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Facts
The assessee filed its return of income for AY 2014-15 declaring NIL income. The AO reopened the assessment under Section 147, alleging that the assessee entered into fictitious transactions with M/s. Latin Manharlal Securities Pvt. Ltd., resulting in alleged artificial profits. The AO made an addition of Rs. 1,27,52,200 under Section 68.
Held
The Tribunal noted that the assessee had indeed recorded derivative gains of Rs. 1,27,27,019/- in its financial statements. It held that the basis for reopening the assessment was factually incorrect as the assessee had earned genuine derivative gains. The Tribunal further observed that even if the income were not genuine, it could not be added as unexplained cash credit under Section 68.
Key Issues
Whether the reopening of assessment under Section 147 was justified based on the alleged fictitious transactions and whether the addition made under Section 68 for unexplained cash credit was appropriate.
Sections Cited
148, 151, 68, 69A, 69C, 234B, 271(1)(c), 271(1)(b), 147
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HONBLE & SHRI SANDEEP SINGH KARHAIL, HONBLEShri Himanshu Gandhi Shri Harmesh Lal
O R D E R PER NARENDRA KUMAR BILLAIYA (AM)
This appeal by the assessee is preferred against the order dated 27.09.2023 by National Faceless Appeal Centre, Delhi [hereinafter in short “Ld. CIT(A)”] pertaining to A.Y.2014-15.
(A.Y: 2014-15) Aadinath Securities Pvt Ltd 2. The grievance of the assessee read as under: - “1. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that notice issued u/s 148 of the Income Tax Act, 1961 (the Act) dated 31.03.2021 which is bad in law and require to be quashed.
On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that the permission obtained u/s 151 of the Act is not in accordance with law, as permission is given by PCIT in mechanical manner. Therefore, resultant proceedings u/s 148 are also bad in law and require to be quashed.
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming addition of Rs. 1,27,52,200 under section 68 of Income Tax Act, 1961 on allegation that appellant had obtained artificial profit from illiquid stocks options without considering the facts that appellant had earned genuine profit and same is already offered for tax.
On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming addition of Rs. 1,27,522 u/s 69A of the Act on allegation that appellant had paid 1% commission of artificial gain of Rs. 1,271 522 without considering the facts that appellant had neither paid any commission nor commission was claimed as expenses. Hence provisions of section 69C of the Act are not applicable.
Without prejudice to the above, On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that addition cannot be made on different nomenclature when tax rates are same.
6. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in charging interest under section 234B of Income Tax Act, 1961.
7. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in invoking penalty u/s 271(1)(c) and 271(1)(b) of Income Tax Act, 1961.
8. Appellant craves leave to add further grounds or to amend or alter the existing grounds of appeal on or before the date of hearing.”
Page No. 2
(A.Y: 2014-15) Aadinath Securities Pvt Ltd 3. Briefly stated the facts of the case are that the, assessee filed its return of income on 25.09.2014 declaring NIL income. Assuming jurisdiction conferred upon him by the provisions of section 148 of Income-tax Act, 1961 (in short “Act”), the Assessing Officer issued notice dated 31.03.2021 stating the he has reasons to believe that income chargeable to tax for the year under consideration has escaped assessment within the meaning of section 147 of the Act. Issues as per reasons recorded for reopening the assessment read as under: -
Page No. 3 (A.Y: 2014-15) Aadinath Securities Pvt Ltd Page No. 4 (A.Y: 2014-15) Aadinath Securities Pvt Ltd Page No. 5
(A.Y: 2014-15) Aadinath Securities Pvt Ltd 4. The entire quarrel revolves around whether transactions through M/s. Latin Manharlal Securities Pvt., Ltd., resulting into the aforementioned profit has been shown in the books of accounts of the assessee. The profit and loss account for the year under consideration is as under: -
