AO can't do additions just by relying on inspector's report

1. A search and seizure operation under section 132 of the Income-tax Act, 1961 was carried out in the Swastik Pipe group of companies on August 28, 2008, which included the assessee-company as well.

2. The Assessing Officer accordingly carried out the investigation. An inspector was deputed to find out the whereabouts of these companies. Based on the report of the inspector, the Assessing Officer held that the share capital received by the assessee-company is not genuine and he accordingly made the addition of Rs. 30 lakhs as unexplained credit under section 68 of the Act.

3. The Assessing Officer further made an addition of Rs. 18,645 under section 14A of the Income-tax Act by invoking the provisions of rule 8D.

4. The assessee came in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) after examining the facts of the case, upheld the addition of the Assessing Officer about the non-genuineness of the share capital of the company. However, he was of the view that the family members of the directors of the assessee-company have purchased these shares after paying 30 per cent. of the value of these shares i.e., Rs. 9 lakhs and hence the addition should be restricted to Rs. 21 lakhs and not Rs. 30 lakhs as made by the Assessing Officer. Accordingly he gave a relief of Rs. 9 lakhs.

Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue is in appeal and the assessee has filed cross-objection.

5. On appeal the ITAT held as under: The address of these companies was Room No. 6/7 on 4th Floor, 6 Clive Road, Kolkata. In this regard the assessee has submitted necessary details which included copy of the income-tax return, balance-sheet, bank statement, share application form, certificate of incorporation, memorandum and articles of association. Nothing adverse has been found or commented upon by the Assessing Officer about these documents submitted by the assessee-company. The Assessing Officer's doubt has arisen merely on the ground that these are Kolkata based companies, the addresses of these companies are common. For this he has carried out enquiry and obtained inspector report which has been quoted in the assessment order. On the basis of this report, the Assessing Officer has drawn an adverse inference holding that the companies are not in existence at the place stated. We note that the Assessing Officer is not correct in drawing such adverse inference on the basis of this report. As rightly pointed out by the learned authorised representative that the inspector has visited this premises on the evening at 4.30 p.m. The inspector has confirmed that there was an office with a name plate, A. S. Grewal and Co. The inspector has further stated that the registered office of these companies belongs to a tax consultant. On the basis of these findings, the Assessing Officer has drawn adverse inference and made the addition. We are of the view that the Assessing Officer is not justified on the basis of this inspector report to hold that the identity of the shareholder company has not been established. On the contrary, as rightly pointed out, the common surname "Grewal" is good enough to indicate that the offices of these companies were at that premises. The inspector did not make any effort to make any further enquiry about these companies and also the Assessing Officer did not make any effort to carry the investigation further. The sole basis for making addition about these companies is the inspector report. No doubts have been raised by the Assessing Officer about the documents filed by the assessee-company. The inspector report as alleged above cannot be a basis for disbelieving the assessee's version. In view of this specific finding of the inspector which remains unrebutted, we are of the view that addition of Rs. 5 lakhs in respect of the share capital received from Prime Vyapar Pvt. Ltd. has rightly been made by the Assessing Officer and accordingly this addition is confirmed. Thus the ground No. 2 of the Revenue's appeal and ground No. 7 of the cross-objection of the assessee is partly allowed. The next issue is regarding disallowance of Rs. 18,645 made by the Assessing Officer invoking the provisions of section 14A read with rule 8D. In this regard we notice that the assessment year under consideration is 2005-06 and rule 8D is effective from the assessment year 2008-09. Accordingly the Assessing Officer was not justified in invoking the provisions of rule 8D for the assessment year under consideration. We further note that the assessee's investment is mainly in group companies. Considering these facts we delete this addition and this ground No. 8 of the cross-objection is allowed. With the result the appeal of the Revenue and the cross-objection of the assessee are partly allowed.