No addition to income can be allowed for unexplained investment based on an unsigned agreement for sale of property
It has recently been held by the ITAT, Hyderabad in the case of R.Nalini Devi vs. Department of Income Tax, (ITA Nos. 930 and 931 of 2009) that no addition to income can be allowed for unexplained investment based on an unsigned agreement for purchase of property.
These were two appeals filed by the Revenue against two orders of CIT (A)-III, Hyderabad dated 3.6. 2009 and 11.12.2009 relating to the assessment years 2003 – 04 and 2004 – 05. Due to the presence of common issues in both the appeals, they were heard together and disposed of by a combined order for convenience.
Facts and circumstances of the case:
The assessee being an individual had income from business. For the relevant assessment year, the assessee filed his income tax return on 30.9.2003 stating a total income of Rs.1, 28,646/-. Later on, a search and seizure as per section 132 of the Income Tax Act was conducted at the residence of the assessee on 4.8.2005.
During such search and seizure operation, the department discovered a photocopy of an agreement for sale dated 19.5.2002 in the name of the assessee as purchaser and Smt. Nalini Devi, her two sons Dr. Basant Reddy and Mr. R. Prem Reddy as vendors for purchase of a piece of land measuring 2400 sq. yards at a total a consideration of Rs.1, 68, 00,000/- .
According to the terms of the agreement a sum of Rs.50 lakhs was agreed to be paid to the assessee as an advance to the vendor Smt. Nalini Devi and his sons. Moreover search was also conducted at the residence of the vendor Smt. Nalini Devi and similar agreement along with some other documents was also seized.
The AO initiated assessment proceedings as per section 153A of the Act after issuing notice under section 142(1) and 143(2) of the Act. During the assessment proceedings, Smt. R. Nalini Devi submitted copies of four registered sale deeds for purchase of the said property for a total consideration of Rs.22,98,000/-.
The AO relying upon the sale agreement seized from the residence of the assessee and the vendor Smt. R.Nalini Devi concluded that the assessee had purchased the property for an aggregate consideration of Rs.1,68,00,000/- and not at Rs.22, 98,000/- as stated in the registered sale deeds. The AO also relied upon the materials seized from the house of Smt. Nalini Devi and concluded that the assessee had incurred total expenses of Rs.109.48 lakhs which could only have been possible if the sale consideration had been Rs.1, 68, 00,000/-.
In view of the above, the AO treated the amount of Rs.1, 48, 52,000/- as unexplained investment in purchase of the land by the assessee and added the said amount to the total income under section 69 of the Act. The assessee being dissatisfied with the assessment preferred an appeal before CIT (A). The assessee produced evidence supporting the contention that the value of the property in question was that as was mentioned in the registered sale deed.
The CIT (A) held that the addition made as per 69 of the Act was not sustainable in law; as such passed a direction for deleting such addition. The grounds raised by the Revenue were rejected. The Revenue preferred an appeal before the second appellate authority.
Provisions of section 69 of the Income Tax Act:
Section 69 of the Act provides that if during a search conducted on the premises of the vendor of a property, cash is found which is explained by the vendor as consideration excess than what is stated in registered sale deed, the AO is at liberty to make addition of excess consideration in the hands of purchaser in the form of unexplained investment without examining the vendor.
Section 69 does not give any specific guideline regarding the extent of the discretionary power of the AO for treating an unexplained investment as income of the assessee. Therefore, an Assessing Officer should appreciate the evidences produced before him and then only make the addition. An Assessing Officer should not make the addition merely on suspicion without any supporting evidence.
Arguments on behalf of both the sides:
During the hearing before the first appellate authority, it was argued on behalf of the assessee that the seized agreement was only a photo copy and was not signed by the assessee. The original agreement was not found during search, from the premises of either the assessee or from that of the vendor Smt. Nalini Devi or at any subsequent time. As the agreement was also not signed by the assessee, it was not enforceable in law.
It was also contended that the agreement allegedly found during the search differed from the registered sale deed regarding the ownership and extent of land as well as the sale consideration. In the photocopy of the agreement for sale there were three owners but in fact the actual owner was Smt. R. Nalini Devi as per the registered sale deed. In the like manner, in the agreement the area of land was mentioned as 2400 sq. yards, whereas the actual area transferred as stated in the registered sale deed was 2450 sq. yards.
It was argued that the assessee denied the knowledge of the photocopy of his sale agreement found during the search, but the same was not recorded. The assessee filed an affidavit on 12.9.2005 before the DDIT, Investigation, Hyderabad alleging that the photocopy of the agreement was nothing but an evidence planted by a particular Officer of the search team during such search operation.
The assessee also submitted that the vendor Smt. Nalini Devi had denied about the authenticity of the copy of the sale agreement found during such search and stated that the property was sold for Rs.23.50 lakhs against which she received Rs.50, 000/- only as an earnest money. It was further contended that the paper slips and other documents seized from residence of Smt. R. Nalini Devi did not state the name of the assessee; as such the assessee was no way connected with them.
The Tribunal relied on the decision of the Hon’ble Supreme Court in K.P. Verghese,131 ITR 597 where it was held that the burden is upon the department to prove that the assessee has understated the value of the transaction of property and has made more payment than what has been stated in the registered sale deed. The judgment of the Hon’ble Supreme Court in Moosa S. Madha and another vs. CIT (89 ITR 65) stated that photocopies do not have much evidentiary value and they cannot be considered as sufficient evidence for making addition in assessment proceedings. The AO should bring further evidence to prove that the sale agreement was practically acted upon by both the parties.
In view of the above, the appeals filed by the Revenue were dismissed.