Income Tax Appellate Tribunal - Hyderabad
A. Rami Reddy, Hyd., Hyderabad vs Ito,Ward-11(3), Hyd, Hyderabad on 4 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND
SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
I.T.A. Nos. 1060 & 1061/HYD/2016
Assessment Years: 2006-07 & 2007-08
A. Rami Reddy, Income Tax Officer,
HYDERABAD Vs Ward-11(3),
[PAN: AHQPA6162Q] HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri K.C. Devdas, AR
For Revenue : Shri L. Ramji Rao, DR
Date of Hearing : 01-08-2017
Date of Pronouncement : 04-08-2017
ORDER
PER CHANDRA POOJARI, A.M. :
These two appeals filed by assessee against the common order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 30-10-2015. Since the grounds for both the assessment years are same, except the amount mentioned in Ground No.2, we heard both the files together and decided the same by this common order.
2. For the sake of convenience, ITA No. 1060/Hyd/2016 for the AY. 2006-07 is discussed in detail.
The Grounds of Appeal are as under:
"1. The order of the Hon'ble CIT(A) is erroneous in law as well as facts of the case.
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2. The Hon'ble CIT(A) erred in making observation that the proportionate share of investment of the assesse amounting to Rs.3,66,667/- has to be taxed as undisclosed investment in the asst. year 2006-07.
3. The directions of the Hon'ble CIT(A) are not legal as the same were beyond the jurisdiction of the Hon'ble CIT(A).
4. The Hon'ble CIT(A) ought not to have issued such direction as the genuineness of the investment of Rs.3,66,667/- was not an issue in appeal before the Hon'ble CIT(A).
5. The Hon'ble CIT(A) without any material on record arrived at the conclusion that the amount of Rs.3,66,667/- constitute undisclosed investment and therefore the direction to tax the same in the case of the assesse for asst. year 2006-07 is not legally valid and therefore the same is liable to be set aside.
6. The directions issued by the Hon'ble CIT(A) are in violation of provisions of section 150(2) of the IT Act and therefore held to be not valid.
7. The directions issued by the Hon'ble CIT(A) for the asst. years 2007-08 and 2008-09 are also beyond jurisdiction as the relevant aspects were not in dispute before the Hon'ble CIT(A). Further, issuing of such directions without allowing a proper opportunity to the assesse are violative of provisions of natural justice and therefore cannot be held as valid.
8. Any other ground will be raised at the time of hearing".
3. The facts of the case are that the assessee is an individual and carrying on business in real estate. For the AY. 2006-07 the assessee filed return of income declaring total income of Rs. 1,53,445/-.
3.1. There was a survey operation u/s. 133A of the Income Tax Act [Act] in the case of M/s. Legend Real Estates Pvt. Ltd. on 23-08-2006. The case was in jurisdiction of ITO. Ward-16(1), Hyderabad and he carried on the survey operation u/s. 133A of the Act. During the course of survey operation, a sale agreement dated 09-03-2006 in respect of a property situated in Sy. Nos. 5 & 6, I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 3 -:
Nagaram Village, Maheshwaram Mandal, R.R. District for a consideration of Rs. 55,00,000/- per acre was found. As per facts delineated in such agreement, it is observed that Shri A. Rami Reddy, the assessee and two others i.e. Shri J.V. Subba Rao and Shri A. Rajendra Prasad nave purchased a land property to the extent of 8 acres vide the above said agreement. But these investments were not reflected in their respective income tax returns. Therefore, the AO initiated proceedings u/s. 147 of the Act in the case of Shri A. Rami Reddy, the assessee.
3.2. The assessee along with two others i.e. Shri J.V. Subba Rao and Shri A. Rajendra Prasad entered into an agreement dated 09-03-2006 with Shri Ch. Naveen Kumar, Shri Ch. Praveen Kumar and Shri Ch. Venkataiah for purchase of land admeasuring Ac 9.29 Gts situated in Sy. No.6, Nagaram Village, Maheshwaram Mandal, R.R. Dist. The sale consideration is stated at Rs.4,10,40,000/-.
Further, as per agreement the purchasers had paid Rs. 11,00,000/- in cash as advance. The condition-3 was that the balance sale consideration should be paid in four months from the date of sale agreement and on receipt of the consideration, the vendor will register the sale deed.
3.3. It was submitted that the assessee along with Shri J.V. Subba Rao entered into a partnership vide deed dated 19-04-2006. The name of the partnership concern was M/s. R.R. Estates. Both the partners were having 50% share each. The firm was promoted with the main intention for development of land and carryon real estate business.
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3.4. Subsequently, the partnership deed was amended and a fresh deed was executed on 15-05-2006. As per the amended partnership deed Shri J.V. Subba Rao, Sri A. Rami Reddy and Smt. J. Rajani, W/o. J.V. Subba Rao were the partners with equal shares i.e., 33.33%. All the remaining clauses of the partnership deed dated 19-04-2006 continued to be the same in the amended partnership deed.
3.5. Shri A. Rami Reddy retired from the said partnership firm w.e.f. 02-05-2007 and Shri J.V. Subba Rao and Smt J. Rajani entered into a fresh partnership vide deed dated 02-05-2007. In the partnership deed it was mentioned that the account of Shri A. Rami Reddy, retiring partner was settled on 02-05-2007 by paying balance of Rs. 10,07,774/- being capital, interest on capital, remuneration and share of profit as full and final settlement.
