The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that the power of enhancement under Section 251(1) of the Income Tax Act is restricted to an issue or source of income considered by the Assessing Officer, expressly or by clear implication, during assessment proceedings; and the CIT(A) cannot introduce and assess a new issue not dealt with by the Assessing Officer, and such matters, if otherwise permissible, must be examined through Sections 263, 147 or 154 of the Income Tax Act.
The ITAT also affirmed that amounts received by the taxpayer under the joint development agreement as security deposits were business receipts, and since the taxpayer was neither a registered shareholder nor a beneficial shareholder of the payer company, Section 2(22)(e) of the Income Tax Act could not be invoked in its hands.
Further, where the taxpayer’s entitlement under the Joint Development Agreement (JDA) was only to receive 16,500 sq. mtrs. of constructed area, the Assessing Officer could not substitute the ready reckoner or stamp duty value of the entire plot of land as the consideration for taxing business income. The taxable consideration had to be derived from the terms of the JDA and not from the market value of the whole land parcel, added the Tribunal.
The Division Bench comprising Saktijit Dey (Vice President) and Arun Khodpia (Accountant Member) observed that the issue taken up by the CIT(A) for enhancement did not emerge from the assessment order and was not examined by the Assessing Officer. It noted that even the impugned order of the CIT(A) recorded that “the AO did not examine other components of the financial statement,” which showed that the matter had not been considered at assessment stage.
Relying on Shapoorji Pallonji Mistry vs. CIT [(1958) 34 ITR 342 (Bom)], the Tribunal observed that the power of enhancement under Section 251(1) is confined to matters considered expressly or by clear implication by the Assessing Officer, and does not extend to a new source of income or a fresh issue not processed by the Assessing Officer.
Accordingly, the Tribunal held that the CIT(A) acted beyond jurisdiction in reducing the WIP and enhancing income on that basis. It observed that, at the highest, such issue could be examined through Sections 263, 147 or 154, if permissible in law, but not by way of enhancement under Section 251(1).
On the Revenue’s challenge to deletion of the Section 2(22)(e) addition, the Tribunal noted that the issue was already covered by the appellant’s own case for AY 2009-10, where it had been held that the security deposit constituted a business receipt and that any deemed dividend, if at all, could be taxed only in the hands of the shareholder. Since the appellant was neither a registered shareholder nor a beneficial shareholder, no addition could be made in its hands.
On the addition relating to the JDA, the Tribunal observed that the subject land was stock-in-trade and not a capital asset, and that the nature of the transaction under the development agreement could not justify adoption of the ready reckoner value of the entire plot as the appellant’s income. The Tribunal approved the CIT(A)’s view that the consideration under the JDA was linked to 16,500 sq. mtrs. of constructed area and that the amount taxable was Rs. 24,75,00,000, not the market value of the entire land parcel.
The Tribunal therefore allowed the appellant’s appeal against enhancement and dismissed the Revenue’s appeal on both substantive additions, namely Section 2(22)(e) and the alleged additional JDA consideration.
Briefly, a partnership firm, filed its return for AY 2012-13 on September 28, 2012 declaring total income of Rs. 22.85 crores. The return was processed and assessment under Section 143(3) resulted in two principal additions: Rs. 17.51 lakhs under Section 2(22)(e) as deemed dividend, and Rs. 17.66 crores as additional value of consideration on the joint development agreement on protective basis.
On appeal, the CIT(A) deleted both additions. On Section 2(22)(e), the CIT(A) held that the security deposits received under the joint development agreement were business receipts and that the appellant was neither a registered shareholder nor a beneficial shareholder of SMPL; therefore, the addition could not be sustained. On the addition of Rs. 17.66 crores, the CIT(A) held that the AO incorrectly substituted the stamp duty value of the entire plot in place of the consideration actually flowing under the JDA. The CIT(A) observed that the appellant was entitled only to 16,500 sq. mtrs. of constructed area, had quantified the consideration at Rs. 24.75 crores, and that applying the market value of the entire land parcel was incorrect.
Separately, during appellate proceedings, the CIT(A) noticed that although the appellant had offered Rs. 12 crores as additional income during survey under Section 133A on account of unexplained cash expenditure, it had capitalized the same as work-in-progress in the books. The CIT(A) issued notice under Section 251(1) and enhanced the assessment by reducing work-in-progress by Rs. 11.96 crores. The appellant challenged this enhancement, contending that the issue of capitalization of the disclosed amount in WIP had never been examined by the Assessing Officer and therefore could not be introduced by the CIT(A) as a new source or new issue under Section 251(1).
Appearances:
AR, Naresh Jain, for the Appellant/ Taxpayer
CIT-DR, Arun Kanti Datta, for the Respondent/ Revenue
