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Facts
The assessee introduced Rs. 14.30 crore as capital in a partnership firm, M/s. Gokul Agrotech, which was funded by a loan from his father. The father had sold shares of Asian Granito India Ltd. for the same amount and transferred the proceeds to the assessee. The Assessing Officer treated this as unexplained investment under Section 69, alleging synchronized trading, layering, and questioning the father's share acquisition and eligibility for Section 10(38) exemption. The CIT(A) subsequently deleted the addition.
Held
The ITAT upheld the CIT(A)'s deletion of the addition, finding that the assessee had satisfactorily explained both the immediate source (loan from father) and the source of source (father's share sales through banking channels) with supporting documentary evidence. The ITAT concluded that the two essential conditions for invoking Section 69 were not met, as the investment was recorded in the books of account and a satisfactory explanation was provided, which the Revenue failed to disprove with credible evidence. The assessee's cross-objection was dismissed as not pressed.
Key Issues
1. Whether the addition of Rs. 14.30 crore as unexplained investment under Section 69 of the Income Tax Act was justified, considering the assessee's explanation of the source of funds and the recording of the investment in books. 2. Validity of reassessment proceedings initiated under Sections 147/148/148A (not pressed by assessee).
Sections Cited
147, 144B, 143(1), 148, 148A(b), 148A(d), 69, 115BBE, 271AAC(1), 10(38), 151
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Income Tax Appellate Tribunal, “ A ” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 2 आदेश/O R D E R PER BENCH : The present appeal filed by the Revenue against the order dated 07.03.2024 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], arising from the assessment order passed by the Assessing Officer [hereinafter also referred to as “AO”] under section 147 read with section 144B of the Income Tax Act, 1961[hereinafter referred to as “the Act”], vide order dated 30.05.2023, for the assessment year 2017–18. The assessee has also filed Cross-Objection in respect of the said appellate proceedings. Since both the Revenue’s appeal and the assessee’s cross- objection pertain to the same assessment and involve common facts and issues, both were heard together and are being disposed of by way of this consolidated order.
Facts of the Case
The assessee is an individual and a partner in the partnership firm M/s. Gokul Agrotech. The assessee originally filed his return of income for Assessment Year 2017-18 on 14.11.2017 declaring total income of Rs. 3,27,580/-. The return was processed under section 143(1) of the Act. Subsequently, information was received from the Directorate of Income Tax (Systems), Directorate of Investigation and Directorate of Intelligence & Criminal Investigation pursuant to risk profiling, indicating that the assessee, during the relevant previous year, introduced capital of Rs. 14,30,00,000/- into the partnership firm M/s. Gokul Agrotech. The partnership firm had also received credits aggregating to Rs. 34.96 crores during the year. The case was reopened under section 147 on the basis of IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 3 this information and notice under section 148 dated 29.06.2021 was issued. In view of the Hon’ble Supreme Court’s judgment in the case of Union of India vs. Ashish Agarwal (2022), the said notice was treated as a notice under section 148A(b). The assessee was issued show cause notice under section 148A(b) dated 26.05.2022 and was ultimately issued notice under section 148 dated 30.07.2022 after passing an order under section 148A(d). In response, the assessee filed his return of income on 19.01.2023 declaring total income of Rs. 3,27,580/-, which was the same as originally filed. The reassessment proceedings culminated in the order passed under section 147 read with section 144B dated 30.05.2023, assessing total income at Rs. 14,33,27,580/- by making an addition of Rs. 14,30,00,000/- under section 69 of the Act.
