No Escapement of Income Where Tax Paid on Consolidated Profits: ITAT Quashes ₹16.06 Cr Double Additions [Read Order]

The Rajkot Bench of Income Tax Appellate Tribunal (ITAT) held that where income arising from business transactions has already been offered to tax on a consolidated basis, no further additions can be sustained on the same transactions in the hands of another entity merely due to the existence of a separate Permanent Account Number (PAN). The Tribunal ruled that such additions result in double taxation without any real escapement of income under the Income Tax Act, 1961.

The appeal was filed by the Income Tax Officer, Ward-1, Junagadh, against M/s Kanji Ambabhai Cotton Industries, Manavadar, Junagadh, for the A.Y. 2017-18. The case arose pursuant to reassessment proceedings initiated after the tax department received information regarding substantial cash deposits, cash withdrawals, time deposits, mutual fund investments, unsecured loans, and interest income reflected in the bank accounts linked to the assessee.

The Assessing Officer (AO) reopened the assessment and passed an order under Section 147 read with Section 144B of the Income Tax Act, 1961, making multiple additions aggregating to approximately ₹16.06 crore under Section 69A and Section 69B of the Income Tax Act, 1961, treating the transactions as unexplained money and unexplained investments. These additions were made on the premise that M/s Kanji Ambabhai Cotton Industries and another firm, M/s Kanji Ambabhai & Co., were separate legal entities with different PANs and therefore required separate taxation.

On appeal, the Commissioner of Income Tax (Appeals) deleted the additions, holding that the impugned transactions had already been recorded in consolidated books and taxed in the hands of M/s Kanji Ambabhai & Co., and that making additions again in the hands of M/s Kanji Ambabhai Cotton Industries resulted in double addition without any loss of revenue. Aggrieved by this relief, the Revenue carried the matter in appeal before the ITAT.

The Revenue contended that the two partnership firms, despite having common partners and identical profit-sharing ratios, were distinct legal persons under Section 2(31) of the Income Tax Act, 1961. It was argued that since M/s Kanji Ambabhai Cotton Industries held a separate PAN, maintained a separate bank account, and was recognised independently for purposes such as availing textile modernization subsidy, it was required to file its own return of income and be assessed separately.

The Revenue submitted that consolidation of profits of two distinct firms for taxation purposes was impermissible and that the AO was justified in treating the bank transactions and investments in the hands of M/s Kanji Ambabhai Cotton Industries as unexplained.

The assessee argued that both firms consisted of the same partners with identical profit-sharing ratios and that the second PAN was obtained solely to comply with eligibility conditions for availing textile modernization subsidy from the Ministry of Textiles. It was submitted that separate books of accounts were maintained and audited for both firms, but for administrative convenience and transparency, the profits were consolidated and offered to tax in the hands of M/s Kanji Ambabhai & Co.

The assessee further contended that all cash deposits, withdrawals, investments, and loans were fully recorded in the books and supported by documentary evidence, and that the AO had failed to point out any actual omission or concealment of income.

The Bench comprising Dinesh Mohan Sinha, Judicial Member, and Arjun Lal Saini, Accountant Member, dismissed the Revenue’s appeal and upheld the order of the Commissioner of Income Tax (Appeals). The Bench noted that separate books of accounts and audit reports existed for both firms and that the AO had not discredited or rejected any of the documentary evidence produced by the assessee.

The Tribunal observed that although a partnership firm is treated as a separate “person” for assessment purposes under the Income Tax Act, 1961, consolidation of profits between two genuine firms having identical partners and profit-sharing ratios does not automatically lead to escapement of income, particularly when the consolidated income has already been subjected to tax.

The Tribunal held that the additions were based solely on information received from banks and represented a mechanical reproduction of data without examining whether the income had already been taxed. It concluded that making additions again in the hands of M/s Kanji Ambabhai Cotton Industries amounted to double addition on the same set of transactions, resulting in no real loss to the Revenue.

Accordingly, the Tribunal ruled that there was no escapement of income and no justification for sustaining the additions under Section 69A and Section 69B of the Income Tax Act, 1961, and dismissed the Revenue’s appeal in its entirety.