Addition on account of cash credit is not sustainable where the assessee has explained the total cash deposit in his Bank account.

1. This appeal is filed by the assessee against the order of the ld CIT(A), Ghaziabad dated 15.07.2015 for the Assessment Year 2011-12. Assessee has raised the following grounds of appeal:-

“1. That the Ld. CIT(A) has erred in substantially confirming the assessment order passed by Assessing Officer which was contrary to law and facts on record.

2. That the Ld. CIT(A) has erred in granting relief of only Rs.50,000/- to the assessee out of total addition of Rs. 8,20,000/- made by the Assessing Officer on account of cash credits in Syndicate Bank A/c and confirming the addition of Rs.7,70,000/- ignoring the documents / Explanation offered by the assessee.

3. That the Ld. CIT(A) has erred in law and on facts in treating the assessee as representative assessee of Shri Ashok Tyagi u/s 160 of the Income Tax Act. Infact, the provisions of section 160(1)(i) are not applicable and therefore, assessment was to be framed by the Assessing Officer directly in the name of non-resident Mr Ashok Tyagi.

4. That the Assessing Officer has erred in law and on facts treating the assessee as agent of non-resident Mr Ashok Tyagi without passing a specific order u/s 163 of the Income Tax Act.

5. That the Ld. CIT(A) has erred in law and on facts in treating the assessee as agent of the non-resident Mr Ashok Tyagi u/s 163 of the Income Tax Act without giving him any opportunity of being heard as to his liability in the capacity of being treated as agent and thus has violated the principles of natural justice.

6. That without admitting, even otherwise the Assessing Officer and consequently the Ld. CIT(A) has erred in not framing the separate assessment in the name of assessee in representative capacity of non- resident Mr Ashok Tyagi. Therefore, the order passed by the Assessing Officer is contrary to provisions of section 161(1) of the Income Tax Act. Hence, the same is liable to be set aside.

7. That the Ld. CIT(A) has erred in law and on facts in assessing the capital gain belonging to the non-resident Mr Ashok Tyagi in the hands of assessee in his Individual capacity.

8. That the Assessing Officer and consequently the Ld. CIT(A) has erred in not giving benefit of section 54F of the Income Tax Act in respect of capital gain of Rs. 56,55,874/-.

9. That the Assessing Officer and the Ld. CIT(A) have erred in not treating the land sold by Mr Ashok Tyagi (non-resident) as agricultural land so as to be outside the ambit of “capital asset” defined in section 2(14) of the Income Tax Act.

10. That the Assessing Officer and the Ld. CIT(A) have erred in not taking into consideration the cost of improvement incurred by Mr Ashok Tyagi in FY 1992-93 and 2000-01 in respect of land sold by him, while computing the amount of capital gain and therefore the calculation made by the Assessing Officer is contrary to the provisions of section 48 of the Income Tax Act.

11. That the Assessing Officer and consequently the Ld. CIT(A) has erred in law and on facts in not giving benefit of investment of Rs. 57,79,893/- made by Mr Ashok Tyagi in a residential flat situated at A-302, Alexandra, Sector-93B, Noida u/s 54F of the Act.

12. That the Assessing Officer and the Ld. CIT(A) have misdirected themselves in not treating the purchase of property by way of executing endorsement form F2 by the original allottee in favour of Mr Ashok Tyagi and endorsing allotment letter and all the receipts in his favour as purchase for the purposes of section 54F of the Act.

13. That the order passed by the Assessing Officer as confirmed by Ld. CIT(A) is contrary to law and facts on record and therefore liable to be set aside.”

2. Brief facts of the case are that the assessee is an individual, who filed his return of income of Rs. 1,62,127/- on 09.09.2011. Return of the assessee shows income from house property, business income and interest income. Assessee did not maintain any books of account. AIR information was received showing that the assessee has deposited cash aggregating to Rs. 66,41,000/- in his two bank accounts with Bank of India and Syndicate Bank during the financial year. Therefore, the case of the assessee was selected for scrutiny. The assessee was asked explain the deposit of cash. The assessee submitted that he has deposited cash of Rs. 53,21,000/- in Bank of India. The source of above deposit was sale of property made by one Shri Ashok Tyagi by whom the assessee was holding power of attorney. Shri Ashok Tyagi, residing in New York, authorized the assessee to sale the property. Full amount of sale of property in the form of Rs. 53,21,000/- in cash of Rs. and 63,20,000/- through cheque amounting in all to Rs. 1,06,41,000/- was deposited in the bank account of assessee and there from transferred to Shri Ashok Tyagi. The assessee submitted the copies of the sale deed showing above transaction and further copy of general power of attorney appointing the assessee as an agent of Shri Ashok Tyagi was also filed. Assessee has further deposited cash in his bank account with Syndicate Bank which represented the repayment of loan from Shri Pankaj Kumar to whom the loan was given on 13.10.2010. The copies of the bank accounts were also furnished. Assessee also furnished the confirmation of Shri Pankaj Kumar of the loan and its repayment, confirmation of Shri Ashok Tyagi towards the receipt of above sum stating that Shri Ashok Tyagi has authorized assessee to sale the parental agricultural land in village Burari, Delhi, received sale proceeds from the assessee. The assessee also explained that the balance sum was out of opening cash available with the assessee and sale of Honda City car. For sale of Honda City car in cash, the assessee submitted confirmation and PAN No of the buyer and documents of transfer of car. The assessee therefore, submitted that total cash deposited in his bank account are fully explained. The ld AO after considering the professional receipt and other income and thereafter reducing the expenditure and investment found with assessee as only balance available with him of Rs. 1,81,234/- and therefore, he could not have deposited the cash in his bank account of Rs. 13,20,000/- (-) Rs. 5,00,000/- remaining Rs. 8,20,000/- was added towards the cash deposit with Syndicate Bank.

