2019 (9) TMI 47 - AT - Income Tax

Denial of natural justice - additional evidence admission under Rule 46A before the CIT(A) - addition u/s 68 - sufficient opportunity not afforded to the assessee for furnishing the confirmations - HELD THAT - Substantial force in the claim of the A.R that as the assessee was not afforded sufficient time for furnishing the aforesaid confirmations of the parties in the course of the assessment proceedings therefore the same could not be obtained by him from the parties and thereafter filed with the A.O. Nothing is discernible from the orders of the lower authorities from where it could be gathered that the assessee was afforded sufficient time to furnish the confirmations of the aforementioned 19 parties in the course of the assessment proceedings. Perusal of the notice issued under Sec.142(1) dated 15.02.2016 reveals that the A.O had observed that the assessee as on 07.01.2016 was directed to furnish the confirmations along with the other details in respect of the aforementioned parties. Accordingly we are of the considered view that it can safely be concluded that sufficient opportunity was not afforded to the assessee for furnishing the confirmations of the aforementioned parties in the course of the assessment proceedings. A perusal of the confirmations of the parties that the same mainly pertains to the same parties to whom interest on loan office rent etc was paid by the assessee during the year under consideration. Accordingly now when the A.O had not drawn any adverse inferences as regards the genuineness of the aforesaid interest expenditure rent expenditure claimed by the assessee in its profit and loss account for the year under consideration viz. A.Y. 2013-14 therefore the said fact in itself inspires substantial confidence as regards the genuineness of the credits appearing against the names of the aforementioned parties. CIT(A) was in error in declining to admit the aforesaid confirmations which were filed by the assessee as an additional evidence under Rule 46A of the Income Tax Rules 1962. Addition u/s 41(1) - HELD THAT - Admittedly as per Sec. 41(1) in a case where the deduction has been made in the assessment for any year in respect of any trading liability incurred by the assessee and subsequently during any previous year the assessee had obtained some benefit in respect of such trading liability by way of remission or cessation thereof the benefit accruing to the assessee shall be deemed to be the profits and gains of its business or profession and accordingly chargeable to income tax as its income of that previous year. However merely for the reason that a liability is outstanding in the books of accounts of the assessee for several years cannot on the said standalone basis justify characterising of the same as a ceased liability under Sec.41(1) of the Act A.O while making an addition under Sec.41(1) had failed to point out as to what benefit the assessee had obtained in respect of the aforesaid trading liability during the year under consideration. In sum and substance as to on what basis the cessation of the aforesaid liability had been related to year under consideration is also not discernible from the assessment order. Accordingly we are unable to persuade ourselves to sustain the aforesaid addition of Rs. 7, 51, 308/- made by the A.O under Sec.41(1) of the Act and thus vacate the same. Disallowance under Sec. 40(a)(ia) - addition made under Sec.68 - HELD THAT - Interestingly we find that all of the 4 parties appear in the list of the 19 parties in respect of which addition had been made by the A.O under Sec.68 of the Act. As we have restored the addition made by the A.O under Sec. 68 to the file of the CIT(A) for fresh adjudication therefore in all fairness as the disallowance made by the A.O under Sec. 40(a)(ia) in respect of the aforesaid parties is inextricably linked to the addition made under Sec.68 by the A.O therefore the same also is restored to the file of the CIT(A). At this stage we may herein observe that the amount of interest credited by the assessee in the accounts of the aforementioned 4 parties prima facie is not found to be in conformity with the amount that had been disallowed by the A.O under Sec.40(a)(ia) of the Act. Accordingly the CIT(A) is also directed to take cognizance of the aforesaid fact while adjudicating the issue pertaining to the disallowance made by the A.O under Sec.40(a)(ia) and addition under Sec.68 in respect of the said parties. Addition in respect of the amount that was credited by the assessee in his capital account - HELD THAT - As is discernible from the orders of the lower authorities in the absence of any explanation as regards the nature and source of the aforesaid amount the same had been added by the A.O to the returned income of the assessee. We have given a thoughtful consideration to the said issue and finding no infirmity in the view taken by the CIT(A) confirm the said addition.

Summary

Issues Involved:
1. Admission of additional evidence under Rule 46A of the Income Tax Rules, 1962.
2. Addition under Section 41(1) of the Income Tax Act, 1961.
3. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.
4. Addition under Section 68 of the Income Tax Act, 1961.
5. Addition of capital receipt.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence under Rule 46A:
The assessee filed appeals against the CIT(A)'s order, which declined to admit additional evidence under Rule 46A of the Income Tax Rules, 1962. The CIT(A) refused to admit the additional evidence on grounds that the assessee had been given sufficient opportunity by the AO and failed to utilize it. The CIT(A) also found the confirmations submitted by the assessee to be untrustworthy. The Tribunal found merit in the assessee's claim that sufficient time was not provided to furnish the confirmations during the assessment proceedings. The Tribunal noted that the AO had directed the assessee to furnish confirmations for the first time on 15.02.2016, with a hearing scheduled on 23.02.2016, which provided less than a month to comply. The Tribunal concluded that the CIT(A) erred in not admitting the additional evidence and directed the CIT(A) to consider the confirmations as additional evidence to substantiate the genuineness of the credits.

2. Addition under Section 41(1):
The AO added Rs. 7,51,308/- under Section 41(1) on account of long-outstanding creditors. The Tribunal observed that merely because a liability is outstanding for several years does not justify its characterization as a ceased liability under Section 41(1). The Tribunal cited the Delhi High Court's judgment in CIT Vs. Jain Exports Pvt. Ltd. and noted that the AO failed to show any benefit obtained by the assessee during the year under consideration. Consequently, the Tribunal vacated the addition made under Section 41(1).

3. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 1,32,875/- under Section 40(a)(ia) for failure to deduct tax at source on interest payments to four parties. The Tribunal noted that these parties were also involved in the addition under Section 68. Given that the Section 68 addition was remanded to the CIT(A) for fresh adjudication, the Tribunal similarly remanded the disallowance under Section 40(a)(ia) to the CIT(A). The Tribunal also directed the CIT(A) to verify the amounts disallowed under Section 40(a)(ia).

4. Addition under Section 68:
The AO added Rs. 1,30,85,423/- under Section 68 for unexplained cash credits from 19 parties. The Tribunal directed the CIT(A) to reconsider the confirmations submitted as additional evidence under Rule 46A. The Tribunal remanded the matter to the CIT(A) for fresh adjudication after considering the additional evidence.

5. Addition of Capital Receipt:
The AO added Rs. 2,92,589/- credited to the assessee's capital account, citing a lack of explanation regarding its nature and source. The Tribunal found no infirmity in the CIT(A)'s decision to confirm this addition and upheld it.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the admission of additional evidence and remanded the issues under Sections 40(a)(ia) and 68 to the CIT(A) for fresh adjudication. The addition under Section 41(1) was vacated, while the addition of the capital receipt was confirmed. The appeals were thus partly allowed in accordance with these observations.