INCOME TAX OFFICER, WARD-1, PALANPUR, PALANPUR V. NIKESHKUMAR SHANTILAL MEHTA, MUMBAI

ITA 2016/AHD/2024

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The case revolves around an appeal by the Revenue against the order of the CIT(A) which had deleted the addition of Rs. 1,57,93,993/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, treating it as undisclosed income. The addition was related to the assessee's share of profit from M/s. Ice Worth Reality LLP, which was alleged to have claimed bogus LTCG exemption on the sale of penny stocks. The CIT(A) found that the income was already assessed in the hands of the LLP and taxing it again in the hands of the partner would result in double taxation. The Revenue's appeal was based on the grounds that the CIT(A) erred in law and on facts in deleting the addition, arguing that the LLP was a paper entity used for accommodation entries.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 29701 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Other Referred Cases: CIT(A), Ahmedabad-5/10757/2019-20
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RIGNESH DAS
• Assessee Lawyers: YASHESH MEHTA
• Keywords: Unexplained cash credit; Tax effect; Accommodation entries; Earning of tax free income; Bogus
• Section: 147; 148; 142(1); 271(1)(c); 68

Judgement Text

" आयकर अपीलीय अिधकरण, अहमदाबाद \u0011ायपीठ “सी“,अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ C ” BENCH, AHMEDABAD \u0015ी टी.आर. से\u0018\u0019ल क ुमार, \u0011ाियक सद\u001b एवं \u0015ी मकरंद वसंत महादेवकर, लेखा सद\u001b क े सम!। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं /ITA No.2016/Ahd/2024 िनधा \u000fरण वष\u000f /Assessment Year : 2015-16 The ITO Ward-1 Palanpur – 385 001 (Gujarat) बनाम/ v/s. Nikeshkumar Shantilal Mehta A-2401, Floor-24th Plot-CS 77 3 One - Avighana Park, Tower Mahadeo Palav Parel Mumbai Marg, Curry Road, Mumbai - 400012 \u0013थायी लेखा सं./PAN:ADIPM 9796 N (अपीलाथ$/ Appellant) (%& यथ$/ Respondent) Assessee by : Shri Yashesh Mehta, CA, AR Revenue by : Shri Rignesh Das, Sr.DR सुनवाई की तारीख/Date of Hearing : 29/01/2025 घोषणा की तारीख /Date of Pronouncement: 31/01/2025 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM: This appeal by the Revenue is directed against the order dated 19.09.2024, passed by the Commissioner of Income Tax(Appeals)-(NFAC), Delhi [hereinafter referred to as “CIT(A)”], in relation to the assessment order dated 25.3.2022 passed under Section 147 r.w.s. 144 of the Income Tax Act, ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 2 1961[hereinafter referred to as “Act\"] by the National Faceless Assessment Centre, Delhi [hereinafter referred to as “AO\"] for Assessment Year 2015-16. Facts of the Case: 2. The assessee filed his return of income for A.Y. 2015-16 on 23.12.2015, declaring total income of Rs.2,51,400/-. In the return, the assessee claimed an exempt income of Rs.93,86,517/- as his share of profit from M/s. Ice Worth Reality LLP. The assessment was reopened under Section 147 on the basis of information received from ITO Ward 25(2)(5), Mumbai, stating that M/s. Ice Worth Reality LLP was engaged in accommodation entries through penny stock transactions. The (AO) issued a notice under Section 148 on 31.03.2021, which remained un-responded. Subsequent notices under Section 142(1) of the Act were issued on 16.08.2021, 16.12.2021, and 08.03.2022, which were also not complied with. The AO observed that the LLP had claimed Rs.60,74,61,289/- as exempt LTCG under Section 10(38) on the sale of shares of Sun Asian. It was alleged that the LLP was a paper entity, providing accommodation entries, and that its LTCG was bogus. The AO held that since the assessee was a 2.6% partner in the LLP, he was a beneficiary of Rs.1,57,93,993/-, which was added as undisclosed income under Section 68 of the Act. Consequently, the total assessed income was computed at Rs.1,60,45,393/-. Penalty proceedings under Sections 271(1)(b) and 271(1)(c) of the Act were also initiated. 3. The CIT(A) deleted the addition of Rs. 1,57,93,993/- and ruled in favour of the assessee. It was observed that M/s. Ice Worth Reality LLP had ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 3 already been assessed separately, and the alleged bogus LTCG of Rs. 60,87,74,856/- was added in its hands. Since the LLP’s entire income was subjected to tax at the entity level, taxing the same income in the hands of the partner was unsustainable and resulted in double taxation. CIT(A) relied on Section 10(2A) of the Act, which explicitly exempts a partner’s share of profit from an LLP. Section 68 of the Act was held to be inapplicable, as the credit in the partner’s account was fully explained, being derived from the LLP’s books. Interest under Sections 234A, 234B, and 234C of the Act was directed to be recomputed, and the penalty proceedings were deemed infructuous. 