3. With respect to the bank account with Bank of India, the ld AO accepted that the above amount is on account of sale of property of Shri Ashok Tyagi. The ld AO then proceed with the location of the property which is an urbanized village and therefore asset transferred is a capital assets u/s 2(14) of the Act and is chargeable to tax under the head capital gains. The assessee was asked to file the details of capital gain and deposit the taxes due thereon. Assessee submitted that the land sold is an agricultural land and is situated beyond 8 kms from Municipal limits of Delhi, therefore it is not a capital assets and hence transfer of it and gain arising from it is not chargeable to tax as capital gain. He submitted the certificate of Tehsildar and the map details to show his contentions. In view of this, it was submitted that the impugned land is not a capital asset but an agricultural land. The ld AO was of the view that said land is agricultural land since it is situated within the municipal limits of Delhi the transfer of same is chargeable to tax under the head capital gain. Therefore, show cause notice was issued. Assessee submitted that the above mentioned property is not his property and he is merely a power of attorney holder. He further submitted that he does not hold any money from the sale proceedings. The assessee further asserted that even otherwise it is an agricultural land. He further stated that the above property was inherited by Shri Ashok Tyagi. He also submitted the report of the valuer for fair market value of the property as on 01.04.1981. It was further stated that there were some improvement in the land in 1992-93 for land filling etc as it is mentioned in the valuation report. Against the sale of property Mr. Ashok Tyagi has purchased two residential units for Rs. 57,79,893/- and copies of the purchase deed, bank account and allotment letters were filed. Therefore, he is also entitled to deduction u/s 54F of the act.

4. Ld AO then proceeds to make assessment of income earned by Shri Ashok Tyagi in the hands of the assessee by invoking section 160 and 162 of the Income Tax Act, 1961 as according to him assessee is a ‘representative assessee’ of Shri Ashok Tyagi and long term capital gain is chargeable to tax in the hand of the assessee. He therefore, held that Shri Manish Tyagi is a representative assessee of Shri Ashok Tyagi u/s 160(2) of the Act. He proceeds to assessee the capital gain in the hands of Assessee.

He computed the capital gain of sale consideration of plot of land of Rs. 1,05,20,000/-, granted deduction of the cost of acquisition of Rs. 18,27,554/- computed long term capital gain of Rs. 86,92,446/-. With respect to the purchase of residential properties of Shri Ashok Tyagi amounting to Rs. 94,54,893/-. He granted deduction of only Rs. 36,75,000/- on one property to the assessee for which sale deed was available. He refused to give deduction u/s 54F in another property of Rs.57,79,893/- stating that there was no allotment letter in the name of Shri Ashok Tyagi and no agreement exists for sale of property and the payment have been made to one Shri Pankaj Tyagi, property was neither registered in the name of Ashok Tyagi till date nor possession was given.

Accordingly, the long term capital gain of Rs. 56,55,874/- was determined in the hands of the assessee and total income of the assessee was assed at Rs. 66,38,001/- against the returned income of the assessee of Rs. 162127/-. Thus, the assessment order u/s 143(3) of the Act was passed on 28.02.2015 by the ITO, Ward 1(4), Ghaziabad.

5. The assessee aggrieved with the order of the ld AO, preferred appeal before the ld CIT(A). With respect to the addition of Rs. 13,20,000/- on account of cash deposited in Syndicate Bank, the ld CIT(A) grant him relief of Rs. 54,000/- and confirmed the addition of Rs. 7,70,000/-. With respect to chargeability of capital gain in the hands of the assessee, he held that the ld AO has rightly assessed the assessee as ‘representative assessee’ of Mr. Ashok Tyagi. With respect to the capital gain, he held that the impugned property transferred is a ‘capital asset’ and its transfer is rightly chargeable to tax .

Further, he did not grant the assessee deduction of cost of improvement claimed by the assessee. With respect to the deduction u/s 54F the ld CIT(A) also upheld that action of the ld AO in not granting deduction u/s 54F of Rs. 56,55,874/-. Thus the appeal of the assessee was partly allowed by the order dated 15.07.2015. THEREFORE, assessee preferred appeal before us.

6. Ground No. 2 is e with respect to addition of Rs. 7,70,000/- laces on account of cash deposited in Syndicate Bank. The ground No. 3 to 13 are with respect to the taxability of income of sale of property of Ashok Tyagi and its computation.

7. With respect to Ground no 1 which is general in nature, no specific arguments were advanced, same is dismissed.

8. Ground number 2 is regarding addition confirmed by the ld CIT (A) on account of cash deposited in syndicate bank account of assessee of Rs 7,70,000/- The ld AR submitted before us a written submission on this account as under:-

Ground No. 2-Addition of Rs. 8,20,000/-

2. That the Ld. CIT(A) has erred in granting relief of only Rs 50.000/- to the assessee out of total addition of Rs 8,20,000/- made by the Assessing Officer on account of cash credits in syndicate bank account and confirming the addition of Rs 7,70,000/- ignoring the documents / explanation offered by the assessee.

Facts

a) Vide letter-dated 26.04.2013, assessee enclosed ledger accounts of syndicate bank and statement of ICICI bank explaining all the credit and debit entries.

b) Assessing Officer required the assessee to explain the source of cash deposit of Rs 13,20,000/- in syndicate bank on various dates.

c) Vide letter-dated 04.10.2013, assessee furnished the cash flow statement for the year ended 31.03.2011 and stated that all the entries of the bank have been incorporated in the cash flow statement.

d) Vide letter-dated 17.10.2013, assessee explained that he was having opening cash in hand of 75,17,397/- out of which 73.80 lakh had been deposited on 08.04.2010, 75 lakh deposited on 14.05.2010, and 72 lakh each were deposited on 07.06.2010 and 24.11.2010. 740,000/- were deposited on 28.03.2010. Assessee also explained that 75 lakh were deposited out of total consideration of 75.5 lakh received through sale of car and other deposits were made out of internal accruals i.e. professional receipts and bank withdrawals. Assessee also furnished all the evidences regarding sale of car.

e) Vide letter dated 29.10.2013, assessee furnished cash flow statement for the year ended 31.03.2010 reflecting cash in hand at 75,17,397/- as on 31.03.2010.

f) However, Assessing Officer made his own calculation, did not point out any discrepancy in the documentary evidence filed by the assessee and made the addition of 78,20,000/- (total deposit of 713,20,000/- in syndicate bank - 75,00,000/- deposited by assessee from sale consideration of car of 75.50 lakh).

g) Against this order, assessee filed an appeal before CIT(A) who allowed relief to the assessee to the extent of 750,000/- i.e. the balance sale consideration of the car and confirmed the addition of 77,70,000/-.

