R. SRINIVAS RAJU,BANGALORE vs. ACIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A. No.162/Bang/2011 (Assessment Year : 2007-08) R Srinivas Raju, Vs. Asst. Commissioner of Income Tax, No.1 Srihari Towers, Central Circle 2(1), Bangalore. 5th A Main, Hebbal, Bangalore. PAN ACWPR 2702A Appellant Respondent.

Appellant By : Shri H. Guruswamy, ITP. Respondent By : Dr.Shankar Prasad, JCIT (D.R) Date of Hearing : 05.05.2016. Date of Pronouncement : 17.6.2016. O R D E R Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dated 22/12/2010 of Commissioner of Income Tax (Appeals)-VI, Bangalore for the assessment year 2007-2008.

2 ITA No. 162/Bang/2011 2. The Hon'ble Commissioner has erred in disallowing 20% of Rs.90,00,000 under Section 40A(3) of the Act even though the expenditure is outside the books of accounts and also the expenditure has been proved as genuine. 3. The Hon'ble Commissioner has erred in adding back Rs.28,00,000 which was not received by the appellant. 4. The Hon'ble Commissioner has erred in adding Rs.16,00,000 based on the statement in the letter which does not affect the profit in books of accounts. 5. The Hon'ble Commissioner has erred in proposing penalty under Section 271(1)(c). 6. The appellant craves to add/delete or alter any grounds during the course of proceedings. For these and such other grounds which may be raised during the Income Tax Tribunal hearing proceedings, it is prayed that the Hon'ble Income Tax (Tribunal) may kindly delete the addition of Rs.1,34,00,000 and drop the penalty proposed under Section 271(1)(c). OR allow any other relief as the Income Tax (Tribunal) may deem fit.” 3. Ground number one is general in nature and does not require any specific adjudication. 4. Ground number 2 is regarding disallowance made under section 40A(3) of the act. The brief facts leading to the controversy, are that a search under section 132 of the Act was conducted in the case of M/s Adarsh Developers on 13/12/2006. During the course of search certain documents pertaining to Sri S. L. Natraj, one of the associate of Sri Jayaram, partner of Sri Jayaram Developers & Contractors who procure land for M/s. Adarsh Developers at the Huttanahalli Village, Jala Hobli, Bangalore, were seized and marked as A/AD/6

3 ITA No. 162/Bang/2011 at pages 77 to 87. Consequent to the said information, a search in the case of this assessee was conducted on 15/12/2006 and various documents pertaining to this case were also seized under section 132 of the Income Tax Act, 1961 (in short 'the Act'). During the course of consequential search, the assessee was confronted with the sale agreement and the sale deed seized from the business premises of M/s. Adarsh Developers marked as A/AD/06. In his statement recorded under section 132 (4) dated 15/12/2006, the assessee stated that he had entered into an agreement with Sri S. L. Natraj for sale of 9 acres 10 guntas at Huttanahalli village for a consideration of Rs.4, 50,00, 000/-. Further, during the course of deposition the assessee has admitted short term capital gain of Rs.2.3 crores arisen from the said transaction. A notice under section 153A was issued on 19/12/2007 for the assessment years 2001-02 to 2006-07 (block period). A statement under section 131 of the act was recorded from Sri R. Srinivas Raju on 01/03/2007; during the course of which he had admitted that he received a sum of Rs. 10.10 crores, comprising of Rs.2.44 Crores through cheques and Rs.7.56 Crores in cash from Sri S.L. Natraj. The assessee had admitted that he has accounted only cheque portion of Rs.2.44 crores in his regular books of accounts and cash receipt of Rs.7.56 crores was not accounted

4 ITA No. 162/Bang/2011 in the books of accounts. The assessee further stated that he bought the said land from Sri B.N. Byregowda for Rs. 5.99 crores which includes a cheque, payment of Rs.1.49 crores during the financial year 2005-06 and cash payment of Rs. 4.50 crores during the financial year 2006-07. Hence, the assessee stated that his unaccounted income out of this land transaction was Rs.2.37 crores after deducting the development expenses of Rs.68.80 lakhs. The assessee offered this sum of the Rs.2.37 crores as unaccounted income for the financial year 2006-07 relevant to the assessment year 2007-08. In addition to his there will of business income of Rs.70 lacs. Since this payment was claimed to have been made in cash, the AO invoked the provisions of section 40A(3) of the Act and disallowed 20% of this sum of Rs.4.5 crores amounting to Rs. 90 Lacs. The assessee challenged the action of the AO before the CIT (appeals) but could not succeed as the CIT (appeal) not only confirmed the disallowance made by the AO under section 40A(3) but also enhanced assessment by disallowing the remaining 80% of the said amount under section 37(1) of the act. 5.1 Before us the Learned AR of the assessee has advanced 3 fold contentions on this ground. The first argument of the Learned AR is that the payment in question is made out of books of accounts of the assessee and

5 ITA No. 162/Bang/2011 therefore, the same cannot be disallowed under the provisions of section 40A (3). In support of his contention he has relied upon the decision dated 8/11/2013 of Panaji benches of this Tribunal in case of Manoj Kumar Jain Vs. DCIT in ITA Nos. 179 to 184/PNJ/2013. The Learned AR has submitted that the Tribunal in the said case has held that the payment was made by the assessee outside the books of accounts, therefore, the onus is on the assessee to prove the source of these expenses. When the assessee did not claim deduction of those expenses while computing the income from business, the provisions of section 40A (3) will not be applicable.

5.2 The next contention of the Learned AR is that the recipient of the said amount offered the same to tax. Therefore, it cannot be disallowed under section 40A(3) of the Act. He has relied upon the judgment of Hon’ble Supreme Court in case of Sattar Singh Gurmukh Singh Vs. ITO (1991) reported in 191 ITR 667 and submitted that the terms of section 40A(3) are held to be not absolute. The genuine and bona-fide transactions are not taken out of the sweep of the section. Thus the learned Authorised Representative has submitted that the recipient of the amount has offered the same for tax then the provisions of Section 40A(3) of the Act cannot be applied. He has referred the confirmation

6 ITA No. 162/Bang/2011 given by the recipient Mr. B.N. Byregowda that they have filed their return and offered the said amount of Rs.4.5 Crores received in cash for taxation. The learned Authorised Representative has submitted that the CIT (Appeals) has reproduced the confirmation given by the recipient of the amount. He has relied upon the exception provided under Rule 6 DDJ of IT Rules and submitted that when the seller of the land demanded the amount in cash then the assessee was having no option but to pay the said amount in cash. He has then relied upon the decision dt.31.10.2012 of this Tribunal in the case of Sri Kabadi Chicknagusa & Sons Vs. DCIT in ITA No.471/Bang/2011.

5.3 On the other hand, the learned Departmental Representative has submitted that the assessee has admitted the payment of Rs.4.5 Crores in cash. The payment was made in the business transaction in purchase and sale of land and between the person engaged in the business activity of real estate therefore the case of the assessee does not fall under any exception provided under Rule 6 DDJ of IT Rules. He has relied upon the orders of the authorities below. The learned Departmental Representative has also relied upon the judgment of Hon'ble Calcutta High Court in the case of Bagmari Tea Co. Ltd. Vs. CIT (251 ITR 640) and submitted that the Hon'ble High Court has held

7 ITA No. 162/Bang/2011 that when the payment is made in contravention of Section 40A(3) of the Act though the payment is genuine, the same cannot be allowed. The Hon'ble High Court has observed that if this view is followed that the payment is genuine then that should not be disallowed in that case the provisions of Section 40A(3) of the Act will become redundant. 5.5 We have considered the rival submissions as well as relevant material on record. The provisions of Section 40A(3) of the Act are attracted because of the mode of payment is cash and therefore if the expenditure is allowable under the other provisions of the Act same would be disallowed under this section to the extent of 20%. If a claim is otherwise not allowable under the provisions of Section 28 to 37 of the Act then the question of applying this section does not arise. The provisions of Section 40A(3) of the Act are attracted when the claim of expenditure is otherwise allowable as per the other provisions of the Act but because the payment is made in violation of said provisions of Section 40A(3) of the Act 20% of the said expenditure is disallowed for such violation. There is no quarrel on the point that the provisions of Section 40A(3) of the Act are not absolute but certain exceptions are provided under Rule 6 DD of the IT Rules. The demand of the seller of the land

