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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAM LAL NEGI
PER G.S. PANNU, VICE PRESIDENT
The captioned appeal filed by the Department is directed against the order passed by CIT(A)-37, Mumbai dated 04.01.2017, which in turn, arises out of an order dated 23.03.2015 passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) for Assessment Year 2012-13.
In this appeal, Revenue has raised the following Grounds of appeal :-
Shri Rajul V. Vora “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.13,30,00,000/- made u/s. 69 of the Act, 1961, in respect of the property purchased.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the assessee is the owner of the property as evidenced by the various recitals in the purchase agreement.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the purchase agreement does not make any mention regarding the assessee signing the agreement as partner of M/s. Dosti Enterprises.
On the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that the assessee, his nominees and his assignees have been vested with the right to enjoy and/or dispose-off the property in any manner whatsoever as deemed fit, thereby implying that the assessee was the owner of the property purchased.
5. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
Briefly put, the relevant facts are that the assessee-individual filed his return of income for Assessment Year 2012-13 on 31.10.2012 declaring a total income of `42,05,560/-. In the course of assessment proceedings u/s 143(3) of the Act, the Assessing Officer noted that as per the AIR information there was a transaction dated 11.04.2011, whereby the assessee had purchased immovable property worth `13,30,00,000/- and the assessee’s name appeared in this transaction as first party; and, whereas in the other purchase agreements, the name of M/s. Adrika Developers Pvt. Ltd. was appearing as first party and assessee’s name was reflected as “Right Holder”. Since this transaction was not recorded in the books of the assessee, assessee was asked to explain / clarify this transaction. In response, assessee submitted that he was a Director of M/s. Adrika Developers Pvt. Ltd.; and, during the year under Shri Rajul V. Vora consideration, the said company had purchased the stated property and the same was reflected as ‘land cost’ in the account books of the company. The assessee being the Director and authorized representative of the company, his PAN was quoted during the registration of property. As per the assessee, the transaction was concerning the company, and it was duly accounted for in the account books of the said company. However, Assessing Officer did not find the explanation of the assessee satisfactory, as according to the Assessing Officer, his query as to why the name of the assessee was reflected as the ‘first party’ remained unanswered. The Assessing Officer thus made an addition of `13,30,00,000/-, which was reflected in the AIR as unexplained investment u/s 69 of the Act.
4. Before the CIT(A), assessee submitted that the said plot of land belonged to M/s. Dosti Enterprises, a Partnership firm where assessee is a Partner and pointed out that the consideration was paid by the Partnership firm and said land is reflected in the books of account of the firm. Based on these facts, the CIT(A) deleted the addition made by the Assessing Officer. Aggrieved by the same, Revenue is in appeal before us.
Before us, the ld. DR argued that the as per the AIR information, assessee has purchased the immovable property worth `13,30,00,000/-. The relevant recitals of the purchase agreement also reveal that the assessee is the owner of the said property. The ld. DR also pointed out that the agreement does not mention that the assessee has signed the agreement on behalf of the Partnership firm. He, thus, argued that the order of the CIT(A) be set-aside and that of Assessing Officer be restored.
Shri Rajul V. Vora 6. On the other hand, the ld. Representative for the assessee submitted that the assessee is a Partner in the Partnership firm of M/s. Dosti Enterprises; and, the said firm is in the business of real estate development. The said firm entered into a Development Agreement for development of land at Mahasuli Village Balkum, Thane District vide agreement dated 13.03.2007. Subsequently, because of various issues involved in starting the work, it was decided to buy over the land. Accordingly, an Agreement of Sale dated 04.11.2011 was entered by the assessee, i.e. Shri Rajul Vrajlal Vora, as one of the Partners of the firm, a copy of which is placed at pages 17-68 of the Paper Book. Since the Development Agreement had already been executed by the Partnership firm, the firm in the Agreement to Sell was one of the Confirming parties and subsequently, Conveyance was executed on 28.11.2011 and registered on the said date. According to the ld. Representative, the Assessing Officer has acted on the basis of the AlR information showing assessee as first party vis-à-vis the said plot of land, but the assessee had duly explained the position vide letters dated 12.12.2014 and 24.02.2015 alongwith the relevant documents to demonstrate that M/s. Dosti Enterprises was indeed the owner of the said plot of land.
