CLAYMINE MICRONS LLP,WANKANER vs. PRINCIPAL CIT 1, RAJKOT

That on the facts and the circumstances of the case and in law, the Ld PCIT Rajkot has erred in law and in facts in assuming juri iction in as much as Assessment

The appellant further reserves it’s right to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.”

The facts of the case which can be stated quite shortly are as follows: The assessee, (M/s Claymine Microns LLP) had filed its return of income for assessment year (A.Y.) 2018-19, on 29.09.2018, declaring total income of Rs. 40,510/-. The assessment was finalised u/s 143(3) r.w.s 144B of the Income- tax Act, 1961, on 01/04/2021, accepting returned income of Rs. 40,510/-.

Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), has exercised his juri iction under section 263 of the Income-tax Act, 1961. On perusal of case records, it was observed by ld PCIT that the assessee firm had introduced amount in the form of capital amounting to Rs.7,22,50,000/-, received from its 28 partners. On perusal of assessment records and after verification of bank statements, returns of income and computations, submitted by the assessee, during the course of the assessment proceedings, it was noticed that 14 partners (out of all the 28 partners) did not have enough credit worthiness to introduce amount of capital. In the present case, apart from filing of ITR, Bank Statement and Computations, no explanation of the 14 partners was available on record explaining the nature and source of their investment recorded in the books of assessee. The total capital introduced by such partners is Rs.4,77,74,600/-. The ld.PCIT noticed that assessment records reveal that the assessee has submitted details like, ITR, PAN, bank statement of all the partners. Other than these details no other details to prove creditworthiness of the investors have been filed. Further on perusal of the income shown by the above 14 persons and the capital introduced in the firm, it has been seen that the capital introduced is 6.55 times to 25.30 times of the return income shown by the partners. Therefore, it proves that these partners

In response, to the notice under section 263 of the Act, the assessee submitted its reply, dated 11.03.2023, before the Ld. PCIT along with documentary evidences. The assessee submitted that in the absence of any income or existence of any source of income during the year under consideration, the impugned fresh capital received prior to the commencement of commercial operation and income generating activity cannot be regarded as unexplained/undisclosed income in the hands of the assessee- firm by invoking the provisions of section 68 of the Act. The decision taken by the A.O. during the assessment proceedings cannot be regarded as erroneous even on any different ground alleging inadequate verification/inquiries by the A.O. It is clearly evident from the assessment records that the A.O. had carried out independent inquiries by issue of notices u/s 133(6) of the Act and called for requisite explanations from all the 28 partners in pursuance thereof, all the 28 partners including the impugned 14 partners have duly responded and furnished the details as required by the A.O. The assessee submitted that during the course of assessment proceedings, the assessing officer had raised specific queries, vide notice u/s 142(1) dated 04.12.2020 with respect of the fresh capital contribution by the partners and in response thereto, assessee furnished a detailed submissions, vide letter dated 06.01.2021 and furnished complete details of partners as well as placed on records the third-party documentary evidences. The fresh capital introduced by the said 14 partners cannot be brought to tax in the hands of assessee -firm, even if the creditworthiness of the said partners or their explanations about source of the funds is not found to be ITA No.216/Rjt/2024 -AY 2018-19 acceptable or satisfactory in view of the binding legal position settled for years by the Hon'ble juri ictional Gujarat High Court in case of CIT vs. Pankaj Dyestuff Industries (dated 06.07.2005 in Tax Appeal No. 241 of 1993) [Page No. 69-77].

However, Ld. PCIT rejected the above contention/ reply of the assessee and held that as per the information available on record, during the year under consideration, total capital amounting to Rs.7,22,50,000/- has been introduced by its 28 partners. Out of the 28 partners, 14 partners did not have enough credit worthiness to introduce amount of capital. The total capital introduced by such partners is Rs. 4,77,74,600/-. Therefore, ld.PCIT was of the view that assessee’s case is a fit case for invoking section 263 of I. T. Act as the twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (i) it is prejudicial to the interests of the revenue are satisfied. Accordingly, the impugned assessment order passed by the A.O. u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961, on 23/04/2021 was set aside by ld PCIT for fresh assessment only to the extent of the issue discussed (supra).

Aggrieved by the order of the Ld.PCIT, the assessee is in appeal before this Tribunal.

