SVK PROJECTS, HYDERABAD,HYDERABAD vs. ITO, WARD-8(3), HYDERABAD, HYDERABAD

PER S. RIFAUR RAHMAN, AM: This appeal filed by the assessee is directed against the order of CIT(A) – 2, Hyderabad, dated, 30/08/2016 for AY 2007-08.

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2.1 Brief facts on reopening of assessment are, there was a search and seizure operation conducted u/s. 132(1) of the Act, 1961 on 29-10-2007, in the case of Sri D. Nagarjuna Rao, partner in the firm M/s. SVK Sri Sitaramanjaneya Constructions. Shri D. V. Krishna Reddy, is also one of the partners in M/s. SVK Sri Sitaramanjaneya Constructions (SCKSSC). During the course of search and seizure proceedings, page 23 of the ledger account books seized vide Annexure "AIDNRI04" dated 29-10-2007 was enquired into. Shri D. Nagarjuna Rao has stated in his statement that M/s. SVK Projects against whom the ledger account was maintained is a group persons represented by Shri D. V. Krishna Reddy, who in turn a partner in the firm M/s. SVK Sri Sitaramanjaneya Constructions also. He also stated that the assessee Shri D. V. Krishna Reddy (in short ‘DVKR’), has invested the amount of Rs. 3,58,90,000/- on behalf of M/s. SVK Projects. When confronted with the above statement, DVKR accepted that he has contributed the amount on various dates as partners capital to M/s. SVK Sri Sitaramanjaneya Constructions and the source of funds being received from M/s. SVK Projects, a firm formed on 21-06-2006. Shri Satyanarayana Reddy, Shri Ch. Sitaramu, D. Srinivasa Reddy, Shri D. V. Krishna Reddy and Shri K. Manhohar Reddy are the partners of the firm M/s. SVK Projects with profit/loss sharing ratio of 30%, 20%, 10%, 30% and 10% respectively.

2.2 It was submitted by DVKR that the firm M/s. SVK Projects was formed on 21-06-2006 with an intention of developing and constructing residential flats and independent houses and to acquire lands. In this process, the firm acquired land to the extent of 2.7 acres at Bahadurpally, Qutubullapur, R.R. District for a consideration of

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Rs.23,22,500/- and the land was registered on 17-08-2006 for a consideration of Rs.3,00,000/-. It was further submitted that M/s. SVK Projects was not maintaining regular books of account since the construction was not commenced. However, DVKR explained that he had written the details of advances received from prospective buyers of land at proposed Bahadurpally Venture (where residential flats and 20 duplex houses would be constructed). Shri DVKR furnished 'katcha' cash-book of the assessee firm along with the details of fund collected. As per the details furnished, the DVKR had received Rs.3,00,50,000/- in cash from various parties in the months of November and December, 2006 and the amounts received by way of cheques to an extent of Rs.58,90,000/- in the month of January, 2007. DVKR furnished the details of persons from whom the assessee firm received the funds, and some of them were examined on oath. All the persons (19 persons) have explained and confirmed that they have advanced the funds on various dates to M/s. SVK Projects.

2.3 The assessing officer while completing the assessment in the case of Shri D. V. Krishna Reddy, has made addition of Rs.2,42,00,000/- u/s. 69 of the Income-tax Act, 1961, with following observation:

“5. From the above discussion, it can be seen that all the aforementioned persons claimed to have made the advances in-cash and have failed to furnish documentary evidence in support of their accumulated savings. Further, the bank statements do not show the advancement of cash to the assessee on respective dates and the dates and amounts of withdrawal by above persons do not match with the cash advances claimed to have been made to the assessee. Thus, the details of the said withdrawals are far apart and well ahead of the said cash advances to the assessee. Even in cases where the source of finance is stated to be

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amounts received from overseas, there is no reason why the advances were received only in cash . 5. In the light of the discussion made above, the claim of the assessee regarding receipt of advances in cash from the above persons aggregating to Rs.2,42,00,000/- and investment of the same as partners' capital to M/s Sri SVK Sri Sitaramanjaneya Constructions by the assessee stood unexplained. Therefore, the same is considered as unexplained investment u/s 69 of the I.T. Act, and added to the total income. "

2.4 Aggrieved by the order of the Assessing Officer, Mr. DVKR filed appeal before the CIT(A) and the main theme of the submissions are that M/s SVK Projects is a firm and whose existence is proved beyond doubt, and receipt of the advances were also provided and confirmations were furnished. The learned CIT(A) not only considered the submission of Assessee and rejected them, but also enhanced the addition to Rs.3,00,00,000/- on the ground that the assessee Shri D. V. Krishna Reddy, in his statement recorded on 14-11-2007, while referring to the statement of Sri D. Nagarjuna Rao (in whose case search & seizure operation u/s. 132(1) was conducted on 29-10-07), confirmed contribution of Rs.3,00,00,000/- in cash made by Shri D.V. Krishna Reddy on 30-12-2006 to the firm M/s S.V.K Sri Seetharamanjaneya Constructions, DVKR has confirmed the contents of such statement given by Shri D. Nagarjuna Rao.

