Loading judgment…
Facts
A survey operation led to the admission by the assessee's partner regarding undisclosed consideration for villa sales. The assessee later retracted this admission. The AO made an addition based on a higher market rate, which the CIT(A) restricted. The Revenue is in appeal against the CIT(A)'s order.
Held
The Tribunal found that while the CIT(A)'s benchmarking was reasonable, it did not fully account for variations in villa specifications and market practices. Therefore, a revised benchmark of Rs. 1,800 per sq. ft. was adopted, balancing the assessee's commercial justifications and the revenue's concerns.
Key Issues
The primary issue is the determination of the fair market value for villas sold at a discounted rate and whether such discounts constitute undisclosed income. Another issue is the validity of the assessee's retraction of its initial admission.
Sections Cited
133A, 132, 148A, 148, 142(1), 147, 40(a)(ia)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI LALIET KUMAR & SHRI MADHUSUDAN SAWDIA
O R D E R PER LALIET KUMAR, J.M:
This appeal is filed by the Revenue feeling aggrieved by the order passed by the Commissioner of Income Tax (Appeals) – 11, Hyderabad dated 19.01.2024 for the A.Y. 2018-19.
2 ITA 327/Hyd/2024
The grounds raised
by the assessee read as under : “1. Whether the Ld. CIT(A), in the facts and circumstances of the case, is correct in restricting the addition to Rs. 1,51,42,632/-, thereby deletmg the balance addition of Rs. 4,05,62,427/- taking the benchmark of Rs. 1,550/-per sft. And ignoring the admission given by Sri Kondal Rao and Sn P Koteswara Rao partners of the assessee-firm?
2. Whether the Ld. CIT(A), in the facts and circumstances of the case, is correct that any advance substantially received can be construed as a discounted sale?
3. Whether the Ld. CIT(A), in the facts and circumstances of the case, is correct in adopting the correct comparable market rate for construction of villa and also for purchase of site cost, which were duly considered by the Assessing Officer while arriving the rate per sft. of Villa?
4. Whether the Ld. CIT(A), in the facts and circumstances of the case, is correct in adopting the same value of Rs. 1,550/- per sq.ft uniformly for all villas with different specifications including luxurious villas?
The brief facts of the case are that the appellant filed its return of income for AY 2018-19 on 19.07.2018 admitting total loss of Rs.64,33,701/-. A Survey operation u/s. 133A was carried out in the case of the appellant on 13.02.2020, in connection with the Search and seizure operations u/s. 132 of the Act in the case of M/s. Lotus Farms, Bengaluru. During the course of the Survey, certain incriminating material was impounded. When the same was confronted to the partner of the firm, Sri Kondala Rao, he had admitted the undisclosed consideration of Rs.4,09,39,850/- and Rs. 1,47,65,209/- in the hands of the appellant. However, the appellant retracted from the admission given during the survey proceedings and has not admitted in its return of income filed on 19.07.2018. Thereafter, notice under section 148A(b) was issued to the appellant on 16.03.2022 and in response, the appellant has 3 ITA 327/Hyd/2024 not furnished any information. Order u/s. 148A(d) was passed with the prior approval of the specified authority. Accordingly, notice u/s. 148 of the Act was issued to the appellant on 30.03.2022. However, the appellant has not filed any return of income, in response to the said notice. Notices u/s.142(1) were issued subsequently calling for information. After verifying the information submitted by the assessee, Assessing Officer completed the assessment interalia making the addition of Rs.5,57,05,059/-, on account of discounted of sales, thereby assessing the total income at Rs.4,92,71,358/-. Thus, Assessing Officer completed the assessment u/s 147 of the Act and passed assessment order on 28.03.2023.
