2023 (7) TMI 272 - AT - Income Tax

Assessment u/s 153A - incriminating material found during the course of search or not? - treatment of profit on sale of flats as long term capital gain was treated as business income and also denying interest deduction u/s 36(1) (iii) - HELD THAT - No infirmity in the order of the LD CIT (A) in holding that there is no incriminating material found during the course of search to treat the income offered as capital gain on sale of flats as business income of the assessee. Such additions made without any reference to incriminating material, cannot be permitted as it is against the provisions of the Act and also the decisions rendered by Hon ble Bombay High Court 2015 (5) TMI 656 - BOMBAY HIGH COURT and confirmed by Hon ble supreme court in 2023 (4) TMI 1056 - SUPREME COURT . Disallowance u/s 36(1) (iii) - Also here there is no incriminating material on record to justify such disallowance. The said disallowance has been made by the AO without making reference to any incriminating material which is evident from the assessment order. Correct head of income - sale of investment property - intention of the assessee - Nature of gain or profit on sale of 6 out of 7 flats sold by the assessee - Profit and Gains of Business or Profession OR Income from Capital Gain - HELD THAT - Intention shown from the main object clause of memorandum of Association and conduct of the assessee shown from the accounting treatment and period of holding of the apartments are also another factor showing as investor looking to earn income from rental and appreciation in the value of assets held by it. In view of above facts we hold that conduct of the assessee is more like to earn the lease rent from the property and not to exploit these properties as business assets. Assessee has not undertaken any other projects of similar nature which could even remotely indicate that the assessee had intention and mindset of a businessman looking to earn profits by taking risks and engaging in multiple activities at once. The position that the assessee s activities are in the nature of an investor and it is not acting as a builder and developer was accepted by the revenue in the course of regular assessment proceedings u/s 143(3) Principle of res judicata v/s consistency - It is true that the principle of res judicata does not apply to income tax proceedings as each assessment year is treated as a distinct unit, but that does not mean consistency in manner in which assessment proceedings are conducted should be ignored especially when there are no material changes in the facts and circumstances of the case. The authorities are not permitted to take a different view in subsequent years when the law and facts are the same as earlier years. As in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT stated that an accepted position in one assessment year cannot be allowed to be changed in a subsequent assessment year where the parties have allowed that position to be sustained by not challenging the order. We reversing the order of the ld CIT (A) direct the AO to treat the proceeds received on sale of properties as income from Capital Gains . Accordingly, the Appeal filed by the assessee is allowed. Addition u/s 69C - addition based on a word document found during the course of search proceedings and statement recorded u/s 132(4) of the Act in relation to such word document - HELD THAT - In the case at hand, the document relied upon by the department was not even a part of regular books of account but merely a loose document which did not even have a date of such transaction which are essential features of an authentic document. No doubt it is a computer document so there is no question of any signature or handwriting, to that extent the argument of the ld AR is rejected. No doubt same also needs to be corroborated. Case of Lavanya Land Pvt. Ltd. 2017 (7) TMI 141 - BOMBAY HIGH COURT is also directly applicable to the facts of the case at hand as observed that the department had not placed on record any evidence to prove that huge amounts of cash had actually exchanged hands. In the present case also, there is no material on record to show that payment of Rs. 20,00,000/- was actually made to a person named Nazir as mentioned by Mr. Vishal Singh in his statement recorded u/s 132(4) of the Act which was subsequently retracted. Accordingly, the addition made u/s 69C of the Act by the Assessing Officer and sustained by ld CIT A is reversed and addition is directed to be deleted. Disallowance u/s 14A r.w.r. 8D - Suo moto disallowance made by assessee - sufficiency of own funds - HELD THAT - Assessee had sufficient non-interest bearing funds to cover the amount of investment in mutual funds which yielded exempt income. Accordingly, presumption is available that the investment was made by the assessee out of its own funds and no interest bearing funds were utilized and no expenditure incurred in order to earn exempt income. This leads to a conclusion that no interest disallowance is warranted under the provisions of section 14A r.w.r. 8D of the Act. Administrative expenses u/r 8D (2) (iii) - We direct the ld AO to restrict the disallowance to the extent of only 0.5% of average of exempt income yielding investments. In this case the average of such mutual fund investments - Therefore, we partly allow the appeal of the assessee.

Summary

Issues Involved:
1. Taxability of income from the sale of flats.
2. Disallowance of interest expenditure under Section 36(1)(iii).
3. Additions under Section 153A for 'unabated years'.
4. Treatment of unsold flats as 'Stock-in-Trade' vs. 'Investment'.
5. Addition of Rs. 20,00,000 under Section 69C for unexplained expenditure.
6. Disallowance under Section 14A read with Rule 8D.

Summary:

1. Taxability of Income from Sale of Flats:
The primary issue was whether the income from the sale of flats should be taxed under 'Profits and Gains of Business or Profession' or 'Capital Gains'. The Tribunal held that the assessee's intention was to lease out the apartments and not to sell them as part of a business activity. The assessee had shown the property as an investment in its books, and there was no substantial evidence to prove that the assessee acted as a builder and developer. The Tribunal reversed the order of the Commissioner (Appeals) and directed the AO to treat the proceeds from the sale of properties as 'Capital Gains'.

2. Disallowance of Interest Expenditure under Section 36(1)(iii):
The Tribunal found no incriminating material to justify the disallowance of interest expenditure under Section 36(1)(iii). The disallowance made by the AO was not based on any incriminating material found during the search. The Tribunal upheld the decision of the Commissioner (Appeals) to delete the disallowance.

3. Additions under Section 153A for 'Unabated Years':
The Tribunal held that additions under Section 153A can only be made based on incriminating material found during the search. Since the AO's additions were not based on any such material, the Tribunal upheld the Commissioner (Appeals)'s decision to delete the additions for the 'unabated years' (A.Y. 2015-16 and A.Y. 2016-17).

4. Treatment of Unsold Flats as 'Stock-in-Trade' vs. 'Investment':
The Tribunal quashed the direction of the Commissioner (Appeals) to treat the unsold flat as 'Stock-in-Trade' instead of 'Investment'. The Tribunal held that the unsold flat, which was generating rental income, should be treated as an investment.

5. Addition of Rs. 20,00,000 under Section 69C for Unexplained Expenditure:
The Tribunal deleted the addition of Rs. 20,00,000 made under Section 69C. The addition was based on a word document found during the search and a statement recorded under Section 132(4). The Tribunal held that there was no corroborative evidence to prove that the expenditure was actually incurred, and the statement was retracted by an affidavit.

6. Disallowance under Section 14A read with Rule 8D:
The Tribunal directed the AO to restrict the disallowance under Section 14A read with Rule 8D to administrative expenses only, amounting to 0.5% of the average of exempt income-yielding investments. The Tribunal found that the assessee had sufficient non-interest-bearing funds to cover the investments, and no interest disallowance was warranted.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, partly allowing the appeal concerning disallowance under Section 14A, and dismissed the appeals filed by the Revenue.