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Assessment order based on invalid notification in violation of Section 148 is unsupportable

Fact and issue of the case

These two appeals filed by the assessee for the assessment years 2008-09 and 2009-10 are directed against the different orders of Ld. CIT(A), Delhi, both dated 06.12.20 19. Since identical grounds have been raised, both appeals were taken up together for hearing and are being disposed off by way of consolidated order for the sake of brevity.

ITA No.799/Del/2020 [Assessment Year : 2008–09]

First, I take up ITA No. 799/Del/2020 assessee’s appeal pertaining to Assessment Year : 2008-09. The assessee has raised following grounds of appeal

On the facts and circumstances of the case, the learned CIT (A) has erred in confirming the reopening of the assessment proceedings uls 148 of the Act as a valid proceedings though the notice u/s 148 of the Act was issued by the Assessing Officer who did non hold jurisdiction (either territorial or class of person) over the appellant.

That the notice u/s 148 of the IT Act dated 30103/2015 is bad in law and without jurisdiction in as much as there was no cogent material or evidence on record to form reason to believe that any income of the assessee, for the concerned assessment year has escaped assessment. The information received (AIRICIB information) in itself was insufficient and could not be cogent material to assume a valid jurisdiction u/s 147/148 of IT Act. Learned CIT(A) turned down the submission of the assessee without looking in to the

That the learned Commissioner of Income tax (A) further erred in law in deciding the appeal on merits only without appreciating the fact that notice u/s 143(2) of the Act was neither issued nor served on the assessee whereas it is being a mandatory requirement before passing any order u/s 143(3)1147 of the Act, assessment order passed without issue of such notice deserves to be quashed as failure to issue notice u/s 143(2) render the reassessment void.

That the learned CIT(A) has erred both on facts and law by upholding the impugned addition u/s 69A of the Act, failing to appreciate that provisions of section 44AF of the Act is presumptive and assessee is not required to maintain books of account an records and further failed to appreciate that the Ld. AO had not summoned the employee of the assessee who were named during assessment proceeding.

That the learned CIT(A) has erred both on facts and law by upholding the impugned addition u/s 69A of the Act, failing to appreciate that verification letter under provisions of section 133(6) of the Act were sent after a long period of time and held assessee responsible for return of letter as well as non-response. Without prejudice to above

That the learned CIT(A) has erred both on facts and law by upholding the addition of Rs. 15,31,500/- u/s 69A of the Act without appreciating the facts that Rs. 14,80,750/- has been withdrawn during the concerned period.

That in any case, the impugned assessment has been framed in violation of the principles of natural justice without granting to the assessee a fair, proper and reasonable opportunity to the instant case.

Apart from these grounds, Ld. Counsel for the assessee raised two nadditional grounds which read as under:-

That on the facts and circumstances of the case, the notice u/s 148 dated 29/03/2016 issued by Ld. AO, Ward 65(5), New Delhi is invalid and without jurisdiction as the said notice was issued by non-jurisdictional assessing officer. The Ld. AO, Ward 65(5), New Delhi did not have jurisdiction over the assessee as per provisions of the law and the related Notification No. 70/2014 dated 13/11/2014 (applicable from 15/11/2014) and thus, the assessment order framed u/s 144/147 of the Act pursuant to such invalid notice is bad in law and void-ab-initio and liable to be quashed.

That on the facts and circumstances of the case, the Ld.AO has erred in law while issuing notice u/s 143(2) of the Act, (on 08/11/2016, that is the day of filing of ITR in response to notice u/s 148 and notice u/s 143(2) handed over to AR of the assessee), which is issued in gross violation of the scheme of section 143(2) and thus the assessment order passed by the Ld. AO liable to be quashed in view of the decision of Hon’ble Jurisdictional High Court (Delhi) in the case of Director of Income Tax vs. Society for Worldwide Interbank Financial Telecommunications (2010) 323 ITR 249

Facts giving rise to the present appeal are that the Assessing Officer (“AO”) was having information regarding cash deposited by the assessee in his bank account. The case of the assessee was re-opened for the assessment u/s 147 of the Income Tax Act, 1961 (“the Act”). Thereafter, the AO framed the assessment vide order dated 29.03.2016 and the income was assessed at Rs. 16,89,866/- u/s 147 r.w.s. 143(3) of the Act. Thus, he treated the cash deposited in bank account as unexplained income of the assessee, even without giving set off of cash withdrawal by him.

Aggrieved against the action of the AO, the assessee preferred appeal before Ld.CIT(A) who after considering the submissions, dismissed the appeal of the assessee and confirmed the addition made by the AO.

Aggrieved against the order of Ld.CIT(A), the assessee is in appeal before this Tribunal.

Apropos to Ground Nos. 1 to 3 raised by the assessee, are against the validity of the re-opening and framing of the assessment u/s 147/143(3) of the 8. Counsel for the assessee reiterated the submissions as made in the written submission.

Observation of the court

I have heard Ld. Authorized Representatives of the parties and perused the material available on record. The assessee has raised question of jurisdiction of proceedings which goes to the root of any proceedings. It is well settled that initiation of proceedings by an Authority which has no jurisdiction would vitiate the order passed in consequence to such proceedings. The assessee has relied on various case laws on the validity of the proceedings. The reliance was placed by the Ld. Counsel for the assessee on the decision of the Tribunal rendered in the case of Mukesh Kumar vs ITO in ITA No.2358/Del/2012 order dated 12.06.2015. It is contended that the decision of the Tribunal squarely applies on the facts of the present case. Ld. Counsel for the assessee submitted that in the light of the binding precedents where it has been categorically held that the notice issued u/s 148 of the Act by the Assessing Authority who was not vested with the requisite jurisdiction and in that event, issuance of such notice is ab-initio void hence, nullity in the eyes of law. Therefore, he submitted that the impugned assessment order deserves to be quashed on this ground.

During the course of hearing, the Revenue was asked to produce the order conferring the jurisdiction on the AO who passed the impugned assessment order and also a report from the Assessing Authority in this regard. It is seen from the records that as per the assessment order, the residential address noted by the AO is House No.415, Sector-22, Gurgaon (Haryana). The Revenue failed to furnish the assessment records and a letter has been field stating that the record is not traceable. I find that a specific objection was raised by Ld.CIT(A) regarding the question of jurisdiction. However, Ld.CIT(A) has decided the issue by observing as under:-

Ground Nos. 1 & 2 states that the notice u/s 148 was not issued by the jurisdictional AO, Ward -65(5). As reported by the AO, the notice was issued from ITO, Ward-65(1) who was in respect of the AIR information. This sharing of information was PAN based. Since no ITR was filed, it is obvious that the final jurisdiction would not been ascertained. It is only when the appellant filed a reply on 07.12.2015 that the actual correct jurisdiction was ascertained and accordingly it was transferred the very same day to the jurisdictional AO that is ITO, Ward-65(5). Moreover, this objection was not raised before the AO which was permissible within one month of receiving the notice. In any case no prejudice was caused to the appellant. Hence, this ground of appeal has no merit and is hereby dismissed.

From the decision of Ld.CIT(A), it is clear that notice u/s 148 was not issued by the jurisdictional AO. However, as per Ld.CIT(A), the assessment was framed by Jurisdictional AO i.e. ITO, Ward-65(5), New Delhi. “The Revenue has miserably failed to answer the question of jurisdiction as Ld.CIT(A in the impugned order himself states that the notice u/s 148 of the Act was not issued by the jurisdictional AO”. Therefore, it can be safely inferred that notice u/s 148 of the Act was issued by the Authority which has no jurisdiction for the assessee. The Revenue has not brought any order by the Competent Authority whereby the jurisdiction was conferred on the Authority who issued notice u/s 148 of the Act. In the absence of such order, I hold that assessment order passed by the AO was based on invalid notice hence, it also vitiated the assessment order in the light of binding precedents as cited by the assessee. The assessment order is hereby, quashed.

Other grounds are related to addition on merits. Before the Lower Authorities, it was stated by the assessee that there were cash withdrawals and deposits. Before Ld.CIT(A), it was stated that the cash was withdrawn and deposited in the bank account. Ld. Counsel for the assessee has pointed out that a sum of Rs. 14,85,750/- was available out of withdrawals on the bank account for making the deposits. I find that Ld.CIT(A) has not given any findings. Therefore, looking to the totality of the facts or findings of the Lower Authorities are based on conjectures and surmises and ignored the facts placed on record. Therefore, in my considered view, the AO was not justified in making the addition. The grounds raised by the assessee are allowed on merit.

In the result, the appeal filed by the assessee is allowed. ITA No.800/Del/2020 [Assessment Year : 2009-10]

Now, I take up ITA No. 800/Del/2020 filed by the assessee pertaining to Assessment Year : 2009-10. The assessee has raised following grounds of appeal

That the notice U/S 148 of the IT Act dated 29103/2016 is bad in law and without jurisdiction in as much as there was no cogent material or evidence on record to form a reason to believe that any income of the assessee, for the concerned assessment year has escaped assessment. The information received (AIRICIB information) in itself was insufficient and could not be cogent material to assume a valid jurisdiction u/s 147/148 of IT Act. Learned CIT(A) turned down the submission of the assessee without looking into the detail.

That the learned CIT(A) has erred both on facts and in law by upholding the addition u/s 69A of the Act, failing to appreciate that provisions of section 44AF of the Act is presumptive and assessee is not required to maintain books of account and records and further failed to appreciate that the evidence submitted remained unverified and the addition was made based on presumptions, surmises and farfetched. Without prejudice to above

That the learned CIT(A) has erred both on facts and law by upholding the addition of Rs. 11,61,500/- U/S 69A of the Act without appreciating the facts that Rs. 12,00,000/- has been withdrawn from banks during the concerned period.

Apart from these grounds, Ld. Counsel for the assessee raised two additional grounds which read as under

I have heard Ld. Authorized Representatives of the parties and perused the material available on record. I find that the facts and issues are similar and identical to the ITA No.799/Del/2020 [AY 2008-09]. Ld. Representatives of the parties have adopted the same arguments in respect of grounds of appeal alongwith additional grounds. Since the facts are identical and no change into the facts and circumstances has been pointed by the Revenue in the year under appeal, the grounds raised in this appeal filed by the assessee are allowed. My decision in ITA No.799/Del/2020 [AY 2008-09] in para 14 and 15 of this order would apply Mutatis Mutandi in this appeal filed by the assessee as well.

In the result, the appeal of the assessee is allowed.

In the final result, both appeals filed by the assessee in ITA Nos. 799 & 800/Del/2020 [Assessment Years 2008-09 to 2009-10] are allowed.

Order pronounced in the open Court on 15th May, 2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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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.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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Transaction between a holding company and a totally owned subsidiary is exempt from Section 56(2)(viib)

Fact and issue of the case

The captioned appeal has been filed at the instance of the assessee against the revisional order of the ld. Pr.CIT, Gurgaon (‘Pr.CIT’ in short) dated 05. 03.2019 wherein order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) dated 15. 12.2016 concerning AY 2014-15 was held to be erroneous in so far as prejudicial to the interest of the revenue within the meaning of Section 263 of the Act.

The grounds of appeal raised by the assessee read as under:

That on the facts and circumstances of the case ld Pr. CIT, Gurgaon in his order dated 05 .03 .2019 passed u/s.263 of the Act, erred in setting aside the order dated 15 .12 .2016 for AY 2014 -15 passed by the Id AO,Ward-1 (3 ), Gurgaon u/ s 143 (3 ) of the Act, by holding that in respect of issue of 513978 shares @ Rs 1284 .10 per share, failure of the ld AO to examine the genuineness of the transactions, creditworthiness of the persons from which share premium was received and identity, rendered the assessment erroneous and prejudicial to the interest of revenue and further erred in exercising the powers u/s. 263 of the Act:

Because the entire share application money was received during the F.Y. 2012 –13 corresponding to A.Y. 2013 -14 and the entire issue including share premium was examined by the ld AO twice, first during the course of proceedings for A.Y. 2013 -14 concluded by order dated 16 .03 .2016 passed us 143 (3 ) of the Act and then again during the course of assessment proceedings for AY 2014 -2015 .

Because provisions of section 68 of the Income Tax Act, 1961 can be applied only in the year in which share application money or share premium is received and not in any subsequent

As per the grounds of appeal, the assessee has sought to challenge the jurisdiction assumed by the CIT under Section 263 of the Act and as a corollary sought to impugn the revisional order passed by the Pr.CIT under Section 263 of the Act.

Briefly stated, the assessee-company is engaged in the business of generating and dealing in electricity and all forms of energy and power generated by wind and other conventional and non conventional The return filed by the assessee for the Assessment Year 2014-15 was subjected to scrutiny assessment. An assessment order was framed under Section 143(3) of the Act wherein the income of the assessee returned at Rs. Nil was accepted by the Assessing Officer without any modifications. Thereafter, the Pr.CIT in exercise of his revisionary powers issued show cause notice dated 29.11.2018 under Section 263 of the Act requiring the assessee to show cause notice as to why the assessment so framed under Section 143(3) was not modified/set aside on the ground that such order is erroneous in so far as it is prejudicial to the interest of the Revenue. The show cause notice issued in this regard is extracted herein for ready reference.

In this case, the assessee company had furnished its return of income for the A. Y. 2014 -15 on 30 .11 . 2014 declaring an income/loss of Rs. Nil. Assessment was completed accepting returned income under section 143 (3) of the I. T. Act, 1961 vide order dated 15.12.2016 .

The assessment records of the aforesaid assessee company for the Y. 2014 –15 were examined. On perusal of the assessment records, it was noticed that the case was selected under scrutiny through CASS with the reasons ” Large Share premium received during the year”. During the year under consideration, the assessee company has issued total 513978 share @ Rs. 1284 .10 /- per share to various parties against the face value of Rs. 10 /- each and received share premium to the tune of Rs. 65,18,59,370 /-. During the course of assessment proceedings, the AO was required Yo examine the justification of share premium with regard to the FMV and the creditworthiness of the subscriber to whom the said shares have been allotted at a huge premium. It is observed that the AO failed to examine the same but completed the assessment, accepting the FMV of shares as submitted by the assessee. The FMV adopted by the assessee at huge premium of Rs. 1274 .10 /- is apparently on a higher side in view of the financial statement of the assessee.

Failure of the AO to examine the genuineness of the transactions, creditworthiness of the persons from which share premium has allegedly received and their identity rendered the assessment erroneous and prejudicial to the interest of the

You are, therefore, provided an opportunity to show cause as to why the assessment order passed by the ITO, Ward 1 (3 )Gurgaon, dated 15 .12 .2016 for the Y.2014 -15 in your case should not be revised u/s. 263 of the Act. You are requested to attended my office on 18 .12 .2018 at 10 :30 AM either in person or by representative duly authorized in writing on your behalf or produce or cause to be produced at the said time, any documents or any other evidence on which your rely in your support. In case of no reply/non-attendance as per above, it shall be assumed that your do not wish to say anything in the matter and the matter would be decided as per material available on record without any further notice/ intimation to you. Yours faithfully, Pr. Commissioner of Income Tax Gurugram

As per the show cause notice, on the basis of perusal of case records the CIT observed that the assessee has issued 513978 shares @ Rs.1284.10 per share against the face value of Rs.10/- each and received a premium to the tune of Rs.65.48 crore. The case was selected for scrutiny for verification of large share premium received during the year. The Assessing Officer however in the course of the assessment has completed the assessment and accepted the Fair Market Value (FMV) of shares submitted by the assessee without carrying out examination on justification of the share premium and also the creditworthiness of the subscriber to whom shares have been allotted on such a huge premium. As per show cause notice, the Pr.CIT thus alleged that the failure of the Assessing Officer to examine the genuineness of the transaction, creditworthiness of the persons from whom share premium have been received has rendered, the assessment erroneous and prejudicial to the interest of the Revenue.

The Pr. CIT did not find the reply of the assessee in response to the show cause notice to be satisfactory and concluded that the assessment order so passed is erroneous and prejudicial to the interest of the Revenue on the ground that the Assessing Officer has not pursued the inquiries to their logical end resulting in the assessment order erroneous and prejudicial to the interest of the Revenue. The Pr.CIT accordingly set aside the assessment order and directed the Assessing Officer to pass fresh assessment order after making thorough and detailed inquiries on the particular issue of issuance of shares at huge premium.

Aggrieved by the aforesaid action of the CIT, the assessee is in appeal before the Tribunal agitating the assumption of supervisory jurisdiction usurped by the Pr.CIT as well consequential order passed under Section 263 of the Act.

The Ld. counsel for the assessee broadly reiterated its submissions made before the Pr.CIT and submitted that all relevant facts and evidences concerning the issue and allotment of shares and premium were placed before the Assessing Officer in pursuance of inquiries carried out under Section 142(1) of the Act in the course of assessment. The ld. counsel pointed out that the assessee company had issued 513978 shares only one entity and that too to ‘M/s. BLP Energy Pvt. Ltd.’ at a premium of Rs.1284.10 per shares having regard to the audited financial statement for F.Y. 2013-14. The aforesaid subscriber M/s. BLP Energy Pvt. Ltd. is 100% holding company and the shares have not been allotted to any third party investor. Delineating further, the ld. counsel referred to its reply dated 01.02.2019 placed before the Pr.CIT and submitted that the said amount of investment aggregating to Rs. 66 crore was received by the assessee company in the preceeding Financial Year, i.e., F.Y. 2012-13 (A.Y. 2013- 14) in the form of share application money and the shares have been issued against such receipts in the subsequent year to the holding company resulting in securities premium amount of Rs.65,48,60,220/- being accounted for its books of account. The ld. counsel next submitted that while the share application money was received in preceding Assessment Year 2013-14 which was also subjected to scrutiny assessment under Section 143(3) of the Act, the compliance of Section 56(2)(viib) of the Act was also verified in the Assessment Year 2014-15 in question. Specific queries have been raised with regard to the aspects of the share premium and the concern expressed in the show cause notice of the Pr.CIT is thus totally unfounded. The ld. counsel thus submitted that the share application money was received in the preceding Assessment Year 2013-14 for which the allotment was carried out in the Assessment Year 2014-15 in question and most importantly, the shares were allotted to its 100% holding company and none else and therefore, there was no warrant to invoke the deeming fiction of Section 56(2)(viib) in the context of the case. It was thereafter submitted that the allotment have been carried out in tune with the valuation report towards calculation of fair market value of shares as per Rule 11UA(2)(b) of the Income Tax Rules. A copy of valuation report obtained in this regard was referred to and relied upon in respect of the case so made out. The ld. counsel thus submitted that requisite inquiries were diligently carried out by the Assessing Officer as warranted in the facts of the case and the Pr.CIT, on the other hand, has omitted to take note of the glaring facts of allotment of shares to its holding company carrying out substantial business in energy sector. It was thus alleged that the action of the Pr.CIT is perfunctory. The ld. counsel thus urged for cancellation of the revisional order and restoration of the stands of the Assessing Officer.

The Ld. DR for the Revenue, on the other hand, referred to and relied upon the revisional order and submitted in furtherance that the Assessing Officer has failed to discharge its quasi judicial functions obligated under the statute and has perfunctorily accepted the position taken by the assessee without any meaningful inquiry. The ld. DR thus supported the action of the Pr.CIT and submitted that such blatant lack of inquiry has resulted in an erroneous order causing grave prejudice to the Revenue. It was submitted that the action of the Pr.CIT is covered by the wide amptitude of the revisional powers

Observation of the court

We have carefully and dispassionately considered the rival submissions and perused the revisional order and the assessment order together with other documents and material placed before us and adverted to. The Pr.CIT, in the instant case, has sought to cancel the assessment order on the pretext that large share premium received against allotment of shares have not been enquired into.

The Pr. CIT has controverted the propriety of assessment order on the ground that requisite inquiries have not been carried out with reference to the receipt of huge share premium on allotment of shares on the touchstone of Section 56(2)(viib) of the Act. The Pr.CIT also observed that the Assessing Officer has failed to examine the genuineness of the transaction of allotment of shares on the touchstone of Section 68 of the Act.

As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT vs. Ozone India Ltd. in ITA No.2081/Ahd/2018 order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in ITA No.9710/Del/2019 order dated 02.11.2022 (SMC) where it was observed that Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.

Preliminary enquiry, if undertaken, by CIT would have thus possibly changed the discourse in the present case.

As regards inquiry on the parameters of Section 68 is concerned, it is the case of the assessee that the money/credit has been entered in the books of the assessee in preceeding Assessment Year 2013-14 and therefore, Section 68 itself is not applicable qua AY 2014-15 in This notwithstanding, money has been received from holding company carrying substantial business activities and getting assessed year after year. On an enquiry from the Bench, the ld. counsel placed the assessment order dated 30.12.2019 passed by the Assessing Officer in pursuance of the impugned revisional order and submitted that the additions of Rs. 65, 48,60,220/- has been carried out under Section 56(2)(viib) of the Act by re-determining the Fair Market Value. The assessee thus contends that the Assessing Officer was thus also satisfied with the parameters of Section 68 of the Act towards such nature and source of such credits in the post revisional proceedings.

