Partner capital contributions cannot be combined in the hands of the partnership firm
Fact and issue of the case
This appeal filed by the assessee is directed against the order of learned Principal Commissioner of Income-Tax, Rajkot-1 [hereinafter referred to as “Ld. Pr. CIT” for short] dated 31.03.2021 passed in exercise of his revisionary jurisdiction under Section 263 of the Income-Tax Act, 1961 [hereinafter referred to as “the Act” for short] for Assessment Year (AY) 2015-16.
The only effective issue raised by the assessee is that the learned Pr. CIT erred in holding the assessment order passed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue.
The brief facts are that the assessee is a partnership firm and engaged in the business of ceramic tiles. The assessee in return filed for the year under consideration declared loss at Rs. 2,19,44,882/- which was selected for scrutiny under CASS. Finally, the AO assessed the income at Rs. 91,19,044/- vide order dated 28th December 2017.
Subsequently, the learned Pr. CIT from the assessment records found that during the year the assessee firm received an amount of Rs. 3,22,78,000/- from 11 partners as capital introduction. The AO made addition of Rs. 12,00,000/- as unexplained credit on account of capital contribution from 2 partners only whereas no finding was given regarding remaining amount of Rs. 3,10,78,000/- representing capital received from 9 partners.
Likewise, the ld. PCIT further found that the AO made an addition of 10% of sundry creditor for Rs. 4,29,42,277/- (total) on ad-hoc basis to plug possible revenue leakage. However, as per the ld. PCIT, there is no provision under the Act to allow or disallow sundry creditors on ad-hoc and certain percentage basis. As such, the AO was required to verify the entire sundry creditor and accordingly reached to the logical conclusion.
The ld. PCIT also found that the AO vide paragraph number 9.2 of his order worked the amount of suppressed production at Rs. 2,08,36,851/- but at the time of computing assessed income made an addition of Rs. 2,02,36,851/- only resulting under assessment of income by Rs. 6,00,000.00.
Thus, the learned PCIT in view of the above was of the opinion that the order of the AO suffers from error which is prejudicial to the interest of the Revenue and accordingly issued notice under section 263 of the Act. The assessee in response to such notice only submitted that original assessment file has been lost, hence it requires time to recollect the data. Thereafter several opportunities of being heard were provided but the assessee failed to avail the same. Hence the learned PCIT in view of the above held that the AO framed the assessment order without making proper inquiry or verification which made the assessment order being erroneous insofar prejudicial to the interest of the Revenue. In holding so, the learned PCIT also referred the explanation 2 to section 263(1) of the Act as well as several judicial pronouncements
Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 340 and submitted the AO during the assessment proceedings has carried out necessary verification on all the issues raised by the learned PCIT in his order. The learned AR for this purpose drew our attention on the notices issued under section 142(1) of the Act and show cause notice which are placed on pages 77 to 87 of the paper book. Likewise, the learned AR further contended that the assessee in response to such notices have made detailed reply with the relevant documents which are placed on pages 89 to 324 of the paper book. Accordingly, it was contended by the learned AR that the assessment cannot be held as erroneous insofar prejudicial to the interest of revenue on account of non—verification or non-application of mind by the AO during the assessment proceedings.
The learned AR further submitted that the issues relating to the addition on account of sundry creditors is pending before the learned CIT(A) and therefore there cannot be any proceedings under section 263 of the Act with respect to such issues pending for adjudication before the learned CIT(A).
On the contrary, the learned DR before us submitted that the AO has made the addition on account of capital contribution from 2 partners only whereas the capital was contributed by 11 partners in total. Thus, the stand taken by the AO is contradictory based on the facts available on record. The learned DR further contended that the AO has not carried out the necessary verification which should have been done under explanation 2 to section 263 of the Act. The ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification or proper application of mind with respect to capital introduced by the partner of the assessee firm, the outstanding balance of the sundry creditor and alleged suppressed production which is erroneous insofar prejudicial to the interest of the Revenue and thus requiring revision by Pr. CIT u/s 263 of the Act.
An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were number of judgments by various Hon’ble High Courts in this regard.
Observation of the court
In view of the above we hold that the allegation framed by the learned PCIT cannot be made subject matter of revision under the provisions of section 263 of the Act. In simple words, the order of the learned PCIT cannot be held as erroneous for not making any addition in the hands of the partnership firm on account of capital contribution by the partner.
The next allegation of the learned PCIT for holding the assessment order as erroneous insofar prejudicial to interest of revenue is that the AO made addition of outstanding sundry creditor on ad-hoc i.e. certain percentage of outstanding balance without making proper inquiry and reaching to the logical conclusion. Likewise, the third allegation of learned PCIT is that the actual amount worked out for supressed production and amount added while computing assessed income are different. Regarding both the issues, we note that the assessee is in appeal before the learned CIT(A). This fact can be verified from the memo of appeal filed by the assessee before the learned. CIT(A) against the assessment order framed under section 143(3) of the Act. The relevant extract of the memo of appeal is reproduced as below
The learned Assessing Officer has erred in law as well as on facts in making addition of Rs.42,94,228/- on account of alleged unexplained sundry creditors
The learned Assessing Officer has erred in law as well as on facts in making addition of Rs.2,02,36,851/- on account of alleged suppression of production of goods.
Once the issue is pending before the learned CIT(A), the same cannot be made subject matter of revision under the provisions of section 263 of the Act. In such facts and circumstances, we note that the Hon’ble Allahabad High Court in case of CIT vs. Vam Resorts & Hotels (P.) Ltd. reported in 111 com 62 has held that when an appeal is pending before the appellate commissioner, then the power under section 263 of the Act cannot be exercised. The relevant finding o the Hon’ble High Court is extracted as under
As, Clause (c) of Explanation 1 to Section263 of the Act provides that when an appeal is pending before the Commissioner, the exercise of jurisdiction under Section263 of the Act by CIT is barred. Thus, in the present case, the CIT wrongly exercised jurisdiction under Section263 of the Act by remanding back the matter to assessing authority on 25.3.2013, while the appeal was decided by CIT (A) on 5.6.2013. Thus, the order passed by the ITAT does not suffer from any irregularity and needs no interference.
From the above principles laid down by the Hon’ble High Court, we hold that the matters which are pending before the Ld. CIT(A) for the purpose of adjudication cannot be disputed in the proceeding’s u/s 263 of the Act.
As we have decided the appeal of the assessee in its favour on merit, we are not inclined to adjudicate the issue raised by the assessee on the validity of the order passed under section 263 of the Act being barred by time. Accordingly, such ground raised by the assessee become infructuous. Thus, we dismiss the same. In view of the above, we set aside the order of the Ld. PCIT and quash the same. Hence, the grounds of appeal of the assessee are partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 12/05/2023 at Ahmedabad.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee