Reference To Charging Section Mandatory To Make Additions; Definition Section Cannot Create Tax Liability

BACKGROUND

• The Assessee¹ is one of the directors of companies of Mohan India Group i.e., M/s Mohan India Pvt Ltd., Tavishi Enterprises Pvt Ltd. and Brinda Commodities Pvt Ltd.
• A search and seizure operation was conducted on Mohan India Group on 26.08.2013 and the Assessee was also covered under the said search.
• AO observed that the amounts received by Mohan India Pvt Ltd. ('the Company)' from National Spot Exchange Ltd. ('NSEL') for purchase of sugar were utilized towards advancing of money by the Company to certain parties.
• Further, the Company had purchased gold and immovable properties during AY 2013-14 and AY 2014-15 and other investments were also made in properties by directors of Mohan India Group.
• AO also observed that Pay Orders ('PO') and Demand Drafts ('DD') were issued from bank account of Mohan India Group in favour of Directors and their relatives and funds were siphoned off through Shri Ram Awadh Sharma, who is known/related to Jai Shankar Shrivastava (director other than Assessee), by transferring funds from Brinda Commodities Pvt Ltd. to assessee.
• Therefore, the AO concluded that the two directors (including the Assessee) have siphoned off funds from Mohan India group companies amounting to INR 947.42 crores.
• Accordingly, the AO framed an assessment order u/s 143(3) for AY 2014-15 making an addition of INR 473.71 crores each in the hands of both directors under section 2(24)(iv) of the Income-tax Act, 1961 ('the Act').
• Aggrieved by the order, the Assessee filed an appeal before the Commissioner of Income-tax (Appeals) ['CIT(A)'], who reiterated the findings of AO and dismissed appeal of the Assessee.
• Against CIT(A)'s order, the Assessee filed an appeal before the Hon'ble Tribunal.

ASSESSEE'S ARGUEMENTS

• Panchnama dated 24.10.2013 is invalid on the ground that it was drawn in the name of bank account no. and not in the name of Assessee, which is not as per the requirements of section 132(1) of the Act.
• Assessment order is liable to quashed as the same has been passed u/s 143(3) of the Act instead of section 153A of the Act.
• Assessment order for AY 2014-15 in case of the Assessee is verbatim to the assessment order passed in case of the Company for AY 2013-14, except for the final outcome.
• None of the DDs/POs have either been issued by the Assessee nor its name is mentioned in the list of persons in whose favour said DDs/POs have been issued.
• Investment in gold/immovable property is in the name of the Company and loans and advances to various parties are also reflected in the balance sheet of the Company.
• AO, nowhere in the findings, has given details of siphoning off of funds by the Assessee, except in the last para where Assessee's name is mentioned along with Jai Shankar Shrivastava.
• It is not emanating from statement of Shri Ram Awadh Sharma that amount advanced to him was at the behest of the Assessee. He does not mention the name of the Assessee in his entire statement.
• Relied on judicial precedents² and argued that income can be charged only if it falls under any of the heads of income specified in section 14 of the Act i.e., charging section whereas AO has made addition only u/s 2(24)(iv) which is a section for definition.

DEPARTMENTAL REPRESENTATIVE'S ARGUEMENTS

• AO in the assessment order meticulously demonstrated the siphoning off of funds by making independent enquiries and recording the statements of various persons on oath.
• Analysis of fund flow clearly establishes that monies were paid without corresponding delivery of goods (i.e., sugar)- an arrangement which squarely falls under the mischief of section 2(24)(iv)r.w.s. section 28 of the Act.
• Assessee either directly or through Mohan India group companies received funds from NSEL without any commensurate obligation.
• Relied on Hon'ble High Court ruling³ to contend that circular fund movement to camouflage real income can be unraveled by lifting the corporate veil and taxing the substance of the transaction. Thus, doctrine of real income is not applicable.

TRIBUNAL OBSERVATIONS

• The name of the Assessee is mentioned after bank account no. in the search warrant which is not a flaw and would not in any manner vitiate the search proceedings.
• Date of search is 26.08.2013, therefore AY 2014-15 is the year of search. Provisions of section 153A (as applicable to AY 2014-15) require assessment for immediately six preceding AYs shall be made u/s 153A of the Act. Therefore, the assessment order for AY 2014-15 has been rightly framed u/s 143(3) of the Act.
• Since the AO has verbatim reproduced the assessment order of the Company in case of the Assessee, findings are superfluous and thus, the order is ambiguous.
• Throughout the assessment proceedings, the stand of the Assessee is consistent that affairs of companies (Mohan India Pvt Ltd. and Tavishi Enterprises Pvt Ltd.) were managed by Jai Shankar Shrivastava, the fact which has not been rebutted by him at any stage and thus, there is no conflict/contradiction in Assessee's stand.
• On allegation of advancing of monies to certain parties, they were made by the Company and not the Assessee. Further, the Assessee firmly denied any relation with these parties and these advances were made for business transactions
• With respect to investment in immovable properties and gold, the Assessee admitted that amount received from NSEL was invested, but these properties and gold were purchased in the name of companies thereby reflecting in their books.
• While making addition, AO has only made reference to section 2(24)(iv) and not specified any head under which the alleged income shall be taxable.
• Definitions given in Section 2 of the Act explain the terms, they do not create any liability to pay tax; only charging sections create the legal obligation to bring an item into the tax net.
• Relied on Hon'ble Supreme Court ruling⁴ to hold that mentioning of charging/machinery provision is necessary for making an addition in the assessment order.
• Even though CIT(A) filled the vacuum left by AO by making reference to section 28 in his order, the amount cannot be taxed as business income as it was not established by the lower authorities that the Assessee is in the business of usurping funds of companies nor in business commensurate with objects of the companies.
• Thereby, partly allowed the appeal of the Assessee.

AURTUS COMMENTS

• This tribunal ruling re-establishes the fundamentals of taxation as per which liability to tax is based on the charging section and not on a definition section. Charging sections determine the taxable entity, tax base (total income) and timing of taxation.
• Therefore, the assessment order should categorically give reference of the charging section under which income is proposed to be added.

Footnotes

1 Jag Mohan [TS-101-ITAT-2026(DEL)]

2 CIT vs. Rajan Nanda 349 ITR 8 Delhi Nanikant Ambalal Mody vs. CIT 61 ITR 428 (SC)

3 Ketan Parik vs. UOI 134 Taxman 234 (Bom)

4 CIT vs B.C. Srinivasa Setty [128 ITR 294]

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