THE ACIT., PATAN CIRCLE, PATAN V. SHIV REFOILS AND CAKES, CHANSAMA, PATAN

ITA 1672/AHD/2019

AI Insights

The case involves an appeal by the Revenue against the order of the CIT(A), Gandhinagar, which had provided relief to Shiv Refoils and Cakes, a firm engaged in manufacturing and trading of agro products. The Assessing Officer had made several additions to the firm's income under section 144 of the Income Tax Act, 1961, due to non-compliance with notices, including unexplained capital and disallowances on interest and depreciation. The CIT(A) deleted these additions, leading to the Revenue's appeal. The Tribunal examined the admissibility of additional evidence under Rule 46A and the merits of the additions and disallowances made by the AO.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 29675 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-10-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 25-09-2024
• Assessment Year: 2014-2015
• Appeal Filed On: 11-11-2019
• Other Referred Cases: Pankaj Dyestuff Industries (ITR No. 241 of 1993)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRITHVI RAJ MEENA
• Assessee Lawyers: MANISH J. SHAH; RUSHIN PATEL; ARS
• Keywords: Set aside; Additional evidence; Corroborative evidences; Unexplained cash credit; Depreciation; Fair market value; Principle of natural justice; Bogus
• Section: 144; 68; 13; 40(b)

Judgement Text

" आयकर अपीलीय अिधकरण, अहमदाबाद \u0011ायपीठ “डी“,अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ D ” BENCH, AHMEDABAD \u0016ी टी.आर. से\u001a\u001bल क ुमार, \u0011ाियक सद\u001d एवं \u0016ी मकरंद वसंत महादेवकर, लेखा सद\u001d क े सम#। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं /ITA No.1672/Ahd/2019 िनधा \u000fरण वष\u000f /Assessment Year : 2014-15 The ACIT Patan Circle, Patan – 384 265 बनाम/ v/s. Shiv Refoils and Cakes Plot No.2 GIDC Estate Chanasma, Patan \u0013थायी लेखा सं./PAN: ABNFS 4402 N (अपीलाथ&/ Appellant) ('( यथ&/ Respondent) Assessee by : Shri Manish J. Shah & Rushin Patel, ARs Revenue by : Shri Prithviraj Meena, CIT-DR सुनवाई की तारीख/Date of Hearing : 25/09/2024 घोषणा की तारीख /Date of Pronouncement: 15/10/2024 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM: This appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), Gandhinagar, Ahmedabad [hereinafter referred to as “CIT(A)”], dated 05-09-2019, for the Assessment Year (AY) 2014-15, allowing certain reliefs to the assessee against the order passed by the Assessing Officer [hereinafter referred to as “AO”] under section 144 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”]. ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 2 Facts of the Case: 2. The brief facts of the case are that the assessee firm, engaged in the business of manufacturing and trading of agro products, filed its return of income declaring a total income of Rs.36,52,580/- for the AY 2014-15. The case was selected for scrutiny, and due to non-compliance with several notices, the AO completed the assessment under section 144 of the Act. Various additions were made to the total income, including an addition of Rs.6,08,44,207/- under section 68 of the Act for unexplained capital, Rs.18,93,533/- for disallowance of interest on capital, and Rs.43,62,678/- for depreciation claimed on assets. The AO also made an addition of Rs.34,50,000/- on account of unsecured loans u/s 68 of the Act and disallowed Rs.4,14,000/- as interest paid on these loans. 2.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A), who deleted the above additions, allowing relief to the assessee. The Revenue is now in appeal before us against the order of the CIT(A) with following grounds of appeal: 1. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred in law and on facts in admitting the additional evidences without drawing satisfaction on one or more of the circumstances laid down in Rule 46A of the I.T.Rules 1962, when the AO has given ample opportunities to the assessee to furnish the requisite details.” 2. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred in law and on facts in admitting the additional evidence merely relying on the decisions without examining their applicability on the facts of the case of the assessee.” 3. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred in law and on facts in deleting Capital introduced amounting to the tune of Rs.70,47,000/- (Rs.19,82,000/- - Smt. Sharmilaben I Patel and Rs.50,65,000/- Shri Jitendra U Patel).” ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 3 4. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred in law and on facts in disallowance of interest paid to partners namely Smt. Sharmilaben J Patel and Shri Jitendra U Patel.” 5. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred' in law and on facts in deleting disallowance of Rs.14,09,08,014/- on account of payment made to relatives.” 6. “Whether, the Ld. Commissioner of Income-Tax(appeals) has erred in law and on facts in deleting disallowance of Rs.3,00,000/- on account of salary paid to relatives.” 7. On the facts and circumstances of the case, the Ld. Commissioner of Income- Tax(appeals) ought to have upheld the order of the Assessing Officer. 8. It is, therefore prayed that the order of the Ld. Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer be restored. 9. The appellant prays for leave, to amend or alter any ground or add a new ground which may be necessary. 