4. Aggrieved by the order of the CIT(A), the revenue is in appeal before us with following grounds of appeal: (a) The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,57,93,993/- made by AO on account of undisclosed income out of benefit taken by the assessee as a partner in M/s Ice Worth Reality LLP, which has claimed bogus LTCG exemption u/s. 10(38) of IT Act on sale of penny stock M/s Sun Asian, without appreciating that: (i) The Firm M/s Ice Worth Reality LLP, in which the assessee is a partner (having 2.6% share), was engaged in providing accommodation entries of bogus capital gain/loss through penny stock transactions at various levels of operators. The firm has shown Long- Term Capital Gain (LTCG) on the sale of penny stock M/s Sun Asian and claimed it as exempt under Section 10(38) of the IT Act. M/s Ice Worth Reality LLP is nothing but a paper firm functioning as a conduit only to benefit its partners, as they are the ultimate beneficiaries of the said LTCG of Rs. 60,74,61,289/-. (ii) The addition made in the hands of LLP firm on account of bogus LTCG has still not reached finality. (b) The appellant craves leave to add, alter, and/or amend all or any of the grounds before the final hearing of the appeal. ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 4 5. During the course of hearing before us, the Departmental Representative (DR) explained the facts and stated there was non-compliance by the assessee and therefore the order was passed u/s 147 r.w.s.144 of the Act. The DR accepted that the addition in the hands of assessee amounts to double taxation. 6. The Authorized Representative (AR) of the assessee, by way of written submission, submitted that the tax effect in present appeal is Rs.52,55,553/- which is below the enhanced monetary limit of Rs.60 Lacs. The AR stated that the addition is already deleted in the hands of M/s Ice Worth Reality LLP in Appeal No. CIT(A), Ahmedabad, 5/10757/2019-20 dated 24.09.2020 and therefore the addition made in the hands of assessee is not sustainable. The AR placed on records the copy of order of CIT(A) in case of Ice Worth Reality LLP. 7. We have heard the rival contentions, perused the material on record, and carefully considered the submissions of both parties. The Revenue is in appeal against the deletion of an addition of Rs.1,57,93,993/- made by the AO under Section 68 of the Act, treating it as undisclosed income in the hands of the assessee. The CIT(A) deleted the addition on the ground that the income was already assessed in the hands of M/s. Ice Worth Reality LLP, and taxing the same in the hands of the partner would lead to double taxation, which is contrary to the provisions of the Act. 7.1. The Authorised Representative (AR) of the assessee, through a written submission, has also brought to our notice that the tax effect in the present appeal is Rs. 52,55,553/-, which is below the enhanced monetary limit of ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 5 Rs.60 Lacs for filing appeals before the Tribunal, as prescribed in CBDT Circular No. 09/2024 dated 17.09.2024. Further, the AR has placed on record the order of CIT(A), Ahmedabad, in the case of M/s. Ice Worth Reality LLP [Appeal No. CIT(A), Ahmedabad-5/10757/2019-20, dated 24.09.2020], wherein the addition made at the LLP level was already deleted. 7.2. Section 10(2A) of the Act explicitly provides that a partner’s share of profit from an LLP is exempt from tax in his hands. The LLP is a distinct taxable entity, and its income is assessed at the LLP level, not at the partner level. If any income of the LLP is found to be fictitious or non-genuine, the correct approach is to tax it in the hands of the LLP, rather than taxing the same in the hands of the partner. The AO’s action of taxing the partner’s share of income separately is contrary to the taxation framework prescribed under the Act and is unsustainable. 