Aggrieved with such assessment order, the assessee has filed the appeal, before the LD.CIT(A), who dismissed the appeal of the assessee by observing as under :
“In the instant case assessment u/s. 147 of the IT act was completed, making the addition of Rs.5,57,05,059/-, being discounted sales. Brief facts of the case are that the appellant is a partnership firm, which was constituted during FY 2016-17 i.e AY 2017-18. The appellant is in to real estate activities and construction of residential villas. A survey operation u/s. 133A was conducted on 13.02.2020 in the case of the appellant firm, in connection with the Search and Seizure operations carried out u/s. 132 of the Act in the case of M/s. Lotus Farms, Bangalore. It was seen that the appellant firm started construction of residential villas in the name and style of `Magnas Majestic Meadows' near Kollur in the year FY 2016-17. A total of 272 villas were proposed to be constructed on an area of 28.10 acres. During the course of survey proceedings, certain incriminating material was found and impounded, which indicated that 12 villas were sold at a price lower than the average rate at which similar villas were sold. When the same was confronted with the partner of the firm, Shri M Kondal Rao during the Survey, he had 4 ITA 327/Hyd/2024 stated that there have been some discounted sales to certain persons, who were either related to partners of the appellant firm or the firm got benefited from the persons for sales. The details of the villas and reasons thereof for discounted sales, as furnished by the partner during the survey was as under:
S. Villa Name of Sale Explanations for low sale value No No. Purchaser Price / sg.ft 1 199 Jnana Deva 927 He facilitated the land deal and helped in Reddy Nalla getting the land for development 2 190 E. Venkatesh 930 He facilitated the land deal and helped in getting the land for development 3 217 M Kondal Rao 1113 He is one of the partners, hence sold for lesser value. 4 270 M. Surekha 952 She is the wife of one of the partners; shri. Damodar Reddy. Hence, sold for lesser price
5 202 M Arun 1020 He is son of the partners; shri. Damodar Madhav Reddy. Hence, sold for lesser price 175 Nagaraju 1124 He helps is getting sales from his friends and relatives. Hence, sold for lesser price
7 118 Lavudya 1440 She helps is getting sales from her friends Karuna and relatives. Hence, sold for lesser price 8 115 Danturi 1533 She being one of the first customer and the Sireesha market during the period was very weak. Hence, sold for lesser price 9 227 M Padmaja 1824 Customer upfront paid substantial amount and also helped in getting few sales through his influence. Hence, sold for lesser price 10 190 Arun Madhav 1967 He is the son of one of the partners; shri. Damodar Reddy. Hence, sold for lesser price 11 153 M. Koteswara 2347 He being one of the partners and have paid Rao substantial amount towards advance. Hence, sold for lesser price
5 ITA 327/Hyd/2024
12 80 Hari Hara 1263 He is advocate who helped in getting the kumar landed property where the villas and constructed which is litigation in the courts for more than two decades. Hence, sold for lesser price.
In his sworn statement recorded during the survey proceedings, Sri Kondal Rao has accepted that the sale price is below the market value and has computed the differential sale consideration, taking the sale price of Rs.2350 per sq.ft. and admitted the difference amount as additional income of the appellant on account of discount given out of their personal consideration.
As seen from the above, the market rate was considered as Rs.2350 per SFT and computed the difference as additional income. As per the above computation, the total additional income worked out was Rs.5,23,81,984/-, out of which Rs.4,09,39,850/- pertains to the assessment year under consideration and the remaining Rs.1,14,42,134/- pertains to next assessment year, AY 2.019-20. During post survey proceedings, it was seen from the impounded material that there were four more villas which were also sold at a relatively lower price, the details of which are as under: Difference Sq ft Sale Price Booking date S Customer Villa P r i c e Actual Difference No Name No / Sq f t price sale price 2350 1416.15 5983234 1 Dontala Shanti 261 4225 3945500 933.85 18.09.2017 2 G. V. 201 4225 3918750 927.51 22.11.2017 2350 1422.49 3916575 Maheswara Rao 3 