ITO., WARD 14(1), HYDERABAD vs. JOSHITA INFRA DEVELOPERS LLP, HYDERABAD

We have heard both the parties and perused the petition and affidavit filed by the Revenue seeking condonation of delay of 168 days in filing the appeal before the Tribunal. We find that, the reasons explained by the Revenue appear to be genuine and bonafide and constitute a reasonable cause. We further find that, the Hon’ble Supreme Court in the case of Collector, Land Acquisition vs. MST Katiji [1987] 167 ITR 471 (SC) has laid down that a liberal approach should be adopted while considering condonation of delay so as to advance substantial justice. Considering the principles laid down in MST Katiji (supra) and the facts of the present case, we condone the delay of 168 days in adjudication.

The brief facts of the case are that, the assessee is a Limited Liability Partnership, engaged in the business of marketing open plots by purchase and selling through Agents, filed its return of income for the assessment year 2022-23 on 22.07.2022, declaring a business loss of Rs. 60,48,449/-. The case of the assessee was selected for scrutiny under CASS to verify high liabilities as compared to low income/receipts and huge turnover but books of accounts not audited under Section 44AB of the Act. During the course of assessment proceedings, the A.O. issued notice under Section 142(1) of the Act, on various dates and called upon the assessee to submit relevant details, including details of liabilities etc. In response, the assessee has submitted the details as called for by the A.O. The A.O., on the basis of the details submitted by the assessee, observed that, the assessee firm has taken an amount of Rs.6,50,00,000/- from the partners which are classified as non-current liabilities for the year ending 31.03.2022. The A.O. called upon the details of loans taken from partners including assessee firm. The A.O. had also noted that the assessee has debited huge expenditure under the head commission expenditure of Rs. 2,05,32,164/-, which is disproportionate to the income declared by the assessee. Therefore, called upon the assessee to file relevant details of commission paid to various parties, basis of commission paid, mode of payment and other details. In response, the assessee submitted that the firm has received unsecured loans of Rs. 62,50,000/- from Sri Rama Krishna Prasad Sadhanala, partner of the assessee firm, through proper banking channel, for which the assessee has furnished the details of source of income of the partners, along with financial statements and bank statements. Similarly, the assessee has also explained loans taken from Smt. Satyavani Sadhanala and filed the details of ITRs filed by the partners for the relevant assessment years, details of source of loan given to the assessee along with relevant bank account statements and also confirmation letters. The assessee had also furnished details of of the transactions.

