IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE

BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER

ITA Nos.255/Bang/2011 Assessment year : 2007-08

Smt. Jeeva Vadivelu, No.1, Doddabommasandra Vidyaranyapura Main Road, Bangalore 560 097. PAN : ACNPJ 9668E APPELLANT Vs. The Assistant Commissioner of Income Tax, Circle 6(1), Bangalore. RESPONDENT

ITA Nos.306/Bang/2011 Assessment year : 2007-08

The Assistant Commissioner of Income Tax, Circle 6(1), Bangalore. APPELLANT Assessee by Revenue by : : Vs. Smt. Jeeva Vadivelu, No.1, Doddabommasandra Vidyaranyapura Main Road, Bangalore 560 097. PAN : ACNPJ 9668E RESPONDENT

Shri R.E. Balasubramaniyan, C.A. Shri Saravanan B., Jt. CIT(DR) : : 21.08.2012 07.09.2012

Date of hearing Date of Pronouncement

ORDER

Per N.V. Vasudevan, Judicial Member

ITA 255/Bang/2011 is an appeal by the assessee, while ITA 306/Bang/2011 is an appeal by the revenue. Both these appeals are

directed against the order dated 22.11.2010 of the CIT(Appeals)-III, Bangalore relating to A.Y. 2007-08.

ITA Nos.255 & 306/Bang/11 Page 2 of 22

2.

The grounds of appeal raised by the assessee read as follows:-

The Appellant objects to the order of the Commissioner of Income Tax (Appeals) -III, Bangalore, on the grounds that: 1. The order of the Learned Commissioner of Income Tax (Appeals) is erroneous and opposed to facts and law in as much as the right of the Appellant to treat an asset as Investment or stock in trade was not recognized. 2. The Learned Commissioner of Income Tax (Appeals) erred in not considering gains on sale of property held for more than three years as Long term Capital Gains. 3. The Learned Commissioner of Income Tax (Appeals) erred in not allowing the fair market value of the Apartments as on the date of entering into the Joint Venture Agreement to be deducted from the sale consideration. 4. The action of the Learned Commissioner of Income Tax (Appeals) in upholding the unsubstantiated contention of the Assessing officer that the Appellant was in receipt of on money is erroneous inasmuch as he has himself recorded a finding of fact to the contrary. The Appellant prays for leave to add, modify, delete or introduce additional Grounds of Appeal at any time before the Appeal is disposed off.

3.

The grounds of appeal raised by the revenue read as follows:-

1. The order of the Learned CIT(A) is opposed to law and facts of the case and is based merely on conjuncture and surmises. 2. The CIT (A) erred in law and on the facts of the case in holding the entire additional turnover of Rs.83,60,865 can not be considered as profit and allowing further expenditure of Rs.41,80,432/- under the head Income from Business, on estimation basis without any proof regarding additional expenditure over and above the expenditure allowed by the AO.

ITA Nos.255 & 306/Bang/11 Page 3 of 22

3. The CIT(A) erred in disturbing the trading account redrawn by the AO and allowing a gross margin of 50% of additional receipts of Rs.83,60,865/-, especially when the opening stock, the purchases, the sales and the closing stock have been worked out by the AO based on the facts of the case. There is no material on record to justify the relief of Rs.41,80,432/given by the CIT(A). 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and, I or delete any of the grounds mentioned above.

4.

The facts and circumstances giving rise to the above appeals are as The assessee is an individual. She was originally carrying on

follows.

business of trading in timber and granites under the name and style, Mahesh Timbers & Granites. selling properties. The assessee was also purchasing and

For the A.Y. 2007-08, the assessee filed return of

income declaring total income of Q 13,02,725. The assessee filed auditors report u/s. 44AB of the Act along with the return of income, wherein the nature of business has been described by the auditors as dealer in timber and granites. Along with the return of income, the audited profit & loss account and the balance sheet as on 31.03.2007 were also filed. The profit & loss account of the assessee as on 31.03.2003 and the trading account as on that date was as follows:-

ITA Nos.255 & 306/Bang/11 Page 4 of 22

PROFIT & LOSS A/c FOR THE YEAR ENDED 31ST MARCH 2001 INCOME: Gross proceeds TOTAL EXPENDITURE Direct Expenses Administrative Expenses Financial Charges Depreciation 15,202,400.00 1,888,294.00 74,691.25 175,375.00 ------------------TOTAL 17,340,850.25 ------------------Net profit transferred to capital account 1.803.764.75 3 4 5 2 Rupees 19,044,615.00 -----------------19,044,615.00 ------------------

Further, Schedule 3 of the P & L account attached to the return of income was as follows:SCHEDULE 3 Direct Expenses: Opening Stock Add: Purchases Less: Closing Stock 48,600.00 13,379,600.00 13,428,200.00 161,750.00 13,266,450.00

5.

