Kerala H.C : Where assessee a real estate developer claimed expenditure incurred for making land suitable for sale and expenditure was supported by documents seized at time of search, benefit of presumption under section 132(4A) would be available to assessee and there would be no need for further proof under section 37, since Assessing Officer did not endeavour to carry out investigation into genuineness of expenditure made

High Court Of Kerala

CIT, (Central) Kochi Vs. Damac Holdings (P.) Ltd.

Section 132, 37(1)

Assessment years 2007-08 and 2008-09

Vinod Chandran And Ashok Menon, JJ.

IT Appeal Nos. 263 Of 2014 22, 51, & 114 Of 2015

December  12, 2017 

JUDGMENT

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 appeals together on the question of law. We heard the learned Senior Counsel, Government of India (Taxes) as also the learned Counsel appearing for the respondents/assessees.

2. There are two assesses involved here, both engaged in the business of real estate; purchase of landed property, development and sale. M/s. Damac Holdings Pvt. Ltd. is concerned with ITA Nos. 263 of 2014 and 22 and 51 of 2015. ITA No.263/2014 is with respect to the assessment year 2007-08 and ITA Nos.22 and 51 of 2015 for the assessment year 2008-09. ITA No.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 search conducted in the residence of the Directors of both the Companies under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) on 26.3.2008. There were objections raised with respect to the search and seizure and the subsequent proceedings, which were negatived by the first appellate authority and the Tribunal, against which there is no appeal filed. We are concerned only with the claim of expenses made by the assesses before the Assessing Officer, who disallowed a major portion on computation made by himself. The fact that the vendors of the assesses had expended amounts to develop the property was also taken into account. The assesses claimed benefit of the presumption available under Section 132(4A) of the Act. The first appellate authority in the context of both assesses allowed the claims to the extent of the cheque payments as disclosed from the documents seized from the premises and disallowed it for the balance. The Tribunal allowed the entire expenses as claimed by the assesses.

4. With respect to M/s. Right Hand Developers India (P) Ltd., for the assessment year 2008-2009 the first appellate authority partly allowed the appeal restricting the dis-allowance to Rs.2,57,56,840/-. The Tribunal allowed the appeals in toto. The questions of law raised in I.T.A. 114 of 2015 are (i) whether the Tribunal was justified in allowing the entire expenditure as claimed by the assessee without reference to the seized materials and the presumption under Section 132(4A) of the Income Tax Act, 1961 (for brevity, the Act) if at all being available only to the extent of the expenditure so discernible from the seized materials (ii) whether even with respect to the seized materials the Tribunal ought not to have put the assesee to strict proof under Section 37.

5. In the case of M/s. Damac Holdings Pvt. Ltd. for the assessment year 2007-08, the total expenditure claimed was Rs.72,81,120/-. The expenditure allowed by the Assessing Officer was Rs.7,77,287/-, disallowing Rs.65,03,833/-. The first appellate authority allowed additional expenses of Rs.37,45,016/-; to that extent, the addition made to income was set aside. The Department filed an appeal from the above order, which was rejected. The question of law framed by the Department in ITA No.263/2014 is as to whether the Tribunal was justified in allowing the claim without putting the assessee to proof under Section 37 of the Act.

6. For the assessment year 2008-09, M/s. Damac Holdings Pvt. Ltd. claimed a total expenditure of Rs.6,13,76,269/- out of which the Assessing Officer allowed Rs.65,52,150/- and disallowed Rs.5,48,24,119/-. The first appellate authority for the said year allowed the claim of expenditure to the extent of Rs.2,42,68,680/- and disallowed Rs.3,69,52,580/-. The addition made on total income for the disallowance by the Assessing Officer was deleted to the extent of the cheques issued by the assessee reflected in the Bank accounts, for the purpose of developing the property. The assessee has filed appeal before the Tribunal against the disallowance sustained by the first appellate authority and the Department against the disallowance set aside by the first appellate authority. The questions of law raised in both the appeals are as to whether the presumption under Section 132(4A) ought to have been confined to the seized materials and even with respect to the seized materials, whether the Tribunal was justified in not having put 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 and 2008-09 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 Tax Authorities took place in the previous year of the assessment year 2008-09. The expenditure was claimed for the year 2007-08 by M/s. Damac Holdings Pvt. Ltd. only since they had entered into agreements with certain property owners in the previous year to the assessment year 2007-08 and had expended some amounts in pursuance of the purchase effected of the properties in the financial year 2007-08. The purchases were made in August, 2007 and the sale was also effected within 4-6 months. In the case of M/s. Damac Holdings Pvt. Ltd., the purchase price was about Rs.5 crores and the sale price about Rs.13 crores. With respect to M/s. Right Hand Developers India (P) Ltd. also, the situation was almost similar with the purchase price about Rs.4 crores and sale price more than Rs.9 crores.

8. The expenditure incurred insofar as developing the property was the specific claim raised. The Assessing Officer found that the vendors of the assessees had in their returns, with respect to capital gains claimed expenditure of Rs.18,000/- per cent, for leveling the properties. The agreement entered into between the vendors and the assesses specifically provides for leveling the property, so as to carry out measurement. The claim of the vendors having been allowed, there was no reason why the assessees, the subsequent purchaser should again expend money on the property for development was the reasoning of the A.O. The assessees claimed that further development was required, as otherwise they would never have obtained the value they did within a period of 4-6 months. The properties purchased were marshy lands lying far below the road level and the leveling done by the vendors were marginal; only to facilitate measurement. Considerable amounts were expended for filling up of the properties, building a compound wall and making it fit for construction; which were supported by the various documents seized from the assesses on the search conducted under Section 132 of the Act. The value addition made by the assesses, in fact resulted in the properties fetching such huge returns in a few months. The assessees even after the expenses obtained considerable profits, which are returned, is the contention.

9. The presumption under Section 132(4A) having not been rebutted by the Department, the assessees are entitled to the entire expenditure as supported by the documents, argues learned Counsel. With respect to the question of law as to whether it has to be confined to the documents seized, it is the submission of the learned counsel for the assessees that there were books of accounts available in the computers which were never looked into by the Department. It is also claimed that the assessees were following the mercantile system of accounting and many payments were made in the subsequent years by cheque, which the assessee would be able to substantiate before the Assessing Officer. In fact, documents seized would reveal such liability of the assessees, which had been satisfied in the subsequent years, but however accrued in the subject assessment year itself.

10. We have gone through the assessment orders, the orders of the first appellate authority and the Tribunal. The question of law raised is only with respect to the amounts that has to be allowed as expenditure. We see from the assessment orders that the Assessing Officer has proceeded on a mere presumption in computing the amounts, which the assessee would have expended for developing the property. The Assessing Officer worked out the total expenditure as Rs.2,40,91,920/- and apportioned it to the total area arriving at the cost expended per cent to be Rs.6,832/-. There was absolutely no basis for such a computation. The Assessing Officer’s finding that the vendors of the property had spend Rs.18,000/- per cent for leveling the property and hence, there was no requirement for the assesses to make the expenditure at the extent claimed, also cannot be sustained. The first appellate authority considering the documents produced allowed the claim to the extent that there were cheque payments; as is discernible from the documents seized.

11. The claim for benefit of presumption under Section 132 (4A) has to be considered at first. Section 132(4A) provides for presumption, inter alia, of the contents of books of accounts and other documents found in the possession or control of any person in the course of search to be true, and the presumption applies both in the case of the Department and the assessee and could be rebutted by either. The Assessing Officer as has been noticed by the Tribunal did not endeavor to carry out an enquiry as to the source of investment and genuineness of the expenditure. The Assessing Officer proceeded on mere conjectures and totally ignored the seized documents. The seized documents contained evidence of cheque payments and vouchers of cash payments effected in pursuance to the development of the lands. The Assessing Officer also did not verify the source of income for such expenditure. The fact that the sale price was astronomical as against the purchase price again raises a valid presumption in favour of the contention of the assessee that, but for the development of the property to a considerable extent this would not have been possible. Especially when there was no unusual spurt in land prices during that short period. The Assessing Officer also did not embark on an enquiry to that end. In such circumstances, it cannot be said that the presumption in favour of the assessees cannot be permitted, insofar as the expenditure revealed from the books seized from the assesses. We are not convinced that in the teeth of the presumption as to the truth of the documents seized, there is any further proof required under Section 37 of the Act; the department having failed to rebut such presumption.

12. The next question would be as to whether the entire claim of the assesses have to be allowed. The claim of the assesses with respect to the further expenditure, which is not supported by the documents seized in the course of search is two fold; first that there were books of accounts available in the computer even at the time of seizure which were never verified by the Department, and second, that the assesses have followed the mercantile system of accounting. The assesses claim that they have shown the liability accrued with respect to the development of the plots; which as of now could be substantiated by subsequent payments made in the subsequent years. We are not convinced that such a prayer can be allowed at this stage. First of all, it is to be noticed that the assesses never produced any books of accounts before the lower authorities. The Assessing Officer, even when a remand report was called for by the first appellate authority, has categorically stated that the assesses did not maintain any books of accounts. The further submission that subsequent payments were made on liabilities accrued in the assessment year cannot also be countenanced. The purchase of the property and the sale were carried within the course of 4-6 months. The entire expenditure said to have been made is for the development of the plots by filling up the same, building compound wall, etc. The claim is also with respect to the documents seized disclosing both cash and cheque payments; which itself reveal considerable expenditure having been made even to the extent of more than the purchase price. To substantiate the cash payments, the specific contention was that it was for purchase of red earth for filling up of the properties which payments were made on each lorry load being received. The Tribunal had also noticed the fact that the cash payments were all below Rs.20,000/- and there was no requirement for a cheque transaction or deduction of tax at source. There could have been no liability, 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 subsequent years, considering the nature of the work carried out.

13. On the above reasoning, we have no hesitation to hold that the presumption under Section 132(4A) of the Act applies in favour of the assesses insofar as the expenditure being supported by the documents seized at the time of search. There is no need for a further proof under Section 37, since as we have found, the Assessing Officer did not endeavor to carry out an enquiry and investigation into the source of investment or the genuineness of the expenditure made. However, the presumption can have effect only to the extent of the documents seized and nothing further.

14. The Departmental appeal filed for the assessment year 2007-08, i.e. ITA No.263/2014, would stand rejected. With respect to ITA Nos.22, 51, and 114 of 2015, the questions of law with respect to the deletion of additions made on account of disallowance of expenditure, on the basis of the presumption available under Section 132 (4A) though answered against the Revenue and in favour of the assessees, it is made clear that the allowance of expenditure would be confined to the amounts revealed from the seized documents, whether it be cash or cheque payments. In such circumstances, the disallowance deleted by the Tribunal for the assessment year 2008-09 in the case of M/s. Right Hand Developers India (P) Ltd. would stand revived to the extent of Rs.1,23,44,050/-. With respect to M/s. Damac Holdings Pvt. Ltd. for the assessment year 2008-09, the disallowance deleted by the Tribunal would stand set aside and it would be revived to the extent of Rs.1,35,39,893/-.

These appeals are ordered accordingly. Parties to suffer their respective costs.

[Citation : 401 ITR 495]