ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2, TRICHY, TRICHY vs. V N S FINANCE, KARUR

The brief facts of the case are that the assessee is a partnership firm engaged in the business of money lending and is stated to be operating from the first floor of the residential premises of Shri K. Natrayan, situated at Karur. It is noted that Shri K.Natrayan is stated to be working as a Manager in various finance concerns. One among such concerns is M/s.VNS Finance and the other entities are M/s.VNS Auto Finance, M/s.VNS Credits, M/s.VNS Enterprises and M/s.VNS Investments. The family members of Shri K. Natrayan are stated to be partners in all the aforesaid entities, each firm consisting of twelve partners. It is further noted that Shri K.Natrayan is managing the business affairs of these firms under a Power of Attorney duly executed by the respective partners.

A search action u/s.132 of the Act was conducted at the premises of the assessee on 11.04.2019 in connection with the General Elections to the Lok Sabha, 2019. During the course of the said search, physical cash amounting to Rs.92,80,220/- was found from the premises. The Authorized Officer recorded a statement from Shri Karthik T.Kalimuthu, Accountant of M/s.VNS Finance. In the said statement, he admitted that out of the cash found, a sum of Rs.6,53,051/- pertained to the closing cash balance of M/s.VNS Finance and Rs.1,27,169/- represented the personal savings of Shri K.Natrayan. Consequently, a balance amount of Rs.85,00,000/- was seized by the Authorized Officer.

The assessee filed its return of income for the A.Y.2020-21 declaring a total income of Rs.2,11,280/- on 01.12.2020. The case was selected for scrutiny and notice u/s.143(2) of the Act was issued on 30.06.2021.

During the assessment proceedings, the AO noted that the opening cash balance of the assessee-firm as on 01.04.2019 was Rs.6,52,748/-. It was further observed that during the course of post-search proceedings, Shri K.Natrayan submitted that the combined cash balance of all five concerns amounted to Rs.40,80,991/-.

Subsequently, during the assessment proceedings, the assessee furnished another report stating that the consolidated cash balance of all the five firms was Rs.91,52,777/-, which included capital contribution received in cash from partners aggregating to Rs.36,00,000/-. In the said report, the opening cash balance of the assessee firm as on 01.04.2019 was shown at Rs.8,46,248/- and the cash balance as on the date of search i.e., 11.04.2019, was declared at Rs.18,87,748/-.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A), vide impugned appellate order dated 03.07.2024, granted partial relief to the assessee by confirming an amount of Rs.14,72,660/- as unaccounted business income of the assessee, out of the total amount of Rs. 92,80,820/- which had been added by the AO on a protective basis u/s.69A of the Act. Consequently, the Ld.CIT(A) deleted the balance amount of Rs.78,08,160/- from the protective addition made by the AO.

Being aggrieved of the relief granted by the Ld.CIT(A), the Revenue has preferred the present appeal before this Tribunal.

At the outset, the Ld.AR appearing on behalf of the assessee, by placing reliance on Rule 27 of the Income Tax Appellate Tribunal Rules, 1963, submitted that the Revenue had simultaneously initiated assessment proceedings in the case of the Managing Partner, Shri K.Natrayan, for the A.Y.2019-20 and had brought to tax the impugned amount as income in his hands on a substantive basis. It was pointed out that the said substantive addition made in the hands of Shri K.Natrayan stood deleted in entirety by the Ld.CIT(A) while disposing of the corresponding appeal for A.Y.2019-20.

It was thus contended by the Ld.AR that, consequent to such deletion in the hands of the Managing Partner, the Ld.CIT(A) in the impugned order relating to the assessee-firm had treated the addition substantively and granted partial relief. The Ld.AR further submitted that subsequent to the aforesaid appellate order, proceedings u/s.263 of the Act were initiated by the Ld.PCIT for the :-5-: ITA. No:2292/Chny/2024 A.Y.2020-21 in the case of the Manging Partner Shri K.Natrayan, whereby the assessment order was set aside with certain directions. Pursuant thereto, while giving effect, the AO again made a substantive addition of Rs.92,80,220/- in the hands of the Managing Partner, Shri K.Natrayan.

In view of the above factual matrix, the Ld.AR contended that the Revenue itself having treated the impugned amount as the income of the Managing Partner on a substantive basis, no addition can legally survive in the hands of the assessee-firm. Accordingly, it was prayed that the impugned addition in the hands of the firm deserves to be deleted in toto.

Per contra, the Ld.DR opposed the submissions advanced by the Ld.AR and placed strong reliance upon the findings and reasoning contained in the assessment order. The Ld.DR accordingly urged that the impugned order passed by the Ld.CIT(A) be set aside and the order of the AO be upheld.

We have heard the rival contentions and perused the relevant material available on record. The undisputed facts emerging from the assessment proceedings reveal that the assessee is a partnership firm engaged in the business of money lending and is operating from the first floor of the residential premises belonging to Shri K.Natrayan located at Karur. A search operation u/s.132 of the Act was conducted on 11.04.2019 in connection with the General Elections to the Lok Sabha, 2019. In the course of the said search, physical cash amounting to Rs.92,80,220/- was found from the aforementioned premises. Based upon the statement recorded from Shri Karthik T.Kalimuthu, Accountant of the assessee-firm, a sum of Rs. 85,00,000/- was seized.

During the assessment proceedings, the AO did not accept the explanation tendered by the assessee pertaining to the availability and source of the cash balance and consequently treated the entire amount of physical cash of Rs.92,80,220/- as unexplained money u/s.69A of the Act. The addition

It is an admitted factual position that the above cash of Rs.92,80,220/- stands subjected to assessment proceedings in two different hands, namely, the assessee-firm and the Managing Partner, Shri K.Natrayan, under independent statutory proceedings. The well-settled legal position, supported by various judicial precedents, is that the same income cannot be assessed substantively in more than one hand. A protective assessment may continue to remain operative only until the substantive assessment reaches finality in the correct and appropriate hands. We further observe that the subsequent developments arising out of proceedings initiated u/s.263 of the Act and the consequential reassessment undertaken in the case of Shri K.Natrayan have a direct bearing on determining the taxability of the impugned cash in the present case. These aspects have not been examined or considered by the Ld.CIT(A) while passing the impugned order.

Considering the totality of facts, the principles of natural justice, and the legal requirement to determine the correct person liable for taxation of the impugned amount, we are of the considered view that the matter warrants fresh adjudication. Accordingly, we set aside the impugned appellate order of the Ld.CIT(A) and restore the matter to his file for denovo consideration. While doing so, the Ld.CIT(A) shall examine the outcome of the consequential assessment orders passed in the case of Shri K.Natrayan and ascertain whether substantive tax liability has crystallized in his hands. Adequate and reasonable opportunity of being heard shall be afforded to the assessee. The Revenue is at liberty to furnish the updated assessment records and relevant proceedings pertaining to Shri K.Natrayan. The assessee shall extend full cooperation to facilitate expeditious disposal of the matter.

In the result, the appeal of the Revenue stands allowed for statistical purposes.