2.5. Aggrieved by the order of the CIT(A), Shri D. V. Krishna Reddy filed appeal before the Hon'ble ITAT. After considering the submissions made by the counsel for the assessee and the learned Departmental Representative, the Hon'ble ITAT vide order in ITA No. 79/Hyd/2012 dtd. 29-11-2013 has observed as under:

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"As seen from the order of AO, there is no dispute with respect to the existence of M/s. SVK Projects and AO himself recorded that M/s. SVK Projects formed with the partners namely, i) C. Satyanarayan Reddy, ii) Ch. Seeta Ramu, iii) D. Srinivas Reddy, (iv) K. Manohar Reddy and v) D. V. Krishna Reddy. There is also no dispute about the existence of M/s. SVK Projects prior to search as property was purchased on 17-8-2006 and 22- 11-2006 by the said firm. There are also cheque receipts as stated in page 5 of the assessment order to an extent of Rs.58,90,000/-, which proves the existence of the said firm much prior to the date of search. Even Shri D. Nagarjuna Rao in his statement admitted that Assessee Shri D. V. Krishna Reddy, promoter of M/s. SCK SSC is also representing M/s. SVK Projects. Assessee also admitted on behalf of M/s. SVK Projects that he has contributed the fund to a large extent in M/s. SVK SSC and he gave details of various persons from whom the funds received by way of cheques and cash and the same were invested in M/s SVK Projects. It is also a fact that ADIT made enquiries with reference to various people, who have admitted the source of funds as well as confirmed that they have invested in M/s. SVK Projects. In spite of explanations and evidence furnished that the amounts were received by M/s. SVK Projects and these funds were withdrawn by the partners and invested in M/s, SVK SSC, the AO considered the amounts in the hands of Assessee on a thin reason that Assessee Shri D. V. Krishna Reddy admitted to have contributed on behalf of the partners. It is obvious that Assessee Shri D. V. Krishna Reddy is acting as a partner in M/s. SVK SSC and its sources of funds are from M/s. SVK Projects. There is not dispute on these facts. The A.O, at best, could have examined the source of funds in M/s. SVK Projects and could have made the addition in the hands of M/s. SVK Projects, if doubted. We are also of the opinion that the learned CIT(A) on frivolous presumptions enhances the addition to Rs.3.00 crores from Rs.2.42 crores, comprising of cheque receipts which AO has accepted and not doubted. In our view, when the receipts by way of cheques have not even doubted by the AO or by the investigation team, the order of CIT(A) in enhancing the amount cannot be justified at all on the facts of the case. Therefore, to the extent of addition enhanced by the CIT(A), the same stands deleted.” 10. Coming to the addition made by the AO of Rs.2.42 crores, which is part of the investment made by

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assessee in M/s. SVK SSC, the explanation given was that they have withdrawn the funds from M/s. SVK Projects and invested in the firm and to that extent the source of funds stand explained as withdrawals from the firm. Page 28 of the ledger, which was narrated by the AO also mentions that contribution from M/s. SVK Account. The copy of Annexure "A/DNR/04 consisting pages 1 to 71 were placed in paper book. Paper book which is copy of note book was also perused by us and page 1 is account of Shri D.N. Rao, page 3 also as DNR as cash credit on 30-12-2006 of Rs.101/-. Page 7 is in the name of Assessee wherein there is credit of RS.1 01. Like-wise, there are other partners accounts. Page 23 is credit of Rs.3 crores on 30-12-2006, which was as stated by Assessee as withdrawal from 14/s. SVK Projects and investment in M/s. SVK SSC on behalf of M/s. SVK Projects. The balance entries starting from 03- 01-2007 by Shri Satyanarayana by way of cheque on lCICl No. 078807. Like wise on 19-01-2007, there was deposit of Rs.10 lakhs by way of three cheques on lCICl and SBH banks into the account of M/s. SVK. There are also credits in various names. These transactions do indicate that the ledger account in page 23 does not pertain to Assessee Shri D. V. Krishna Reddy but pertains to M/s. SVK Projects. Therefore, we are unable to understand as to how the addition can be made in the hands of Assessee, who is a partner in both the firms. We were informed that no action has been taken in the hands of M/s. SVK Projects. Since all the contributions/transactions are pertaining to M/s. SVK projects, we are of the considered opinion that the amount cannot be added in the hands of Assessee. In view of this, we have no hesitation in deleting the amount in the hands of Assessee. If there is any incriminating material or doubt about sources, revenue is free to enquire in the 'hands of M/s. SVK, if required, but this is only an observation but not a direction. With these observations, addition made in the hands of Assessee stands deleted. "

2.6 In view of the order of ITAT, the AO issued Notices u/s. 143(2) and 142(1) of the Income-tax Act, 1961 dated 16-02- 15.

