2019 (10) TMI 728 - AT - Income Tax

Addition u/s 69 or 40A - Expenses incurred in cash - Cash found with an employee of the appellant from his residence at the time of search operation - setoff of loss against the addition made u/s.68/69 - CIT (A) held that addition cannot be made u/s. 40A (3), because the hotel was under construction and no expenses have been claimed in the profit loss acount, however, he has made the addition u/s.69 on the ground that these payments towards capital-work-in-progress - HELD THAT - From the documents placed in the paper book as well as observations noted in the impugned assessment order, it is an admitted fact that these seized documents was not found from the premises of the assessee company albeit it was from the premises of Shri Mandeep Singh in Goa, who was an employee of the assessee-company at the relevant time. The assessee had submitted that he had his own independent construction business also. However, neither the statement of Shri Mandeep Singh was recorded nor any evidence has been produced by the assessee that he carried on any independent construction business. However if one goes by the presumption under the law, then if the documents have not been found from the premises of the assessee, then presumption u/s.132(4A) r.w.s. 292C cannot be drawn against the assessee. Without going into the merits of the addition made u/s.69 and cash found with an employee of the assessee made u/s 68 of the Act, we find substance in the argument raised by the ld. counsel that said addition should be set off from the losses on account of depreciation and business loss. The said loss was claimed in the revised return and it consists of loss arising from depreciation put to use w.e.f. 01.03.2011 and business loss during the year. As per CBDT Circular No.11/2019 dated 19th June, 2019, Assessing Officer should allow the said loss against the addition made u/s.68/69 etc. and the amendment brought by the Finance Act, 2016 is w.e.f. 01.04.2017 and any denial of such set off is only applicable from the Assessment Year 2017-18; and assessment for the period prior to Assessment Year 2017-18, such set off would be allowed against income determined u/s.115BBE. Thus, in view of clear cut clarification by the CBDT, we hold that the addition made u/s. 69 and addition u/s.68 is liable to be set off from the loss. Accordingly, the additions made by the Assessing Officer and confirmed by the Ld. CIT (A) would be liable to be set off from such losses. With this direction, the appeal of the assessee is partly allowed

Issues Involved:
1. Addition of ?26,68,500/- under Section 69 of the Income Tax Act, 1961.
2. Addition of ?85,000/- under Section 69.
3. Non-availability of depreciation set-off against additions confirmed under Section 69.
4. Validity of additions considering the business commencement date.

Issue-wise Detailed Analysis:

1. Addition of ?26,68,500/- under Section 69 of the Income Tax Act, 1961:
The assessee contested the addition of ?26,68,500/- made under Section 69 based on seized documents found from an employee's residence. The assessee argued that these documents were related to the employee’s independent construction business and not the assessee-company. The Assessing Officer did not accept this explanation due to a lack of documentary evidence. The CIT (A) confirmed the addition under Section 69, stating that the payments were towards capital-work-in-progress. However, the Tribunal noted that the documents were not found on the assessee’s premises, and the presumption under Section 132(4A) read with Section 292C could not be drawn against the assessee. As such, there was no concrete evidence linking the seized documents to the assessee-company.

2. Addition of ?85,000/- under Section 69:
The addition of ?85,000/- was made based on cash found during a search operation. The assessee failed to provide a satisfactory explanation for the cash found. The CIT (A) confirmed this addition under Section 68 due to the absence of any explanation from the assessee. The Tribunal upheld this addition, noting the lack of evidence or explanation from the assessee regarding the source of the cash.

3. Non-availability of depreciation set-off against additions confirmed under Section 69:
The assessee argued that the losses, including depreciation, should be set off against the additions made under Section 69. The CIT (A) directed the Assessing Officer to calculate the depreciation allowance as per Section 32(1) read with Explanation 5 of the Act but held that the loss would not be available for set-off against the addition confirmed under Section 69. The Tribunal referred to CBDT Circular No. 11/2019, which clarified that for assessments prior to the Assessment Year 2017-18, losses could be set off against additions made under Sections 68/69. Consequently, the Tribunal directed that the addition of ?26,68,500/- under Section 69 and ?85,000/- under Section 68 be set off against the claimed losses totaling ?39,05,893/-.

4. Validity of additions considering the business commencement date:
The assessee contended that the additions were unjust as the company was under erection and had not commenced business before 01.03.2011. The Tribunal did not delve deeply into this argument, as the primary focus was on the evidence linking the seized documents to the assessee and the set-off of losses against the additions.

Conclusion:
The Tribunal partly allowed the appeal, directing that the additions made under Sections 69 and 68 be set off against the assessee’s claimed losses, in accordance with the CBDT Circular No. 11/2019. The Tribunal emphasized the lack of evidence linking the seized documents to the assessee-company and upheld the principle that losses could be set off against such additions for assessment years prior to 2017-18.

← Previous Next →