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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R.S. SYAL & SHRI PARTHA SARATHI CHAUDHURY
आदेश / ORDER PER R.S. SYAL, VP : This batch of six appeals by the assessee arising out of common order dated 29-02-2016 involve assessment years 2002- 03 to 2007-08. Since all the appeals have some common issues, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience. A.Y. 2002-03 : 2. Only two issues were pressed by the ld. AR, namely, confirmation of addition of Rs.4,17,350/- towards interest from money lending business; and confirmation of addition of Rs.6,67,857/- towards unexplained investment in residential house.
Pithily put, the facts for the A.Y. 2002-03 are that a search and seizure action u/s.132(1) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) was taken on 18-10-2007 at the residential and business premises of Vasa Group at Sangli. The assessee is part of this group. Notice u/s.153A(a) was issued requiring the assessee to furnish return of income. The assessee filed a return declaring total income of Rs.1,87,910/-. The Assessing Officer (AO) noted that the search transpired that the assessee had not maintained any books of account for the previous year relevant to the assessment year under consideration nor had filed any income-tax return. The assessee produced before the AO cash book, bank account extracts, details of current assets for verification, which were prepared on the basis of material found during the course of search. The AO observed that total investment by the assessee in FDRs as on 31-03-2002 stood at Rs.29,59,000/-. The assessee declared interest income of Rs.1,17,414/- on FDRs worth Rs.7,59,000/- in his return u/s 153A of the Act. The AO observed that no interest income was shown on the remaining FDRs amounting to Rs.22.00 lakh. In addition to that, the AO further observed that the assessee was engaged in money lending activity. No interest income from money lending activity was shown in such return. Applying 2% rate of interest
per month on the money lending activity, the AO computed interest income of Rs.9,74,221/-, which was in addition to certain interest income determined on FDRs. The ld. CIT(A) accepted the assessee’s contention anent to the interest income on FDRs.
As regards the interest on money lending activity, the ld. CIT(A) observed that the assessee was engaged in money lending activity and the advances made were active accounts even in later years.
The assessee’s contention that the money lending activity did not fructify because even the principal amounts were not recoverable, did not find countenance with the ld. CIT(A). He, however, noticed that the AO computed disallowance of interest on money lending activity at Rs.9.72 lakh on the basis of total advances taken at Rs.40.59 lakh on which interest rate of 24% per annum was applied. He accepted the assessee’s contention that some of the advances given were towards purchase of land, being the core business activity. He went with the assessee’s figure of loans and advances given in money lending business at Rs.23,18,590/-.
Taking into consideration the fact that rate of interest on bank FDRs was 15%, he applied interest rate on money lending activity at 18% p.a. This is how, he computed the amount of interest includible in the assessee’s income at Rs.4,17,350/-. No credit was given towards interest income offered by the assessee in the return pursuant to search because the same was in respect of FDRs matured during the year. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
We have heard the rival submissions and gone through the relevant material on record. There is no duality of opinion that the assessee was also engaged in money lending activity in addition to his main business of construction. Such money lending activity was carried on outside the books of accounts. It was only during the course of search that some incriminating material were found, which divulged the involvement of the assessee in money-lending activity. This fact was also admitted by the assessee in his statement recorded u/s 132(4) of the Act. As regards the extant addition, the ld. CIT(A) considered the amount of investment in the money lending activity at Rs.23,18,590 and applied 18% rate of interest. Initially, the ld. AR contested the amount of advances taken up by the ld. CIT(A) at Rs.23,18,590/- on which interest income was chargeable. However, on being pointed out that this was the same figure which was given by the assessee to the ld. CIT(A) as pertaining to the money lending activity, the ld. AR did not press this argument. His submission was confined only to the rate of interest applied by the ld. CIT(A) at 18%. The ld. AR argued that the interest income did not accrue because the money advanced had become bad. Except the bald assertion as to the non-recoverability of the principal amount of the advances or the interest income thereon, no evidence, much less any cogent evidence, has been placed on record to substantiate the same. It is seen that the AO adopted rate of interest at 24%, which the ld. CIT(A) brought down to 18%. On being called upon to put forth any evidence about the rate of interest at which the assessee lent the money, the ld. AR failed to put across any material or document. We have also examined the submission of the assessee recorded u/s.132(4) of the Act in which he admitted to have been involved in money lending activity but there is no reference to the rate of interest at which the money was lent. Considering the fact that the assessee was engaged in the money lending activity, which is obviously with a purpose of earning interest income, a reasonable rate of interest has to be applied. Taking into account the peculiar facts of the case, we are satisfied that the ld. CIT(A) was more than reasonable in applying interest rate of 18%, as against the interest rate of FDRs prevailing at that time at 15%. We, therefore, approve the computation of interest at Rs.4,17,350/-.
The ld. AR contended that the amount offered by the assessee as interest income in the return filed u/s.153A(a) should be reduced from the amount of interest computed by the ld. CIT(A).
This contention of the ld. AR does not hold water for the reason that the amount of interest offered by the assessee at Rs.1,17,414/- is on the FDRs which were encashed during the year. Though the AO made addition of interest income in respect of remaining FDRs worth Rs.22.00 lakh also, but the ld. CIT(A) deleted the same and the Revenue is not in appeal. In that view of the matter, it becomes graphically clear that the amount of interest offered by the assessee as income at Rs.1,17,414/- is only qua the FDRs, which is distinct from money lending activity separately carried out by the assessee. Since no interest income was suo motu offered by the assessee on the money lending activity, the amount as computed by the ld. CIT(A) on this score at Rs.4,17,350/- is held to be correctly added. This issue is, therefore, determined against the assessee.
The only other issue which has been pressed in this appeal is against the confirmation of addition of Rs.6,67,857/- towards unexplained investment in the residential house construction.
The facts apropos this issue are that the assessee showed Rs.5,40,256/- towards construction of Bungalow ‘Hemangini Palace”. As per the report of the District Valuation Officer (DVO), the cost of construction during the F.Y. 2001-02 was computed at Rs.11,74,700/-. On being called upon to explain as to why the differential amount of Rs.6,34,444/- be not added to the total income, the assessee submitted that the total value of the property as per DVO report was Rs.58,73,500/- as against Rs.37,51,000/- determined by the Registered Valuer. The assessee submitted, inter alia, that the DVO applied CPWD rates while valuing the property at Rs.58.73 lakh, instead of the local PWD rates. Certain other objections were also raised by the assesee, all of which got repelled by the AO, eventually making an addition of Rs.6,34,444/- on this count. The ld. CIT(A) did not accept the assessee’s contention for adoption of the value determined by the Registered Valuation Officer. He went with the value determined by the DVO at Rs.52,86,150/- (after allowing rebate for self- supervision). After reducing the total cost shown by the assessee over a period of three years at Rs.19,47,895/-, he worked out the amount of unexplained investment at Rs.33,38,250/-, which was bifurcated over a period of three years during which the construction continued, as under :
Asst. yr. % Completion Addition 2002-03 20% 6,67,651/- 2003-04 48% 16,02,360/- 2004-05 32% 10,68,240/- In this way, he sustained the addition at Rs.6,67,651/- for the year under consideration. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
After considering the rival submissions and perusing the relevant material on record, the first issue raked up by the assessee is about the applicability of State PWD rates as against CPWD rates applied by the DVO in computing the value of the property. In principle, it is a fairly settled position that while determining the value, the recourse should be taken to the State PWD rates rather than Central PWD rates. The Hon’ble Supreme Court in CIT Vs. Sunita Mansingha (2017) 393 ITR 121 (SC) accorded its imprimatur to the judgment of the Hon’ble High Court approving the view taken by the Tribunal, wherein local PWD rates were held to be applicable for valuation of property rather than the Central PWD rates. In view of the fact that the value has to be determined on the basis of State PWD rates and the ld. AR contended that the DVO applied Central PWD rates, we set aside the impugned order and remit the matter to the file of the AO for examining the rates applied by the DVO in determining the value of the property. In case, he applied the CPWD rates in determining the value of the property, then such value should be re-worked out by applying the State PWD rates.
The next contention of the ld. AR was that the amount of interest income added by the AO for which the addition has been sustained by the ld. CIT(A) should be telescoped in the unexplained investment in construction of Bungalow. Once an addition is made towards earning undisclosed income, then no addition should be made towards undisclosed investment to that extent. For example, if an assessee earns an undisclosed income of Rs.100/- and makes an unexplained investment of Rs.170/-, it is the higher of these two, namely, Rs.170/-, which can be added to the income and not the both: Rs.170/- towards unexplained investment and Rs.100/- towards unexplained income. The raison d’etre is that the inflow of Rs.100/- gets utilized in the outflow of Rs.170/-. If we add Rs.100/- as well as Rs.170/-, it will amount to double taxation of Rs.100/-. Coming back to the facts of the instant case, it is seen that the amount of unexplained interest income on money lending activity for the assessment year under consideration has been found out at Rs.4,17,350/-, as against the unexplained investment in Bungalow at Rs.6,67,651/-.
We, therefore, order to reduce the amount of addition towards unexplained investment in Bungalow by a sum of Rs.4,17,350/-, being, interest income from the money lending activity which was not originally disclosed. This relief would be in addition to the effect of the conversion of valuation of the property from the CPWD rates, if applied by the DVO, to the State PWD rates. The impugned order is set aside and the matter is restored to the file of the AO for doing accordingly.
In the result, the appeal is partly allowed.
A.Yrs. 2003-04 and 2004-05 :
The facts of these two appeals are admittedly similar to those of the A.Y. 2002-03 as discussed above except for the amount of addition sustained by the ld. CIT(A) towards interest on money lending activity and the amount of unexplained investment in Bungalow. For the A.Y. 2003-04, the amount of interest on money lending activity on the amount of investment as
per the assessee’s own version has been computed by the ld.
CIT(A) at Rs.4,17,350/- as per para 20 of the impugned order.
For the A.Y. 2004-05, the amount of such interest on money lending activity, calling for the addition, has been computed at Rs.4,65,280/-. The impugned order is upheld on this score and the issue of interest income on money lending activity to that extent is decided against the assessee.
The next issue for these two years is against the unexplained investment in the Bungalow which has been sustained by the ld. CIT(A) at Rs.16,02,360/- for the assessment year 2003-04 and Rs.10,68,240/- for the assessment year 2004-05. Following the view taken hereinabove for the assessment year 2002-03, we direct to reduce the amount of addition towards unexplained investment in bungalow for the two years under consideration by the amount of the above interest income on money lending activity, which relief will be in addition to the effect of converting the valuation from the CPWD rates, if applied by the DVO, to the State PWD rates.
In the result, these two appeals are partly allowed.
A.Yrs. 2005-06, 2006-07, 2007-08 :
The only issue argued by the ld. AR in respect of these three years is about the sustenance of addition of interest income on money lending activity. As the facts for these years are mutatis mutandis similar, following the view taken hereinabove, we uphold the addition of Rs.4,91,400/- for the assessment year 2005-06; Rs.4,17,350/- for the assessment year 2006-07; and Rs.4,17,350/- for the assessment year 2007-08 towards interest income from money lending activity.
In the result, these three appeals stand dismissed. Order pronounced in the Open Court on 06th April, 2022.