Thus, it is claimed that the assessee ceased to be a partner of the firm M/s. R.R. Estates w.e.f. 02-05-2007 and he did not have any financial transaction with the said firm after that date.
3.6. As mentioned earlier, the assessee and two others Shri J.V. Subba Rao and Shri A. Rajendra Prasad have entered into an agreement for purchase of 9.29 acres of land situated at Nagaram Village, for a consideration of Rs. 4,10,40,000/- vide (unregistered sale agreement dated 09-03-2006). It is submitted by the assessee that subsequently, due to certain differences Shri A. Rajendra Prasad dropped out from the land deal and the assessee and Shri J.V. Subba Rao proceeded with the transaction.
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3.7. As per the agreement of sale deed produced during appeal proceedings, Shri Ch. Naveen Kumar and others executed a registered agreement of sale cum GPA with possession dated 22-
06-2006 in favour of M/s. R.R. Estates with regard to sale of 4 Gts in Sy.No.6 situated at Nagaram Village, Maheshwaram Mandal, R.R. Dist. The sale consideration is mentioned at Rs.12 lakhs (Rs.3 lakhs per acre basing on the basic registrar of the stamp duty authorities).
3.8. Again another registered agreement of sale cum GPA with possession dated 03-07-2006 was executed by Shri Ch. Naveen Kumar and others (land owners) in favour of M/s. R.R. Estates with regard to sale of Ac.4.07 guntas in Sy.No.6 situated at Nagaram Village, Maheshwaram Mandal, R.R. District and the sale consideration was mentioned at Rs.12,52,500/- (Rs.3 lakhs per acres as per basic registrar) 3.9. From the above facts it appears that:
i. Shri A. Rami Reddy the assessee and two others entered into an agreement dated 09-03-2006 for purchase of Ac.9.29 guntas situated at Nagaram Village for a consideration of Rs. 4,10,40,000/- .
ii. Subsequently, a firm by name M/s. R.R. Estates was promoted by partnership deed dated 19-04-2006 and amended later on. Shri A. Rami Reddy, the assessee and two others were the partners.
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iii. The firm M/s. R.R. Estates entered into the agreement of sale cum GPA with possession for purchase of 4 acres out of the above mentioned land vide document dated 22-06-2006 at a consideration of Rs.12 lakhs only.
iv. The firm M/s. R.R. Estates entered into another registered agreement of sale cum GPA with possession dated 03-07-2006 for purchase of Ac.407 guntas out of the remaining land mentioned above at a consideration of Rs.12,52,000/- .
3.10. Thus, it is argued that M/s. R.R. Estates (in which Shri A. Rami Reddy, Shri J.V. Subba Rao and Shri J. Rani were partners) was the purchaser and legal owner of the land of Ac.8.07 guntas situated at Nagaram Village, which was originally intended to be purchased by Shri A. Rami Reddy and two others.
3.11. It is further submitted that the firm M/s. R.R. Estates filed their return of income for the AY. 2007-08 on 31-10-2007 before the DCIT, Circle-11(1), Hyderabad. The assessee firm filed the return of income along with audit report in 3CD form. In the profit and loss account the firm M/s. R.R. Estates declared the cost of land of Ac.8.07 guntas at Rs. 4,10,68,520/- and debited the same to that account. The sale were shown at Rs. 4,22,01,529/-.
The closing work progress was shown at Rs. 99,66,600/-. The profits were divided among the assessee and Shri J.V. Subba Rao and Smt J. Rajani at the end of accounting year 31-03-2007. The firm M/s. R.R. Estates in their financial statements filed along with the return of income for the AY. 2007-08 declared the cost of acquisition of land admeasuring Ac.8.07 guntas at Rs.
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4,10,68,520/-. Thus it was submitted that the investment in land of Ac.8.07 guntas was disclosed in the case of firm M/s. R.R. Estates in which the assessee was a partner.
3.12. The assessee contended that at the time of execution of agreement for purchase of land the three agreement holders i.e. Sri A. Rami Reddy, Sri J.V. Subba Rao and Sri A. Rajendra Prasad paid Rs. 11,00,000/-. Thus, the total investment made by the three persons jointly in the land in the shape of advance was Rs.
11,00,000/ - only during the accounting year 2005-06 relevant for the AY. 2006-07. It is further clarified by assessee, that the remaining purchase cost of land was met out of the sale proceeds realized by sale of plots of layout put by M/s. R.R. Estates, Hyderabad the firm in which the assessee is a partner.
3.13. In the sworn statement recorded on 01-09-2006 Shri. J.V. Subba Rao deposed that the land was purchased for a consideration of Rs. 4,10,40,000/-. With respect to purchase, Shri J.V. Rao, in his statement recorded u/s 131 of the Act stated as follows:
Ans to Q 7: In the answer to the earlier question, I have stated that I have purchased the 8 acres of land for a total consideration of Rs. 24,52,500/- only which is a sub-registrar's value as per the registered documents. However, I submit that the land was purchased at the rate of Rs. 4,10,40,000/- has been paid by three of us and taken the possession of the land for developing into plots and marketing the same.
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The statement was the basis for the AO to draw the conclusion that the assessee invested 1/3rd of that amount i.e. Rs. 1,36,80,000/- towards his share of purchase consideration. Thus, the AO proceeded to conclude that the assessee made investment of Rs. 1,36,80,000/- from undisclosed sources.
