Opportunity of Hearing must before addition for Unexplained Eviction Expenses

Shadawal Enterprises Vs CIT (ITAT Mumbai)

Addition of unexplained expenses on failure to establish evidence for eviction of encroacher should be made after providing opportunity of hearing to assessee

Conclusion: Shri Ganesh Vithal Indore was the appropriate person to establish his possession over the encroached property/land by submitting the relevant documents and/or other direct or indirect evidence, thus for the just decision of the case and for real adjudication of the issue, it would be appropriate to remand the instant issue to the file of AO for decision afresh by summoning Shri Ganesh Vithal Indore and in case he will not appear then by taking appropriate measures as prescribed under the law and also by giving one more opportunity to assessee to corroborate its stand qua encroached land and to establish the transaction as genuine, with direct-indirect or circumstantial evidence etc.. accordingly addition as unexplained expenses should be made.

Held: Search and survey operation under Section 133A was conducted in the business premises of assessee, wherein a statement of Shri Rajaram Ganpat Vichare, partner of assessee-firm was recorded, in which a voluntary declaration of Rs. 1,10,06,000/- as per the discrepancies detected was made based on provisional income and expenditure account. Assessee-firm has debited total amount of Rs. 3,30,66,526/- and therefore, assessee was asked to furnish complete details of the purchases along with ledger confirmations, bank details and income tax details of the parties. AO summoned one of the party Ganesh Vithal Indore, however, inspite of the service of summons under Section 131, Shri Ganesh Vithal neither appeared nor filed any details/reply, and therefore the AO by taking into consideration the facts “that assessee failed to establish/bring to have made any efforts for eviction of encroacher, installation of electricity and water connection on the said land, reporting of encroachment with the Government authorities, permission for construction, photographs of encroachment and activities of the encroachers and possession of encroachers in any form”, doubted the said transaction of Rs. 1,30,00,000/- allegedly paid to Shri Ganesh Vithal Indore for vacating the alleged encroached land and therefore, the addition had also been affirmed by the Commissioner. It was held that as per the details furnished by assessee before the AO, Shri Ganesh Vithal Indore has shown the said amount of Rs. 1,30,00,000/- as deemed consideration under section 50C, therefore, Shri Ganesh Vithal Indore was also the appropriate person to establish his possession over the encroached property/land by submitting the relevant documents and/or other direct or indirect evidence, thus for the just decision of the case and for real adjudication of the issue and to unearth the real controversy, it would be appropriate to remand the instant issue to the file of AO for decision afresh by summoning Shri Ganesh Vithal Indore and in case he will not appear then by taking appropriate measures as prescribed under the law and also by giving one more opportunity to assessee to corroborate its stand qua encroached land and to establish the transaction as genuine, with direct-indirect or circumstantial evidence etc.. Hence, the issue in hand stood remanded to the file of AO for de-novo decision. Hence, considering peculiar facts and circumstances in totality as grounds raised remained un-adjudicated and the Assessee candidly accepted its mistake, the issue should be remanded qua addition on account of opening stock and adhoc disallowance of labor charges and purchase expenses, to the file of the Commissioner but subject to deposit of Rs. 11,000/- in the account of the Revenue/Department within 30 days of this order.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The Assessee/Appellant herein has preferred this appeal against the order dated 20.02.2020 impugned herein, passed by Ld. Commissioner of Income Tax (Appeals)-3, Thane {in short ‘Ld. Commissioner)’} under section 143(3) of the Income Tax Act 1961 (in short ‘the Act’).

2. At the outset, we observe that there is a delay of 623 days in filing of the instant appeal, on which the Assessee by filing a petition dated 09.08.2023 claimed that due to Covid-19 restrictions in the Nation, the appeal could not be filed within the prescribed period of 60 days from the date of the receipt of the impugned order. The business of the Assessee was also substantially affected and some of the working staff left the Assessee’s office and therefore on the aforesaid reasons, the delay of 623 days has been occurred. We observe that in the instant case, the impugned order was passed on 20.02.2022 which was served upon the Assessee on dated 15.05.2020, as it appears in Form-36. Therefore the Assessee was supposed to file its appeal on or before 15^th of July 2020 which was admittedly Covid-19 period when the entire Nation was on hold. The Assessee, however, filed its appeal on 04.01.2022 with a delay of 539 days. The Hon’ble Apex Court vide its order dated 10.01.2022 in the suo-moto writ petition (C) No. 3 of 2020 in [Re:- Cognizance for extension of limitation] excluded the period from 15.03.2020 to 28.02.2022 in computing the periods prescribed for filing proceedings before the Courts including the Tribunals and given a time of 90 days from 01.03.2022 onwards for filing/instituting the appropriate proceedings. Thus in view of the Hon’ble Apex Court directions, we are inclined to condone the delay of 539 days in filing the instant appeal, consequently the same is condoned accordingly.

3. Now coming to the merits of the case, we observe that a search and survey operation under section 133A of the Act was conducted in the business premises of the Assessee on dated 03.02.2015, wherein statement of Shri Rajaram Ganpat Vichare, partner of the Assessee-firm was recorded, in which a voluntary declaration of Rs. 1,10,06,000/- as per the discrepancies detected was made on the basis of provisional income and expenditure account for the period 01.04.2014 to 03.02.2015 (till the date of survey). Subsequently, the case of the Assessee was selected for scrutiny as per the scrutiny selection guidelines for survey cases issued by Central Board of Direct Taxes, New Delhi, (in short ‘CBDT’). Accordingly statutory notices along with the detailed questionnaire were issued, in response to which the Assessee attended the assessment proceedings and furnished the details. The Assessing Officer (AO) vide assessment order dated 26.12.2017 under section 143(3) of the Act ultimately made various additions inter-alia of Rs. 1,30,00,000/- which was only agitated by the Assessee and has been affirmed by the Ld. Commissioner, hence, for the sake of brevity, we are inclined to adjudicate the instant issue first.

4. It appears from the assessment order that on perusal of list of expenses towards party wise purchases, it was observed by the AO that the Assessee-firm has debited total amount of Rs. 3,30,66,526/- and therefore, the Assessee was asked to furnish complete details of the purchases along with ledger confirmations, bank details and income tax details of the parties. On perusal of party wise purchases, it was further observed by the AO that the Assessee has debited expenses towards purchase from following two parties:

5. The Assessee in response furnished one MOU dated 28.07.2014 on a non-judicial stamp paper of Rs. 100/- executed between the Assessee (first party) and Sh. Balasaheb Ganpat Vichare (2^nd party) and Sh. Ganesh Vithal Indore (3^rd party). Thereafter the Assessee furnished another MOU dated 28.07.2014 duly notarized on Non-Judicial Stamp Paper of Rs. 500/- executed between the Assessee and Shri Ganesh Vithal Indore. The Assessee mainly claimed that Shri Ganesh Vithal Indore had encroached possession of the land situated at Sarvli, Palghar and vide agreement MOU dated 04.07.2014 agreed to release the encroachment on consideration of Rs. 85,00,000/- against the settlement of encroached land. Shri Ganesh Vithal Indore has also declared Long Term Capital Gain (LTCG) amounting to Rs. 1,06,97,223/- in its return of income , details of which are as under:

“Immovable property other than residential house

6. In order to verify the said facts and circumstances, the AO by issuing summons under section 131 of the Act, summoned Shri Ganesh Vithal Indore whereby he was asked to file certain details/documents, however, Shri Ganesh Vithal Indore neither appeared nor responded by filling any reply, therefore, the AO vide letter dated 21.12.2017 show caused the Assessee to explain the transaction of Rs. 1,31,00,000/- and as to why the same should not be disallowed and treated as income.

6.1 In response, the Assessee vide letter dated 22.12.2017 claimed that Shri Ganesh Vithal Indore will not be available as the partners do not know of his address, however, in response to queries qua alleged encroachment, the Assessee made submissions, which have duly been considered by the AO and by considering the peculiar facts mentioned below:

(i) That there is no efforts for eviction of encroachers were made.

(ii) The Assessee has not furnished any concrete evidence to prove that the said land was encroached by Adivashi families.

(iii) No water and electricity connection were there.

(iv) No encroachment has been recorded in Government records of Gram Panchayat, Tahsildar, etc..

(v) The Assessee failed to put forth any concrete evidence with regard to permission of construction by the alleged encroacher and the activities carried out by them.

(vi) No evidence in the form of photographs has been furnished by the Assessee for the claimed encroachment.

(viii) A letter dated 11.12.2017 was issued to Shri Ganesh Vithal Indore whereby he was requested to furnish the details with regard to the encroachment as alleged by the Assessee , though the letter was duly served upon him on 16.12.2017 but till the passing of the assessment order Shri Ganesh Vithal Indore has not appeared.

The AO doubted the transaction and ultimately made the addition of Rs. 1,30,00,000/- as unexplained purchase expenses allegedly paid to Shri Ganesh Vithal Indore, on the following reasons:

“6.1 In view of the above facts the assessee’s contentions are not acceptable and the payments made for the alleged encroachment remain unexplained for the following reasons-

A. The assessee has not provided any cogent evidence of the enquiries with regards to the efforts made for eviction of the alleged encroachment, details of the Government records wherein the encroachment has been registered. Copies of Police complaints, Ghar patti details of the alleged encroachers etc.

