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Judgment
O R D E R
PER MAHAVIR SINGH, VP:
This appeal by the assessee is emanating from the order of the Ld. Commissioner of Income Tax (Appeals-26), Delhi dated 31.10.2025. Assessment was framed by the DCIT-14, New Delhi vide order dated 28.01.2025 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as “Act”) relevant to assessment year 2023-24.
The assessee has raised the following grounds :
1)That the impugned order is bad in law since it places reliance on information gathered through survey conducted under section 133A of the Income Tax Act, 1961. Such survey itself is illegal since it has been conducted in gross violation of CBDT order dated 19.10.2020 (F.No. 187/3/2020-ITA-I) which states that survey action is to be conducted only as a last resort when all other means of verification / obtaining details online/ recovery are exhausted. The assessee was never contacted prior to the survey for any information/ verification etc. thereby violating the above CBDT order and rendering the survey illegal.
Ground No. 2: That the order is bad in law since it is in gross violation of the procedure laid out in Section 127 read with CBDT guidelines dated 03.05.2024 (ENo.225/72/2024/ITA-1I) in so far as the alleged centralization order has been order, the assessee's case should have been transferred to central charge by an order under Section 127 of the IT Act after 15 days of notice under Section 143(2), there fore procedure under section 127 was not followed at all rendering the entire order void ab initio.
Ground No. 3: The Order is bad in law in the light of the fact that the conditions passed in 2022, almost two years príor to the notice under Section 143(2). However, as per Sl. No. 1 of the CBDT guidelines, quoted by the A0 in the impugned for invoking section 68 were not fulfilled as there was no credit entry in the balance sheet or the books. The A0 challenged a part of the total income of the assessee which was already a part of the profit/loss account and admittedly, the A0 came to no finding of any credit entry or liability.
Ground No, 4: The Order is bad in law in the light of the fact that firstly the AO has not recorded any findings pertaining to a credit entry, and secondly has not disputed the source of the income received through banking channels. Therefore, there was no cause to arbitrarily treat the income of a different nature which in either case would not have changed the tax liability in the original assessment. Ground No. 5: The Order is perverse and self-contradicting as in para 5.12 of the Order the A0 has taxed the entire receipts of Rs. 8.36 crores from Earth Justice u/s. 68 and in para 5.13 the AO has again taxed the corresponding expenditure of the above receipts amounting to Rs. 3.23 crores under section 37. The Order fails to explain how the corresponding expenditure can be disallowed when the entire gross receipts itself has already been taxed.
Ground No. 6: The Order is perverse and self-contradicting as the A0 has reduced the professional income from Rs. 8.60 crores to Rs. 0.23 crore by treating Rs. 8.36 crores as unexplained credit and taxing it directly under section 68 rw.s. 115BBE. Once the A0 had removed Rs. 8.36 crores from the head PGBP then the AO was factually incorrect in deducting Rs. 3.23 crores under section 37 when the available income under business head was only Rs. 0.23 crore and the A0 by his own admission had not disputed the expenditure corresponding to the Rs. 0.23 crore in para 5.7 of the Order.
Ground No. 7: The A0 erred in law by presuming that legal services are confined only to litigation services contrary to law and against substantial evidence produced; such legally inconsistent assumption is unassailable for taxing genuine professional receipts as unexplained credits under section 68.
Ground No. 8: The Order is bad in law in the light of the fact that the disallowance have been made on estimated basis without recording any specific findings pertaining to the expenditure claimed in the audited statement and ITR. The A0 does not have the mandate to make arbitrary and estimated disallowance without rejecting the books of accounts.
Ground No. 9: The A0 erred in law by disallowing deduction of expenditure under Section 37 in the absence of a finding of illegality of the purpose of expenditure. In order to disallow expenditure under Section 37, the A0 must show that the expenditure is capital expenditure or personal expenditure or not used entirely for business purposes or used for illegal purposes. Where income/receipt has been charged to tax, corresponding expenditure which is exclusively for the purpose of profession cannot be disallowed in the absence of a finding of illegality of the purpose of expenditure as per Section 37.
Ground No. 10: The A0 erred in law and facts by making an addition of Rs. 11,59,88,539/- (Rs. 8,36,57,744/- under section 68 and Rs. 3,23,30,795/- under section 37) when the entire receipts from Earth Justice were amounting to Rs. 8,36,57,744/-The entire sum of Rs. 8.36 crores were already assessed as a part of income, further, in the computation table the AO had also added the total income amounting to Rs. 5,24,62,140/- as per return filed u/s. 139 while making the total addition.
