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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & MS. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER
ITA No.417/Bang/2021
Assessment year : 2018-19
K.R Pradeep, Vs. The Dy. Commissioner of Income- 20, Eden Park, 101, I Floor, tax, Vittal Mallya Road, Central Circle-1(3), Bengaluru. Bangalore-560 001. PAN – AALPP 7901 M APPELLANT RESPONDENT
Assessee by : Smt. Girija G.P, Advocate Revenue by : Shri Muzaffar Hussain, CIT(DR)
Date of hearing : 09.02.2022 Date of Pronouncement : 03.03.2022
O R D E R Per Padmavathy S, Accountant Member
This appeal by the assessee is directed against the order of the CIT(Appeals) – 11 Bengaluru dated 09/08/2021 passed u/s 250 of the Income-tax Act (the Act) for the asst. year 2018-19.
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The main grounds raised by the assessee before us pertain to addition made u/s.68 r.w.s.115BBE(2) of the Act towards unaccounted foreign currency and disallowance u/s.14A r.w.r. 8D of the Act
Brief facts of the case 3. The assessee is an Advocate in practise during the impugned year and has filed the return of income on 31.10.2018 declaring an income of R.5,88,06,210/-. The assessee’s premises was subjected to search u/s.132 of the act on 21.09.2017. The assessing officer (AO) completed the assessment by making the below adjustment vide order dated 24.12.2019 (i) Unaccounted foreign currency – Rs.50,00,000 (ii) Disallowance u/s.14A r.w.r. 8D – Rs.1,45,16,553
Aggrieved by the order of the AO the assessee filed an appeal before the CIT (A) and the CIT (A) upheld the order of the AO on facts and circumstances of the case
The assessee has now filed the appeal before aggrieved by the additions and the disallowance made by the AO as confirmed by the CIT(A). The relevant grounds raised by the assessee in connection with the issues before us is reproduced below :-
“1. That the above order of the authorities below in so far as it is against the assessee is against the law, facts, circumstances, natural justice, equity and all other known principles of law.
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That the total income computed and the total tax computed is hereby disputed. 3. The proceedings of search and all other subsequent proceedings are bad in law, without jurisdiction and invalid. 4. The order u/s 143(3) r.w.s 153D of the Act is bad in law and requires to be vacated. 5. That the authorities below erred in making the addition of Rs.50,00,000/- u/s 68 rws I15BBE(2) of the Act. 6. That the authorities below erred in resorting to section 68 rws 115BBE(2) of the Act. 7. Without prejudice the authorities below erred in making the addition of Rs.50,00,000/- for the AY 2018-19. 8. Without prejudice the authorities below erred in adopting value of Rs.50,00,000/overlooking Rule 115 rwr 26 of the IT Rules. 9. Without prejudice the authorities below ought to have allowed the entire sum as allowable loss since the same was handed over to the Enforcement Directorate and that the assessee has no longer been in possession of the foreign currency. 10. That the authorities below erred in disallowing Rs.1,45,16,553/- u/s 14A r.w.r the Act. 11. That the l.d.CIT-A erred in overlooking the fact that the disallowance u/s 14A r.w.r SD of the Act had been recomputed by the AO at Rs.64,30,746/- vide order u/s 154 of the Act. 12. The authorities below erred in not considering the relevant material and thereby violating the principles of natural justice, hence the order requires to be cancelled. 13. That the authorities below erred in overlooking the binding decisions on the above issues. 14. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.”
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We will take up the issue of disallowance u/s.14A r.w.r. 8D first. During the assessment year 2018-19, the assessee has earned a dividend of Rs. 1,96,81,60/ . This amount consists of Dividend from shares / equities – Rs.1,67,24,149/- against which the assessee had claimed an exemption of Rs.10,00,000/- u/s.10(34) and the balance was offered to tax. The assessee claimed the dividend from Mutual Funds Rs.29,57,454/- as fully exempt u/s.10(35). The AO during assessment took the annual average of investments made by the assessee in shares and mutual funds and computed 1% of the same to arrive a disallowance Rs,1,45,16,55,294/- u/s.14A r.w.r. 8D. The CIT confirmed the disallowance of the AO.
