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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” (SMC
Before: SHRI B. RAMAKOTAIAH
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-II, Hyderabad, dated 17-09-2012.
Assessee filed appeal on 10-09-2012 with various grounds, which include submission and case law. Assessee filed revised Form 36 on 24-08-2017, revising some columns and grounds as well. The revised grounds are as under:
“Revised Grounds of Appeal: 1. The order of the Commissioner of Income tax, (Appeals) is erroneous both on facts and in law.
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The CIT(A) failed to appreciate that reopening of assessment under section 147 was bad in Law; and thus ought to have annulled the assessment.
The CIT(A) erred in confirming the addition of Rs. 23,00,200/- brought to tax as unexplained investment.
Crave Leave to urge/raise any ground that might be necessary at the time hearing”.
Briefly stated facts are that assessee has filed his return of income on 21-10-1999 declaring a total income of Rs. 78,480/. The return was accepted u/s 143(1). However, notices u/s. 148 of the Income Tax Act [Act] has been issued on the reason that the income has escaped assessment. The Assessing Officer (AO) has completed the assessment u/s. 143(3) r.w.s. 147 vide order dt. 27-03-2006 by making the addition on account of unexplained investment of Rs. 23,00,200/-.
Before the Ld.CIT(A), assessee raised two grounds mainly one was that the issuance of notice u/s. 148 and reopening of assessment is bad in law and other was the addition of Rs. 23,00,200/- on account of unexplained investment. It was the contention of assessee that the reopening was at the instance of report of JCIT, Bhubaneswar, that the reasons for reopening were not communicated, that the notices were not served properly. No enquiries were made and those reports of enquiry which were relied were not furnished to assessee and no cross-examination was provided. Further, reliance of enquiries conducted in the company’s case does not establish the unaccounted nature of amounts involved and no fresh material was available. It was further contended that assessee had disclosed the investments and
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sources in the returns filed originally and these returns were accepted without any scrutiny. In the proceedings before Ld.CIT(A), assessee filed fresh affidavits from the creditors in support of borrowals. Ld.CIT(A) relying on the order of N. Sridhar has negatived the assessee contentions and confirmed the addition, hence the present appeal.
Ld. Counsel explained that assessee along with other family members (whose appeals are separately dealt with) has invested in a company (M/s Sankhya Infotech Ltd, Bhubaneswar) promoted by them and the investment by assessee was to the tune of Rs. 23,00,200/-. The sources of the amount was stated in the original return filed. Out of which, savings are to an extent of Rs. 7.50 Lakhs and loan from 20 persons is Rs. 15.50 Lakhs.
5.1. It was submitted that there was no enquiry about the sources which include encashment of FD, but AO has treated the same also as unexplained and Ld.CIT(A) has not even discussed about the same.
5.2. It was submitted that assessee has borrowed from the following persons:
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Sl.No. Name of the Creditor Amount (Rs) 1 Bapuji 50,000 2 Bhoji 53,000 3 Chittemma 73,000 4 Eeswara Rao 80,000 5 Jaya Raju 50,000 6 Jayapal 1,00,000 7 Jayaraju 45,000 8 Kanakaiah 95,000 9 Mariyamma 95,000 10 Nallaiah 42,000 11 Puppala Rambabu 95,000 12 Raju 92,000 13 Rambabu 50,000 14 Rambabu 73,000 15 Sambhasiva Rao 90,000 16 Satyavathi 50,000 17 Srinivas 1,00,000 18 Tilapalamma 1,43,000 19 Veerabhadra Rao 90,000 20 Yugandar 84,000 Total: 15,50,000
5.3. It was further submitted that the enquiries were originally caused in the case of company and there the promoters’ investment was considered but the addition was made as unexplained investment in Machinery. During the assessment proceedings of the company, the DDIT, Vijayawada made enquiries of sources of source and that too behind the back of assessee’s promoters after a lapse of time and no cross-examination was provided. Assessees filed detailed replies in the case of company’s appeal and Ld.CIT(A) deleted the additions so made. Anticipating an adverse order, the JCIT, Bhubaneswar has written a letter to the officers in Hyderabad to reopen the assessments and that was the basis for issuance of notice. Even though assessee filed the returns of income disclosing the investments and sources, the AO who has no jurisdiction had reopened the assessment and without
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further enquiries relied on the earlier reports and completed the assessment.
