2025 (2) TMI 163 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleted addition - HELD THAT - Assessee had invested this money in his own sister concerns and all the companies were private limited and no dividend income was received by the assessee. Addition on account of investment in properties from undisclosed sources and short-term capital gains - HELD THAT - On perusal of the written submissions an records it is observed that the appellant has not shown the short-term capital gain on purchase sale of the property. AO has correctly made addition account of short-term capital gains which is the total consideration of the property under consideration. Thus short-term capital gain is confirmed. Unexplained Cash Credits - assessee did not file any details/ evidence to prove the sources of the Credits in her account - HELD THAT - CIT(A) correctly observed that it will meet the ends of the justice if the GP applied by the AO on the total turnover @1.5% is also applied on the total cash deposits of Rs. 82, 84, 580/- being sale proceeds which comes at Rs. 1, 24, 269/-. Accordingly the addition of Rs. 1, 24, 269 is deleted. Decided against revenue.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in accepting additional evidence without adhering to the stipulations under Rule 46A of the Income Tax Rules, 1962.

2. Whether the CIT(A) was justified in deleting the addition of Rs. 7,54,00,000/- made by the Assessing Officer (AO) on account of investments in properties from undisclosed sources.

3. Whether the CIT(A) was justified in reducing the addition of Rs. 82,84,580/- to Rs. 1,24,269/- concerning unexplained cash deposits in the assessee's bank accounts.

4. Whether the CIT(A) was justified in deleting the disallowance of expenses amounting to Rs. 7,23,980/- under Section 14A of the Income Tax Act.

ISSUE-WISE DETAILED ANALYSIS

1. Acceptance of Additional Evidence under Rule 46A

The relevant legal framework involves Rule 46A of the Income Tax Rules, 1962, which restricts the admission of additional evidence at the appellate stage unless certain conditions are met. The Court examined whether the CIT(A) adhered to these conditions when accepting additional evidence from the assessee.

The CIT(A) accepted additional evidence without explicitly demonstrating that the conditions under Rule 46A were satisfied. The Tribunal noted that the CIT(A) did not provide adequate reasoning or justification for accepting such evidence, which was a point of contention for the revenue.

2. Deletion of Addition for Undisclosed Sources of Investment

The CIT(A) deleted the addition of Rs. 7,54,00,000/- made by the AO, which was based on the assessment that the assessee had not substantiated the source of investments in various properties. The CIT(A) relied on the audited financial statements of Kanodia Enterprises Pvt. Ltd. to conclude that there were no outstanding loans, contradicting the assessee's claim of financing through loans.

The Tribunal scrutinized the CIT(A)'s reliance on the financial statements and the lack of supporting evidence from the assessee regarding the source of funds. The Tribunal found that the CIT(A)'s decision to delete the addition was not sufficiently supported by evidence, as the assessee failed to demonstrate the source of investment during both assessment and appellate proceedings.

3. Reduction of Addition for Unexplained Cash Deposits

The CIT(A) reduced the addition from Rs. 82,84,580/- to Rs. 1,24,269/-, applying a gross profit rate of 1.5% on the total cash deposits, which were claimed as sale proceeds. The CIT(A) justified this reduction by asserting that the application of the GP rate was appropriate given the circumstances.

The Tribunal evaluated the CIT(A)'s rationale and found that the reduction was not adequately justified by the evidence presented. The assessee did not provide substantial proof that the cash deposits were indeed sale proceeds, leading to questions about the CIT(A)'s decision to apply the GP rate.

4. Deletion of Disallowance of Expenses under Section 14A

The CIT(A) deleted the disallowance of Rs. 7,23,980/- under Section 14A, which pertains to expenses incurred in relation to income not includible in total income. The CIT(A) observed that the investments were made in sister concerns, and no dividend income was received by the assessee.

The Tribunal examined the CIT(A)'s reasoning and found that the deletion was not sufficiently justified, as the assessee did not demonstrate the business expediency of the investments. The Tribunal noted the relevance of Board's Circular No. 5/2014, which emphasizes the need for a clear nexus between the expenditure and the exempt income.

SIGNIFICANT HOLDINGS

The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal. The Tribunal found that the CIT(A) had provided sound logic in addressing the issues raised, and there was no substantial ground for interference. The Tribunal emphasized the importance of adhering to procedural requirements, such as those under Rule 46A, and the need for clear evidence when substantiating claims related to undisclosed income and expenses.

The judgment reinforces the principle that appellate authorities must exercise due diligence in considering additional evidence and justifying deletions or reductions of additions made by assessing officers. The decision highlights the necessity for taxpayers to provide cogent evidence to support claims of legitimate sources of income and business expenditures.

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