Merely because assessee does not produce copy of agreement to AO but does so before CIT(A), ITAT cannot delete relief granted by CIT(A)

Status Home and Enclaves (P) Ltd. Vs CIT (Calcutta High Court)- Whether the Tribunal was justified in law in withdrawing the relief granted by the Commissioner of Income Tax (Appeals) merely because the Development Agreement was not produced before the Assessing Officer when the said agreement was duly submitted before the considered by the Commissioner of Income Tax (Appeals) and no objection in that regard was raised by the Department either in the ground of appeal or in course of argument nor the Tribunal require production of the agreement?

After hearing both the parties HC propose to remand the matter back to the Assessing Officer for giving opportunity to the appellant to re argue the case on the basis of the explanations which have already been given before the Commissioner of Income-tax (Appeals). The Assessing Officer will be entitled to ask for further explanation and after taking into consideration such explanations, if any, the Assessing Officer will pass necessary order.

Status Home and Enclaves (P) Ltd. Vs CIT

Decided by- Calcutta High Court

I.T.A. No. 268 of 2003

Judgement on: August 12, 2011

Bhaskar Bhattacharya, J.:

This appeal under Section 260A of the Income-tax Act, 1961 is at the instance of an assessee, and is directed against an order dated June 13, 2003 passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata, in Income-tax (SS) Appeal No.36 (Kol) of 2000 for the Block Period from 1992-93 to 1997-98 and thereby dismissing the appeal preferred by the assessee.

Being dissatisfied, the assessee has come up with the present appeal.

The facts giving rise to filing of this appeal may be summed up thus:

a) The appellant is a private limited company within the meaning of the Companies Act, 1956 and is assessed to tax under the Income-tax Act. The present appeal arises out of the appellant’s assessment for the block period from 1992-93 to 1997-98.

b) The appellant was incorporated with the object of, inter alia, doing real estate business. According to the appellant, the first project undertaken by the appellant was at ‘L’ Road, Jamshedpur and from time to time, it invested diverse amounts in the said project. The appellant claims that due to paucity of fund, the appellant could not complete the project and in the circumstances, on April 4, 1996 a development agreement was entered into between the appellant and one M/s. Thakkar Constructions, a partnership firm.

c) In terms of the said agreement, the said firm agreed to complete the project at its own cost and provide a portion of the constructed area to the appellant by way of consideration. The appellant claimed that the said firm also agreed to pay the appellant a sum of Rs.4 lac towards reimbursement of part of the construction cost and preliminary expenses incurred by the appellant which was referred to in the said agreement as premium. In order to secure the payment of the said sum of Rs.4 lac, according to the appellant, it had obtained from the said firm a promissory note for the said amount. By the said promissory note, the said firm promised to pay the said sum of Rs.4 lac in terms of the said agreement by December 2, 1996 with interest @ 18% per annum.

d) According to the appellant, the said firm did not pay the said sum of Rs.4 lac to the appellant within the financial year ending on March 31, 1997 and in the account for the said financial year, the said sum of Rs.4 lac was reduced from the cost of work-in-progress relating to the project and an identical amount together with interest of Rs. 18,000/- was shown as receivable from the said fund.

e) According to the appellant, the said firm had also shown the said sum of Rs.4 lac together with interest of Rs. 18,000/- as payable to the appellant during the financial year ending on March 31, 1997. The appellant further claimed that in the financial year ending on March 31, 1998, on April 9, 1997, the said firm allotted additional constructed area to the appellant in the project and adjusted the said sum of Rs.4 lac against the same.

f) On February 18, 1997 a search was conducted against the appellant in course of which the said promissory note in original was seized from the residence of the appellant’s director, viz. one Mr. Parikh. The Assessing Officer initiated block assessment proceeding pursuant to the said search against the appellant and in course thereof, required the appellant to explain as to why the said sum of Rs.4 lac should not be treated as the appellant’s income for the financial year 1996-97 since the said amount was not shown as received from the said firm during the said financial year.

g) By a letter dated January 14, 1999, the appellant duly explained to the Assessing Officer the circumstances relating to the execution of the development agreement and the promissory note and stated that the appellant had not received the amount from the said firm till the date of search.

h) The Assessing Officer, however, treated the said sum of Rs.4 lac as the appellant’s undisclosed income for the block period on the ground that the promissory note did not indicate that the payment had not been made to the appellant and further that the appellant could not furnish the agreement with the said firm.

i) Being dissatisfied the appellant preferred an appeal before the Commissioner of Income-tax (Appeals) and before the said authority the appellant specifically referred to the agreement with the said firm. The appellant also referred to the Commissioner of Income-tax (Appeals) the circumstances and consequently by an order dated September 6, 2000 the Commissioner of Income-tax (Appeals) allowed the appeal of the appellant and held that the sum of Rs.4 lac could not be considered in the appellant’s block assessment and the matter was required to be examined in the subsequent year.

j) Being dissatisfied with the aforesaid order passed by the Commissioner of Income-tax (Appeals), the Assessing Officer preferred an appeal before the Income-tax Appellate Tribunal.

k) The Tribunal by an order dated June 13, 2003 allowed the Revenue’s appeal on the ground that the appellant could not produce the agreement entered into with the said firm and that the said promissory note did not indicate that no money was paid against the same to the appellant.

