Case Law Details
Spandan Tradecom Private Limited Vs ITO (ITAT Kolkata)
Introduction: In a recent decision, the Income Tax Appellate Tribunal (ITAT) in Kolkata granted relief to Spandan Tradecom Private Limited, emphasizing that incorrect accounting and wrong grouping of investment holdings do not constitute a bogus investment. The case centered on an addition of Rs. 10.50 lakh by the Assessing Officer, which was subsequently confirmed by the Commissioner of Income Tax (Appeals). This article provides a detailed analysis of the case and its implications.
Detailed Analysis
1. Background: Spandan Tradecom Private Limited, a private limited company, declared an income of Rs. 66,510 in its e-return for the Assessment Year (AY) 2016-17. The case was selected for scrutiny, and during the assessment, the Assessing Officer noticed an amount of Rs. 10.50 lakh in the name of M/s. Kothari Containers Pvt. Ltd. on the asset side of Spandan Tradecom’s balance sheet.
2. Misclassification: The Assessing Officer inquired about the nature of this amount and received a response from M/s. Kothari Containers Pvt. Ltd., stating that it had issued 35,000 equity shares for Rs. 15 lakh in March 2012. The Assessing Officer concluded that the investment of Rs. 10.50 lakh was bogus and added it to Spandan Tradecom’s income.
3. Incorrect Accounting: It was revealed that the investment in equity shares of M/s. Kothari Containers Pvt. Ltd. was made in previous years but had been wrongly categorized under “loans & advances.” Additionally, during the relevant year, Spandan Tradecom sold these equity shares, incurring a capital loss of Rs. 10.50 lakh. However, the company failed to correctly account for this capital loss in its books, leading to the amount remaining on the balance sheet.
3. ITAT Decision: The ITAT ruled that this was not a case of bogus investment but a matter of incorrect accounting and misclassification. The investment was genuine, but it had been wrongly grouped under “loans & advances.” Furthermore, the capital loss resulting from the sale of these shares should have been transferred to the profit and loss account. The failure to do so resulted in the Rs. 10.50 lakh balance, which was wrongly assumed to be a bogus investment.
4. Relief Granted: In light of the incorrect accounting and misclassification, the ITAT set aside the findings of the Commissioner of Income Tax (Appeals) and deleted the addition of Rs. 10.50 lakh. Spandan Tradecom was granted relief in this matter.
Conclusion: The ITAT’s decision in the case of Spandan Tradecom Private Limited serves as a reminder that issues related to accounting and grouping of investments must be carefully considered. Incorrect accounting and misclassification can lead to misunderstandings and incorrect tax assessments. In this case, the ITAT clarified that such errors do not constitute a bogus investment, providing relief to the taxpayer. It underscores the importance of proper accounting and adherence to tax regulations to avoid unnecessary tax liabilities.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee pertaining to the Assessment Year (in short ‘AY’) 2016-17 is directed against the order passed u/s 250 of the Income Tax Act, 1961 (in short the ‘Act’) by ld. Commissioner of Income-tax (Appeals)-NFAC, Delhi [in short ld. ‘CIT(A)’] dated 05.06.2023 arising out of the assessment order framed u/s 143(3) of the Act dated 28.12.2018.
2. The assessee is in appeal before the Tribunal raising the following grounds:
“1. In the facts and circumstances of the case the learned CIT(A) erred in passing the order without giving the opportunity of hearing to the assessee.
2. In the facts and circumstances of the case the learned CIT(A) erred in confirming the addition of Rs. 10,50,000/- made by the Learned Assessing Officer by alleging that the investment of Rs. 10,50,000/-shown in M/s Kothari Containers Pvt Ltd is bogus investment which was actually assessee’s investment in shares with M/s Kothari Containers Pvt Ltd and wrongly classified under the head ‘loans and advances’.
3. In the facts and circumstances of the case the learned Assessing Officer as well as the CIT(A) erred in not considering the fact mentioned in reply received in response to notice u/s 133(6) by M/s Kothari Containers Pvt Ltd.
4. In the facts and circumstances of the case the learned CIT(A) erred in not considering the facts submitted by the assessee along with form no. 35 in the statement of facts.
5. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”
3. At the outset, ld. Counsel for the assessee did not press ground no. 1 hence, dismissed as not pressed.
4. ground nos. 4 & 5 are general in nature which needs no adjudication.
5. The only effective issue raised in ground nos. 2 & 3 is against the addition of Rs. 10.50 Lakh made by the Assessing Officer (in short ld. ‘AO’) for the alleged investment in shares of M/s. Kothari Containers Pvt. Ltd. holding it as bogus and action of ld. AO confirmed by ld. CIT(A). The facts in brief are that assessee is a private limited company. Income of Rs. 66,510/- declared in the e-return for AY 2016-17 filed on 31.03.2017. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. The assessee’s main source of income is trading and investment. While carrying out complete scrutiny, ld. AO noticed that sum of Rs. 10.50 Lakh is appearing in the name of M/s. Kothari Containers Pvt. Ltd. on the asset side of the balance sheet. Ld. AO enquired the correctness of the said sum from M/s. Kothari Containers Pvt. Ltd. who stated that it has issued 35,000 equity shares for Rs. 15 Lakh on 31.03.2012. Based on this submission, ld. AO came to a conclusion that the investment of Rs. 10.50 Lakh is a bogus investment and made the addition thereof. The assessee failed to get any relief before ld. CIT(A). Aggrieved, the assessee is now in appeal before this Tribunal.
6. Ld. Counsel for the assessee submitted that investment was made in the equity shares of M/s. Kothari Containers Pvt. Ltd. in preceding years but it was wrongly shown under the head ‘loans & advances’. Further during the year under consideration, the assessee sold the equity shares at Rs. 4.50 Lakh and incurred a capital loss of Rs. 10.50 Lakh but failed to recognize the same as capital loss in the books as a result of which Rs. 10.50 Lakh was appearing in the balance sheet. He further, submitted that it is not a case of bogus investment. Therefore, no addition is called for.
7. On the other hand, ld. D/R vehemently argued supporting the orders of both the lower authorities.
8. We have heard rival contentions and perused the records placed before us. Addition of bogus investment of Rs. 10.50 Lakh has been challenged by the assessee before us. We observe that the assessee earns income from trading and investment. It invested Rs. 15 Lakh in the equity shares of M/s. Kothari Containers Pvt. Ltd. This was actually investment but it is disclosed under the head ‘loans & advances’. This error is claimed to have been occurred at the end of the person who prepared the financial statement and it is a case of wrong grouping. Further, it is brought to our notice that the investments in the equity shares of M/s. Kothari Containers Pvt. Ltd. were sold in the past for consideration of Rs. 4.50 Lakh. As per the correct accounting system the capital loss of Rs. 10.50 Lakh [Cost Rs. 15 lakh (-) sale Rs. 4.50 Lakh] should have been carried to the profit and loss account and the account of M/s. Kothari Containers Pvt. Ltd. would have become NIL. But, as per the details filed before us, we notice that the assessee did not transfer the capital loss from M/s. Kothari Containers Pvt. Ltd. account to the loss in share trading account and as a result, Rs. 10.50 Lakh was standing as a balance in the name of M/s. Kothari Containers Pvt. Ltd.
9. After perusing of all the details and considering the facts placed before us, we notice that it is not a case of bogus investment but it is a case where proper accounting under correct group heading has not been done which has thus, given rise to the issue in question before us. Therefore, since the investment of Rs. 15 Lakh was made during FY 2011-12 and during FY 2014-15 (AY 2015-16) that investment has been sold and the remaining amount of capital loss of Rs. 10.50 Lakh not transferred to capital loss account, remained as a balance amount in the account of M/s. Kothari Containers Pvt. Ltd. and brought forward from the preceding year has been wrongly considered as bogus investment by both the lower authorities. We thus, set aside the finding of ld. CIT(A) and delete the addition of Rs. 10.50 Lakh and allow ground nos. 2 & 3 raised by the assessee.
10. In the result, the appeal filed by the assessee is partly allowed.
Kolkata, the 18th September, 2023