Contentions

a) The Assessing Officer and the CIT(A) had not considered the accounts filed by the assessee.

The Assessing Officer did not point out any discrepancy in the accounts filed by the assessee.

b) The Assessing Officer and CIT(A) did not take into consideration the past savings of the assessee, arbitrarily holding that the assessee could not have past and current savings of this magnitude.

c) The Assessing Officer did not consider that the assessee since last 10 years was running the business and had reflected only savings of 75.17 lakh which cannot be said to be of huge magnitude.

d) The Assessing Officer has also not taken into consideration depreciation of 769,00,198/- which was the non-cash transaction.

e) Thirdly, Assessing Officer and CIT(A) did not take into consideration various withdrawals made by the assessee from syndicate bank and ICICI bank to the tune of approx. 74.25 lakh.

f) Assessee had incurred expenditure mainly by way of credit card or through cheque. Therefore, substantial part of cash withdrawals was re¬deposited by the assessee in the bank.

g) Explanation offered by the assessee alongwith evidences were deliberately ignored by the Assessing Officer. If, the cash flow statement is relied upon then no addition could have been made on account of unexplained cash credit.

h) Assessing Officer has made the addition in an arbitrary manner without giving any reason and therefore, deserves to be deleted.”

9. The ld DR extensively read the order of the ld AO and ld CIT(A). He submitted that there is no infirmity in the order passed by the lower authorities. He submitted that the assessee has been given a proper opportunity of hearing before all the authorities and therefore there is no reason for not upholding the order of the lower authorities.

10. We have carefully considered the rival contentions and perused the orders of lower authorities on this issue. The ground No. 2 relates to the addition of Rs. 7,70,000/- in the hands of the assessee on account of cash deposit in Syndicate Bank. The assessee has deposited a cash of Rs. 13,20,000/- in Syndicate Bank on various dates. In the cash flow statement, the assessee has incorporated all the entries of the cash withdrawal and deposit. The claim of the assessee is that he was having an opening cash hand of Rs. 517397/- and has also sold a motor car for Rs. 5,00,000/- and therefore the total deposit covers the above sum after considering the current year income. . Therefore, the assessee tried to explain the total deposit of Rs. 13,20,000/- in the bank account. The ld AO accepted the fact that the cash received of sale of car of Rs. 5 lakhs however the opening balance of Rs. 573397/- was not believed and hence not considered. No reason were given by ld AO for the same. The learned CIT – A also did not believe the same stating that the assessee could not have past and current savings of the magnitude in view of the fact that out of the gross receipt of Rs. 662,041 the net income was too meager. However, we do not find any reason to ignore the above opening balance as well as the amount of cash available with the assessee from his current and past earning. The reason being that that assessee has earned gross income of Rs. 624,235 resulting into a net cash and loss of Rs. 258,989 after reducing the depreciation of Rs. 69,198. The learned assessing officer has also included the depreciation in the net cash available with the assessee which is a non-cash flow item. Further assessee has submitted a cash flow statement which is placed at page number 23 of the paper book. The assessee has shown opening cash in hand of Rs. 517,397. To show the availability of the above cash as on 31st of March 2010 available with the assessee at page number 27 assessee filed a cash flow statement wherein assessee has shown the net profit available for the year ended on 31/3/2010 of Rs. 255,858 as well as the gift from father and gift from mother of Rs. 51,000 each received by the assessee in the year ended on 31/03/2010. The assessee has also shown an opening cash on hand as on 1/4/2009 of Rs. 360,697. The learned assessing officer has not disputed the above cash flow statement for the year ended on 31st of March 2010 which resulted into a closing balance of cash on hand of Rs. 517,397.

The ld AO also ignored the fact that the assessee was in the business and is filing his return of income regularly, therefore in absence of any contrary evidence as well as questioning the earlier year cash flow statement the opening cash available in hand as well as the cash withdrawal from the bank account of the assessee cannot be ignored. In view of this, it is apparent that the assessee has explained the total cash deposit of Rs. 13,20,000/- in his Syndicate Bank account. The ld CIT(A) has held that sale of car was not for Rs. 5 lakhs but Rs. 5.50 lakhs and therefore he has granted a relief of Rs.50,000/- only and sustained the addition of Rs. 7,70,000/-. In view of the fact that to deposit a sum of Rs. 1,320,000 in the bank account of the assessee, assessee has received Rs. 550,000 on sale of car and further Rs. 517,397/- available with the assessee is an opening cash on hand, further the assessee has also cash flow generated during the year of approximately Rs. 320,000 out of his professional income justifies the deposit of cash into the bank account of the assessee of Rs. 1,320,000. In view of above uncontroverted facts, we do not find any justification for addition of all the above sum of Rs.7,70,000/- in the hands of the assessee. In view this ground No. 2 of the appeal of the assessee is allowed.

11. Ground number 3 is with respect to the addition of Rs. 5,655,874 in the hence of the assessee on account of long-term capital gain chargeable to tax on account of sale of property by 13 Mr Asoka Tyagi, non-resident, in the hence of the assessee holding assessee as an agent of the non-resident as he is holding a power of attorney and the property is sold by the assessee and the money is transferred to the non-resident owner.

12. The learned authorised representative contested the above addition on several counts raising 4 different grounds as Under:-

“Ground No.3 to 7 - Treating the assessee as agent of non- resident

3. That the Ld. CIT(A) has erred in law and on facts in treating the assessee as representative assessee of Shri Ashok Tyagi u/s 160 of the Income Tax Act. Infact, the provisions of section 160(1)(i) are not applicable and therefore, assessment was to be framed by the Assessing Officer directly in the name of non-resident Mr Ashok Tyagi.