7.3. It is an undisputed fact that the AO has already made an addition of Rs. 60,87,74,856/- in the hands of M/s. Ice Worth Reality LLP on account of bogus LTCG from penny stock transactions. The CIT(A), Ahmedabad, in the case of M/s. Ice Worth Reality LLP, has already deleted the said addition, holding that the LTCG transactions were not taxable. Since the same income has already been taxed at the LLP level and subsequently deleted in appeal, taxing it again in the partner’s hands would lead to double taxation, which is impermissible under the Act. 7.4. Section 68 of the Act applies when an assessee fails to explain the source of a credit in his books of accounts. In this case, the assessee’s share of profit from M/s. Ice Worth Reality LLP is fully explained and recorded in the ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 6 LLP’s books, which were assessed separately. Since the income was already disclosed at the LLP level, there was no unexplained credit in the partner’s books, and invoking Section 68 in the partner’s case was unjustified. 7.5. The AR has pointed out that the tax effect in the present appeal is Rs. 52,55,553/-, which is below the revised monetary threshold of Rs. 60 Lacs for filing appeals before the Tribunal. As per the CBDT’s policy, the Department is instructed not to file appeals before the Tribunal where the tax effect is below the prescribed limit unless the case falls within specific exceptions. The Revenue has not demonstrated that this case falls within any such exception. Thus, the appeal is liable to be dismissed on this ground alone. 7.6. Before concluding, we find it imperative to address a broader concern regarding the Revenue’s approach in filing appeals that are neither maintainable nor in line with the statutory framework governing taxation. The Income Tax Act, 1961, provides a clear and structured mechanism for the taxation of Limited Liability Partnerships (LLPs) and their partners, wherein the LLP is taxed as a separate legal entity, and its partners are exempt from tax on their share of profit under Section 10(2A). The present case is a clear example where the AO disregarded this fundamental principle and sought to tax the same income twice—once in the LLP’s hands and again in the partner’s hands, leading to double taxation, which is impermissible under the law. Such unwarranted additions not only create unnecessary litigation but also burden the appellate authorities, including the Tribunal, High Courts, and Supreme Court, with cases that lack legal sustainability. The Revenue should exercise prudence in filing appeals only when there is a genuine and ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 7 debatable issue rather than pursuing matters where the law is well settled. By avoiding such unsustainable additions and frivolous appeals, the Department can significantly save valuable time and cost of the entire tax administration machinery and ensure that resources are deployed more effectively in addressing genuine cases of tax evasion and revenue leakage. We hope that the authorities take cognizance of such instances and refrain from unnecessary litigation that does not serve the intended purpose of tax collection but merely adds to avoidable legal proceedings. 7.7. The Revenue’s appeal lacks merit, as the scheme of taxation for LLPs and partners is clear under the Act. The addition of Rs. 1,57,93,993/- in the hands of the assessee is unsustainable. The CIT(A) correctly deleted the addition, applying the correct legal principles. 7.8. The appeal is also liable to be dismissed on the ground that the tax effect is below the prescribed monetary limit of Rs.60 Lacs, as per CBDT Circular. 8. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the Open Court on 31 January, 2025 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER अहमदाबाद/Ahmedabad, िदनांक/Dated 31/01/2025 टी.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS ITA No.2016/Ahd/2024 The ITO vs. Nikeshkumar Shantilal Mehta Asst. Year : 2015-16 8 आदेश की #ितिलिप अ$ेिषत/Copy of the Order forwarded to : 1. अपीलाथ% / The Appellant 2. #&थ% / The Respondent. 3. संबंिधत आयकर आयु' / Concerned CIT 4. आयकर आयु' ) अपील ( / The CIT(A)-(NFAC), Delhi 5. िवभागीय #ितिनिध , अिधकरण अपीलीय आयकर , राजोकट/DR,ITAT, Ahmedabad, 6. गाड\u000f फाईल / Guard file. आदेशानुसार/ BY ORDER, स&ािपत #ित //True Copy// सहायक पंजीकार (Asstt. Registrar) आयकर अपीलीय अिधकरण, ITAT, Ahmedabad 1. Date of dictation (word processed by Hon’ble AM in his laptop) : 30.1.2025 2. Date on which the typed draft is placed before the Dictating Member. : 30.1.2025 3. Date on which the approved draft comes to the Sr.P.S./P.S : 4. Date on which the fair order is placed before the Dictating Member for pronouncement. : 5. Date on which fair order placed before Other Member : 6. Date on which the fair order comes back to the Sr.P.S./P.S. : 31.1.25 7. Date on which the file goes to the Bench Clerk. : 31.1.25 8. Date on which the file goes to the Head Clerk. : 9. The date on which the file goes to the Assistant Registrar for signature on the order. : 10. Date of Despatch of the Order : "