THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1,, GUNTUR vs. PARUCHURU SATISH KUMAR(HUF), GUNTUR

We have heard rival contentions and perused the material placed on record.

In the group of ‘Premier’ a search u/sec. 132 was conducted and during the course of search information was found from the mobile phone of Shri Motamarri Naga Anil Kumar in the form of Whatsapp messages evidencing unaccounted cash receipts on which the department has recorded the statement u/sec. 131 on 29/11/2017 from Shri Anil Kumar wherein stated that the Whatsapp messages represent the information regarding the flat 11 ITA Nos. 698 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) sold to Shri T. Hanumantha Rao, SBI, Sattenapalli. As per the Whatsapp messages the consideration as per registered sale deed was Rs. 29,92,500/- and the cash receipt of Rs. 27,82,500/-, the additional amount of Rs. 27,82,500/- represented the charges for additional works of the said flats. He further stated that he had received only agreement for Rs. 7,90,000/-, but neither received the cash of Rs. 7,90,000/- nor balance amount of Rs. 19,92,500/-. Thus, submitted that the facts regarding the sale price of Rs. 55,75,000/- as per the message received through Whatsapp is known to be Shri Satish Kumar but not to him. During the course of search from the table of the accountant, a rough notings of receipts and expenditure details were found which revealed that certain additional amounts were received for carrying out additional works in respect of flat Nos. 215, 312 & 404 of Nandamuri Nagar project, Flat No.404 & 307 of Amaravati Road project. A statement was recorded u/sec. 132(4) from the assessee in respect of flat No.302 of Amaravati Road Project sold to Golla Venkata Pitchaiah, the assessee explained that cost of flat was Rs.41,12,500/- as against the recorded value of Rs.22,05,000/- in the books of accounts and there existed unaccounted cash receipts in sale of flats. Thus, the assessee had accepted that there was cash receipts for additional works. The 12 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) assessee also admitted the additional income of Rs. 10.00 crores as per the statement recorded on 30/11/2017 covering various assessment years. The AO has conducted detailed enquiries from the flat buyers and collected the information with regard to total consideration paid and the consideration recorded in the sale deed and the difference amount in respect of various projects undertaken by the assessee. 10.1. There is no dispute that the assessee has accepted the cash over and above the registered sale deed which was accepted by the assessee in the statement recorded u/sec. 131 or 132(4) of the Act. The moot question in this case is whether the entire additional receipt constitute income or not when unaccounted expenditure is also involved. Though the AO collected the information with regard to total consideration recorded and the amount recorded in sale deed there is no documentary evidence available with regard to sale consideration found during the course of search or during the course of assessment proceedings except the statements recorded u/sec. 131 from the flat buyers on sample basis. The AO did not find out whether the land is own land or taken for development. In case own land what was the purchase consideration of the land, what was the cost of construction, other incidental expenses related to sale of flat and 13 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) the profit thereon. Similarly, in case of land taken on development the assessee has to incur the expenditure in respect of the entire building which includes the land owners share as well as the assessee’s share for ascertaining true and correct profit. Therefore, it is incumbent upon the AO, to ascertain the actual expenditure and determine the profit thereon from the gross receipts received by the assessee including the receipts received by the assessee over and above the registered value. No such exercise was made by the AO. The AO simply ascertained the total consideration as per statement recorded u/sec. 131 from the flat buyers and the consideration recorded in the sale deed and the difference amount was treated as income. The AO ought to have ascertained whether the land was own land if so the cost of land, cost of construction of the building and other incidental expenditure and the profit in case of land taken on development the expenditure incurred for construction of the entire building and the assessee’s share and land owners share the gross receipts representing the assessee’s share minus expenditure is the profit which required to be brought to tax as income. The AO did not make any such exercise to arrive at the true and correct profit of the assessee which required to be brought to tax. When there is no information available and AO has suspected the cash receipt 14 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) alternatively he ought to have referred the cost of construction to DVO and taxed the difference u/sec. 69C of the Act. In the instant case except the statements recorded from the flat buyers on sample basis and the whatsapp message in mobile phone of the accountant, no other evidence is available to the AO. The said information was related to the total consideration and the accounted in books and unaccounted cash received for some flats. No details are available with regard to expenditure incurred from the unaccounted cash receipts. The statement recorded from the flat buyers does not indicate at what stage sale deed was registered whether it is semi finished stage or at completed stage and what was additional work carried out by the assessee etc. In absence of any such information, the statement recorded u/sec. 132(4) cannot be completely relied upon for making the addition. Thus, we do not see any reason to disbelieve the contention of the assessee that the sum of Rs.10.00 crores admitted by the assessee for various years represented the additional receipt. Ld.CIT(A) deleted the addition holding that the assessee has received the on money for the additional work executed by them and the entire receipts cannot be treated as income. The ld. CIT(A) also given a finding that the additional work carried out by the assessee was emphasised right from the beginning by the 15 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) accountant, buyers as well as appellant. For the sake of clarity, we extract the order of the ld. CIT(A) in para 6.2 to 6.2.3 which reads as under:- “6.2) I have considered the assessment order, submissions of the appellant and the material placed before me. The facts emanating there from are that the appellant admitted that additional amounts over and above the registered value of flats have been collected from the customers/buyers. The contention of the AO is that the additional receipts are taxable in entirity as accepted by the appellant u/s. 132(4). Whereas the appellant's contention is that the AO has received such money for additional works executed by them and entire receipts cannot be treated as income solely on the basis of statement u/s.132(4) which was given on erroneous assumption. The appellant has incurred expenditure in executing the additional works undertaken/assigned to them. The appellant contends that they offered income thereon @30% which is reasonable and the same be accepted. The appellant relied on various decisions in support of their contention. 6.2.1) A statement from Mr. Motamarri Naga Anil Kumar, accountant of the appellant was recorded on 29.11.2017, i.e on the day of Search itself before the appellant was even examined. In the statement which is reproduced in the order, it is clearly stated that (Answer to question 9) the additional amount is towards additional works. 6.2.2) The statements recorded from the buyers also reaffirms the same. The additional amount paid is for additional works and the appellant has executed the additional works in relation to the flat purchased. 6.2.3) The appellant during the various statements recorded on 29.11.2017,08.12.2017, 12.01.2018, 24.01.2018 and 02.02.2018 has made disclosure of Rs.10,00,56,250/- said to be on account of receipts for additional works. The fact of additional work being carried by appellant was emphasized right the beginning by the accountant, buyers as well as the appellant. The same cannot be ignored placing reliance only on disclosure made in the statement u/s. 132(4). The ratio of decisions relied on by the appellant cannot be ignored and the disclosure itself cannot be sole basis for admission/ assessment of additional income ignoring the 16 ITA Nos. 698 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) facts/material on record. In view of the above, the receipts for additional works has to be treated as turnover and reasonable profit thereon has to be estimated. -The contention of the appellant is reasonable and acceptable in the facts of the case. The income@30% offered by the appellant is reasonable and the AO is directed to accept the same and restrict the addition to 30% of the additional receipts. The grounds are disposedoff with above directions.

