2006 (12) TMI 189 - AT - Income Tax

Block Assessment - Third party statement and unsigned agreement - difference between undisclosed purchase consideration and disclosed consideration - search and seizure operations u/s 132 - sale of 22 acres of land - addition of short-term capital gain - interest income - HELD THAT - In our opinion, there is no valid seized material representing addition of Rs. 1.49 lakhs towards undisclosed purchase consideration. It is only on surmise basis and statement recorded from third party, K. Madhava Reddy, and M/s Shilpa Homes (P) Ltd. This cannot be acted upon. The Circular No. F. No. clearly refrains the AO from recording confessional statement during the course of search and seizure and survey operations and also warns the AO not to attempt to obtain any confessional statement as to the undisclosed income, and any action contrary shall be viewed adversely. It also states that the AO should rely upon the evidence and material gathered during the course of search. Here, in the present case, the evidence is only agreement which reflects the purchase consideration at Rs. 2.40 crores and the recorded statement shows the sale consideration of 22 acres at Rs. 3,62,18,000. The third party statement and unsigned agreement cannot be acted upon. Further, the loose papers found during the course of search at the premises of K. Madhava Reddy are a dumb form having no evidential value. No addition can be made on the basis of noting on loose sheets in the absence of corroborative material. The Revenue has not found any circumstantial evidence in the form of any investments in cash, jewellery or others. They found only Rs. 6,73,610 in cash at the assessee's place. The assessee is not expected to explain the loose papers found at the premises of K. Madhava Reddy. Further, there is no evidence for the payment of money to the assessee by any party other than entered in the books of accounts. Similarly, there is no evidence for the payment of money towards purchase consideration by the assessee to M/s K.M.R. Estates Builders (P) Ltd. other than Rs. 91 lakhs. The AO failed to establish the payment of Rs. 2.40 crores as purchase consideration for the acquisition of 22 acres of land and he has failed to prove the payment. Hence, we have no other alternative but to rely on the books of accounts maintained by the assessee according to which the purchase consideration was Rs. 91lakhs and this has properly tallied with the sworn statement of the assessee. The sale consideration for the sale of 22 acres of land for which the assessee is not a party and there is a valid agreement to which the assessee is a party and the payment in this agreement properly tallies with the books of accounts maintained by the assessee. Therefore, in our opinion, the sale consideration is properly disclosed by the assessee and the difference is interest for the delayed payment. This plea of the assessee, in our opinion, is having merit. The valid agreement cannot be said that it is an after though since it is the part of seized material. The assessee is justified in offering the difference between Rs. 1,15,52,148 and Rs. 91,00,000 as undisclosed income at Rs. 24,52,148, Since we have already held that there is no purchase consideration of Rs. 2,40,40,000 there is no question of computing the short-term capital gain on the difference of sale consideration of Rs. 3,62,18,000. Accordingly. we allow the grounds taken by the assessee. In the result, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Addition of Rs. 1.49 crores as undisclosed purchase consideration.
2. Addition of short-term capital gain and interest income based on the sale of 22 acres of land.

Detailed Analysis:

1. Addition of Rs. 1.49 crores as undisclosed purchase consideration:

The CIT(A) confirmed the addition of Rs. 1.49 crores, being the difference between the undisclosed purchase consideration of Rs. 2.40 crores and the disclosed consideration of Rs. 91 lakhs. The AO based this on an unsigned MoU found during a search at the premises of the assessee's business associate. The MoU indicated a transaction for purchasing 95 acres and 5 guntas of land for Rs. 2.40 crores. However, the assessee recorded only Rs. 91 lakhs in its books. The AO treated the difference as undisclosed income spread over two assessment years.

The assessee argued that the unsigned MoU lacked evidentiary value and was not found at its premises. The Department failed to prove the veracity of the documents seized from other premises. The AO relied heavily on the statement of Mr. K. Madhava Reddy, which was later retracted. The Department did not find any asset or cash corresponding to the alleged undisclosed income.

The Tribunal noted that the unsigned MoU was found at the residence of K. Madhava Reddy, and not at the assessee's premises. K. Madhava Reddy retracted his statement, and there was no corroborative evidence linking the loose papers to the assessee. The Tribunal held that the unsigned agreement had no evidential value and that the AO failed to establish the link between the loose papers and the seized material. The Tribunal concluded that the addition of Rs. 1.49 crores was based on surmises and conjectures and deleted the addition.

2. Addition of short-term capital gain and interest income based on the sale of 22 acres of land:

The CIT(A) confirmed the addition of short-term capital gain of Rs. 93,62,148 and interest income of Rs. 3,63,704. The AO found that the assessee was entitled to receive Rs. 3,62,18,000 for the sale of 22 acres of land, as per an agreement dated 25th March, 1997. The AO computed the difference between the cost of purchase (Rs. 2.40 crores) and the sale consideration, arriving at Rs. 1,21,78,000, segregating it into short-term capital gain and interest income.

The assessee argued that the MoU dated November 1996 was unsigned and lacked evidentiary value. The Department did not prove the payments purportedly made as per the MoU. The assessee contended that the sale consideration of Rs. 1,15,52,148 was correctly recorded in its books, and the difference between the sale consideration and purchase price (Rs. 24,52,148) was rightly offered to tax.

The Tribunal noted inconsistencies in the AO's determination of the sale consideration and short-term capital gain. The AO was not firm on whether the consideration was Rs. 1,15,52,148 or Rs. 3,62,18,000. The Tribunal observed that the AO failed to establish the nexus between the loose slips and the seized material. The Tribunal held that the valid agreement dated 1st January 1997, which tallied with the books of accounts, should be relied upon. The Tribunal concluded that the sale consideration of Rs. 1,15,52,148 was properly disclosed, and the difference of Rs. 24,52,148 was rightly offered to tax. The addition of Rs. 93,62,148 as short-term capital gain and Rs. 3,63,704 as interest income was deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions of Rs. 1.49 crores as undisclosed purchase consideration and Rs. 93,62,148 as short-term capital gain along with Rs. 3,63,704 as interest income. The Tribunal emphasized the lack of corroborative evidence and inconsistencies in the AO's findings, relying on valid agreements and entries in the assessee's books of accounts.