3.14. The Sale Transaction: After the purchase of the land, it was divided into 82 plots totaling 19,675 sq. yards. The assessee and others entered into MOU dated 24-04-2006 with Legend Real Estates Pvt. Ltd and it was stated that they have received Rs. 90 lakhs to Rs.1 crore towards sale consideration and Rs. 55 lakhs towards advance from Legend Real Estates Pvt. Ltd. The assessee stated that they have incurred about Rs. 30 lakhs for development.
With respect to sale transaction, Shri J.V. Rao in his statement recorded u/s. 131 stated as follows:
"QNo.8 How many no of plots that have been demarcated for marketing?
Ans: The land has been divided into 82 plots totaling to 19,675 sq. yards.
QNo.9 What is the expenditure that you have incurred for development of the land?
Ans: The estimated development charges per sq. yd., will be approximately Rs. 500/-. However, so far we have incurred about Rs.150 per sq. yd or about Rs.30 lakhs. In this connection, I would like to state that though we could not procure the land on western side of the layout, we have already incurred expenditure in respect I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 9 -:
of laying of roads, etc., to the extent of about 3200 sq. yds The development work is still going on.
QNo.10: What is the rate agree upon by you for selling the plots with M/s. Legend Real Estates (P) Ltd?
Ans: We have entered into MOU with M/s. Legend Real Estates (P) Ltd., according to which the selling rate per sq. yd. is Rs,3,050/-.
QNo. 11. So far how many plots you have sold?
Ans: So far we registered 9 plots in respect of which we received the full sale consideration @ Rs.3,050/- per sq.yd. Out of which, 6 plots have been marketed by M/s. Legend Real Estates [P) Ltd. and the other 3 plots have been sold off independently. However, all the plots have been registered at Rs. 3,050/- per sq. yd. We have also marketed about 40 plots independently and received advances from them. I do not exactly remember how much advances have been received in respect of these plots. However, I furnish the details in couple of days as the same is available in our office.
QNo.12. Have you received the entire sale consideration of the 6 plots marketed by M/s. Legend Real Estates (P) Ltd.? Ans: Yes. We have received the entire sale consideration in respect of the 6 plots and also advances for the plots being marketed by the above company. So far we have received about Rs.90 lakhs to Rs 1 crore from M/s. Legend Real Estates (P) Ltd., which includes the total consideration of 6 plots registered as well as advances received by it for marketing the plots.
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QNo. 13. Have you received any advance from M/s. Legend Real Estates (P) Ltd.?
Ans: Yes. We have received about Rs.55 lakhs on different dates at the time of execution of the MOU and this amount is agreed to be adjusted towards the sale value of the plots."
3.15. The AO basing on the statement of Shri J. V. Subba Rao proceeded to estimate the gross receipts at Rs. 6,00,08,750/- in the assessment for the AY. 2007-08. When questioned about the details of land sold and the sale consideration accrued it was explained by Sri J.V. Subba Rao that the land was divided into 82 plots covering 19675 sq. yards [question No.8]. It was further deposed that the land was sold at the rate of Rs.3,050/- per sq. yard.
3.16. The AO as can be seen from the assessment order proceeded to work out the share of sales of the assessee for the AY. 2007-08 as under:
Sale proceeds of 19675 sq. yards @ Rs. 3,050 per sq. yard Rs.6,00,08,750 Less: Development expenditure Rs.500 X 19675 Rs. 98,37,500
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Net receipts for the 3 persons Rs.5,01,71,250 Assessee's 1/3rd share (Rs.5,01,71,250/3) Rs.1,67,23,750 Thus, the AO proceeded to include the above figure of Rs.1,67,23,750/-, while computing the total income for the A.Y. I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 11 -:
2007-08. Against this, the assessee went in appeal before the CIT(A).
4. Before the CIT(A) the assessee filed additional evidence. The CIT(A) called for the remand report from the AO. In the remand reports dated 24-04-2015, the AO has raised the issue of non- cooperation during assessment proceedings and the matter of admission of additional evidence. The AO contended that "in spite of giving several opportunities by way of several notices, the assessee Shri A. Rami Reddy did not turn up before the AO. Since the assessment is getting barred by limitation of time, the AO had no choice but to complete the assessment u/s 144 of the IT Act. Since the assessee neither attended himself in response to any of the notices issued, nor preferred to authorize any auditor to represent his case, the assessment was completed by raising a demand of Rs. 89,10,265/- for AY. 2006-07 & Rs. 1,0l,37,162/ - for the AY. 2007-08"
4.1. The Ld.CIT(A) objected with regard to admission of additional evidence during appellate proceedings that prior to the insertion of Rule 46A, the power of the first appellate authority was solely governed by section 250(4) of the 1961 Act {corresponding to section 31(2) of the Act of 1922}. The said action empowered the Commissioner of Income-tax (Appeals), the first appellate authority under the Act, to make such further inquiry as he thought fit or cause further inquiry to be made by the AO before disposing the appeal filed before him. The discretionary power of the Commissioner of Income-tax (Appeals) to take additional evidence and to make further inquiry, u/s. 31(2) of the 1922 Act, was I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 12 -:
endorsed by the Supreme Court in Keshav Mills Co. Ltd. Vs. CIT (1956) 56 ITR 365 (SC), in the context of Rule 29 of the Income- tax (Appellate Tribunal) Rules, 1946 {corresponding to Rule 29 of the present Income-tax (Appellate Tribunal Rules, 1963}. Vide the Finance Act, 1972, with effect from 1st April, 1972, clause (mm] in Section 295(2) was inserted in the Act with a view to regulate the discretion of the first appellate authority in the matter of admission of new evidence, empowering the Central Board of Direct Taxes to lay down circumstances or conditions subject to which and the manner in which the first appellate authority may permit an appellant to produce evidence which he did not produce or which he was not allowed to produce before the AO [refer, Board's Circular No, 108, dated 20th March, 1973]. Consequently, Rule 46A was inserted in the Rules by the Income-tax (Second Amendment) Rules, 1973, w.e.f. 1st April, 1973. As per the said rule, the assessee shall not be entitled to produce before the first appellate authority any evidence, oral or documentary, other than the evidence produced during the course of proceedings before the AO, except in the following circumstances, viz.,
(a) where the AO has refused to admit evidence which ought to have been admitted; or
(b) where the assessee was prevented by sufficient cause from producing the evidence which he was called upon to produce by the AO; or
(c) where the assessee was prevented by sufficient cause from producing before the AO any evidence which is relevant to any ground of appeal; or I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 13 -:
(d) the AO has made the order appealed against without giving sufficient opportunity to the assessee to adduce evidence relevant to any ground of appeal.
