ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(1), BANGALORE vs. M/S CHAITANYA PROPERTIES PVT LTD , BANGALORE

Common grounds are raised by the revenue in these appeals and the grounds raised for AY 2010-11 are as follows:-

The ld. DR submitted that the learned C.I.T.(Appeals) failed to appreciate that in the case of M/s.Calcutta Knitwears, the A.O. of the "searched person" and the "other person" were not the same whereas in the case the of the assessee, the A.O of the "searched person" and the “Other Person" are one and the same. The Boards Circular No.24/2015 dated 31.12.2015 does not contemplate that satisfaction should be recorded in the case of the searched person and the other person to

The CIT(Appeals) erred in allowing the appeal of the assessee relying on the decision of the Hon'ble Supreme Court in the case of M/s.Calcutta Knitwears (362 lTR 673)(SC), Karnataka High Court Judgment in the case of CIT Vs. IBC Knowledge Park P Ltd. (385 ITR 346)(Kar) stating that only when incriminating material belonging to the assessee is available, there is a case for issue of notice u/s.153C of the Income Tax Act, 1961 and also relying on the Boards Circular 24/2015 dated 31.12.2015. The ld. DR brought to our notice the decision of the Karnataka High Court in the case of M/s. Canara Housing Development Corporation (49 Taxmann.com 98) wherein it was held that "total income" and not merely "undisclosed income" that is required to be assessed in proceedings u/s 153A which are applicable in proceedings u/s 153C also. He therefore prayed for allowing the appeals filed by the revenue.

The ld. AR submitted that the AO has not discharged the burden of proving that there is a valid initiation of proceedings u/s 153C to assume jurisdiction to make an assessment under section 153C of the Act. The proceedings initiated u/s 153C are not based on proper reasoning but done with no application of mind inasmuch as the following:-

He further submitted that in fact, documents contained in material No. 14/ST/132 formed the very basis for the department initiating proceedings u/s 148 on 06/03/2012 for the A.Y. 2005-06, on the ground that the document represented income hitherto concealed. Despite the objection raised by the assessee that the said document was very much disclosed to the department in the scrutiny assessment proceedings for A.Y. 2005-06 & also considered and dealt with by the concerned AO, the department proceeded to estimate income based on the covenants contained in the JDA and assessed income escaping assessment which order came to be confirmed by the CIT(Appeals). However, the assessee succeeded in its appeal before the ITAT which quashed the assessment vide its order in ITA No.551/Bang/2014 dated 21.11.2014 and the order of the ITAT was upheld by the Jurisdictional High Court for A.Y. 2005-06 which is placed at pages 23 to 54 of the paperbook.

The ld. AR submitted that as regards material 18/ST/132, it contains details of loans sanctioned by financial institutions and these are all duly disclosed in the balance sheets of the assessee and do not in any manner

He further submitted that the assessee was once again taxed on the income from the said JDA for the A.Y. 2009-10 by an order u/s 143(3). The addition made in this order was deleted by the CIT(Appeals) in his appellate order holding that the lands which formed the subject matter of JDA were being held as Stock in Trade and the same can be taxed only when sold/transferred by a registered sale deed and not before. The said order of the CIT(Appeals) was upheld by the jurisdictional ITAT vide its order dated 27/3/2015.

Therefore, it is virtually a settled fact that the documents relied upon by the department to initiate proceedings u/s 153 are not INCRIMINATING but only BENIGN documents, are also known to the department and do not represent any undisclosed income. He relied upon the decision of the Jurisdictional Karnataka High Court in the case of CIT vs IBC Knowledge Park .P. Ltd, 385 ITR 346, wherein the Hon'ble High Court has in unequivocal terms held that "The Detection of Incriminating Material leading to an inference of Undisclosed Income is a sine qua non for invocation of section 153C of the Act.” He also relied upon the following judgments.

In CIT vs Lancy Constructions, 383 ITR 168 (Kar) the Hon'ble High Court has held that "In the absence of Incriminating Documents having been found, the same accounts of the assessee were re assessed by making further reinvestigations and this was impermissible, as the same would amount to reopening a concluded assessment, without there being any additional material found at the time of search. Otherwise it would give the Revenue a second opportunity to reopen a concluded assessment which is impermissible in law". This decision was further approved in the case of Pr.CIT vs Delhi International Airport Pvt Ltd., in ITA No. 322/2018, order dated 29th September 2021.

The ld. AR submitted that In the light of the above incontrovertible facts the very initiation of proceedings u/s 153C in the case of the assessee is illegal being in contravention of the provisions contained in the Act and thus renders the entire proceedings from issue of notice upto the passing of the assessment order, void ab initio.

He further submitted that it is important to take note of the fact that the notice u/s 153C was issued on 30/08/2013, which is the date to be considered for commencement of proceedings u/s 153C & deemed to be the date of search. The assessments for the A.Y. 2010-11 & 2011-12 do not abate on 30/08/2013. In view of the fact that these assessments do not abate, the same cannot be disturbed in the absence of incriminating material which warrants disturbance of the income returned originally. It is an undisputed fact that there is no such incriminating material unearthed during the search. He relied on the decision of the coordinate bench of this ITAT in the case of Sree Lakshmi Venkateshwara Minerals vs DCIT 123 taxmann.com 255 (Bang Trib).

