G. PRASAD REDDY,BANGALORE vs. ASST.C.I.T., BANGALORE

PER S. JAYARAMAN, ACCOUNTANT MEMBER : This is an appeal filed by the assessee against the order of the CIT

(A)-II, Bengaluru, dt.24.10.2014, for the assessment year 2005-06.

and marketing residential layouts and being a partner in about 8

real estate firms, is also running a bar- cum- restaurant. He had filed his

return on 31.10.2005, declaring a total income at Rs.2,66,85,820/-.

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There was a search and seizure action u/s 132 in his case. In

response to the notice u/s 153A , he had filed a return on 17.4.2006 in

which he declared the income at Rs.3,00,19,510/-. In the

assessment made u/s 143(3) read with section 153A dated 2/1/2007,

his total income had been determined at Rs.3,37,74,510/. In that

assessment, the AO had , inter alia, allowed the deduction

claimed at R s . 9 7 , 0 0 , 0 0 0 / - c o s t o f l a n d i n v e s t e d i n f y

2 0 0 3 - 0 4 a l r e a d y d e c l a r e d , n o w c o n v e r t e d i n t o s t o c k

i n t r a d e a n d R s . 2 2 , 0 0 , 0 0 8 / - c o s t o f i m p r o v e m e n t

N a g a w a r a a l r e a d y d e c l a r e d a b o v e , n o w c o n v e r t e d i n t o

s t o c k i n t r a d e , a g g r e g a t i n g a t Rs.1,19,00,000/-. Be s ide s ,

th e A O fo u n d t h at h as bro u g h t to ta x Rs.37,55,000/- as

additional income being the difference between the amounts of

Rs.1,92,55,000/- and Rs.1,53,00,000/disclosed as additional income for

the assessment years 2004-05 and 2005-06.

(Central), Bangalore [the CIT(C)], reviewed the above assessment

order u/s 263 and held the deduction claimed and allowed by the

AO at Rs.97,00,000/and Rs.22,00,000/- was "clearly not in

accordance with the law and it was prejudicial to the interests of

revenue” and hence the CIT ( C ) set aside the impugned assessment

order and directed the AO to re-examine the allowability of the

expenses of Rs.97,00,000/- and Rs.22,00,080/- by an order dt

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31/3/2008. The assessee filed an appeal against the C’s IT (C) order

and the Hon'ble ITAT, Bangalore 'B' Bench in its order in ITA.No.702/

Bang/2008 dated 23/12/2008 disposed that appeal. The relevant

portion of the order is reproduced below:

"3. The contention on behalf of the assessee before us is that the CIT ought not to have recorded a finding that the assessee's claim was not in accordance with law even while he set aside the assessment order to the Assessing Officer for being made de novo vis-a-vis the claim of the assessee for deduction of Rs.97 lakhs and Rs.22 lakhs. We find force in the contention. The CIT rightly assumed jurisdiction u/s 263 on the footing that the claim for deduction of Rs.97 lakhs and Rs.22 lakhs while computing the profits of the business had not been enquired into by the Assessing Officer. The assumption of jurisdiction was in conformity with the judgement of the Hon'ble Karnataka High Court in Thalibai P.Jain (1975) 101 hR 1. The purport and tenor ofthe order of the CIT are also that the claim has to be enquired into by the Assessing Officer. So far so good. However, it was not proper for the CIT to have also recorded a finding that the assessee's claim was 'clearly not in accordance with the law' when at the same time he was directing the Assessing Officer had failed to carry out while completing the assessment in the first instance. While therefore upholding the assumption of jurisdiction u/s 263 by the CIT, we modify his order by saying that the assessment order is set aside with the direction to the Assessing Officer to pass the same afresh afte4r enquiring into the claim of the assessee for deduction of Rs.97 lakhs as cost of the land invested and Rs.22 lakhs as cost of improvements incurred in the financial year 2003-04. The Assessing Officer shall take a fresh decision on the allowability of the claim in accordance with law and after giving adequate opportunity of being heard to the assessee. Both the sides are free to raise all factual and legal contentions that are available to them on this issue. The Assessing Officer is not bound by the finding recorded by the CIT that the assessee's claim was not in accordance with law. He shall take his own decision on the basis of the materials available to him both factual and legal without being influenced by the observations or findings recorded by the CIT in his order u/s 263. The directions of the CIT are modified as above .......”

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passed a re-assessment order u/ss 143(3) r w ss 153A and 254 dated

31/12/2009. Aggrieved, the assessee filed an appeal before the

CIT(A) who sustained the disallowances of Rs.1,19,00,000 &

Rs.50,000/- made u/s 40A(3), respectively. On that order, the

assessee filed this appeal with following grounds :

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income from other sources and that too under Section 69C of the Act. There being no income under Section 69C of the Act, the question of application of the proviso to Section 69C has no relevance and the assessee has purchased the land and made improvements in the land at Nagavara and later they were sold and the profit there from has been determined for the purpose of taxation. Obviously, the cost of land and the Cost of improvement are required to be deducted out of sale proceeds of the land in order to arrive at the correct profit for the purpose of taxation. The entire computation was under Sections 28 to 43 of the Act and thus there is no application of Section 69C or the proviso therein to the case of the Appellant. Per contra, the DR relied on the CIT (A) order.

“3.2 In this regard, the appellant's submissions are as follows: "It was explained that Rs.97,00,000/- was the cost of improvement on the land (Invested in the previous year) that was converted into stock-in-trade and Rs.22,00,000/represented cost of improvement of land in Nagawara that was already declared which was converted into stock-intrade, during the year and utilised for formation of a r e s i d e n t i a l l a y o u t c l a i m i n g a n e x p e n d i t u r e o f Rs.1,19,00,000/- and therefore the same constituted an allowable expenditure of the year. It was also explained that Section 69C of the Act was not applicable in the case on hand.

"Further, we wish to submit that the provisions of Section 69C have no application to the income declared by the assessee. The assessee is in the business of real estate and the transactions were all in relation to his business. Consequently, the income is determined under the head income from business and there is no income assessable under the head income from other sources and that too under Section 69C of the Act. There being no income under Section 69C of the Act, the question of application of the proviso to Section 69C has no relevance and the assessee has purchased the land and made improvements in the land at

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Nagavara and later they were sold and the profit there from has been determined for the purpose of taxation. Obviously, the cost of land and the Cost of improvement are required to be deducted out of sale proceeds of the land in order to arrive at the correct profit for the purpose of taxation. The entire computation was under S e c t i o n s 2 8 t o 4 3 o f t h e A c t a n d t h u s t h e r e i s n o application of Section 69C or the proviso therein to the case of the Appellant. Further, even with regard to the investment in land, the seized documents would show that the assessee had adequate resources for investment, the details of which have already been furnished and the same has been discussed in the assessment order in Para 8. A c o p y o f t h e a s s e s s m e n t o r d e r i s e n c l o s e d t o t h i s submission. Thus, the assessing authority had fully satisfied with the sources available with the assessee and thus there was no scope to make any addition under Section 69C of the Act. It may kindly be appreciated that the cash transactions both of purchases and sales were not recorded in the books of accounts. Thus, the transactions were o u t s i d e th e b o o k s o f a c c o u n t s a n d t h a t i s h o w t h e undisclosed income was offered by the assessee under Section 153A of the Act, when the entire transactions were outside the books of accounts and the sources for the transactions were fully explained, the provisions of Section 69C were not applicable. In fact, the assessee has explained the sources fully to the satisfaction of the a s s e s s i n g a u t h o r i t y . T h e f a c t t h a t t h e s o u r c e s o f investments were not recorded in the books of accounts were of no consequence and once the sources have been fully explained for the expenses incurred, the provisions of Section 69c of the Act were not applicable and no impugned disallowance of deduction can be made under Section 69C of the Act.

It is further submitted that the assessing officer erred in making addition of Rs.23,89,000/- under Section 40A(3) of the Act without appreciating that Section 40A(3) has no appl i cati on to th e Appel l an t's cas e s i n ce th e ca sh transactions of both purchases and sales were outside the books of account. It may please be further appreciated that the expenses are related to the financial year 2003=04 and if any disallowance has to be made, the same is required to be made only in the assessment year 2004-05 and not the relevant assessment year since it forms part of the opening stock and no disallowance has been made in the previous assessment year."

3 . 3 I h a v e c a r e f u l l y c o n s i d e r e d t h e a p p e l l a n t ' s submissions and perused the original assessment order as well as the reassessment order under appeal. I find that the appellant has not been able to demonstrate with evidence t h a t t h e a m o u n t o f R s . 1 , 1 9 , 0 0 , 0 0 0 / - c o n s i s t i n g o f Rs.97,00,000/- and Rs.22,00,000/- claimed as expenditure incurred in connection with the improvements made to two immovable properties mentioned above had actually been incurred. This is because

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the disclosure made is on a different note and the nature of expenditure shown in that respect is different. The AO's action in following the directions of the CIT (Central) in this regard is in order and the disallowance of the amount of Rs.1,19,00,000/- is confirmed.

3.4 The appellant has raised an additional ground during appeal pro c eedi n gs, c on t en di n g th at th e addi ti on of Rs.37,50,000/- is unwarranted as the amount forms part of the disclosures made for the assessment year 2004-05. The appellant had made a declaration of additional income of Rs.1,53,00,000/- for the assessment year 2004-05 and a sum of Rs.1,92,55,000/- for the assessment year 2005-06. The AO deducted the first amount from the second amount i.e. Rs.1,53,00,080/- from Rs.1,92,55,000/- and brought the difference of Rs.37,55,000/- to tax. However, the appellant has produced evidence during the appeal proceedings in s u p p o r t o f h i s c o n t e n t i o n t h a t t h e a m o u n t o f Rs.1,53,00,000/- declared for the assessment year 2004-05 included the sum of Rs.37,55,000/-. In other words, the amount of Rs.37,55,000/- is telescoped into the unexplained amount of Rs.1,53,00,000/- as forming part of the amount disclosed in the previous year. In view of this, I hold that the addition of Rs.37,55,000/- is unwarranted and delete the same.

