2024 (9) TMI 78 - AT - Income Tax

Validity of reopening of assessment - addition u/s 68 as unexplained cash credit - HELD THAT - From the details given, it can be seen that the derivative gain from M/s. Latin Manharlal Securities Pvt., Ltd., is duly recorded in the financial statements returned for the year under consideration. Therefore, the very basis for the reopening of the assessment is found to be factually incorrect. A close perusal of the notice and the observations of the AO show that the entire proceedings revolve around the fact that the alleged parties have claimed losses and accordingly evaded taxes. Whereas the facts discussed hereinabove show that the assessee has earned derivative gains from M/s. Latin Manharlal Securities Pvt., Ltd. Therefore, the entire observations / basis of the assessment is factually incorrect. Since the assessment has been reopened on the wrong facts the impugned assessment order deserves to be quashed. The assessee has included the profit in its profit and loss account for the year under consideration, however, while concluding the assessment order the Assessing Officer has again made addition by holding as It is held that the assessee has routed back its own undisclosed money in the guise of profit from alleged share transaction and the same is added to the income of the assessee under section 68 of the Income-tax Act. Thus, even if the income is not genuine may be even illegal, then also in our understanding of the law the same cannot be added under section 68 of the Act as unexplained cash credit. Assessing Officer ought to have reduced the amount of ₹.1,27,27,019/- from the income side and then proceeded further. The assessee has shown revenue from operations which includes cash credit amount. If the Assessing Officer is of the opinion that this amount is illegal earned from non-genuine transaction then reducing the same will result into the loss and if it is added under section 68 of the Act then the assessee is eligible for set-off of which will make the entire exercise tax neutral. Since the amendment has been brought in the statute from A.Y. 2017-18 and as clarified by the CBDT Circular No. 11 of 2019 wherein it has been clarified that upto A.Y. 2016-17 the losses can be set-off from the additions made under section 68 of the Act. Thus AO is directed to delete the impugned addition. Decided in favour of assesseee.

Issues Involved:

1. Validity of notice issued under section 148 of the Income Tax Act, 1961.
2. Legality of permission obtained under section 151 of the Act.
3. Addition of Rs. 1,27,52,200 under section 68 of the Income Tax Act, 1961.
4. Addition of Rs. 1,27,522 under section 69A of the Act.
5. Different nomenclature for additions when tax rates are the same.
6. Charging of interest under section 234B of the Income Tax Act, 1961.
7. Penalty under sections 271(1)(c) and 271(1)(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148 of the Income Tax Act, 1961:

The assessee contended that the notice issued under section 148 dated 31.03.2021 was invalid and should be quashed. The Assessing Officer issued the notice based on the belief that income chargeable to tax had escaped assessment. The Tribunal found that the basis for reopening the assessment was factually incorrect, as the derivative gains from M/s. Latin Manharlal Securities Pvt. Ltd. were duly recorded in the financial statements for the year under consideration. Therefore, the notice and subsequent proceedings were deemed invalid.

2. Legality of Permission Obtained Under Section 151 of the Act:

The assessee argued that the permission obtained under section 151 was not in accordance with the law, as it was given mechanically by the Principal Commissioner of Income Tax (PCIT). The Tribunal did not specifically address this issue separately but implied that since the basis for reopening the assessment was incorrect, the permission obtained was also flawed.

3. Addition of Rs. 1,27,52,200 Under Section 68 of the Income Tax Act, 1961:

The Tribunal noted that the Assessing Officer had added Rs. 1,27,52,200 to the income of the assessee under section 68, alleging that the assessee had routed back its undisclosed money as profit from fictitious share transactions. However, the Tribunal found that the derivative gains of Rs. 1,27,27,019 were already included in the profit and loss account. Even if the income was not genuine or illegal, it could not be added under section 68 as unexplained cash credit. The Tribunal held that the Assessing Officer should have reduced this amount from the income side and then proceeded further.

4. Addition of Rs. 1,27,522 Under Section 69A of the Act:

The assessee contended that the addition of Rs. 1,27,522 under section 69A, alleging payment of 1% commission on artificial gains, was incorrect. The Tribunal did not specifically address this issue separately but implied that since the primary addition under section 68 was incorrect, the related addition under section 69A was also flawed.

5. Different Nomenclature for Additions When Tax Rates are the Same:

The assessee argued that additions could not be made under different nomenclatures when tax rates were the same. The Tribunal did not specifically address this issue separately but implied that the entire basis for the additions was incorrect.

6. Charging of Interest Under Section 234B of the Income Tax Act, 1961:

The assessee contended that the interest charged under section 234B was erroneous. The Tribunal did not specifically address this issue separately but implied that since the primary additions were incorrect, the interest charged was also flawed.

7. Penalty Under Sections 271(1)(c) and 271(1)(b) of the Income Tax Act, 1961:

The assessee argued against the penalties invoked under sections 271(1)(c) and 271(1)(b). The Tribunal did not specifically address this issue separately but implied that since the primary additions were incorrect, the penalties were also unwarranted.

Conclusion:

The Tribunal concluded that the entire basis for reopening the assessment was factually incorrect. The derivative gains from M/s. Latin Manharlal Securities Pvt. Ltd. were duly recorded in the financial statements. The Assessing Officer's observations were found to be incorrect, and the impugned assessment order was quashed. The appeal filed by the assessee was allowed, and the Assessing Officer was directed to delete the impugned addition.

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