SRI MUNIRAJU KEMPANNA ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(4), BANGALORE

Facts of the case are that there was a search action in the case of assessee on 9.10.2014 u/s 132 of the Act. Consequent to this search action, notice u/s 153A of the Act was issued to the assessee

Decisions relied by Ld.AR is not in the context of applicability of Explanation 2. Explanation 2 was inserted by the Finance Act, 2015, w.e.f 01/06/2015. Explanation 2 sets out, what orders passed by Assessing Officer constitute orders, which are erroneous, in so far as they are prejudicial to the interest of Revenue. We have perused Explanatory notes to Memorandum of Objects to the Finance Bill, 2015, reported in (2015) 371 ITR 233 (St). It has been mentioned that, issue of what constitutes assessment orders, “erroneous and prejudicial to the revenue”, is a contentious one and Explanation 2 was introduced to clarify, what constitutes an erroneous order that is prejudicial to the revenue.

On the contrary, Ld.Standing Counsel for revenue submitted that all these decisions relied upon by Ld.AR are in context of 153A/153C proceedings, wherein additions were made by assessing officer in a concluded assessment without there being seized materials to support. He submitted that, ratio laid down by Hon’ble High Court and various coordinate benches of this Tribunal in above referred decisions does not have any bearing on the facts of present case. Ld.Standing Counsel submitted that reliance is placed by Ld.AR on CIT vs Lancy construction (supra) passed by Hon’ble Karnataka High Court. He further submitted that, Hon’ble Karnataka High Court in (GMR Energy Ltd.,) in of 2018 by order dated 08/01/2019 held that, view taken by coordinate bench of Karnataka High Court in Lancy construction (supra) is without considering decision in case of Canara Housing Development Company reported in 62 taxmann.com 650.

On perusal of decisions relied, we note that, facts are not similar to that of assessee. Most of these decisions( at sl.no. (a) to (i) refers to proceedings under section 153A of the Act, where there was no seized material based on which, certain additions were made in an unabated assessment. These decisions do not consider situation of no enquiry by Ld.AO on any issue.

In case of M/s Rajeesh exports Ltd vs principals CIT (supra), relied by Ld.AR, in identical situation this Tribunal placed reliance on decision of Hon’ble Karnataka High Court in case of CIT vs Lancy constructions reported in 237 taxman 728. Ld.Standing Counsel for revenue brought to our notice that decision of Hon’ble Karnataka High Court in case of CIT vs Lancy Constructions (supra) is no longer held to be a good law by subsequent bench of Hon’ble Karnataka High Court in case of CIT vs GMR Energy Ltd. (Supra). Be that as it may, we note that, even in case of Rajeesh exports Ltd vs Ld.Pr.CIT(supra) there is a categorical observation by this Tribunal that, Ld. AO in original assessment prior to search had adjudicated this issue. In the present facts of the case Ld.AR has not brought anything on record to establish any verification/enquiries by Ld.AO on the issue of huge cash payments for years under consideration, either in sec. 143(3) r.w.s 153A proceedings or original assessment order passed by Ld.AO u/s143(3) of the Act.

In the present facts of the case, provisions of 263 are invoked by Ld.Pr.CIT alleging that, no enquiry/verification was conducted by Ld.AO, in respect of expenditure incurred in cash and applicability of provisions of section 40A(3), is discernible from assessment records.

Further in case of H. Nagaraja vs CIT (supra) relied by Ld.AR, this Tribunal quashed proceedings under section 263, as it was a case of inadequate enquiry by Ld.AO on alleged issues therein. In facts before us, Ld.Pr.CIT initiated proceedings under section 263, wherein no enquiry was conducted by Ld.AO, as was discerned by him from assessment records.

In decision relied on by Ld.AR of Hon’ble Bombay High Court in case of CIT vs Slum Rehabilitation Authority (supra), Hon’ble Court considered the issue in case of trust, wherein, facts were that, assessee therein challenged revision order before Mumbai Tribunal and Mumbai Tribunal allowed appeal on the ground of merger, as well as on the ground that the order of assessment could not be stated to be prejudicial to the interest of the revenue since assessing officer rejected assessee’s claim of exemption under section 11 of the Act, may not be with reference to section 2 (15) of the Act.

Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (supra) held that: "There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.”

Further Hon’ble Delhi High Court in the case of CIT v. Sunbeam Auto Ltd., reported in (2010) 189 Taxman 436 has held that; "The Assessing Officer in the assessment order is not required to give a detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see whether there was application of mind before allowing the expenditure in question. If there was any inquiry, even inadequate, that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act 1961, merely because he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open."

In the instant case, Ld. Pr. CIT on perusal of assessment records held that Ld.AO, did not make any inquiries or called for any information/evidences in respect of such huge expenditure in cash, and that assessment order; do not reveal that, Ld.AO considered all aspects of the case, including huge expenditure incurred by assessee in cash. Even before us, Ld.AR could not establish the fact that, any query was raised and/or enquiries conducted by way of documentary evidences on this aspect. Therefore, in our view, Ld.AO failed to apply his mind to this issue and therefore order passed by him was erroneous in so far as it was prejudicial to the interests of the revenue. We therefore do not find any infirmity in the order passed by Pr. CIT and the same is upheld.

The decision based on discussion above shall apply mutatis mutandis to Asst. Years 2012-13, 2013-14 and 2014-15, as facts are identical and grounds alleged by assessee on merits are similar. In the result appeals filed by assessee for asst. year 2011-12 to 2014-15 stands dismissed.”

Next common ground in these appeals in & 1166 to 1170/Bang/2022 is with regard to making addition u/s 40A(3) of the Act. In these assessment years, assessee made payment of various expenditure exceeding Rs.20,000/- in cash while purchasing the land. According to the Page 8 of 15 A.O., it is the violation of provisions of section 40A(3) of the Act. Accordingly, he disallowed that expenditure made in excess of Rs.20,000/- otherwise than by crossed cheque or DD. The ld. A.R. submitted that these payments are made for purchase of land. The genuineness of payment to the payee who is identifiable and all these payments are duly recorded in the assessee’s books of accounts and also supported by registered sale deeds. Being a genuine cash payment, section 40A(3) of the Act cannot be applied. For this purpose, he relied on the CBDT Circular No.6-P dated 6.7.1968 for the proposition that this provision is designed to counter tax evasion by showing various fictitious expenditure in cash and to frustrate the proper investigation by the department as to the identity of the payee and reasonableness of the payment. He relied on the following judgements: a) Sri Laxmi Satyanarayana Oil Mills vs. CIT 367 ITR 200 (T&AP) b) Maigold Merchandise (P) Ltd. in dated 11.9.2017 c) Harshilla Chordia vs. IT 298 ITR 349 (Raj) d) The judgemen of High Court of Delhi in case f RC Goyal vs. CIT in ITA nO.636 OF 2012. e) Prime Infra Developers Pvt. Ltd. Vs. ITO in ITA No.7144/Del/2017 dated 27.6.2018 f) Madras High Court in the case of PCIT vs. Sumukha Synthetics (2020) Taxpub (DT) 3709 g) Jaipur ITAT in caseof K.K. Construction company vs. ACIT ITA No.990/JP/2017 h) Delhi ITAT in case of Gayatri Build Assocatges pvt. Ltd. Vs. DCIT ITA No.1888/Del/2017. i) Madras High Cout in case of PCIT vs. Sumukha Synthetics (2020) Taxpub (DT) 3709

The ld. D.R. submitted that provisions u/s 40A(3) of the Act will come into operation only in a case and circumstances as may be prescribed having regard to nature and extent of banking facility available, consideration of business exigency and other relevant factors and such cases have been prescribed under Rule 6DD of the Income Tax Rules, 1962, in this case, no exceptions are provided under Rule 6DD of the IT Rules, 1962, is applicable to the assessee, and thus there is no error in the reason given by the lower authorities to make or sustain addition towards expenditure incurred in cash in excess of Rs.20,000/- otherwise addition by crossed cheque or DD.

We have heard the rival submissions and perused the materials available on record. There is no dispute that the assessee has made various payments and claimed it as an expenditure, which has been incurred in cash otherwise by crossed cheque or DD or by electronic clearance system through bank account. Now the question is whether the case of the assessee falls under exception as provided in Rule 6DD of IT Rules, 1962 and further, proviso to section 40A(3) of the Act. As per proviso to section 40A(3) of the Act, no disallowance shall be made and no payment shall be deemed to be profit and gains

Next common ground in & 1165/Bang/2022 is with regard to addition of Rs.5,12,17,000/- and Rs.6,02,51,004/- for the assessment years 2010-11 & 2011-12 for the total credit in the bank account of Mr. B.R. Madhusudhan. During the course of search action, it was found that assessee has been operating bank account in the name of Shri B.R. Madhusudhan. The AO noted that there were huge credits and debits in the said bank account. Statement from Shri B.R. Madhusudhan was recorded during search. He has submitted that he had only signed various cheques as per the instructions of the assessee and entire transaction in the bank account relate to the assessee. Before lower authorities, assessee submitted that income generated from this impugned bank account reflected in the assessee’s books of accounts and offered for taxation. However, the AO observed that the same was only after thought as no such details were there at the time of search or produced during the post search enquiry. More so, the assessee has not explained why the payments were issued in Shri B.R. Madhusudhan’s bank account rather than assessee’s own bank account. The AO observed that assessee has failed to provide necessary details of the transaction appearing in the bank account. The ld. CIT(A) confirmed the same since the assessee was not able to substantiate his claim by submitting details of the payment made through the said impugned bank account with transaction from which he is claiming to have made profit or loss and subsequently reflected in the income offered by the assessee. Against this assessee is in appeal before us in the assessment years 2010-11 & 2011-12.

We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that bank account in the name of B.R. Madhusudhan is already incorporated in the books of accounts of the assessee and the profit or loss generated from these transactions are also offered for taxation. The plea of the department is that assessee has not been able to substantiate his claim by submitting details of the payments made through the said bank account and it has not been shown that it has been included in the income while arriving the gross total income of the assessee. In our opinion, this is required to be examined at the end of AO after going through the necessary details furnished by the assessee. In other words, assessee has to furnish necessary details to establish that all the receipts and payments generated from this bank accounts in the name of Shri B.R. Madhusudhan has been duly accounted in the books of accounts of the assessee and correspondingly income from this bank transactions has been offered for taxation. If it is incorporated in the books of accounts of the assessee the profit or loss arriving from these transactions is offered for taxation, there cannot be any further addition on this count. The AO has to verify in detail of this bank account along with books of accounts of the assessee and if the assessee proves that all the receipts and payments through this bank account is duly accounted in the books of accounts of the assessee and supported by necessary bills and vouchers, the claim of assessee to be allowed. Otherwise, the transactions in this account to be considered as unexplained investment/income of the assessee. With these observations, we remit the issue in dispute to the file of AO for fresh consideration.

We have heard the rival submissions and perused the materials available on record. In our opinion, if these persons are the agents or customers of assessee who have been just introduced by assessee to the Canara Bank to open bank accounts and the credit appearing in those bank accounts cannot be treated as income of the assessee. The assessee has to furnish details of address of those agents, whom he has claimed to have brought those agriculturists from whom the assessee purchased the land. The plea of the ld. D.R. is that this is just a story created to evade tax. So the action of the AO in treating the credit in these bank accounts as un-explained income of the assessee to be confirmed. In our opinion, the enquiry made by the AO is not sufficient to fasten the tax liability on the assessee at this stage. In our opinion, it is appropriate to remit this Page 14 of 15 issue also to the file of AO with the direction to the assessee to furnish necessary addresses of these parties and explained the circumstances under which he has introduced these parties to the Canara Bank, Hebbal branch, Bangalore. Further, since there were huge transactions in these bank accounts and subsequent immediate withdrawals, the AO has to carry out necessary examination of these bank accounts after giving an opportunity to the assessee to controvert the same. If the assessee fails to explain these accounts, then only the AO has to treat it as unexplained investment/income of the assessee. This ground of appeal of the assessee is partly allowed for statistical purposes.