4. That the Assessing Officer has erred in law and on facts treating the assessee as agent of non-resident Mr Ashok Tyagi without passing a specific order u/s 163 of the income Tax Act.

5. That the Ld. CIT(A) has erred in law and on facts in treating the assessee as agent of the non-resident Mr Ashok Tyagi u/s 163 of the ncome Tax Act without giving him any opportunity of being heard as to his liability in the capacity of being treated as agent and thus has violated the principles of natural justice.

6. That without admitting, even otherwise the Assessing Officer and consequently the Ld. CIT(A) has erred in not framing the separate assessment in the name of assessee in representative capacity of non- 'esident Mr Ashok Tyagi. Therefore, the order passed by the Assessing Officer is contrary to provisions of section 161(1) of the Income Tax Act. Hence, the same is liable to be set aside.

7. That the Ld. CIT(A) has erred in law and on facts in assessing the capital gain belonging to the non-resident Mr Ashok Tyagi in the hands of assessee in his Individual capacity.

The Assessing Officer have held that the assessee is a representative assessee for Shri Ashok Tyagi, being his agent in respect of the transaction of property situated at Village Ibrahimpur, Delhi and the income arose out of these transactions as per section 160(1)(i) of the Income Tax Act. Definition of Agent in section 163(1)(c) of the Act is squarely applicable as Shri Ashok Tyagi, being a non-resident has earned income in India through Shri Manish Tyagi, the assessee. Hence, Shri Manish Tyagi shall be deemed to be an assessee as per section 160(2) of the Income Tax Act. Accordingly, Assessing Officer framed the assessment of the assessee in his individual capacity also adding long term capital gain of ^56,55,874/- belonging to Shri Ashok Kumar Tyagi, as his personal income.

CIT(A) confirmed the order of Assessing Officer.

CONTENTIONS

Representative assessee cannot be assessed in his individual capacity in respect of income of the person represented by him

a) Section 160(1) defines 05 categories of representative assessees in respect of the particular incomes set out against each.

As per section 160(1)(i), in respect of the income of a non-resident specified in sub-section (1) of section 9, representative assessee means the agent of a nonresident, including a person who is treated as an agent u/s 163.

By virtue of section 160(2) a representative assessee is deemed to be an assessee.

b) Section 161(1), in defining the liability of a representative assessee, makes him subject to the same duties, responsibilities and liabilities, in respect of that income, as if the income were income received by or accruing to or in favour of him beneficially. He is liable to be assessed in his own name in respect of that income, but separately from the assessment of his own other income because the assessment, in respect of other’s income, is to be deemed to have been made upon him in his representative capacity. Tax is levied and recovered from the representative assessee in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Kindly see Arundhati Balkrishna vs CIT (1989) 177 ITR 275 (SC).

c) A representative assessee cannot be assessed in his Individual capacity in respect of the income of the person represented by him. Where the Trust deed has authorized the trustee(s) to do business as a proprietor or as a partner of a firm and such trustee(s) becomes / become partner in a firm in his / their representative capacity, assessment could not be made in respect of share income from such firm even on protective basis on the trustee(s) in his / their Individual capacity and such share income has to be taxed in the hands of the Trust itself through the trustee(s) of the Trust as held by the Gujarat High Court in GIT vs Mangaldas Bechardas Family Trust (1999) 236 ITR 574(Guj).

d) Section 160, 161 & 163 are merely enabling provisions which empower the income tax authorities at their option to make assessment, in respect of income of a non-resident specified in section 9(1 )(i) and to recover tax due under the Act from the agent or deemed agent of the non-resident as the representative asfcessee. However, the liability of such an agent arises only if such income of the nonresident is taxable under the Act. If no income could be deemed to accrue or arise in India to the non-resident within the meaning of section 9(1), no question of treating anybody as representative assessee u/s 160(1 )(i) arises and nobody could be treated as such u/s 163 as held in T.I. & M. sales Ltd. vs CIT (1981) 21 CTR (Cal) 258, 259.

e) The liability of a representative assessee u/s 161(1) is a vicarious liability and it is coextensive with the liability of the person represented by him.

In this view of the matter income received by a trustee, even where such income is share income from a firm, is to be assessed in his hands in his representative capacity and cannot be clubbed with his Individual income as held in State of Karnataka vs C.P. Chandrasekhar (1979) 116 ITR 84 (Karn- FB).

f) A trustee in his representative capacity, is distinct from his Individual capacity. Assessee is relying upon Maharaja Dharmendra Pratap Narain Singh vs State of Uttar Pradesh (1980) 121 ITR 806 (ALL) (Mad) Valivalam Desikar High School Trust vs CAgIT (1981) 131 ITR 84

g) In respect of the income of a validly created Trust, no assessment can be made against the trustee of the Trust in his Individual capacity unless such trustee himself is a beneficiary under the Trust.

AGENT OF A NON-RESIDENT - AN ORDER TREATING THE PERSON AS AN AGENT OF A NON-RESIDENT IS TO BE PASSED BEFORE FRAMING ASSESSMENT ON HIM AND THAT TOO ONLY AFTER GIVING OPPORTUNITY OF BEING HEARD

a) Section 163(1) defines, for the purposes of the Act, an “agent” in relation to a nori-resident.

The Assessing Officer has relied upon sub- clause (c) of clause (1) of section 163 which includes any person in India from or through whom the non-resident is in receipt of any income whether directly or indirectly. Section 163(1 )(c) requires only that the non-resident should receive income directly or indirectly from or through any person in India.

b) In CIT vs T.I.& M. Ltd. (1978) 114 ITR 59 (Cal), it is held that as ordained by section 163(2), no person can be treated as the agent of non-resident unless he had an opportunity of being heard given by the Assessing Officer as to his liability for being treated as such. Until and unless one is appointed a statutory agent in this manner, one cannot be fastened with any liability whatsoever including payment of advance tax, because doing so will amount to giving retrospective effect to these provisions which is not warranted in the absence of express provisions in this regard.

c) In CIT vs Express Newspapers (P) Ltd. (1978) 111 ITR 347 (Mad), it is held that Keeping in view the provisions of section 163(2) regarding opportunity of being heard to be given to the agent as also those of section 246(1 )(d) or 246(2A) or 246(2B) or section 246A(1)(d) regarding filing of an appeal against an order made u/s 163 treating the assessee as an agent of a non-resident, it is necessary that a written order must be passed by the taxing authorities for appointing a person to be an agent of a non-resident. Since no such order had been made, the levy of penalty was held to be not justified also observing that not disputing the assessment proceeding cannot be the only foundation for laving penalty.

d) The Punjab High Court in CIT vs Kanhaya Lai Gurmukh Singh (1973) 87 ITR 476 came to consider the phraseology of section 163 of the Act on the point. Upon difference of opinion between the two Ld. Judges constituting the Division Bench, the matter was referred to the Ld. Chief Justice.

