ita 255-366-b11.pdf

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IN THE INCOME TAX APPELLATE TRIBUNAL“A” BENCH : BANGALORE

BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER

AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER

ITA Nos.255/Bang/2011

Assessment year : 2007-08

Smt. Jeeva Vadivelu,

No.1, Doddabommasandra

Vidyaranyapura Main Road,

Bangalore – 560 097.

PAN : ACNPJ 9668E

Vs. The Assistant Commissioner of

Income Tax,

Circle 6(1),

Bangalore.

APPELLANT RESPONDENT

ITA Nos.306/Bang/2011

Assessment year : 2007-08

The Assistant Commissioner of

Income Tax,

Circle 6(1),

Bangalore.

Vs. Smt. Jeeva Vadivelu,

No.1, Doddabommasandra

Vidyaranyapura Main Road,

Bangalore – 560 097.

PAN : ACNPJ 9668EAPPELLANT RESPONDENT

Assessee by : Shri R.E. Balasubramaniyan, C.A.

Revenue by : Shri Saravanan B., Jt. CIT(DR)

Date of hearing : 21.08.2012

Date of Pronouncement : 07.09.2012

O R D E R

Per N.V. Vasudevan, Judicial Member

ITA 255/Bang/2011 is an appeal by the assessee, while ITA

306/Bang/2011 is an appeal by the revenue. Both these appeals are

directed against the order dated 22.11.2010 of the CIT(Appeals)-III,

Bangalore relating to A.Y. 2007-08.

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ITA Nos.255 & 306/Bang/11

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2. The grounds of appeal raised by the assessee read as follows:-

“The Appellant objects to the order of the Commissioner of Income Tax (Appeals) -III, Bangalore, on the grounds that:

1. The order of the Learned Commissioner of Income Tax

(Appeals) is erroneous and opposed to facts and law in as much

as the right of the Appellant to treat an asset as Investment or

stock in trade was not recognized.

2. The Learned Commissioner of Income Tax (Appeals)

erred in not considering gains on sale of property held for more

than three years as Long term Capital Gains.

3. The Learned Commissioner of Income Tax (Appeals)

erred in not allowing the fair market value of the Apartments as

on the date of entering into the Joint Venture Agreement to be

deducted from the sale consideration.

4. The action of the Learned Commissioner of Income Tax

(Appeals) in upholding the unsubstantiated contention of the

Assessing officer that the Appellant was in receipt of ‘on money’

is erroneous inasmuch as he has himself recorded a finding of

fact to the contrary.

The Appellant prays for leave to add, modify, delete or introduceadditional Grounds of Appeal at any time before the Appeal is

disposed off.”

3. The grounds of appeal raised by the revenue read as follows:-

“1. The order of the Learned CIT(A) is opposed to law and

facts of the case and is based merely on conjuncture and

surmises.

2. The CIT (A) erred in law and on the facts of the case in

holding the entire additional turnover of Rs.83,60,865 can not be

considered as profit and allowing further expenditure of

Rs.41,80,432/- under the head Income from Business, on

estimation basis without any proof regarding additional

expenditure over and above the expenditure allowed by the AO.

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3. The CIT(A) erred in disturbing the trading account

redrawn by the AO and allowing a gross margin of 50% of

additional receipts of Rs.83,60,865/-, especially when the

opening stock, the purchases, the sales and the closing stock havebeen worked out by the AO based on the facts of the case. There

is no material on record to justify the relief of Rs.41,80,432/-

given by the CIT(A).

4. For these and other grounds that may be urged at the time

of hearing, it is prayed that the order of the CIT(A) in so far as it

relates to the above grounds may be reversed and that of the

Assessing Officer may be restored.”

5. The appellant craves leave to add, alter, amend and, I or

delete any of the grounds mentioned above.”

4. The facts and circumstances giving rise to the above appeals are as

follows. The assessee is an individual. She was originally carrying on

business of trading in timber and granites under the name and style,

Mahesh Timbers & Granites. The assessee was also purchasing and

selling properties. For the A.Y. 2007-08, the assessee filed return of

income declaring total income of Q 13,02,725. The assessee filed auditor’s

report u/s. 44AB of the Act along with the return of income, wherein the

nature of business has been described by the auditors as ‘dealer in timber

and granites’. Along with the return of income, the audited profit & loss

account and the balance sheet as on 31.03.2007 were also filed. The profit

& loss account of the assessee as on 31.03.2003 and the trading account

as on that date was as follows:-

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PROFIT & LOSS A/c FOR THE YEAR ENDED 31ST MARCH 2001

INCOME: Rupees

Gross proceeds 19,044,615.00

------------------TOTAL 19,044,615.00

------------------

EXPENDITURE

Direct Expenses 3 15,202,400.00

Administrative Expenses 4 1,888,294.00

Financial Charges 5 74,691.25

Depreciation 2 175,375.00

-------------------

TOTAL 17,340,850.25

-------------------Net profit transferred to capital account 1.803.764.75

Further, Schedule 3 of the P & L account attached to the return of

income was as follows:-

“SCHEDULE 3

Direct Expenses:

Opening Stock 48,600.00

Add: Purchases 13,379,600.0013,428,200.00

Less: Closing Stock 161,750.00

13,266,450.00 ”

5. The Assessing Officer wanted to verify the correctness of the

trading, profit & loss account as on 31.03.2007 filed by the assessee along

with the return of income. The assessee could not substantiate the

opening stock disclosed in the trading account. The assessee could not

also substantiate the purchases of Q 1,33,79,600 disclosed in the trading

account, but could substantiate only purchases to the tune of Q 89,84,950.

The closing stock also could not be substantiated by the assessee. In view

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of the above discrepancies, the AO rejected the books of account as not

complete and correct by exercising his powers u/s. 145 of the Income Tax

Act, 1961 (the Act). The AO, thereafter, worked out a trading, profit & loss

account on the basis of transactions that the assessee indulged in during

the previous year.

6. During the previous year, the assessee had entered into following

transactions(categorized as A, B and C) :-

A. Property bought and sold within the Previous Year under assessment.

____________________________________________________________

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7. On the basis of the above details, the AO proceeded to recast the

trading & profit & loss account of the assessee. As can be seen from the

aforesaid three charts which depict the sales done by the assessee during

the previous year, the total sales were Q 1,06,83,750. The trading account

filed by the assessee along with the return of income however showed

sales to the tune of Q 1,90,44,615, the difference viz., a sum of Q 83,60,865

was presumed by the AO to be on-money received by the assesse in the

transaction of sale shown in the books of accounts. It was the stand of the

assessee before the AO that the financial statements were prepared by a

C.A., and that the assessee does not know the basis on which the C.A. had

given the sales figure in the audited trading, profit & loss account filed

along with the return. It was the case of the assessee that the assessee

was not an educated lady and not aware of the finer aspects of

accountancy. It was the plea of the assessee that the CA did not

cooperate with the assessee and also did not appear before the AO to give

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explanation of various aspects of the trading, profit & loss account filed

along with the return of income.

8. The assessee was also been engaged in the business of timber and

granites. This business had been discontinued in the year 2003. Though

the assessee tried to plead before the AO that the difference in the receipts

viz., Q 83,60,865 could be sale proceeds of timber business, but the

assessee could not substantiate the same. The AO therefore adopted the

sales figure at a sum of Q 1,90,44,615 as disclosed in the trading, profit &

loss account filed along with the return of income.

9. With regard to the opening stock, the AO noticed that the assessee

purchased 6 properties as stated in Part B of the list of transactions done

by the assessee during the previous year reproduced in the earlier part of

this order. These properties had been purchased much earlier to the

previous year and the cost of acquisition by the assessee was a sum of Q

10,16,165. The assessee had claimed that she had incurred the following

expenses on the aforesaid properties:-

10. The assessee could not substantiate the expenses incurred on

construction of compound wall, conversion charges and filling of mud,

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therefore the AO allowed a sum of Q 5,43,319 as expenses incurred on the

aforesaid 6 properties and thus arrived at the opening stock of Q 15,59,484

(10,16,165 + 5,43,319).

11. As far as the purchases are concerned, the AO found that the

assessee could furnish evidence of purchases during the year only to the

extent of Q 89,84,950. Therefore he did not accept the purchases of Q

1,33,79,600 given in the trading & profit & loss account filed along with the

return of income. The AO adopted the purchases during the year of Q

89,84,950.

