Sec.158BA/158BC- Addition based on estimation not sustainable

Brief of the Case

Delhi High Court held In the case of CIT vs. Vatika Landbase Pvt. Ltd.  that the assessment for the block period can be done only on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. In the present case, there was no material on the basis of which the AO could have applied a standard rate of Rs 4,800 per sq ft for all the floors. It was also not open to the AO to draw an inference on the basis of the projection in the document, particularly when the Assessee offered a plausible explanation for the document. Further as pointed out in Commissioner of Income Tax v. D.K. Gupta (2009) 308 ITR 230 (Del) that merely because there are notings of offers on slips of paper, it did not mean that those transactions actually took place. Likewise in Commissioner of Income Tax v. Girish Chaudhary (2008) 296 ITR 619 (Del), the Court termed a loose sheet containing some notings of figures as a ‘dumb document’ since there was no material to show as to on what basis the AO had reached a conclusion that the figure ’48’ occurring in one of them was to be read as Rs. 48 lakhs. In the circumstances, the ITAT was justified in coming to the conclusion that the addition of Rs. 5,60,73,380 made by the CIT (A) was not sustainable in law.

Facts of the Case

The Assessee is engaged in the business of real estate development. A search and seizure operation under was carried out at the business premises of the Assessee and residential premises of its Directors on 8th May 2003. During the search and seizure operation, the Revenue seized various materials including inter alia the documents stored in the computer of one Mr. Sunil Awasthi, an employee of Vatika Group to which the Assessee belongs. These documents contained the working of the anticipated sale revenue on account of sale of space in the Vatika Triangle (‘VT’) and Vatika World (‘VW’) commercial complexes. A questionnaire was issued on 10th May 2005 to the Assessee by the AO asking it to explain the undisclosed receipts of sale of spaces/flats in VT. On 25th May 2005 the Assessee filed a reply stating that in respect of the spaces sold in VT, the entire sale consideration received had been disclosed. The Assessee volunteered that “it is evident from the plain reading of the paper that these are mere projections and do not represent any completed materialized transaction.” It was submitted that the said paper did not reflect that those were the actual sale rates.

According to the AO, during the course of search the evidence discovered revealed that the average sale price was more than what was reflected in the books of accounts. According to the AO, the seized material showed that certain amount of cash was paid over and above the cheque component/payment. On that basis the undisclosed income of the Assessee was determined at Rs. 31,01,09,834 which was then added to the returned income. There were two other additions made by the AO. One was Rs. 13,84,20,000 regarding alleged undisclosed receipt from sale of flats/space in VW. The other was the addition of Rs. 1,04,39,000 on the ground of alleged undisclosed income on account of accommodation entries. Consequently the total addition in terms of the assessment order under Section 158BA/158BC read with Section 143 of the Act was Rs. 45,89,68,830.

Contention of the Assessee

The ld counsel of the assessee submitted that the ITAT was right in observing that CIT (A) erred in accepting only one part of document which was otherwise characterized as projections. Merely because the portion that was accepted indicated that flats on the second and third floor had already been sold, it did not mean that the flats were sold at the rates mentioned therein. He further submitted that once the sheet is held to be a projection statement, it is to be treated as such for all purposes. In the note it was observed that on the basis of Sheet No. 4 that “anticipated sale proceeds of seven floors has been worked out at Rs. 47 crores.”  All these indicated that these were only projections and were not sale figures. It is submitted that an undated, unsigned and untested printout from the computer of an employee without linking the same with any actual transaction cannot constitute evidence detected as a result of the search which in turn would result in an addition of the undisclosed income under Section 158B (b).