4.2. Sub-rule (2) of Rule 46A expressly requires the first appellate authority to record his reasons for admitting the additional evidence. Further, sub-rule (3) mandatorily requires the Commissioner of Income-tax (Appeals) to afford an opportunity to the AO to examine the evidence or document or to cross-examine the witness produced by the assessee and also to produce new evidence on his side to rebut the additional evidence produced by the assessee. The so-called restrictions placed by sub-rule (l) of rule 46A have been rendered superfluous by the overriding provision of sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the assessee shall not affect the power of the first appellate authority to call for the production of any document or the examination of any witness in order to enable him to dispose of the appeal or for any other substantial cause including enhancement of the assessment or penalty or the imposition of penalty u/s. 271 of the Act. In addition to above, sub-section (5) further confers discretion on the Commissioner of Income-tax (Appeals) to allow the assessee to raise any new ground of appeal if he is satisfied that the omission of that ground from the form of appeal was not wilful or unreasonable.
4.3. The Ld.CIT(A) relied on the decision rendered in the case of Smt. Prabhavati S. Shah Vs. CIT reported at 231 ITR 1, the Hon'ble Bombay High Court, categorically pointed out that with the I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 14 -:
avowed object of ensuring that evidence is primarily led before the AO, Rule 46A(1) puts fetters on the right of the assessee to produce before the Commissioner of Income-tax (Appeals) any additional evidence, not previously raised before the AO. Putting fetter on the right of assessee in the matter of producing additional evidence before the Commissioner of Income-tax (Appeals), clarified the Court, does not mean affecting in any way the powers of the first appellate authority conferred by sub-rule(4) and section 250 of the Act. The Court held as under:
"3 On a plain reading of rule 46A, it is clear that this rule is intended to put fetters on the right of the appellant to produce before the AAC any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the ITO except in the circumstances set out therein. It does not deal with the powers of the AAC to make further enquiry or 10 direct the ITO to make further enquiry and to report the result of the same to him. This position has been made clear by sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the AAC to call for the production of any document or the examination of any witness to enable him to dispose of the appeal. Under sub-section (4) of section 250, the AAC is empowered to make such further inquiry as he thinks fit or to direct the ITO to make further inquiry and to report the result of the same to him. Sub-section (5) of section 250 empowers the AAC to allow the appellant at the hearing of the appeal, to go into any ground of appeal not specified in grounds of appeal, on his being satisfied that the omission of the ground from the form of appeal was not wilful. It is clear from the above provisions that the powers of the AAC are much wider than the powers of an ordinary court of appeal. The scope of his powers is coterminous with that of the ITO. He can do what the ITO can do. He can also direct the ITO to do what he failed to do. The power conferred on the AAC under sub-section (4) of section 250 being quasi-Judicial power, it is incumbent on him to exercise the same if the facts and circumstances justify. If the AAC fails to exercise his discretion judicially and arbitrarily refuses to make enquiry in a case where the facts and circumstances so demand, his action would be open for correction by a higher authority.
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4. On a conjoint reading of section 250 and rule 46A, it is clear that the restrictions placed on the appellant to produce evidence do not affect the powers of the AAC under sub-section (4) of section 250. The purpose of rule 46A appears to be to ensure that evidence is primarily led before the ITO.
5. We are supported in our above conclusion by the decision of the Orissa High Court in B.L. Choudhury v. CIT (1976) 105 ITR 371 in which it was held:
"Wide provision has, thus, been made conferring jurisdiction on the first appellate authority to make such inquiry as he deems fit. The provision seems to have been based on the fact that before the Appellate Assistant Commissioner there is generally no opposite party. The appellate authority himself is the departmental authority representing the revenue. Therefore, he has been invested with the power of making further inquiry. He does not exceed his jurisdiction if he asks or allows the assessee to produce or file additional papers or additional evidence in the matter he thinks fit....." (p. 376) It was further held that-
".......... In fact, receiving new material by the Appellate Assistant Commissioner cannot be equated with receipt of additional evidence as contemplated in Order 41. rule 27 of the Code of Civil Procedure or even at the stage of second appeal by the Tribunal ...." (p. 376)"
Thus, a cojoint reading of section 250(4) and, (5) of the Act and rule 46A(1) and (4) of the Rules clarifies that restriction is only imposed on the appellant's right to produce additional evidence before the Commissioner of Income-tax (Appeals).
