ASST. COMMISSIONER OF INCOME TAX , CIRCLE-1, ANANTAPUR vs. N MADHUSUDHANA, TADIPATRI, TADIPATRI

Brief facts of the case are that all the assessees before us are individuals. They filed their returns of income for the AYs 2009-10 and 2010-11 respectively. All of their assessments for the A.Y. 2009-10 were completed u/s 143(1) of the Income Tax Act, 1961 (the Act). In their returns of income, the assessees have shown receipts under the head “Transport Charges” during the previous years 2009-10 and 2010-11, from which TDS was also allegedly made. The assessments for the A.Y. 2009-10 were completed initially u/s 143(1) of the Act and thereafter completed u/s 143(3) r.w.s 147 of the Act while the assessments for the A.Y. 2010-11 were completed u/s 143(3) of the Act. The facts and circumstances in all the cases being same, for the sake of convenience, the facts in the case of Sri Rageni Gangadhar are taken for discussing the issue involved in these appeals.

During the scrutiny proceedings for the A.Y. 2010-11, the A.O. of the assessee observed that against the Gross Receipts of transportation charges of Rs. 7,49,10,293/-, the assessee had claimed expenditure of Rs. 7,46,41,854/- and disclosed income of Rs. 5,60,621/- which also included ‘income from shares’ and ‘income from other sources’. On perusal of the P & L Account, the A.O. observed that the assessee has claimed a huge expenditure against the receipts to the extent of Rs. 98%, which according to him was an unusual percentage. Thus, to verify the genuineness of the expenses claimed by the assessee, he asked the assessee to produce various documents / bills / vouchers and such other evidence that he may rely on to substantiate the claim of expenditure. During the course assessment proceedings, on 28.12.2012, a statement of the assessee was recorded u/s 131 of the Act, wherein he identified himself and revealed the nature of his business activities etc., and stated that he has done the business of shifting iron ore from two companies in Bellary, Karnataka.

On verification of the assessee’s books of account, A.O. found that they contain the registration number of the lorries / trucks, which were said to have been engaged by the assessee for transportation of iron ore. On verification, A.O. noted that most of the alleged Lorry Numbers written in the books of account were found pertaining to ‘Auto Rickshaws, Bikes, Scooters, Cars, Ambulances, School Vans etc’ and that with regard to certain other entries, there was no data available with the Transport Authorities. Thus, it was presumed that the vehicle numbers written in the books of account are fictitious and no vehicles existed with such Registration Numbers. Therefore, A.O. observed that the assessee had claimed an abnormal percentage of his gross receipts as expenditure under a single head ‘Transport Hire Charges’ but details submitted to substantiate the said expenses are totally unreliable. He further observed that the vehicles such as Auto Rickshaws, Bikes, Scooters, Cars, Ambulances, Schools Vans etc., cannot be used to transport of iron ore material within the mines and some of the vehicle numbers mentioned in the books of account were totally non-existent.

Therefore, in order to verify this aspect further, the assessee was asked to produce the bills raised by him against mining companies viz., M/s. Obulapuram Mining Company (P) Ltd., Bellary (OMC) and M/s. Anantapuram Mining Corporation, Bellary (AMC). In response to the said query, the assessee stated that the original bills were submitted to the mining companies (OMC & AMC) for settlement of transport claims made by him and therefore, he could not produce any such bills. The A.O thereafter, conducted a verification of bank statements and books of accounts and found that invariably every receipt has been withdrawn by the assessee by cash on the same day, in huge sums at Bellary mining area, where custody of such cash is a very high risky affair and thus A.O. found the bank statement to be very unusual.

Thereafter, the assessee was asked to produce Katchaa Books based on which, the transportation charges have been claimed by him on OMC & AMC and also the alleged Katchaa books based on which the assessee has paid huge expenses under the head ‘transport hire charges paid’. However, the assessee did not produce such Katchaa books as well. Therefore, the A.O. observed that the assessee did not have any evidence for having carried out transport services as claimed by him.

Therefore, A.O. felt it necessary to verify whether the assessee has actually rendered any transport services at all. In this connection, A.O. again recorded a statement of the assessee on 11.03.2013 confronting him with the specific issues like his experience in the field of transport business, payment of finance charges, details of unsecured loans shown in his balance sheet, details of audit fees shown as payable, details of transport charges shown as payable etc. In his statement, the assessee admitted that he has recorded fictitious financial transactions in his books of account upon the directions of Sri Phani Kishore of OMC (Obulapuram Mining Company). He stated that no vehicles / lorries were supplied by any of the transport companies, but that the assessee has received the amounts by way of cheques and subsequently returned the same, in cash to Mr. Phani Kishore of OMC etc. Assessee also admitted that he does not have any sort of registration with any Government Department for providing transport services. He also stated that he has not maintained any primary documentary evidence viz., Katchaa books in support of the stated transport business. Assessee did not produce the details of the persons from whom he had allegedly hired lorries for the purpose of shifting of iron ore in the mines related to OMC. In view of all the above facts, A.O. came to the conclusion that there is no agreement between assessee and M/s. AMC and OMC for transporting of iron ore and that the CBI also had

Thus, the A.O. held that the substantive addition is to be made in the hands of the relevant deductors and the protective addition is to be made in the hands of the deductee i.e., the assessee before us. Similar disallowance of expenditure and the addition of the gross receipts to the returned income was made in the hands of all the assessees before us for the A.Y. 2010-11.

Aggrieved by the order of the A.O, all the assessees preferred appeals before the CIT (A), mainly on the ground that the assessment was made protectively in the hands of the assessees and the gross receipts are to be considered for taxation substantively in the hands of the deductors and the respective CIT (A) of the deductors have confirmed the substantive additions made in the hands of the deductors. The CIT (A), Kurnool observing that the substantive additions have been confirmed in the hands of the OMC and others, deleted the protective additions made in the hands of some of the assessees before us. Subsequently, there was a change of incumbent officer in the office of the CIT (A), who, while adjudicating the appeals of the other assessees’, observed that the substantive additions made in the hands of OMC and confirmed by the CIT(A), have been deleted by the ITAT. Therefore, he converted the protective assessments in the

Meanwhile, on the basis of assessments completed for the A.Y. 2010-11, the A.O. reopened the assessments for the A.Y. 2009-10 by issuance of notices u/s 148 of the Act to all the assessees before us for making protective assessments. In the reopened assessments, the Assessing Officer brought to tax the gross receipts received by the respective assessees on protective basis, against which all the assessees filed appeals before the CIT (A), who confirmed the order of the A.O. and all the assessees are in further appeal before us.

Thus, in all the appeals before us for the A.Y. 2010-11, the respective assessees are against the order of the CIT(A) in converting the protective assessment into substantive assessment, while in the appeals for A.Y. 2009-10, the respective assessees are against the reopening of their assessments u/s 147 of the Act, and, also on merits of the additions made thereunder.

The Learned Counsel for the Assessee submitted that when the assessee’s appeals for both the A.Ys had come up for hearing before the Tribunal in the year 2017, the Learned Counsel for the Assessee had brought to the notice of the Tribunal that ITAT, Bangalore had deleted the substantive additions made in the hands of OMC and others. At this juncture, the Revenue sought time to find out the status of the appeals filed by the Revenue in the High Court of Karnataka and at this stage that the CIT had taken a decision to file appeals against the order of the earlier CIT (A), Kurnool, deleting the protective additions on the

Therefore, in the appeals of all the assessees for the A.Y. 2010-11, the grounds raised before us are identical, except the figures mentioned therein, and they are as under:- “1. The order of the First Appellate Authority is not correct on facts in law and in both. 2. The Learned First Appellate Authority is not justified in upholding the addition made by the Assessing Officer as a substantive addition. 3. The Learned First Appellate Authority is not justified in confirming the addition of Rs. 7,52,06,478/- on substantive basis. 4. The First Appellate4 Authority is not justified in not appreciating the fact, which is evident from the assessment order itself, that the total transport receipts were assessed in the hands of the payer, on substantive basis, disallowing the claim of expenditure under the head transport charges. 5. The Learned First Appellate Authority failed to appreciate the fact that the Assessing Officer himself in his order u/s 143(3) stated that the money in question was withdrawn immediately by the payer and hence the appellant was not the beneficiary of the transportation charges. 6. The First Appellate Authority is not justified in converting, during the appellate proceedings, the ‘protective assessment’ into a ‘substantive assessment without giving an opportunity to the appellant especially when substantive assessment was confirmed by the appellate authority. 7. The Learned First Appellate Authority in confirming the addition on substantive basis failed to appreciate the fact that the same amount got taxed twice, once in hands of the payer as disallowance and for the second time in the hands of the appellant, payee as addition u/s 68. 8. Without prejudice to the above, the First Appellate Authority having held that the appellant received transportation charges should have directed the Assessing Officer to estimate the income thereon at reasonable rate instead of confirming the addition u/s 68 of the Act.”

