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Facts
A search operation under Section 132 of the Income Tax Act was conducted on the assessee, a construction firm, leading to assessment proceedings under Section 153A. The AO made an addition of Rs. 5,61,76,200/- to the assessee's income, alleging unaccounted receipts from the sale of flats based on estimated market prices and the assessee's non-cooperation. The assessee appealed, arguing no incriminating material was found during the search.
Held
The Ld. CIT(A) deleted the addition, and the Tribunal upheld this decision. The Tribunal found that the AO's addition was speculative, lacked corroborative evidence, and was based on an arbitrary selection of the highest sale price without considering market fluctuations, negotiation differences, or location-based valuation factors. No incriminating material was found during the search to justify the addition.
Key Issues
Whether an addition for unaccounted receipts from flat sales, based on estimated market price and alleged non-cooperation, is justified under Section 153A in the absence of incriminating material found during a search.
Sections Cited
132, 153A, 142(1), 144, 139, 143(2)
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Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue against the order passed by the CIT(A) - 2, Panaji dated 27/05/2024 in for the assessment year 2016-17. The assessee has filed cross objection.
2. The only effective issue raised by the revenue is that the learned CIT(A) erred in deleting the addition of Rs. 5,61,76,200/- made on account of unaccounted receipt of sale of flats.
The facts in brief are that the assessee, a partnership firm, is engaged in the business of construction and sale of units or land acquired through a joint development agreement. A search and seizure operation under Section 132 of the Income Tax Act was carried out in the case of the assessee and its group concern on 06-09-2017. Accordingly, the proceeding under section 153A of the Act was initiated. The AO during the assessment proceeding examined the financial records and transactions related to the construction and sale of flats in the scheme known as MAM Classic Towers complex, built between the years 2012 and 2015 in Gulbarga. The project comprised 45 flats spread across five floors, with a total plinth area of 45,000 square feet. Each floor contained 9 flats, primarily consisting of 2 BHK units.
Based on documentary evidence, including receipts from buyers, found at the office of Dr. Md. Abdul Mujeeb in Luqman College of Pharmacy, the AO noticed that the assessee has shown receipts of Rs. 3,08,37,455/- for the sale of 17 flats, which indicated an average sale price of Rs. 1,830 per square foot. However, the AO within these transactions, observed significant variations in pricing which are detailed as under: • The highest sale rate was recorded for Flat No. SF-7 at Rs. 2,755 per square foot, amounting to Rs. 24 lakhs for 871 square feet.
• The lowest sale rate was noted for a first-floor flat (Flat No. 8) at Rs. 1,790 per square foot.
Therefore, the AO considering the market behaviour and pricing pattern of the flats inferred that the average sale price charged by the builder was approximately Rs. 2,755 per square foot, as evidenced by the sale of a second-floor flat at that rate. The AO concluded that lower- floor flats would have been sold at a slightly lower rate, and an approximate market rate of Rs. 2,700 per square foot was used for further calculations. It was noted that out of 45 flats, during the assessment year 10 flats remained unsold (all located on the ground floor) whereas 35 flats were sold and should have been accounted for in the books of the assessee.
Using an estimated sale price of Rs. 2,700 per square foot and an average flat size of 1,000 square feet, the AO computed the expected gross receipts from the sale of these 35 flats at Rs. 9,45,00,000/-.
However, the gross receipts reported in the books in the form of advances amounted to only Rs. 3,83,23,800/-. Thus, unaccounted receipts of Rs. 5,61,76,200/- (Rs. 9,45,00,000 - Rs. 3,83,23,800) from the sale of 35 flats, after adjusting the amounts already admitted in previous assessment years, were added to the income of the assessee. This addition was made considering that: 1. The assessee did not cooperate in the assessment proceedings.
Notices issued under Sections 142(1) and 144 were not complied with.
3. The assessee failed to submit books of accounts, bills, and vouchers to support their reported income.
Due to non-disclosure and lack of cooperation, the AO proceeded with the best judgment assessment under Section 144 and added the sum of Rs. 5,61,76,200/- to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A). The assessee before the learned CIT(A) submitted that there was no incriminating material found, nor any statement recorded during the course of the search and survey proceeding carried out on its premises or from the purchaser of the flat in its project. Therefore, in absence of any incriminating material found during the search, no addition could be made in the proceedings under section 153A of the Act. Similarly, there was no question raised in respect of its project during the search and after search proceedings. The AO has also not .
Page 5 of 11 made any enquiry or investigation with respect to the allegation of receipt of on money in the project.
The assessee further submitted that the project MAM Classic was launched in the F.Y. 2011-12 at the outskirt of the city, which is not surrounded by any big bazaar, market or complex etc. From the launch of the project, the assessee has received advance booking from the prospective buyers which are duly recorded in the books and disclosed in the return of income. The rate of the flats which were booked at the beginning of the project was as per the prevailing market price at that time without any premium. Therefore, the consideration worked out by the AO for making addition of Rs. 5,61,76,200/- is without any basis. The assessee in support of its contention furnished copy of statement showing opening stock, flat/shop constructed/developed, sale of flat/shop and closing stock for the period 1-04-2011 to 31-03-2019, along with copy of sales ledger, copy of trading and profit loss account for said period.
10.1 The learned CIT(A) after considering the facts in totality deleted the addition made by the AO on merit by observing as under: 5.0 With respect to the appellant’s claim that no warrant of authorization under Section 132 of the Act was issued against the appellant and, therefore, the assessment under Section 153A is invalid, the warrant of authorization executed in the appellant’s case was called for from the AO. It was noticed that the appellant’s name was included in the said warrant of authorization as the person against whom an action under Section 132 was initiated and his relevant premises were covered. Therefore, the allegation of the appellant stated above is found to be incorrect, and therefore, the said additional ground of appeal is dismissed. 6.0 The appellant further claimed that the return of income filed for A.Y. 2016- 17 was that neither the search party nor the assessing officer found any incriminating materials during the course of search proceedings or assessment .
Page 6 of 11 proceedings. Therefore, the appellant argued that no notice under Section 153A can be issued, and also no addition can be made to the returned income. 6.1 In this regard, it may be noted that the appellant filed his return of income for A.Y. 2016-17 under Section 139 on 27.09.2016. The due date for the issue of notice under Section 143(2) for scrutiny proceedings was 30.09.2017. The search action was initiated on 06.09.2017. Therefore, the return for A.Y. 2016- 17 falls under the category of incomplete assessment, and therefore, the AO has the liberty to assess/reassess the total income of the appellant notwithstanding any incriminating material is found or not during the search. All the case laws quoted by the appellant have been superseded, and the issue in this regard has been settled in the case of Principal CIT v/s Abhisar Buildwell (P) Ltd. (2023) 332 CTR (SC) 729. However, as pointed out by the AO in the assessment order, there was no incriminating material found during the search, and based on which addition was made by the AO. 7.0 As far as the estimation of income by the AO is concerned, a best judgment assessment arises only when the Assessing Officer determines income based on materials gathered by him independently and not when assessment is made based on books of account submitted by the appellant. This being a search assessment, it is expected that any addition is based out of the material found during the search. However, in this case, no iota of evidence/incriminating material was found against the appellant, nor the AO gathered any evidence to justify the addition made. The only reference was to the sale deeds and the price at which some apartments were sold to determine the average selling rate for residential and commercial spaces. The AO had not brought any material record to show what was the investigation conducted, who were enquired, what was the outcome of the enquiry, whether such evidence gathered was confronted to the appellant to elicit his response at the stage of investigation or at the stage of assessment, etc. The AO should have justified with the evidences why the highest sale value per sq. ft. is to be considered as the average rate for all the apartments and commercial units sold by the appellant. Merely stating that the appellant would have received on-money from other buyers without any reference to incriminating material and estimating the additional income of the appellant is unjustified and illogical. 7.1 In light of the above, the addition of Rs. 5,61,76,200/- on account of estimated unaccounted income is deleted, and the ground of appeal in this regard is allowed.
Being aggrieved by the order of the learned CIT(A), the revenue is in appeal before us.
The learned DR before us reiterated the findings contained in the assessment order. On the other hand, the learned AR before us filed a . paper book running from pages 1 to 45 and heavily supported the order of the learned CIT-A.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the AO on account of alleged unaccounted receipts from the sale of flats has made additions to the total income of the assessee. A search and seizure operation was conducted under Section 132 of the Act on the assessee and its group concerns on 06.09.2017, which led to an assessment under section 153A of the Act. The core dispute revolved around whether the addition made by the AO was justified or whether the CIT(A) was correct in deleting the same.
13.1 During the assessment proceedings, the AO scrutinized the financial records and transactions related to a project named MAM Classic Towers, constructed between 2012 and 2015 in Gulbarga. The project comprised 45 flats across five floors, with an estimated plinth area of 45,000 square feet. The AO observed that the assessee had disclosed total receipts of Rs. 3,08,37,455/- from the sale of 17 flats, translating to an average sale price of Rs. 1,830 per square foot. However, upon further examination, the AO noticed significant discrepancies in the sale prices per square feet across different flats. For instance, Flat No. SF-7 was sold at Rs. 2,755 per square feet (totalling Rs. 24 lakhs for 871 sq. ft.), whereas another flat (Flat No. 8 on the first floor) was sold at a significantly lower rate of Rs. 1,790 per square foot. Based on this analysis, the AO inferred that the average sale price charged by the assessee should be Rs. 2,755 per square foot .
(considering the highest recorded rate in the project). The AO assumed that flats on lower floors would have been sold at slightly lower rates, leading him to estimate the market rate for all flats at Rs. 2,700 per square feet. Out of 45 flats, 10 remained unsold, while 35 flats were considered having been sold, and their corresponding receipts were expected to be accounted for in the books of the assessee. Based on the estimated Rs. 2,700 per square feet rate and an average flat size of 1,000 square feet, the AO computed the expected gross receipts at Rs. 9,45,00,000/- only. However, the assessee had reported receipts of Rs. 3,83,23,800/- only in the books of accounts. The AO, therefore, concluded that the difference of Rs. 5,61,76,200/- represented unaccounted receipts, which were added to the income of the assessee in the assessment order made under Section 144 (Best Judgment Assessment), since the assessee had allegedly failed to cooperate by not submitting books of accounts, bills, and vouchers in response to the notices issued under Sections 142(1) and 144 of the Act.
13.2 The assessee, being aggrieved by this addition, filed an appeal before ld. CIT(A), arguing that no incriminating material had been found during the search proceedings to justify the addition. The assessee further contended that its project was launched in F.Y. 2011-12 in an area located on the outskirts of Gulbarga, without proximity to commercial centres or premium locations. Given the market conditions prevailing at the time of the launch, flats were booked at competitive rates, and all transactions were properly recorded in the books and disclosed in its returns of income. The assessee also furnished detailed documentary evidence, including sales ledgers, trading and profit and . loss accounts, and a statement of stock movements for the period from 01.04.2011 to 31.03.2019. It was argued that the AO’s reliance on the highest sale price as the benchmark rate for all transactions was arbitrary and unfounded. The CIT(A) examined the evidence and ruled in favor of the assessee and relevant finding is reproduced in the preceding paragraph.
13.3 We, after reviewing the facts and legal principles, concurred with the ld. CIT(A) and found the addition made by the AO to be unsustainable. As such, we find that no incriminating material was found during the search. The AO made the addition based purely on an assumption of higher market rates, without any corroborative evidence. It is pertinent to mention that the best Judgment Assessment under Section 144 of the Act requires a rational basis. The AO’s computation was based on an arbitrary selection of the highest sale price, ignoring that market fluctuations and negotiated pricing could result in different rates for different buyers. No independent inquiry was conducted by the AO. The AO did not confront the assessee with any material or statements from buyers to support the claim that on-money was received. The project was located in a non-premium area. The AO failed to consider location-based valuation factors, which significantly affect real estate pricing.
13.4 Furthermore, we hold that the AO’s approach of applying a single high sale rate to all transactions is erroneous and unjustified, as this methodology failed to consider variations in sale timing, demand, and negotiation differences among buyers. We are of the considered opinion . that real estate prices are influenced by multiple factors, including floor level, view, and amenities, and the AO’s blanket assumption that all flats were sold at the highest recorded price was unreasonable.
13.5 Based on these observations, we uphold the order of the ld. CIT(A) and dismiss the revenue’s appeal, confirming the deletion of Rs. 5,61,76,200/- from the total assessed income of the assessee. Hence, we conclude that the AO’s addition was entirely speculative and lacked factual or legal justification. Therefore, the ground of appeal of the revenue is hereby dismissed.
In the result, the appeal filed by the revenue is hereby dismissed.
At the outset, we note that the assessee succeeds on merit of the case in the appeal filed by the revenue. Accordingly, we do not find any reason to adjudicate the objections raised by the assessee in the CO filed by it. Furthermore, the ld. AR also expressed at the time of hearing that the assessee is inclined to withdraw the objections raised in the CO in the event if it succeeds in the appeal filed by the revenue. Accordingly, we hold that the CO filed by the assessee does not require any separate adjudication and hence dismissed as infructuous.
In the result, the CO filed by the assessee is hereby dismissed as infructuous.
In the combined result, the appeal filed by the revenue is dismissed and the CO filed by the assessee is dismissed as infructuous.