Necessity for Verification of Capital and stock balances: ITAT Remits Rs. 7 Cr Income Addition [Read Order]

Tejasvi Bhalla (assessee), a commission agent and proprietor of Arshia Enterprises, faced scrutiny for AY 2018-19. The assessee filed original Income Tax Return (ITR) on 28.08.2018, declaring an income of Rs. 4,77,890.

The case was selected for scrutiny based on a suspicious transaction report from the bank regarding credits in account. The assessee filed a revised ITR, declaring an income of Rs. 46,27,244, claiming that transactions worth Rs. 96,66,11,798 pertained to proprietary concern, Arshia Enterprises, which traded in import and export licenses.

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The assessee submitted that Rs. 5,51,33,956 and Rs. 1,77,38,463 represented the opening capital and stock-in-trade of Arshia Enterprises as per the closing balances of the balance sheet for AY 2017-18.

The AO treated these amounts as unexplained investments under Section 69 of the Income Tax Act, 1961, and added them to her taxable income. The AO also initiated penalty proceedings under Section 271AAC of the Income Tax Act.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) dismissed the appeal for non-prosecution. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The counsel for the assessee argued that the AO failed to consider the complete facts, as the AY 2017-18 assessment was pending before the CIT(A). The Counsel for the assessee further submitted that the balance sheet of Arshia Enterprises for the financial year ending 31.03.2017 demonstrated that the disputed sums were closing capital and stock balances.

The counsel requested the matter be remitted to the AO for verification of these balances, to which the Senior Departmental Representative did not object.

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The two-member bench, comprising Challa Nagendra Prasad (Judicial Member) and Avdhesh Kumar Mishra (Accountant Member), observed that the assessee deserved a reasonable opportunity to address the non-compliances. The tribunal noted that the AO had not verified the opening capital and stock balances for the year starting 01.04.2017.

The tribunal held that, in the interest of justice, the matter should be remitted to the AO for fresh adjudication after providing the assessee adequate opportunities to substantiate claims. The tribunal set aside the CIT(A)’s order and directed the AO to re-examine the additions of Rs. 7,28,72,419. The issue of penalty initiation under Section 271AAC was dismissed as premature.

The appeal of the assessee was allowed for statistical purposes.

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