Ground No. 11: The A0 erred in law and exceeded his mandate by relying on various unrelated and extraneous reasons such as litigation related to coal power plants, to which no findings of any nexus with assessee's income have been recorded.
Now at the time of hearing, Ld. Counsel for the assessee first of all drew our attention to the facts of the case that the assessee is a Limited Liability Partnership (LLP) engaged in the business of providing legal services in India as well as outside India. The assessee narrated the facts that for the relevant assessment year 2022-23 it provided legal services amounting to Rs. 8,60,54,380/- and the corresponding expenditure claimed was Rs. 3,32,58,713/-. Therefore, returned income was Rs. 5,24,60,824/-. Ld. Counsel for the assessee before us, also stated that survey u/s. 133A of the Act was conducted by the Income Tax Department in the case of Legal Initiative for Forests and Environment (LIFE Trust) alongwith other entities on 7.9.2022 at N-71, LGF, GK-I, New Delhi – 110 048 and Shri Ritwick Dutta is Managing Trustee of Legal Initiative for Forests and Environment (LIFE).
The AO of the Income Tax Department’s survey team after impounding and collecting the material during survey noted that Shri Ritwick Dutta was earlier running a proprietorship concern in the name of Legal Initiative for Forests and Environment in which he has received fee of Rs. 22 crores from M/s Earth Justice USA during the past 5 years from FY 2015-16 to FY 2020-21. Subsequently, this partnership was converted into LLP namely Life Legal Services LLP (the present assessee). The department noted in the survey report that the funds provided by Earth Justice are apparently being used for activities such as litigation against coal, power plant in India under the guise of professional fee, which cannot be considered as professional services rendered by Life Legal Services LLP to Earth Justice. The search material collected was confronted to trustee of LIFE trust Mr. Rahul Choudhary whose part of questions/answers are reproduced in the assessment order at page no. 5 & 6. The AO noted that during the course of proceedings Assessing Officer required the assessee to show cause notice as to why total receipts from Earth Justice of Rs. 8,36,57,774/- be not treated as unexplained credit in its books of accounts u/s. 68 of the Act for the reasons that 97.21% receipts are out of the total professional receipts are from M/s Earth Justice. The assessee failed to explain the nature of these receipts and establish the genuineness of these transactions with M/s Earth Justice by any documentary evidences. This fact as noted by the AO in para no. 10 and 11 at page no. 17 & 18 read as under:-
“10.The assessee has claimed that certain services, including legal opinions, were provided to M/s. Earth Justice as per the submitted invoices. However, despite listing these services, the assessee has failed to provide any concrete proof that the legal opinion was actually rendered. Earth Justice was not having any legal dispute in India therefore there is no question of Earth Justice seeking legal opinion from Ritwick Dutta. The mere submission of invoices does not substantiate the claim that legal opinions or advisory services were actually provided to M/s. Earth Justice. It is essential for the assessee to Furnish supporting documentation, such as communication having legal queries raised before Ritwick Dutta, where the legal opinion of Shri Ritwick Dutta was sought on a particular legal matter of interest to Earth Justice, or copies of the legal opinions or advice provided to M/s. Earth Justice, any correspondence (emails, letters, or meeting minutes) confirming the request for and provision of these advisory services, acknowledgments from M/s. Earth Justice confirming receipt of the advisory legal services, any documentation showing the discussions or scope of services provided to M/s Earth Justice or any relevant correspondence that demonstrates that the services billed for were indeed rendered. Without such proof, it is difficult to verify the legitimacy of the invoiced amount. While the invoices indicate that legal services were provided, the absence of supporting documents that confirm the delivery and receipt of those services raises questions regarding the genuineness of these receipts. Without such supporting evidence, it is difficult to establish the authenticity of the services and their corresponding invoices.
11.As it is already established that the assessee has failed to provide any tangible proof that the legal opinions or advisory services mentioned in the invoices were, in fact, provided to M/s. Earth Justice. Without the same, the assertion that the claimed expenses are related to services rendered is merely speculative and cannot be considered as substantiated. The lack of any formal documentation or tangible evidence linking the expenses to the provision of services makes it impossible to determine whether the expenses to the provision of services makes it impossible to determine whether the expenses were incurred for the legitimate purpose of earning the income.”
Similarly, the assessee was unable to explain the expenditure incurred or made wholly or exclusively for the purpose of business in terms of section 37 of the Act and therefore, he disallowed the entire expenses and added to the returned income of the assessee of Rs. 3,23,30,795/-.
Aggrieved, assessee preferred the appeal before the CIT(A) against both the additions.
