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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
ORDER \nPER MAKARAND V. MAHADEOKAR, AM:\nThis appeal by the Revenue is directed against the order dated\n19.09.2024, passed by the Commissioner of Income Tax(Appeals)-(NFAC),\nDelhi [hereinafter referred to as “CIT(A)”], in relation to the assessment order\ndated 25.3.2022 passed under Section 147 r.w.s.144 of the Income Tax Act,\n1961[hereinafter referred to as \"Act\"] by the National Faceless Assessment\nCentre, Delhi [hereinafter referred to as “AO"] for Assessment Year 2015-16.\nFacts of the Case:\n2.\nThe assessee filed his return of income for A.Y. 2015-16 on 23.12.2015,\ndeclaring total income of Rs.2,51,400/-. In the return, the assessee claimed\nan exempt income of Rs.93,86,517/- as his share of profit from M/s. Ice Worth\nReality LLP. The assessment was reopened under Section 147 on the basis of\ninformation received from ITO Ward 25(2)(5), Mumbai, stating that M/s. Ice\nWorth Reality LLP was engaged in accommodation entries through penny\nstock transactions. The (AO) issued a notice under Section 148 on 31.03.2021,\nwhich remained un-responded. Subsequent notices under Section 142(1) of\nthe Act were issued on 16.08.2021, 16.12.2021, and 08.03.2022, which were also\nnot complied with. The AO observed that the LLP had claimed\nRs.60,74,61,289/- as exempt LTCG under Section 10(38) on the sale of shares\nof Sun Asian. It was alleged that the LLP was a paper entity, providing\naccommodation entries, and that its LTCG was bogus. The AO held that since\nthe assessee was a 2.6% partner in the LLP, he was a beneficiary of\nRs.1,57,93,993/-, which was added as undisclosed income under Section 68\nof the Act. Consequently, the total assessed income was computed at\nRs.1,60,45,393/-. Penalty proceedings under Sections 271(1)(b) and 271(1)(c)\nof the Act were also initiated.\n3.\nThe CIT(A) deleted the addition of Rs.1,57,93,993/- and ruled in\nfavour of the assessee. It was observed that M/s. Ice Worth Reality LLP had\nalready been assessed separately, and the alleged bogus LTCG of\nRs.60,87,74,856/- was added in its hands. Since the LLP's entire income was\nsubjected to tax at the entity level, taxing the same income in the hands of the\npartner was unsustainable and resulted in double taxation. CIT(A) relied on\nSection 10(2A) of the Act, which explicitly exempts a partner's share of profit\nfrom an LLP. Section 68 of the Act was held to be inapplicable, as the credit\nin the partner's account was fully explained, being derived from the LLP's\nbooks. Interest under Sections 234A, 234B, and 234C of the Act was directed\nto be recomputed, and the penalty proceedings were deemed infructuous.\n4.\nAggrieved by the order of the CIT(A), the revenue is in appeal before\nus with following grounds of appeal:\n(a) The Ld. CIT(A) has erred in law and on facts in deleting the addition of\nRs.1,57,93,993/- made by AO on account of undisclosed income out of benefit\ntaken by the assessee as a partner in M/s Ice Worth Reality LLP, which has\nclaimed bogus LTCG exemption u/s.10(38) of IT Act on sale of penny stock\nM/s Sun Asian, without appreciating that:\n(i) The Firm M/s Ice Worth Reality LLP, in which the assessee is a\npartner (having 2.6% share), was engaged in providing\naccommodation entries of bogus capital gain/loss through penny stock\ntransactions at various levels of operators. The firm has shown Long-\nTerm Capital Gain (LTCG) on the sale of penny stock M/s Sun Asian\nand claimed it as exempt under Section 10(38) of the IT Act. M/s Ice\nWorth Reality LLP is nothing but a paper firm functioning as a conduit\nonly to benefit its partners, as they are the ultimate beneficiaries of the\nsaid LTCG of Rs.60,74,61,289/-.\n(ii) The addition made in the hands of LLP firm on account of bogus\nLTCG has still not reached finality.\n(b) The appellant craves leave to add, alter, and/or amend all or any of the\ngrounds before the final hearing of the appeal.\n5.\nDuring the course of hearing before us, the Departmental\nRepresentative (DR) explained the facts and stated there was non-compliance\nby the assessee and therefore the order was passed u/s 147 r.w.s.144 of the\nAct. The DR accepted that the addition in the hands of assessee amounts to\ndouble taxation.\n6.\nThe Authorized Representative (AR) of the assessee, by way of written\nsubmission, submitted that the tax effect in present appeal is Rs.52,55,553/-\nwhich is below the enhanced monetary limit of Rs.60 Lacs. The AR stated that\nthe addition is already deleted in the hands of M/s Ice Worth Reality LLP in\nAppeal No. CIT(A), Ahmedabad, 5/10757/2019-20 dated 24.09.2020 and\ntherefore the addition made in the hands of assessee is not sustainable. The\nAR placed on records the copy of order of CIT(A) in case of Ice Worth Reality\nLLP.\n7.\nWe have heard the rival contentions, perused the material on record,\nand carefully considered the submissions of both parties. The Revenue is in\nappeal against the deletion of an addition of Rs.1,57,93,993/- made by the AO\nunder Section 68 of the Act, treating it as undisclosed income in the hands of\nthe assessee. The CIT(A) deleted the addition on the ground that the income\nwas already assessed in the hands of M/s. Ice Worth Reality LLP, and taxing\nthe same in the hands of the partner would lead to double taxation, which is\ncontrary to the provisions of the Act.\n7.