Shri Hardik Vora, Learned Counsel for the assessee submitted that during assessment proceedings, the assessing officer issued notice u/s.142(1) of the Act, which is placed at paper book page no.26, wherein the assessing officer has raised relevant question, which is reproduced below:

The Ld. Counsel for the assessee further submitted that during the assessment proceedings, the assessing officer also issued further notice u/s.142(1) of the Act, which is placed at paper book page no.9, asking the assessee to file the details of capital introduced. In response to the notice of the assessing officer, dated 19th April, 2021, the assessee filed the detailed reply before the assessing officer, which is reproduced below:

Your honour may kindly appreciate that the confirmations submitted by the assessee contains the details of partners i.e. the name of the party, details of amount received, amount repaid during the year along with the detailed address and pan number of the said party. Further the said capital were received and repaid by normal banking channel. Therefore considering the above mentioned facts and the submission the identity of the said party is clearly established and further the amount received and repaid is along through the banking channel and therefore the genuineness of the said loan transactions along with the creditworthiness is established beyond doubt.

Further due to Covid Pandemic and due to lockdown in Gujarat and Morbi, offices are closed. The assessee and its partners had great difficulties, in the process of getting the copies of ITR and Bank statement of the said partners. The assessee therefore requests your honour to kindly consider the above mentioned submission that the identity and genuineness and creditworthiness is proved beyond doubt.

Vide your notice dated 19.04.2021, as per para "c" your good self has stated that "Nine partners replied to notice u/s. 133(6) and provided the capital account, banks statement

In this connection, remaining 19 partners have submitted their reply to the notice u/s. 133(6) (Acknowledgements for the dated 19.04.2021 & 20.04.2021 is submitted in annexure A). List of all the 19 partners mentioned above along with PAN, details of Capital and amount of capital received are being submitted in tabular format in Annexure B.

Vide your notice dated 19.04.2021, as per para "d" your good self has stated that "It can be clearly seen from the above table that out of 28 partners only 18 partners are filing return of income. In connection with the above, it is humbly submitted that all the 28 partners are filling their return of income. For all the 28 partners, last 2 years ITR details along with their date of filing of IT return and GTI are being submitted in tabular format in Annexure C.

Moreover, all the 28 partners have provided documentary evidence to substantiate the identity, creditworthiness and genuineness of transactions by furnishing the ITR of last 2 years with annual accounts of the partners. Similarly furnished partners capital account along with supporting of source of capital introduced by the partners.

Thus, as far as the introduction of capital by partners in the books of accounts of the LLP is concerned, we had furnished two years ITRs along with annual accounts of the partners which include the balance sheet as well. Thus, the source of the fund received in the hands of the LLP stand explained as all the three ingredients of section 68 of the Act i.e. Identity, Capacity and Genuineness of transition are discharged by the LL.P

Judiciaries have time and again held that the assessing authority should restrict the verification of cash credit received to the extent of verification of source/creditworthiness of creditor and not to verify the "source of source In this regard, reliance is placed on following decisions:

Therefore, Ld. Counsel for the assessee contended that during the assessment proceedings, the assessing officer conducted sufficient enquiry by issuing two notices and in response to these notices, the assessee submitted its reply before the assessing officer along with documentary evidences and after considering the reply of the assessee, the assessing officer has framed the assessment order, therefore, order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the Revenue. Hence, the juri iction exercised by the Ld.PCIT u/s.263 of the Act should be quashed.

On the other hand, Ld. CIT.DR for the Revenue submitted that assessing officer has not conducted proper enquiry and the assessee has not submitted the Bank Statement in respect of the some of the partners. Besides, the issue involved under consideration, is complex and critical, therefore, the assessing officer, should have conducted further enquiry during the assessment proceedings which he has failed to do so. Therefore, to that extent the order passed by the assessing officer is erroneous and prejudicial to the interest of the Revenue.

Therefore, ld.Counsel stated that in fact the assessee has submitted the return of income and bank statement of all the partners and the assessing officer having examined all these evidences, framed the assessment, therefore, the order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the Revenue.

We have carefully considered the facts of the case, the submission of the Learned Counsel for the assessee and ld DR for the Revenue and evidences on record. We find that case of the assessee, under consideration was taken-up for the complete scrutiny through CASS mainly for the reason of verification of the fresh capital introduced during the year. We note that during the course of assessment proceedings, the assessing officer had raised specific queries, vide notice u/s 142(1) dated 04.12.2020, with respect of the fresh capital contribution by the partners and in response thereto, assessee furnished a detailed submissions, vide letter dated 06.01.2021 and furnished complete details of partners as well as placed on records the following third-party documentary evidences:

