ACIT, NEW DELHI vs. M/S R & R ARTS, NEW DELHI

ORDER PER O.P. KANT, A.M.: These two appeals by the Revenue are directed against two separate orders dated 30th of March, 2011 passed by the learned Commissioner of Income-tax (Appeals)-I, New Delhi, for assessment years 2006-07 and 2007-08. The facts and circumstances in both the appeals, being identical, are heard together and disposed of by this consolidated order for the sake of convenience and brevity.

4. The Revenue filed additional ground through application under Rule 11 of Income-tax(Appellate Tribunal) Rules, 1962 dated 22/09/2013 and 20/03/2014 in respect and respectively. The additional grounds raised in both the appeals are identical, which is reproduced as under:

3 & 3113/Del/2011 AYs: 2006-07 & 2007-08 “The Commissioner of Income Tax (Appeals) has erred in law by accepting additional evidences during the course of appellate proceedings without giving any opportunity to Assessing Officer as per Rule 46A of the Income Tax Rule, 1962.” ITA No. 3114/Del/2011 for AY: 2006-07 5. First we take up the appeal in ITA No. 3114/Del/2011. Facts in brief of the case are that a search and seizure operation under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) was carried out in the case of the assessee on 17/04/2007. Notice under section 153A of the Act was issued on 11/05/2009 requiring the assessee to file return of income. In response, the assessee filed return for the year under consideration on 27/07/2009 declaring income of Rs.26,14,378/-. In the original return filed under section 139 of the Act on 31st of October 2005, also the same amount of income was declared by the assessee. In the course of reassessment proceeding under section 153A of the Act, the Assessing Officer found that the gate passes issued for some paintings could not be reconciled with the books of accounts and, therefore, he made addition of Rs.57,14,271/- with following observations: “4.2. Total 128 paintings (for the AY 2006-07 to 2008-09) were sent out of the gallery through gate passes which are not entered in the books of accounts of the assessee and for which confirmations or any credible document has not been submitted to prove that the paintings were returned to the gallery. In view of the above, the paintings which were sent out of the gallery through gate passes found during the search, for which the assessee has failed to submit the sale bill, have been treated as the undisclosed sale of the gallery 4 & 3113/Del/2011 AYs: 2006-07 & 2007-08 for the year. The detailed working of the unaccounted sales has been given below: A.Y. Price Sales (Rs.) GP (Rs) Remark No. of (Rs.) s paintings 2006-07 62 2,76,497 1,71,42,814 57,14,271 Note 1 2007-08 63 3,14,881 1,98,37,503 66,12,501 Note 2 2008-09 3 4,22,222 12,66,666 4,22,222 Note 3 Note 1. Out of the 128 paintings 62 paintings (according to the date mentioned in the gate pass) are treated as sold in the A. Y. 2006-07. The average sale price of one painting is calculated by dividing the total sale consideration of Rs.91,48,382/- by 80-total number of paintings sold during the year as per the details filed by the assessee/audit report Rs.91,48,382/- / 80 = 2,76,497/- For the purpose of determining the gross profit, the gross profit ratio of 33% has been taken on the basis of the GP ratio of the last seven years, as has been shown by the assessee in its own returns and on the basis of documents seized during the search. Note 2. Out of the 128 paintings 63 paintings (according to the date mentioned in the gate pass) are treated as sold in the A.Y. 2007-08. The average sale price of one painting is calculated by dividing the total sale consideration of Rs.4,34,53,607/- by 138-total number of paintings sold during the year as per the details filed by the assessee/audit report Rs.4,34,53,607/- / 138 = 3,14,88l/-. For the purpose of determining the gross profit, the gross profit ratio of 33% has been taken on the basis of the GP ratio of the last seven years, as has been shown by the assessee in its own returns and on the basis of documents seized during the search. Note 3. Out of the 128 paintings 3 paintings (according to the date mentioned in the gate pass) are treated as sold in the A.Y. 2008-09. The average sale price of one painting is calculated by dividing the total sale consideration of Rs.6,03,77,699/- by 143-total number of paintings sold during the year as per the details filed by the assessee/audit report. Rs.6,03,77,699/- / 143 = 4,22,222/- For the purpose 5 ITA Nos. 3114 & 3113/Del/2011 AYs: 2006-07 & 2007-08 of determining the gross profit, the gross profit ratio of 33% has been taken on the basis of the GP ratio of the last seven years, as has been shown by the assessee in its own returns and on the basis of documents seized during the search.

As the assessee has already booked all the expenses against the above paintings in its books of account the entire gross profit is treated as the income of the assessee. (Addition of Rs. 57,14,271)”

5.1 Aggrieved, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals) and filed certain additional evidences. After considering submission of the assessee, the learned Commissioner of Income-tax (Appeals) allowed relief of Rs.44, 23, 951/-with following findings: “I have considered the submissions of the appellant and finding contained in the order of assessment and the material placed on record. From the perusal of the submissions filed by the appellant and the material placed on record, it is undisputed fact that a gate pass is prepared whenever a painting is taken out of the premises of the gallery. It is evident that the paintings are usually taken out from gallery premises against sale, purchase returns, sent for approval, returns to the artists in case of paintings received on consignment, framing, for taking photographs for promotion and catalogue, restoring etc. Hence when a gate pass is prepared and a painting is taken out of the gate, there may be a sale of painting or the painting may be taken out for some other purpose. It is also undisputed that whenever a painting is issued on approval by preparing gate pass, the same is not always converted into sales. The said facts has also been accepted by the AO as he has given credit for paintings sent for framing to Sharma Printers and Suijeet Framing. The appellant has submitted the reconciliation of the said 128 gate passes along with 6 & 3113/Del/2011 AYs: 2006-07 & 2007-08 corroborative evidence of the same at page 45 to 113 of the paper book, which has been placed on record. The appellant has also submitted the purpose - wise break up of 128 paintings for which the gate passes were found and seized during the course of search & seizure operation, which is given in para - viii above. Whenever the sales have been made, the sale bills in respect of the gate passes have been raised and accounted for. Even most of the sale bills are part of the documents seized during the course of search & seizure operation. In view of the facts stated above, I am of the opinion that out of 128 paintings, the appellant has explained 109 paintings and failed to explain about 19 paintings to the satisfaction, so estimation of sale out of books on the basis of gate passes seized in respect of 109 paintings is bad in law and I upheld addition in respect of 19 paintings made by the AO. Out of the said unexplained 19 paintings, 14 paintings relate to the assessment year 2006-07. Accordingly the addition amounting to Rs.12,90,320/- (Rs.57,14,271 x 14/62) in respect of 14 paintings is sustained and balance addition of Rs. 44,23,951/- in respect of 48 paintings is hereby deleted. The appellant gets relief of Rs44,23,951/-.”

5.2 Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds and additional grounds reproduced above.

7 & 3113/Del/2011 AYs: 2006-07 & 2007-08 6.1 On the other hand, the Authorized Representative of the assessee opposed the admission of the additional ground. 6.2 We have heard the representative of the both the parties on the issue of the admission of additional ground. We find that the additional ground raised is purely legal in nature and no fresh facts are required for examination and the legal ground can be raised at any stage of the appellate proceeding, therefore, following the decision in the case of National Thermal Power Company Limited versus CIT (1998) 229 ITR 383 (SC), we admit the additional ground of the revenue.

7. In support of the additional ground, the learned Commissioner of Income Tax (Departmental Representative) referred to para-5 of the impugned order and submitted that the reconciliation of 128 gate passes alongwith corroborative evidence of the same were filed by the assessee before the learned Commissioner of Income-tax (Appeals), which are available at page 45 to 113 of the assesses paper book. The assessee also submitted purpose-wise breakup of 128 paintings for which the gate passes are found. According to the learned Commissioner of Income Tax(Departmental Representative), these being the additional evidences, should have been forwarded by the learned Commissioner of Income-tax (Appeals), to the Assessing Officer, following the Rule 46A of the Income Tax Rules, for his comments, however the learned Commissioner of Income-tax (Appeals) has decided the appeal without giving an opportunity to the Assessing Officer for giving 8 & 3113/Del/2011 AYs: 2006-07 & 2007-08 his comment as required under Rule 46A of the Income Tax Rules. Accordingly, he prayed that the impugned order may be restored back to the to the Assessing Officer for considering and verifying the additional evidences taken into consideration by the learned Commissioner of Income Tax Appeals. In support thereof, the learned Commissioner of Income-tax (Departmental Representative) relied on the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Manish Buildwell Pvt. Limited (2012) 204 taxmann 106 (Delhi).

