DCIT., CIRCLE-3(1) , HYDERABAD vs. SOUTH ASIAN CERAMIC TILES PRIVATE LIMITED, HYDERABAD

Succinctly stated, the assessee company which is engaged in the business of manufacturing of ceramic tiles had filed its return of income for AY 2022-23 on 26/10/2022 declaring a loss of (Rs.18,74,49,155/-). Thereafter, the case of the assessee company was selected for complete scrutiny under the Faceless Assessment Scheme-2019 for verification of certain issues, viz., (i) that the assessee company had shown high liabilities in its balance sheet as compared to its low income/receipts declared in the return of income; (ii) that the assessee company had though disclosed significant amount of capital/loans 3 DCIT vs. South Asian Ceramic Tiles Pvt Ltd during the year, but it had been consistently showing loss before depreciation. Also, the introduction of funds in a business consistently showing cash loss was unusual; and (iii) that there was a substantial addition/introduction of tangible assets during the year which was significantly more than the written down value (WDV) on the first day of previous year as per the Income Tax Return filed by the assessee company. Also, the value of the tangible assets shown by the assessee company was required to be verified in the backdrop of the fact as to whether or not the same were disclosed on the actual value or at a higher value to claim higher depreciation.

During the course of the assessment proceedings, it was observed by the AO that the assessee company had in its balance sheet disclosed “unsecured loans” to the tune of Rs.17,38,91,674/-. As the assessee company out of the total loans of Rs.17,38,91,674/- could verify the loans aggregating to Rs.14,21,65,413/- only, therefore, the AO was constrained to treat the balance amount of the unsecured loans of Rs.3,17,26,261/- as unexplained cash credits under section 68 of the Act.

Apart from that, the AO observed that the assessee company had during the subject year made investments in tangible assets of 4 DCIT vs. South Asian Ceramic Tiles Pvt Ltd Rs.66,62,39,100/-. On being queried, it was the claim of the assessee company that it had commenced production in the subject year, i.e., Financial Year 2021-22 and amount lying in CWIP of Rs.53,22,24,563/- was during the subject year capitalized to the respective “block of assets” and it had during the year under consideration made an investment in fixed assets of Rs.13,01,49,074/-. As the assessee company failed to provide any corroborative evidence for the investment made in tangible assets along with the source of the said investments, therefore, the AO after putting the assessee company to notice brought the same within the meaning of unexplained investment under section 69 of the Act.

Also, the AO observed that the assessee company had during the year under consideration made payments to sundry creditors of Rs.62,62,96,168/-. The AO called upon the assessee company to provide the details and source of the payments along with the confirmation from parties, copies of their returns of income, bank statements, bills/vouchers, etc., but the assessee company failed to furnish the requisite details. As the assessee company had failed to substantiate the source of the payments made to the creditors, therefore, the AO issued notices under section 133(6) of the Act to the respective parties but the payments made to sundry creditors amounting to Rs.38,30,75,528/- (out of Rs.62,62,96,168/-) could not be 5 DCIT vs. South Asian Ceramic Tiles Pvt Ltd verified, therefore, he held the same as unexplained cash credits under section 68 of the Act. The AO based on his aforesaid observations determined the income of the assessee company at Rs.35,75,01,708/- after making the aforementioned additions, viz., (i) addition of unconfirmed loans made under section 68 of the Act: Rs.3,17,26,261/-;

Aggrieved, the assessee company carried the matter in appeal before the CIT(A), who allowed the same and vacated all the aforementioned three additions that were made by the AO.

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us.

We have heard the Learned Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record.

Ms. U. Mini Chandran, Ld. CIT-DR, at the threshold of hearing of the appeal submitted that the CIT(A) while disposing of the appeal had grossly erred in law and facts of the case by admitting certain additional documentary evidence in violation of Rule 46A of the Income Tax 6 DCIT vs. South Asian Ceramic Tiles Pvt Ltd Rules, 1962, without affording the AO an opportunity to rebut or examine such evidence. Elaborating on her contention, the Ld. CIT-DR submitted that the assessee company in the course of the hearing of the appeal, while assailing the addition of Rs.3,17,26,261/- that was made by the AO with respect to the unsecured loans, had produced before the CIT(A) certain fresh documentary evidence, viz., (i) PANs, copies of the returns of income and the financial statements of certain partis from whom the said unsecured loans were received during the subject year and had prayed for admission of the same as additional evidence under Rule 46A. The Ld. CIT-DR to fortify her contention had drawn our attention to Page 11 of the CIT(A) order, wherein it was clearly observed that the aforementioned documents were produced by the assessee company as additional evidence with a request for admission of the same. The Ld. CIT-DR submitted that the CIT(A) had admitted the aforementioned documents, i.e., copies of the returns of income, PANs and the financial statements of the concerned parties as additional evidence in clear violation of Rule 46A of the Income Tax Rules, 1962. Carrying her contention further, the Ld. CIT-DR submitted that as per sub-rule (3) of Rule 46A of the IT Rules, 1962 the CIT(A) shall not take into account any evidence produced before him under sub-rule (1) i.e., as additional evidence unless the AO has been allowed a reasonable opportunity, viz., (i) to examine the evidence or document or to cross-examine the witness produced by the appellant; or (ii) to 7 DCIT vs. South Asian Ceramic Tiles Pvt Ltd produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. The Ld. CIT-DR submitted that in the present case the CIT(A) had admitted the aforementioned documents, i.e., additional evidence without even confronting the same to the AO and calling for his objections as required as per the mandate of Rule 46A of the Income Tax Rules, 1962, which therein rendered the order so passed by him as unsustainable in the eyes of law.

Per contra, Shri Pawan Kumar Chakrapani, CA, Learned Authorized Representative (for short, “Ld. AR”) for the assessee company/respondent failed to rebut the aforementioned contention of the revenue that the CIT(A) had admitted the above mentioned additional evidence in violation of Rule 46A of the Income Tax Rules, 1962.

We have given thoughtful consideration to the contentions advanced by the Learned Authorized Representatives of both parties in the backdrop of the orders of the authorities below.

Before proceeding further, we deem it apposite to cull out Rule 46A of the Income Tax Rules, 1962 which contemplates the set of circumstances under which additional evidence can be filed by an appellant before the CIT(A), as well as the manner in which such 8 DCIT vs. South Asian Ceramic Tiles Pvt Ltd additional evidence can be admitted by the said appellate authority, as under:

We thus, in terms of our aforesaid observations, are of firm conviction that as the CIT(A) had admitted the aforementioned additional evidence without confronting the same to the AO as mandatorily required under sub-rule (3) of Rule 46A of the IT Rules, 1962, therefore, the order so passed by him cannot be sustained and is liable to be set aside. Accordingly, in all fairness and in the interest of justice, we herein set aside the order passed by the CIT(A), NAFAC to his file with a direction to re-decide the appeal after carrying out due compliance of Rule 46A with respect to the additional documentary evidence produced by the assessee before him and re-adjudicate the appeal afresh.

The Principal Commissioner of Income Tax, Hyderabad. 4. "वभागीय""त"न"ध, आयकरअपील"यअ"धकरण /DR,ITAT, Hyderabad.