PEGASES PROPERTIES P. LTD.,MUMBAI vs. DY CIT - CC-2(3), MUMBAI

आदेश / O R D E R PER BENCH:

These appeals in ITA Nos.350/Mum/2021 to 352/Mum/2021 for A.Yrs.2016-17 to 2018-19 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal No.CIT(A)-48/IT- 21/DCCC-2(3)/2019-20 dated 29/01/2021 (ld. CIT(A) in short) against the order of assessment passed u/s.153C r.w.s. 143(3) of the Income Tax

2 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., Act, 1961 (hereinafter referred to as Act) dated 26/01/2019 by the ld. Dy. Commissioner of Income Tax, Central Circle-2(3), Mumbai (hereinafter referred to as ld. AO).

Identical issues are involved in all these appeals, hence, they are taken up together and disposed of by this common order for the sake of convenience.

3 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., flats once the project is launched. The booking for the project starts from the day the project is launched and continues till the entire project is sold out. The assessee recognizes the income from the flats sold, on the basis of completion. The income earned from sale of flats is offered to tax as business income in the return of income filed by the assessee.

5.2. In certain cases and again a regular phenomena, the assessee is not able to always sell all the flats forming part of the project before its completion. This is due to the various factors such as excess supply as against the demand, incentives from the government for promoting housing industry, new investments in the region around the project location etc. which are beyond the control of the assessee. However, the assessee as a businessman tries to sell the flats on the first available opportunity, when an interested customer is identified or approaches the assessee.

5.3. On completion of the project, the unsold flat is treated as stock-in- trade under the head "Inventories". As at 31st March 2016, the assessee had 47 unsold flats for which completion certificate was received. The project and site-wise details of the unsold flats as on 31 March 2016 are given below:

Sr. No. Name of the No. of unsold flats Area (Sq.Ft) Project 1. Sangria 44 65,062 2. Sparklet 01 950 3. Splendor 02 2558 Total 47 68,570

5.4. The assessee had never given the unsold flats / units on rent and no rental income has been earned either in the past or in future. The assessee also placed on record the computation of income from A.Yrs.

4 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., 2012-13 to 2018-19 wherein income from sale of flats had been offered to tax as business income and there is no rental income earned by the assessee. The same treatment is being given by the assessee in subsequent years also.

5.5. The ld. AO followed the decision of Hon'ble Delhi High Court in case of CIT vs. Ansal Housing & Construction (2016) (389 ITR 373) (Delhi) and CIT vs. Ansal Housing Finance & Leasing Co. Ltd (2013) (354 ITR 180) (Delhi) and Hon'ble Bombay High Court in case of Mangla Homes P Ltd (325 ITR 281) for determining the Annual Letting Value (ALV) of the unsold flats/units as per section 23 of the Act. The Ld. AO took the fair value of the rent which can be fetched in that area and considered Rs. 12 per Sq. Ft. Based on the same, the ld. AO applied the fair value rent of Rs. 12 per sq. ft. to the total saleable area of the unsold flats/ units and thereby calculated deemed rent on proportionate basis on these units and disallowed the same and allowed standard deduction. The details of the additions are as follows - Sr. No. Particulars Amount (Rs.) A Notional income on 98,74,501 account of deemed rent (68,570 *12m* 12 sq/ft) B Less: Standard deduction (29,62,215) @30% as per sec 24(a) C Net addition (A-B) 69,11,836

5.6. The ld. CIT(A) did not follow the decision of the Tribunal for AYs 2013-14 and AY 2014-15 in assessee's own case dated 09/11/2019 which had in turn relied upon the decision of Hon'ble Gujarat High Court in case of Neha Builders Pvt Ltd (296 ITR 661) but followed decision of the and Hon'ble Delhi High Court in case of Ansal Leasing Finance & Co. Ltd (354 ITR 180) and Hon'ble Bombay High Court in case of Mangla Homes P Ltd

5 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., (325 ITR 281) and upheld the addition made by the Ld. AO on account of notional rent on unsold flats vacant. 5.7. It was specifically pointed out that assessee is a builder / developer engaged in the business of construction and income earned from sale of flats is offered to tax as business income and that the unsold flats are treated as ‘stock in trade’ under the head ‘inventories’ till they are ultimately sold. 5.8. The ld. AR accordingly sought to distinguish the decision of the Hon’ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd., reported in 325 ITR 281 which was relied upon by the lower authorities. The ld. AR also pointed out that in the case of Mangla Homes Pvt. Ltd, the main object of the company was to carry on business of dealing and investment in properties, flats, warehouses, shops, commercial and residential houses. In other words, that company was letting out properties as an investor and not as a builder where as assessee is a builder / developer. The rental income in the hands of Mangla Homes Pvt. Ltd., was assessed to tax under the head ‘income from house property’. One more distinguishing feature of Mangla Homes Pvt. Ltd., pointed out by the ld. AR was that in that case the only activity was letting out properties on rent and the rental income derived thereon was assessed under the head ‘income from house property’, whereas the question involved in the present case is with respect to deemed rental income earned from unsold flats of a builder and not rental income earned from letting out of the properties. The ld. AR also pointed out that the issue is covered in favour of the assessee by the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd., reported in 296 ITR 661. The assessee also submitted that the very same issue in assessee’s own case for A.Yrs. 2013-14 and 2014-15 had been decided by this Mumbai Tribunal in favour of the assessee and that the ld. CIT(A)

6 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., ought to have followed this Tribunal order while passing the appellate order.

5.9. The ld. CIT(A) also took cognizance of the amendment that has been brought in Section 23(5) of the Act w.e.f. 01/04/2018 and hence applicable only from A.Y.2018-19 which reads as under:-

“[(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to 66[two years] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.]” 5.10. Per contra, the ld. DR vehemently argued that Section 23(4) of the Act is a deeming provision and it triggers the moment the assessee is the owner of more than two houses. Hence, it is immaterial whether the flats are shown in the balance sheet as investments or as stock-in-trade. He argued that the decision of the Hon’ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd., would be applicable here.

5.11. It is not in dispute that the assessee is a builder or developer and had been showing the income derived from sale of flats as and when they are sold and the flats remaining unsold are shown as inventories in the balance sheet of the assessee as ‘stock-in-trade’. These unsold stocks when it is sold subsequently would again get taxed only under the head ‘income from business’. We find that the assessee being a builder or developer would be interested in selling those flats and earn profits out of the same. No business man would be interested in keeping the properties idle. Hence, the intention of the assessee company being a builder or developer was always to sell the same.

7 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., 5.12. Since all the unsold flats are lying as ‘stock in trade’, the resultant income arising out of sale would only from income from business, We find that amendment has been brought in the statute in Section 23(5) of the Act where in respect of unsold stock of properties held as ‘stock in trade’ for a period of two years from the date of obtaining completion certificate from the competent authority, the annual value of such property would be determined as ‘Nil’. In other words, there would be no addition towards deemed rental income in respect of unsold stock of properties held as ‘stock in trade’ for a period of two years from the date of obtaining the completion certificate from the competent authority. This specific provision has been brought in the statute from A.Y.2018-19 onwards. Hence, prior to A.Y.2018-19, there is no provision provided in the Act to tax the deemed rental income on unsold stock of properties lying as ‘stock in trade’ under the head ‘income from house property’. The provisions of Section 23(4) of the Act are meant only for properties that are held as investments and not as stock in trade. We find that decision rendered by the Hon’ble Jurisdictional High Court in the case of Mangla Homes Pvt. Ltd., reported in 325 ITR 281 would not be applicable in the instant case as the main object of that company was to make investment in properties, flats, warehouses, shops etc and let out the same and derive rental income. In any case, principle laid down in Mangla Homes Pvt. Ltd., had been subsequently reversed by the Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd., vs. CIT reported in 373 ITR 673. We also find that the charging provisions of Section 22 of the Act specifically gives exemption from determination of actual value of the property which is used for the purpose of any business or provision carried on by the assessee. There is no dispute that the assessee had retained the unsold stock of flats as stock in trade in the capacity of builder. Hence there is no dispute that the unsold stock of flats were used only for the purpose of business of the assessee. The

8 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., exception provided in charging section 22 of the Act seems to be indirectly taxed only from A.Y.2018-19 after providing the moratorium period of two years. Hence, upto A.Y.2017-18, no addition could be made in respect of deemed rental income on unsold stock of flats lying as stock in trade as they are used for the purpose of business of the assessee.

5.13. We find that all the decisions relied upon by the Hon’ble Bombay High Court in Mangla Homes Pvt. Ltd., were prior to the decision of the Hon’ble High Court in the case of Chennai Properties referred to supra. This is the background in which all the Tribunal decisions had followed the decision of the Hon’ble Gujarat High Court in the case of Neha Builders reported in 296 ITR 661. We find that the issue in dispute is also covered by the decision of Pune Tribunal in the case of Kumar Properties and Real Estates Pvt. Ltd., vs. DCIT in ITA No.2977/PUN/2017 for A.Y.2013-14 dated 28/04/2021. For the sake of convenience, the entire order is reproduced hereunder:-

“This appeal by the assessee is directed against the order passed by the CIT(A)-7, Pune on 01.09.2017 in relation to the assessment year 2013-14. 2. The assessee has assailed confirmation of addition of Rs.1,47,65,688/- towards deemed rental income on stock-in-trade of unsold flats/bungalows held by the assessee, as a first major issue. Succinctly, the factual panorama of the case is that the assessee has been engaged in the business of development of properties with the projects `Kumar Infinia' and `Kumar Picasso' ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited having certain unsold flats/bungalows for ready possession at the year end. The AO opined that the assessee ought to have offered deemed notional rental income on such vacant flats/bungalows. The assessee submitted that the flats/bungalows were its stock-in-trade, from which no income could be taxed under the head 'Income from house property'. Relying on judgment of the Hon'ble Delhi High Court in CIT Vs. Ansal Housing Finance and Leasing Company Ltd. (2013) 354 ITR 180 (Del), the AO computed the annual letting value of the unsold flats u/s.23 of the Income-tax Act, 1961 (hereinafter also called `the Act') at Rs.1,47,65,688/- and made addition for the same. The ld. CIT(A) echoed the addition, against which the assessee has approached the Tribunal.

9 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., 3. We have heard the rival submissions through Virtual Court and gone through the relevant material on record. Indisputably, the assessee has been engaged in the business of development of properties. Certain flats/bungalows out of the two buildings were unsold as at the year end. The authorities below have canvassed a view that annual letting value of such unsold flats/bungalows lying as stock-in-trade at the end of the year is income chargeable to tax under the head `Income from house property'. Section 22 is the ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited charging section of Chapter IV-C, `Income from house property', which reads as under:- `The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".' (emphasis supplied by us) 4. This section states that the annual value of property (buildings or land appurtenant thereto) held by the assessee as an owner shall be chargeable as `Income from house property'. However, an exception has been carved out, which provides that any such property or its part, which is occupied by the assessee for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, shall be excluded. Thus, in order to fall in the exclusion clause, the following conditions must be satisfied: i. The property or its part should be occupied by the assessee as an owner. ii. Any business or profession should be carried on by the assessee-owner. iii. Occupation of the property should be for the purpose of business or profession iv. Profits of such business or profession should be chargeable to income-tax. ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited 5. Only when the above four conditions are cumulatively satisfied that the property or its part goes outside the ken of section 22, not requiring computation of the annual letting value therefrom. Let us see if the above conditions are satisfied in the instant case ad seriatim. 6. The first condition is that the property or its part should be occupied by the assessee as an owner. The assessee is engaged in the business of developing buildings. Admittedly, the assessee is owner of the flats/bungalows lying unsold at the year end. Now the question is whether these flats etc. can be said to be `occupied' by the assessee? The term `occupy' has neither been defined in section 2 (general definitions under the Act) nor section 27 (definitions relating to income from house property). Rather it is defined nowhere in the Act. In such a scenario, we will have to understand its connotation in common parlance. The term `occupation' (in land law) has been defined in the Oxford Dictionary of Law to mean `the

10 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., physical possession and control of land'. Thus, occupation of a property means having its physical possession coupled with dominion rather than the physical possession coupled with actual use. Once a property is in physical possession and control of a ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited person, it is said to be in his occupation, even if it is not actually used by him. Adverting to the facts of the extant case, we find it not to be a case of the AO or that of the ld. DR that the unsold flats etc. were not in the physical possession and control of the assessee. In fact, there is no one other than the assessee having physical possession and control over such flats, thereby making the assessee solely in their `occupation'. Thus the first condition is fulfilled as the flats etc. were occupied by the assessee-owner. 7. The second condition is that any business or profession should be carried on by the assessee-owner. Obviously, the assessee is engaged in the business of property development and has returned income from such business. 8. The third condition is that the occupation of the property should be for the purpose of business or profession. Crucial words used in the provision linking occupation of property with are `for the purpose of business'. If the property is occupied for the purpose of business, the condition gets satisfied. The expression `for the purpose of business' is of wide amplitude. To fall within its purport, what is essential is that there should be some nexus with the business. Even remote connection with the business satisfies the test ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited of `for the purpose of business'. Section 37(1) of the Act, granting other deductions, also uses similar expression - `for the purposes of the business or profession'. This has been interpreted to be wider in its scope vis-à-vis the expression `for the purpose of making or earning such income' as used in section 57(iii), providing deduction under the head `Income from other sources'. Reverting to section 22, we find that the legislature has used a wider expression: `for the purpose of business' with occupation of the property rather than any narrower expression indicating that the business must be carried on from such property or something like that as a sine qua non for exception. If the intention of the legislature had been to provide exception in a limited manner, it would have used a suitable constrained expression. Coming back to the factual scenario prevailing in the instant case, we find that the purpose of occupation of the flats is to hold them either for readying them for final sale or during the interregnum from the ready stage to sale stage, which satisfies the test of `for the purpose of business'. 9. The last condition is that profits of such business or profession should be chargeable to income-tax. It is indisputable that the ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited profits of the business of property development by the assessee are chargeable to income-tax. 10. On a bird's-eye view, we find that that flats/bungalows are occupied by the assessee owner; business of property development is carried on by the assessee; the occupation of the flats etc. is for the purpose of business; and

11 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., profits of such business are chargeable to income-tax. Ergo, all the four conditions for exclusion from section 22 of the Act are cumulatively satisfied in the present case. 11. The authorities below have canvassed a view that the annual letting value of flats/bungalows is income chargeable to tax as `Income from house property' by relying on Ansal Housing Finance and Leasing Company Ltd. (supra). There is no doubt that the Hon'ble Delhi High Court in the said case has held that Annual letting value of unsold flats at the year end is chargeable to tax under the head 'Income from house property'. At the same time, we find that the Hon'ble Gujarat High Court in CIT Vs. Neha Builders (Pvt.) Ltd. (2008) 296 ITR 661(Guj) has held that income from the properties held as stock in trade can be treated as Income from business and not as `Income from house property. Our attention has been drawn towards certain Tribunal decisions including ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited Cosmopolis Construction, Pune vs. ITO dated 18.06.2018 (ITA NO. 230 & 231/PUN/2018), wherein, after taking note of both the above judgments and finding none of them from the jurisdictional High Court, a view has been canvassed in favour of the assessee by holding that no income from house property can result in respect of unsold flats held by a builder at the year end. Similar view has been reiterated by the Pune Bench of the Tribunal in Mahanagar Constructions VS. ITO (ITA NO.632/PUN/2018) vide its order dated 5.9.2019. 12. At this juncture, it is relevant to mention that the Finance Act, 2017 has inserted sub-section (5) of section 23 w.e.f. 01.04.2018 reading as under:- `Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.' 13. A close scrutiny of the provision inducted by the Finance Act, 2017, transpires that where a property is held as stock-in-trade which is not let out during the year, its annual value for a period of ITA No.2977/PUN/2017 Kumar Properties and Real Estate Private Limited one year, which was later enhanced by the Finance Act, 2019 to two years, from the end of the financial year in which the completion certificate is received, shall be taken as Nil. The amendment has been carried out w.e.f. 1.4.2018 and the Memorandum explaining the provisions of the Finance Bill also clearly provides that this amendment will take effect from 01.04.2018 and will, accordingly apply in relation to the assessment year 2018-19 and subsequent years. Obviously, it is a prospective amendment. The effect of this amendment is that stock-in-trade of buildings etc. shall be considered for computation of annual value under the head 'Income from house property' after one/two years from the end of the financial year in which the

12 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., certificate of completion of construction of the property is obtained on and from the A.Y. 2018-19. Instantly, we are concerned with the assessment year 2013-14. As such, the amendment cannot apply to the year under consideration. In the absence of the applicability of such an amendment, no income can be said to have accrued to the assessee from unsold flats available as stock-in-trade. We, therefore, overturn the impugned order on this score and delete the addition of Rs.1.47 crore sustained in the first appeal.”

