ROBBI SRINIVASA RAO.,VISAKHAPATNAM vs. THE PR,. CIT,-1,, VISAKHAPATNAM

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA No. 284/VIZ/2017 (Asst. Year : 2012-13) Robbi Srinivasa Rao, vs. Pr.CIT-1, D.No. 49-50-7/10, Srinivasa Visakhapatnam. Towers, Akkayyapalem, Visakhapatnam. PAN No. ADSPR 1884 N (Appellant) (Respondent)

Assessee by : Shri G.V.N. Hari, Advocate. Department By : Shri Deba Kumar Sonawal, CIT DR

Date of hearing : 26/07/2018. Date of pronouncement : 10/08/2018.

O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the assessee is directed against the order of Principal Commissioner of Income Tax-1, Visakhapatnam, dated 27/03/2017 for Assessment Year 2012-13. 2. Facts of the case, in brief, are that assessee had filed his return of income by declaring total income of Rs. 12,89,020/-. Subsequently, case of the assessee was selected for scrutiny and assessment was completed under section 143(3) of the Income

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Tax Act, 1961 (hereinafter referred to as 'Act') on 16/02/2015 assessing total income at Rs. 14,92,992/-. Subsequently, ld.Commissioner while exercising the powers conferred on him under section 263, same is examined and it is noticed that the assessee, who is proprietor of M/s. Sritanuja Builders & Developers was engaged in the business of construction and sale of flats. During the previous year, the assessee purchased an immovable property admeasuring 267 sq.yds for a consideration of Rs. 59,10,000/- from Smt. Voleti Kanakavalli & Others. The assessee debited the purchase cost of the site to trading account in five names of Rs. 11,82,000/- each and claimed it as business expenditure. It is also noticed from the sale deed that out of the purchase consideration of Rs.59,10,000/-, the assessee had paid Rs. 17,00,000/- vide demand drafts and the remaining amount of Rs. 42,10,000/- by way of cash. The details of payments made in cash ought to have been verified in the light of section 40A(3) of the Act and Rule 6D of the Income Tax Rules, 1962. However, it is seen from the assessment record that assessee’s claim of expenditure has been allowed without subjecting the payments made in cash to any scrutiny or verification. Thus, the assessment order dated 16/02/2015 passed under section 143(3) is prima-facie erroneous and prejudicial to the interests of the

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Revenue and therefore, the same is proposed to be revised under section 263 of the Act. Accordingly, a show-cause letter dated 05/04/2016 has been issued to the assessee as to why the order under section 143(3) dated 16/02/2015 shall not be revised and the income be recomputed and determined as per discussions made above by fixing the case for hearing on 03/05/2016. As there was no response from the assessee, again case was fixed for hearing on 31/05/2016. In response to the second notice, the assessee’s AR has appeared on 31/05/2016 and submitted that assessee purchased the property on 21/12/2011 initially as a fixed asset. Thereafter, another site adjacent was offered for sale. With an intention to construct an apartment, he converted the fixed asset originally purchased by him on 21/12/2011 as stock- in-trade. 3. The ld. Commissioner has considered the explanation given by the assessee and observed that the property actually purchased in the name of M/s. Sritanuja Builders & Developers, which is into the business of construction and sale of apartments and the deed was executed by the assessee in the capacity of the proprietor of the said concern, thereby the intention of the assessee is to acquire the land as a stock-in-trade. It is also noticed by the ld. Commissioner that in the return of income filed

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for computation of short term capital gain on alleged conversion of capital asset into stock-in-trade during the year, even if it is nil, is not reported in the relevant schedule of ITR (Schedule-CG of ITR). Therefore, the claim of the assessee that the property was initially acquired as a capital asset is only an afterthought to escape the rigors of section 40A(3) and no credence can be given to such self-serving statement. The cost of acquisition was claimed as deduction in the profit & loss account in the return of income filed by the assessee for Assessment Year 2012-13 relevant to the Financial Year of purchase i.e. 2011-12 which also clearly establishes that the property was purchased as a business asset only and was used as stock-in-trade during the year of purchase itself and hence the provisions of section 40A(3) are squarely applicable to the expenditure claimed in profit & loss account against the purchase of the said property. Further, the assessee has not explained the extenuating circumstances for payment of part of the consideration in cash to the extent of Rs. 42,10,000/- to the land owners when the other part of the consideration was paid by way of DDs. Therefore, payments in question do not fall within the exceptions provided under Rule 6DD of the I.T. Rules. Ignoring all these aspects, the Assessing Officer has allowed the entire expenditure of Rs. 59,10,000/- without verifying the

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applicability of provision of section 40A(3) in respect of cash payments to the tune of Rs. 42,10,000/-. The expenditure to the tune of Rs. 42,10,000/- ought to have been disallowed while making the assessment for the subject year, but the Assessing Officer has failed to do so and therefore, the assessment so made is not only erroneous but also prejudicial to the interests of the Revenue. Accordingly, the ld. Commissioner has directed the Assessing Officer to disallow the said expenditure of Rs. 42,10,000/- being cash payments made to the land owners in violation of section 40A(3) of the Act as the said payment do not fall under the exceptions provided in Rule 6DD of the IT Rules and added to the income already assessed in the assessment order dated 16/02/2015. 4. On being aggrieved, the assessee carried the matter in appeal before the Tribunal. 5. Ld. counsel for the assessee has submitted that the Assessing Officer during the course of assessment proceedings has called the assessee to submit audit report, reasons for large amount of sundry creditors, bank statements, details of sale deeds, ledger copies of various claims, purchase deeds, unsecured loans, sundry creditors and other allied details for verification and accordingly assessment under section 143(3) of the Act was

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completed. Therefore, the Assessing Officer after examining all the details including the details of purchase and sale deeds, assessment is completed, hence, the order passed by the Assessing Officer cannot be said that erroneous and prejudicial to the interests of the Revenue. 6. Ld. counsel for the assessee further submitted that when the property was purchased on 21/12/2011, the intention of the assessee was only to keep it as a capital asset and subsequently, when adjacent plot was offered for sale, the same has also been purchased and converted the asset as a stock-in-trade on 21/12/2011 and thereafter constructed an apartment. Therefore, cash payments made by the assessee of Rs. 42,10,000/- to acquire the capital asset and does not under the purview of section 40A(3) and submitted that the ld. Commissioner wrongly exercised the jurisdiction under section 263 of the Act and the same has to be quashed. 7. On the other hand, ld. Departmental Representative strongly supported the order passed by the ld. Commissioner. He further submitted that the assessee has purchased the property on 21/12/2011 in the name of M/s. Sritanuja Builders & Developers, therefore the intention of the assessee is very clear that the property is purchased only with an intention to carry the business

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and construction and sale of apartments. Therefore, the cash payment made by the assessee is connected to the business and not for acquiring capital asset, hence, section 40A(3) squarely applies to the assessee’s case and ld. Commissioner rightly directed the Assessing Officer to disallow the amount paid in cash of Rs. 42,10,000/- and add the same to the total income of the assessee. 8. We have heard both the sides, perused the material available on record and orders of the authorities below. 9. In this case, a site is purchased to the extent of 269 sq.yds. by the assessee in the capacity of proprietor in the name of M/s.Sritanuja Builders & Developers on 16/12/2011 for a total consideration of Rs. 59,10,000/-, out of which Rs. 17.00 lakhs paid though DDs and Rs. 42,10,000/- paid in cash. The Assessing Officer completed the assessment under section 143(3) of the Act on 16/02/2015 after calling the details, such as, sundry creditors, bank statements, details of sale deed, ledger copies of various claims, purchase deeds, unsecured loans and other details. Subsequently, the ld. Commissioner called the entire file of the assessee and examined the same and found that the Assessing Officer has failed to examine the cash payments made by the assessee and therefore, it attracts section 40A(3) of the Act,

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which the Assessing Officer has failed to do. Therefore, the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue and issue a show-cause notice dated 05/04/2016 calling explanation from the assessee why the order passed by the Assessing Officer cannot be revised. The relevant portion of the notice is extracted as under:-

“3. Further, it is noticed that the assessee, proprietor of M/s Sritanuja Builders and Developers, was engaged in the business of construction and sale of flats. During the previous year, the assessee purchased an immovable property admeasuring 267 sq.yards for consideration of Rs.59,10,000/- from Smt Voleti Kanakavalli & others. The assessee debited the purchase cost of the site to trading, P & L Account and claimed it as expenditure. It is noticed from the sale deed that out of the purchase consideration of Rs.59,10,000/-, the assessee had paid Rs.17,00,000/- vide demand drafts and the remaining amount of Rs.42, 10,000/- by way of cash, in the computation of income. The details payments made in cash ought to have been verified in the light section 40A(3) of the I.T. Act and Rule 6DD of the Income Tax Rules. However, it is seen from the assessment record that assessee's claim of expenditure has been allowed without subjecting the payments made in cash to scrutiny or verification. Thus, the assessment order dated 16.02.2015 passed u/s 143(3) of the I.T. Act is prima-facie erroneous and prejudicial to the interest of revenue and therefore, the same is proposed to be revised u/s 263 of the I.T. Act. 4. In the light of the above, you are hereby requested to show cause as to why the order u/s 143(3) of the I.T. Act dated 16.02.2015 for the Asst. Year 2012-13 shall not be revised and the income recomputed and determined as per discussions made above. In this regard, your case is posted for hearing on 03.05.2016 at 11.00A.M. in the chamber of the undersigned at 4th floor, Aayakar Bhavan, Dabagardens, Visakhapatnam, on which date you may appear before the undersigned, either personally or through an authorized representative, failing which it will be deemed that you have no objection for the proposed revision u/s 263 of the Act.”

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claimed as deduction in the profit & loss account in the return of income filed by the assessee for Assessment Year 2012-13 relevant to the Financial Year of purchase i.e. 2011-12 which also clearly establishes that the property was purchased as a business asset only and was used as stock-in-trade during the year of purchase itself and hence the provisions of section 40A(3) are squarely applicable to the expenditure claimed in profit & loss account against the purchase of the said property. The ld.Commissioner further observed that the assessee has not explained the extenuating circumstances for payment of part of the consideration in cash to the extent of Rs. 42,10,000/- to the land owners when the other part of the consideration was paid by way of DDs. Therefore, payments in question do not fall within the exceptions provided under Rule 6DD of the I.T. Rules. Ignoring all these aspects, the Assessing Officer has allowed the entire expenditure of Rs. 59,10,000/- without verifying the applicability of provision of section 40A(3) in respect of cash payments to the tune of Rs. 42,10,000/-. He further observed that the Assessing Officer ought to have been disallowed an amount of Rs. 42,10,000/- while making the assessment, but the Assessing Officer failed to do so. Therefore, the assessment so made is not only erroneous but also prejudicial to the interests of

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the Revenue and the ld. Commissioner directed the Assessing Officer to disallow the said expenditure of Rs. 42,10,000/-, which is made in violation of section 40A(3) of the Act and the same do not fall under the exceptions provided in Rule 6DD of the IT Rules. 11. Before us, ld. counsel for the assessee has submitted that the property initially purchased on 21/12/2011 with an intention to keep it as an investment. Subsequently, adjacent property was ready for sale and therefore, same is purchased and constructed an apartment. So far as, the argument of the ld. counsel for the assessee is concerned, the property which is in dispute before us is purchased on 21/12/2011 wherein cash payment of Rs.42,10,000/- has been made and subsequently on 05/01/2012 i.e. within 20 days, another property is purchased. Therefore, when the assessee is in the business of builder and developer and purchased the property in the name of M/s. Sritanuja Builders & Developers and another property is purchased within a short span of 20 days, it cannot be said that assessee is an investor. So far as another argument is concerned, the Assessing Officer has examined all the details and passed the order under section 143(3) of the Act, therefore, it cannot be said that the order passed by the Assessing Officer is erroneous. No doubt the Assessing Officer called the sale deeds and other details and

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assessment is completed under section 143(3) of the Act. When assessee has purchased the property in the name of M/s.Sritanuja Builders & Developers for total consideration of Rs. 59,10,000/- when assessee has paid Rs. 42,10,000/- in cash, the Assessing Officer ought to have been called the details and examined the issue whether section 40A(3) shall attracts or not. The Assessing Officer simply passed the assessment order in mechanical manner without examining the details of the property and the another property purchased by the assessee subsequently within 20 days, the assessment is completed. In our opinion, the order passed by the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue. Therefore, ld. Commissioner has rightly appreciated the facts of the case and considered all the issues after calling the explanation from the assessee by considering the same, he passed the order and directed the Assessing Officer to disallow the expenditure of Rs. 42,10,000/-, being a cash payment made to the land owners is in violation of the provisions of section 40A(3) of the Act, as the said payment do not fall under the exception provided under Rule 6DD of the IT Rules. We find that the order passed by the ld. Commissioner is within the powers conferred on him under section 263 of the Act and no interference is called for.

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Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 10th August, 2018. vr/- Copy to: 1. The Assessee – Robbi Srinivasa Rao, D.No. 49-50-7/10, Srinivasa Towers, Akkayyapalem, Visakhapatnam. 2. The Revenue – Pr.CIT-1, Visakhapatnam. 3. The D.R., Visakhapatnam. 4. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.