B. The assessee was provided with opportunity to produce Shri Ganesh Vithal Indore during the assessment proceedings but the assessee failed to do so.

C. Ganesh Vithal Indore has not attempted to attend during the assessment proceedings Efforts have been made vide letter dt. 11.12.2017 for his explanation which has been duly served to him. But it is observed that till date neither Shri Ganesh Indore attended nor has any written communication been received from him.

D. The wrong claim of Long Term Capital Gains on sale of property the title of which was allegedly acquired by way of adverse possession without any acquisition cost further consolidates the doubt of the unexplained claim of alleged encroachment.

E. The payments made to the alleged encroacher amounting to Rs. 1.30,00,000/- have been debited under the head Purchases No proof of purchases, details of the purchases made from Shri. Ganesh Indore have been furnished other than self made unsigned vouchers amounting to Rs.45,00,000/-. The genuinity of the same is doubtful and remain unexplained.

6.2 In view of the above facts and on perusal of the submissions made it is observed that, the conjuncture of events, adjusted for payment of Rs. 1,30,00,000/-. towards the alleged encroachment, in the disguise of Purchase expenses, are completely based on conjecture and surmise and the same remain unexplained The unexplained Purchase expenses amounting to Rs.1,30,00,000/- made to Shri. Ganesh Vithal Indore are disallowed and the same are added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961 are initiated for concealment of particulars of Income.

Addition of Rs. 1,30,00,000/-”

6.2 The AO also made other additions.

7. The Assessee being aggrieved challenged the said addition as well as other additions before the Ld. Commissioner, who vide impugned order upheld the said addition of Rs. 1,30,00,000/- by observing as under:

“6.1 I have carefully considered the submission of the appellant, the observations of the AO in the assessment order and the facts of the case.

The appellant is a partnership and was subjected to survey u/s. 133A of the Income Tax Act, 1961 (‘the Act’) during the previous year relevant for A.Y. 2015- 16 under consideration. In the course of survey, several discrepancies were noticed, which have been taken into account by A.O. In the order of assessment and additions made thereon. In Form No. 35, grounds were taken against these additions. However, in the course of appellate proceedings, fresh grounds of appeal were filed, wherein only one issue remains for adjudication, that of payment of Rs.1,31,31,313/- to Shri Ganesh Vitthal Indore for getting encroachment on property vacated. The background fact that the appellant is engaged in construction activities. The amounts paid by banking channels were also subjected to TDS of 1% and was claimed as expenses.

The A.O. made enquiries about the genuineness of these payments and before the A.O. Memorandum of Understanding dated 28.07.2014 was filed to establish substantially the source of payment to Shri Ganesh Vitthal Indore. It was contended that Rs.85 lacs were borrowed from brother of a partner against agreement to transfer a flat in his name. However, A.O. desired evidence of existence of encroachment on the land and other related details. In the assessment proceedings, the assessee could not produce even a single evidence of existence of encroachment on the land. The A.O. also asked the assessee to produce Shri Ganesh Vitthal Indore to whom these payments were made. The assessee could not produce Shri Ganesh Vitthal Indore. In this background, the A.O. made disallowance of the entire amount paid to Shri. Ganesh Vitthal Indore as payment depicted was not related to business activity.

Before me, it was contended that the payment was made by account payee cheque and Shri Ganesh Vitthal Indore has offered the amount received by him as Long Term Capital Gain in his own return of income. They have also submitted that confirmation from Shri Ganesh Vitthal Indore has been filed in the course of assessment proceedings. It is therefore contended that deduction should be allowed.

I have perused the facts of the case and find that the assessee is in the business of construction activities. It is quite plausible that in any of the lands owned or purchased by the appellant, there may have been encroachment. However, if the appellant had effected payment to Shri Ganesh Vitthal Indore for getting the land free of encroachment, there ought to be some existence of evidence of encroachment itself. In the present case, the assessee has not been able to file any such evidences. They have also failed to produce Shri. Ganesh Vitthal Indore for examination before A.O. I also noticed that Shri. Ganesh Vitthal Indore in his return of income, the details of which have been filed before A.O., has disclosed the amount under consideration as income under the head “Capital Gains. It is intriguing to note that amount received by him for getting the encroachment removed has been treated as capital gain by Shri Ganesh Vitthal Indore. I do not see any reason for the linkage between the two, the capital gain Shri Ganesh Vitthal Indore on one hand and the so claimed payment for removal of the encroachment by the assessee. There is no basis under which such payment would become capital gains in the hands of the recipient. The stand taken by the A.O. therefore appears to be on sound footing. The disallowance made by the A.O. is confirmed that there has been claim made without there being any corroborative evidence.