In appellate order, the CIT(A) simply noted that there is no doubt about the receipts from Earth Justice of Rs. 8,50,65,744/- (gross receipts) which is supported by invoices raised to M/s Earth Justice USA and receipts as evidenced by bank account. However, the assessee during the appellate proceedings as well as during assessment proceedings could not substantiate the services rendered to M/s Earth Justice USA and in the absence of any documentary evidence, the same was confirmed by the CIT(A) vide para no. 7.2 & 7.3 as under:-
7.2I have gone through the facts of the case as well as submissions of the appellant. It is evident that the appellant had not disputed the receipt of Rs. 8,36,57,744/- (out of gross receipt Rs.8,50,65,744/- from M/s. Earth Justice, USA. The primary question to deal herein is that whether this transaction was a legitimate business transaction or not. In this context, the appellant had submitted invoices raised to M/s. Earth Justice, USA and receipt is evident in bank accounts; meaning the receipt is not in question. However, during the appellate as well as assessment proceedings, the appellant could not substantiate the services rendered by it to M/s. Earth Justice, USA; the appellant has not submitted any documentary evidences (such as contracts, email, letters etc. whereby the service requisitioned /rendered can be proved).
On the facts, I am inclined to agree with AO that mere submission of invoices and receipt of payment (through banking channels) doesn't make a transaction legitimate'- particularly as 'business transaction'. Such assertion is also supported by the facts that even the long-term employees of LIFE LLP were not aware of cases in which M/s. Earth Justice, USA was their client; in fact they were not aware whether Earth Justice, USA was their client or not. Further, as per impounded material as well as statement of Sh. Ritwik Dutta (Partner in LIFE Legal Services LLP and promoter of LIFE trust) raised question over the genuineness of such receipts/transactions and it seems that this was a way around to avoid FCRA regulations- to receive fund from a foreign entity.
7.3In my considered opinion, when the LLP (.e. appellant) fails to prove the genuineness of the receipts {substantiate their nature and source with invoices, contracts, services rendered, etc.), the AO is right in invoking Section 68 the Act. Herein, it is also important to note that burden of proof is on the appellant - to prove the genuineness of the transaction.; which it failed to do. The Hon'ble Supreme Court in PCIT v. NRA Iron & Steel (P.) Ltd. [2019] 412 ITR 161 (SC) held that 'If the assessee fails to prove identity, creditworthiness, and genuineness of the credit entries, the A0 is justified in making an addition under section 68; even if the amounts are recorded in the books, mere banking channels or confirmations are not enough the assessee must establish the real source and nature of the receipts. If LLP claims "business receipts' but cannot prove actual services rendered or link with clients, AO can treat it as unexplained.”
Similarly, Ld. CIT(A) also confirmed the disallowance of expenditure as unexplained expenditure u/s. 37 of the Act for the reasons that the expenses are not incurred wholly or exclusively for the purpose of business purposes. Aggrieved, assessee is in appeal before us.
Before us, ld. Counsel for the assessee argued that these are simple business receipts and authorities below have admitted that in view of the invoices raised to M/s Earth Justice USA and receipts evidenced by bank accounts are gross receipts of legal fee amounting to Rs. 8,50,65,744/-. The net receipt are Rs. 8,36,57,744/-. Ld. Counsel for the assessee also stated that these are supported by all the evidences and complete paper books and submissions and evidences were filed at asessee’s paper book page no. 39 to 450 which was also filed before the AO as well as CIT(A). Similarly, as regards to expenditure of Rs. 3,23,30,795/- is incurred wholly or exclusively for the professional income earned or not by the assessee. Ld. Counsel for the assessee stated that assessee has enclosed each anmd every evidence of this expenditure, but these were not examined by the AO or CIT(A).
In terms of above, Ld. Counsel for the assessee made the submissions that these evidences at this stage needs to be verified by the AO to give his remand report or matter has to be restored back to the file of the AO for fresh consideration of these evidences. On contrary, Ld. Sr. DR also agreed that these evidences were neither examined by the AO as well as CIT(A), thus the same needs to be examined at the lower level and he fairly agreed that the matter may be restored to the file of the AO for fresh adjudication, after verification / examination of the evidences as discussed above.
Keeping in view the aforesaid factual matrix and in the interest of justice, we deem it fit and proper to restore back the issues in dispute to the file of the AO for verification/examination of the evidences filed by the assessee in an adequate manner and then decide the issue afresh, after giving adequate opportunity of being heard to the assessee, in accordance with law. We hold and direct accordingly.
The instant assesseee’s appeal is allowed for statistical purposes.