Smt. Noothan P. Shetty Vs DCIT (ITAT Bangalore)
When CIT(A) Proposes Enhancement, Additional Evidence Cannot Be Shut Out Merely by Invoking Rule 46A: ITAT Bangalore
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that although an assessee does not have an unrestricted right to produce additional evidence before the CIT(A), where the CIT(A) proposes to enhance the assessed income, the principles of natural justice require him to properly examine the additional evidence furnished by the assessee in response to the proposed enhancement.
The Tribunal accordingly restored the issues relating to land-development expenditure and commission payments to the Assessing Officer for fresh examination.
Facts of the case
The assessee was an individual deriving income from shares, investments and agricultural activities. During the relevant year, she participated in certain land transactions and declared the resultant income as short-term capital gains.
The assessee, jointly with another person, had entered into an agreement dated 25 September 2006 to purchase land belonging to one Shri H.N. Shivananjaiah. The property was subsequently purchased by DMR Enterprises on 8 February 2007. The assessee was one of the confirming parties to that transaction and received consideration of approximately ₹3.97 crore.
While computing the income from the transaction, the assessee claimed, among other amounts:
- ₹54.54 lakh towards land development, demolition of structures, levelling, construction of compound wall and eviction of occupants; and
- ₹63 lakh towards commission allegedly paid to various persons who assisted in arranging the transaction.
The Assessing Officer held that the assessee had failed to produce adequate confirmations from the persons who had carried out the development and related work. Nevertheless, considering that some work had actually been carried out, he allowed expenditure of ₹20 lakh and disallowed the balance of ₹34.54 lakh.
In respect of commission, the Assessing Officer allowed ₹43 lakh and disallowed ₹20 lakh as excessive.
Enhancement made by CIT(A)
During the appellate proceedings, the CIT(A) called for further enquiries under Section 250(4). On the basis of the Assessing Officer’s enquiry report, the CIT(A) issued a notice under Section 251(2), proposing enhancement of the assessment.
After considering the material, the CIT(A) held that the assessee was not entitled to any deduction for the development expenditure of ₹54.54 lakh. He consequently enhanced the disallowance from ₹34.54 lakh to the entire amount of ₹54.54 lakh.
Similarly, the CIT(A) found that the assessee had not established the services rendered by the alleged commission agents. He observed that it was improbable that as many as 31 commission agents were required for the sale of one property. The commission payments were also made to several persons belonging to the same families. He, therefore, enhanced the disallowance from ₹20 lakh to the entire commission claim of ₹63 lakh.
Contentions of the assessee
The assessee contended that the original landowner had failed to complete the development work required under the agreement. The assessee had, therefore, incurred the expenditure to make the property marketable and to protect the advance already paid.
It was also contended that expenses were incurred for demolition, levelling, construction of the compound wall and eviction of illegal occupants. Even if such expenditure was not allowable as expenditure incurred wholly and exclusively in connection with the transfer, it was alternatively allowable as the cost of acquisition or cost of improvement under Section 48.
Regarding commission, the assessee submitted that substantial payments had been made through crossed cheques, the recipients were identifiable, and the transaction had to be completed within a stipulated time. The services of several persons were allegedly required to locate a purchaser and conclude the transaction promptly.
The assessee further argued that when the CIT(A) proposed to enhance the assessment, he ought to have admitted and examined the supporting confirmations, affidavits and other additional evidence furnished before him.
Rule 46A and enhancement proceedings
The Tribunal initially observed that Rule 46A does not confer an unrestricted right upon an assessee to produce additional evidence during appellate proceedings. Additional evidence can ordinarily be admitted only in the circumstances prescribed under the Rule, such as where:
- the Assessing Officer refused to admit evidence which ought to have been admitted;
- the assessee was prevented by sufficient cause from producing the evidence before the Assessing Officer; or
- the assessment was completed without providing sufficient opportunity to furnish relevant evidence.
The assessee had not produced sufficient material to establish that any of these conditions existed. Therefore, viewed in isolation, the CIT(A)’s refusal to admit fresh evidence under Rule 46A could not be regarded as wholly without jurisdiction.
However, the Tribunal drew an important distinction. In the present case, the CIT(A) was not merely deciding the assessee’s appeal against the disallowances already made by the Assessing Officer. He had proposed to substantially enhance those disallowances.
Once enhancement was proposed, the additional evidence produced by the assessee became directly relevant to her defence against such enhancement. The principles of natural justice, therefore, required the CIT(A) to examine those documents before determining that the entire expenditure was liable to be disallowed.
Thus, while Rule 46A regulates the assessee’s right to voluntarily introduce new evidence, it cannot be applied mechanically to exclude material produced in response to an enhancement initiated by the appellate authority.
Opportunity under Section 251(2)
The assessee also alleged that the CIT(A) had not given proper opportunity before enhancing the assessment. The Tribunal rejected this contention.
The CIT(A) had issued a specific notice under Section 251(2) dated 25 March 2010, setting out the proposed enhancement of both disallowances and calling upon the assessee to submit her explanation. Therefore, the statutory requirement of issuing a show-cause notice before enhancement had been complied with.
The defect was not the absence of a notice. The defect was the failure to properly examine the evidence furnished by the assessee in defence against the proposed enhancement.
Assessment order also lacked proper examination
The Tribunal found that the Assessing Officer had himself not examined the claims satisfactorily.
Regarding the development expenditure, the Assessing Officer stated that ₹20 lakh was reasonable considering the work actually carried out but did not record a proper basis for arriving at that figure.
In relation to commission, the assessment order contained inconsistencies concerning the total amount claimed and the amount allowed. The Assessing Officer had also not properly discussed the identity of the recipients, mode of payment or nature of services allegedly rendered.
The Tribunal consequently concluded that neither the original assessment nor the appellate enhancement was based upon a complete examination of the relevant facts and evidence.
Decision of the Tribunal
The entire matter relating to the expenditure of ₹54.54 lakh and commission payment of ₹63 lakh was restored to the Assessing Officer for fresh adjudication.
The Assessing Officer was directed to consider the confirmations, affidavits and other evidence produced by the assessee and decide the matter afresh in accordance with law after providing a reasonable opportunity of hearing.
The assessee had also raised an additional ground concerning deduction of housing-loan interest of ₹5.58 lakh while computing income from house property. Since the necessary particulars were not available before the Tribunal, the assessee was permitted to raise the issue before the Assessing Officer during the set-aside proceedings.
The appeal was accordingly treated as partly allowed for statistical purposes.
Author’s comments
The decision makes an important distinction between an assessee’s general attempt to produce fresh evidence in an appeal and evidence furnished specifically to meet an enhancement proposed by the CIT(A).
The power of enhancement under Section 251 is undoubtedly wide. However, the wider the proposed enhancement, the greater is the obligation to provide an effective—not merely formal—opportunity of defence. Issuing a notice under Section 251(2) satisfies only one part of that obligation. The authority must also consider the assessee’s explanation and relevant supporting evidence before drawing an adverse conclusion.
At the same time, the decision does not mean that commission or development expenditure becomes allowable merely because payments were made through banking channels or because recipients are identifiable. The assessee must still establish the actual rendering of services, business necessity, genuineness and nexus of the expenditure with the transfer or improvement of the asset.
The ruling is, therefore, primarily on proper enquiry and natural justice. It does not finally allow the expenditure; it gives the assessee another opportunity to substantiate the claim before the Assessing Officer.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE
This appeal of the assessee is directed against the order of the Ld. CIT (A)-VI, Bangalore, in ITA NO: 161/DCIT/CC, Mysore/CIT(A)-VI, Bangalore, for the assessment year 2007-08.
2. The assessee had raised as many as 22 grounds in an illustrative and narrative manner. On a careful perusal of the grounds raised, we find that the cruxes of the issues are two-folds which are listed out in a concise manner as under:
(i) The CIT (A) erred in enhancing the disallowance by Rs.20 lakhs under the head ‘land development, demolition, leveling, construction of compound wall etc’.; &
(ii) The CIT (A) erred in enhancing the disallowance by Rs.43 lakhs under the head ‘commission payments’.
3. During the course of hearing, the assessee came up with a plea for raising an additional ground [vide her letter dated 13.12.2010] which is reproduced as under:
“The assessing officer erred in not allowing house loan interest of Rs.5,58,486/- while computing the property income.”
3.1. After due consideration of the assessee’s plea and also hearing the either party, the additional ground raised by the assessee was admitted with a direction to the registry to place the same on record.
4. The issues, in brief, are that the assessee, an individual, derives income from shares, investments and agriculture. During the relevant period under dispute, the assessee had indulged in a land dealing and admitted short term capital gains. The issue was that the assessee along with one K.Subramanya Rai have entered into an agreement on 25.9.06 to buy a piece of land from H.N.Shivananjaiah which was later purchased by DMR Enterprises on 8.2.2007. In this transaction, the assessee appears to have received Rs.3.97 crores as consideration being one of the confirming parties, out of which, she had claimed expenses towards development, leveling etc. and also commission in addition to advance paid to the land lord. After verifying the details, the AO disallowed Rs.34.54 lakhs out of the claim of Rs.54.54 lakhs under “land development” and Rs.20 lakhs out of ‘commission payment’ of Rs.53 lakhs (sic) Rs.63 lakhs [as claimed by the assessee] and concluded the assessment accordingly.