The Ld AR submitted that this issue is covered by the decision of the coordinate bench of the Tribunal in assessee’s own case in ITA No.416/Bang/2021 for the assessment year 2017-18, where the Tribunal had allowed the case in favour of the assessee. The Ld DR relied on the decision of the lower authorities
We have heard the rival submissions and perused the materials on record. We notice that the coordinate Bench of the Bangalore Tribunal in assessee’s own case had dealt with the similar issue. The Tribunal has held that – “15. We shall now take up the appeal filed for assessment year 2017-18. This year also falls under the category of abated assessment and hence the A.O. may make addition even in the absence of incriminating material. In this year also, the A.O.
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has made addition u/s 14A of the Act only. During this year, the assessee earned aggregate exempt income of Rs.2,58,00,533/-, which consisted of dividend income of Rs.4,25,247/- and long-term capital gain of Rs.2,53,75,286/-. The A.O. computed disallowance as per Rule 8D. We notice that the manner of computation of disallowance of expenses has been changed completely from AY 2017-18. The AO computed annual average of investments in shares & mutual funds at Rs.140.01 crores and accordingly made disallowance of 1% thereof as per rule 8D which worked out to Rs.1,40,01,732/-. The Ld. CIT(A) also confirmed the same.
The Ld. A.R. submitted that the computation provision given under Rule 8D has been substituted in assessment year 2017- 18. The new provisions of Rule 8D read as under:- “8D (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.”
The Ld. A.R. submitted that the assessee has received dividend income exceeding Rs.10 lakhs from shares held in domestic companies during the year relevant to the assessment year 2017-18. According to the newly inserted provision of Section 115BBDA of the Act, the assessee shall become “a specified assessee” and hence income tax is payable on the dividend income at the rates specified in sec.115BBDA. Hence, the dividend income is not exempt u/s 10(34) of the Act in the hands of the assessee, since he is a specified assessee. Accordingly, the assessee has claimed exemption of dividend income received from mutual funds only.
The Ld. A.R. submitted that under new Rule 8D, the disallowance is computed @ 1% of the annual average of the monthly average of the opening and closing balances of the
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value of investment income from which does not or shall not form part of total income. However, the AO has computed average value of investments made both in shares of domestic companies and mutual funds. The Ld A.R submitted that the A.O. should not have considered investments made in domestic companies, since the dividend income earned therefrom is taxable in the hands of the assessee. Accordingly, the Ld. A.R. submitted that the A.O. should have considered only investments made in mutual funds for computing the average value of investment for the purpose of Rule 8D(2) of the I.T. Rules for assessment year 2017-18. The Ld. A.R. submitted that the annual average value of investments whose income is exempt works out to Rs.73,79,660/- and hence the disallowance that is required to be made under Rule 8D(2)(ii) works out to Rs.73,797/- only.
We heard Ld. D.R. on this issue and perused the record. A perusal of the amended provisions of Rule 8D, which is extracted above, would show that the annual average of the monthly average of the opening and closing balances of investments shall be worked out on the basis of investments, income from which does not or shall not form part of the total income. In the hands of the assessee, the dividend income is taxable as per the provisions of section 115BBDA during AY 2017-18, since the aggregate amount of dividend earned from shares held in domestic companies has exceeded the threshold limit of Rs.10 lakhs. Hence, for the purpose of computing average value of investment, the A.O. should not have taken the investment made in the shares of domestic companies. Accordingly, we find force in the contention of the Ld. A.R. that the average value of investment should have been computed by the AO by considering only those investments, income from which does not or shall not form part of total income. In the case of the assessee, dividend income received from mutual funds alone is exempt.
In view of the foregoing discussions, we are of the opinion that there is a flaw in the working made by the A.O. The submissions made by Ld A.R is in accordance with the provisions of amended Rule 8D. Accordingly, we set aside the order passed by the Ld. CIT(A) on this issue and direct the A.O.
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to recompute the disallowance u/s 8D(2) in accordance with the discussions made (supra). 9. Respectfully following the decision of the coordinate bench of the Bangalore, we set aside the order passed by the CIT(A) and direct the AO to re-compute the disallowance u/s.14A r.w.r. 8D.
