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Facts
The assessee challenged an order upholding the addition of Rs. 46,65,485/- based on a difference in closing balances with a creditor, M/s. Arham International. The AO invoked Section 69 of the Income Tax Act due to a discrepancy in the reconciled balances.
Held
The Tribunal held that Section 69 of the Income Tax Act is not applicable as the differences in balances were reconciled in subsequent years and the assessee was not provided with an adequate opportunity to explain. The Tribunal also noted that no additions were warranted as the revenue authorities were satisfied with the reconciliation.
Key Issues
Whether Section 69 of the Income Tax Act is applicable when the difference in balances is reconciled in subsequent years and the assessee is not given a proper opportunity to explain.
Sections Cited
250, 69, 133(6), 144, 142(3)
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Income Tax Appellate Tribunal, “SMC” BENCH MUMBAI
Before: HON’BLE SHRI SANDEEP GOSAINDr. E. Moses Road, Worlki,
Assessee by Shri Swapnil Newaskar & Shri Bharat Gandhi Revenue by Shri Sunny Kachhwaha, Sr. DR Date of Hearing 22.01.2025 Date of Pronouncement 24.01.2025 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
1. The present appeal has been filed by the assessee challenging the impugned order 22.07.2024, passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (‘Ld. CIT(A)’) for the assessment year 2016-17.
2. The solitary ground raised
in the present appeal relates to challenging the order of Ld.CIT(A) in upholding the order of AO in invoking the provisions of section 69 of the Act on account of difference between the closing balance in the books of the assessee‘s creditor, and closing balance in the books of assessees as on 31. March 2016.
3. Ld. AR appearing on behalf of the assessee reiterated the same arguments as were raised by him before the revenue authorities and relied upon his written submissions, the contents of the same are reproduced here in below
1. During the course of assessment proceedings, the Ld. AO asked the appellant to submit details of trade payables. Further, the Ld. AO also issued notice u/s 133(6) to the creditors calling for the relevant details.
The Ld. AO observed that while all parties submitted the relevant details, no response was received from M/s. Arham International ('Arham') having outstanding balance of Rs. 46,65,485/- as on 31st March, 2016. Accordingly, the Ld. AO proceeded to add the said amount to the total income of the appellant.
3. Closing balance of Arham as on 31st March, 2016 in the books of the appellant stands duly reconciled with the corresponding closing balance of the appellant in the books of Arham in subsequent year.
During the course of assessment proceedings, Arham as well as the appellant could not submit the relevant details asked for by the Ld. AO. However, it is pertinent to note that subsequently, Arham submitted the balance confirmation to the Ld. AO on 24th December, 2018 vide their letter dated 20/12/2018.
Enclosed Copy of Arham International submissions vide letter dated 20/12/2018 as "Exhibit - E".
5. The appellant had also informed the Ld. AO about the aforesaid confirmation filed by Arham vide the letter dt. 26" December, 2018.
Enclosed Copy of Appellant's Letter dated 26/12/2018 as "Exhibit - F".
Vide the said letter, the appellant also requested the Ld. AO to pass rectification order. However, the Ld. AO did not reconsider the said request.
6. During the course of the ongoing appellate proceedings, the appellant has filed application for admission of additional evidence before the Ld. CIT(A).
Enclosed Copy of Application for admission of additional evidence before the Ld. CIT(A) as "Exhibit - G".
7. With regard to the balance confirmation filed by Arham before the Ld. AO. Based on the said application, the Ld. A.O. issued notice to the appellant on 10th January, 2024 to submit the relevant details regarding Arham such as ledger accounts. bank statement, balance confirmation etc. in response, the appellant had duly filed the relevant details on 23 January, 2024 in connection with remand report called by the Ld. CIT(A) vide their letter dated 22/01/2024. Enclosed Copy of Notice dated 10/01/2024 and appellant submissions made vide letter dated 22/01/2024 as "Exhibit - H".
8. Subsequently, the Ld. AO also issued fresh notice u/s 133(6) of the Act on 27th February, 2024 to Arham. In response, Arham had duly submitted details called for by the Ld. AO on 20th March, 2024 Enclosed Copy of Acknowledged copy of the said submission vide letter dated 20/03/2024 as "Exhibit - I".
