THE COMMISSIONER OF INCOME TAX vs. SRI SUNILA KEERTHI

1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 9TH DAY OF AUGUST 2012 PRESENT THE HON'BLE MR.JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR ITA NO.1345/2006 & ITA.NO.1346/2006 ITA NO.1345/2006 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX, MANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1 (1), MANGALORE. …APPELLANTS (BY SRI.E.I.SANMATHI, ADV) AND: SRI.SUNILA KEERTHI, C/O.HOTEL PANCHAMI, OPP.K.S.R.T.C BUS STAND, MANGALORE. …RESPONDENT (BY SRI.K.CHANDRANATH, ADV) ITA FILED U/S. 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 21-04-2006 PASSED IN ITA.NO.2084/BANG/2004 FOR THE ASSESSMENT YEAR 1997- 98, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA.NO.2084/BANG/2004 DATED 21-04-2006 AND CONFIRM

2 THE ORDER OF PASSED BY THE ASSESSING OFFICER, IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO.1346/2006 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX, MANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE – 1 (1), MANGALORE. …APPELLANTS (BY SRI.E.I.SANMATHI, ADV) AND: SRI.SUNILA KEERTHI, C/O.HOTEL PANCHAMI, OPP.K.S.R.T.C BUS STAND, MANGALORE. …. RESPONDENT (BY SRI.K.CHANDRANATH ARIGA, ADV) ITA FILED U/S. 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 21-04-2006 PASSED IN ITA.NO.2189/BANG/2004 FOR THE ASSESSMENT YEAR 1997- 98, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA.NO.2189/BANG/2004 DATED 21-04-2006 AND CONFIRM THE ORDER OF PASSED BY THE ASSESSING OFFICER, IN THE INTEREST OF JUSTICE AND EQUITY. THESE ITA’S ARE HAVING BEEN HEARD AND RESERVED AND COMING ON FOR PRONOUNCEMENT OF JUDGEMENT THIS DAY, B.MANOHAR J., DELIVERED THE FOLLOWING:

3 J U D G M E N T These appeals are filed by the Revenue being aggrieved by the order dated 21-4-2006 passed by the Income Tax Appellate Tribunal in ITA No.2084 & 2189/BANG/2004 confirming the order dated 21-05-2004 passed by the Commissioner of Income Tax (Appeals) (in short ‘CIT (Appeals) Bangalore in ITA No.117/MNG/CIT(A)MNG/2002- 03 modifying the order passed by the Assessing Authority. 2. The facts of the case are as follows: The respondent-assessee is a partner of Hotel Panchami and also an agriculturist. For the assessment year 1997-1998, the assessee filed return of income declaring taxable income of Rs.6,07,890/-. The return was processed under Section 143(1) and after issuing notice under Section 143(2), completed the assessment on 31-3-2000 assessing the taxable income at Rs.78,96,970/-. The assessee being aggrieved by the assessment of the taxable income preferred an appeal before the CIT (Appeals). The Appellate Authority by its order dated 20-10-2000 set aside the assessment order dated 31-3-2000 and remitted

4 the matter for reconsideration. After remand, the Assessing Authority reassessed the taxable income and held that the taxable income is at Rs.30,10,330/-. Being aggrieved by the fresh assessment order passed by the Assessing Authority, the respondent preferred an appeal before the CIT (Appeals) in ITA No.117/MNG/CIT(A) MNG 2002-2003. The Appellate Authority after considering the matter in detail gave relief to the assessee to an extent of Rs.20,55,108/-. The assessee being not satisfied with the order passed by the CIT (Appeals) preferred an appeal before the Income Tax Appellate Tribunal. Further, the Revenue being aggrieved by the order passed by the CIT (Appeals) insofar as deletion of Rs.10,00,000/- under the Heading of unaccounted payment made to Sri.Veerendra for transfer of 17 cents of land. The Income Tax Appellate Tribunal after considering the matter upheld the order passed by the CIT (Appeals) and dismissed the appeal filed by the Revenue insofar as deletion of Rs.10,00,000/- towards the payment made to Sri.Veerendra and allowed the appeal filed by the assessee insofar as the relief which was denied by the CIT (Appeals) by its order