A revisional action of the CIT in the context of the facts of the case thus appears to be wholly unjustified and without meeting the jurisdictional requirement of Section 263 of the Act. We thus find wholesome merit in the plea of the assessee for cancellation of the revisional order and restoration of the order of the Assessing Officer. We do so accordingly. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 31/05/2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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June, 5
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Standard

The part under which the AO added during the evaluation cannot be changed by CIT(A)

Fact and issue of the case

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 10, Chennai dated 12.03.2020 relevant to the assessment year 20 11-12.

The appeal filed by the assessee is delayed by 248 days in filing the appeal due to outbreak of Covid-19 pandemic and accordingly, the delay in filing the appeal is condoned and admitted for adjudication.

Brief facts of the case are that the assessee filed her return of income for the assessment year 2011-12 on 30.03.2013 returning total income of ₹.2,35,280/-. During the course of remand proceedings relating to assessment year 2012-13, the assessee submitted certain working to show “summary for cash transaction”, “individual capital account and balance sheet” and copy of bank account statement of Tamilnad Mercantile Bank. On perusal of the bank statement, the Assessing Officer noted following credit entries:

15/10/2010	₹.	8,28,000/-
31/10/2010	₹.	3,00,000/-
31/10/2010	₹.	3,00,000/-

The assessee has submitted before the Assessing Officer that the 2 entries of ₹.3 lakhs each were given by her husband Shri S. Sekar, but the assessee has not supported by proof. Similarly, the source for ₹.8,28,000/- was also not given. Accordingly, the Assessing Officer reopened the assessment under section 147 of the Income Tax Act, 1961 [“Act” in short] and after following due procedures, the assessment was completed under section 143(3) r.w.s. 147 of the Act dated 29.12.2018 assessing total income of the assessee at ₹.8,35,280/- after making addition of ₹.6,00,000/- as unexplained credit in the bank account. On appeal, after considering the submissions and by invoking the provisions of section 69A of the Act, the ld. CIT(A) confirmed the addition.

Observation of the court

On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the ld. CIT(A) has erred in adding ₹.6,00,000/- as unexplained money under section 69A of the Act without considering the confirmation given by the assessee’s It was further submission that the ld. CIT(A) has not empower to to assess a particular item under different provision of the Act what the Assessing Officer had done without giving a specific notice to the assessee regarding such action and prayed for deleting the addition.

On the other hand, the ld. DR supported the order passed by the ld. CIT(A).

Both the sides have been heard, perused the materials available on record and gone through the orders of authorities below including paper book filed by the assessee. In this case, the Assessing Officer made addition of ₹.6,00,000/- as unexplained credit. However, the Assessing Officer has not mentioned the relevant section under which, the addition was made, but “unexplained credit” comes under section 68 of the Act. In the appellate order, in page No. 7, para (v), the ld. CIT(A) has noted that “However, I am also in agreement with the appellant that the provisions of section 68 are not applicable to the appellant”. Therefore, the ld. CIT(A) treated the addition of ₹.6,00,000/- as unexplained money under section 69A of the Act and confirmed the addition. Section 68 of the Act deals with “unexplained Credit” in the books of the assessee and section 69A of the Act deals with “unexplained money, bullion, jewellery or other valuable article”. Both are entirely different. Though the Assessing Officer has not mentioned the section 68 of the At in his order, the very fact that he calls it “unexplained credit” and not “unexplained money” as done by the ld. CIT(A), while he invoked section 69A of the Act, it proves that the Assessing Officer invoked section 68 of the Act. I find merit into the contention of the ld. Counsel for the assessee that there is no power conferred upon the ld. CIT(A) to assess a particular item under different provision of the Act what the Assessing Officer had done without giving a specific notice to the assessee regarding such action. I am of the considered view that law does not permit for such change of provision of law. As per section 250 of the Act, the ld. CIT(A) is empowered to make further inquiry as he thinks fit or may direct the Assessing Officer to make further inquiry and report to the ld. CIT(A). As per section 251(1 )(a) of the Act, in appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment, but there is no such power provided by the law that ld. CIT(A) could change the provision of law qua the item of which assessment was made. Therefore, in the absence of such power, learned CIT(Appeals) could not have treated the addition made under section 69A of the Act. Therefore, the addition made by the ld. CIT(A) under section 69A of the Act is liable to be deleted.

Over and above, when the Assessing Officer found credit of ₹.6,00,000/- (₹.3.00 lakhs each) in the bank statement and the assessee’s husband Shri S. Sekar has furnished confirmation by way of duly notarized affidavit, the assessee has discharged the onus cast upon On perusal of the orders of authorities below, both the Assessing Officer and the ld. CIT(A) failed to discharge their onus by getting the details from the bank under section 133(6) of the Act. Considering the entire facts and circumstances of the case, the addition of ₹.6,00,000/- made by the ld. CIT(A) under section 69A of the Act is deleted.

In the result, the appeal filed by the assessee is allowed.

Order pronounced on 21st December, 2022 at Chennai.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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May, 27
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Standard

Unsustainable addition to the closing cash balance due to funds gained from agricultural activity

Fact and issue of the case

The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-6, Ahmedabad, dated 11/06/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2015-16

The assessee has raised following grounds of appeal

On the facts and in the circumstances of the case as well as law on the subject, the learned commissioner of the Income Tax(Appeals) has erred in confirming the action of the assessing officer in making addition of Rs.7,81,648/- on account of unexplained closing cash balance u/s. 68 of the Income Tax Act and taxed u/s. 115BBE r.w.s 68 of the Income tax Act 1961

On the facts and in the circumstances of the case as well as law on the subject, the learned Commissioner of the Income Tax (Appeals) has not offered ample opportunities to hear the case and passed ex-parte order, hence the case may please be set aside and restored back to the CIT(A) or AO

It is therefore prayed that the above addition may please be deleted as learned members of the tribunal may deem it proper

Appellant craves leave to add, alter or delete any ground(s) either before of in the course of the hearing of the appeal

At the outset, I note that there is a delay in filing the appeal by the assessee for 779 days. The learned AR of the assessee has explained the reasons for the delay by stating that he (the assessee) was not aware of the provisions of income tax being small agriculturist. On being advised by his brother and upon his reference of the CA, the assessee filed the appeal with the delay. Thus, as per the AR the delay occurred in filing the appeal which needs to be condoned

The learned DR at the time of hearing, considering the length of delay opposed on the condonation petition filed by the assessee

I have heard the rival contentions of both the parties and perused the materials available on record. U/s 253 of the Act, the Tribunal may admit an appeal, or cross-objection, after the expiry of prescribed period, if it is satisfied that there was sufficient cause for not presenting it within that period. At the outset, I note that the Hon’ble Supreme Court in series of cases has observed that the expression “sufficient cause” should be interpreted to advance substantial justice. Therefore, advancement of substantial justice is the prime factor while considering the reasons for condoning the delay. The Hon’ble Supreme Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down certain principles for considering the condonation petition for filing the appeal which are reproduced hereunder

Ordinarily, a litigant does not stand to benefit by lodging an appeal late

Refusing to condone delay can result in a meritorious matter being thrown at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties

‘Every day’s delay must be explained’ does not mean that a pedantic approach should be Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational, commonsense and pragmatic manner

There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to In fact, he runs a serious risk

It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so

From the above judgment of the Hon’ble Apex Court, I note that the substantial justice deserves to be preferred rather than deciding the matter on the basis of technical defect. I also note that there is no allegation from the Revenue that the appeal was not filed within the time deliberately. Therefore, I am inclined to prefer substantial justice rather than technicality in deciding the issue

I further note that the case on merit appears to be in favour of the assessee. But there is a technical defect in the appeal since the appeal was not filed within the period of limitation. There was the application filed by the assessee explaining the reasons for the delay in filing the appeal before me. I note that the Hon’ble Gujarat High Court in the case of S.R. Koshti Vs. CIT reported in 276 ITR 165 has held as under

The position is, therefore, that, regardless of whether the revised return was filed or not, once an assessee is in a position to show that the assessee has been over-assessed under the provisions of the Act, regardless of whether the over-assessment is as a result of assessee’s own mistake or otherwise, the CIT has the power to correct such an assessment under section 264(1) of the Act. If the CIT refuses to give relief to the assessee, in such circumstances, he would be acting de hors the powers under the Act and the provisions of the Act and, therefore is duty-bound to give relief to an assessee, where due, in accordance with the provisions of the Act

In the present case, the respondent-CIT has nowhere stated that the petitioner is not entitled to the relief under section 10(10C) of the Act. In fact, the said position is The Assessing Officer himself had passed an order under section 154 of the Act, granting such relief. In the circumstances, even the order under section 264 of the Act made on 29-3-2004, cannot be sustained

A word of caution. The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. This Court, in an unreported decision in case of Vinay Chandulal Satia v. N.O. Parekh, CIT [Spl. Civil Application No. 622 of 1981 dated 20-8-1981], has laid down the approach that the authorities must adopt in such matters in the following terms

The Supreme Court has observed in numerous decisions, including Ramlal v. Rewa Coalfields Ltd. AIR 1962 SC 361, State of West Bengal v. Administrator, Howrah Municipality AIR 1972 SC 749 and Babutmal Raichand Oswal v. Laxmibai R. Tarte AIR 1975 SC 1297, that the State authorities should not raise technical pleas if the citizens have a lawful right and the lawful right is being denied to them merely on technical grounds. The State authorities cannot adopt the attitude which private litigants might adopt

From the above it is revealed that the income of the assessee should not be over assessed even there is a mistake of the assessee. As such, the legitimate deduction for which the assessee is entitled should be allowed while determining the taxable income

I also note that the Hon’ble Gujarat High Court in the case of Vareli textile industry versus CIT reported in 154 Taxman 33 wherein it was held as under: It is equally well-settled that where a cause is consciously abandoned (as in the present case) the party seeking condonation has to show by cogent evidence sufficient cause in support of its claim of condonation. The onus is greater. One of the propositions of settled legal position is to ensure that a meritorious case is not thrown out on the ground of limitation. Therefore, it is necessary to examine, at least prima facie, whether the assessee has or has not a case on merits