From the above, we observe that the AO made the addition solely on the basis of statement recorded u/sec. 132(4) without considering the other issues and facts involved in construction with regard to the additional expenditure related to construction of flats. No other evidence was brought on record by the AO to controvert the statement regarding receipt of additional receipts for additional work carried out by the assessee. This fact was supported by the information found from the table of the Accountant indicating the additional receipt as well as expenditure. The assessee has explained during the course of assessment proceedings that the additional income of Rs. 750/- per sq.ft. was accepted without taking into consideration of the land owners share. The assessee from the beginning explained that the additional receipts were received for earning the additional work. All these facts and circumstances support that only profit required to be brought to tax but not the entire receipts. The assessee had admitted the income @ 30% on additional receipts which appears 17 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) to be fair and reasonable.The AO cannot make addition solely on the basis of statement u/sec. 132(4) without considering the entire facts and the expenditure, therefore we do not find any reason to interfere with the order of the ld.CIT(A) and the same is upheld and the appeal of the Revenue is dismissed for both the assessment years.

In the cross objections while supporting the order of the ld. CIT(A), the assessee has challenged the validity of framing the assessment u/sec. 147 in ground Nos. 2 & 3. The assessee contended that this issue was raised before the ld. CIT(A) in ground Nos. 2 & 3 which was addressed by the ld. CIT(A) in para 5. The arguments placed by the assessee before the ld. CIT(A) was reproduced by the ld. CIT(A) in para 5 which reads as under:- "The Assessee is a separate legal entity and no Search U/s 132 or Survey proceedings U/s 133A were conducted on the Business premises of the Assessee. Then initiation of action i.e. u/s 148 for the Asst Year 2017-18 is against the law and more specifically no information in the form of material was found during search proceedings conducted on the sister concerns of the Assessee. On the legality of the statement recorded u/s 132(4) of the I.T.Act, reference is invited to the following cases on the subject. The Telangana & Andhra Pradesh High Court in the case of C.I.T Vs. Naresh Kumaf Agarwal reported in 369 ITR 171 @ pages 177 to 179 held as under: “11. The mandate under sub section (4) gets honoured only when there is no other version from the assessee, vis-à-vis the statement. In such a case, the statement would constitute the basis for making block assessment even if the department does not have any other material to buttress its case. However, if the statement is retracted by the person from 18 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) whom it is said to have been recorded, it has to be subjected to the same test, as is done in matters of similar nature. This is particularly so, when the person, from whom it is recorded, is going to be visited with penal consequences. Sub-section (4) of section 132 of the Act cannot be taken as a provision laying down any new principle in the law of evidence. "12. For all practical purposes, the statement recorded under sub-section (4) of section 132 of the Act, partakes the character of the one recorded by an investigating officer under section 162 of the Code of Criminal Procedure. Howsoever desirable, it may appear to be; it cannot be ascribed the status of a proven fact. At the most, it would constitute the basis for the prosecution to frame its case and correspondingly be a material for the defence to ensure that the prosecution sticks to its version. The question of a statement of that nature being treated as the clinching evidence, by itself, leading to any penal action does not arise.”

The circumstances under which a statement is recorded from an assessee, in the course of search and seizure, are not difficult to imagine. He is not virtually put under pressure and is denied of access to external advice or opportunity to think independently. A battalion of officers, who hardly feel any limits on their power, pounce upon the assessee, as though he is a hardcore criminal. The nature of steps, taken during the course of search are sometimes frightening. Locks are broken, seats of sofas are mercilessly cut and opened. Every possible item is forcibly dissected. Even the pillows are not spared and their acts are backed by the powers of an investigating officer under section 94 of the Code of Criminal Procedure by operation of sub-section (13) of section 132 of the Act. The objective may be genuine, and the exercise may be legal. However, the freedom of a citizen that transcends, even the Constitution cannot be treated as non-existent." “18. It is not without reason that Parliament insisted that the recording of statement must be in relation to the seized and recovered material, which is in the form of documents, cash, gold, etc. It is obviously to know the source thereof, on the spot. Beyond that, it is not a limited licence, to an authority, to script the financial obituary of an assessee." "19. At the cost of repetition, we observe that if the statement made during the course of search remains the same, it can constitute the basis for proceed further under 19 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) the Act even if there is no other material. If, on the other hand, the statement is retracted, the Assessing Officer has to establish his own case. The statement that too, which is retracted from the assessee cannot constitute