ITO 24(3)(3), MUMBAI vs. O.K. SUSHEELA NAMBIAR, MUMBAI

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the Revenue. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-34, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

2. The grounds of appeal

filed by the assessee read as under: -

1. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in holding that the capital in the proprietary concern Minar Exports was the carried forward balance of earlier years in the absence of any documentary evidence?

2. Whether, on the facts and in the circumstances of the case, the CIT(A) failed to appreciate that the onus is on the assesse to establish and prove the correctness of the opening balance, the capital in the assessment year 2010-11 as the assessee for the first time filed her return for AY 2010-11 and not filed any returns of income in earlier assessment years.

3. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in holding that the capital was introduced in the earlier years merely on the basis that it was shown as 'opening capital balance' in the books of the assessee during the year under consideration, especially when the assessee failed to explain the source of the opening balance.

4. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in holding that capital was introduced in the accounting year relevant to assessment year 2006-07 even when the assessee could not produce any evidence to prove that the capital was acquired in the accounting year relevant to assessment year 2006-07 through taking over of the debtors and closing stock of the erstwhile partnership firm Minor Exports.

5. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in allowing the assessee's appeal based on the case laws quoted by the assessee even though the case laws were factually distinguishable from the assesee's case?

3. Briefly stated, the facts of the case are that the assessee filed her return of income for the AY 2010-11 on 03.06.2011 declaring total income of Rs.7,33,210/-. The Assessing Officer (AO) noticed during the assessment proceedings that the assessee had shown an opening credit balance of capital at Rs.2,75,00,000/- and adding the profit of the year, she had shown the capital at Rs.2,80,40,829/- before debiting the drawings of Rs.11,03,267/-. The assessee’s accounts showed an opening capital of Rs.2,75,00,000/-. The assessee vide letter dated 12.03.2013 filed before the AO explained that the above amount could only be brought to tax in the AY 2006-07. The assessee further submitted before the AO that (i) she was a partner of M/s Minar Exports w.e.f. 1997, (ii) the said firm stopped its operation on 16.01.2006, (iii) as per the profit and loss account and balance sheet of the said firm as on 16.01.2006, the balance of the assessee in the current account and capital account was Rs.3,56,28,736/- and out of the above capital balance, the assessee took over Rs.280 lakhs as stock and debtors and started her proprietary business in the name of Minar Exports and started trading in some selected areas of textile goods w.e.f. 17.01.2006, (iv) for the years ended 31.03.2006, 31.03.2007, 31.03.2008 and 31.03.2009, her proprietary business made losses and she did not file returns for the AYs 2007-08, 2008-09 and 2009-10, (v) the closing balance in the capital account as on 31.03.2009 is carried over as opening balance for the financial year 2009-10 and (vi) there is no introduction of additional capital during the FY 2009-10 and therefore, there can be no addition for an amount appearing as opening balance carried over from earlier years.

3.1 However, the AO was not convinced with the above explanation of the assessee for the reason that (i) as per the agreement dated 22.12.2005, M/s Minar Exports, the erstwhile partnership firm was to be converted to a company w.e.f. 16.01.2006 and as per clause 5 of the said agreement, the parties thereto (including the assessee) shall prepare a separate restated balance sheet as at 16.01.2006 after revaluation of assets and liabilities and this restated balance sheet shall be the basis for allotment of shares to the parties. As the documents relating to revaluation account was not filed, and admittedly as the assessee was not filing her return of income after closure/conversion of the partnership, the AO made an addition of the opening capital of Rs.2,75,00,000/- shown by the assessee in the impugned assessment year.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has held that the amount of Rs.2,75,00,000/- represents the opening balance in the capital account brought forward from earlier years and it is settled law that there can be no addition for an amount appearing as opening balance carried over from earlier years. Therefore, the Ld. CIT(A) deleted the addition of Rs.2,75,00,000/- made by the AO and allowed the appeal filed by the assessee.

5. Before us, the Ld. DR submits that admittedly the proprietary concern of the assessee did not file return of income for the AYs 2007- 08, 2008-09 and 2009-10. Therefore, it is incumbent on the part of the AO to verify the opening capital of Rs.2,75,00,000/- shown by the assessee in the AY 2010-11. As the assessee has not filed the revaluation account, the Ld. DR pleads that the AO has rightly made an addition of Rs.2,75,00,000/-.