Deletion based on evidences produced before CIT(A) without giving opportunity to AO violates rule 46A

DCIT Vs Villa Mode Exports (India) Pvt Ltd (ITAT Mumbai)

ITAT Mumbai held that CIT(A) deleted the additions/ disallowances on the basis of information/ evidences filed before him without providing any opportunity to AO is in violation of rule 46A of the Income Tax Rules. Accordingly, matter restored back to CIT(A).

Facts- The case of the assessee was selected for scrutiny and statutory notice under the Income Tax Act were issued. However, the assessee didn’t respond to explanation or query raised by AO. In absence of response, AO made addition u/s 68 and other disallowances.

CIT(A) deleted the addition/ disallowances. Being aggrieved, the present appeal is filed by revenue.

Conclusion- Held that the order of the Ld. CIT(A) need to be set aside on two grounds. Firstly, the Ld. CIT(A) has considered the information or evidences filed by the assessee before him in violation of the Rule 46A of the Rules without providing any opportunity to the Assessing Officer for his comments. Secondly, the Ld. CIT(A) has not given proper reasoning for deleting the additions. Accordingly, we set aside the order of the Ld. CIT(A) and restore the matter back for deciding afresh after following due procedure of law. The ground No. iv of the Revenue is allowed . Since we have restored the appeal back to ld CIT(A), the other grounds of the appeal are rendered academic and not required to be adjudicated on merit.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against order dated 27.02.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2016-17, raising following grounds:

i. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting addition amounting to Rs. 1,63,64,050/- made u/s 68 of the Act neglecting the fact that the assessee has not furnished complete details during the assessment proceedings regarding High Sea sales amounting to Rs. 1,63,64,050/- and thus assessee had failed to establish genuineness of these credit entries in books of account”

ii. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting disallowance amounting to 50% of the employee benefit expenses on ad hoc basis, neglecting the fact recorded by Assessing officer that no details/ bifurcation were submitted by the assessee regarding employee benefit expenses and summarily allowing the appeal of assessee”

iii. “Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) is right in deleting disallowance of purchases of Rs.50,00,000 neglecting the fact recorded by Assessing officer that necessary details were not provided and summarily allowing the appeal of assessee”

iv. “Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) is right in deleting addition/ disallowances made by the A.O. without remanding the matter to the file of A.O. in case new details were filed by the assessee which were never filed before the A. O.

2. Briefly stated, facts of the case are that the assessee filed its return of income on 30.11.2016 declaring loss of Rs. 1,94,60,215/-. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued from time to time. The Assessing Officer in the assessment order passed u/s 144 of the Act on 12.012.2018 has noted that initially on the first date, the assessee had filed manual submission on 27.02.2018 . Since, the case was under scrutiny through electronic mode ,therefore, the Assessing Officer subsequently issued notices through the Income-tax Department Portal (ITBP) calling for various information and explanation regarding the entries of purchase and sales, foreign currency fluctuation loss, evidence in support of expenses etc. However, the assessee did not respond to explanation or query raised by the Assessing Officer on the various issues. The Assessing Officer after taking prior approval from higher authority issued notice in physical format also. But the relevant information sought by the Assessing Officer was not filed by the assessee. The Assessing Officer also issued a final show cause notice asking the assessee as why the assessment should not be completed as an ex -parte within the section 144 of the Act. In absence of relevant submissions or explanation on the part of the assessee, the Assessing Officer made disallowance/addition as follows :

3. On further appeal, the assessee filed detailed submissions before the Ld. CIT(A). The Ld. CIT(A) vide impugned order deleted the additions/disallowance made by the Assessing Officer. Aggrieved, the Revenue is in appeal before the Tribunal raising grounds as reproduced above.

4. Before us, the Ld. Departmental Representative (DR) refered to ground No. (iv) of the appeal and submitted that no information were filed before the Assessing Officer. The assessee filed certain information in respect of additions made by the Assessing Officer before the Ld. CIT(A), however, the Ld. CIT(A) did not follow the procedure provided under Rule 4 6A of the Income-tax Rules, 1962 (in short ‘the Rules’) and did not send sent the matter to the Assessing Officer calling for his remand report. He further submitted that the Ld. CIT(A) has not given proper reasoning for deleting the addition and therefore, also the order of the Ld. CIT(A) need to be set aside. He further submitted that on the issue of advance from Jaikar H.K. Ltd for addition of Rs.17,30,875/ -, though the Ld. CIT(A) referred to the order of the assessment and submission of the assessee , however omitted to give his finding on that issue.

5. On the contrary, the Ld. Counsel of the assessee submitted that the Ld. CIT(A) after consideration of the submission and explanation of the assessee has deleted the additions made by the Assessing Officer which were unjustified and excessive without taking into account pragmative approach. The Ld. Counsel submitted that in past assessment years no addition has been made by the Assessing Officer. The Ld. Counsel referred to the Paper Book filed by the assessee and the information filed before the Assessing Officer. The Ld. Counsel also relied on the decision of the Hon’ble Supreme Court in the case of Excel Industries Ltd. [2013] 358 ITR 295 (SC) and submitted that the Assessing Officer should have taken consistent view without any change of facts. The Ld. Counsel also relied on the decision of the Hon’ble Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT order dated 03.05.1979 and submitted that expenditure incurred wholly and exclusively for the purpose of the business is allowable under the provisions of section 37(1) of the Act.

6. We have heard rival submission of the parties and perused the relevant material on record. We find that the Assessing Officer has allowed ample opportunities to the assessee for furnishing explanation of the queries raised by him. However, the assessee did not file any information before the Assessing Officer except providing basic information containing profit and loss account and balance sheet etc. The Ld. Assessing Officer raised specific query in respect of additions made. The relevant part of the order of the Assessing Officer is reproduced as under:

5.High Sea Sales Rs.1.63.64,050/-.

On perusal of P & L A/c it is observed that assessee has show high sea sale of Rs.163,64,– 050/ However the details of High Sea Sales and corresponding details of purchase was not provided by assessee though number of opportunities were given to it.

Details were submitted under the heading ‘party wise details’ but actually no party wise details were submitted by assessee but only following details were mentioned.

No further details were produced by assessee. It can be observed from various notices issued us 142(1) mentioned above that assessee was given number of opportunities to produce details of High Sea Sales but no details were submitted.

After providing above referred opportunities the assessee submitted only part details through mail on 08.12.2018. The assessee filed following details in respect of Import purchases and “High Sea Sales ‘

5.2 Export Sales:

The assessee produced copy of purchase bill of Jaykara (H.K.) Ltd. dated 20.072015 for purchase of 36MT Malric Anhydride. (2X20′ Container)

5.3 However as can be observed from details shown above of sales, several sales bills are having dates prior to the date of purchase bill of 20.07.2015. Some of the sale bills are of dates 07.04.2015, 28.04.2015, 28.04.2015, 04.06.2015 which is prior to date of import purchase of 20.07.2015 which is not possible.

5.4. Further the sales bills show sale of Skyrene Monomer which is not the item of purchase shown in purchase bill as purchase bills show purchase of Malric Anhydride

5.5. Therefore another 142(1) notice was issued on 09.12.2018 requesting assessee to submit following details.

1) You have not fully justified High Sea Sales though you had been given number of opportunities. Part submission is made by you on 08.12.2018 which does not justify credits in your books under the name High Sea Sales. In this connection you have not produced following details to justify transaction.

i) Copy of account for A.Y. 2016-17 and 2017-18 of person to whom High Sea Sales is made

b) Jaydip Agencies

c) Ghandhi Chemicals

ii) Purchase bill of materials in respect of High Sea Sales, sold to above person along with copy of account of person from whom purchase was made and details of payments made.

iii) Please explain details of actual payments received for High Sea Sales of Rs.1,63,64,050/ – and corresponding payment for purchase made by you.