5.14. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that no addition on account of deemed rental income could be made in respect of unsold stock of flats held as ‘stock in trade’ upto A.Y.2017-18. However, the amendment has been brought in the statute in Section 23(5) from A.Y.2018-19 providing a moratorium period of two years. Hence, no addition could be made even for A.Y.2018-19 also.

5.15. Accordingly, the ground raised by the assessee for all the three years in respect of addition made on account of deemed rental income of unsold stock of flats as ‘stock in trade’ are allowed.

ITA No.352/Mum/2021 (A.Y.2017-18)

13 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., ITA No.351/Mum/2021(A.Y.2018-19) 9. We find that assessee has raised ground No.12 for A.Y.2018-19 challenging the addition of Rs.13,86,600/- made u/s.69A of the Act on account of alleged unaccounted cash. 9.1. We have heard rival submissions and perused the materials available on record. The search and survey action initiated on ABIL group on 21/07/2017. In the search and survey action, the address of the assessee was covered and the case of the assessee was also centralised u/s.127(2) of the Act. During the course of search proceedings, the cash of Rs.13,86,600/- was found and it was explained that the said cash belongs to M/s. Fisher Health Resorts Pvt. Ltd., having address at 2413, Kumar Capital, East Street, Pune-411001. M/s. Fisher Health Resorts Pvt. Ltd., is engaged into the business of running health and fitness club having PAN AAACF2830J. A statement of oath of Shri Manoj Shah, GM (Finance) was recorded by the search party on 22/07/2017 wherein he had stated that total cash in hand of entity and all individuals is Rs.13,98,728/-. However, during the search conducted u/s.132 of the Act at the registered office of the assessee, cash of Rs.27,85,300/- was found in the cabin of Shri Keval Jain. It was submitted to the search party that an amount of Rs.13,98,728/- belong to various group entities of the assessee and certain individuals which was also reconciled with their books of accounts. With regard to query raised by the search party for the excess cash of Rs. 13,86,600/-, Shri Manoj Shah stated that the said excess cash belongs to Fisher Health Resorts Pvt. Ltd. It was also submitted that the assessee and Fisher Health Resorts Pvt. Ltd., had common Director and hence, the cash belonging to Fisher Health Resorts Pvt. Ltd., was kept in the premises of the assessee. It was also submitted that the source of such cash for Fisher Health Resorts Pvt. Ltd., was from subscription from members for health club facilities. The ld. AO however, disregarded these

14 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., contentions of the assessee and proceeded to tax the aforesaid excess cash of Rs.13,86,600/- in the hands of the assessee on protective basis u/s.69A of the Act. The ld. AO does not make any mention as to whether any substantive addition was indeed made for the same excess cash of Rs.13,86,600/- in the hands of Fisher Health Resorts Pvt. Ltd or any other person. The ld. CIT(A) observed that there is no evidence that Fisher Health Resorts Pvt. Ltd., had owned up this cash and no confirmation from the company has been filed regarding cash belonging to them and not to the assessee. He also observed that no explanation has been given by the assessee that this cash has been considered in the hands of Fisher Health Resorts Pvt. Ltd., Accordingly, he upheld the action of the ld. AO. 9.2. From the aforesaid narration of facts, it could be seen that only protective addition has been made in the excess cash of Rs.13,86,600/- in the hands of the assessee company. We find that assessee right from the date of search had given an explanation that the excess cash of Rs.13,86,600/- belongs to Fisher Health Resorts Pvt. Ltd., The assessee had also given an explanation that in view of the common Directors, assessee company and Fisher Health Resorts Pvt. Ltd., the said cash of Rs.13,86,600/- was found in the premises of the assessee. Normally protective assessment is made only if the revenue entertains doubt as to in whose hands a particular income is to be assessed. This is primarily done to protect the interests of the revenue. Hence, either in the hands of the assessee, addition u/s.69A should have been made on substantive basis and in the hands of the Fishers Health Resorts Pvt. Ltd., it should have been made on protective basis or vice versa. Very strangely, addition has been made u/s.69A of the Act in the hands of the assessee company on protective basis. The ld. AR made a statement made from Bar that no substantive addition at all were made for this excess cash in the hands of any other party including Fisher Health Resorts Pvt. Ltd. We

15 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., also find that these deficiencies was not sought to be corrected by the ld. CIT(A), despite the fact that the ld. CIT(A) having co-terminus powers with that of the ld. AO and the statute had conferred on him the power of enhancement of income by converting the protective addition into a substantive addition in the hands of the assessee company. Now, the short point that arises for our consideration is that whether any protective addition could at all survive when no substantive addition at all were made in the hands of any other person. We find that this issue has been addressed by the Co-ordinate Bench of Kolkata Tribunal in detail in the case of Vikash Iron and Steel Pvt. Ltd., vs. ITO in ITA No.332- 334/Kol/2012 and ITO vs. Vikash Iron & Steel Pvt. Ltd., in ITA No.473 to 475/Kol/2011 dated 01/07/2015. For the sake of convenience, the entire order is reproduced hereunder:-

“These appeals of the assessee and the Revenue are directed against separate orders of the CIT(A)-I, Kolkata in Appeal No.173- 175/CIT(A)-I/Ward-3(2)/10-11 dated 20.12.2011 and Appeal Nos.509-511/CIT(A)-I/3(2)/09-10 dated 15.12.2010 respectively. Assessments were framed by I.T.O., Ward-3(2), Kolkata u/s 147/145(3) of the Income Tax Act, 1961 (hereinafter referred to as “the act”) for A.Y. 2003- 04,2004-05 and 2008-09 vide its order dated 30.11.2010.

“1. For that in the facts and circumstances of the case, the Ld.A.O. erred in making protective additions in an order u/s 147/145(3) and as such the entire order is void ab- initio since an order passed u/s 147/145(3) cannot be on the basis of suspicion or doubt while a protective addition is made only when there is a doubt. The action

16 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., of the A.O. was wholly unreasonable, uncalled for and bad in law. The ld. CIT(A) was unjustified in confirming the action of AO.”

Similarly the assessee has also raised the issue under rule 27 of Income Tax (Appellate Tribunal) Rule 1963 whereby the ld. Counsel for the assessee raised the same issue qua the revenue‟s appeal also and he wanted to support the order of CIT(A) on this issue. As we have reproduced the ground raised by assessee in ITA No.332/Kol/2012, the issue is crystallized.

“Return of income was filed on 31.10.2005 showing returned income Nil. A survey operation u/s 133A was carried out in the business premises of the assessee company on 26.02.2008. Later Shri Vikash Agarwal, the Director was examined on oath u/s 131 of the Income Tax Act, 1961 and his statements were recorded. He has confessed that the Company did not carry out any trading activity but only gave accommodation entries to interested parties on which it got commission. Later he has also confessed that the company has offered an additional income of Rs.2,25,000/- for Asst.Year 2005- 06 for taxation. He has also admitted that the assessee company has some undisclosed bank accounts.

Therefore, this is a clear case of income escaping assessment. Issue notice u/s 148 of the Income tax Act, 1961.”

The ld. Counsel for the assessee made a categorical statement that no substantive addition is made only protective assessments are made in the hands of the assessee company. On query from the Bench the ld. JCIT, Sr. DR Shri Prabal Chowdhury fairly conceded that no substantive addition is made in the hands of any person but only protective addition is made. But he relied on the orders of the authorities qua the assessee‟s appeal. Qua Revenue‟s appeal, he relied on the assessment order. We find that this issue dealt with by CIT(A) vide para 5.1. of his appellate order which reads as under :-

17 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd.,

“5.1. The argument of the appellant is misplaced in view of the fact that addition has been made on the basis of information collected during the course of survey, enquiry and investigation made by the A.O. The protective addition was made in order to protect the interest of the revenue on the basis of the information received from the A.O. of the persons with whom the appellant has made transactions. Since the addition is protective and subject to outcome of assessment in the case of persons with whom appellant has made transactions, the appellant has no basis to be aggrieved. It amounts to the appellant‟s insistence to make the assessment on the basis of its own statement given without allowing for cross verification with the other persons transaction. In fact, the A.O. has resorted to protective addition only when the related persons did not corroborate to the statement given by the appellant on oath. In that case, the statement of the appellant on oath may require further probe. Thus, the addition of the A.O. on protective basis is held to be correct. Thus, the appellant fails to get relief on this issue.”

“ 23. Before us, both the learned counsel for the assessee and the learned D.R. have relied on the decision of Mumbai Bench of the ITAT in the case of M.P.Ramachandran v. Dy.CIT [IT Appeal No.587(Mum) of 2005]. In the aforesaid case, facts were that in assessment under section 143(3) for assessment year 1997-98 was completed on 25-2- 2000. On 3-22-2000, there was a search and consequent there to, notice under section 148 dated 26-3-2003 was issued to the assessee. Consequent to the search, block assessment order was framed on 30-11-2008 in which, sum of Rs.5.27 crores was held to be expenditure not related to the business of the assessee and considered as undisclosed income for the block period. In the reassessment proceedings under section 148, very same amount was added on a protective basis. When the Assessing Officer made aforesaid addition in the reassessment proceedings under section 148, he noticed that the order of the Assessing Officer in the block assessment making the addition has already deleted by learned CIT(A). The appeal of the revenue before the Tribunal was pending. The Assessing Officer while making addition in the reassessment proceedings under section 148 had observed that the addition was being made on protective measure. It is in the aforesaid background of fact,

18 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., question of validity of initiation of reassessment proceedings had come up for consideration before the Tribunal.

Further he drew our attention to the findings of ITAT Mumbai Bench of this Tribunal in the case of M.P.Ramachandran vs DCIT (2009) 32 SOT 592 wherein it has held as under :-

“Though from the reasons recorded by the A.O., it comes up that he had taken the steps for including this amount in the reassessment with a view to protect the interest of Revenue, but he had not specifically spelt out his mind that the addition was to be made on protective basis. It is another matter that while passing the order u/s.143(3) r.w.s. 147 addition of Rs.527.85 lakhs was made on protective basis. Be that as it may, we shall proceed to decide the matter with the presumption that the AO reopened the original assessment made u/s 143(3) on this count for the purpose of making the disallowance of advertisement expenses on protective basis. Protective assessment cannot be independent of substantive assessment. Thus protective assessment is 'always

19 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., successive to the substantive assessment. There may be a substantive assessment without any protective assessment, but there cannot be any protective assessment without there being a substantive assessment. In simple words there has to be some substantive assessment/addition first which enables the AO to make a protective assessment/addition. Substantive addition/assessment is made in the hands of the person in whose hands the AO prima facie holds the opinion that the income is rightly taxable. Having done so and with a view to protect the interest of the Revenue, if the AO is not sure that the person in whose hands he had made the substantive addition rightly, he embarks upon the protective assessment. Thus the protective assessment is basically based on the doubt of the AO as distinct from his belief which is there is the substantive assessment. Obviously there is no place for "doubt' in the scheme of reassessment, as it has to be belief of the AO about the escapement of income, which is the foundation for assessment or reassessment u/s 147. Even if for a moment we agree with the Id. DR that the protective addition is different from substantive addition and hence the reassessment proceedings be upheld, we find that ultimately the same conclusion will follow if the substantive addition is struck down at a place where it was made. In such a scenario the protective addition will get converted into substantive addition in the reassessment. That will also run contrary to the format of reassessment, being to tax an income which has escaped assessment. In that case again it will tantamount to reopening assessment on the basis of an item of income or disallowance, which has already been made in block assessment of the assessee, thereby leaving no income escaping assessment. Under these circumstances we are satisfied that having made addition of Rs.527.85 lakhs in the block assessment, the Assessing Officer was not justified in forming the belief, either on substantive or protective basis, that the same income has escaped assessment in the instant year. CIT VS. Wipro Finance Ltd. (2008) 10DTR (Kar) 281 relied on;"

“The main argument which is urged by Mr.Nambiar in support of this appeal is that respondent No.1, the Income-tax Officer, who has issued the impugned notice, has no jurisdiction to assess the appellant for the income in question, because he contends that even according to respondent No.,1 the said proposed assessment would be in the nature of a precautionary or protective assessment, and Mr.Nambiar‟s case is that this concept of a

20 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., precautionary or protective assessment is not recognised by the Act and as such any attempt to levy such assessment would be illegal. In support of this argument Mr.Nambiar strongly relied on the finding recorded against the appellant‟s brother, Lalji, in the ex parte assessment order which had originally been passed against him. It is no doubt true that the said ex parte order had held that Lalji was liable to pay the tax on the amount of income in question; but the said order has been subsequently set aside, and, as we have already seen, fresh proceedings against Lalji have been commenced at Jamnagar. Mr. Nambiar also relied on the admission made by the respondent in his statement of the case before this court, and he contended that the respondent himself seems to concede that the assessment proposed to be made against the appellant is no more than precautionary. It is true that paragraph 3 of the statement avers that “steps are being taken against the appellant for taxation of income in his hands only as a precautionary measure against the eventuality of its being finally held that the income is not liable to be taxed in his brother‟s hands”, and it was added that “the appellant‟s contention that such a procedure is not warranted under the Act is entirely untenable”; but in appreciating the effect of this statement it would be necessary to consider the other relevant statements made by the respondent in his statement of the case. In paragraph 4, for instance, it is added that until the question of liability to pay tax in respect of the income in question is finally determined it may not be possible to safely predicate that it is the income of one and not of the other, and the respondent‟s case appears to be that in such circumstances protective assessments have to be made so that the income may not escape taxation altogether. In other words, the respondent‟s case clearly is that the notices issued against the two brothers by their respective Income-tax Officers are intended to determine who is responsible to pay tax for the income in question; now though Mr.Nambiar wanted to argue that protective or precautionary assessment of tax is not justified by any of the provisions of the Act he did not seriously contest the position that at the initial stage it would be open to the income-tax authorities to determine by proper proceedings who is in fact responsible for the payment of tax, and that is all that is being done at the present stage. In cases where it appears to the income-tax authorities that certain income has been received during the relevant assessment year but it is not clear who has received that income and prima facie it appears that the income may have been received either by A or B or by both together, it would be open to the relevant income-tax authorities to determine the said question by taking appropriate proceedings both against A and B. That being so, we do not think that Mr.Nambiar would be justified in resisting the enquiry which is proposed to be held by respondent No.1 in pursuance of the impugned notice issued by him against the appellant. Under these circumstances we do not propose to deal with the point of law sought to be raised by Mr.Nambiar.

21 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd.,

We would, however, like to add one direction in fairness to the appellants. The proceedings taken against both the appellants should continue and should be dealt with expeditiously having regard to the fact that the matter is fairly old. In the proceedings taken against Lalji the Income-tax Officer should make an exhaustive enquiry and determine the question as to whether Lalji is liable to pay the tax on the income in question. All objections which Lalji may have to raise against his alleged liability would undoubtedly have to be considered in the said proceedings. Proceedings against Chhotalal may also be taken by the Income-tax Officer and continued and concluded, but until the proceedings against Lalji are finally determined no assessment order should be passed in the proceedings taken against Chhotalal. If in the proceedings taken against Lalji it is finally decided that it is Lalji who is responsible to pay tax for the income in question it may not become necessary to make any order against Chhotalal. If, however, in the said proceedings Lalji is not held to pay tax or it is found that Lalji is liable to pay tax along with Chhotalal it may become necessary to pass appropriate orders against Chhotalal. When we suggested to the learned counsel that we propose to make an order on these lines they all agreed that this would be a fair and reasonable order to make in the present proceedings.”

22 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd., not adjudicate those issues on merits. Accordingly these appeals of the assessee are allowed and that of the revenue‟s appeals are dismissed.

9.3. In the instant case before us, admittedly, no substantive addition of Rs 13,86,600/- was made by the revenue either in the hands of M/s Fisher Health Resorts Pvt ltd or in the hands of any other person. In Respectfully following the aforesaid decision, since no substantive addition was made, the protective addition made in the hands of the assessee company does not survive. Hence, we have no hesitation in directing the ld. AO to delete the addition made in the sum of Rs.13,86,600/- on protective basis u/s.69A of the Act for A.Y.2018-19. Accordingly, the ground No.12 raised by the assessee is allowed.

23 ITA Nos.350-352/Mum/2021 M/s. Pegasus Properties Pvt. Ltd.,

Order pronounced on 23/12/2021 by way of proper mentioning in the notice board.

Sd/- Sd/- (LALIET KUMAR) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 23/12/2021 KARUNA, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai