Aravind Reddy Devagiri Vs ITO (ITAT Visakhapatnam)

ITAT Visakhapatnam held that addition under section 68 r.w.s. 115BBE of the Income Tax Act deleted as the source for capital investment properly explained by the assessee. Accordingly, addition deleted.

Facts- Assessee is a Managing Partner in M/s. A. R. Constructions with 75% share in Profits. Assessee is also a partner in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. The assessee filed his return of income for the A.Y. 2017-18 admitting a total income of Rs.7,54,800/- on 08.03.2018. It was noticed that assessee has declared a capital balance of Rs.48,53,245/- in M/s. A.R. Constructions but did not disclose the capital introduced in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage where the assessee invested amount of Rs.1,45,64,960/- and Rs. 86,64,883/- respectively towards his 40% share in the firms. The Assessing Officer therefore considered that there are reasons to believe that the income has escaped assessment within the meaning of section 147 of the Act. During assessment proceeding, AO made the various additions.

CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.

Conclusion- Held that capital investments made by the assessee are through book entries which is reflected in the books of M/s. A.R. Constructions and consequently in the assessee’s capital account in M/s.Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. We therefore direct the Assessing Officer to delete the addition of Rs. 1,94,99,178/- made under section 68 r.w.s. 115BBE of the Act as the source for the capital investment has been properly explained by the assessee.

Held that unsecured loans have been made through banking channels by submission of bank statements. These facts are not disputed by the Revenue. However, only contention of the Assessing Officer is the assessee has not furnished any evidences for the source of these amounts. In our considered view, since the amount has been transferred from the bank accounts of the respective parties wherein the sources for the amounts available in the bank accounts of the parties granting unsecured loans to the assessee were not disputed by the Revenue, which was demonstrated by the Ld.AR, we are inclined to allow this ground raised by the assessee thereby deleting the addition made by the Assessing Officer.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

This appeal filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter in short “Ld.CIT(A)”] vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1064613461(1) dated 03.05.2024 for the A.Y.2017-18 arising out of order passed under section147 r.w.s. 144B of the Income Tax Act, 1961 (in short ‘Act’) dated 29.09.2021.

2. Brief facts of the case are that, assessee is a Managing Partner in M/s. A. R. Constructions with 75% share in Profits. Assessee is also a partner in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. The assessee filed his return of income for the A.Y. 2017-18 admitting a total income of Rs.7,54,800/- on 08.03.2018. It was noticed that assessee has declared a capital balance of Rs.48,53,245/- in M/s. A.R. Constructions but did not disclose the capital introduced in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage where the assessee invested amount of Rs.1,45,64,960/- and Rs. 86,64,883/- respectively towards his 40% share in the firms. The Assessing Officer therefore considered that there are reasons to believe that the income has escaped assessment within the meaning of section 147 of the Act and thereafter issued notice under section 148 of the Act on 12.03.2020 after obtaining prior approval from the JCIT, Range – 2, Guntur. In response, assessee did not file any return of income to the notice issued under section 148 of the Act. However, assessee filed replies to various notices issued under section 142(1) of the Act from time to time. Considering the reply and after examining the submissions made by the assessee, Assessing Officer made the following additions : –

i. Addition for cash introduced in the firm under section 68 r.w.s. 115BBE of the Act of Rs.11,40,665/-.

ii. Addition on account of introduction of capital in the firm under section 68 r.w.s. 115 BBE of the Act of Rs.24,50,000/-.

iii. Addition towards investment in two firms of Rs.1,94,99,178/-.

iv. Addition on account of investment of Rs. 1,40,000/-.

v. Addition under section 56(2)(x) of the Act of Rs.9,65,000/-.

3. Being aggrieved by the above additions, assessee filed an appeal before the Ld. CIT(A). Before Ld. CIT(A), assessee made similar submissions which was made before Assessing Officer. Considering the submissions made by the assessee, Ld. CIT(A) dismissed the appeal of the assessee by sustaining the order of the Assessing Officer.

4. On being aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us by raising the following grounds of appeal : –

“1. That under the facts and circumstances of the case the order passed u/s 147 r.w.s. 144B of the IT Act dt: 29/09/2021 that was upheld by Ld.CIT(A), NFAC vide order u/s 250 of the IT act dt: 03/05/2024 is contrary to the facts of the case and provisions of law.

2. The CIT(A), NFAC erred in upholding the addition made u/s 68 of the Act of Rs. 1,94,99,178/-, relating to investment made in two partnership firms, ignoring the sources explained. In any case invoking sec. 68 of the IT Act for the impugned addition is against the provisions of the section.

3. The Ld. CIT(A) and as well as the AO ought to have known that out of the amount of Rs. 1,94,99,178/- an amount of Rs. 1,72,55,600/- does not pertain to the impugned assessment year since it relates to investment pertaining to the previous year i.e. AY. 2016-17.

4. The Id. CIT(A) is not correct in confirming the addition made of Rs.11,40,665/-, u/s 68 of the IT Act relating to capital introduced by the assessee in the firm which is a partner when the sources were explained and as is evident from the books of accounts. In any case the addition made u/s 68 is not legally tenable.

5. The Ld. CIT(A), NFAC in a summary and casual manner confirm the addition made of Rs.24,50,000/- u/s 69A/68 of the IT Act, sum introduced by the assessee towards capital in the partnership firm ignoring that the subject amount was made out of loans borrowed for which necessary evidences have been filed.

6. The CIT(A), NFAC ought not to have approved addition of Rs.1,40,000/- u/s 68 of the Act. This amount was an investment made towards share capital in a partnership firm, and the sources were explained with accurate details. Invoking section 68 of the IT Act is not acceptable under law.

7. The CIT(A), NFAC grossly erred in considering the gifts received from father’s HUF of Rs.9,65,000/- for addition u/s 56(2)(x) of the IT act, when the subject amount does not fall within the mischief and ambit of Section 56(2)(ix) of the Act.

8. The appellant prays that the Hon’ble Tribunal may kindly:

a. Delete the additions made u/s 68 of the Act amounting to Rs.1,94,99,178/-, Rs. 11,40,665/-, and Rs. 24,50,000/-.

b. Delete the addition of Rs. 1,40,000/- made u/s 68 of the Act.

c. Delete the double addition of Rs. 9,65,000/- made u/s.56(2)(ix) and 68 of the Act.

9. For these and other reasons that are to be urged at the time of hearing of the case the appellant prays that the impugned order is liable to be set aside in the interest of justice.”

5. Ground Nos. 1, 8 & 9 are general in nature and needs no adjudication.

6. Ground Nos.2 & 3 are with respect to the addition of Rs.1,94,99,178/-made under section 68 of the Act. On this issue, Ld. Authorised Representative [hereinafter “Ld.AR”] submitted that the assessee has made investments in the two firms by purchasing two cold storage units which was funded by M/s. A.R. Constructions where the assessee is a Managing Partner. The Ld.AR referring to Page No. 69 of the paper book wherein from the bank account of M/s.A R Constructions an amount of Rs.1,24,55,600/- transferred to E-Auction account of SBI for the purchase of cold storage units. Ld.AR reiterated that this amount has been debited to the capital account of assessee which is reflected in the books of accounts. Ld.AR also submitted that similar investment of Rs.86,64,883/-was made for the purchase of cold storage house by the assessee out of the funds transferred from the bank account of M/s. A.R. Constructions. He therefore reiterated that the sources of funds are being duly explained before the Assessing Officer, which was not considered by the revenue Authorities.

7. Per contra, Ld. Departmental Representative [hereinafter in short “Ld.DR”] placed heavy reliance on the orders of the revenue authorities.

8. We have heard both the sides and perused the material available on record and orders of the lower authorities. It is an admitted fact that the assessee has purchased two cold storage units in an auction which is evidenced by the sale certificate available in page no. 41 of the paper book. Ld.AR also demonstrated that the funds for the purchase of the two cold storage units was transferred from the bank accounts of M/s. A.R. Constructions to Shri G. Mohana Rao through whom Auction was successfully bidded. Subsequently, these two cold storage units was transferred to M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage by crediting the capital account of the assessee in the respective firms. It cannot be disputed that the sources for the investment is not explained. In our considered view funding for the purchase of cold storage units has been made by M/s. A. R. Constructions on behalf of the Managing Partner being the assessee which was later on transferred to M/s.Lakshmi Cold Storage and M/s. Vigneswara Cold Storage as capital of the assessee in the respective firms amount to Rs.1,09,74,295/- and Rs. 85,24,883/-. Since the amount has been considered as the investment by the assessee in the respective firms the observation of the Assessing Officer that it is neither reflected in the books of accounts of M/s. A.R. Constructions could not be accepted. These capital investments made by the assessee are through book entries which is reflected in the books of M/s. A.R. Constructions and consequently in the assessee’s capital account in M/s.Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. We therefore direct the Assessing Officer to delete the addition of Rs. 1,94,99,178/- made under section 68 r.w.s. 115BBE of the Act as the source for the capital investment has been properly explained by the assessee. Accordingly, we allow the Ground Nos. 2 and 3 raised by the assessee.

9. Ground No. 4 is with respect to the addition of Rs.11,40,665/-. Ld.AR submitted that assessee has withdrawn the cash from his capital account from the partnership firms which is placed in the paper book at page no. 181 disclosing the cash withdrawals during the F.Y. 2015-16. He therefore pleaded that these cash withdrawals have been utilised for the purpose of making investments and hence the source is properly explained. He therefore pleaded that addition made by the Assessing Officer be deleted.

10. Per contra, Ld. DR submitted that the cash drawings were made during the A.Y. 2016-17 whereas the investments in the firm was during the year 2017-18. Assessee has not proved beyond doubt the cash withdrawn has been utilised for the purpose of investments in the firm. He therefore pleaded that the addition be sustained.

11. We have heard both the sides and perused the material available on record and the orders of the lower authorities. It is noticed from the submissions of the Ld.AR that, assessee has made cash withdrawals during the F.Y. 2015-16 which was explained by the Ld.AR was invested in the partnership firm during the year 2017-18. However, Ld.AR failed to explain why the withdrawals of cash was held for a period more than one year for investment into the partnership firm. The burden lies on the assessee to properly explain the cash deposits investments as a capital in the firm. There is merit in the argument of Ld. DR that the assessee has not properly explained the source of investment in capital of the said firm and hence we are of the considered view that since the investment in the firm remains unexplained, we are inclined to sustain the order of the Assessing Officer on this ground. Accordingly Ground No. 4 raised by the assessee is dismissed.

12. Ground No. 5 is with respect to the addition made for an amount of Rs.24,50,000/- under section 68 of the Act. On this issue, Ld.AR submitted that assessee has borrowed funds as unsecured loans from various parties as listed in Page No. 123 of the paper book. Ld.AR further submitted that the parties who have given unsecured loans have furnished confirmation letters along with Aadar Cards, PAN card and bank statements. He further reiterated that these unsecured loans were given through proper banking channels and hence pleaded that this addition be deleted.

13. Per contra, Ld. DR relied on the orders of the Revenue Authorities.

14. We have heard both the sides and perused the material available on record. From the submissions of the Ld.AR we noticed that assessee has taken unsecured loans from various parties aggregating to Rs. 24,50,000/-. Ld.AR also submitted confirmation letters from the parties which is available in Page No. 158 to 178 of the paper book. Further, it was demonstrated by the Ld.AR that these unsecured loans have been made through banking channels by submission of bank statements. These facts are not disputed by the Revenue. However, only contention of the Assessing Officer is the assessee has not furnished any evidences for the source of these amounts. In our considered view, since the amount has been transferred from the bank accounts of the respective parties wherein the sources for the amounts available in the bank accounts of the parties granting unsecured loans to the assessee were not disputed by the Revenue, which was demonstrated by the Ld.AR, we are inclined to allow this ground raised by the assessee thereby deleting the addition made by the Assessing Officer. Accordingly, Ground No.5 raised by the assessee is allowed.

15. Ground No. 6 is with respect to the addition of Rs.1,40,000/-under section 68 of the Act. The Ld.AR submitted that assessee has introduced capital by way of cash for Rs. 20,000/- and has paid insurance amount for Rs.1,20,000/- which was credited at the capital account of the assessee. Ld.AR submitted that considering the quantum of cash of Rs. 20,000/- introduced by the assessee as capital which is very nominal amount, hence pleaded to be allowed. Further he also submitted that assessee paid an insurance amount of Rs.1,20,000/- on behalf of the firm which was credited to the capital account as it has to be reimbursed to the assessee. He therefore pleaded that this amount also may be allowed.

16. Per contra, Ld. DR relied on the orders of the Revenue Authorities.

17. We have heard both the sides and perused the material available on record. From the submissions of the Ld.AR we find there is no justification by the Assessing Officer for treating amount of Rs. 1,40,000/- considering it as unexplained by the assessee, considering the quantum of the cash introduced as capital and the payment of insurance on behalf of the firm. We find that the assessee has properly demonstrated the sources for the said amount of expenditure incurred by the assessee and credited to the capital account of the assessee. We therefore consider the sources as explained and hence we direct the Assessing Officer to delete the addition of Rs.1,40,000/-. Accordingly, Ground No. 6 raised by the assessee is allowed.

18. Ground No. 7 is with respect to the addition of Rs.9,65,000/- under section 56(2)(x) of the Act. On this ground Ld.AR submitted that the amount of Rs.9,65,000/- has been received by the assessee as gift from his Father’s HUF account. He therefore pleaded that since source has been explained the addition may be deleted.

19. Per contra, Ld. DR relied on the orders of the Revenue Authorities.

20. We have heard both the sides. It is an admitted fact that the assessee has received gifts aggregating to Rs. 9,65,000/- from Shri Devagiri Lakshmi Narsimha Reddy HUF, the father of the assessee being its Kartha. Assessing Officer has rightly considered that the amount has been received without any consideration and assessee also not covered within the definition of relative under section 56 of the Act. We therefore find no reason to interfere with the orders of the Revenue Authorities, thereby dismissing this ground raised by the assessee. Accordingly Ground No. 7 raised by the assessee is dismissed by sustaining the addition made by the Assessing Officer.

21. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 24^th October, 2024.