In view of the above and after considering the facts in totality, I am of the view that it is a fit case where the delay in filing the appeal by the assessee deserves to be condoned. Accordingly, I condone the same and proceed to decide the issue on merit

The only issue raised by the assessee is that the learned CIT(A) has erred in confirming the addition made by the AO for ₹ 7,81,648/- representing the closing cash balance as on 31 March 2015 under the provisions of section 68 of the Act

The facts in brief are that the assessee in the present case is an individual and claimed to be an agriculturist. The assessee first time has filed the belated return of income for the year under consideration dated 26/11/2016 declaring an income of ₹2,66,710/- only. The income tax return was filed by the assessee under the provisions of section 44AD of the Act disclosing the closing cash balance at ₹7,81,648/- as on 31 March 2015. As per the assessee, the income tax return was filed under section 44AD by the accountant inadvertently. As such, the assessee being an agriculturist was not under the obligation to file the income tax The assessee to support his contention has filed form No. 7/12 and 8A to demonstrate the landholding and sales bills of the agricultural produce

As per the assessee, the cash balance of ₹7,81,648/- was accumulated by him in order to purchase the land for the agricultural activity. The assessee being uneducated was reluctant to visit the bank frequently and therefore the cash was not deposited in the bank account

However, the AO disagreed with the contention of the assessee by observing that the income tax return was filed belatedly in order to justify the cash deposits of ₹10,20,000/- during the demonetization period. The assessee has also not filed the cash book during the assessment proceedings. Furthermore, the assessee in the income tax return has declared the income under the provisions of section 44AD of the Act whereas during the assessment proceedings he has changed his stand by claiming himself as an agriculturist. As per form No. 7/12, the landholding of the assessee was 5 vighas only wherein the production of the Kapas to the tune of 507 Mans is not possible. There was no detail of agricultural expense furnished by the assessee. Furthermore, the assesse is not having the irrigation facilities for agriculture production as mentioned in the form No. 7/12. Thus, in view of the above the AO treated the amount of ₹7,81,648/- shown as closing cash balance as unexplained cash credit under section 68 of the Act and accordingly made the addition to the total income of the assessee

Aggrieved assessee preferred an appeal to the learned CIT(A)

The assessee before the learned CIT(A) submitted that he does not carry out any business activity and he is depending only upon the agriculture income for which he does not maintain any cash book and other books of accounts. The accountant has wrongly declared income under the provisions of section 44AD of the Act wherein it is mandatory to furnish the details of the cash balance. As such the income of the assessee is not subject to the provisions of section 44AD of the Act and therefore there was no necessity of maintaining any details being an agriculturist

The assessee also submitted that he has furnished the Talati certificate to demonstrate the production of Kapas in the year under consideration which has not been considered by the AO during the assessment proceedings. As such, no iota of doubt was raised by the AO on such certificate

However, the ld. CIT-A disregarded the contention of the assessee by observing as under

After considering findings of the AO and submissions of the appellant, this ground is adjudicated as under. The AO noted that the appellant had shown Closing Cash balance of Rs.7,81,648/- as on 31.3.2315 in his return of income of A.Y. 2015-16. When asked to substantiate the same and produce Cash Book, the appellant could not do so. Accordingly, the AO added Rs.7,81,648/- u/s 68 r.w.s 115BE of the Act. It is seen that for A.Y. 2015-16, the appellant filed Return of Income u/s 44AD of the Act. However, when asked by the AO to explain the Closing Cash balance and to produce the Cash Book, the appellant turned around and said he has no business and no business income and that he is an agriculturalist and his accountant wrongly snowed agricultural income as income from sale of goods. For the Cash Balance of Rs.7,81,648/- he submitted that he submitted he has accumulated this amount for purchase of land. During appea1 proceedings he reiterated above submissions. The authorised representative of the appellant explained that the appellant was advised by someone to file return of income u/s 44AD o the Act so that later the appellant could explain deposit of cash of Rs.10,20,000/- , deposited during Demonetization period between 9.11.2016 to 30.12.2016. Thus it is clear that the appellant has been changing his stand and has filed different explanations at different times. It is noteworthy that the appellant has filed Return of Income first time for A.Y. 15-16, the year under consideration. Before this the appellant had never filed return of income. Thus it is clear that the appellant has failed to explain with evidence the source of Rs.7,81,648/- In view of discussion above, I hold that the AO was justified in making addition of Rs.7,81,648/- u/s. 115BBE r.w.s 68 of the Act. Accordingly, addition of Rs.7,81,648/- is upheld. This ground of appeal is rejected

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before me

The learned AR before me contended that the Revenue has not brought anything on record suggesting that the cash balance was generated from the activity other than the agricultural activity. As per the ld. AR, the cash balance shown at the end of the financial year does not itself represents the income

On the other hand, the learned DR before me vehemently supported the order of the authorities below

Observation of the court

I have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, I note that the assessee claimed to be an agriculturist and in support of his contention has filed the landholding certificates in form 7A/12 and Talati certificate showing the agricultural produce. But the assessee fairly admitted that the accountant has wrongly declared the income under the provisions of section 44AD of the Act wherein it was mandatory to disclose the cash balance. As per the assessee, being an agriculturist, he was not supposed to disclose any cash balance in the return filed under section 44AD of the Act. Accordingly, it was contended that the assessee should not be punished for the mistake committed by the accountant of the assessee

To give relief to small assessees, the Income-tax Law has incorporated a simple scheme commonly known as Presumptive Taxation Scheme. There are two schemes, viz., the scheme of section 44AD and the scheme of section 44AE. An assessee adopting these provisions is not required to maintain the regular books of account and is also exempt from getting the books of account audited. The provisions of section 44AD are applicable to such resident assessee who is an Individual, Hindu Undivided Family and Partnership Firm but not Limited Liability Partnership Firm. The presumptive taxation scheme under these provisions can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in section 44AE), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB of the Act

There is no evidence available on record to indicate that the case of the assessee is covered under the provisions of section 44AD of the Act except the income tax return i.e. the income was disclosed under the provisions of section 44AD of the Act. However, the assessee during the assessment proceedings has countered that he is not covered under the provisions of section 44AD of the Act by furnishing the landholding and Talalti certificates as discussed above. However the AO, without disposing of the objections raised by the assessee has assumed that the assessee has not furnished the necessary details in support of agricultural activity. But at the same time the AO has also not brought anything on record suggesting that the assessee is engaged in the activity which is subject to the provisions of section 44AD of the Act. As such, the assessee shifted the onus upon the revenue by submitting the details of the landholding and thereafter it was the onus upon the revenue to disprove the contention of the assessee based on the documentary evidence but it has not been done so

Be that as it may, the question also arises whether the cash balance shown by the assessee represents the income. The cash balance shown at the end of the financial year represents the cash available with the assessee out of various transactions carried out by him in the relevant financial year. In simple words, the assessee generally receives cash against the sales and makes payments for the purchases and other expenses. Whatever is left at the end of the financial year is shown as closing cash balance. As per the assessee, the cash balance was arising to him out of the accumulated fund from the agricultural activities which has been disbelieved by the AO but without bringing any material on record that the cash was generated by the assessee from any other activity which was subject to tax. Thus in my considered view, the revenue failed to discharge the onus imposed upon it to disprove the contention of the assessee. Thus, it is transpired that whatever cash was available with the assessee was out of the agricultural activity of the earlier years carried out by him. Accordingly, I am not inclined to uphold the finding of the authorities below. Hence the ground of appeal of the assessee is hereby allowed

In the result, the appeal of the assessee is allowed

Order pronounced in the Court on 10/04/2023 at Ahmedabad

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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May, 6
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It is unjustified to disallow a short-term capital loss based solely on information from the investigative wing

Fact and issue of the case

This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 01.01.2022 for the A.Y.2011-12

At the outset, we observe that the present appeal is filed by the assessee with a delay of 338 days and assessee also filed an affidavit in this regard and prayed for condonation of delay. In the affidavit assessee has submitted as under: –

I Shri Naveen Kishor Mohnot, aged about 51 years residing at Monami ‘A’, 3rd Floor, Behind Chandan Cinema, Juhu, Mumbai 400049, hereby state and depose as under

I am regularly assessed to Tax in my individual capacity under PA No. ABGPJ1360D

That in my case assessment for A.Y. 2011-12 was completed u/s 143(3) r.w.s. 147 of the Act on 18-12-2018 against which I had filed an appeal before the Id. CIT(A) on 02-01-2019. Which was decided by the Hon ‘ble CIT (A) vide Order dtd 01-01-2022

The aforesaid order was passed ex parte by Honorable CIT (A) which I had not received. It was noticed by me when I received the Show cause notice u/s 271(1)(c) from the Income Tax Department. It was then I realised that the Order u/s 250 was already passed without any hearing

Once I came to know, I appointed the Chartered Accountant and compiled the data and documents from the earlier Chartered Accountant and file the appeal which is delayed on such account

Since the delay caused is not due to any neglect but due to circumstances beyond my control I depose this statement to support my application for delay in filing appeal before the Hon ‘ble ITAT Mumbai to condone the delay and hear my appeal on merit

Whatever is stated herein is true to the best of my knowledge and belief

DR objected to the submissions of the assessee on delay condonation and he submitted that all the relevant details are already available in ITR portal, therefore the submissions of the assessee cannot be relied upon

Considered the submissions of both parties, we observe that in the case of M/s. Midas Polymer Compounds Pvt. Ltd., v. ACIT in ITA.No. 288/Coch/2017 the Coordinate Bench of the Tribunal has considered the issue of condonation of delay and by following various judicial precedents along with the decision of the Hon’ble Supreme Court in the case of Collector, Land Acquisiont v. Mst Katiji and ors. (167 ITR 471) condoned the delay of 2819 days observing as under

We have heard the rival submissions and perused the record. There was a delay of 2819 days in filing the appeal before the Tribunal. The assessee has stated the reasons in the condonation petition accompanied by an affidavit which has been cited in the earlier para. The assessee filed an affidavit explaining the reasons and prayed for condonation of delay. The reason stated by the assessee is due to inadvertent omission on the part of Shri Unnikrishnan Nair N, CA in taking appropriate action to file the appeal. He had a mistaken belief that the appeal for this year was filed by the assessee as there was separate Counsel to take steps to file this appeal before the ITAT. Therefore, we have to consider whether the Counsel’s failure is sufficient cause for condoning the delay. The Madras High Court considered an identical issue in the case of Sreenivas Charitable Trust v. Dy. CIT (280 ITR 357) and held that mixing up of papers with other papers are sufficient cause for not filing the appeal in time. The Madras High Court further observed that the expression “sufficient cause” should be interpreted to advance substantial justice. Therefore, advancement of substantial justice is the prime factor while considering the reasons for condoning the delay

