2019 (10) TMI 1615 - AT - Income Tax

ITAT Upholds Donation Claims Under Section 80GGC, Sets Aside Unexplained Investments and Expenses Disallowance

The ITAT Ahmedabad dismissed the challenge to the AO's ex-parte order u/s 144, applying the doctrine of merger with no prejudice to the assessee. The ... Ex-parte order u/s. 144 - assessee has challenged the order passed by the AO by resorting to Section 144 instead of passing order u/s 143(3) - HELD THAT:- At the time of hearing, AR was confronted with the fact that the order of the AO now stands merged and thus applying the doctrine of merger no prejudice was caused to the assessee. In the absence of any rebuttal to such observation, we see no merit in the aforesaid ground. Ground No. 1 of the assessee’s appeal is dismissed. Disallowance u/s 80GGC - AO has disallowed the donation made to a political party namely ‘Rashtriya Komi Ekta Party’ - HELD THAT:- We observe that the assessee had filed the copy of receipt issued by the political party as well as the copy of registration of said party by the Election Commission of India by letter . The bank statement filed by the assessee also reflects that payment has been made through banking channel to the aforesaid done. Therefore, we see no justification in the action of the AO for denial of disallowance claimed under s. 80GGC of the Act merely on the ground that notice issued under s. 133(6) of the Act was returned unserved. We thus find merit in the plea raised on behalf of the assessee for allowability of aforestated deduction of Rs. 7,85,000/- claimed under s. 80GGC. The action of the CIT(A) also accordingly set aside and the AO is directed to restore the claim of the assessee. Unexplained investment - The aforesaid transaction has been recorded in the books in FY 2011-12 concerning AY 2012-13 and therefore not relatable to assessment year in question. Relevant documentary evidences were filed to support such contention. Therefore, without going into other aspects on merits, we find prima facie merit in the appeal of the assessee for unsustainability of the addition in so far as AY 2012-13 in question is concerned. Unexplained capital introduced by partners - The amount of capital has been introduced through banking channels. In the wake of such facts, the principles laid down in CIT vs. Odedara Construction [2014 (2) TMI 130 - GUJARAT HIGH COURT] would squarely apply. Hence, deeming fiction created by Section 68 of the Act could not be invoked in the hands of the assessee-partnership firm. We thus reverse the action of the lower authorities and direct the AO to delete the addition of Rs. 44 Lakhs on this score. Disallowance of expenses and disallowance of expenses u/s 40A(3) incurred towards conversion of land to non-agricultural land for the purposes of development thereof - The assessee has claimed that expenses have been incurred in several tranches without breach of limit prescribed under s.40A(3) of the Act. The Revenue authorities have applied Section 40A(3) of the Act on wrong assumptions on facts by seeking aggregate the monthly expenses in cash instead of daily expenses. The documentary evidences adduced by the assessee supports the plea of the assessee. The expenditure incurred relates to development of land and considering the nature of activity, we find force in the plea of the assessee for admissibility of claim. Needless to say, the degree of onus cast upon the assessee varies from case to case. The assessee is not expected to furnish infallible proof towards incurring of expenditure in all circumstances. Many a times, it is not possible to establish the incurring of expenditure to the hilt and the surrounding circumstances and preponderance of probabilities would be guiding factor in many situations. Having regard to the totality of facts and circumstances, we find considerable merit in the case made out on behalf of the assessee for allowability of such expenditure. ISSUES: Whether an order passed under Section 144 of the Income Tax Act, 1961, can be sustained when the assessee has responded to notices and the order stands merged with a subsequent order.Whether the income determined under Section 144 can be confirmed in place of the return income when the order is 'high pitched.'Whether disallowance under Section 80GGC of the Act is justified when donations are made to a registered political party and payment is through banking channels.Whether addition on account of unexplained investment is sustainable when the transaction relates to a different assessment year.Whether addition on account of unexplained increase in capital account of partners can be made under Section 68 when partners have filed returns and capital is introduced through banking channels.Whether disallowance of expenses under Section 40A(3) of the Act is justified when cash payments are made in several tranches without breaching prescribed limits. RULINGS / HOLDINGS: Regarding the order under Section 144, the court held that 'applying the doctrine of merger no prejudice was caused to the assessee,' and therefore dismissed the challenge to the order's validity.The court dismissed the general challenge to the 'high pitched' income determination as infructuous.The disallowance under Section 80GGC was reversed, holding that 'there is no justification in the action of the AO for denial of disallowance claimed under s. 80GGC... merely on the ground that notice issued under s. 133(6) was returned unserved,' and directed restoration of the deduction.The addition of Rs. 5 Lakhs on account of unexplained investment was deleted as the transaction pertained to a different assessment year, finding 'prima facie merit in the appeal of the assessee for unsustainability of the addition.'The addition of Rs. 44 Lakhs on account of unexplained capital introduced by partners was deleted, applying the principle that 'deeming fiction created by Section 68 of the Act could not be invoked' where partners are assessed and capital is introduced through banking channels.The disallowance of expenses under Section 40A(3) was set aside, reasoning that the AO erred by aggregating monthly cash payments instead of daily payments, and recognizing that 'the degree of onus cast upon the assessee varies' and 'preponderance of probabilities would be guiding factor.' RATIONALE: The court applied the doctrine of merger to hold that once a subsequent order is passed, the earlier order under Section 144 stands merged, thus no prejudice arises.For Section 80GGC, the court relied on documentary evidence including receipts, registration of the political party by the Election Commission, and bank statements to uphold the deduction.The court emphasized the relevance of the assessment year, excluding additions relating to transactions outside the relevant year.In respect of unexplained capital under Section 68, the court applied precedent from the Gujarat High Court, holding that where partners are assessed and capital introduced through banking channels, the deeming fiction cannot be invoked against the firm.Regarding disallowance under Section 40A(3), the court interpreted the statutory limit on cash payments on a daily basis rather than monthly aggregation, and acknowledged practical difficulties in proving expenditure, applying 'surrounding circumstances and preponderance of probabilities' as guiding principles.