4.2 I have carefully considered the appellant's su b m i s s i o n s . T h e a p p e l l a n t ' s c o n t e n t i o n t h a t t h e disallowance has been made without any opportunity being given to him appears to have merit as nowhere in the assessment order there is any discussion as to how the amount of Rs.28,80,000/- has been arrived. However, according to the appellant, disallowance to the extent of Rs. 23,89,000/- is unjustified. The disallowance of Rs.2880,000/- at 20% u/s 43A is directed against the aggregate of the three amounts mentioned at para 4.1, which works to Rs.1,44,00,000/-. it is, however, seen that the v e r y a m o u n t s o f R s . 9 7 , 0 0 , 0 0 0 / - a n d R s . 2 2 , 0 0 , 0 0 0 / [aggregating Rs.1,19,08000/-] had been brought to tax. Therefore, further disallowance at 20% of Rs.1,19,00,000/ is unwarranted. The disallowance at 20% of Rs.1,19,00,080/works out to only to Rs.23,80,000/- and not Rs.23,89,000/as made out by the appellant. Therefore, disallowance to the extent of Rs.23,80,000/- is deleted

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and the remaining disallowance of Rs.50,000/- being disallowance u/s 40A (3) at 20% of Rs.25,00,000/- (figuring among the disallowances in the computation) is sustained.”

3 7 . T h e a b o v e w a s e x a m i n e d v i s - à- v i s t h e s e a r c h m a t er i a l . T h e a b o v e investigation made during the course of search before the DDIT Unit-1(2), Bangalore was examined. The DDIT, Unit-II ascertained undisclosed income of Rs. 7,17,68,525 because of Cash payment for purchase of Land.

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39.A reconciliation of undisclosed income was drawn vis-à-vis the search material which is as under:

a. In the seized material inventorised as A/GPR/5 dtd 8/11/05 at page no.191 to 197 payment made to Satyavati and Somshekar at Rs. 40,00,000 was now included.

b. In the seized material inventorised as A/RRR-5/1 dtd 17/4/04 & 04/5/04 at page no.1 payment made for land conversion at Rs. 13,75,000 was now included.

c. In the seized material inventorised as A/GPR/5 dtd 8/11/05 at page no. 87-payment made to Honnappa K was actually at Rs. 41,00,000 and not 51.56 which is now actuals.

d. In the seized material inventorised as A/RRR-4/5 at page no.87 difference in cash payment made to several persons at Rs. 25,48,125, did not exist which was now taken at actuals.

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e. In th e sei zed m ateri al i n ven tori sed a s A/RP-2/8 dtd 17112105 difference in cash payment made to Krishna Singh for Nagawara project at Rs.10,00,000/- was actually the transaction done by H Ravichandra and has been taxed in the hands of H Ravichandra Group. Hence, the same has been reduced.

f. An amount of Rs. 50,00,000/- was received from H Ravichandra which gets reduced from the undisclosed income as its taxed in the hands of H Ravichandra.

are not accounted in the regular books of account of the business

concerns of Shri. G Prasad Reddy) to landlords is about Rs.7.17

crores while the unaccounted cash collections was at Rs.4.71

crores only. In view of that, the AO inferred that Shri G Prasad

Reddy and his concerns generated the balance of Rs.2.46 crores by

inflating the expenditures in the projects executed by them. Thus,

the AO arrived the unaccounted cash payments made towards

land purchases at Rs.71,768,525 and treated it as undisclosed

income generated by Shri G Prasad Reddy and his group

concerns. Thereafter, after due discussion with the assessee, the

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AO reconciled such undisclosed income a y wise, person wise, in

the above table. In the assessee’s case, for ay 2005-06, he

arrived the total undisclosed income as under:

Additional income declared Rs.1,55,00,000 Add: Disallowance u/s 40 A (3) 20% on Rs.97,00,000 + Rs.22,00,000 On the investments in Royal county in ay 2005-06 Rs. 23,80,000 Payment made for land conversion viz seized material inventorised as A/RRR-5/1 dtd 17/4/04 & 04/5/04 at page no.1 included , supra , viz item (b) Rs. 13,75,000 Total Unaccounted investments in ay 2005-05 Rs. 1,92,55,000

Rs.1,55,00,000 only , the AO has added the difference between it

and the reconciled undisclosed income (Rs.1,92,00,000) and added

the difference at Rs.37,55,000 as undisclosed income. Prima facie,

it appears that the investments are more than available sources.

This being so, it is not clear from the CIT (A) order, supra, whether

the impugned investments / expenses were admitted and assessed

in the earlier year as claimed by the assessee, how and what basis

the assessee seeks deduction in ay 2005-06 etc. Further, when we

examine the addition made by the AO as indicated in para 8,supra,

with the observations of the CIT(A) in para 3.4 & 4 of his order,

supra, it appears there are factual errors. In the facts and

circumstances, we deem it fit to set aside the CIT(A) order, and

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remit these issues to the CIT (A) for a fresh adjudication. While

doing so, the CIT (A) shall have to give due opportunity to the

assessee to present its case.

Sd/- Sd/-

(SUNIL KUMAR YADAV) (S. JAYARAMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

By Order

Assistant Registrar