The Assessing Officer wanted to verify the correctness of the

trading, profit & loss account as on 31.03.2007 filed by the assessee along with the return of income. The assessee could not substantiate the

opening stock disclosed in the trading account. The assessee could not also substantiate the purchases of Q 1,33,79,600 disclosed in the trading account, but could substantiate only purchases to the tune of Q 89,84,950. The closing stock also could not be substantiated by the assessee. In view

ITA Nos.255 & 306/Bang/11 Page 5 of 22 of the above discrepancies, the AO rejected the books of account as not complete and correct by exercising his powers u/s. 145 of the Income Tax Act, 1961 (the Act). The AO, thereafter, worked out a trading, profit & loss account on the basis of transactions that the assessee indulged in during the previous year. 6. During the previous year, the assessee had entered into following

transactions(categorized as A, B and C) :A. Property bought and sold within the Previous Year under assessment.

____________________________________________________________

ITA Nos.255 & 306/Bang/11 Page 6 of 22

7.

On the basis of the above details, the AO proceeded to recast the

trading & profit & loss account of the assessee. As can be seen from the aforesaid three charts which depict the sales done by the assessee during the previous year, the total sales were Q 1,06,83,750. The trading account filed by the assessee along with the return of income however showed sales to the tune of Q 1,90,44,615, the difference viz., a sum of Q 83,60,865 was presumed by the AO to be on-money received by the assesse in the transaction of sale shown in the books of accounts. It was the stand of the assessee before the AO that the financial statements were prepared by a C.A., and that the assessee does not know the basis on which the C.A. had given the sales figure in the audited trading, profit & loss account filed along with the return. It was the case of the assessee that the assessee

was not an educated lady and not aware of the finer aspects of accountancy. It was the plea of the assessee that the CA did not

cooperate with the assessee and also did not appear before the AO to give

ITA Nos.255 & 306/Bang/11 Page 7 of 22 explanation of various aspects of the trading, profit & loss account filed along with the return of income. 8. The assessee was also been engaged in the business of timber and

granites. This business had been discontinued in the year 2003. Though the assessee tried to plead before the AO that the difference in the receipts viz., Q 83,60,865 could be sale proceeds of timber business, but the assessee could not substantiate the same. The AO therefore adopted the sales figure at a sum of Q 1,90,44,615 as disclosed in the trading, profit & loss account filed along with the return of income. 9. With regard to the opening stock, the AO noticed that the assessee

purchased 6 properties as stated in Part B of the list of transactions done by the assessee during the previous year reproduced in the earlier part of this order. These properties had been purchased much earlier to the

previous year and the cost of acquisition by the assessee was a sum of Q 10,16,165. The assessee had claimed that she had incurred the following expenses on the aforesaid properties:-

10.

The assessee could not substantiate the expenses incurred on

construction of compound wall, conversion charges and filling of mud,

ITA Nos.255 & 306/Bang/11 Page 8 of 22 therefore the AO allowed a sum of Q 5,43,319 as expenses incurred on the aforesaid 6 properties and thus arrived at the opening stock of Q 15,59,484 (10,16,165 + 5,43,319). 11. As far as the purchases are concerned, the AO found that the

assessee could furnish evidence of purchases during the year only to the extent of Q 89,84,950. Therefore he did not accept the purchases of Q 1,33,79,600 given in the trading & profit & loss account filed along with the return of income. The AO adopted the purchases during the year of Q 89,84,950. 12. As far as the closing stock is concerned, the AO found that during

the previous year, the assessee had made purchases of Q 89,84,950 and out of such purchases, sales were made to the extent of Q 25,18,585. This will be evident from a perusal of Part A of the list of properties purchased and sold by the assessee during the previous year, which we have given in the earlier part of this order. 13. After excluding the aforesaid sales figure, the AO arrived at a closing

stock of Q 64,66,365. The AO recast the trading & profit & loss account and determined the income as follows:-

Thus the gross profit of the assessee was arrived at Rs. 1,49,66,546/-. The assessee had debited certain expenditure in the profit and loss

ITA Nos.255 & 306/Bang/11 Page 9 of 22 account. The following expenditure debited to the P & L account by the assessee was considered and allowed as deduction to arrive at the net profit.

