put on blinkers while looking at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnment are executed on stamp paper of Rs. 100 each. It however appears that the same is covered by the term 'Instrument' defined in ub-section (14) of Section 2 of the Indian Stamp Act, 1899, which reads as Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. . Also, the said Instrument is being executed for the first time not having been executed previously, hence chargeable to stamp duty under Indian Stamp Act, 1899. The effect of not paying proper stamp duty is that the Deed of Assignment becomes non-enforceable in law. Please offer your comments on the above. 3. Please explain how the credit entries in name of M/s Manali Properteis and Finance Private Limited and M/s Stephens Financial Services Private Limited are settled subsequently, along with their confirmed account statement. 4. Consequent upon executing the Deed of Assignment, you have acquired shares worth Rs. 50.42 crores Rs. 21.00 crores of M/s Falcon Tyres Ltd. And M/s Dunlop India Ltd., whereas no actual payment is made to the creditors i.e. M/s Manali Properties and Finance Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities obtained by above two Ruia Group companies. Also, substantial shares of Falcon Tyres Ltd. (FFL) and Dunlop were pledged as additional collateral with ICICI Bank. The loan amount was around Rs 575 crore. After a long legal battle, the Kolkata High Court had passed a winding up order for DIL in 2012 wherein the High Court had exposed the fraud committed by Pawan Kumar Ruia (PKR) group and ordered the properties to be transferred back to DIL. The PKR group feared that the high court order would make ICICI Bank insecure and force them to use the second collateral by invoking the shares of FTL and DIL. If invoked, ICICI Bank would have controlling stake and power to change the management in these companies. So to overcome this threat, PKR group had planned money laundering to the tune of Rs. 200 crore. Modus operandi was as usual. As per the investigation report, Manali Properties and Finance Pvt Ltd a PKR group company created a loan of Rs 165 crores in the book of accounts of FTL. Instead of asking the company to repay, PKR assigned this loan to three hawala companies i.e. Suncap Commodities Ltd, Regus Impex Private Ltd and Salputri Commerce Pvt Ltd. The deed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the tune of Rs. 2,000 crore wherein assets of Public Ltd were transferred to shell companies and further book entries were passed for the payment of the diminished transaction value, thus no monetary transaction or gain to the transferor company. The above news report is available on following link: http://indiatoday.intoday.in/story/ruiasuryamani- financing-rbi- pawan-kumarruia-- dunlop-india/1/322904.html You are hereby required to give your comments on above news report explaining full facts with supporting evidences. Also, please explain the present status of said investigation. 7. In view of the above facts and circumstances of the case, you are hereby Show Cause to satisfactory explain the said sham transactions with supporting evidences. You are further show cause as to why appropriate adverse inference should not be drawn based on information available on records/in public domain against you and why you Grounds of Appeal should not be dismissed. Your case is fixed for hearing on 27.02.2017 at 11.00 am -sd- (SS KEMWAL) CIT (A)-3, Mumbai 7.20 In response to the show cause notice the appellant preferred to reply by speed post l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that it had negative net worth which further deteriorated. It had only assets of advances given as a share application money from Rs nil to ₹ 714,157,505/ in Falcon Tyres Limited and Dunlop India Limited . The assessee was doing the business of trading of goods such as chilly. Both the companies from whom the loans have been assigned were found to be bogus, further the parties who assigned the loans are also found to be in violation of the respective laws. In view of this it was stated that both the transaction are non genuine, bogus and are correctly added u/s 68 of the act by the learned AO and upheld by the learned CIT A. he further submitted that Loan were obtained from bogus companies by Falcon Tyres Limited and Dunlop Tyres Limited. Such loans were assigned to the assessee. In the books of assessee there is credit of Manali and Stephen and Debit of Falcon and Dunlop. The share were then issued to the assessee by falcon and Dunlop. So this is circuitous non genuine route adopted. 09. We have carefully considered contentions of the learned departmental representative as well as the findings of the learned that lower authorities. The facts clearly shows that Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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