It was submitted that the payments were made by the Partnership firm, M/s. Dosti Enterprises, for purchase of land, stamp duty and registration charges and the said plot of land is duly accounted for in the account books of the firm, and it forms a part of inventory of the said firm. In support of the same, the ld. Representative has referred to the following documents, which are placed in the Paper Book - i) Bank statement ii) Audited accounts of M/s. Dosti Enterprises
Shri Rajul V. Vora iii) Details of land cost debited by M/s. Dosti Enterprises in its Land and Development Account iv) Confirmation by M/s. Dosti Enterprises regarding purchase of Land.
The ld. Representative for the assessee, then drew our attention to Section 14 of the Indian Partnership Act, 1932, which reads as under :-
"14. The property of the firm.- Subject to contract between the partners, the property of the firm includes all property and rights and interests in property, originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm."
(underlined for emphasis by us)
The next argument canvassed by the ld. Representative was that substance over form is relevant. It was submitted that regard must be had to the substance of the transaction rather than its form. In support of his contention, he relied on the following decisions: i) Sir Kikabhai Premchand vs. CIT, 24 ITR 506 (SC) ii) CIT vs. The 21st Society of Immaculate Conception, 241 ITR 193 (Mad.) iii) CIT vs. Virtual Soft Systems Ltd., 404 ITR 409 (SC)
Further the ld. Representative relied on the following case laws to support his argument that merely because the land stood in the name of Partner of the assessee, no addition can be made in the hands of the assessee when the same was held by him in a fiduciary capacity as Partner of the firm :- i) ITO vs. Shri Amit Vijay Kulkarni, 1597/PN/2013 ii) Muthoot Bankers vs. DCIT, (2007) 11 SOT 603 (Cochin-Trib) iii) Gandamal & Sons vs ACIT, (2006) 101 ITD 368 (Pune-Trib)
Lastly, it was argued that assessee has filed the Affidavit-cum- Declaration that the land does not belong to the assessee but belongs to M/s. Dosti Enterprises. It was thus argued that when an Affidavit is filed, the same is deemed to be correct unless proved otherwise. In support of this, he relied on the decision of the Hon'ble Supreme Court in the case of Mehta Parikh & Co. vs. CIT, (1956) 30 ITR 181 (SC). It was also argued that when the government authorities concerned with the development of land has considered the firm as the owner, the Department cannot take a different stand.
We have carefully considered the rival submissions and perused the material on record. We find that the limited issue before us is as to whether the property appearing in the AIR, wherein the assessee is a first party, belongs to the assessee or the Partnership firm in which the assessee is a Partner. The sole basis of the addition, as can be seen from the assessment order, is the information contained in the AIR that the assessee was the owner; whereas, it is the contention of the assessee that the property belonged to the firm in which assessee was a Partner; payment for the same was made by the partnership firm; the property was recorded in the account books of the partnership firm; and, the assessee was merely acting as an authorized representative of the partnership firm. On the other hand, the contention of the Department is that the said property belonged to the assessee as the assessee is the first party as per the AIR information in the transaction of purchase of property and the assessee has not explained the source of Shri Rajul V. Vora investment in the said property and, therefore, the addition made by the Assessing Officer u/s 69 of the Act is justified.
It is pertinent here to refer to the observations of the CIT(A) while allowing the appeal of the assessee, which are reproduced hereunder :-
“5. I have considered the facts, oral submissions and written submissions of the appellant as against the observations/ findings of the AO in assessment order. The submissions and contention of the appellant are being discussed and decided as under:-
5.1 In the instant case all the grounds of appeal pertain to addition of Rs.13,30,00,000/-. For the sake of convenience, all the grounds are disposed together.
5.2 During the scrutiny proceedings, the assessing officer has noticed that the appellant has made purchase immovable property valued at 13,30,00,000/-. The assessing officer has asked to the appellant to submit details and clarification on purchase of said property. The appellant has submitted detailed explanation before the assessing officer. The assessing officer has further asked that why the appellant name reflected as first party in the above said transaction. The explanation of the appellant was not accepted by the Assessing Officer and made a addition of Rs. 13,30,00,000 u/s 69 of IT Act as unexplained.
5.3 During the appellant proceeding, appellant has stated that the appellant is a partner in the partnership firm of M/s. Dosti Enterprises. The firm is in the business of real estate development. The said firm entered into a development agreement for development of land at Mahasuli Village Balkum, Thane District vide agreement dated 13thMarch 2007. Further, an agreement of sale was entered into vide agreement dated 4th November 2011 by the appellant i.e. Shri.Rajul Vrajlal Vora, one of the partners of the firm. The payments were made by the partnership firm of Dosti Enterprises for purchase of land, stamp duty and registration charges and duly accounted in the books of the firm. The AO made addition u/s 69 on the ground that the name of the appellant in the transaction for Shri Rajul V. Vora purchase of land reflected as first party. During the appellate proceedings, appellant has stated that the AO has made addition of Rs. 13,30,00,000/- u/s 69 of the Act without considering the submissions and documents filed in support of the appellant's submissions during the course of assessment proceedings. The land in question was purchased by the partner of the partnership firm viz., M/s Dosti Enterprises. The firm is also confirming party in the agreement and the total consideration, stamp duty and registration charges are paid by M/s Dosti Enterprises.
Section 69 of the Income Tax Act, 1961 with regard to unexplained investments reads as under:
"Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer is not satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”
As per the provision of Section 69 of I.T.Act, the value of investments made by the assessee in a financial year immediately preceding the assessment year may be deemed to be income of the assessee of such financial year, if-
(i)Such investments are not recorded in the books of account, if any, maintained by him for any source of income, and (ii) The assessee offers no explanation about the nature and source of the Investments, or the explanation offered by him is, in the opinion of the Assessing Officer not satisfactory.
5.6 Section 69 shows that when investments outside the books of account are found, the assessee is entitled to offer an explanation about the nature and source of the investment. It is evident that the s. 69 has three important limbs VIZ., (i) the assessee has made in the financial year certain investments, (ii) such investments are not recorded in the books of Shri Rajul V. Vora accounts, if any, maintained by him and (iii) the assessee offers no explanation or that his explanation is not satisfactory. If all the three limbs/conditions are satisfied, the section provided that the value of such investments may deemed to be the income of the assessee of that financial year.
5.7 In the case of the appellant, the appellant has not made any investment of his own in the property as shown in the AIR statement and therefore recording of the same in his books of accounts does not arise. The said investments belonging to the partnership firm where the appellant is partner. These investments are recorded in the books of the partnership firm and source of investment by the firm has been explained to the AO during the course of assessment by providing the documents in support of the same i.e. Copy of purchase agreement dated 11thApril 2011, confirmation of M/s Dosti Enterprises in respect of land purchased by the partnership firm, details of payment made by M/s Dosti Enterprises towards purchase consideration, stamp duty, and registration charges, copy of acknowledgement of Return of income and audited accounts of M/s Dosti Enterprises.
Attention is also invited to section 14 of the Indian Partnership Act, 1932 which reads as under.
"14. The property of the firm. - Subject to contract between the partners, the properly of the firm includes all property and rights and interests in property, originally brought into the stock of the firm, or acquired, by purchase or otherwise by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.”
5.9 The consideration of the property in question has been paid by the partnership firm of M/s. Dosti Enterprises and has been accounted in the books of accounts of M/s. Dosti Enterprises. However, the conveyance was registered in the name of partner. The firm is assessed as a separate entity
Shri Rajul V. Vora as per provisions of Income Tax Act. However, as per the Indian Partnership Act, firm is not a legal entity and it is not distinct from its partners. Under section 18 of the Indian Partnership Act, 1932, a partner is an agent of the firm for the purpose of business of the firm. Therefore any property purchased by the partner which is funded by the firm for the purpose of its business belongs to the firm. There are decisions where it was held that although the asset purchased by the firm/company is in the name of partner/director and used by the firm / company for its business and the same has been shown as asset in the accounts of the said entities, depreciation 32(1) of the Act has to be allowed. The Hyderabad Tribunal in the case of Pradeep Kumar Agarwal vs ACIT (50 taxmann.com 85) held that the assessee was residing in the property belonging to his mother. Investment in the construction of the said house was reflected in the return of his mother. The AO further noticed that during the course of search certain bills / delivery challans standing in the name of assessee were found which indicated that the assessee had invested in the construction of the said house. The AO thus made addition of unexplained investment. The Hyderabad Tribunal held that merely because bills for materials etc. were in the name of the assessee would not clinch against the assessee. If at all any addition on account of unexplained investment was warranted, it would lie in the assessment of the assessee's mother who was the actual owner of the land and the constructed property and not in the hands of the assessee.
5.10 Further, the Hon'ble Cochin Bench of the Tribunal in the case of Muthoot Bankers vs DC (11 SOT 603 ) wherein the issue was with regard to claim of depreciation on building standing and registered in the names of 2 partners. The Tribunal held that although under the Act though the assessee was assessed as a separate entity, yet under the Indian Income- tax Act, it was not a legal entity and it was not distinct from its partners. Moreover the funds required for purchasing the said building were made by the assessee firm. Therefore merely because the building was standing in the names of 2 partners, the claim of the assessee in respect of depreciation could not be rejected as the building was also used by the assessee for its business purposes. The relevant part of the decision are as under:-
Shri Rajul V. Vora The assessee was a partnership firm. Though under the Act the assessee was assessed as a separate entity, yet under the Indian Partnership Act it was not a legal entity and it was not distinct from its partners. Moreover, the funds required for purchasing the said building was made by the assessee-firm. Therefore, merely because the building was standing in the name of the two partners, the claim of the assessee in respect of depreciations could not be rejected, as the building was also used by the assessee for its business purposes. Therefore, the assessee was entitled for depreciations on the said building.
5.11 Further, identical issues discussed in the case of Gandamla & Sons vs ACIT(101 ITD 368) Pune Bench of the Tribunal while dealing with the issue of provisions of section 45(4) in respect of distribution of assets on dissolution of the firm. It is held that it had been pointed out that the land was purchased with the funds of the firm. It was shown in the balance sheet of the assessee from year to year till it was distributed in connection with the dissolution of the firm. Section 14 of the Indian Partnership Act clearly provides that any property obtained by means of partnership from time to time during its continuation, whether by way of purchase or by employment in the business, is the partnership property unless contrary is established. The relevant part of the decision are as under: ………………………. 5.12 Recently, the Hon'ble Pune Tribunal has decided identical issues in the case of ITO vs. Shri Amit Vijay Kulkarni ITA No. 1597/PN/2013. It is held that where the assessee was an employee of M/s. Lavasa Corporation Ltd., Pune and received salary from the said company. The AO received information through AIR that the assessee has made investment In agricultural land amounting to Rs.4,23,63,269/- based on which the case of the assessee was selected for scrutiny. The case of the assessee was that the sale deed was for purchase of land by M/s. Lavasa Corporation Ltd. in the name of the assessee and he was holding the same for the benefit of M/s. Lavasa Corporation only. It was also pointed out by the assessee that M/s. Lavasa Corporation Ltd. was the confirming party to the sale deed and the total sale consideration, stamp duty and registration charges were paid by M/s.Lavasa Corporation Ltd. Also confirmation in this regard was filed by M/s. Lavasa Corporation Ltd. The AO did make any addition in respect of purchase of land. However he estimated and added
