2013 (11) TMI 368 - AT - Income Tax

ITAT directs AO to delete unverified additions, rules against interest charge, and dismisses premature penalty appeal

The ITAT directed the AO to delete the additions made on account of unaccounted hundies, as there was no evidence linking them to the assessee. The ITAT ... Addition made in the income of assessee u/s 68/69 of the Income tax Act – Search u/s 132 was conducted and Hundies/Promissory Notes were seized from the residence of Shri Jayant Vithaldas - Substantive addition on the aggregate sum of the hundies was made on Mr. Jayant Vithaldas, as these were found from his premises and possession. However, the protective addition was made on the assessee – Held that:- None of the hundies found from the premises and possession of the Mr. Jayant Vithaldas bears the name of the assessee. The revenue authorities have simply proceeded on the presumption that the lender name could be inscribed at any time and that since Mr. Jayant Vithaldas was closely connected to the directors of the assessee, eventually concluded that it is the assessee, who is the lender. This conclusion is merely based on conjecture - The close relation of Mr. Jayant Vithaldas with the assessee company, on which the entire edifice has been built does not bear any foundation. The revenue authorities have failed to establish the connection of the assessee and Mr. Jayant Vithaldas or even Mr. Dilip Sardesai. Ld. CIT(A) erred in confirming the addition made by the AO to the income of the Appellant on account of unaccounted hundies /bills of exchange on protective basis on the basis of certain materials seized from the residence of Shri Jayant Vithaldas, Pune, who was an ex-executive of the Appellant company and he further grossly erred in changing the protective addition into substantive addition without allowing any opportunity of hearing to the Appellant before increasing the tax liability by changing the protective addition into substantive addition – Decided in favor of Assessee. Issues Involved:1. Addition of Rs. 1,09,51,150/- on account of unaccounted hundies/bills of exchange.2. Procedural fairness and opportunity of hearing.3. Applicability of interest under section 234B.4. Protective vs. substantive addition.5. Penalty proceedings under section 271(1)(c).Detailed Analysis:1. Addition of Rs. 1,09,51,150/- on Account of Unaccounted Hundies/Bills of Exchange:The assessee contested the addition of Rs. 1,09,51,150/- made by the AO, which was based on materials seized from the residence of a third party, Mr. Jayant Vithaldas. The CIT(A) had confirmed this addition. The assessee argued that the seized materials did not belong to them and that there was no evidence linking them to the hundies. The ITAT found that none of the hundies bore the name of the assessee and that the revenue authorities had failed to establish any connection between the assessee and the seized hundies. Consequently, the ITAT directed the AO to delete the addition.2. Procedural Fairness and Opportunity of Hearing:The assessee argued that no opportunity of hearing was provided before the AO changed the protective addition into a substantive addition. The CIT(A) allowed the assessee to explain its case, but the ITAT found that the revenue authorities had not adequately linked the unexplained hundies to the assessee. The ITAT emphasized the importance of procedural fairness and concluded that the addition was based on conjecture rather than concrete evidence.3. Applicability of Interest under Section 234B:The assessee contested the applicability of interest under section 234B, arguing that it did not exist for the assessment year 1985-86. The ITAT agreed, noting that section 215 was the corresponding section at that time and that it did not apply to reassessment proceedings. The ITAT directed the AO to pass an order in accordance with the law as it prevailed then.4. Protective vs. Substantive Addition:The ITAT examined the procedural history, noting that the substantive addition in the hands of Mr. Jayant Vithaldas had been deleted by the coordinate Bench. Consequently, the AO reversed the protective assessment to a substantive one for the assessee. The ITAT found that the revenue authorities had not followed the directions given by the ITAT in earlier proceedings to re-examine the material linking the unexplained hundies to the assessee. The ITAT concluded that the addition was not justified.5. Penalty Proceedings under Section 271(1)(c):The assessee also contested the initiation of penalty proceedings under section 271(1)(c). The ITAT found this issue to be premature and did not call for any interference. The ITAT dismissed the revenue's appeal against the levy of penalty, as it was consequential to the main appeal being decided in favor of the assessee.Conclusion:The ITAT allowed the assessee's appeals partly, directing the AO to delete the additions made on account of unaccounted hundies and to pass orders in accordance with the law regarding interest under section 234B. The ITAT dismissed the revenue's appeal concerning the levy of penalty under section 271(1)(c).