2012 (12) TMI 656 - AT - Income Tax

Unexplained Investment u/s 69 Held that - Profit arising from the sale of plots along with building is to be taxed under the head Capital Gain. Tribunal has taken into consideration the investment made in past year and held that the investment has been made from its books of account as all the entries are incorporated in books of account. No amount has been spent over and above recorded in the books of account. Therefore, there was no reason in not accepting the claim of the assessee. CIT (A) has also deleted the addition for the year under consideration following the order of Tribunal as all the facts have already been discussed by the Tribunal. Accordingly, Order of CIT (A) in this aspect as the issue has already been considered by the Tribunal while disposing the appeal for the assessment year 2005-06 is confirmed. Addition on account of interest on capital from partnership firm Held that - Where there is no tax effect of revenue, the authority would not fritter away its energy in fighting matters of this kind. The supplementary partnership deed has not provided any interest on capital to the partners. Accordingly the firm had not allowed interest on capital. If capital allowed by the firm is expenses of the firm and to that extent the income of the firm would reduce. The tax effect is hardly there. Therefore, the addition made by the AO is deleted - In the result, appeals of the department as well as cross objections of the assessee are dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of unexplained investment under section 69 of the IT Act for the assessment year 2002-03.
2. Deletion of addition on account of interest on capital from a partnership firm for the assessment years 2003-04 and 2004-05.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Investment (Assessment Year 2002-03):

The department contested the deletion of an addition of Rs. 21,80,880/- on account of unexplained investment under section 69 of the IT Act. The case arose when it was observed during the assessment proceedings for the year 2005-06 that the construction on certain plots was completed earlier than claimed by the assessee. The Assessing Officer (AO) held that the cost of improvement was completed in the relevant previous year based on an application for a completion certificate. However, the assessee argued that advances were made to the contractor over several years, which were duly reflected in the books of account, and the construction was completed in the assessment year 2005-06 when the contractor's account was squared off.

The Tribunal found that the AO did not provide positive proof of the alleged expenditure in the year ended 31.03.2002 and relied solely on the completion certificate. The Tribunal referenced the ITAT Mumbai 'J' Bench decision in Rupee Finance and Management (P) Ltd. vs. ACIT, which held that if all investments are recorded in the books of account, no addition under section 69 is sustainable. The Tribunal had previously rejected the department's claim for the assessment year 2005-06, confirming that the investments were made through the books of account.

The CIT (A) deleted the addition, observing that the issue had already been decided by the Tribunal for the assessment year 2005-06, which accepted the assessee's claim that the construction was completed in the relevant year. The Tribunal upheld the CIT (A)'s order, confirming that the issue was covered by the Tribunal's earlier decision, and no amount was spent over what was recorded in the books of account. Thus, the addition made by the AO was deleted.

2. Deletion of Addition on Account of Interest on Capital from Partnership Firm (Assessment Years 2003-04 and 2004-05):

The department challenged the deletion of additions of Rs. 8,12,187/- and Rs. 16,52,094/- for the assessment years 2003-04 and 2004-05, respectively, on account of interest on capital from a partnership firm. The assessments were reopened under section 148, and the AO found that the assessee company had not disclosed interest on capital employed with M/s. Mascot Foot Care, Faridabad, as per the partnership deed.

The assessee contended that no interest was payable by the firm, supported by a supplementary partnership deed dated 31.03.2003, which provided that partners mutually decided not to provide interest on capital from that date onwards. The ITAT had already decided this issue in favor of the assessee for the assessment year 2005-06, rejecting the department's view.

The CIT (A) deleted the addition, noting that the issue was covered by the Tribunal's order for the assessment year 2005-06, which followed the Bombay High Court's observation in CIT vs. Nagri Mills Company Ltd. that the tax effect was negligible. The Tribunal confirmed the CIT (A)'s order, noting that the firm had not claimed any deduction for interest payable to the company, resulting in no revenue impact as both the firm and the company were taxed at the maximum rate. The Tribunal upheld the deletion of the additions, confirming that the issue was similar to that of the assessment year 2005-06.

Conclusion:

The appeals of the department were dismissed, and the cross objections of the assessee were also dismissed as they were not pressed during the hearing. The Tribunal upheld the CIT (A)'s orders, confirming that the issues were covered by the Tribunal's earlier decisions, and no additions were justified under the circumstances.