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2.7 In response to the notice u/s 148, assessee has filed letter dated 09/02/2015. In its letter, the assessee has contended that according to the provisions of Sec. 147 of the I.T. Act, notice u/s. 148 can be issued within six years from the end of the assessment year. The notice is issued for the assessment year 2007-08. The due date for initiating the proceedings u/s. 147 by issue of notice u/s. 148 expired by 31-03-2014. The notice u/s. 148 is not within time. The provisions of Sec. 150 have no application as the Hon'ble Tribunal made it very clear that the order cannot be read as a "direction" for initiating the proceedings in the case of partnership firm. In view of the above, the notice issued u/s. 148 is without jurisdiction and is not within time. The proceedings may, therefore be dropped." The AO has not responded to the above letter and proceeded as below:

2.8 The AO observed that the assessee's contention that provisions of "Sec. 150 have no application as the Hon'ble Tribunal made it very clear that the order cannot be read as a "direction" for initiating the proceeding in the case of partnership firm" is not accepted. The Hon'ble ITAT is a final fact finding authority, and it has observed vide order in ITA NO.79/Hyd/2012 dated 29-11-2013 (page 3), that Shri D.V. Krishna Reddy had received Rs.3,00,50,000/- in cash from various parties in the months of November and December, 2006, and the amounts received by way of cheques to an extent of Rs.58,90,000/- in the month of January 2007, and confirmed that they have advanced the funds on various dates to M/s. SVK Projects. Further as seen from para 10 of page 9 of Hon’ble ITA T's order, there is credit of Rs.3 crore on 30- 12-2006, which is said to be withdrawal from M/s. SVK

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Projects and investment in M/s. SVK SSC on behalf of M/s. SVK Projects.

2.9. The AO referring to the provisions of section 150 of the Act, observed that there is no dispute to say that the Hon'ble ITAT has not given any direction. At the same time it is equally un-disputable fact that the Hon'ble ITAT has made an observation that "These transactions do indicate that the ledger account in page 23 does not pertain to Shri D. V. Krishna Reddy but pertains to M/s. SVK Projects." Thus, it is a clear finding, though it is not direction. Based on such observation/finding, notice u/s 148 was issued as per sec 150(1) & explanation (3) to sec. 153. Hence the notice u/s 148 is valid as per sec 150(1). He observed that the contentions of the assessee are baseless and hence the same are not considered.

2.11 Further, the AO observed that in response to the notice u/s 148, dt. 10/11/2014, the assessee has filed a letter dt. 'Nil', on 10/02/2015, requesting to treat the original return filed on 03/12/2009 as filed in response to the notice u/s 148 of the IT Act. Hence notices u/s 143(2) and 142(1) were issued to the assessee on 16/02/2015. The notices were returned by the postal department with remark as “left’. As the assessee has not furnished the present address, the same notices were served by affixture, at the last known address. As there is no response to the notices u/s 143(2) and 142(1), one more and final opportunity was also provided to the assessee vide this office notice dt.17/06/2015, u/s 142(1), where in it is informed that the assessment will be completed u/s 144 in case of non- compliance to this notice. In spite of sufficient number of opportunities, the assessee did not responded at all.

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2.12. Under the above facts & circumstances of the case, the AO completed the assessment u/s 144 of the IT Act as follows: “The assessee has failed to provide any evidences regarding the existence, identity, address, PAN and creditworthiness of the investors who have invested Rs.3,00,50,000/- and failed to furnish the documentary evidence in support of their accumulated savings. Therefore, the amount of Rs.3,00,50,000/- received in cash from the investors is unexplained credit u/s. 68 of the Income-tax Act, 1961 in the hands of M/s. SVK Projects. The assessee has in turn 'las invested such amount in M/s SVK Sri Sitaramanjaneya Constructions (SCKSSC) which is evident from the statement of Shri D. Nagarjuna Rao, partner in M/s SVK Sri Sitaramanjaneya Constructions (SVKSSC). Even the assessee did not dispute the fact at any juncture up to the appeal proceedings at ITAT, that. the amount is invested in M/s SVK Sri Sitaramanjaneya Constructions. Hence, it is clear that the receipt of money by the assessee is true and beyond doubt.

