M/S MERLINS,KOLKATA vs. A.C.I.T.,CILCLE-31, KOLKATA

The relevant facts of the case giving rise to this appeal are that the assessee is a partnership firm which is engaged in the business of trading of shares & securities, real estate business and registration services. The return of income for the year under consideration was filed by it on 29.09.2013 declaring a total income of Rs. 94,620/-. Although the said return was initially processed by the AO u/s 143(1) of the Act, the assessment was reopened by him for the reason that the capital gain arising from the sale of shares was not declared by the assessee in its return of income and there was thus escapement of income of assessee from the assessment on account of capital gain. The AO accordingly issued a notice u/s 148 of the Act to the assessee on 10.06.2014 and completed the assessment u/s 143(3) / 147 of the Assessment Year: 2013-14 M/S. MERLINS Act vide an order dated 24.06.2019. In the assessment so completed, the AO did not make any addition on account of capital gain arisen to the assessee on sale of shares as alleged in the reasons recorded. He however made the following two additions: “i. Advances received from the customers and balance amount receivable by the assessee towards work allegedly completed Rs. 1,43,14,605/-. ii. Disallowance u/s 14A read with Rule 8D Rs. 2,25,121/-.”

Against the order passed by the AO u/s 143(3)/147 of the Act, an appeal was preferred by the assessee before the Ld. CIT(A) challenging the validity of the assessment made by the AO as well as disputing both the additions made on merit. During the course of appellate proceedings before the Ld. CIT(A), it was inter alia contended on behalf of the assessee that there being no additions made by the AO in the assessment completed u/s 143(3) / 147 on the issue of capital gain which formed the reasons for reopening, other two additions made by him were not sustainable. Reliance was placed on behalf of the assessee on certain judicial pronouncements in support of this contention. The Ld. CIT(A) however found that the said decisions relied upon by the assessee were rendered prior to insertion of Explanation 3 to Section 147 introduced with effect from April 1, 1989 by the Finance No. 2 Act 2009 which was clearly applicable in assessee’s case. By relying on the said explanation, he rejected the contention raised on behalf of the assessee on this issue. He also did not find merit in the submissions made on behalf of the assessee in support of the other issues relating to two additions made by the AO and rejecting the same, he confirmed both the additions made by the AO. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.

Reliance was also placed by the Hon’ble Delhi High Court on the decision of Hon’ble Punjab & Haryana High Court in the case of Atlas Cycle Industries Ltd. wherein it was held that even after insertion of Explanation 3 to Section 147 by the Finance No. 2 Act, 2009, existence of the income, for which the AO formed belief, to have escaped assessment, is a precondition, for including any other income chargeable to tax which had escaped assessment and came to the notice of the AO subsequently in the course of the reassessment proceedings. Explaining further, it was held by their Lordships that unless and until such income, as giving rise to form belief, for escaping assessment, continues to exist, and constitutes a subject matter of assessment, under section 147, no other income coming to Assessment Year: 2013-14 M/S. MERLINS the notice of the AO during the course of the proceedings, can be roped in.

In the present case, the assessment was reopened, as is evident from the reasons recorded by the AO, on the issue of capital gain arisen to the assessee from sale of shares which according to the AO had escaped assessment and since no addition on account of such capital gain was made by the AO in the assessment completed u/s 143(3) / 147, I find merit in the contention of the learned counsel for the assessee that the AO had no jurisdiction to make the additions on two other issues and the additions so made are not sustainable as held by the Hon’ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. (supra). Even the ld. DR has not been able to dispute this legal position emanating from the decision of Hon’ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. (supra) as well as the other judicial pronouncements relied upon therein as discussed above. He has also not been able to bring to my notice any judicial pronouncement which is in favour of the revenue on this issue. I accordingly delete both the additions made by the AO in the assessment completed u/s 143(3) / 147 of the Act and allow this appeal of the assessee.

In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 23rd June, 2021.