the basis for an order under section I588C of the Act. Kind attention is invited to another judgment of the Madras High Court in the case of C.I.T. Vs. Smt.S.JayalakshmiAmmal reported in 390 ITR 189. The observations of the Hon'ble Madras High Court at page 197 are extracted below for kind consideration of the Hon'ble Court “If there is no corroborating documentary evidence, then statement recorded under section 132(4) of the Income tax Act, 1961, alone should not be the basis, or arriving at any adverse decision against the assessee. If the authorities under the Income tax Act, 1961, have to be conferred with the power, to be exercised, solely on the basis of a statement, then it may lead to an arbitrary exercise of such power. An order of assessment entails civil consequences. Therefore, under judicial review, courts have to exercise due care and caution that no man is condemned, due to erroneous or arbitrary exercise of authority conferred. The Hon'ble Supreme Court in the case of Pullngode RubberProducts Co. Ltd. Vs. State ofKerala (reported in (1973) 91 ITR 18) held as under: “An admission is a extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the person who made the admission to showthat it is incorrect.” The above decisions would establish that any statement made U/s 132(4) of the I.T Act', cannot be taken as conclusive and if it is retracted it cannot be considered at all for making any assessment. They have to be independently proved for making assessment that the assessee has earned the undisclosed income accepted in such a statement u/s 132 (4) of the I.T.Act. The statement recorded u/s 132(4) of the IT Act if not retracted may be used for making the assessment, but only to the extent of incriminating evidence/material unearthed during the search. Reference is also invited to two instructions of CBDT (Central Board of Direct Taxes) in relation to statements recorded u/s. 20 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) 132(4) of the I.T.Act. It is settled law that the instructions are binding on the authorities. These instructions are numbered as under. a) F.No.286/2/2003-IT(Inv.II) dt. 10-3-2003 b) F. No.286/98/2013-IT(Inv. II) dt. 18-12-2014 Objection for Issue of Notice u/s 148: The Assessee is objecting for issue of notice U/s 148 because there is no material in hand to the department which proves that the Assessee has concealed the income which was earthed during search proceedings. There is no information with the department also that particular income has been escaped for which Notice U/s 148 is warranted. In the case of AMSA India P. Ltd. v. CIT (2017) 393 ITR 157/ 82 taxmann.com 29 (Delhi)( HC) the Court held that the statement of third person not having live link assessee's suspected income, the reassessment was held to be bad in law. The material should have a live link with the assessee's suspected income or non-disclosure of a material fact. That kind of live link was absent. Therefore the notice under section 148 read with section 147 of the Act was to be quashed. The statements recorded from third parties and the reliance on the statement for reassessment is against law. As the income of the assessee cannot be known to the third party that to that particular income has been escaped. The statement recorded from the third party without linkage of evidence found in the premises of the assessee and relying on such statement is against the provisions of law. The department has also not identified any asset which was not recorded in the books of accounts during the search proceedings. IT: Merely because during search, assessee surrendered an amount in stipulation that details of same would be given in due course of time, but no such assets were ever found/identified by authorities, no addition could be made to assessee's income [2019] 104 taxmann.com 371 (Allahabad) HIGH COURT OFALLAHABAD Commissioner of Income-tax V. Dilbagh Rai Arora 21 & 699/VIZ/2019 C.O.Nos. 08 & 09/VIZ/2020 (Paruchuru Satish Kumar (HUF)) BHARATI SAPRU AND PIYUSH AGRA WAL, JJ, IT APPEAL NO. 304 OF 2009 MARCH 15, 2019 Section 69, read with section 143of the Income-tax Act, 1961 - Unexplained investment (Search & seizure) - Assessment year 2006-07 - Whether where a person can explain exclusively with supportive evidence/material or otherwise that true state of affairs was different from that he presented in his statement of admission, tax liability should be fixed on basis of correct and true affairs as ascertained from material on record - Held, yes - During search operation, assessee, in his statement, surrendered Rs.18 crores on account of investment made in purchase of jewellery, precious stones and Rs. 6 crores as cash in hand duly shown in books of account – Rs.7 crores were surrendered in stipulation that details of same would be given in due course of time - However, no incriminating materials or documents had been brought on record for said amount of Rs. 7 crores - No assets of Rs. 7 crores were found by authorities, nor such assets were identified or declared by assessee - Whether it could be inferred that no such assets actually existed – Held, yes - Whether Tribunal was right in holding that addition in respect of Rs. 7 crores was not based on any evidence - Held, yes [Pares 17 and 21] [In favour of assessee] Receipt of on-money-No addition on the basis of statement of seller: No addition U/s 698 can be made based on the statement of the seller admitting receipt of on-money when they were not cross examined and when other evidence was not forthcoming in support of on money. This was so held in the case of Pr.CIT Vs. Kanubhai Maganlal Patel 79 Taxmann.com 257 by Hon'ble Gujrat High Court. No reopening was possible merely on the basis of the statement.”

The ld. CIT(A) dismissed the appeal of the assessee in para 5.1 which reads as under:- “5.1 I have perused the material placed on record and considered the submissions of the appellant. The AO clearly based his satisfaction on the material available to him. The appellant admitted additional receipts and income in respect of projects of HUF also. The buyers statements are also placed on record. The above material constitutes valid evidences to enable AO to have „reason to believe‟ that income has escaped assessment. In view of the above the facts of the case are different and distinguishable from the decisions relied on by the appellant. Accordingly, the grounds are dismissed.”

During appeal hearing, ld.AR reiterated the submissions made before the ld. CIT(A) and argued that the assessment made u/sec. 143(3) r.w.s. 147 is bad in law. During appeal hearing, ld.DR did not place the reasons recorded by the AO for reopening the assessment before us. However, as seen from the assessment order the assessee has accepted the additional income u/sec. 132(4) on the basis of information collected by the AO during the search proceedings thus there was escapement of income and hence, we hold that reopening of assessment by issue of notice u/sec. 148 is valid. Thus we dismiss ground Nos. 2 & 3 as erroneous.

Since we have dismissed the appeals on merits, the cross objections filed by the assessee become on merits infructuous and, hence, dismissed. 16. In the result, appeals filed by the Revenue and the cross objections filed by the assessee are dismissed. Order Pronounced in open Court on 23/11/2020.