It was observed that under the provisions of 1922 Act, no appeal lay against an order of the Assessing Officer by which a person was deemed to be an agent. The contention that a person was wrongfully deemed to be an agent could only be taken as one of the grounds of attack against the assessment order. But section 246(1 )(d) or 246(2A) or 246(2B) provides for an appeal from an order passed u/s 163 treating a person as statutory agent of the non-resident.

This appeal is separate from any appeal that may lie against the assessment itself. Accordingly, notices issued by Assessing Officer were set aside holding that status as an agent of non-resident must be determined before issue of notice u/s 148.

e) In CIT vs Belapur Sugar & Allied Industries Ltd (1983) 141 ITR 404 (Bom), it is held that from the language of section 163 and 246(1 )(d), there could be no manner of doubt that, before an Assessing Officer proceeds to assess the income in the hands of the agent, he has to pass an order u/s 163. The determination of a question of agency can not be postponed to be taken-up along with the assessment, as was the case under 1922 Act.

f) Bangalore Bench of ITAT in Suez Tractebel S.A. vs Deputy Director of Income Tax (International Taxation), Bangalore (2013) 35 Taxmann.com 419 (Bangalore-Trib), 143 ITD 614 (Bangalore-Trib) have held that as per the provisions of section 163(2) before treating a person as an agent, an opportunity of being heard has to be given to such person so that he can file objections in that regard. Tribunal relied upon the judgement of Punjab & Haryana High Court in the case of Kanahiya Lai Gurmukh Singh wherein it was observed that the obvious intention of the legislature in providing an appeal under clause (g) of section 246 against an order u/s 163 was that a person who is treated as an agent could challenge the matter so as to avoid further botheration to himself in facing the assessment.

Tribunal has also relied upon the judgement of Madras High Court in the case of Express Newspapers Pvt. Ltd. wherein no order had been passed by the Assessing Officer u/s 163 treating TESA as an agent of the assessee company and therefore, the notice issued u/s 148 as well as subsequent proceeding culminating into passing off assessment order were held to be bad- in-law. In the present case also the Assessing Officer had not passed any order u/s 163 treating the assessee as an agent of the non-resident person and therefore, the assessment framed in the hands of assessee is bad-in-law.

g) In the present case, Assessing Officer have committed a mistake by passing the combined order in the hands of assessee, without passing a separate order treating the assessee as an agent of a non-resident Shri Ashok Tyagi. Hence, the assessment order passed by the Assessing Officer qua the property of Shri Ashok Tyagi deserves to be set aside.

C) Ground No.9 - Agricultural Land whether capital asset u/s 2(14) of the Act

9. That the Assessing Officer and the Ld. CIT(A) have erred in not treating the land sold by Mr. Ashok Tyagi (non-resident) as agricultural land so as to be outside the ambit of “capital asset” defined in section 2(14) of the Income Tax Act.

a) Vide letter-dated 20.01.2014, assessee explained that the land sold by Shri Ashok Tyagi was an agriculture land being 8 kms away from municipal limits of Delhi.

b) Assessee stated that there was no notification issued by the Corporation u/s 507 of Delhi Municipal Corporation Act, 1957. Section 507 of DMC Act lays down that “notwithstanding anything contained in the forgoing provisions of the Act -

(a) the Corporation with the previous approval of the Government, may by notification in the official gazette, declare that any portion of the rural areas shall cease to be included therein and upon the issue of such notification that portion shall be included in and form part of the urban areas;

(b) the Corporation with the previous approval of the Government may, by notification in the official gazette :-

(i) exempt the rural areas or any portion thereof from such of the provisions of this Act as it deems fit,

(ii) levy taxes, rates, fees and other charges in the rural areas or any portion thereof at rates lower than those at which such taxes, rates, fees and other charges are levied in the urban areas or exempt such areas or portion from any such tax, rate, fee or other charge;

c) Assessee also produced certificate-dated 09.01.2014 issued by the Tehsildar stating that the land sold by the assessee was agriculture land and that the land situated in the village was a rural village.

d) Assessee also produced map showing distance of 18.7 km of Ibrahimpur from MCD limit i.e. from Narela.

e) Assessee also produced copy of NOC issued by the office of Deputy Commissioner (North West) Kanjhawala stating that the land was purely agriculture land. Despite all these documents, the Assessing Officer treated the land as urban land, he merely relied upon the website of Delhi Govt, and treated the property as capital asset within the meaning of section 2(14) of the Act.

f) CIT(A) did not decide the issue stating that the assessee has not contested the finding of the Assessing Officer that impugned land is a capital asset subject to capital gain taxation. When the assessee had challenged the addition of ?56,55,874/- as a whole.

D) Ground No. 10 - Disallowance of cost of Improvement

10. That the Assessing Officer and the Ld. CIT(A) have erred in not taking into consideration the cost of improvement incurred by Mr Ashok Tyagi in FY 1992-93 and 2000-01 in respect of land sold by him, while computing the amount of capital gain and therefore the calculation made by the Assessing Officer is contrary to the provisions of section 48 of the Income Tax Act.

