Assessee Not Liable for Co-Owners’ On-Money payments: ITAT Ahmedabad

Manish Ramanbhai Patel Vs ITO (ITAT Ahmedabad)

The case of Manish Ramanbhai Patel Vs ITO, heard by the Income Tax Appellate Tribunal (ITAT) in Ahmedabad, has set a significant precedent in the realm of income tax assessments. This article offers a comprehensive analysis of this case, including an exploration of the grounds of appeal and the relevant case laws cited during the proceedings.

1. Grounds of Appeal: In this case, the appellant raised several grounds of appeal, challenging the addition made by the Assessing Officer. The primary contentions included:

• An appeal against an addition of INR 13,07,000 made in the hands of the assessee, despite the payment being made by co-owners of the land and accepted as such on record.
• Contesting an addition of INR 11,30,000 under Section 69C of the Income Tax Act, 1961, pertaining to unexplained sources of income incurred during the purchase of the land.
• Asserting that the entire share of the transaction was conducted through bank accounts, with the “on-money” element admitted to be paid by the co-owners.
• Citing relevant case laws to justify the payment of INR 30,00,000 by the assessee and questioning the addition of INR 11,30,000 on the grounds of legal justification.
• Requesting the quashing of the order of the Ld CIT(A) and seeking any other appropriate relief.

2. Background:

• The proceedings initiated with the filing of an income tax return on 25-03-2010, declaring a total income of Rs. 3,10,110.
• Subsequently, the case was reopened under Section 147 of the Income Tax Act, with a notice under Section 148 being issued on 28-03-2014.
• The Assessing Officer uncovered the fact that the assessee, along with two co-owners, had purchased a piece of land for Rs. 1,50,00,000. Of this, the assessee had paid Rs. 30,00,000 by cheque, while the other co-owners had contributed a part via cheque, and the remaining Rs. 70,00,000 was paid in cash.
• The Assessing Officer questioned the source of the cash payment, as there was no specified distribution of the investment in the land among the co-owners.

3. Ld. CIT(A)’s Decision:

• The ld. CIT(A) partially allowed the appeal, upholding a 20% addition of the total disputed amount, which amounted to Rs. 41,78,333.

4. Condonation of Delay:

• The appellant sought condonation of a 1494-day delay in filing the appeal, citing non-residence and NRI status as the reasons for the delay, which was subsequently condoned.

5. ITAT’s Decision:

• After careful consideration of the submissions, the ITAT concluded that the 20% addition of Rs. 1,77,000, as made by the Assessing Officer, was not justified.
• The explanation provided by the co-owners regarding the land purchase had not been duly considered by the Assessing Officer or the ld. CIT(A).
• Consequently, the ITAT allowed the appeal filed by the assessee.

6. Precedents Cited: The legal arguments presented in this case were reinforced by pertinent case laws, which include:

• PCIT v Bhagwanbhai K. Patel (2019): This judgment by the Hon’ble Gujarat High Court emphasized that an assessee is only obligated to explain the sources for their share in a purchase transaction. The case law was invoked to support the justification for the payment of INR 30,00,000 by the assessee.
• CIT, Kottayam v. Sree Ganesh Trading Company (2019): A decision by the Hon’ble Kerala High Court was cited to assert that when an assessee firm receives funds from partners, any doubt regarding the source of funds of the donor/creditor should lead to additions in the hands of the donor/creditor, not the assessee.

These precedents played a pivotal role in building the case for the appellant, highlighting the legitimacy of the payment and the unjust nature of the addition.

7. Conclusion: The case of Manish Ramanbhai Patel Vs ITO, heard by ITAT Ahmedabad, marks a notable decision where an addition was invalidated based on a compelling argument supported by relevant case laws. This case underscores the significance of considering all available explanations and evidence during tax assessments, ensuring that any additions are well-founded and conform to the principles of natural justice.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed against the order dated 19-08-2016 passed by !d. CIT(A) for assessment year 2009-10.

2. The grounds of appeal are as under:-

“1. The Ld. AO has erred in law by allowing an addition of INR 13,07,000 in the hands of the assessee, when the actual payment was made by the co-owners of the land and the same was also accepted by them on record.

2. The Ld. AO has erred both in law and fact, in making the addition of Rs. 11,30,000/-under section 69C of the Income Tax Act, 1961 being unexplained source of income incurred towards purchase of the land without properly appreciating the various submissions/ explanations / evidences on record where in-fact the assessee had not paid a single penny in cash and the entire share of the transaction was routed through the bank accounts and the entire share of “on-money” was admitted to be paid by the co-owners. This fact existed in the official records as well and the Ld. CIT(A) has also confirmed the same in his order. Furthermore the Ld CIT (A) also erred in confirming the captioned addition when he over-looked all the facts and passed order without due consideration of the same.

3. Hence both the Ld. A. O. and Ld. CIT (A) erred in making the addition of Rs. 13,07,000!- in the hands of the assessee. Furthermore an addition of INR 1,77,000/- was also made in the hands of appellant , presuming share paid towards stamp-duty, even though Baldevbhai Patel (one of the co-owner(s))had on-record admitted that he had solely paid the amount towards the stamp-duty and the assessee had no role to play therein.