4.4. He also referred the decision rendered in the case of K. Ravindranathan Nair reported at 184 CTR (Ker) 46, the Kerala High Court took cognizance of the decision in the case of Prabhavati S. Shah and further specified that "if the provisions of r.46A sub-rule (1) thereof is held to be mandatory, that will go against the I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 16 -:
provisions of section 250 of the Act conferring power on the first appellate authority to enquire into the matter and pass appropriate orders. In other words, rule 46A without sub-rule (4) will be open to challenge as ultra vires section 250 of the Act". The Kerala High Court, in the instant case, accordingly held that in spite of the restrictive provisions of Rule 46A(1), section 250 of the Act read with sub-rule (4) of Rule 46A enable the Commissioner of Income- tax (Appeals) to accept additional evidence in appropriate cases, The Court therefore, upheld the impugned order of the Tribunal whereby the AO was directed to consider the evidence produced by the appellant before the first appellate authority to prove the genuineness of the credits.
4.5. According to CIT(A), a reading of the exposition of law relating to the power of the Commissioner of Income-tax (Appeals) to admit additional evidence, as made by the Bombay High Court and relied on by the Kerala High Court (discussed above) reveals that even if repeated opportunities were given to the appellant to produce evidence and even if the assessee does not suo motu produce any evidence, in the spirit of justice and fair-play, it is incumbent on the first appellate authority, being a quasi-judicial authority, to require the assessee to produce requisite evidence or to make necessary inquiry and admit any such fresh and additional evidence, of course, by virtue of section 250(4) and (5) read with sub-rule (4) of rule 46A.
4.6. According to CIT(A), the details submitted by the assessee are crucial to the grounds raised in appeal. In response to specific query by CIT(A) the assessee explained that the assessee I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 17 -:
furnished a notarized affidavit dated 17-08-2015 confirming the submissions in connection with non-compliance. Assessee also enclosed copy of the passport and other proof as evidence. It was submitted that the assessee left for USA on 17th April, 2012 and returned to India on 14-06-2012. In the meantime, there was change of residence and he had shifted to his rented accommodation in Vishal Towers, Kukatpally. Thus, it was claimed that subsequent notices were not received by the assessee.
4.7. One of the claims made in the submission that the entire purchase and sale of land is reflected in the accounts of a Partnership Firm M/s. R.R. Estates. In this respect assessment of the firm and the other partner and details of income tax proceedings were submitted. Further, copy of registered sale deeds were produced. Since, these documents and evidences arc part of statutory record, these are considered while deciding this appeal as the genuineness of such documents are not in doubt.
4.8. The assessments were finalized u/s. 144 for both the asst. years. Since the assessment for both the assessment years were completed u/s. 144, no details were there before the AO and the information and details filed during the appeal stage were not available with the AO, it constituted additional evidence and as such required to be examined by the AO as per Rule 46A of the IT.
Rules. The relevant information and the petition for admitting additional evidence were forwarded to the AO for necessary verification and for furnishing the report.
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4.9. The AO in his remand report submitted that:
"From the information submitted by the assessee, it is observed that the assessee along with other two persons, are partners in a firm, M/s. R.R. Estates, on behalf of which the land in question was purchased. It is also seen from the information submitted, that the DCIT, Circle-11(1), Hyderabad has completed the assessments of M/s. R.R. Estates for the A.Y.2006-07, in which the purchase and sale receipts of the above land transactions were admitted, on 08- 06-2009 raising a demand of Rs. 4,05,255/-. Similarly in the case of another partner Shri J V. Subba Rao, the DClT, Circle-11(1), Hyderabad has completed the assessment for the AY. 2006-07 on 28-03-2014, raising a demand of Rs.7,07,454/-, treating the investment made by Shri J.V. Subba Rao to the extent of Rs. 10.00 lakhs as unexplained investment in the firm M/s. R.R. Estates.
From the above assessments, which are duly completed by the DCIT, Circle 11(1), Hyderabad with regard to the firm, M/s. R.R. Estates in which the assessee is a partner and also with regard to Shri J.V. Subba Rao, who is the other partner, it can be seen that the land transactions of 8 acres, which was purchased and sold by the assessee is in fact the transactions of the firm, M/s. R.R.Estates, which was acknowledged by the DCIT, Circle-11(1), Hyderabad during the assessments of the firm and other partners. Since the land transactions are accepted to be belonging to the firm, it is treated that the assessee does not have any liability towards these transactions in his individual capacity. The investment made by the assessee in the firm, M/s. R.R. Estates to the extent of Rs. 30.00 lakhs is to be verified.
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Though the land transaction i.e., purchase of land and sale of plots belonging to the firm. since the assessee did not appear in response to any of the notices and also since the AO did not have any of the information before him while completing the assessment, the above transactions were treated to be belonging to the assessee and assessment was completed by treating the income out of the transactions belonging to the assessee".