Mr. Agarwal pointed out that neither Mr. Sunil Awasthi nor any of the buyers were examined as although a request made was on behalf of the Assessee. Once the Assessee gave an explanation for the documents seized, the burden shifted to the Revenue to show the basis on which it could be said that the flats were sold at Rs. 3250 per sq.ft.  Relying on the decision in Commissioner of Income Tax v. S.M. Aggarwal (2007) 293 ITR 43 (Del), Mr. Agarwal submitted that no adverse inference can be drawn unless the author of the document was examined, particularly since the document did not belong to the Assessee. Reliance was placed on the decision of this Court in Commissioner of Income Tax. V. D.K. Gupta (2009)308 ITR 230 (Del) to urge that since a remand report of the AO did not rebut the submission of the Assessee, no adverse inference could have been drawn by the CIT (A). Relying on the decision in Commissioner of Income Tax v. Ved Prakash Choudhary (2008) 305 ITR 245 (Del), it was urged that in the absence of corroborative material, the additions made on the basis of sketchy documents which were unproved cannot be sustained in law. Reliance was also placed on the decision in Commissioner of Income Tax v. Vivek Aggarwal 231 Taxman 392 to urge that unless the amounts stated in the documents were actually paid, it cannot be presumed that the amount mentioned in the sale deed was not correct.

Relying on the decision in Commissioner of Income Tax v. Ravi Kant Jain (2001) 250 ITR 141 (Del), Mr. Agarwal submitted that the purpose of invoking Section 158BC was to bring to tax undisclosed income which was detected as a result of the search. There was no incriminating evidence to show that the Assessee had sold second floormeasuring 1667 sq.ft. area @ Rs. 3250 per sq.ft. as against the actual sale consideration received @ Rs. 1535 per sq.ft. ( average rate). There was no basis for the AO to have adopted the unit rate of Rs. 4800 per sq.ft. for determining the actual sale consideration in respect of the flats in VT. Lastly, it was submitted that the ITAT had based its conclusion on an interpretation of the documents in question and the said finding was essentially a finding of fact. Reliance was placed on the decisions in Commissioner of Income Tax v. Kantilal Prabhudas Patel (2008) 296 ITR 568 (MP) and Commissioner of Income Tax v. Manish Buildwell (P) Ltd. (2011) 245 CTR 397 (Del) to underscore the point that the additions cannot be made on guess work or estimates.

Contention of the Revenue

The ld counsel of the revenue submitted that the additions made by the AO to the extent of Rs. 31,01,09,834 on account of undisclosed receipt from sale of space/flats in Vatika Triangle was based on the searched materials. The search material was in the form of documents titled ‘cash flow/Vatika Triangle/backup’ stored in the computer of Mr. Sunil Awasthi who was an employee of the Vatika Group as well as the actual documents pertaining to sales made of the various flats in Vatika Triangle. This clearly indicated that the declared sale consideration was lower than the actual sale consideration.

Relying on the decisions of the Supreme Court in Commissioner of Income Tax. v. Durga Prasad More (1971)82 ITR 540 (SC)  and Sumati Dayal v. Commissioner of Income Tax (1995) 214 ITR 801 (SC), it was urged that the ITAT should have appreciated the documents seized during the search from the standard of preponderance of probabilities. It was submitted that merely because Mr. Sunil Awasthi was not produced for examination and cross-examination, the documents recovered from his computer could not be ignored since he was an employee of the Vatika Group. It was safe to proceed on the basis of the documents recovered from the possession of the Assessee itself. Inasmuch as the documents indicated that two of the flats mentioned therein has already been sold, it could not be said to be mere projections as contended by the Assessee.

He further submitted that the burden shifted on the Assessee to show that the other flats in VT were indeed sold only at the rate indicated in the sale register and not for a higher consideration. Although the question framed by the Court was confined to the deletion made by the ITAT of Rs. 5,60,73,380  as sustained by the CIT (A), the Court could also examine the validity of the deletion by the CIT (A) of the balance sum of Rs. 25,40,35,954 in this regard.

Held by CIT (A)

CIT (A) partly allowed the appeal of the assessee. According to the CIT (A), the AO should have confined himself to the documents found during the search and seizure action instead of making an addition based on estimates. The CIT (A) examined each of eight instances of sale of flats in VT and upheld the addition only to the extent of Rs. 5,60,73,380. He deleted the addition to the extent of Rs. 25,40,35,954.

