Advance from Customers Not Section 68 Income; Powers of CIT(A) Parallel to AO’s

ITO Vs Raj Maitry & Eskon Developer (ITAT Mumbai)

ITAT Mumbai held that Advance received from customers can’t be considered as income for the purposes of section 68 of the Act and powers of Ld. CIT (A) was coterminous with that of AO, and what an AO can do the same action, can be taken by him also.

The case of ITO Vs Raj Maitry & Eskon Developer was brought before the ITAT Mumbai, concerning the treatment of advance payments received from customers. The key contention revolved around whether such advances should be considered as income under section 68 of the Income Tax Act.

The dispute originated from the assessment year 2018-19 when the assessee, a partnership firm, filed its income tax return declaring a total income of Rs. 28,68,540/-. The assessment proceedings focused on two primary issues: income from real estate business and unsecured loans.

During the assessment proceedings, the Assessing Officer (AO) made significant additions to the income, including Rs. 12,63,66,352/- on account of advance received from customers under section 68 of the Act. However, the Ld. CIT (A) overturned these additions, leading to an appeal by the revenue before the ITAT Mumbai.

The crux of the appeal lay in whether the Ld. CIT (A) was justified in admitting additional evidence presented by the assessee without allowing the AO an opportunity to examine it, as mandated by Rule 46A(3) of the Income Tax Rules, 1962.

Upon review, the ITAT Mumbai observed that while the AO may have not been given a chance to examine the additional evidence, the information provided by the assessee was largely available on record before the AO. Furthermore, it was noted that advances received from customers cannot be considered as income under section 68 of the Act.

The ITAT Mumbai upheld the decision of the Ld. CIT (A), emphasizing that the powers of the Ld. CIT (A) are coterminous with those of the AO. Thus, actions permissible to the AO can also be taken by the Ld. CIT (A), as per Section 251 of the Income Tax Act.

The ruling reiterated established legal principles and precedents, highlighting the appellate authority’s discretion in considering additional evidence and exercising powers conferred by the statute. Judicial pronouncements cited by the ITAT Mumbai supported the decision, affirming the authority’s ability to permit additional evidence when necessary for the proper disposal of the appeal.

In conclusion, the ITAT Mumbai dismissed the appeal by the revenue, affirming the decision of the Ld. CIT (A). The case underscores the importance of proper assessment procedures and the interpretation of relevant provisions under the Income Tax Act, ensuring fair treatment for taxpayers within the bounds of the law.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by revenue is directed against the order of National Faceless Appeal Centre (for short “NFAC”) dated 17.03.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2018-19. The revenue has raised the following grounds (revised) of appeal:-

a. The order of the Ld. CIT (A) is erroneous in law and on the facts of the case.

b. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not allowing the A.O. to examine the additional evidence admitted by him as per the provisions u/s. 46A(3) of the I. T. Rules, 1962.

c. On the facts and in circumstances of the case, the Ld. CIT (A) erred in accepting the additional evidences which had not stood the test of enquiries in assessment proceedings.

d. The appellant craves leave to add, alter, amend and modify any of the above grounds of appeal either before or at the time of hearing of the appeal, if considered necessary.

2. The Brief facts of the case are that assessee is a partnership firm, filed its return of income 22-09-2018 declaring total income at Rs. 28,68,540/-. Case of the assessee was selected for complete scrutiny on following issues specifically – A). Income from Real Estate Business and B). Unsecured Loans. During the assessment proceedings various notices were issued to the assessee u/s. 142(1) and 143(2) of the Act vide dated: 22.09.2019, 18.12.2020, 08.01.2021, 19.01.2021 and 04.02.2021, but no compliance was made by the assessee against these notices. Other notices were issued to assessee on 24.02.2021, 09.03.2021 and 27.03.2021 against these notices a partial compliance was done by assessee on 01.03.2021, 15.03.2021 and 26.03.2021 respectively.

3. Case of the assessee was assessed u/s. 143(3) r.w.s. 144B of the Act by making addition of Rs. 2,90,30,000/- on account of unsecured loans and Rs. 12,63,66,352/- on account of advance received from the customers u/s. 68 of the Act. Assessee being aggrieved with this order preferred an appeal before the Ld. CIT (A), who in turn deleted these additions made by the AO. Now Revenue being aggrieved with the order of Ld. CIT (A) passed u/s. 250 of the Act preferred this appeal before us.

4. We have gone through the order of AO u/s. 143(3) r.w.s. 144B of the Act, order of the Ld. CIT (A) passed u/s. 250 of the Act and submissions of the assessee alongwith grounds raised by the revenue. We observed that moot question before us is whether Ld. CIT(A) was justified in admitting the additional evidences adduced by the assessee before him without giving an opportunity of examination to the AO as provided in Rule 46A (3) of the I.T. Rules, 1962. Here it is also pertinent to examine whether allegation of not providing opportunity to the AO by Ld. CIT (A) is really exists or not.

5. We have observed order of Ld. CIT (A) and find that information furnished by the assessee before the Ld. CIT (A) is mostly available on record before the AO also. It is also observed that addition u/s. 68 of the Act on account of Unsecured Loan may be treated as such but as far as advance received from customers is concerned it’s a settled position of law, same can’t be considered as income for the purposes of section 68 of the Act. So, addition made u/s. 68 on account of customer’s advance treatment by AO was void-ab-initio and Ld. CIT (A) rightly handled the issue by analysing the same in the light of the fact that same has been duly reflected in the books of account as per the accounting system followed by the assessee under the head sales, advance and booking amount returned.

6. It is observed that the job which ought to have been done by the AO on amount received by assessee as customer’s advance, same has been carried out by the Ld. CIT(A) and due assessment has been carried out. As far as amount involved on account of unsecured loans are concerned as mentioned (supra) most of the documents were available before the AO and practically AO may have grievance that due procedure was not followed as prescribed under Rule 46A (3) of the Rules, but same was not required as the powers of Ld. CIT (A) was coterminous with that of AO, and what an AO can do the same action, can be taken by him also.

7. We found the order of Ld. CIT (A) to be reasonable and logical on the given set of facts and other than the issue of giving opportunity to AO under 46A (3) of the Rules, AO is not able to make out the case how it is prejudicial to the interest of revenue or what anomaly is there in the order of Ld. CIT (A). On this issue following judicial pronouncements alongwith the bare language of relevant Rule and section of the Act can be relied upon for better understanding of the issue under consideration:

Rule – 46A, Income-tax Rules, 1962

[Production of additional evidence before the [ [Joint Commissioner] (Appeals)] [and Commissioner (Appeals)].

46A. (1) The appellant shall not be entitled to produce before the [Joint Commissioner] (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely:

(2) No evidence shall be admitted under sub-rule (1) unless the [ [Joint Commissioner] (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission.

(3) The [Joint Commissioner] (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity—

(4) Nothing contained in this rule shall affect the power of the [Joint Commissioner] (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.]

Section – 251, Income-tax Act, 1961 – FA, 2023

Powers of the [Joint Commissioner (Appeals) or the [Commissioner (Appeals)].

251. (1) In disposing of an appeal, the [Commissioner (Appeals)] shall have the following powers—

(1A) in disposing of an appeal, the Joint Commissioner (Appeals) shall have the following powers—

(2) The [Joint Commissioner (Appeals) or the [Commissioner (Appeals)][, as the case may be,] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.

Explanation.—In disposing of an appeal, the[Joint Commissioner (Appeals) or the][Commissioner (Appeals)], may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the [Joint Commissioner (Appeals) or the [Commissioner (Appeals)] , as the case may be, by the appellant.

[1990] 53 Taxman 85 (SC) Jute Corp. of India Ltd. v. Commissioner of Income-tax

“The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to the amplitude of appellate authority’s power being co-terminus with that of the initial authority should normally be applicable. If the tax liability of the assessee is admitted and if the ITO is afforded opportunity of hearing by the appellate authority in allowing the assessee’s claim for deduction on the settled view of law, there appears to be no good reason to curtail the powers of the appellate authority under section 251(1)(a). Even otherwise an appellate authority while hearing appeal against the order of subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appeared to be no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. There may be several factors justifying raising of such new plea in appeal, and each case has to be considered on its own facts. If the AAC is satisfied he would be acting within his jurisdiction in considering the question so raised in all its aspects. Of course, while permitting the assessee to raise an additional ground, the AAC should exercise his discretion in accordance with law and reason. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The satisfaction of the AAC depends upon the facts and circumstances of each case and no rigid principles or any hard and fast rule can be laid down for this purpose.

In the present case, the assessee did not claim any deduction of its liability to pay purchase tax under the provisions of the Bengal Raw Jute Taxation Act, 1941, as the assessee entertained a belief that it was not liable to pay purchase tax under the aforesaid Act. But later on, it was assessed to purchase tax and the assessee disputed the demand and filed an appeal before the appellate authority and obtained stay order. The assessee thereafter claimed deduction for the said amount towards his liability to pay purchase tax as deduction for the assessment year under consideration. The assessee had not actually paid the purchase tax as he had obtained stay from the appellate authority. Nonetheless its liability to pay tax existed and it was entitled to the said deduction.

Thus, the High Court and the Tribunal both committed error in refusing to state the case or making a reference. The High Court should be directed to call for the statement of case from the Tribunal and thereupon decide the matter afresh, but this procedure would be time consuming. Since, the view taken by the Tribunal was not sustainable in law, it was to be set aside and the matter was to be remitted to the Tribunal to consider the merit of the deduction permitted by the AAC. Decision of the Calcutta High Court reversed.”

[2020] 117 taxmann.com 548 (Bom.) Sesa Goa Ltd. v. Addl. CIT, Panaji, Goa

[2007] 164 TAXMAN 168 (BOM.) CIT-II, Nagpur v. Suretech Hospital & Research Centre Ltd.

“1. This appeal is filed by the revenue under section 260A of the Income-tax Act, 1961, stating that the following questions of law arise out of the order of the Tribunal dated 28-­2-2003 in I.T. Appeal No. 25/Nag. /2001.

“(i)Whether, on the facts and in the circumstances of the case, the Hon’ble Income-tax Appellate Tribunal was justified in law in deciding that the learned CIT(A) ought to have exercised its powers to receive new/additional evidence for deciding the issue in terms of rule 46A (4) of the Income-tax Rules, 1962?

(ii)Whether, on the facts and in the circumstances of the case, the Hon’ble Income-tax Appellate Tribunal was justified in law in admitting the additional/new evidence under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963?

(iii)Whether, on the facts and in the circumstances of the case, the Hon’ble Income-tax Appellate Tribunal was justified in law in setting aside the matter to the file of the Assessing Officer relating to the additions of Rs. 6, 06,725?

(iv)Whether, on the facts and in the circumstances of the case, the Hon’ble Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 1, 16,000 on the basis of additional/new-evidence produced by the assessee before it?

(v)Whether, on the facts and in the circumstances of the case, the Hon’ble Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 1, 40,000 on the basis of additional/new evidence produced by the assessee before it?”

2. The assessment year involved herein is assessment year 1997-98.

3. the assessee is a company and it runs, a Speciality Poly Trauma Hospital at Nagpur. In the assessment year in question, the Assessing Officer made various additions inter alia on the ground that the assessee failed to establish the genuineness of the loan transaction between the assessee and various creditors and also the payments made to SICOM towards the payment of interest.

4. before CIT (A), the assessee produced confirmation letters from various creditors and a letter dated 19-9-2000 from SICOM to the effect that the assessee had paid the amount towards interest. However, the CIT (A) dismissed the appeal on the ground that under rule 46A (1) of the Income-tax Rules, 1962, no fresh evidence could be permitted for the first time in appeal. With reference to the payment made to the SICOM, the CIT (A) held that the amount mentioned in the letter of SICOM and the amount claimed by the assessee did not tally. Accordingly, the CIT (A) upheld the disallowance made by the Assessing Officer.

5. On further appeal filed by the assessee, the Tribunal held that in the light of rule 46A (4), the CIT(A) ought to have permitted the assessee to produce confirmation letters given by 12 unsecured creditors as the same were necessary for disposal of the appeal on merits. Accordingly, the Tribunal set aside the additions of Rs. 6, 06,725 and remanded the matter for fresh consideration.

6. the Tribunal further held that although the assessee had claimed that it had taken loan from Shri M.M. Dandekar, in fact it is established that the assessee was liable to pay to Mr. Dandekar Rs. 1, 16,000 for the project consultancy work done by him. Accordingly, the Tribunal deleted the addition of Rs. 1, 16,000 made on account of Mr. Dandekar. Similarly, the Tribunal deleted the addition of Rs. 1,40,000 as it was established that the said amount was paid by the assessee to SICOM for processing loan of Rs. 70,00,000 and the Collector of Stamps had endorsed the same.

7. Challenging the aforesaid order, the present appeal is being filed by the revenue.

8. The first contention of the revenue is that the Tribunal was not justified in invoking rule 46A (4) of the Income-tax Rules and allowing additional evidence to be produced before CIT (A) for the first time. It is contended that the mere fact that the evidence sought to be produced is vital and important, does not provide substantial cause to allow its admission at the appellate stage when the evidence was available to the assessee at the initial stage and was not produced by him. In our opinion, there is no merit in this contention because rule 46A (4) provides that notwithstanding rule 46A (1), the appellate authority can permit production of documents which enable him to dispose of the appeal. In the facts of the case, the finding given by the Tribunal is that the documents produced were necessary for disposal of the appeal on merits and no question of law arises from such finding of fact recorded by the Tribunal.

9. In the light of the additional evidence permitted to be adduced; the Tribunal had deleted this addition of Rs. 6, 06,725 and remanded the matter for fresh consideration. It is admitted by Counsel on both sides that on remand the addition of Rs. 6, 06,725 has been deleted by the lower authorities and the revenue is in appeal before the Tribunal. Thus, the dispute regarding deletion of Rs. 6, 06,725 in the present appeal does not survive.

10. As the assessee has established that no loan is taken from Mr. Dandekar and in fact the assessee is liable to pay Rs. 1,16,000 to Mr. Dandekar, the Tribunal was justified in deleting the said addition. Similarly, the assessee has established that the amount of Rs. 1, 14,000 has in fact been paid towards stamp duty charges and, therefore, deletion of the said amount cannot be faulted.

11. In this view of the matter, we do not find any merit in the appeal and the same is hereby dismissed with no order as to costs.”

8. In view of the judicial pronouncements by the Hon’ble Apex Court and Jurisdictional High Court, as the similar matters were dealt and discussed therein, we do not find any infirmity in the order of Ld. CIT (A), especially when a substantive justice has been delivered within the scope of powers given to him by the statute and confirmed over the period by the Superior Courts. In view of above, grounds raised by the Revenue are dismissed.

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

Order pronounced in the open court on 29th day of January, 2024.