In the appeals of all the assessees for the A.Y. 2009-10, the grounds raised before us are identical, except the figures mentioned therein, and they are as under:- “1. The order of the First Appellate Authority is not correct on facts in law and in both. 2. The Learned First Appellate Authority is not justified in upholding the addition made by the Assessing Officer as a substantive addition. 3. The Learned First Appellate Authority is not justified in confirming the addition of Rs. 7,52,06,478/- on substantive basis. 4. The First Appellate4 Authority is not justified in not appreciating the fact, which is evident from the assessment order itself, that the total transport receipts were assessed in the hands of the payer, on substantive basis, disallowing the claim of expenditure under the head transport charges. 5. The Learned First Appellate Authority failed to appreciate the fact that the Assessing Officer himself in his order u/s 143(3) stated that the money in question was withdrawn immediately by the payer and hence the appellant was not the beneficiary of the transportation charges. 6. The First Appellate Authority is not justified in converting, during the appellate proceedings, the ‘protective assessment’ into a ‘substantive assessment without giving an opportunity to the appellant especially when substantive assessment was confirmed by the appellate authority. 7. The Learned First Appellate Authority in confirming the addition on substantive basis failed to appreciate the fact that the same amount got taxed twice, once in hands of the payer as disallowance and for the second time in the hands of the appellant, payee as addition u/s 68. 8. Without prejudice to the above, the First Appellate Authority having held that the appellant received transportation charges should have directed the Assessing Officer to estimate the income thereon at reasonable rate instead of confirming the addition u/s 68 of the Act.”

The Learned Counsel for the Assessee argued at length that the assessments for the A.Y. 2010-11 are to be set-aside for the reason that A.O. has brought the entire gross receipts to tax even after giving a specific finding that the assessees have not received any income from these transactions. He drew our attention to the finding of the A.O. that

He also objected to the condonation of delay in the case of Revenue’s appeals for the A.Y. 2010-11. While the Learned Counsel for the Revenue has filed an affidavit explaining the reasons for the delay of 902 days, the Learned Counsel for the Assessee submitted that it was he, who had brought to the notice of the Revenue that the appeals of the OMC has been allowed by ITAT and it is only thereafter, that the Revenue had filed the appeals before the ITAT and therefore, the Revenue has not acted diligently and hence the delay should not be condoned.

As regards the reopening of the assessment for the A.Y. 2009-10, the Learned Counsel for the Assessee submitted that even for reopening of the assessment completed u/s 143(1) of the Act, the A.O. should have some tangible material which has come to his notice after giving intimation u/s 143(1) of the Act. He submitted that in the case before us, there was no such tangible material which has come to the notice of the A.O. subsequent to giving of intimation u/s 143(1). He also submitted that the reopening of assessment cannot be done for making a protective assessment as for the reopening of the assessment, the A.O. has to have ‘reason to believe that the income of the assessee has escaped assessment’. The very fact that the substantive additions have

The Learned Senior Counsel for the Department, Sri B. Narasimha Sharma, prayed that the delay in filing of the Revenue’s appeals be condoned as the delay has occurred due to communication gap between the Assessing Officer of the assessees’ before us and the CIT in Bangalore. He has filed a chart showing the chronology of events to explain that the cause for delay in filing the appeals is bonafide and genuine. As regard the merits of the additions are concerned, he submitted that the assessees have participated in fictitious transactions with OMC and have therefore helped OMC in evasion of tax. He submitted that although the assessees are not involved in transport business, but as proved by the A.O, they claimed to have been engaged in such business activities. He submitted that since the assessees have failed to prove the expenditure claimed by them, the entire expenditure has rightly been disallowed and the gross receipts brought to tax. Further, he also prayed that since the appeals of the Revenue in the case of OMC against substantive assessments are pending adjudication before the Hon’ble Karnatka High Court, these being the protective assessments, may be kept pending till the disposal of such appeals.

Having regard to the rival contentions and material on record, we find that the enquiries conducted by the A.O. during the assessment proceedings for the A.Y. 2010-11 clearly proved that the assessees have not rendered any transport services as claimed by them in their returns

But, in the case before us, the A.O. has given a clear finding that the payments to the assessees were taken back by the deductor, therefore, there is no doubt that the income was of the deductor and finally was taken back by the deductor. Then, in such a situation, can the said amount be brought to tax in the hands of the assessee’s before

Even presuming that the assessees are involved in transport business, the entire receipts cannot be brought to tax and the expenditure incurred for running of such business is to be allowed. However, A.O. and the CIT (A) have clearly brought out that the assessees have not rendered any transport services to any of the companies and therefore the assessments of the assessee are to be considered independent of the assessments in the case of mining companies and it is held that the entire receipts cannot be brought to tax. If at all, the assessees have received any income, it is only a commission for lending their names and the assessees have already offered such income, which according to them is not business income, but commission income and has to be taxed as such. Therefore, we hold that the entire gross receipts cannot be brought to tax in the hands of the assessees and the income offered by the respective assessees has to be accepted. We make it very clear that the findings in these cases are independent of any findings in this case of OMC on any of the issues and these findings shall have no impact, whatsoever, on the cases of

As regards the Revenue’s appeals also, since we have set-aside the assessments in the case of all the assessees before us, the Revenue’s appeals do not survive and have to be dismissed accordingly. Therefore, we do not see any purpose in condoning the delay in Revenue’s appeals and thereafter adjudicating the appeals. Therefore, the Revenue’s appeals for the A.Y. 2010-11 are rejected.

As regards the assessee’s appeals for the A.Y. 2009-10, we find from the reasons recorded for the A.Y. 2009-10, that the assessments are reopened only to make protective assessments ie., to bring the income to tax protectively as was done in A.Y. 2010-11. The assessments for A.Y. 2010-11 were completed u/s 143(1) in the case of all the assessees. The Learned Counsel for the Assessee argued that there was no fresh & tangible material which has come before the A.O. after issuing the intimation u/s 143(1), to form an opinion that there was escapement of income. Therefore, the assessments for A.Y. 2009- 10 could not be reopened u/s 147 of the Act. He relied upon the decision of the Hon’ble Delhi High Court in the case of Orient Craft Ltd reported in 354 ITR 536 (Delhi) for the proposition that the condition that tangible material is necessary for reopening of the assessment has to be followed even for the assessments which are completed u/s 143(1) of the Act. But we find that in a recent judgment in the case of Indulata Rangwala vs. DCIT reported in (2016) 384 ITR 337 (Delhi), the Hon’ble Delhi High Court has held that “in a case where the initial return is processed u/s 143(1) of the Act and intimation is sent to the assessee, the reopening of such assessment no doubt requires the A.O. to form

Therefore, on the question whether there is satisfaction for reopening of an assessment, we find that in the assessment for A.Y. 2010-11, the A.O. has come to a conclusion that the substantive assessment is to be made in the hands of the deductor. Therefore, the provisions of section 147 are very clear that the A.O. has to have reason to believe that the income of the relevant assessee for the relevant A.Y. has escaped assessment. When the A.O. has himself held that the income is taxable in the hands of the deductor, he could not have formed another opinion that the income is taxable in the hands of the deductee-assessees which has escaped assessment. The A.O. cannot be allowed to blow hot and cold at the same time. In the instant case, as there is no satisfaction / opinion formed by the A.O. that the income of the assessee has escaped assessment, we are of the opinion that the re-assessment is not valid. Accordingly, the assessee’s appeals for the A.Y. 2009-10 are treated as allowed and the assessments are set-aside.

In the result, the assessee’s appeals are allowed and the Revenue’s appeals are dismissed. Order pronounced in the open court on 26th September, 2018. Sd/- Sd/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 26th September,2018 OKK, Sr.PS