IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 07/10/2004
CORAM
THE HONOURABLE Mr. JUSTICE P.D.DINAKARAN
and
THE HONOURABLE Mr. JUSTICE S.R.SINGHARAVELU
Tax Case (Appeals) No.31 of 2000
and
Tax Case (Appeals) No.44 of 2000
and
Tax Case (Appeals) No.45 of 2000
The Assistant Commissioner
of Income-tax,
Central Circle III (3),
Chennai 34. Appellant in all the
Tax Case Appeals
-vs-
C.Subba Reddy (Individual/HUF) Respondent in TC (A)
No.31 & 45 of 2000
Rajini Reddy Respondent in TC(A)
No.44 of 2000
Tax Case Appeals preferred against the order of the Income Tax
Appellate Tribunal, Madras 'A' Bench, in I.T. (SS) A.No.59 to 61/MDS/97 dated
26.05.1999
!For Revenue : Mrs. Pushya Sitaraman,
Sr. Standing Counsel for IT Dept.
^For Assessees : Mr.Philip George
Mr.M.P.S.Senthil Kumar
:J U D G M E N T
(Judgment of the Court was delivered
by P.D.DINAKARAN, J.)
The revenue is the appellant in all these appeals which were preferred
against the order of the Income Tax Appellate Tribunal dated 26.05 .1999
allowing the appeals preferred by the respondents-assessees in each of the
appeals.
2. In precise, the facts of the case is that the respondentsassessees
are shareholders of Kencess Enclave Project, which commenced its business in
the year 1992 and was engaged in the business of construction and selling of
residential and commercial buildings. K.Narasa Reddy designated as the
Managing Director of the assessee company held 5 0% of the shares and the
remaining 50% of the shares was shared by Subba Reddy (Individual) designated
as the Director of the Company, Subba Reddy (HUF) and Rajini Reddy, wife of
Subba Reddy.
3. There was a search under Section 132 of the Income Tax Act, 1961
on 23.02.1996 in the premises of the Kences Enclave Project in which the
respondents/assessees were holding 100,900 shares. In the course of the
search the following documents were ed:
i.statement of accounts prepared by one V.C.Gupta, Executive Director
(Finance) of the company, relating to the settlement of accounts to the
outgoing Director Subba Reddy and his group;
ii. work Sheet prepared by Chartered Accountants Giri and Prabhakar, which
was taken into consideration for settling the accounts of the outgoing
Director Subba Reddy and his Group,
iii. paper showing negotiation with buyers for purchase of flats.
4.1. As per the statement of accounts prepared by the
Executive Director (Finance) and the work-sheet prepared by the Chartered
Accountant of the Company for the purpose of settling of accounts of the
respondents-assessees who intended to retire from the Company, a sum of
Rs.3,40,00,000/- were settled to them.
4.2. Out of Rs.3,40,00,000/- the department took into
consideration a total sum of Rs.1,84,64,700/- towards the shares of the
respective assessees at the rate of Rs.183 per share as follows:
Name of the shareholder
No. of shares held
Sale consideration received @ 183 per share
Date of payment
Amount paid
Subba Reddy (Indl)
20900
Rs.38,24,700/-
12/9/1995
Rs. 38,24,700/-
Subba Reddy (HUF)
40000
Rs.73,20,000/-
18/9/1995
22/9/1995
Rs. 47,58,000/-
Rs. 25,62,000/-
Rajini Reddy
40000
Rs.73,20,000/-
22/9/1995
29/9/1995
Rs. 29,28,000/-
Rs. 43,92,000/-
Total
100900
Rs.1,84,64,700/
Rs.1,84,64,700/-
4.3. The balance of Rs.160.00 lakhs (approximately),
according to the revenue, was apportioned as follows :
i.construction advance of Rs.120 lakhs paid by the said company to the
respondents-assessees for purchase of building space in Alexander Square,
constructed by the assessees (Subba Reddy and Group) was included as amount
paid for settlement of the value of shares held by the assessees towards their
retirement from the company and was treated as undisclosed income; and
ii. since the respondents-assessees, concededly purchased 14500 sq. ft in
Kences Enclave for a sum of Rs.1,88,44,146/- as against the actual
consideration of Rs.2,30,00,000/-, the difference of Rs.40 lakhs was treated
as an undisclosed income.
4.4. The respondents-assessees in their objections explained
that assuming that the assessees accepted the materials seized from the
premises of Kences Enclave Foundation, to be correct, there was no reason to
disbelieve the case of the respondents that the advance of Rs.1 20 lakhs
received by them for the sale of commercial space at Alexander Square was
returned to the said company by way of cheques and therefore the said amount
should not be treated as amount paid to the respondents-assessees towards the
settlement of accounts of the share for the retirement as shareholders from
the said company.
4.5 The further case of the respondents-assessees was that the
concession availed by the respondents/assessees for the purchase of 14500 sq.
ft. in Kences Enclave for a sum of Rs.188.00 lakhs as against Rs.230.00
lakhs, the actual value to be paid, in view of the down payment made by the
respondents-assessees and the said concession of Rs.40.00 lakhs which worked
out to the tune of 17.5% is permissible in the real estate business in normal
practice.
5.1 That apart, the revenue also treated a further sum of Rs.10,16,6
40/- as undisclosed income which is claimed to be the difference in the cost
of construction between valuation report of the department valuer with respect
to the properties at Nos.9, 10, 11, Venkatraman Street, T. Nagar, Chennai 17
and the cost of construction debited in the books of accounts maintained by
the assessee, as per the details given below:
Estimate of probable cost of
construction by District Valuation
Officer as per the Valuation Report Rs.93,22,140/-
Cost of construction as debited in Books of accounts Rs.83,05,500/- -------------- Difference treated as Undisclosed Income Rs.10,16,640/- --------------
5.2 According to the assessee as between the cost of construction
arrived at as per the books maintained by the assessee and the estimated value
arrived at based on the report of the valuation officer, the cost of
construction as per the books of accounts has to be preferred, unless there is
material evidence to disbelieve the same, inasmuch as the books of accounts
maintained by the assessee were not rejected by the revenue.
6.1 A further sum of Rs.1,05,990/- and Rs.1,91,671/- were also treated
as undisclosed income in the case of the respondents Rajini Reddy and Subba
Reddy HUF towards the assessment years 1994-95 to 1996-97 and 1992-93 to
1996-97, as they failed to satisfy the source for the same even though they
claimed the said income as agricultural income.
6.2 The case of the assessees before the Tribunal was that Rajini
Reddy and Subba Reddy HUF claim the said amounts as agricultural income during
the respective assessment years, for having raised sugar cane as the major
crop paddy and other minor produce at Yellapalayam village at Andhra Pradesh.
6.3 The Assessment Officer, however, gave credit to 50% of the amount
received by way of cheques from the sugar mills for the supply of sugar cane
and treated the same as agricultural income and treated the balance as non
agricultural income and held the same as undisclosed income by an order dated
27.02.1997.
7. Since the Assessing Officer by his order dated 27.02.1997 refused
to accept the case of the assessees as narrated above and finally held against
the assessees, the assessees preferred appeals before the Tribunal, which
appreciated the contentions of the respondents assessees, and by an order
dated 26.05.1999 allowed the appeals giving cause of action to the revenue to
prefer these Tax Case Appeals. The substantial questions of law to be
considered in these appeals are as follows:
i) whether on the facts and in the circumstances of the case, the
Appellate Tribunal is right in deleting the addition of undisclosed income
with reference to the advance received by the assessees for the sale of
commercial space at Alexander Square and the concession availed by the
assessees in respect of the purchase of commercial plots at Kences Enclave?;
ii) whether on the facts and circumstances of the case, the Appellate
Tribunal is justified in deleting the estimated undisclosed income with
respect to the difference in cost of construction between the valuation report
of the Department valuation officer and that of the cost of construction as
debited in books of accounts of the assessee?; and
iii)whether on the facts and in the circumstances of the case the
Appellate Tribunal is justified in restricting the disallowance in respect of
the credits in the capital account from 50% to 25% and to delete the income of
non agricultural nature?
