2019 (2) TMI 168 - AT - Income Tax

Treatment of undisclosed investment on purchase of property - as per assessee transactions are business transactions and the loss sustained by the assessee should be allowed - loss sustained should also be allowed to be carried forward u/s 71 - Held that - We notice that the assessee had declared and accepted that the value of the property purchased by him from Mr. Jaipal Reddy was at ₹ 42.84 lakhs. At the same time, he claims that the above funds were arranged from the customers as advances. Since, assessee has not brought any cogent material in support of the above claim, we are inclined to determine the purchase cost of the property at ₹ 42.84 lakhs. Accordingly, ground No. 2 is rejected. Loss sustained should also be allowed to be carried forward u/s 71 - as considered the profit & loss statement drawn by the assessee. The assessee records the purchase cost as per the actual cost agreed with Mr. Jaipal Reddy but declared sales value as per the registered sale deed, thereby, declaring huge loss. We are also not in a position to accept since the purchase cost is declared on actual agreed price but the sales values are declared as per registered sale deed, which is not the actual sale price. Since, in this AY, AO has only made addition u/s 69, we can only adjudicate on this aspect. Since the assessee has accepted the purchase price and AO has made the addition u/s 69, we direct the AO to allow the assessee to declare the value of closing stock based on the purchase price. Since the cost of purchase is treated as investment in land, the assessee is allowed to carry forward the unsold value of land as closing stock as determined above. The assessee cannot treat the difference between purchase price and sales price as loss and is also not eligible to carry forward as business loss u/s 71. Accordingly, the grounds raised by the assessee on this issue are partly allowed.

Issues Involved:
1. Addition of undisclosed investment in property.
2. Treatment of business loss and its set-off against income.
3. Determination of profit from trading activities.
4. Carry forward of business loss under Section 71.
5. Validity of addition based on unexecuted agreements.

Detailed Analysis:

1. Addition of Undisclosed Investment in Property:
The primary issue revolves around the addition of undisclosed investments in properties purchased by the assessee. During a survey under Section 133A at the premises of Shri Beereddy Jaipal Reddy, papers indicating the assessee's involvement in property transactions were found. The Assessing Officer (AO) added ?42.84 lakhs as undisclosed investment based on these documents and the sworn statement of Mr. Jaipal Reddy. The assessee contended that the purchase was made at the registered value of ?10.67 lakhs and that any additional amount was sourced from advances received from customers. However, the AO did not accept this explanation and maintained the addition.

2. Treatment of Business Loss and Its Set-off Against Income:
The assessee argued that the trading activities involving the sale of plots should be considered, and the loss incurred should be set off against the assessed income under Section 71. The CIT(A) observed that the assessee did not maintain proper books of account, and receipts and payments were made in cash. The CIT(A) upheld the AO's decision to adopt the purchase value as per the impounded material, stating that allowing the claimed loss would result in assessed income being less than the returned income.

3. Determination of Profit from Trading Activities:
The assessee proposed two methods of treating the trading activities and the undisclosed investment. The first method was based on the registered purchase value, and the second on the value mentioned in Mr. Jaipal Reddy's sworn statement. The Tribunal noted that the assessee accepted the purchase price of ?42.84 lakhs but did not provide evidence for the claimed advances from customers. Consequently, the Tribunal determined the purchase cost at ?42.84 lakhs and directed the AO to allow the closing stock value based on this purchase price.

4. Carry Forward of Business Loss Under Section 71:
The Tribunal addressed the assessee's plea to carry forward the business loss. It was determined that the difference between the purchase price and the sales price could not be treated as a loss eligible for carry forward under Section 71. The Tribunal allowed the assessee to carry forward the unsold value of the land as closing stock but did not permit the carry forward of the claimed business loss.

5. Validity of Addition Based on Unexecuted Agreements:
The assessee contended that the AO wrongly considered an undisclosed investment of ?9,22,050 based on an unexecuted agreement for purchasing a plot in the name of his wife. The Tribunal noted that the agreement was not executed and was later canceled. The addition based on this unexecuted document was deemed incorrect, and the Tribunal directed its deletion.

Separate Judgments for Different Assessment Years:
- AY 2009-10: The Tribunal partly allowed the appeal, directing the AO to determine the closing stock value based on the purchase price and rejecting the claim for business loss carry forward.
- AY 2010-11: Similar directions were given, with the Tribunal allowing the AO to disallow an amount under Section 69 and determine the profit based on the conversion value of the sales.
- AY 2011-12: The Tribunal directed the AO to follow the same method as in AY 2010-11 for determining profit and additional investment, allowing the appeal for statistical purposes.

Conclusion:
The Tribunal's judgment addressed the issues of undisclosed investment, business loss treatment, profit determination, and the validity of additions based on unexecuted agreements. The appeals for AYs 2009-10 and 2010-11 were partly allowed, while the appeal for AY 2011-12 was allowed for statistical purposes.

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