2025 (1) TMI 642 - AT - Income Tax

Violation of Rule 46A by accepting evidences not produced before AO - whether CIT(A) / First Appellate Authority erred in passing the impugned order without following Rule 46A? - HELD THAT - assessee didn t file any additional evidence on its own during the appellate proceedings, but the Ld. First Appellate Authority exercising his co-terminus as that of AO has called for evidence and in such an event, there is no violation of Rule 46A of the Rules, because Rule 46(4) permits such a course of action by the Appellate Authority and in such an event, Rule 46A (1)to (3) are not applicable. As relying on the case of CIT Vs. Sanu Family Trust 2011 (12) TMI 337 - KARNATAKA HIGH COURT we do not find any infirmity in the action of the.CIT(A) calling for relevant documents in respect of both the aforesaid issues and admitting the same and adjudicating the grounds of Appeal, and hold that in this case, there is no violation of Rule 46A of the Rules; and therefore, we don t find any merit in Ground No.2 of the Revenue and therefore, it stands dismissed. Addition of sundry creditors and unsecured loans u/s. 68 - Addition as the business income which was estimated at 8% of the gross receipts - HELD THAT -CIT(A) after going through relevant the ROI as well as the Tax Audit Report expressed his satisfaction about the nature and source of the loan taken from his mother and was pleased to hold that the same can t be treated as unexplained cash credit u/s. 68 of the Act which action of the CIT(A) can t be held to be perverse, in the light of the supporting relevant materials which were produced by the assessee before the AO as well before the CIT(A) who called for it exercising his co-terminus power. Therefore, there is no infirmity in the action of Ld.CIT(A) holding that unsecured loan of Rs. 60 lakhs couldn t be added u/s. 68 of the Act. Addition u/s. 68 of the Act as unexplained sundry creditors - Assessee produced the ledger extracts (of sundry creditors) and from perusal of which, CIT(A) found that most of the sundry creditors were paid the amounts due in the subsequent years by the assessee. In such a scenario CIT(A) rightly found that there was no justification to make addition of sundry creditors u/s. 68 which action we concur; and also repel the contention of the Revenue that the impugned addition was sustainable u/s. 41(1) of the Act; and thus, we find no infirmity in the action of CIT(A) holding that the assessee succeeded on merits on these two issues/additions erroneously made by the AO. CIT(A) rightly noted that since the sundry creditors formed part of the business transaction of the assessee (trading of the assessee), therefore, no separate addition either u/s. 68 of the Act or u/s. 41(1) of the Act was legally tenable and therefore rightly deleted by the Ld.CIT(A) as held in the case of Indwell Constructions 1998 (3) TMI 121 - ANDHRA PRADESH HIGH COURT No infirmity in the action of the Ld.CIT(A) deleting the two additions and restricting the estimated income @6% of the turnover of the assessee. Appeal filed by the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in the judgment are:

• Whether the Commissioner of Income Tax (Appeals) [CIT(A)] violated Rule 46A of the Income Tax Rules, 1962 by admitting additional evidence not produced before the Assessing Officer (AO).
• Whether the CIT(A) was justified in deleting separate additions made by the AO in respect of sundry creditors and unsecured loans under Section 68 of the Income Tax Act.
• Whether the CIT(A) correctly applied a 6% rate for estimating business income under Section 44AD of the Income Tax Act, following the amendment by the Finance Act, 2017.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility of Additional Evidence under Rule 46A

• Relevant Legal Framework and Precedents: Rule 46A of the Income Tax Rules governs the conditions under which additional evidence can be admitted during appellate proceedings. Sub-rule (4) allows the appellate authority to direct the production of evidence deemed necessary for an effective decision.
• Court's Interpretation and Reasoning: The court noted that the CIT(A) exercised his power under Rule 46A(4) to request additional documents from the assessee, which does not constitute a violation of Rule 46A.
• Key Evidence and Findings: The CIT(A) requested and reviewed documents related to sundry creditors and unsecured loans, which were not initially presented to the AO.
• Application of Law to Facts: The court found no violation of Rule 46A as the CIT(A) acted within his rights to request additional evidence, citing the precedent set by the Karnataka High Court in CIT v. Sanu Family Trust.
• Treatment of Competing Arguments: The Revenue's argument that Rule 46A was violated was dismissed, as the CIT(A)'s actions were within the legal framework.
• Conclusions: The court upheld the CIT(A)'s decision to admit additional evidence, finding no merit in the Revenue's objections.

Issue 2: Deletion of Additions under Section 68

• Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, requiring the assessee to prove the identity, creditworthiness, and genuineness of transactions.
• Court's Interpretation and Reasoning: The CIT(A) found the unsecured loan from the assessee's mother to be genuine and supported by adequate documentation, and that sundry creditors were settled in subsequent years.
• Key Evidence and Findings: The CIT(A) reviewed the creditor's tax records and the assessee's ledger extracts, confirming the legitimacy of the transactions.
• Application of Law to Facts: The court agreed with the CIT(A) that the transactions were adequately explained and should not be treated as unexplained cash credits.
• Treatment of Competing Arguments: The Revenue's claim that additions were justified was rejected based on the evidence provided by the assessee.
• Conclusions: The court supported the CIT(A)'s decision to delete the additions under Section 68, affirming the genuineness of the transactions.

Issue 3: Application of 6% Rate under Section 44AD

• Relevant Legal Framework and Precedents: Section 44AD provides for a presumptive taxation scheme for small businesses, with a 6% rate applicable if receipts are through banking channels, as amended by the Finance Act, 2017.
• Court's Interpretation and Reasoning: The CIT(A) applied a 6% rate based on the assessee receiving payments via cheque from government contracts, aligning with the amended Section 44AD.
• Key Evidence and Findings: The CIT(A) verified that the assessee's receipts were through account payee cheques, justifying the 6% rate.
• Application of Law to Facts: The court found the CIT(A)'s application of the 6% rate appropriate given the nature of the transactions.
• Treatment of Competing Arguments: The Revenue did not challenge the CIT(A)'s application of the 6% rate, leading to its acceptance by the court.
• Conclusions: The court upheld the CIT(A)'s decision to apply a 6% rate for estimating business income.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The material on record would clearly show that the Assessing Officer had the benefit of looking into the books of account maintained by the assessee... the conditions specified under Rule 46A(1) to (3) of the Rules is not applicable to sub-rule (4)." - CIT v. Sanu Family Trust.
• Core Principles Established: The appellate authority can request additional evidence under Rule 46A(4) without violating procedural rules. Genuine transactions supported by adequate documentation should not be treated as unexplained cash credits under Section 68.
• Final Determinations on Each Issue: The appeal by the Revenue was dismissed. The CIT(A)'s actions in admitting additional evidence, deleting additions under Section 68, and applying a 6% rate under Section 44AD were upheld.