8 ITA No. 162/Bang/2011 for payment in cash does not fall any of the exceptions provided under Rule 6 DD of the IT Rules. It is pertinent to note that merely because the recipient of the amount has included the same in the return of income for taxation, it would absolve the assessee who has made the payment on the contravention of Section 40A(3) of the Act. The decisions relied upon by the assessee cannot be applied in the facts of the case as the same were delivered in a different context and facts. The Hon’ble Calcutta High Court in the case of Bagmari Tea Co. Ltd. (supra) has held in para 5 as under :

“ 5. With respect we are of the view that when the payment is made in contravention of s. 40A(3) though the payment is genuine that cannot be allowed, because the genuineness of payment is required in all cases but payment by account payee cheque or demand draft is additional requirement under s. 40A(3). If we follow the view that the payment is genuine, then that should not be disallowed, in that case the provision of s. 40A(3) will become redundant. Therefore, unless there is unavoidable circumstances for payment in cash that payment will hit by the provision of s. 40A(3). The finding of the AO and CIT(A) as well as Tribunal that there was no unavoidable circumstances in payment by cheque or bank draft. When there was no compelling circumstances or the assessee was not compelled to make payment in cash, in such circumstances we find no infirmity in the order of Tribunal.” When there is no unavoidable circumstances for payment by cheque or bank draft then the payment made in cash in violation of Section 40A(3) of the Act cannot be allowed. In the case on hand it is admitted fact that this payment was made by the assessee out of books of accounts therefore, this itself shows that the payment in question was ‘on money’ transaction and cannot be held as a

9 ITA No. 162/Bang/2011 genuine transaction much less as a genuine business transaction. Though during the course of search and seizure action under Section 132 of the Act the assessee admitted the receipt of ‘on money’ in transaction of sale of land and to cover the undisclosed income the assessee then claim the corresponding payment of ‘on money’ for purchase of the land. Further, the contention of the assessee that when this transaction is not recorded in the books of accounts then it cannot be disallowed under Section 40A(3) of the Act is not accepted because of the fact that in the computation of income the assessee explained this amount as an expenditure for earning the business income from purchase and sale of land in question. Therefore once the assessee has claimed this amount of Rs.4.5 Crores as an expenditure laid out for earning the business income then the contention of the assessee that this transaction is out of books of accounts and therefore cannot be disallowed under the provisions of Section 40A(3) of the Act is contradictory. In view of the above facts, we find that the assessee has violated the provisions of Section 40A(3) of the Act and therefore the Assessing Officer was justified in invoking the provisions of section in disallowing the claim to the extent of 20%.

10 ITA No. 162/Bang/2011 6. The assessee has also raised additional ground regarding the enhancement of disallowance made by the CIT (Appeals) on account of the additional compensation of Rs.68.80 lakhs on account of the additional compensation paid by the assessee in cash. On appeal, the CIT (Appeals) proposed to enhance the disallowance by issuing the show cause notice that the entire amount is not allowable under Section 37(1) of the Act. The CIT (Appeals) was of the view that the payment was not made wholly and exclusively for the business of the assessee. 6.1 Before us, the learned Authorised Representative of the assessee has submitted that the assessee proved that the payment was made to the seller as part of the cost of acquisition and therefore the same is allowable expenditure against the income from sale of the land. He has further contended that the Assessing Officer has not disputed the ‘on money’ receipt and payment. However, the CIT (Appeals) disallowed the same on the ground that it was not an expenditure for acquisition of the land and transaction was not recorded in the books of accounts. The learned Authorised Representative has contended that when the payment was not in dispute and it was made to the seller of the land

11 ITA No. 162/Bang/2011 then no other purpose can be attributed to this payment other than the purchase consideration in cash. 6.2 On the other hand, the learned Departmental Representative has submitted that this claim of the assessee is after thought as the assessee did not disclose this payment in the statement recorded during the search and seizure action. No supporting evidence has been produced by the assessee in support of his claim. He has relied upon the orders of the authorities below. 6.3 We have considered the rival submissions as well as the relevant material on record. As regards the disallowance made by the Assessing Officer under Section 40A(3) of the Act we have already taken a view on this point while deciding the issue regarding the cash payment of Rs.4.5 Crores. We made it clear that since the CIT (Appeals) has enhanced the assessment by making a disallowance of full amount therefore the additional issues raised by the assessee is not a fresh plea before us but the issue is arising from the impugned order of the CIT (Appeals) therefore we admit the additional ground for deciding on merits. 6.4 The Assessing Officer has recorded in para 9.02 of the assessment order that in the statement recorded under Section 131 of the Act the assessee