AADINATH SECURITIES PVT., LTD., PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2014 Year ended 31st year ended 31st Schedule No. march, 2014 march, 2013 I. Revenue from operations 8 10,058,736.28 7,178,769.07 II. Other income 9 511,823.11 907,894.25 III. total revenue (I + II) 10,570,559.39 8,086.663.32 IV EXPENSES Purchase of Traded Goods 10 10,103.276.01 10638582.52 (Increase) Decrease in inventory 11 (1,744,758.88) 218679.94 of traded Employees Benefit Expenses 12 -- -- Other EXPENSES 13 562,844.04 497501.86 8921361.17 11354,764.32 v. Profit Before Exceptional and Extraordinary items and 1,649,198.22 (3,268,101.00) TAX (III – IV) VI Exceptional Items -- -- Profit before Extraordinary Items and Tax (V – VI) VII 1,649,198.22 (3,268.101.00) VIII Extraordinary Items -- -- IX Profit before Tax (VII – VIII) 1,649,198.22 (3,268.101.00) X Tax Expense: Tax Adjustment of earlier written back / W/o --- (5,000.00) XI Profit for the Year (IX – X) 1,649,198.22 (3,273,101.00) XII Profit for the year (XII) -- -- XIII Earnings per equity Share @10/- each (1) Basic 1.25 (2.48) (2) Diluted 1.25 (2.48) As per our report of even date For Aadinath Securities Pvt Ltd. attached For A.K. Dawda & CO. Chartered Accountants Sd/- Sd/- Sd/- (A.K. Dawda) Director Director M.No. 30249 Proprietor Place: Mumbai Date: 02/09/2014
Page No. 6
(A.Y: 2014-15) Aadinath Securities Pvt Ltd 5. Note - 8 is as under: -
AADINATH SECURITIES PVT., LTD., SCHEDULES FORMING PART OF THE BALANCE SHEET AS AT 31.03.2014 AS AT 31.03.2014 AS AT 31.03.2013 Rupees Rupees Note 8 Revenue from operations Sales 8,935,826.04 7,178,769.07 Trading Gains in shares & Commodities 1,122,910.24 10,058,736.28 7,178,769.07
The trading gains in shares and commodities mentioned hereinabove is bifurcated as under: -
SN Name of Broker Nature Amount Latin Manharlal Securities Pvt. Ltd. 1 Derivative Gain 1,27,27,019 2. Spectrum Derivative Gain 14,39,510 3. Aadinath Securities Derivative Loss (1,56,53,034) Intraday Gain 19,982 4. CD Equi Search Pvt., Ltd., Derivative Gain 25,83,459 Intraday Gain 5,974 Trading Gains in Shares & Commodities Total 11,20,910
From the above details, it can be seen that the derivative gain of ₹.1,27,27,019/- from M/s. Latin Manharlal Securities Pvt., Ltd., is duly recorded in the financial statements returned for the year under Page No. 7
(A.Y: 2014-15) Aadinath Securities Pvt Ltd consideration. Therefore, the very basis for the reopening of the assessment is found to be factually incorrect. A close perusal of the notice and the observations of the Assessing Officer show that the entire proceedings revolve around the fact that the alleged parties have claimed losses and accordingly evaded taxes. Whereas the facts discussed hereinabove show that the assessee has earned derivative gains of ₹.1,27,27,019/- from M/s. Latin Manharlal Securities Pvt., Ltd. Therefore, the entire observations / basis of the assessment is factually incorrect. Since the assessment has been reopened on the wrong facts the impugned assessment order deserves to be quashed.
As mentioned elsewhere, the assessee has included the profit of ₹.1,27,27,019/- in its profit and loss account for the year under consideration, however, while concluding the assessment order the Assessing Officer has again made addition of ₹.1,27,52,200/- by holding as “It is held that the assessee has routed back its own undisclosed money in the guise of profit from alleged share transaction and the same is added to the income of the assessee under section 68 of the Income-tax Act.”
Page No. 8
(A.Y: 2014-15) Aadinath Securities Pvt Ltd 9. In our humble opinion, even if the income of ₹.1,27,27,019/- is not genuine may be even illegal, then also in our understanding of the law the same cannot be added under section 68 of the Act as unexplained cash credit. In our considered opinion the Assessing Officer ought to have reduced the amount of ₹.1,27,27,019/- from the income side and then proceeded further.
For the sake of completeness, let us do this exercise. The assessee has shown revenue from operations ₹.1,00,58,737/- which includes ₹.1,27,27,019/-. If the Assessing Officer is of the opinion that this amount is illegal earned from non-genuine transaction then reducing the same will result into the loss of (-) ₹.26,68,283/- and if ₹.1,27,27,019/- is added under section 68 of the Act then the assessee is eligible for set-off of ₹.26,68,283/- which will make the entire exercise tax neutral. Since the amendment has been brought in the statute from A.Y. 2017-18 and as clarified by the CBDT Circular No. 11 of 2019 wherein it has been clarified that upto A.Y. 2016-17 the losses can be set-off from the additions made under section 68 of the Act.
Considering the facts of the case in totality from all possible angles be it factual or legal, we do not find merit in the impugned assessment.
Page No. 9
(A.Y: 2014-15) Aadinath Securities Pvt Ltd The Ld. CIT(A) grossly erred in confirming the same and therefore the orders of the authorities below deserve to be set-aside. The Assessing Officer is directed to delete the impugned addition.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 05th June, 2024.