14.

Before the AO, one of the stand taken by the assessee was that in

respect of Part B of the list of properties purchased and sold by the assessee given in the earlier part of this order, the properties were not held as stock-in-trade but were held as investments and were purchased long back without any intention of doing business in those properties. The

assessee therefore submitted that the properties have to be considered as investments and capital gain on the sale of these properties have to be computed. This plea was rejected by the AO and he held that the

properties were held by the assessee only as stock-in-trade and that the assessee acquired these properties only with an intention to do business. 15. The assessee also submitted that in respect of the Part B and Part C

of the list of properties purchased and sold by the assessee during the previous year set out in earlier part of this order, the same were converted as stock-in-trade only during the previous year and therefore as per the provisions of section 45(2) of the Act, the profit on this transaction should

ITA Nos.255 & 306/Bang/11 Page 10 of 22 be taxed partly as long term capital gain and partly as business income. Since the cost of the property and sale value of properties were similar there was no business income and only capital gain had to be computed. This plea was also rejected by the AO. 16. Another plea put forth by the assessee before the AO was that in

respect of transactions stated in Part C of the chart given in the earlier part of this order, the same comprised of 5 flats which was sold during the previous year. The assessee submitted that it owned a piece of land. The assessee entered into joint development agreement dated 20.10.03 with M/s. Nova Hamlet Ltd. As per the joint development agreement, the total built up area that could be constructed on the piece of land owned by the assessee was 28,880 sq.ft. The assessee agreed to sell 70% of undivided share of land of the piece of property owned by her to the developer in consideration of the developer constructing and delivering 8 apartments measuring total area of 8664 sq.ft. to the assessee. The 5 flats sold by the Assessee during the previous year were out of the 8 flats which the Assessee was to get from the Developer. The assessee submitted that the cost of acquisition of 5 flats should be allowed as a deduction in computing the business income of the assessee. This plea of the assessee was also rejected by the assessee. 17. Aggrieved by the aforesaid action of the AO, the assessee filed Before the CIT(A), the assessee

appeal before the CIT(Appeals).

explained as to how the CA refused to handle the case of the assessee and also how the assessee was not in a position to explain the basis on which the CA had filed the trading & profit & loss account filed along with

ITA Nos.255 & 306/Bang/11 Page 11 of 22 the return of income. The assessee again reiterated the plea that she had taken before the AO. The assessee however admitted that the business of dealing in timber and granite was discontinued long back and that the only business was the business of purchase and sale of property carried on by the assessee during the previous year. The submissions of the assessee before the CIT(A) were as follows:1. As far as transactions set out in Part-A of the Chart set out in the earlier part of this order, the Assessee conceded that the AO has taken the correct stand. 2. In respect of transactions in Part-B of the Chart set out in the earlier part of this order, the Assessee contended that the Assessee was holding the properties for a very long time, with some being held for more than 10 years and as such, they should be taxed as Long Term Capital Gains with indexation and not as Business Profits. 3. In respect of the transactions in Part-C of the Chart set out in the earlier part of this order, the Assessee submitted that cost of the land which was given away for joint development has no relevance in arriving at the gain on the transfer of the houses which the Assessee obtained as her share of joint development. It was contended that the Assessee entered into a Joint Development Agreement in the year 2003 with a Developer and as a consideration of parting with 70% of her interest in the land, the Assessee obtained the apartments which were sold during the year. It was contended that, by putting the Developer in possession of the land in part performance of the said Development Agreement, the Transfer of the land is deemed to have taken place within the meaning of the Section 2(47)(v) of the Income Tax Act and the commitment on the part of the Developer to hand over the specified number of Apartments to the Assessee at the end of the project should be treated as the consideration for the said Transfer of the land. It was contended that the cost of acquisition of the Apartments sold by the Assessee during the year should be taken as the fair market value of these apartments in 2003 and not the cost of the land as taken by the AO. 4. The assessee further submitted that the inaccuracies in the accounts were never denied by the Assessee since she was under the bona fide belief that the Chartered Accountant to whom she entrusted the work would have done everything correctly. The Assessing Officer in his order has also recorded a

