M/S VIRTUOSO NETSOFT PVT. LTD.,CHANDIGARH vs. DCIT, C-1(1), CHANDIGARH

आदेश/Order

PER N.K. SAINI, VICE PRESIDENT:

2. Following grounds have been raised in this appeal:

1. The impugned order is both against facts and erroneous in law.

2. On the facts and circumstances of the case the Ld. CIT(Appeals) has erred in having confirmed the order of the Ld.AO in making the addition of Rs. 12,20,510/- treating the same as income u/s 68 of the Income Tax Act which has been further enhanced to Rs. 14,50,000/-. 3. The Ld.CIT(Appeals) has gravely erred in having enhanced the addition to Rs. 14,50,000/- without giving any show cause notice against such enhancement, to the assessee 4. On the facts and circumstances of the case the Ld. CIT(Appeals) has erred in having held that dissolved firm cannot extend loan to the appellant. 5. On the facts and circumstances of the case the Ld. CIT(Appeals) has erred in having held that explanation of source is immaterial in the present case.

From the aforesaid grounds it would be clear that the only grievance of the assessee relates to the sustenance of addition of Rs. 14,50,000/- under section 68 of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).

4. Being aggrieved the assessee carried the matter to the Ld.CIT(A) and furnished the additional evidences under Rule 46A of the Income Tax Rules 1962. The said evidences were forwarded by the Ld. CIT(A) to the A.O. for his remand report. In response the A.O., submitted as under:

In this regard as per AOs report it is submitted that the assessee during the assessment proceedings was given ample time to explain the identity of source and genuineness and creditworthiness of the transaction. However, the assessee failed to discharge its onus. Now, the assessee along with the submission of documents before the Ld. CIT(A) has submitted that these documents could not be filed during the assessment proceedings as these were not traceable as the firm was dissolved in January, 2011. The assessee itself is accepting that the firm had been dissolved hence a dissolved entity could not advance money to anyone and the identity of source itself and genuinty of the transactions is under doubt in these circumstances. Further, the assets and liabilities of the dissolved firm had become a part of the assessee company by virtue of the dissolution, the submission of the assessee is nothing but an afterthought hence the submission of the assessee should not be accepted and reliance of the assessee on the documents submitted should not be permitted.

3. In this regard, it is submitted that as per the deed of dissolution dated 20-Jan- 2011, copy of which was submitted by the assessee M/s virtuoso Netsoft (P) Ltd, during the course of assessment proceedings, the partnership firm so far carried on under the name and style of M/s Vastech Solutions was dissolved with effect from 20.01.2011 (copy enclosed) and the partnership firm had been upgraded to new company M/s Virtuoso Netwoft (P) Ltd.

'2. You have produced dissolution deed of M/s Vastech Solutions as per which the firm was dissolved on 20.01.2011. However, you are showing loan from M/s Vastech Solutions standing as on 31.03.2012 amounting to Rs.25,31,765/- and received during the year Rs. 12,20,510/-. Explain from where this fresh amount of Rs.12,20,510/-received. Give details of the source. Also explain, in the event of no source why not this amount be treated as your income u/s 68 as credits?'

7. The assessee was given ample time to explain the identity of source and genuineness and creditworthiness of the transaction. However, the assessee failed to discharge its onus. Now the assessee along with the submission of documents before the Ld. CIT(A) vide letter dated 18.02.2019 has submitted that these documents could not be filed during the assessment proceedings as these were not traceable as the firm was dissolved in January, 2011. The assessee itself is accepting that the firm had been dissolved hence a dissolved entity could not advance money to anyone and the identity of the source itself and genuinenity of the transactions is under doubt in these circumstances. Further, the assets and liabilities of the dissolved firm had become a part of the assessee company by virtue of the dissolution, the submission of the assessee is nothing but an afterthought hence the submission of the assessee should not be accepted and reliance of the assessee on the documents submitted should not be permitted."

4.1 The Ld. CIT(A) provided the copy of the remand report to the assessee and in the rejoinder the assessee submitted as under:

"Sir, For the sake of convenience I beg to make the following written submissions which may kindly be considered while disposing of the appeal noted in the subject.

