M/S. Zain Constructions v. The Income Tax Ofïcer -18(3)(5) & Ors

R.M. AMBERKAR (Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. WRIT PETITION NO. 345 OF 2019 M/s. Zain Constructions ..Petitioner Versus The Income Tax OfÏcer -18(3)(5) & Ors...Respondents ................... Mr. Devendra H. Jain for the Petitioner Mr. Devendra H. Jain for the Petitioner •Mr. A.R. Malhotra for the Respondents ................... CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE : MARCH 29, 2019. P.C.: 1.Heard learned counsel for the parties for final disposal of the petition. 2.The petitioner has challenged a notice of reopening of assessment as also an order of assessment passed pursuantto such notice. 3.Facts in brief are as under:- 3.1 Petitioner is a partnership firm and is engaged inthe business of real estate development. For the assessment year 2013-14, the petitioner had filed return of incomedeclaring income of Rs. 1,15,560/-. Pending such return, asurvey action was taken against the petitioner under Section133A of the Income Tax Act, 1961 ("the Act" for short) on15.1.2015. During survey, it was found that the petitionerhad sold certain flats in one Zain Tower at a price lower thanthe stamp valuation of such property. The statement of apartner of the petitioner firm was recorded. On the basis ofsuch statement and other material, the Assessing ofÏcerpassed an order of assessment under Section 143(3) of theAct on 28.3.2016 determining the total income of Rs. 76.75Lakhs (rounded off). 3.2 To reopen such assessment, the Assessing OfÏcer issued impugned notice on 28.3.2018. In order to do so, hehad recorded following reasons:- "Reasons recorded for issue of notice u/s. 148 of the Income Tax Act,1961 inthe case of M/s. Zain Construction (PAN: ) FOR AY 2013-14 Brief details of the assessee:The assessee is a partnership Firm and filed itsreturn of income for AY 2013-14 on 30/09/2013 declaring the total income at Rs1,15,560/-. The same was processed u/s.143(1) on 22.04.2014. Scrutinyassessment u/s. 143(3) of the Act, was completed on 29.03.2016, determining thetotal income at Rs. 77,90,560/-. Brief details of information collected / received by the AO : In this case, asurvey u/s 133A of the Income tax Act 1961 was conducted on 15.01.2015. Duringthe survey action, it was found that the assessee is a firm engaged in the businessactivities of development of property and has developed a property named 'ZainTower’. It was also found that the assessee has sold the flats of Zain tower at a pricelesser than the Market Value (Stamp Duty Value). Mr. Umer Basar holding 90%stake of the firm, accepted the discrepancies regarding sale of flats at lower valuethan that of current market value and declared an amount of Rs. 76.75,000/- for theFY 2012-13 relevant to AY 2013-14, accordingly scrutiny assessment wascompleted making addition of Rs. 76,75,000/- to the total income of the assessee. However, recently it has come to the notice of the undersigned that the total marketvalue of the 13 flats (each having area of 355 sq ft) sold during the year underconsideration works out to Rs. 4,46,81,000/-as per Market Value (Stamp Duty Value)mentioned in the AIR/CIB information. The assessee has shown income towardssale of flats at Rs. 3,03,70.0007- and offered profit of Rs. 59,497/- in the return andfurther declared an amount of Rs. 76,75,000/- towards under vałuation of flatsduring the survey action. Thus, an amount of Rs. 66,36,000/- (44681000 - 30370000- 7675000) escaped assessment. It was further seen that during the FY 2011-12 relevant to AY 2012-13, assesseeconstructed 33 flats, out of which it sold 18, and was left with a closing stock of 15,whose value was Rs. 2,61,93,081/-. During the FY 2012-13 relevant to the AY 2013-14, the assessee constructed one more flat and sold 13 flats, hence it should hadbeen left with 3 [(15+1)-13] unsold flats, however, the assessee had shown only oneunsold flat, in its closing stock, amounting to Rs. Rs. 9,08,114/-. It was further seen that during the FY 2011-12 relevant to AY 2012-13, assesseeconstructed 33 flats, out of which it sold 18, and was left with a closing stock of 15,whose value was Rs. 2,61,93,081/-. During the FY 2012-13 relevant to the AY 2013-14, the assessee constructed one more flat and sold 13 flats, hence it should hadbeen left with 3 [(15+1)-13] unsold flats, however, the assessee had shown only oneunsold flat, in its closing stock, amounting to Rs. Rs. 9,08,114/-. Value of unsold flat as on 31.03.2013 Opening WIP of 15 flats unsold as on 31.03.2012Add : Expenses during FY 2012-13 Closing WIP of 3 unsold flat as on 31.3.201330874404*3/16 Rs. 2,61,93,081/-Rs. 46,81,323/-Rs. 3,08,74,404/-Rs. 57,88,950/- Thus, as on 31.03.2013, the assessee has undervalue the unsold flats to the extentof Rs. 48,80,836/- (5788950 - 908114), on account of reduced closing stock. Analysis of information collected / received: The total market value of the 13 flats, each having area of 355 Sq. Ft, sold duringFY 2012-13 worked out to Rs. 4,46,81,000/-, as per Market Value (Stamp DutyValue) mentioned in the AIR/CIB information. Thus, an amount of Rs. 66,36,000/-,escaped assessment towards under valuation of flats. Further, an amount of Rs.48,80,836/-, also escaped assessment on account of reduced closing stock. Enquiries made by the AO:The above findings were made from the details filed bythe assessee during the assessment proceedings for AY 2013-14. The partners ofthe assessee