2012 (4) TMI 468 - HC - Income Tax

ITAT deleted addition of Rs.5,60,750/-, Rs.4,50,600/- and Rs.8,12,350/- made by the Assessing Officer on the basis of the valuation report Held that - AO cannot make addition solely on the basis of the report of the DVO - no incriminating material was found during the course of search and the transactions were duly reflected in the returns filed by the assessee in the normal course against revenue. ITAT deleted addition made by the Assessing Officer on account of undisclosed investment Held that - Income in question had to be taxed in the hands of Association of Persons and the mere fact that the said income was taxed in the hands of individual members of Association does not bar the Income Tax Officer from taxing the Association of Persons - Order passed by the tribunal is perverse and an order of remit is passed to the tribunal to re-examine the question of taxability on account of the undisclosed investment in the purchase of property No.1028, Sector 15-II, Gurgaon in the hands of the respondent-assessee in favour or revenue. Undisclosed income in the block assessment proceedings has to be taxed at a flat rate - no matter whether the income has been assessed under the head income from business , income from other sources or income from property .

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of undisclosed investment.
2. Deletion of addition made by the Assessing Officer based on the valuation report.
3. Classification of income earned by the assessee from the sale and purchase of immovable property.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by the Assessing Officer on Account of Undisclosed Investment:
The first question addressed the deletion of addition made by the Assessing Officer (AO) on account of undisclosed investment. The AO noticed that the property No. 1028, Sector 15-II, Gurgaon was originally allotted to P.C. Gupta in 1989 for Rs. 8,19,310/-. However, it was sold to Sonali Jain, the daughter of the assessee, in 1994 for Rs. 4,00,000/-. The AO found it implausible that the property value would decrease by 50% in five years. The CIT(A) partly sustained the addition to the extent of Rs. 8,00,000/- by relying on the DVO's report. However, the tribunal observed that there was no direct evidence regarding the purchase of the property for Rs. 8,00,000/- and thus, the addition was not justified. The High Court found the tribunal's reasoning perverse, noting that Sonali Jain, a minor with no income, could not have afforded the property, and the property was effectively owned by the assessee. Consequently, the High Court remitted the issue back to the tribunal for re-examination.

2. Deletion of Addition Made by the Assessing Officer Based on the Valuation Report:
The second question involved the deletion of additions of Rs. 5,60,750/-, Rs. 4,50,600/-, and Rs. 8,12,350/- made by the AO based on the valuation report. These additions related to three properties: 102/C-9, Sector 8, Rohini; 216, Block D, Lok Vihar, Delhi; and 117/D-12, Sector 8, Rohini. The AO referred the matter to the valuation cell, which recomputed the purchase and sale prices, leading to the additions. The CIT(A) held that additions could not be made solely based on the DVO's report, especially in the absence of any material or evidence found during the search. The tribunal upheld this view, noting that no incriminating material was found during the search, and the transactions were reflected in the assessee's returns. The High Court agreed with the tribunal, emphasizing the lack of material evidence to support the AO's additions, and thus, question (b) was returned unanswered.

3. Classification of Income Earned by the Assessee from the Sale and Purchase of Immovable Property:
The third question concerned whether the income earned by the assessee from the sale and purchase of immovable property should be treated as business income. The High Court noted that in block assessment proceedings, undisclosed income is taxed at a flat rate, making the classification of income under different heads irrelevant. Therefore, the High Court concluded that question (c) did not require an answer, as the tax rate would remain the same regardless of the income classification.

Conclusion:
The High Court disposed of the appeal, remitting the issue of taxability on account of undisclosed investment in the purchase of property No. 1028, Sector 15-II, Gurgaon, back to the tribunal for re-examination. The tribunal's findings on the valuation report-based additions were upheld due to the lack of material evidence. The classification of income was deemed irrelevant for the purpose of block assessment. The appeal was thus disposed of with no costs.