RAMANTRA CREATIONS LLP,ANDHRA PRADESH vs. ITO, WARD-1, KAKINADA

The first issue relates to addition of Rs.1,64,92,400/- under section 68 of Income Tax Act, 1961 [hereinafter in short “the Act”] disbelieving the amounts received and being added as unexplained cash credit. The second addition, which is in appeal, relates to addition under section 69C of the Act for an amount of Rs.34,37,149/-. The Learned Authorized Representative (for short “Ld.AR”) of the appellant claims that all the necessary evidences were furnished before Ld. CIT(A) and still the Revenue has not acted upon the same and no enquiries were conducted by the Department.

From the assessment order for the A.Y. 2021-22, it is observed that notice under section 143(2) and 142(1) of the Act and certain reminder letters were also issued to the appellant. In these notices, the Ld.AO wanted the assessee to provide Certificate of Incorporation, details of designated partners who have contributed to the appellant-firm, Copy of ITR’s for the late three years, Objectives of the business along with details of Owners’ Equity at Rs.10,00,000/-. Ld.AO in the notices issued, had also required the assessee to provide the details of investments made in movable & immovable properties including agricultural land. The assessee was asked to furnish the details of unsecured loans of Rs.1,54,400/- along with names, address and PAN, the details of Capital work-in-progress of Rs.1,98,86,307/-, details of other payables of Rs.1,04,59,141/-, details of sale of services of Rs.10,00,000/-, details of Professional / Technical fees of Rs.34,37,149/- were also required to be furnished by appellant. The assessee was also requested to mention the reasons for filing revised Return of Income. The assessee was asked to provide a copy of computation of income, profit and loss account for the year under consideration. While filing the original Return of Income, it was found that there are only two partners whereas while filing revised Return of Income, it was observed that there are three partners and the details relating to joining a new partner and his contribution etc., were also required to be provided. Since there was no response from the appellant, the Ld.AO issued a show-cause notice informing that he is disallowing business expenses on Professional / Technical fees of Rs.34,37,149/-, adding an amount of unexplained unsecured loans of Rs.1,54,92,400/- and unexplained credits in the capital account to the extent of Rs.10,00,000/- in the absence of reply. Since the assessee has not responded to any of these notices, the Ld.AO has finally completed the assessment under section 143(3) of the Act wherein unsecured loans of Rs.1,64,92,400/- [unsecured loans of Rs.1,54,92,400/- + and unexplained credit in the capital account to the extent of Rs.10,00,000/-], addition under section 69C to the extent of Rs.34,37,149/- was also made while concluding the assessment.

Aggrieved by the additions towards unsecured loans and unexplained expenditure, the appellant filed an appeal before the First Appellate Authority contesting both these additions. Since the assessee has not filed the required details before Ld.AO, the Ld. CIT(A) called for remand report from the Ld.AO. The Ld.CIT(A), after taking into consideration the remand report, sustained the additions made by the Ld.AO and dismissed the appeal of the assessee. While passing the order, the Ld. CIT(A) held that the capital contribution claimed by the appellant is from a person who is not recognized as partner in the LLP statutory records and the unsecured loans are from NRI who is also not a recognized partner. The Ld. CIT(A) held that in the absence of evidences of lenders and their source of funds and financial capacity, the statutory onus remains unfulfilled by the appellant and hence the addition made by the Ld.AO was sustained. As far as the second addition of Rs.34,37,149/-, the appellant has stated before the Ld. CIT(A) that they have debited this amount as Professional / Technical fees in the Profit and Loss account. From the Order of Ld. CIT(A), it is observed that the assessee has no contracts, work orders and no details were produced to substantiate the nature of services rendered or to establish that the expenditure was incurred wholly and exclusively for the purposes of business. Hence the Ld.AO treated the expenditure as unexplained expenditure under section 69C of the Act and added to the returned income. During the proceedings before the Ld. CIT(A), the appellant has stated that these are the payments made to identifiable professionals and consultants whose KYC and other qualifications were submitted and hence the expenditure is to be treated as incurred for wholly and exclusively for the purposes of business. In response to the remand report called for by the Ld. CIT(A) from the Ld.AO, it is seen that the Ld.AO has stated that the expenditure related to work forming part of a work-in-progress asset and therefore the expenditure should be treated as capital in nature and hence not allowable as deduction in the year under consideration. Ld.AO has also further stated that there is no independent evidence to prove that the services were actually rendered for business purposes. Hence, the Ld.CIT(A) sustained the addition stating that the appellant has not produced the contracts, deliverables, third party confirmations, or any other corroborative evidence of actual services rendered. The simple deduction of TDS is not a conclusive proof of the genuineness or revenue nature of expenditure. In view of the observations of Ld.AO in the remand report, the amount was to be treated as unexplained expenditure under section 69C of the Act and capital in nature which cannot be allowed as revenue expenditure. Thus, the Ld. CIT(A) has confirmed the addition and dismissed the grounds raised by the appellant as above.

Aggrieved by the additions made by the Ld.AO which were sustained by the Ld. CIT(A), a further appeal was filed before the ITAT stating that the assessee has provided all the details and it is for the concerned authorities to make necessary enquiries to prove that the credits are really unexplained or sources were not properly explained. In other words, the appellant has stated before the Bench that since all the details relating to the credits were submitted to the Ld. CIT(A) / Ld.AO at the time of remand report, the Department is supposed to conduct enquiries with regard to genuineness of credits. Since the Department has not conducted any enquiry to disprove the contentions of assessee the addition has to be deleted, argued by Ld.AR before the Bench.

Ld. Departmental Representative (hereinafter in short “Ld. DR”) relied on the orders of Ld.AO and Ld. CIT(A) and emphasized that the required details were not at all furnished before the Ld.AO and hence it was properly added while completing the Assessment Order. As far as the order of Ld. CIT(A) is concerned, his order is also correct, in view of the fact that the contribution from the designated partner of the firm Shri Ravi Datla alias Shri Satyendra Ravi Prasad Raju Datla is actually not a partner. The changes in the Partnership Deed including Shri Satyendra Ravi Prasad Raju Datla were not notified to the Ministry of Corporate Affairs as per the extant rules. Ld.DR has further argued that the order of Ld. CIT(A) is correct in view of the Point No. 10 of the remand report sent by the Ld.AO where it was mentioned as follows: “10. Also, it is pertinent to note here that the discrepancies in the percentage of share submitted in ITRs and the partnership deeds and the fact that the assessee did not furnish any audit reports and ultimately offset all the profit against the manufactured losses point to manipulation of finances with the intention of avoidance of tax.”

The rival submissions are heard and the Bench decides the issues of unsecured loans / introduction of credit in the capital account and expenditure claimed as capital work-in progress separately.

Thus, the addition relating to the capital expenditure to the extent of Rs.34,37,149/- is confirmed and the addition relating to Rs.1,64,92,400/- under section 68 of the Act is remitted to the file of Ld.AO for further enquiries and pass an order afresh after giving an opportunity to the appellant.

In the result, appeal of the assessee is partly allowed for statistical purposed in the above terms.