The A.O., after considering the submissions, observed that the assessee claimed to have received a sum of Rs. 1,95,00,000/- from Sri Rama Krishna Prasad Sadanala, partner of the firm, and out of which a sum of Rs. 62,50,000/- has been sourced from past savings of the partner which were introduced in the capital account. However, the assessee has not given any evidence such as bank accounts of the partner creditor showing entries of Rs.62,50,000/- to prove the nexus. The assessee has submitted gross income of the past five years of the partner and as evident from the details submitted by the assessee there is huge discrepancy in the return of income and gross income shown by the partner. On going through the ROIs it is seen that, the partner creditor has not accounted/reduced the investment which have been made out of the gross income as shown in the computation of income. Therefore, observed that, the assessee has failed to partners’ capital account to the tune of Rs.62,50,000/- and therefore, treated the same as unexplained cash credit u/s 68 of the Act. The A.O. further noted that the assessee firm claimed to have received a sum of Rs. 1,95,00,000/- from Smt. Satyavani Sadanala, partner of the firm, out of which a sum of Rs. 95,00,000/- has been shown as sourced from the past savings. However, as evident from the details submitted by the assessee, the loan advanced out of past savings is not supported by relevant details, including bank account statements. Although the assessee has furnished details of ITRs filed for the last six years, but there is a discrepancy in the return of income and gross income shown. Therefore, it was observed that the assessee has failed to discharge the onus to prove source and the genuineness of the loan introduced by way of partners’ capital account to the tune of Rs. 95,00,000/-, and thus, the same has been treated as unexplained cash credit under Section 68 of the Act. The A.O. further noted that although the assessee has furnished relevant details of commission expenses of Rs. 2,05,32,164/-, but the fact remains that the commission expenditure incurred by the which comes to 21.23% of the total sales. Therefore, it was observed that the same is very high keeping in view the usual practice of giving commission of 2% in property deals. The A.O. further noted that the assessee has failed to furnish any agreement between the parties for payment and the basis of commission and also not filed supporting evidence by filing confirmations linking the same with the sales and value of flats. The assessee has not even filed receipts regarding the payment of commission. Therefore, it was observed that the assessee has failed to substantiate the commission expenditure debited in the profit and loss account by filing relevant evidences to prove the genuineness of the commission. Therefore, it was observed that even the plea of the assessee of deducting TDS does not prove the genuineness of the commission expenses. Thus, the A.O. rejected the explanation of the assessee and made an addition of Rs. 2,05,32,164/- towards disallowance of commission expenses.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee furnished relevant details of loans received from the partners, Sri Rama Krishna Prasad Sadanala and Smt. Satyavani Sadanala, by filing confirmation letters from the partners, ITRs filed for the relevant assessment years, including for the past assessment years, confirmation letter and bank statements of the parties, other details for explaining the source in the hands of the partners and relevant bank accounts, for indicating transfer of funds to bank accounts and submitted that, although these evidences have been furnished before the A.O., but the A.O. had made addition only on the ground that there is a mismatch between gross income and net income shown in the ITR without appreciating the fact that, the gross income represents the income earned by the assessee for the year under consideration before expenditure and net income represents income declared in the ITR filed for the relevant assessment year and therefore, submitted that the addition made by the A.O. towards partners’ capital account should be deleted. The assessee further submitted that, assuming for a moment that the assessee has not satisfactorily explained the credits in the partners’ capital accounts, still the same cannot be assessed as income of the firm, in view of the decision of the Hon’ble Jurisdictional High Court in the case of Nova Medicare Vs. ITO (2023) 150 taxmann.com 363 (Telangana). The assessee further contended that, the A.O. has erred in making addition towards commission expenditure of Rs. 2,05,32,164/- even though the assessee has justified commission payment with relevant details, including payment through proper banking channels, TDS deducted on said commission, ITR filed for the relevant parties and also confirmation from the parties. Therefore, he submitted that, the additions made by the A.O. should be deleted.

The Ld. CIT(A), after considering the submissions of the assessee and also taking note of various facts, and the evidence submitted by the assessee, held that the addition made by the A.O. towards loans received from the parties i.e. partner, Shri Rama Krishna Prasad Sadanala, of Rs. 62,50,000/- is not sustainable. The Ld. CIT(A) further held that, after going through the submissions and documentary evidences filed by the assessee, the assessee has satisfactorily explained the loans received from the partners by filing all the relevant details. The A.O. made the addition towards loan received from partners out of past savings not a decisive criterion for estimating accumulated savings. Further, the evidence filed by the assessee clearly shows that the partner has transferred a sum of Rs. 62,50,000/- out of the amount available in his bank account as on 01.04.2021, and from the above, it is very clear that, the assessee has satisfactorily explained the source of the amount transferred to the assessee firm. Thus, deleted the addition made towards loan received from Shri Rama Krishna Prasad Sadanala. Similarly, the Ld. CIT(A) has deleted the addition made by the A.O. towards loan received from Smt. Satyavani Sadanala for Rs. 95,00,000/- on the ground that the A.O., on flimsy grounds, has made the addition towards loan even though the assessee has satisfactorily explained the loan received from the partner by filing relevant evidences, including the bank account statements, wherein it is clearly shown that the partner was having sufficient bank balance of Rs.1,14,86,292/- as on 01.04.2021 before transferring funds to the assessee firm. Therefore, directed to A.O. to delete the addition made towards loan received from Smt. Satyavani Sadanala.

The Ld. CIT(A) also deleted the addition made towards disallowance of commission expenditure of Rs. 2,05,32,164/- by holding that, on going through the details submitted by the assessee, the A.O. has not denied the genuineness of the expenditure and has only questioned about the higher rate of commission paid by the assessee firm. Further, on verifying the details, although the assessee firm has materialized 94 plots, but also received advances from some more customers, and such registrations were pending as at the end of the financial year, but the commission has been paid on the basis of booking of the plots, and therefore, the observation of the A.O. that the commission paid is disproportionate to the sales is not based on proper appreciation of facts. Therefore, it was held that the A.O. has erred in making the disallowance of commission expenditure, and accordingly directed the A.O. to delete the disallowance of commission expenditure of Rs. 2,05,32,164/-.

Aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal and the assessee has filed Cross-appeal before us.

The first issue that came up for our consideration from Ground Nos. 2 to 4 of the Revenue’s appeal is deletion of addition made towards unexplained cash credit under Section 68 of the Act towards loans received from partners.

The learned Senior A.R. for the Revenue, Ms. Reema Yadav, submitted that, the Ld. CIT(A) erred in deleting the addition made by the A.O. towards loan received from the partners without appreciating the fact that the assessee has not satisfactorily explained the creditworthiness of the partners to advance loans to the assessee firm. The learned Senior A.R. further submitted that the Ld. CIT(A) has deleted the addition only on the basis of opening bank balance as on 01.04.2021 without properly verifying whether those balances were actually available for lending. The Ld. CIT(A) had also deleted additions by admitting additional evidences filed by the assessee without affording an opportunity to the A.O. as mandatory under Rule 46A of I.T. Rules, 1962. Therefore, she submitted that the order of the Ld. CIT(A) should be set aside and the addition made by the A.O. should be upheld.

The learned counsel for the assessee, on the other hand, supporting the order of the Ld. CIT(A), submitted that the assessee has furnished all the evidences in respect of loans received from two partners, including their identity, and also proved the genuineness of the transactions and creditworthiness of the partners by filing relevant bank account statements, ITRs filed for the last six assessment years, confirmation letters from the partners, and also other evidences to prove the source in the hands of the partners. The learned counsel for the assessee further submitted that the A.O. never disputed the fact that the assessee has furnished all the details, however, the A.O. disregarded the evidences filed by the assessee and made addition only on the ground that there is a mismatch between gross income and net income shown in the ITRs, without properly appreciating the ITRs filed by the assessee, where the assessee have only explained the gross income which includes the exempt income earned by the assessee and net income, which represents taxable income, to explain the past savings out of income declared for the last six assessment years. The Ld. CIT(A) after considering relevant facts, has rightly deleted the additions made by the A.O.

The learned counsel for the assessee further referring to the decision of Hon’ble Jurisdictional High Court of Telangana in the case of Nova Medicare Vs. ITO (supra) and CIT Vs. M. Venkateswar Rao and Others (2015) 57 taxmann.com 373, submitted that, in case the assessee is not able to prove the creditworthiness of the amount received from the partners either for capital contribution or loans, in such circumstances, the unexplained cash credits would have to be assessed in the hands of the partners of the firm and not in the hands of the firm itself. Therefore, he submitted that, the A.O. has erred in making addition towards loans received from partners as unexplained cash credits under Section 68 of the Act. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the addition made by the A.O. Therefore, he submitted that the order of the Ld. CIT(A) should be upheld.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The A.O. made additions of Rs. 62,50,000/- and Rs. 95,00,000/- towards loans received from partners Sri Rama Krishna Prasad Sadanala and Smt. Satyavani Sadanala on the ground that the creditworthiness of the creditors. According to the A.O., the assessee firm failed to discharge the onus cast upon it under Section 68 of the Income-tax Act, 1961 by filing relevant details and treated the loans received by the assessee firm from the above two partners as unexplained cash credits. We find that, the assessee has received a sum of Rs. 62,50,000/- from Sri Rama Krishna Prasad Sadanala, and the same has been received through proper banking channels, and the assessee claims that the above amount has been received out of the income of the assessee declared for the earlier assessment years, for which the assessee has furnished relevant ITRs filed for A.Y. 2017-18 and up to A.Y. 2022-23. The income declared by the assessee for the above six assessment years exceeds Rs. 1.33 crores, whereas the partner has claimed to have given a loan of Rs. 62,50,000/- out of the net income declared for the above assessment years. Further, the assessee has also furnished relevant bank account statements, and as per the bank account statements of the partner as on 01.04.2021, there was an opening balance of Rs. 93,86,427/-, out of which, he has transferred a sum of Rs. 62,50,000/- to the assessee firm’s account.

Similarly, the assessee firm has received a sum of Rs. 95,00,000/- from Smt. Satyavani Sadanala out of her past income declared for the last six assessment years, and as per the details submitted by the assessee, she has declared sufficient income for the last six assessment years, which is sufficient to explain the loan given to the assessee firm. Further, the income declared by the assessee is not a decisive criterion for estimating accumulated savings and it may be depended upon various other incomes of the assessee including exempt income and other sale proceeds received from sale of property, if any. Since the assessee has furnished relevant details and also explained the source of the amounts given to the assessee firm, in our considered view, the A.O. has erred in making additions towards loans received from the partners as unexplained cash credits.

We further note that the A.O. has made additions towards partners’ capital account / loan account as unexplained cash credits of the assessee firm on the ground that the assessee firm partners. It is a well-settled principle of law laid down by the Hon’ble Jurisdictional High Court in the case of Nova Medicare Vs. ITO (supra) that, in a case where the assessee firm receives capital contribution or loan from the partners and not explained the credits to the satisfaction of the A.O., then such unexplained credit should be treated as income of the partners, but not the income of the assessee. A similar view has been taken by the Hon’ble High Court of Telangana in the case of CIT Vs. Venkateswara Rao and others (supra), wherein it has been held that the amount i.e., sought to be treated as income of the firm in the contribution made by the partners to the capital in a way the amount so contributed constitutes the very substratum for the business of the firm and it is difficult to treat the pooling of such capital as credit and it is only when the entries are made during the course of business that can be subjected to scrutiny u/s 68 of the Act. The sum and substance of the ratio laid down by the Hon’ble Jurisdictional High Courts of Andhra Pradesh and Telangana is that the sums received from partners either towards credit to the satisfaction of the A.O., then the same may be treated as income of the partners, but not in the hands of the firm. In the present case, there is no dispute with regard to the fact that the assessee has satisfactorily explained the loans received from the partners by filing all details including confirmation letters from the partners, ITRs filed for the relevant assessment years, bank account statements, and also other evidences to prove the source in the hands of the partners. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the additions made by the A.O. Thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the grounds taken by the Revenue.

The next issue that came up for our consideration from Ground Nos. 5 to 7 of the Revenue’s appeal is deletion of addition made towards commission expenditure of Rs. 2,05,32,164/-.

The learned Senior A.R. for the Revenue submitted that, the Ld. CIT(A) erred in deleting the commission expenditure without appreciating the fact that the assessee has failed to prove the genuineness of the commission expenditure with relevant details. The learned Senior A.R. for the Revenue further submitted that, although the A.O. has brought on record the fact that the commission payment is disproportionate to the income declared by the assessee, which is almost 21.23% of the total sales, but the Ld. CIT(A) has deleted the addition towards commission expenditure only on the ground that the assessee has furnished details relating to deduction of TDS on commission, without appreciating the fact that payment through proper banking channels and deduction of TDS by itself does not prove the genuineness of the commission expenditure incurred by the assessee. Therefore, he submitted that the order of the Ld. CIT(A) deserves to be set aside and the addition made by the A.O. should be upheld.

The learned counsel for the assessee, Shri Maheswar Reddy, C.A., on the other hand, supporting the order of the Ld. CIT(A), submitted that the assessee has furnished all the details of commission expenditure, including the list of parties to whom commission has been paid, their confirmation letters, ITRs filed for the relevant assessment years, bank account statements, and also Form 16A for having deducted TDS on such commission. The assessee has also explained the basis of commission payment. Although it appears that commission payment is excess when compared with industry practice, but the fact remains that the assessee was marketing plots in a remote place where it is difficult to attract buyers, and under such circumstances, the assessee offered higher commission to brokers to bring customers to the assessee firm. Therefore, when the assessee has satisfactorily explained the commission with relevant details and also the basis of commission, the A.O. ought not to have made the addition towards commissioner expenditure as non-genuine nature. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the commission expenditure. Therefore, he submitted that the order of the Ld. CIT(A) should be upheld.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The A.O. has disallowed commission expenditure of Rs. 2,05,32,164/- on the ground that it is disproportionate to the income declared by the assessee and that it is almost 21.23% of the total sales and in excess of the industry practice. In other words, the A.O. has never disputed the fact that the assessee has also explained the basis for payment of commission; however, the A.O. made the addition only on the ground that the commission paid by the assessee is excessive and unreasonable. In our considered view, the A.O. has not brought on record any comparable cases of similar nature to establish that the commission payment made by the assessee is excessive or unreasonable to compare with similar nature of cases. Secondly, the A.O. alleged that the assessee has paid commission which is ranging above 21.23% of the total sales. The assessee has explained the reason for making huge commission and according to the assessee the business model of the assessee demands payment of higher commission to achieve the sales, since the assessee firm has started its operations in the Financial Year 2021-22, which is the first year of its operations, and further, there was tough competition in the market and the assessee was required to overcome the threat of competition in this line of business by offering better incentives to the marketing agents/brokers who bring the customers. We further find that the assessee is developing plotted lands in mofussil areas which are located beyond 60 to 70 kms., away from the city limits. In mofussil areas selling of plotted land is a difficult task, and the assessee needs to adopt different marketing strategies, including offering higher commission to brokers, who bring the customers. If we go by the business model of the assessee and the location where the assessee has developed plots for sale, in our considered view, the explanation of the assessee with regard to payment of higher commission appears to be bona fide and genuine. Since the A.O. has not brought on record any comparable case of similar nature to allege that the assessee has paid excessive commission, and further the assessee has also explained the basis for making higher payment of commission, in our considered view, there is no reason for the A.O. to disallow the commission merely on the basis of higher percentage of commission paid by the assessee. Further, the assessee has also furnished all evidences, including relevant details of commission paid to various parties, payments through proper banking channels, deduction of TDS, and also confirmations from the parties along with their ITRs filed for the relevant assessment years. Since the assessee has satisfactorily explained the commission payment with relevant details, in our considered view, the Ld. CIT(A) has rightly deleted the addition made by the A.O. Thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the grounds taken by the Revenue.

In the result, the appeal of the Revenue is dismissed.

Coming to the appeal filed by the assessee, the assessee has filed this appeal and claimed that, the same was filed as a normal appeal. The assessee, by way of a letter dated 04.12.2025, has clarified that, although the assessee has filed the appeal and paid the normal appeal fee and the same has been listed as the same was filed inadvertently, and that the appeal is only in support of the order of the Ld. CIT(A) against the Department’s appeal. It was further clarified that, there are no fresh or separate grounds raised by the assessee in the appeal filed by it. Since the appeal filed by the assessee does not raise any independent grievance and is only in support of the order of the Ld. CIT(A) on the issues involved, in our considered view, the same does not survive for independent adjudication and deserves to be dismissed as infructuous. Accordingly, the appeal filed by the assessee is dismissed as infructuous.

In the result, both the appeals filed by the Revenue and assessee are dismissed.