Shri Rajul V. Vora 5 % of cost of land as commission income of the assessee. The Tribunal dismissed the departmental appeal. The relevant part of decision are as under;
"We have heard the rival contentions and perused the record. In the facts of the present case, admittedly, the assessee was a party to a transaction of purchase of land at Temghar, Mulsht. The total sale consideration of the said property along with stamp duly and registration charges amounting to Rs. 4.23 crores were paid by Lavasa Corporation Ltd, who was the confirming party to the said sale deed. The contention of the assessee before the Assessing Officer was that the said land purchased was an agricultural land and could not be transferred in the name of the company Lavasa and hence, was purchased in the name of assessee. The said contention of the assessee has been accepted by the Assessing Officer. However, the Assessing Officer was of the view that for the said transaction, commission should have been earned by the assessee and 5% of the total value of the transaction was included as commission in the hands of the assessee, resulting the addition of Rs. 21,18,163/ The addition was made by the Assessing Officer on the premises that in real transaction, commission is generally charged @2% each from both the purchaser and the seller and commission of 4% of the transaction value is received for only introducing the person, whereas in the case of assessee, the risk involved is much higher and hence, commission was estimated @5% of the transaction value. No evidence in this regard was available with the assessing Officer to presume that the commission has been paid to the assessee by Lavasa. IN the absence of any concrete evidence, there is no warrant for estimating the income in the hands of the assessee. Accordingly, we are in conformity with the order of CIT(A) in deleting the addition of Rs.21,18,163/- The grounds of appeal raised by the revenue are thus dismissed.
5.13 It is clear from the assessment order that the AO had made addition relied on the AIR information without verifying the evidences filed by the appellant during the course of assessment proceedings. The appellant denies that he has invested in the property as shown in the AIR statement. The Hon'ble Mumbai Tribunal in the case of M/s ANS Law Associates vs. ACIT in Appeal No.5181/M/2012 dated 5.12.2014 wherein the Hon'ble
Shri Rajul V. Vora Tribunal held that additions made solely on the basis of AIR information are not sustainable in the eyes of Law if the assessee denies that he is in receipt of income from a particular source. It is for the AO to prove that the assessee has received the income. Further jurisdictional Mumbai Tribunal in the case of M/s Kroner Investments Ltd. vs. DCIT (ITA No.5125/M/2013 dt. 10.4.2015) where in the Tribunal held that additions made solely on the basis of AIR information are not sustainable in the eyes of law if the revenue has not made any enquiries to find out whether the AIR information was correct or not. Further, the Hon'ble ITAT Bangalore bench in the case of DCIT vs. Shree G.Sekva Kumar in and In the case of Aarti Raman vs. DCIT in ITA No.245/Bang/1 2 wherein it has been held that the assessment order based only on the AIR information would not stand in the eyes of law. Information of investment is good reason for making investigation but A.O. did not carry out any work while independent inquiry and merely completed the assessment on AIR Report.
5.14 In the case of Raj Pal Singh Ram Autar vs. ITO (39 TTJ 544) Delhi Tribunal held that before invoking the provisions of Section 69, it will be necessary to ensure the fulfillment of all the conditions precedent as to the existence of such unexplained investment. The provisions can be invoked only if it is factually found that the assessee had made Investment in the business and the assessee and none else was the owner of such unexplained investment. The Tribunal further held that, it will have to be further established that the amount has not been recorded or is in excess of amount recorded in the books of accounts and the assessee offers no explanation about such amount or the explanation offered by him is not satisfactory. The Hon'ble Mumbai Tribunal in the case of Biren V. Savla vs. ACIT (155 Taxman 270)(Mag.) wherein the Tribunal held that for making addition u/s.69, there ought to be some material to show that the ownership of the investment is of the assessee. The onus is on the department to prove it before actually deeming the income relevant to the investment as that of the assessee. The Hon'ble Jodhpur Tribunal in the case of ITO vs. Permanand (107 TTJ 395) wherein the Tribunal held that no addition can be made in the hands of the assessee on the basis of observations made by a third party.
