In a recent judgment, the Delhi High Court noted that the undisclosed income in question, which is the matter of the current dispute, has already been subjected to taxation in the accounts of the primary company. Therefore, it cannot be taxed once more when used as share capital in another company.
The appellant Principal Commissioner of Income Tax has filed 3 appeals filed under Section 260A of the Income Tax Act , 1961 against Surya Agrotech Infrastructure limited and Surya Processed Food Pvt Ltd.
The respondents/assessees are companies forming a part of M/s Priya Gold Group of Companies. On 16.12.2014, search and seizure proceedings under Section 132 of the Income Tax Act were conducted in the case of Priya Gold Group of Companies, during which statement of Shekhar Aggarwal, Director of Surya Food & Agro Limited (the flagship company of the group) was recorded under Section 132(4) of the Income Tax Act.
In his said statement, Aggarwal admitted that the said group of companies had earned unaccounted income which was routed as bogus share capital during the Financial Years pertaining to the Assessment Years 2013-14 and 2014- 15.
As assured in his said statement by Aggarwal, the said entire undisclosed income of the group was surrendered in the respective assessment years by the flagship company Surya Food & Agro Ltd. through proceedings before the Settlement Commission.
The applicant disclosed an additional income of Rs. 49,12,73,399 before the Settlement Commission. It was explicitly stated that the undisclosed profit had been used to invest in the share capital of the respondents/assessees. The Settlement Commission, in its ultimate decision, finalized the income at Rs. 55,77,22,000. Both parties accepted this final order, and it became conclusive.
It is undeniable that Shekhar Aggarwal handled all investment-related matters for the Priya Gold Group of Companies as Director of the flagship company, Surya Food & Agro Ltd. According to respondents/assessees, further addition in the name of unexplained share capital in their hands now would be tantamount to double taxation on the same income.
In light of the foregoing, the Assessing Officer (AO) came to the conclusion that the investment of Rs. 46,91,00,000 in the form of share capital in various Priya Gold Group companies was nothing more than a lodging entry and should therefore be subject to tax assessment in the hands of the respondents/assessees. The AO did this by heavily relying on Shekhar Aggarwal’s statement.
The AO, having recorded his satisfaction that the respondents/assessees had concealed the income, made additions under Section 68 of the Income Tax Act both with respect to the above mentioned amount and commission at the rate of 2.5%; and also triggered that penalty proceedings under Section 271(1)(c) of the income Tax Act against the respondents/assessees.
The appeals filed by the respondents/assessees against the assessment orders were rejected by the Commissioner of Income Tax (Appeals), thereby confirming the assessment orders.”
However, the respondents/assessees achieved victory in the second appeal, as the Income Tax Appellate Tribunal (ITAT) ruled in their favour by overturning the contested orders.
The Tribunal concluded that since the income in question had already been subjected to taxation within Surya Food & Agro Limited, it could not be subjected to taxation again due to its utilization as share capital by the respondents/assessees.
The counsel for appellant/revenue contended that the impugned orders are liable to be set aside since the same are based on wrong understanding of law that the income in question was being assessed to tax twice. It was argued that in the hands of respondents/ assessees, the income was being subjected to tax only once.
The Revenue’s counsel also laid emphasis that the respondents/assessees were not party to the settlement proceedings and the Settlement Commission did not deliver any findings concerning the respondents/assessees, consequently, the latter cannot take any advantage of the proceedings before the Settlement Commission.
After considering the facts and submissions, the bench of Justice Girish Kathpalia and Justice Rajiv Shakdher ruled that “since the undisclosed income which is subject matter of the present dispute had already been taxed in the hands of the flagship company Surya Food & Agro Ltd., it cannot be again subjected to tax in the hands of the respondents/assessee companies in the form of application of the said income as their share capital.”
Accordingly, the question as framed above was answered against the appellant/revenue and in favour of the respondent/assessee.
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