5 dated 21-4-2006. Being aggrieved by the same, the Revenue has preferred these appeals. 3. Since common question of law is involved in these appeals and common order is passed by the Income Tax Appellate Tribunal, Bangalore in respect of the same assessment year and between the same parties, both the appeals are taken up together and disposed of by this common judgment. 4. Both the appeals are admitted for consideration of the following substantial questions of law: “1. Whether the Appellate Tribunal was right in relying upon the letter of Veerendra filed before the Commissioner of Income Tax (Appeals) under the provisions of Rule 46A of the Income Tax Rules, 1962 without complying with the mandatory requirements contained under clauses (A) to (D) and considering the same as additional evidence and confirming the order passed by the First Appellate Authority? 2. Whether the Appellate Tribunal is right in setting aside the finding of fact recorded by the Assessing Authority with regard to the deletion of Rs.10 lakhs paid to the agreement holder Veerendra and confirming the order of the Commissioner of Income Tax (Appeals) by setting aside the order of the Assessing Officer?”

6 5. Sri.E.I.Sanmathi, learned counsel appearing for the appellant contended that the order passed by the Appellate Tribunal as well as the First Appellate Authority is contrary to law. As per the Memorandum of Agreement dated 01-04-1996 entered into between the respondent-assessee and his brother Veerendra, the assessee has to pay to his brother Rs.20,00,000/- for use of 17 cents of land in Sy.No.118-8A/1A/1B(P) situated at Municipal limits of Moodbidri and constructed a commercial complex to an extent of 11.095 sq. ft. of built up area. Rs.20,00,000/- has to be paid on or before 01-04-1997. The assessee has not shown the source of income for the payment made to his brother. Hence, Rs.10,00,000/- paid to his brother has to be treated as undisclosed sources and he has to pay tax on the said amount. 6. Though an opportunity was given to the assessee to produce the documents to substantiate his contention that he has paid only Rs.10,00,000/- to his brother for utilizing 17 cents of land, no document was produced before the

7 Assessing Officer. However, he had produced the affidavit of his brother Veerendra before the First Appellate Authority and the Appellate Authority has also secured the records from the ACIT, Circle-12, Chennai and passed the order. As per Rule 46-A of Income Tax Rules, without complying with the mandatory requirements contained in clause (a) to (d) of Rule 46-A, the assessee is not entitled to produce the additional documents before the Appellate Authority as additional evidence. Further, deleting the unexplained cost of construction of the commercial complex of Rs.9,86,443/- is contrary to law and sought for setting aside the order passed by the Income Tax Appellate Tribunal by allowing the appeals. 7. On the other hand, Sri.K.Chandrakanth Ariga, learned Advocate appearing for the respondent argued in support of the Appellate Tribunal contending that as per the Memorandum of Agreement entered into between the assessee and his brother Veerendra, the assessee has to use 17 cents of land in Sy.No.118/8A/1A 1B(P) and 14.75 cents of land in Sy.No.151/5A1 and 6¼ in Sy.No.151/5A2 situated

8 at Marpady village within the town limits of Moodbidri Municipality. However, the assessee has used only 17 cents of land for construction of a commercial complex and he has not utilized the remaining 21 cents of land. The owner of the said property Mr.Veerendra had sold 21 cents of land to some other buyers for a sum of Rs.8,00,000/-. All these documents have been produced before the Assessing Authority. The Assessing Authority has taken into consideration of the same. The assessee has paid only Rs.10,00,000/- for using 17 cents of land and there is no question of giving undisclosed amount of Rs.10,00,000/-. Further, construction of the building has been commenced in the assessment year 1995-1996 and was completed during the assessment year 1998-1999. The building was constructed under the personal supervision of the assessee. The property is situated in Marpady village and has been assessed by the assessee to an extent of Rs.29,39,857/-. However, the Assessing Authority after obtaining a report from the District Valuation Officer who has assessed the valuation of the building on the basis of CPWD rates, taken

9 into consideration the value of the building as Rs.49,55,120/-. Though the Assessing Authority reduced the cost of building partly, the Appellate Authority after considering the matter in detail reduced the same. There is no infirmity or irregularity in the said order and sought for dismissal of both the appeals. 8. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned passed by the Authorities below. 9. It is not in dispute that the respondent-assessee filed returns for the assessment year 1998-1999 declaring taxable income. The same was assessed under Section 143(1) of the Act determining the taxable income of Rs.78,96,970/-. The assessee preferred an appeal before the CIT (Appeals). The Appellate Authority set aside the order and remitted the matter to the Assessing Authority. After remand, the income of the assessee was once again assessed by the Assessing Authority by its order dated 28-3-2002 and after some additions arrived at taxable income of Rs.30,10,330/-. The