10. In view of above Rule, it is evident that the learned Commissioner of Income-tax(Appeals) was required to record in writing the reason for admission of the additional evidences and after admitting he was required to allow a reasonable opportunity to the Assessing Officer to examine and rebuttal of those evidences. With regard to compliance of Rule 46A of the Income Tax Rules, 1962, in the case of ITO Vs. Rajendra Kumar Diwan, in the Tribunal after taking into account the decision of the Hon’ble jurisdictional High Court in the case of Manish Buildwell Pvt. Ltd. has observed as under: “7.1 A perusal of the said decision shows that considering the non-fulfillment of the requirements set out in sub-Rule (3) of Rule 46A the Hon’ble Court was pleased to restore the issue back to the CIT(A directing the said Authority to address the shortcomings. Holding that it is true that the 10 & 3113/Del/2011 AYs: 2006-07 & 2007-08 powers of CIT(A) as First Appellate Authority are co- terminous power over the sources of income constituting the subject matter of the assessment, except the power to tackle new sources of income not considered by the Assessing Officer, and that the CIT(A) can also do and can direct the Assessing Officer to do what he has failed to do, as held by the Supreme Court in the case of Commissioner of Income-Tax, U.P. v. Kanpur Coal Syndicate, (1964) 53 ITR 225. However, in the facts before the Hon’ble Court, the CIT (A) did not exercise this right. This power, the Court observed is recognized in sub- Section (4) of section 250 and has to be exercised by the CIT (A) and for this there should be material on record to show that he, while disposing of the appeal, had directed further enquiry and called for the confirmation letters from the assessee even in respect of receipt of monies from customers by way of cheques. Rule 46A, it was observed held that is a provision in the Income Tax Rules, 1962 which is invoked, on the other hand, by the assessee who is in an appeal before the CIT (A). Once the assessee invokes Rule 46A and prays for admission of additional evidence before the CIT (A), then the procedure prescribed in the said rule it has been held has to be scrupulously followed. The fact that sub-Section (4) of Section 250 confers powers on the CIT (A) to conduct an enquiry as he thinks fit, while disposing of the appeal the Hon’ble Court held cannot be relied upon to contend that the procedural requirements of Rule 46A need not be complied with. Their Lordships have held that if such a plea of the assessee is accepted then it would reduce Rule 46A to a dead letter because it would then be open to every assessee to furnish additional evidence before the CIT (A) and thereafter contend that the evidence should be accepted and taken on record by the CIT (A) by virtue of his powers of enquiry under sub- Section (4) of Section 250. The Court held that this would mean in turn that: (a) the requirement of recording reasons for admitting the additional evidence; (b) the requirement of examining whether the conditions for admitting the additional evidence are satisfied; and (c) the 11 & 3113/Del/2011 AYs: 2006-07 & 2007-08 requirement that the assessing officer should be allowed a reasonable opportunity of examining the evidence etc. can all be thrown to the winds, a position which the Hon’ble Court held was wholly unacceptable and may result in unacceptable and unjust consequences. The Hon’ble Court held that the procedural requirements mentioned in the Rule must be strictly complied with so that the Rule is meaningfully exercised and not exercised in a routine or cursory manner. The Tribunal in view thereof was faulted with for over-looking the requirements of sub-Rule (3) of Rule 46A and confusing it with sub-Rule (4) of Rule 46A. Addressing the rationale for the Rule the Hon’ble Court observed that the fundamental rule which is valid in all branches of law, including Income Tax Law is that the assessee should adduce the entire evidence in his possession at the earliest point of time. This ensures full, fair and detailed enquiry and verification. Referring to the decision in Keshav Mills Co. Ltd. v. Commissioner of Income-Tax, Bombay North, Ahmedabad (1965) 56 ITR SC 365, 7-Judge Bench judgement of the Supreme Court, it was observed that the Court held that "Proceedings taken for the recovery of tax under the provisions of the Act are naturally intended to be over without unnecessary delay, and so, it is the duty of the parties, both the department and the assessee, to lead all their evidence at the stage when the matter is in charge of the Income-tax Officer." It was held by the Jurisdictional High Court that it is for the said reason that Rule 46A starts in a negative manner by saying that an appellant before the CIT (A) shall not be entitled to produce before him any evidence, whether oral or documentary, other than the evidence placed by him before the assessing officer. Their Lordships held that after making the said general statement, which was found to be in consonance with the principle stated in the aforesaid judgment of the Apex Court, exceptions have been carved out setting out under what circumstances it would be open to the CIT (A) to admit additional evidence. The additional evidence can only then be produced at the first appellate stage when 12 & 3113/Del/2011 AYs: 2006-07 & 2007-08 conditions stipulate in the Rule 46A are satisfied and a finding is recorded to that extent which makes it clear in unambiguous language that firstly the conditions prescribed in Rule 46A must be shown to exist before additional evidence can be admitted and thereafter every procedural requirement mentioned in the Rule has to be strictly complied with so that the Rule is meaningfully exercised and not exercised in a routine or cursory manner. Their Lordships have held that a distinction should be recognized and maintained between a case where the assessee invokes Rule 46A to adduce additional evidence before the CIT (A) and a case where the CIT (A), without being prompted by the assessee, while dealing with the appeal, considers it fit to cause or make a further enquiry by virtue of the powers vested in him under sub-Section (4) of Section 250. It is only when the CIT(A) exercises his statutory power suo moto under the above sub-section that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the requirements of the Rule strictly.”

11. When we advert to the facts of the case in hand, we find that following additional evidences have been produced before the learned Commissioner of Income-tax (Appeals):

1. 1. Reconciliation of 128 gate passes alongwith corroborative evidence (in the form of pages 45 to 113 of the assesses paper book) 2. Purpose wise breakup of 128 paintings for which the gate passes are found.

12. From para- 5 of the impugned order, it is evident that the learned Commissioner of Income-tax (Appeals) neither recorded in writing the admission of additional evidences nor 13 & 3113/Del/2011 AYs: 2006-07 & 2007-08 those evidences were forwarded to the Assessing Officer by the learned Commissioner of Income-tax (Appeals) for his examination and rebuttal. Thus, the learned Commissioner of Income-tax(Appeals) has violated Rule 46A(2) and 46A(3) of Income Tax Rules.

13. In our considered opinion, it was incumbent upon the learned Commissioner of Income Tax (Appeals) under Rule 46A of the Income Tax Rules to confront the evidences so as to allow an opportunity to rebut the evidences which are placed on record. In absence of any such exercise, the impugned order is in violation of the stated Rules. In view of the facts of the present case discussed above, we find that procedure lapse is evident on the face of the record and, therefore, we restore the issue in dispute back to the file of the learned Commissioner of Income-tax (Appeals) to address the procedure lapses and pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. The additional ground of appeal is allowed for statistical purposes.

14. Since the impugned order has been restored back to the learned Commissioner of Income Tax (Appeals), the other grounds raised by the assessee are not required to adjudicate and all those grounds are also restored to the learned Commissioner of Income Tax (Appeals) for fresh adjudication after providing a reasonable opportunity of being heard to the assessee.

14 & 3113/Del/2011 AYs: 2006-07 & 2007-08 15. In the result, the appeal of the Revenue is allowed for statistical purpose. AY: 2007-08 16. The facts and circumstances of appeal in ITA No. 3113/Del/2011 and additional ground raised therein are identical to the facts and circumstances as well as additional ground of appeal in ITA No. 3114/Del/2011, thus, following our findings in ITA No. 3114/Del/2011, we restore the appeal in ITA No. 3113/Del/2011 to the file of the learned Commissioner of Income-tax (Appeals) with the directions to address the procedure lapses and pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard.

16. In the result, both the appeals of the Revenue are allowed for statistical purpose. The decision is pronounced in the open court on 5th Oct., 2016.