THE COMMISSIONER OF INCOME TAX vs. DR L NARENDRA PRASAD

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 18TH DAY OF AUGUST 2015

PRESENT

THE HON’BLE MR.JUSTICE VINEET SARAN AND THE HON’BLE MR.JUSTICE B MANOHAR ITA No.473 OF 2009 BETWEEN:

… APPELLANTS (BY SRI.JEEVAN.J.NEERALAGI, ADV.,)

AND:

DR. L.NARENDRA PRASAD, NO. 175, 6TH CROSS, GANDHINAGAR, BANGALORE.

… RESPONDENT (BY SRI.A.SHANKAR, ADV.,)

2 THIS ITA IS FILED UNDER SECTION 260-A OF THE I.T. ACT, 1961 ARISING OUT OF ORDER DATED 30-04-2009 PASSED IN IT(SS)A NO.47/BNG/2008, FOR THE BLOCK ASSESSMENT PERIOD 1/4/1996 TO 26/11/2002, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO:

(i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN,

(ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN IT(SS)A NO.47/BNG/2008, DATED 30-04-2009, CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(3), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.

THIS APPEAL COMING ON FOR HEARING THIS DAY, B.MANOHAR, J. DELIVERED THE FOLLOWING:

JUDGMENT

The Revenue has preferred this appeal under Section 260-A of the Income-Tax Act (hereinafter referred to as ‘the Act’ for short) being aggrieved by the order dated 30th April 2009 passed in IT(SS)A 47/BANG/2008 by the Income Tax Appellate Tribunal,

3 Bangalore-‘B’ branch, (hereinafter referred to as ‘the Tribunal’ for short) dismissing the appeal filed by the Revenue and confirming the order passed by the Commissioner of Income-Tax (Appeals) (hereinafter referred to as ‘the First Appellate Authority’ for short) modifying the order passed by the Assessing Authority for the block period from 01-04-1996 to 26-11-2002.

“The assessee purchased agricultural lands of about 8 acres from K.Gundu Rao in the year 1996 and 1997. Subsequently, he proposed to develop the same by having it converted for residential layout. He decided to form a layout along with his father Sri.C.V.L.Sastry and had agreed to do the

4 same for HMT Employees Co-Operative House Building Society Ltd. On 12-07-1999. M/s. HMT Employees Co-Operative House Building Society Ltd., wanted a layout spread over 50 acres 36 guntas land to be formed over a period of time. For various reasons this project did not go through and had to be abandoned. In the meanwhile an advance of Rs.82 lakhs was received from M/s.HMT Employees Co-Operative House Building Society Ltd., and the same was used for layout development.

The assessee subsequently, entered into an agreement with one Sri.S.N.Krishnaiah Setty on 05-09-2001 for sale of residential sites @ rate of 110 p.sq.ft. The assessee also received advance payments amounting to Rs.73,75,000/- upto 31-03-2002 and of which a sum of Rs.57 lakhs was repaid to HMT Employees Co-op. House Building Society Ltd. And the balance amount utilized to layout development.

The layout is not fully developed even as on date and the following works are pending.

i. Formation of two roads ii. Water supply and sanitary works iii. Electricity sanction and connections iv. Overhead water tank v. Statutory payments to City Municipal Corporation by way of betterment charges.

5 As the layout is still not fit for residential use and pending completion the assessee will offer income from layout business on completion of the same”

6 the assessee appeared and produced necessary documents. Incidentally, a search was conducted in the premises of S.N.Krishnaiah Setty on 26-11-2002 on the day on which, the assessee’s premises was searched. On the basis of the materials seized with reference to the Real Estate business, the Assessing Authority examined the case; and after obtaining the clarification held that though the assessee purchased the property in the year 1996-97, in the balance sheet of the assessment year 1998-99, the assessee has shown the value of the land as Rs.46,46,660/- and for the assessment year 2000-01, the value was shown as Rs.1,10,46,660/- and for the assessment year 2001-02, the value was shown as Rs.1,19,46,660/-. The assessee contended that he has invested Rs.78,00,000/- for formation of the layout. However, no document has been produced to show that he has spent Rs.78,00,000/- for formation of the layout. During search, some materials were found, which reveals that

7 the assessee had spent a sum of Rs.14,92,705/- on 26-12-2002 and a sum of Rs.11,69,628/- was spent by M/s. Sky Top Builders Pvt. Ltd. for improvement of the said property. In all, they have spent Rs.26,62,333/-. The cost of the land comes to Rs.73,08,993/-, whereas the assessee had entered into an agreement with S.N.Krishnaiah Setty agreeing to sell the sites at the rate of Rs.110/- per sq.ft. and power of attorney was also executed in favour of S.N.Krishnaiah Setty for marketing the sites through Shri. Balaji Krupa Enterprises. Krishnaiah Setty had sold 86 sites from 01-04-2001 to 31-3-2002 and 53 sites from 01-04-2002 to 31-3-2003. Taking into consideration the extent of land as 8 acres; value of the land at the rate of Rs.110/- per Sq.ft. deducting expenditure towards CMC and KEB and development expenditure of Rs.97,49,994/-, from the total value of the land, the balance amount of Rs.1,27,51,055/- was net receivable by the assessee. Out of the said amount, the profit of the assessee is

8 worked out to Rs.51,22,096/- as on 26-11-2002. The assessing officer worked out the undisclosed income and determined the profit at Rs.42,17,430/- for the block period from 1-4-1996 to 26-11-2002. A draft assessment order was prepared and the assessee was called upon to file his objections. The assessee filed his objections to the Draft Assessment. After considering the objections, the Assessing Authority concluded the assessment and called upon the assessee to pay tax on the said amount, by its order dated 30-11-2004.

9 Department. The facts of the case has not been disputed by the Assessing Officer, thus the sum determined does not constitute the undisclosed income. The Assessing Officer is not justified in assessing income contrary to the method of accounting followed by the assessee. The assessee clearly stated that he has not maintained the books of accounts. Along with the returns, the assessee has clearly disclosed that the assessee will offer the income from the real estate business on completion of the layout. For so many years the profit from the Real Estate business has been taken at 8% of total amount of income. However, the Assessing Authority assessed the income at the rate of 26% which is contrary to law.

10 Assessing Authority taking 8 acres of land to arrive at an undisclosed income is contrary to facts of the case. Further, the net profit of 26% taken by the Assessing Authority is not correct since from many years, the Department has been taking 8% from the Real Estate business on the total amount and accordingly modified the order reducing the undisclosed income of the assessee to Rs.13,95,240/- from Rs.42,17,430/- by its order dated 31-03-2008. Being aggrieved by the order passed by the First Appellate Authority the assessee as well as the Revenue preferred appeals before the Tribunal. The Appellate Tribunal after re-examining the matter and taking into consideration the material seized during the course of search and also accepting some of the findings of the Assessing Authority held that the assessee has not suppressed any facts in the return filed for the assessment year 2002-03. He has disclosed everything regarding purchase of the property in the year 1996-97 and also entering into an agreement with

11 HMT Employees Co-operative House Building Society Limited and subsequently with S.N.Krishnaiah Setty on 5-9-2001 for sale of residential sites at the rate of Rs.110/- per sq.ft. The seized materials clearly disclose that the assessee has spent Rs.26,62,333/- for formation of the layout. Further, the agreement entered into with S.N.Krishanaiah Setty was only in respect of 6 acres of land and the Department itself has accepted the net profit at 8% on the turnover from the Real Estate business. Accordingly, upheld the order passed by the First Appellate Authority and dismissed both the appeals filed by the assessee as well as the revenue by its order dated 30th April, 2009. Being aggrieved by the said order, the Revenue preferred this appeal.

12 material found during course of search reflected the actual expenditure incurred by the assessee and consequently recorded a perverse finding?