We note that main allegation of Ld.PCIT was that assessing officer did not make adequate inquiries with reference to the capital contribution by partners. We find that it is not at all disputed anywhere that the assessing officer has called for requisite documents and carried out independent inquiries as deem fit, in respect of the capital contribution by the partners which were duly placed on records by the assessee- firm and after the due verification and considering the binding legal position, the assessing officer accepted the factum of capital contribution by partners. It is a very well settled position under the law that while making assessment, the assessing officer made an inadequate enquiry, that by itself, would not empower exercise of powers u/s 263 of the Act and it is only in cases of lack of inquiry, the actions can be taken u/s. 263 of the Act. Therefore, we note that the proposed revision proceedings u/s 263 of the Act is merely by distrusting creditworthiness of partners, while the identity of partners and factum of capital contribution by them remained undisputed and that it is not a case where partners are fictitious and nothing brought on record to establish that the amounts brought in by partners represented income of assessee -firm.

We note that in respect of impugned 14 partners out of total 28 partners, the identity of partners as well as the factum of their capital contribution is nowhere disputed by ld.PCIT. The ld.PCIT doubted only their creditworthiness. In fact, the identity of the said 14 partners and factum of their capital contributions can never be under dispute in view of the detailed examination carried out by the Ministry of Corporate Affairs (MCA) at time of incorporation and third-party documentary evidences already available on the records. We note that the said 14 partners are not fictitious and there is not a single evidence on records to ITA No.216/Rjt/2024 -AY 2018-19 conclude that the amounts brought in by these partners were actually income of the assessee- firm. We note that the observation of ld.PCIT that no explanation of these 14 partners is available on record is factually incorrect and in direct contradiction to the assessment records itself. In fact, it is clearly evident from the assessment records that the A.O. had carried out independent inquiries by issue of notices u/s 133(6) of the Act and called for requisite explanations from all the 28 partners in pursuance thereof, all the 28 partners including the impugned 14 partners have duly responded and furnished the details as required by the A.O. Therefore, the impugned 14 partners have duly responded, during the assessment proceedings and to prove this fact, the information pertaining to 14 partners are reproduced below: Compliance to Notices u/s. 133(6) before issuance of SCN Compliance on 19/20.04.2021 in response to Notices u/s. 133(6) Kevinbhai Ravjibhai Patel Akashbhai Maheshbhai Moradiya Nileshbhai Bhanjibhai Kavar Amrutlal Ruganathbhai Detroja Pradyumanbhai Ratilal Patel Ashokbhai Rugnathbhai Detroja Ramilaben Jayasukhbhai Mendapara Dalpatbhai Rugnathbhai Detroja Ravjibhai Amababhai Ughareja Pankajbhai Durlabhjibhai Barasara Upendrabhai Nanjibhai Kaila Rajnibhai Dharmsibhai Mordiya

The above being the position, the fresh capital introduced by the said 14 partners cannot be brought to tax in the hands of assessee -firm, even if the ITA No.216/Rjt/2024 -AY 2018-19 creditworthiness of the said partners or their explanations about source of the funds is not found to be acceptable or satisfactory in view of the binding legal position settled for years by the Hon'ble juri ictional Gujarat High Court in case of CIT vs. Pankaj Dyestuff Industries (dated 06.07.2005 in Tax Appeal No. 241 of 1993) [Page No. 69-77] wherein it has been clearly held that:

We also note that by following the aforesaid legal position settled by the Hon'ble juri ictional Gujarat High Court, in the identical situation of exercising revisionary powers u/s 263 of the Act by questioning the partners' capital contribution in the hands of the assessee- firm, recently, Hon’ble juri ictional Rajkot ITAT in case of Lexico Ceramics vs. PCIT-1, Rajkot (decision dated 12.05.2023 in ITA No. 01/Rjt/20231, quashed the revision order u/s 263 of the Act. We note that ld.PCIT has merely compared the capital contribution by the said 14 partners with their total taxable income as per return of income. At the same time, ld.PCIT has completely lost the sight from substantial amounts of exempt income reported by partners in their return of income. However, we note that the creditworthiness of a person is required to be judged from the bank statement and Balance Sheet and not only from the income reported in the return of income. It is an undisputed fact that the said

Therefore, we note that since the identity of the partners as well as factum of capital contribution by them remained undisputed and that it is not a case that the partners are fictitious and nothing brought on record to establish that the amounts brought in by partners represented income of assessee- firm, there remains no scope to draw any adverse inference in the hands of the assessee- firm. In the conclusion, we are of the view that none of the reasons set out by the PCIT for invoking the juri iction u/s 263 of the Act are sustainable. The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case. We accordingly quash the order u/s 263 of the Act and allow the appeal of the assessee. 22. In the result, the appeal of the assessee in ITA No.216/RJT/2024, is allowed.