RAJESHRI ASSOCIATES,MUMBAI vs. DCIT 24(2), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals)-41, Mumbai, dated 19.11.2015, which in itself arises from the order passed by the A.O under Sec. 271(1)(c) of the Income-tax act, 1961 (for short ‘Act’), dated 02.03.2012. The assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:-

The A.O however not persuaded to subscribe to the aforesaid explanation of the assessee observed that as the assessee had clearly shown the aforesaid immovable properties as an ‘Investment’ in its balance sheet, therefore, the claim of the assessee that the said respective properties were being exploited for its business purposes could not be accepted. The A.O in the backdrop of his aforesaid observations worked out the ‘Annual Lettable Value’ (for short ‘ALV’) of the property under Sec. 22 r.w.s 23 of the Act at Rs. 6,34,831/- and after allowing statutory deduction of 30% under Sec. 24 made an addition of Rs. 4,44,382/- under the head ‘Income from house property’ in the hands of the assessee.

The A.O further observed that though a perusal of the AIR information revealed that the assessee had received an amount of Rs. 6,50,000/- from M/s Siddhivinayak Construction company, as under: Date Amount 04.10.2005 Rs. 6,50,000/- 31.10.2005 Rs. 4,00,000/- Total Rs. 6,50,000/- ,but however, the assessee had accounted for receipt of only Rs. 2,50,000/- in the contract receipts for the year under consideration in context of the said client. The assessee reconciling the variance submitted before the A.O that though it had received an amount of Rs.

The A.O after deliberating on the explanation of the assessee was however not persuaded to accept the same. The A.O observed that as the assessee was maintaining its accounts on mercantile system of accountancy, therefore, it remained under an obligation to have recognized the income at the time when the bill of Rs. 4 lac was raised on the client and the non-recovery of the amount could only have been routed through the books of account by subsequently raising a claim of bad debt. Thus, the A.O on the basis of his aforesaid observations made an addition of Rs. 4 lac in the hands of the assessee.

Aggrieved, the assessee carried the order of the A.O in appeal before the CIT(A). The CIT(A) after deliberating on the facts of the case did not find favour with the contentions of the assessee and vide his order dated 21.10.2010 dismissed the appeal. The assessee did not assail the order of the CIT(A) before the Tribunal, which thus attained finality.

The A.O called upon the assessee to show cause as to why penalty under Sec. 271(1)(c) may not be imposed in respect of the aforesaid additions made in its hands, viz. (i). addition under the head income from house property: Rs. 4,44,382/-; and (ii). addition towards suppressed contract receipts : Rs. 4,00,000/-. The explanation offered by the assessee did not find favour with the A.O, who after deliberating on the facts concluded that as the assessee had failed to substantiate the bonafides of its explanation, therefore, penalty under Sec. 271(1)(c) – Explanation 1(B) was clearly attracted. The A.O on the A.Y. 2006-07 5 M/s Rajeshri Associates vs. DCIT basis of his aforesaid conviction imposed a penalty of Rs. 2,84,218/- in the hands of the assessee.

Aggrieved, the assessee assailed the penalty imposed by the A.O under Sec. 271(1)(c) before the CIT(A). The CIT(A) not being persuaded to subscribe to the contentions of the assessee upheld the penalty imposed by the A.O and dismissed the appeal.

