Borrowed Satisfaction cannot be used to make an addition

Facts and issues of the case

The appeal has been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals)-1, Ahmedabad (‘CIT(A)’ in short) vide Appeal No. CIT(A)-1/ITO, Wd 1(1)(1)/09/2015-16 dated 27.02.2017 arising in the assessment order dated 05.03.2015 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (the Act) concerning AY. 2010-11.

The assessee is a Private Limited Company engaged in the business of Finance and Real Estate purpose. The assessee furnished return of income on 28.09.2010 declaring total income of Rs.Nil. The return was accepted under S.143(1) of the Act and no notice under S.143(2) of the Act was issued to the assessee to scrutinize the return within the permissible time limit. The learned AO issued notice under S. 148 of the Act on 13.03.2014 and same is part of paper book. The assessee furnished return of income under S.148 of the Act on 25.04.2014 declaring Nil income.

The assessee provided reasons of reopening vide letter dated 08.05.2014 and same are part of paper book at page no.55. The reopening was made on the basis of investigation carried out by the Investigation Wing concluding that there was no transfer of property located at 7, Nalanda Society, Ahmedabad within the meaning of section 2(47) (v) of the Act nor was there any transfer of property within the meaning of section 53A of the Transfer of Property Act. Such conclusion was derived on the ground that banakhat dated 16.03.2009 entered by assessee to acquire the property as well as possession agreement were simply on stamp paper of Rs. 100/- and were not registered.

Therefore, loss of Rs. 34 lacs incurred on sale of said property and consequential set off said loss against profit earned in another land transaction was considered not genuine leading to escapement of income to the extent of loss of Rs.34 lacs. The assessee objected to the re-opening vide letter dated 11th June, 2014 and same are part of paper book at page nos. 62 to 64. The Assessing Officer passed order disposing of the objections of the assessee on 16.06.2014 and the same are part of paper book at Pages 69 to 72. Consequently, Assessing Officer passed assessment order u/s 143(3) r.w.s. 147 on 05.03.2015 wherein following additions/ disallowances were made and which are subject matter of appeal before us:

Disallowance of loss on sale of property – Rs. 34,00,000/-

Disallowance u/s 14A r.w.r. 8D – Rs. 1,14,869/-

==================== Rs. 35,14,869/-

Observation by the court

Thereafter, assessee preferred first statutory appeal before the learned CIT(A) who confirmed the action of the learned AO on the ground that assessee has made same transaction of purchase of property situated at 7, Nalanda Society, Ahmedabad belonging to Smt. Neela R. Gandhi, one of the shareholder of the assessee company for amount of Rs.105 Lakhs on 16.03.2009. Later on the said property was sold to one Mr. Dinesh Shah and Smt. Kamla Shah for an amount of Rs.71 Lakhs resulting into capital loss of Rs.34 Lakhs.So far next ground relating to Section 14A of the Act is concerned, the learned AO made addition on dividend income of Rs.5,63,596/- and made disallowance of Rs.1,14,869/-.

But before the both lower authorities, assessee has not submitted any evidence regarding sources and applications in support of its contention that there is a direct nexus between utilization of interest free funds and investigation made by it. In our considered opinion, disallowance under S. 14A r.w. Rule 8D was correctly worked out. The assessee has not disallowed any expenditure for earning exempt income in P&L account, which does not form part of total income. Further, the assessee has paid interest of Rs.2,36,887/- and assessee has made average investment of Rs.63,85,900/- and having average assets of Rs.2,00,64,030/-. In our considered opinion, learned AO has rightly made disallowance under S.14A r.w. Rule 8D. In view of the above, we concur the decision of the lower authorities and dismiss this ground of appeal.

Now, assessee has come before us by way of second appeal. The lower authorities have made addition of Rs. 34 Lakhs only on the ground that proper registration has not been taken place before the relevant authorities of the State Government. Court had heard both the parties and gone through the relevant record. In this case, it is an undisputed fact that assessee purchased a flat in residential colony and in assessment order, learned AO himself has mentioned that assessee is having business of Financing services and is a Private Limited Company.

In this case, the learned AO received an information from the Investigation Wing that a so called purchase of property by the assesse was purely sham transaction and the loss claimed by the assessee on the sake of the said property on a later date was an artificial loss created by the assessee in its books of account to take the advantage of set off of loss against the income earned by the assessee. But nowhere AO has applied his own mind before issuing notice and to arrive at conclusion that assessee has escaped an income and on the basis of report submitted by the Investigation Wing, learned AO issued notice purely on borrowed satisfaction. In our considered opinion, in such case addition cannot be made.