12. As far as the closing stock is concerned, the AO found that during

the previous year, the assessee had made purchases of Q 89,84,950 and

out of such purchases, sales were made to the extent of Q 25,18,585. This

will be evident from a perusal of Part A of the list of properties purchased

and sold by the assessee during the previous year, which we have given in

the earlier part of this order.

13. After excluding the aforesaid sales figure, the AO arrived at a closing

stock of Q 64,66,365. The AO recast the trading & profit & loss account

and determined the income as follows:-

“

Thus the gross profit of the assessee was arrived at Rs. 1,49,66,546/-.

The assessee had debited certain expenditure in the profit and loss

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account. The following expenditure debited to the P & L account by the

assessee was considered and allowed as deduction to arrive at the net

profit.

14. Before the AO, one of the stand taken by the assessee was that in

respect of Part B of the list of properties purchased and sold by the

assessee given in the earlier part of this order, the properties were not held

as stock-in-trade but were held as investments and were purchased long

back without any intention of doing business in those properties. The

assessee therefore submitted that the properties have to be considered as

investments and capital gain on the sale of these properties have to be

computed. This plea was rejected by the AO and he held that the

properties were held by the assessee only as stock-in-trade and that the

assessee acquired these properties only with an intention to do business.

15. The assessee also submitted that in respect of the Part B and Part C

of the list of properties purchased and sold by the assessee during the

previous year set out in earlier part of this order, the same were converted

as stock-in-trade only during the previous year and therefore as per the

provisions of section 45(2) of the Act, the profit on this transaction should

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be taxed partly as long term capital gain and partly as business income.

Since the cost of the property and sale value of properties were similar

there was no business income and only capital gain had to be computed.

This plea was also rejected by the AO.

16. Another plea put forth by the assessee before the AO was that in

respect of transactions stated in Part C of the chart given in the earlier part

of this order, the same comprised of 5 flats which was sold during the

previous year. The assessee submitted that it owned a piece of land. The

assessee entered into joint development agreement dated 20.10.03 with

M/s. Nova Hamlet Ltd. As per the joint development agreement, the total

built up area that could be constructed on the piece of land owned by the

assessee was 28,880 sq.ft. The assessee agreed to sell 70% of undivided

share of land of the piece of property owned by her to the developer in

consideration of the developer constructing and delivering 8 apartments

measuring total area of 8664 sq.ft. to the assessee. The 5 flats sold by the

Assessee during the previous year were out of the 8 flats which the

Assessee was to get from the Developer. The assessee submitted that the

cost of acquisition of 5 flats should be allowed as a deduction in computing

the business income of the assessee. This plea of the assessee was also

rejected by the assessee.

17. Aggrieved by the aforesaid action of the AO, the assessee filed

appeal before the CIT(Appeals). Before the CIT(A), the assessee

explained as to how the CA refused to handle the case of the assessee

and also how the assessee was not in a position to explain the basis on

which the CA had filed the trading & profit & loss account filed along with

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the return of income. The assessee again reiterated the plea that she had

taken before the AO. The assessee however admitted that the business of

dealing in timber and granite was discontinued long back and that the only

business was the business of purchase and sale of property carried on by

the assessee during the previous year. The submissions of the assessee

before the CIT(A) were as follows:-

1. As far as transactions set out in Part-A of the Chart setout in the earlier part of this order, the Assessee conceded thatthe AO has taken the correct stand.

2. In respect of transactions in Part-B of the Chart set out in theearlier part of this order, the Assessee contended that theAssessee was holding the properties for a very long time, withsome being held for more than 10 years and as such, theyshould be taxed as Long Term Capital Gains with indexationand not as Business Profits.

3. In respect of the transactions in Part-C of the Chart set out inthe earlier part of this order, the Assessee submitted that cost ofthe land which was given away for joint development has norelevance in arriving at the gain on the transfer of the houseswhich the Assessee obtained as her share of joint development.

It was contended that the Assessee entered into a JointDevelopment Agreement in the year 2003 with a Developer andas a consideration of parting with 70% of her interest in the land,the Assessee obtained the apartments which were sold duringthe year. It was contended that, by putting the Developer inpossession of the land in part performance of the saidDevelopment Agreement, the ‘Transfer’ of the land is deemed tohave taken place within the meaning of the Section 2(47)(v) ofthe Income Tax Act and the commitment on the part of theDeveloper to hand over the specified number of Apartments tothe Assessee at the end of the project should be treated as theconsideration for the said Transfer of the land. It was contended

that the cost of acquisition of the Apartments sold by theAssessee during the year should be taken as the fair marketvalue of these apartments in 2003 and not the cost of the landas taken by the AO.

