DCIT, BANGALORE vs. M/S IND- SING DEVELOPERS (P) LTD.,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, JM ITA No.107/Bang/2012 : Asst.Year 2005-2006 M/s.Ind Sing Developers Private The Deputy Commissioner of Limited, No.208, West Minister V. Income-tax, Complex, 13 Cunningham Road Central Circle 2(3) Bangalore. Bangalore – 560 052. PAN : AABCI2107G. (Appellant) (Respondent) ITA No.202/Bang/2012 : Asst.Year 2005-2006 The Deputy Commissioner of M/s.Ind Sing Developers Income-tax, Private Limited, No.208, West V. Central Circle 2(3) Minister Complex, 13 Bangalore. Cunningham Road Bangalore – 560 052. (Appellant) (Respondent) Revenue by : Smt.Priyadarshini Besaganni, JCIT-DR Assessee by : S/Sri. G.S.Prashanth, CA and Narendra Sharma, Advocate Date of Pronouncement : 02.03.2022 Date of Hearing : 22.02.2022 O R D E R Per George George K, JM These cross appeals are directed against CIT(A)’s order dated 30.11.2011. The relevant assessment year is 2005- 2006. The order of CIT(A) arises out of assessment order dated 31.12.2010 passed u/s 143(3) r.w.s. 153A of the I.T.Act.

2 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited search was conducted u/s 132 of the I.T.Act in the business premises of the assessee on 26.08.2008. During the course of search, certain documents and other details were seized. Subsequent to the search proceedings, notice was served on the assessee and proceedings were completed by the Assessing Officer u/s 143(3) r.w.s. 153A of the I.T.Act vide order dated 31.12.2010 for the assessment year 2005-2006. The A.O. considered the income arising on sale of land and relinquishment of Rights as business income as against the assessee’s treatment as part of income as receipt from capital gains and part of it as capital receipt not exigible to tax. Accordingly, a sum of Rs.18,58,08,412 was assessed as business income (in the assessment order completed u/s 143(3), the same was considered as capital gains and assessed). Besides the above addition, selling expenses of Rs.1,40,48,960 was added and also a sum of Rs.9,65,175 was disallowed u/s 40(a)(ia) of the I.T.Act.

3 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited the relief granted by the CIT(A) on 06.02.2012. We shall first adjudicate the assessee’s appeal.

ITA No.107/Bang/2012 (Assessee’s appeal) 5. The assessee has filed a paper book enclosing therein the audited financials for the relevant assessment year, copy of the orders of the Tribunal and the High Court in respect of the original assessment completed u/s 143(3) of the I.T.Act etc. The learned AR submitted that the assessment u/s 143(3) of the Act was completed by the Assessing Officer vide order dated 28.12.2007 by treating the consideration received on sale of land and relinquishment of rights of Rs.20 crore as taxable under the head `capital gains’. However, the Assessing Officer during the course of search proceedings u/s 153A of the Act, treated the same as business income. It was further submitted that the other additions made on account of disallowance of selling expenses and disallowance u/s 40(a)(ia) of the Act is not based on any incriminating material and consequently no addition could have been made by the Assessing Officer in a proceedings completed u/s 153A of the Act. In support of the above submission, the learned AR relied on the following judicial pronouncements:-

(i) CIT v. IBC Knowledge Park (P) Ltd. reported in 385 ITR 346 (Karnataka) (ii) Pr.CIT v. Delhi International Airport Pvt. Ltd. in ITA No.322/2018 (judgment dated 29.09.2021) (iii) CIT v. Kabur Chawla reported in 380 ITR 537 (Delhi) (iv) PCIT v. Ms.Lata Jain 384 ITR 543 (Delhi) (v) PCIT v. Devangi Alias Rupa 394 ITR 184 (Guj.)