The next issue is the addition made u/s.68 towards the unaccounted foreign currency. There was a search in the premises of the assessee on 21.09.2017 and during the search certain foreign currencies were found the list of which is as under :-
In the statement recorded the assessee has mentioned that out of the currencies seized, EURO 47000 belonged to his sister-in-law and brother-in-law who live in USA and he is keeping it in safe custody to
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be spent during their visit to India. The rest of the currencies the assessee claimed that were given as travel allowance by various companies and due to be returned to them. Later assessee made a submission on 17.10.2017 that the EURO 47000 and some Australian currencies were pooled in by few individuals who are relatives of the assessee to establish a Charitable Organisation and as the trust was not yet registered was kept in the safe custody of the assessee. In this regard the assessee had produced an email dated 17.10.2017 from his sister-in-law and brother-in-law. With regard to the other currencies also the assessee informed that they are left-over currencies for his several foreign travels. In the return of income for the assessment 2018-19 the assessee has offered an amount of Rs.50,00,000 under ‘Income from Other sources’ against which he claimed deduction u/s.57 for interest paid which resulted in NIL income offered to tax.
The AO was not satisfied with the explanation and the e-mail evidence provided by the assessee and added a sum of Rs.50,00,000 u/s.68 and taxed the same u/s.115BBE. The AO made the addition on the grounds that a. The identities of the individuals are not established from the email confirmation submitted by the assessee b. The money in an ideal situation should have come through the banking channels from the individuals who live abroad c. The currencies, as claimed by the assessee is kept in his safe custody is without any documentary evidence to that effect.
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d. The email is dated 17.10.2017 i.e. post the date of search and hence is merely an afterthough to explain the source of the huge foreign currency in possession e. The individuals in the email reside in USA and if at all they have given the foreign currency to the assessee for safe custody, it should have been in USD and not EURO f. The invoice substantiation submitted for purchase of foreign currency from various authorised dealers for travel purposes pertain to FY 2015-16 and FY 2014-15
The CIT(A) confirmed the order of the AO. The relevant findings of the CIT(A) reads as follows : “11. In the assessment order the AO has brought out the fact that a sum valuing Rs. 48.38 iakh in foreign currency was found at the appellant's residence during search operation. The appellant was issued a show cause notice dated 01/10/2019 issued along with notice u/s142(1) by the AO during assessment proceedings as to why the sum found should not be treated as unaccounted income in his hands. 12. In his computation of income, the appellant declared a sum of Rs. 50,00,000/- under the head income from other sources. However, the appellant failed to establish the identity of individuals from whom foreign currency was received by him as claimed. All the said individuals it is seen reside abroad. As such, if there was any expediency, they could have transferred through banking channels if the objective for giving money was for charitable purpose. However, that did not happen. They gave the appellant money through foreign currency. Moreover, the email confirmation is dated 17/10/2017 le after the search operation. Further, in his emails it is seen that some individuals based in USA gave the appellant EUROS. Furthermore the invoices filed by appellant pertain to FY 2015-16 & 2014-15. These show that explanation offered by appellant is an afterthought and also emails produced by him have no supporting documents. 13. In view of the above facts and circumstances, addition amounting to Rs. ,00,000/- u/s 68 rwsll5BBE(2) is upheld, confirmed and sustained. The ground fails.”
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Before the Tribunal the assessee contended that (i) The addition made u/s. 68 is not correct as the foreign currencies are not recorded in the books of the assessee (ii) Rule 115 r.w.r 26 of the Income Tax Rules is overlooked while converting the foreign currency and assessing the amount @ Rs.50,00,000 (iii) The said foreign currency was handed over to Enforcement Directorate and hence to be treated as allowable loss as the assessee is no longer in possession of the currency
The ld.AR submitted that -
i) The explanation and evidences submitted by the assessee has been rejected purely on surmise without any contrary. evidence. The AO has not brought anything contrary on record. Even statement on oath u/s 132(4) of the Act has been rejected without any basis.
ii) The AO's view that the identities of the relatives could not be established is incorrect as the email confirmation has names, addresses and the email ID of all the relatives and if the AO wanted any other evidence he ought to have asked. Such rejection amounts to arbitrariness.
