2025 (5) TMI 1648 - AT - Income Tax

Addition in the form of fresh capital introduction - unjustified receipt of high fresh capital to carry on of a seemingly unprospective firm and without examining the creditworthiness of the capital introducer - CIT(A) deleted addition - HELD THAT - All these introductions in capital account were made by Mr. Govind Garg through banking channels and out of the money borrowed from LIC Housing Finance Co. Ltd the copy of statement of the assessee as well as the partner are available in the paper book. Therefore there is no dispute as to the source of money. Therefore the order passed by the ld. CIT (A) is very reason and speaking order dealing with each and every aspect of the matter and therefore - Appeal of the Revenue dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs. 7,01,00,000/- as unexplained expenditure under section 69C of the Income Tax Act, 1961, on account of fresh capital introduction, was justified in the absence of satisfactory explanation or evidence regarding the source of capital?

(b) Whether the capital introduction can be treated as expenditure under section 69C, or is it a capital receipt outside the scope of section 69C?

(c) Whether the admission of fresh evidence/documents by the appellate authority without providing a reasonable opportunity to the Assessing Officer (AO) violated Rule 46A of the Income Tax Rules?

(d) Whether the assessment framed ex-parte under section 144 read with section 144B of the Act was valid, given the non-compliance of the assessee to notices during the scrutiny proceedings?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Legitimacy of addition under section 69C on capital introduction

Relevant Legal Framework and Precedents: Section 69C of the Income Tax Act deals with unexplained expenditure, providing that if an assessee incurs any expenditure and fails to satisfactorily explain the source thereof, such expenditure may be deemed to be income of the assessee for that financial year. The two conditions precedent for invoking section 69C are: (i) there must be an expenditure incurred, and (ii) failure to explain the source of such expenditure.

Court's Interpretation and Reasoning: The Tribunal noted that the AO invoked section 69C treating the capital introduction of Rs. 7,01,00,000/- as unexplained expenditure due to non-submission of explanation by the assessee during the assessment proceedings. However, the appellate authority observed that the amount in question was not an expenditure but a capital receipt introduced by a partner of the firm through banking channels. The appellate authority emphasized that section 69C applies only to expenditure and not to capital receipts.

Key Evidence and Findings: The assessee furnished detailed evidence during appellate proceedings, including bank statements, copies of PAN and Aadhaar cards, ledger accounts, balance sheets of the capital introducer (partner), and IT acknowledgments. It was established that the capital introduction of Rs. 7 crores was made by a partner, Mr. Govind Garg, via cheque from his account, sourced from a loan taken from LIC Housing Finance Co. Ltd. Further, the capital introduction was linked to a registered development agreement related to land ownership and construction project development.

Application of Law to Facts: Since the amount was a capital receipt introduced through legitimate banking channels and not an expenditure, the AO's application of section 69C was found to be erroneous. The appellate authority held that the addition under section 69C was unjustified and illegal.

Treatment of Competing Arguments: The Revenue argued that the large capital introduction in a seemingly unprospective firm warranted scrutiny and that the creditworthiness of the capital introducer should have been examined. The Tribunal acknowledged these concerns but found that the detailed documentary evidence submitted by the assessee during appeal sufficiently explained the source of capital, negating the basis for invoking section 69C.

Conclusions: The Tribunal upheld the appellate authority's decision to delete the addition of Rs. 7,01,00,000/- under section 69C, concluding that the amount was a capital receipt and not expenditure, and the source was satisfactorily explained.

Issue (c): Admission of fresh evidence without opportunity to AO (Rule 46A)

Relevant Legal Framework: Rule 46A of the Income Tax Rules mandates that when fresh evidence is admitted during appellate proceedings, a reasonable opportunity must be provided to the AO to examine such evidence.

Court's Interpretation and Reasoning: The Revenue contended that the appellate authority erred in admitting fresh evidence without allowing the AO a reasonable opportunity, thereby violating Rule 46A. However, the Tribunal noted that the assessment was framed ex-parte due to the assessee's non-compliance during the scrutiny stage, and the fresh evidence was filed during the appeal stage to explain the source of capital introduction.

Key Evidence and Findings: The Tribunal observed that the assessee was unable to present evidence during the assessment proceedings due to the COVID-19 pandemic and other constraints. The appellate authority considered the fresh evidence on record, which was comprehensive and satisfactorily explained the source of capital.

Application of Law to Facts: Given the circumstances of the pandemic and the fact that the AO had already completed assessment ex-parte, the Tribunal found no prejudice caused to the Revenue by the admission of fresh evidence at the appellate stage. The appellate authority's action was deemed appropriate and within the bounds of procedural fairness.

Treatment of Competing Arguments: The Revenue's argument focused on procedural violation, but the Tribunal balanced this against the assessee's right to present evidence and the absence of any demonstrable prejudice to the AO.

Conclusions: The Tribunal held that there was no violation of Rule 46A and that the admission of fresh evidence was justified in the facts and circumstances of the case.

Issue (d): Validity of ex-parte assessment under sections 144 and 144B

Relevant Legal Framework: Section 144 allows the AO to complete assessment ex-parte if the assessee fails to comply with notices or appear for hearings. Section 144B provides procedural safeguards for faceless assessments.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee failed to appear or comply with notices on multiple occasions spanning from October 2019 to March 2021. The AO issued a show cause notice and, upon non-response, completed the assessment ex-parte treating the capital introduction as unexplained expenditure.

Key Evidence and Findings: The Tribunal acknowledged that the assessment was completed in accordance with statutory provisions due to the assessee's non-compliance. However, the subsequent filing of evidence and submissions during appeal justified reconsideration of the addition.

Application of Law to Facts: The ex-parte assessment was validly framed under the law. However, the appellate authority's power to admit fresh evidence and reconsider the addition was exercised properly.

Treatment of Competing Arguments: While the Revenue relied on the validity of ex-parte assessment, the Tribunal balanced this with the assessee's right to be heard during appeal and the availability of evidence explaining the capital introduction.

Conclusions: The ex-parte assessment was valid, but the appellate authority rightly allowed the assessee to explain and delete the addition.

3. SIGNIFICANT HOLDINGS

"As per the provisions of Section 69C of the Act, in case the assessee fails to explain the source of expenditure or part thereof to the satisfaction of the AO, such expenditure shall be considered as unexplained expenditure and be deemed to be expenditure made by the assessee firm. The appellant reiterates that: But in this case, there was no expenditure. It was a capital receipt to the assessee firm and such capital receipt is outside the purview of section 69C of the Income Tax Act."

"Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year."

"In the appellant's case, it is a capital receipt by way of Cheques and completely through banking channels as explained by the appellant in the written submissions. This is not a case of involving any expenditure debited in the books of accounts of the appellant. For this reason alone, I agree with the appellant that the AO is incorrect and unjustified in invoking the provisions of section 69C of the Act."

"The order passed by the ld. CIT (A) is very reason and speaking order dealing with each and every aspect of the matter and therefore, we are inclined to uphold the same by dismissing the appeal of the Revenue."

Core principles established include:

- Section 69C applies solely to unexplained expenditure and not to capital receipts.

- Capital introduction through legitimate banking channels with adequate documentary evidence cannot be treated as unexplained expenditure under section 69C.

- Admission of fresh evidence at the appellate stage is permissible even if the AO was not given prior opportunity, especially when assessment was completed ex-parte and no prejudice is caused.

- Ex-parte assessments under sections 144 and 144B are valid where the assessee fails to comply with notices, but appellate authorities retain power to reconsider additions on fresh evidence.

Final determinations:

- The addition of Rs. 7,01,00,000/- under section 69C was deleted.

- The appeal by the Revenue was dismissed, and the order of the appellate authority allowing the assessee's appeal was upheld.