On merit the issue is in favour of the assessee. But there is a technical defect in the appeal since the appeal was not filed within the period of limitation. The assessee filed an affidavit saying that the appeal was not filed because of the Counsel’s inability to file the appeal. The Revenue has not filed any counter affidavit to deny the allegation made by the assessee. While considering a similar issue the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down six principles. For the purpose of convenience, the principles laid down by the Apex Court are reproduced hereunder

Ordinarily, a litigant does not stand to benefit by lodging an appeal late

‘Every day’s delay must be explained’ does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational, commonsense and pragmatic

It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so

When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right for injustice being done because of nondeliberate delay. In the case on our hand, the issue on merit regarding allowability of deduction u/s. 80IB of the Act was covered in favour of the assessee by the binding Judgment of the jurisdictional High Court. Moreover, no counter-affidavit was filed by the Revenue denying the allegation made by the assessee. It is not the case of the Revenue that the appeal was not filed deliberately. Therefore, we have to prefer substantial justice rather than technicality in deciding the issue. As observed by Apex Court, if the application of the assessee for condoning the delay is rejected, it would amount to legalise injustice on technical ground when the Tribunal is capable of removing injustice and to do justice. Therefore, this Tribunal is bound to remove the injustice by condoning the delay on technicalities. If the delay is not condoned, it would amount to legalising an illegal order which would result in unjust enrichment on the part of the State by retaining the tax relatable thereto. Under the scheme of Constitution, the Government cannot retain even a single pie of the individual citizen as tax, when it is not authorised by an authority of law. Therefore, if we refuse to condone the delay, that would amount to legalise an illegal and unconstitutional order passed by the lower authority. Therefore, in our opinion, by preferring the substantial justice, the delay of 2819 days has to be condoned

The next question may arise whether 2819 days was excessive or inordinate. There is no question of any excessive or inordinate when the reason stated by the assessee was a reasonable cause for not filing the appeal. We have to see the cause for the delay. When there was a reasonable cause, the period of delay may not be relevant factor. In fact, the Madras High Court in the case of CIT v. K.S.P. Shanmugavel Nadai and Ors. (153 ITR 596) considered the delay of condonation and held that there was sufficient and reasonable cause on the part of the assessee for not filing the appeal within the period of limitation. Accordingly, the Madras High Court condoned nearly 21 years of delay in filing the appeal. When compared to 21 years, 2819 days cannot be considered to be inordinate or excessive. Furthermore, the Chennai Tribunal by majority opinion in the case of People Education and Economic Development Society (PEEDS) v. ITO (100 ITD 87) (Chennai) (TM ) condoned more than six hundred days delay. It is pertinent to mention herein that the view taken by the present author in that case was overruled by the Third Member

The Madras High Court in the case of Sreenivas Charitable Trust (supra) held that no hard and fast rule can be laid down in the matter of condonation of delay and the Court should adopt a pragmatic approach and the Court should exercise their discretion on the facts of each case keeping in mind that in construing the expression “sufficient cause” the principle of advancing substantial justice is of prime importance and the expression “sufficient cause” should receive a liberal construction. Therefore, this Judgment of the Madras High Court (supra) clearly says that in order to advance substantial justice which is of prime importance, the expression “sufficient cause” should receive a liberal construction. In this case, the issue on merit regarding granting of deduction u/s. 80IB was covered in favour of the assessee by the Judgment of the jurisdictional High Court. Therefore, for the purpose of advancing substantial justice which is of prime importance in the administration of justice, the expression “sufficient cause” should receive a liberal construction. In our opinion, this Judgment of the jurisdictional High Court is also squarely applicable to the facts of this case. A similar view was taken by the Madras High Court in the case of Venkatadri Traders Ltd. v. CIT (2001) 168 CTR (Mad) 81 : (2001) 118 Taxman 622 (Mad)

The Mumbai Bench of this Tribunal in the case of Bajaj Hindusthan Ltd. v. Jt. CIT (AT) (277 ITR 1) has condoned the delay of 180 days when the appeal was filed after the pronouncement of the Judgment of the Apex Court. Furthermore, the Revenue has not filed any counter-affidavit opposing the application of the assessee for condonation of delay. The Apex Court in the case of Mrs. Sandhya Rani Sarkar vs. Smt. Sudha Rani Debi(AIR 1978 SC 537) held that non-filing of affidavit in opposition to an application for condonation of delay may be a sufficient cause for condonation of delay. In this case, the Revenue has not filed any counter-affidavit opposing the application of the assessee, therefore, as held by the Apex Court, there is sufficient cause for condonation of delay. The Supreme Court observed that when the delay was of short duration, a liberal view should be taken. “It does not mean that when the delay was for longer period, the delay should not be condoned even though there was sufficient cause. The Apex Court did not say that longer period of delay should not be condoned. Condonation of delay is the discretion of the Court/Tribunal. Therefore, it would depend upon the facts of each case. In our opinion, when there is sufficient cause for not filing the appeal within the period of limitation, the delay has to be condoned irrespective of the duration/period. In this case, the non-filing of an affidavit by the Revenue for opposing the condonation of delay itself is sufficient for condoning the delay of 2819 days

In case the delay was not condoned, it would amount to legalise an illegal and unconstitutional order. The power given to the Tribunal is not to legalise an injustice on technical ground but to do substantial justice by removing the injustice. The Parliament conferred power on this Tribunal with the intention that this Tribunal would deliver justice rather than legalise injustice on technicalities. Therefore, when this Tribunal was empowered and capable of removing injustice, in our opinion, the delay of 2819 days has to be condoned and the appeal of the assessee has to be admitted and disposed of on merit

In view of the above, we condone the delay of 2819 days in filing the appeal and admit the appeal for adjudication

Respectfully following the above said decision and for the sake of overall justice we condone the delay and admit the appeal for

On merits, we observe that assessee has filed its return of income on 29.07.2011 declaring total income of ₹.6, 67,900/-. Based on the information received from the Investigation Wing that the assessee has dealt in sale and purchase of shares of M/s. VAS INFRASTRUCTURE LIMITED, which is a penny stock company. Accordingly, the case of the assessee was reopened by issue of notice u/s. 148 of the Act and served on the assessee. Assessee submitted the return of income in compliance to the notice u/s. 148 of the Act. The assessee was provided with the reasons recorded for initiation of proceedings u/s. 147 of the Act. Subsequently notice u/s. 143(2) and 142(1) were issued and served on the assessee and in response assessee submitted all the relevant information

Assessee derives income from salary, business, speculation income, capital gain and income from other sources. The Assessing Officer observed that during the present assessment year assessee purchased 2078 shares of M/s. VAS Infrastructure Limited for a consideration of ₹.2,14,550/-. He observed that assessee claimed loss of ₹.46,964/- being short-term Capital loss. Assessing Officer in the Assessment Order discussed various findings of the Investigation Wing on the scrips relating to M/s. VAS Infrastructure Limited and the same is discussed in the Assessment Order at Page No. 6 to 12 of the Assessment Order. Based on the informations from Directorate of Investigation in relating to the scrip the Assessing Officer treated the whole sale proceeds of ₹.2,14,390/- as unexplained cash credit u/s. 68 of the Act. Accordingly, he rejected the loss claimed by the assessee and also he made the addition of ₹.2,14,390/-. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and made a detailed submission, for the sake of clarity it is reproduced below

The assessee had purchased 2078 number of shares of VAS INFRA STRUCTURE LIMITED resulting total purchase cost of Rs.261354 from M/s Emkay Global Financial Services Ltd. and M/s HDFC Securities Ltd. The said shares were sold by assessee in the same year (A.Y. 2010-11) for sale consideration of Rs.2,14,390/- after payment of Securities Transaction Tax (STT). As all the shares were held the assessee for less than one year there has been short term capital loss of Rs.46,964/-.In the assessment order passed u/s 143(3), the ld. A.O. has treated the short term capital loss of Rs.46,964/- as well as the sale proceeds of Rs. 2, 14,390/- as accommodation entries. The A.O. has disallowed the losses (STCL) & added the entire amount of sale consideration to the assesses income by which my assessed income has increased

The bank interest amounting to Rs.9,799/- has not been shown in computation, same has been added to the total income by A.O

I have upheld that I have produced copies of bills issued by M/s Emkay Global Finance Services LTD & had also demonstrated the purchase and sale of shares over a period of time. In my opinion, the Assessing Officer has simply acted on the information received from the Investigation Wing without verifying the details furnished by the assessee The assessee has also produced best possible evidence to support its claim. Consequently the addition made by the Assessing Officer cannot be sustained. As per Hon ‘ble Jurisdictional High Court in the case cited as CIT Vs Vishal Holding and Capital Pvt. Ltd. vide order dated 9th August 2010

Nothing has been brought on record to show that the persons investigated, including entry operators or stock brokers, have named that the assessee was in collusion with them. In absence of such finding how is it possible to link their wrong doings with the assessee. In fact the investigation wing is a separate department which has not been assigned assessment work and has been delegated the work of only making investigation

The assessee is not having any intention to book bogus loss as the assesse itself is having various carry forward losses which is not yet been set-off till date, why would assessee be indulge in such transaction to create additional loss as it would be resulting in addition to previous carry forward losses which cannot be set off, As AO is claiming that assessee is dealing in such transaction to evade payment of taxes which is not correct as the assessee cannot evade payment of tax with STCL when he is having earlier carry forward loss, even if there would be any income or gain it would be first setoff against carry forward loss. The assessee is dealing with such brokers from years and their dealings is in around lakhs why would will be interested in creating loss of Rs 46,964/- against purchase and sale in lakhs, if the intention of the assessee was really to evade tax payment by booking bogus loss he would have done it resulting into lakhs and not the small amount of Rs. 46,964, The addition of sale proceeds amounting to Rs. 2,14,390 is not justifiable as it is one sided approach as the equity shares sold were purchased in the same year, only sale proceeds were added to the income & what about purchases. Ideally & currently only differences needs to be considered. When ITO had not rejected the purchase, he must not reject the sales. ITO was not able to prove receipt/payment in cash. No addition needs to be made on more imaginations. The whole transaction including purchase & sale of shares are routed through banking channels and have not been opened in the name of the dummy person

