2025 (5) TMI 515 - AT - Income Tax

Reducing the Work-in-Progress (WIP) value by disallowing payments made to two entities on the ground that these entities were non-existent and had not filed income tax returns - HELD THAT - Both the payee entities have acted as POA holders for landlords who have sold their land to the assessee. The transactions are well documented with various sale deeds and the impugned payments are in line with these sale deeds. The sale consideration has duly been split in the respective sale deeds between POA holders and the landlords and the payments have accordingly been made by the assessee through banking channels. There is no evidence that POA holders were paid more than what was specified in the sale deeds nor was there any evidence suggesting that the payments were made for purposes other than the land purchase. AO has made adjustment solely on the ground that the POA holders could not be traced and they had not filed their income tax returns. However both these reasons do not invalidate the payments made for the land which were properly documented in the sale deeds. This fact would not change the legal validity of the transaction and assessee could not be denied its legitimate claim. Therefore the impugned reduction of WIP has rightly been reversed by Ld. CIT(A)

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

Whether the Assessing Officer (AO) was justified in reducing the Work-in-Progress (WIP) value by disallowing payments made to two entities, M/s Gayathri Infrastructure and Developers and M/s Venkateshwara Developers, on the ground that these entities were non-existent and had not filed income tax returns.
Whether the payments made to these two entities, who acted as Power of Attorney (POA) holders for the sellers of land, were legitimate and properly documented so as to justify their inclusion in the WIP valuation.
Whether the closure of bank accounts of these entities and their non-filing of returns could invalidate the transactions or justify downward adjustment of WIP.
Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in reversing the AO's disallowance based on the evidence presented.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Payments to POA Entities and Their Existence

Relevant legal framework and precedents: Under the Income Tax Act, assessment proceedings under section 147 allow reassessment upon discovery of new facts or income escaping assessment. The valuation of assets such as WIP must be based on legitimate and verifiable transactions. Precedents generally hold that documentary evidence such as sale deeds and banking transactions are critical to establish the genuineness of payments and existence of parties.

Court's interpretation and reasoning: The AO held that since the two entities had not filed returns and were not traceable, the payments to them could not be accepted, leading to a reduction of Rs. 3.18 crores from WIP. However, the CIT(A) examined the sale deeds and found that these payments were made as per the terms recorded in the sale deeds, where these entities acted as POA holders for the landowners. The payments were made through banking channels with proper KYC documentation. The Tribunal concurred with the CIT(A) that the AO's reasoning based solely on non-filing and non-traceability was insufficient to discredit the transactions.

Key evidence and findings: The sale deeds explicitly recorded the split of sale consideration between the landlords and the POA holders. The payments corresponded exactly to the amounts stated in these deeds. Banking evidence showed payments were routed through proper channels. No evidence was found that the payments exceeded the amounts specified or were for purposes other than land acquisition.

Application of law to facts: The Tribunal applied the principle that documentary evidence and legitimate banking transactions establish the validity of payments. The non-filing of returns by the payees or closure of their bank accounts did not invalidate the transactions. The legal validity of the sale and payments was preserved by the clear documentation and transparency of the transaction.

Treatment of competing arguments: The AO's argument rested on the non-existence and non-filing status of the payees. The CIT(A) and Tribunal rejected this as a sole ground for disallowance, emphasizing that the legal effect of the sale deeds and payments could not be negated by such procedural or compliance failures of the payees. The assessee's argument of proper documentation, KYC compliance, and banking evidence was accepted as sufficient proof.

Conclusions: The payments to the two POA entities were legitimate and properly documented. The AO's reduction of WIP on the ground of non-existence and non-filing was not justified. The CIT(A) correctly reversed the disallowance.

Issue 2: Impact of Non-Filing of Income Tax Returns by POA Entities and Closure of Bank Accounts

Relevant legal framework and precedents: Filing of returns and maintenance of bank accounts are compliance requirements under the tax and banking laws. However, failure to comply does not ipso facto invalidate transactions unless evidence shows illegitimacy or fraudulent intent.

Court's interpretation and reasoning: The AO relied on the non-filing and closure of bank accounts as indicators of non-existence and possible sham transactions. The CIT(A) found no evidence that these procedural lapses affected the underlying transaction's validity. The Tribunal agreed that absence of filing or bank account closure does not negate the fact that payments were made for land acquisition as per the sale deeds.

Key evidence and findings: No evidence was presented to show that the payments were diverted or that the POA holders were fronts for undisclosed transactions. The closure of bank accounts occurred after receipt of payments, which is not unusual in business transactions. The KYC documents and banking transactions were intact and verified.

Application of law to facts: The Tribunal applied the principle that compliance failures by third parties do not affect the assessee's legitimate claim if the transactions are otherwise genuine and documented. The legal effect of the sale deeds and payments is independent of the payees' tax compliance status.

Treatment of competing arguments: The AO's reliance on non-filing and bank account closure was effectively countered by the assessee's evidence of proper documentation and banking compliance. The Tribunal found no basis to penalize the assessee for third-party non-compliance.

Conclusions: Non-filing of returns and closure of bank accounts by POA entities do not invalidate the payments or justify reduction of WIP. The CIT(A) rightly held that these factors do not affect the legal validity of the transactions.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the following core principles and final determinations:

"The impugned payments to the sellers as well as to both these entities was duly documented in the sale deeds which clearly outline the sale consideration."
"There was no evidence that POA holders were paid more than what was specified in the sale deeds nor was there any evidence suggesting that the payments were made for purposes other than the land purchase."
"The fact that the POA holders were not traceable or non-filer would not change the legal validity of the transaction."
"The impugned reduction of WIP has rightly been reversed by Ld. CIT(A)."

The Tribunal conclusively determined that the AO's downward adjustment of WIP based solely on the non-existence and non-filing status of the payees was erroneous. The payments made to the POA holders were legitimate, evidenced by sale deeds and banking transactions, and therefore the WIP valuation should include these amounts. The appeal by the revenue was dismissed accordingly.

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