13 brother of assessee are in the Real Estate business. Initially the assessee entered into an agreement with the HMT Employees Co-operative House Building Society Limited for formation of layout for HMT employees and developed the residential layout. However, the said project did not go through and abandoned in the middle. The assessee entered into an agreement with S.N.Krishnaiah Setty for the sale of residential sites at the rate of Rs.110/- per sq.ft. and received some amount and the said amount was repaid to the HMT Employees Co-operative House Building Society Limited. A search was conducted on 26-11-2002 at the residential premises of the assessee as well as the office premises of his father C.V.L. Sastry and also the premises of S.N.Krishnaiah Setty. On the basis of the material seized during the search, a notice was issued to the assessee under Section 158BC, calling upon the assessee to file return for the block period from 1-4-1996 to 26-11-2002. The assessee filed NIL returns

14 on 11-12-2003. During the course of assessment proceedings, the assessee claimed that he had purchased 8 acres of agricultural land in the year 1996-97 for Rs.46,46,600/-.

Subsequently, he proposed to develop the said land and form a residential layout along with his father and brother. He invested a sum of Rs.78,00,000/- consequent to buying of the property towards improvement charges, however, no document has been produced in this regard. It was found from the seized material that a sum of Rs.26,62,333/- has been spent towards improvement of the layout. In view of the agreement entered into with S.N.Krishnaiah Setty on 5-9-2001 to sell the sites for Rs.110/- per sq.ft., considering the value of the sites as Rs.2,25,01,050/-, deducting expenditure, the assessing officer determined the undisclosed income in a sum of Rs.42,17,430/- and called upon the assessee to pay tax on the said amount with fine and interest.

15 9. On an appeal filed by the assessee, the First Appellate Authority after examining the matter in detail found that purchase of the land has already been disclosed to the Assessing Authority along with the return for the assessment year 2002-03 and also admitted that the residential layout is not fit for residential use, pending completion, and the assessee will offer income from the layout business on completion of the same. As per the agreement entered with S.N.Krishnaiah Setty, the power of attorney executed was only in respect of 6 acres of land i.e. 158550 sq.ft. and not 8 acres of land. The cost of 6 acres of land is Rs.1,74,40,550/- instead of Rs.2,25,01,050/-. Normally, in the real estate business, the net profit would be taken at the rate of 8%. Hence, the Appellate Authority, taking into consideration the net profit at 8% on the total amount of income arrived at undisclosed income of Rs.13,95,240/- as against Rs.42,17,430/- assessed by the Assessing Officer. Accordingly modified

16 the order passed by the Assessing Authority and the said order was confirmed by the Tribunal after re- examining the matter afresh. The finding recorded by the First Appellate Authority as well as the Tribunal is purely a question of fact. The Assessing Officer having accepted the fact that the agreement entered with S.N.Krishnaiah Setty is only in respect of 6 acres of land, while assessing the undisclosed income, had taken into consideration the entire 8 acres of land, which is contrary to law. In the real estate business the department had accepted the net profit of 8% on the turnover for the last so many years in respect of the M/s.Skytop Builders Pvt.Ltd. The same benefit was extended in case of assessee also. Section 44-AD of the Act contemplates that in the case of an eligible assessee engaged in an eligible business, a sum equal to 8% of the total turnover or gross receipt of the assessee in the previous year on account of such business or, as the case may be. In the instant case, admittedly, the

17 assessee had not maintained books of accounts. The assessee is a doctor by profession, his father and brother are involved in the real estate business. For the last so many years, the Department has accepted the net profit at 8% on the total turnover of the company M/s. Skytop Builders Pvt. Ltd. Accordingly, the Appellate Authority as well as the Tribunal accepted the contention of the assessee and taken 8% of the total turnover as the income. The Assessing Authority during the course of assessment proceedings admitted the fact that the assessee has entered into an agreement and issued power of attorney to Sri.S.N.Krishnaiah Setty for marketing the sites formed in 6 acres of land. In respect of remaining 2 acres of land, the dispute is pending before the Arbitrator. Such being the case, the Assessing Authority ought to have taken the income from 6 acres of land. We find no infirmity or irregularity in the finding arrived at by the First Appellate Authority as well as the Tribunal. The

18 appellants have not made out a case to interfere with the order passed by the Tribunal. Hence, the substantial questions of law are answered against the revenue and in favour of the assessee. Accordingly, the appeal is dismissed.

Sd/- JUDGE

Sd/- JUDGE

mpk/-*