Section 115BBE provisions are not applicable when a source of income is determined

Fact and issue of the case

This appeal filed by the assessee is directed against the order dated 16.06.2022 of the Learned Commissioner of Income Tax (Appeals)-12, Hyderabad relating to AY 2021-22.

Facts of the case, in brief, are that the assessee is an individual and partner in M/s. Yashoda Helathcare Services Pvt.Ltd and derives partner’s remuneration and interest on capital. He filed his original return of income on 28.12.2021 declaring total income of Rs.8,56,33,070/- A search and seizure operation u/s. 132 of the I.T. Act was conducted in the case of Yashoda Group on 22.12.2020, during which the case of the assessee was also covered. In response to notice u/s. 153A of the I.T. Act, the assessee filed his return of income admitting additional income of Rs.5,07,48,000/- under the head “business & profession

During the course of assessment proceedings, the AO observed that during the course of search proceedings, certain loose sheets were seized vide Annexure YSH/PDR/RES/01. Page number 38 of the Annexure YSH/PDR/RES/01 is a voucher which represents an amount of Rs.1,50,00,000/- paid to Dr. G. Abhinav in cash. Page number 37 represents the details of sale of land at Malakpet, Hyderabad wherein an amount of Rs.2,58,98,100/- was received in cash. Further a loose sheet numbered 31A represents Rs. 1,00,00,000/- in the name of Shri G. Devender Rao. On perusal of the above it was noticed that, a sum of Rs.5,08,98,100/-(Rs.1,50,00,000 + 2,58,98,100 + 1,00,00,000) are cash payments pertaining to various concerns and individuals of the group for the current financial year 2020-21, which are related to Shri G. Devender Rao.

The AO further noted that when the assessee Shri Devender Rao Gorukanti was confronted with the above details of cash receipts/payments pertaining to current financial year 2020-21, he, in his sworn statement u/s 132(4), Primafacie stated that these payments and receipts are yet to be accounted in the books of accounts and accordingly admitted an amount of Rs. 5,00,00,000/- as his additional undisclosed income for the current year i.e. FY 2020-21 on account of seized evidences gathered during the Course of search and seizure proceedings.

The AO therefore, asked the assessee to support his claim of receipt of Rs.5,07,48,000/- from business. In response to the same, the assessee furnished a detailed note in respect of the above said issue which the AO has reproduced in the assessment order and which reads as under:-

Thus the receipts mentioned above have been reflected in the regular books. The fact that the receipts form part of the regular income is clear from the following facts. The said income formed a part of his regular income for the previous year and was subject to advance tax which was paid before the end of the previous year as per provisions of the Act. It is not that after discovery of any incriminating evidence regarding real estate activities that assessee came forward and included the income in the regular return. The same amount was utilized for making certain payments. That it is a regular income is evidenced by books of account maintained by the assessee. Even during the current previous year 2021-22, the assessee continues the said business. The nature of business is not purchase and sale of land The activities were in the area of acting as a facilitator in various land deals which is usual in this line of business. It is submitted that under Section 34 of Indian Evidence Act entries in books of account regularly kept in course of business are relevant whenever they refer to a matter into which the Court has to enquire.. The principle underlying this provision are that the books of account regularly kept in course of business are presumed to be correct. There is a strong presumption that the transactions recorded therein are truthfully done. This also includes memoranda books if regularly kept in course of business. It was so held in the case of CIT Delhi v woodwords Governors India P Ltd 179 Taxman 326 SC that accounts regularly maintained in the course of business are to be taken as correct. This would demonstrate that real estate income is a regular activity during the period. Hence the same cannot be equated with undisclosed income by any reckoning being a part of regular income. It is clarified that the provisions of section 115BBE which appear in Chapter VI[68,69,69A,69B,69C and 69D] cannot be applied in this case as the income falls under section 14 which appears in Chapter-IV. The income can only be assessed as business income. Hence the provisions of 115BBE shall not be applicable as there is a direct nexus between source of income and outgo of such income duly evidenced by books of accounts.

However, the AO was not satisfied with the arguments advanced by the assessee. He noted that Shri G. Devender Rao (Director) takes care of all the financial activities of Yashoda Group. Yashoda Group, apart from providing healthcare services also invested in real estate through number of legal entities who are regularly filing returns of income. In the process of negotiating real estate transactions on behalf of the group companies, the assessee came to be associated with a number of persons within and outside Hyderabad who regularly transact in real estate. During the FY.2020-21, the assessee claimed that he had an opportunity to involve and negotiate number of real estate deals. For withdrawing in this deal, the assessee has received Rs. 5,07,48,000/- through certain parties viz, Shri Bommanagiri Jaipal, Shri Circoori Prabhakar and Shri Srinivas Telugu as commission.

The AO further noted that subsequently, Shri Bommanagiri Jaipal, Shri Circoori Prabhakar and Shri Srinivas Telugu also filed affidavits individually supporting the contention of the assessee. On perusal of the affidavits filed by the above three persons, the AO noticed that all of them had stated that they know Shri Devender Gorukanti since several years and apart from hospital business he is involved in real estate business. He noted from the affidavits that Shri Devender Gorukanti used to participate and negotiate in real estate transactions, settlement of buying and selling of lands situated at Medchel, Velimela, Vikarabad etc., and later on withdrawn from the deal for which he has received certain amount as commission. However, he noted that the affidavits do not specify the quantum,. mode of payment and dates of payment etc. Therefore, he was of the opinion that these are self-serving documents which cannot be relied upon.

