2024 (8) TMI 557 - HC - Income Tax

Validity of order passed u/s 264 - Unexplained investment in the purchase of property - as argued notice as is contemplated under Section 143(2) was not issued in time - HELD THAT - Onus was on the petitioner partnership firm to show that the amount which was sought to be treated as unexplained investment and unexplained expenditure of the petitioner partnership firm, was that of the other partners and that of the individuals namely, 5 brothers. That apart, there are no records to show that any of the partners of the petitioner partnership firm was having substantial income to lend a sum of Rs. 1,01,00,000/- to the Muthukrishnan who has purportedly executed a Mortgage Deed dated 31.08.2005. The fact remains that the petitioner partnership firm has income from the rental property. The profit and loss account for the year ended on 31.03.2007 filed of the typed set of papers indicates that the petitioner partnership firm had rental income and the amounts were used for maintenance of buildings of the petitioner partnership firm. Therefore, no infirmity in the impugned order rejecting the petition filed by the petitioner under Section 264 before the respondent in the remand proceedings. Objections, that has been raised for the first time, as far as the non-issuance of the Notice u/s 143(2) of the Income Tax Act, 1961 within the period of 6 months - It cannot be countenanced, as this was not the ground taken by the petitioner before the respondent before the impugned order was passed. Section 292BB of the Income Tax Act, 1961 makes it clear that if an assessee had participated in the proceedings, the notice issued would be deemed to be valid even if there were infractions by way of legal fiction. This is what the Hon'ble Supreme Court has clarified in its decision in Commissioner of Income Tax Vs. Laxman Das Khandelwal 2019 (8) TMI 660 - SUPREME COURT Only if no notice was issued, the defects cannot be cured. That apart, Explanatory Note to the provisions of the Finance Act, 2008, content of which has been extracted above also makes it clear that legal fiction shall not apply where the assessee had not raised such objection before the completion of the assessment or reassessment. Therefore, this Writ Petition is liable to be dismissed and is accordingly dismissed.

Issues Involved:
1. Validity of the notice under Section 143(2) of the Income Tax Act, 1961.
2. Ownership of the property and whether it was purchased using the firm's funds or individual partners' funds.
3. Addition of Rs. 90 lakhs as sundry creditor under the caption "loan from friends and relatives."
4. Unexplained investment in the purchase of property.
5. Unexplained capital expenditure under Section 69C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Notice under Section 143(2) of the Income Tax Act, 1961:
The petitioner contended that the notice under Section 143(2) was not issued within the stipulated time frame, i.e., within six months from the end of the financial year in which the return was filed. The notice was issued on 08.11.2010, whereas it should have been issued by 30.09.2010. The court, however, noted that the petitioner had participated in the assessment proceedings without raising this issue at the appropriate time. As per Section 292BB, once the assessee has participated in the proceedings, the notice is deemed valid despite any infractions. The court referenced the Supreme Court decision in Commissioner of Income Tax Vs. Laxman Das Khandelwal, which clarified that Section 292BB does not save the complete absence of notice but cures infirmities in the manner of service of notice.

2. Ownership of the Property:
The court examined whether the property was purchased using the firm's funds or individual partners' funds. The petitioner argued that the property was owned by the individual partners and not the firm. However, the court found that the property was purchased using a bank loan taken in the firm's name, and the rental income from the property was admitted in the firm's hands. The court held that the property belonged to the firm, as there was no credible evidence to show that the partners had invested their own funds in the property.

3. Addition of Rs. 90 Lakhs as Sundry Creditor:
The petitioner claimed that the amount of Rs. 90 lakhs was a loan from the partners' father, K. Paramasivam. However, Paramasivam denied any such transaction in his sworn statement. The court upheld the addition made by the Assessing Officer, stating that the onus of proving the source of the funds lay with the assessee, which they failed to discharge. The court found no merit in the petitioner's argument regarding the lack of natural justice, as the credit was never in the name of the father in the return.

4. Unexplained Investment in the Purchase of Property:
The court noted that the difference between the loan amount and the value of the property, amounting to Rs. 89,86,394/-, was unexplained. The petitioner argued that since the property was purchased in the joint names of the partners, the difference could not be added to the firm's income. However, the court held that the property was in the firm's name, and there was no evidence to show that the partners had invested in the property. Thus, the addition was upheld.

5. Unexplained Capital Expenditure under Section 69C:
The Assessing Officer had added Rs. 21,98,650/- towards the cost of the lift, furniture and fittings, deposits, and a loan to K.P. Alagarsamy. The petitioner failed to provide credible evidence for the source of these expenditures. The court confirmed the addition, noting that the petitioner did not produce any books of accounts or other relevant documents to substantiate their claims. However, the court allowed a credit of Rs. 9 lakhs shown as advances for letting out the property towards the additions to assets.

Conclusion:
The court dismissed the writ petition, holding that the petitioner failed to provide sufficient evidence to substantiate their claims regarding the ownership of the property, the source of funds for the purchase, and the unexplained capital expenditure. The court upheld the additions made by the Assessing Officer and rejected the petitioner's arguments regarding the validity of the notice under Section 143(2) of the Income Tax Act, 1961. The court also emphasized the applicability of Section 292BB, which precludes the assessee from raising objections regarding the notice after participating in the assessment proceedings.

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