3. During the course of hearing before us, the Departmental Representative (DR) stated that the order of AO was passed u/s 144 of the Act as the assessee failed to comply with the notices. During the appellate proceedings, the CIT(A) called for a remand report from the AO and decided on the basis of the same. Ground Numbers 1 and 2, raised by Revenue, are relating to admission of additional evidence under Rule 46A. 4. Under Rule 46A of the Income Tax Rules, 1962, additional evidence can be admitted at the appellate stage if specific conditions are met, such as (a) the AO refusing to admit evidence that ought to have been admitted, (b) the appellant being prevented by sufficient cause from producing evidence during the assessment, or (c) the AO passing an order without providing the ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 4 appellant sufficient opportunity to produce evidence. The CIT(A) must record reasons in writing for admitting such evidence, ensuring that it aligns with the principles of natural justice. In this case, the CIT(A) observed that the assessee was not able to furnish the documents during the assessment proceedings due to certain mitigating circumstances, as explained by the assessee, including financial difficulties and the failure of internal communication at the assessee's business premises. The CIT(A) admitted the additional evidence under Rule 46A after satisfying himself that these conditions were met. The CIT(A) followed the procedure outlined in Rule 46A by allowing the AO an opportunity to examine the additional evidence and provide a remand report. The AO, in his remand report, did not object to the admission of the additional evidence but commented on its merits. Therefore, the admission of additional evidence by the CIT(A) was in accordance with Rule 46A, and there was no violation of the procedural requirements. 5. We find no error in the CIT(A)'s decision to admit the additional evidence. The conditions under Rule 46A were satisfied, and the AO was provided with an opportunity to review and comment on the additional evidence. Hence, these grounds of appeal are dismissed. Ground No. 3 relates to deletion of Addition of Rs. 70,47,000/- for Capital Introduced by Partners 6. The AO made an addition of Rs.6,08,44,207/- under section 68 of the Act, which included the disputed capital introduction of Rs.70,47,000/-. The additions included Rs.19,82,000/- introduced by Smt. Sharmilaben I. Patel ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 5 and Rs.50,65,000/- introduced by Shri Jitendra U. Patel. The AO noted that both partners, Smt. Sharmilaben I. Patel and Shri Jitendra U. Patel, had failed to file their returns of income for the relevant year and, therefore, doubted their creditworthiness and the genuineness of the capital introduced. While the capital was introduced through banking channels, the AO was not satisfied with the evidence provided regarding the sources of the funds. 6.1. The CIT(A) deleted the addition of Rs.70,47,000/- while doing so the CIT(A) acknowledged that the capital introduction was made through proper banking channels, which establishes the identity and genuineness of the transaction. The assessee produced bank statements and capital accounts for both partners, which were verified by the CIT(A). These documents showed that the funds were available in the partners' accounts before the capital introduction. The CIT(A) relied on the judgement of Hon’ble Gujarat High Court’s in Pankaj Dyestuff Industries (ITR No. 241 of 1993), which held that when partners introduce capital through banking channels, the partnership firm cannot be held responsible for explaining the source of the funds if the partners’ identity is established. The CIT(A) provided the AO with an opportunity to examine the additional evidence during the appellate proceedings. In the remand report, the AO did not dispute the authenticity of the bank statements but maintained the view that the partners' failure to file returns made the capital suspect. 7. The DR pointed out that there was a cash deposit of Rs.30,00,000/- in the bank account of Smt. Sharmilaben I. Patel before issuance of cheque of Rs.8,50,000/- which is ignored by the CIT(A). ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 6 8. The Authorised Representative (AR) of the assessee, explained the situation under which the assessee was not able to submit the necessary information to the AO (which the CIT(A) has detailed in his order) and, therefore, the details provided to the CIT(A) as additional evidence were remanded back to AO and upon receiving the remand report, the CIT(A) passed his order. The DR reiterated the judicial precedent relating to Pankaj Dyestuff Industries which was referred by the CIT(A) in his order. 9. We have considered the contentions of both the parties and note the contents of remand report from the AO. Section 68 of the Act requires the assessee to explain the nature and source of any sum credited in their books. The assessee must prove the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor. In the present case, the AO added the capital introduced by the partners under section 68 of the Act, arguing that their failure to file income tax returns raised doubts about their creditworthiness. We find that the CIT(A) rightly concluded that the identity of the partners and the genuineness of the transactions were established, as the funds were routed through banking channels. The crux of the issue lies in the third test under section 68—whether the partners were creditworthy. Although the partners did not file their income tax returns for the relevant year, the CIT(A) found that they had sufficient balances in their bank accounts