Ita/263/2014 Of The Commissioner Of Income Tax v. M/S.damac Holdings Pvt. Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 12TH DAY OF DECEMBER 2017/21ST AGRAHAYANA, 1939 ITA.No. 263 of 2014 () ----------------------- AGAINST THE ORDER/JUDGMENT IN ITA 224/COCH/2012 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 06-06-2014 APPELLANT(S)/APPELLANT: ---------------------- THE COMMISSIONER OF INCOME TAX (CENTRAL) KOCHI. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT: ------------------------- DAMAC HOLDINGS PVT. LTD. 33/2241A, CIVIL LANE ROAD, PALARIVATTOM, ERNAKULAM-682 035. BY ADV. SRI.K.I.MAYANKUTTY MATHER THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12-12-2017,ALONG WITH ITA. 22/2015, ITA. 51/2015 & ITA. 114/2015, THE COURT ONTHE SAME DAY DELIVERED THE FOLLOWING: ITA 263/14 APPENDIX APPELLANT'S ANNEXURES ANNEXURE A :COPY OF ASSESSMENT ORDER DATED 28.12.2009. ANNEXURE B :COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 28.5.2012. ANNEXUIRE C :COPY OF COMMON ORDER OF THE APPELLATE TRIBUNAL INITA NO.224, 225, 230 AND 231/COCH/2012 DATED 6.6.2014. //TRUE COPY// jg-18/12 PS TO JUDGE. K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- ITA Nos.263 of 2014 and 22, 51 & 114 of 2015 ------------------------------------------- Dated this the 12[th] day of December, 2017 J U D G M E N T Vinod Chandran, J. The facts in all the aforesaid appeals are more or less similar so are the questions of law raised. We deal with the appealstogether on the question of law. We heard the learned SeniorCounsel, Government of India (Taxes) as also the learned Counselappearing for the respondents/assessees. 2.There are two assesses involved here, both engaged inthe business of real estate; purchase of landed property,development and sale. M/s.Damac Holdings Pvt. Ltd. is concernedwith ITA Nos. 263 of 2014 and 22 and 51 of 2015. ITANo.263/2014 is with respect to the assessment year 2007-08 andITA Nos.22 and 51 of 2015 for the assessment year 2008-09. ITANo.114/2015 is with respect to M/s.Right Hand Developers India (P)Ltd. for the assessment year 2008-09. 3.Assessments were initiated on the basis of the searchconducted in the residence of the Directors of both the Companiesunder Section 132 of the Income Tax Act, 1961 (hereinafter referredto as ‘the Act’, for short) on 26.3.2008. There were objectionsraised with respect to the search and seizure and the subsequentproceedings, which were negatived by the first appellate authorityand the Tribunal, against which there is no appeal filed. We areconcerned only with the claim of expenses made by the assessesbefore the Assessing Officer, who disallowed a major portion oncomputation made by himself. The fact that the vendors of theassesses had expended amounts to develop the property was alsotaken into account. The assesses claimed benefit of thepresumption available under Section 132(4A) of the Act. The firstappellate authority in the context of both assesses allowed theclaims to the extent of the cheque payments as disclosed from thedocuments seized from the premises and disallowed it for thebalance. The Tribunal allowed the entire expenses as claimed bythe assesses. -3- -3- 4.With respect to M/s. Right Hand Developers India (P)Ltd., for the assessment year 2008-2009 the first appellateauthority partly allowed the appeal restricting the dis-allowance toRs.2,57,56,840/-. The Tribunal allowed the appeals in toto. Thequestions of law raised in I.T.A. 114 of 2015 are (i) whether theTribunal was justified in allowing the entire expenditure as claimedby the assessee without reference to the seized materials and thepresumption under Section 132(4A) of the Income Tax Act, 1961(for brevity, the Act) if at all being available only to the extent of theexpenditure so discernible from the seized materials (ii) whethereven with respect to the seized materials the Tribunal ought not tohave put the assesee to strict proof under Section 37. 5.In the case of M/s.Damac Holdings Pvt. Ltd. for theassessment year 2007-08, the total expenditure claimed wasRs.72,81,120/-. The expenditure allowed by the Assessing Officerwas Rs.7,77,287/-, disallowing Rs.65,03,833/-. The first appellateauthority allowed additional expenses of Rs.37,45,016/-; to thatextent, the addition made to income was set aside. The Departmentfiled an appeal from the above order, which was rejected. The ITA 263/14, 22, 51 & 114/15 question of law framed by the Department in ITA No.263/2014 is asto whether the Tribunal was justified in allowing the claim withoutputting the assessee to proof under Section 37 of the Act.6.For the assessment year 2008-09, M/s.Damac HoldingsPvt. Ltd. claimed a total expenditure of Rs.6,13,76,269/- out ofwhich the Assessing Officer allowed Rs.65,52,150/- and disallowedRs.5,48,24,119/-. The first appellate authority for the said yearallowed the claim of expenditure to the extent of Rs.2,42,68,680/-and disallowed Rs.3,69,52,580/-. The addition made on totalincome for the disallowance by the Assessing Officer was deleted tothe extent of the cheques issued by the assessee reflected in theBank accounts, for the purpose of developing the property. Theassessee has filed appeal before the Tribunal against thedisallowance sustained by the first appellate authority and theDepartment against the disallowance set aside by the first appellateauthority. The questions of law raised in both the appeals are as towhether the presumption under Section 132(4A) ought to havebeen confined to the seized materials and even with respect to the ITA 263/14, 22, 51 & 114/15 seized materials, whether the Tribunal was justified in not havingput the assessee to proof under Section 37 of the Act. 7.Both the assesses were incorporated in the year 2006.The transactions itself took place during the years 2007-08 and2008-09 with respect to M/s.Damac Holdings Pvt. Ltd., and 2008-09 with respect to M/s. Right Hand Developers India (P) Ltd. In fact,the subject transactions, which were assessed by the Income TaxAuthorities took place in the previous year of the assessment year2008-09. The expenditure was claimed for the year 2007-08 byM/s.Damac Holdings Pvt. Ltd. only since they had entered intoagreements with certain property owners in the previous year to theassessment year 2007-08 and had expended some amounts inpursuance of the purchase effected of the properties in the financialyear 2007-08. The purchases were made in August, 2007 and thesale was also effected within 4-6 months. In the case of M/s.DamacHoldings Pvt. Ltd., the purchase price was about Rs.5 crores and thesale price about Rs.13 crores. With respect to M/s.Right HandDevelopers India (P) Ltd. also, the situation was almost similar with ITA 263/14, 22, 51 & 114/15 the purchase price about Rs.4 crores and sale price more than Rs.9crores. ITA 263/14, 22, 51 & 114/15 the purchase price about Rs.4 crores and sale price more than Rs.9crores. 8. The expenditure incurred insofar as developing the propertywas the specific claim raised. The Assessing Officer found that thevendors of the assessees had in their returns, with respect to capitalgains claimed expenditure of Rs.18,000/- per cent, for leveling theproperties. The agreement entered into between the vendors andthe assesses specifically provides for leveling the property, so as tocarry out measurement. The claim of the vendors having beenallowed, there was no reason why the assessees, the subsequentpurchaser should again expend money on the property fordevelopment was the reasoning of the A.O. The assessees claimedthat further development was required, as otherwise they wouldnever have obtained the value they did within a period of 4-6months. The properties purchased were marshy lands lying farbelow the road level and the leveling done by the vendors weremarginal; only to facilitate measurement. Considerable amountswere expended for filling up of the properties, building a compoundwall and making it fit for construction; which were supported by the ITA 263/14, 22, 51 & 114/15 various documents seized from the assesses on the searchconducted under Section 132 of the Act. The value addition made bythe assesses, in fact resulted in the properties fetching such hugereturns in a few months. The assessees even after the expensesobtained considerable profits, which are returned, is the contention. 9. The presumption under Section 132(4A) having not beenrebutted by the Department, the assessees are entitled to the entireexpenditure as supported by the documents, argues learnedCounsel. With respect to the question of law as to whether it has tobe confined to the documents seized, it is the submission of thelearned counsel for the assessees that there were books of accountsavailable in the computers which were never looked into by theDepartment. It is also claimed that the assessees were following themercantile system of accounting and many payments were made inthe subsequent years by cheque, which the assessee would be ableto substantiate before the Assessing Officer. In fact, documentsseized would reveal such liability of the assessees, which had beensatisfied in the subsequent years, but however accrued in thesubject assessment year itself. -8- 10.We have gone through the assessment orders, the ordersof the first appellate authority and the Tribunal. The question oflaw raised is only with respect to the amounts that has to be allowedas expenditure. We see from the assessment orders that theAssessing Officer has proceeded on a mere presumption incomputing the amounts, which the assessee would have expendedfor developing the property. The Assessing Officer worked out thetotal expenditure as Rs.2,40,91,920/- and apportioned it to thetotal area arriving at the cost expended per cent to be Rs.6,832/-.There was absolutely no basis for such a computation. TheAssessing Officer's finding that the vendors of the property hadspend Rs.18,000/- per cent for leveling the property and hence,there was no requirement for the assesses to make the expenditureat the extent claimed, also cannot be sustained. The first appellateauthority considering the documents produced allowed the claim tothe extent that there were cheque payments; as is discernible fromthe documents seized. 11.The claim for benefit of presumption under Section 132(4A) has to be considered at first. Section 132(4A) provides for The claim for benefit of presumption under Section 132 11.The claim for benefit of presumption under Section 132(4A) has to be considered at first. Section 132(4A) provides for The claim for benefit of presumption under Section 132 presumption, inter alia, of the contents of books of accounts andother documents found in the possession or control of any personin the course of search to be true, and the presumption applies bothin the case of the Department and the assessee and could berebutted by either. The Assessing Officer as has been noticed bythe Tribunal did not endeavor to carry out an enquiry as to thesource of investment and genuineness of the expenditure. TheAssessing Officer proceeded on mere conjectures and totallyignored the seized documents. The seized documents containedevidence of cheque payments and vouchers of cash paymentseffected in pursuance to the development of the lands. TheAssessing Officer also did not verify the source of income for suchexpenditure. The fact that the sale price was astronomical asagainst the purchase price again raises a valid presumption infavour of the contention of the assessee that, but for thedevelopment of the property to a considerable extent this would nothave been possible. Especially when there was no unusual spurt inland prices during that short period. The Assessing Officer also didnot embark on an enquiry to that end. In such circumstances, it -10- cannot be said that the presumption in favour of the assesseescannot be permitted, insofar as the expenditure revealed from thebooks seized from the assesses. We are not convinced that in theteeth of the presumption as to the truth of the documents seized,there is any further proof required under Section 37 of the Act; thedepartment having failed to rebut such presumption.12.The next question would be as to whether the entireclaim of the assesses have to be allowed. The claim of the assesseswith respect to the further expenditure, which is not supported bythe documents seized in the course of search is two fold; first thatthere were books of accounts available in the computer even at thetime of seizure which were never verified by the Department, andsecond, that the assesses have followed the mercantile system ofaccounting. The assesses claim that they have shown the liabilityaccrued with respect to the development of the plots; which as ofnow could be substantiated by subsequent payments made in thesubsequent years. We are not convinced that such a prayer can beallowed at this stage. First of all, it is to be noticed that theassesses never produced any books of accounts before the lower authorities. The Assessing Officer, even when a remand report wascalled for by the first appellate authority, has categorically statedthat the assesses did not maintain any books of accounts. Thefurther submission that subsequent payments were made onliabilities accrued in the assessment year cannot also becountenanced. The purchase of the property and the sale werecarried within the course of 4-6 months. The entire expendituresaid to have been made is for the development of the plots by fillingup the same, building compound wall, etc. The claim is also withrespect to the documents seized disclosing both cash and chequepayments; which itself reveal considerable expenditure having beenmade even to the extent of more than the purchase price. Tosubstantiate the cash payments, the specific contention was that itwas for purchase of red earth for filling up of the properties whichpayments were made on each lorry load being received. TheTribunal had also noticed the fact that the cash payments were allbelow Rs.20,000/- and there was no requirement for a chequetransaction or deduction of tax at source. There could have been noliability, hence, accrued in the course of the assessment year for the developmental activities carried on within the period of 4-6 months,which would have been settled by the assesses in the subsequentyears, considering the nature of the work carried out. 13.On the above reasoning, we have no hesitation to holdthat the presumption under Section 132(4A) of the Act applies infavour of the assesses insofar as the expenditure being supportedby the documents seized at the time of search. There is no need fora further proof under Section 37, since as we have found, theAssessing Officer did not endeavor to carry out an enquiry andinvestigation into the source of investment or the genuineness ofthe expenditure made. However, the presumption can have effectonly to the extent of the documents seized and nothing further. 14.The Departmental appeal filed for the assessment year2007-08, i.e. ITA No.263/2014, would stand rejected. With respectto ITA Nos.22, 51, and 114 of 2015, the questions of law withrespect to the deletion of additions made on account ofdisallowance of expenditure, on the basis of the presumptionavailable under Section 132 (4A) though answered against theRevenue and in favour of the assessees, it is made clear that the allowance of expenditure would be confined to the amountsrevealed from the seized documents, whether it be cash or chequepayments. In such circumstances, the disallowance deleted by theTribunal for the assessment year 2008-09 in the case of M/s. RightHand Developers India (P) Ltd. would stand revived to the extent ofRs.1,23,44,050/-. With respect to M/s.Damac Holdings Pvt. Ltd. forthe assessment year 2008-09, the disallowance deleted by theTribunal would stand set aside and it would be revived to the extentof Rs.1,35,39,893/-. These appeals are ordered accordingly. Parties to suffer theirrespective costs. K.V INOD CHANDRAN Judge ASHOK MENON Judge jg xxx