2014 (10) TMI 209 - AT - Income Tax

Tribunal Decision: Some ITA Appeals Allowed, Some Partly Allowed, Some Dismissed; Assessing Officer's Additions Deleted

Sri KC. Reddappa Naidu, Tirupathi. Versus Asst. Commissioner of Income Tax, Central Circle

The Tribunal allowed ITA No. 1462/Hyd/2012 and ITA No. 1463/Hyd/2012, partly allowed ITA No. 1464/Hyd/2012 and ITA No. 1465/Hyd/2012, and dismissed ITA ... Unexplained investment in land - Search u/s 132 – Held that:- The lands were in the name of Shri S. Vijaya Kumar stated to be an employee of the assessee, but, it is also a fact that the investment in land was not only recorded in the books of assessee but also reflected in the balance sheet furnished along with the return of income filed in response to notice u/s 153A of the Act - AO without properly examining the books of account and the balance sheet has added the amount by simply observing that the amount has not been reflected in the return of income, which is not correct - CIT(A) sustained the addition by simply observing that the assessee has updated the books of account by incorporating such investment after search - the conclusion drawn by the AO as well as the CIT(A) are without any basis - as the assessee has reflected the investment in its books of account as well as in the balance sheet furnished along with the return of income, there is no reason to consider the investment made as unexplained – the AO is directed to delete the addition of ₹ 2,10,800 – Decided in favour of assessee. Addition treated as gifts – Held that:- The gifs consist of small amounts received from close relatives of the assessee - all the donors have furnished affidavits not only confirming the gifts but have also furnished their source of income from agriculture with supporting evidences like Pahani and certificate from the VRO - It cannot also be denied that assessee has shown gifts in the original return filed by him prior to the date of search - the addition made by observing that the creditworthiness of the donors have not been established appears to be merely on presumption and surmises - As the assessee has established the identity of the donors and their source of income as well as genuineness of transaction, which in any case has not been disputed by the CIT(A), addition of the gifts amounting to ₹ 1,99,227/- is not justified – Decided in favour of assessee. Addition towards unaccounted investment – Held that:- While the AO has added the amount in question with the remark that the assessee has not reflected them in the returns filed, the CIT(A) sustained part of the addition on the ground that though the assessee has reflected the investments in the books of account but the lands have been purchased by third parties – the observation of the AO is without any basis as Assessee has not only reflected the investments in its books of account but has also shown it in the balance sheet accompanying the return of income - The finding of the CIT(A) is also on the basis of presumptions and surmises considering the fact that merely because the investments have been made in the name of some other persons, the additions have been made by totally ignoring the fact that the assessee recorded the investments in its books of account as well as balance sheet furnished along with the return - the investments cannot be considered as unexplained – Decided in favour of assessee. Addition of ₹ 10 lakhs – Genuineness of transaction not proved - Held that:- The expenditure claimed by the assessee on various dates towards Gajalakshmi Nagar – II project, on account of gravel purchase, JCB hire charges, labour charges, land development charges, watering charges etc. - the entire expenditure has been incurred in cash and supported by only self-made vouchers - the expenditure has been recorded in the books of account, that cannot by itself prove the fact that the entire expenditure is genuine - it is incurred in cash and being supported by only self-made vouchers, some amount of inflation in the expenditure cannot be ruled out - search assessment u/s 153A of the Act cannot be confined to seized material alone - AO while making search assessment in a case where assessment has not been made in regular course can consider all aspects of income accruing to the assessee during the relevant AY - the assessee is required to prove the genuineness of the expenditure - as the assessee has not proved the genuineness of the entire expenditure claimed to have been incurred, the order passed by the CIT(A) in restricting the disallowance to 10% of the total expenditure debited to P&L A/c is reasonable – Decided against assessee. Addition of unexplained investment – Held that:- The document has not been signed by the assessee. Similarly, assessee has submitted the affidavits of original land owners as well as vendees before the AO as well as the CIT(A) - Original land owners in their affidavits have clearly stated that they have neither sold the property to the assessee nor received any consideration from the assessee in that regard - These evidences have not been controverted by bringing any other evidence on record either by the AO or by the CIT(A) - seized document raises a presumption with regard to the authenticity of the contents thereof in terms of section 132(4A) of the Act - assessee can prove the contents of such document incorrect by producing necessary evidence - apart from unregistered sale agreement (not signed by the assessee) there are no other evidence corroborating the fact that the assessee has in fact purchased the land or has paid any consideration to the original land owners - the statement of the vendors before the departmental authorities, affidavits filed by the vendors and vendees, copies of the registered sale deeds on actual sale of the property clearly establish that the unregistered agreement of sale found during search was never acted upon, nor assessee paid any