before introducing the capital, which demonstrated their ability to introduce the funds. The reliance on the decision in Pankaj Dyestuff Industries is well-founded. The Hon’ble Gujarat High Court held that once the partner’s identity and the fact that the funds were introduced through banking channels are established, the burden of explaining the source shifts to the partner and not the firm. Therefore, the firm cannot be penalized under ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 7 section 68 for unexplained cash credits when the capital is introduced by partners through legitimate means. The AO’s primary objection was the non- filing of returns by the partners. While non-filing of returns may indicate a lack of compliance, it does not necessarily prove that the funds introduced were unexplained. The partners had provided bank statements showing that they had the requisite funds available, and these transactions were genuine. The AO failed to bring any material on record to suggest that the funds were not available or that the transactions were bogus. 9.1. In light of the facts and evidence, we find no merit in the Revenue's contention. The partners' identity and the genuineness of the transactions have been established, and the capital was introduced through banking channels. The CIT(A) has rightly applied judicial precedents and allowed the additional evidence. The mere non-filing of returns by the partners does not invalidate the genuineness of the capital introduced, especially when bank statements support the availability of funds. The AO’s concerns about creditworthiness were adequately addressed by the assessee through documentary evidence. We uphold the CIT(A)’s order in deleting the addition of Rs.70,47,000/-. The conditions under section 68 of the Act were satisfactorily met, and there is no justification for treating the capital introduced as unexplained cash credit. This ground of appeal is dismissed. Ground Number 4 relates to deletion of disallowance of Rs.18,93,533/- on account of Interest on Capital Introduced by Partners. 10. The assessee claimed interest of Rs.18,93,533/- paid to the partners on the capital introduced during the assessment year 2014-15. The AO ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 8 disallowed the interest, reasoning that the capital introduced by the partners was treated as unexplained under section 68 of the Act. Since the capital itself was deemed unexplained, the interest paid on such capital was also treated as non-genuine and disallowed. The CIT(A) deleted the addition of Rs.70,47,000/- under section 68, holding that the capital introduced by the partners was adequately explained. The CIT(A) also deleted the disallowance of interest on capital as a direct consequence of the deletion of unexplained capital. The CIT(A) observed that the interest paid to the partners was as per the terms of the partnership deed and within the limits prescribed under section 40(b) of the Act and, therefore, there was no basis to disallow the interest when the capital was already treated as explained. 11. The DR relied on the order of AO and, on the other hand, the AR relied on the order of CIT(A). 12. Section 40(b) of the Act allows a deduction for interest paid to partners provided it is within the prescribed limits (12% per annum) and is as per the terms of the partnership deed. In this case, the CIT(A) verified that the interest paid was in accordance with the terms of the partnership deed and within the allowable limits. The AO did not dispute this fact. Therefore, there was no violation of section 40(b), and the interest payment was eligible for deduction. The Revenue’s primary contention was that since the capital was treated as unexplained, the interest paid on it should not be allowed. However, the CIT(A) rightly pointed out that once the capital was held to be genuine and the addition under section 68 was deleted, the interest paid on such capital automatically became allowable. The Revenue’s argument does ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 9 not hold since the foundation of the disallowance, i.e., the unexplained nature of the capital, was disproved. 13. We agree with the CIT(A)'s conclusion that the disallowance of Rs.18,93,533/- on account of interest paid on capital cannot be sustained. Since the capital introduced by the partners has been found to be genuine, the corresponding interest paid is allowable as a deduction. The conditions under section 40(b) of the Act have been met, and the interest payments were made in accordance with the terms of the partnership deed. The disallowance of Rs.18,93,533/- is deleted. This ground of appeal by the Revenue is dismissed. Ground Number 5 and 6 relates to disallowance of Payments Made to Related Parties. 14. During the assessment proceedings, the AO scrutinized payments made by the assessee firm to related parties. The payments included salary of Rs.3,00,000/- paid to Shri Prakash U. Patel, the brother of one of the partners, and purchases of Rs.14,12,08,014/- made from M/s. Bhavya Enterprises, a proprietary concern of another partner, Shri Jitendra U. Patel. The AO disallowed these payments stating that the assessee failed to produce adequate supporting documents, such as salary registers, proof of work done by Shri Prakash U. Patel, and bills or invoices for purchases from M/s. Bhavya Enterprises. The AO questioned the reasonableness of the payments, particularly the salary paid to Shri Prakash U. Patel, as no evidence of his qualifications or services rendered was provided. Additionally, the AO noted ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 10 that M/s. Bhavya Enterprises had not filed its return of income for the relevant year, raising doubts about the genuineness of the transactions. 