Even otherwise, any payment made for removal of encroachment cannot be revenue expenditure in any circumstances. At best, it has to be a capital expenditure being integral part of the land purchased/owned by the assessee and therefore ought to have gone to enhance the value of land owned by the assessee. For this reason also, the addition made by the A.O. is justified. The same is confirmed.”

8. Having heard the parties on the issue under consideration, we observe that Assessee claimed to have paid Rs. 1,30,00,000/- to Shri Ganesh Vithal Indore for vacating the encroached land at Palghar. The AO summoned Shri Ganesh Vithal Indore, however, inspite of service of summon u/s 131 of the Act, Shri Ganesh Vithal Indore neither appeared nor filed any details/reply and therefore the AO by taking into consideration the facts “that the Assessee failed to establish/bring to have made any efforts for eviction of encroacher, installation of electricity and water connection on the said land, reporting of encroachment with the Government authorities, permission for construction, photographs of encroachment and activities of the encroachers and possession of encroachers in any form”, doubted the said transaction of Rs. 1,30,00,000/-allegedly paid to Shri Ganesh Vithal Indore for vacating the alleged encroached land and therefore, the addition has also been affirmed by the Ld. Commissioner, however, we observe as it appears from para-5.3 of the assessment order that Shri Ganesh Vithal Indore was summoned vide letter dated 11.12.2017 by which he was asked to produce certain relevant information and documents on or before 15.12.2017, whereas the said summon was infact served on the next day of the time given i.e. on 16.12.2017 and therefore in our considered view , this could be the reason for not responding the summon and not filling any reply/document by Shri Ganesh Vithal Indore. It is also a fact that thereafter no summon was ever issued and on dated 26.12.2017 the assessment order was passed.

8.1 As per the details furnished by the Assessee before the AO, Shri Ganesh Vithal Indore has shown the said amount of Rs. 1,30,00,000/- as deemed consideration under section 50C of the Act, therefore, in our considered opinion Shri Ganesh Vithal Indore is also the appropriate person to establish his possession over the encroached property/land by submitting the relevant documents and/or other direct or indirect evidence, thus for the just decision of the case and for real adjudication of the issue and to unearth the real controversy, it would be appropriate to remand the instant issue to the file of the AO for decision afresh by summoning Shri Ganesh Vithal Indore and in case he will not appear then by taking appropriate measures as prescribed under the law and also by giving one more opportunity to the Assessee to corroborate its stand qua encroached land and to establish the transaction as genuine, with direct-indirect or circumstantial evidence etc.. Hence, in the aforesaid directions, the issue in hand stands remanded to the file of the AO for de-novo decision.

9. Coming to the other grounds of appeal, which pertains to addition of Rs. 18,75,645/- on account of separation of opening stock and adhoc disallowance of Rs. 12,42,542/- on account of un-explained labor charges and purchase expenses, we observe that though the Assessee before the Ld. Commissioner challenged the said additions also, however, as it appears from para 5.1 of the impugned order, the Assessee had claimed that he would like to proceed the appeal only on the ground relating to the addition of Rs. 1,30,00,000/-, meaning thereby the Assessee waived his right to agitate the other additions/grounds and therefore, the Ld. Commissioner affirmed the same without adjudicating on merit. However before us, the Ld. Counsel claimed that due to wrong advice or inadvertent mistake or otherwise, the Assessee failed to agitate the other additions mentioned above and therefore, the lenient view may be taken as no prejudice shall be caused to the Revenue Department, in case the grounds related to the additions mentioned above may be directed to be decided in accordance with law.

9.1 We have given thoughtful consideration to the peculiar facts and circumstances of the case and observe that the impugned order was passed on 20.02.2020 and the Assessee voluntarily may be on wrong advice or otherwise, did not agitate the other grounds of appeal raised before the Ld. Commissioner and if at this stage we afford an opportunity by remanding the case to the file of the Ld. Commissioner, certainly the Revenue/Department would suffer unnecessary burden, however as the law bends towards justice and it is a fact that the issue pertaining to the aforesaid additions remained un-adjudicated, may be because of the default of the Assessee but still in our considered view, requires to be adjudicated in view of the Principle of Natural Justice. Hence, considering peculiar facts and circumstances in totality as grounds raised remained un-adjudicated and the Assessee candidly accepted its mistake, we are inclined to remand the aforesaid issues qua addition on account of opening stock and adhoc disallowance of labor charges and purchase expenses, to the file of the Ld. Commissioner but subject to deposit of Rs. 11,000/- in the account of the Revenue/Department within 30 days of this order and accordingly the aforesaid issues stands remanded in the aforesaid terms.

10. In the result, appeal filed by the Assessee is allowed for statistical purposes.

Order pronounced in the open court on 7-11-2023.