2021 (4) TMI 686 - AT - Income Tax

Enhancing the income of the assessee u/s 40A(2)(b) by CIT - enhancement in respect of purchases made from sister concern and on account of suppressed sale to the sister concern - Submission of assessee that the learned CIT(A) is not empowered to make enhancement in respect of a new source of income which is not the subject matter of the assessment order and which has not been considered by the Assessing Officer - HELD THAT - Since, the facts of the instant case are identical to the case decided by the Co-ordinate Bench of the Tribunal in the case of Hari Mohan Sharma 2019 (2) TMI 113 - ITAT DELHI , therefore, respectfully following the same, we hold that the learned CIT(A) in the instant case was not justified in enhancing the income of the assessee in the form of new source of income which has not been considered by the Assessing Officer and thus he had exceeded his jurisdiction u/s 251(1)(a) of the Act. Accordingly, grounds no. 3, 4 and additional grounds are allowed. Addition u/s 36(1)(iii) - Addition being interest @12% per annum for two days on account of advance of ₹ 2,20,00,000/- given to one of its supplier - CIT(A) sustained the addition made by the Assessing Officer on the ground that the assessee is not into business of lending of money - HELD THAT - A perusal of the audited balance sheet, copy of which is placed at page 18 of the paper book shows that the share capital and reserves and surplus of the assessee company at the beginning of the year was ₹ 11,93,456.12/- and at the close of the year was ₹ 11,67,33,870/-. Thus, own capital and free reserves of the assessee company throughout during the year was much more than the interest free advance of ₹ 2,20,00,000/- given to M/s Lakshya Overseas. We, therefore, respectfully following the decision of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT hold that the learned CIT(A) was not justified in sustaining the addition of ₹ 14,194/- made by the Assessing Officer u/s 36(1)(iii) of the Act. Under valuation of closing stock - as submitted that the learned CIT(A) has not considered the submission of the assessee on this issue properly, if given an opportunity, the assessee is in a position to substantiate either before the Assessing Officer or learned CIT(A) that there is no undervaluation of closing stock - HELD THAT - Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore this issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate its case that there is no undervaluation of closing stock and decide the issue as per fact and law. We hold and direct accordingly. Ground raised by the assessee is allowed for statistical purpose.

Summary

Issues Involved:

1. Enhancement of income by CIT(A) under section 40A(2)(b) and suppressed sales.
2. Disallowance under section 36(1)(iii) for interest on advances.
3. Disallowance of donations.
4. Disallowance of ROC filing fees under section 37(1).
5. Valuation of closing stock and alleged undervaluation.
6. Jurisdiction of CIT(A) to enhance income by introducing a new source of income.

Issue-wise Detailed Analysis:

1. Enhancement of Income by CIT(A) under Section 40A(2)(b) and Suppressed Sales:
The CIT(A) enhanced the income of the assessee by ?3,57,53,276, which included ?2,19,63,025 for purchases from sister concerns and ?1,37,90,251 for suppressed sales. The CIT(A) compared the purchase price and sale price of items from related parties with those from outside parties and noted discrepancies. He issued an enhancement notice to the assessee, explaining that the purchases were made at excessive prices and sales at undervalued prices to related parties, thereby suppressing profits. The assessee contended that the CIT(A) is not empowered to enhance income for a new source not considered by the Assessing Officer. The Tribunal, citing various judicial precedents, including the case of Hari Mohan Sharma vs. ACIT, held that the CIT(A) exceeded his jurisdiction under section 251(1)(a) by enhancing income from a new source not considered by the Assessing Officer. The Tribunal allowed the grounds of appeal related to this issue.

2. Disallowance under Section 36(1)(iii) for Interest on Advances:
The Assessing Officer disallowed ?14,194 as interest on an advance of ?2,20,00,000 given to a supplier, invoking section 36(1)(iii). The CIT(A) upheld this disallowance. The assessee argued that the advance was made from its own funds, not borrowed funds, citing the Bombay High Court decision in Reliance Utilities and Power Ltd. The Tribunal found that the assessee's own capital and reserves were more than the advance amount, and hence, no disallowance was warranted. The Tribunal allowed this ground of appeal.

3. Disallowance of Donations:
The Assessing Officer disallowed ?13,000 claimed as donations to two trusts due to lack of evidence. The CIT(A) sustained this disallowance. The assessee did not press this ground of appeal before the Tribunal, and it was dismissed as not pressed.

4. Disallowance of ROC Filing Fees under Section 37(1):
The Assessing Officer disallowed ?1,05,484 paid as ROC filing fees for increasing authorized share capital, considering it a capital expenditure. The CIT(A) sustained this disallowance. The Tribunal did not specifically address this issue in the provided judgment text.

5. Valuation of Closing Stock and Alleged Undervaluation:
The Assessing Officer found that the closing stock of gold jewelry was undervalued by ?13,27,855. The CIT(A) partly sustained this disallowance, reducing it to ?6,27,165. The assessee argued that the undervaluation was due to clerical errors in recording the value of gold issued for job work. The Tribunal, considering the assessee's submission, remanded the issue back to the Assessing Officer for a fresh examination, directing the Assessing Officer to give the assessee an opportunity to substantiate its claim.

6. Jurisdiction of CIT(A) to Enhance Income by Introducing a New Source of Income:
The Tribunal extensively discussed the jurisdiction of the CIT(A) to enhance income by introducing a new source of income not considered by the Assessing Officer. The Tribunal, relying on judicial precedents, held that the CIT(A) cannot enhance the assessment by considering a new source of income not examined by the Assessing Officer. This principle was upheld in various cases, including CIT vs. Rai Bahadur Hardutroy Motilal Chamaria and CIT vs. Union Tyres. The Tribunal concluded that the CIT(A) exceeded his jurisdiction by enhancing the income from a new source and allowed the related grounds of appeal.

Conclusion:
The Tribunal allowed the appeal partly, setting aside the enhancement of income by CIT(A) related to new sources not considered by the Assessing Officer and remanding the issue of undervaluation of closing stock for fresh examination. The disallowance under section 36(1)(iii) was also deleted, while the disallowance of donations was dismissed as not pressed.