M/s The Nest, Bangalore V. ITO, Bangalore

ITA 823/BANG/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77010 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 20-05-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 19-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BIJOY KUMAR
• Assessee Lawyers: SURESH
• Keywords: Unexplained cash credit; Unexplained investment; Income from undisclosed sources
• Section: 143(3); 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P.BOAZ, ACCOUNTANT MEMBER ITA NO. 823/ BANG/20 1 1 (ASSESSMENT YEAR: 20 06 - 07) THE NEST, NO.33, NE RATNALAYA, AGA ABBAS ALI ROAD, BANGALORE - 42. APPELLANT PAN:AAEFT0236F VS. INCOME - TAX OFFICER, WARD 1(2), BANGALORE. RESPONDENT APPELLANT BY: SHRI SURESH, CA. RESPONDENT BY: SHRI BIJOY KUMAR PANDA, ADDL.CIT DATE OF HEARING : 20 - 5 - 201 4 DATE OF PRONOUNCEMENT: 25 - 7 - 2014 O R D E R PER SMT. P.MADHAVI DEVI, JM : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(A) - I, BANGALORE, DATED 26 - 07 - 2011 FOR THE ASSESSMENT YEAR 2006 - 07. THE ASSESSEE IS AGGRIEVED BY T HE CONFIRMATION OF THE FOLLOWING ADDITIONS BY THE CIT(A): ITA NO . 823/BANG/2011 THE NEST PAGE 2 OF 9 I. RS.5,00,57,566/ - U/S 40 ( A ) (IA) OF THE INCOME - TAX ACT, 1961[HEREINAFTER REFERRED TO AS 'THE ACT'] II. RS.5,98,000/ - AS UNEXPLAINED INVESTMENT, AND III. RS.10,95,000/ - AS UNEXPLAINED CASH CREDIT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM WHICH IS ENGAGED IN THE BUSINESS OF RUNNING SERVICE APARTMENT S . FOR THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF INCOME ON 26 - 6 - 2006 DECLARING AN INCOME OF RS.88,003/ - . DURI NG THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO OBSERVED THAT THE ASSESSEE HAD MADE THE FOLLOWING PAYMENTS WITHOUT DEDUCTING TAX AT SOURCE: I) AMENITIES RS.3,30,000/ - II) MAINTENANCE RS.1,03,052/ - III) COMMISSION RS.1,24,514/ - --------------- TOTAL RS.5,57,566/ - ========= SINCE THE ABOVE PAYMENTS WERE MADE WITHOUT DEDUCTION OF TAX AT SOURCE, THE AO DISALLOWED THE SAME U/S 40(A)(IA) AND BROUGHT IT TO TAX. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 2.1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS IS THE FIRST YEAR OF BUSINESS OF THE ASSESSEE AND THE ASSESSEE WAS NOT AWARE OF ITS LIABILITY TO DEDUCT TAX AT SOURC E. HE, HOWEVER, SUBMITTED THAT THE ISSUE IS COVERED BY THE B BENCH OF THE TRIBUNAL AT BANGALORE IN THE CASE OF SHRI ANAND MARAKALA IN ITA NO.1584/BANG/2012 & CO NO.58/BANG/2013 DATED 13 - 9 - 2013 ITA NO . 823/BANG/2011 THE NEST PAGE 3 OF 9 WHEREIN IT HAS BEEN HELD THAT IF THE RECIPIENT HAS OFFERED TH E INCOME TO TAX AND HAS PAID TAX THEREON , THEN THE DISALLOWANCE U/S 40A(IA) IS NOT CALLED FOR. COPY OF THE SAID ORDER IS FILED BEFORE US. 2.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAD FAILED TO COMPLY WITH THE PROVISIONS OF THE ACT AND HAS MADE THE PAYMENT WITHOUT DEDUCTION OF TAX AT SOURCE DUE TO WHICH THE DISALLOWANCE U/S 40(A)(IA) IS CALLED FOR. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE UPON TH E DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. M/S.RISHI STOCK & SHARES PVT.LTD. IN ITA NO.112/MUM/2012 DATED 2 - 8 - 2013 . 2.3 HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS, WE FIND THAT DEFAULT HAS BEEN CO MMITTED BY THE ASSESSEE BY NOT DEDUCTING TAX AT SOURCE AND THEREFORE, THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT IS CALLED FOR. HOWEVER, THE LEGISLATURE HAS INTRODUCED THE SECOND PROVISO TO CLAUSE (IA) OF SUB - SECTION (A) TO SEC.40 BY THE FINANCE ACT, 2012 WHEREBY IT IS PROVIDED THAT IF THE RECIPIENT FILES RETURN OF INCOME AND PA YS TAX THEREON , THEN THE DISALLOWANCE IS NOT ATTRACTED . IN THE CASE OF SHRI ANAND MARAKALA (CITED SUPRA) THIS TRIBUNAL HAS HELD THAT THE SAID PROVISO IS APPLICABLE RETROSPECTIVELY. IN VIEW OF THE SAME, WE ITA NO . 823/BANG/2011 THE NEST PAGE 4 OF 9 ARE INCLINED TO FOLLOW THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL. WE REMIT THE MATTER BACK TO THE AO WITH A DIRECTION THAT HE SHALL CONSIDER THE EVIDENCE FILED BY THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT THE RECIPIENT HAS FILED THE RETURN OF INCOME AND HAS OFFERED THESE AMOUNTS FOR TAX AND TAX IS PAID THEREON. THE ASSESSEE IS DIRECTED TO FILE ALL THE NECESSARY EVIDENCE BEFORE THE AO AND CO - OPERATE WITH THE AO IN COMPLETION OF THE ASSESSMENT IN ACCORDANCE WITH LAW. TH IS GROUND OF APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 3 . IT IS FURTHER SEEN THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD SUBMITTED RENTAL AND AMENITIES AGREEMENT BEFORE THE AO AND ON VERIFICATION OF THE SAME, THE AO FOUND THAT T HE ASSESSEE HAS PAID A TOTAL SUM OF RS.5,98,000/ - TO THREE PERSONS WHO HAVE RENTED OUT THEIR PROPERTY OR AMENITIES TO THE ASSESSEE TO CARRY ON THE ASSESSEE S BUSINESS. SINCE THE ASSESSEE HAD NOT ACCOUNTED FOR THE SAME IN ITS BOOKS OF ACCOUNT, THE AO TREAT ED IT AS UNEXPLAINED INVESTMENT AND ACCORDINGLY BROUGHT IT TO TAX. 3.1 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) STATING THAT THOUGH THE ASSESSEE HAD ENTERED INTO RENTAL AGREEMENT S WITH THE SAID PARTIES, PAYMENT WAS NOT MADE DURING T HE RELEVANT FINANCIAL YEAR AND THEREFORE, THEY WERE NOT ACCOUNTED FOR IN THE BOOKS OF THE ASSESSEE. THE CIT(A), ITA NO . 823/BANG/2011 THE NEST PAGE 5 OF 9 HOWEVER, CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US ON THIS ISSUE ALSO. 3.2 AT THE TIME OF HEARING, THE LEAR NED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THIS IS THE FIRST YEAR OF BUSINESS AND THE ASSESSEE HAD TAKEN THE PROPERTY ON RENT AND SINCE IT WAS NOT HAVING FINANCES, IT DID NOT PAY THE SAID AMOUNTS DURING THE RELEVANT FINANCIAL YEAR AND HAS THUS NOT ACCOUNTED FOR SAME IN THE BOOKS OF ACCOUNT. 3.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 3.4 HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS TAKEN PROPERTIES ON RENT IN NOVEMBER 2005 AND HAS AGREED TO PAY A TOTAL SUM OF RS.5,98,000/ - FOR THE SAME. IT IS SEEN FROM THE RECITALS IN THE AGREEMENT FILED BEFORE US THAT THE ASSESSEE HAS MADE THE PAYMENT ON THE DATE OF AGREEMENT. FURTHER IT IS ALSO SEEN THAT THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS RENT AND HAS ALSO RECEIVED RENTAL INCOME. WITHOUT TAKING THE PROPERTIES ON RENT, THE ASSESSEE COULD NOT HAVE PAID RENT AND ALSO RECEIVED INCOME THERE - FROM. THEREFORE, WE ARE NOT INCLINED TO ACCEPT THE CONTENTION OF THE ASSESSEE. FURTHER, THE ITA NO . 823/BANG/2011 THE NEST PAGE 6 OF 9 ASSESSEE COULD NOT HAVE EARNED ANY INCOME EVEN PRIOR TO TAKING THE SAID PROPERTIES ON RENT. THEREFORE, THE SAME CANNOT BE TREATED AS UNACCOUNTED INCOME OF THE ASSESSEE AS THIS IS THE VERY FIRST YEAR OF OPERATION. HOWEVER, IT IS TO BE SEEN WHETHER THESE AMOUNTS HAVE BEEN PAID OUT OF CAPITAL CONTRIBUTION OF THE PARTNERS. NONE OF THE AUTHORITIES B ELOW HAVE EXAMINED THIS ISSUE FROM THIS ANGLE. THEREFORE, WE REMIT THIS ISSUE BACK TO THE FILE OF THE AO TO VERIFY IF THE PAYMENTS ARE OUT OF THE CAPITAL CONTRIBUTION BY THE PARTNERS AND IF IT IS FOUND TO BE SO, THEN THE SAME CANNOT BE TREATED AS UNEXPLAI NED INVESTMENT. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 4 . THE NEXT DISALLOWANCE IS OF RS.10,95,000/ - AS UNEXPLAINED CASH CREDIT. THE AO HAD OBSERVED FROM THE RETURN OF INCOME THAT THE ASSESSEE HAD SHOWN CAPITAL CONTRIBUTI ON OF RS.10,95,000/ - . THE ASSESSEE WAS ASKED TO SUBMIT THE DETAILS AND SOURCE FOR THESE CREDITS AND SINCE THE ASSESSEE DID NOT FILE THE SAID DETAILS, THE AO TREATED IT AS UNEXPLAINED CASH CREDIT U/S 68 OF THE ACT AND BROUGHT IT TO TAX. 4 .1 AGGRIEVED, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. ITA NO . 823/BANG/2011 THE NEST PAGE 7 OF 9 4 .2 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE - FIRM WAS ONLY FORMED ON 13 - 4 - 2005 AND THE CAPITAL CON TRIBUTED BY THE PARTNERS IS RS.10,95,000/ - AND THERE IS NO ADDITIONAL CONTRIBUTION BY THE PARTNERS. HE SUBMITTED THAT T HE ASSESSEE HAS EXPLAINED THE SOURCE AS CONTRIBUTION FROM ITS PARTNERS AND IT IS FOR THE PARTNERS TO E XPLAIN THE SOURCES FROM WHERE THEY HAVE MADE SUCH CONTRIBUTION . H E SUBMITTED THAT IF AT ALL THERE IS ANY ADDITION TO BE MADE, IT IS TO BE MADE IN THE HANDS OF THE PARTNERS IF THEY ARE UNABLE TO EXPLAIN THE SOURCE, BUT THE SAME CANNOT BE MADE IN THE HANDS OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: I. SURENDRA MAHAN SETH VS. CIT ( 221 ITR 239 )(ALL.) II. ABHYUDAYA PHARMACEUTICALS VS. CIT (2012) 72 DTR(ALL) 58; AND III. INDIA RICE MILLS VS. CIT (218 ITR 508(ALL.) 4 .3 THE LEARNED DEPARTMENTAL REPRESENTA TIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND ALSO PLACED RELIANCE ON THE DECISION OF THE HON BLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. SHIV SHAKTI TIMBERS (1997)(90 TAXMAN 349)(MP) AND ALSO THE DECISION OF THE HON BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. KISHORILAL SANTOSHILAL (1995) 216 ITR 9(RAJ.) 4 .4 HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE AO ITA NO . 823/BANG/2011 THE NEST PAGE 8 OF 9 HAS OBSERVED THAT THERE IS AN ADDIT IONAL CONTRIBUTION OF CAPITAL BY THE PARTNERS. HOWEVER, FROM THE PROFIT & LOSS ACCOUNT AND THE OTHER DOCUMENTS FILED BY THE ASSESSEE BEFORE US, IT IS SEEN THAT IT IS THE CAPITAL CONTRIBUTION MADE BY THE PARTNERS AT THE TIME OF FORMATION OF THE FIRM AND TH ERE IS NO ADDITIONAL CAPITAL INTRODUCED SUBSEQUENTLY. THE HON BLE ALLAHABAD HIGH COURT, IN THE CASE OF INDIA RICE MILLS (CITED SUPRA) HAS HELD THAT WHERE ALL THE DEPOSITS CAME TO BE MADE DURING THE ACCOUNTING YEAR IN THE BOOKS OF THE ASSESSEE - FIRM BEFORE IT STARTED ITS BUSINESS AND THE DEPOSITS REPRESENTED THE CAPITAL CONTRIBUTION OF THE PARTNERS IT WAS FOR THE PARTNERS TO EXPLAIN THE SOURCE OF DEPOSITS AND IF THEY FAILED TO DISCHARGE THE ONUS THEN SUCH DEPOSITS COULD BE ADDED IN THE HANDS OF THE PARTNERS ONLY. SIMILAR VIEW HAS BEEN EXPRESSED BY THE HON BLE ALLAHABAD HIGH COURT IN THE CASE OF ABHYUDAYA PHARMACEUTICALS (CITED SUPRA). IN THE DECISIONS RELIED UPON THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE FACTS ARE DISTINGUISHABLE AND ARE THU S NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE US. FURTHER, WHEN THERE ARE CONTRARY VIEWS BY VARIOUS HIGH COURTS ON THE SAME ISSUE, IT HAS BEEN HELD THAT THE VIEW IN FAVOUR OF THE ASSESSEE IS TO BE ADOPTED. IN VIEW OF THE SAME, WE ARE INCLINED TO FOLLO W THE DECISIONS IN FAVOUR OF THE ASSESSEE. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED AND THE ADDITION MADE BY THE AO ON THIS GROUND IS DELETED. ITA NO . 823/BANG/2011 THE NEST PAGE 9 OF 9 5 . IN THE RESULT, THE ASSESSEE S APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRON OUNCED IN THE OPEN COURT ON 25 TH OF JULY, 201 4. SD/ - SD/ - (JASON P BOAZ ) ( SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER EKSRINIVASULU COPY TO: 1. APPELLANT 2. RESPOND ENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALO RE