consideration to the vendors - no addition can be made at the hands of the assessee purely relying upon unregistered sale agreement when the fact remains that land was ultimately sold to some other persons by the original land owners - addition made at the hands of the assessee cannot be sustained – Decided in favour of assessee. Unexplained investment in land – Held that:- The entire addition has been made solely relying upon the document found at the time of search indicating the sale of property to the assessee and his wife Smt. K.A. Aruna Kumari - the document does not bear any signature of the assessee and his wife - the vendors of the property in course of post search proceeding when confronted with the seized material categorically stated before the ADIT that they have not sold the property to the assessee nor received any consideration from the assessee - solely relying upon unregistered document, which is also not signed by the assessee and his wife, addition cannot be made at the assessee’s hands - the AO has not brought any corroborative material on record to prove that the transaction as mentioned in unregistered agreement of sale has fructified and the consideration referred to therein was actually paid by the assessee - since there are material to indicate that the consideration mentioned in the unregistered and unsigned document was actually paid by the assessee to land owners and when the materials on record otherwise prove that the land was sold to persons other than the assessee and his wife, no addition can be made at the hands of the assessee by solely relying upon the unregistered sale agreement – Decided in favour of assessee. Partial addition made – Held that:- The assessee has explained that the amount was received on behalf of Shri K. Harinath Reddy as GPA Holder towards sale of site on 23/08/2007 and the same were passed on to the Shri Harinath Reddy on 08/04/2007 - there is a credit entry of ₹ 36 lakhs with the noting that the amount was received on behalf of Shri Harinath Reddy being a GPA holder - assessee has referred to the returns of income of Shri K.Gopinath Reddy and K. Vishwanatha Reddy to substantiate that sale of land has been shown by the concerned persons by declaring capital gain - amount of ₹ 36 lakhs has been paid back to Shri K. Harinath Reddy - only because assessee has shown liability of ₹ 36 lakhs it cannot be inferred that the amount is the unexplained cash credit - This could have been established had Shri Harinath Reddy been examined - No enquiry has been taken up with shri Harinath Reddy to ascertain whether the assessee had repaid the amount of ₹ 36 lakhs as claimed by the assessee –the matter is to be remitted back to the AO for fresh consideration – Decided in favour of assessee. Amount of fictitious gifts deleted – Held that:- The AO has given absolutely no reason why he considers gifts to be unexplained inspite of the fact that the assessee has furnished confirmations/affidavits along with other details like land holding of the donors their source of income etc. - gifts are of small amounts of ₹ 30,000/- to ₹ 45,000/- from different donors and most of them are close relatives of the assessee - when the assessee has established the identity of the donors, their source of income and the donors have also confirmed of having gifted the amounts to the assessee, it is unreasonable on the part of the AO to ignore the evidences brought on record and make addition by treating the gifts as unexplained - the CIT(A) was justified in deleting the addition made by the AO – Decided against revenue. Unexplained investment in land – Held that:- CIT(A) rightly observed that the AO without properly verifying the facts has made the addition in a summary manner - the assessee has reflected the investment made in purchase of land in his books of account along with registration charges, the conclusion drawn by the AO that the assessee has not disclosed the investment in the return of income is without any basis - this fact has not been controverted by the department by bringing any other material on record – the order of the CIT(A) is upheld – Decided against revenue. Addition in construction of building – Held that:- As decided in assessee’s own case for the earlier year, it has been held that the seized material clearly indicates that the expenditure incurred was towards construction of assessee’s own house as well as the house of Shri V. Mallesh - even as per the seized material, it cannot be said that the assessee has invested more than ₹ 27,40,957/- as disclosed in the return of income for the AY 2003-04 and 2004-05 - the valuation made by the DVO also gives credence to the fact that the cost of construction disclosed by the assessee at ₹ 27,40,957/- is correct considering the fact that the DVO has arrived at the cost of construction at ₹ 30.04 lakhs - CIT(A) was justified in deleting the addition of ₹ 5,01,069/- as well as the amount of ₹ 2,63,043/- being the difference between the valuation as per the assessee and cost of construction determined by the DVO as the difference is negligible, which can be due to the fact of self supervision and procurement of materials by the assessee at lower cost – Decided against revenue. Addition of unexplained investment – Held that:- CIT(A) rightly noted that the document in question on the basis of which AO has made the addition is an unregistered document and not signed by the assessee - original land owners in the post search proceedings have categorically denied of having sold the property to the assessee or receiving any consideration towards proposed sale of the property - property in question has ultimately found to have been sold to various other persons and not the assessee and Smt. K. Aruna Kumari - solely relying upon the seized document marked as Annexure A/KCRN/05 addition could not have been made by the AO when the evidences brought on record clearly indicate that the sale was neither effected to the assessee nor payment has been made by the assessee - In absence of any other material brought on record to establish the fact that unregistered sale agreement was acted upon or the money actually changed hand it is not possible to sustain the addition – the order of the CIT(A) is upheld – Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether investments shown by the assessee in books and balance sheet that correspond to sale deeds or other documents found during search-but where title documents are in third parties' names-can be treated as unexplained investment/unrecorded income. 