During reassessment, the assessee explained that the capital introduced in the firm M/s. Gokul Agrotech was funded through loan received from his father Shri Jivabhai Revabhai Patel by way of banking channel. The father had in turn sold shares of Asian Granito India Ltd. and transferred the sale proceeds to the assessee. On examination of the details furnished during assessment proceedings, the Assessing Officer noted that the assessee’s father, Shri Jivabhai Revabhai Patel, had originally acquired 21,900 shares of Asian Tiles Ltd. during the financial year 2000 and further acquired 3,25,000 shares of Artistique Ceramics Pvt. Ltd. during the financial year 2008, both through off-market transactions. Thereafter, pursuant to a merger scheme approved by the Hon’ble Gujarat High Court, Asian Tiles Ltd. was amalgamated with Asian Granito India Ltd. in the year 2006, as a result of which Shri Jivabhai Revabhai Patel received 21,900 shares of Asian Granito India Ltd. in exchange for his original holding in Asian Tiles Ltd. Subsequently, in the year 2016, Artistique Ceramics Pvt. Ltd. was amalgamated with Asian Granito India Ltd. in terms of a scheme IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 4 of amalgamation sanctioned by the Hon'ble Gujarat High Court. Pursuant thereto, Shri Jivabhai Revabhai Patel was allotted an additional 5,10,250 shares of Asian Granito India Ltd. in exchange for his holding in Artistique Ceramics Pvt. Ltd. These shares were dematerialized on 10.10.2016 and thereafter sold through Monarch Networth Capital Ltd. on 13.10.2016 and 14.10.2016, aggregating sale consideration of Rs. 14.30 crores. However, while examining the transaction, the Assessing Officer observed that the original acquisition of shares by the father in the years 2000 and 2008 was never disclosed in his income-tax returns filed for the respective assessment years. The Assessing Officer further observed that out of the 5,10,250 shares allotted pursuant to the amalgamation, 1,85,250 shares were effectively allotted less than twelve months prior to their sale. Hence, the Assessing Officer concluded that the condition of long-term holding required for claiming exemption under section 10(38) was not fulfilled in respect of these additional shares. The Assessing Officer further noted that the sale transactions were executed through synchronized trading between close relatives and family members. The buyers of the shares were identified as Shri Kamleshbhai Patel, a relative, and Shri Mukeshbhai Patel, a close relative and significant shareholder of Asian Granito India Ltd. The Assessing Officer also highlighted that both sale orders and corresponding purchase orders were executed on the stock exchange within microseconds, which, in his view, clearly indicated a pre-arranged transaction lacking commercial substance. Upon further examination of the fund movement, the Assessing Officer recorded that immediately upon receipt of Rs. 14.30 crore from sale of shares, Shri Jivabhai Revabhai Patel transferred the entire amount to the bank account of the assessee on the same day or shortly thereafter. The assessee, in turn, introduced the identical amount of Rs. 14.30 crore as capital contribution into the partnership firm M/s. Gokul IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 5 Agrotech on the very same day. Thereafter, the partnership firm transferred substantial amounts to Monarch Infraventure, which subsequently routed the funds back to other related family entities. The Assessing Officer was of the view that this entire arrangement of fund flow was designed only for layering. and rotation of unaccounted funds through a circuitous route involving multiple family members and group entities. Based on the foregoing findings, the Assessing Officer concluded that the assessee had failed to satisfactorily explain the genuineness of the source of capital introduced into the partnership firm. Accordingly, the Assessing Officer invoked the provisions of section 69 of the Act, treating Rs. 14,30,00,000/- as unexplained investment, taxable under section 115BBE. Penalty proceedings under section 271AAC(1) of the Act were also initiated separately.
4. Aggrieved by the assessment order, the assessee carried the matter in appeal before the Learned CIT(A). Before the CIT(A), the assessee challenged both the legal validity of the reassessment proceedings and also contested the merits of the addition made under section 69 of the Act. Before the learned CIT(A), the assessee reiterated that the capital contribution of Rs. 14.30 crore was fully explained through loan received from his father, supported by complete banking trail and documentary evidences. The assessee placed reliance on contract notes, demat statements, broker’s ledger, bank statements, share purchase documents, and income- tax returns of his father. It was submitted that once the source and source of source were explained with credible evidence, no addition under section 69 was warranted. The assessee also placed reliance on various judicial pronouncements including the decision of the Hon'ble Supreme Court in CIT vs. Smt. P.K. Noorjahan (1999) 237 ITR 570 in support of his contentions. Allegations of synchronized trading and layering were denied, and it was IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 6 contended that no independent inquiry was made by the Assessing Officer to establish any collusive arrangement. The assessee specifically contended that once he had fully explained the immediate source of capital introduced, i.e., loan received from his father through banking channel, he could not be expected to prove the source of source unless specific evidence existed to suggest his involvement in any colourable device. The assessee also argued that during the year he had not carried out any business activity and had correctly filed his return in ITR-2. The balance sheet submitted during assessment was furnished only at the instance of the Assessing Officer and reflected investments, which were erroneously shown as closing stock. It was contended that such inadvertent error could not be made a ground to treat the return of income defective or inaccurate.