9. Subsequently, the appellant had filed additional submission before the Ld. AO on 4th April, 2024 vide their letter dated 03/04/2024, once again submitting the relevant details (which were already submitted vide letter dt. 22nd January, 2024) and duly reconciling the balance of Arham in its books with the corresponding balance of the appellant as recorded by Arham in its books.
Enclosed Copy of appellant's submissions made vide letter dated 03/04/2024 as "Exhibit - J".
Based on the ledger confirmation submitted by Arham, the closing balance as per books of accounts of Arham as on 31st March, 2016 was Rs. 75,99,348/-. However, closing balance of Arham as per books of accounts of appellant was Rs. 46,65,485/ resulting in difference of Rs. 29,33,863/-. The said difference was on account of adjustment of the outstanding balance of Rs. 29,33,863/- pertaining to its associate concern viz. Shamrock Pharmachemi Pvt. Ltd. Arham adjusted the said outstanding balance of Shamrock Pharmachemi Pvt. Ltd. in the subsequent year FY 2016- 2017.
Enclosed Copy of Arham International Ledger Account in the books of the appellant as well as Shamrock International Ledger account in the books of Arham International of F.Y. 2016-17 as "Exhibit - K".
C. Grounds of Appeal:
1. The Id. CIT(A) has erred on facts and in law in invoking provisions of section 69 of the Act to the difference of Rs. 29,33,863/- between the closing balance in the books of the appellant's creditor viz. M/s Arham International and corresponding closing balance of M/s Arham International in the books of the appellant as on 31st March, 2016. The Ld. CIT(A) ought to have appreciated that the said difference was duly reconciled and section 69 has no application to the facts of the case.
2. The appellant craves leave to add and / or to amend and / or to delete the foregoing ground of appeal, at any time before the hearing or during the course of hearing.
D. Appellant's Plea on Ground No.1:
1. The appellant submits that the closing balance of Arham International as on 31st March, 2016 in the books of the appellant stands duly reconciled with the corresponding closing balance of the appellant in the books of Arham as on 31st March, 2017 which can be seen from the ledger accounts submitted on dated 23/01/2024 before the Ld. A.O. during the remand report proceedings by the appellant and submissions made by the Arham International in response to notice issued u/s. 133(6) on dated 20/03/2024 as well as appellants submissions made before the Ld. A.O. on 03/04/2024, clearly establishes that the balance confirmations filed by both the parties shows that balances have been reconciled as on 31st March, 2017 amongst the parties, hence, no additions is warranted for the year under consideration.
2. The appellant is relying upon the submissions made before the Ld. A.O. during the course of remand report proceedings.
Section 69 of the Act has no application in case of the appellant which reads as under: a) Section 69 of the Income Tax Act 1961 states that "Where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. b) Thus, for applying the provisions of section 69 of the Act, the Assessing Officer should first come to finding that the assessee has made investments and the same are not recorded in the books of account and thereafter, he can call the assessee for an explanation from about the nature and source of the investments and in acse he finds that the assessee is unable to furnish the explanation or the explanation offered by him is not satisfactory, the assessing officer can treat the value of the investments to be the income of the assessee of the financial year in which he has made the investments. c). Essential Conditions of Section 69:
1. The assessee has made investment in the financial year immediately preceding the assessment year. ii. Also, such investments are not recorded in the books of accounts, if any, maintained by him for any source of income. iii. Either the assessee unable to furnish explanation about the nature and source of the investments or the A.O. is in opinion that the explanation offered by him is not satisfactory.
If all the above conditions are satisfied, then the value of such investments "MAY" be deemed to be the income of the assessee of the financial year in which he has made the investments. iv. Thus, it is clear from the above discussion that the provisions of Section 69 contained that before the amount of the undisclosed investment is included in the total income of an assessee, he is entitled to get an opportunity to explain the same before the assessing officer proceeds for additions. v. The appellant submits that no opportunity was provided to the appellant by the Ld. CIT(A) before passing the Order u/s. 250 of the Act, dated 22/07/2024, invoking Section 69 of the Act making additions of Rs. 29,33,863/- being differences in ledger balances without appreciating the appellant submissions that the balances have been reconciled in subsequent year.
4. The appellant is relying upon the following legal judgments:
1. The Income Tax Appellate Tribunal ""A" Bench Ahmedabad in the matter between The Income Tax Officer v/s. Rajeev Kumar N. Bodawala, Surat in vide order dated 31- 12-2010, Held that:
On consideration of the submission of the Ld. DR, we do not find it to be a fit case for interference. The AO was satisfied with the reconciliation filed by the assessee in respect of the account of M/s. Premprit Textiles (1) Ltd. but part addition is made because the credit note of difference of Rs.28,881/- was not noted in the books of accounts. The assessee explained that part of the amount was pertaining to the earlier year which is offered for taxation and for part of the amount credit note was received late in the subsequent year and that amount was also offered for taxation in the subsequent year. Therefore, there was no negligence on the part of the assessee not to post the credit notes in the books of accounts. Entries are supported by ledger accounts of the party. Since the assessee has already offered the amount in question in the earlier year and subsequent year and offered for taxation, therefore, it would amount to double taxation. This ground of appeal of the revenue has no merit. The same is accordingly dismissed.
Enclosed Copy of Order of Income Tax Appellate Tribunal ""A" Bench - Ahmedabad in the matter between The Income Tax Officer v/s. Rajeev Kumar N. Bodawala, Surat in vide order dated 31-12-2010 as "Exhibit - L".
2. [1974] 96 ITR 148 (Kerala) High Court of kerala (T.C.N. Menon v/s. Income Tax Officer), Held that:
It is clear from the provision of Section 69 that before the amount of the undisclosed investment is included in the total income of an assessee, he is entitled to an opportunity to explain it. The petitioner's case attracts the application of section 69 of the Act. The Income-tax Officer was, therefore, bound to give an opportunity to the petitioner to explain about the nature and source of his investment before that was treated as his income.
Enclosed Copy of Order of (Kerala) High Court of Kerala (T.C.N. Menon v/s. Income Tax Officer) [1974] 96 ITR 148 (Kerla H.C.) as "Exhibit - M".
In view of the aforementioned submissions, the appellant humbly prays Your Honor that additions of Rs. 29,33,863/- made u/s. 69 of the Act being differences amongst the parties as on 31st March, 2016 may please be deleted and Order passed by the Ld. CIT(A)'s Order Dated 22/07/2024 may please be set aside.
4. On the other hand, Ld. DR relied upon the orders passed by the revenue authorities.
I have heard the counsel for both the parties and have also perused the material placed on record , judgements, cited before me and the orders passed by the revenue authorities. From the records, I noticed that the order of assessment was passed thereby making additions under section 69 of the Act on account of the fact that sundry creditors in case of Arham International Ltd, has not responded to any of the notices by the Ld.AO, and no documents were filed. However, during the course of appellate proceedings, the additional evidences were filed with regard to balance confirmation of the said party and consequently remand report was also sought and both the parties submitted their respective documents, and thus based on the ledger confirmation submitted by Arham International Ltd, the closing balance as per books of accounts of Arham as on 31 March 2016 was found to be Rs. 75,99,348/- and closing balance of Arham as per books of accounts of assessee was Rs. 46,65,485/- resulting in difference of Rs. 29,33,863/-. The said difference as explained by Ld. AR was on account of adjustment of the outstanding balance of Rs. 29,33,863/- pertaining to its associate consultant i.e Shamrock pharmachemi Private Limited in the subsequent year, i.e FY 2016–17, in this regard my attention was drawn to the documents placed by way of paper book and the same are marked as exhibit K.
Since the closing balance of Arham International as on 31st March 2016 in the books of the assessee stands reconciled with the corresponding closing balance of the assessee in the books of Arham International Pvt Ltd as on 31st March 17, clearly establishes that the balance has been reconciled as on 31st March 2017 among the parties.
Therefore, in such a scenario, the provisions of section 69 of the Income Tax Act has no application because section 69 of the Income Tax Act states that Section 69 of the Income Tax Act 1961 states that "Where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.
Therefore, in my view the essential conditions for attracting section 69 of the Income Tax Act are as under:
The assessee has made investment in the financial year immediately preceding the assessment year. ii. Also, such investments are not recorded in the books of accounts, if any, maintained by him for any source of income. iii. Either the assessee unable to furnish explanation about the nature and source of the investments or the A.O. is in opinion that the explanation offered by him is not satisfactory.
If all the above conditions are satisfied, then the value of such investments "MAY" be deemed to be the income of the assessee of the financial year in which he has made the investments.
Therefore, now it is clear from the above discussion that the provisions of section 69 of the Act is attracted only if the assessee gets an opportunity to explain the same before AO proceeds for making addition under section 69, which in this case has not been done. For this legal proposition, I rely upon the decision of Hon’ble High Court of Kerala in the case of TCN Menon Vs ITO, [1974] 96 ITR 148, wherein it was held as under:
What section 144 requires the ITO to do in the case of defaulting assessee is to make an assessment of his total income to the best of judgment, after taking into account all relevant materials which the ITO has gathered. An assessment to the best of judgment is a quasi-judicial process, and it has to be based on the materials gathered. Any quasi-judicial process requires an opportunity for being heard before decision. The decision can be arrived at best, or as correctly as possible, only if the assessee is given an opportunity to say why on the materials gathered by the ITO, the income should not be assessed in the manner proposed to be done by him. There is no express denial of this well- established common law right in section 142(3).
Sub-section (3) of section 142 deals with a stage before the ITO comes to a tentative decision or proposal to determine the total income at a certain amount on the basis of the materials gathered by the ITO. Those materials can be used against an assessee only after giving him an opportunity of being heard. The assessee is entitled to have a second opportunity to show cause why the total income should not be determined in the manner proposed to be done by the ITO. It is only the first opportunity that is denied by sub-section (3) of section 142 to a defaulting assessee. He is entitled to show cause why, on the materials gathered by the ITO, his total income should not be assessed in the manner proposed by the ITO It is clear from the provision of section 69 also that before the amount of the undisclosed investment is included in the total income of an assessee, he is entitled to an opportunity to explain it. The petitioner's case attracted the application of section 69. The ITO was, therefore, bound to give an opportunity to the petitioner to explain about the nature and source of his investment before that was treated as his income.
1. The Income Tax Appellate Tribunal ""A" Bench Ahmedabad in the matter between The Income Tax Officer v/s. Rajeev Kumar N. Bodawala, Surat in vide order dated 31-12-2010, Held that:
On consideration of the submission of the Ld. DR, we do not find it to be a fit case for interference. The AO was satisfied with the reconciliation filed by the assessee in respect of the account of M/s. Premprit Textiles (1) Ltd. but part addition is made because the credit note of difference of Rs.28,881/- was not noted in the books of accounts. The assessee explained that part of the amount was pertaining to the earlier year which is offered for taxation and for part of the amount credit note was received late in the subsequent year and that amount was also offered for taxation in the subsequent year. Therefore, there was no negligence on the part of the assessee not to post the credit notes in the books of accounts. Entries are supported by ledger accounts of the party. Since the assessee has already offered the amount in question in the earlier year and subsequent year and offered for taxation, therefore, it would amount to double taxation. This ground of appeal of the revenue has no merit. The same is accordingly dismissed.
10. Moreover, throughout the proceedings before the revenue authorities, it was not pointed out that the explanation put forth along with supporting documentary evidences by the assessee was found to be wrong or non- genuine. Therefore in such a situation when once the revenue authorities were satisfied with the reconciliation filed by assessee in respect of the account of Arham International Ltd, wherein the said outstanding balance of Shamrock Pharmachem Private Limited was adjusted in the subsequent year, therefore, no additions under section 69 of the Act was warranted. Hence I direct to delete the same.
In the result the appeal filed by the assessee is allowed. .Order pronounced in the open court on 24.01.2025.