8.1. Question No.1 :
whether on the facts and in the circumstances of the case, the Appellate
Tribunal is right in deleting the addition of undisclosed income with
reference to the advance received by the assessees for the sale of commercial
space at Alexander Square and the concession availed by the assessees in
respect of the purchase of commercial plots at Kences Enclave?;
8.2. The assesses do not dispute the fact as to the receipt of
advance for the sale of commercial space at Alexander Square constructed by
them, which reads as follows:
Date of payment
Amount paid
12/9/1995
Rs. 38,24,700/-
18/9/1995
22/9/1995
Rs. 47,58,000/-
Rs. 25,62,000/-
22/9/1995
29/9/1995
Rs. 29,28,000/-
Rs. 43,92,000/-
Total
Rs.1,84,64,700/-
Even though the receipt of advance for the sale of commercial space at
Alexander Square is not disputed, there are materials to show that the
assessees refunded a sum of Rs.60 lakhs before the date of search and the
balance of Rs.120 lakhs have been repaid by way of cheques on different dates
after the date of search. Similarly, the assessees paid a sum of
Rs.1,88,44,146/- as a down payment for purchase of 14,500 sq.ft. in Kences
Enclave as against the actual value of Rs.2.30 crores by availing a concession
of Rs.40 lakhs, which works out to 17.5% of the market value, which is a
common practice in the real estate business, which has been correctly
appreciated by the Tribunal. Hence, we do not find any reason to interfere
with the findings of the Tribunal in this regard.
8.3. Question No.2:
ii) whether on the facts and circumstances of the case, the Appellate
Tribunal is justified in deleting the estimated undisclosed income with
respect to the difference in cost of construction between the valuation report
of the Department valuation officer and that of the cost of construction as
debited in books of accounts of the assessee?
8.4. The Tribunal while deleting the addition of Rs.10,16,640/-
refused to act on the basis of the report of the Department Valuer by
accepting the cost of construction based on the accounts maintained by the
assessees.
8.5. It is a settled law that when the credibility of the books of
accounts maintained by the respondents/assessees is not doubted, the revenue
should not be carried away merely on the report of the Department Valuation
Officer, as held in the case of K.K.Seshaiyar vs. CIT, 246 ITR 351, by a
Division Bench of the Madras High Court.
8.6. When there is neither doubt about the books of accounts
maintained by the assessees nor there was rejection of the same document by
the revenue, the Court should not interfere by substituting its own estimate
in place of the one of the Tribunal unless it is shown that the estimate of
the Tribunal could not p ossibly be reached, as held by a Division Bench of
the Punjab and Haryana High Court in the case of Ved Prakash vs. CIT, 265 itr
642. Therefore, we are of the considered opinion that the Tribunal is
justified in deleting the addition of Rs.10,16,640/- and the question is
answered in favour of the assessee and against the revenue.
8.7. Question No.3:
“Whether on the facts and in the circumstances of the case the Appellate
Tribunal is justified in restricting the disallowance in respect of the
credits in the capital account from 50% to 25% and to delete the income of non
agricultural nature?”
8.8. With regard to the agricultural income, while refusing to accept
the case of the respondents-assessees, the revenue took into account the
cheques received from the sugar factory for the sale of sugar cane raised in
the lands in Yellapalayam village in Andhra Pradesh ignoring the receipts for
the sale of minor produce.
8.9. In agricultural transactions cash payments and receipts are
permissible. There are materials to show that the assessees are holding lands
in which sugar canes are raised and supplied to the sugar industries, for
which payments were made by them to the assessees by cheques. Hence, this
question is decided in favour of the asseessees and against the Revenue.
9. Since all the questions raised in these appeals are answered
against the revenue and in favour of the assessees, these appeals are
dismissed.
Index : Yes
Web : Yes
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