firm were also issued summons u/s 131 of the Act, at their registeredaddress, which returned unserved. Findings of the AO:After appraisal of the above material on record there is enoughreason to believe that the assessee did not offer an amount of Rs. 66,36,000/-towards under valuation of flats. Assessee has shown one unsold flat instead ofthree and shown value of closing stock at Rs. 9,08,114/- instead of Rs. 57,88,950/-,and therefore, an amount of Rs. 48,80,836/-, also escaped assessment. Hence, theassessee has failed to disclose truly and fully all material facts for determination oftotal income. Basis of forming reason to believe and details of escapement of income: In thelight of above facts and detailed findings, I have reason to believe that Rs.1,15,16,836/-, has escaped assessment within the meaning assigned in theprovision of section 147 of the Act, since, the assessee clearly failed to disclose trulyand fully all material facts for determination of income, hence, it is a fit case for issueof notice u/s.148 of the Income Tax Act, 1961. Accordingly, approval u/s 151(2) ofthe Income Tax Act, 1961 is solicited for issuing notice u/s 148 of the Act.” 3.3 The petitioner raised objections to the reopening of assessment on 15.11.2018. The Assessing OfÏcer rejectedsuch objections by order dated 03.12.2018. Without allowinga period of four weeks to the assessee after communicationof disposal of the objections as provided by this Court in caseof Asian Paints Ltd Vs. Dy. CIT & Anr.[1], the AssessingOfÏcer passed assessment orderdated 17.12.2018 underSection 143 r/w 147 of the Act. At that stage, the presentpetition has been filed. 1[2008] 296 ITR 90 (Bom) 4.Previously, learned counsel for the petitioner had statedthat he does not wish to enter into the question of AssessingOfÏcer passing the order of assessment before less than fourweeks' of disposing of the petition since eventually, it wouldamount to requiring the Assessing OfÏcer, at best to pass afresh order. He had, therefore, focussed his challenge to thevery notice of reopening of assessment and in that context,we have heard the learned counsel for both the sides in thispetition. 1[2008] 296 ITR 90 (Bom) 4.Previously, learned counsel for the petitioner had statedthat he does not wish to enter into the question of AssessingOfÏcer passing the order of assessment before less than fourweeks' of disposing of the petition since eventually, it wouldamount to requiring the Assessing OfÏcer, at best to pass afresh order. He had, therefore, focussed his challenge to thevery notice of reopening of assessment and in that context,we have heard the learned counsel for both the sides in thispetition. 5.Perusal of the reasons recorded by the AssessingOfÏcer would indicate two grounds on which he sought toreopen the assessment. First is with respect to the receiptsarising out of the sale of flats in Zain Tower by the assessee.According to the Assessing OfÏcer, during survey, it wasfound that the assessee had sold the flats at a price less thanthe market value which fact the partner of the assessee firmhad accepted in his statement and declared the amount ofRs. 76.75 Lakhs by way of additional income. Subsequently,however, the Assessing OfÏcer noticed that as per the stampduty valuation, the total consideration of the sold flats came to Rs. 4.46 Crores (rounded off) as against the total salevalue of 3.03 crores (rounded off). Thus, the assessee haddisclosed a sum of Rs. 66.36 Lakhs short in the process. Thesecond ground for reopening the assessment was that therewas a discrepancy of three units of unsold flats, the valuationof which had to be added to the closing stock. 6.In so far as the second ground is concerned, theRevenue was unable to substantiate the same. When theAssessing OfÏcer raised a factual dispute about the left overunsold flats, it is at least his primary duty to substantiate thesame with material on record. The assessee has been at atotal loss from where the Assessing OfÏcer obtained suchfigures. The assessee cannot be expected to prove thenegative and it was a duty of the Assessing OfÏcer whoasserted a certain discrepancy to establish the same. Thisground of reopening of assessment, therefore, remainsunsubstantiated and is, therefore, ignored. 7.Coming to the main ground on which the AssessingOfÏcer desires to open the assessment, we may recall his contention is that during survey, the assessee had agreedthat certain flats were sold at a value less than a marketvalue adopted by the Stamp Valuation Authorities for levyingstamp duty for registration of sale deed. The assessee hadadmitted additional income of Rs. 76.75 Lakhs in thestatement recorded during survey. However, later on, theAssessing OfÏcer realized that as per the stamp dutyvaluation, such difference between the stamp duty valuationand the sale price of the flat was much higher. He, therefore,quantified this different at Rs. 66.36 Lakhs. 