2) Please produce Form No 16A of salary payment of Shri Rajesh Parab and Shri Sunil Mathew and copy of their return to justify claim of salary.

Without above details your reply is incomplete and shall be treated as part compliance.

5.6. No details are produced by assessee in response to it. The asse ssee was asked to produce quantity details several times but were not produced.

5.7. Thus the assessee has credited to its books of account amount of Rs. 1,63,64,050 under the head ‘High Sea Sales’ for which it has offered no explanation.

5.8. Thus the amount of Rs. 1,63,64,050/- credited by assessee in its books is nothing but unexplained credits which is required to be added us 68 of the IT Act.

In view of the above facts Rs. 1,63,– 64,050/ is added u/s 68 of the IT Act.

6. Addition of Advance from Customers.

The assessee had show opening balance of advance from customers from Jaykara H.K. Ltd of Rs.5,68,45,-483/ . There was no sales to it during the year. However addition of Rs.70,30,875/ – is shown as advance from customers again from Jaykara H.K. Ltd.

6.2. The assessee was given several opportunities to provide details of addition to advances received from customers. However no details were submitted by the assessee. Therefore final show cause was given vide 142(1) dated 30.11.2018 that why addition u/s 68 of the IT Act may not be made as genuineness of credit in the name of advances from customers was not explained.

6.3. However there is no compliance by the assessee in respect to show cause. I have therefore left with no option but to believe that ciredt appearing in the name of advance from customer is nothing but unexplained credit introduced in books under the shelter of advances from customers and therefore the same is added us 68 of the IT Act.

(Addition Rs. 70,30,875/ -)

7. Disallowance of Expenses

The assessee has claimed loss from foreign exchange fluctuation of Rs.51,96,012/–. The bifurcation was given by assessee in its email reply given on 06.08.2018 where in it was mentioned that loss of Foreign Exchange of Rs.36,- 15,649/ was because of revaluation of closing balance of Jay Kara H.K. Ltd. The account of Jaykara H.K. Ltd share following balances.

The amount is shown as advances from customer however no sale is executed in its favor. The assessee created contingent liability by showing fluctuation loss of Rs.36,15,- 649/ for the closing balance.

7.2. The following specific issue was asked to assessee vide notice issued u/s 142(1) on 24.11.2018.

Please refer to your mail wherein you have submitted that details were filed by you vide submission dated 27.02.2018 and 28.02.2018 and on mail.

Please note that your case has been selected for complete scrutiny and subsequent details were called for from you after considering above details filed by you.

You are once again requested to submit following details which are not submitted by you till date inspite of several opportunities given to you.

Please provide comolete bifurcation of advance from customers

2) Please give detailed bifurcation of salary of Rs. 96,02,- 952/ person wise and explain why it has increased thought sales and business is reduced.

3) As per details submitted you have claimed foreign exchange losses mainly on account of transaction with Saidaya Enterprise and Jaykara (H K) Ltd. Please produce their copy of account of last three years and for A. Y. 2016-17 and A.Y. 2017-18 also. Please justify that transaction done with you was in foreign currency and not in Rupees term. Please produce evidence of inward foreign remittance and purpose of inward foreign remittance

7.3. However no details were submitted by assessee. I have been therefore left with no other option but to treat it as non genuine claim made by assessee as no evidences are produce by assessee to substantial its claim.

Foreign exchange loss of Rs.3- 6,15,649/ claimed by assessee is therefore disallowed.

(Disallowance Rs.36,-) 15,649/

8. Disallowance of other Expenses

During the year sales of assessee reduced from Rs. 5.64 crore to Rs. 4.08 crore however other expenses increased from Rs.70.90 lacs to 89.11 lacs and employee’s benefit expense increased from Rs.54 .61 lacs to 96.55 lacs. No justification no bifurcation of expenses were given by assessee though details were called for from assessee again and again.

8.2. There is no justification for increase in expense particularly employee’s benefit expenses from 54 .61 lacs to 96.55 lacs. The assessee was asked to provide details of persons to whom salary was paid. The assessee submitted it through email dated 08.12.2018. However assessee was again asked to provide Form No. 16A and proof of salary payment to Shri Rajesh Parab and Shri Sunil Mathew vide notice issued u/s 142(1) on 09.12.2018. However the same was not justified.

8.3. In absence of details I am left with no other option but to disallow 50% of 96.55 lacs claimed as employee ‘s benefit expenses as no details/bifurcation is submitted by assessee particularly when sales is reduced Rs.48.27 lacs is accordingly disallowed. 8.4 Since no quantitative details and purchase details are given Rs. 50,00,000/ – is disallowed from purchase also.

(Disallowance Rs.98,27,000/-)”

6.1 We find that before the Ld. CIT(A) , the assessee filed information in respect of additions but the Ld. CIT(A) has adjudicated the issues in perfunctory manner. In respect of addition of Rs.1,63,64,050/- , the ld CIT(A) adjudicated as under:

6.1.3 Adjudication and decision: I have gone through the submissions on either side. The A© attempted comparison of solitary import with reference to High Sea Sales invoice represented by 7 separate invoices in relation to 3 parties. The reasoning given on the basis of the mistaken stand of the AO does not justify the addition. Besides, the A attempted to classify the same as an unexplained credit even though the said revenue already forms part of the end result in the form of loss/profit. The said addition is therefore directed to be deleted.

6.2 On the issue of advance from Jaikar H.K. Ltd. of Rs.70,30,875/-, though the Ld. CIT(A) has reproduced the submission of the assessee and the order of the Assessing Officer however omitted to give any finding on this issue.

6.3 On the issue of disallowance of foreign exchange fluctuation loss, the Ld. CIT(A) did not refer to any submission of the assessee , but given the finding as under :

“6.2.3 Adjudication and decision :

I have considered the submissions of the appellant. The appellant is seen to be having regular transactions with the said customers. The advance received during the year is credited to the account and the resultant increase in liability on account of exchange fluctuation has been recorded by way of credit to the account of the party. This is as per the requirement of the ICAI accounting standards. The restatement of liability at the end of the year is purely notional in nature. To this extent disallowance of Rs.36,15,149 is justified. The addition would be under the normal provision of the Act.

The appellant produced all the necessary documentary evidences towards foreign inward remittance through banking channel. Hence the balance addition of Rs.34,15,226 is directed to be deleted.

This ground is therefore partly allowed.”

6.4 Regarding the disallowance of 50% of the employees benefit the Ld. CIT(A) adjudicated the issue as under:

“6.2.3 Adjudication and decision :

The appellant provided the necessary documentary evidences towards the expenses towards employees salary and staf welfare expenses. The reason given for disallowance of expenses of Rs.48,27,000 does not justify the disallowance.

Hence the AO is directed to delete the disallowance. This ground is allowed.”

6.5 Regarding the disallowance of purchase on ad-hoc basis, the Ld. CIT(A) deleted the addition observing as under:

“6.4.3 Adjudication and Decision:

The reason given for disallowance of purchases of Rs.50,00,000 does not justify the disallowance. The AO is directed to delete the disallowance. This ground is allowed.”

6.6. In view of the above finding of the Ld. CIT(A) , we are of the opinion that the order of the Ld. CIT(A) need to be set aside on two grounds. Firstly, the Ld. CIT(A) has considered the information or evidences filed by the assessee before him in violation of the Rule 46A of the Rules without providing any opportunity to the Assessing Officer for his comments. Secondly, the Ld. CIT(A) has not given proper reasoning for deleting the additions. Accordingly, we set aside the order of the Ld. CIT(A) and restore the matter back for deciding afresh after following due procedure of law. The ground No. iv of the Revenue is allowed . Since we have restored the appeal back to ld CIT(A), the other grounds of the appeal are rendered academic and not required to be adjudicated on merit.

7. In the result, the appeal filed by the Revenue is allowed for statistical purposes.

Order pronounced in the open Court on 25/08/2023.