Mere Doubting Expenditure On Construction Without Evidence On Sole Basis Of Inspector Report Is Invalid
In the present case the addition has been made by the ld AO on the basis of mere presumptions. The market value of the flat determined by the ld AO was without any evidence. The cost of construction is also determined by him at Rs. 1500/ sq ft without any evidence. He has not supported his order with any evidence of incurring expenditure by the assessee. He did not also take the expert opinion of departmental valuer if he had any doubt about the actual cost of construction incurred by the assessee. The ld AO has also not made any enquiry with the buyers of those flats about the price paid by them. Further, the ld AO also did not submit what kind of enquiry he has made with real estate dealers of that area. He also did not deal with what kind of enquiry the inspector deputed has conducted. Obviously the inspector deputed could not have given the value of the flat sold as he has not an expert. The ld CIT(A) has considered all these facts and deleted the addition in absence of any material with respect to unaccounted expenditure or any on money received by the assessee on sale of flats. Further, the assessee supported the cost of construction with the registered valuers report. Therefore, there is no infirmity in the order of the ld CIT(A). The judicial precedent relied upon are on different facts. It merely said that inspector of the Income Tax is not qualified to estimate the cost of immovable property. There is no quarrel on this issue. Thus, we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. Accordingly, solitary ground raised by the ld AO is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
1. This appeal is filed by the ld AO against the order of the ld CIT(A)-17, New Delhi dated 04.01.2017 for the Assessment Year 2012-13, wherein, the addition of Rs. 2,05,85,062/- on account of unexplained expenditure u/s 69C and profit on sale of flat is deleted.
2. The brief facts of the case shows that the assessee filed his return of income on 29.09.2012 declaring total income of Rs. 14,69,573/-. During the course of assessment proceedings the ld AO considered the income of collaboration on real estate as per para No. 4.7 of his order and made the addition of Rs. 2,05,85,062/- on account of net of understatement of sale consideration as well as understatement of expenditure from the collaboration agreement. The reasons given by the ld AO are as under:-
“4.7 Addition on account of collaboration
During the year under consideration, the assessee entered a collaboration agreement with Mrs. Shashi Soni w/o Lt. Sh. Madan Mohan Soni for developing residential flats consisting 5 floors including basement at Plot no.C-3/256, Janak Puri, New Delhi. The size of the Plot was 142.53 sq.mt. and on the plot 5 floors was constructed after demolishing the old structure. The portion of the collaborate agreement is reproduced as follows:
“NOW THEREFORE IT IS HEREBY AGREED, DECLARED, AND CONVEYED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS;-
1. That the subject matter of this collaboration agreement between the First Party and the Second Party is the existing property bearing No.C-3/256, measuring 142.53 sq.mtrs., situated at Janak Puri, New Delhi, for utilizing the same for construction of the new/fresh building consisting of Basement, Ground Floor, First Floor, Second Floor & Third Floor.
2. That the Developers/Builders/Second Party undertakes to develop the “Said Property at his own cost and expenses and with his resources and it is further mutually agreed that the First Party/Owner shall not claim for the further price/cost of the land except the amount being paid here with and Developer/Builder/Second Party shall not claim any amount for the cost of the construction.
3. That it is hereby agreed between the First Party/Owner and the Developers /Builder /Second Patty that the entire financial commitment for the development of the “said property’ and construction of flats over it will be exclusively the full responsibility of the Developer/Builder/Second Party and the First Party/Owner shall not invest any amount at any time whatsoever or be responsible for any consequences as a result of this new construction.
4. That after demolishing the existing building by the first party, the Developer/Builder/Second Party shall construct the building comprising of basement Ground Floor, First Floor, and Third Floor as per specification detailed in the annexure attached hereto And the old material/malba shall be on account of the Second Party.
5. That all the rates and taxes due and payable up to the date of this agreement executed between the parties in respect of the “said Properly” hereby agreed to be developed by the Developer/Builder/Second Party shall be excusive liability of the First Party/Owner. Thereafter the liability in this behalf shall devolve exclusively on the parties or there nominee(s) in respect of their respective portions proportionately and house tax shall also be paid separately according to the respective portions by them.
