SUNDARAMAHALINGAM NARAYANAN,CHENNAI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CHENNAI

Since the issues involved in both the appeals are interconnected and arise out of a common set of facts, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience, brevity, and to avoid repetition of facts and findings.

Subsequently, a search and seizure operation u/s.132 of the Act was conducted on 27.11.2019 in the cases belonging to the group of M/s.Asvini Fisheries Pvt. Ltd. During the course of the said search proceedings, the residential and business premises of the assessee were also covered. According to the Revenue, certain incriminating materials were found and seized indicating that the assessee, while selling lands situated at Madambakkam Village to M/s. Prathishri Properties Pvt. Ltd., a group concern of the searched entity, had allegedly received consideration in cash over and above the consideration disclosed in the registered sale deeds.

Consequent to the search proceedings, the case of the assessee was centralized and transferred to the jurisdiction of the AO by Notification No.27/2019-20 dated 21.01.2020 issued by the Principal Commissioner of Income Tax-3, Chennai. Thereafter, notice u/s.153C of the Act dated 04.02.2021 was issued requiring the assessee to furnish the return of income for the relevant assessment year. In response thereto, the assessee filed the return of income on 28.02.2021 declaring the same total income of Rs.1,77,34,410/-.

During the assessment proceedings, the AO examined the computation of income arising from sale of lands situated at Athur Village. It was noticed that while computing the income from sale of the said lands, the assessee had claimed deduction towards cost of acquisition and development expenses aggregating to Rs.85,74,759/- and expenses incurred in connection with transfer amounting to Rs.27,42,119/-. The AO called upon the assessee to substantiate the aforesaid claims with supporting evidences, bills and vouchers. In response, the assessee furnished only year-wise break-up of the expenditure incurred during various financial years but could not produce complete documentary evidence in support thereof.

The assessee explained that substantial expenditure had been incurred towards development of the lands, including levelling, re-earth filling, relaying work and removal of shrubs, and that the vouchers relating to such expenditure had not been preserved in entirety since the expenses pertained to lands held by the assessee. Reliance was also placed upon the assessment completed for A.Y 2014-15 wherein only 30% of similar development expenditure had been disallowed for want of supporting evidence.

The AO, while accepting that development expenditure would ordinarily be incurred in converting agricultural lands into residential plots, observed that the assessee had failed to produce complete documentary evidence in support of the expenditure claimed. Following the approach adopted in the assessment for A.Y 2014-15, the AO disallowed 30% of the development expenditure amounting to Rs.18,49,503/- and 30% of transfer expenses amounting to Rs.8,22,635/-, resulting in an aggregate disallowance of Rs.26,72,138/-.

Apart from the above, the AO also examined the sale deeds executed in respect of plots sold at Athur Village. It was noticed that in several sale deeds,

The AO called upon the assessee to explain the nature of the arrangement with M/s.Vetri Reals and to justify why the amounts paid to the said concern should not be treated as part of the assessee’s sale consideration. In response, the assessee contended that while the initial development of the project had been carried out by him during the earlier years, certain additional development activities and marketing functions during Financial Year 2017-18 were entrusted to M/s.Vetri Reals. It was submitted that the purchasers had directly paid the agreed charges to M/s.Vetri Reals and, therefore, there was no diversion of the assessee’s income. The assessee also furnished confirmation letters obtained from M/s.Vetri Reals acknowledging receipt of the amounts.

The AO, however, observed that the assessee failed to produce any written agreement, memorandum of understanding, work order or any other contemporaneous document evidencing the scope of work entrusted to M/s. Vetri Reals. Further, no bills, invoices, expenditure statements, progress reports or accounts maintained by M/s.Vetri Reals in relation to the alleged development and marketing activities were produced. The explanation of the assessee that no written agreement had been executed in order to avoid future legal complications was found unacceptable. According to the AO, in the absence of any documentary evidence establishing the nature of services rendered by M/s.Vetri Reals, the diversion of a substantial portion of the sale consideration to the said concern could not be accepted as genuine.

The AO further observed that the lands sold belonged exclusively to the assessee and that M/s.Vetri Reals had no ownership rights in the property.

Accordingly, the assessment u/s.153C r.w.s 143(3) of the Act was completed on 24.09.2021 by determining the total income of the assessee at Rs.3,06,17,960/- after making (i) disallowance of development and transfer expenses amounting to Rs.26,72,138/- and (ii) addition of Rs.1,02,11,414/- being the amount paid by purchasers to M/s.Vetri Reals.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). The principal grievance raised before the first appellate authority pertained to the addition of Rs.1,02,11,414/- representing payments made to M/s.Vetri Reals.

During the appellate proceedings, the assessee reiterated that M/s.Vetri Reals had carried out development and marketing activities in relation to the project and that the amounts paid by the purchasers directly to the said concern represented consideration for such services. Reliance was placed upon confirmations furnished by M/s.Vetri Reals. The assessee also sought time to obtain a further declaration from the said concern elaborating the nature of activities allegedly carried out.

The Ld.CIT(A), however, observed that no fresh material evidence had been brought on record beyond the confirmations already considered by the AO. The proposed declaration was also not furnished despite sufficient opportunity. The Ld.CIT(A) further noted that the assessee had failed to produce any agreement, memorandum of understanding, invoices, bills, expenditure details or any other documentary evidence establishing the actual execution of development or marketing activities by M/s.Vetri Reals.

The Ld.CIT(A) recorded a finding that the assessee, being the owner and transferor of the plots, bore the burden of establishing the genuineness and necessity of the payments diverted to M/s.Vetri Reals. According to the Ld.CIT(A), mere confirmations acknowledging receipt of money could not substitute substantive evidence regarding the nature, extent and value of services allegedly rendered. The Ld.CIT(A) further observed that there was no discernible basis for payment of consideration to M/s.Vetri Reals over and above the amount of Rs.525/- per square feet allegedly retained by the assessee towards land cost, particularly in the absence of evidence quantifying the work performed.

In view of the foregoing findings, the Ld.CIT(A) concurred with the conclusion reached by the AO that the assessee had failed to discharge the onus cast upon him to establish the genuineness of the claim. Accordingly, the addition of Rs.1,02,11,414/- was sustained and the appeal of the assessee was dismissed.

Aggrieved of the above order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.

The Ld.AR, appearing on behalf of the assessee reiterated his arguments made before the lower authorities and prayed for deletion of the addition of Rs.1,02,11,414/- made by the AO and sustained by the Ld.CIT(A).

Per contra, the Ld.DR relied upon the orders of the lower authorities and prayed for dismissal of the appeal of the assessee.

We have heard the rival submissions, perused the orders of the lower authorities and carefully considered the material placed on record. The solitary issue arising for our consideration is whether the AO was justified in treating the sum of Rs.1,02,11,414/-, paid directly by the purchasers of plots to M/s.Vetri

On a careful appreciation of the facts, we find that the addition has been made primarily on the ground that the assessee could not produce any written agreement, memorandum of understanding, invoices, work orders or other contemporaneous documentary evidence evidencing the nature of services rendered by M/s.Vetri Reals. The AO as well as the Ld.CIT(A) have proceeded on the premise that in the absence of such documentary evidence, the entire amount paid by the purchasers to M/s.Vetri Reals must necessarily represent consideration belonging to the assessee. In our considered opinion, such a conclusion is not supported either by the facts available on record or by any positive material brought on record by the Revenue.

It is an undisputed fact that the amounts aggregating to Rs.1,02,11,414/- were not received by the assessee. The sale deeds themselves clearly record that certain amounts were payable directly by the purchasers to M/s.Vetri Reals towards development and marketing charges. The payments were admittedly made by the purchasers directly to M/s.Vetri Reals through identifiable banking channels. The Revenue has not brought any material on record to establish that the said amounts were subsequently returned to the assessee or were received by him either directly or indirectly. It is also not the case of the Revenue that the payments made to M/s.Vetri Reals were fictitious or that the said concern was non-existent. On the contrary, confirmations acknowledging receipt of the amounts were furnished before the authorities below and the existence of M/s.Vetri Reals as the recipient of such payments has never been doubted.

The foundation of the impugned addition rests merely upon the inability of the assessee to substantiate, with documentary precision, the exact nature and extent of development and marketing services allegedly rendered by M/s.Vetri Reals. However, in our view, such deficiency by itself cannot lead to the automatic inference that the amounts paid to a third party constitute income

We further find merit in the contention of the assessee that the project involved development and marketing activities in connection with the sale of residential plots. The AO himself has accepted, while dealing with the claim of development expenditure, that expenditure would necessarily be incurred for converting lands into saleable residential plots. Therefore, the existence of development-related activities cannot be disputed. Merely because the assessee could not produce a formal agreement with M/s. Vetri Reals, it would not automatically follow that the payments made to the said concern were sham or that the consideration belonged to the assessee. Commercial arrangements, particularly in the real estate sector, cannot be disregarded solely for want of formal documentation unless there is evidence indicating that the arrangement is a colourable device or a make-believe transaction. No such material has been brought on record in the present case.

Another important aspect which cannot be lost sight of is that the AO has not conducted any independent enquiry with M/s.Vetri Reals. No statement was recorded from its proprietors/partners/directors. No verification was carried out regarding the receipt of the amounts, the accounting treatment thereof, or the nature of activities undertaken by the concern. Having accepted that the payments were made directly to M/s.Vetri Reals through banking channels, the Revenue could not have simply ignored the recipient and proceeded to assess the same amount in the hands of the assessee without bringing any material to

It is also pertinent to note that the sale deeds themselves bifurcate the amounts payable towards land cost and the amounts payable to M/s.Vetri Reals. The Revenue has not disputed the genuineness of the registered sale deeds nor has it established that the recitals contained therein are false. In the absence of any material demonstrating that the amounts directed to be paid to M/s.Vetri Reals were in reality received by or accrued to the assessee, the addition made by the AO lacks legal and factual foundation.

Considering the totality of the facts and circumstances of the case, we are of the view that the authorities below have proceeded merely on suspicion arising from inadequate supporting documentation and not on the basis of any positive evidence establishing that the impugned sum of Rs.1,02,11,414/- constituted income of the assessee. Since the Revenue has failed to discharge the burden of establishing that the amounts paid directly by the purchasers to M/s.Vetri Reals represented consideration accruing to the assessee, the addition cannot be sustained. Accordingly, we set aside the order of the Ld.CIT(A) on this issue and direct the AO to delete the addition of Rs.1,02,11,414/- made towards the amounts paid by the purchasers directly to M/s.Vetri Reals. Thus, the grounds raised by the assessee on this issue are allowed.

In the result, the appeal of the Assessee in ITA No.440/Chny/2025 stands allowed.

Subsequently, the AO initiated proceedings u/s.154 of the Act on the premise that there existed a mistake apparent from the record inasmuch as the aforesaid addition, according to him, represented business income and not capital gains. It was thus alleged that the application of tax at the rate of 20% constituted an apparent error requiring rectification. Accordingly, vide order dated 25.08.2023 passed u/s.154 of the Act, the AO rectified the assessment by subjecting the addition of Rs.1,02,11,414/- to tax at the rate of 30% treating the same as business income.

Aggrieved by the aforesaid rectification order, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A), vide the impugned appellate order dated 16.12.2024, dismissed the appeal of the assessee. While doing so, the Ld.CIT(A) observed that since the addition itself had been sustained in appellate proceedings and the nature of such income was held to be business income and not capital gains, the AO was justified in invoking the provisions of section 154 of the Act. According to the Ld.CIT(A), the incorrect application of the tax rate constituted a mistake apparent from the record and, therefore, the rectification carried out by the AO was in accordance with law.

However, we find that in the connected appeal arising out of the assessment framed u/s.153C of the Act, the very addition of Rs.1,02,11,414/- made by the AO has been deleted by us for the detailed reasons recorded in the preceding paragraphs of this order. Once the substantive addition itself ceases to survive, the controversy relating to the rate at which such addition is liable to be taxed becomes wholly academic and merely consequential in nature. In other words, when the foundation itself has been removed, the superstructure built thereon cannot independently survive.

In the present case, the rectification order passed u/s.154 of the Act merely seeks to alter the rate of tax applicable to the impugned addition. Since the addition forming the very subject matter of such rectification has been deleted by us, the rectification order loses its substratum and becomes infructuous. Consequently, the question whether the amount was liable to be taxed at 20% as capital gains or at 30% as business income no longer survives for adjudication.

Accordingly, in view of our decision deleting the addition of Rs.1,02,11,414/-, we hold that the impugned order passed by the AO u/s.154 of the Act cannot be sustained and is liable to be quashed. We order accordingly and allow the appeal of the assessee.

In the result, the appeal of the assessee in ITA No. 445/Chny/2025 stands allowed.