The assessee being aggrieved with the order of the CIT(A) sustaining the penalty imposed by the A.O under Sec. 271(1)(c) had carried the matter in appeal before us. The ld. authorised representative (for short ‘A.R’) for the assessee took us through the facts of the case. The ld. A.R submitted that the order of the CIT(A) dismissing the quantum appeal of the assessee was not further carried in appeal before the Tribunal. The ld. A.R adverting to the addition of Rs.4 lac made by the A.O towards suppressed contract receipts, took us through the copy of the ledger account of its client, viz. M/s Siddhivinayak Construction as appearing in the books of account of the assessee for the year under consideration (Page 77) of the assesses paper book (for short ‘APB’). The ld. A.R submitted that the assessee who had undertaken certain construction work for M/s Sidhivinayak Construction had though raised an invoice of Rs. 6,50,000/- for the same, but however, before recording of the same in the books of account the said client disputed the payment of the amount. It was submitted by the assessee that it was thereafter agreed that M/s Sidhivinayak Construction would in discharge of its liability pay only an amount of Rs. 2,50,000/-. The ld. A.R submitted that as M/s Sidhivinayak Construction had agreed for a payment of Rs. 2,50,000/- only, therefore, the assessee recorded only an amount of Rs. 2,50,000/- towards the contract receipts in respect of the said client, and also raised the claim for the credit of TDS corresponding to the A.Y. 2006-07 6 M/s Rajeshri Associates vs. DCIT said amount only. The ld. A.R submitted that the client M/s Sidhivinayak Construction had though accounted an amount of Rs. 6,50,000/- as payable to the assessee during the year under consideration, but however, had thereafter written back an amount of Rs. 4 lac in the Financial year 2007-08. The ld. A.R averred that now when only an amount of Rs. 2,50,000/- was received from the aforesaid client, viz. M/s Sidhivinayak Construction, therefore, no suppression of the contract receipts could be inferred. The ld. A.R in order to drive home her contention that in the absence of receipt of the amount of Rs. 4 lac from the aforesaid client, viz. M/s Sidhivinayak Construction, the same could not have been assessed as the income of the assessee relied on the judgment of the Hon’ble High Court of Kerala in the case of Karn Vir Mehta Vs. Collector of Customs, Cochin (1998) 97 E.L.T 42 (Ker).

That as regards the addition of Rs.4,44,382/- made by the A.O under the head ‘Income from house property’, it was submitted by the ld. A.R that as the Shop nos. 3,4,5,6 and 7 were not in possession of the assessee due to dispute between the builder and the society, therefore, no income was offered for the same under the head ‘house property’. That as regards the Flat Nos. 502 and 203 at Kent Estate, it was submitted by the assessee that as both of the properties were being exploited by the assessee for its business purposes, therefore, the issue of determining the annual lettable value under Sec. 22 of the Act did not arise at all. The ld. A.R in support of her contention that as the assessee had not been put into possession of the shops no. 3,4,5,6 and 7 after purchasing the same, therefore, in the absence of exercise of powers by the assessee as an owner of the property under consideration, the ALV of the same could not have been brought to tax in his hands relied on the judgment of the Hon’ble High Court of Gujarat in the case of Commissioner of Income-tax vs. Gaekwad A.Y. 2006-07 7 M/s Rajeshri Associates vs. DCIT & Co. (2005) 277 ITR 553 (Gujarat). The ld. A.R in order to put to rest any doubt as regards her claim that the possession of the aforesaid shops were in dispute, therein took us through Page 35 of the ‘APB’, which is a letter dated 01.09.2006 addressed by the society, viz. God’s Gift Cooperative Housing Society to the assessee, wherein the society had refused to enrol the assessee as a member of the society with respect to the Shop nos. 3 to 7. Alternatively, it was submitted by the ld. A.R that even otherwise as the addition in respect of the ALV of the property was made by the A.O on an adhoc basis, the same was thus not maintainable. That in the backdrop of the aforesaid facts it was vehemently submitted by the ld. A.R that no penalty under Sec. 271(1)(c) of the Act was called for in the hands of the assessee. Per contra, the ld. Departmental representative (for short ‘D.R’) relied on the orders of the lower authorities.

We have heard the ld. authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal is sought for adjudicating the validity of the penalty imposed by the A.O under Sec. 271(1)(c) in respect of additions made in the hands of the assessee on two grounds, viz. (i). addition under the head income from house property: Rs. 4,44,382/-; and (ii). addition towards suppressed contract receipts : Rs. 4,00,000/-.

