M/S. FAIRLAND DEVELOPMENT PVT. LTD.,KOLKATA vs. CIT-II, KOLKATA, KOLKATA

The Assessee is a company engaged in the business of land development and sale. It filed the return of income for A.Y.2007-08 declaring total income at Rs.NIL. Order of assessment was passed on 30.12.2009 u/s 143(3) of the Act in which the total income of the assessee was assessed at Rs.48,78,240/-.

The CIT in exercise of his powers u/s 263 of the Act was of the view that the previous year relevant to A.Y.2007-08 was the first year of the business of the assessee. The CIT found that the assessee had invested a sum of Rs.1,01,04,668/- in land purchase and development. The assessee’s own funds were only Rs.2,00,000/-. CIT further found that during the previous year the assessee had availed of unsecured loan of Rs.1,60,000/- only. CIT found that the assessee had received money from M/s. Fairland Development Pvt. Ltd. A.Yr.2007-08 prospective buyers of developed land which was reflected as liability towards plot holders of Rs.1,23,01,089/-. This amount was included in the current liabilities as on 31.03.2007. According to CIT AO while completing the assessment had not called for the details of such huge liabilities nor had he made any inquiry in respect of advance received from the plot holders. According to CIT, it is unlikely that in the first year of the business, the assessee would receive advance from plot holders in such huge quantity. He, therefore, concluded that AO’s order was erroneous and prejudicial to the interest of the revenue as no proper inquiry had been made with regard to the source of investment in land purchase and without verification of liabilities shown against the plot holders. CIT accordingly issued a show cause notice u/s 263 of the Act .

In response to the show cause notice dated 24.02.2012, the assessee filed a reply dated 07.03.2012 in which the assessee pointed out that AO completed the assessment u/s 143(3) of the Act after thorough examination of books of account and supporting documents filed in the course of assessment proceedings. He contended that the AO had applied his mind after proper inquiry and concluded the assessment. The assessee pointed out that with regard to the liability of Rs.1.23 crores received from prospective buyers of the developed land the agreement with the land holders were duly examined by the AO on a test check basis. It was also pointed out that in the case of a company which was the first year of the operation there cannot be any addition on account of unexplained cash credit. In this regard the assessee placed reliance on the decision of the Hon’ble Gauhati High Court in the case of Bongaigaon Refinery and Petrochemicals 287 ITR 120 (Gau). The assessee accordingly prayed that the proposal for revision u/s 263 of the Act should be dropped.

CIT, however was of the view that the AO had not made proper enquiries with regard to the advance of Rs.1.23 crores received from prospective purchasers of land. CIT observed as follows :- “As per the Balance Sheet, the assessee invested Rs.1,01,04,668/- in land purchase and development during the year, but the assessee's own fund was Rs. 2 Lakh only. Besides, unsecured loan of Rs.1,60,600/- only is reflected in the accounts. It is apparent that the M/s. Fairland Development Pvt. Ltd. A.Yr.2007-08 investment was made mainly out of money received from prospective buyers of developed land in project from the assessee company, which is reflected as liability towards 'land holders' of Rs.1.23 crore included in Current Liabilities in the Balance Sheet. But no details were obtained nor any enquiry/verification was made in respect of such advance received by the assessee from land holders. It is also not clear how the advances could be received by the assessee company before actual purchase or possession of land by the assessee company for the project. It is also seen from record that some payments for purchase of land were made in cash. There is nothing on record about such cash receipts/availability of cash. In view of this, was all the more necessary to enquire and verify about the sources of the investment in land/land development made by the assessee company during the year. But there is nothing on record in this respect nor any enquiry/verification was made during the assessment.” CIT accordingly set aside the order of assessment with the direction to frame assessment after making thorough enquiry regarding the source of funds claimed as advance by the assessee received from prospective plot purchasers and also to examine their identity, creditworthiness and genuineness of the transaction.

Aggrieved by the order of CIT the assessee preferred the present appeal before Tribunal.

We have heard the rival submissions. A perusal of the records reveals that there were 23 hearings in the proceedings before the AO, before conclusion of the assessment proceedings. Copy of the order sheet in respect of the proceedings u/s 143(3) of the Act are placed at pages 17 to 24 of the assessee’s paper book. The AO had specifically issued notice u/s 142(1) of the Act dated 29.09.2009 in which he had specifically called upon the assessee to submit the names and addresses, amount of payment, evidence of parties who have advanced for land. The AO also called upon the evidence in the form of plot holder agreement. The assessee had filed a list of prospective purchases of the plot who had given advances together with their addresses the same was filed before the AO during the proceedings u/s 143(3) of the Act. The details in this regard had been filed at pages 25 to 27 of the assessee’s paper book Photo copies of the agreement between the assessee and the prospective purchasers of the land was also filed before the AO. The same are at pages 29 to 58 of the assessee’s paper book. It is also seen that at the time of conclusion of the assessment proceedings the AO even made enquiries with the Alipore Registrar Office

In the light of the above enquiries made by the AO before concluding the assessment proceedings it cannot be said that the AO failed to make proper enquiries with regard to the money received from prospective buyers of developed land. The jurisdiction of the CIT u/s 263 of the Act can be exercised only when he find that order of the AO which is sought to be reviewed u/s 263 of the Act was erroneous and prejudicial to the interest of the revenue. The law is well settled that failure of the AO to make an enquiry which he ought to have made before concluding the assessment, renders his order erroneous and prejudicial to the interest of the revenue. The question before us is as to whether in the present case the AO made the necessary enquiry with regard to the money received by the assessee from prospective buyers of the developed land. As we have already seen, the AO made enquiries which he ought to have made with regard to receipt of advance from prospective purchasers of plot from the Assessee to ascertain whether the identity, capacity and genuineness of these persons.

The Hon’ble Delhi High Court in the case of CIT vs Sunbeam Auto Ltd. 332 ITR 167 (Del.) had taken a view that one has to see from the record that there was application of mind by the AO to an issue in question. Once the record reveals that there was application of mind by the AO then it cannot be said that there was lack of enquiry made by the AO. The Hon’ble Delhi High Court made distinction between “lack of inquiry’ and ‘inadequate inquiry ‘. The Hon’ble Court further held that provision u/s 263 of the Act can be invoked only when there was lack of enquiry and not in case CIT feels that there was inadequate inquiry conducted by the AO. This proposition has also been reiterated by the Hon’ble Delhi High Court in the case of M/s. Fairland Development Pvt. Ltd. A.Yr.2007-08 DIT vs Jyoti Foundation 357 ITR 388 (Delhi) and CIT vs. Anil Kumar Sharma 335 ITR 83 (Del.).

We are of the view that in the light of the material available on record the AO had conducted inquiries with regard to the money receipt by the assessee from prospective buyers of developed land. The CIT therefore could not have invoked the jurisdiction u/s 263 of the Act on the ground that there was lack of inquiry on the part of the AO. We, therefore quash the order u/s 263 of the Act and allow the appeal of the assessee.

In the result the appeal of the assessee is allowed. Order pronounced in the court on 20.01.2016.