5.4. Referring to the order of Ld.CIT(A) it was submitted that the fact is that the reasons for reopening were not communicated by AO and communicated only during the present appeal proceedings recently that too in the form of paper book filed before this forum and referred to the letter of AO given to CIT(A) that reasons for reopening were not communicated even though assessee asked for it.
5.5. On merits, referring to the order of Ld.CIT(A), Bhubaneswar in the company’s appeal, it was submitted that there are enquiries in the case of assessee but even in the enquiries conducted, there was no denial of investment. It was further submitted that AO stated to have sent 78 enquiry letters and 48 of them were returned unserved. It was the contention that assessee has borrowed only from 20 loan creditors an amount of Rs. 15.50 lakhs and furnished affidavits in the course of appeal proceedings. AO has replied that the confirmations tally with details on record except in one case of Tilapalamma which was not signed. But CIT(A) relying on other order in the case of N. Sridhar has rejected the appeal without discussing the facts. Thus, the order of Ld.CIT(A) is therefore devoid of facts and should be set aside.
5.6. Regarding the issue of reopening, the summary of contentions are as under:
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• Precedents on re-opening –
No tangible material – In the returns of income filed originally in all the cases, notes were appended to the ROI about investment in shares of Sankhya Infotech, Bhuvaneshwar. Details of loans taken and confirmation letter etc. were filed in case of Ramakrishna, Parvathavardini, Indira Ramani, N. Sridhar and N. Gayatri. Except these notes, evidences and the letter received from Addln. CIT, Bhuvaneshwar, to take action u/s. 147 there is no tangible material that income has escaped assessment. ( judgment of Delhi High Court in the case of CIT Vs. Atul Kumar Swami where reference to notes filed along with original return of income are made). The entire reasons recorded for re-opening of assessment is “BORROWED SATISFACTION” and not that of the Assessing Officer.
• Reasons for re-opening not communicated in any of the cases – Fatal to re-assessment –
Not furnishing of reasons or its non-communication is fatal to reassessment proceedings. Pls. see case law relied upon as under –
Sr. Case Law ITR Page Court No. i. CIT Vs. Tecumseh Product 361 429 AP & Telangana ii. CIT Vs. Trend Electronics 379 456 Mumbai iii. CIT Vs. Vijaya Talkies & 398 13 Delhi Distributors iv. CIT Vs. Kothari Mills 377 581 Karnataka
Ld.DR, however, defended the order of the AO/CIT(A) vehemently. Regarding the letter of AO denying the recording of reasons, it was stated that the letter is not correct and how the same reached assessee is not known. While admitting that the reasons recorded were traced and provided to assessee recently (in pg.17, in the form of paper book filed). It was submitted that the enquiries were conducted and assessee is aware of all the proceedings and there was non-co-operation from assessee. He referred to various orders- that of Ld.CIT(A), Bhubaneswar, the order of AO and CIT(A)- to support the AO’s action.
