SRI. B.T. DAYANANDA REDDY,BANGALORE vs ACIT, BANGALORE

Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE

Before: SHRI A. K. GORODIA & SMT. BEENA PILLAI

Pronounced: 30.01.2020

Appellant by : Sri. Narendra Sharma Advocate Respondent by : Sri. Dilip Junior Standing counsel : 19.12.2019 Date of Hearing Date of Pronouncement : 30.01.2020 O R D E R PER BEENA PILLAI, JUDICIAL MEMBER: Present appeals filed by assessee as well as revenue arises out of order dated 28.10.2011 passes by Ld.CIT(A), Mysore for assessment year 2004-05 and 2007-08 on following grounds of appeal:

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 2 of 17 ITA 134/B/2012 1. The Order of the Authorities below in so far as it is against the Appellant is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant’s case.

2. The appellant denies itself liable to be assessed under section 153A r.w.s. 143[3] of the Act under the impugned order on the ground that:- i. The Search initiated in the case of the appellant is illegal and ultra vires the provisions of section 132[1][a],[b] &[c] of the Act; ii. That the search is conducted not on the basis of any prior information or material inducing any belief but purely on the suspicion and therefore, the action under section 132[2] is bad in law [224 ITR 19 [SC] ] and consequent assessment under section 153 A is null and void-ab-inito on the parity of the ratio of the decision of the Hon’ble Apex Court in the case of Ajith jain, reported in 260 ITR 80. iii. The learned authorities below has not discharged the burden of proving that there is a valid initiation of search under section 132[1][a][b]&[c] of the Act, its execution and its completion in accordance with law to render the proceedings valid and to assume jurisdiction to make an assessment under section 153A of the Act.

3. The authorities below failed to appreciate that a valid search is a sine qua non for making a valid assessment under section 153A of the Act on the parity of the ratio of the decision of the Hon’ble Apex Court in the case of Ajit Jain, reported in 260 ITR 80 and also reliance is placed on the decision of the Hon’ble Karnataka High Court in the case of C. Ramaiah Reddy Vs. DCIT, reported in 339 ITR 210.

4. Without Prejudice the Appellant denies himself liable to be assessed on a total income of Rs. 72,58,000/- as against the returned income of Rs.1,87,000/- under the facts and circumstances of the case.

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 3 of 17

5. The authorities below were not justified in making an addition of Rs. 70,00,000/- brining the entire sale consideration received by the appellant to tax under the facts and circumstances of the case.

6. The authorities below failed to appreciate the fact that the lands which were sold is an agricultural land and cannot be considered as a capital asset as per section 2[4] of the Act under the facts and circumstances of the case. 7. The authorities below were not justified in law in treating the sale transaction as an adventure in the nature of trade as per the provisions of section 2[13] of the Act. 8. The learned authorities below failed to appreciate the fact that the appellant did not had any intention to carry on the business of trading by converting the said agricultural land which is a perquisite condition for invoking the provisions of section 2[13] of the Act under the facts and circumstances of the case. 9. The authorities below failed to appreciate the fact that since there was a dispute between the appellant and the original owners of the agricultural land purchased by the appellant the same could not have been registered in the year 1994 under the facts and circumstances of the case. 10. Without prejudice the learned authorities below ought to have treated the consideration received from sale of agricultural land as long term capital gain and ought to have given the benefit of indexation from the year 1994 under the facts and circumstances of the case. 11. The Appellant denies himself liable to be charged to interest under section 234A, and 234B of the Income-Tax Act, 1961, under the facts and circumstances of the case. 12 The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 13. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the justice and equity. ITA 135/B/2012 1. The Order of the Authorities below in so far as it is against the Appellant is opposed to law, equity, weight of evidence, ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 4 of 17 probabilities and the facts and circumstances in the Appellant’s case.

The appellant denies itself liable to be assessed under section 153A r.w.s. 143[3] of the Act under the impugned order on the ground that:- i. The Search initiated in the case of the appellant is illegal and ultra vires the provisions of section 132[1][a],[b] &[c] of the Act; ii. That the search is conducted not on the basis of any prior information or material inducing any belief but purely on the suspicion and therefore, the action under section 132[2] is bad in law [224 ITR 19 [SC] ] and consequent assessment under section 153 A is null and void-ab-inito on the parity of the ratio of the decision of the Hon’ble Apex Court in the case of Ajith jain, reported in 260 ITR 80. iii. The learned authorities below has not discharged the burden of proving that there is a valid initiation of search under section 132[1][a][b]&[c] of the Act, its execution and its completion in accordance with law to render the proceedings valid and to assume jurisdiction to make an assessment under section 153A of the Act.

The authorities below failed to appreciate that a valid search is a sine qua non for making a valid assessment under section 153A of the Act on the parity of the ratio of the decision of the Hon’ble Apex Court in the case of Ajit Jain, reported in 260 ITR 80 and also reliance is placed on the decision of the Hon’ble Karnataka High Court in the case of C. Ramaiah Reddy Vs. DCIT, reported in 339 ITR 210.

Without Prejudice the Appellant denies himself liable to be assessed on a total income over and above the returned income of Rs 1,66,728 under the facts and circumstances of the case.

5. The learned assessing officer is not justified in law in not allowing the appellant to carry forward of capital loss of Rs. 2,61,621 under the facts and circumstances of the case.

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 5 of 17

The Appellant denies himself liable to be charged to interest under section 234A, 234B & 234C of the Income-Tax Act, the facts and circumstances of the case.

The Appellant craves leave to add alter, delete or substitute any of the grounds urged above. 8. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the justice and equity. 2. Ld.AR submitted that, in both years under consideration, assessee has challenged initiation of search under section 132 (2), as bad in law, and consequent assessment under section 153A to be null and void ab initio. It has been submitted that assessee wished to withdraw grounds pertaining to while entity of search raised before this Tribunal for years under consideration. Ld.AR identified Ground No.1-3 is in present appeals for withdrawal. He submitted with an endorsement in grounds of appeal filed before this Tribunal against these grounds as withdrawan. Accordingly, for both years under consideration ground No. 1-3 stands dismissed as withdrawan. In lieu of the above, following grounds has to be adjudicated is on merits as submitted by Ld.AR. (2004-05) Brief facts of the case are as under:

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 6 of 17 Assessee is an individual, and filed its original return of income, declaring total income of Rs.1,87,000/- from salary, house property, income from capital gains, income from other sources and agricultural income of Rs.70,000/-. Subsequent to an action under section 132 of the Act on 28/02/08, notice under section 153A was issued to assessee in response to which assessee filed return declaring the same income on a December 2008. 2.1. During assessment proceedings, Ld.AO observed that assessee sold land admeasuring 4 acres 28 guntas plus 6 guntas Kharb(hereinafter referred to as the said property), for consideration of Rs.70,00,000/-. On verification of sale deed, Ld.AO observed that, assessee acquired the land on 29/09/03, which was not declared in balance sheet as on 31/03/03. He was of opinion that, the land was acquired by assessee in previous year relevant to AY 2004-05, and sold during the same year. Ld.AO called upon assessee to produce sale deed, of having purchased the property which assessee failed to do. It was observed that assessee did not file any details for investment in this property and in the absence of any such details Ld.AO treated entire consideration as STCG. While passing assessment order under section 143 (3) read with 153A of the Act, income of assessee was ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 7 of 17 determined at Rs.72,58,000/- as against returned income of Rs.1,87,000/- by making addition of Rs.70,00,000/- being sale of agricultural land as income from short term capital gain which assessee claimed as not taxable, since said property was not capital asset as per provisions of section 2 (14) of the Act. Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld.CIT(A).

3. Before Ld.CIT(A), assessee contended that, said property was agricultural land and cannot be treated as capital asset. Assessee filed purchase documents, sale documents, Ledger accounts of transaction before Ld.CIT(A) and submitted that said property was purchased for consideration of Rs.4,70,000/- on 29/09/03, and was held as agricultural property, which was sold as it is, on 31/01/04 for a sum of Rs.70,00,000/-. Assessee submitted that, out of total consideration received by assessee, sum of Rs.15,50,000/- was realised on 05/02/04 and sum of Rs.54,00,000/- was realised on 30/06/04. Assessee furnished certificate dated 28/01/11 from PWD stating that, property is beyond 12.6 km from BBMP limits. He thus argued that land sold is not a capital asset as per section 2 (14) of the Act, and hence capital gains are not ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 8 of 17 attracted, as it is situated more than 8 km from local limits of Bangalore and municipal Corporation. 3.1. The details furnished by assessee was remanded to Ld.AO by Ld.CIT (A) since, they were not filed at the time of assessment. In remand report, Ld.AO ascertained that BDA classified the subject village that included the subject land as residential zone, and therefore cannot be treated as agricultural land as submitted by assessee. In response, assessee alternatively submitted that this may be treated as a single business venture and difference between sale price and cost price should be taxed as business income placing reliance on decision of Hon’ble Supreme Court in case of Raja J. Rameswaram vs CIT reported in 42 ITR 179. 3.2. Ld.CIT(A) rejected submissions made by assessee and upheld observations of Ld.AO that, the transaction does not attract capital gains and that, it is in the nature of single venture of business. Ld.CIT(A) was of the opinion that and agricultural land can also be stock in trade. He held the transaction to be colourable device to avoid taxation, as assessee used provisions of law to generate capital without paying any tax. Ld.CIT(A), placing reliance upon CIT vs Durga Prasad More reported in 821 ITR 540 and Sumathi Dayal vs CIT reported in 214 ITR 801 held ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 9 of 17 that, what is apparent need not be real. He accordingly, upheld addition made by Ld.AO. Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now.

4. Ld.AR submitted that, said agricultural land was originally purchased by assessee from one Sh.Abdul Khudus, vide sale deed dated 29/09/03 for total consideration of Rs.4,70,000/-. Ld.AR submitted that assessee made advance payment towards purchase of said land, way back in the year 1994-95 amounting to Rs.4,00,000/-. It was submitted by Ld.AR that Sh.Abdul Khudus was original owner of the said property situated in Bommasandra, to whom part consideration was paid by assessee. Sh.Abdul Khudus demised on 11/09/94, leaving behind his legal hairs. There was a legal dispute between legal hairs of Sh.Abdul Khudus being the vendor and assessee, which culminated into a Suit before The Court of Principal Civil Judge at Bangalore in original suit No.229/1995 placed at page 1-18 of paper book filed on 06/11/2019. 4.1. It has been submitted that compromise petition was filed and the decree was passed directing the vendor is to execute and register the sale deed in favour of assessee and thus the assessee could get the agricultural land ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 10 of 17 registered only on 29/09/03. Ld.AR referring to page 12, 14, 15 and 16 of paper book compilation submitted that, these facts have been brought out in the recitals of registered sale deed dated 29/09/03, which has not been considered by Ld. CIT (A) while deciding the issue. The Ld.AR also submitted that the land when originally was purchased in the year 1994 by assessee was agricultural land and was situated outside 8 km from and simple limits and therefore cannot be treated as a capital asset as defined under section 2 (14) of the Act. He submitted that even as on 2011 a certificate has been issued by PWD, certifying the land to be situated beyond 8 km of BBMP limits. 4.2. As regards treatment of sale of land as adventure in the nature of trade or business, Ld.AR placed reliance on following decisions:  Indian Hume Pipe Company Ltd vs CIT reported in 195 ITR 386;  CIT vs RV Gupta reported in 258 ITR 261 Ld.AR submitted that, in facts narrated hereinabove, sale transaction entered into by assessee cannot be treated as adventure in nature of trade, as per section 2 (13) of the Act, and therefore, sale consideration received from sale of said property, cannot be considered as business income.

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 11 of 17 4.3. On the contrary, Ld.CIT.DR placed reliance upon orders passed by Ld.CIT(A) and Ld.AO.

We have perused submissions advanced by both sides in light of records placed before us. Submissions of Ld.AR has been considered in light of sale agreement, entered into by assessee with Sh.Abdul Khudus on 02.06.1994 (placed at page 24-35 of paper book filed on 05/12/12), and subsequent suit filed by assessee against legal hairs of Sh.Abdul Khudus on 17/04/1995, for specific performance of contract dated 02/06/1994 (placed at page 1-10 of paper book filed on 06/11/2019). A compromise Petition was filed before, The Principal City Civil Judge, and suit was decreed on 22/04/1995 (placed at page 15-17 of paper book filed on 06/11/19), in terms of compromise petition on 21/04/95, (placed at page 11-12 of paper book filed on 06/11/19). Assessee paid balance amount of Rs.70,000/- to the vendors, and obtained no objection to register sale document in favour of assessee, which is placed at page 14 of paper book filed on 06/11/2019. 5.1. Thereafter, assessee registered sale deed in respect of said property on 29/09/2003 (placed at page 8-22 of paper book filed on 05/12/12), and details regarding litigation filed against vendors and decree of Principal City ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 12 of 17 Civil Judge are encapsulated in recitals therein. It has been submitted that agreement was registered on 29/09/2003, though it was acquired as on the date of decree by the Civil Court subsequent to which the balance payment was made by assessee to Vendors on 22/04/1995. On the basis of above facts, emanating from record, we agree with Ld.AR that the said property was acquired by assessee in the year 1995, being the date of Decree, pursuant to consent terms, by Hon’ble Principle Civil Judge. As assessee sold the said property vide sale deed dated 31.01.2004, consideration so received therefore cannot be held as STCG. Ld.AR also argued that subject property is agricultural land and is situated outside 8 KM of local limits of Bangalore Minicipal Corporation, therefore it does not amount to be a capital asset as per section 2(14) of the Act. In support of this contention, he placed reliance on certificate dated 28.11.2011from PWD stating that property is situated beyond 12.6 km from BBMP limits, It has been submitted that Ld.AO erred in treating the purchase and sale of said property as business venture, and that, difference in price must be treated as business income.

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 13 of 17 Ld.AR submitted that this is merely an assumption as according to Ld.AO, the said property was purchased and sold in a short period. As against, Ld.DR placed reliance on orders passed by authorities below. We have perused arguments advanced by both sides in light of records placed before us. In preceding paragraphs, we have already negated observation of Ld.AO that, said land was purchased and sold in a short span during financial year relevant to assessment year under consideration. We therefore reject this argument by Ld.DR that income earned from sale of said land is to be treated as business income. Coming to the nature of said land, Ld.AO before Ld.CIT(A), submitted that the Village that includes said land has been ascertained by BDA as residential zone. Whereas assessee submitted that he did not convert the said land for non agricultural purposes. However, we also note that assessee has not established by way of documents /evidences that it was agricultural land. We therefore cannot appreciate the argument advanced by Ld.AR. As we have held hereinabove that said land is a long term capital asset, capital gains must be computed by granting indexation benefit to assessee.

ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 14 of 17 Ld.AO is directed to recomputed LTCG in respect of sale of said land by asessee in accordance with law. Accordingly Grounds 5-10 stands allowed partly. Ground No.11 is consequential in nature and therefore do not require adjudication. Ground no.12-13 are general in nature. In the result appeal for assessment year 2004-05 stands allowed partly. Ground no.1-3 has been withdrawn by Ld.AR as has been dealt with in para 2 hereinabove. In lieu of the above, these grounds in present appeal stands dismissed as withdrawn. Ground no.4 This ground is in respect of addition of Rs.4,66,666/-. Ld.AR submitted that assessee had F.D with Karur Vysya Bank Ltd, amounting to Rs.1crore. On maturity, assessee received Rs.97,03,081/- after adjusting certain interest payment that were outstanding on the loan taken against the said F.D. Assessee submitted before authoritiws below that he is the Director and had availed loan of Rs.50 Lakhs from M/s. Karur Vysya Bank. The company paid entire amount of loan during the previous year and the loan account was closed. The bank adjusted accrued ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 15 of 17 interest on the loan raised for the company against F.D. Without prejudice it has been further argued that, assessee had not claimed any expenditure in his books of accounts towards payments of interest on FD and on the interest paid on loan alone can be added. The appellant produced loan statement of bank in support of its arguments. On the contrary, Ld.Sr,DR placed reliance on the orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. Admittedly, assessee deposited Rs.1 crore in bank in his name as F.D, on which assessee received interest of Rs.3,93,198/-. On security of this FD, company in which assessee is a Director, raised loan of Rs. 50 lakhs and repaid the loan. However, interest on loan amounting to Rs.3,68,252/- was claimed as expenditure by the assessee. In our opinion this interest is actually the liability of the company and there is no basis for claiming this expenditure, in the hands of the appellant. Therefore there is no basis for setting off of this liability of company against interest earned by assessee on funds belonging to him deposited in the bank. Hence, the actual interest which actually works out to 3,68,253/- ITANo.134-135/Bang/2012 A.Y.2004-05 & 2007-08 Page 16 of 17 We therefore do not find any infirmity in order of Ld,CIT(A). Accordingly, this ground raised by assessee stands dismissed. Ground no.6 is in respect of denial of carry forward of capital loss of Rs. 2,61,621/- Except arguing that it is not justified, Ld.AR has not filed any evidence whatsoever. Hence we up hold the order of Ld.CIT(A) Accordingly, this ground raised by assessee stands dismissed. In the result appeal filed by assessee stands partly allowed. Order pronounced in the open court on 30.01.2020.

SRI. B.T. DAYANANDA REDDY,BANGALORE vs. ACIT, BANGALORE