4.10. The Additional CIT while endorsing the report of the AO also clarified that:
"In this connection, after examining the information submitted, has reported that, the assessee has admit ted the purchase and sale of 8 Acres of land in the return of income for the AY. 2006-07, in the case of the firm M/s. R.R. Estates, wherein the assessee and two others are partners. It has also been informed that the assessment in the case of M/s. R.R. Estates, for the A.Y.2006-07 has been completed by the Dy. Commissioner of Income Tax, Circle-11(1), Hyderabad on 08-06-2009, raising a demand of Rs.4,05,255/-. The assessment in the case of the partner Shri J.V. Subba Rao, for the AY. 2006-07 has also been completed by the DCIT, Circle-11(1), Hyderabad on 28-03- 2014, raising a demand of Rs.7,07,454/- treating the investment, made by the assessee, to the extent of Rs. 10,00,000/- as unexplained investment in the firm, M/s. R.R.Estates.
As the assessee has admitted the purchase and sale of 8 acres of land in the said firm M/s. R.R.Estates, wherein the assessee and Shri J.V. Subba Rao are partners, the assessee is not liable towards the transactions, in his individual capacity. However, the AO has I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 20 -:
informed that, the investment of Rs. 30,00,000/- made by the assessee, in the firm, M/s. R.R.Estates has to be verified" .
Thus the AO clarified that both purchase and sale transactions associated with 8 acres of land are reflected in the accounts of firm M/s. R.R.Estates, wherein the assessee and Shri J.V. Subba Rao are partners. Accordingly the assessee is not liable towards the transactions, in his individual capacity.
4.11. The CIT(A) examined the assessment record of M/s.
R.R.Estates for AY.2007-08. M/s. R.R. Estates is a partnership firm incorporated on 21-04-2006, showing its main business activity of real estate development. As per Schedule to Balance Sheet as on 31-03-2007, three partners are Shri J.V.Subba Rao, Shri A. Rami Reddy and Smt J.Rajani. Each of them were having 33.33% of profit share. During the year 2006-07, they have contributed Rs. 11 lakhs, Rs.22 lakhs and Rs.l lakh as their capital contribution respectively.
4.12. As per the details submitted along with return, the firm had purchased land 9.29 guntas in Sy.No.5 & 6 situated at Nagaram Village. The said purchase was made from Shri Ch. Praveen Kumar and Naveen Kumar at a consideration of Rs.4,10,68,520/-. As per the details, the purchased land was converted into plots and these plots measured to 22,850 sq yards. After development of the plot and other amenities, the plots were sold to various customers and the total sale consideration is shown at 4.22 crores. During the financial year the firm had sold 17.550 sq. yards and there were 5,300 sq yards shown as work-in-
I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 21 -:
progress at the end of the year. In the subsequent year i.e. in financial year 2007-08 the firm was dissolved.
As per the audited statement of accounts, the purchase of land is shown at Rs. 4,10,68,520/- and the sales at Rs.4,22,01,529/- and closing work-in-progress at Rs.99,66,600/-. The assessment of the firm was completed u/s 143(3) with an addition of Rs.42,20,153/-.
4.13. Thus, the purchase of land and sale of plotted land are disclosed in the hands of the firm M/s. R.R. Estates. The purchase and sale transaction of land and associated developments were examined by the AO of the firm. There are also various agreement of sales which show the transaction between R.R. Estates and the purchasers like Shri D.Sashibhushan Reddy, Shri Raju Doiker, Shri B.Ravinder, etc. Thus the transaction of purchase and sales are reflected in the hands of the firm. Hence, he observed that no additions were warranted in the case of assessee individual.
4.14. Thus, taking into account the remand report furnished by the AO, the clarification by the Range Addl CIT. submission of the assessee, assessment records of Firm etc. The CIT(A) held that both purchase of land and sales of plotted land arc reflected in the accounts of the firm R R Estates. Thus no additions were warranted in the AY. 2006-07 for undisclosed investments in the form of land u/s 69 and no additions for AY. 2007-08 for unrecorded sales of such landed properties.
4.15. However, he observed that there were two questions which are required to be answered. (1) The share of assessee in I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 22 -:
initial investments amounting to 11 lakhs made in cash. This investment was not disclosed by the assessee. Hence the proportionate share of investment amounting to Rs 3,66,667/- is to be taxed in the hands of the assessee as undisclosed investments in AY. 2006-07 (2) The contribution of Rs.22 lakhs by the assessee towards capital of the firm R.R. Estates. Since there is no explanation regarding the source of capital of Rs.22 lakhs, it is to be added in the hands of the assessee for AY. 2007-08, (3) The amount received as settlement for retirement of partner is to be taxed in the hands of the assessee in AY. 2008-09.
Aggrieved by the order of CIT(A), assessee in appeal before us for both the assessment years.
