ACIT, CIRCLE- 2(1), CUTTACK vs. K P PRIME ASSETS (P) LTD. , CUTTACK

आयकर अपीऱीय अधिकरण, कटक न्यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH CUTTACK BEFORE SHRI C.M. GARG, JM & SHRI ARUN KHODPIA, AM आयकर अपीऱ सं./ITA No.459/CTK/2019 (नििाारण वषा / Assessment Year :2014-2015) K.P.Prime Assets Pvt. Ltd. Vs ACIT, Cirlce-2(1), Cuttack Chhatra Bazar, Canal Road, Cuttack PAN No. : AAFCK 2253 D AND आयकर अपीऱ सं./ITA No.67/CTK/2020 (नििाारण वषा / Assessment Year :2014-2015) ACIT, Cirlce-2(1), Cuttack Vs K.P.Prime Assets Pvt. Ltd. Chhatra Bazar, Canal Road, Cuttack PAN No. : AAFCK 2253 D (अऩीलाथी /Appellant) (प्रत्यथी / Respondent) .. ननधाारिती की ओर से /Assessee by : Shri Mohit Sheth, Advocate : Shri Sovesh Chandra Mohanty,Sr.DR िाजस्व की ओर से /Revenue by सुनवाई की तािीख / Date of Hearing : 16/02/2022 घोषणा की तािीख/Date of Pronouncement : 07/03/2022 आदेश / O R D E R Per Arun Khodpia, AM: These two cross appeals by the assessee and revenue made against the order dated 30.10.2019, passed by the ld. CIT(A), Cuttack for the assessment year 2014-2015. 2. First, we shall take up the appeal of the assessee i.e. ITA No.459/CTK/2019, wherein the sole ground raised by the assessee is as under:-

2 ITA No.459/CTK/19 & ITA No.67/CTK/2020 1. For that on the facts and in the circumstances of the case the addition of Rs.22,81,892/- as made by way of disallowance of operative expenses as claimed is uncalled for and unjustified. 3. Brief facts of the case are that the assessee company derives income from the sale of properties (Real Estate) during the year under consideration. The assessee company filed its return of income on 28.11.2014 disclosing a total income of Rs.37,80,885/-. The case was selected for scrutiny under the CASS scheme and statutory notices were issued to the assessee. Thereafter, the AO completed the assessment assessing the total income of the assessee at Rs.2,31,03,880/-. 4. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) and the CIT(A) deleted the addition of Rs.1,70,41,104/- made by the AO and upheld the addition of Rs.22,81,892/- made by the AO under the head „Operative Expenses‟. Thus, the appeal of the assessee was partly allowed by the CIT(A). 5. Now, the assessee against the addition confirmed by the CIT(A) made under the head operative expenses is in appeal before us. 6. Ld. AR before us submitted that the books of account were duly audited and the assessee has furnished the documents and the details during the course of assessment proceedings, which was

3 ITA No.459/CTK/19 & ITA No.67/CTK/2020 properly examined by the AO, the same is evident from para 2 of the order of AO, which reads as under :- “In response to the statutory notices issued, Mr. Anil Agarwal, FCA, Authorized Representative (A/R) of the assessee appeared from time to time, explained the issues involved through production of relevant details and the case was discussed. The details/documents furnished during the course of assessment proceedings were examined vis-à-vis books, the bills and vouchers. Mr. Annand Podar, Director also appeared in person to explain the claim of land development expenses. Information were called for from the buyer, different contractors etc. After taking into consideration the details/documents/explanations, as submitted and gathered, the total income of the assessee is computed after due confrontation of facts which is as under”. 6.1 It was also submitted by the ld. AR that such expenditure are stamp duty and registration charges made by the assessee and are fully explainable. The ld. AR contended that the AO is not justified to disallow the operative expenses in toto. 7. On the other hand, ld. Sr. DR relied on the findings of CIT(A) with regard to upholding the addition of Rs.22,81,892/- made by the AO under the head Operative Expenses. Further the ld. Sr. DR submitted that the assessee did not furnish ledger account or details of the expenses claimed for. Even in the appellate proceedings also the assessee was unable to furnish any corroborate information or documents in support of such expenses. Therefore, the ld. Sr. DR submitted that the appeal of the assessee has no merit and deserves to be dismissed.

