CIT(A) cannot enhance income on issues not examined by AO: ITAT Mumbai

ITAT: CIT(A) cannot enhance income on issues not examined by AO; appropriate remedy lies under Sections 263, 147 or 154

In Skyline Greathills Vs DCIT, the ITAT Mumbai held that the CIT(A) exceeded jurisdiction under Section 251 by enhancing income on an issue not examined by the Assessing Officer during assessment proceedings. The enhancement related to capitalization of Rs.12 crore disclosed during survey proceedings under Section 133A and added to work-in-progress. The Tribunal observed that the Assessing Officer had not examined this issue in the original assessment and therefore the CIT(A) could not introduce a new source of income at the appellate stage. The Tribunal noted that such matters could only be examined through proceedings under Sections 263, 147 or 154, if permissible. Accordingly, the enhancement was quashed. The Tribunal also upheld deletion of additions under Section 2(22)(e) and on account of additional consideration under the Joint Development Agreement. It held that security deposits received under the development agreement were business receipts and that valuation based on the entire land parcel was unsustainable.

Facts:

• The assessee, Skyline Greathills, is a partnership firm engaged in the business of real estate development. For Assessment Year 2012–13, the assessee filed its return of income on 28.09.2012 declaring total income of Rs.22,84,63,844/-. The return was processed under Section 143(1) of the Income-tax Act, 1961 and thereafter the case was selected for scrutiny assessment. Accordingly, statutory notices under Sections 143(2) and 142(1) of the Act were issued and served upon the assessee. During the course of assessment proceedings, authorised representatives of the assessee appeared before the Assessing Officer from time to time and furnished explanations in response to the various issues raised during scrutiny. However, the explanations furnished by the assessee did not find favour with the Assessing Officer on certain issues and consequently assessment under Section 143(3) of the Act came to be completed on 24.03.2014 by the JCIT, Range-21(3), Mumbai. In the assessment order, while retaining the business income declared by the assessee at Rs.22,84,63,844/-, the Assessing Officer made an addition of Rs.17,51,910/- under Section 2(22)(e) of the Act on account of alleged deemed dividend. The Assessing Officer further made an addition of Rs.17,66,44,500/- as additional value of consideration on Joint Development Agreement on protective basis. Consequently, the total income of the assessee was computed at Rs.40,68,60,254/- and rounded off under Section 288A at Rs.40,68,60,250/-.
• The additions made by the Assessing Officer arose primarily from a Joint Development Agreement entered into between the assessee and Skyline Mention Pvt. Ltd. in respect of development rights over a large parcel of land situated at Powai, Mumbai. The assessee had entered into the Joint Development Agreement on 04.04.2008 under which the assessee received security deposits amounting to Rs.54,68,90,000/-. The land in question consisted of approximately 32,262 sq. meters and at the relevant point of time was situated in a No Development Zone (NDZ), due to which several permissions and sanctions were required before actual development could commence. In due course, after obtaining the requisite approvals and sanctioned plans, possession of the property was granted to Skyline Mention Pvt. Ltd. on 25.04.2011. Under the terms of the Joint Development Agreement, the assessee was entitled to receive constructed area having FSI equivalent to 16,500 sq. meters upon completion of the project. During the relevant assessment year, an amount of approximately Rs.21 crores had been received by the assessee out of total deposits aggregating to Rs.84.95 crores. The Assessing Officer formed an opinion that the security deposits received by the assessee were in substance loans and advances from a company in which the partners of the assessee firm collectively held 59.66% shares and therefore the provisions of Section 2(22)(e) of the Act were attracted. Accordingly, the Assessing Officer treated Rs.17,51,910/- as deemed dividend in the hands of the assessee.
• The Assessing Officer further took the view that the assessee had understated the consideration receivable under the Joint Development Agreement. The assessee had suo motu offered Rs.24,75,00,000/- as consideration by estimating the value of the constructed area receivable under the agreement at Rs.15,000/- per sq. meter for 16,500 sq. meters of constructed premises. However, the Assessing Officer disregarded the basis adopted by the assessee and instead substituted the declared consideration with the stamp duty value/market value of the entire land parcel measuring 32,262 sq. meters, which according to municipal and stamp valuation records amounted to Rs.42,41,44,500/-. Proceeding on such basis, the Assessing Officer treated the differential amount of Rs.17,66,44,500/- as additional business income arising from the Joint Development Agreement and added the same on protective basis.
• Aggrieved by the aforesaid additions, the assessee preferred appeal before the Commissioner of Income Tax (Appeals)-50, Mumbai. The CIT(A), vide appellate order dated 21.03.2025, granted substantial relief to the assessee by deleting both the additions made by the Assessing Officer. Insofar as the addition under Section 2(22)(e) was concerned, the CIT(A) relied upon the earlier order passed in the assessee’s own case for Assessment Year 2009–10 as well as the decision of the Mumbai Tribunal dated 08.05.2013 and the judgment of the Hon’ble Bombay High Court dated 16.02.2016 in ITA No. 2299 of 2013, wherein it had been held that the security deposits received under the Joint Development Agreement constituted business receipts and could not be treated as deemed dividend in the hands of the assessee firm, which was neither a registered shareholder nor a beneficial shareholder of the lender company. The CIT(A), therefore, directed deletion of the addition of Rs.17,51,910/- made under Section 2(22)(e).
• Similarly, while dealing with the addition of Rs.17,66,44,500/- relating to the Joint Development Agreement, the CIT(A) observed that the Assessing Officer had incorrectly adopted the market value of the entire land parcel instead of considering the actual consideration receivable by the assessee under the agreement. The CIT(A) noted that the assessee was not receiving monetary consideration equivalent to the value of the land but was only entitled to receive constructed premises equivalent to 16,500 sq. meters of FSI area. The CIT(A) further observed that the assessee had already offered Rs.24,75,00,000/- as consideration based on estimated value of such constructed premises and therefore substitution of such value with the stamp duty value of the entire land was legally unsustainable. Accordingly, the CIT(A) deleted the addition of Rs.17,66,44,500/- made by the Assessing Officer.
• However, while examining the records during appellate proceedings, the CIT(A) noticed that a survey under Section 133A of the Act had been conducted at the business premises of the assessee on 20.01.2012. During the course of the survey proceedings, the statement of Shri Narottam Sharma, partner of the assessee firm, had been recorded wherein he admitted undisclosed income of Rs.12 crores on account of unexplained cash expenditure incurred in construction activities. On examining the computation of income and financial statements of the assessee for Assessment Year 2012–13, the CIT(A) observed that although the assessee had disclosed the additional income of Rs.12 crores in the Profit & Loss Account, the assessee had simultaneously capitalized the same amount into work-in-progress in its books of account. According to the CIT(A), such capitalization had the effect of nullifying the disclosure of additional income made during the survey proceedings. Consequently, the CIT(A) issued a show cause notice dated 10.01.2025 under Section 251(1) of the Act calling upon the assessee to explain as to why the amount disclosed during survey proceedings should not be reduced from the work-in-progress to the extent it had been capitalized.
• In response to the said show cause notice, the assessee objected to the proposed enhancement by contending that the issue relating to capitalization of Rs.12 crores into work-in-progress had never been examined by the Assessing Officer during the original assessment proceedings and therefore the CIT(A) lacked jurisdiction under Section 251(1) of the Act to introduce a completely new issue at the appellate stage. Reliance was placed upon judicial precedents including decisions in Edelweiss Asset Management Ltd. v. ACIT (2024) 1 TMI-650, ITAT Mumbai, and CIT v. Sardari Lal & Co. (2001) 9 TMI-1130, Hon’ble Delhi High Court. The submissions of the assessee, however, did not find favour with the CIT(A), who proceeded to enhance the income of the assessee by reducing the work-in-progress by Rs.11,96,87,000/-. Aggrieved by such enhancement, the assessee preferred appeal before the Income Tax Appellate Tribunal, Mumbai.

