Addition Unwarranted as Settlement Commission Accepted Surrendered Amount

ACIT Vs Shyamsunder R. Agrawal (ITAT Ahmedabad)

ITAT Ahmedabad held that addition towards unexplained expenditure unsustainable as impugned amount has already been surrendered by the firm and accepted by the Settlement Commission.

Facts- The assessee, is partner in a partnership firm. Search operation u/s. 132 of the Act was conducted at the residential premises of the assessee, and simultaneous survey operation u/s. 133A of the Act was carried out at the business premise of M/s. Laxmi Construction on 21.10.2016. The partnership firm had filed a petition before the Settlement Commission and offered income on account of noting in this diary for settlement. The ld. Pr. CIT, Ahmedabad in his report under Rule 9 had stated that proceedings under section 153A are on-going in the case of partner Shri Shyamsundar R. Agrawal, and impact of the seized material found during the course of search shall be taken into consideration at the time of finalization. The assessee had objected to the same, and thereafter the order was passed by the Settlement Commission accepting the income returned by the assessee on account of unaccounted expenditure to the tune of Rs.1,66,98,800/- pertaining to the noting in the diary found during the search at the assessee’s premises.

During assessment proceedings, the assessee had not disclosed any income on account of noting in the impugned diary on the ground that this stood disclosed and accepted in the settlement petition of the partnership firm. But the AO did not agree with the same for the reason that Pr. CIT in his report under Rule 9 had categorically stated that the impact of diary would be considered during the course of assessment of the assessee, and also for the reason that the assessee had admitted to the transactions pertaining to his unaccounted income and expenditure. Accordingly, he made an addition of Rs.2,54,73,420/-.

CIT(A) deleted the said addition. Being aggrieved, revenue has preferred the present appeal.

Conclusion- CIT(A) has found that all income relating to entries noted in the diary stood disclosed by the partnership to and accepted by the settlement commission. This fact is not disputed before us. In the light of the same we agree with the ld.CIT(A) that the objection of the ld. Pr. CIT to the ITSC being overruled by acceptance of income by ITSC, the said objection was irrelevant to merit any consideration while framing assessment in the hands of the assessee.

In the light of the above where the assessee had stated the notings in the diary as relating to his business and which stood disclosed by its partnership firm to the settlement commission, who in turn accepted the same also, we find no reason to interfere in the order of the Ld.CIT(A) deleting the addition made in the hands of the assessee finding the said income to be doubly assessed to taxed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the Revenue against order passed by the ld.Commissioner of Income Tax(Appeals)-12, Ahmedabad [hereinafter referred to as “Ld.CIT(A)”] under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) dated 20.5.2019pertaining to the Asst.Year 2017-18.

2. At the outset, it was stated that solitary grievance of the Revenue relates to the deletion of addition made by the AO on account of unexplained expenditure under section 69C of Rs.2,54,73,420/-. The said addition, it was pointed out, emanated from noting in a diary found during search conducted on the assessee’s premises, which diary marked as Annexure A/1 and which allegedly contained details of receipts and payments. The assessee, it was stated, is partner in a partnership firm, M/s. Laxmi Constructions. Search operation under section 132 of the Act was conducted at the residential premises of the assessee, and simultaneous survey operation under section 133A of the Act was carried out at the business premise of M/s. Laxmi Construction on 21.10.2016. The partnership firm had filed a petition before the Settlement Commission and offered income on account of noting in this diary for settlement. The ld. Pr. CIT, Ahmedabad in his report under Rule 9 had stated that proceedings under section 153A are on-going in the case of partner Shri Shyamsundar R. Agrawal, and impact of the seized material found during the course of search shall be taken into consideration at the time of finalization. The assessee had objected to the same, and thereafter the order was passed by the Settlement Commission accepting the income returned by the assessee on account of unaccounted expenditure to the tune of Rs.1,66,98,800/- pertaining to the noting in the diary found during the search at the assessee’s premises.

3. During assessment proceedings, the assessee had not disclosed any income on account of noting in the impugned diary on the ground that this stood disclosed and accepted in the settlement petition of the partnership firm. But the AO did not agree with the same for the reason that the ld. Pr. CIT in his report under Rule 9 had categorically stated that the impact of diary would be considered during the course of assessment of the assessee, and also for the reason that the assessee had admitted to the transactions pertaining to his unaccounted income and expenditure. Accordingly, he made an addition of Rs.2,54,73,420/-.

4. The contents of the diary were explained to us in a summarized form as under:

i) Total amount of all transactions (Payments, Receipts, repetitive entries etc.) : Rs.3,91,33,420/-

ii) Amount Revised as per Order Sheet dated 04/12/2018 (after eliminating duplicate entries : Rs.2,54,73,420/-

iii) Total Amount of payments of Seized Diary (as per ITSC Application : Rs.1,66,98,800/-

iv) Total Amount of Receipts of Seized Diary (as per ITSC Application : Rs.1,45,23,900/-

v) Other Amounts (such as sub-totals, c/f balances, amount not considered by AO, rough notings etc. : Rs.12,50,720/-

5. Referring to the above, it was explained that total of notings of transactions in the diary amounted to Rs.3,91,33,420/-, which after eliminating duplicate entries the total impact came to Rs.2,54,73,420/- which included payment of Rs.1,66,98,800/- and receipt of Rs.1,45,23,900/-. The partnership firm had surrendered the higher of the payments and receipts, being Rs.1.66 crores, to the Settlement Commission, while the AO had made addition to the income of the assessee of the total entries found in the diary amounting to Rs.2,54,73,720/-. The entire facts relating to the case, as stated above, are reproduced at para 3 to 3.4 of the order as under:

“3. The appellant is an Individual, who derives income from business as Partner in the firm, M/s Laxmi Constructions, which is assessed to tax as such (the Firm has total three partners – the appellant and his two sons – all three partners sharing P&L equally). In addition, the assessee had also minor income from other sources such interest income. There was a search operation u/s 132 of the Income Tax Act at the residential premises of the assessee on 21/10/2016. Simultaneously, survey operation u/s 133A of the Act was carried out at the business premises of the M/ Laxmi Constructions, in which appellant is a partner. During the course of search at the residential premises, among other things, cash of Rs.14,88,310/- was found out of which Rs.13,50,000/- was seized. Further, jewellery worth Rs.63,75,335/- was found out of which jewellery worth Rs.11,41,810/-was seized. Further, a diary marked as Annexure A-l (containing pages 1 to 28) was also seized during the search. The notings in the said diary was related to receipts and payment mainly pertaining to the Partnership Firm, M/s. Laxmi Constructions and this fact was admitted by the appellant in the statement recorded u/s 132(4) of the Act. The said partnership firm subsequently filed a petition before the Hon’ble Settlement Commission, Mumbai for settling the case of the Firm for the assessment years from A.Y. 2011-12 to A.Y. 2017-18. In the said petition, the Firm had owned up the diary seized from the residential premises of the appellant being the Annexure A-l containing the pages from 1-28 and also disclosed income on well accepted basis of accounting and taxation with respect to the entries in the said diary as well as cash and other valuables found from the residential premises of the Appellant.

3.1 As per the appellant, the summary analysis of seized diary Annexure A­l (Pages 1 to 28) is explained as under:

3.2 It is seen that the PCIT (Central), Ahmedabad had submitted his report under Rule-9 dated 05/03/2018, to the Hon’ble ITSC wherein it was stated that “the proceedings u/s 153A are ongoing in case of the partner Shri Shyamsunder Agrawal and the impact of the seized material found during the search shall be taken into consideration at the time of finalization of assessment” and accordingly the PCIT had not offered his comments on that portion of ITSC application filed by the Firm. In the rejoinder to the Rule – 9 report filed by the Firm before the Hon’ble ITSC, the Firm had submitted that the “observation of the PCIT is contrary to his own comments with excluding certain repetitive entries, vide order sheet noting asked the assessed to show cause as to why an amount of Rs.2,54,73,420/- should not be added to the total income of the assessee. The appellant filed the written submission dated 14/12/2018, wherein it was explained that the income with respect to the entries appearing in the seized diary being Annexure A-1 had been duly considered in the additional income in the petition filed before Hon’ble Settlement Commission, Mumbai and therefore, no addition can be made in the case of appellant assessee again on the basis of such entries as appearing in the seized diary. It was also explained before the AO that, entries in the seized diary i.e. Annexure A-1 contained receipts and payments which pertained to the business of the Partnership Firm, M/s Laxmi Constructions. It was brought to the AO’s notice that the payments made on account of expenditures as per said diary cannot be treated as unexplained expenditure in the case of appellant, as such payments were nothing but application of income for which there were corresponding incomes of receipts. Moreover, the income that is relatable to the entries in the said diary had already been offered for taxation in the case of Partnership Firm, M/s Laxmi Construction as per the petition filed before the Settlement Commission.

3.5 The appellant had also furnished to the AO on 19/12/2018, a copy of the final order u/s 245D(4) dated 17/12/2018 passed by the Hon’ble Settlement Commission, Mumbai which referred to the seized diary being Annexure A-1 and income disclosed w.r.t. said diary.

3.6 It is the case of the appellant that the AO without appreciating the facts in the proper perspective, finalized the assessment for the year under appeal vide his order u/s 143(3) dated 26/12/2018 wherein the addition of sum of Rs.2,54,73,420/- was made on account of alleged unexplained expenditures by invoking the provisions of the section 69C of the Act w.r.t. aggregate of entries appeared in the seized diary and thus, the income in respect of the entries in the seized diary i.e. Annexure A-1 has been taxed twice.”

6. The ld.CIT(A), however, it was pointed out did not agree to the addition made by the AO noting that the impugned amount had already been surrendered by the partnership firm in its settlement application, which was accepted by the Settlement Commission also, and adding the same again in the hands of the assessee, he stated, would tantamount to double addition. He also found that the assessee had never admitted to the amount as pertaining to him in his individual capacity as cash receipt/payment. Accordingly, he deleted the entire addition made in the hands of the assessee.

7. Aggrieved, the Revenue is in appeal before us raising the following grounds:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,54,73,420/- on account of unexplained expenditure u/s.69C of the Act.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,54,73,420/- without appreciated the fact that the department in the Rule-9 Report had not accepted the contention of the assessee and had stated that the impact of seized material found during the search shall be taken into consideration at the time of finalization of assessment proceedings.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,54,73,420/- without considering the fact that in Rule 9 report, submitted by the Department before the Hon’ble ITSC, it has been specifically mentioned that the seized material has been found from the residential premises of the assessee and the same will be considered in the case of Shri Shyamsunder R Aggrawal.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,54,73,420/- without appreciating that during the course of assessment proceedings, the assessee in his statement recorded on oath have admitted that day to day cash receipts and payments are written in the diary are not recorded in the regular books of account.

5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.

8. As evident from the grounds raised the Revenue is aggrieved by the deletion of addition made u/s 69C of the Act, by the Ld.CIT(A) finding:

• the transactions noted in the diary to be surrendered by the partnership firm of the assessee to the Settlement Commission, when the ld. Pr. CIT had categorically stated in Rule 9 of his report to the Settlement Commission that the amount would be considered in the hands of the assessee.
• Finding the assessee to have never stated the amounts noted in the diary as pertaining to his personal income and expenditure.

9. The ld.CIT(A), we find, has dealt both the aspects at para 5.2 to 5.5 of his order as under:

“5.2 The appellant’s submission before the AO as well as during the present appeal proceedings is very straightforward in the sense that as per the analysis of the seized diary Annexure-Al though the total of all transactions including repetitive entries was Rs.3,91,33,420/-, the total after eliminating duplicate entries was Rs.2,54,73,420/-, but in fact, it was basically payments of Rs. 1,66,98,800/- and receipts of Rs.1,45,23,900/-, in substance, and thus the financial effect of the diary was only of unaccounted income of Rs.1,66,98,800/. Further, thereto, it is the case of the appellant that the said amount was already offered before the Hon. Income Tax Settlement Commission by the Firm, M/s. Laxmi Construction and the same was accepted in the order u/s.245D(4) along with another additional offer of Rs.6,93,54,241/- on account of withdrawals by the Partners. It is also the case of the appellant that he had no source of income other than the income from the Partnership Firm, M/s. Laxmi Construction and therefore, as the amount has been owned up and offered in the settlement application and the same having been accepted by the Commission, no further addition was called for in the hands of the appellant as that would amount to double taxation which is not permissible under the Act. From the paper book submitted and even from the assessment order, the appellant’s submission is found to be factually as well as legally tenable.

5.3 However, in the context of the reasoning of the AO for addition of Rs.2,54,73,420/- it appears that he is banking on the provisions of Section 132(4)/132(4A) of the Act, the Rule 9 Report of the PCIT (Central) to the Hon. ITSC in the case of the appellant’s firm M/s. Laxmi Construction. In this regard, I note that the contents of the diary Annexure-Al were explained by the appellant which is not disputed by the Department and nowhere it has been admitted by the appellant that the unaccounted income as per the said diary was his own in his personal capacity and that it was not out of the income and expenses of his only Partnership Firm the source of all income (except some interest income in personal capacity). I do not find that the appellant has failed to discharge his onus in terms of questions asked by the authorized officer during the course of search and that the appellant had admitted the undisclosed income in his personal capacity, which he has not honoured while filing the return of income. Otherwise also there is no bar under the Income Tax Act that the unaccounted income cannot be owned up by another person including Partnership Firm or Company if the evidences and circumstances are so. This also has to be kept in mind that though the Partnership Firm is an entity for the purpose of Income Tax Provisions, it is soulless and all its affairs are managed and controlled by the individuals only, be they partners or its employees.

5.4 Furthermore it is well settled in taxation law that double assessment in both partners and the firm on same income is not tenable [ITO v. Atchaiah (Ch.) (1996) 218 ITR 239 (SC)] and it is possible to hold that moneys may belong to the partners and not to the firm [India Rice Mills v. CIT (1996) 218 ITR 508 (All), Sunder Lal Jain v. CIT (1979) 117 ITR 316 (All)]. Thus the approach of the AO, taking the cases of firms and the partners (including the appellant in consideration) together, is not legally, tenable. This also is a trite law that a reasonable explanation of assessee has t be considered and in doing so the AO has to act reasonably and fairly. If the AO is still suspicious, it is for the AO to gather cogent materials to refute the assessee’s explanation. This has not been done in the case here.

5.5 I find no wrong in the amount being owned up by the Partnership Firm and in such a case, the same amount cannot be added in the hands of the appellant. As to the difference between Rs.2,54,73,420/- and Rs.1,66,98,800/-, I find that the reconciliation and explanation by the appellant is plausible and thus acceptable because there is no cogent material with the Department to refute the same. Even otherwise, if the difference is admitted, the same gets nullified in the web of income and its application and also in further additional disclosure of Rs.6,93,54,251/-which is the net result of cash generated of Rs.15,95,60,974/- as shown in the cash flow filed by the firm before the ITSC in its settlement application and the utilization thereof has been accepted by the Hon’ble Commission.”

10. As is evident from the above the Ld.CIT(A) has found that the assessee did not admit to the notings as relating to him in his personal capacity. During the course of hearing, our attention was drawn to the statement recorded of the assessee reproduced at page no.3 of the assessment order. It was pointed out therefrom that in response to question no.27 where the assessee was asked whether noting in the diary were recorded in his books of accounts, the assessee has responded by saying that they were not recorded in the regular books of accounts; that some of the expenses recorded in the diary related to his household expenses, and some related to the business of the assessee.

Thus it is evident that there was no categorical admission by the assessee of the notings in the diary as all pertaining to him in his personal capacity, on the contrary he had stated that it related to his business also.

11. Moreover, the Ld.CIT(A) has found that all income relating to entries noted in the diary stood disclosed by the partnership to and accepted by the settlement commission. This fact is not disputed before us. In the light of the same we agree with the ld.CIT(A) that the objection of the ld. Pr. CIT to the ITSC being overruled by acceptance of income by ITSC, the said objection was irrelevant to merit any consideration while framing assessment in the hands of the assessee.

12.In the light of the above where the assessee had stated the notings in the diary as relating to his business and which stood disclosed by its partnership firm to the settlement commission, who in turn accepted the same also, we find no reason to interfere in the order of the Ld.CIT(A) deleting the addition made in the hands of the assessee finding the said income to be doubly assessed to taxed.

In view of the above, we do not find any merit in the grounds raised by the Revenue before us. All the grounds raised by the Revenue being Ground No.1 to 5 raised by the assessee are accordingly rejected.

13. In the result, appeal of the Revenue is dismissed.

Order pronounced in the Court on 11th October, 2023 at Ahmedabad.