M/S. MINESTONE, MUMBAI V. ACIT 18(2), MUMBAI

ITA 2546/MUM/2022

AI Insights

The case involves M/s. Minestone, a partnership firm engaged in the business of manufacturing and exporting gold jewellery and diamonds, which appealed against the order of the Commissioner of Income Tax (Appeals) confirming the addition of Rs.107,53,11,047 on account of unexplained sundry creditors. The A.O. had reopened the assessment under section 147 of the Income Tax Act, 1961, based on information from the Investigation Wing that the assessee had not repaid loans from Antwerp Diamond Bank (ADB) and other creditors, leading to a cessation of liability. The Tribunal found that the A.O. had not assessed the income for which the reopening was done, making the assessment order invalid.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 125780 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-06-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 02-10-2022
• Other Referred Cases: National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC), CIT vs. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Reason to believe
• Section: 147; 148; 144; 143(3); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI B R BASKARAN, AM AND MS. KAVITHA RAJAGOPAL, JM I TA N o. 254 6/ M u m / 20 22 ( A s s e ss me nt Y ea r: 20 1 0- 11 ) M/s. Minestone Room No. 32, 4 th Floor, Plot No. 98, Sagar Bhavan, Building No.2, Kantilal M Sharma Marg, Lohar Chawl, Kalbadevi, Mumbai-400 002 V s. ACIT-18(2) Mumbai -400 020 P A N / G I R N o. AA A F M 0444 L (Appellant) : (Respondent) Assessee by : Shri K. Gopal Revenue by : Shri Soumendu Kumar Dash D a te o f H e a r i n g : 30.06.2023 D ate of P ro n ou n ce me n t : 22.09.2023 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals) (‘ld.CIT(A) for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2010-11. 2. The assessee has challenged the addition on outstanding sundry creditors amounting to Rs.107,53,11,047/- made by the Assessing Officer (A.O. for short) and confirmed by the ld. CIT(A) which the assessee claims to have not been written off in the books of accounts. The assessee has also challenged the grounds of violation of principle 2 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT of natural justice where the assessee is said to have not been given sufficient opportunity of hearing by the ld. CIT(A). 3. The brief facts are that the assessee is a partnership firm engaged in the business of manufacturing of gold jewellery and cut and polish diamonds and also exporting the same outside India. The assessee filed its return of income dated 15.10.2010, declaring total loss of Rs.63,92,92,710/- and the same was processed u/s.143(1) of the Act. The assessee’s case was selected for scrutiny and the assessment order dated 15.03.2013 was passed by the A.O., rejecting the books of accounts of the assessee, where the A.O., determined the gross loss at Rs.12,66,71,272/-, thereby making an addition of Rs.51,26,21,438/-. The assessee’s case was reopened u/s. 147 of the Act and the assessment order u/s. 144 r.w.s. 147 of the Act was passed by the A.O. dated 29.12.2017, where the A.O. made an addition of Rs.107,53,11,047/- on account of unexplained sundry creditors. 4. The assessee was in appeal before the ld. CIT(A), challenging the addition made by the A.O. The ld. CIT(A) then confirmed the addition stating that the assessee has failed to substantiate its claim by any cogent evidence. 5. The assessee is in appeal before us, challenging the impugned order of the ld. CIT(A). The assessee vide its submission dated 20.12.2022 has filed an additional grounds of appeal, challenging the reopening proceeding vide notice dated 30.03.2017 issued u/s. 148(1) of the Act to be time barred and also on the ground that the A.O. has not made addition relating to the issue that was mentioned in the reasons recorded for 3 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT reopening. As the additional ground goes to the very root of the case, we deem it fit to admit the said ground as per the proposition laid down by the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC). It is also pertinent to decide the additional ground first before getting into the other grounds of appeal raised by the assessee. 6. The learned Authorised Representative (ld. AR for short) for the assessee contended that the notice u/s. 148(1) of the Act dated 30.03.2017 was issued beyond four years from the end of the relevant assessment year and, hence, the same was void-ab- initio as per the proviso to section 147 of the Act. The ld. AR for the assessee further contended that the reopening was a mere change of opinion by the A.O. and was to reconsider the assessment order passed u/s. 143(3) of the Act. The ld. AR further stated that the addition was not made with respect to the reasons stated for reopening the assessment order and relied on the decision of CIT vs. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). The ld. AR prayed that the assessment order be quashed. 7. The learned Departmental Representative (ld. DR for short) for the Revenue, on the other hand, controverted the said fact and stated that the reopening of the assessment in the assessee’s case was based on the information received from the Investigation Wing that the assessee has ceased off all the liabilities which it was due to ADB and other sundry creditors. The ld. DR further stated that the addition was made on account of both the secured loan as well as the outstanding sundry creditors. The ld. DR relied on the order of the lower authorities. 