4. The assessee further submitted that the inaccuracies in theaccounts were never denied by the Assessee since she wasunder the bona fide belief that the Chartered Accountant towhom she entrusted the work would have done everythingcorrectly. The Assessing Officer in his order has also recorded a

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clear finding of fact that the accounts and financial statementsfurnished by the Assessee are not reliable and has proceeded tocomplete the assessment to the best of his judgement. As such,the Assessing Officer’s view that the properties sold by theAssessee during the year were not shown as Investments in the

Balance Sheet of the assessee is not reasonable. It wassubmitted that he cannot for his own convenience, placereliance upon a document which he himself had found to beunreliable. Having once rejected the accounts as unreliable andproceeded to make an assessment to the best of his judgement,he should have brought to tax, the transactions that came to hisnotice, under the proper heads of income.

5. The Assessee also objected to the addition ofRs.83,60,865 to the turnover considered by the AO asunreasonable. It was argued that once the accounts submittedby the Assessee are rejected as fabricated and unreliable, it is

not open to the AO to rely upon the same statements againaccording to his convenience. Towards this, the Assessee reliedupon the decision of the Andhra Pradesh High Court in the caseof Indwell Constructions vs. CIT reported in (1998) 232 ITR 776,which has been referred to in 316 ITR 127 by the Punjab &Haryana High Court.

5.4. In the alternative, it was pleaded that even if it isassumed that the Assessee received ‘on money’ during thecourse of real estate transactions, then it follows that theAssessee would have also paid similar amounts at the time ofpurchase. Accordingly, it was submitted that the amount to be

brought to be tax, if any should only be a reasonable grossmargin and not the entire amount as held by the AO. It was alsosubmitted that it was incumbent upon the Income tax authoritiesto levy and collect only that tax that can be considered fair and just and the statute does not envisage that the citizen should betaxed at a higher amount, even if the assessee has erroneouslydeclared a higher amount. In support of his arguments, reliancewas placed upon the decision of the Gujarat High Court in thecase of S.R. Koshti v CIT (276 ITR 1.65), which in turn hasrelied upon a few decisions of the Supreme Court.”

18. The ld. CIT(Appeals) firstly held that it was not possible to accept

that the properties sold by the assessee were held as investment and not

as stock-in-trade of the business of the carried on by her. In this regard,

the CIT(A) was also of the view that the details given by the assessee were

sketchy and incomplete and that throwing the entire blame on the CA

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cannot save the assessee. From the conclusions arrived at by the AO, he

was of the view that the sales declared in the profit & loss account have to

be explained only by the assessee. He held that there was a practice of

receiving on-money in real estate transactions and that the CA would have

taken these into account while preparing the annual statements. The

CIT(A) also held that the assessee should have taken due care of her

affairs and cannot plead total ignorance. The CIT(A) was however of the

view that only 50% of the additional turnover shown in the profit & loss

account should be considered as income earned by the assessee and in

this regard he gave the following reasons:-

“5.7. However, it must also be noted that the Appellant has been

a victim of some avoidable professional misguidance and has

been made to suffer for the same. On the issue of assessable

profits from the additional turnover, I am in agreement with the

AR that the entire additional turnover amount of Rs.83,60,865

taken by the AO cannot be considered as profits. A perusal of the

transactions recorded at guidance value of the Registering

Authority during the year would show that the Appellant hasbeen making a minimum of 7% gross margin on the properties

bought and sold during the same year and a gross margin of

anywhere from 10% to 75% on properties held for more than 3years. This would obviously not include the ‘on money’

component in the hands of the Appellant. The Appellant as noted

earlier has been investing in properties only in the outskirts of

Bangalore. As such, the gross profit margin in respect of different

properties also appears to depend on the level of urbanization and

growth of the city in that direction and hence not consistent with

the period of holding. At the same time, she has carried out some

developmental work like land fillings, conversion, betterment,construction of walls etc, which would have their own costs.