Issues:

Issues raised by the Assessee:

• On the facts and circumstance of case and in law, the Ld. CIT(A) erred in exercising the power of enhancement u/s 251 of the Act without considering the fact that the Ld. CIT(A) does not have power to enhance the assessment by discovering a new source, which was not considered by the Ld. AO in the order appealed against. In the present case, the Ld. AO has not dealt with the issue relating to capitalization of Rs. 12 Crores under WIP in the assessment order, therefore, CIT(A) has no jurisdiction to enhance the same under section 251 of the Act.
• Without Prejudice to Ground No.1 and on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in reducing Rs. 11.97 Crore from Closing WIP without considering the fact that the assessee has offered the undisclosed income with respect to the undisclosed expenditure, which was not disputed by the revenue in the original assessment, therefore, the corresponding expenses incurred out of such income should also be allowed. Hence, the assessee has correctly increased the WIP by the expenditure incurred.
• Without Prejudice to Ground No.1 and on the facts and in the circumstances of the case and in law, the Ld. CIT(A)-50 erred in reducing Rs. 11.97 Crore from Closing WIP without considering the fact under double entry system of accounting, if any, undisclosed income with respect to the undisclosed expenditure is brought into the books of accounts, the corresponding undisclosed expenditure should also be recognized. Therefore, in the present case, the undisclosed expenditure should be recognized, and increase in WIP due to increase in such expenditure should be allowed.
• On the facts and circumstance of case and in law, the Ld. CIT(A) erred in initiating penalty proceedings u/s 271(1)(c) of the Act.