4 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT 8. We have heard the rival submissions and perused the materials available on record. It is observed that the assessee’s case was reopened based on the information received from the DDIT (Inv) that the assessee has failed to repay the loan availed from Antwerp Diamond Bank (‘ADB’ for short) along with the other banks and has ceased off the liability and, hence, for the reason that income has escaped assessment, the case was reopened. The reasons recorded for reopening of the assessment is cited hereunder for ease of reference: The DDIT (Inv) Unit 6 (1, Mumbai vide his letter dated 17.03.2017 has intimated that the above assessee is a diamond trader and manufacturer, borrowed substantial sums with interest from Antwerp Diamond Bank (ADB), at Mumbai to import rough diamonds and then to cut and polish them before export as finished goods. The loan was sanctioned on the basis of its status and credit rating as a DTC (Diamond Tradign Co.) sight holder menaing thereby a recognized customer in trader parlance as more than three years has elapsed since the money was lent by the Bank and as yet Minsone has not returned/repaid the loan bank had advanced, there apparently is a suspicious activity. Mine stone also did not initiate any legal action from their side to recover its due from their defaulting buyers. Also no request were made by Minestone to extend the period for realization of export bills where one could except that at least some bills could be genuinely realized. One of the buyers of Mine stone is Rolling Stone in Hongkong, ADB is informed that Rolling Stone is only a pass through party through whom diamonds have been shipped to Turkey, UAE and Russia ADB attempted to assist Minestone in the recovery of the export bills by asking to sign a Deed of Assignment of Debt in favour ADB for the Exports made through Direct Bill. This would help ADB to file suits abroad against the Deed and on the contrary it was indicated to ADB that payments from abroad could still be “organized” if the ADB would agree to a one time settlement (OTS) at a substantially lower amount than the repayment due. When confronted with ADB’s remark on how Mine stone would show the realization of exports when RBI would follow up on unpaid export bills, it was stated that one of the Bank is taken out of picture, either through OTS or otherwise, it would get these export bills set off or written off in the RBI records. Based on these elements, it raises suspicion as to existence of some sort of complicity between the seller and the buyer. The above assessee has shown secured loan in the range of Rs.148 to 169 crores and has shown sundry creditors in the range of Rs.86 to 107 crroes, in its return of income for the A.Y. 2010-11 to 2015-16. Further, the partner’s capital of M/s. Mine stone has been as negative i.e., Rs.(-)72 crores for A.Ys. 2014-15 & 2015-16. Thus, this is a case of cessation of liability, as the assessee has not repaid the loan taken from Antwerp Diamond Bank and thereby income has been escaped. Since the assessee has not disclosed material facts fully & truly in respect of his income returned this case comes in the ambit of Sec. 147 of Income-tax Act. Therefore, I have reason to believe that income chargeable to tax to the extent of Rs.86 crores has escaped in the form of cessation of liability and also any other income that may be detected during the course of assessment proceedings. Hence, I propose to re-open the assessment for the A.Y. 2010-11 by issuing Notice u/s. 148 of the Income Tax Act, 1961. The last date for issue of notice u/s. 148 for A.Y. 2010-11 expires on 31.03.2017. However, an early approval is highly appreciated. 5 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT 9. It is observed that the ld. A.O. vide notice u/s. 148 of the Act dated 31.03.2017 sought for reopening the assessment for the reason that the assessee has borrowed loan from ADB and other banks for the purpose of importing rough diamonds which the assessee would then cut and polish them before exporting the same as finished goods. The ld. A.O. stated that the assessee has not repaid the said loans to the banks. The ld. A.O. also observed that the assessee has shown secured loan amounting to Rs.140 crores from Rs.160 crores and sundry creditors amounting to Rs.86 crores to Rs.107 crores as per the return of income filed by the assessee for A.Ys. 2010-11 to 2015-16. The ld. A.O. has also stated that ADB had sought for signing a deed of Assignment of debt by the assessee in favour of the ADB for the purpose of recovery of export bills due to the assessee from various defaulting buyers of the assessee and thereby recover the monies due to the ADB. It is found that the assessee failed to accept the said proposal and had rather suggested for a one time settlement proposal (OTS) from ADB for a lesser amount than that which was due. The ld. A.O. then reopened the assessment u/s. 147 of the Act on the reason to believe that there was cessation of liability to the extent of Rs.86 crores which was income escaped to tax. The assessee had duly filed its objection to the notice issued u/s. 148 of the Act vide letter dated 24.10.2017. The ld. A.O. rejected the objections of the assessee and had passed the impugned assessment order u/s. 144 r.w.s. 147 of the Act for the reason that the assessee has not filed any reply or submission in rebuttal of the reopening proceeding. The ld. A.O. has also stated that the summons u/s. 131 of the Act could not be served on ADB for the reason that the bank had closed its operation at the specific address and that the current address was not accessible due to the reason that ADB must have closed its operation at Mumbai and for this reason cross 6 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT examination to the assessee could not be availed. The ld. A.O. relied on the report of the Investigation Wing that the assessee has not repaid the said loan and had also not initiated any legal proceeding to recover its dues from the defaulting buyers nor has the assessee requisitioned for extension of the period of realization of the export bills. The ld. A.O. had also stated that M/s. Rolling Stone one of the buyers of the assessee was only pass through entity through whom diamonds have been shifted to Turkey, UAE and Russia. The ld. A.O. had also noted that the assessee refused to sign the deed of assignment of debt favoring ADB for the exports made through direct bill which further corroborated the fact that the assessee does not intend to repay the said loan to ADB. The A.O. then proceeded to make an addition of Rs.107,53,11,047/- being the outstanding liability to the sundry creditors during the year consideration for the reason that the assessee had failed to furnish the name, address, amount-wise break up and the duration of the outstanding amount to the sundry creditors, thereby failing to prove the genuinety of such liabilities. The ld. A.O. considered the same as trading liability which normally should have been settled within a month or two and not prolong for years as in assessee’s case, thereby inferring that the liabilities has ceased to exist u/s. 41(1) of the Act. The ld. CIT(A) upheld the order of the ld. A.O. for the reason that the assessee has failed to substantiate whether the outstanding liability to sundry creditors has ceased to exist. 