2024 (4) TMI 1300 - AT - Income Tax

Assessee's books restored under s.145(3); unexplained investment (s.69) and third-party disclosure additions deleted; interest adjusted

Smt. Deepika A Mehta Versus The Dy. Commissioner of Income Tax, Cen. Circle-4 (1), Mumbai And (Vice-Versa)

Smt. Deepika A Mehta Versus The Dy. Commissioner of Income Tax, Cen. Circle-4 (1), Mumbai And (Vice-Versa) - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in rejecting the assessee's books of account under section 145(3) of the Income Tax Act for the assessment year, given the reasons recorded in the assessment order. 2. Whether additions under section 69 (unexplained investments) based on materials available to the AO (including custodian's letter and prior records) are sustainable where the Tribunal had previously directed de novo consideration and the assessee was not furnished the material on which additions were made. 3. Whether additions made on the basis of a composite disclosure by a group constituent (statement under section 132(4)) can be sustained where the assessee's books of account are available and accepted. 4. Whether unexplained receipts of a small amount should be pressed or sustained. 5. Whether interest expenses on funds borrowed for investment in shares are deductible (section 57/other relevant provisions) where AO disallowed interest on grounds that books were unreliable and interest claims were tentative. 6. Whether additions premised on mismatch in balances between the assessee and a related party should be sustained or require fresh adjudication by the AO. 7. Whether interest under section 234D can be levied in a de novo assessment when the original assessment was completed before insertion of section 234D (i.e., whether section 234D applies retrospectively). 8. Whether profits of a partnership firm included in assessee's income and levy of interest under sections 234A/234B require reassessment or remand for computation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Rejection of books of account under section 145(3) Legal framework: Section 145(3) empowers the AO to make an assessment under section 144 where he is not satisfied about correctness or completeness of accounts or regularity of accounting method. Precedent treatment: The Tribunal examined jurisprudential limits on reasons that justify rejection; non-audit under section 44AB is penal and not per se a ground for rejection under section 145(3). Interpretation and reasoning: The AO's reasons (non-audit, alleged non-availability of certified bank copies despite earlier records collected by the Department, entries written belatedly, journal entries with related persons, and passage of time impeding verification) do not constitute an expression of satisfaction as to incorrectness or incompleteness required by section 145(3). Specific factual defects or deceitful elements were not established; examples cited (uniform drawings, related-party journals) could give rise to adjustments rather than wholesale rejection. The AO also incorrectly claimed non-possession of bank statements despite earlier assessment files showing bank details collected. Ratio vs. Obiter: Ratio - non-audit under section 44AB and the cited generalized reasons do not automatically satisfy section 145(3); AO must record specific satisfactions about correctness/completeness. Obiter - comments on improbability of uniform withdrawals as illustrative, not determinative. Conclusion: Rejection of books under section 145(3) was unsustainable; books admitted. Issue 2 - Addition under section 69 for unexplained investments (custodian material and prior directions) Legal framework: Section 69 permits charging unexplained investments to income where assessee fails to explain sources; AO must base additions on material and afford opportunity to the assessee. Precedent treatment: Tribunal had earlier restored identical issues for de novo adjudication and directed AO to furnish the material on which additions were based; coordinate bench decisions required AO to provide copies of information relied upon. Interpretation and reasoning: AO in the subsequent assessment reproduced verbatim earlier reasoning and made identical additions without furnishing the underlying material (e.g., custodian lists) to the assessee, contrary to Tribunal directions. Where CIT(A) had earlier allowed certain issues and Department did not appeal, those findings attained finality and AO could not re-open them in de novo proceedings. The AO's failure to follow Tribunal's directions and to provide relied-upon material rendered the additions unsustainable. Ratio vs. Obiter: Ratio - where Tribunal directs disclosure of material on which addition is based, AO must comply in de novo assessment; failure to provide material or to respect appellate finality invalidates addition. Obiter - observations on verbatim reproduction of earlier paras. Conclusion: Additions under section 69 on unexplained investments deleted; issue not restored to AO. Issue 3 - Additions based on group composite disclosure (statement under section 132(4)) Legal framework: Disclosure statements during search may be used, but allocation among group constituents requires cogent basis; where assessee's books are available and reliable, composite disclosure cannot be mechanically apportioned to override books. Precedent treatment: Coordinate bench decisions held that where books of account subsequently become available and permit computation of actual income, additions based on earlier composite disclosure should be deleted. Interpretation and reasoning: The composite disclosure lacked a breakup specific to the assessee