MAHMOOD HUSSAIN SYED,HYDERABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-6(1), HYDERABAD

The brief facts of the case are that, the assessee is an individual, derives income from house property and real estate business, filed his return of income for AY 2014-15 on 13.09.2014, declaring a total 3 Mahmood Hussain Syed income of Rs. 1,24,51,960/-. The case was selected for scrutiny and the assessment was completed under Section 143(3) of the Income Tax Act, 1961, and determined the total income at Rs. 6,69,47,580/- by inter alia making addition towards disallowance of excess claim of interest against income from house property for Rs. 5,39,579/- and addition of Rs. 2,37,92,244/- towards difference in capital account of the proprietor, addition of Rs. 97,76,424/- under the head ‘income from capital gains’ towards difference between sale consideration as per the registered sale deed and fair market value of the property, as per the provisions of Section 50C of the Income Tax Act, 1961 and addition of Rs. 2,03,87,170/- under Section 56(2)(vii)(b) of the Income Tax Act, 1961 towards the difference between purchase consideration and the stamp duty value of the property as on the date of registration as income from other sources.

The Ld. CIT(A) after considering relevant submissions of the assessee and also taking note of reason given by the A.O. to make addition towards difference between capital account balance of the proprietor, sustained additions made by the A.O. by holding that, the assessee could not reconcile the difference with relevant evidences, although claims that it is due to incorrect accounting treatment given by the accountant in respect of rental income received by the assessee and his wife, Ms. Saleha Shaheen in a joint account. The Ld. CIT(A) also rejected the explanation of the assessee with regard to the additions made towards capital gain in terms of Section 50C of the Act, on the ground that, the A.O. has rightly 6 Mahmood Hussain Syed adopted value of the property determined by the DVO. Similarly, the Ld. CIT(A) rejected the explanation of the assessee with regard to the addition made towards difference between property under Section 56(2)(vii)(b) of the Act, on the ground that, the provisions of Section 56(2)(vii)(b) were introduced to curb the menace and to tax the difference between the sale consideration and the amount mentioned in the registered document as per government record. The assessee had failed to justify the reason for difference in the sale consideration and registration of the property, as per the amount fixed by the registration department. Therefore, the Ld. CIT(A) rejected the explanation of the assessee and upheld the additions made by the A.O.

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

The first issue that came for our consideration from ground No.1 of assessee’s appeal is addition of Rs. 2,37,92,244/- under Section 69A of the Income-tax Act, 1961, as unexplained investment towards difference in capital account of the proprietor. The facts with regard to the impugned dispute are that, during the course of assessment 7 Mahmood Hussain Syed proceedings, the A.O. noticed that, there is a difference in closing balance of capital account of the proprietor and if we consider opening balance of capital account plus additions during the year and minus deletions during the year, there is a difference to the extent of Rs.2,37,92,244/-. The A.O. called upon the assessee to explain the difference. In response, the assessee filed a reconciliation between balance sheet filed along with return of income and the corrected balance sheet indicating the correct amount of capital account balance and claimed that, the assessee along with his wife, Ms. Saleha Shaheen jointly received a rental income and the same has been credited to joint account maintained by the assessee and his wife, Ms. Saleha Shaheen. Further, the assessee has invested rental income received by himself and his wife, Ms. Saleha Shaheen and credited to the joint bank account for purchase of the property, however, while preparing the balance sheet by an inadvertent error, the amount received from wife of assessee in respect of rental income credited to the joint bank account has not been considered in the books of accounts. The above discrepancy has been noticed while reconciling the difference and found that, a difference of Rs. 2,37,92,244/- has been adjusted in the closing balance of capital 8 Mahmood Hussain Syed account. This has been explained to the A.O. and Ld. CIT(A). The assessee has also furnished relevant details, including the joint bank account held by the assessee and his wife and the ITR filed by his wife to prove the receipt of rental income. The A.O. without considering the relevant reconciliation, made addition towards difference in capital account as unexplained investment.