4. Further in the case of PCIT v Bhagwanbhai K. Patel (2019) it was held by the Hon’ble Gujarat High Court, that an assessee is liable only to explain the sources for his share in the purchase transaction. Applying the rationale of the above case-law, the assessee in this case reasonably justified the discharge of the payment for the purchase transaction and the same was duly supported by cross-examination of facts of other parties to the transaction (i.e. payment of INR 30,00,000 by cheque and the remaining by the co-owners).

5. Furthermore as held in the case of CIT, Kottayam v. Sree Ganesh Trading Company (2019) by the Hon’ble Kerala High-court, where the assessee firm received funds from partners, if at all the source of funds of donor/creditor was doubted then the addition should be made in the hands of the donor /creditor only and not the assessee. Applying the same rationale, when the assessee and the co-owners had on-record admitted the payment arrangement and the same was no-where disputed or varied in facts, and it was accepted by everyone including co-owners, that the assessee had paid only INR 30,00,000 and the “on-money” and the stamp-duty were solely discharged by the other co-owners, the addition of INR 11,30,000 in the hands of the assessee on protective basis, for what was paid by the co-owners (similar to partners/ /donors/creditors) was impunged and bad in law. Also the same is against the principles of natural justice.

6. Hence in light of the above facts and similar case-laws, the assessee requests the Hon’ble ITAT to quash the order of the Ld CIT(A), along with the order for penalty u/s 271 (1) (C) as the same is bad in law and provide any other appropriate relief.

7. The appellant craves leave to add, alter or delete any ground either before or in the course of hearing of the appeal.”

3. The return of income was filed on 25-03-20 10 declaring total income of Rs. 3,10,110. The case was reopened u/s. 147 of the Act and notice u/s. 148 of the Act was issued on 28-03-20 14. The Assessing Officer observed that assessee along with other two co-owners had purchased land for Rs. 1,50,00,000/- as per registered sale deed. The assessee made payment of Rs. 30,00,000/- by cheque out of total amount of Rs. 1,50,00,000/-, other two co-owners had made payment of Rs. 50,00,000/- by cheque and remaining payment of Rs. 70,00,000/- was made in cash. The Assessing Officer enquired as to who made payment in cash of Rs. 70,00,000/- as there was no share specified in investment sale/purchase land. The assessee submitted before the Assessing Officer that during the search action u/s. 132 of the Act in the case of Shri Baldevbhai Patel who is one of the co-owners of the said land property had admitted that the sale land had been purchased for Rs. 2,06,55,000/- and remaining payment of Rs. 56,50,000/- was made as on The Assessing Officer after taking cognizance of the reply of the assessee made addition of Rs. 4 1,78,333/- u/s. 69 of the Income Tax Act, 1961 as unexplained investment.

4. Being aggrieved by the assessment order, the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) partly allowed the appeal of the assessee.

5. At the time of hearing, none appeared on behalf of the assessee despite giving several notices which were duly received as per the acknowledgment card received by the registry. Therefore, proceeding on the basis of details such as assessment order, order of the ld. CIT(A) and some of the case laws along with Form 35 and Form 36 filed by the assessee. The contentions made by the assessee before the Assessing Officer as well as CIT(A) are taken as contentions before the Tribunal.

6. There is a delay of 1494 days for which the assessee has filed condonation of delay application thereby stating that the assessee is not residing in India and in fact is a NRI and therefore was not aware to the order dated 19-08-2016 passed by the ld. CIT(A). The assessee in his affidavit as well as in condonation of delay has given details about the delay of four years in sympatric consideration. After taking cognizance of the reasons and the documents, we are condoning the delay but this should not be taken as precedent in any other matters.

7. The ld. Departmental Representative submitted that ld. CIT(A) has rightly upheld the addition to the 20% out of the total addition of Rs. 41,78,333/- and therefore the appeal needs to be dismissed.

8. Heard ld. Departmental Representative and perused all the relevant materials available on record. It is pertinent to note that the search action against Mr. Baldevbhai Patel was not based for reopening of assessee’s case and assessee as well as co-owners i.e. Shri Baldevbhai Patel and Saileshbhai Patel had admitted that the share of three purchasers was 60:20:20 respectively was there as Shri Baldevbhai Patel and Sailseshbhai Patel and Shri Manish Ramanbhai Patel i.e. assessee. The additional amount paid in cash on money was admittedly paid by the other two-owners and not by the assessee as per the reply filed by the assessee during the assessment proceedings. In fact, the assessee’s portion of share only 20% i.e. of 1,77,000/- and the ld. CIT(A) has categorically observed that both co-owners has challenged the ratio of land holdings amongst co-owners who challenged addition of on money on the ground that money received earned on sale of land were utilized by said co-owners for making money payment of land. This explanation was not taken into consideration by the Assessing Officer as well as by the ld. CIT(A) and thus in fact charging/making 20% addition of Rs. 1,77,000/- was not justified and therefore the appeal of the assessee is allowed.

9. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 13-09-2023