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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri N.V. Vasudevan, JM & Shri M.Balaganesh, AM ]
Per M.Balaganesh, AM
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax (Appeals) -21, Kolkata [ in short the ld CITA] in Appeal No. 468/CC- 4(1)/CIT(A)-21/14-15 dated 19.01.2015 against the orders passed by the DCIT, Central Circle-XXIII, Kolkata [ in short the ld AO] under section 263 read with Section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 20.12.2013 for the Assessment Year 2009-10.
The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the addition made in the sum of Rs. 1,26,65,460/- towards unaccounted investment in respect of drafts in hand, in the facts and circumstances of the case.
The facts of the case are that the assessee firm filed its return of income for the assessment year 2009-10 on 01.10.2010 declaring total income of Rs. 80,31,121/-. The assessment was completed u/s 143(3) of the Act on 23.12.2010 at the assessed income
2 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 of Rs. 80,31,120/-. Subsequently, the ld AO sent a proposal u/s 263 of the Act to the ld CIT, Central-III, Kolkata on the ground that the assessee firm held drafts in hand amounting to Rs. 1,26,65,460/- over a period of two years although the validity of a drafts is only six months. Thus, the drafts in hand represent unexplained investment and should have been added to the income of the assessee. Further, the assessee firm had shown long term capital gain of Rs. 18,41,200/- on sale of HDFC FMP of Rs. 1 crore. However, it revealed that the investment which was originally in the name of partner was transferred in the hands of the firm during the F.Y. 2008-09 relevant to A.Y. 2009- 10 and redeemed in this year itself. Hence, the gain is assessable as short term capital gain instead of long term capital gain. The ld CIT, Central-III, Kolkata passed an order u/s 263 of the Act dated 27.02.2013 and set aside the assessment order to the file of the ld AO with the direction to make the assessment afresh after giving due opportunity of being heard to the assessee.
2.1. In view of the order u/s 263 of the Act the ld AO re-initiated the assessment proceedings. In the course of re-initiated proceedings, the ld AO asked the assessee firm to explain that as per the assessment records relating to the A.Y. 2008-09 and 2009-10, the assessee firm was having drafts in hand amounting to Rs. 1,26,65,460/- in both the assessment years. Since, the drafts in hand were not valid for more than six months, this investment would be deemed to be the income of the assessee firm for the A.Y. 2009-10. In response, it was submitted before the ld AO that the drafts in hand is nothing but the realization from the sundry debtors of their balances. Since the same were not deposited in the bank, so these drafts in hand were shown as such in the books of the firm and in the balance sheet. The nature of such drafts in hand is same as of cheques in hand. It was submitted by the assessee that the drafts were not deposited in the bank account because of some issues between the partners. It is true that the time period of such drafts is six months only and cannot be endorsed after such period, but the firm has kept these drafts because the same were required to be returned to get the 2
3 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 new drafts. It was contended before the ld AO that till the time new drafts are received these drafts may be treated as ‘Receivable from debtors’ in the balance sheet and change in nomenclature of balance sheet item could not result in the same being treated as unexplained investment. However, the contention of the assessee was not accepted by the ld AO and he added the sum of Rs. 1,26,65,460/- to the income of the assessee firm.
Before the Ld. CIT(A), it was humbly submitted that the assessee firm had made investments in Fixed Deposit in the various banks situated in Bokaro in the earlier years. Out of the total Fixed Deposits, a sum of Rs. 1,26,65,460/- was pre-matured in the A.Y. 2008-09 and the banks issued drafts to the tune of Rs. 1,26,65,460/- in favour of the assessee-firm. The details of the drafts are given hereunder- Banks Amount (Rs.) Remarks Sl. No. 1. Allahabad Bank 6,17,272/- The Allahabad Bank had issued the D/D of Rs. 6,17,272/- 2. UCO Bank 9,62,412/- The UCO Bank had issued the D/D of Rs. 9,62,412/- bearing the draft no. 503491 dated 06.12.2007. 3. State Bank of India 30,85,776/- State Bank of India had issued the DD of Rs. 30,85,776/- bearing the draft no. 081123 dated 04.12.2007. 4. Allahabad Bank 80,00,000/- The Allahabad bank had issued the DD of Rs. 80,00,000/-, bearing the draft nos. 846174 to 846117 and 846184 to 846189. Total 1,26,65,460/-
But due to some disputes between the partners of the assessee-firm, the said drafts could not be encashed in time. Accordingly, the assessee-firm in its books of accounts reduced the sum of FD and showed the said sum of Rs. 1,26,65,460/- in the A.Y. 2008-09 as drafts in hand. It was humbly submitted that in the relevant year, since the said drafts of Rs. 1,26,65,460/- were not encashed, the said amount of Rs. 1,26,65,460/- was lying in the asset side of the assessee- firm under head Drafts in Hand. It was humbly submitted that the addition of unexplained investment can only be made where investments are not recorded in the books of accounts in the year in question. In the instant case, the asset in 3
4 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 question was appearing in the Balance Sheet for F.Y. 2007-08 when it arose. The same asset was also appearing in the Balance Sheet of the year in question i.e., Balance Sheet for F.Y. 2008-09. It makes no difference to the position in law even if the asset has become bad due to expiry of time and as such, no addition can be made to the income for the said reason. Thus, the twin conditions envisaged in the provisions of Section 69, that is, the asset is question is not recorded in the books of the assessee and that the addition is to be made in the financial year the assessee has made the investment, is not satisfied in the instant case.
The ld AO was asked to verify the contention of the appellant with reference to the documents filed and the assessment records that the drafts were issued by the bankers of the assessee firm out of the fixed deposits with the bank. In response, the ld AO submitted his report vide letter No. DCIT/CC-4(1)/Kol/Remand Report/2014-15/406 dated 09.01.2015. In his report, it was submitted by the ld AO that original assessment was set aside u/s 263 of the Act due to revenue audit objections. In the remand report the ld AO reproduced the findings in the assessment order to make addition on account of drafts in hand and the submission filed by the assessee-firm in the course of appellate proceedings. It was submitted by the ld AO that the contention of the assessee has been examined with reference to the records available and appears to be in order.
4.1. The copy of the remand report submitted by the ld AO was forwarded to the assessee for counter comments, if any. In response, it was submitted by the assessee that in the remand proceedings, the authorized representative of the assessee appeared before the ld AO and explained the case of the assessee with the help of relevant evidences which were on the record of the ld AO. After considering the said details, the ld AO has accepted in the remand report that the contention of the assessee is in order. Thus, the ld AO has not disputed the contention of the assessee as per the submission and he was
5 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 completely satisfied with it. Accordingly it was prayed for deletion of the addition made u/s 69 of the Act.
The Ld. CIT(A) deleted the addition by making the following observations: “I have considered the submission of the appellant and perused the assessment order. It is observed that in the case of appellant firm the original assessment for the A.Y. 2009-10 was completed u/s 143(3) of the Act on 23.12.2010 determining the total income at Rs. 80,31,120/-. However, due to revenue audit objections on the points of drafts in hand and calculation of capital gain income, the order u/s 143(3) was set aside by the CIT, Central-II, Kolkata by invoking the provision of Section 263 of the Act vide order dated 27.02.2013. On perusal of the remand report submitted by the AO, it is observed that the revenue audit was of the view that the assessee firm held draft-in-hand were not valid for more than six months, the investment would be unexplained investment by the firm and the value of investment would be deemed to be income of the assessee for the financial year 2008-09 relevant to the A.Y. 2009-10. On examination of the Balance Sheet of the appellant as on 31.03.2008 it is observed that the appellant had enchased the FDR of Rs. 4,36,97,555/-. However, due to dispute amongst the partners, the drafts of Rs.1,26,65,460/- were not deposited in the bank account of the assessee firm and, therefore, reflected separately in the Balance Sheet under the nomenclature 'Draft in Hand' . Similar was the position in the year under consideration i.e. the A.Y. 2009-10 that the drafts of Rs.1,26,65,460/- were still lying un-deposited in the bank account and as such reflected in the Balance Sheet as on 31.03.2009. It is not known that on what basis and under which law the revenue audit opined that the drafts in hand reflected in the balance sheet as on 31.03.2009, are to be treated as unexplained investment because their life had already been expired after six months. It is observed that on this point the original assessment order was set-aside u/s 263 of the Act. In the course of re- assessment proceedings the appellant firm explained the facts before the AO and filed a submission that no addition on account of draft in hand could be made u/s 69 of the Act. However, in the order under appeal, the AO did not accept the submission of the appellant and made the addition of Rs.1,26,65,460/- u/s 69 of the Act. Though, in the assessment order, the AO made addition u/s 69 of the Act on account of drafts in hand as opined by the revenue audit but he did not give any reason for not accepting the explanation of the appellant firm filed in the course of assessment proceedings. On careful consideration of the facts and in law, I am of the opinion that under no circumstances, the drafts in hand which are reflected in the balance sheet of the appellant company can be treated as unexplained assets and consequently no addition can be made u/s 69 of Act on account of unexplained investment. I am of the opinion that once the drafts had 5