2. The only issued involved in the present appeal is regarding addition of Rs. 12,20,510/- made u/s 68 by the Ld. AO. On perusal of balance sheet of assessee company, the Ld. AO found that the assessee company received an amount of Rs. 40,93,524/- as loan from M/s Vastech Solutions. It was submitted during the assessment proceedings that M/s Vastech Solutions was a partnership firm consisting of two partners namely Sh. Nitendra Tewari and Smt. Asha Phagna. The said firm M/s Vastech Solutions was dissolved on 20.01.2011. A copy of Dissolution Deed was filed during assessment proceedings (copy attached at pages 1-2). The assessee company namely M/s virtuoso Netsoft Pvt. Ltd. came into existence on 21.10.2011 with its promoter directors, Shri Nitendra Tewari and Smt. Asha Phagna. As regards the source of loan given by M/s Vastech Solutions to assessee company, a confirmation was submitted to the,Ld. AO during the course of assessment proceedings, signed by Shri Nitendra Tewari as partner on behalf of M/s Vastech Solutions wherein details of loan with dates and amount, was given (certified copy of confirmation attached at page 3). It is respectfully submitted that it was on account of recovery from sundry debtors in the hands of M/s Vastech Solutions as reflected in balance sheet as on 31.03.2012 (pg 4, 8 of additional evidence) relating to M/s Vastech Solutions and further receipts received by M/s Vastech Solutions during the financial year 2012-13. A copy of ledger account of M/s Vastech Solutions in the books of assessee company during the previous year, is attached herewith at page 1 of additional evidence. It is evident from this account that aggregate payments of Rs.20,50,000/- were received from the said firm through Bank on different dates which are credited in Axis Bank pertaining to assessee. Further kind attention is invited to Bank statement of M/s Vastech Solutions relating to previous year (pages 2-3 of additional evidence) in which payments made to assessee company (Virtuoso Netsoft) are reflected in column 'withdrawal amt'. On combined perusal of copy of ledger account of M/s Vastech Solutions and Bank statement of M/s Vastech Solutions, it is clear that all credit entries in the ledger account of M/s Vastech Solutions in the books of assessee company, are directly linked with debit entries (withdrawal side) in the bank statement of M/s Vastech Sollutions. Now coming to source of credit entries in bank statement of M/s Vastech Solutions, it is respectfully submitted that as per balance sheet of M/s Vastech Solutions, an aggregate amount of Rs. 15,94,258/- was recoverable as on 31.03.2012 from two parties i.e. M/s Cain Technology and M/s Triotech Solutions (pages 4 and 8 of additional evidence). It is evident from the narration of credit entries (deposit side) of bank statement of M/s Vastech Solutions (pages 2-3 of additional evidence), that there was opening balance of Rs.5,47,719/- and further deposits were on account of bank transfers from the above said two parties shown in the balance sheet as sundry debtors of M/s Vastech Solutions. Therefore, source of the amount in the hand of M/s Vastech Solutions stood fully explained. The identity of M/s Vastech Solutions is not doubt as it was a regular assessee till A.Y. 2013-14 and genuineness of transactions also stood fully explained as the funds have been received through banking channels which is evident from the .evidence submitted during the course of assessment proceedings as well as additional evidence submitted during the appellate proceedings. As regards capacity of M/s Vastech Solutions, that cannot be doubted in view of substantial income shown in ITRs by creditor. Copies of ITRs relating to Vastech Solutions alongwith Computation Chart of total income for the A. Y. 2012-12 attached at pages 4-7 and ITR forAsstt. year 2013-14 attached at page 8. Thus the assessee has discharged the onus placed upon it u/s 68 of the Income Tax Act. The Ld. AO made the addition of Rs. 12,20,510/- without considering the facts correctly.

3. As for comments of AO in Remand Report, that M/s Vastech Solutions was dissolved and that it could not have advanced money to the assessee company, it is respectfully submitted that M/s Vastech Solutions has been a regular assessee till A.Y. 2013-14 (pages 4-8) showing receipts from customers till the contracts lasted with some parties. On the other hand the assessee company started its business effectively during the previous year relating to the asstt. year 2013-14 by way of new contracts with parties. Copies of ITRs of assessee company for the A.Ys. 2012-13 and 2013-14 respectively, are attached at pages 9-11. It is respectfully submitted that partnership firm and a private limited company are two different and independent persons under the law. A partnership firm can run its business by mutual understanding of the parties. It cannot be said that assets and liabilities of dissolved firm had become part of assessee company by virtue of Dissolution Deed. A company is created and formed under the Companies Act and capital is generated by issuing shares to the shareholders. It is further submitted that the firm was duty bound to complete the ongoing contracts which lasted till asstt. year 2013-14. It is evident from ITR, computation of income and balance sheet for year ended on 31.03.2012 that the receipts were shown by the firm M/s Vastech Solutions which were made by two parties namely M/s Cains Technologies India Pvt. Ltd and M/s Trio Tech Solutions Pvt. Ltd after TPs. The Ld. AO has not considered the facts correctly which are on record. Further, it is submitted that the Ld. AO has not given any specific comments on the documents attached with application for additional evidence which are self explanatory and have direct link to decide the point at issue. It is, therefore, prayed that the additional evidence may kindly be admitted and adjudicated upon.

4. It is prayed that addition of Rs. 12,20,510/- made by the Ld. AO u/s 68 of the Income Tax Act, may kindly be deleted keeping in view the above submissions."

4.2 The Ld. CIT(A) after considering the remand report of the A.O. and the rejoinder to the remand report by the assessee admitted the additional evidence under Rule 46A of Income Tax Rules 1962 by observing in para 5.2.4 to 5.2.7 of the impugned order as under:

5.2.4. In the decision rendered in the case of Smt. Prabhavati S. Shah vs. CIT reported at 231 ITR 1, the Hon'ble Bombay High Court, categorically pointed out that with the avowed object of ensuring that evidence is primarily led before the Assessing Officer, Rule 46A(1) puts fetters on the right of the appellant to produce before the Commissioner of Income-tax (Appeals) any additional evidence, not previously raised before the Assessing Officer. Putting fetters on the right of appellant in the matter of producing additional evidence before the Commissioner of Income-tax (Appeals), clarified the Court, does not mean affecting in anyway the powers of the first appellate authority conferred by sub- rule (4) and section 250 of the Act. The Court held as under: "3 ........ On a plain reading of rule 46A, it is clear that this rule is intended to put fetters on the right of the appellant to produce before the AAC any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the ITO except in the circumstances set out therein. It does not deal with the powers of the AAC to make further enquiry or to direct the ITO to make further enquiry and to report the result of the same to him. This position has been made clear by sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the AAC to call for the production of any document or the examination of any witness to enable him to dispose of the appeal. Under sub-section (4) of section 250, the AAC is empowered to make such further inquiry as he thinks fit or to direct the ITO to make further inquiry and to report the result of the same to him. Sub-section (5) of section 250 empowers the AAC to allow the appellant, at the hearing of the appeal, to go into any ground of appeal not specified in grounds of appeal, on his being satisfied that the omission of the ground from the form of appeal was not willful. It is clear from the above provisions that the powers of the AAC are much wider than the powers of an ordinary court of appeal. The scope of his powers is coterminous with that of the ITO. He can do what the ITO can do. He can also direct the ITO to do what he failed to do. The power conferred on the AAC under sub-section (4) of section 250 being quasi-judicial power, it is incumbent on him to exercise the same if the facts and circumstances justify. If the AAC fails to exercise his discretion judicially and arbitrarily refuses to make enquiry in a case where the facts and circumstances so demand, his action would be open for correction by a higher authority.

4. On a conjoint reading of section 250 and rule 46A, it is clear that the restrictions placed on the appellant to produce evidence do not affect the powers of the AAC under sub-section (4) of section 250. The purpose of rule 46A appears to be to ensure that evidence is primarily led before the ITO.

5. We are supported in our above conclusion by the decision of the Orissa High Court in B.L. Choudhury v. CIT [1976] 105ITR 371 in which it was held:

Wide provision has, thus, been made conferring jurisdiction on the first appellate authority to make such inquiry as he deems fit. The provision seems to have been based on the fact that before the Appellate Assistant Commissioner there is generally no opposite party. The appellate authority himself is the departmental authority representing the revenue. Therefore, he has been invested with the power of making further inquiry. He does not exceed his jurisdiction if he asks or allows the assessee to produce or file additional papers or additional evidence in the matter he thinks fit. . . .

It was further held that— ". . . In fact, receiving new material by the Appellate Assistant Commissioner cannot be equated with receipt of additional evidence as contemplated in Order 41, rule 27 of the Code of Civil Procedure or even at the stage of second appeal by the Tribunal. . . ."(p. 376)"

Thus, a conjoint reading of section 250(4) and, (5) of the Act and rule 46A(1) and (4) of the Rules clarifies that restriction is only imposed on the appellant's right to produce additional evidence before the Commissioner of Income-tax (Appeals).