Issues raised by the Revenue:

• Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition made u/s 2(22)(e) of the Act without appreciating the facts as mentioned in the assessment order.
• Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 17,66,44,500/- being business income in the guise of security deposit received by the Respondent, as the latter had already transferred its rights of ownership by way of irrevocable covenant as also received the entire consideration by way of security deposit.

Observations:

• The Tribunal observed that admittedly the issue for enhancement neither emerged from the findings of the Assessing Officer nor from the assessment order and facts on record, and it was ostensible that the Assessing Officer had not looked into the same. The Tribunal noted that such fact was itself visible from the impugned order of the CIT(A), wherein it had been observed that “the AO did not examine other components of the financial statement”. The Tribunal therefore found force in the submissions advanced on behalf of the assessee that Section 251(1) of the Act restricts the CIT(A) from assuming jurisdiction for enhancement of income on an issue or new source of income which was not dealt with or considered by the Assessing Officer during assessment proceedings. The Tribunal further observed that at the most such issue could have been taken up by invoking provisions of Sections 263, 147 or 154, if permissible in law. In view of the aforesaid legal position, the Tribunal held that in the facts and circumstances of the present case, the proceedings for enhancement initiated by the CIT(A) were not in consonance with the mandate of law and consequently the proposed enhancement was liable to be reversed. Accordingly, Ground No. 1 raised by the assessee was allowed.
• The Tribunal further observed that since the enhancement itself had been held invalid, Grounds No. 2 and 3 raised by the assessee became merely academic and therefore no opinion on merits was being expressed, particularly when the facts relied upon by the parties were subject to further verification.
• While dealing with Ground No. 1 raised by the Revenue concerning the addition under Section 2(22)(e) of the Act, the Tribunal observed that the amounts had admittedly been deposited by Skyline Mention Pvt. Ltd. to the tune of Rs.84.95 crores, out of which an amount of Rs.21 crores had been received during the relevant assessment year. The Tribunal noted that it was an undisputed fact, as revealed by the Assessing Officer himself, that the partners of the assessee firm were shareholders of Skyline Mention Pvt. Ltd. collectively holding 59.66% shares therein.
• The Tribunal further observed that the Assessing Officer had alleged that the deposits received by the assessee were nothing but loans and advances camouflaged as security deposits. However, the Tribunal noted that a similar issue had arisen in the assessee’s own case for Assessment Year 2009–10 wherein addition under Section 2(22)(e) had been deleted by the Tribunal vide order dated 08.05.2013 passed in ITA No. 6616/Mum/2012 holding that the amount received as security deposit constituted business receipts.
• The Tribunal further observed that the aforesaid issue had thereafter been challenged before the Hon’ble Bombay High Court, which vide order dated 16.02.2016 in ITA No. 2299 of 2013 dismissed the Revenue’s appeal by observing that even assuming the payment to be dividend within the meaning of Section 2(22)(e), such amount could only be taxed in the hands of the shareholders and not in the hands of the assessee firm, which was neither a registered shareholder nor a beneficial shareholder. The Tribunal therefore held that the issue stood squarely covered by the earlier decision rendered in the assessee’s own case and accordingly approved the order of the CIT(A) deleting the addition of Rs.17,51,910/- made under Section 2(22)(e).
• While adjudicating Ground No. 2 raised by the Revenue concerning deletion of the addition of Rs.17,66,44,500/- relating to the Joint Development Agreement, the Tribunal observed that the Assessing Officer had substituted the value offered by the assessee with the market value/ready reckoner value of the entire plot of land admeasuring 32,262 sq. meters amounting to Rs.42,41,44,500/-. The Tribunal noted that under the terms of the Joint Development Agreement dated 04.04.2008, the assessee was not receiving any monetary consideration upon transfer of development rights but was only entitled to receive constructed premises having FSI equivalent to 16,500 sq. meters.
• The Tribunal further observed that the assessee had quantified the consideration by applying the ready reckoner value to such constructed area and had accordingly offered Rs.24,75,00,000/- as consideration for entering into the Joint Development Agreement. The Tribunal held that the approach adopted by the Assessing Officer in applying the market value of the entire land parcel was incorrect because the consideration actually flowing to the assessee under the Joint Development Agreement was only in the form of constructed area equivalent to 16,500 sq. meters and not the value of the entire land.
• The Tribunal further observed that the subject land constituted stock-in-trade and not a capital asset and therefore the business profits would arise only when the constructed premises were ultimately sold and not merely upon execution of the Joint Development Agreement. Consequently, the Tribunal found substance in the order passed by the CIT(A) that the actual FSI which is available to the assessee as a consideration of JDA was only 16500 sq. mtrs for which the actual amount to be taxed was Rs. 24,75,00,000/- and the value of total plot of land admeasuring 32262 sq. mtr. As per market value /ready reckoner cannot be added in the hands of assessee and approve the decision of ld. CIT(A), which is based on the findings of ITAT in assessee’s own case for AY 2009-10.