8.In our opinion, the entire approach of the AssessingOfÏcer is wholly incorrect. As is well known, Section 50C ofthe Act would enable the Revenue to bring to tax by way ofdeemed capital gain difference between the stamp valuationand the sale price of a capital asset. For obvious reasons,this provision would not apply in case of a builder for whomsuch immovable property is in nature of stock in trade andnot capital asset. To overcome this difÏculty, the legislaturehad inserted Section 43CA under Finance Act, 2013 w.e.f.1.4.2014. This provision would enable the Revenue to tax the income arising out of sale of stock by a deeming fictionwhere subject to certain conditions, stamp valuation of suchstock would substitute the actual receipt thereof. In absenceof any such statutory provisions, giving rise to the deemingfiction, the Revenue cannot tax any amount which has notbeen received by a seller of an immovable property at thetime of sale. 9.With this background, we may refer to the statement ofthe partner of the firm during survey. Relevant question andanswer read as under:- the income arising out of sale of stock by a deeming fictionwhere subject to certain conditions, stamp valuation of suchstock would substitute the actual receipt thereof. In absenceof any such statutory provisions, giving rise to the deemingfiction, the Revenue cannot tax any amount which has notbeen received by a seller of an immovable property at thetime of sale. 9.With this background, we may refer to the statement ofthe partner of the firm during survey. Relevant question andanswer read as under:- Q. 13. I am showing you a loose papers impounded and marked as PageNo. 8 & 9 of Annexure 'A-1', which contains list of customers towhom flats in 'Zein Tower' has been sold. As per said list, theAgreement Value of the flats sold is varying from the Market Value(Stamp Duty Value) for which the flats shuld have been sold. Youare asked to furnish justification in this regard.No. 8 & 9 of Annexure 'A-1', which contains list of customers towhom flats in 'Zein Tower' has been sold. As per said list, theAgreement Value of the flats sold is varying from the Market Value(Stamp Duty Value) for which the flats shuld have been sold. Youare asked to furnish justification in this regard. Ans. These papers contains the list of customers to whom flats havebeen sold at the value lesser that the Market Value. I understandabout tax implications for selling flats at the value lower than theMarket Value. Therefore, in order to avoid litigation and to buypeace of mind I offer the amount of Rs. 83,25,000/- forAssessment Year 2012-2013 and Rs. 76,75,000/- for AssessmentYear 2013-2014 to tax towards undervaluation of flats as comparedto Market Value (Stamp Duty Value).been sold at the value lesser that the Market Value. I understandabout tax implications for selling flats at the value lower than theMarket Value. Therefore, in order to avoid litigation and to buypeace of mind I offer the amount of Rs. 83,25,000/- forAssessment Year 2012-2013 and Rs. 76,75,000/- for AssessmentYear 2013-2014 to tax towards undervaluation of flats as comparedto Market Value (Stamp Duty Value). Under this question, the partner was then showncertain loose papers containing list of customers to whomflats in Zain Towner were sold. It was pointed out that as perthis list, the agreement value of the flats was less than themarket value i.e stamp duty valuation. The partner wasasked to justify this difference. To this, the partner statedthat the flats were sold at the value less than the marketvalue. He understood the implications thereof and therefore,in order to avoid litigation, he offered an amount of Rs. 76.75Lakhs for the assessment year 2013-14 to tax towards"undervaluation of flats as compared to Market Value (StampDuty Value)." 10. In plain terms, in this statement, the partner neveradmitted that the flats were sold at a price higher than whatwas reflected in the document. In other words, he did notadmit to any cash payment not recorded in the documents.He was asked about the difference between the stampvaluation for the purpose of registration and the price atwhich the flats were sold. He admitted the different. Heoffered to tax the said amount of Rs. 76.75 Lakhs being the 10. In plain terms, in this statement, the partner neveradmitted that the flats were sold at a price higher than whatwas reflected in the document. In other words, he did notadmit to any cash payment not recorded in the documents.He was asked about the difference between the stampvaluation for the purpose of registration and the price atwhich the flats were sold. He admitted the different. Heoffered to tax the said amount of Rs. 76.75 Lakhs being the difference between the stamp duty valuation and the saleprice. We are prepared to proceed on the basis that thisamount of Rs. 76.75 Lakhs does not reflect accurately suchdifference between the two valuations. However, in absenceof voluntary surrender by the assessee of any additionalincome, it was simply not possible for the Revenue to makeany addition on the ground of the difference between thestamp valuation and the sale price of the property inquestion. As noted, Section 43CA of the Act was insertedw.e.f 1.4.2014 and therefore, had no applicability to theassessment year in question. The attempt on the part of theAssessing OfÏcer to make the addition with the aid of thestatement of the partner of the assessee and reference tothe correct stamp valuation, is simply invalid. What theAssessing OfÏcer wishes to do is to adopt a stamp valuationfor the properties in question, superimpose the statement ofthe partner of the assessee of the declaration of certainadditional income and extrapolate such statement to fitwithin the scheme of Section 43CA of the Act. 11. In the result, the impugned notice of reopening of assessment is set aside. Consequently, the order ofassessment is rendered invalid. Petition disposed ofaccordingly. [ SARANG V. KOTWAL, J. ] [ AKIL KURESHI, J ]