ASSISTANT COMMISSIONER OF INCOME TAX, PANCHKULA CIRCLE, PANCHKULA, PANCHKULA vs. KONARK RAJHANS ESTATE PRIVATE LIMITED, PANCHKULA

5. Whetheronthefactsandinthecircumstances ofthecase,Ld.CIT(A)has not erred in deleting the disallowance of cash expenditure made u/s 40A(3) of the Act without appreciating the finding recorded by the AO that it was not covered under any clause of Rule 6DD.

6. Whether on the facts and circumstances of the case, Ld. CIT(A) has noterred in deleting the disallowance of expenditure made in cash u/s 40A(3) of the Acton the ground that no such expenditure had been debited to Profit & Loss A/c during the year without recording a finding of fact as to in which assessment year it had been claimed by the assessee and it was to be disallowed u/s 40A(3) of the Act? 7. Whether on the facts and circumstances of the case, Ld.CIT(A) has not erredtoallowtheappealoftheassesseeanddeletetheadditionof Rs.5,28,00,000/- u/s 68 of the Act without appreciating the fact that therewasnocreditworthinessofRoyalPalmlnfratechPvt.Ltd.toadvance such a huge amount of loan, as was evident from reply to Q.No.7 & 8 in the statement of Sh. Sanjiv Kumar, Director M/s RoyalPalm lnfratech Pvt. Ltd., recorded by the AO u/s 131of the Act during assessment proceedings, wherein itwas stated that the lender company had given loan to the assessee out of token monies received in cash, for which there were no agreements to sell, and which were received for a housing projectwhich never took off.

1.2 The assessee has filed petition u/r 27 of ITAT Rules, 1963 wherein the assessee has questioned the validity of reassessment proceedings and assails the jurisdiction of Ld. AO to make the impugned additions. The grounds read as under: - That on laws, factsandcircumstances ofthecase,the assessment proceedings and assessment order deserve to be quashed since the initiation, continuation as well as completion of the impugned assessment u/s 148 r.w.s. 147 was void-ab-initio and more-so when the reasons recorded were legally unsustainable and di not establish any valid ‘reason to believe; of escapement of income and also when no addition was made on issue on which reasons were recorded.

1.3 The Ld. CIT-DR advanced arguments supporting the addition made in the assessment order. The Ld. AR supported impugned order on merits and assailed reopening of the case on legal grounds by referring to various case laws. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Assessment Proceedings 2.1 The assessee filed regular return of income on 30-09-2011 which was processed u/s 143(1). However, the case was reopened and notice u/s 148 was issued on 31-03-2018 as per due process of law. The same wason the belief that the assessee purchased immoveable property for Rs.819.57 Lacs and the return of income was processed u/s 143(1) at Nil income. On verification of information, it was observed that investment so made by the assessee was not verifiable from the return of income. The said investment remained unexplained. To verify the same, the case was reopened and reasons for reopening were provided to the assessee. 2.2 It transpired that the assessee made investment in properties in Village Kot, Tehsil Barwala, Panchkula and the source of the investment remained unexplained. The assessee objected to reassessment proceedings which was disposed-off vide order dated 22-11-2018. The assessee stated that it made advances towards purchase of land for Rs.574.39 Lacs only. The copies of purchase deeds were furnished but none of the deeds pertained to this year. 2.3 The Ld. AO obtained information fromTehsildar and observed that the assessee purchased four properties for Rs.335.32 Lacs during this year. The perusal of purchase deeds revealed that certain payments exceeding Rs.20,000/- was made in cash. The assessee was accordingly required to explain the source of the same and also confronted with the provisions of Sec.40A(3) for cash payment exceeding Rs.20,000/- in the property deals. 2.4 Regarding sources, the assessee stated that it had share capital of Rs.1 Crores as well as unsecured loans of Rs.179.75 Lacs. The assessee had current liability of Rs.5.28 Croresstanding against M/s Royal Palm Infratech Pvt. Ltd. (RPIPL). The assessee had land of Rs.574.39 Lacs which formed part of its fixed assets. The unsecured loans and current liability were stated to the source of investment in land. However, the assessee did not provide details of unsecured loans but stated that the loans were paid-off and the payments were made through banks. 2.5 With respect to loan taken from RPIPL, the assessee furnished copy of its Income Tax Return, Audited financial statements for this year reflecting investment in assessee-entity which were sourced out of sundry creditors for Rs.599.86 Lacs. However, Ld. AO held that this entity lacked creditworthiness to extend loan of Rs.5.28 Crores to the assessee. To verify the same, summons u/s 131 were issued to RPIPL. In response thereto, the director Shri Sanjeev Kumar appeared and his statement was recorded on 27-12-2018. 2.6 The Ld. AO noted that the assessee made payment for purchase of land. The assessee was engaged in real estate and land was stock- in-hand for the assessee. Therefore, Ld.AO proceeded to invoke the disallowance of cash payment in the deals in terms of Sec. 40A(3). The assessee opposed the same on the ground of commercial expediency and stated that and was purchased from villagers and such pieces of land were jointly owned by number of persons. These persons being villagers were not having bank accounts. The sellers insisted oncash payments. However, rejecting the same, Ld. AO made addition of Rs.40.85 Lacs invoking the provisions of Sec. 40A(3). 2.7 Another addition as made by Ld. AO was u/s 68 for unsecured loans. The unsecured loan of Rs.5.28 Crores was obtained by the assessee from RPIPL. The director Shri Sanjeev Kumar confirmed having extending the said loan to the assessee during this year. It was stated that advances were collected from various customers who were interested to buy flat in approved projects. Initially, it was planned to launch a project but after joining hands with the assessee, this advance money was extended to the assessee as unsecured loans towards project at Village Kot, Tehsil Barwala, Panchkula. The advances were received in the bank account of RPIPL which was later on extended to the assessee. These advances were token advances received from various customers against proper receipts. The money was stated to be refunded to customers subsequently through banking channels. However, going by financials of RPIPL, Ld. AO doubted the creditworthiness of RPIPL. The details of customers of RPIPL were not provided along with their PAN and addresses etc. No formal agreement of sale was executed by RPIPL. The assessee thus could not discharge the onus to establish the genuineness of the transactions and creditworthiness of the lender. M/s RPIPL returned loss of Rs.2.84 Lacs during this year. Accordingly, the advance of Rs.5.28 Crores was treated as unexplained cash credit u/s 68. 2.8 Apart from this, the assessee obtained unsecured loans of Rs.179.75 Lacs from 11 parties and furnished various documents in terms of requirement of Sec.68. The same has already been tabulated by Ld. AO at para 8.4 of the assessment order. For most of the parties, the assessee furnished PAN, address & confirmation etc. However, Ld. AO disbelieved the same on the ground that returned income of the lending parties was low and bank statement of these parties was not furnished by the assessee. Therefore, these loans were added as unexplained cash credit u/s 68 and the assessment was framed. Appellate Proceedings 3.1 The assessee, in its submissions, assailed the reopening of the assessment on legal grounds. It was contended that the recording of reasons was solely derived on suspicion formed merely on the basis of information as available with the department without there being any fresh tangible material. The Ld. AO, while recording the reasons, failed to authenticate the correctness of the information and resulted in recording of wrong reasons. The Ld. AO admitted in the opening paragraph of recorded reasons that the assessee had filed return of income whereas Ld. AO contradicted his own statement in para-6 while observing that the assessee did not file return of income and accordingly, formed opinion of escapement of income. Reference was made to the decision of Hon’ble Supreme Court in the case of Associated Stone Industries (Kotah) Ltd. (224 ITR 560) which mandate that reason to believe must have four elements viz. some material before Ld. AO; a nexus of such material and belief of escapement of income; an application of mind by AO to such material; an inference based on reasons drawn tentatively by Ld. AO that income had escaped assessment. However, in the present case, the assessee had filed its return ofincome on 30-09-2011. The assessee- entity was formed on 14-02-2011. The details of Balance Sheetwere already placed which contained details of purchase of fixed assets and sources thereof. No fresh tangible material was brought on record by Ld. AO while recording reasons. The Ld. AO, though formed belief of escapement of income for Rs.819.57 Lacs whereas the assessee duly disclosed block of assets for Rs.575.62 Lacs which was very much verifiable form the Balance Sheet already forming part of the record. Even in the assessment order, Ld. AO did not consider the figure of Rs.819.57 Lacs. Further, Ld. AO did not make any independent efforts to verify the facts so received by him and reasons were recorded merely on the basis of information received via Annual Information Report(AIR) without there being any independent application of mind. It was very much clear that no inference of escapement of income could be drawn against the assessee on these facts. The reasons to believe had no nexus or live link with the escapement of income of the assessee. The assessee had duly filed return of income which fact was contradicted by Ld. AO while recording the reopeningreasons. The reopening was thus on mere presumptions and conjectures and therefore, the notice u/s 148 was liable to be quashed. Reference was made to various other judicial decisions to support various legal arguments. However, Ld. CIT(A) rejected the same on the ground that no assessment u/s 143(3) was made and therefore Clause (b) of Explanation 2 to Sec.147 was correctly been invoked by Ld. AO. Aggrieved, the assessee has filed Rule 27 petition against the same. 3.2 On merits of additionof cash payment in land deals u/s 40A(3) for Rs.40.85 Lacs, the assessee made out a case of commercialexpediency and also referred tothe decision of Tribunal in assessee’s own case for AY 2012-13 wherein the matter was restored back to the file of Ld. AO to verify whether the assessee had claimed this expenditure or not. If no expenditure was claimed, nodisallowance u/s 40A(3) could be made. The AY 2011-12 was the first year of assessee’s operations and the land so purchased from various farmers was capitalised by the assessee in its books of account. The reasonable cause for impugned payment was that the lands so purchased by the assessee were jointly owned by number of persons and all of these owners were not having bank accounts. At the time of signing of agreement to sell, they insisted for cash payment only. In some cases, one person represented a group of others as the land was jointly owned by the family / extended family and there were number of owners. The representativereceived total payment in cash and then distributed the same to other owners. Further, there was no dispute regarding the identity of the payees and the genuineness of these landtransactions. The copies of respective sale deeds were duly furnished to Ld. AO. In this background, the assessee made out a case of business expediency.Reliance was also placed on various decisions including the decision of Hon’ble High Court of Gujarat in the case of Anupam Tele Services (43 Taxmann.com 199)as well as the decision of Hon’ble High Court of Gauhati in the case of Walford Transport (Eastern India) Ltd. (124 Taxman 538) holding that these provisions were to check evasion of tax and flow of unaccounted money. Where the authorities were satisfied about the genuineness of the transaction and the identity of the payees, there would be no occasion to disallow such kind of payments in the circumstance of acute financial stringency. Where the transaction is found to be genuine and the identity of the payee is established, a liberal view of compelling and mitigating circumstances should be taken. The Ld. CIT(A), considering the decision of Tribunal for AY 2012-13, after examining the financial statement of the assessee, rendered a finding that no claim of expenditure was made by the assessee with regard to such land transactions and therefore, the addition of Rs.40.85 Lacs was deleted. Aggrieved, the revenue is in further appeal before us. 3.3 On the issue of addition u/s 68 for Rs.528 Lacs, the assessee stated that to prove sources thereof, it had furnished various documents relating to RPIPL which includes copy of ITR, computation of income, copy of audited financial statements, ledgers extract of the assessee in the books of RPIPL, confirmation from RPIPL and bank statement of RPIPL. The director of RPIPL, in response to summons u/s 131, acknowledged the said loan. As per extant provisions of Sec.68 as applicable for this year, the assessee was only required to establish the source of the loans and not the source of source and the assessee had duly discharged its onus by furnishing above documents relating to RIPPL. Even otherwise, the RPIPL had received advances from customers which was evidenced by its financial statements. The Ld. AO did not doubt the identity and genuineness of the transactions and only doubted the creditworthiness of RPIPL. The creditworthiness stood substantiated by audited accounts. Reliance was placed on various judicial decisions including the decision of jurisdictional High Court in the case of GP International Ltd. (325 ITR 25) wherein addition u/s 68 was deleted on similar facts. The Ld. CIT(A) concurred that director of RPIPL acknowledged business relation and confirmed the aforesaid loan. The loan was sourced from advances received by RPIPL from its customers who were interested to buy flats in approved projects. However, after joining hands with RPIPL, the plan of developing the project was dropped by RPIPL and the advances so received was extended as unsecured loans to the assessee. The formal agreement of sale was not signed by RPIPL with prospective customers and the money was subsequently refunded through account payee cheque. After due consideration of provisions of Sec.68, it was evident that obligation to explain source of source was effective from AY 2023-24 only. Before 01-04-2023, the assessee was not required to explain the source of source. The assessee duly provided the detail of source of unsecured loan of Rs.5.28 Crores with documentary evidences. Therefore, the impugned addition could not be sustained in the light of various judicial decisions of High Courts and Tribunal which have already been enumerated in the impugned order. Aggrieved, the revenue is in further appeal before us. 3.4 Similar arguments were extended on the issue of addition of Rs.179.75 Lacs u/s 68 with respect to 11 parties. The attention was drawn to the fact that during reassessment proceedings for AY 2014- 15, the assessee submitted confirmation from the parties. All the loans stood settled due to change in management. The loans were received and repaid through banks. Confirmed copies of ledgers and Id proof was furnished before both the lower authorities. As against this, no notice was issued u/s 133(6) by Ld. AO to these parties to verify assessee’s claim. The Ld. CIT(A) concurred that the assessee had furnished PAN and addresses of all the lender parties along with their respective confirmation. The loans were duly repaid in subsequent period which stood confirmed by the lenders and such repayment was also confirmed by the lenders. No dispute was raised by AO with respect to the said facts and documents. The assessee had duly discharged the onus of Sec.68 by furnishing these documents. Accordingly, the impugned addition was also deleted against which the revenue is in further appeal before us. Our findings and Adjudication 4. Since the assessee has raised pertinent legal ground in its Rule 27 petition which challenges the very assumption of reassessment jurisdiction of Ld. AO, we take up the same first. The copy or reasons as recorded by Ld. AO to reopen the case of the assessee has already been extracted in the assessment order. After careful consideration of the same, it could indeed be seen that Ld. AO has contradicted the factum of filing of return of income by the assessee. Though in the opening para, Ld. AO has acknowledged that fact that the assessee filed return of income and declared ‘nil’ income, however, in concluding para, Ld. AO has misdirected himself by noting that the assessee was non-filer and formation of reasons of escapement of income stem from this fact. It has been alleged in the recorded reasons that the assessee purchased immoveable property for Rs.819.57 Lacs and upon perusal of return of income as filed by the assessee, the said information was not verifiable and accordingly, the said investment remained unexplained. However, the assessee has never purchased land to that extent and whatever land was purchased, the same had been grouped under fixed assets in the financial statements. The assessee has procured land for Rs.574.39 Lacs which has been sourced out of unsecured loans. Therefore, no case of unaccounted investment could be made out against the assessee. The assessee entity was incorporated only on 14-02-2011and this was the first year of its business operations. The information as procured from Tehsildar revealed that the assessee purchased only four properties for Rs.335.32 Lacs during this year. Ultimately, no addition has been made for unaccounted investment but Ld. AO has made addition for violation of provisions of Sec. 40A(3). It could thus be seen that the formation of belief of escapement of income has fundamental flaws which vitiate the very jurisdiction of Ld. AO. The assessee’s regular return of income was already processed u/s 143(1) wherein the assessee reflected its financial details including investment made in the land. The allegation of unaccounted investment ultimately remained un-true and no such addition has been made by Ld. AO while framing the assessment. Therefore, in our considered opinion, the belief of escapement of income was flawed and having no substance at all and therefore, the consequential assessment so framed would be bad-in-law. We order so. The assessee succeeds in its legal grounds. The assessment is liable to be quashed on this score only.