5.2.5. In the decision rendered in the case of K. Ravindranathan Nair reported at 184 CTR (Ker) 46, the Kerala High Court took cognizance of the decision in the case of Prabhavati S. Shah and further specified that "if the provisions of r. 46A sub-rule (1) thereof is held to be mandatory, that will go against the provisions of section 250 of the Act conferring power on the first appellate authority to enquire into the matter and pass appropriate orders. In other words, rule 46A without sub-rule (4) will be open to challenge as ultra vires section 250 of the Act".

5.2.6. Thus, a reading of the exposition of law relating to the power of the Commissioner of Income-tax (Appeals) to admit additional evidence, as made by the Bombay High Court and relied on by the Kerala High Court (discussed above) reveals that even if repeated opportunities were given to the appellant to produce evidence and even if the appellant does not suo motu produce any evidence, in the spirit of justice and fair-play, it is incumbent on the first appellate authority, being a quasi-judicial authority, to require the appellant to produce requisite evidence or to make necessary inquiry and admit any such fresh and additional evidence, of course, by virtue of section 250(4) and (5) read with sub- rule (4) of rule 46A. ' 5.2.7. In the present case, the details submitted by the appellant are crucial to the adjudication of the grounds raised in appeal inasmuch confirmation and bank accounts statements submitted by the appellant will help to adjudicate the matter in judicious way. The major addition on the appellant's case having been made on account of non submission of evidence to prove creditworthiness and genuineness of unsecured loan. In view of these facts, after considering the principles laid down by the Bombay High Court in the case of Smt. Prabhavati S. Shah (cited supra), the additional evidence submitted by the appellant is admitted with reference to the addition on account of unsecured loans. Hence, as the appellant was prevented by sufficient cause in not producing these documents before the Assessing Officer and these were relevant to the ground of appeal, these documents are admitted under Rule 46A.

4.3 The Ld. CIT(A) further observed that as per the bank statement submitted as additional evidence the amount extended to the assessee by M/s Vastech Solutions was Rs. 14,50,000/- the relevant observations are given in para 5.3.1 to 5.3.2 which read as under:

5.3.1. Section 39 of the Indian Partnership Act 1932 states that the dissolution of partnership firm leads to cease of the existence of the organization. After this, the partnership firm cannot enter into any transaction with anybody. It can only sell the assets to realize the amount, pay the liabilities of the firm and discharge the claims of the partners. Now if we see the accounting treatment on dissolution, the books of the firm are to be closed. Dissolution process starts by opening the following accounts in the firm's books: Realisation Account, Partner's Loan Account, Partners' Capital Accounts, Bank or Cash Account. The object of preparing of Realisation Account is to close the books of accounts of the dissolved firm and to determine profit or loss on the Realisation of assets and payment of liabilities. It is prepared by transferring all the assets except Cash or Bank Account to the debit side of the account. Transferring all the liabilities except Partner's Loan Account and Partners' Capital Accounts to the credit side of the account. Crediting the Receipt on the sale of assets to the account. Debiting the payment of Liabilities to the account. Debiting the dissolution expenses of the firm. The balance in the account may be either profit or loss. Then the balance is transferred to the Capital Accounts of the Partners in their profit- sharing ratio.

5.3.2. It is in these facts and circumstances, AO has rightly held that a dissolved firm cannot extend loan to the appellant. Here explanation of source is immaterial. Hence, addition to the correct amount of Rs.14,50,000/- [instead of Rs. 12,20,510/-] is confirmed. The Ground of Appeal is No.2 is dismissed.

5. Now the assessee is in appeal.

6. The Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that only business activity of the partnership firm M/s Vastech Solution were seized however the said firm was regularly filing the return of income and maintaining the books of account, therefore the identity of the firm and the capacity to advance the loan to the assessee company was verifiable from the record as the said firm was maintaining the books of account, the reference was made to page no. 1 to 3 of the assessee’s compilation which are the copies of the ledger account of M/s Vastech Solution in the assessee’s books of account and the bank statement of the said firm. It was also submitted that the assessee proved the identity as well as credit worthiness of the creditor and genuineness of the transaction, therefore the addition made by the A.O. and sustained by the Ld. CIT(A) under section 68 of the Act was not justified.

The said firm also confirmed the loan given to the assessee to the A.O. copy of the said confirmation is placed at page no. 19 of the assessee’s compilation. We therefore considering the peculiar facts of the present case, are of the view that the addition made by the A.O. and enhanced by the Ld. CIT(A) was not justified, accordingly the same is deleted.

In the result, appeal of the assessee is allowed. 9.

(Order pronounced in the open Court on 02/03/2021)