ITA Nos.255 & 306/Bang/11 Page 12 of 22 clear finding of fact that the accounts and financial statements furnished by the Assessee are not reliable and has proceeded to complete the assessment to the best of his judgement. As such, the Assessing Officers view that the properties sold by the Assessee during the year were not shown as Investments in the Balance Sheet of the assessee is not reasonable. It was submitted that he cannot for his own convenience, place reliance upon a document which he himself had found to be unreliable. Having once rejected the accounts as unreliable and proceeded to make an assessment to the best of his judgement, he should have brought to tax, the transactions that came to his notice, under the proper heads of income. 5. The Assessee also objected to the addition of Rs.83,60,865 to the turnover considered by the AO as unreasonable. It was argued that once the accounts submitted by the Assessee are rejected as fabricated and unreliable, it is not open to the AO to rely upon the same statements again according to his convenience. Towards this, the Assessee relied upon the decision of the Andhra Pradesh High Court in the case of Indwell Constructions vs. CIT reported in (1998) 232 ITR 776, which has been referred to in 316 ITR 127 by the Punjab & Haryana High Court. 5.4. In the alternative, it was pleaded that even if it is assumed that the Assessee received on money during the course of real estate transactions, then it follows that the Assessee would have also paid similar amounts at the time of purchase. Accordingly, it was submitted that the amount to be brought to be tax, if any should only be a reasonable gross margin and not the entire amount as held by the AO. It was also submitted that it was incumbent upon the Income tax authorities to levy and collect only that tax that can be considered fair and just and the statute does not envisage that the citizen should be taxed at a higher amount, even if the assessee has erroneously declared a higher amount. In support of his arguments, reliance was placed upon the decision of the Gujarat High Court in the case of S.R. Koshti v CIT (276 ITR 1.65), which in turn has relied upon a few decisions of the Supreme Court.

18.

The ld. CIT(Appeals) firstly held that it was not possible to accept

that the properties sold by the assessee were held as investment and not as stock-in-trade of the business of the carried on by her. In this regard, the CIT(A) was also of the view that the details given by the assessee were sketchy and incomplete and that throwing the entire blame on the CA

ITA Nos.255 & 306/Bang/11 Page 13 of 22 cannot save the assessee. From the conclusions arrived at by the AO, he was of the view that the sales declared in the profit & loss account have to be explained only by the assessee. He held that there was a practice of receiving on-money in real estate transactions and that the CA would have taken these into account while preparing the annual statements. The

CIT(A) also held that the assessee should have taken due care of her affairs and cannot plead total ignorance. The CIT(A) was however of the view that only 50% of the additional turnover shown in the profit & loss account should be considered as income earned by the assessee and in this regard he gave the following reasons:-

5.7. However, it must also be noted that the Appellant has been a victim of some avoidable professional misguidance and has been made to suffer for the same. On the issue of assessable profits from the additional turnover, I am in agreement with the AR that the entire additional turnover amount of Rs.83,60,865 taken by the AO cannot be considered as profits. A perusal of the transactions recorded at guidance value of the Registering Authority during the year would show that the Appellant has been making a minimum of 7% gross margin on the properties bought and sold during the same year and a gross margin of anywhere from 10% to 75% on properties held for more than 3 years. This would obviously not include the on money component in the hands of the Appellant. The Appellant as noted earlier has been investing in properties only in the outskirts of Bangalore. As such, the gross profit margin in respect of different properties also appears to depend on the level of urbanization and growth of the city in that direction and hence not consistent with the period of holding. At the same time, she has carried out some developmental work like land fillings, conversion, betterment, construction of walls etc, which would have their own costs. Considering that these activities were carried out in the semi urban areas, through unorganized labour, it is possible that proper bills and vouchers may not be readily available for the same. The decisions relied upon by the AR also seem to support the view that, where the assessee runs the risk of being over assessed due to mistake or misconception, then it would be open to the

ITA Nos.255 & 306/Bang/11 Page 14 of 22

authorities to use their powers and bring to tax the correct amount. 5.8. In view of the foregoing discussions and based on the decisions cited and considered, I would therefore hold that the ends of justice can be said to have been met if a Gross Profit margin of 50% of the additional turnover of Rs.83,60,865 is treated as income in the hands of the Appellant. The appellant herself has shown a Gross Profit margin of 7% to 75% as shown in Para Tables described in Para 2 of this order. The results shown by the Appellants books are not reliable and the AO has rightly rejected them under section 145 of the Act. However, after considering the submissions made by the AR of the Appellant, it would be reasonable and just to apply a Gross Profit margin of 50% of the additional turnover of Rs.83,60,865 as income in the hands of the Appellant. This profit margin shall also cover as an estimate any leakages of unexplained investment made by the appellant in order to earn the turnover of Rs.83,60,865/-. Such a margin is justified and reasonable considering the GP margin shown by the Appellant and increasing the same by the on money component which the Appellant would have received. Accordingly, I would hold that an amount of Rs.41,80,432/- is the amount which should be added as net taxable income in the hands of the appellant. Since the Assessing Officer has already allowed Depreciation to the extent of Rs.1,75,375/- and other expenses of Rs.38,99,025/- as claimed by the Appellant, no further deductions need to be considered. The other items taxed by the AO are sustained. 5.9. Accordingly, I delete a sum of Rs.41,80,432/- and sustain the remaining amount of Rs.63,10,678 (Net Taxable Income assessed @ Rs.1,04,91,11O - Rs.41,80,432) as net taxable income.

19. 20.

Thus, the ld. CIT(Appeals) allowed partial relief to the assessee. Aggrieved by the order of the CIT(Appeals) in not treating the sale of

Part B properties as giving rise to income under the head capital gains and not allowing the cost of construction of the 5 flats sold by the assessee during the previous year as given in Part C of the chart and not deleting the entire addition of Q 83,60,865, the assessee has preferred the present

ITA Nos.255 & 306/Bang/11 Page 15 of 22 appeal before the Tribunal. Aggrieved by the order of the CIT(A) in

reducing addition on account of on-money from Q 83,60,865 to Q 41,80,432, the revenue is in appeal before the Tribunal. 21. We have heard the rival submissions. We will deal with the issues in

seratium. (A) Whether the sale of properties described in Part B of the chart could give rise to business income or income under the head capital gains? 22. On the above issue, the ld. counsel for the assessee has filed an

affidavit before us. In the affidavit so filed, the assessee has submitted that the items of properties given in Part B of the chart were acquired without any intention of holding them as stock-in-trade, but with an intention to hold them as investments. It has further been stated that the CA for the reasons best known to him has declared the transactions in respect of the aforesaid properties as business transactions. 23. We have considered the affidavit filed by the assessee and are of

the view that the same cannot be sufficient to hold that the properties in Part B of the chart were held by the assessee only as investments. In this regard, we find that in the submissions dated 05.10.10 filed by the assessee before the CIT(A), the assessee has clearly mentioned that the lands were purchased with an intention of holding them till such time there was a prospect of making profits. It has also been mentioned that when there was ready purchaser for the property, they would be purchased and sold within a short span of time. Even in respect of the property that was

ITA Nos.255 & 306/Bang/11 Page 16 of 22 given for joint development, the assessee has mentioned that they were held with a view to make profits at a time when there were good prospects. In our opinion, the intention at the time of purchase as to, whether the property is investment or stock-in-trade, is the most relevant and important criterion. The intention of the assessee appears clear that even at the time of acquisition of the properties, selling the same at a profit was the motive. We therefore hold that the properties were held as stock-in-trade by the assessee and not as investments. Consequently the sale proceeds of the properties mentioned in Part B of the chart have to be treated as sale proceeds/receipts of the business of buying and selling of properties of the assessee. In that event the inclusion of the sale proceeds of these