The learned CIT(A), after considering the detailed submissions and evidences filed, held that the assessee had satisfactorily discharged the onus cast upon him. The CIT(A) observed that the Assessing Officer proceeded on mere suspicions and presumptions without bringing any corroborative material on record to establish that the transactions were non-genuine or fictitious. The CIT(A) noted that the entire capital contribution of Rs. 14.30 crore was fully reflected in the assessee’s books of account and balance sheet, and hence the primary condition for invoking section 69 was not satisfied. The CIT(A) categorically held that once the assessee had explained the source of funds and furnished cogent evidences, the burden shifted on the Department to disprove the same, which the Assessing Officer failed to discharge. The CIT(A) further held that mere timing of trades and identity of buyers being related persons could not lead to any adverse inference unless supported by independent evidence of collusion or pre-arrangement. The CIT(A) also observed that there was no material on record to suggest IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 7 that either the assessee or his father was involved in any accommodation entry, layering, or circular fund movement designed to introduce unaccounted income. After examining the entire money trail, demat statements, contract notes, bank statements, share purchase documents, and income-tax returns of the father, the CIT(A) recorded a clear finding that the transactions stood explained. The CIT(A), therefore, concluded that the addition made by the Assessing Officer under section 69 was unsustainable both on facts as well as in law, and accordingly deleted the entire addition of Rs. 14,30,00,000/-.
Aggrieved by the order of CIT(A) the Revenue is in appeal before us and the assessee filed cross objection raising following respective grounds: i. In Revenue’s appeal -
Whether on facts and circumstances and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 14,30,00,000/- being variation assessed and brought to tax u/s. 69 r.w.s. 115BBE of the Act without appreciating the facts of the case."
2. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 3. It is prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. ii. In Assessee’s Cross Objection No. 18/Ahd/2024 1. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in not quashing the re-opening proceedings where notice u/s 148A(b) was issued without the approval of authority specified u/s 151 of the Act. The re-opening proceedings are bad in law and deserves to be quashed. 2. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding the validity of notice issued u/s 148 of the Act where notice was issued by Jurisdictional Assessing officer instead of Faceless Assessment Centre which is a clear violation of CBDT Notification No. 18/2022 dated 29.03.2022. The order passed u/s 147 of the Act deserves to be nullified.
IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 8 3. In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in upholding the validity of notice issued u/s 148 of the Act where notice was issued without approval of authority specified u/s 151 of the Act. The order passed u/s 147 of the Act deserves to be quashed.
In law and in the facts and circumstances of the appellant's case, appellant craves leave to add, amend and/or alter the ground or grounds of appeal
either before or at the time of hearing of the appeal.
7. During the course of hearing before us, the learned Authorised Representative reiterated the facts of the case and extensively referred to the factual matrix as already recorded by the lower authorities. The AR submitted that the assessee has fully explained not only the nature and source of the capital introduced into the partnership firm M/s. Gokul Agrotech but has also explained the source of source in a comprehensive and satisfactory manner. It was submitted that the capital contribution of Rs. 14.30 crores was made through banking channels, and the entire fund trail was duly established through independent documentary evidences. The AR took us through various documents submitted before lower authorities. The AR specifically invited our attention to the detailed findings recorded by the CIT(A) in the impugned order wherein the CIT(A) concluded that the assessee had satisfactorily discharged the burden of explaining the capital introduced and that the AO’s conclusions rested purely on assumptions. The learned AR further submitted that since the present appeal is being argued on merits and the addition made under section 69 is otherwise liable to be deleted on merits, the assessee does not wish to press the grounds raised in the Cross-Objection at this stage. The AR accordingly stated that the Cross-Objection may be treated as not pressed, if the matter is adjudicated on merits.
IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 9 8. Per contra, the learned Departmental Representative supported the assessment order passed by the Assessing Officer. The DR submitted that the CIT(A) erred in granting relief to the assessee by accepting explanations which were neither credible nor satisfactorily demonstrated.