Shri Rajul V. Vora 5.15 After considering the totality of facts, the rival submissions, the applicable law and on the basis of discussions mentioned above, I find merit in the argument of the appellant and draw strength from the decision given by the Hon'ble ITAT, Pune in the case of I.T.O. vs. Amit Vijay Kulkarni Gandamla & Sons vsACIT (101 ITD 368) and decision of ITAT Cochin in the case of Muthoot Bankers vs DC (11 SOT 603). However, as per provision of Section 14 of the Indian Partnership Act clearly provides that any property obtained by means of partnership, whether by way of purchase or by employment in the business, is the partnership property unless contrary is established. In the case of the appellant although the appellant is a first party to the agreement, the land is purchased by the partnership firm for the purpose of development of property and payments were also made by the partnership firm. All the necessary documents have been filed before the AO and established that partnership firm of M/s Dosti Enterprises is the owner of the property. In the assessment order, the A.O. did not at all discuss the merit of submission made by the appellant and casually brushed aside the details filed by the appellant. Further, the appellant has stated that he had furnished all the relevant details during the course of the assessment proceedings and accordingly had duly discharged its onus by furnishing the identity and address of the parties.
5.16 Further, Mumbai Tribunal in the case of M/s.ANS Law Associates vs. ACIT and M/s.Kroner Investment Ltd. Vs. DCIT wherein Hon'ble Tribunal held that additions made solely on the basis of AIR information are not sustainable in the eye of law, if the assesse denies that he is in receipt of income. The provisions of Section 69 of I.T.Act, can be invoked only if it is factually found that the appellant had made investment in the property and the appellant was the owner of such unexplained investment. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year, In this, case the legislative mandate is not in terms of the words "shall" be charged to Income-tax as the income of the assessee of that previous year. The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word "may" and not "shall". Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as Shri Rajul V. Vora the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K.Noorjahan [1999] 237 ITR 570.
5.17 Based on the facts as well judicial decision, I have came to the conclusion that nature of transaction stands explained. Therefore addition of Rs.13,30,00,000/- made by the A.O. cannot be sustainable. The A.O. is directed to delete the addition.”
We find that the CIT(A) has extensively dealt with the issue in his order while allowing the appeal of the assessee, which we have reproduced above. The CIT(A) has rightly observed that the transaction was in fact recorded in the books of account of the partnership firm and as per Section 14 of Partnership Act, when an asset is purchased utilizing the funds of the firm, then unless contrary is proved, it is always to be treated as asset of the firm. Since in the present case admittedly the payment was made by the firm and was also recorded in the books of account of the firm, the same cannot be treated as belonging to the assessee. The matter may also be seen from another angle. A firm is represented by its partners; and, a transaction carried out by the partner for and on behalf of the firm in a representative capacity cannot be treated as entered into by the assessee in his personal capacity. Also, in the present case, assessee denies having made any investment in the instant property and with supporting documents, assessee has proved that the property belongs to the firm, in which he is a Partner. The ld. DR has not controverted the fact that the firm has made the payment for the property and the property was always recorded in the account books of the firm. Furthermore, there is no material to say that the property is in the use of the assessee or is in the possession of the assessee. In any case, there is no denying the fact regarding the source of investment in the property, which has come from the partnership firm, and, thus considering the aforesaid factors, no Shri Rajul V. Vora addition is warranted u/s 69 of the Act in the hands of the assessee. It is also noteworthy that the sole basis of addition is the information contained in AIR. It is a trite law that addition solely on the basis of information contained in AIR, disregarding the contention of the assessee that the same did not belong to him, is not justifiable unless the AIR information is also supported by independent evidence to prove that the investment/ income, in fact, belonged to the assessee. In view of the aforesaid discussion, we hereby affirm the decision of CIT(A) and Revenue fails in its appeal.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 26th July, 2019.