5. Aggrieved, the assessee took up the issues before the Ld. CIT (A) for solace. Due consideration of the assessee’s submissions as well as the evidences produced by her during the course of appellate proceedings and also examining the terms and conditions reduced in the agreement entered into with Shivananjaiah, the CIT (A) was of the view that the AO erred (i) in allowing the expenses to the tune of Rs.34.54 lakhs (sic) Rs.20 lakhs and (ii) in allowing commission payment of Rs.43 lakhs, ignoring the fact that there cannot be 31 commission agents for sale of a piece of land etc.
5.1. In view of the above, the Ld. CIT (A), by invoking the provisions of s.250(4) of the Act, required the AO to make further inquiry and send a report. On the basis of inquiry report of the AO dated: 24.3.2010, the CIT (A) issued a letter (notice) u/s 251(2)</a) of the Act to the assessee wherein detailing the inquiry conducted by the AO on various expenses claimed by her and required the assessee to show-cause as to why (i) the disallowance of Rs.20 lakhs (sic) Rs.34.54 lakhs made by the AO should not be enhanced to Rs.54.54 lakhs; and (ii) the disallowance of the commission of Rs.20 lakhs by the AO should not be enhanced to Rs.63 lakhs.
5.2. After consideration of the assessee’s explanation, scrutinizing the agreement entered into for the land dealing, cash books, evidences produced during the appellate proceedings and also the AO’s inquiry report and for the detailed reasons recorded in his impugned order under challenge, the Ld. CIT (A) came to a conclusion that –
Expenses on land development:
– “(On page 26) ………………… Considering the facts discussed above, the appeal on ground Nos. 2 and 4 is dismissed and the disallowance (out) of Rs.34,54,000/- out of Rs.54,54,000/- made by the assessing officer is enhanced to Rs.54,54,000/- which means the appellant is not entitled for claiming deduction under section 48 of the Income-tax Act on the above accounts claimed for Rs.54,54,000/-”
Expenses on Commission:
– “(On page 32) …………….the appellant failed o produce any evidences to support that any services were rendered by the above persons in respect of transfer of the said property, even from the enquiries conducted by the assessing officer by issue of notice under section 133(6) of the Income-tax Act, discussed above it is evident that the persons to whom the alleged commission was paid were unable to prove that they have rendered any services to the appellant. It is also evident from the facts narrated above that the alleged commission was paid to some of the families which itself indicates that there were no services rendered for which the commission is required to be paid. The payment is not genuine as for transferring one property there cannot be 31 commission agents, the commission, if any, is given to the agent who is finally able to find out the party for sale and to whom the actual sale is effected. Hence, the appellant is not eligible for deduction of alleged commission of Rs.63,00,000/-. Accordingly disallowance of the commission of Rs.20,00,000/- made by the assessing officer is enhanced to Rs.63,00,000/-.”
6. Agitated, the assessee has come up with the present appeal. During the course of hearing, the Ld. A R had argued at a greater length and contested the stand of the Ld. CIT (A) in enhancing the income (i) by Rs.20 lakhs under ‘land development’; and (ii) by Rs.43 lakhs under ‘commission’. The substance of the argument put-forth by the Ld. AR is summarized as under:
- the work under-taken by H.N. Shivananjaiah as agreed upon by the agreement dt.25.6.06 was not completed and, hence, the assessee had incurred an expenditure of Rs.54.54 lakhs to make the property marketable;
- the CIT(A) erred in not entertaining fresh evidence sought to be produced by the assessee by relying rule 46A of I.T.Rules; that the CIT(A) ought to have admitted the fresh evidence as he had proposed to enhance the income, wholly ignoring that such enhancement could be made only after giving opportunity to the assessee which he had failed to do so;
- the CIT (A) failed to notice that the AO had disallowed Rs.34.54 lakhs after a spot inspection on 18.10.08 after verifying the work executed, conducting local enquiries at the spot;
- he had erred in concluding that the assessee had not incurred Rs.20.30 lakhs towards erection of compound wall as the details of dates of payment to workers did not tally with submission made before him on 2.6.10 etc. without considering the copy of account furnished before the AO by the assessee vide her letter dated: 18.3.08 wherein it was clearly shown that the said expenditure was incurred by the assessee’s husband on various dates and later on his account has been credited with the narration ‘paid for land development, demolition of building and compound wall charges’.
- Also erred in concluding that Rs.20 lakhs paid for eviction of illegal occupants of the property after the sale of property on 8.2.07 to DMR Enterprises without noticing that on 13.2.07 the account of Prabhakar Shetty (assessee’s husband) was credited Rs.20 lakhs being the amount spent by him on behalf of the assessee;
- That the CIT (A) erred to appreciate that Rs.14.24 lakhs was paid to Smt. Varalakshmi, w/o Shivananjaiah was wholly related to the land which was agreed to be purchased from her husband. This amount as per agreement had to be spent by Shivananjaiah who had failed to discharge his undertaking as per the agreement and, thus, borne by the assessee; that the seller was intentionally delaying the work undertaken by him, the assessee had to spend the amount to salvage the advance already paid to the seller of the land;
- That the CIT (A) had ignored the fact that if the expenses of Rs.54.54 lakhs was not allowable as not having been incurred wholly sand exclusively in regard to transfer, the same was allowable as the cost of the asset transferred or alternatively as cost of improvement of the asset;
- That the CIT (A) erred in rejecting the expenditure of Rs.63 lakhs as commission paid to 31 agents whereas the AO had disallowed only Rs.20 lakhs after due enquiries u/s 133(6) of the Act;
- That the CIT (A) erred in not appreciating the evidence collected through bank which established that the payment of Rs.36.68 lakhs to the agents were through crossed cheques and the payees were identifiable and the balance was by open cheques. The facts gathered by the CIT(A) show that the payments of Rs.63 lakhs were from the assessee’s bank account; that he had failed to appreciate the need to engage the services of 31 agents as the sale had to be completed by 24.3.07, otherwise, the assessee had to face the risk of getting back the advance of Rs.50 lakhs paid to the seller; &
- That the CIT (A) failed to appreciate that the disallowances made by the AO of Rs.34.54 lakhs and Rs.20 lakhs under the heads ‘land development’ and ‘commission’ respectively was with the approval of the Addl. CIT as both the authorities considered the disallowance adequate on the facts of the case.
6.1. To strengthen his argument, the Ld. A.R furnished a voluminous paper book containing 1 – 226 pages which consist of, inter alia, copies of
(i) agreement of sale dt.25.9.2006 with Shivananjaiah;
(ii) Agreement dt.7.2.2007 with DMR Enterprises;
(iii) Deed of Absolute Sale deed and conveyance dt.8.2.2007 with DMR Enterprises as confirming party;
(iv) correspondence with various authorities etc.,
6.2. On the other hand, the Ld. D R came up with a spirited argument that the Ld. CIT(A) had, in fact, gathered all the relevant information, analyzed the same with reference to the issues before him at a greater length and, for the detailed reasons recorded in his finding which is under scrutiny, came to a conclusion that (i) the disallowance of Rs.34.54 lakhs out of Rs.54.54 lakhs made by the AO was to be enhanced to Rs.54.54 lakhs under the head ‘land development, leveling etc’., and (ii) the disallowance of the commission payment of Rs.20 lakhs made by the AO was to be enhanced to Rs.63 lakhs under the head ‘commission’. It was earnestly pleaded by the Ld. D R that as the finding of the Ld. CIT (A) was backed with relevant facts and evidences which requires no interference by this Hon’ble Bench at this stage.
7. We have carefully considered the rival submissions, thoroughly perused the relevant records and also the documentary evidences produced by the Ld. AR in the shape of a paper book referred supra.
7.1. At the outset, we would like to point out that the assessee’s allegation that the CIT(A) erred in not admitting the fresh evidence sought to be produced by the assessee before him, relying on rule 46A of I.T. Rules is found to be wanting as the said rule makes it explicit that –
“46A. (1) The appellant shall not be entitled to produce before the CIT(A) any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the AO except in the following circumstances, namely:-
(a) where the AO has refused to admit evidence which ought to have been admitted; or
(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the AO; or
(c) where the appellant was prevented by sufficient cause from producing before the AO any evidence which is relevant to any ground of appeal; or
(d) where the AO has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal”
7.1.1. As the assessee had not brought any proof to suggest that (i) the AO had refused to admit, (ii) the assessee was prevented by sufficient cause from producing the same before the AO; & (iii) the AO had made the order without affording sufficient opportunity to the assessee to adduce any evidence etc., the Ld. CIT(A) was within his domain to refuse to admit the fresh evidence sought to be produced by the assessee.
7.1.2. However, in the instant case, the Ld. CIT (A) had proposed to enhance the addition over and above the additions made by the Ld. AO. In such circumstances, the principles of natural justice warrant that the Ld. CIT (A) should have examined the additional evidences advanced by the assessee during the course of appellate proceedings which is lacking in this case.
7.2. The assessee’s other allegation that the CIT(A) had not given proper opportunity before resorting to enhancement of the assessee’s income is also found to be incorrect as the Ld. CIT (A) vide his (communication) Notice u/s 251(2) of the Act dated: 25.3.2010 called upon the assessee to show-cause as to why the disallowance of (i) Rs.20 lakhs (sic) Rs.34.54 lakhs made by the AO should not be enhanced to Rs.54.54 lakhs; and (ii) Rs.20 lakhs made by the AO on account of commission payments should not be enhanced to Rs.63 lakhs and the assessee was required to explain her stand on these issues by 31.3.2010 [source: P 93-99 of PB AR]. Thus, in our considered view, the Ld. CIT(A) had given proper opportunity to the assessee before concluding the appellate proceedings.
8. Let us now turn our attention to the other issues raised by the assessee in her grounds of appeal.
8.1. We have diligently perused the impugned assessment order under dispute. For the appreciation of facts, we indulge in to reproduce the relevant portion of the order:
“2. Short term capital gains on sale of lands purchased from Lakshmi Venkatesh has been offered to tax. Besides, surplus received in connection with the land dealings of Shri H.N.Shivananjiah has been declared as short term capital gains. The assessee, along with Sri K. Subramanya Rai had entered into an agreement on 25.9.2006 to buy the land belonging to Sri H.N. Shivananjiah which was later bought by DMR Enterprises on 8.2.2007. The assessee received Rs.3,97,11,130/- consideration as one of the confirming parties to the transaction. Out of this sum, the assessee has claimed expenses towards land development, demolition of structures, eviction expenses and commission to parties who arranged for sale in addition to the advance paid to the landlord. The assessee is not able to produce confirmation from the persons who carried out the work of demolition, development, construction of compound, leveling and eviction of occupants. Considering the work actually carried out, a sum of Rs.20 lakhs is treated as reasonable. Out of the commission of Rs.53 lakhs paid by cheques to various persons, a sum of Rs.20 lakhs is treated as excessive. This leaves balance of Rs.2,94,11,130/- taxable as income from the transaction to which the assessee’s representative has consented.”
8.2. The assessment order, it appears, has been framed without proper examination of the facts that the assessee had claimed expenses of Rs.54.54 lakhs for land development, demolition of building, leveling and erection of compound wall etc., and also ‘commission payments’ to the agents of Rs.63 lakhs since the Ld. AO had himself admitted that ‘The assessee is not able to produce confirmation from the persons who carried out the work of demolition, development, construction of compound, leveling and eviction of occupants. Considering the work actually carried out, a sum of Rs.20 lakhs is treated as reasonable.’ However, the AO had concluded that, considering the work actually carried out, the expenses to the tune of Rs.20 lakhs was reasonable, without recording his reasons for such a finding.
8.3. The assessee’s claim of commission alleged to have been paid to the agents to the tune of Rs.63 lakhs have also been conceded by the Ld. AO to the extent of Rs.43 lakhs. While dealing with this issue, the AO made a mistake in mentioning that ‘Out of the commission of Rs.53 lakhs paid by cheques to various persons, a sum of Rs.20 lakhs is treated as excessive’ whereas the assessee has all along been claiming that she had incurred expenditure to the tune of Rs.63 lakhs under ‘commission payments’. This issue also has not been properly dealt with.
8.4. In order to facilitate the AO to have a fresh look at the additional evidences now in possession of the assessee and also to examine the observations made by the Ld. CIT (A) in his impugned order under dispute, we are of the unanimous view that the issue should be looked into in its entirety by the assessing officer with reference to the evidences advanced by the assessee in the shape of confirmation letters, affidavits etc., the entire issue is remitted back on the file of AO with a specific direction to look into the issue afresh and to take appropriate action in accordance with the provisions of the Act, of course, after affording a reasonable opportunity to the assessee of being heard. In the meanwhile, the assessee, through her Ld. AR, is advised to furnish all the relevant particulars at her possession which would facilitate the AO to carry out the direction of this Bench cited supra in an expeditious manner. It is ordered accordingly.
9. With regard to the additional ground that the AO had not allowed the house loan interest of Rs.5.58 lakhs while computing the property income etc., we would like to point out that the assessee had not furnished details during the course of hearing before us and also it could not be ascertained from the assessment order as to whether the assessee had raised this issue during the course of assessment proceedings and, if so, the outcome of the assessee’s plea etc. However, the assessee is at liberty to raise this issue before the AO during the course of reassessment proceedings.
10. In the result, the assessee’s appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 28th day of January, 2011.
