TMI Blog2021 (6) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... s no working capital funds available in the first year of incorporation i.e. 2007-08. The particular facts that the assessee firm was incorporated only on 23.02.2007 and gained the legal status as a firm only on that particular date upon such incorporation and, thus, the assessee company did not exist when the impugned income was earned. Thus, the assessee cannot be made responsible for evasion of tax on the ground of alleged payment made prior to such incorporation and/or registration of the partnership firm. The present addition has been made in the case of the appellant also states that one payment is made on 01.04.2007 which falls in A.Y. 2008-09 and not in A.Y. 2007-08 and therefore, even balance payment cannot be considered as undisclosed payment in the hands of the appellant for the current Assessment Year. Since the AO has not been able to establish that the appellant had any source of making for such huge unaccounted payment particularly with the payment towards on-money of land purchase were prior to the incorporation of the appellant firm and part payment was in subsequent Assessment Year, the condition of addition is not satisfied. Addition made by the Ld. AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners to carry on business. 1.4 The Partnership Act does not mandate that such agreement has to necessarily be in writing, it could be oral too so that date of registration of the partnership deed is not paramount if the cumulative facts showed that there was existence of partnership even before that date. 1.5 The Ld. CIT(A) has failed to appreciate that the partner of the assessee firm had admitted to have negotiated the said land deal on behalf of the firm and the payment was also made on behalf of the firm. 1.6 The Ld. CIT(A) had failed to appreciate that even if cash payment was made by one of the partners, it was paid on behalf of the firm as the said land belonged to the firm. 1.7 The Ld. CIT(A) has failed to appreciate that a partner is an agent of the firm in terms of section 18 of the Partnership Act. 2. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 2. The brief facts leading to the case is this that a search under Section 132 of the Act was conducted in the case of Savvy Group on 27.04.2011 and subsequent dates. A warrant of authorization under Section 132 was also issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of land for the project Savvy Solaris undertaken by the appellant firm, jointly by Savvy Group and Maruti Group; the same were out of unaccounted receipt of Savvy Infrastructure, another firms promoted by the Savvy and Maruti Group. The Ld. AO was of the view that since the land has been purchased in the name of the appellant firm, and the final sale deed was executed in the name of the appellant, and above all cheques payments were made by the appellant, the logical corollary would be that it is none but the appellant had borne the cash amount too. Apart from that one Amit Patel was negotiating the land deal in the capacity of the partner of the appellant firm and he has accepted and confirmed that an on-money payment was made by the appellant firm fact of which has been relied upon by the Ld. AO while making addition of ₹ 4.01 crores in the hands of the assessee. The Ld. AO was of the view that the said amount has not been offered either in the return of income of Savvy Infrastructure Company or before the Settlement Commission and neither tax has been paid thereon. Ultimately the addition of ₹ 4.01 crores was made on the ground that on-money payment towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the assessee when such amount was paid to the venture of the land much before the formation of the appellant firm. 7. We have heard the rival submission made by the respective parties and we have perused the relevant materials available on record. 8. The case of the assessee is this that the partners of the firm have invested in the land for and on behalf of the firm out of undisclosed receipt of Savvy Infrastructure. It is also the further case of the assessee that the firm was incorporated on 23.02.2007 and majority payments in respect of such purchase of land was made prior to the date of incorporation and therefore, the same is not out of the undisclosed income of the firm. It is an admitted position that the appellant firm was incorporated on 23.02.2007. It further appears from the Audited Annual Accounts of the appellant firm relevant portion whereof has been reproduced in the order passed by the Ld. CIT(A) evidencing that there was no working capital funds available in the first year of incorporation i.e. 2007-08. The relevant extract of the balance sheet of 2007-08 as reproduced by the Ld. CIT(A) is reproduced hereinbelow for ready reference:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd lying and situated at Survey No. 197/1 and 198/2. Moreso, when the appellant firm was incorporated on 23.02.2007 i.e. in the A.Y. 2007-08 the present year under consideration being the first year of incorporation of business of the appellant, no addition towards unexplained cash credit can be made under Section 68 in the first year of incorporation of business. In the absence of huge capital available with the assessee firm the addition of ₹ 4.01 crore on the ground of unaccounted payment for purchase of land lying and situated at Survey No. 197/1 and 198/2 is non-application of mind and not justified under Section 68 of the Act. Moreso, the amount paid by cheque was also introduced by the partners of the appellant firm as their capital and payment was made by the appellant firm out of the said amount. It is further evident from the following chart that the major portion of such cash amounts paid to the owners of land on various dates was before the date of incorporation of the appellant firm on 23.02.2007:- Date Payments made to Amount (Rs.) 19.07.2006 Baldev, Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the appellant firm before the date of its incorporation. Thus, the fund utilized for payments towards acquisition of land were not belonging to the appellant firm; the same seems belonged to the partners of the appellant firm. Thus, admittedly when the appellant has no source of making alleged unaccounted cash payment of ₹ 3.82 crore out of the total payment of ₹ 4.01 crore prior to the date of incorporation of the appellant firm, such unaccounted payment cannot be subject matter of addition in the hands of appellant firm merely on the ground that cheque payments were made by the appellant firm. 11. We have further considered the judgment passed by the Hon ble Apex Court in the case of CIT vs. City Mills Distributors Pvt. Ltd., reported in 85 Taxman 352 wherein it has been held that the income earned on business carried on by the promoters of company prior to the date of incorporation of company cannot be said to the income of the company inasmuch as a company becomes a legal entity in the eye of law only when it is incorporated and the question as to who is liable to pay tax on such income cannot depend upon whether or not the company after incorporation so d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions for the transactions prior to the date of incorporation of company or registration of partnership deed, additions cannot be made in the hands of such company or firm. Partnership firm is a person as defined under the Act and come into existence from the date of registration of firm under the Partnership Act. Before registration, such firm has no legal status and cannot be considered responsible for any act. Therefore, the payment as shown in the seized paper amounting to ₹ 3.82 crore is prior to the date of registration of partnership firm, hence, it cannot be added in the hands of the partnership firm. The Assessing Officer may initiate proceedings to assess this income in the hands of the partners, if deemed fit. Additions to the extent of ₹ 3.82 crore are deleted for the reasons as discussed above. 16. The Ld. Representative appearing for the respondent vehemently argued against such observation and/or direction made by the Ld. CIT(A). The sum and substance of his argument is this that without giving an opportunity of being heard to the aggrieved party the direction issued by the appellant authority is an exercise in futility. On this issue he has relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, has not been granted an opportunity of hearing by the CIT(A) before these directions were issued. Such being the admitted facts, its beyond doubt that a completed assessment cannot be disturbed or reopened to give effect to such findings or directions. 16. There is, however, an even more fundamental issue, and that issue is whether the direction that the deemed dividend income being brought to tax in the hands of Shri Asnani is a direction necessary for the disposal of case. This issue assumes significance in view of the legal position that, as held by Hon ble Supreme Court in the case of CIT vs Rajinder Nath [(1979) 120 ITR 14 (SC)], As regards the expression direction in s. 153(3)(ii) of the Act, it is now well settled that it must be an express direction necessary for the disposal of the case before the authority or Court. It must also be a direction which the authority or Court is empowered to give while deciding the case before it. Their Lordships then added that The expressions finding and direction in s. 153(3)(ii) of the Act must be accordingly confined and that Sec. 153(3)(ii) is not a provision enlarging the jurisdiction of the authority or Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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