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Judgment
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.
In precise, the facts of the case is that the respondents-assessees 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 50% 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.
There was a search u/s 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 seized:
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 No. of shares held Date of payment Amount paid
shareholder Saleconsideration
received @ 183 per share
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 Rs. 47,58,000/-
22/9/1995 Rs. 25,62,000/-
Rajini Reddy 40000 Rs. 73,20,000/- 22/9/1995 Rs. 29,28,000/-
29/9/1995 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. 120 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. 10,16,640/- 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/-
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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.
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. Seshaiyer Vs. Commissioner of
Income Tax, , 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 possibly be reached, as held by a Division Bench of the Punjab and Haryana High Court in the case of Ved Prakash Vs.
Commissioner of Income Tax, . 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.
Since all the questions raised in these appeals are answered against the revenue and in favour of the assessees, these appeals are dismissed.