The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, held that the disallowance of the claim of write-off made in an individual entity’s financials prior to amalgamation could not be added as income in the hands of the assessee.
The assessee, Citygold Education Research Limited, is a private limited company engaged in the business of disseminating and advancing knowledge, promoting educational activities, and acquiring, selling, constructing, developing, promoting, or otherwise dealing in land, commercial and residential complexes, etc.
The assessee company and two other entities were amalgamated from 01/04/2018, as per the order of the National Company Law Tribunal.
A search action under section 132 of the Income-Tax Act was carried out in the case of Hubtown Limited and other group concerns, including the assessee, on 30/07/2019. The notice under section 153A was issued on 12/11/2020. In response to the said notices, the assessee filed a return of income on 05/02/2021, declaring a total loss of Rs. 72,15,826/-
Pursuant to the search in the case of the assessee, the Assessing Officer noticed that in the financial accounts submitted by the assessee of M/s Citygold Farming P Ltd and M/s Heddle Knowledge P Ltd for the year ended 31/03/2016, there was a write-off of advances and other debit balances to the tune of Rs. 8,45,866/- and Rs. 18,16,839/-, respectively.
After acquiring certain details with respect to the write-off of advances from Sandeep N Gharat, one of the farmers to whom advances were paid towards the purchase of land, he concluded that there was no transaction between M/s Citygold Farming P Ltd and Sandeep N Gharat to justify the write-off that was in the books.
Accordingly, he made the disallowance in the hands of the assessee under section 37(1) of the Income Tax Act while completing the assessment under section 153A read with section 143(3) of the Income Tax Act.
Aggrieved by the order, the assessee filed an appeal before the CIT(A), who dismissed the appeal filed by the assessee. Therefore, the assessee filed a second appeal before the tribunal.
Counsel for the assessee before the tribunal submitted that the rejection based on the legal justification that advances and debts were written off in M/s Citygold Farming P Ltd and M/s Heddle Knowledge P Ltd’s books of accounts before the merger’s effective date. Therefore, they cannot be disallowed in the hands of the assessee for the year under consideration while completing the assessment under section 153A of the Income Tax Act.
The assessee’s counsel further argued that prior to the AY 2019-20, M/s Citygold Farming P Ltd and M/s Heddle Knowledge P Ltd were separate entities filing returns of income on their own, and their assessments cannot be clubbed with that of the assessee.
The counsel for revenue submitted that the amalgamation order of NCLT is post the date of search and, therefore, the Assessing Officer has concluded the assessment by clubbing the entities.
It was observed by the tribunal that the Assessing Officer had issued separate notices of 153A / 153C to these entities in their individual names, which makes it clear that prior to amalgamation, these entities were treated as not part of the assessee. Therefore, the disallowance of a claim made in the individual entity’s financials cannot be added as income in the hands of the assessee during the year, which is prior to amalgamation.
After reviewing the facts and records, the two-member bench of Padmavathy S. (Accountant member) and Kuldip Singh (Judicial Member) held that the disallowance of the claim of write-off made in an individual entity’s financials prior to amalgamation could not be added as income in the hands of the assessee. Therefore, the bench deleted the addition made by the assessing officer.
Vijay Mehta, Counsel, appeared for the assessee, and Madhu Malati Ghosh, counsel, appeared for revenue.
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