and was made when complete books were not available; now that books are accepted, they furnish the actual income and preclude addition based on the composite disclosure. Parity with coordinate decisions supports deletion. Ratio vs. Obiter: Ratio - composite group disclosures cannot sustain proportionate additions once reliable books of individual constituents are before authorities; such additions must give way to book-based assessment. Obiter - reliance on identical outcomes in related appeals. Conclusion: Addition based on group disclosure deleted. Issue 4 - Small unexplained receipts Legal framework: AO may make additions for unexplained receipts, but assessee may not press de minimis grounds. Interpretation and reasoning: Assessee abandoned the ground given the small amount. Conclusion: Ground not pressed; dismissed as not pursued. Issue 5 - Deductibility of interest expenses on borrowings for share investments Legal framework: Deduction of interest under section 57 (or head-specific provisions) requires nexus between expenditure and income; precedent allows indirect nexus to suffice where borrowing finances income-producing investments (Supreme Court and coordinate bench guidance). Precedent treatment: Coordinate bench and higher court authority recognized that indirect connection can establish eligibility for deduction; recent coordinate decisions allowed interest where borrowing financed investments producing dividends/other income even if not the sole purpose. Interpretation and reasoning: Primary AO reason for disallowance (unreliability of books) was reversed, removing the main basis for disallowance. Other AO conclusions (tentative interest, no basis for charging) were undocumented. In light of binding coordinate precedent recognizing indirect nexus and given acceptance of books, interest expense claimed is allowable. Ratio vs. Obiter: Ratio - interest on funds borrowed for share investments deductible where nexus with income (including dividends/other sources) is established and books support claim; AO must record material basis for contrary conclusion. Obiter - comparison with decisions in related family-member appeals. Conclusion: Interest disallowance deleted; AO to allow interest in computation. Issue 6 - Addition arising from mismatch in balances with related party Legal framework: Additions based on inter-party mismatches require factual clarity and, where material uncertainty exists, may be remanded for AO's fresh consideration; interplay with appeals in related parties may affect relief. Precedent treatment: Coordinate bench remanded similar disputes where facts were unclear or where related-party appellate outcomes could affect relief. Interpretation and reasoning: Unlike some prior cases where addition stemmed from alleged concessions, here the addition was on merits and facts are not settled; given factual complexity and related appellate proceedings, it is appropriate to restore the issue to the AO for fresh adjudication in line with directions in comparable matters. Ratio vs. Obiter: Ratio - where material facts remain unclear and related-party assessments are pending, mismatches should be examined afresh by AO. Obiter - procedural cross-reference to related appeals. Conclusion: Issue restored to AO for de novo determination (allowed for statistical purposes). Issue 7 - Levy of interest under section 234D where original assessment pre-dates insertion of the section Legal framework: Section 234D introduced with effect from a specified date; retrospective application disallowed unless expressly provided. Precedent treatment: Supreme Court authority held that interest under newly inserted section cannot be levied where original assessment was completed prior to its insertion. Interpretation and reasoning: Original assessment was completed prior to insertion of section 234D; levy in de novo assessment cannot retrospectively invoke section 234D. Ratio vs. Obiter: Ratio - interest under section 234D cannot be levied where original assessment pre-dates insertion of that section. Obiter - none. Conclusion: Direction issued that section 234D interest not to be charged. Issue 8 - Partnership firm profit addition and section 234A/234B interest Legal framework: Additions arising from partnership profits depend on whether AO's concession/position before CIT(A) stands; statutory interest (sections 234A/234B) follows law and relevant assessment dates. Interpretation and reasoning: Partnership-profit ground arose from AO's concession at appellate stage and was not pursued successfully by appellant; additional ground seeking remand lacked substantive argument and was dismissed. Interest under sections 234A/234B being consequential and mandatory should be determined by AO in accordance with law; accordingly that issue was remanded to AO for computation consistent with regular assessment date. Ratio vs. Obiter: Ratio - where concession before CIT(A) was made, additional ground lacks merit; mandatory statutory interest questions to be computed by AO consistent with regular assessment. Obiter - procedural handling. Conclusion: Partnership-profit addition dismissed; interest under 234A/234B remanded to AO for levy in accordance with law. Overall outcomes The Court reversed the rejection of books, deleted unexplained investment and disclosure-based additions, allowed interest deduction, directed remand on the inter-account mismatch and computation of certain statutory interest, and held that section 234D cannot be applied where original assessment predated its insertion; the Department's cross-appeal was dismissed to the extent it challenged deletions upheld for the assessee.