In view of the above, the AO rejected the arguments advanced by the assessee and held that the assessee could not substantiate his claim that the sources for the expenses is from real-estate business. He, therefore, treated the amount of Rs.5,08,98,100/-as unexplained expenditure u/s. 69C of the I.T.Act and brought to tax the same as per the provisions of section 115BBE. 7. Before the ld.CIT(A), the assessee made elaborate arguments and made the following submissions which has been reproduced by the ld.CIT(A) in his order and which reads as under:-

Before giving detailed submission on individual issues, the appellant submits it explanation as furnished before AO. The same will give an insight to the Hon’ble CIT(A) as to the state of affairs. The same is extracted below from the Para No.3.3 of the assessment order

Modus operandi of real estate business: As to the modus operandi of the business, it is submitted that the appellant in addition to taking care of the financial activities of the Yashoda Group had also invested in Real Estate through a number of legal entities of the group who are regularly filing their returns on income. It is not as if the appellant was a stranger to the business. Being intimately associated with real estate business over the years, in the process of negotiating real estate transactions on behalf of the group companies and others the appellant came to be associated with a number of persons who regularly transact in real estate. During the Fin. Year 2020-21, the appellant had an opportunity to involve and negotiate a real estate deals involving certain parties from outside Hyderabad. During some of these negotiations, the appellant was persuaded to withdraw from the transactions in consideration for a lump-sum amount in different occasions and earned about Rs.5 Crores in various land deals. Hence, this amount received by the appellant, which could be in the nature of non-compete fees and taxable under section 28 which has close nexus with real estate business. The amount was of Rs 5,07,48,000/- was accounted for in regular books of the appellant for the Fn.Year 2020-21 relevant to the Asst. Year 2021-22. This Income from real estate business was included in the return for Asst. Year 2021-22 and taxes were paid on the same before the end of the previous year. The fact of the matter was that the receipts of Rs 5,07,48,000/- has been reflected in the appellant’s regular books and from the same, the appellant made the payments of Rs.5,08,98,100. Despite these documentary evidences by way of regular books and affidavits filed by some of the business associates through whom the income was earned, the learned AO glossed over these evidences merely on the ground that the same is not satisfactory without spelling out the reasons therefore. This makes the order infirm and not sustainable.

Income is regular source: It is submitted the income from the real estate business is formed a part of the appellant’s regular income for the previous year and was subject to advance tax which was paid before the end of the previous year as per provisions of the Act. Even during the F.Y 2021-22 also, the appellant continues the said business and paid the advance tax on the said income.

supported by Books of account: The appellant recorded the income from the real estate activity in the regular books of account. The same are produced before the assessing officer during the course of hearing. It is submitted that, under Section 34 of Indian Evidence Act, entries in books of account, regularly kept in course of business are relevant. Whenever they refer to a matter into which the Court has to enquire. The principle underlying this provision is that the books of account regularly kept In course of business are presumed to be correct. There Is a strong presumption that the transactions recorded therein are truthfully done. This also includes memoranda books if regularly kept In course of business. It was so held in the case of CIT Delhi vs Woodwords Governors India P Ltd 179 Taxman 326 SC that accounts regularly maintained in the course of business are to be taken as correct. This would demonstrate that real estate Income is a regular activity during the period. Hence the same cannot be equated with undisclosed income by any reckoning being a part of regular income. Despite this regal stipulations supported by the decision of the Apex Court, the learned AO, without bringing any cogent adverse evidence against the appellant simply ignored the submissions with a general observation that the same is not satisfactory. Therefore, the best evidence which appellant could adduce is its books supported by affidavits from his business associates .

From the facts of the case at hand, it is clear that the AO has acted unreasonably in rejecting the genuine explanations offered by the appellant in respect of the source of income without any enquiry for the source of income and application thereof. Such recourse primarily hedged on surmises, conjecture, assumptions, presumptions. The addition so made is unsustainable in the eyes of law and thus deserves to be quashed

Observation of the court

We find the Bangalore Bench of the Tribunal in the case of Ragavs Diagnostic & Research Centre Pvt. Ltd.(supra) while deciding an identical issue has observed as under:-

We will look at the provisions of section 69C which are as follows:-

Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year : Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.

From the plain reading of the section, it is clear that when an assessee offers no explanation or the explanation offered is not satisfactory in the opinion of the AO, then the amount of such expenditure is to be taxed as income u/s. 69C of the Act. The satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. It would then mean that justification for exercise of the power has to be found by the authority by making a subjective satisfaction on the basis of objective material and such satisfaction must be reflected in the reasons recorded in writing while exercising the power. (Vide: Dee Vee Projects Ltd. v/s. Union of India & Ors., Writ Petition No.2693/2021, dated 11.02.2022 (Bombay High Court)). In the present case, the assessee is in the business of running a diagnostic centre and the only source of income is the receipts from patients which is stated to be the source for unexplained expenditure. That being the case the AO has not brought any contrary material on record to state that the source for the expenditure was other than from business income and has formed the opinion based on conjectures and surmises. While exercising the quasi-judicial functions, the administrative authorities have to reach satisfaction on the basis of material available and not on conjectures and surmises. The test of reasonableness has to be satisfied which in our view failed in the case under consideration. Therefore, we are of the view that the additional income offered cannot be taxed u/s. 115BBE and the impugned addition is hereby deleted. Accordingly the assessee is allowed to set off the current year loss against the additional income offered to tax as business income

The various other decisions relied on by the ld. counsel for the assessee also support his case to the proposition that provisions of section 69C r.w.s. 115BBE are not applicable to the facts of the present case. In view of the above discussion and in view of the detailed reasoning given by the ld. CIT(A) on this issue, we do not find any infirmity in his order directing the AO to tax the amount of Rs. 5,08,98,100/- under normal provisions of the Act. Accordingly, the same is upheld and the grounds raised by the revenue are dismissed.

In the result, the appeal filed by the revenue is dismissed.

Order pronounced in the Open Court on 31st May, 2023.