He thus pleaded that the decision of the CIT(Appeals) cancelling the assessment orders passed u/s 153 C r.w.s. 143(3) of the Act is to be upheld.

We have heard the rival submissions and perused the record. There was a search in the case of Srinivasa Trust on 6.8.2012. In the course of search documents belonging to the assessee were found. The documents seized and marked as Annexure 14/ST/132 comprised Joint Development Agreement dated 5.2.2005 between the assessee and PEPL and related documents. The related document marked as 18/ST/132 consisted of loan sanction details of the assessee. After duly recording the reasons, notice u/s. 153C of the Act dated 30.8.2013 was issued and served on the assessee requiring the assessee to file return of income in the prescribed form by 10.9.2013. In this case, search took place on 6.8.2012. Now the dispute is with regard to the framing of assessment u/s 153C of the Act. There was seized material marked as 14-ST/132 & 18-ST/132. The contention of the Ld. A.R. is that these seized materials are already on record relevant to proceedings u/s 148 of the Act on 6.3.2012 for the assessment year 2005-06. According to the A.R., they are not incriminating material. In our opinion, this argument of the Ld. A.R. holds no merit since the provisions of section 153C of the Act do not discuss that seized material should be incriminating in nature or undisclosed in nature for pending assessment. It says only about any material, articles, things, books of accounts, documents seized or requisitioned that belongs to or pertains to person other than the searched person. In our opinion, there were seized material procured during the course of search action in the case of Srinivasa Trust on 6.8.2012. Therefore, framing assessment thereafter u/s 153C of the Act is valid and the question of abatement or non-abatement do not arise since there are seized material. Accordingly, the argument of the assessee’s counsel that the assessment for the

Accordingly, the issue of framing of assessment u/s. 153C of the Act is upheld and order of the CIT(Appeals) is reversed on this issue.

Further, the ld. DR submitted that in view of ground No.9, he may be permitted to argue that the issue on merits may be remitted to the CIT(Appeals) to decide each issue independently, after going through the earlier order of the Tribunal in ITA Nos.52 & 125/Bang/2013 dated 27.3.2015. As the CIT(Appeals) has failed to adjudicate each ground independently on merits by identifying similarity of facts on the additions in the present year under consideration vis-à-vis the preceding assessment year relied on by him in his order.

The ld. AR submitted that the additions made in the order of assessment with respect to the JDA entered into with Prestige Estates Pvt Ltd are as under:-

Likewise, for the assessment year 2011-12 he assessed the Income from Business at Rs.325,32,46,980/-, Income from Long Term Capital Gains at Rs.71,90,45,278/-, Income from Short Term Capital Gains at Rs.84,92,10,510/- & Disallowance u/s 14A Rs.7,91,031/-.

In the assessment order for the A.Y. 2010-11, the AO has concluded that the sum of Rs.100 crores received by way of Non refundable deposit is nothing but consideration for agreeing to take a lesser share in the built up area and that the same is income in the hands of the Respondent for the A.Y. 2010-11 as the sum of Rs.100 crores is received during the previous year relevant to the said A.Y. He therefore proceeded to assess the Income from Business at Rs.75,83,01,870/- & income from Long Term Capital Gains at Rs.9,92,46,023 & income from Short Term Capital Gains at Rs.11,72,12,043/-.

The assessee has during the course of the assessment proceedings submitted that the supplemental agreement dated 15/5/2009 no doubt confers PEPL to receive a larger portion of the commercial area to be built up but however PEPL will get the absolute rights to the same only after PEPL hands over Our Share of Built up area only after the Construction of which is complete in all respects and duly certified to be so by the Architect of the Project.

The sum of Rs.100 crores is not consideration but represents Non Refundable Deposit & will remain as Non refundable Deposit till such time the Developer completes his part of the contract. In the event the Developer is not able to perform & is forced to abandon the contract for any reason what so ever the Non-Refundable Deposit would then remain with the assessee & would partake the nature of a Capital Receipt. The same will fructify into income only upon the developer performing his part of the contract & will become converted into income on a proportionate basis as and when the Developer hands over the Respondent’s share of the built-up area to the Respondent. In other words, the Respondent is to receive total built up commercial space of 6,99,469 sft from PEPL. The Non-Refundable deposit of Rs100 crores is in respect of this entire agreed area of 6,99,469 sft of built up area. If the developer were to hand over 69,947 sft being 10% of the agreed built up area in a particular financial year, then Rs10 crores would be transferred to income from the Non-Refundable deposit of Rs.100 crores & the Non-Refundable Deposit as on 31st March of the said financial year would stand reduced to Rs.90 crores.

As a natural corollary since no built-up area is received by us during A.Y. 2010-11 & 2011-12, no portion of the Non-Refundable Deposit of Rs.100 crores would fructify into income for the said assessment year.