10. The ld. AR for the assessee contended that on the facts of the assessee, the ld. A.O. had reopened the assessment for the reason that the assessee has failed to repay the loan availed from ADB and has stated that income amounting to Rs.86 crores has escaped the assessment in the form of cessation of liability. However, the ld. A.O. has 7 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT added sundry creditors balance of Rs.107.00 crores but has not assessed bank loan of Rs.86.00 crores for which the reopening was done. The ld. AR relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Jet Airways (I) Limited (supra), wherein it was held that the A.O. has to assess or reassess such income for which reopening was made along with any other income chargeable to tax which comes to the notice during the assessment proceeding and failure to make an addition on the grounds for which the reopening was done while passing the assessment order will make it null and void. The relevant extract of the said decision is cited hereunder for ease of reference: The rival submissions which have been urged on behalf of the Revenue and the assessee can be dealt with both as a matter of first principle, inter-preting the section as it stands and on the basis of precedent on the sub-ject. Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to belhieve under section 147 and following the issuance of a notice under section 148, the Assessing Officer has power to assess or reassess the income which he has reason to believe had escaped assessment, and also any other income chargeable to tax. The words "and also" cannot be ignored. The interpretation which the court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament having used the words "assess or reassess such income and also any other income chargeable to tax which has escaped assessment", the words "and also" cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word "or". The Legislature did not rest content by merely using the word "and". The words "and" as well as "also" have been used together and in conjunction. The Shorter Oxford Dictionary defines the expression "also" to mean further, in addition besides, too. The word has been treated as being relative and conjunctive. Evidently therefore, what Parliament intends by use of the words "and also" is that the Assessing Officer, upon the formation of a reason to believe under section 147 and the issuance of a notice under section 148(2) must assess or reassess: (1) such income ; and also (1) any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The words "such income" refer to the income chargeable to tax which has escaped assessment, and in respect of which the Assessing Officer has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the Assessing Officer to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If 8 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT upon the issuance of a notice under section 148(2), the Assessing Officer accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of section 147 with effect from April 1, 1989 clearly stipulated that the Assessing Officer has to assess to reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which carne to his notice during the proceeding. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter. 11. From the above observation, it is evident that the ld. A.O. cannot make an addition on any other income chargeable to tax without making an addition on the grounds for which the reopening was done. In the present case in hand, the ld. A.O. in the last paragraph of the reasons for reopening has belief that income has escaped assessment amounting to Rs.86.00 crores in the form of cessation of liability along with any other income and the said amount being the loan taken from ADB by the assessee for which the repayment was not made resulting in cessation of liability. It is also observed that at pg. no. 106 of paper book no. 2, the assessee has given the list of Sundry Creditors as on 31.03.2009 and at pg. no. 727 of paper book no. 4, the onetime settlement offer given by the assessee to ADB had stated that the outstanding due was Rs.142 crores. It is also evident from OTS offer that the assessee has paid interest and other charges to ADB as per the letter dated 28.09.2011 and has also undertaken to make payment subsequently. Both the A.O. as well as the first appellate authority has failed to elaborate as how they have arrived at the impugned addition of Rs.107,53,11,047/-. Hence, it is evident that the ld. A.O. has not made addition for the reason for which the reopening was made but had only made addition on the outstanding sundry creditor declared by the assessee. 12. From the above observation and by respectfully following the proposition laid down by the Hon'ble Apex Court in Jet Airways (supra), we hereby hold the assessment order to be null and void. 9 ITA No. 2 5 4 6 / M u m / 2 0 2 2 ( A . Y . 2 0 1 0 - 1 1 ) M/s. Minestone vs. ACIT 13. As we have held the assessment order to be invalid, the other grounds of appeal raised by the assessee becomes academic in nature. 14. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 22.09.2023. Sd/- Sd/- (B R Baskaran) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 22.09.2023 Roshani , Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT - concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai