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Facts
The assessee filed its ITR for AY 2017-18, declaring Rs.33,511/-. The case was selected for limited scrutiny due to low income compared to high investments/loans. The Assessing Officer (AO) made additions of Rs.29,65,145/- (1% of investment) and Rs.36,36,756/- (12% notional interest on loans) on a hypothetical basis, citing alleged non-compliance. The CIT(A) upheld the AO's order but remanded the matter for re-examination.
Held
The Tribunal found that the additions were purely notional/hypothetical without concrete evidence, and the AO failed to reject the books of accounts or provide valid reasons. The assessment under limited scrutiny without conversion to complete scrutiny was not in accordance with law. Citing the Godhra Electricity Co. Ltd. judgment, the Tribunal ruled that income tax is on real income, not hypothetical income. The CIT(A)'s order was set aside, and the AO was directed to delete the additions.
Key Issues
Whether additions made on a hypothetical/notional basis without rejecting books of accounts are legally sustainable; and the validity of a limited scrutiny assessment for such additions.
Sections Cited
250, 143(2), 142(1)
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Income Tax Appellate Tribunal, “D” BENCH KOLKATA
Before: Shri Sonjoy Sarma & Shri Rakesh Mishra
Assessment Year: 2017-18 M/s Funidea Vinimay Pvt. Ltd.…………………………………..….……….Appellant 2, Lal Bazar Street, 1st Floor, Kolkata -1. [PAN: AABCF9340C] vs. ITO, Ward-5(1), Kolkata...……..............................……........……...…..…..Respondent Appearances by: Shri Manoj Kataruka, Advocate, appeared on behalf of the assessee. Shri Sailen Samadder, Addl. CIT- Sr. DR, appeared on behalf of the Revenue. Date of concluding the hearing : February 27, 2025 Date of pronouncing the order : February 28, 2025 ORDER
Per Sonjoy Sarma, Judicial Member:
The present appeal has been preferred by the assessee against an order dated 11.12.2024 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).
Brief facts of the case are that the assessee filed its return of income for the assessment year 2017-18 by declaring total income of Rs.33,511/-. The case of the assessee was selected for scrutiny assessment under limited scrutiny criteria for the reason of selection of low income compared to high loans/advances/investment in shares appearing in balance sheet and expenses debited to P&L A/c for earning exempt income as per schedule BP of ITR is significantly lower as compared to investments made to earn exempt income. Subsequently, notice u/s 143(2) of the Act was issued to the assessee and also notice u/s 142(1) of the Act along with questionnaire were issued and duly served upon the assessee. The Assessing Officer observed that the assessee has failed to comply with the notices u/s 142(1) and demonstrated gross non-compliance. Due to this gross-non-compliance, the investment could not be identified and income from the said investment could not be verified. Accordingly, the Assessing Officer on hypothetical basis made 1% of the investment of Rs. 29,65,14,500/- amounting to Rs.29,65,145/- is treated as income out of the investment made. It was also observed that the assessee has interest income from loans & advances of Rs.3,03,06,302/-. Due to non-compliance, this could not be verified. The Assessing Officer added 12% of the undisclosed interest income of short term loans & advances at Rs.36,36,756/- as notional interest income to the total income of the assessee of the assessee by assessing the total income of the assessee at Rs.66,35,410/-.
Dissatisfied with the above order, the assessee preferred an appeal before the ld. CIT(A) where the ld. CIT(A) without examining the factual matrix upheld the Assessing Officer’s order and directed the Assessing Officer to examine the issues by remanding back the matter.
Aggrieved by the said order, the assessee filed the present appeal before this Tribunal arguing that the addition of 1% on investment i.e. Rs.29,65,145/- as income made by the AO was purely on hypothetical basis without any concrete findings, which is illegal. Similarly, an addition of 12% of the notional interest of Rs.36,36,756/- on interest income on loans & advances was arbitrary and lack of any substantive basis. The ld. AR submitted that all the relevant books of accounts were produced before the Assessing Officer. However, the Assessing Officer made the addition without rejecting the books of accounts or providing any valid reason, which is not permissible under the law. He further stated that the assessment was conducted under limited scrutiny without converting into complete scrutiny with due approval from the competent authority rendering the order erroneous. Besides that while passing the order, the ld. CIT(A) also erred by not considering the documents and evidences submitted by the assessee and merely on hypothetical basis set aside the order to AO. The ld. AR in order to substantiate this claim submitted a short paper-book containing return filing acknowledgement along with audited accounts of the assessee for A.Y 2017-18, bank statement of the assessee.
On the other hand, the ld. DR supported the decisions of the lower authorities contending that order passed by authority below are just and proper therefore, appeal may be dismissed.
We, after hearing both the parties and perusing the materials available on record, find that both the additions were made purely on notional or hypothetical basis without any concrete evidences and proper verification. Since while framing of the assessment order, the Assessing Officer did not reject the books of accounts of the assessee and no discrepancies were pointed out hence the additions made were not legally sustainable. We also note that conducting assessment under limited scrutiny without conversion to complete scrutiny was not in accordance with law and the assessee has submitted sufficient documents before the authorities below including audited account, bank statement and other relevant details in order to substantiate its claim. However, the authorities below have failed to provide a valid finding against the submissions of the assessee. We also rely on the decision of the Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. reported in 225 ITR 746 (SC) where it was held that Income tax is tax on real income and not notional or hypothetical income if income does not actually materialise. It cannot be taxed merely on the basis of accounting entries.
Following the decision of the Hon’ble Supreme Court and considering the facts of the case, we find that the order of the ld. CIT(A) setting aside the order to the file of the Assessing Officer was not proper which is set aside. Accordingly, we direct the Assessing Officer to delete the hypothetical addition as made in the case of the assessee by allowing the appeal of the assessee.
In terms of the above, the appeal of the assessee is allowed.
Kolkata, the 28th February, 2025.