6. That as mentioned above, the project shall consist of Basement, Ground Floor, First Floor, Second Floor and Third Floor. The parties hereto have agreed to divide the portions separately in the following manner:
i) First Party/Owner Share –
Entire Basement, Entire Ground Floor, Entire First Floor and Entire Third Floor with complete Terrace/Roof thereupon and thereabove, in/of the said property, along with proportionate undivided, indivisible and impartiable ownership rights in the land underneath the said property measuring 180 sq.yds. All the common areas and facilities such as entrance, passages, staircase, lift, sewer lines, shafts, under ground/over head water Tanks and space for Electric & water meters etc. shal be used commonly by all the owner/occupants of the building.
ii) Developer/Builder/Second Party Share:-
Entire second Floor, in/of the said property along with proportionate undivided, indivisible and impartiable ownership rights in the land underneath the said property measuring 180 sq.yds. All the common areas and facilities such as entrance, passages, staircase, lift, sewer lines, shafts, under ground/over head Water Tanks and space for electric and water meters etc. shall be used commonly by all the owners/occupance of the building.
And it is agreed that in addition to the floor allocation as specified above the Developer/Builder/Second Party shall pay a sum of Rs. 13,50,000/- (Rupees Thirteen Lacs Fifty Thusand Only) as proportionate cost of land for its share to the First Party/Owner and also for equalizing their share in the allocation of the floors in the said property.
That the above said Entire settlement amount of Rs.13.50,000/- (Rupees Thirteen Lacs Fifty Thousand Only) has been paid by the Second Party/Developer to tlio First Paity in the following manner:-
Rs.5,00,000/- vide cheque No.612874 dated 14.04.2010 drawn on Punjab & Sind Bank.
Rs. 8,50,000/- vide cheque No.452268, dated 01.07.2010 drawn on Citi Bank
The receipt of the above said amount is hereby admitted confirmed and acknowledged by the First Party/Owner, having received from the Second Party/Developer as consideration in token of their acceptance to the terms and conditions of this agreement. ’’
From the collaboration, the assessee didn’t show any separate income, however, the consideration from the sale of the second floor flat which was allocated to him as per the agreement of collaboration is treated as the sales in the profit and loss account and against the sale total cost of construction/development of 5 floors is treated as purchases. The difference amount is the profit/income from the collaboration agreement. On perusal of the profit and loss account, it is noticed that the assessee has shown the sale price of the flat as Rs.40,00,000/-and purchases against the sale is shown as Rs.34,27,813/-. Since the data provided relating to cost and sale was a catatonic figure therefore the assessee was asked to show-cause vide this office letter dated 16/03/2015 “why the total sales consideration of the flat (Second Floor) will not be treated as five times of the consideration on the basis of market value and profit from the collaboration agreement be calculated accordingly. ”
In response, the assessee vide his submission dated 20/03/2015 stated that:
“Sir I would like to provide you with the details of the construction, Sale Deed and collaboration Agreement. Till today also the sale value of the similar flat is not 2 times also, so how can it be treated 5 times. Also we have provided the details of the amount paid to the contractors and suppliers. Total constructed area was 4000 sq.ft. and we spent approx.Rs.500/- per sq.ft. it was year 2010. Even today the cost of construction is Rs. 950/-per sq.ft.”
The submission of the assessee in this regard was considered but found nowhere near reality. Before taking any decision in this matter, the points raised by the assessee is discussed in detail.
1. The size of the plot is 142.53 mt. which equals to 1535.05 sq.ft.(142 53 x 10.77) and that is the area of development of each floor. Since 5 floors have been constructed by the assessee on the said plot, therefore, total area constructed is 1535.05 x 5 = 7675.25 sq.ft. which is almost double of the constructed area as stated by the assessee in the mentioned reply.