5. The Ld.AR submitted that for these assessment years, the CIT(A) given direction to sustain addition of Rs. 3,66,667/- for the AY. 2006-07 and Rs. 22 Lakhs for the AY. 2007-08 for which he has no power. More so, he has not given any mandatory notice for the enhancement of assessment u/s. 251(1)(a) of the Act. He submitted that CIT(A) cannot introduce new source of income which is not subject matter of assessment. Further, he submitted that in case of co-owner Shri J.V. Subba Rao, no such addition has been made for the AY. 2006-07 being 1/3rd share of his investment. In such circumstances, such addition in the hands of assessee is unwarranted. He relied on the following judgments in support of his argument:
1. CIT Vs. G. Viswanatham [172 ITR 401];
2. CIT Vs. Dinesh Jain (HUF) (Delhi) [352 ITR 629];
I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 23 -:
3. Computer Science Corporation India (P) Ltd. Vs. ACIT (MP) [99 DTR 383];
4. Smt. Pramod Kumar Singhal Vs. ITO (MP) [99 DTR 386];
5. Rajinder Nath Vs. CIT (Supreme Court) [120 ITR 014];
6. ITO Vs. Murlidhar Bhagwan Das (Supreme Court) [052 ITR 335];
7. Jaswant Rai Vs. CIT (P&H) [107 ITR 477];
8. CIT Vs. S. Muthukarupan (Madras) [290 ITR 154];
9. Gajjam Chinna Yellappa Vs. ITO (T&AP) [370 ITR 671];
10. CIT Vs. Naresh Kumar Agarwal (T&AP) [369 ITR 171];
11. CIT Vs. S. Khader Khan Son (Madras) [300 ITR 157];
12. CIT Vs. P.H. Patel (AP) [171 ITR 128];
13. CIT Vs. Mohanbhai Pamabhai (Gujarat) [91 ITR 393];
14. Addl.CIT Vs. Mohanbhai Pamabhai (Supreme Court) [165 ITR 166];
15. CIT Vs. Rai Bahadur Hardutroy Motilal Chamaria (Supreme Court) [66 ITR 443];
16. CIT Vs. Shapporji Pallonji Mistry (Supreme Court) [44 ITR 891];
17. CIT Vs. R. Lingmallu Raghukumar (Supreme Court) [247 ITR 801];
5.1. Finally he submitted that the total investment in land has been declared by assessee-firm viz., R.R. Estates as such there cannot be any further addition in the hands of assessee.
5.2. For the AY. 2007-08 the AR submitted that the sum of Rs. 22 Lakhs was invested by the assessee in R.R. Estates and first I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 24 -:
of all R.R. Estates has to explain the sources of investment in their hand. Once it is explained by R.R. Estates, then it is the burden of assessee to explain the sources of investment. In the present case, there was no explanation asked from R.R. Estates and strait away the addition was made in the hands of assessee, which is not proper.
6. On the other hand, DR submitted that assessee-firm, R.R. Estates was formed on 19-04-2006. Before the formation of firm, there was an agreement of purchase of property by three persons viz., J.V. Subba Rao, A. Rami Reddy and A. Rajendra Prasad with three vendors on 09-03-2006. As per that sum of Rs. 11 Lakhs was paid by these purchasers to the vendors. This amount was paid before formation of the firm. The said Rs. 11 Lakhs to be explained by these three assessees, how the sources was met. Since the assessee was not able to explain the sources for this Rs. 11 Lakhs, 1/3rd of this was considered in the hands of assessee as 'unexplained investment' and it cannot be said that this is a new source of addition in the hands of assessee or enhancement of assessee so as to give notice to the enhancement to assessee before making any addition by CIT(A).
6.1. In the same way for the AY. 2007-08, it was submitted by the DR that amount of Rs. 22 Lakhs investment in R.R. Estates was not at all explained by assessee. Hence, it was made addition in the hands of the assessee.
7. We have heard the rival contentions and perused the material available on record. For the AY. 2006-07, the CIT(A) after I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 25 -:
considering the remand report from AO, observed that there is no question of making any addition in the hands of assessee to the tune of Rs. 1,67,23,750/- since it was shown in the hands of the firm, R.R. Estates. However, there was an investment of Rs. 11 Lakhs before formation of the partnership firm on purchase of land. The assessee has not offered any explanation regarding the source of this investment. Being so, 1/3rd of the share was considered in the hands of assessee. Now the contention of the AR is that this is a new source of income considered by the CIT(A) and not at all considered by the AO which amounts to enhancement of assessment and notice for such action of CIT(A) is required u/s. 251(1)(a) of the Act. In our opinion, the power of CIT(A) is restricted to the source of income as mentioned in the return and in the assessment order. Thus, provided an income was considered by the AO, the CIT(A) has the fullest jurisdiction in respect of it; he can include it in the assessment, even though it was excluded by the AO, and, naturally when he includes it, he must include it under one or other head, there cannot be any justification for saying that, while he can do so, he cannot take an income wrongly included by under one head by the AO and it under the correct head. It follows that appeal is not confined to the subject matter of the appeal as restricted by the assessee, but the power of the CIT(A) extends to consider and deciding of sources of items in respect of which assessment is made. The expression 'assessment is made' does not carry the meaning that the sources and item have been brought to tax. Thus, if a particular item or matter is subject matter of assessment by the AO or even it was done by the assessee in his return, the CIT(A) will undoubtedly have the jurisdiction to consider and decide the same in the appeal although I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 26 -:
such item was sustained by the AO on different grounds. The Legislature has conferred on the CIT(A) extraordinary power. It is the CIT(A) has been constituted a revising authority again the decisions of the AO; a revising authority not in the narrow sense of revising what is the subject matter of appeal not in the sense of revising those matters about which the assessee makes a grievance, but revising authority is the sense that once the appeal is before him he can revise not only ultimate computation arrived at by the AO, but he can revise every process which lead to the ultimate computation or assessment. In other words, what he can revise is not merely an ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by AO in the course of the assessment and also various incomes or deduction which make in for consideration for AO. [Narrondas Manordass Vs. CIT (31 ITR 909)] and [208 ITR 312].