Chelluri 235 3400 3125750 919.34 01.12.2017 2350 1431 4865400 Mohana Vamsi Krishna/ Sri Lakshmi 4 Gutupalli 237 3029 7053700 2329 09.01.2019 2500 171 517959 Venkaiah Naidu Total 1,52,83,168 The above was confronted with Mr. P. Koteshwar Rao, executive partner of the appellant firm in his sworn statement recorded during the post- survey proceedings. The partner, Sri P. Koteshwar Rao has accepted the 6 ITA 327/Hyd/2024 difference amount of Rs.1,52,83,168/- as additional income of the appellant firm in similar lines to the earlier admission given during the Survey. Out of Rs.1,52,83,168/-, the amount of Rs.1,47,65,209/- pertains to the present assessment year AY 2018-19 and Rs.5,17,959/- pertains to AY 2019-20. Thus, for AY 2018-19, the total additional income, as admitted by the partners of the firm during the survey and post survey proceedings, cumulate to Rs.5,57,05,059/-. The villa wise additional income is summed up as under:
Name of the Buyer Sale Sr Date of Villa Amount of Marke Difference No Booking No. Total price addition t adopted by SFT per SFT price AO for (in Rs.) per addition SFT 1 Lavudya Karuna 29.09.2017 118 4156 1,440 2,350 910 37,81,960 2 Danturi Sireesha 05.10.2017 817 155 4800 1,533 2,350 39,21,600 3 E Venkatesh 27.11.2017 90 4156 930. 2,350 1,420 59,01,520 4 M Kondal Rao 27.11.2017 217 3727 1,113 2,350 1,237 46,10,299 5 M Sureka 23,11.2017 270 55,97,592 4004 1,398 952 2,350 6 M Arun Madhav 29.11.2017 202 3770 1,020 2,350 1,330 50,14,100 7 P Koteswara Rao 07.07-2017 153 4260 2,347 2500 153 6,51,780 8 Nagaraju 16.02.2018 175 1,426 60,23,424 4224 1,124 2,550 9 Hari Hara Kumar 31.03.2018 80 4225 1,287 54,37,575 1,263 2,550 10 Dontala Shanti 18.09.2017 261 59,83,234 4225 934 2,350 1,416 22.11.2017 201 4225 928 2,350 1,422 39,16,575 11 GV Maheswara Rao 12 Chelluri 01.12.2017 235 Venkaiah 3400 919 2,350 1,431 48,65,400 Naidu TOTAL 5,57,05,059
However, the appellant has not included the above additional income in its return of income filed for the assessment year under consideration. The AO stated that there is no reason for the retraction from the admission of additional income during the survey and post survey proceedings. Further, considering the nature and quality of construction of villas as well as the amenities and facilities that were provided (which has also been brought out by the AO in the assessment order), the AO concluded that the minimum value of construction would be at least Rs.2350 per sq.ft and any sale that would be made even without profit would at least
7 ITA 327/Hyd/2024 be at Rs.2350 per sq.ft. Accordingly,the AO made the differential amount of Rs.5,57,05,059/- to the returned income. It is important to note that during the course of Survey operation u/s. 133A, no unaccounted cash was found at the premises of the appellant firm nor any evidence was unearthed to indicate that the appellant has received on-money in cash on sale of these villas. There was evidence on record to indicate that certain villas have been sold at a lesser price but no evidence of on-money or unaccounted cash with respect to these villas were found. The appellant admitted that these have been sold at a discounted rate either to relatives or related parties or to persons who facilitated the development of the project or the sales. The admission of income was made by the partner of the appellant firm when difference in sale prices were confronted to him. Even in the statement of the partners of the appellant firm, they have admitted additional income on account of lower rate in certain villas but it is necessary to note that they have not stated anywhere that the additional consideration was received. Therefore, there is no primary evidence of receipt of unaccounted consideration by the appellant found during the Survey nor it was stated by partners of the appellant firm. Further, with regard to these villas, the villa wise details of receipts of consideration submitted by the appellant during the appeal proceedings is brought out as under: ***** It is seen that certain part of the advances were received post survey operation, in respect of the villa Nos. 118, 270 and 175, which were not considered by the AO as part of the consideration while arriving at the cost of the respective villa and the same are considered in the present adjudication. The relevant ledger account copies of these villas as submitted by the appellant is as under: ***** It is seen that the project got completed only subsequently and the appellant, from these villa owners, have received substantial sums in advance. It is seen that 84% of the cost of the villas has been received by the appellant much in advance. The appellant does not have much funds and the advances so received have gone into the project and also is a huge impetus to funds, otherwise, the appellant needs to borrow funds from outside and that has an interest cost to the same. Therefore, any advance substantially received cannot be construed as a discounted sale, as in normal bookings, the initial offer prices are much lower when the 8 ITA 327/Hyd/2024 project is launched and the prices of finished goods or projects which have taken off are much higher. The developers and builders use the initial booking advances as working capital for the project and therefore, discount the rates and also the raising of finances is a challenge and the interest portion is not only high but also requires servicing, whereas, with regard to advances, the promise is only of delivery and that too when the project gets completed. There is no evidence on record to indicate anything otherwise than what has been observed above. Before computing the advances in relation to the time value of money, it would be also proper to arrive at the cost of the project per sq.ft. The AO has taken the value at Rs.2350 per sq.ft in spite of the denial and subsequent retraction by the appellant. If one looks into the financials, the average cost of construction works out to be Rs.2,176/- per Sq.ft. and the same is calculated as under:
Particulars FY 2016- 2017-18 2018-19 2019-20 2020-21 2021-22 Total 17 4,92,01,94 18,06,48,0 47,48,69,69 76,52,13,54 Operating and 28,99,85, 45,19,40, 2,21,18,58,435 28 219 5 3 other expenses 4 00 6 Employee cost 1,07,507 22,03,147 17,52,23 22,06,755 20,82,926 13,12,282 96,64,851 4 Depreciation 35,667 2,46,107 2,33,094 2,26,648 2,16,005 1,68,894 11,26,415 69,64,22 Other expenses - 61,95,207 39,85,774 1,20,15,967 2,9 1,6 1,169 1 Cost of 4,93,45,11 18,30,97,2 29,89,34, 46,05,68,6 48,11,54,40 77,87,10,68 2,25,18,10,870 8 82 768 Construction 1 6 0 6
Cost incurred Cost incurred in in the year the year 48 177 289 445 465 752
Cost: incurred Cost incurred in in the year the year jCumulalive (Cumulative.) ) 48 225 513 958 1,423 2,176 Thus, the cost of the project is Rs.2176 per Sq.ft and not Rs.2350 per Sq.ft. Further, the time value of advances or the cost of construction is considered when substantial advance was received from these villa owners, the same works out to be as under:
FY 2016- 2017- 2018- 2019-20 2020-21 2021-22 17 18 19 Discounting the cost of 1,549 1,735 1,943 2,176 1,235 1,383 construction @,1Z,Y,0
9 ITA 327/Hyd/2024
It is seen that 68% advance was received in FY 2017-18 and the same increased to 84% in FY 2018-19. If one considers that all the advance was received in FY 2018-19, the cost of construction discounted on interest works out to be Rs.1549 per Sq.ft and let that be considered at Rs.1550 per Sq.ft as a round figure. The reason for benchmarking the rate to Rs.1550 per Sq.ft is because 16% of the advance was yet to be received and 68% advance has already been received in the earlier year i.e. FY 2017-18. Therefore, approximately, Rs.1550 per Sq.ft is a fair benchmarking considering time value of money and otherwise. Now, it is also important to consider the SRO value of these properties and to verify whether the same is higher than Rs.1550 per Sq.ft. The appellant has submitted a certificate obtained from SRO, regarding the value of the land Rs.2500 per Sq.yd and construed area at Rs.700 per Sq.ft as on 01.12.2017 and as on 01.12.2018 on the basis of the same, the cost works out to be as under of each villa:
Villa Area Total SRO SRO Value SRO SRO Per S FT Sr in const No. value of of Building Value of Value Cost as per No Sq. ructe Land (@Rs.700 the computin AO Yds. d (@Rs. per Sq.ft) Property g per area 2500 per sq.ft. in sq.yd) Sq.ft 1 118 300 750000 4,156 29,09,200 Lavudya 36,59,200 880 1,440 Karuna 2 Danturi 155 400 1000000 4,800 33,60,000 43,60,000 1,533 908 Sircesha 3 E Venkatesh 90 300 750000 4,156 29,09,200 36,59,200 880 930 785000 3,727 26,08,900 1,113 4 M Kondal Rao 217 314 33,93,900 911 5 M Sureka 270 324 810000 4,004 28,02,800 36,12,800 902 952 6 M Arun Madhav 202 383 957500 3,770 954 1,020 26,39,000 35,96,500 7 153 400 1000000 4,260 2,347 P Koteswara 29,82,000 39,82,000 935 _ Rao 8 Nagaraju 175 300 750000 4,224 29,56,800 37,06,800 878 1,124 9 Hari Hara 80 4,225 29,57,500 37,07,500 878 1,263 300 750000 Kumar 10 Dontala Shand 261 311 777500 4,225 29,57,500 37,35,000 884 934 11 201 300 750000 4,225 29,57,500 37,07,500 878 928 CIV Maheswara Rao 1 2 Chelluri 235 222 555000 3,400 23,80,000 29,35,000 863 919 Venkaiah Naidu
10 ITA 327/Hyd/2024
Thus, the SRO value ranges from Rs.863 per sq.ft to Rs.954 per sq.ft on the basis of the constructed area and in all the cases, Therefore, it would be fair to benchmark the higher value which is the basic cost of construction and land value at an average rate of Rs.1550 per sq.ft which is as per books to calculate the discounted sales. It would be also proper to note that if the appellant wants to argue that these were with regard to rendering of service, then the TDS provisions will kick in and none of these villa owners have reflected that as income, therefore, the discounted value if commensurate to rendering of service would get disallowed as per Sec. 40(a)(ia) and become income of the appellant itself. Anyways, no substantiation of service has been proved and the related parties have been sold in certain cases at a value lower than the time value of money also. Therefore, the same needs to be taxed accordingly. Therefore, considering the benchmarking of cost of construction at Rs.1550/- per Sq.ft, the difference in sale consideration is worked out for these villas as under: BenchmarkDiferenc Amount of Amount Sale Sr Name of the Buyer Vill Total addition e Price price per No a are of received sq.ft No. villa in by the sq.ft. appellant (in Rs.) excluding GST 77,08,884 1855 1550 - 118 4156 1 Lavudya Karuna 1535 1550 15 72783 73,67,217 Danturi Sireesha 155 4800 90 4156 39,23,810 944 1550 606 2517990 3 E Venlcatesh 21.7 3727 41,48,309 1113 1550 437 1628541 4 M Kondal Rao 80,36,286 2007 1550 5 M Sureka 270 4004 202 3770 38,47,619 1021 1550 529 1995881 6 M Arun Madhav 153 4260 99,98,268 2347 1550 - 7 P Koteswara Rao 1797 1550 - 175 4224 75,90,474 8 Nagaraju 80 4225 53,68,530 1271 1550 279 1180220 9 Hari Nara Kumar 261 4225 35,22,770 834 1550 716 3025980 10 Dontala Shanti 940 1550 610 2576987 11 GV Maheswara Rao 201 4225 39,71,763
11 ITA 327/Hyd/2024
31,25,750 12 Chelluri Venkaiah 235 3400 919 1550 631 2144250 Naidu 15142632
As per the above working, taking the benchmarking of Rs.1550 per sft, the effective sale consideration works out to Rs.1,51,42,632/-, which should have been charged on the basis of cost itself from these related parties/relatives. In view of the same, this amount of Rs.1,51,42,632/- is treated as sale consideration which should have been into taxation as per the cost price of the appellant and if it had anything to do with services rendered, then the said service quantum in rupees/value would attract disallowance on account of TDS provisions. Needless to state anything sold at cost price is the discretion of the appellant as long as no losses are incurred, the AO cannot dictate the terms of profit to the business of the appellant. In view of the above, addition is to be restricted to Rs.1,51,42,632/- and the balance addition of Rs. 4,05,62,427/- is deleted accordingly. The ground nos. 5, 10 and 11 are partly allowed accordingly.”
Aggrieved with the order of LD.CIT(A), the Revenue is now in appeal before us.
Before us, ld.DR submitted that LD.CIT(A) erred in restricting the addition to Rs.1,51,42,632/- and deleting the balance addition of Rs.4,05,62,427/-. It was submitted that during the course of the survey, the assessee’s partners admitted to having sold certain villas at a price below the market rate, and the difference was rightly computed as additional income by the Assessing Officer (AO). The Ld.DR argued that the AO had determined the fair market rate of Rs. 2,350 per sq. ft. based on incriminating material seized during the survey and statements recorded from the partners of the firm. The partners had admitted that these villas
12 ITA 327/Hyd/2024 were sold at a lower price either due to personal relations or certain benefits received in connection with the project. Furthermore, during the post-survey proceedings, additional villas were identified as being sold below the average price, further reinforcing the AO’s stand that the assessee had earned unaccounted income.
The Ld.DR further submitted that LD.CIT(A) while reducing the addition, did not fully appreciate the fact that no independent third-party valuation was submitted by the assessee to justify its claims of lower sale prices. The benchmarking at Rs. 1,550 per sq. ft. by the CIT(A) was, according to the DR, arbitrary and lacked a sound basis. The AO had considered multiple factors, including cost of construction, market trends, and project specifications, and arrived at Rs. 2,350 per sq. ft., which should have been upheld in full. The DR urged that the order of the AO be reinstated.
7.1 Per contra, LD.AR submitted that the benchmarking adopted by the AO was excessive and did not reflect the commercial reality of the real estate market. It was argued that the assessee, being a developer, had to adopt a pricing strategy that ensured continuous cash flow, and as part of this strategy, certain villas were sold at discounted rates in exchange for benefits such as land facilitation, marketing assistance, and early financing. The ld.AR contended that the AO failed to consider the fact that a substantial portion of the sale consideration was received in advance, which significantly reduced the financing burden on the assessee. In real estate projects, early buyers often receive discounts because their
13 ITA 327/Hyd/2024 payments help fund ongoing construction. The ld.AR pointed out that in the present case, approximately 84% of the project’s cost was funded through customer advances, which eliminated the need for high-interest borrowings. Furthermore, the ld.AR submitted that the LD.CIT(A) had correctly undertaken a financial analysis and arrived at a reasonable benchmark of Rs. 1,550 per sq. ft. by considering actual cost of construction, time value of money and SRO rates. The AR strongly argued that no addition was warranted as there was no evidence of unaccounted cash transactions or receipt of on-money. It was asserted that the LD.CIT(A) had rightly rejected the AO’s arbitrary benchmarking at Rs. 2,350 per sq. ft., and no further enhancement should be made beyond Rs. 1,550 per sq. ft.
We have heard both sides and perused the material on record. In the present case, the issue revolves around the differential sale consideration of villas, where the AO made an addition based on an assumed market rate of Rs. 2,350 per sq. ft., while the CIT(A) restricted the addition by benchmarking at Rs. 1,550 per sq. ft. The assessee contended that the villas were sold at lower rates due to commercial reasons such as early bookings, marketing assistance, and advance payments, which played a crucial role in financing the project and reducing borrowing costs. The AO, on the other hand, determined the market rate based on survey proceedings and the statements of the partners, concluding that the differential amount should be taxed as additional income.
14 ITA 327/Hyd/2024
We have carefully examined the order of the LD.CIT(A), including the various tables presented therein and reproduced hereinabove. The first table lists 12 villas that were sold at lower prices, along with the names of the buyers and the reasons for discounted sales, such as relationships with partners, facilitation of land deals, or assistance in sales. The second table provides details of additional villas identified during post-survey proceedings, showing their square footage, sale price, and market price, which formed the basis for further additions. The third table consolidates the total differential sale consideration computed by the AO, summing up to Rs. 5,57,05,059/-. The LD.CIT(A) after reviewing the financial data, prepared another set of tables analyzing the cost of construction across financial years, which averaged Rs. 2,176 per sq. ft. Another table considered the time value of money due to advances received and discounted the construction cost to Rs. 1,550 per sq. ft., which was then used as the benchmark to restrict the addition to Rs. 1,51,42,632/-. Upon reviewing these tables and the overall reasoning of the LD.CIT(A) we find that while the approach taken is reasonable, the benchmarking at Rs. 1,550 per sq. ft. does not fully account for the variations in villa specifications, amenities, and industry practices. The project involved high-end villas, and the pricing structure should reflect this aspect. Although the assessee’s argument regarding commercial justifications and advance payments is valid, the valuation must also consider the overall pricing trend of similar properties. Therefore, we find it appropriate to benchmark the rate at Rs. 1,800 per sq. ft., which balances both
15 ITA 327/Hyd/2024 the assessee’s explanations and the revenue’s concerns regarding underreported income. We may also mention that Assessing Officer in A.Y. 2019-20 had also adopted the rate at Rs.1,800 per sq. ft in the case of assessee in his order dt.30.03.2024. In view of the foregoing reasoning, we believe that this adjustment considers the assessee's commercial reasons while ensuring a fair and reasonable valuation of the project’s pricing. Accordingly, the addition is partly sustained based on this revised benchmark, and the appeal is partly allowed.
In the result, the appeal of the Revenue is partly allowed.