Assessee had declared cost of improvement as under:

a) Khasra No. 201 (4-13)

In FY 1992-93 : Rs. 2,10,900/-

In FY 2000-01 : Rs. 5,88,000/-

b) Khasra No. 247 (4-1), 256 (4-16) & 257 (4-161

In FY 1992-93 3,85,000/-

In FY 2000-01 : 15,10,000/-

Assessing Officer had disallowed the cost of improvement on the ground that assessee had not furnished any evidence. Assessing Officer has ignored the valuation report of the registered valuer filed by the assessee. Registered valuer had inspected the property and had rightly made the valuation also examining the improvement made by the assessee in the year 1992-93. Infact, Assessing Officer has deliberately ignored this valuation report. He has not pointed out any discrepancy in the valuation report and therefore, improvement valued by the registered valuer had to be accepted by the Assessing Officer.

E) Ground No.8 & 11 to 13 - Taxing the Capital Gain & Deduction u/s 54 F

8. That the Assessing Officer and consequently the Ld. CIT(A) has erred in not giving benefit of section 54F of the Income Tax Act in respect of capital gain of T56,55,874/-.

11. That the Assessing Officer and consequently the Ld. CIT(A) has erred in law and on facts in not giving benefit of investment of ?57,79,893/- made by Mr Ashok Tyagi in a residential flat situated at A- 302, Alexandra, Sector-93B, Noida u/s 54F of the Act.

12. That the Assessing Officer and the Ld. CIT(A) have misdirected themselves in not treating the purchase of property by way of executing endorsement form F2 by the original allottee in favour of Mr Ashok Tyagi and endorsing allotment letter and all the receipts in his favour as purchase for the purposes of section 54F of the Act.

13. That the order passed by the Assessing Officer as confirmed by Ld. CIT(A) is contrary to law and facts on record and therefore liable to be set aside. Assessing Officer has disallowed the claim of assessee u/s 54 of the Act qua the property purchased by the assessee from Shri Pankaj Kumar Sharma at ?57,79,893/-.

Assessee had got the allotment letter assigned by Shri Pankaj Kumar Sharma in his favour. Shri Pankaj Sharma was the original allottee who had already paid 90% of the payment to the builder M/s Omaxe Buildhome Pvt. Ltd. Assessee paid a sum of T57,79,893/- to Pankaj Sharma from his bank account with Bank of India and in turn Shri Pankaj Sharma signed endorsement Form F2 and endorsed the allotment letter and all the receipts in favour of Shri Ashok Kumar Tyagi. All these documents were filed by the assessee with Assessing Officer vide reply- dated 10.02.2014.

Claim u/s 54F

a) As per section 45 any profits or gains arising from the transfer of a capital asset, subject to section 54 etc., be chargeable to income tax under the head Capital Gains and shall be deemed to be the income of the P.Y. in which the transfer took place.

b) Section 54F deals with the exemptions, it lays down that, where capital gain arises from the transfer of any Long term capital asset and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after the date constructed a residential house, then the capital gain shall not be chargeable if entire sale consideration in respect of original asset is invested in new asset or if the cost of new asset is less than the net consideration in respect of original asset than proportionate capital gain.

c) In the present case, the allotment letter was assigned in favour of assessee by Shri Pankaj Kumar Sharma for a consideration of ?50,90,000/- and thereafter, assessee had made the payments of ?6,92,160/- directly to M/s Omaxe Buildhome Pvt. Ltd.

The Assessing Officer has arbitrarily denied the claim of assessee ignoring various documents.

d) Assessing Officer has observed that there was no allotment letter in the name of Shri Ashok Kumar Tyagi or there was no agreement for sale between Shri Pankaj Sharma and Shri Ashok Kumar Tyagi.

While arriving at such a conclusion Assessing Officer has ignored the endorsement form (F2) filed by the assessee along with allotment letter which depicted assignment of allotment letter by Mr. Pankaj Sharma to the assessee and this assignment was duly confirmed by M/s Omaxe Buildhome Pvt. Ltd. Ltd. By way of endorsement Shri Pankaj Sharma has assigned all his rights and interest pertaining to the flat allotted to him hence observations made by the Assessing Officer that there was no allotment letter or no agreement between the parties is incorrect on the face of record.

e) Observation of Assessing Officer that there was no evidence on record which reflected that Shri Ashok Kumar Tyagi had made any payment to Shri Pankaj Sharma is also incorrect. Assessee has produced copy of account of Mr. Tyagi from B.O.I. which reflected payment of ?50,90,000/- to Mr. Pankaj Sharma and of T6,92,160/- directly to M/s Omaxe Buildhome Pvt. Ltd.

f) It is further stated that for claiming deduction u/s 54F of the Act neither registration is necessary nor the possession of the property, what is essential is the investment in property within the stipulated time. Section 54F is a beneficial legislation and once the assessee falls within the parameters prescribed in that provision, benefits cannot be denied. Beneficial legislation has to be interpreted liberally.

g) CIT (Appeal) has held that the assessee had neither purchased nor constructed the property. CIT (Appeal) has wrongly held that CBDT Circular No. 471 and 672 are not applicable to the present case. Circular No.471 dated 15.10.1986 applies to acquisition of flat by allottee under the self financing scheme by DDA, it also clarifies that cases of allotment of flats under the self financing scheme of DDA. should be treated as cases of construction for the purpose of deduction u/s 54/54F. Circular No.672 dated 16.12.1993 clarified that if terms of scheme of allotment and construction of flat by co-operative society or other institutions are similar to that of DDA then such cases may also be treated as construction for the purpose of deduction u/s 54 and 54F of the Act.

h) In the present case Shri Pankaj Sharma was covered by Circular No.471 r/w Circular No.672 and therefore, his deal was to be treated as construction. By way of signing endorsement form in favour of assessee, Mr. Pankaj Sharma had assigned all his rights to him in the flat and in the record of Omaxe Buildhome Pvt. Ltd., the name of the assessee had been substituted.