In other words, his powers are limited to the subject matter of the assessment and not subject matter of the appeal. When it is said that he cannot travel beyond the subject matter of assessment what is meant is that he cannot introduce into the new source of income to the assessment, as it is the powers of enhancement and it is restricted only to the income which was subject matter of consideration for the purpose of assessment by the AO. Therefore, if an income is subject matter of consideration by the AO and even though the AO may come to the conclusion that income is not subject to tax it would be open to CIT(A) to take a different view and to bring that income to tax. [Mrs. Banoo E. Cowasji Vs. CIT (138 ITR 686)].
I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 27 -:
8. The Explanation to Section 251 shows that the competence or jurisdiction of the CIT(A) in dealing with the appeal before him is not restricted only to matters raised or complained of by the assessee in the appeal, but it extends to all matters arising out of the proceedings which might have been considered and determined by the AO in the course of assessment proceedings, although such matters may not have been raised before him in appeal by the assessee. In appeal, therefore, the competence of the CIT(A) ranges over the whole assessment proceedings which are thrown open, as there were before the AO, without any restrictions or him to consider whether those matters raised before him in appeal by the assessee. His jurisdiction is, therefore, not confined to the subject matter of the appeal but extends to the subject matter of assessment. In exercising of such jurisdiction, Section 251 has given wide powers including even a power of enhancement of the assessment subject to an opportunity of being heard given to assessee before doing so as is required under sub-section (2) of Act.
9. In view of the above discussion, we are of the opinion that the CIT(A) in this case not introduced the new source of income for assessment. He has considered the total investment considered by the AO and out of this he deleted the investment shown by the firm after the formation of the firm and shown in its books of account and the investment which was made before the formation cannot be considered in the hands of firm which is to be considered only in the hands of investors i.e., three partners, who joined subsequently after agreement of property. So, we do not find any infirmity in the direction of the CIT(A) in directing the AO I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 28 -:
to consider 1/3rd of Rs. 11 Lakhs which was paid towards purchase consideration before formation of the firm, R.R. Estates and the same is confirmed. This ground of appeal by the assessee is rejected.
10. Coming to AY. 2007-08, Rs.22 Lakhs contributed by assessee in the firm. This investment shown in the hands of assessee, it is the duty of the assessee to explain with the cogent material, the source of which in terms of Section 69 of the Act. In the present case, the assessee has not explained the source of investment. Being so, the CIT(A) considered that amount of Rs. 22 Lakhs as 'unexplained investment' in the hands of the assessee. The argument of the Ld.AR is that no explanation is asked for regarding source of this investment. Considering the plea of AR, we are inclined to remit the issue to the file of the AO with a direction to assessee to explain the sources of investment and AO has to decide in accordance with law; after giving opportunity of hearing to the assessee. Thus, this issue is remitted to AO for re- consideration.
11. Further argument of AR is that direction of the CIT(A) that amount received as settlement for retirement of partner is to be taxed in the hands of assessee in the AY. 2008-09, which cannot be given while adjudicating the appeals relating to AYs. 2006-07 and 2007-08. In our opinion, jurisdiction of the CIT(A) is strictly confined to the assessment order of the particular year [ITO Vs. Murlidhar Bhawan Das (52 ITR 335)]. When the order passed by him is beyond the scope of powers conferred upon him u/s. 251 could be an order without jurisdiction. In other words, I.T.A. Nos. 1060 & 1061/Hyd/2016 :- 29 -:
he is committed to decide whether a particular item or particular amount is income of an assessment year, but he has no jurisdiction further to decide in that appeal, the appropriate year in which the said income would fall. [Mathuradas B. Mohta Vs. CIT (56 ITR 269)].
12. In the present case, the CIT(A) dealing in the AYs. 2006- 07 & 2007-08, he can decide whether income considered by the AO whether it falls to the AY. 2006-07 or 2007-08, he can give direction relevant to these assessment years only he cannot travel beyond the assessment year under appeal before him which is not necessary for the purpose of dispose of the present appeal. Being so, we vacate the findings of the CIT(A) that amount received as settlement for retirement of partner is to be taxed in the hands of assessee in the AY. 2008-09. In other words, it is left to the wisdom of the AO while framing assessment for the AY. 2008-09 and he cannot act on the direction of the CIT(A) given in these two assessment years. Accordingly, appeal in ITA No. 1060/Hyd/2016 for the AY.2006-07 is allowed and appeal in ITA No. 1061/Hyd/2016 for the AY.2007-08 is partly allowed for statistical purposes.
Order pronounced in the open court on 4th August, 2017 Sd/- Sd/-
(D. MANMOHAN) (CHANDRA POOJARI)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated 4th August, 2017
TNMM
I.T.A. Nos. 1060 & 1061/Hyd/2016
:- 30 -:
Copy to :
1. A. Rami Reddy, C/o. B. Narsing Rao & Co., Chartered Accountants, Plot No. 554, Road No. 92, Jubilee Hills, Hyderabad.
2. Income Tax Officer, Ward-11(3), Hyderabad.
3. CIT (Appeals)-5, Hyderabad.
4. Pr.CIT-5, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.