We shall first advert to the penalty imposed under Sec. 271(1)(c) in respect of the addition made by the A.O towards income from house property of Rs. 4,44,382/-. We find that the assessee had duly disclosed the fact of having purchased the properties under consideration, viz. (i). Shop Nos. 3,4,5, 6 & 7 in God’s Gift Cooperative Housing Society; and (ii). Flat Nos. 502 and 203 at Kent Estate, in its balance sheet that was enclosed alongwith the return of income for the A.Y. 2006-07 8 M/s Rajeshri Associates vs. DCIT year under consideration. The A.O while framing the assessment, being of the view that the properties were held by the assessee as investment, had thus made an addition of their respective ALV in the hands of the assessee. We find that the assessee had assailed the determining of the ALV of the Shop Nos. 3,4,5, 6 & 7 in God’s Gift Cooperative Housing Society, for the reason that now when it was not put into exclusive possession of the said respective shops, therefore, the ALV of the same could not be brought to tax in its hands. We have perused the letter dated 01.09.2006 addressed by the society, viz. God’s Gift Cooperative Housing Society to the assessee, wherein the society had declined to enrol the assessee as a member of the society in respect of the Shop nos. 3 to 7. We are of the considered view that the fact that the assessee was not put into exclusive possession of the aforesaid shops can safely be gathered from the aforesaid correspondence of the society with the assessee. We find that the Hon’ble High Court of Gujarat in the case of Commissioner of Income-tax vs. Gaekwad & Co. (2005) 277 ITR 553 (Gujarat) had held that if an assessee is not in a position to exercise his right as owner of the property purchased by him then the income from the property cannot be brought to tax in his hands. We are of the considered view that now when the assessee was not enjoying the exclusive rights of an owner in respect of the shops in the society, therefore, in the backdrop of the fact that now the assessing of the ALV of the property in itself was not free from doubts, therefore, no penalty under Sec. 271(1)(c) as regards the addition made on the said count in the hands of the assessee would be justified. We may however clarify that our observations recorded hereinabove are only in context of the validity of the penalty imposed under Sec. 271(1)(c) in the hands of the assessee and would in no way prejudice the quantum A.Y. 2006-07 9 M/s Rajeshri Associates vs. DCIT addition made in the hands of the assessee, which as conceded by the ld A.R had attained finality.

We shall now advert to the penalty under Sec. 271(1)(c) imposed in respect of the ALV of the Flat Nos. 502 and 203 at Kent Estate, which had been assessed in the hands of the assessee. We find that the ld. A.R had claimed that the aforesaid respective flats were being used for the business purposes by the assessee, viz. Flat No. 203 was being used as additional office premises, while for Flat no. 502 was being used as storage space for books, stationery etc. We are of the considered view that as the assessee had failed to substantiate its aforesaid contention of using the flats for its business purposes, therefore, the ALV of the same had been brought to tax under the head house property. We are of the considered view that though the aforesaid claim of the assessee had remained unproved, but not disproved, therefore, the same though may justify an addition in its hands in the course of the assessment proceedings, but however, no penalty under Sec. 271(1)(c) on the basis of the said unproved claim of the assessee can be imposed. We find that our aforesaid observations are fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Upendra V. Mithani (ITA (L) No. 1860 of 2009), dated 05.08.2009 wherein the Hon’ble High Court had observed as under:- “The issue involved in the appeal revolves around deletion of penalty under Section 271(1)(c) of the I.T. Act. The Tribunal has concurred with the view taken by the Commissioner of Income Tax (A). The Commissioner of Income Tax (A) has rightly taken a view that no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If A.Y. 2006-07 10 M/s Rajeshri Associates vs. DCIT the assessee gives an explanation which is unproved but not disproved, i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false. The view taken by the Tribunal is a reasonable and possible view. The appeal is without any substance. The same is dismissed in limine with no order as to costs.” We thus being of the considered view that the claim of the assessee that it was using the Flats No. 203 and 502 for its business purposes had not been disproved, therefore, no penalty under Sec. 271(1)(c) on the said count could have been validly imposed in its hands on the said count. We thus in the backdrop of our aforesaid observations delete the penalty imposed by the A.O and sustained by the CIT(A) as regards the addition of Rs. 4,44,382/- made in the hands of the assessee. The Ground of appeal No. 3 is allowed.