iii) The assessee during the search has explained the complete source of the foreign currency. The allegation that explanation
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given on two dates are inconsistent is far from true. Mere perusal shows that the possession of the foreign currency having received from relatives and residual from travel has been consistently explained and there is no inconsistency at all. The AO himself has mentioned that the details and invoices pertain to earlier years. Further the AO erred in treating the said sum as unexplained disbelieving the explanation given and the details and evidence noticed during the search, explanation given by the assessee at the time of search and at the time of assessment and is in total disregard to the contemporaneous evidence and explanation given by the assessee. Further the AO erred in including the said sums for the impugned assessment year even though holding of the foreign exchange clearly relates to the period prior to the previous year relevant to the assessment year. Kindly refer to the order of the Enforcement Directorate dt.25.09.2020 (PB - 2 page 286) wherein it has been held that the assessee was holding the foreign exchange for a period more than 180days prior to the date of search i.e, 23.09.2017 on which date the said foreign exchange was kept under order of restraint u/s 132(3) of the Act. The period of 180 days prior to 23.09.2017 goes to a period earlier to that of the impugned previous year.
Hence the same cannot be an issue for the impugned assessment year and the addition is required to be deleted.
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iv) That the Assessee for the AY 2018-19 had already offered a sum of Rs.50,00,000/- and Rs.8,33,875/- under the head Income from Other Sources in the return of income filed (PB-I page 217). Thus it is a case of double addition. Further it can be seen that no expenditure has been claimed against the same.
v) The Show cause notice dt.01.10.2019 proposes to make addition of Rs.48.381acs (page 3 para 9 of the assessment order) whereas the addition made in the assessment order is Rs.501acs. The valuation of the currency ought to have been made as per the mandatory applicable Rules 115 rwr 26. Hence the quantification of Rs.501acs is not as per law.”
The Ld DR, drew our attention to the statement of the assessee recorded during the search proceedings at the residence of the assessee on 23.09.2017, where the assessee has said that
“Q.11. During the course of search and seizure proceedings u/s 132 of the Income Tax Act, 1961 in your residential premises on 21/09/2017, the following foreign currencies were found.
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The same has been inventorised as C-2/132A/KRP/2017-18. Please state the reason for keeping such huge amount of foreign currencies in your name. Ans: Yes, I confirm that the above mentioned foreign currencies were found in my residence. These currencies were found in several envelopes having names of various authorized dealers, via, Western Union, HDPC [lank, American Express, ICICI Bank, Centrum and Weizmann. These various foreign currencies except Euros of denomination of 500 are all travel/daily allowances given by various companies In the past and left by me to be returned to them, as my travel has been completed, The Earns in SOB denominations totaling 47000 Euros are kept with nix for safe custody by my sister-in-law. brother-in-law & family who live at Michigen, USA. This money was kept with me by them when they visited Bangalore. The same will be given back to them whenever they would like to utilize for their expenses in India. The details of travelling allowances received from various companies will be furnished after going through my records. I will also furnish necessary confirmations and necessary documentary
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evidences in respect of Euros belonging to my sister-in-law & & family in 3-4 days.”
The Ld DR submitted that the assessee has changed his own statement and in the letter dated 17.10.2017 has stated EUROs found belong to his relative which he is holding in custody until the formation of the charitable trust the purpose for which these currencies were handed over to him. The Ld DR also submitted that the email shared by the assessee as an evidence to explain the source of the currencies seized is dated 17.10.2017, i.e. post the date of search and is merely an afterthought to explain the source. The Ld DR further submitted that the assessee neither produced any evidence towards the identity of the individuals who sent the email and also did not provide anything to substantiate the financial status of these individuals to prove that there are in a position to contribute such a huge sum for forming a trust. Hence the Ld DR said that the assessee has not discharged the onus of providing proper explanations as to the source of the foreign currencies and relied on the addition made by the AO / CIT(A). On the contention of making addition u/s.68, the Ld DR submitted that the mere wrong mention of the section by the AO cannot be a reason for not sustaining the additions
We heard the rival submissions and perused the materials on record. The first issue we would consider is whether the AO and CIT were right in making the addition u/s.68 and whether the mere wrong
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mention of the section would make the addition in fructuous. The 5 member Special Bench of Delhi Tribunal in the case of Shri Manoj Aggarwal, Bemco vs DCIT 310 ITR 100 (AT) (Delhi – Spl) has held that “26. The argument advanced on behalf of the assessee before us was that the assessee was not maintaining any books of account and the deposits were found only in the assessee's bank statement which cannot be considered as the books of account of the assessee and, therefore, Section 68 was not applicable. Our attention was drawn to the confirmation letters placed at pages 159 and 160 of the paperbook. We are however unable to accept the argument. Though Section 68 of the Act may not be strictly applicable since the assessee was not maintaining any books of accounts and the bank statement cannot be considered as the assessee's books of account on the basis of the judgment of the Supreme Court in the case of A. Govindrajulu Mudaliar 34 ITR 807, it is the onus of the assessee to explain the cash received by him and if there is no explanation or acceptable evidence to prove the nature and source of the receipt, the amount may be added as the assessee's income on general principles and it is not necessary to invoke Section 68, nor is it necessary for the income-tax authorities to point out the source of the monies received. Even if Section 68 is not applicable, the cash deposit in the bank can be asked to be explained by the assessee under Section 69 or Section 69B of the Act. No doubt the assessee had tried to file additional evidence before the CIT (Appeals) in the form of confirmation letters and income-tax returns but these were not admitted by the CIT (Appeals) and no reasons have been shown before us as to why they should have been admitted. In the absence of any clinching evidence to show the nature and source of the monies deposited into the bank account which belongs to the assessee, the Assessing Officer was justified in adding the amount of Rs. 15 lacs as the assessee's unexplained income. We confirm the addition and dismiss the ground”.
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Respectfully following the decision of the Special Bench, we are of the considered view that the additions mentioned in the order of AO and CIT under section 68 cannot be deleted because, even if section 68 is not applicable, the assessee can be asked to provide explanation for the said foreign currency found in the possession of the assessee under section 69A of the Act.
The basic premise for making addition either u/s.68 or u/s.69A is the source need to be explained to the satisfaction of the AO. The assessee has submitted an email received from relatives dated 17.10.2017 as the evidence to explain the source of the foreign currency. The Ld AR contents that the email confirmation has the details of names addresses of the relative was available and the AO could have enquired further into the details. The Ld AR further submitted that CIT(A) also did not make efforts to check the identity of the inviduals and proceeded to confirm the decision of the AO without bringing anything more into the records. The Ld AR prayed that the entire addition is made ignoring the explanations provided by the assessee and the same amounts to arbitrariness.
The Ld DR reiterated that the assessee has not discharged his onus of proving the source.
We heard both the parties and perused the material on record. We notice that the AO and the CIT(A) have mentioned that the email
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shared by the assessee is an afterthought and that cannot be taken as an evidence to substantiate the source. However from the orders passed and other materials on records the following points are not clear,
(i) Whether the AO / CIT(A) asked for further substantiation to the assessee and that the assessee failed to provide (ii) The assessee is made aware that the addition would be done as they are not satisfied with the explanation provided by the assessee (iii) The workings for the addition made at of Rs.50,00,000
The assessee has offered some miscellaneous income to tax against the foreign currencies found in order to buy peace. This is rejected by the AO stating that the assessee has claimed expenses against the said income and hence need to be added again to the income of the assessee. We notice that the assessee had shown other incomes like income from Fixed Deposits, Dividends etc under the head ‘income from other sources’ in addition to what is offered to tax in order to buy peace. Against the total income offered under the ‘income from other sources’ the assessee has claimed deduction u/s.57 towards interest paid on loans, which is reproduced below:-
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The AO and the CIT(A) have not looked into the details of the deduction claimed in order to establish the nexus with the additional income offered in order to buy peace. Further, our conclusion that the income needs to be brought to tax not under 68 but under 69A also warrants examining of facts, records and evidences afresh in the interest of justice. Hence we remand the matter back to the AO to examine the evidences in detail as where the nature and the source stands proved no addition can be warranted and the onus in this regard
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will lie fully on the assessee. This ground of the assessee is allowed for statistical purposes
In the result, assessee’s appeal is allowed for statistical purposes.
Order pronounced in court on 3rd March, 2022. Sd/- Sd/- (GEORGE GEORGE K) ( PADMAVATHY S) Judicial Member Accountant Member Bangalore, Dated, 3rd March, 2022 / vms /
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.
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Date of Dictation ……………………………………
Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..