12 ITA No. 162/Bang/2011 stated that he has incurred the expenses of Rs.68,8 lakhs and all the expenses relating to the development of land were entered in his unaccounted cash book maintained in his laptop. Though the Assessing Officer has observed that the assessee failed to produce any evidence in support of his claim however the recording of the expenses in the unaccounted cash book maintained in the laptop has not been disputed by the Assessing Officer. Further the Assessing Officer has not examined the correctness of the claim by verification of the entries maintained in the laptop as well as by examining the recipient of the said amount. Since the corresponding addition has been made by the Assessing Officer in respect of ‘on money’ received by the assessee then the claim of ‘on money’ payments by the assessee also required to be examined by considering the fact whether the recipient has accepted this amount and offered the same as income for tax. Accordingly, in the facts and circumstances of the case when the Assessing Officer prima facie accepted the payment while making the disallowance under Section 40A(3) of the Act then for making a disallowance of the said amount under Section 37(1) of the Act a detailed and proper enquiry is required to be conducted. Accordingly, we are of the view that this issue requires a proper enquiry and consequently set aside to the record of the

13 ITA No. 162/Bang/2011 Assessing Officer for proper enquiry and verification and then decide the same. We make it clear that so far as the disallowance made under Section 40A(3) of the Act the same is found to be proper and therefore issue of enhancement for the balance amount made by the CIT (Appeals) is set aside to the record of the Assessing Officer. Ground No.3 is regarding addition of Rs.28 lakhs. 7. At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee does not press this ground and the same may be dismissed. The learned Departmental Representative has rasied no objection if the Ground No.3 is dismissed as not pressed. Accordingly, Ground No.3 of the assessee’s appeal is dismissed being not pressed. Ground No.4 is regarding an addition of Rs.16 lakhs. 8. During the course of the appellate proceedings, the CIT (Appeals) issued show cause notice for enhancement of assessment inter alia on account of suppression of profit disclosed as per the books of accounts of Rs.16 lakhs. The CIT (Appeals) noted from the written submissions of the assessee that the profit quoted as per the books of accounts is net of all transactions including cash transaction of Sri Byregowda. It was noted that the payment to Sri

14 ITA No. 162/Bang/2011 Pillappa is also shown as paid for purchase of land however the said payment for purchase of land was made in respect of different land and not in respect of the transaction with Sri Byregowda. Thus the CIT (Appeals) was of the view that the assessee has concealed the income from the transaction by claiming the additional compensation where as no such compensation was paid. Accordingly, the income assessed by the Assessing Officer was enhanced by Rs.16 lakhs.

15 ITA No. 162/Bang/2011 Hence the said payment does not form part of purchase consideration of the land sold at Puttenahalli. Thus the land transaction of Sri Pillappa was made prior to the period ending 31.3.2006 which was accounted for in the books of accounts for the Assessment Year 2006-07. This amount included in the purchase account for the Assessment Year 2006-07 and closing stock included the transaction of Sri Pillappa for the year ending 31.3.2006 was shown at Rs.7,60,07,500. The closing stock as on 31.3.2006 was taken as opening stock as on 1.4.2006 and therefore no addition can be made on account of this payment of Rs.16 lakhs already accounted in the books of accounts. He has referred the profit and loss account as well as the details of the payment made to Sri Pillappa and submitted that the expenditure claimed during the year does not include this amount of Rs.16 lakhs.

16 ITA No. 162/Bang/2011 Sri Pillappa in respect of a different land transaction. Thus the learned Departmental Representative has submitted that the CIT (Appeals) was justified in enhancing the income by Rs.16 lakhs as the assessee has concealed the income by wrongly claiming the same as an expenditure in respect of the transaction of Sri Byregowda.

17 ITA No. 162/Bang/2011 decide this issue as per law after affording an opportunity of hearing to the assessee. 12. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on this 17th day of June, 2016.

Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. By Order

Asst. Registrar, ITAT, Bangalore