15. The CIT(A) deleted the disallowances noting that the assessee had submitted additional evidence during the appellate proceedings, including proof of salary payments, work done by Shri Prakash U. Patel, and invoices for purchases from M/s. Bhavya Enterprises. These documents were verified during the remand proceedings, and the AO did not dispute their authenticity in the remand report. The CIT(A) held that the payments made to related parties were not excessive or unreasonable under section 40A(2)(b) of the Act. The payments for salary and purchases were in line with the business requirements of the assessee, and there was no evidence to suggest that the amounts paid were inflated. The CIT(A) emphasized that the assessee firm and its related parties are separate legal entities. Merely because payments were made to related parties does not justify disallowance unless it is proven that the payments were unreasonable or excessive. In this case, the CIT(A) concluded that the payments were genuine and made in the normal course of business. 16. The DR relied on the order of AO and stated that the turnover of the related party Bhavya Enterprises was more than Rs.100 Cr and the return of income is not filed, and the CIT(A) has directed to re-open the case considering the facts. 17. The AR pointed out that the AO has not questioned the genuineness but has questioned the reasonableness of the amounts. The further pointed out that the CIT(A) in his order has noted that the AO has neither made any ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 11 comparison of similar goods purchased from sister concern and outside parties nor given his findings on excessive or unreasonable fair market value of the goods or services (so far as disallowance of salary of Rs.300,000/- is concerned). The AR with the help of various bills of related parties and outside parties demonstrated the reasonableness of the prices of goods purchased from related parties. 18. We have considered the facts and circumstances relating to the transactions with related parties. Section 40A(2)(b) of the Act empowers the AO to disallow any expenditure incurred by the assessee in respect of payments made to related parties if such payments are found to be excessive or unreasonable compared to the fair market value of the services rendered or goods purchased. The onus is on the AO to establish that the payments are excessive or unreasonable. In the present case, the AO disallowed the payments solely on the basis of suspicion, without providing concrete evidence to show that the payments were excessive. The CIT(A) found that the payments were justified based on the evidence provided by the assessee, including salary registers, invoices, and details of the work performed by Shri Prakash U. Patel. The AO failed to provide any comparable data or market rates to demonstrate that the payments were excessive. The AO’s primary objection was the lack of sufficient documentary evidence to substantiate the payments. However, during the appellate proceedings, the assessee produced additional evidence, including proof of salary payments and purchase invoices. The CIT(A) admitted this additional evidence under Rule 46A and forwarded it to the AO for comments. The AO, in the remand report, did not raise any objections to the authenticity of these documents but maintained that the payments were excessive. he CIT(A) rightly concluded ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 12 that once the additional evidence was verified and found to be authentic, there was no basis for disallowing the payments. 18.1. The AO must establish that payments made to related parties are excessive or unreasonable. In this case, the AO did not provide any comparable data or analysis to show that the salary paid to Shri Prakash U. Patel or the purchases from M/s.Bhavya Enterprises were above market rates. The CIT(A) emphasized that simply because payments were made to related parties does not automatically lead to disallowance. The AO must demonstrate with supporting evidence that the payments were not in line with industry standards or market rates, which was not done in this case. We uphold the CIT(A)’s order in deleting the disallowance of payments made to related parties. The conditions under section 40A(2)(b) of the Act were not violated, and the payments were found to be reasonable and justified based on the facts and evidence. The AO’s disallowance was not supported by any substantial evidence, and therefore, this ground of appeal is dismissed. 19. In the result, the Revenue’s appeal is dismissed. Order pronounced in the Open Court on 15th October, 2024 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER अहमदाबाद/Ahmedabad, िदनांक/Dated 15/10/2024 टी.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS ITA No.1672/Ahd/2019 The ACIT vs. Shiv Refoils and Cakes Asst. Year : 2014-15 13 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)-Gandhinagar, Ahmedabad 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) : 10.10.2024 2. Date on which the typed draft is placed before the Dictating Member. : 14.10.2024 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. : 15.10.24 7. Date on which the file goes to the Bench Clerk. : 15.10.24 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 : "