Observation of the court

After considering the submissions of the assessee, Ld.CIT(A) dismissed the appeal filed by the assessee with the following observations

I have gone through the submission of the assessee and perused the assessment order. As per the above facts, VAS Infrastructure Private Limited is a penny stock. A group of operators, intermediatories were active in this stock in the stock exchange to assist interested persons to convert their cash into short term capital gain/loss as per their requirement. There were an investigation by DIT(Inv.) Kolkata and Ahmedabad on the modus operandi of earning bogus gains/loss through penny stocks. The facts have come out that after the interested persons bought these shares, its prices were artificially moved up and down and when the desired price were reached an exit opportunity is provided to the shareholder to enable him earning of profit or incurring of loss. If such exit opportunity is not provided by the operator who were closely holding the share, the investor is stuck and he cannot sell the share as he will not get a buyer. In this particular case price of share increased from 45.80 in April 2010 to 123.05 in December 2010 i.e., within a short period of 8 months. This price rise has happened without there being any positive change in the business financials of the company. EPS of the share is negligible, and net worth is very low. Under such circumstances the increase in the share price could not be explained. Appellant has contended that she has purchased these shares through registered brokers therefore, the transactions cannot be doubted. I find that merely entering into transaction through registered brokers is not sufficient to establish the genuineness of the transaction. She has no knowledge of the activities of company whereas she is a regular dealer in shares. The assessee could not reply that for what motive she has purchased the shares which is a penny stock and which had no scope of rising. Appellant has contended that transactions were done through banking channel and registered share broker, I note that in order to prove the transaction as genuine, the form is important but just because form and formalities have been observed, the transaction does not per se become genuine. Appellant has not explained on what criteria she has picked up these shares for purchase. Whether its financials were good, whether there was some information that there would be some major break through in business of the company. Answers to all these questions are negative. Therefore, the loss cannot be held as genuine. Appeal is dismissed.”

Aggrieved assessee is in appeal before us raising following grounds in its appeal: –

Under the facts and circumstances of the case the CIT (A) has erred in confirming the addition made by the Assessing Officer amounting to 2,14,390/- as unexplained cash credit u/s 68 of Income Tax Act, 1961

Under the facts and circumstances of the case the CIT (A) has erred in confirming the disallowance made by the Assessing Officer of Short Term Capital Loss of Rs. 46,964/- on sale of shares of VAS Infrastructure Ltd

At the time of hearing, Ld. AR of the assessee submitted that assessee has purchased all the shares from the recognized stock exchange and also sold the same in the recognized stock exchange and through authorised broker. During the year, assessee has purchased and also sold the same within the same year and suffered a loss of ₹.46,964/- . He submitted that merely because the scrip is under scanner as penny stock and by merely relying on the report from investigation wing, the Assessing Officer has rejected the loss claimed by the assessee and also made the addition of sale proceeds as undisclosed income u/s. 68 of the Act without appreciating the fact in the case of the assessee. In this regard, he relied on the decision of the Coordinate Bench in the case of Rajiv Rameshchander v. Income Tax Officer in ITA.No. 1528/Mum/2020 dated 31.01.2023

On the other hand, Ld. DR relied on the orders of the lower

Considered the rival submissions and material placed on record, we observe that during the current Assessment Year assessee has purchased the scrip of M/s. VAS Infrastructure Limited and subsequently sold the same within the same year from the recognized stock exchange and also through authorised agent. It is also submitted that all these transactions were through banking channels only and in that process assessee has suffered loss of ₹.46,964/-. The Assessing Officer mechanically applied the informations received from investigation wing and proceeded to disallow the loss claimed by the assessee as well as proceeded to make the sale proceeds as undisclosed income. The similar issue was dealt with by the Coordinate Bench in the case of Rajiv Rameshchander v. Income Tax Officer (supra) and decided the issue in favour of the assessee, for the sake of clarity it is reproduced below

It was also brought to the notice of the AO that the assessee has purchased and sold the shares during the year under consideration and there is no Short Term Capital Gain(STCG)/Long Term Capital Gain (LTCG)/Short Term Capital loss claimed in the return. Thus, according to the assessee the transaction carried out by the assessee in regard to the share of M/s. SSTL are genuine and bonafide and therefore fully allowable. However, according to assessee, the AO/Ld. CIT(A) has not appreciated the facts in the right perspective and has disallowed the business loss of the assessee while trading in this scrip. It is found that Assessee is a trader in shares which fact has been discerned from the facts discussed (supra). Therefore, the shares traded are his stock-in-trade. And once assessee is found to be a trader, the loss incurred during business need to be allowed as business loss. And therefore the AO is directed to allow the business loss of Rs.41,64,684/-

Respectfully following the above said decision, we are inclined to delete the addition made by the Assessing Officer u/s. 68 of the Act and direct the Assessing Officer to allow the short term capital loss claimed by the assessee incurred during the year. Accordingly, appeal filed by the assessee is allowed

In the result, appeal filed by the assessee is allowed

Order pronounced in the open court on 05th April, 2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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Funds put in the account of the Assesee has already been taxed by his employer; there has been no addition to the Employee’s account

Fact and issue of the case

Brief facts as noted by the AO are that the assessee is an individual who has derived income from salary, and income from other sources. The AO notes that the assessee had filed return of income on 25.05.2011 declaring total income of Rs.2,85,630/- and the return was processed u/s 143(1) of the Act. Later, the assessment of the assessee was reopened on the basis of information received from the DDIT(Inv.), Mumbai from which it transpired (the adverse information verbatim has been reproduced for easy reference) “the assessee, was a manager in M/s. Kareem’s Hospitality Pvt. Ltd. and Mr. Kareem Dhanani was the Director of the same. Mr. Kareem Dhanani gave his brand “Kareem” on commission to different franchises and collected commission by way of cash and deposited the same into assessee, i.e. Mr Vikas Sharma’s Bank Account.” Based on the aforesaid information, the AO summoned the assessee (Vikas Sharma) and asked him to explain the source of cash deposits in his bank accounts and the evidence of the same. The AO notes that the assessee had attended the office and his statement was recorded u/s 131 of the Act on 30.03.2015 wherein he has admitted that the money in the three (3) bank accounts which were credited where that of the M/s. Kareem’s Hospitality Pvt. Ltd. The AO took note of the following cash deposits which were found to have been made in the accounts of the assessee are as under: –

Sr no.	Name of the bank and A/c. No.	Amount	F.Y.
1	ICICI Bank Saving A/c. No. 10901501136	Rs. 18,44,255/-	2009-10
2	The Saraswat Co-op Bank A/c. No. 197200100000301	Rs. 7,65,900/-	2009-10
3	The Saraswat Co-op Bank A/c. No. 197200100000355	Rs. 10,59,140/-	2009-10
4	Total	Rs. 36,69,295/-

According to the AO, even though he had issued notice u/s 133(6) of the Act to M/s. Kareem’s Hospitality Pvt. Ltd. asking information as to whether the aforementioned cash deposited in the assessee’s bank accounts was reflected in its income, the same elicited no reply. Therefore, the AO concluded that the assessee could not prove the “nature and source” of the cash deposited in his bank accounts. Therefore, he was pleased to make the addition of Rs.36,69,295/- u/s 68 of the Act dated 07.12.2016.

ITA. No. 49/Mum/2022 (for AY. 2011-12)

18. Brief facts is that the AO has framed re-assessment on 07.12.2016 by making an addition of Rs.2,89,850/- u/s 68 of the Act based on the fact that the assessee had bank deposit at HDFC Saving Account no. 04901930003090 of an amount of Rs.2,89,850/- which the assessee failed to explain, therefore, he made an addition of Rs.2,89,850/-.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who on similar reasons stated (supra) have sustained the addition. Aggrieved, the assessee is before us.

Observation of the court

We have heard both the parties and perused the records. In respect of this assessment year (AY. 2011-12), the Ld. AR drew our attention to the assessment order passed by the AO dated 22.12.2016 in the case of M/s. Kareem’s Hospitality Pvt. Ltd wherein the AO was pleased to add Rs.14,71,400/- which included Rs.2,89,850/- in HDFC Bank account no.04901930003090. The AO has also noted in that order that the director of assessee company Shri Kareem Dhanani had deposited the cash in the personal account of his manager Mr. Vikas Sharma maintained with HDFC and Saraswat Bank. And thereafter has made an addition of Rs.11,71,400/- which included the amount of Rs.2,89,850/- which was in the name of the assessee (Mr. Vikas Sharma) opened in HDFC Bank account no. 04901930003090. Thus, it was demonstrated before us that the addition of Rs.2,89,850/- which was made in the assessee’s hand, have been again taxed in the hands of M/s. Kareem’s Hospitality Pvt. Ltd. In such a scenario, we are inclined to set aside the impugned order of the Ld. CIT(A) remand the same back to the file of the AO with a direction to verify the facts narrated (supra) and if the cash deposited in assessee’s bank account in HDFC Bank to the tune of Rs.2,89,850/- has already been taxed in the hands of M/s. Kareem’s Hospitality Pvt. Ltd as observed by us (supra) then there is no necessity of make an addition in the hands of the assessee who was only a manager of M/s. Kareem’s Hospitality Pvt. Ltd. With this observation, this appeal of the assessee is also allowed for statistical purposes.

ITA. No.51/Mum/2022 (For AY. 2011-12)

This is an appeal preferred by the assessee against the penalty levied u/s 271(1)(c) of the Act by the AO which has been confirmed by the Ld. CIT(A) for AY.2011-12. Since we have set aside the quantum assessment back to the file of the AO, the penalty stands cancelled and the AO is at liberty to initiate the same after framing the assessment order in accordance to law.

In the result, all the appeals of the assessee are allowed for statistical purposes.

Order pronounced in the open court on this 26/07/2022.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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Vikas-Sharma-Vs-ITO-ITAT-Mumbai-1

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Section 68 is not authorised to add other creditors or provide growers advances

Fact and issue of the case

Brief fact of the case is that the assessee is a dealer of fresh fruits and commission agent besides under a cold storage plant. In the preceding year for A.Y. 2016-17, the sundry debtors amount of Rs.6,14,67,226/- was reflected in the books of account of the assessee which is finally reflected in the final accounts. The assessee had paid advanced to the farmer for purchasing of fresh fruit. For the impugned assessment year, the advance was returned back by the farmers after the declaration of demonetisation. The advance amount was returned back to the assessee. The assessee had deposited the cash in bank account in Jammu & Kashmir Bank, Branch Lassipora Pulwama, Kashmir and Azadpur, New Delhi Branch. The total amount was deposited in bank account toRs.6,45,50,000/- out of that in Pulwama Branch amount to Rs. 42,50,000/- & in New Delhi Branch amount to Rs. 6,03,00,000/-. As per the information from bankers Rs.32,50,000/- was demonetised currency (SBN) and rest amount was deposited on normal currency. Toconsider the demand of the parties, the cash was immediately received from the total 156farmers to maintain the business liaison. During the assessment, the details of transactions were submitted before the ld. AO. The notice u/s 133(6) was issued to 60 debtors. out of 60 notices, 16 notices were returned back undeliveredwith the remark that “incomplete address or no person received here”. Only denial of transaction from one party was happened during assessment. Perusal of assessment record the appellate authority confirmed that many of the confirmations from parties were received after assessment. All parties had confirmed the cash transaction. One of the debtors Mohd. Ahmed and Sons, Molu Chitragam, Sopian, was alleged returned an amount of Rs.5,03,336/- denied having made any such payment to assessee. But the assessee had made an objection that the verification was not proper and incomplete one. Later the confirmation from party was filed& reason was well explained. But both the authorities have not accepted the argument of assessee & confirmed the amount of Rs. 5,03,336/-. The total addition was made U/s 68 of the Act by the ld. AO amount of Rs.6,33,46,052/- &the tax was charged U/s 115BBE of the Act. Aggrieved assessee had challenged the assessment order before the ld. CIT(A). In order of appeal the amount of Rs.5,03,336/- was only confirmed by the ld. CIT(A). The rest amount of addition of Rs.6,28,42,716/- was deleted by the appellate authority. Being aggrieved, the assessee and the revenue both have filed appeal and cross appeal before the ITAT by challenging the order of the ld. CIT(A).

During hearing the ld. CIT DR had filed a written submission the relevant part of the written submission is extracted as below:-

“The fact of the case gives rise to following queries –

The demonetization was announced at 8.00 p.m. on 08.11.2016. It is unbelievable to accept as to how the news spread so fast so that the illiterate fruit growers got panic and came to the office from different places to return the advances taken by them within a period of 4 hours since all the amounts received from the debtors is shown to have received on 08.11.2016.

It is surprising to note how the debtors from various places in Kashmir could reach at the assessee’s office at Pulwama or the Bank Branch at Azadpur, New Delhi for depositing their advances taken from assessee.

There were 156 debtors who returned the advances taken form the assessee on 08.11.2016. There are only 10 deposit entries from 11.11.2016 to 30.11.2016. It is the moot question that as per the directions of the assessee, how 156 debtors can deposit the amounts in only 10 entries.

It is the question as to who collected the money and deposited the same in the bank account of the assessee since either the pay slips are unsigned or they are only initialled (not having complete signature) due to which depositor cannot be identified easily. (Refer – 24 of the assessment order)

When the amount was deposited in 10 instalments on various dates, then why the total amount of Rs.6,33,46,052/-was shown to have received on 08.11.2016 i.e. on single date.

How the assessee came to know that the total amount of Rs.6,33,46,052/- was received from all 156 debtors on 08.11.2016 when the amounts were deposited on various dates in 10 instalments on subsequent dates.

Amongst the debtors who returned their advances are (i) Mohd. Maqbul and Sons, Check Keeham, Chowgal, Kupwara who returned its outstanding amount of Rs.208.85 and (ii) Irshad Ahmed Lone, Chitragam, Awenura, Anantnag who returned his outstanding amount of Rs.779.20. It is the question as to why such persons will run here and there for such a miniscule amount and return the said amount on 08.11.2016 within 4 hours of the announcement of demonetization.”

Observation of the court

Income Tax Officer Vs. Atul Kumar Mittal, ITAT Delhi, ITA No. 885/Del/2012 Asstt. Year 2007-08:- When The debtor was considered genuine at the end of preceding year, the receipt from the said debtor during the year under consideration cannot be treated as bogus.

The observation of the Bench is extracted as follows: –

We have heard both the parties and carefully gone through the material available on record. In the present case it is noticed that a sum of Rs.4,55,990/-was outstanding in the name of M/s Pankaj International and the said amount was received by the assessee during the year under consideration. However, the AO was of the view that the account in the name of M/s Pankaj International belonged to Shri Pankaj Mittal in whose account, no such entry was appearing.

However, the AO did not bring any material on record to substantiate that the debtor M/s Pankaj International was not outstanding in the earlier year. On the contrary the claim of the assessee was that the amount was outstanding in the name of said party since 31.3.2005 and the amount was received during the year under consideration. In our opinion when the debtor was considered genuine at the end of the preceding year, the receipt from the said debtor during the year under consideration cannot be treated as bogus. We, therefore, are of the view that the ld. CIT(A) has rightly deleted the addition.

Racmann Springs (P) Ltd Vs. DCIT (1995) 55 ITD0159.TheITAT Delhi Bench has observed that realisation from Sundry Debtors cannot be treated as cash credits. The observation of the Bench is reproduced as below: –

The CIT (Appeals) proceeds on the basis that the impugned addition of Rs. 15,59,845 is made as the assessee was not able to prove the cash credits. This is evident from para 29 of his order. He speaks of identity and creditworthiness of the creditors. The Assessing Officer never held that the said amount represents unproved credits. The Assessing Officer only held that it represents “undisclosed sales of the assessee”. This shows the utter confusion in the mind of the CIT (Appeals) which led to the dismissal of the assessee’s appeal.

Besides the total of the amounts of drafts as per list-I reproduced in the assessment order dated 13-1-1992 comes only to Rs. 15,09,845. But the Assessing Officer had made an addition of Rs. 50,000 more by taking the figure to be added at Rs. 15,59,845. Neither the assessee’s counsel nor the Departmental Representative have noticed this. This shows the light attitude taken by the Assessing Officer.

In the above facts and circumstances of the case, we hold that the Assessing Officer is not at all justified in adding Rs. 15,59,845 towards undisclosed sales of the assessee and in applying section 68 of the Income-tax Act, 1961 to the same. We delete the sustained addition of Rs. 15,42,000.”

We consider the rival submission and perused the documents available in the record. In our factual matrix, the assessee has “Advance to Grower” in other sense Sundry Debtors which were carry forwarded from preceding years. There is no doubt, that the assessee has a sundry debtor in sufficient amount to liquidate the amount for depositing in the bank. Only, the question is the mode of receiving of cash by the assessee and deposited it in Kashmir and in Delhi. In argument, the ld. CIT DR only pointed out the mode of receiving of cash or returned of cash by the Growers during demonetisation. The ld.CIT(A) had clearly verified that the amount was duly deposited by the farmers and most of the Growers are verified and accepted the facts.

The ld. Counsel has relied on catena of judgments. In summary the assessee has enough amount to advance to party/ grower. In preceding assessment year there, the assessee was maintain more than 6 crore in “Advance to Grower” account. The full amount was disclosed in books and assessed U/s 143(3). In the impugned assessment year, the verification was initiated& the part response was in favour of assessee. Pending verifications were accepted by the appellate authority. But total addition was made U/s 68 of the Act by the ld. AO.

We relied on the order of ITAT Delhi bench that Sundry Debtor cannot be added back U/s 68 as it is not creditor. The assessing authority has doubt on transaction of assessee with the party. The Hon’able Apex court, supra in observation that assessment cannot be done on suspicion. The ld. CIT-DR was not able to submit any contrary judgment against the submission of assessee. In the submission of CIT-DR reiterated by demurring onthe mode of transaction of assessee with parties to whom the advance was given. This can not be negated only on basis of suspicion.

In our considered view, that there is no infirmity in the order of the ld. CIT(A). So, we are not interfering in the order of ld. CIT(A) related allowing of assessee’s appeal amount to Rs.6,33,46,052/-. We respectfully relied on the order of Apex Court, supra. Section 68 is not empowered to allow addition of sundry debtors/ advance to growers. The ld. CIT(A) without any cross verification had disallowed the amount of Rs.5,03,336/-. The rest amount was accepted which was also not verified& Section 68 is not proper for entertaining the addition. So, we find that the disallowance of Rs.5,03,336/- is erroneous and liable to be dismissed.

In the result, the appeal of the revenue bearing ITA No. 150/Asr/2021 is dismissed and the appeal of the assessee bearing ITA No. 94/Asr/2021 is allowed.

Order pronounced in the open court on 31.01.2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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ACIT-Vs-HN-Agri-Serve-P.-Ltd-ITAT-Amritsar-1

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The identity and creditworthiness of share subscribing corporations proven to make addition u/s 68 untenable

Fact and issue of the case

Brief facts of the case are that assessee filed its return on 28.09.2012, reporting total income at Rs.2,06,404/-. Case was selected for scrutiny through CASS for which statutory notices were issued and served on the assessee. In the assessment proceeding, Ld. AO noted that assessee had introduced Rs.230 lacs in the form of share capital including share premium for which it has issued 4,60,000 shares at a face value of Rs.10/- each with a premium of Rs.40/- each to eighteen different share subscribing companies. Ld. AO in the course of assessment proceedings directed the assessee to produce the director of the assessee and also the directors of the allottee companies along with relevant documentary evidence and details. By applying the test of human probability, ld. AO made an addition of Rs.230 lacs u/s. 68 of the Act. Aggrieved, assessee went in appeal before the Ld. CIT(A) who confirmed this addition made by the Ld. AO. Aggrieved, assessee is now in appeal before the Tribunal.

Shri Anil Kochar, Advocate represented the assessee and Smt. Ranu Biswas, Addl. CIT represented the revenue.

It was also submitted that audited Balance Sheet of each of the share applicant companies reflected the amount of investment made by them in the assessee as against their respective net worth. He thus, contended that Ld. AO has made the addition with a predetermined mind set. Further, according to him, they are all registered companies under the Companies Act and are active companies on the MCA portal.

Observation of the court

From the perusal of the paper book and the documents placed therein, it is vivid that all the share applicants are (i) income tax assessees, (ii) they are filing their income tax returns, (iii) share application form and allotment letter is available on record, (iv) share application money was made by account payee cheques, (v) details of the bank accounts belonging to share applicants and their bank statements, (vi) in none of the transactions there are any deposit of cash before issuing cheques to the assessee, (vii) all the share applicants are having substantial creditworthiness represented by their capital and reserves.

Considering the facts and circumstances of the case and the material placed on record, we find that assessee has discharged its onus to prove the identity and creditworthiness of the share subscribing companies and the genuineness of the transactions towards sum of Rs.121.50 lacs received during the impugned year. Accordingly, considering these facts and in the light of the judicial precedence referred above, we set aside the order of the ld. CIT(A) and direct the ld. AO to delete the addition made towards share capital and share premium u/s. 68 of the Act. Accordingly, grounds taken by the assessee in this respect are allowed.

In the result, appeal of the assessee is allowed. Order pronounced in the open court on 13 January, 2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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Manju-Credit-Pvt.-Ltd.

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February, 23
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Income Tax, Income Tax Circular Notification
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ITAT deletes addition for share premium as Assessee established identity, genuineness & creditworthiness of investor

According to Section 56(1) of the Income Tax Act, 1962, income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the other heads.

According to Section 56(viib) of the Income Tax Act, 1962, where a company, not being a company in which the public are substantially interested, receives in any previous year, from any resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to the head “Income from other sources”

However, this clause shall not apply where the consideration for issue of shares is received—

by a venture capital undertaking from a venture capital company or a venture capital fund; or
by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Let us refer to the case of ITO Vs M/s Heckyl Technologies Pvt.Ltd. (ITAT Mumbai) where shares were issued at premium were taxed as income from other sources under section 56(1) by the AO.

Alternate Issue raised was whether such income can be considered as disallowed under Section 68 which pertains to unexplained cash credits? According to Section 68 of the Income Tax Act,where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless:-

the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory

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Facts of the Case

The assessee was engaged in the business of brokerage’ financial institutions and fund managers etc.
The assessee filed return of income declaring a loss. The case of the assessee was selected for scrutiny and show cause notice was duly served upon the assessee.
During the course of assessment proceedings the AO observed that the assesee had issued shares at a premium and accordingly the assessee was asked to clarify the share premium received.
The assessee replied by filing various explanation from time to time. A reference was made to the United Kingdom tax authorities from where the major funds were received in books of Seed Fund 2 International Mauritius (SFM)

The AO noted that the shareholders of Mauritius based company had contributed the capital as equity funds and out of that; partial funds were transferred from Seed Fund 2 International to the assessee company.
The assessee company in turn had allotted the Redeemable Preference Share as Compulsorily Convertible Preference Share (CCPS) of face value Rs. 10 each.
Upon allotment of shares’ the share premium was immediately transferred to Reserve and surplus.

Contention of Assessing Officer (AO)

The AO was not satisfied with the genuineness of the transactions and was of the view that such types of private equities share premiums were nothing but the profits in the hands of the company and liable to be taxed as income from other sources under section 56(1).
Accordingly’ the same was added u/s 56(1) as income from other sources.
AO also recorded that the said sum may be added u/s 68 as assessee had failed to prove the genuineness and creditworthiness of the investors.
The share premium credited through reserve and surplus account was added as unexplained cash credit u/s 68.
Aggrieved with the order of the AO, assessee filed an appeal before the Commissioner of Income Tax (Appeals)

Observations of CIT(A) on references made by AO

The AO had mentioned in his order that he had made two references to the tax authorities in Mauritius and the UK.
These references were made under section 90 (pertains to Agreement with foreign countries or specified territories under Double Taxation Relief) and had been accordingly made through the Competent Authority.
However, there was no mention of either the details of the exact reference made to either country or the receipt of any information or the results of the Investigation of the AO subsequent to the obtaining of the said information.
It was clear from the order under appeal that the appellant had not been challenged with any information obtained under section 90.
In these circumstances, CIT(A) found merit in the argument of the assessee that nothing had been found against the appellant as a result of the exercise of the powers available to the AO under section 90 of the Act.

Observations of CIT(A) on contention of AO that the allotment was done before the date the funds were received and before the date of allotment as given to the RBI

It was not clear as to how the AO reached this conclusion, as there was no material available to substantiate this finding.
Even if it was true, there was no scope for contemplating an addition either under section 56 or under section 68 on the basis of such discrepancies.
The AO has himself mentioned in his order that the reason for distorting the date of allotment given to the RBI was to escape the penal provisions of FEMA.
However alleged fudging of dates would not be of any effect under the Income Tax Act.

Observations of CIT(A) on contention of AO that the receipt by the appellant was from entities which were neither venture capital companies nor venture capital funds

AO’s argument was that SFM was neither a venture capital company nor a venture capital fund in terms of section 10(23FB) of the Act.
According to section 56(2)(viib), any consideration for issue of shares exceeding the face value of such shares has to be charged to tax, unless the consideration has been received from a venture capital company or a venture capital fund.
The said provision of section 56(2)(viib) had been inserted by the Finance Act 2012 with effect from 1st April 2013.
As such, it would be / applicable only from AY 2013-14 onwards, while the AY under consideration was AY 2012-13.
According to CIT(A), the AO had no basis for invoking the provisions of section 56(2)(viib) of the Act.

Observations of CIT(A) on the fact that the AO had invoked the provisions of section 68

AO had given the details furnished by the appellant viz. copy of account of the investor-company along with its name and addresses.
However, according to the AO, the genuineness and creditworthiness of the investor had not been addressed. In this context, CIT(A) referred the documentation filed by the appellant.
Assessee had filed a copy of the PAN card of SFM along with a copy of the first page of its relevant return of income.
It had also filed audited financial statements of SFM. As per the Statement of Financial Position (roughly equated with the balance sheet), while the total assets of SFM were US$ 17.93 million, its total liabilities were only US$ 0.012 million, placing its net asset base at US$ 17.92 million.
At an exchange rate of Rs. 67 per USD, this would amount to net assets of over Rs 120 crores.
The investment of the said Fund in the appellant-company of Rs. 2.49 crores was a little over 2% of its net assets.
The appellant has also furnished copies of the Certificate of Incorporation issued by the Registrar of Companies of Mauritius, the Business License issued by the Financial Services Commission of Mauritius and the Tax Residency Certificate issued by the Mauritius Revenue Authority, the last document having been submitted for two Mauritian financial years.

The appellant also submitted its documentation filed with the RBI (form FCGPR). It also filed a copy of the acknowledgment of the said FC-GPR.
It then filed a copy of the bank account of SFM highlighting the deposit of monies which were eventually transferred to the appellant.
It also filed a copy of its bank account maintained with State Bank of India to demonstrate the inflow of funds from Mauritius.
After careful consideration of all these documents, CIT(A) was of the opinion that appellant had more than satisfactorily acquitted itself when it comes to establishing all the three crucial components required to be validated under section 68 of the Act viz identity, genuineness and creditworthiness of the investor.

Reference to older cases by CIT(A)

The Supreme Court also had occasion to go into the legality of this matter in the case of CIT v. Allahabad Bank Ltd. It was held that the share premium account had to be included in the paid-up capital account, thus leading to it being treated on a par with the paid-up capital.
In the case of CIT v. Standard Vacuum Oil Co, it was held that premium realized on issue of shares was not in the nature of a revenue receipt and is hence not chargeable to tax.
The Bombay High Court too had occasion to go into this matter in its decision rendered in the case of Vodafone India Services (P) Ltd. It had held that the amounts received on issue of share capital including the premium – are undoubtedly on the capital account.

Thus, the Revenue was stopped from charging the said premium to tax in the absence of any explicit legislative sanction. The appellant-company was far from being a non company or a zero balance one. It was in possession of assets far in excess of the premium charged even on the day of the charge of such premium. In these circumstances, there would be all the more reason for not charging to tax the share premium collected by the appellant.

Therefore in the appellate proceedings the CIT(A) allowed the appeal of the assessee. Aggrieved with the order of the CIT(A), Revenue appealed before Income Tax Appellate Tribunal (ITAT)

Proceedings of ITAT

The assessee had entered into a share purchase agreement with Seed fund 2′ International and Seed fund 2 ‘India for purchases of shares.
The Appellant Company submitted that in light of the background of Seed fund 2′ International’ Mauritius’ the funds in form of share capital received by the appellant company from Seed fund2 International’ Mauritius stood fully explained.
Further the above investment done by the investor was being reflected in their audited accounts.
In fact the investment made by SeedFund2 International in the appellant company was a Scheme floated by the Indian Seed Investment Trust which was a Trust based in India and also registered with SEBI as Venture Capital Fund.

The Certificate of approval by SEBI was submitted to the AO. As stated by the assessee SEEDFUND2 India has filed its Return of Income for A.Y. 2012-13. The Return of Income, copy of computation and acknowledgement of Returns filed were submitted by the appellant company.
The investments in the appellant company were being reflected in the audited balance submitted to the AO during the course of hearing.
Seed Fund 2 India Ltd was registered under SEBI as Venture Capital Fund Category.
The CIT(A) had passed a very reasoned and speaking order justifying the deletion of additions by dealing with all the issues as raised by the revenue
ITAT did not find any defect legal or otherwise in the order of the CIT(A) and hence the conclusion drawn by the CIT(A) was affirmed
The appeal of the Revenue was dismissed by ITAT.

As the explanation provided by the assessee proving the identity, genuineness & creditworthiness of investor was found to be satisfactory to the CIT(A) and ITAT share premium was not added to the income of the assessee under Section 68 and 56.

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September, 10
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Income Tax, Income Tax Circular Notification
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section 68

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Fact and issue of the case

Observation of the court

Conclusion

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Observation of the court

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Transaction between a holding company and a totally owned subsidiary is exempt from Section 56(2)(viib)

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The part under which the AO added during the evaluation cannot be changed by CIT(A)

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It is unjustified to disallow a short-term capital loss based solely on information from the investigative wing

Fact and issue of the case

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Funds put in the account of the Assesee has already been taxed by his employer; there has been no addition to the Employee’s account

Fact and issue of the case

Observation of the court

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Section 68 is not authorised to add other creditors or provide growers advances

Fact and issue of the case

Observation of the court

Conclusion

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The identity and creditworthiness of share subscribing corporations proven to make addition u/s 68 untenable

Fact and issue of the case

Observation of the court

Conclusion

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ITAT deletes addition for share premium as Assessee established identity, genuineness & creditworthiness of investor

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Facts of the Case

Contention of Assessing Officer (AO)

Observations of CIT(A) on references made by AO

Observations of CIT(A) on contention of AO that the allotment was done before the date the funds were received and before the date of allotment as given to the RBI

Observations of CIT(A) on contention of AO that the receipt by the appellant was from entities which were neither venture capital companies nor venture capital funds

Observations of CIT(A) on the fact that the AO had invoked the provisions of section 68

Reference to older cases by CIT(A)

Proceedings of ITAT

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