Thus the amount of Rs. 3,00,50,000/- stands to be unexplained credit in the books of the assessee as contemplated under section 68 of the Act, and which is in turn invested in M/s SVK SSC. As such the amount so credited is not offered to tax by the assessee, the same is added to the income returned.” 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and made elaborate submissions which were extracted by the CIT(A) in his order at pages 10 to 14.

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“1) The order of the learned CIT (A) is erroneous both on facts and in law. 2) The learned CIT (A) ought to have held that initiation of proceedings u/s 147 after a period of 6 years is not valid and that the assessment is not legally valid. The learned CIT(A) ought to have observed the fact that the provisions u/s 150 have no application to the facts of the case. The Hon'ble CIT (A) while passing the order considered observations made by the Hon'ble ITAT while passing the order in the case of Sri D.V.Krishna Reddy. 3) The learned CIT (A) ought to have held that the provisions uls 147 of the I.T. Act have no applications as the explanation mentioned in Sec. 150 are not applicable to the facts of the case. 4) The learned CIT (A) erred in confirming the addition of Rs.3,00,50,000/- without considering the detailed explanations submitted before him. 5) The learned CIT(A) ought to have considered the fact that the investment made is from out of the advances received from various persons and necessary evidences were furnished before the Assessing Officer and the learned CIT(A). 6) Any other ground or grounds that may be urged at the time of hearing.”

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6.1 Subsequently, AO initiated the proceedings u/s 147 after expiry of 6 years. AO initiated the proceedings by heavily relying on provisions of section 150, whereas Hon’ble ITAT has only given their observation, not direction, the provisions of section 150 has no application. He further submitted that AO should have initiated proceedings u/s 153C and not u/s 147 as the material found relevant to assessee during search was very much present in the records.

6.2 Further, he submitted that it is clear from the records, the DIT has recorded the facts that assessee has collected advances for development of the project and it had only passed on such advances to the other partnership firm. It has not commenced the operation and has not earned any income. The source of such collection of advances were already explained, hence, there is no possibility of making any addition in the assessee’s hand. He relied on the following decisions: a) ITO Vs. Arun Kumar Kapoor [2011] 16 Taxman.com 373 (Amritsar) b) CIT Vs. Bharat Engineering & Construction Co. [1972] 83 ITR 187 7. Ld. DR relied on the orders of AO/CIT(A). 8. Considered the rival submissions and perused the material on record. We notice from the records submitted before us that in the case of Mr. D.V. Krishna Reddy, who is the partner in the assessee firm, in whose hands the additions were made for making investment in the partnership firm M/s SVK Sri Sitaramanjaneya Constructions. The source for such investments were from the advances collected by the assessee. The coordinate bench in its order in ITA No. 79/Hyd/2012, dated 29/11/2013, deleted the addition in the hands of Mr. D.V. Krishna Reddy and made observation that

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revenue is free to enquire in the hands of assessee, if required. They made it clear that it is only an observation but not a direction. The ITAT order in the case of Mr. D.V. Krishna Reddy prompted the AO to initiate the proceedings u/s 147 in the case of assessee. At the time of initiating proceeding u/s 147, the period to initiate was already over i.e. it was beyond 6 years. AO initiated proceedings with reference to section 150(1) and observed that Hon’ble ITAT has found that the transactions are relating to assessee and the partner of the assessee has made investment in another firm and at the same time, he has not disputed the fact that ITAT has not given any direction, but only made observation.

8.1 Considering overall facts of the case, it is clear that AO has initiated proceedings u/s 147 after expiry of 6 years and had not brought on record any failure on the part of the assessee. Further, AO applied the provisions of section 150, when the findings of the coordinate bench are not direction but observation. Therefore, in our considered opinion, the proceedings initiated u/s 147 beyond 6 years are void ab-initio as the notice u/s 148 cannot be issued after the expiry of 6 years as per the time limit prescribed u/s 149 of the Act. In this case, AO issued the notice after expiry of 6 years and initiated the proceedings only after the observations made by the ITAT in its order. As stated earlier, the section 150 is also not attracted in this case. Therefore, the proceedings were initiated for reopening after period of limitation u/s 149 is void. Therefore, we are inclined to quash the assessment order and, accordingly grounds raised by the assessee are allowed.

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Pronounced in the open court on 27th May, 2019.

Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 27th May, 2019. kv