Held by ITAT

The ITAT dismissed the Revenue’s appeal while partly allowing the Assessee’s appeal. With regard to issue of the alleged undisclosed receipt on sale of flats/space in VT, the ITAT deleted the additions made by the AO as sustained by the CIT (A) of Rs. 5,60,73,380. It however upheld the additions of Rs. 1,35,00,000/- and Rs. 49,64,904/- aggregating to Rs. 1,84,64,904/- out of Rs. 2,00,14,904/- sustained by the CIT (A) in respect of the alleged undisclosed receipt on sale of flats/space in VW. The ITAT also deleted the implied confirmation of the addition of Rs. 20 lakhs made by the CIT (A).

Held by High Court

High Court held that in Commissioner of Income Tax v. Ravi Kant Jain (2001) 250 ITR 141 (Del), the Court explained that the assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Likewise in Commissioner of Income Tax v. Vishal Aggarwal (2006) 283 ITR 326 (Del), Commissioner of Income Tax v. Girish Chaudhary (2008) 296 ITR 619 (Del) and Commissioner of Income Tax v. V.B. Aggarwal 296 ITR 750 (Del) it was emphasized that provisions of Chapter XIV B of the Act are not meant to make an assessment or reassessment of an income but are the provisions which are aimed to make addition of an undisclosed income detected as a result of search.

The document recovered from the file in the computer of Mr. Awasthi, forms the basis of the addition made by the AO, which was further reduced by the CIT (A). This was in the form of a computer print out of three sheets which were unsigned and undated. The first sheet was titled ‘Cash-in-flow detail for the revenue’, the next was titled ‘Revenue details’ and the third was titled ‘Vatika Triangle, Guargaon.’ The notes to the documents are indicative of their being projections. Noting (i) states that “it is presumed that the building will be completed and fully let out in the month of November 2002.”  Another note states “Further, the sale of the building will took place over a period of nine months.” Admittedly, as on the date of the search the construction was still in progress. Flats up to the fourth floor had been sold. The view taken by the ITAT that mere fact that the print out states that the flats on second and third floor have been sold, does not necessarily mean that they were sold at the rates indicated therein is definitely a plausible view to take.

In Commissioner of Income Tax v. S.M. Aggarwal (2007) 293 ITR 43 (Del), in similar circumstances certain slips of paper were recovered during search and their author was not examined. The Court observed that “It is well-settled that the only person competent to give evidence on the truthfulness of the contents of the document is the writer thereof. So, unless and until the contents of the document are proved against a person, the possession of the document or handwriting of that person on such document by itself cannot prove the contents of the document. The said document can at best be termed as a ‘dumb’ document which in the absence of independent corroboration could not possibly have been relied upon as a substantive piece of evidence to determine the actual rates at which the flats were sold. Further as pointed out in Commissioner of Income Tax v. D.K. Gupta (2009)308 ITR 230 (Del) merely because there are notings of offers on slips of paper, it did not mean that those transactions actually took place. Likewise in Commissioner of Income Tax v. Girish Chaudhary (2008) 296 ITR 619 (Del), the Court termed a loose sheet containing some notings of figures as a ‘dumb document’ since there was no material to show as to on what basis the AO had reached a conclusion that the figure ’48’ occurring in one of them was to be read as Rs. 48 lakhs.

In the present case, there was again no material on the basis of which the AO could have applied a standard rate of Rs 4,800 per sq ft for all the floors of VT. It was also not open to the AO to draw an inference on the basis of the projection in the document, particularly when the Assessee offered a plausible explanation for the document. The burden shifted to the Revenue to show, on the basis of some reliable and tangible material,  how the rate at which the flats on the second and third floors of VT was higher than that indicated in the sales register or the sale deeds themselves. In the circumstances, the Court is of the view that the ITAT was justified in coming to the conclusion that the addition of Rs. 5,60,73,380 made by the CIT (A) was not sustainable in law.

Accordingly, appeal disposed of.

CA Deepak Aggarwal