We have carefully perused the orders of the lower authorities, the submissions made by both parties, and the material available on record. The issue before us lies in a narrow compass — whether the learned CIT(A) was justified in deleting the addition of Rs. 14,30,00,000/- made by the Assessing Officer under section 69 of the Act on account of unexplained investment in the capital introduced by the assessee in M/s. Gokul Agrotech. The facts are largely undisputed. The assessee introduced capital of Rs. 14.30 crore in the partnership firm during the year under consideration. The assessee explained the source of this capital as unsecured loan received from his father, Shri Jivabhai Revabhai Patel, through regular banking channels. The father, in turn, had sold shares of Asian Granito India Ltd. through Monarch Networth Capital Ltd., a SEBI registered broker, and the entire transaction of sale and subsequent fund transfer to the assessee was routed through banking channels. The assessee placed on record the complete evidentiary trail. The Assessing Officer, however, rejected the explanation on the ground that the entire transaction was a colourable device involving synchronized trading among family members. The Assessing Officer noted that the buyers of the shares were close relatives of the assessee and trades were executed within microseconds, thereby indicating pre-arrangement. The AO further questioned the genuineness of the original acquisition of shares by the father and doubted the eligibility of the capital gains for exemption under section 10(38), particularly in respect of additional shares allotted on amalgamation which were sold within twelve months.
IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 10 10. After a careful consideration of the facts and rival contentions, we find ourselves unable to sustain the action of the Assessing Officer for the following reasons: a. It is an admitted position that the assessee has explained not only the immediate source of capital introduced but also the source of source. The entire transaction flow from sale of shares by the father to transfer of sale proceeds to the assessee is fully documented and supported by contemporaneous evidences. The law is well settled that once the assessee discharges his primary onus of explaining the source of funds through credible documents, the burden shifts on the Department to prove otherwise. In our opinion the onus shifts on the Revenue once the assessee has placed primary evidence in support of his explanation. The Revenue cannot reject the explanation merely on suspicion or doubt unless contrary evidence is brought on record. b. For invoking section 69, two essential conditions must be satisfied: i. There must be an investment made by the assessee not recorded in the books of account. ii. The assessee fails to offer a satisfactory explanation about the nature and source of the investment. c. In the present case, the capital contribution was duly recorded in the balance sheet submitted during assessment proceedings, which has not been disputed by the Assessing Officer. Therefore, the first pre- condition for application of section 69 itself fails. With respect to the second condition under section 69, we find that the assessee has offered a detailed and satisfactory explanation regarding the nature and source of the capital introduced. The assessee has explained that IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 11 the funds were received from his father through regular banking channels, and the father, in turn, generated such funds from sale of shares through recognized stock exchange transactions duly supported by contract notes, demat statements, bank statements, and income-tax returns. Accordingly, the second condition for invoking section 69 is also not fulfilled.
In our considered view, the assessee has satisfactorily explained the immediate source of the capital introduced as loan received from his father through regular banking channels, supported by complete fund trail. The father’s source has also been substantiated through sale of shares conducted on the recognized stock exchange through a registered broker. The Revenue has not brought any independent material to discredit the assessee’s explanation or establish that the funds represented undisclosed income of the assessee. In absence of any evidence of collusion, pre-arrangement, or accommodation, the explanation furnished by the assessee cannot be rejected merely on suspicion. Whether or not the capital gains were correctly offered to tax in father’s hands is not a subject matter before us. The limited issue under section 69 being satisfactorily explained, the addition made by the Assessing Officer is liable to be deleted.
In view of the above discussion and considering the totality of facts and circumstances of the case, we hold that both the essential conditions prescribed under section 69 of the Act stand unfulfilled. The assessee has duly recorded the investment in his books of account and has satisfactorily explained the nature and source of such investment through cogent documentary evidences. The Assessing Officer has failed IT No.934/Ahd/2024 with C.O No.18-Ahd-2024 ITO vs. Kalidas J Patel Asst. Year :2017-18 12 to bring on record any credible material to rebut or disprove the explanation furnished by the assessee. Mere suspicion, howsoever strong, cannot substitute legally admissible evidence. We thus find no infirmity in the well-reasoned order passed by the learned CIT(A) deleting the addition of Rs. 14,30,00,000/- made by the Assessing Officer. So far as the Cross-Objection filed by the assessee is concerned, during the course of hearing, the learned Authorised Representative has stated that the assessee does not wish to press the grounds raised therein if the matter is adjudicated on merits. In view of the same, the Cross-Objection is dismissed as not pressed.
In the result the appeal filed by the Revenue is dismissed and the Cross-Objection filed by the assessee is dismissed as not pressed.