DCIT CEN CIR 2(2), MUMBAI vs. BHAVESH L. GALA, MUMBAI

The assessee as well as the Revenue has taken more or less common grounds of appeal for all the assessment years. Through these grounds, the assessee has challenged the additions sustained by the CIT(A) in respect of unsecured loans under Section 68 of the Income Tax Act, 1961 (hereinafter “the Act”), disallowance of interest expenses, disallowance of consultancy expenses and disallowance us 80C/80D of the Act. Revenue has taken the grounds challenging the deletion made by the CIT(A) towards cessation of liability under Section 41(1)(a) of the Act, deletion of unsecured loan added under Section 68 of the Act, deletion of unexplained credit card expenses made under Section 69C of the Act, deletion of additions made towards unexplained purchase of Apple Ipod. Similarly in the case of Shri Bhavesh L. Gala the assessee has taken grounds challenging the additions sustained by the CIT(A) towards unsecured loans made under Section 68 of the Act, interest disallowance claimed against rental income, disallowance of consultancy expenses and addition towards Mundan Ceremony gifts under Section 68 of the Act. The Revenue has taken grounds challenging the deletion made by the CIT(A) towards cessation of liability under Section 41(1)(c), unexplained credit towards

The brief facts of the case extracted from for A.Y. 2005-06 are that the assessee is an individual deriving income from salary and other sources. A search and seizure action under Section 132 of the Act, was carried out in the case of Reliable Paper (India) Pvt. Ltd. and its group concerns, Mumbai between 23rd February, 2010 and 20th April, 2010 wherein incriminating documents relating to the assessee was found and simultaneously action under Section 132 of the Act, was carried out in the premises of the assessee. Consequent to the search notice under Section 153A of the Act dated 07.03.2011 was issued and duly served on the assessee calling for the return of income for A.Y. 2004- 05 to A.Y. 2009-10. In response to the notice, the assessee has filed his return of income for assessment years 2005-06 to 2009-10 on 23.03.,2011. For A.Y. 2010-11 the assessee has filed return of income under Section 139(1) on 31st December 2010.

The case has been selected for scrutiny and accordingly notices under Sections 143(2) and 142(1) of the Act dated 25th April 2011 were issued. On 26th April, 2011 the assessee filed a letter of adjournment seeking time for filing details. A further notice under Section 142(1) dated 25th April, 2011 along with a questionnaire was issued fixing the case for hearing on 12.05.2011. The assessee neither appeared nor filed any details on the date fixed for hearing, however, filed a letter dated 19.05.2011 seeking adjournment of hearing. The AO has issued one more letter dated 15.10.2012 and directed the assessee to comply with the earlier notice issued on 25th April, 2011. The assessee neither appeared nor filed any details. Therefore, in view of the non-compliance on the part of the assessee, the AO issued a show cause notice on 29.10.2012 asking as to why the assessment should not be completed under Section 144 of the Act, on the basis of the material, documents and information available on record. Since the assessee failed to comply with the show cause notice issued, the AO has passed the assessment under Section 144 r.w.s. 153A

Aggrieved by the assessment order the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged the assessment order passed by the AO under Section 144 r.w.s. 153A of the Act, on the ground that the AO has passed the assessment order without providing reasonable opportunity of being heard. The assessee has also taken a legal plea in as much as the additions made by the AO for A.Y. 2004-05 to A.Y. 2008-09 are bad in law as the assessment for A.Y. 2004 -5 to A.Y. 2008-09 have be unabated/concluded as on the date of search and hence in the absence of any incriminating material found as a result of the search no addition can be made. In this regard relied upon the decision of the ITAT, Mumbai Special Bench, in the case of All Cargo Global Logistics Ltd. vs. DCIT (2012) 137 ITD 287 (Mum). Regarding the addition made by the AO towards unsecured loan, cessation of liability, unexplained credit card expenditure, disallowance of interest expenses, consultancy expenses, denial of deduction under Section 80C/80D, the assessee has filed elaborate written submissions along with additional evidences. The CIT(A), during the course of appellate proceedings forwarded the additional evidences filed by the assessee to the AO for his comments. The AO, vide his remand report dated 20th August, 2014, commented on the additional evidences filed by the assessee and their admissibility. The AO also 5 Shri Lakamshi J. Gala/Bhavesh L. Gala commented on the ground taken by the assessee with regard to ex-parte assessment order under Section 144 and rejection of books of account and submitted that the assessee was non-cooperative during the course of assessment proceedings which is evidence from the facts recorded in the assessment order where number of notices have been issued to the assessee to file details for which the assessee has filed to file any evidence. In so far as the addition towards unexplained cash credit, the AO has reiterated the findings recorded in the assessment order and submitted that the assessee has failed to provide any evidence to justify the unsecured loans with identity of the parties and also failed to file any evidence to prove the genuineness of transaction and creditworthiness of the parties. As regards other additions made in the assessment order, the AO has reiterated his findings recorded at the time of assessment.

The CIT(A), after considering the submission of the assessee and also considering the additional evidences filed by the assessee, partially allowed the appeal filed by the assessee, wherein he deleted the additions made by the AO towards cessation of liability towards unproved sundry creditors under Section 41(1)(a) by holding that the additions made by the AO is not based on any incriminating material found as a result of search. The CIT(A) further observed that so far as unexplained cash credit towards unsecured loans, deleted the addition made by the AO in respect of credit representing opening balance brought forward from previous financial years on the ground that the credits received for the past cannot be considered under Section 68 of the Act. In so far as fresh credits, wherever the assessee has filed confirmation letters, the CIT(A) has deleted the additions made by the AO by holding that the assessee filed confirmation letters to prove the identity of creditors, therefore the AO was incorrect in making the additions only on the ground that the assessee has failed to prove genuineness of transaction and creditworthiness of the parties. Similarly, the CIT(A) deleted the additions made by the AO towards unexplained credit card expenses under Section 69C of the Act on the ground that the AO has failed to bring on record any evidence to prove that 6 Shri Lakamshi J. Gala/Bhavesh L. Gala the assessee has incurred credit card expenses. Merely possessing credit card does not mean that the assessee has incurred expenditure. Therefore, the question of disallowance on adhoc basis on suspicions and surmises cannot arise. Similarly, the CIT(A) has deleted the addition made by the AO towards interest expenses for A.Y. 2010-11 and also deleted the disallowances on account of undisclosed jewellery and unexplained purchase of Appeal Ipod. However, the CIT(A) confirmed the additions made by the AO towards disallowance of consultancy expenses and disallowance on account of claim under Section 80C/80D by holding that the assessee has failed to furnish any evidences. In so far as unsecured loans, the CIT(A) has confirmed the addition made by the AO wherever the assessee failed to file any kind of evidence including confirmation from the creditors. The CIT(A) also confirmed the disallowance of interest expenses for A.Y. 2008-09 on account of assessee’s failure to file proof of payment of interest along with name and address of the parties and their PAN. Aggrieved by the order of the CIT(A) the assessee as well as Revenue are in appeal before us.

The learned A.R. for the assessee submitted that the learned CIT(A) was erred in confirming the addition made by the AO towards unsecured loans as unexplained cash credit under Section 68, ignoring the fact that the assessee has filed confirmation letters and also evidences to prove the genuineness of transaction and creditworthiness of the parties. The learned A.R. further submitted that the CIT(A) has confirmed the addition only on the ground that the assessee was not able to substantiate the loan with any evidence ignoring the fact that all these loans have been accepted by cheque and the assessee has filed confirmation letters from the parties. The learned A.R. further submitted that the CIT(A) has erred in confirming the disallowance of interest expenditure of `5,51,378/- for A.Y. 2008-09 when he has allowed such interest payment for A.Y. 2010-11 under similar facts without bringing any contrary evidence. The A.R. further submitted that the assessee has incurred consultancy expenses which have been paid by cheque. Merely for non production of bills and vouchers

The learned A.R. further submitted that the additions made by the AO for A.Y. 2004-05 to A.Y. 2008-09 in the assessments framed under Section 153A, without any reference to seized material is bad in law as the assessments for A.Y. 2004-05 to 2008-09 have been unabated/concluded on the date of search. The A.R., with reference to the search, submitted that in this case the search took place on 20th April, 2010 and by the time the assessments for A.Y. 2004-05 to A.Y. 2008-09 have been unabated and the time limit for issue of notice under Section 142(1) has been expired, therefore, in the absence of any incriminating material found as a result of search no addition can be made in the assessment order under Section 153A of the Act. In this regard relied upon the decision of the Hon'ble Bombay High Court in the case of CIT vs. Continental Warehousing Corporation (Nava Sheva) Ltd. (2015) 374 ITR 645 and Division Bench judgement of the Hon'ble Bombay High Court in the case of CIT vs. Murli Agro Products Ltd. (2014) 49 taxmann.com 172. The assessee also relied upon the decision of the ITAT Mumbai Special Bench in the case of All Cargo Global Logistics Ltd. vs. DCIT (2012) 137 ITD 287.

The learned D.R., on the other hand, submitted that the CIT(A) has deleted the additions made by the AO towards unsecured loans, unexplained liability towards unproved sundry creditors and unexplained credit card expenditure by admitting additional evidences, eventhough the AO has commented on additional evidences filed by the assessee and admissibility of such additional evidences. The order passed by the CIT(A) is brief and cryptic and the CIT(A) has not given any reason for deleting the additions made by the AO. The learned D.R. further submitted that the CIT(A) has deleted unsecured loans only on the basis of confirmation letters filed by the assessee without appreciating the fact that mere filing of 8 Shri Lakamshi J. Gala/Bhavesh L. Gala confirmation letters would not be sufficient compliance to discharge the onus cast under Section 68 of the Act, to prove identity, genuineness and creditworthiness of the parties. The CIT(A) deleted the additions made by the AO towards unexplained credit card expenditure by shifting the burden on the AO to prove the expenditure incurred by the assessee without appreciating the fact that the assessee has failed to furnish any kind of evidence in the assessment proceedings and even during the remand proceedings. The learned D.R. further submitted that the CIT(A) deleted the cessation of liability without discussing how the addition made by the AO is not sustainable when the assessee is not able to file any evidence to prove sundry creditors appearing in the books of account.

We have heard both the parties, perused the material available on record and gone through the orders of the Authorities below. In this case the search and seizure action under Section 132 of the Act, was conducted on 20th April, 2010. The facts born out from the record reveals that during the course of search incriminating material relating to the assessee was found and seized. The AO has passed ex-parte assessment order under Section 144 r.w.s. 153A of the Act and made various additions towards cessation of liability under Section 41(1)(a), unexplained cash credit under Section 68 towards unsecured loans, disallowance of interest expenses, disallowance of consultancy expenses, disallowance of 80C/80D deductions, addition towards unexplained credit card expenditure and addition on account of undisclosed jewellery and unexplained purchase of Appeal Ipod. The AO further observed that the assessee is non-cooperative and not filed any details in respect of various notices and questionnaire issued. The AO has made various additions towards unsecured loans, unproved sundry creditors, consultancy expenses, disallowance of interest expenses and deductions claimed under Section 80C/80D and unexplained credit card expenses. But, except for addition made on account of undisclosed jewellery and unexplained purchase of Apple Ipod and also unexplained expenditure made on loose papers, the AO has not referred to any incriminating material found as a result of search in all

Having heard both the sides and considering the material on record, we find that the additions made by the AO towards unsecured loans under Section 68 of the Act, cessation of liability under Section 41(1)(a), unexplained credit card expenditure under Section 69C, disallowance of interest expenses, consultancy expenses and denial of deduction claimed under Section 80C/80D are not based on any reference to the incriminating material found and seized as a result of search. We further observes that the Hon'ble Bombay High Court, in the case of Continental Warehousing Corporation (Nava Sheva) Ltd. (supra) has held that in the absence of any seized material found during the search no addition can be made in respect of unabated assessments which have become final as on the date of search. This legal proposition is further supported by the decision of the Division Bench of the Hon'ble Bombay High Court, in the case of Murli Agro Products Ltd. (supra) wherein it was held that no additions can be made in respect of unabated assessments which have become final, if no incriminating material is found during the search. The ITAT, Mumbai Special Bench in the case of All Cargo Global Logistics Ltd. vs. ACIT (supra) has taken similar view wherein it was categorically observed that the AO is not empowered to make any addition in the absence of any seized material in respect of assessments that have unabated/concluded as on the d ate of search. In this case, the search took place on 20th April, 2010. Admittedly, as on the date of search the 10 Shri Lakamshi J. Gala/Bhavesh L. Gala assessment for A.Y. 2004-05 to A.Y. 2008-09 have been unabated. The time limit for issue of notice under Section 143(2) has also expired as on the date of search. Therefore, we are of the considered view that the AO cannot make any additions in respect of unabated assessments, if no incriminating material is found during the search for A.Y. 2004-05 to A.Y. 2008-09.

Coming to the addition made by the AO towards unsecured loans under Section 68 of the Act. Admittedly the assessee has not filed any details before the AO at the time of assessment. The assessee has filed additional evidences in the form of confirmation letters before the CIT(A). Though the CIT(A) has forward the additional evidences filed by the assessee for the comments of the AO, in the remand report the AO has opposed admission of additional evidences and also commented that mere filing of confirmation letters would not absolve the assessee from the obligation to discharge the burden cast under Section 68 of the Act. The CIT(A) has deleted addition made by the AO towards unsecured loans merely on the basis of confirmation letters filed by the assessee without giving any reason in respect of genuineness of transaction and creditworthiness of the parties. The assessee claims to have filed all evidences to prove unsecured loans including confirmation letters, ITR acknowledgement and bank statement to prove the identity, genuineness of transaction and creditworthiness of the parties. The facts are contrary. The CIT(A) deleted addition made by the AO towards unsecured loans, without any reason. Therefore, we are of the considered view that the issue needs re-examination by the AO in the light of the additional evidences filed by the assessee to prove identity, genuineness of transaction and creditworthiness of the parties. Therefore, we set aside the issue to the file of the AO and direct him to consider it afresh after affording reasonable opportunity of being heard. If the assessee files details in respect of the identity, genuineness of transaction, etc. then the AO is directed to delete the addition made towards unsecured loans. Once the assessee discharges its initial onus

In so far as cessation of liability, the CIT(A) has deleted the addition made by the AO only on the ground that there was assessment order under Section 143(3) for the previous year wherein there is no addition and also the addition is made without any incriminating material without discussing the issue in the light of provisions of Section 41(1)(a), when the assessee has not able to furnish any evidence to prove the sundry creditors. Similarly in respect of additions towards disallowance of interest expenses, consultancy expenses and deduction claimed under Section 80C/80D the CIT(A) has either deleted the additions or confirmed the additions without discussing the issue raised by the AO as well as the assessee. Therefore, we are of the view that the issue needs to be re- examined by the AO in the light of the additional evidences filed by the assessee. Similarly, in respect of deletion of addition in respect of undisclosed jewellery and unexplained purchase of Apple Ipod the CIT(A) has not given any cogent reason for deleting the additions made by the AO. The order of the CIT(A) is brief and cryptic and no reason has been given to counter the allegations made by the AO. On the other hand, the assessee has filed various details in respect of jewellery and Apple Ipod to explain the source. Therefore, we are of the considered view that the issues need to be re-examined by the AO in the light of the additional evidences filed by the assessee. Hence, we set aside the issue of disallowance of interest expenses, disallowance of consultancy expenses, disallowance of deduction claimed under Section 80C/80D, disallowance of addition based on loose papers, deletion of addition made by the AO

In the result, the appeals filed by the assessee and appeals filed by the Revenue are allowed for statistical purposes.