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I have considered the rival contentions and perused the orders and documents placed on record and precedents relied. Before adverting to the adjudication of issues, the following facts are to be noted:
A) Assessee filed the return of income on 21-10-1999 with the jurisdiction of ITO 5(5), Hyd admitting incomes and stating the sources of investment of Rs. 23,00,200/- in M/s. Sankya Infotech Ltd., This was accepted u/s. 143(1) and no scrutiny was taken up;
B) The company M/s. Sankya Infotech Ltd., was assessed at Bhubaneswar and enquiries were conducted in some promoters cases including assessee case ;
C) In the company appeal, Ld.CIT(A), Bhubaneswar has deleted the addition with the following observations/findings:
“In this case, the AO has made certain enquiries through the DDTI (lnv.), Hyderabad and Vijayawada regarding the sources of investment towards share capital contributed by four shareholders namely, (i) Shri N. Ramakrishna Rao, (ii) Smt N. Paravathavarhini, (iii) Smt. N. Gayatri and (iv) Smt. N. Indira Ramani. The AO has relied upon the report of the DDlT(lnv.), Hydembad and the statements recorded by him on oath from Shri Babu Rao, Shri Suryanarayana and Shri G. Kanakaiah to state that the loans were bogus and that the agent who arranged the loans had obtained signatures on the loan confirmation letters after bribing the agriculturists. Of course this report was not confronted to the appellant by the AO, but the same had been confronted in course of the remand proceeding. The appellant-company have also cited from the same report to contend that Shri G. Kanakaiah together with his family members have given money to Shri Babu Rao, who has given the money 10 the appellant-company and that the farmer-creditors have Stated that they have signed the loan confirmation letters. The AO has relied upon the said report to question the creditworthiness of the farmers on the ground that, the land was drought prone area for the last five to six years and sufficient income was not generated. The appellant-company has quoted from the same report to assert
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that from 1986 to 1996, prawn was being cultivated in the land where the yield per acre was Rs.1 lakh per anum. The AO has drawn attention to the discrepancies between the plot/survey numbers and the extent of land area given by the cultivators and as appearing in the land records. This discrepancy has been attempted to be explained by the appellant-company by attributing the same to non-mutation of land and typographical and unintentional error etc., although the veracity of the allegation has been admitted in few cases. The difference regarding the extant of land area was attributed to causes like sale/gift or sharing of land subsequently. But, be that as it may, the enquiry report does not indicate that the sources of source, i.e., the loans advanced by the farmers to the Directors/shareholders; were totally bogus or that they completely lack creditworthiness. But, there appears to be some substance in the assertion of the AO/Jt.CIT that certain elements like the genuineness of the transactions and complete creditworthiness of the farmers was not conclusively established. These matters nevertheless require further enquiry as only sixteen out of seventy five farmer-creditors, who have advanced loans to the four share holders have been examined. No enquiry has been conducted in respect of loans availed by the two promoter-directors; namely Shri N. Srinivas and Shri N. Sridhar. Therefore the AO or the concerned AOs can conduct further enquiries and if it is found that the loans given by the farmers were neither credible nor genuine; the additions could be made in the hands of the shareholders who have subscribed to the shares of the appellant-company. The sources of funds in such cases can be tackled by the AO in the hands of the subscribers to the equity shares who have availed the loans. Therefore, the AO is free to conduct further enquiries in the case of individual sharesholders as per the extant provisions of law and consider these amounts in their hands in view of the discussions in para 4.1 and 4.2 and the judicial decisions cited supra”.
D) Before the order of Ld.CIT(A), Bhubaneswar was passed, the JCIT has reported his findings to the officers at Hyderabad with a request to reopening the assessment s for protecting the interest of Revenue. As per the paper book filed by the Dept (page 15), there was a direction by Addl. CIT letter no 49/R-13/04-05 to ACIT to submit proposal for initiating action u/s. 147 immediately by the letter dt. 02-03-2005;
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E) The order sheet endorses the said letter and the reopening by the AO, Asst. Commissioner of Income Tax, Circle-13(1), was consequential to the above letter and AO recorded the satisfaction that assessee has not filed return and hence escaped assessment.
F) Assessee received notice u/s. 148 dt. 16-03-2005 but the reasons recorded were not communicated either during assessment proceedings or during appeal proceedings.
G) Even though confirmations in the form of affidavits were filed, no further enquiries were caused nor the earlier reports were given to assessee and cross examination was not provided;
H) AO in the assessment order states to have sent 78 letters of enquiry when assessee has borrowed only from 20 persons. Even though 48 letters seem to have returned unserved, how many of them are from the creditors claimed by assessee are not stated. The AO enquiry seems to be misdirected.
I) The affidavits filed by assessee before CIT(A), Hyd. has been sent to AO and AO has more or less accepted the affidavits, except in one case of Tilapalamma on the reason that the same was not signed;
J) The addition of Rs. 23 Lakhs was not correct even though the loan amounts were only Rs. 15.50 Lakhs; Balance being savings can not be taxed as unexplained loans, as assessee stated to have encashed FD. This was not examined nor commented upon in any of the proceedings by revenue.
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Now, coming to the merits of the addition, the findings of AO and CIT(A) are not based on facts. No enquiry was conducted in assessee’s case on the affidavits filed and those enquiries conducted in company case cannot be relied, in the absence of cross-examination. The statement of Shri Kanakaiah (supposed to be a mediator) was behind the back of assessee and assessee never claimed that he is the mediator. The confirmation and affidavits given later have not been disproved. The statement of Shri G. Srinivas in fact confirms that there was prawn cultivation and ryots got affected due to cyclone in 1999, much later to the advance of monies. Subsequent problem by farmers could be reason for assessee’s inability to get them produced before AO in the proceedings, but it does not prove that the claim of credits is not genuine. The reliance on CIT(A), Bhubaneswar order by the present CIT(A), Hyderabad is also misplaced. In fact, the order of CIT(A) has this to state:
“…………But, be that as it may, the enquiry report does not indicate that the sources of source, i.e., the loans advanced by the farmers to the Directors/shareholders; were totally bogus or that they completely lack creditworthiness. But, there appears to be some substance in the assertion of the AO/Jt.CIT that certain elements like the genuineness of the transactions and complete creditworthiness of the farmers was not conclusively established. These matters nevertheless require further enquiry as only sixteen out of seventy five farmer-creditors, who have advanced loans to the four share holders have been examined. No enquiry has been conducted in respect of loans availed by the two promoter- directors; namely Shri N. Srinivas and Shri N. Sridhar. Therefore the AO or the concerned AOs can conduct further enquiries and if it is found that the loans given by the farmers were neither credible nor genuine; the additions could be made in the hands of the shareholders who have subscribed to the shares of the appellant-company. The sources of funds in such cases can be tackled by the AO in the hands of the subscribers to the equity shares who have availed the loans. Therefore, the AO is free to conduct further enquiries in the case of individual sharesholders as per the extant provisions of law and consider these amounts in their hands in
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view of the discussions in para 4.1 and 4.2 and the judicial decisions cited supra”.
Thus, the observation of CIT(A) indeed does not state that the sources are totally bogus and AO was in fact, asked to make further enquiries. Since no enquiries worth were made, the order of CIT(A) Bhubaneswar cannot be relied on for denying the genuineness of the credits. Since so much time has lapsed and the affidavits furnished have not been disproved, more or less accepted by AO in remand proceedings, the contentions of assessee in this regard has merit. I am of the opinion that Revenue wrongly relied on the reports in the case of company and on the order of CIT(A), Bhubaneswar and has not made any enquiry in assessee case to disprove the credits claimed. In the circumstances, I direct the AO to accept the credits as such as genuine. In fact, the borrowals are only to the extent of Rs. 15.50 lakhs. Addition of Rs 22.30 lakhs is not correct and hence deleted.
That leaves us the matter of reopening. Even though the same is academic now, in view of the acceptance of issue of credits on merit, it is to be placed on record that the contentions on the issue have merit. First of all, assessee has disclosed the investment in the original return which was accepted. There was a direction by Addl. CIT, Range-13 to reopen the assessment. The satisfaction indicate that assessee has not filed return hence escaped assessment is not correct as assessee filed return in due course and assessee on record. Another officer (whose jurisdiction is not examined) has issued the notices, even though assessee was assessed earlier. The reasons for reopening were not communicated violating the directions of Hon'ble Supreme Court in
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the case of GKN Drive Shaft, 259 ITR 19 (SC). The contentions extracted in assessee counsel’s submissions and the case law relied, do result that the reopening itself is bad in law.
On these reasons, the order of AO and CIT(A) cannot be upheld. The grounds are allowed.
In the result, appeal of assessee is allowed.
Order pronounced in the open court on 12th January, 2018
Sd/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER Hyderabad, Dated 12th January, 2018 TNMM
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Copy to : 1. Mr. N. Ramakrishna Rao, C/o. Shri K.C. Devdas, Chartered Accountants, R.P. Road, Secunderabad.
The Asst. Commissioner of Income Tax, Circle-13(1), Hyderabad.
CIT (Appeals)-II, Hyderabad.
CIT-I, Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.