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Facts
The Revenue appealed against the order of the CIT(A) which deleted additions made by the Assessing Officer. The assessee had filed a return declaring a loss, and the case was selected for scrutiny. The AO made additions on account of disallowance of expenses, undisclosed income, and share capital. The CIT(A) deleted these additions.
Held
The Tribunal held that the CIT(A) was justified in deleting the disallowance of expenses as there was evidence of business activity, albeit slow. Regarding the addition on account of share capital, the Tribunal found that the assessee had provided sufficient documentation to establish the genuineness of the transactions, and the AO had not doubted the identity of the investors. Consequently, the addition was deleted.
Key Issues
Whether the CIT(A) erred in deleting additions made by the AO regarding disallowance of expenses and share capital. Whether the CIT(A) followed the procedure prescribed under Rule 46A while admitting additional evidence.
Sections Cited
143(2), 142(1), 250(6), 143(3), 46A, 68
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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI VIMAL KUMAR
PER VIMAL KUMAR, JUDICIAL MEMBER:
The appeal filed by the Revenue is against order dated 22.06.2017 of the Learned Commissioner of Income-Tax (Appeals)-3, Delhi (hereinafter referred as “Ld. CIT(A)”) under Section 250(6) of the Income-Tax Act, 1961 (hereinafter referred as “the Act”) arising out of assessment order dated 27.02.2015 by the DCIT, Circle-7(1), New Delhi under Section 143(3) of the Act for the assessment year 2012-13.
Brief facts of the case are that assessee on 19.10.2013, assessee e-filed return of income declaring a loss at Rs.49,96,011/-. The case was selected for scrutiny assessment under CASS. Notices under Section 143(2) of the Act dated 04.09.2014 and questionnaire under Section 142(1) of the Act dated 28.10.2014 were issued. Shri Alok Periwal and Shri Nishchay Kandelwal, CA/AR attended the proceedings from time to time. On completion of proceedings, Ld. AO vide order dated 27.02.2015 made various additions. Against order dated 27.02.2015, appellant/assessee preferred appeal before Ld. CIT(A) which was allowed vide order dated 22.06.2017.
Being aggrieved, the appellate/revenue preferred present appeal.
4. Learned Authorised Representative for the Revenue submitted that Ld. CIT(A) erred in deleting the addition of Rs.52,30,420/- on account of disallowance of expenses claimed, particularly, when there was no business activity carried by the assessee. Ld. CIT(A) erred in deleting addition of Rs.30,60,748/- on account of undisclosed income as per 26AS. Ld. CIT(A) erred in deleting addition of Rs.12,00,00,000/-on account of disallowance under Section 68 of the Act. Ld. CIT(A) erred in 2 accepting the evidence in appellate proceedings without obtaining comments of the Ld. AO in remand proceedings in violation of Rule 46A of the Income Tax Rules. Reliance was placed on judgment of Hon’ble High Court of Delhi in CIT, Central-1 Vs. Manish Build Well (P) Ltd. [2016] taxmann.com.27 wherein it is held that “24. In the present case, the CIT (A) has observed that the additional evidence should be admitted because the assessee was prevented by adducing them before the assessing officer. This observation takes care of clause (c) of sub-rule (1) of Rule 46A. The observation of the CIT (A) also takes care of sub-rule (2) under which he is required to record his reasons for admitting the additional evidence. Thus, the requirements of sub-rules (1) and (2) of Rule 46A have been complied with. However, sub-rule (3) which interdicts the CIT (A) from taking into account any evidence produced for the first time before him unless the Assessing Officer has had a reasonable opportunity of examining the evidence and rebut the same, has not been complied with. There is nothing in the order of the CIT (A) to show that the Assessing Officer was confronted with the confirmation letters received by the assessee from the customers who paid the amounts by cheques and asked for comments. Thus, the end result has been that additional evidence was admitted and accepted as genuine without the Assessing Officer furnishing his comments and without verification. Since this is an indispensable requirement, we are of the view that the Tribunal ought to have restored the matter to the CIT (A) with the direction to him to comply with sub-rule (3) of Rule 46A---”.
5. Learned Authorised Representative for respondent assessee relied on impugned order and submitted that Ld. CIT(A) had suo moto examined the evidence in support of ground of appeal. Hon’ble High Court of Delhi in Commissioner of Income Tax Vs. Manish Build Well (P) Ltd., supra, in para nos. 23 has held that “it is only when he exercises his statutory suo moto power under the above sub-section that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the requirements of the Rule strictly”.
6. From examination of record in the light of light of aforesaid rival contentions, it is crystal clear that Ld. CIT(A) decided in favour of assessee. Disallowance of Rs.52,30,420/- on account of disallowance of expenses, addition of Rs.1,73,278/- on account of claim of depreciation on plant and machinery, Addition of 4 Rs.30,60,748/- on the basis of document regarding the pendency of the matter in court, the addition of Rs.12,00,00,000/- were deleted by examining the submissions of appellant and material placed on record.
6.1 The Ld. CIT(A) in paras 2 to 10 has observed as under:
“2. The ground no.1(a) of the appeal has been raised by the appellant regarding the disallowance of Rs.52,30,420/-. It was stated by the counsel of the appellant that the similar addition was made by the Assessing Officer in the preceding year and the facts and circumstances of the case remain the same as were in the preceding year. It was further submitted by the counsel that in the ITAT SMC Benh, New Delhi in for the assessment year 2010-11 in the case of the assessee held as under:- "I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the AO disallowed all the expenses claimed by the assessee for the reasons that there was no business activity during the year under consideration. On the contrary, the claim of the assessee is that the business was not closed down permanently, the assessee was facing lull at business and to keep itself a float, the assessee company was required to incur various necessary and bare minimum expenses. In the present case, the copy of profit and loss account placed at page no. 13 of the assessee's paper book revealed that the assessee had made sales of Rs. 71,97,431.47 and also earned miscellaneous income of Rs.4,05,13,194.14 in the preceding year. During the year under consideration, the miscellaneous income earned by the assessee was of Rs.2,90,013/- but there was no income from sales, the reasons given by the assessee was that there was lull in business but the business itself was not closed.
10. On a similar issue their lordships of the Hon'ble Jurisdictional High Court at Delhi, in the case of CIT vs. Anita Jain (supra) observed in para 3 as under:- "3. Ms.Bansal, learned counsel for the revenue, has drawn our attention to the observation in CIT v. Lahore Electric Supply Co.Ltd.[1966] 60 ITR 1(SC)to the effect that the 'mere fact that the company had not gone into liquidation would not establish that it had the intention to do business". This submission loses sight of the observations made at page 5 which clearly indicate that the Court came to the conclusion that the assessee had closed business because it had not 'established an intention to resume it'. Such is not the circumstances obtaining in the present case. This case had been applied in CIT v. Vellore Electric Corpn. Ltd. [2000] 243 ITR 529 (Mad.) where it has been pithily noted that maintenance and establishment is the indication of intention to resume business. In Karsondas Ranchhoddass v. CIT [1972] 83 ITR 1 (Brn.) it was noted that there were two periods of activity which was indicative that the business was nevertheless continued. We are in complete agreement with the view taken by the ITAT that the present case is an example of a lull in business and not cessation in business."
In the aforesaid case the disallowance made by the AO was deleted up to the level of the Tribunal and the Hon'ble Jurisdictionl High Court held that the view taken by the Tribunal was justified and there was no substantial question of law involved. In the present case also the assessee company continued to maintained an establishment which was the indication of its intention to resume business and the expenses incurred by the assessee were directly related to the business of the assessee had rightly claimed the establishment expenses to resume its business in near future. I, therefore, do not see any valid ground to interfere with the findings given by the Ld.CIT(A) and accordingly do not see any valid ground to interfere with the findings given by the Id.CIT(A) and accordingly do not see any merit in this appeal of the department.
In the result, the appeal of the department is dismissed." 2.1 In view of the above, the disallowance of expenses of Rs.52,30,420/- made by the Assessing Officer is deleted.
3. The ground no.1(b) of the appeal has been raised by the appellant regarding the disallowance of Rs.1,73,278/- on account of the claim of depreciation on fixed assets. The submission of the appellant filed in this regard are reproduced as under:- "This issue has been discussed by AO on page 6/7 of the assessment order vide Para 6. 5.2). It is submitted that once the asset is merged in the block of assets it is difficult to segregate any asset under the block 6
system of providing depreciation. Depreciation has to be provided by default on the carried forward block of asset from one year to the other, till such times the block of asset turns negative or ceases to exist and the block is to be written off as capital loss. It is submitted this is not the case. 5.3). Depreciation has been calculated on the Written Down Block of Assets brought forward and after charging the depreciation the balance block has been carried forward to the next year. 6). The AO has proceeded to make the addition on lines with proceedings for Assessment Year 2011-12. Following the judgment for Assessment Year The or2011-12 as decided by Ld.CIT(A) in proceedings for Assessment Year 2011-12 your goodself is requested to delete the disallowance made.
6.1). In view of the above facts and circumstances of the case and in the light of similar facts for the year under consideration it is humbly prayed that similar directions may please be given for the year under consideration." 3.1 Having gone through the submissions of the appellant, the order of assessment made by the Assessing Officer and the material evidences placed on the record, it emerges from the facts of the case that the appellant has debited depreciation of Rs.401,088 to the Profit and Loss Account and claimed the amount of Rs. 1,73,278 in the return of income. The appellant had admitted that the depreciation has been calculated on the Written Down value of the Block of assets brought forward and after charging the depreciation the balance block has been carried to the subsequent year. The depreciation chart for the block shows that the appellant has claimed the depreciation on the Plant and Machinery of Rs. 1,73,278. The appellant had himself admitted that there is no manufacturing activity undertaken by the company during the year. In view of this crucial finding of fact, the depreciation claimed by the company on the Plant and Machinery is disallowed. However, the Assessing Officer is directed to allow the Depreciation on Furniture, Fixtures and Buildings.
The ground no.2(a) of the appeal has been raised by the appellant regarding the addition of Rs.30,60,748/- made by the Assessing Officer on account of the TDS being deducted by the depositor. The appellant explained that the property in question is in dispute and the matter is pending in the High Court. The detailed submissions filed on this issue have been considered and kept on the record. 4.1 The counsel of the appellant explained that the company has not received the rental income of Rs.43,47,000/- as shown by the company M/s Universal Buildcon (India) Limited. It was further stated that the company is in dispute with M/s Universal Buildcon (India) Limited and the matter is pending in the High Court. The copy of the affidavit filed by the Director of the company before the Assessing Officer is reproduced by the Assessing Officer in the assessment order. It is clear from the evidences adduced during the appellate proceedings that the appellant has not credited any income on account of the rent being received from M/s Universal Buildcon (India) Limited. The documents regarding the matter pending in the court have been filed during the appellate proceedings. Moreover, the possession of the property in question is in the domain of the assessee. It is not in the knowledge of the company that the tax has been deducted at source by M/s Universal Buildcon (India) Limited and deposited in the treasury and the cheques for the consequent income have been issued in favour of the assessee. The details adduced during the assessment proceedings make it clear that the assessee company had not taken the credit of the tax deducted at source as discussed by the Assessing Officer in the order of assessment passed by him. The same issue was involved in the assessment for the assessment year 2011-12 and no addition has been made by the Assessing Officer on this account. In view of the above, the addition of Rs.30,60,748/- made by the Assessing Officer is deleted.
The ground no.2(b) of the appeal has been raised by the appellant regarding the addition of Rs.12 crores made by the Assessing Officer under section 68 of the Act. The Assessing Officer has held that the assessee has failed to establish the creditworthiness and genuinity of the transaction. The submissions of the appellant filed in this regard are reproduced as under:- "8.1) During the year under consideration Appellant Company has raised Share Capital of Rs. 12,00,00,000/- by way of issue of shares which have been added back to the total income of the Appellant Company U/s. 68 of the I.T. Act alleging that the transactions are non genuine and doubting the credit worthiness of the subscribers. 8.2). It is submitted that following necessary documents / explanation were made available to the A.O. regarding Investors:-
Sparkline Buildhomes Pvt. Ltd. a) Copy of Share application Form for Investment having been made by the Investing Companies (Pages 48/49). b) Copy of Bank Statement of the Investing Companies reflecting therein payment made to Appellant Company (Pages 50/51). c) Copy of Audited Balance Sheet of the Investing Companies for the Financial Year relevant to the Year under consideration. (52/62) d) Printout from the website of the Ministry of Corporate Affairs regarding the Company Master Details of Investing Company thereby showing the existence of the Company (Pages 103). e) Printout from the website of the Income Tax Department regarding the PAN of Investing Company thereby showing that the Company is assessed to Income Tax (Pages 104). Sparkline Infrastructures Pvt. Ltd. a) Copy of Share application Form for Investment having been made by the Investing Companies (Pages 63/64). b) Copy of Bank Statement of the Investing Companies reflecting therein payment made to Appellant Company (Pages 65/66). c) Copy of Audited Balance Sheet of the Investing Companies for the Financial Year relevant to the Year under consideration. (67/77) d) Printout from the website of the Ministry of Corporate Affairs regarding the Company Master Details of Investing Company thereby showing the existence of the Company (Pages 105). e) Printout from the website of the Income Tax Department regarding the PAN of Investing Company thereby showing that the Company is assessed to Income Tax (Pages 106). 8.3). It is worthwhile mentioning that A.O. has not doubted the identity of Investor Companies. The basis of doubting the credit worthiness was the low income of Investing A.O. had not undertaken any investigation of the accuracy of the documents of Investor Companies which were made available on record. 8.4) Attention in this regard is invited to the following Judgments Intital Onus Discharged a) High Court of Delhi, CIT v. Kamdhenu Steel and Alloys Ltd. reported at 19 taxmann.com 26 (Copy Enclosed) (Pages 85/88). It was held "Where assessee had given particulars of registration of investing / applicant companies; confirmation from share applicants; bank account details; and had shown payment through account payee cheques etc., it could be said that the assessee had discharges its initial onus and just because some of creditors / share applicants could not be found at address given, it would not give revenue a right to invoke section 68 without any additional material to support such a move". Identity of Share Applicants not Disputed / Intital Onus Discharged b) High Court of Delhi in the case of CIT-9 Vs. Vrindavan Farms (P). Ltd. (Copy Enclosed) (Pages89/92) "No addition can be made in the hands of Assessee Under Section 68 of the Act if Identity of the Share Applicant has not been doubted by Assessing Officer, Moreover AO must have undertaken some inquiry and investigation before coming to a conclusion on issue of credit worthiness" Identity of Share Applicants not Disputed c) Hon'ble Delhi High Court in the case of Sarthak Securties Co. Pvt. Ltd. Vs. Income Tax Officer Ward 7(3) (Copy Enclosed) (Pages 93/102) wherein it was held that There was was no dispute vis-à-vis the identity of Investor Companies. 8.5). In view of the above facts and circumstances of the case, addition made by the AO is not warranted. 8.6). Addition is liable to be deleted and be directed to be deleted."
5.1 Having gone through the submissions of the appellant, the order of assessment made by the Assessing Officer and the material evidences placed on the record, it emerges from the facts of the case that the Assessing Officer has made the addition of Rs.12 crore under section 68 of the Act. The counsel of the appellant was directed by this office to file the complete details of the transactions regarding the receipt of the share application of Rs.12 crore as shown in the books of accounts of the company. The details adduced by the assessee show that M/s LSC Associates Pvt. Ltd. received the equity of Rs.12 crores from the appellant company during the year under consideration. M/s LSC Associates Pvt. Ltd. further invested Rs 6 crore each in M/s Sparkline Infrastructures Pvt. Ltd and M/s Sparkline Buildhomes Pvt. Ltd.. It is further seen that M/s Sparkline Infrstructures Pvt. Ltd and M/s. Sparkline Buildhomes Pvt. Ltd. invested Rs. 6 crores each in the equity of the assessee company. The entire transaction is demonstrated through the chart which is as under:
5.2 In view of the above, it is clear that the share capital in question of Rs.12 crores started from the assessee company which has been transferred to M/s LSC Associate Pvt.Ltd. 11 and M/s LSC Associate Pvt.Ltd. invested in the equity of M/s Sparkline Infructures Pvt.Ltd. and M/s Sparkline Build Homes Pvt..Ltd. The same money came back as equity capital from both the companies during the year under consideration. The addition of Rs.12 crores made by the Assessing Officer under section 68 of the Act is, therefore, deleted.
As the result, the appeal of the appellant is treated as partly allowed.”
As per ratio in judgement of CIT, Central-! Vs. Manish Build Well (P) Ltd., supra, it is well settled that it only it is only when he exercises his statutory suo moto power under the above sub- section that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the requirements of the Rule strictly.
From complete reading of the discussion, reasons and findings recorded by Ld.CIT(A) in light of aforesaid well settled principles, it is evident that Ld. CIT(A) had suo moto examined material evidence in support of grounds of appeal. So, there was no need to seek comments of Ld. AO in remand proceedings. The grounds of appeal being devoid of merit are rejected. We see no reason to interfere with the process of reasoning and findings of Ld.CIT(A).
In the result, the appeal of Revenue is dismissed.
Order pronounced in the open court on 04/06/2025.