6 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 been accounted for in the books of account of the appellant firm and duly disclosed in the balance sheet, they cannot be treated as unexplained even if the life span of such drafts was only for the six months. If the period of six months has been lapsed, it does not mean that the money had gone forever and the drafts cannot be revalidated or re-issued by the issuing bank by producing the expired drafts to the bank. In fact, in the course of appellate proceedings it is submitted by the appellant that out of the drafts of Rs. 1,26,65,460/-, the drafts of Rs. 80,00,000/- were cancelled by the bank on 24.11.2010 and a fresh draft of Rs. 70,00,055/- was issued on the same date. The balance drafts were still lying with the appellant firm as drafts in hand since the disputes between the partners are still continuing. In view of above, it is held that the AO was not justified in making the addition of Rs. 1,26,65,460/- on account of drafts in hand treating them as unexplained assets u/s 69 of the Act. He is directed to delete the addition made by him. The ground no. 1 is allowed”.
Aggrieved the Revenue is in appeal before us on the following grounds: 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) was not justified in allowing relief to the assessee of Rs. 1,26,65,460/- on unaccounted investment, since the draft in hand were not valid for more than six months, the asset is not a real asset and on contrary the value of this fictitious asset would be deemed to be income in the hands of the assessee.
We have heard the rival submissions and perused the material available on record including the paper book filed by the assessee comprising of pages 1 to 65. We find that the Ld. CIT(A) had elaborately dealt the issue under dispute before us and we also find that the Ld. AO had duly accepted the contentions of the assessee in his remand report dated 09.01.2015. While that is so, the revenue ought not to have preferred any appeal before us. Hence, we do not find any infirmity in the order of the Ld. CIT(A) in this regard. Accordingly, ground no. 1 raised by the revenue is dismissed.
The last ground to be decided in this appeal is as to whether the Ld. CIT(A) was justified in treating the sum of Rs. 18,41,200/- representing gain on redemption of mutual fund as long term capital gain as against treatment of the same as short term capital gain by the Ld. AO, in the facts and circumstances of the case.
7 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 9. During the course of assessment proceedings it was observed by the ld AO that the assessee firm had derived gain of Rs. 18,41,200/- on redemption of HDFC Mutual Fund. However, in the return of income the assessee claimed the gain as long term capital gain and after indexation net gain of Rs. 6,27,327/- was offered as long term capital gain. However, as per the ld AO that gain of Rs. 18,41,200/- is to be treated as the short term capital gain instead of long term capital gain because the investment of Rs. 1 crore in the HDFC Mutual Fund was initially made in the name of the partner of the firm which was transferred in the hands of firm in the year under consideration only. On being asked by the ld AO, it was submitted by the assessee firm that the investment in HDFC FMP of Rs. 1 crore was originally made by Shri Radha Krishan Agarwal, one the partners on 06.09.2006 in his individual name and the same was transferred by him to the firm on that date itself. The said transaction was accounted for in the books of the firm by debiting investment and crediting his capital account and the same is apparent from the balance sheet of the firm for the financial year ending 31.03.2007 and 31.03.2008 where it was shown in the asset side as “Unit Linked FDR”. The assessee submitted before the ld AO the copy of the partner’s capital account wherein said entry was recorded. It was submitted before the ld AO that investment of HDFC FMP was redeemed on 07.11.2008 and since the original investment was in the name of Shri Radha Krishan Agarwal, the transaction was routed through partner’s current account in the books of the firm. Profit on such sale was duly recognized in the books of the firm and the tax on the same is duly considered in the year under consideration. It was argued by the assessee that since the said units were transferred to partner’s capital/ current account, on the same day of its purchase in individual name, the starting date for calculation of period of holding should be the date of actual purchase. Similarly, the actual date of sale should be taken as the last date for the period of holding since sale of said unit was done under individual name and accounting effect for the same in the books of the firm was routed through partner’s capital /current account. It was contended by the assessee that since, the period between the date of purchase and date 7
8 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 of sale is more than 12 months, the said transaction is eligible for being called as long terms capital gain. However, the ld AO did not accept the contention of the assessee and he treated the gain of Rs. 18,41,200/- as short term capital gain.
