2014 (11) TMI 375 - AT - Income Tax

Issues not properly adjudicated by the CIT(A) - Levy of penalty u/s 271A - Admission of additional evidence Unexplained investment in respect of improvement of these two properties u/s 69B Income to be assessed as profit and gains of business or capital gains Held that - The entire matter needs re-examination at the end of the AO - So far as addition under Section 69B made by the CIT(A) and his observation with regard to the head of income and levy of penalty u/s 271A is concerned, all these aspects were not considered by the AO - The CIT(A) made these additions and observations without allowing any specific opportunity to the assessee which cannot be said to be justified - the issue with regard to the source of cost of improvement also needs examination - The issue whether the income from sale of property is to be assessed under the head capital gains or business income also needs examination because from the details submitted by the assessee - one property at GK-1 was purchased by the assessee on 2.4.2006 for ₹ 43,00,386/- and assessee claimed to have incurred the expenditure for improvement amounting to ₹ 1,22,98,550/-. The property is sold on 31.3.2008 - Another property was purchased on 10.1.2007 for ₹ 18,69,638/-, cost of improvement is claimed at ₹ 61,48,700/- and the property is sold on 30.1.2008 - it certainly requires examination whether the profit/loss from the sale of those two properties is assessable under the head capital gains or business income- the matter is to be remitted back to the AO for re-examination of whole issue and pass a speaking order Decided in favour of revenue.

Issues Involved:
1. Deletion of addition by CIT(A) due to lack of evidence for cost of improvement.
2. Admission of additional evidence (valuation reports) by CIT(A).
3. Addition of Rs. 35,00,000/- as undisclosed investment under Section 69B by CIT(A).
4. Classification of income as business income instead of capital gains.
5. Imposition of penalty under Section 271A.

Detailed Analysis:

1. Deletion of Addition by CIT(A):
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 1,34,20,036/-, representing 75% of the cost of improvement disallowed by the Assessing Officer (AO) due to the assessee's failure to furnish bills of the cost of construction during the assessment stage. The AO had allowed only 25% of the claimed cost of improvement based on the available receipts and vouchers.

2. Admission of Additional Evidence:
The Revenue argued that the CIT(A) wrongly admitted two valuation reports from a government-approved valuer as evidence of the cost of construction during the appellate stage, despite the AO's objection that the conditions specified in Rule 46A were not met. The CIT(A) overruled the AO's objections and accepted the additional evidence, which led to the acceptance of the assessee's claimed improvement costs.

3. Addition of Rs. 35,00,000/- as Undisclosed Investment:
The CIT(A) made an addition of Rs. 35,00,000/- as unexplained investment, noting that the assessee had shown withdrawals of Rs. 1,50,00,000/- from the bank but claimed improvement costs totaling Rs. 1,84,47,250/-. The assessee argued that this addition was made without giving a show cause notice or adequate opportunity to be heard, and it was contrary to law and facts.

4. Classification of Income:
The CIT(A) held that the income from the sale of properties should be assessed under the head 'profit and gains of business' instead of 'capital gains' as shown by the assessee in the return. The assessee contended that this reclassification was done without proper jurisdiction and opportunity for representation.

5. Imposition of Penalty under Section 271A:
The CIT(A) imposed a penalty of Rs. 25,000/- under Section 271A for the assessee's failure to maintain books of account, considering the income as business income. The assessee argued that this penalty was imposed without specific opportunity and was beyond jurisdiction.

Tribunal's Decision:
The Tribunal observed that the AO provided inadequate opportunity to the assessee to furnish complete bills of cost of improvement, as the notice was issued on 15th December 2010, and the assessment order was passed on 30th December 2010. Therefore, the CIT(A) was justified in admitting the additional evidence. However, the Tribunal noted that the CIT(A) should have allowed the AO another opportunity to comment on the additional evidence.

Citing the Hon'ble Delhi High Court's decision in CIT Vs. Manish Build Well (P.) Ltd., the Tribunal emphasized the need for strict compliance with Rule 46A when admitting additional evidence. The Tribunal found that the CIT(A) made the addition under Section 69B and reclassified the income without giving specific opportunities to the assessee, which was unjustified.

The Tribunal concluded that the entire matter required re-examination by the AO, including the source of cost of improvement and the proper head of income. The Tribunal set aside the issues raised by both the Revenue and the assessee and remanded the matter to the AO for a fresh examination and a speaking order, ensuring adequate opportunity for the assessee to be heard.

Conclusion:
The appeals by both the Revenue and the assessee were deemed allowed for statistical purposes, and the matter was remanded to the AO for re-examination and passing of a speaking order in accordance with the law.

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