2013 (10) TMI 754 - AT - Income Tax

Evidence and explanation regarding source of deposit Addition made on account of unexplained expenditure Partner has brought in Rs. 11,00,000 on 12/04/2004 and Rs. 60,000 on 11/03/2005 from the OD account with Karnataka Bank. It was further observed that the partner account is also credited with cash on 30/03/2005 at Rs. 6,12,883/- and Rs. 1,32,500 on 31/03/2005 - Held that - Assessee was of the view that the above amounts have been deposited out of the OD account of Karnataka Bank, however, the source of the OD account was not explained - In these circumstances, to meet the ends of justice, one more opportunity given to the assessee to provide necessary evidence in support of its claim Decided in favor of Assessee for statistical purpose. Addition on ground of unexplained destination of the withdrawals and unexplained payee - Assessee had filed account copies of the said withdrawals and also explained that the amounts withdrawn from capital account of one of the partners Sri Vemireddy Prabhakar Reddy cannot be considered something uncommon in view of the fact that the assessee firm was almost closed down during the previous year relevant to the assessment year since the assessee also did not have any business and the income admitted for the assessment year under consideration is NIL Held that - The CIT(A), deleted the addition on the ground that the withdrawals made by the assessee s partner Sri Vemireddy Prabhakar Reddy cannot be construed as unexplained withdrawals - In view of the controversial findings by the AO and CIT(A), matter remitted to the file of the AO to examine the account copies filed before the CIT(A) and decide the issue in accordance with law Decided in favor of Assessee for statistical purpose.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 153C of the IT Act.
2. Addition towards unexplained expenditure.
3. Addition of financial charges and depreciation.
4. Disallowance of salaries.
5. Addition of capital introduced by partners.
6. Addition of withdrawals from the firm.

Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 153C of the IT Act:
The primary issue was whether the proceedings initiated under Section 153C were valid given that no incriminating documents were seized during the search operation. The assessee argued that the initiation of proceedings was invalid as no incriminating documents were found. The CIT(A) dismissed this ground, stating that the reopening of the assessment was in order due to the connection with Sri Vemireddy Prabhakar Reddy. However, the ITAT referred to the jurisdictional High Court judgment in the case of Mr. Gopal Lal Bhadruka vs. DCIT, which held that the AO is not required to confine himself only to the material found during the search operation. Consequently, the ITAT followed the jurisdictional High Court judgment and allowed the revenue's appeal.

2. Addition Towards Unexplained Expenditure:
For AY 2002-03, the AO disallowed Rs. 30 lakhs towards unexplained expenditure, citing unverifiable vouchers. The CIT(A) deleted this addition, noting that no seized material justified the disallowance. The ITAT upheld the CIT(A)'s decision, emphasizing that the AO did not have any valid reasons or seized material for making such disallowances.

3. Addition of Financial Charges and Depreciation:
For AY 2004-05, the AO disallowed Rs. 15,80,739 towards financial charges and depreciation. The CIT(A) deleted this addition, stating that the AO had no seized material to justify the disallowance. The ITAT upheld the CIT(A)'s decision, reiterating the lack of incriminating evidence.

4. Disallowance of Salaries:
For AY 2004-05, the AO disallowed Rs. 2,43,000 towards salaries. The CIT(A) deleted this addition on similar grounds, stating that there was no seized material to support the disallowance. The ITAT upheld the CIT(A)'s decision.

5. Addition of Capital Introduced by Partners:
The AO added Rs. 19,05,383, being the amount introduced in the capital account, due to lack of evidence. The CIT(A) confirmed this addition, noting insufficient explanation for cash deposits. However, the ITAT remitted the issue back to the AO, directing a re-examination of the evidence provided by the assessee.

6. Addition of Withdrawals from the Firm:
The AO added Rs. 96,75,000, being withdrawals from the firm, citing unexplained destination of the withdrawals. The CIT(A) deleted this addition, stating that the withdrawals from the partner's capital account were justified, especially since the firm had ceased operations. The ITAT remitted the issue back to the AO for re-examination, directing the AO to consider the account copies filed before the CIT(A).

Conclusion:
The ITAT allowed the revenue's appeals for AYs 2002-03 to 2004-05, following the jurisdictional High Court's decision that the AO is not confined to search material alone. For the remaining issues regarding capital introduction and withdrawals, the ITAT remitted the matters back to the AO for further examination, providing an opportunity for the assessee to present additional evidence.