ITO vs. M/S KAMAKSHI LAND DEVELOPERS,

Date of hearing : 22/01/2015. Date of pronouncement: 23/03/2015. O R D E R Per Smt. P.MADHAVI DEVI, JM:

All the three appeals are filed by the revenue against the two orders of the CIT(A)-II, Bangalore, dated 15/04/2013 for the assessment years 2000-01 and 2005-06 and another order dated 27/02/2013 of the CIT(A)-II, Bangalore, for assessment year 2005-06. ,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 2 of 14 which was engaged in the business of land development was searched u/s 132 of the Income-tax Act, 1961[hereinafter referred to as 'the Act'] on 23/09/2004. Consequent to the search, notice u/s 153A was issued on 31/03/2005 requiring the assessee to file its return of income. The assessee requested for copies of books of account and other related documents seized during the course of search (as per Panchanama) which was duly supplied to the assessee. Thereafter, the assessee, enclosed copy of return of income filed on 31/10/2000 along with tax audit report and also the details of land sold to various parties for a sum of Rs.4,68,52,500/-. During the assessment proceedings u/s 143(3) r.w.s.153A, the Assessing Officer (AO) verified the documents filed by the assessee with reference to the seized material and the books of account produced. The AO observed that the assessee has claimed to have sold 43 acres and 3 guntas of land to seven persons for an amount of Rs.80,40,000/- at the rate of Rs.1.91 lakh per acre through agreements to sell. The AO, however, held that the price at which the land has been sold to these persons is very cheap when compared to the similar land sold by the assessee to M/s.Rishi Homes Ltd. and that the material gathered during the course of search revealed that the alleged transactions with the above seven persons were sham transactions since no sale of land was actually intended or took place in favour of the seven persons. He observed that :

ITA Nos.644,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 3 of 14 (i) the land was sold for Rs.80,40,000/- but there has been no actual flow of fund from the so-called purchasers to the assessee; (ii) the so-called agreement to sell with the above 7 persons was written on a stamp paper of Rs.100/-. One of such agreements was seized as per Annexure A/SLD/1/2 page Nos.31 to 35 which is not notarized, not registered and is not signed by any witnesses. It is mentioned in the agreement that the seller shall deliver and put the purchaser in actual vacant possession of the schedule property at the time of registration of sale deed but since the agreement was never registered, the actual sale never took place. The possession of land was not handed over to the so-called agreement holders and therefore there was no actual transaction of the land; and (iii) it is seen from the record that subsequently, the assessee-firm agreed to sell this land to M/s.Vasavi Developers, a newly constituted firm having only two partners – Shri Arjun Chavala and Smt.N.K. Aswathlakshmi, a copy of which was seized as pages No.22 to 28 of annexure A/SLD1/1, according to which the assessee is mentioned as seller and M/s.Vasavi Developers is mentioned as purchasers and there is no mention of any agreement holders in the share holding. This agreement to sell is dated 19/08/2003 wherein the assessee had agreed to sell the schedule land for a consideration of Rs.3,50,00,000/- as seen from records, this agreement to sell was open and M/s.Vasavi Developers finally sold this land to M/s.Aishwarya Shelters P. Ltd., in April 2004. If the assessee were to sell the land to the above 7 persons there is no way the assessee could have sold the same land subsequently to & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 4 of 14 M/s.Vasavi Developers and then any portion to M/s.Aishwarya Shelters P. Ltd. Observing as above, the AO held that the alleged sale of land to seven persons was a sham transaction and is thus to be ignored for the purpose of arriving at the assessee’s actual income for the relevant assessment year. Thereafter, he proceeded to value the closing stock of the land left with the assessee as on 31/03/2000 and adopted the lower of the cost or the market value for the purpose of valuation of closing stock. He observed that out of 42 acres of land, about 11 acres of land was agricultural land not converted for industrial or residential use and the guidance value of the agricultural land during the relevant period was about Rs.1.50 per lakh per acre. Since the assessee had itself alleged to have entered into agreement to sell this land at Rs.2 lakhs per acre, the AO valued the 11 acres at Rs.2 lakhs per acre. As regards the balance of 30 acres, being converted land, he valued it at Rs.4 lakhs per acre totaling to Rs.120 lakhs. Thus, he valued the entire land of 42 acres as closing stock at Rs.144 lakhs and computed the tax thereon accordingly.

2.1 Aggrieved, the assessee preferred an appeal before the CIT(A) stating that the ‘agreements to sell’ transactions between the assessee and seven persons were genuine transactions and valuation of closing stock by the AO is also erroneous. It was further stated that the assessee had received & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 5 of 14 an advance of Rs.4,01,000/- from the purchasers in cash and that possession was also handed over to them. Before the CIT(A), the learned counsel for the assessee had also filed copies of endorsements to the effect that possession was handed over to the purchasers pursuant to the agreements to sell. The CIT(A), after considering the said documents, held that the seven persons mentioned in the ‘agreements to sell’ have received possession of the property and also that they have transferred their right and title in the property in question to M/s.Vasavi Developers by means of agreements dated 6/9/2003 and 10/1/2004 and since sale of property to the said persons did not materialize, the value of land measuring 42 acres became opening balance in the hands of the recipient. She also, deleted the addition made by the AO. Aggrieved by the relief given by the CIT(A), the revenue is in appeal before us.

2.2 The learned Departmental Representative, while placing strong reliance on the order of the AO, submitted that the assessee has claimed to have entered into ‘agreements to sell’ the land to seven persons and as held by the AO, no consideration has moved from these seven persons to the assessee. As regards the endorsements to the effect that possession of the property was handed over to the said persons, he stated that these documents were never filed before the AO and further that only Xerox copies of the same were filed before the CIT(A) in spite of request to file originals of the same.

ITA Nos.644,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 6 of 14 Therefore, according to him, no reliance could be placed on these documents. Further, he drew our attention to the ‘agreements to sell’ between the assessee, the seven persons as confirming parties and M/s.Vasavi Developers to demonstrate that they were allegedly entered into on 6/9/2003 and 10/1/2004 respectively and the Memorandum of understanding between the assessee and M/s.Vasavi Developers and M/s.Aishwarya Shelters P. Ltd. dated 10/05/2004 and also the absolute sale deed dated 24/04/2004 between assessee and M/s.Aishwarya Shelters P. Ltd. with M/s.Vasavi Developers as confirming party, to demonstrate that these documents cannot be relied upon simply for the reason that in the absolute sale deed, it is mentioned that the vendors M/s.Aishwarya Shelters P. Ltd. have paid the entire sale consideration to the vendors out of which Rs.68,000/- by way of pay order No.019558 dated 05/09/2003 drawn on Union Bank, Bangalore and Rs.39,250/- by Pay order No.019560 dated 5/9/2003 drawn on Union Bank, Bangalore as desired by the vendors. Thus according to him, when the vendor himself has paid part of the sale consideration as on 5/9/2003 there was no necessity for the assessee to enter into any agreement with M/s.Vasavi Developers. Thus according to him, the entire chain of transactions claimed to have been entered into by the assessee with seven persons and thereafter with M/s.Vasavi Developers is not believable and has to be & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 7 of 14 disregarded. Thus, he prayed that the order of the CIT(A) may be set aside.

2.3 The learned counsel for the assessee, on the other hand, supported the order of the CIT(A) and placed reliance upon the copies of the ‘agreements to sell’ between the assessee and the seven persons and the agreement to sell between seven persons and M/s.Vasavi Developers, memorandum of understanding between the assessee, M/s.Vasavi Developers and M/s.Aishwarya Shelters P. Ltd. and the sale deed in favour of the M/s.Aishwarya Shelters P. Ltd. He submitted that the documents found and seized during the course of search were (1) the ‘agreement to sell’ entered into by the assessee with one of the seven persons and also (2) the ‘agreement to sell’ between the assessee and M/s.Vasavi Developers with the seven persons as confirming parties. He submitted that all these documents were executed prior to the date of search and were found during the course of search and therefore it cannot be considered as an after-thought and these documents cannot be disregarded. Therefore, he prayed that the order of the CIT(A) be upheld. He also relied upon the remand report of the AO wherein the AO has accepted and confirmed the ‘agreement to sell’ entered into by the assessee with M/s.Vasavi Developers and the seven persons as confirming parties and has not refuted the said documents. ,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 8 of 14 2.4 Having regard to the rival contentions and also the material on record, we find that the basic dispute is with regard to the genuineness of the transaction of ‘agreement to sell’ between the assessee and the alleged seven persons. As seen from the assessment order, one of the documents found and seized during the course of search is a copy of ‘agreement to sell’ between Kamakshi Land Developers i.e. the assessee herein and one of the seven persons. Another document found during the course of search as seen from the assessment order is the copy of the agreement to sell between the assessee herein and M/s.Vasavi Developers. We had directed the learned Departmental Representative to produce copies of these seized documents. However, the learned Departmental Representative submitted his inability to produce the same. Therefore, we proceed to adjudicate the issue on the basis of the findings of the AO and the material on record before us. For the sake of convenience, the chronology of events is tabulated as under:

Date of the Seller Buyer Sy.No. Extent Village Consideration Rs. document Acre Gnt. 14/2/2000 Assessee 1)C.R.Naveen 124 02 10 Koppa 15,00,000 2)K.A.Lavanya 111/1A 02 03 “ 111/B 03 25 “ 13,00,000 23/2/2000 Assessee 1)A.Vishveshwaraiah 111/3 03 00 “ 2)Miss. A.Lakshmi 125/1 13 02 “ 125/2 08 04 “ 213 23 00 “ 03/3/2000 Assessee Smt.A.S.Devi Suraj 17/2 01 14 Ammanebidu- 4,50,000 rakere 16/2 01 05 “ 09/3/2000 Assessee P.Venkatesh Babu 111/2 01 32 Harappanahalli 11,40,000 108 03 36 Koppa 13/3/2000 Assessee K.B.Avinash 212 03 04 “ 211 02 38 Ammanebidu- 12,00,000 rakere & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 9 of 14 17/2/2000 Assessee 1)H.R.Satish 210 04 25 Koppa 11,00,000 2)Smt.Rama Devi 214 00 34 “ 10/2/2000 Assessee 1)S.N.Santosh Kumar 117/2 04 18 “ 13,50,000 2)Rajesh B.Chand 117/1 00 39 “ 124 27 08 “ 06/09/2003 Assessee 124 02 10 Koppa (seller) and 1) K.A.Lavanya 111/1A 02 03 “ 1)C.R.Naveen 2) 111/ 03 25 “ 2)A.Vishvesh- 3)Miss. A.Lakshmi 111/3B 03 00 “ waraiah 4)Smt.A.S.Devi Suraj 125/1 13 02 “ 5) Rajesh B.Chand 3)S.N.Santosh 125/2 08 04 “ Kumar 213 23 00 “ (confirming parties 17/2 01 14 Ammanebidura- and Vasavi Builders rakere 16/2 01 05 “ 117/2 04 18 Koppa 117/1 00 39 “ 124 27 08 “ 116 02 10 “ 15 00 38 J.Bingipura 10/1/2004 Assessee 1)P.Venkatesh Babu 111/2 01 32 (Seller) 2)H.R.Satish 108 03 36 3) Smt.Ramadevi 212 03 04 K.B.Avinash (confirming party) 211 02 38 & Vasavi builders 210 04 25 214 00 34 10/4/2004 Assessee Vasavi Builders & Aishwarya Shelters (MOU) 24/4/2004 “ Vasavi Builders & 125/1 13 02 Aishwarya (Absolute sale deed)

From the chronology of events tabulated above, it is seen that the ‘Agreements to sell’ with the seven persons were entered into in February and March of 2000, and according to the said agreements, the assessee had agreed to hand over the possession of the scheduled lands to the buyers for the limited purpose of survey and marking of the sites as the purchasers were agreeing to purchase the schedule property for the purpose of formation of sites in the schedule property and disposal of the same in favour of the prospective purchasers and the sale shall be completed in favour of the purchasers or their nominees or & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 10 of 14 assignees after formation of the layout and the balance sale price is realized from the prospective buyers of the sites. Even from the copies of the endorsements of handing over of the possession to these seven persons, we find that the possession was handed over in part performance of the said agreements to sell and only to hold, possess and enjoy the schedule property with liberty to form layouts and develop the same with roads, drainages, borewells, electricity and water connections etc. It is not mentioned therein that the other conditions of the agreements to sell have been fulfilled by the purchasers. Further, we also do not find any mention of the payment of balance sale consideration and in some of the endorsements, there are no witnesses even. Therefore, it is difficult to accept the contentions of the assessee that the transaction of sale with these seven persons is complete. However, by virtue of ‘agreements to sell’ the assessee has transferred some right in favour of the purchasers as held by the Hon’ble Apex Court in the case of Sanjeev Lal vs. CIT in Civil Appeal Nos.5899-5900 of 2014 dated 1/7/2014. However, in the case before us, the AO has held these transactions to be sham as they do not find a mention in the sale deeds executed by the assessee in favour of Aishwarya Shelters. On perusal of all the documents filed before us, we find that the ‘agreements to sell’ with the seven persons are mentioned in the ‘agreements to sell’ between the assessee and the seven persons as confirming party and Vasavi Builders ,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 11 of 14 dated 6/9/2003 and 10/1/2004. The relevant recitals are at pages 72 and 86 of the paper book filed by the assessee. The documents dated 6/9/2003 and 10/1/2004 are referred to in the tri-partite MOU between the assessee, Vasavi Builders and Aishwarya Shelters. The AO has not doubted the genuineness of the MOU. In fact, it is stated by the AO in the assessment order that one of the documents found and seized during the course of search is the ‘agreements to sell’ between the assessee and Vasavi Builders wherein there is no mention of any agreement holders. The date of search in the case of the assessee is 23/09/2004 whereas one of the documents found and seized is dated 19/8/2003 which is subsequent in time to document No.1 in the chronology of events. The assessee has filed other documents which are executed along with documents seized during the course of search and the execution of the ‘agreement to sell’ with the seven persons is very much available amongst the same. As regards the endorsement to the effect that possession of the property has been handed over by the assessee, the learned counsel for the assessee submitted that even the assessee was not in possession of the originals of these documents and confirmed that only xerox copies have been filed before the CIT(A). We find that in most of these endorsements, there are no witnesses. The agreement between assessee and the seven persons and M/s.Vasavi Developers is also filed at page 68 of the paper book and on perusal of the said document, ITA Nos.644,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 12 of 14 we find that there is reference to four agreements to sell dated 14/2/2000, 23/2/2000, 3/3/2000 and 2/10/2000 and also about handing over of the possession and receipt of part payment of sale price. Therefore it is clear that the sale was not complete during the relevant previous year. The sale can be complete only when all the conditions of the agreement are fulfilled. Further, as pointed out by the learned Departmental Representative, the partners of M/s.Vasavi Developers are also partners of Kamakshi Land Developers and there is a mention of pay orders of Aishwarya Shelters dated 5/9/2003 in the absolute sale deed executed by Kamakshi Land Developers and M/s.Aishwarya Shelters P. Ltd. which also creates a doubt as regards the necessity of the assessee to enter into a memorandum of understanding with M/s.Vasavi Developers on 6/9/2003, when the final purchaser was already in the field. In all the absolute sale deeds, part of the sale consideration is alleged to be paid by pay orders dated 5/9/2003 as is evident from the recitals in the sale deeds. This creates a doubt on the veracity of the agreements to sell dated 6/9/2003 and 10/1/2004. Further, there is no document dated 19/8/2003, as per the assessee, whereas, there is a mention of the same in the assessment order as one of the documents seized. Further the handing over of the possession was only to enable the seven persons to make the layout and was not as part of performance of the contract and many of the endorsements do not bear the signatures of the & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 13 of 14 witnesses. In this view of the matter, in our opinion, the whole issue requires proper and thorough verification and we are of the opinion that the CIT(A) has proceeded to allow the assessee’s appeal only on the basis of the copies of the endorsements of handing over of the possession without properly verifying the same. We are also aware of the fact that the CIT(A) had called for a remand report from the AO, but we find that the AO also has not verified the documents from this angle. In view of the same, we deem it fit and proper to remand the issue to the file of the AO with a direction to verify the documents filed by the assessee and re-consider the issue de novo in accordance with law without being influenced by any of our observations above. Needless to mention that the assessee shall be given a fair opportunity of hearing.

2.5 The next ground of appeal against the valuation of closing stock is consequent to the adjudication as to whether there was any sale of land during the relevant assessment year and a finding as to whether the transaction of sale between assessee and the seven persons is genuine or not. Therefore, we remand this issue also to the file of the AO.

2.6 In the result, the revenue’s appeal (ITA No.644/Bang/2013) is allowed for statistical purposes. ,645 & 1177/Bang/2013 M/s.Kamakshi Land Developers Page 14 of 14 143(3) r.w.s.147 and also the relief given by the CIT(A) against the penalty levied by the AO u/s 271(1)(c) of the Act. We find that these appeals are consequent to the findings given in the assessment year 2000-01. Therefore, since the appeals for assessment year 2000-01 have been remanded to the file of the AO, these appeals also need re-consideration by the AO. In view of the same, the orders of the CIT(A) are also set aside and remanded to the file of the AO for de novo consideration after giving the assessee a fair opportunity of hearing.