2. Whether amounts shown as gifts/credits in capital account are taxable unexplained credits when donors are relatives/agriculturists and have furnished affidavits and supporting documents. 3. The evidentiary weight of seized loose papers/unregistered agreements (including unsigned documents) in search assessments and the applicability and rebuttability of the presumption arising from search evidence. 4. Whether loans/advances/credits reflected in books and supported by affidavits, passbooks and other proof of donor/creditor identity and source can be treated as unexplained cash credits where creditors are agriculturists or where no interest was charged. 5. The standard of proof required to sustain adhoc disallowances of expenditure (including large cash expenditures supported by self-made vouchers) in search assessments and the scope of permissible ad hoc reductions (CIT(A)'s 10% direction). 6. Whether advances received in the course of real-estate business (reflected in accounts as advances and later credited to sales) are taxable as unexplained credits in the year of receipt. 7. Proper approach when seized material indicates a transaction (e.g. unregistered agreement) but post-search statements, vendor affidavits and registered deeds show the transaction did not fructify-whether addition can still be made on assessee. 8. Whether issues requiring further factual enquiry (e.g. large credited amount allegedly held on behalf of third party) should be remitted to Assessing Officer for verification. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Investments recorded in books vs sale deeds in third parties' names Legal framework: Assessment of unexplained investments where sale deeds or other documents found during search indicate purchases (s. 68/69 principles and search-assessment under s.153A). Books of account and balance sheet produced with return are relevant evidence. Interpretation and reasoning: The Tribunal examined whether Assessing Officer/CIT(A) could treat investments as unexplained when the assessee had recorded those investments in its books and balance sheet filed in response to s.153A notices. Where the assessee consistently reflected the amounts in audited books and accompanying balance sheet/cash-flow, mere fact that registered title was in a third party's name-without contrary corroborative material-was insufficient to treat the investment as unexplained. Findings of AO/CIT(A) based on mere surmise (e.g., that entries were updated after search) were held to be without basis where books/balance sheet were not rejected or shown to be fabricated, and no confirmations from purported third parties disproved the entries. Precedent treatment: No single case was overruled; Tribunal applied established principle that seized documents must be corroborated and that entries in books, once not rejected, carry evidentiary value. Ratio vs. Obiter: Ratio - where investments are recorded in books and balance sheet furnished with return and not shown to be fabricated, they cannot be added as unexplained merely because title appears in another name; presumption from seized documents is rebuttable. Obiter - observations on how investments could be reflected as debtors under accounting norms. Conclusion: Additions on account of such investments were deleted where books and balance sheet consistently recorded them and no corroborative material demonstrated the assessee did not make payment. Issue 2 - Gifts credited to capital account Legal framework: Section 68 principles: identity, genuineness and creditworthiness of donors to explain gifts/credits. Interpretation and reasoning: Small-value gifts from close relatives/agriculturists supported by affidavits, pattadar passbooks, VRO certificates and shown in original return pre-search sufficed to establish identity and source. CIT(A)'s reliance on late-dated affidavits or perceived insufficiency of donors' creditworthiness was treated as mere presumption where Assessing Officer did not verify or controvert the evidence. Non-charging of interest and agricultural status of donors are not conclusive grounds to treat gifts as unexplained. Precedent treatment: Following established practice that affidavits and documentary evidence of donors' land holdings and income can satisfy s.68 if not successfully controverted by AO. Ratio vs. Obiter: Ratio - where identity and source of donors are established and not rebutted, gifts shown in return are not to be treated as unexplained credits. Obiter - comments on timing and formality of affidavits (late affidavits nearer limitation) as factors to be considered but not determinative. Conclusion: Additions relating to gifts were deleted when adequate confirmations and source evidence were produced and not effectively challenged. Issue 3 - Seized loose papers / unregistered or unsigned agreements and the presumption from search Legal framework: Search operations create a presumption in respect of seized material (reference to statutory presumption under search provisions) but such presumption is rebuttable by the assessee with contrary evidence; loose papers are 'dumb documents' and require corroboration. Interpretation and reasoning: Tribunal held that entries on loose papers or unsigned/unregistered sale agreements cannot, by themselves, justify additions where there is no corroborative evidence that the transaction was completed or money changed hands. Statements of vendors denying sale, affidavits from vendees showing property sold to others, registered deeds in favor of third parties, and absence of signature by assessee rebut the presumption. Where seized documents are ambiguous, unspecific as to nature of entries, unsigned, or not linked to assessee's books, they are unreliable for making additions. Precedent treatment: Applied prior decisions treating loose seizure documents as not sufficient unless supported by corroborative materials; acknowledged settled law that seized documents are presumptive but rebuttable. Ratio vs. Obiter: Ratio - additions cannot be sustained solely on seized loose papers/unregistered/unsigned agreements absent corroboration; presumption from search is rebuttable by credible contrary evidence. Obiter - practical guidance that AO must seek corroboration and examine vendors/third parties where possible. Conclusion: Additions based solely on such seized papers were deleted where assessee produced evidence disproving the transactions or showing sales were to others. Issue 4 - Credibility of loans/credits from agriculturists and non-charging of interest Legal framework: Under s.68 the assessee must prove identity, genuineness and creditworthiness of creditors; acceptance of cheque/DD receipts, affidavits, passbooks and income details satisfy initial burden. Interpretation and reasoning: Tribunal emphasized that AO must independently verify and not summarily reject creditors' affidavits or pattadar passbooks. Non-charging of interest or agriculturist status is not ipso facto proof of sham; where loans are routed through banking channels (cheque/DD) and creditors' returns or confirmations show corresponding receipts, the credits are explained. Where material gaps remain or important corroboration (e.g., examination of creditor) absent, remand or further inquiry may be required. Ratio vs. Obiter: Ratio - where identity, mode of payment and creditworthiness are supported by documentation and not controverted, AO cannot treat credits as unexplained simply because creditors are agriculturists or interest was not charged. Obiter - direction to remit issues where further enquiries (e.g., examine third party) are necessary. Conclusion: Deletions of unexplained credit additions were upheld where creditors' affidavits, passbooks and other evidence were on record and AO had not made verifying enquiries; in limited cases remand ordered for specific enquiries. Issue 5 - Ad-hoc disallowance of expenditure supported by self-made vouchers/cash payments Legal framework: Burden on assessee to prove genuineness of expenditure; in search assessments AO may examine beyond seized material; however disallowance must be based on material and not mere suspicion. Interpretation and reasoning: Tribunal accepted that cash expenditures supported only by self-made vouchers raise suspicion of inflation and that AO may make ad hoc disallowances. However the quantum must be reasonable and based on material; CIT(A)'s reduction to 10% of total debited expenditure was held reasonable where vouchers were self-made, expenses in cash and genuineness unproven. Conversely, where expenditure is recorded in audited books and not contested, disallowance without specific defects is improper. Ratio vs. Obiter: Ratio - AO may make ad hoc disallowance where cash payments are supported only by self-made vouchers and genuineness is unproven; appellate authority may moderate quantum (10% in facts) as reasonable. Obiter - exact percentage is fact-specific; guidance that AO must point to specific defects if seeking larger disallowance. Conclusion: Tribunal sustained CIT(A)'s moderation of ad-hoc disallowance to 10% where expenditure lacked independent vouchers; other adhoc disallowances were deleted where books and DVO valuation supported the assessee. Issue 6 - Advances in real-estate business and timing of taxation Legal framework: Accounting treatment for advances (shown as liabilities until sale crystallises) and recognition of income on completion/registration; double taxation avoidance where advances later credited to sales. Interpretation and reasoning: Tribunal accepted that advances received in normal course of real-estate business, recorded as advances and subsequently transferred to sales account when sale finalized, do not constitute unexplained income in the year of receipt. AO must establish that advances are unexplained or originated from unaccounted income; mere showing of advances in capital account is not conclusive. Ratio vs. Obiter: Ratio - advances properly shown and later realized as sales are not taxable as unexplained credits in the advance year. Obiter - importance of verifying accounting entries and book linkage. Conclusion: Additions treating advances as unexplained credits were deleted where records showed advances were legitimate business receipts later recognized as sales. Issue 7 - Remedial procedure where material facts require further enquiry Legal framework: AO's duty to make enquiries; appellate authority may remit for fresh verification where testimony/corroboration lacking. Interpretation and reasoning: Where large specific credits were alleged to be held on behalf of a third party (e.g., Rs.36 lakhs), Tribunal found remand appropriate because AO had not examined the alleged third party or otherwise verified repayment; factual determination required. Ratio vs. Obiter: Ratio - where material facts remain unverified and factual inquiries are necessary, tribunal will remit to AO for fresh enquiry with opportunity to assessee. Obiter - procedural expectation that AO conduct such enquiries before making additions. Conclusion: Certain issues were remitted for further enquiry; where AO had not made requisite inquiries additions were disturbed or remitted.