2021 (6) TMI 863 - AT - Income Tax

Undisclosed investment in land - income in the hands of the partners - assessee submitted before us that the Ld. AO failed to appreciate the fact that the partners of the appellant firm has invested in the said land for and on behalf of the assessee firm out of the unaccounted income earned from the scheme Savvy Serene belonging to the partnership firm Savvy Infrastructure Company - HELD THAT - The case of the assessee is this that the partners of the firm have invested in the land for and on behalf of the firm out of undisclosed receipt of Savvy Infrastructure. It is also the further case of the assessee that the firm was incorporated on 23.02.2007 and majority payments in respect of such purchase of land was made prior to the date of incorporation and therefore, the same is not out of the undisclosed income of the firm. It is an admitted position that the appellant firm was incorporated on 23.02.2007. As appears from the Audited Annual Accounts of the appellant firm relevant portion whereof has been reproduced in the order passed by the CIT(A) evidencing that there was no working capital funds available in the first year of incorporation i.e. 2007-08. The particular facts that the assessee firm was incorporated only on 23.02.2007 and gained the legal status as a firm only on that particular date upon such incorporation and, thus, the assessee company did not exist when the impugned income was earned. Thus, the assessee cannot be made responsible for evasion of tax on the ground of alleged payment made prior to such incorporation and/or registration of the partnership firm. The present addition has been made in the case of the appellant also states that one payment is made on 01.04.2007 which falls in A.Y. 2008-09 and not in A.Y. 2007-08 and therefore, even balance payment cannot be considered as undisclosed payment in the hands of the appellant for the current Assessment Year. Since the AO has not been able to establish that the appellant had any source of making for such huge unaccounted payment particularly with the payment towards on-money of land purchase were prior to the incorporation of the appellant firm and part payment was in subsequent Assessment Year, the condition of addition is not satisfied. Addition made by the Ld. AO to the tune on the ground that on-money payment towards land is made by the appellate firm has been rightly decided against the Revenue by the CIT(A). Admittedly before making such a direction upon the Ld. AO the aggrieved party being the partners of the farm have not been given an opportunity of being heard which is sine qua non in terms of Explanation 2 of Section 153 - respectfully relying upon the judgment we observe that the direction given by the Ld. CIT(A) upon the Ld. AO to initiate proceedings to assess this income in the hands of the partners, if deemed fit be expunged. Finally the appeal preferred by the Revenue is found to be devoid of any merit and hence dismissed. Appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?4,01,00,000/- as undisclosed investment in land.
2. Legal status and liability of a partnership firm for transactions before its incorporation.
3. Directions to assess income in the hands of partners without giving them an opportunity of being heard.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?4,01,00,000/- as Undisclosed Investment in Land:
The Revenue's primary contention was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition of ?4,01,00,000/- made by the Assessing Officer (AO) as undisclosed investment in land. The AO based the addition on seized materials indicating receipt of 'On-Money' amounting to ?4.01 crores by the sellers from the appellant firm during FY 2006-07. The AO argued that since the land was purchased in the name of the appellant firm, and payments were made by the firm, it logically followed that the firm also made the cash payments. However, the CIT(A) deleted this addition, and the Revenue appealed against this decision.

2. Legal Status and Liability of a Partnership Firm for Transactions Before Its Incorporation:
The appellant firm argued that the unaccounted funds used for purchasing the land belonged to the partners and were from the undisclosed income of another firm, Savvy Infrastructure, and not from the appellant firm. The firm was incorporated on 23.02.2007, and most payments for the land were made before this date. The CIT(A) and the Tribunal noted that the firm did not have sufficient working capital during the first year of incorporation, making it improbable that the firm made such payments. The Tribunal referenced the Supreme Court's judgment in CIT vs. City Mills Distributors Pvt. Ltd., which held that income earned from business carried on by promoters before a company's incorporation cannot be considered the company's income. Similarly, the Tribunal found that the appellant firm could not be held liable for transactions before its incorporation.

3. Directions to Assess Income in the Hands of Partners Without Giving Them an Opportunity of Being Heard:
The CIT(A) directed the AO to assess the income in the hands of the partners if deemed fit. The respondent's representative argued that such a direction was given without providing the partners an opportunity to be heard, which is essential as per Explanation 2 of Section 153 of the Act. The Tribunal agreed, citing the Mumbai Bench's decision in Income Tax Officer vs. Biotech Opthalmic Pvt. Ltd., which emphasized that directions affecting another person's assessment must include an opportunity for that person to be heard. Consequently, the Tribunal expunged the CIT(A)'s direction to assess the income in the hands of the partners.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of ?4,01,00,000/- as undisclosed investment, agreeing that the firm did not have sufficient funds and was not liable for transactions before its incorporation. The Tribunal also expunged the CIT(A)'s direction to assess the income in the hands of the partners due to the lack of an opportunity for the partners to be heard. The Revenue's appeal was dismissed in its entirety.