2025 (9) TMI 1253 - HC - Income Tax

Appeal allowed: addition for unexplained investments and loans unjustified; sale proceeds and documented loans explained sources

Principal Commissioner Of Income Tax-1, Kolkata Versus Improve Financial Consultants Private Limited

HC allowed the appeal, holding the addition for unexplained investments and loans was not justified. The AO ignored the opening balance and treated the ... Unexplained investments and unexplained loans and advances - HELD THAT:- Initially, there was an investment of Rs. 7,98,97,100/- in equity shares as on 31.3.2013, which has been reduced to Rs. 5,60,77,100/- as during the year under assessment the assessee sold equity shares for a consideration of Rs. 2.38 Crore. The Appellate authority has relied upon the relevant schedule of the balance sheet, which prima facie indicates that the AO has made the addition for the total investment in equity shares appearing as on 31.3.2013 totally ignoring the investments as on the last day of the preceding financial year. Even the documents available in the public domain in the portal of the Ministry of Corporate Affairs were also relied upon by the Appellate authority in support of its conclusion as regarding the sale of such equity shares. Unexplained loans and advances - Issue with regard to the source of the said fund was explained by the assessee as it appears that it was partly from the funds realized from the sale of equity shares of Rs. 2.38 Crore and a fresh unsecured loan of Rs. 1,03,25,000/- which was received from A.V. Ispat Pvt. Ltd. at Rs. 1 Crore and Ganga Carriers Pvt. Ltd. at Rs. 3.25 Lakh. Assessee has given full and detailed particulars with regard to unsecured loans which he has received from sister concern and the transactions have been done through banking channel and the creditors who have given loan in cash are all private limited companies duly assessed to tax and registered at the Ministry of Corporate Affairs. Decided in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether documents first placed before the Appellate authority (Income Tax Appellate Tribunal) but not before the Assessing Officer or the Commissioner (Appeals) can be admitted and relied upon by the Tribunal in deciding the appeal. 2. Whether additions made by the Assessing Officer as unexplained investments (equity shares) can be sustained where audited financial statements and schedules for the assessment year and the preceding year show no fresh investment and indicate sale of shares during the year. 3. Whether additions made by the Assessing Officer as unexplained loans and advances can be sustained where audited balance-sheet schedules and bank-mediated transactions indicate sources (sale proceeds and fresh unsecured loans) and the creditors are assessed companies recorded with the Ministry of Corporate Affairs. 4. Whether questions raised in relation to the above determinations constitute substantial questions of law warranting interference by the High Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility and reliance on documents produced first at appellate stage Legal framework: Principles governing admission of evidence at appellate stage and power of appellate authorities to consider documents not placed before the lower authority where relevant to deciding the appeal. Precedent Treatment: No express precedents were cited or overruled in the judgment; the Court applied established appellate fact-finding principles rather than distinguishing or overruling case law. Interpretation and reasoning: The Court held that if the assessee offers explanations at the appellate stage and the Appellate authority finds such documents relevant for deciding the issue, there is no reason to reject those documents merely because they were not produced before the Assessing Officer or Commissioner (Appeals). The Tribunal is empowered to consider relevant materials placed before it when forming its own conclusions on facts. Ratio vs. Obiter: Ratio - Appellate authorities may admit and rely upon documents first produced at the appellate stage if they are relevant to the determination of the appeal; this is a binding proposition for the appeal at hand. No broader obiter addressing limits or conditions for such admission was articulated beyond relevance. Conclusions: The Court accepted the Tribunal's reliance on documents considered at the appellate stage as valid, where the documents were relevant and had been evaluated by the Appellate authority. Issue 2 - Validity of addition for unexplained investments in equity shares Legal framework: Assessment of unexplained investments requires examination of the actual movement and source of investments during the relevant year, having regard to audited financial statements and comparative balances from the preceding year. Precedent Treatment: No precedent was expressly applied or distinguished; the Court treated the matter as one of fact calling for scrutiny of account schedules and public records. Interpretation and reasoning: The Tribunal examined audited financial statements and balance-sheet schedules for the assessment year and the immediately preceding year and found that the position of investments as on 31.3.2013 reflected a reduction from the opening position, indicating sale of equity shares during the year for Rs. 2.38 crore. The Tribunal also relied on Ministry of Corporate Affairs portal records to corroborate sale transactions. The Assessing Officer's addition, based on the total investment figure as on 31.3.2013 without accounting for the preceding year's investments and the year's sales, was thus prima facie incorrect. Ratio vs. Obiter: Ratio - Where audited accounts and contemporaneous public records show that no fresh investment was made during the year and indicate sale of shares, an addition treating the closing investment figure as unexplained without accounting for the opening balance and disposals is unsustainable as a matter of fact. This factual finding is central to the Court's decision in the appeal. Conclusions: The Court affirmed the Tribunal's decision to set aside the addition regarding unexplained investments, finding the Tribunal's factual conclusion supported by audited statements and external records. Issue 3 - Validity of addition for unexplained loans and advances Legal framework: Additions for unexplained loans and advances require analysis of year-end balances, comparative figures from previous year(s), and credible explanation of sources for any net increase, including bank-mediated transactions and documentary particulars identifying creditors and movements. Precedent Treatment: No specific precedent was relied upon; the matter was treated as a question of fact amenable to documentary scrutiny. Interpretation and reasoning: The Tribunal looked at loans and advances as on 31.3.2012 and 31.3.2013, noting an increase from Rs. 2.35 crore to Rs. 5.76 crore (net increase ~Rs. 3.41 crore). The Tribunal identified disposals/realizations (receipt of Rs. 18 lakh) and fresh advances made during the year (specific amounts to named entities). The assessee explained that the increase was funded partly by sale proceeds of equity shares (Rs. 2.38 crore) and a fresh unsecured loan of Rs. 1.03,25,000 received from related companies. The Tribunal accepted that unsecured loans were received through banking channels and that the creditors were private limited companies duly assessed to tax and registered with the Ministry of Corporate Affairs. Ratio vs. Obiter: Ratio - Where contemporaneous financial schedules, bank transactions, and corporate records substantiate the source of funds for the increase in loans and advances, and where creditors are recognized corporate entities, an addition on the ground of unexplained loans and advances is not warranted. This factual conclusion constituted the operative ratio in relation to the loans and advances. Conclusions: The Court upheld the Tribunal's finding in favour of the assessee that the increase in loans and advances was satisfactorily explained and hence the addition could not be maintained. Issue 4 - Existence of substantial question of law Legal framework: High Court interference in appeals from the Tribunal requires the existence of substantial questions of law; purely factual disputes decided by the Tribunal generally do not amount to such questions. Precedent Treatment: No precedent was cited; the Court applied the standard principle that questions of fact decided on evidence do not ordinarily raise substantial questions of law for admission. Interpretation and reasoning: The Court observed that the contested determinations concerned assessment of documents, audited financial statements, balance-sheet schedules, bank-mediated transactions and public records - matters of fact and evidence. The Tribunal's conclusions were supported by documents placed before it. Absent a legal error or misapplication of law, these fact-based conclusions do not constitute substantial questions of law. Ratio vs. Obiter: Ratio - Where the Tribunal's decision rests on factual findings supported by documentary evidence, the High Court will not entertain the appeal on the ground of a substantial question of law. This is the operative legal proposition applied to refuse admission. Conclusions: The Court found no substantial question of law arising from the Tribunal's fact-based determinations and dismissed the appeal as lacking merit.