4 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited (vi) CIT v. Mechmen 380 ITR 591 (MP) (vii) CIT v. RRJ SEcuriites 380 ITR 612 (Delhi) (viii) CIT v. Ramesh Kumar 338 ITR 126 (P&H) (ix) CIT v. Lata J.Chandrashekar (HUF) 338 ITR 61 (Mad.) 5.1 The learned Standing Counsel appearing for the assessee submitted that as regards the nature of addition of sale of land and relinquishment of Rights, the same has been rightly taxed under business income. It was submitted that during the search on 26.08.2008, the department had seized the documents containing the opinion of Shri S.Parthasarathy, Sr.Advocate. The Sr.Advocate from whom the assessee had sought opinion has stated in his letter dated 20.08.2005 that the entire receipt of Rs.20 crore is to be treated as business income. The A.O. during the course of assessment proceedings examined the chargeability of the proceeds under the head `business income’ and relied on following documents:-

(a) Directors Report for the year ending 31.03.2004 to share holder where in according to Boards resolution land was agreed to be converted into stock in t4rade as the company. (b) Copy of the Notes forming part of accounts as on 03.03.2004. (c) Audited balance sheet for A.Y. 2004-05 where the land was shown as stock in trade. (d) Seized document containing opinion of Shri S.Parthasarathy, Sr.Advocate. (e) Copy of Memorandum of assessee company.

It was stated by the Standing Counsel that the A.O. considered the assessee’s submissions vis-à-vis above

5 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited documents and concluded that the considerations received on sale of land and relinquishment of rights are business income and quantified business income at Rs.18,58,08,412 (in the original assessment it was taxed under the head Capital Gains). The A.O. also stated in para 11 of his order that the above documents were not available before the A.O. at the time of concluding assessment u/s 143(3). With regard to the additions of selling expenses and disallowance u/s 40(a)(ia) of the Act, the learned Standing Counsel was unable to convert the assertion of the learned AR that additions are not based on incriminating material.

5.2 We have heard rival submissions and perused the material on record. The Hon’ble Karnataka High Court in the case of IBC Knowledge Park Private Limited v. CIT reported in 385 ITR 346 had held that unless in the material seized during the course of search show undisclosed income and are incriminating in nature, jurisdiction u/s 153C of the Act cannot be assumed. The ratio of the above decision would apply to section 153A of the Act also. The latest judgment of the Hon’ble jurisdictional High Court in the case of Pr.CIT v. M/s.Delhi International Airport Pvt. Ltd. in ITA No.322/2018 & Ors. (judgment dated 29th September, 2021) also followed the judgment of the Hon’ble Karnataka High Court in the case of IBC Knowledge Park Pvt. Ltd. v. CIT (supra). The relevant finding of the Hon’ble jurisdictional High Court in the case of Pr.CIT v. M/s.Delhi International Airport Pvt. Ltd. (supra), reads as follow:-

6 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited “30. Thus, it is clear that the Assessing Officer while passing the order under Section 153A read with Section 143(3) of the Act, ordinarily cannot disturb the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings establishes that the finalized assessments are contrary to the material unearthed during the course of 153A proceedings, as held by the Co- ordinate Bench of this Court in the case of IBC Knowledge Park (P) Ltd. supra. A concluded assessment could not be disturbed without there being any basis for doing so which is impermissible in law. Even in case of a searched person, the same reason would hold good…………………..” 5.3 The judgment of the Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla reported in (2016) 380 ITR 573 (Delhi) had summarized the legal position as regards assessment u/s 153A of the Act, as follows:-

"37. On a conspectus of Section. 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six A Ys immediately preceding the previous year relevant to the A Y in which the search. takes place. ii. Assessments and reassessments pending on the date of the search shall abate The total income for such AYs will have to be computed by the AOs as afresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income of the aforementioned six years In separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs in which both the disclosed and the undisclosed income would be brought to tax". iv. Although. Section. 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information. available with the AO which can be related to the

7 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.” v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each A Y on the basis of the findings of the search and any ether material existing or brought on the record of the AD. vi. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment."

5.4 The Hon’ble jurisdictional High Court in the case of Pr.CIT v. M/s.Delhi International Airport Pvt. Ltd. (supra) had also referred to the judgment of the Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla (supra) (Refer para 20 of the Karnataka High Court judgment). From the above judicial pronouncements, cited supra, it is clear that the assessments which are not pending and hence does not abate, the addition can be made only on the basis of incriminating material found during the course of search. In the instant case, the original assessment was already completed vide order dated 28.12.2007 passed u/s 143(3) of the I.T.Act and further appeal was preferred to ITAT and the Hon’ble High Court.

8 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited Therefore, the assessment for assessment year 2005-2006 was not pending as on the date of search (date of search 26.08.2008), and hence, does not abate. Therefore, for the addition to be made in the assessment to be completed u/s 153A of the I.T.Act necessarily has to be based on incriminating material found during the course of search. Viewed from the above legal position, let us list out the three additions in the assessment completed u/s 153A r.w.s. 143(3) of the I.T.Act.

(i) Treatment of consideration received on sale of land and relinquishment of rights Rs.18,58,08,412 treated as business income (in the original assessment, it was treated as capital gains) (ii) Selling expenses (see para 21 of the assessment order) (iii) Section 40(a)(ia) of the I.T.Act (see para 22 of the assessment order)

5.5 On a careful perusal of the assessment order, it is clear that the seized material pertains to only the first addition mentioned above. The relevant observation of the A.O. with reference to the seized material, reads as follows:-

“10. During the course of present assessment proceedings, the issue of chargeability of the proceeds arising out of the sale of land and rights is examined in the light of the following documents seized during the course of search proceedings u/s 132 documents found during the course of assessment proceedings. These were not available to the Assessing Officer at the time of concluding proceedings u/s 143(3). The same are listed herewith: (i) Directors Report to the Shareholders part of ninth annual accounts as at 31.03.2004 dated 7th September 2004 filed with the return of income in compliance to section 153A for the previous A.Y. 2004-95.

9 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited

Relevant para is extracted as follows: “It was decided in the Board Resolution passed at the Board Meeting held on 31.03.2003 (wrongly as against 31.03.2004) it has been decided to convert the land (fixed assets) to Stock-in-trade as the company was `engaged in the business of land development’. The same is duly signed. (ii) Copy of notes forming part of accounts as on 31.03.2004 wherein the same is reiterated in para 5 dated 07.09.2004 filed with the return of income for A.Y. 2004-05 in response to notice u/s 153A. (iii) Audited Balance Sheet for A.Y. 2004-05 reflecting the land as `stock in trade’ as on 31.03.2004 as filed with return of income for A.Y.2004-05 in compliance to notice u/s 153A. (Iv) The details as per balance sheet as on 31.03.2004 filed along with the return of A.Y. 2004-05 and A.Y. 2005-06 (as comparatives) this b/s filed before the A.O. is different, as it reflects the land as fixed asset. (v) Seized document pages 62-65 of AS/ISD/2 is a copy of opinion given by senior advocate Shri S.Parthasarthy dated 20.08.2005, the opinion is given on the queries about the taxability of sale of land and rights on the facts recorded in the preamble….. …………… (vi) Copy of memorandum of company giving the objects as all types of construction and development work in all its branches such as canal, roads, hotel, hospital, Dharmshala, housing project…. 11. The above documents are vital evidences to determine the chargeability of the income of the assessee. At the cost of repetition it may be stated here that these documents were not available before the Assessing Officer at the time of concluding proceedings u/s 143(3).”

5.6 At this point, it is necessary to elaborate on the facts with regard to the issue of treatment of consideration received on sale of land and relinquishment of rights of Rs.18,58,08,412. The assessee had entered into a MOU with

10 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited Shri. Pradeep Kumar Sharma on 22.05.1995 for jointly developing 9 Acres of land at Sy. Nos. 19 & 20 of Ambalipura Village, Varthur Hobli, Bangalore and a formal agreement dated 12.07.1995 was entered between the parties as per which the assessee was entitled to receive 40% of the net profit eventually arising from the sale of the apartments to be built. Thereafter Shri. Pradeep Kumar floated a company named Parkway Developments Pvt. Ltd. (PDPL) and assigned his rights in favour of the said Company. A supplementary agreement was entered by the assessee with M/s PDPL as per which the assessee's share was reduced to 20% and the assessee executed a GPA in favour of M/s. PDPL. Subsequently, serious differences cropped up between the parties leading to assessee cancelling the GPA on 12.03.2004 and M/s. PDPL filed a suit in the Court of the City Civil Judge, Bangalore in as No. 2224/2004 on 25.03.2004 seeking nullification of the cancellation of power of attorney. During the pendency of the suit, the parties reached a settlement on 02.04.2004 and the assessee through the settlement agreement agreed to forego all their rights and interests as per the development agreement & also agreed to convey the subject property to M/s PDPL. The consideration as per the settlement was Rs. 20 crore, which was split by the parties into Rs. 14 crore for foregoing their rights and Rs. 6 crore for conveying the subject property. While filing the return of income for the impugned assessment year, assessee declared a long term capital gain on a sum of Rs.6 crore and Rs.14 crore was not offered to tax as it was a capital receipt.

11 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited However, the assessing officer considered the entire sum of Rs. 20 crore as taxable under the head 'Capital Gains' and completed the assessment vide order dated 28.12.2007 passed u/s 143(3) of the Act. Subsequently a rectification order u/s 154 of the Act dated 03.11.2008 was passed whereby the value of land component was increased to Rs. 6,29,67,000.

5.7 Aggrieved by the order of the assessing officer, the assessee filed an appeal before the CIT(A) on 29.01.2008. The assessee had contended that the transaction between the assessee and M/s PDPL is not assessable to tax in the hands of the assessee. However, the learned CIT(A) confirmed the addition of Rs. 14 crore. Aggrieved by the orders of the authorities below, the assessee had preferred an appeal before the Hon'ble Tribunal in ITA No. 629/Bang/2009.

5.8 The Tribunal after considering the facts of the case vide order dated 17.04.2015 it was held as under:

"26. …………………. The capital asset here, which was the land, could be considered as transferred to the ADP in the year in which assessee entered the principal agreement. This happened much before the impugned assessment year. Even if we consider that assessee could have introduced this capital in the ADP only after acquiring the property, even this happened much before the currency of the relevant previous year. Resultantly there was no capital gains on account of land being introduced by the assessee into the ADP, during the relevant previous year.

12 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited 27 ........... . It is clear from Section 45(4) of the Act, that profits and gain if any, arising on transfer of capital by way of distribution of capital assets is assessable in the hands of the AOP only and not in the hands of its members. The settlement deed practically put an end to the AOP and transfer of title in the land to M/s. PDP was nothing but distribution of the capital assets of the AOP on its dissolution …………..

5.9 Aggrieved by the order of the Hon'ble Tribunal, the Department preferred an appeal before the Jurisdictional High Court and the Hon'ble High Court dismissed the appeal vide judgment dated 02.03.2016 in ITA No.541/3015. The relevant portion of the judgment reads as follows :-

"4. The aforesaid shows that the Tribunal mainly considered two aspects. At the time of Association of Person (hereinafter referred to as the 'AOP,) was formed, the said AOP could have been considered for the taxation purpose on the ground of capital gain. But, the said AOP neither filed return nor was assessed for the purpose of taxation. The AOP was formed in the year 1995. The activities of the AOP were also continued for some time and it is only in the year 2004, on account of dispute, settlement was entered into between the members of AOP and the properties were distributed. It has been held by the Tribunal that when distribution of assets takes

13 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited place the same is not transfer of assets. Further, the Tribunal has taken note of the fact that the assessment at Rs.14 Crore is on the basis of 20% share of the profit which the assessee would have earned in future. The Tribunal has taken note of the fact that the share of the income is not taxable in the hands of the members. Ultimately, the Tribunal found that the addition of Rs.14 Crore, made under the head of capital gain was incorrect and the sail addition is ordered to be deleted. 5 ........................................................ . 6 .................. Merely because the AOP at the relevant point of time could not be assessed for tax is not a valid ground to tax a member of an AOP at the time when AOP is dissolved and the properties are distributed. "

5.10 Therefore, as regards the assessment of Rs.14 crore is concerned, the Hon’ble High Court confirmed the findings of the Tribunal and the same is to be taxed in the hands of the AOP and not in the hands of the assessee. Therefore, in the assessment pursuant to search, the only question is regarding taxability of Rs.6 crore disclosed by the assessee in the original return of income under the head capital gains (subsequently enhanced to Rs.6,29,67,000 u/s 154 of the Act). In the assessment concluded u/s 153A r.w.s. 143(3) of the I.T.Act, the Assessing Officer had brought to tax the aforesaid amount as business income mainly on the basis of a written opinion of a Senior Advocate found during the course of search in which he opined that the receipt on sale of land and relinquishment of rights is taxable under business income. It is settled position of law that taxes are not be collected or paid on the basis of opinion of expert. No addition

14 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited can be based on an opinion which is even not put to the assessee for his rebuttal during the course of assessment proceedings. Without prejudice, it is also to be mentioned that the assessee had taken opinion from others and the same has not been considered by the Assessing Officer. If there was an opinion in favour of the assessee, would be the Assessing Officer followed the same instead of one against the assessee. The answer would be certainly `no’. Therefore, the assessment should be framed only on the basis of evidence gathered and not on the basis of opinion of expert. As mentioned earlier, the taxability of settlement proceeds of Rs.14 core was subject to matter disputed before the Tribunal in ITA No.629/Bang/ 2009 and the Tribunal vide its order dated 17.04.2015 had clearly held that the said amount of Rs.14 crore is not taxable in the hands of the assessee. The order of the Tribunal was confirmed by the Hon’ble jurisdictional High Court (supra).

5.11 The Assessing Officer has also stated that as per the Director’s Report to the shareholders as on 31.03.2004, the Board has decided to convert the land into stock-in-trade and sought legal opinion regarding taxability of transaction. The Assessing Officer alleged that the assessee on receiving such legal opinion in order to evade taxes reflected the land as capital asset. During the course of hearing before the Tribunal on 22.02.2022, the learned Standing Counsel had contended that the Director’s Report to shareholders, note forming part of accounts as on 31.03.2004, audited balance sheet for the year ending 31.03.2004 was found during the course of search u/s 132 of the I.T.Act and these are

15 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited incriminating materials. Further, he contended that the balance sheet filed for assessment years 2004-2005 and 2005-2006 (as comparative) is different from the balance sheet filed before the Assessing Officer. This contention of the learned Standing Counsel is contrary to the facts of the case. The assessment u/s 143(3) of the I.T.Act was completed by the Assessing Officer vide letter dated 28.12.2007 and copies of the financial statements for the assessment years 2004- 2005 and 2005-2006 dated 07.09.2004 and 07.09.2005, respectively were available before the Assessing Officer much before the search was conducted u/s 132 of the I.T.Act on 26.08.2008. Therefore, the aforesaid documents cannot be considered as incriminating materials on the facts of the case. Insofar as the contention that balance sheet filed for assessment years 2004-2005 and 2005-2006 (as comparative) is different from the balance sheet filed before the Assessing Officer is concerned, it is relevant to state that whenever there is a change in accounting policy followed by the assessee, the assessee is required to disclose the same in accordance with the Accounting Standard-1 `Disclosure of Accounting Policies’ issued by the Institute of Chartered Accountants of India (ICAI) as applicable then and also required to regroup /reclassify the figures of the previous year so as to make them comparable with current year figures in the financial statements. It is pertinent to state that, the assessee had offered capital gains even after reclassification and it was not disputed by the Assessing Officer in the order dated 28.12.2007. Therefore, on the facts of the instant case, there

16 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited is no incriminating materials seized during the course of search, which can be linked to the three additions made in the assessment completed u/s 143(3) r.w.s. 153A of the I.T.Act. Hence, in view of the Hon’ble jurisdictional High Court judgment in the case of CIT v. IBC Knowledge Park (P) Ltd. (supra) and Pr.CIT v. Delhi International Airport Pvt. Ltd. (supra), these additions cannot be sustained.

5.12 In the result, the appeal filed by the assessee is allowed.

ITA No.202/Bang/2012 (Revenue’s appeal) 6. In Revenue’s appeal, the solitary issue that is challenged is the decision of the CIT(A) wherein he changed the head of income from business income to the capital gains, with reference to the asessability of receipt on sale of land and relinquishment of rights. Since we have already held that the additions are not warranted in the facts of the case, the Revenue’s appeal is dismissed.

Order pronounced on this 02nd day of March, 2022. Sd/- Sd/- (Padmavathy S) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 2nd March, 2022. Devadas G*

17 ITA No.107 & 202/Bang/2012 M/s.Ind Sing Developers Private Limited

Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-VI, Bangalore. 4. The CIT (Central), Mangaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore