Decision Cited :

In ITO v. Diamond Investment Properties ITA no. 5537/Mum/2009, the flats sold to related parties at a price much lower than the price charged from the other parties.

In Neelkamal Realtor & Erectors India (P) Ltd. v. DCIT (2013) 38 taxmann.com 195 (Mum) and ACIT v. Rustom Soil Sethna ITA no. 5086/Mum/2014, the ITAT has held that when the assessee offered an explanation for charging lower price in respect of some of the flats sold by it, the AO without controverting such explanation cannot make addition to income of assessee by applying rate of another flat sold by it.  

In K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) the Apex Court has held that burden of proving an understatement or concealment of income is on the Revenue. It cannot be done on presumption. 

Similarly, in CIT v. Shivakami Co. (P) Ltd. (1986) 159 ITR 71 (SC) and CIT v. Godavari Corporation Ltd. (1993) 200 ITR 567 (SC), the court held that the burden is on the Revenue to prove under-statement of the consideration.

In ACIT v. Metro Construction Company 2013 (7) TMI 687 (Mum.) hon’ble ITAT held that if there were evidences that certain flats were sold for “on money”, there was no evidence that such “on money” was charged in other flats too. Therefore, it cannot be said with certainty that for  the flats  for which no evidence either way was found, any “on money” payment has been made. This order of ITAT subsequently stands affirmed by the Hon’ble Bombay High Court. Where Bombay High Court has held that addition of “on money” cannot be made on suspicion.

 Acelegal analysis :

This judgement reinforces the principle that the judicial opinion is against any estimation of “on money” purely on estimation and in absence of any specific information or evidence. The courts have always leaned in favour of taxing “real income” instead of “notional income”. The presumption and presupposition applied against the specific legal mandate is not easily upheld by courts.

Facts of the case :

The assessee is a partnership firm, engaged in the business as a builder and developer. During the year under consideration, the assessee sold various buildings / gala which included building no. 3 and 10. The market value of building no. 3 was Rs.138,14,500/- and building no. 10 was Rs.135,55,000/-. However, the sale value of Building no. 3 was Rs.425,00,000/- (i.e. Rs.5,025/- per sq.ft.) and building no. 10 was Rs.160,00,000/- (i.e. Rs.1,948/- per sq.ft.). Both the buildings were sold at more than Stamp Duty Valuation.  

The assessee submitted that in case of sale of building no. 3, the buyer was occupying the said building on “leave and license” basis approx. from last 18 months and the plant and machinery were already fastened to earth. Besides that the assessee also handed over possession of approx. 12000 sq.ft. of adjoining plot for exclusive use of the buyer. Therefore, the said building was sold to buyer at a lumpsum price of Rs.4.25 crs. These special characteristics were not present in building no.10 and hence, there was a reason for difference in sale price with building no. 10.  

AO' s contention :

The AO rejected assessee’s submission on the grounds that (i) the cost of installed machinery is Rs.4.22 crs. which have been acquired and installed in the year of purchase. In the period prior to sale or during the period where the building was leased to assessee machinery valued only Rs.83,195/- (ii) the Ward Inspector reported that the open area was not exclusively used by the buyer and only old wooden logs were found in the said area (iii) building no. 3 was sold at higher price than building no. 10 and was sold four months prior to building no. 10. Accordingly, AO estimated “on money” income on sale of building no. 10 and made addition. CIT(A) confirmed the addition.

 ITAT’s verdict :

The AO has on suspicion about the “on money” made the addition by observing variation of rates between two buyers. The onus is upon the AO to prove that the assessee received “on money” on sale of building no. 3. The AO made the addition of difference in sale price without any evidence in his possession. No enquiry was made from purchaser of building no. 10. No enquiry from other  purchaser was carried out by the AO, though the assessee has furnished the details of all the purchasers. Thus, the addition was made by AO merely on assumption and presumption basis and without any evidence.