Considering that these activities were carried out in the semi

urban areas, through unorganized labour, it is possible that proper

bills and vouchers may not be readily available for the same. The

decisions relied upon by the AR also seem to support the view

that, where the assessee runs the risk of being over assessed due

to mistake or misconception, then it would be open to the

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authorities to use their powers and bring to tax the correct

amount.

5.8. In view of the foregoing discussions and based on the

decisions cited and considered, I would therefore hold that the

ends of justice can be said to have been met if a Gross Profitmargin of 50% of the additional turnover of Rs.83,60,865 is

treated as income in the hands of the Appellant. The appellant

herself has shown a Gross Profit margin of 7% to 75% as shown

in Para Tables described in Para 2 of this order. The results

shown by the Appellant’s books are not reliable and the AO has

rightly rejected them under section 145 of the Act. However,

after considering the submissions made by the AR of the

Appellant, it would be reasonable and just to apply a Gross Profit

margin of 50% of the additional turnover of Rs.83,60,865 as

income in the hands of the Appellant. This profit margin shall

also cover as an estimate any leakages of unexplained investment

made by the appellant in order to earn the turnover of

Rs.83,60,865/-. Such a margin is justified and reasonable

considering the GP margin shown by the Appellant and

increasing the same by the on money component which the

Appellant would have received. Accordingly, I would hold that

an amount of Rs.41,80,432/- is the amount which should be

added as net taxable income in the hands of the appellant. Since

the Assessing Officer has already allowed Depreciation to the

extent of Rs.1,75,375/- and other expenses of Rs.38,99,025/- as

claimed by the Appellant, no further deductions need to be

considered. The other items taxed by the AO are sustained.

5.9. Accordingly, I delete a sum of Rs.41,80,432/- and sustain

the remaining amount of Rs.63,10,678 (Net Taxable Income

assessed @ Rs.1,04,91,11O - Rs.41,80,432) as net taxable

income.”

19. Thus, the ld. CIT(Appeals) allowed partial relief to the assessee.

20. Aggrieved by the order of the CIT(Appeals) in not treating the sale of

Part B properties as giving rise to income under the head ‘capital gains’

and not allowing the cost of construction of the 5 flats sold by the assessee

during the previous year as given in Part C of the chart and not deleting the

entire addition of Q 83,60,865, the assessee has preferred the present

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appeal before the Tribunal. Aggrieved by the order of the CIT(A) in

reducing addition on account of on-money from Q 83,60,865 to Q

41,80,432, the revenue is in appeal before the Tribunal.

21. We have heard the rival submissions. We will deal with the issues in

seratium.

(A) Whether the sale of properties described in Part B of the chart could

give rise to ‘business income’ or income under the head ‘capital

gains’?

22. On the above issue, the ld. counsel for the assessee has filed an

affidavit before us. In the affidavit so filed, the assessee has submitted that

the items of properties given in Part B of the chart were acquired without

any intention of holding them as stock-in-trade, but with an intention to hold

them as investments. It has further been stated that the CA for the reasons

best known to him has declared the transactions in respect of the aforesaid

properties as business transactions.

23. We have considered the affidavit filed by the assessee and are of

the view that the same cannot be sufficient to hold that the properties in

Part B of the chart were held by the assessee only as investments. In this

regard, we find that in the submissions dated 05.10.10 filed by the

assessee before the CIT(A), the assessee has clearly mentioned that the

lands were purchased with an intention of holding them till such time there

was a prospect of making profits. It has also been mentioned that when

there was ready purchaser for the property, they would be purchased and

sold within a short span of time. Even in respect of the property that was

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given for joint development, the assessee has mentioned that they were

held with a view to make profits at a time when there were good prospects.

In our opinion, the intention at the time of purchase as to, whether the

property is investment or stock-in-trade, is the most relevant and important

criterion. The intention of the assessee appears clear that even at the time

of acquisition of the properties, selling the same at a profit was the motive.

We therefore hold that the properties were held as stock-in-trade by the

assessee and not as investments. Consequently the sale proceeds of the

properties mentioned in Part B of the chart have to be treated as sale

proceeds/receipts of the business of buying and selling of properties of the

assessee. In that event the inclusion of the sale proceeds of these

properties in the profit and loss account as receipts by the AO is upheld.

(B) Whether the sale of flats as stated in Part C of the chart given

earlier, should be treated as giving rise to capital gains or income

from business?

(C) In case the sale of properties set out in Part C of the chart is treated

as giving rise to income from business, whether the assessee will be

entitled to deduction on account of cost of construction of the flats?

24. On the issue (B) referred to above, we have already held that the

sale of 5 flats will be treated as business done in the course of business of

the assessee and therefore they have to be treated as sale proceeds of the

business and not giving rise to capital gains.

25. As far as issue (C) is concerned, we find the following facts from the

record. The assessee had entered into joint development agreement dated

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20.10.03 whereby it was agreed that 70% of the land will be given to the

developer and the assessee would retain 30% of the land. Out of

constructions put up by the developer, the assessee will be entitled to 8664

sq.ft. of built up area in the form of 8 flats in consideration for the assessee

selling to the developer 70% of the land area.

26. The ld. counsel for the assessee had submitted before us that in

case of joint development, the transfer would be deemed to have taken

place when the transferee gets the right to make use of the land or enjoy its

usufructs. It was further submitted that the intention should be that the

property should pass irrespective of the payment of consideration. In this

regard, our attention was drawn to the decision of the Hyderabad Bench of

the ITAT in the case of Maya Shenoy v. CIT 124 TTJ 692 HYD . The

Tribunal in the aforesaid case after analyzing the provisions of the Transfer

of Property Act came to the conclusion that when possession is handed

over in part performance of an agreement for sale and if the assessee has

right to receive the consideration, there would be an effective transfer.

27. Further reference was also made by the ld. counsel for the assessee

to the decision of the Hon’ble Bombay High Court in the case of

Chaturbhuj Dwarkadas Kapadia v. CIT 260 ITR 491 (Bom) for the

proposition that when the possession of the property is handed over to the

developer, transfer would take place in a joint development agreement. In

this regard, the ld. counsel for the assessee also drew our attention to the

joint development agreement whereby the developer was given a licence to

enter upon the property for the purpose of development. Reference was

also made to clause 19.1 and 20 of the joint development agreement

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whereby the developer had right to sell 70% of the undivided share of land.

It was submitted by him that ‘transfer’ if at all, had taken place on 20.10.03

i.e., the date of joint development agreement falling within the assessment

year 2004-05.

28. It was further submitted by the ld. counsel for the assessee that

while computing income on sale of 5 flats which came to the share of the

assessee, the cost of construction should be allowed as deduction by

showing the same in the debit side of the trading account. In this regard,

the ld. counsel also filed a report of the registered valuer, a copy of which is

placed at pages 101 to 113 of the assessee’s paperbook. The registered

valuer has given a valuation of estimated cost at Q 625/sq.ft. to be debited

to the trading account. The assessee has also filed application to admit the

valuer’s report as additional evidence. It has been submitted that the CA

due to his professional negligence and lack of cooperation had not given

the papers to the assessee. Therefore the assessee could not file these

documents before the lower authorities.

29. The ld. DR submitted that the property in question should be

considered as falling within the parameters of section 45(2) of the Act.

According to him, the property was originally investment and later on was

brought in as stock-in-trade of the business by the assessee and therefore

under the provisions of section 45(2) of the Act, capital gain has to be

computed by reducing from the fair market value as on the date of

conversion into stock-in-trade and cost of acquisition of the property. The

remaining sum has to be taxed as business income. He therefore

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submitted that taxing the gain on sale of flats obtained under the joint

development agreement in this year was justified.

30. We have considered the rival submissions. At the outset, we reject

the argument of the ld. DR regarding applicability of section 45(2) of the

Act. As we have already held, the assessee even at the time of acquiring

these properties had the intention of carrying on the business in those

properties. Therefore they were to be treated as stock-in-trade and not as

investments. The question of the same having been converted as stock-in-

trade of business does not arise.

31. As far as computation of income on sale of 5 flats is concerned, we

are of the view that the revenue authorities have proceeded to compute the

income of the assessee incorrectly. In our view, in the A.Y. 2004-05, there

would be income arising out of joint development agreement dated

20.10.03. Such income would have to be arrived at by reducing from the

value of 8664 sq.ft. of built up area which the assessee was to receive from

the developer the market value of 70% of the land as on the date of the

joint development agreement. This conclusion is on the basis that a sale by

the assessee to the developer had happened during the previous year

relevant to A.Y. 2004-05. It appears that the revenue has not taken any

steps to tax the income for the A.Y. 2004-05. We are not, however,

concerned at this stage on the above aspect. We are now concerned with

the question as to whether the assessee should get the benefit of cost of

construction of the 5 flats sold during the previous year. In our view, the

assessee should be allowed the aforesaid benefit. Admittedly, the

assessee had to pay a cost for acquiring these 5 flats. The Assessing

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Officer in the order of assessment has not given any cost to these flats. In

our view, therefore the cost of 5 flats has to be worked out and for this

purpose of working out the cost of acquisition of 5 flats, the matter is

remanded to the Assessing Officer. The AO will verify the cost from the

developer, who developed the properties and arrive at the cost of 8664

sq.ft. This cost should be debited to the trading account. The assessee

has retained 3 flats out of 8 flats and we direct the cost of these 3 flats lying

in the stock with the assessee has to be added as part of the closing stock

in the trading account. Similarly, 30% of the value of the land (retained by

the Assessee) should also be shown as cost in the debit side of the profit

and loss account. The value for this purpose will be 30% of the value for

which the Assessee purchased the entire property which was given for joint

development. Out of the 30% undivided share of land retained by the

Assessee, the value attributable to the extent of undivided share of land

sold by the assessee (along with the 5 flats) should be shown as receipt on

the credit side of the profit and loss account. The AO is directed to work

out the trading account by following the aforesaid procedure and in

accordance with law and the directions given earlier. Thus, issue (C) is

decided accordingly.

(D) Whether a sum of Q 83,60,865 should be considered as sales in the

trading account?

32. On the above issue, we find that the assessee had pleaded that the

figures given by the CA could not be explained by her. The CA who

prepared the trading, profit & loss account also did not assist the assessee

in the course of assessment proceedings. This aspect is accepted even

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by the CIT(A). The sale as reflected in the documents available on the

record is only to the tune of is Q 1,06,83,750. The AO has accepted the

sales figure as shown in the trading, profit & loss account filed along with

the return of income. When it comes to purchases, the AO has not taken

the purchases as reflected in the trading & profit & loss account filed along

with the return of income. Besides the above, there is no evidence on

record to show that the assessee had in fact received a sum of Q

83,60,865. The only basis for the AO has been the trading & profit & loss

account filed along with the return of income. The AO rejected the books of

account as unreliable, but has however chosen to accept the sales figure

as reflected therein, because it suits the purpose of the revenue. This

approach, in our view, is unacceptable. As rightly contended on behalf of

the assessee, there is no evidence on record to show that the assessee

was in receipt of a sum of Q 83,60,865. The reliance placed by the ld.

counsel for the assessee on the decision of the Hon’ble Supreme Court in

the case of K.P. Varghese v. ITO 131 ITR 597 SC and the Karnataka

High Court decision in the case of N. Seenappa v. CIT 163 ITR 253

(Karn) fully support the plea of the assessee in this regard.

33. Another reason given by the revenue authorities for upholding the

aforesaid addition is that there is a practice of on-money prevailing in real

estate transactions. In our view, without evidence on record, just on the

basis of practice prevailing in the trade, adverse inference cannot be drawn

against the assessee.

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34. We are, therefore, of the view that the sales figure as reflected in the

trading account should be reduced by a sum of Q 83,60,865.

35. The AO is directed to recast the trading, profit & loss account as

drawn by him with the modifications as stated in this order and work out the

income of the assessee.

36. Thus, the appeal of the assessee is partly allowed, while appeal of

the revenue is dismissed.

Pronounced in the open court on this 7th

day of September, 2012.

Sd/- Sd/-

( JASON P. BOAZ ) ( N.V. VASUDEVAN )

ACCOUNTANT MEMBER Judicial Member

Bangalore,Dated, the 7

thSeptember, 2012.

Ds/-

Copy to:

1. Assessee

2. Revenue

3. CIT

4. CIT(A)5. DR, ITAT, Bangalore.

6. Guard fileBy order

Senior Private Secretary

ITAT, Bangalore.

ita 255-366-b11.pdf

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