The fact that the land which is subjected to Joint Development is Stock In Trade of the assessee is a very important fact to take note off in order to decide the exact point in time as to when the ownership in these lands held as stock in trade gets actually transferred from the Respondent. The application of section 45 is limited to sub section (2) of section 45 in as much as the impugned lands are held as Stock in Trade. The provisions of section 53A of the Transfer of Property Act apply to an asset held as a Capital asset /investment & not to Stock In Trade.

It is submitted that from a reading & understanding of the JDA what has to be ascertained is the date on which PEPL starting exercising the POA to convey ownership of the undivided interest in the land held as Stock in Trade & treat only those portions of undivided interest in land which are actually registered in favour of PEPL or its nominees or any third person for that matter & bring to tax the Capital Gains arising out of such conveyance in such years in which it is transferred. The sale of undivided interest in land has two components of income. The first is Income from Capital Gains which is to be worked out as per the provisions of sub section (2) of section 45 & the other component being Income from Business, which is to be computed on the basis of the value attributed to the building in the office of the sub – registrar for purposes of stamp duty at the time of registration of the sale deed of an apartment. The Sale deed for an apartment will consist of two components namely Value of the undivided interest in land & Value of building. The purchaser of the apartment will pay a composite price which will be split up into the above two components for purpose of registration. If one were to study the Sale deeds executed by PEPL transferring ownership of the apartment to the purchasers, one can find out the value per sft of land and the value per sft of building. Both these components are to be taxed in the assessment year relevant to the previous year in which the undivided interest in land is actually conveyed

It is submitted that the property being held by way of stock in trade, the sale of the same will have to be recognised only when the same is actually conveyed by a registered sale deed. This principle which is applicable to stock in trade has been upheld by the Jurisdictional Bangalore Bench of the ITAT in the assessee’s own case for the A.Y. 2009-10 wherein the Tribunal, confirming the decision of the CIT(A) has held categorically in its order that “When an immoveable property is held as Stock in Trade, the same is to be considered as sold only when the sale is conveyed by means of a registered sale deed and not before that.”

Further on the issue of Non Refundable Deposit, the ITAT, again confirming the decision of the CIT(A), held that “The Non Refundable Deposit would partake the character of sale consideration only upon the ownership of the undivided interest in land being transferred by a sale deed and not before that and then only to the extent of the amount proportionately applicable to the extent of land so transferred.”

Thus, from the above brief submissions made above as regard to the merits of the matter, it is submitted that the additions made in the order of assessment is not warranted and further the binding decision of the Jurisdictional ITAT, Bangalore Bench in assessee’s own case for the AY 2009-10 in ITA No. 52/Bang/2013, order dated 27/03/2015 supports the contention of the assessee, as no income accrues to the assessee either by way of Income from Business and nor by way of Capital Gains whether Long or Short Term Capital gains which has held that when an immovable property is held as stock-in-trade, the same is to be considered as sold only when the sale is conveyed by means of a registered sale deed and not before that.

Thus, the additions made by the AO have been rightly deleted by the CIT A for the A.Y. 2010-11 & 2011-12 & the order of the CIT(A) needs to be confirmed in the interest of Justice.

The ld. AR also submitted that assessee has started declaring income from the said JDA as & when the Sale deeds are actually registered on & from A.Y. 2012-13. The Respondent has so far declared a Total Taxable income of Rs. 435,43,56,426/- which includes a sum of Rs. 310,96,66,066/-as Income from Business & Rs.124,46,90,420/- as Income from Long Term Capital Gain which are income arising out of the JDA on upto A.Y. 2020-21. The assessee has paid the due taxes & assessments are completed for most of the years except A.Y. 2020-21, which is in progress.

The details of the Returns filed for the A.Y’s 2012-13 to 2020-21 & a consolidated chart showing income declared under the heads Business Income & Long Term Capital Gains, year wise, arising out of the Project is also filed separately before this Tribunal. This proves that there is no intention on the part of the assessee not to disclose income from the JDA but that the assessee is declaring the same in accordance with law. Any addition made in A.Y. 2010-11 & 2011-12 would amount to double addition & double collection of taxes on the very same income.

There is no proper satisfaction arrived at by the AO to come a conclusion that disallowance of expenses is indeed warranted. Several Appellate authorities have held that application of the provisions of section 14A cannot be done without application of mind and that a proper satisfaction is essential to proceed with disallowance. The following decisions are in support of this proposition:-

Reliance is placed on the assessee’s own case in ITA No.52/Bang/2013 for the A.Y. 2009-10 in favour of the assessee and the case of DCIT vs Subramanya Constructions & Development Co. Ltd 154 ITD 303, ITAT Bangalore Bench.

Further it is now a settled law that any disallowance of expenditure u/s section 14A by applying rule 8D (2)(ii) & (iii) cannot exceed the income earned from the said investment. In the present case the income earned is NIL and hence no expenditure can be disallowed. The assessee relies upon the following decisions in support of the above said proposition:-

We have heard both the parties and perused the material on record. We find that the CIT(Appeals) has passed a cryptic order on merits on the additions made by the AO and his findings are as follows:-

In the result, the revenue’s appeals are allowed for statistical purposes.