10 Assessing Officer found that Rs.10,00,000/- has been paid to Mr.Veerendra in respect of 17 cents of land, additional expenditure has been made to an extent of Rs.13,86,445/- and Rs.16,000/- towards the shop and Rs.68,666/- towards agricultural income. Being aggrieved by the same, an appeal was preferred before the CIT (Appeals), before whom the assessee has produced some documents to show that he has paid only Rs.10,00,000/- to Veerendra as per the agreement dated 01-04-1996 in respect of 17 cents of land and the remaining 21 cents of land has not been utilized and that is sold by Veerendra himself. In support of the same, he has filed an affidavit of Veerendra. Apart from that the Appellate Authority after getting the records from ACIT, Circle-12, Chennai held that the assessee has paid only Rs.10,00,000/- to Sri.M.Veerendra for utilizing 17 cents of land. The Appellate Authority had given relief to the assessee except Rs.4,00,000/- towards the supervision charges of construction of the building. Being aggrieved by the order of the First Appellate Authority, the assessee preferred an appeal before the Appellate Tribunal,

11 challenging the disallowance of Rs.4,00,000/- towards supervision charges. The Revenue also preferred an appeal before the Appellate Tribunal challenging the order of the Commissioner insofar as deleting the construction cost, unauthorised payment made to his brother and also deletion of cost of ceramic tiles. The Tribunal, after considering the matter in detail, allowed the appeal filed by the assessee by giving full relief to the assessee while dismissing the appeal filed by the revenue. 10. The main contention of the revenue in this appeal is that the CIT (Appeals) ought not to have accepted the documents produced by the assessee as there is a bar under Rule 46(1) of Income Tax Rules which contemplates that the appellant shall not be entitled to produce any evidence whether oral or documentary or other evidence subject to certain exceptions. Rule 46-A(2) contemplates that “no evidence shall be admitted under Rule 1, unless the Commissioner records in writing reasons for its admission.” In the instant case, the affidavit of Veerendra was accepted by the Commissioner. Further the records have been called

12 for from the ACIT, Circle-12, Chennai. On the basis of the said documents, the Commissioner allowed the appeal and deleted Rs.10,00,000/- paid under the agreement which is contrary to law. Unless, the assessee complies with the mandatory requirement under clauses(a) to (d) of Rule 46-A, the additional evidence cannot be taken into consideration. The records clearly disclose that as per the agreement entered into between the assessee and his brother dated:01-04-1996, the assessee is allowed to use 17 cents of land in Sy.No.118/8A/1A-1B and 21 cents of land in Sy.No/151/3A-1 and 351/A2. However, the assessee has used only 17 cents of land and he has not utilized the remaining 21 cents of land. The specific case of the assessee is that he has paid only Rs.10,00,000/- to his brother Veerendra. Further, the said Veerendra had sold remaining 21 cents of land for a sum of Rs.8,00,000/-. The District Valuation Officer has estimated the cost of building as Rs.49,55,120/-, by adopting CPWD rates and not the PWD rates. The building has been constructed in a village within the limits of Town Municipality of Moodbidri and higher

13 value has been taken for rolling shutters as Rs.120/- per sq.ft. as against Rs.60/- per sq.ft. and ceramic tiles at the rate of Rs.41/- per sq.ft. as against Rs.17/- to Rs.18/- per sq.ft. as available in that area. Further the assessee has produced the document to show that after construction of the building, he has sold 1,680 sq.ft. of built up area to Sri.Prabhachandra Jain for a sum of Rs.10,00,000/- and offered Rs.2,44,000/- as income from the business. Further the said purchaser constructed 53 sq. meters mezzanine floor. The said purchaser also filed an affidavit before the Assessing Authority. But the same was not considered by the Assessing Authority. The addition made by the purchaser cannot be treated as an addition made by the assessee. The CIT (Appeals) though given relief in respect of other additions, failed to grant relief insofar as personal supervision of the building. The Appellate Tribunal on considering the mater in detail has granted the relief. Acceptance of the affidavit of assessee’s brother M.Veerendra is only a technical flaw. Apart from that on the basis of the affidavit, the Appellate Authority after getting the entire

14 records from the ACIT, Circle-12, Chennai where Mr.Veerendra had filed his returns had given relief of Rs.10,00,000/- 11. We find that there is no infirmity or irregularity in the order passed by the Appellate Tribunal. The reasoning given by the Appellate Tribunal is a sound reasoning and we are not inclined to interfere with the same. Hence, the substantial questions of law are held against the revenue. 12. Accordingly, we pass the following ORDER Both the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE mpk/-*