Therefore, deal of the assessee with Pankaj Sharma and the builder was to be treated as construction. Assessee had produced all the evidences reflecting payment to the Co. as well as to Mr. Pankaj Sharma. It is not out of place to mention here that payment of 76,92,160/- was the part of original agreement. It cannot be segregated only for the purpose of denying the claim of the assessee. Allotment letter is crystal clear that allottee is liable to pay the basic sale price, preferential location charges and the additional charges.

i) Even if that deal of assessee with Mr. Pankaj Sharma is not treated as construction then also it falls within the ambit of purchase. Purchase involves transfer in relation to a capital asset. Section 2(47) states that relinquishment of the asset or extinguishment of any rights therein is to be treated as transfer. Explanation-2 to section 2(47) clarifies that transfer includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever by way of an agreement or otherwise. Explanation-2 has been inserted by the Finance Act 2012 with retrospective effect w.e.f. 01.04.1962.

j) In CIT vs Ashok Kumar Ralhan (2014) 360 ITR 575 (Del), Hon'ble Delhi High Court have held that the word “construction” for the purpose of section 54F has to be given a realistic practical and pragmatic meaning keeping in mind the object and purpose of the provision. Section 54F is a beneficial provision as a capital asset, which is sold is replaced by a new capital asset in the form of a residential house, which should be purchased or constructed within the period stipulated. In this case, assessee purchased a fully built- up property, demolished it and rebuilt it. He claimed deduction u/s 54F of the Act. However, AO denied it holding that there was neither the need for the assessee to reconstruct nor renovate the purchased property as it was fully constructed. However, CIT(A) and ITAT allowed the claim of assessee. On filing appeal by the Revenue, High Court held that it was a case of construction u/s 54F. Since the construction was carried out within the outer limit of 03 years, assessee was entitled to benefit u/s 54 of the Act.

k) In Rustam Homy Vakil vs ACIT (2016) 69 Taxmann.com 42 (Mum-Triob), Mumbai Bench of Tribunal held that when the tax- payer is allowed to purchase or construct residential house without any ceiling as to the amount of investment u/s 54, then merely because tax-payer has purchased a residential house and thereafter followed it with alterations and modifications carried out to make said house habitable, benefit cannot be denied by the Revenue u/s 54 of the Act. In this case, assessee sold his tenancy rights in a residential property and invested the sale proceeds in purchase of another house which was in a dilapidated condition. In order to make the house fit for residential purpose, assessee incurred certain expenses on repairs etc and claimed deduction u/s 54 of the Act. Assessing Officer rejected the same holding that cost of improvement cannot be allowed as deduction at the time of purchase of property. CIT(A) confirmed the order of Assessing Officer, however, ITAT allowed benefit of section 54 to the assessee holding that section 54 is a piece of beneficial legislation being incentive provision which need to be strictly construed for bringing within its hold the entitlement of the taxpayer to the said benefit, but once the taxpayer establishes his entitlement to the benefit u/s 54, then section 54 is to be liberally construed to grant the benefit to the assessee to fulfill the mandate of legislation which is to promote investment in residential housing construction rather than in the manner which may frustrate the object.

I) In BB Sarkar vs CIT (1981) 132 ITR 150 (Cal), Calcutta High Court held that where a taxpayer spends capital gain partly for purchase of another house and partly for further construction on it, he is still entitled to exemption u/s 54. Section 54 contemplates fulfillment of two alternate conditions viz purchase or construction, but where both the conditions are fulfilled within the time stipulated, the taxpayer would also be entitled to the relief. High Court observed that the expression used in a statute should ordinarily be understood in the sense in which it is best harmonious with the object of the statute and which effectuates the object of the legislature. It is therefore, necessary to read section 54 in the context of the subject matter and its setting in the scheme of capital gains and the object of the exemption and to ascertain its true import. The main purpose of section 54 is to give relief in respect of profit on sale of residential house. If an assessee is entitled to relief on fulfillment of either of two constructions viz purchase or construction, it would be improper to hold that on fulfillment of both the conditions, he would be disentitled to that relief.

m) In Rajat B Mehta vs ITO (ITA No.19/Ahd/16 decided on 09 Feb 18), issue arose as to whether cost of new residential house so purchased by the assessee would mean only the cost of the house or the furniture and fixtures as well. Ahmedabad Bench of ITAT held that the expression “cost of the residential house so purchased” used in section 54 does not necessarily mean that it should confine to the cost of civil construction alone. A residential house may have many other things such as furniture, fixtures etc which are integral part and may also be on sale as an integral deal. Hon’ble Bench held that purchase of furniture and fixture was a part of big deal and therefore, was to be included in the cost of purchase.

In the present case also, assessee had paid the amount of Rs. 6,92,107/- directly to the builder towards club charges etc which was a part of the deal and therefore, to be included in the cost of acquisition.

Whether For Claiming Exemption u/s 54F, Possession is Necessary

a) Section 54F requires investment in property either by way of purchase or by way of construction within the time specified. If the assessee had made investment within period of 03 years, exemption u/s 54 could not be denied for the reason that possession had not been taken.

There may be delay in taking possession because of many factors not under control of assessee. Merely because possession is not taken, exemption could not be denied (Kishore H Galaiya vs ITO (2012) 24 Taxmann.com 11 (Mum).

In the present case also, assessee was offered possession of house on 28.01.2011 i.e. within 03 years from the date of transfer but he could not take possession as infrastructure was not complete at that time. Later, the assessee could not take possession as he was out of India and therefore, could not complete the formalities of possession. In view of Circular No.471 dated 15.10.1986 and Circular No.672 dated 16.12.1993, allotment of flat by the builder is sufficient to entitle the assessee to claim benefit u/s 54F. Assessee had paid full amount of consideration and the builder had also offered possession, deduction u/s 54F cannot be denied to the assessee.

b) In CIT vs R L Sood (2000) 245 ITR 727 (Del), it is held that on payment of substantial amount in terms of purchase agreement within 04 days of sale of his old house, assessee acquired substantial domain over new residential flat within specified period, it could be said that assessee complied with requirements of section 54. Merely because builder failed to handover possession of the flat within specified period, assessee could not be denied benefit of benevolent provision of section 54.

c) In ACIT vs Sudhakar Ram (2011) 16 Taxmann.com 175, Mumbai Bench of ITAT have held that where assessee invested amount of capital gain on sale of shares in purchase of flat before expiry of statutory period, benefit of deduction u/s 54F could not be denied to assessee on the ground that building was under construction stage and assessee had chosen to pay entire advance.

d) In Smt Rajneet Sandhu vs DCIT (2011) 16 Taxmann.com 210, Chandigarh Bench of ITAT has observed that section 54F does not prescribe completion of construction of residential house and thrust of the said section is on investment of net consideration received on sale of original asset and start of construction of a new residential house.

Whether Registered Deed Necessary to Claim Deduction u/s 54F

a) In CIT vs Dr Laxmichand Narpal Nagda (Deceased) (1995) 211 ITR 804 (Bom), Bombay High Court have held that taking into consideration the letter and spirit of section 54, the word “purchase” is not used in the sense of legal transfer. High Court held that where the tax payer had paid the full consideration, obtained the possession of the flat and had actually put the flat to use, exemption u/s 54 cannot be denied though no registered purchase deed was executed.

b) In Smt Shashi Varma vs CIT (1997) 224 ITR 106 (MP), Madhya Pradesh High Court have held that where the investment of capital gain in the purchase of a flat had been duly made within two years of the sale, the taxpayer would be entitled to exemption u/s 54, even though the construction was not completed within the statutory time limit. In this connection, the High Court relied upon the CBDT’s circular clarifying to the effect that investment made under the self financing scheme of the DDA or other cooperative societies or similar bodies, where a house property was allotted to a taxpayer, it would be treated as a case of construction for the purpose of section 54.

c) In Rajeev B Shah vs ITO (ITA No.262/Mum/2015 decided on 08.07.2016 by ITAT Mumbai), assessee sold a plot of land on 09.02.2010 for a consideration of T19,35,325/- and earned long term capital gain of ^14,81,284/-. Thereafter, the assessee invested a sum of T15,00,000/- on 12.03.2010 and T3,60,000/- on 19.03.2010 for buying a residential flat under construction from Seth Developers Pvt. Ltd. and Poonam Builders. Assessee claimed deduction u/s 54 of the Act which was denied by the Assessing Officer on the ground that the property was incomplete and that the registered document was not filed by the assessee.

ITAT allowed deduction u/s 54F on the ground that the assessee had already invested a sum of T18.60 lakh in the residential property under construction within the time limit prescribed u/s 54F of the Act.

13. The ld DR extensively read the order of the ld AO and ld CIT(A). He submitted that assessee is an agent of the non-resident, granted an opportunity of hearing by the learned AO holding that why he should not be considered as an agent of the non-resident, considered the nature of the assets transferred and its taxability and thereafter computed the taxable income arising in the hence of the non-resident as income of the assessee Under the head capital gain. Thus, There is no infirmity in the order passed by the lower authorities. He submitted that the assessee has been given a proper opportunity of hearing before all the authorities and therefore there is no reason for not upholding the order of the lower authorities.

14. We have carefully considered the rival contentions and perused the orders of the lower authorities.

The assessee has contested ground No. 3 to 7 of the appeal which deals with the addition on account of sale of property of Shri Ashok Tyagi a non resident in the hands of the assessee as representative assessee u/s 160 of the Act. The claim of the ld AR is that the assessee cannot be treated as agent of nonresident Mr. Ashok Tyagi without passing a specific order u/s 163 of the Act. Other ground of proper opportunity of hearing and further even otherwise the ld AO was required to frame a separate assessment order in the name of the assessee in his representative capacity as a agent of Mr. Ashok Tyagi which has not been made by the learned assessing officer but has made the addition in the hands of the assessee as his own income. Thus not passing an order separately treating the assessee as the representative assessee of Mr. Asoka Tyagi but making the addition along with the other income of the assessee in the hence of the assessee is an invalid order. According to the provisions of Section 160 (1) (i) representative with respect to a non-resident means the agent of the non-resident including a person who is treated as an agent u/s 163 of the income tax act. According to Section 163 of the act in relation to a non-resident and agent includes any person who has any business connection with the non-resident or from or through womb the non-resident is in receipt of any income whether directly or indirectly. In the present case, the assessee has sold the property on behalf of a non-resident and has transferred the money to the non-resident through him. Therefore, according to the provisions of Section 163 of the act, the assessee is an agent of the non- resident Mr. Ashok Tyagi. It page number 9 and 10 of the order the assessee was given an opportunity to explain why he should not be treated as an agent of the massessee which has been answered by the assessee as evident by the letter dated 10/2/2014 of the assessee. This objection of the assessee was rejected holding that assessee is an agent of a non-resident and therefore he is a representative assessee of a non-resident. Further the provisions of Section 161 provides that every representative assessee as regards the income in respect of which he is a representative assessee shall be subject to the same duties, responsibilities and liabilities as if income is received by or accruing to or in favour of him beneficially and shall be liable to assessment in his own name in respect of that income but such assessment shall be deemed to be made upon him in his representative capacity only. It further provides that the tax subject to other provisions of the income tax act be levied upon and recovered from him in like manner and to the same extent as would be leviable upon and recoverable from the person represented by him. Therefore, the assessing officer should have passed a separate assessment order from the income of the assessee with respect to the income of the non-resident holding the assessee as a representative of a non-resident. In the present case, the assessing officer has passed an order in the name of the assessee without specifying that the above income is chargeable to tax in the hands of the assessee as a representative assessee of a non-resident i.e. not passing a separate order but adding the income of the non-resident in the hands of the assessee is not in accordance with the provisions of Section 161 of the act. The learned AO has also charged the tax in the hands of the assessee in the residential status of resident and not non-resident. On this score, the addition made by the learned assessing officer of the income of the non-resident Under the head capital gain of Rs. 5,655,874/– is required to be deleted. Thus, ground number 7 of the appeal of the assessee is allowed.

15. In view of our decision in ground number 7 of the appeal, other grounds which are on the merits and on the computation of the capital gains are not required to be adjudicated as they become academic in nature.

16. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 25/03/2021.

Sd/- Sd/-

(AMIT SHUKLA) (PRASHANT MAHARISHI)

JUDICIAL MEMBER ACCOUNTANT MEMBER