1. The Authorised Representative (AR) of the assessee, through a written\nsubmission, has also brought to our notice that the tax effect in the present\nappeal is Rs.52,55,553/-, which is below the enhanced monetary limit of\nRs.60 Lacs for filing appeals before the Tribunal, as prescribed in CBDT\nCircular No. 09/2024 dated 17.09.2024. Further, the AR has placed on record\nthe order of CIT(A), Ahmedabad, in the case of M/s. Ice Worth Reality LLP\n[Appeal No. CIT(A), Ahmedabad-5/10757/2019-20, dated 24.09.2020],\nwherein the addition made at the LLP level was already deleted.\n7.
2. Section 10(2A) of the Act explicitly provides that a partner's share of\nprofit from an LLP is exempt from tax in his hands. The LLP is a distinct\ntaxable entity, and its income is assessed at the LLP level, not at the partner\nlevel. If any income of the LLP is found to be fictitious or non-genuine, the\ncorrect approach is to tax it in the hands of the LLP, rather than taxing the\nsame in the hands of the partner. The AO's action of taxing the partner's share\nof income separately is contrary to the taxation framework prescribed under\nthe Act and is unsustainable.\n7.
3. It is an undisputed fact that the AO has already made an addition of\nRs.60,87,74,856/- in the hands of M/s. Ice Worth Reality LLP on account of\nbogus LTCG from penny stock transactions. The CIT(A), Ahmedabad, in the\ncase of M/s. Ice Worth Reality LLP, has already deleted the said addition,\nholding that the LTCG transactions were not taxable. Since the same income\nhas already been taxed at the LLP level and subsequently deleted in appeal,\ntaxing it again in the partner's hands would lead to double taxation, which is\nimpermissible under the Act.\n7.
Section 68 of the Act applies when an assessee fails to explain the\nsource of a credit in his books of accounts. In this case, the assessee's share of\nprofit from M/s. Ice Worth Reality LLP is fully explained and recorded in the\nLLP's books, which were assessed separately. Since the income was already\ndisclosed at the LLP level, there was no unexplained credit in the partner's\nbooks, and invoking Section 68 in the partner's case was unjustified.\n7.
The AR has pointed out that the tax effect in the present appeal is\nRs.52,55,553/-, which is below the revised monetary threshold of Rs.60 Lacs\nfor filing appeals before the Tribunal. As per the CBDT's policy, the\nDepartment is instructed not to file appeals before the Tribunal where the tax\neffect is below the prescribed limit unless the case falls within specific\nexceptions. The Revenue has not demonstrated that this case falls within any\nsuch exception. Thus, the appeal is liable to be dismissed on this ground\nalone.\n7.
Before concluding, we find it imperative to address a broader concern\nregarding the Revenue's approach in filing appeals that are neither\nmaintainable nor in line with the statutory framework governing taxation.\nThe Income Tax Act, 1961, provides a clear and structured mechanism for the\ntaxation of Limited Liability Partnerships (LLPs) and their partners, wherein\nthe LLP is taxed as a separate legal entity, and its partners are exempt from\ntax on their share of profit under Section 10(2A). The present case is a clear\nexample where the AO disregarded this fundamental principle and sought\nto tax the same income twice-once in the LLP's hands and again in the\npartner's hands, leading to double taxation, which is impermissible under the\nlaw. Such unwarranted additions not only create unnecessary litigation but\nalso burden the appellate authorities, including the Tribunal, High Courts,\nand Supreme Court, with cases that lack legal sustainability. The Revenue\nshould exercise prudence in filing appeals only when there is a genuine and\ndebatable issue rather than pursuing matters where the law is well settled.\nBy avoiding such unsustainable additions and frivolous appeals, the\nDepartment can significantly save valuable time and cost of the entire tax\nadministration machinery and ensure that resources are deployed more\neffectively in addressing genuine cases of tax evasion and revenue leakage.\nWe hope that the authorities take cognizance of such instances and refrain\nfrom unnecessary litigation that does not serve the intended purpose of tax\ncollection but merely adds to avoidable legal proceedings.\n7.
The Revenue's appeal lacks merit, as the scheme of taxation for LLPs\nand partners is clear under the Act. The addition of Rs.1,57,93,993/- in the\nhands of the assessee is unsustainable. The CIT(A) correctly deleted the\naddition, applying the correct legal principles.\n7.
The appeal is also liable to be dismissed on the ground that the tax\neffect is below the prescribed monetary limit of Rs.60 Lacs, as per CBDT\nCircular.\n8.\nIn the result, the appeal filed by the Revenue is dismissed.\nOrder pronounced in the Open Court on 31 January, 2025 at Ahmedabad.\nSd/-\n(T.R. SENTHIL KUMAR)\nJUDICIAL MEMBER\nSd/-\n(MAKARAND V. MAHADEOKAR)\nACCOUNTANT MEMBER\nअहमदाबाद/Ahmedabad, दिनांक/Dated 31/01/2025\nटी. सी. नायर, व.नि. स. / T.C. NAIR, Sr. PS\nआदेश की प्रतिलिपि अग्रेषित/