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Facts
The Assessing Officer (AO) made an addition of Rs. 1,49,17,060/- to the assessee's income as commission received, based on information from SEBI that the assessee was a shell company. The AO reopened the assessment and made the addition assuming a 5% commission on turnover.
Held
The CIT(A) deleted the addition, noting that SEBI had revoked its earlier observations and found no material evidence of wrongdoing. The Tribunal agreed, holding that the AO's reopening was based on SEBI's preliminary report without further investigation, and since SEBI later gave a clean chit, the basis for the addition was invalid.
Key Issues
Whether the addition made by the AO based on SEBI's initial report, which was later revoked, is sustainable when SEBI itself provided a clean chit to the assessee company.
Sections Cited
Rule 46A of the Income Tax Rules 1962
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Mumbai “F” Bench, Mumbai.
In this case, Ld. AO received information from Securities and Exchange Board of India (SEBI) that M/s. JIK Industries Ltd. is a shell company and not doing any business activity. SEBI has also stated in its order that the general practice of such companies is to charge 5% of total trade volume as commission. SEBI arrived at this conclusion after placing the company under grade VI surveillance mechanism, mentions Ld. AO in his assessment order at para 5.2. After receiving the above said information, the assessment was reopened after recording reasons and taking prior approval of Principal Commissioner of Income Tax. Accordingly, the Ld. AO, made an addition of Rs. 1,49,17,060/- as commission received, being 5% company’s turnover of Rs. 29.93 crores.
Aggrieved by the addition made by Ld. AO., the assessee company filed an appeal stating that their company is neither a shell company nor they are into any accommodation entries as presumed by Ld. AO. There is no question of receiving any commission from anyone and the Ld. AO made the addition without any basis and hence the addition may be deleted, it was pleaded before the Ld. CIT(A).
The Ld. CIT(A) deleted the addition made by Ld. AO because SEBI has revoked all its directions relating to assessee company and passed an order stating that there is no material evidence relating to misuse of funds, misrepresentation of business violation regulations. The Ld. CIT(A) held that the addition was made based on SEBI’s interim order and once SEBI itself found that there are no violations, the consequential addition made by Ld. AO cannot sustain. With these observations, the addition made by Ld. AO was deleted by the Ld. CIT(A)
Aggrieved by the deletion of addition by the Ld. CIT(A), the Revenue filed an appeal to ITAT stating that the first appellate authority deleted the addition without providing an opportunity to the assessee and invoked the provisions of Rule 46A of the Income Tax Rules 1962.
On the day of hearing, the Ld. DR supported the order of Ld. AO and argued that the evidences were filed before the Ld. CIT(A) for the first time and Ld. AO should have been given an opportunity to verify the same under Rule 46A. Per contra, Ld. AR of the assessee argued that the Department should not have filed further appeal at all because the addition itself was made based on surmises and conjectures. It was also argued that SEBI revoked all its observations on the company and observed that M/s. JIK Industries is not a shell company. So, the additions would not have any legs to stand and pleaded that the Revenue’s appeal be dismissed.
Heard both the sides. The Ld. AR of assessee filed a copy of SEBI’s order before the Bench. The documents filed before first appellate authority and before the Bench during the course of hearing clearly shows that SEBI has revoked all its earlier observations that M/s. JIK Industries is a shell company after perusing the auditor’s report, bills, vouchers and bank statement filed by assessee before SEBI. Hence, we agree with the observations of the Ld. CIT(A) that the additions were made merely on the basis of earlier observations of SEBI prior to examination of books of account of the assessee company. It is observed that the Ld. AO had reopened assessee’s case merely on the SEBI’s report and without any other incriminating material and as SEBI had conducted its enquiry and came to a conclusion and gave a clean chit to assessee company, the very basis for reopening is held to be bad in law. We therefore do not find any infirmity in the order of the Ld. CIT(A) and hence the grounds of appeal of Revenue are dismissed
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 31st July, 2024.