2. During the mentioned year, the Delhi Development Authority (DDA) allocated some flats by use of draw of lots. DDA is a Govt, organization which develops and sales flat in no loss no profit basis and the cost of construction is supposed to be the lowest available in the market. The cost of construction for a DDA flat located in Vasant Kunj measuring approx. 60 mt. (LIG Flat) was approx. Rs.17.50 lakh thereby making the rate of construction per sq.ft. is approx. Rs.2705/- (17,50,000/647) which also is almost 6 times of the amount quoted by the assessee as cost of construction.
3. Market value of the flat which is under discussion was approx 1.80 to 1.85 crore during the year under consideration. The assessee has mentioned that the price of the flat even today is not 2 times of the price at which the flat was alleged to be sold. He might have quoted the price keeping in mind the circle rate of that area and not on the basis of market value. It is well-known fact that the market value of the real estate of the area under consideration is much higher than the prevailing circle rate arid to reduce the gap, the circle rate of different areas in Delhi are changed very frequently. Therefore, the claim of the assessee is fully absurd, misconceived and far away from the reality.
4. The habit of misrepresenting the fact by the assessee is also confirmed from the submission regarding purchase account submitted by the assessee in two occasions represents different narration. In the first submission of the purchase account provided on 09/02/2015 shows that the payment to Sh. Deepak Gupta alleged contractor of the collaboration was made for an amount of Rs.5,50,050/-. However, ledger account of Sh. Deepak Gupta shows he has received an amount of Rs. 8,00,000/- more apart from the mentioned amount of Rs.5,50,050/-. In the case of Janta Steel, ledger account submitted on 09/02/2015 shows that payment of Rs.1,03,125/- whereas the purchase details submitted alongwith the show-cause notice reply on 20/03/2015 represent a different figure of Rs.3,00,000/-. Other payment of Rs.3,00,000/- as alleged to be made to Kalru Marbels as per purchase ledger submitted on 09/02/2015 was changed to Rs.1,03,125/-on the submission dated 20/03/2015.
Considering the above and taking into consideration, the most conservative price of construction i.e.Rs.1500/-sa.ft. The total cost of the construction becomes 1,15,12,875/(7675.25 X 1500). As the amount of Rs.13.50 lakhs paid to the landlord as additional amount apart from the cost of construction is also included in the abovementioned amount of Rs.1,15,12,875/-, therefore, the per sq.ft. rate will get reduced by approx. Rs.176/-. On the basis of the calculation the amount of construction expenses which is not accounted for comes to Rs.80,85,062/- (Rs.1,15,12,875 – Rs.34,27,813) and the same is added to the income of the assessee as. unexplained expenditure u/s 69C of the Income Tax Act, 1961.
Apart from the above, the sales price of the flat is shown as Rs.40,00,000/- in the P&L Account for the year under consideration. However, as mentioned above, the market price of the flat as enquired from the real estate dealers of that area and as /reported by the Inspector deputed to enquire the facts is Rs.1,65,00,000/-. Therefore, the difference of Rs.1,25,00,000/- (1,65,00,000 – 40,00,000) is treated as undisclosed profit from the collaboration agreement and the same is added to Income of the assessee.
3. According, the assessment order u/s 143(3) of the Act was passed on 31.03.2015. The assessee challenged the same before the ld CIT(A) who deleted the addition as per para No. 8 of his order as under:-
“8. Ground No. 8 to addition of Rs.2,05,85,062/- made by the AO. The fact of the case is that the AO found that the appellant had entered into a collaboration agreement with Smt. Shashi Soni for developing residential flats consisting of five floors including basement at Plot no. C-3/256, Janak Puri, New Delhi. As per the agreement, the appellant was required to bear the entire cost of construction against which he got his share in the developed property as entire 02nd floor. The 02nd floor was sold by the appellant during the year under consideration at a sale consideration of Rs.40 lac but the AO found that the market price of the flat was much higher than what the appellant has shown. Thereby, he estimated the same at Rs. 1,65,00,000/- and thereby an addition of Rs.1,25,00,000/- was made. The AO had also made an addition u/s 69C as the appellant had shown cost of construction expenses of Rs.34,27,813/- of the entire floors whereas the AO estimated the same at Rs.1,15,12,875/-. Thereby, an addition of Rs.80,85,062/- was made. Hence, total addition of Rs.2,05,85,062/-was made. However, the appellant has submitted that the AO made addition on account of an unexplained expenditure under section 69C of Rs. 80,85,062/- and market price of flats of Rs. 1,25,00,000/-respectively. It was submitted that he had clarified with reference to contemporaneous sale instances and registered valuer report, that there is no suppression of the expenditure on construction of flats, also there is no suppression of sale price of flats. Here no incriminating material worth name has been brought on record by AO to justify the wild allegations made on basis of assumptions and presumptions. (Reference can be made to point no. 4 of letter dated 20/03/2015 filed to AO, paperbook pages 6 and 7).
Two parts of captioned addition relates to:
i) Unexplained expenditure u/s 69C Rs 80,85,062/-
ii) Macket price of flats Rs 125,00,000
Taking first part of addition, it is firstly stated that section 69C which is applied to assessee’s case is absolutely not applicable to present facts. Said provision at the outset requires concrete evidence of actual expense by assessee which cannot be replaced and substituted by probabilities and estimates. On this short count, for failure to lead evidence of actual expenditure being in excess of recorded & accounted expense, whole exercise fails and additions becomes invalid. Secondly, assessee is maintaining regular books and same are not rejected u/s 145 so also bald allegation of extra expense becomes invalid. Thirdly, AO himself has become expert in the matter and without any reference to DVO etc has estimated on its own the construction expense and jumped to unaccounted construction expense on aerial allegations.
Sec. 69C of the Act reads as under:-
“Assessee has incurred any expenditure and he offers no explanation
about the sourced of such expenditure or the explanation. ”
A perusal of the aforementioned section shows that the requirement of the section is that the assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof or the explanation, if any, offered by him is not in the opinion of the AO satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may deemed to be the income of the assessee for such financial year. But in the present case, the AO has not brought any material on record to establish that an excess expenditure was incurred. The appellant has also relied upon the following judgments:
i) CIT vs. Lubtec India Ltd. 311 ITR 175 (Del);
ii) CIT vs. C.L. Khalri 282 ITR 97 (MR);
iii) Prabhu Dayal Lallu Ram vs. ITO 63 TTJ 557 (Del);
iv) M.P. Mallival vs. JCIT10 SOT 319 (Hyd)(TM);
v) ITO vs. L.N. Mehta (HUF) 77 TTJ 63 Jodhopur);
vi) ACIT vs. K.H. Dhamdhere 19 SOT 201 (Coch);
vii) Harakchand P. Vora vs. ACIT 68 TTJ 417 (Mum);
viii) Pradip C. Patel vs. DCIT 58 TTJ 409 (Ahd);
ix) Lakshmi Jewellery vs. ACIT 73 TTJ 981 (Mad);
x) Om Prakash Sharma vs. DCIT 4 SOT 369 (Jaipur);
xi) ITO vs. Dr. Anand Meenawat 43 TTJ 213 (Jaipur);
xii) Mahaan Food Ltd. vs. DCIT 27 DTR (Del)(Trib) 185.”
As per the language used by the Legislature in section 69C, the burden is on the A.O. to prove that the assessee has “incurred” an expenditure then the onus is shifted on the assessee to prove the source. (H” BENCH: MUMBAI Shri Kishore Thakkar 09.09.2011) Second leg of the addition of Rs 125,00,000 on a/c of alleged extra receipts from sale of flat is purely based on vague estimates by Ld AO and is beyond comprehension. After again and again searching for reason of said addition, we have not been able to find any ground to proffer our comments on the same. Still for sake of completing this submission, it is by now well settled that any charge of on money requires specific & solid evidences based on enquiry and examination where in present case neither there is any evidence to support AO’s allegations nor there is any enquiry or examination done by him to support his allegations from relevant parties. There is no sale which is unaccounted. Merely substituting the notional market price cannot serve the purpose of law.
It only remains for us to refer to the observations of the assessing officer to the effect that no one makes a loss in real estate business and that the market perceptions indicate that the prices of the immoveable properties are always on the upward trend. These observations have, inter alia, formed the basis of the additions made by the assessing officer. It was even suggested before us on behalf of the revenue that it is a “notorious practice” prevailing in real estate circles that in all property transactions there is non¬disclosure of the full consideration. /Is pointed out earlier, this cannot per se constitute the basis of the addition, though we must hasten to add that it can very well be a starting point for further investigation. In Lalchand Bhagat Ambica Ram vs. CIT: (1959) 37 ITR 288, the Supreme Court disapproved the practice of making additions in the assessment on mere suspicion and surmises or by taking note of the “notorious practice” prevailing in trade circles. It was observed as under:
“Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf.”
8.1 I have carefully considered the facts and circumstances of the case, submission of the appellant and perused the assessment order. I find merit in the argument of the appellant that the AO has not brought any material on record to establish the fact that an excess expenditure was incurred in construction of the building other than the expenditure shown by him. Further, there was also no material brought on record to substantiate his finding that there was more sale consideration was received by the appellant beyond what he has shown whereas the appellant has brought on record the sale instances of the nearby area to substantiate that the prevailing market rate shown by him was reasonable and further the registered valuer’s report substantiates the fact that the expenditure incurred by the appellant to construct the building was reasonable. In view of*above discussion, the appeal on this ground is allowed.
9. Ground no.9 relates to addition of Rs.34,800/-. The fact of the case is that the appellant claimed deduction under chapter VIA of the IT Act towards tuition fee, however, no supporting document was filed. Therefore, the claim of the appellant was disallowed. However, during the appellate proceedings, the appellant submitted that the payment was made towards tuition fee which is allowable as deduction under chapter VIA of the IT Act. In this regard, he has filed evidence also. The AO is directed to verify the same and effect of the same be given accordingly.”
Therefore, the ld AO aggrieved with the order of the ld CIT(A), is in appeal before us.
The ld DR extensively read the reasons given by the ld AO for making the addition and submitted that there is wide variation between the sale price of the flat shown by the assessee and what is prevalent in the market. She further stated that the ld AO has made the above addition after making proper enquiry about the market price of the flat in that area as well as report of the Inspector. She submitted that the ld CIT(A) has deleted the addition without considering the reasons given by the ld AO.
The ld AR vehemently supported the order of the ld CIT(A) and submitted that addition has been made by the ld AO without any evidence of incurring of any expenditure. He further relied upon the decision of the coordinate bench in ITA No. 2106/Del/2011 for Assessment Year 2002-03, wherein, identical addition was deleted.
We have carefully considered the rival contentions and also perused the orders of the lower authorities. In the present case the addition has been made by the ld AO on the basis of mere presumptions. The market value of the flat determined by the ld AO was without any evidence. The cost of construction is also determined by him at Rs. 1500/ sq ft without any evidence. He has not supported his order with any evidence of incurring expenditure by the assessee. He did not also take the expert opinion of departmental valuer if he had any doubt about the actual cost of construction incurred by the assessee. The ld AO has also not made any enquiry with the buyers of those flats about the price paid by them. Further, the ld AO also did not submit what kind of enquiry he has made with real estate dealers of that area. He also did not deal with what kind of enquiry the inspector deputed has conducted. Obviously the inspector deputed could not have given the value of the flat sold as he has not an expert. The ld CIT(A) has considered all these facts and deleted the addition in absence of any material with respect to unaccounted expenditure or any on money received by the assessee on sale of flats. Further, the assessee supported the cost of construction with the registered valuers report. Therefore, there is no infirmity in the order of the ld CIT(A). The judicial precedent relied upon are on different facts. It merely said that inspector of the Income Tax is not qualified to estimate the cost of immovable property. There is no quarrel on this issue. Thus, we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. Accordingly, solitary ground raised by the ld AO is dismissed.
8. In the result appeal of the revenue is dismissed.
Order pronounced in the open court on 16/10/2019.