4 ITA No.459/CTK/19 & ITA No.67/CTK/2020 8. We have heard both the parties and perused the impugned orders of the lower authorities. On careful perusal of the order of the AO has not allowed the claim of the assessee holding that the expenses claimed by the assessee were exclusively for the purpose of business. The findings of the AO in this regard at para 3.6.19 are as under:- “3.6.19 Details of operative expenses claimed at Rs.22,81,891/- are not furnished in spite of several opportunities allowed. There being a single transfer of land and no other activities involved during the previous year 2013-14, the purpose of such expenses should have been proved to be exclusively for the earring of income i.e. sale of land. In view of the failure on the part of the assessee to substantiate that such claim of expenses were exclusively for the purpose of business, deduction of Rs.22,81,892/- is not allowed.” 8.1 In first appeal, the CIT(A) confirmed the above findings of the AO, observing as under:- “The next issue relates to the disallowance of operative expenses of Rs.22,81,892/-. It is seen from an examination of the assessment record for A.Y-2014-15 that no ledger account or details of this expense was provided to the AO. Even during the appellate proceedings, the counsel for the assessee has been unable to furnish any evidence to corroborate these expenses. Hence, the addition of Rs.22,81,892/- made by the AO under the head „Operative expenses‟ is hereby upheld.” 8.2 From the perusal of these relevant observations of both the authorities below, we find that the assessee has not produced ledger account and details with respect to the claimed expenditure. However, ld. AR before us submitted copy of Ledger Account of Registration Charges on the sale of property, which shows that the expenditure was for stamp duty and registration charges for the sale

5 ITA No.459/CTK/19 & ITA No.67/CTK/2020 effect, a copy of the same was provided to Ld DR also. Ld AO also contented that this evidence was duly submitted to the revenue authorities at respective stages. Looking to this position, it seems that these expenditures are legitimate and paid to the Government account for registration, which are allowable expenditure in the eye of law Hence, for the sake of justice, we restore the matter back to the file of AO for proper verification of the expenditures claimed by the assessee and allow the same after providing sufficient opportunity of hearing to the assessee. The assessee is directed to cooperated with the AO for early disposal of the matter. Accordingly, the sole ground raised by the assessee in its appeal is allowed for statistical purposes. 9. Thus, ITA No.459/CTK/2019 is allowed for statistical purposes. 10. Now, we shall take up the appeal of the revenue i.e. ITA No.67/CTK/2020, wherein the revenue has raised the following grounds:- 1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A), Cuttack was justified in deleting the addition of Rs.1,70,41,104/- made for land development expenses even though the assessee had failed to furnish proper evidence in support of actual payments to the sub-contractors. 2. Whether on the facts and in the circumstances of the case, the Ld.CIT(A), Cuttack was justified in deleting the addition on account of land development expenses ignoring the fact that 3 out of 16 sub-contractors had categorically denied having done any such work for the assessee and in one case the letter was returned unserved?

6 ITA No.459/CTK/19 & ITA No.67/CTK/2020 3. Whether, on the facts and circumstances of the case and in law, the CIT (A) erred in not making further enquiry or directing the AO to make further enquiry and report the result of the same to him u/s. 250(4) of the Act in respect of the timely on which relief was granted by him. 4. Whether, on the facts and circumstances of the case and in law, the CIT (A) erred in granting relief without appreciating that the perverse of the CIT(A) are co-terminus with that of the AO, as held by the Hon'ble Supreme Court in ease of CIT Vs Kanpur Coal Syndicate in 53 ITR 225 (SC). 5. The appellant craves leave to add, alter, amend one or more grounds of appeals before the appeal is heard. 11. Though the revenue has raised five grounds, however, the effective ground is against the deletion of addition of Rs.1,70,41,104/- made for land development expenses, with the allegation that “”Whether on the facts and in the circumstances of the case, the Ld.CIT(A), Cuttack was justified in deleting the addition of Rs.1,70,41,104/- made for land development expenses even though the assessee had failed to furnish proper evidence in support of actual payments to the sub-contractors.” Other 4 grounds are ancillary in the nature or general, hence all are dealt with together. 12. To start with arguments, Ld. Sr. DR submitted that the main objective of the assessee-company being real-estate business, the activity of purchase of land and selling of some portion of it can be very well treated as business income and not short-term capital gain. The expenses claimed by the assessee are not genuine and payments claimed to have made were not exclusively for the purpose of business. The AO has applied his mind while examining