Against such order of the Tribunal, the appellant has come up with the present appeal.

A Division Bench of this Court on May 16, 2005 formulated the following substantial question of law for decisions in this appeal:

“i) Whether the Tribunal was justified in law in withdrawing the relief granted by the Commissioner of Income Tax (Appeals) merely because the Development Agreement was not produced before the Assessing Officer when the said agreement was duly submitted before the considered by the Commissioner of Income Tax (Appeals) and no objection in that regard was raised by the Department either in the ground of appeal or in course of argument nor the Tribunal require production of the agreement?

“ii) Whether the purported findings of the Tribunal upholding the presumptive addition of Rs.4,00,000/- made by the Assessing Officer on the basis of an un cancelled promissory note found with the appellant in original ignoring the accounts of the parties, certificate of Chartered Account etc. are arbitrary, unreasonable and perverse?”

In course of hearing of the present appeal, this Bench formulated an additional point, as according to this Bench, on the face of the promissory note, the same was payable not to the company, the assessee before us, but to Mr. Parikh, one of its Directors, and as such, the authorities below committed substantial error of law in treating the amount to be payable to the assessee. The additional point formulated by this bench is quoted below:

“In view of the fact that the promissory note in question mentioned that the amount is allegedly payable to Sri Dinesh B. Parikh (Director Status Home & Enclaves (P) Ltd.), whether the Tribunal below committed substantial error of law in holding that the said amount was payable to Status Home & Enclaves (P) Ltd., the assessee in this appeal.”

Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, has, strenuously contended before us that the Tribunal below erred in law in not taking into consideration the development agreement which was produced before the Commissioner of Income-tax (Appeals) on the ground that the same was not produced before the Assessing Officer. Mr. Khaitan submits that there was no justification of setting aside order of the Commissioner of Income-tax (Appeals) who passed the order after being satisfied with the explanations given by his client.

Mr. Shome, the learned Advocate appearing on behalf of the Revenue, has, on the other hand, opposed the aforesaid contention of Mr. Khaitan and has contended that the Commissioner of Income-tax (Appeals) should not have taken into consideration the agreement produced before it without recording formal order that the documents were required to be taken into consideration before the appellate forum as provided in the Income-tax Rules. Mr. Shome further submits that even no specific order was recorded admitting the said document into evidence and thus, the Commissioner of Income-tax (Appeals) erred in law in relying upon such document.

Mr. Shome, therefore, prays for affirming the order passed by the Tribunal.

After hearing the learned Counsel and after going through the materials on record, we are of the view that even if we do not take into consideration the explanation given by the assessee before the Commissioner of Income-tax (Appeals), it will appear that the promissory note in question on the face of it did not disclose that the same was payable to the company, the appellant before us. The promissory note is quoted below:

“On Demand we M/s. THAKKAR CONSTRUCTION promise to pay to Shri Dinesh B. Parikh (Director Status Home & Enclaves P. Ltd.) a sum of Rs. 4,00,000/- (Rupees four lacs) only being the premium amount for development agreement dated 04-04-1 996.

The amount will be payable latest by 02-12-1 996 along with an interest at 18% (Eighteen per cent per annum) till the date of payment.”

On a plain reading of the said promissory note, it appears that on demand M/s. Thakkar Construction promised to pay to Sri Dinesh B. Parikh who was described as a Director of the appellant, a sum of Rs.4 lac being the premium amount for development agreement dated 4^th April, 1996 and that the amount should be payable latest by 2^nd December, 1996 along with an interest 18% per annum till the date of payment.

Thus, even if we do not take into consideration the explanations given by the appellant by production of the development agreement dated 4^th April, 1996, on the basis of such promissory note, the amount was not payable to the appellant but was payable to Shri Parikh who happens to be one of the Directors of the appellant. Any promissory note promising to pay an amount to a Director of the company cannot be deemed to be an amount payable to the company and thus, the authorities below acted illegally in treating the amount payable under that promissory note to be an amount receivable by the appellant, the Company.