properties in the profit and loss account as receipts by the AO is upheld. (B) Whether the sale of flats as stated in Part C of the chart given earlier, should be treated as giving rise to capital gains or income from business? (C) In case the sale of properties set out in Part C of the chart is treated as giving rise to income from business, whether the assessee will be entitled to deduction on account of cost of construction of the flats? 24. On the issue (B) referred to above, we have already held that the

sale of 5 flats will be treated as business done in the course of business of the assessee and therefore they have to be treated as sale proceeds of the business and not giving rise to capital gains. 25. As far as issue (C) is concerned, we find the following facts from the

record. The assessee had entered into joint development agreement dated

ITA Nos.255 & 306/Bang/11 Page 17 of 22 20.10.03 whereby it was agreed that 70% of the land will be given to the developer and the assessee would retain 30% of the land. Out of

constructions put up by the developer, the assessee will be entitled to 8664 sq.ft. of built up area in the form of 8 flats in consideration for the assessee selling to the developer 70% of the land area. 26. The ld. counsel for the assessee had submitted before us that in

case of joint development, the transfer would be deemed to have taken place when the transferee gets the right to make use of the land or enjoy its usufructs. It was further submitted that the intention should be that the property should pass irrespective of the payment of consideration. In this regard, our attention was drawn to the decision of the Hyderabad Bench of the ITAT in the case of Maya Shenoy v. CIT 124 TTJ 692 HYD. The Tribunal in the aforesaid case after analyzing the provisions of the Transfer of Property Act came to the conclusion that when possession is handed over in part performance of an agreement for sale and if the assessee has right to receive the consideration, there would be an effective transfer. 27. Further reference was also made by the ld. counsel for the assessee

to the decision of the Honble Bombay High Court in the case of

Chaturbhuj Dwarkadas Kapadia v. CIT 260 ITR 491 (Bom) for the
proposition that when the possession of the property is handed over to the developer, transfer would take place in a joint development agreement. In this regard, the ld. counsel for the assessee also drew our attention to the joint development agreement whereby the developer was given a licence to enter upon the property for the purpose of development. Reference was also made to clause 19.1 and 20 of the joint development agreement

ITA Nos.255 & 306/Bang/11 Page 18 of 22 whereby the developer had right to sell 70% of the undivided share of land. It was submitted by him that transfer if at all, had taken place on 20.10.03 i.e., the date of joint development agreement falling within the assessment year 2004-05. 28. It was further submitted by the ld. counsel for the assessee that

while computing income on sale of 5 flats which came to the share of the assessee, the cost of construction should be allowed as deduction by showing the same in the debit side of the trading account. In this regard, the ld. counsel also filed a report of the registered valuer, a copy of which is placed at pages 101 to 113 of the assessees paperbook. The registered valuer has given a valuation of estimated cost at Q 625/sq.ft. to be debited to the trading account. The assessee has also filed application to admit the valuers report as additional evidence. It has been submitted that the CA due to his professional negligence and lack of cooperation had not given the papers to the assessee. Therefore the assessee could not file these documents before the lower authorities. 29. The ld. DR submitted that the property in question should be

considered as falling within the parameters of section 45(2) of the Act. According to him, the property was originally investment and later on was brought in as stock-in-trade of the business by the assessee and therefore under the provisions of section 45(2) of the Act, capital gain has to be computed by reducing from the fair market value as on the date of conversion into stock-in-trade and cost of acquisition of the property. The remaining sum has to be taxed as business income. He therefore

ITA Nos.255 & 306/Bang/11 Page 19 of 22 submitted that taxing the gain on sale of flats obtained under the joint development agreement in this year was justified. 30. We have considered the rival submissions. At the outset, we reject

the argument of the ld. DR regarding applicability of section 45(2) of the Act. As we have already held, the assessee even at the time of acquiring these properties had the intention of carrying on the business in those properties. Therefore they were to be treated as stock-in-trade and not as investments. The question of the same having been converted as stock-intrade of business does not arise. 31. As far as computation of income on sale of 5 flats is concerned, we

are of the view that the revenue authorities have proceeded to compute the income of the assessee incorrectly. In our view, in the A.Y. 2004-05, there would be income arising out of joint development agreement dated 20.10.03. Such income would have to be arrived at by reducing from the value of 8664 sq.ft. of built up area which the assessee was to receive from the developer the market value of 70% of the land as on the date of the joint development agreement. This conclusion is on the basis that a sale by the assessee to the developer had happened during the previous year relevant to A.Y. 2004-05. It appears that the revenue has not taken any steps to tax the income for the A.Y. 2004-05. We are not, however,

concerned at this stage on the above aspect. We are now concerned with the question as to whether the assessee should get the benefit of cost of construction of the 5 flats sold during the previous year. In our view, the assessee should be allowed the aforesaid benefit. Admittedly, the

assessee had to pay a cost for acquiring these 5 flats. The Assessing

ITA Nos.255 & 306/Bang/11 Page 20 of 22 Officer in the order of assessment has not given any cost to these flats. In our view, therefore the cost of 5 flats has to be worked out and for this purpose of working out the cost of acquisition of 5 flats, the matter is remanded to the Assessing Officer. The AO will verify the cost from the developer, who developed the properties and arrive at the cost of 8664 sq.ft. This cost should be debited to the trading account. The assessee

has retained 3 flats out of 8 flats and we direct the cost of these 3 flats lying in the stock with the assessee has to be added as part of the closing stock in the trading account. Similarly, 30% of the value of the land (retained by the Assessee) should also be shown as cost in the debit side of the profit and loss account. The value for this purpose will be 30% of the value for which the Assessee purchased the entire property which was given for joint development. Out of the 30% undivided share of land retained by the Assessee, the value attributable to the extent of undivided share of land sold by the assessee (along with the 5 flats) should be shown as receipt on the credit side of the profit and loss account. The AO is directed to work

out the trading account by following the aforesaid procedure and in accordance with law and the directions given earlier. Thus, issue (C) is decided accordingly. (D) Whether a sum of Q 83,60,865 should be considered as sales in the trading account? 32. On the above issue, we find that the assessee had pleaded that the The CA who

figures given by the CA could not be explained by her.

prepared the trading, profit & loss account also did not assist the assessee in the course of assessment proceedings. This aspect is accepted even

ITA Nos.255 & 306/Bang/11 Page 21 of 22 by the CIT(A). The sale as reflected in the documents available on the record is only to the tune of is Q 1,06,83,750. The AO has accepted the sales figure as shown in the trading, profit & loss account filed along with the return of income. When it comes to purchases, the AO has not taken the purchases as reflected in the trading & profit & loss account filed along with the return of income. Besides the above, there is no evidence on record to show that the assessee had in fact received a sum of Q 83,60,865. The only basis for the AO has been the trading & profit & loss account filed along with the return of income. The AO rejected the books of account as unreliable, but has however chosen to accept the sales figure as reflected therein, because it suits the purpose of the revenue. This approach, in our view, is unacceptable. As rightly contended on behalf of the assessee, there is no evidence on record to show that the assessee was in receipt of a sum of Q 83,60,865. The reliance placed by the ld. counsel for the assessee on the decision of the Honble Supreme Court in the case of K.P. Varghese v. ITO 131 ITR 597 SC and the Karnataka High Court decision in the case of N. Seenappa v. CIT 163 ITR 253

(Karn) fully support the plea of the assessee in this regard.

33. Another reason given by the revenue authorities for upholding the

aforesaid addition is that there is a practice of on-money prevailing in real estate transactions. In our view, without evidence on record, just on the basis of practice prevailing in the trade, adverse inference cannot be drawn against the assessee.

ITA Nos.255 & 306/Bang/11 Page 22 of 22 34. We are, therefore, of the view that the sales figure as reflected in the

trading account should be reduced by a sum of Q 83,60,865. 35. The AO is directed to recast the trading, profit & loss account as

drawn by him with the modifications as stated in this order and work out the income of the assessee. 36. Thus, the appeal of the assessee is partly allowed, while appeal of

the revenue is dismissed. Pronounced in the open court on this 7th day of September, 2012. Sd/Sd/-

( JASON P. BOAZ )

( N.V. VASUDEVAN )

ACCOUNTANT MEMBER

Judicial Member

Bangalore,
Dated, the 7th September, 2012. Ds/Copy to: 1. 2. 3. 4. 5. 6. Assessee Revenue CIT CIT(A) DR, ITAT, Bangalore. Guard file By order

Senior Private Secretary ITAT, Bangalore.