7 ITA No.459/CTK/19 & ITA No.67/CTK/2020 the expenses during assessment proceedings claimed by the assessee under the head Material and Labour of Rs. 2,30,41,104/-. The AO has correctly computed and arrived at an estimated amount of Rs. 60,00,000/- as against actual claim of assessee for Rs. 2,30,41,104/- and rightly restricted the expenses claimed by the assessee and correctly made the disallowance of Rs. 1,70,41,104/-. 13. In support Ld DR read para 3.6.15 -3.6.18, as under: “3.6.15 Under the circumstances and in the facts of the case, there is no option available but to go for estimation of probable expenses incurred in connection with the transfer of the land. Admittedly there has been the some works done in connection with the transfer of the land which has been confirmed by the Director of the buyer company also. Such expenses are for; (i) Construction of approach road and road in front of the site (Morrum/Sand road with compaction). (li) Bush clearing & Leveling. (i) The volume of approach road of 400 meter with 40 ft width and 0.5 ft depth is calculated at 20,640 ft and the road in front of the plot of 600 ft in length 60 ft in width and 0.5 ft in depth is calculated at 18,000 ft. It is understood from the market that the rate for construction of Morrum/send road with compaction comes is between Rs.700/- to Rs.1,000/- per cubic Mt. depending on the leads for availability of Morrum and sand. Total volume of the constructed road is computed at 38,640 ft, which is equivalent to 1094.617 Cubic mt. On adoption of the rate of Rs.900 per cubic meter, total expenditure on this count might be at Rs.9,85,155/- or at best it can not be more than RS.10 Lakhs. (ii) As per the admission of the director, Mr. Anand Paddar, Bush Clearing and leveling have only been carried out on the plot of land transferred i.e. Ac 8.15 decimal. The Kisam of the land is "Bagayat" which means the land was having bushes and trees hence not low- laying lands. The prevalent rate for bush-clearing & leveling type of contract works is at best Rs.25/sqmt. 8 acres of land is equivalent to 3,48,400 sq.ft or 32,366.368 sq ft meters. Thus, expenses on such work might be at Rs.8,09,159/- or say at best at RS.10 Lakhs. If uniform sand filling of 6" (inch) is accepted to have done over the surface of land, sand equivalent to 4932 cubic mt might have been required for such purpose. As per the bills submitted, 13CM of sand

8 ITA No.459/CTK/19 & ITA No.67/CTK/2020 had been purchased at Rs.10,400/-. Accordingly, expenses against purchase of 4932 CM sand might have been for Rs.39,46,235/- or say Rs.40 Lakhs. 3.6.16 The main objective of the company being real-estate business, the activity of purchase of land and selling of some portion of it can be very well treated as business income and not short-term capital gain. 3.6.17 For the facts discussed in preceding paragraphs, the claim of expenses are not genuine and payments claimed to have made were not exclusively for the purpose of business. 3.6.18 In view of the discussion made at Para-3.6.15, total land development expenditure and payments claimed to have made were not exclusively for the purpose of business.” 13.1 Further, The Ld DR, also took us to para 3.6.13 (a) & (b) of the assessment order with the contention to show that the claim of the assessee as per its books of account was found to be not reliable and genuine. Para 3.6.13 (a), (b) and 3.6.14 are reproduced as under: 3.6.13 (a) Mr. Ranjit Jena confirmed that he had supplied sand to the company through credit purchases and he had procured sand from other people othe than the authorized lessee. It shall not be out of context to mention here that sand can only be raised from river belt, etc by the authorized lessee and royalty is required to be paid on such raising or transportation of sand. Mr. Jena is a salaried employee of May Fair Hotel and Resort Ltd., Bhubaneswar and has declared only salary income in his return of income for the A.Y. 2014-15. He has been paid Rs.9,89,000/- through bank on 26.03.2014 and said amount has been withdraw in cash on 27.03.2014 which goes on to prove that Mr. Jena has been used as a conduct for siphoning out of fund in guise of expenses. In the TDS return, gross contract value has been declared at Rs.9,89,000/- where as this is the net payment to him. Signature of Ranjit Jena in the bill copy submitted and in the reply received, do not match. As the claim is purchase of sand, TDS is found to have been made with an intention to depict the transaction as true, because of the fact that the provisions of section 194C does not warrant any deduction on purchase of materials. The circumstantial back ground of the events involved in this case clearly leads to the contumacious nature of the assessee to inflate expenses and squeeze the generation of income to avoid tax liability. Otherwise, how can a

9 ITA No.459/CTK/19 & ITA No.67/CTK/2020 hotel employee be entrusted to supply sand to the project of the assessee? Therefore, the claim that Mr. Ranjit Jena has supplied sand is not acceptable in the facts of the case. (b) Similar is the case of one Shri S.B. Kar, who is claimed to have raised a bills for RsA,54,850/- against supply of "Mankada Stone" & "Cement". TDS has also been deducted against such payment and in the TDS return the amount allowed is at Rs4,50,000/- with the TDS of Rs.4,546/-. The sole reason for making TDS is to give the transaction acceptability and is an afterthought. Transfer of fund of RsA,50,OOO/- to his account on 25.03.2014 and withdrawal of said amount in three installment within a week goes on to prove the nature of transaction. Had it been a genuine transaction, creditors payment could have been made through cheques or on the dates of payment as required leaving the profit margin in the bank. 3.6.14 Therefore, the claim of expenses reflected in the book is found not reliable and genuine. The circumstantial evidences oozes out from the material facts clearly indicates assessee's unwarranted approach to comply TDS provision or purchases of materials with an ulterior motive to establish the genuineness of incurrence of expenses for the reason best known to the directors. The said claim of incurrence of expenditure of Rs.2,30,41,104j- to make an approach road of given dimensions, bush cutting & levelling also fail human perception. 13.2 The Ld DR also pointed out that, while conducting enquiry AO had called for information by enquiring 16 parties, whereas, 3 out of 16 sub-contractors had categorically denied having done any such work for the assessee. Para 3.6.7 of the Order of AO is relevant for this fact: 3.6.7 Out of notices issued in 16 cases calling for information, Sri Sarbeswar Das, Sri Nabaghana Das and Sri Kasinath Mahasuwar sent their reply disowning the claim of the assessee company that they have executed certain work for them or supplied some materials to the company. This fact are confronted to Mr. Anil Agarwal on 29.03.2012 and it is explained that the payments being made in cheque on making TDS their submission should not be entertained as evidence. 13.3 The same fact was further reiterated by Ld CIT(A) also vide last para on page 3 of 5 with a mention that the assessee was not

10 ITA No.459/CTK/19 & ITA No.67/CTK/2020 granted an opportunity to cross examine the said 3 parties namely Sri Sarbeswar Das, Sri Nabaghana Das and Sri Kasinath Mahasuwar. Relevant para from CIT(A)‟s order is extracted as under: 13.4 In view of above discussion, the Ld Dr has mentioned that , relief granted by the Ld CIT(A) for the addition made by the AO, is not justified and proper in absence of proper evidence even without directing the AO to make further enquiry. Therefore, ld. Sr. DR submitted that the order passed by the AO deserves to be restored. 14. On the other hand, ld. AR for the assessee relied on the order of CIT(A) and submitted that the expenses were duly explained before the AO. To counter the contention of Ld Sr DR, Ld AR placed reliance on the decision of the coordinate bench of the Tribunal in the case of Devika Bhagat Vs. DCIT, in ITA No.3384/Del/2014 and submitted that AO‟s Action is unlawful. Therefore, the CIT(A) after proper observation has rightly deleted the addition made by the AO and there is no interference is called for in the findings recorded by the CIT(A) in this regard. 15. Ld AR also pointed out that during the assessment proceedings itself it is proved that the parties who have disowned the claim of assessee is mere a afterthought of them and transaction

11 ITA No.459/CTK/19 & ITA No.67/CTK/2020 done with them are duly supported as were paid by cheque and proper TDS was made on the same. 16. In rejoinder, the Ld DR has mentioned that the payment by cheuqe and TDS were done only to colour the transaction, otherwise observation of the AO was correct and genuineness of the expenditure made is doubtful in its entirety. 17. After hearing both the parties, carefully perusing the material available on record, we find that in order to verify the genuineness of the expenditure incurred on land development, the AO issued letters u/s.133(6) of the Act to the various sub-contractors who had carried out the work of leveling and road construction. Out of 16 letters issued u/s.133(6) of the Act, 13 sub-contractors confirmed that land development work had been carried out by them for the assessee. However, in respect of 3 sub-contractors a negative reply was received by the AO. The 13 contractors have also replied to the AO confirming that they executed contractor work/supply of material for the assessee. The bank statements evidencing payment received from the assessee were also furnished by these sub-contractors along with a description of the nature of work performed and the daily sheets showing supply of labour and sand. However, the AO has built up his entire case on a suspicion that the land development charges are excessive and after disregarding all evidence placed

12 ITA No.459/CTK/19 & ITA No.67/CTK/2020 before him, has proceeded to introduce his own calculation of how much an approach road should cost and how much expenditure should be incurred in clearing a plot of land of bushes. The assessment order built entirely on surmises and assumptions cannot be endorsed and nor can it stand the test of appeal. We also observe that the AO ought to have taken into consideration the payments made by the assessee to 13 sub-contractors and the remaining 3(three) sub-contractors may come into play for making addition against the payments made to them by the assessee. Even the CIT(A) while deleting the addition would have taken into consideration of the payments made to 13 sub-contractors and not the payments done to all 16 sub-contractors. 18. Therefore, we are of the opinion that CIT(A) has rightly deleted the addition made by AO as the same was based purely on the basis of assumptions. We therefore, respectfully following the decision of „Honble apex court in the case of JJ Enterprises V CIT(Supra) wherein it has been categorically held that if the addition had been made on the basis of pure guess work was unsustainable. The same view has been taken by Lucknow Bench of the Tribunalin the case of ITA No.722/LKW/2017 and Delhi Bench of the Tribunal in the case of ACIT Vs. Modi Rubber Limited, ITA No.1952/Del/2014.

13 ITA No.459/CTK/19 & ITA No.67/CTK/2020 19. However, to the extent of transaction with 3 contractors who have given adverse feedback that no work was done by them as against claimed of the assessee, we restore back the ground to the files of AO for thos limited purpose, with directions to restrict the addition, only to the extent of transactions done with specified 3 contractors, who had given adverse report against the information / contention of the assessee, but in case it could not be proved that the cash withdrawn from their account is received back by the assessee the same cannot be disallowed. Therefore, we restore the appeal of the revenue to the AO for this limited purpose and allow the appeal of the revenue for statistical purposes. 20. In the result, the appeal of the assessee and revenue are allowed for statistical purposes. Order pronounced in the open court on 07/03/ 2022. Sd/- Sd/- (C.M.GARG) (ARUN KHODPIA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER कटक Cuttack; ददनाांक Dated 07/03/2022 Prakash Kumar Mishra, Sr.P.S. आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीलाथी / The Appellant- 1.

प्रत्यथी / The Respondent- 2. आयकि आयुक्त(अऩील) / The CIT(A), 3. 4. आयकि आयुक्त / CIT ववभागीय प्रनतननधध, आयकि अऩीलीय अधधकिण, कटक / DR, 5. आदेशािुसार/ BY ORDER, ITAT, Cuttack गार्ा पाईल / Guard file. 6. (Senior Private Secretary) आयकर अपीऱीय अधिकरण, सत्यावऩत प्रनत //True Copy// कटक/ITAT, Cuttack