Before the Ld. CIT(A), it was humbly submitted that one partner of the assessee- firm, Shri Radha Krishan Agarwal made two investments in HDFC FMP to the tune of Rs. 2,00,00,000/- on 06.09.2006. Out of the said investments, investment of Rs. 1,00,00,000/- made in HDFC FMP was transferred by him to the assessee firm on the same date. Accordingly, the said investment was accounted in the books of the assessee firm by debiting investment and crediting the said partners’ capital account in the A.Y. 2007-08. In the relevant year, i.e., in the A.Y. 2009-10 the said investment as well as the investment shown by Shri Radha Krishan Agarwal in his return were redeemed and copy of the bank statement reflecting such redemption of Rs. 2,63,82,400/- (Rs. 1,18,41,200/- + Rs. 1,18,41,200/-) was furnished. It was humbly submitted that since the investment of Rs. 1,00,00,000/- was made in the name of the partner, the matured amount was routed through partner’s capital account in the books of the assessee firm. The profit arising out of such redemption to the tune of Rs. 18,41,200/- was shown in the account of the assessee firm under the head long term capital gain. Therefore, the Ld. AO’s contention that the investment of Rs. 1,00,00,000/- was shown in the records of the partner as on 31.03.2008 and the same was transferred to the firm during the A.Y. 2009-10 is not correct. The sum of Rs. 1,00,00,000/- reflected in the Balance Sheet of the said partner as on 31.03.2008 is the balance amount of Rs. 1 crore out of Rs. 2 crore investment made by him, which was not transferred to the firm’s account. It was further clarified here that initially the mistake was committed while filing the return of the firm for A.Y. 2009-10 by not including the figure of LTCG. The mistake was detected and the revised ROI was submitted on 22.09.2010 incorporating the figure of LTCG in the revised ROI.
9 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 11. The copy of the submission and documents filed by the assessee were forwarded to the ld AO vide letter No. CIT(A)-21/Kol/Remand Report/14-15/693 dated 19.12.2014. The ld AO was asked to verify the contention of the assessee with reference to the documents filed and the assessment records. In response, the ld AO submitted his report vide letter No. DCIT/CC-4(1)/Kol/Reman Report/2014-15/406 dated 09.01.2015. It was submitted by the ld AO that the contention of the assessee has been examined with reference to the records available and appears to be in order.
The Ld. CIT(A) deleted the addition by making the following observations: “I have considered the submission of the appellant and perused the assessment order. I have also gone through the documents submitted by the appellant in the course of appellate proceedings. It is observed that in the year under consideration the appellant company has redeemed the units of HDFC FMP for a consideration of Rs. 1,18,41,200/-. The cost of acquisition/ investment was Rs. 1,00,00,000/-. Thus, the appellant company had gained a sum of Rs. 18,41,200/- on redemption of said mutual fund. After indexation, the appellant firm declared long term capital gain of Rs. 6,27,327/-. However, on the basis of observation of revenue audit the AO was of the view that the gain of Rs.18,41,200/- was taxable as short term capital gain instead of long term capital gain because initially the investment of Rs.1,00,00,000/- was made in the name of the partner in his individual capacity and the said investment was transferred to the appellant company in the year under consideration itself. However, in the course of appellate proceedings, it is contended on behalf of the appellant that Shri Radha Krishan Agarwal, one of the partners of the firm had made two investments in HDFC FMP to the tune of Rs.2,00,00,000/- i.e. Rs.1,00,00,000/- each on 06.09.2006. Out of the said investment, the investment of Rs.1,00,00,000/- was transferred by him to the appellant firm on the same date and accordingly, the said investment was accounted for in the books of appellant firm by debiting investment and crediting the said partner's account in the A.Y. 2007-08. It is submitted by the appellant that in the year under consideration the investment transferred to the appellant firm as well as the investment of Rs.1,00,00,000/- shown by Shri Radha Krishan Agarwal in his individual capacity were redeemed Rs.1,18,41,200 each . However, since the originally the investment was in the name of the partner, therefore, the redeemed amount of the firm's investment was also routed through the partner's capital account in the books of the appellant 9
10 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 firm. The gain/profit of Rs.18,41,200/- was shown in the accounts of the appellant firm under the head long term capital gain because the purchase date was 06.09.2006 and the redemption was in the year under consideration. Therefore, the contention of the AO that the investment of Rs.1,00,00,000/- was shown in the records of the partner as on 31.03.2008 and same was transferred to firm during the A.Y. 2009-10 itself; is not correct. In fact, the sum of RS.1 crore reflected in the balance sheet of the said partner as on 31.03.2008 was the balance amount of RS.1 crore out of RS.2 crore investment made by him, which was not transferred to the appellant firm's account and was standing in his individual capacity. It is observed that in support of its claim the appellant firm submitted the copy of the bank statement of the partner showing investment of RS.2 crore in HDFC FMP on 06.09.2006, the copies of ledger account of the said partner for the A.Y. 2007- 09 to 2009-10, the copy of the balance sheet of the partner for A.Y. 2007-08 and copy of bank statement showing redemption of units of mutual fund. It is observed that in the course of remand proceedings, the AO has verified the claim and contention of the appellant with reference to the documents submitted in the course of appellate proceedings and the records maintained by him. As per the remand report the AO found the claim of the appellant firm in order. Since, the AO has verified the contention and claim of the appellant and found the same in order, in view of above facts, I am of the opinion that the AO was not justified in treating the gain of Rs. 18,41,200/- on redemption of units of HDFC FMP as short term capital gain. He is directed to assess the aforesaid gain as long term capital gain. The ground no. 2 is allowed”.
Aggrieved the Revenue is in appeal before us on the following grounds: 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the sum of Rs. 18,41,200/- as Short Term Capital Gain since the appellant firm had shown long term capital gain of Rs. 18,41,200/- for sale of HDFC FMP of Rs. 1 crore (original investment), where it reveals that the investment originally in the names of the partner was transferred in hands of the firm during the F.Y. 2008-09 (A.Y. 2009-10) and it was transferred in hands of the firm during the same financial year 2008-09, and therefore, the appellant firm is liable to pay short term capital gain on the sale of HDFC FMP instead of long term capital gain.
We have heard the rival submissions and perused the material available on record including the paper book filed by the assessee comprising of pages 1 to 65. We find that the Ld. CIT(A) had elaborately dealt the issue under dispute before us and we also 10
11 ITA No.234/Kol/2015 M/s Singhal Enterprises A.Yr.2009-10 find that the Ld. AO had duly accepted the contentions of the assessee in his remand report dated 09.01.2015. While that is so, the revenue ought not to have preferred any appeal before us. Hence, we do not find any infirmity in the order of the Ld. CIT(A) in this regard. Accordingly, ground no. 2 raised by the revenue is dismissed.
Ground No. 3 raised by the Revenue is general in nature and does not require any specific adjudication.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Court on 04.08.2017
Sd/- Sd/- [N.V. Vasudevan] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 04.08.2017 SB, Sr. PS Copy of the order forwarded to: 1. DCIT, CC-4(1), Kolkata 2. M/s Singhal Enterprises, 34A, Metcalfe Street, 4th Floor, Suit No. 4F/1, Kolkata- 700013 3..C.I.T.(A)-21, Kolkata 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.