Presumption u/s 132(4A)-No further proof of expenses recorded in books seized was required-HC

Presumption u/s 132(4A)-No further proof u/s 37 of expenses recorded in books seized was required as department failed to rebut presumption-High Court

Prelude:
Section 132(4A) provides for the presumption that where during the course of a search proceedings, any books of account, documents, money, bullion, jewellery or other valuable article or thing is found in possession or control of any person, then such books/documents etc. belong to such person and the contents of such books of account/documents are correct.

The question arose if the further proof u/s 37 of the Act of the expenses recorded in books of account seized was required?

ABCAUS Case Law Citation:
ABCAUS 2151 (2017) (12) HC

The Challenge/Grievance:
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (Revenue/Department) against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) deleting the addition giving benefit of presumption u/s 132(4A) of the Income Tax Act, 1961 (the Act).

Brief Facts of the Case:
The instant judgment involved two assesses with the similar facts and the questions of law raised. Both the respondent assesses were engaged in the business of real estate; purchase of landed property, development and sale thereof.

Assessments were initiated on the basis of the search conducted in the residence of the Directors of both the Companies under Section 132 of the Act. The assesses raised objections with respect to the search and seizure and the subsequent proceedings, which were negatived by the first appellate authority (FAA/CIT-A) and the Tribunal , against which no appeals were filed.

The instant controversy was related to addition made by the Assessing Officer (AO), who disallowed a major portion of amounts claimed to had been expended on developing the property.  

The Assessing Officer found that the persons(vendors) who had sold the land to the assesses had in their returns already claimed expenditure for leveling the properties. The agreement entered into between the vendors and the assesses specifically provided for leveling the property, so as to carry out measurement. According to the AO, when the claim of the vendors had already been allowed, there was no reason why the assessees, the subsequent purchaser should again expend money on the property for development.

The assesses claimed benefit of the presumption available under Section 132(4A) of the Act. The first appellate authority in the context of both assesses allowed the claims to the extent of the cheque payments as disclosed from the documents seized from the premises and disallowed it for the balance payments which were made in cash. However, The Tribunal allowed the entire expenses as claimed by the assesses.

Aggrieved by the order of the Tribunal, the Department had filed an Income Tax Appeal before the Hon’ble High Court.

The Substantial Questions of Law framed/pressed for determination:

The questions of law raised in both the appeals were  as to

(1) Whether the presumption under Section 132(4A) ought to have been confined to the seized materials and even with respect to the seized materials? and

(2) Whether the Tribunal was justified in not having put the assessee to proof under Section 37 of the Act?

Contentions made on behalf of the Respondent Assessees:
The assessees claimed that further development was required, as otherwise they would never have obtained the value they did within a period of 4-6 months. The properties purchased were marshy lands lying far below the road level and the leveling done by the vendors were marginal; only to facilitate measurement. Considerable amounts were expended for filling up of the properties, building a compound wall and making it fit for construction; which were supported by the various documents seized from the assesses on the search conducted under Section 132 of the Act.

It was submitted that the value addition made by the assesses, in fact resulted in the properties fetching such huge returns in a few months. The assessees even after the expenses obtained considerable profits, which were reflected in their returns.

It was argued that since the presumption under Section 132(4A) had not been rebutted by the Department, the assessees were entitled to the entire expenditure as supported by the documents.

With respect to the question of law as to whether it had to be confined to the documents seized, it was submitted that there were books of accounts available in the computers which were never looked into by the Department. It was also claimed that the assessees were following the mercantile system of accounting and many payments were made in the subsequent years by cheque, which the assessee would be able to substantiate before the Assessing Officer. In fact, documents seized would reveal such liability of the assessees, which had been satisfied in the subsequent years, but however accrued in the subject assessment year itself.

Observations made by the High Court:

The Hon’ble High Court observed that the questions of law raised were only with respect to the amounts that had to be allowed as expenditure.

It was observed that the Assessing Officer had proceeded on a mere presumption in computing the amounts, which the assessee would have expended for developing the property. The AO worked out the total expenditure and apportioned it to the total area arriving at the cost expended per cent, which was absolutely no basis for such a computation.

The Hon’ble High Court also rejected the findings of the Assessing Officer’s finding that the vendors of the property had spend already for leveling the property and hence, there was no requirement for the assesses to make the expenditure at the extent claimed.

It was observed that Section 132(4A) provides for presumption, inter alia, of the contents of books of accounts and other documents found in the possession or control of any person in the course of search to be true, and the presumption applies both in the case of the Department and the assessee and could be rebutted by either.

The Hon’ble High Court observed that the AO as had been noticed by the Tribunal did not endeavor to carry out an enquiry as to the source of investment and genuineness of the expenditure but proceeded on mere conjectures and totally ignored the seized documents which contained evidence of cheque payments and vouchers of cash payments effected in pursuance to the development of the lands. The AO also did not verify the source of income for such expenditure. The fact that the sale price was astronomical as against the purchase price again raised a valid presumption in favour of the contention of the assessee that, but for the development of the property to a considerable extent this would not have been possible. Especially when there was no unusual spurt in land prices during that short period. The Assessing Officer also did not embark on an enquiry to that end.

The Hon’ble High Court opined that in such circumstances, it could not be said that the presumption in favour of the assessees cannot be permitted, insofar as the expenditure revealed from the books seized from the assesses.

The Hon’ble High Court was not convinced that in the teeth of the presumption as to the truth of the documents seized, there is any further proof required under Section 37 of the Act; the department having failed to rebut such presumption.

With respect to the question whether the entire claim of the assesses had to be allowed. The Hon’ble High Court noted that the claim of the assesses with respect to the further expenditure, which was not supported by the documents seized in the course of search was two fold; first that there were books of accounts available in the computer even at the time of seizure which were never verified by the Department, and second, that the assesses have followed the mercantile system of accounting. The contention that the liability accrued with respect to the development of the plots could be substantiated by subsequent payments made in the subsequent years. In view of the fact that the assesses never produced any books of accounts before the lower authorities.

The Hon’ble High Court observed that the entire expenditure said to have been made is for the development of the plots by filling up the same, building compound wall, etc. The claim was also with respect to the documents seized disclosing both cash and cheque payments; which itself revealed considerable expenditure having been made even to the extent of more than the purchase price. To substantiate the cash payments, the specific contention was that it was for purchase of red earth for filling up of the properties which payments were made on each lorry load being received. The Tribunal had also noticed the fact that the cash payments were all below Rs.20,000/- and there was no requirement for a cheque transaction or deduction of tax at source. There could have been no liability, hence, accrued in the course of the assessment year for the developmental activities carried on within the period of 4-6 months, which would have been settled by the assesses in the subsequent years, considering the nature of the work carried out.

The Hon’ble High Court opined that on the above reasoning, the presumption under Section 132(4A) of the Act applied in favour of the assesses insofar as the expenditure being supported by the documents seized at the time of search. There was no need for a further proof under Section 37, since the Assessing Officer did not endeavor to carry out an enquiry and investigation into the source of investment or the genuineness of the expenditure made. However, the presumption can have effect only to the extent of the documents seized and nothing further.

Decision/ Conclusion/Held:
The questions of law with respect to the deletion of additions made on account of disallowance of expenditure, on the basis of the presumption available under Section 132 (4A) answered against the Revenue and in favour of the assesses. It was clarified that the allowance of expenditure would be confined to the amounts revealed from the seized documents, whether it be cash or cheque payments.

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