HARESH SHANTILAL AVLANI,MUMBAI vs. DCIT RG 22(1), NAVI MUMBAI

The present assessment order was passed by the AO consequent to the restoration of certain matters to his file by the Tribunal. We shall first take up the appeal filed for Ay 2003-04. The first issue relates to the addition made u/s 68 of the Act. The assessing officer assessed following cash credits as income of the assessee u/s 68 of the Act:-

We heard the parties on this issue. All the above parties are related to the assessee. Out of the six parties, first four parties are not assessed to income tax and the loans from them have been obtained by way of cash. During the course of assessment proceedings, these parties have filed confirmation letters along with affidavits. The contention of the assessee is that the assessing officer should not have rejected the affidavits without examining the concerned parties. However on a perusal of the sources given by these creditors, we notice that the first three creditors have stated their sources to be salary income, but no document substantiating the said claim was filed. It is the primary responsibility of the assessee to prove the credit worthiness. In that regard, the confirmation letters/affidavits, in our view, are not sufficient. Accordingly we are of the view that the Ld CIT(A) was justified in confirming the addition made u/s 68 of the Act.

In respect of Rekha Avlani, we notice that the creditor is the spouse of the assessee herein. It is simply stated that the loan was given out of her savings. But no source was given. Accordingly we are of the view that the Ld CIT(A) was justified in confirming this addition also.

In respect of the loans taken from Master Kartik H Avlani and Master Jigar H Avlani, we notice that they are assessed to income tax and the assessee has 3 Haresh Shantilal Avlani filed their respective income tax returns also. Further we notice that the assessing officer accepted the loans taken from these two persons partially. The assessee had taken loan of Rs.1,00,000/- and Rs.1,10,000/- respectively from Shri Kartik Avlani and Shri Jiggar Avlani, but the addition has been made for a sum of Rs.40,000/- and Rs.50,000/- and the remaining loan has been accepted. When the AO accepts a part of loan, we do not find any reason in rejecting the remaining amount of loan, when the assessing officer did not bring on record any material to support his view. We further notice that the Ld CIT(A) has held that the amount of Rs.1,00,000/- and Rs.1,10,000/- received from the above said two persons are assessable to tax u/s 68 of the Act. However, we notice that the Ld CIT(A) has made the above said observations without noticing that the addition was made to the extent of Rs.50,000/- and Rs.40,000/- only. In effect, the observations made by Ld CIT(A) may amount to enhancement of income, but the enhancement should not have been made without providing opportunity to the assessee. Accordingly, the observations made by Ld CIT(A) is liable to be set aside. Accordingly, we set aside the order passed by Ld CIT(A) in respect of these two additions and direct the AO to delete the same. In effect, the assessee gets relief of Rs.90,000/- out of the addition of Rs.1,45,000/- made u/s 68 of the Act.

The next issue relates to the protective addition of Rs.1,14,59,500/- made in the hands of the assessee on account of unexplained investment. The fact remains that the above said assessment has been made on substantive basis in the hands of Shri Harshad Mehta. Further, it is an admitted fact that Shri Harshad Mehta has accepted the ownership of the shares held in the name of the assessee, by filing an affidavit before Hon’ble Special Court. It is also submitted that the shares found in the name of the assessee have already been handed over to the Special Court by Shri Harshad Mehta. Despite these facts,

We heard the parties on this issue. The fact that the investments found in the name of the assessee have been owned by Shri Harshad Mehta has not been disputed by the revenue. In fact, the physical share certificates have also been handed over by Shri Harshad Mehta to the Special Court and further they have been assessed in his hands on substantive basis. Under these set of facts, we are of the view that there is no reason to sustain the protective addition made in the hands of the assessee. The protective addition is required to be sustained only when there is doubt about the ownership of investments resulting in a possibility of assessing income in the hands of the assessee on substantive basis. The facts prevailing in the instant case does not throw light on such kind of possibility. Another important point is that the assessing officer himself did not make any addition in respect of these kind of Benami Shares in AY 1995-96. The observations made by the AO in the assessment order relating to AY 1995- 96 are extracted below, for the sake of convenience:- “6. As far as benami shareholding by assessee is concerned the Hon’ble Spl. Court has delivered judgement holding Shri Harshad Mehta as owner of such shares. In view of the said judgement and C.I.T., Central-III, Mumbai’s direction vide letter dated……., no addition is made in respect of investment and dividend accrued thereon.”

The next issue relates to the estimation of income from Dhalali business. The facts relating thereto are that the deposits found in the bank account of the assessee was considered as his turnover. The assessee declared commission

We have heard the parties on this issue and perused the record. The contention of the assessee is that the estimate of commission income at 10% is on the higher side in the case of textile business. We notice that the assessing officer has estimated the income on net basis, i.e., he has not given any deduction towards expenses. Further the assessee has also contended that the commission given in textile business will be around 3% only. Hence, on a conspectus of the matter, we are of the view that this issue shall be put at rest, if the net income is estimated at 5%. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to estimate the commission income at 5% of the deposits found in the bank account.

We shall now take up the appeal filed by the assessee for AY 2005-06. The first issue relates to the addition of unexplained investments and profit on sale of shares.

The facts relating to the same are discussed in brief. The entire amount of investments and the alleged profit realised on sale of shares were related to a partnership concern named M/s. Kaka Investments. During the course of Survey operations conducted u/s 133A of the Act, it was noticed that the concern M/s Kaka Investment has indulged in buying and selling of shares. The shares were bought at fixed rates without having any co-relation with the market price and they were also sold at fixed price/market rate after expiry of certain period. If the market rate was lower than the purchase price, then they shall be sold at fixed rate and if it was higher than M/s Kaka Investment had an option of selling at the market rate. The shares were purchased from companies indicated by a person named Mr. Jignesh Ramnikbhai Sheth alias Jigar Seth. It is pertinent to 6 Haresh Shantilal Avlani note that the office address of M/s Kaka Investments happened to be the residence address of the assessee herein. Further the partners of M/s Kaka Investments are Smt. Rekha Avlani (spouse of the assessee) and Miss Jayashree Shah (a friend of Rekha). Further, it is pertinent to note that the documents relating to M/s Kaka investments were also taken from the premises of M/s Genesis Capital Market Ltd and its group concerns. Further, it is also pertinent to note that the above said company belong to Shri Jigar Seth.

Subsequent to survey operations, statements were taken from the assessee herein u/s 131 of the Act on 07-03-1997, 10-02-1998, 10-03-1998 and 18-03-1998. In the statement taken on 07-03-1997, the assessee could explain the various transactions noted in the books of accounts, papers found during the course of survey. In the said statement, the assessee had stated that the entire transactions of purchase and sale were carried out as per the instructions given by Shri Jigar Seth. The AO noticed that the partnership firm M/s Kaka investment is not assessed to tax. In Q. No.5, the assessee has explained the transactions relating to buy back of shares noted in the documents. Based on the same, the assessing officer worked out the purchase and sale transactions as under:- Sale Proceeds (Buy Back) 9,75,10,400 Less:- Cost of Shares (investment) 4,60,45,000 --------------- Profit 5,14,65,400 ======== Since the assessee could explain the nature of transactions found in the documents and since one of the partners of the firm is the spouse of the assessee and since the survey operations have taken place, the AO took the view that the benefit of business carried on by M/s Kaka investments cannot be given to it. Accordingly the AO took the view that the above said partnership

During the course of first round of proceedings, the Tribunal has set aside the matter to the file of Ld CIT(A) with the direction to examine the sources of capital of the partners of M/s Kaka Investments and also to examine both the partners in connection with the allegation of benami concern. In the set aside proceedings, the Ld CIT(A) examined only Smt. Rekha Avlani and noticed that she was not aware of any of the transactions carried on by M/s Kaka investments. Accordingly, the Ld CIT(A) took the view that the above said partnership firm is a benami concern of the assessee only.

The main contention of the assessee is that the documents relating to M/s Kaka Investments were seized from the concerns belonging to Shri Jigar Seth and further the above said partnership firm is a separate legal entity. Further, it is contended that the assessee had given explanations on the basis of his knowledge relating to those transactions. Accordingly it was contended that there is no reason to treat the concern M/s Kaka Investments as benami concern of the assessee.

We have heard the parties on this issue and perused the record. Both the parties reiterated the contentions that were urged before the Ld CIT(A). The undisputed fact remains that the transactions pertaining to M/s Kaka investments were found at the premises of the concern belonging to Mr. Jignesh Ramnikbhai Sheth alias Jigat Sheth. The assessee could explain the transactions, since he was aware of the nature of the transactions carried on by the assessee. In our view, the assessee cannot be considered to be real owner, simply for the reason that he could explain the transactions found in the documents seized from the office premises of the companies belonging to Shri Jignesh Ramnikbhai Sheth. The fact that M/s Kaka Investments is a partnership concern was not denied. We have earlier noted that the AO himself was having doubts about his decision and hence he has observed that “it appears that the firm was benami entity”. If it is presumed to be a benami entity, then the question arises is as to who is the real owner.

We have seen that the assessee himself was a benamidar of Shri Harshad Mehta, since the shares held in the name of the assessee has been found to be belonging to Shri Harshad Mehta. Further, the assessee was working as a broker in textile market. The assessee has not been shown to be a man of wealth. The transactions carried on by M/s Kaka Investments were in crores and it is not believable that the assessee could have carried on such transactions. Further, the shares have been purchased from the companies pointed out by Shri Jigat Sheth and the payments have been made to those companies. The documents relating thereto were also found from the companies belong to Shri Jigat Sheth. Further, the revenue found out that the assessee is having certain bank accounts and the assessee himself has admitted that those accounts were operated by Shri Jigat Sheth. We notice that the assessing officer did not make any addition in respect of those bank accounts,

In the earlier proceedings, the Tribunal had directed the Ld CIT(A) to find out the sources for establishing the business of M/s Kaka investments and also to examine both the partners of the firm. The Ld CIT(A) was also directed to examine as to who was having control over the management of the firm and who enjoyed the usufruct of the business of the firm. However, the Ld CIT(A) examined only one of the partners and foreclosed the matter. Thus, we notice that the Ld CIT(A) has only partially complied with the directions.

The foregoing discussions would show that the Ld CIT(A) has confirmed the order of the AO on this issue on the basis of incomplete enquiries. Further, the back ground of the assessee discussed above would show that the assessee cannot be considered to be a man of great means and surrounding circumstances and transactions show that he himself was acting as benamidar of other persons. Under these set of facts, we are of the view that the tax authorities are not justified in treating M/s Kaka Investments as benami concern of the assessee. Accordingly, we set aside the orders passed by the tax authorities on this issue.

Since we have held that M/s Kaka investments cannot be considered to be the benami concern of the assessee, the relevant additions, viz., unexplained investment in shares and profit on sale of shares are liable to be deleted. We order accordingly.

The next issue contested by the assessee relates to the disallowance of expenses claimed by the assessee from his commission income. The assessee

In the result, both the appeals filed by the assessee are partly allowed. Order has been pronounced in the Open Court on 27.5.2016.