The learned counsel for the assessee, Shri Palivela Santosh Kranthi, C.A., referring to corrected balance sheet filed before the A.O., submitted that, the assessee has reconciled the difference in capital account and explained that, the rental income received by his wife, Ms. Saleha Shaheen credited into joint bank account was not considered as loan received from the wife, even though the entries into the bank account and corresponding investment made for purchase of property by using the above rental income has been accounted in the books of accounts of the assessee. At the time of preparing balance sheet, the accountant could not notice the discrepancy and the difference in rental income received on behalf of his wife, Ms. Saleha Shaheen has been adjusted in the capital account, and the same has been explained by filing revised balance sheet along with ITR filed by his wife. The A.O. and Ld. CIT(A), 9 Mahmood Hussain Syed without appreciating the relevant facts, simply sustained the addition made by the A.O. Therefore, he submitted that, the addition made by the A.O. should be deleted.

The learned Senior A.R. for the Revenue, Ms. V. Koteshwaramma, on the other hand, supporting the order of the A.O. and Ld. CIT(A), submitted that, although the assessee claims to have reconciled the difference in capital account, but the A.O. and Ld. CIT(A) noted that, the assessee has not explained the credits into the capital account with relevant details. Further, the assessee has also failed to offer any explanation with regard to non-consideration of rental income of the wife while preparing financial statements. In the absence of a proper explanation, the A.O. has rightly assessed the difference in capital account, as unexplained investment. The Ld. CIT(A), after considering the relevant facts, has rightly sustained the additions made by the A.O. Therefore, she submitted that, the additions made by the A.O. should be upheld.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, if we consider the 10 Mahmood Hussain Syed opening balance of capital account, additions during the year towards various incomes and deletions during the year towards drawings and other expenditure, including tax payment, the closing balance works out to Rs. 19,83,40,014/-. But, in the capital account filed along with the return of income, the assessee had shown closing balance of capital account of Rs. 22,21,32,258/-, which resulted in difference in capital account of Rs. 2,37,92,244/-. The assessee explained the difference and claimed that, the rental income from a joint property held by the assessee and his wife, Ms. Saleha Shaheen has been credited to a joint bank account and the said bank account has been considered in the books of accounts of the assessee. However, while considering the rental income, the assessee has claimed 50% of rental income which was at Rs. 1,85,73,044/- and remaining 50% was considered in the hands of assessee’s wife, Ms. Saleha Shaheen, but the entire rental income including his wife’s share has been credited to a joint bank account which has been considered in the books of accounts of the assessee. Since the assessee has considered only 50% of rental income in the capital account and considered the entire credit of rental income, including the remaining 50% of assessee’s wife, there is a difference 11 Mahmood Hussain Syed of Rs. 2,37,92,244/- in the liability side of the balance sheet and the same has been adjusted in the capital account, which is evident from relevant capital account filed by the assessee, where the total credits of the assessee from the bank account comes to Rs. 21,63,19,285/-, but the accountant, by inadvertent mistake, arrived at a total of Rs. 24,01,11,529/-, which resulted in excess amount of Rs. 2,37,92,244/- in the closing balance of capital account. Since the entire rental income has been considered in the books of accounts of the assessee without giving any effect to the account of assessee’s wife, Ms. Saleha Shaheen, the difference has been adjusted in capital account which resulted in excess balance in capital account of Rs. 2,37,92,244/- and the same has been reconciled by the assessee. Although the assessee has reconciled the difference and explained the difference, the A.O. made addition under Section 69 of the Income Tax Act, 1961. The Ld. CIT(A), without appreciating the relevant facts, simply sustained the additions made by the A.O. Thus, we reverse the findings of the Ld. CIT(A) on this issue and direct the A.O. to delete the addition made towards difference in capital account of Rs. 2,37,92,244/- under Section 69 of the Income Tax Act, 1961. 12 Mahmood Hussain Syed

The next issue that came up for our consideration from ground no. 2 of assessee’s appeal is addition under Section 50C of the Income-tax Act, 1961, of Rs. 97,76,424/-.

The learned counsel for the assessee submitted that, during the financial year relevant to the assessment year under consideration, the assessee has sold a property for a consideration of Rs. 25,00,000/- on 05.07.2013 and the stamp duty value of the property has been determined at Rs. 1,97,61,000/-. The assessee explained the reasons for the difference in sale consideration and stamp duty value to the A.O. and claimed that, the property sold by the assessee was not having a valid title, because of dispute in the ownership of the property and there are no proper approach roads. The assessee submitted that, the land ownership was claimed by the State Government of Telangana and however, the assessee had purchased the land from the previous seller without ascertaining the correct legal title and also constructed a building without any sanction plan from the municipal authorities. Later, the assessee came to know that the property in question is not having valid title, sold the property for a consideration of Rs. 25,00,000/- and received 13 Mahmood Hussain Syed consideration through proper banking channel. Although all these facts have been explained to the A.O., who determined the fair market value by referring the matter to the DVO and the DVO has determined the value of the property at Rs. 1,41,93,000/- and the A.O. has adopted the stamp duty value and worked out capital gain at Rs. 97,76,424/- as against the capital gain declared by the assessee. The assessee has also justified the value by obtaining an independent valuation report from registered valuer and as per which, the registered valuer has determined the value of the property at Rs. 42,30,000/- on rental income method plus land and building method and by averaging both the values arrived at fair market value of the property at Rs. 42,30,000/-. Although these evidences have been furnished before the A.O. and Ld. CIT(A), but both the authorities have ignored the valuation and determined the value as per DVO report and made addition. Therefore, he submitted that, the addition made by the A.O. should be deleted.

The learned Senior A.R. for the Revenue, on the other hand, supporting the order of the Ld. CIT(A), submitted that, there is no dispute with regard to the fact that, there is a difference between the fair market value of the property as determined by the DVO, which 14 Mahmood Hussain Syed was at Rs. 1,41,93,000/-, and the sale consideration as per the registered sale deed, which was at Rs. 25,00,000/-. The arguments of the assessee that the property in question is unauthorized and does not have a valid legal title, is not supported by necessary evidence. The A.O., after considering the relevant facts and also taking into account the DVO report, has rightly adopted the fair market value at Rs. 1,41,93,000/- and computed long-term capital gain at Rs. 97,76,424/-. The Ld. CIT(A), after considering the relevant facts, has rightly sustained the additions made by the A.O. Therefore, she submitted that, the additions made by the A.O. should be upheld.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, there is a difference between sale consideration as per registered sale deed and fair market value of the property as on the date of registration. The A.O. applied provisions of Section 50C of the Act, and has determined the net sale consideration of Rs. 1,41,93,000/- by considering the value of the property determined by the DVO. The DVO has determined the fair market value of the property at Rs. 1,41,93,000/-. The 15 Mahmood Hussain Syed assessee claimed that, the DVO, while determining the fair market value of the property at Rs. 1,41,93,000/-, has not considered certain vital points, including dispute in title of the property and unauthorized construction of the building. The assessee further claimed that, he has obtained a valuation report from registered valuer for Income Tax Department and as per the valuation report, the fair market value of the property has been determined at Rs. 42,30,000/- on rental income method plus land and building method and while arriving at fair market value, the registered valuer has considered the vital points like dispute in title in the property and also unauthorized building construction without sanctioned plan. Therefore, the A.O. ought not to have adopted the higher value as per the DVO report.

We find that, the assessee has furnished certain evidences to prove that, the impugned property sold by the assessee does not have a valid title for which the assessee has furnished certain pending disputes. The assessee has also furnished a valuation report from registered valuer of the Income Tax Department where the valuer had considered the point of dispute in property and unauthorized construction in the building and claimed that, the 16 Mahmood Hussain Syed property in question does not have any value as determined by the stamp duty authorities. If we consider the valuation report submitted by the DVO and the valuation report of the registered valuer, we find that, the DVO has considered the cost of land as per stamp duty authorities and cost of building as per CPWD rate without considering the location of the property, dispute in title and unauthorized construction of the building without any sanctioned plan. However, the registered valuer of the Income Tax Department had considered all these points, including the dispute in title, location of the property and unauthorized construction of the building and claimed that, the valuation officer has not taken the actual land area, but gone by the plot area, as per sale deed and the purchaser will give the value as per actual land area and not as per sale deed. If actual plot area, as per the sale deed is less, the purchaser will give the value as per actual land area and not as per the sale deed. Since the actual land area is less than the sale deed area, this point, the DVO should have considered. The registered valuer further observed that, the DVO has not given source of land rate taken at Rs. 22,000/- per square yard against the Sub-