Income Tax Appellate Tribunal - Ahmedabad
D.R. Construction , Surat vs Assessee
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM
ITA No.2735/Ahd/2010
Asst. Year 200809
M/s D.R. Construction, 710, Vs. Income-tax Officer, Ward
Silk Plaza, Ring Road, 2(3), Surat.
Surat.
(Appellant) (Respondent)
..
Appellant by :- Shri Rasesh Shah, AR
Respondent by:- Shri Shelley Jindal, CIT, DR
ORDER
Per D.C. Agrawal, Accountant Member.
This is an appeal filed by the assessee raising following grounds :-
(1) On the facts and circumstances of the case as well as law on the subject, the ld. AO has erred in making addition of Rs.10,00,00,000/- as for income not offered for taxation in return of income which is disclosed during survey proceedings.
(2) On the facts and circumstances of the case as well as law on the subject, the ld. AO has erred in making addition of Rs.13,35,593/- on account of interest income on advances by treating the same as income from other sources.
(3) On the facts and circumstances of the case as well as law on the subject, the ld. AO has erred in making addition of Rs.2,69,690/- as interest alleged interest free advances.
(4) It is, therefore, prayed that above addition made by the AO and confirmed by CIT(A) may please be deleted.ITA No.2735/Ahd/2010
Asst. Year 2008-09
2. The facts of the case are that assessee is engaged in the business of construction. It has undertaken a project for constructing houses/flats at Surat. A survey u/s 133A was carried out on 19.9.2007 at the business premises of the assessee at block 30, Model Town Park, Opp. Bhakti Dham Mandir, Magob, Surat. It is claimed by the AO that certain loose papers were found from the bag from Shri Ravi Khandelwal, a partner in the assessee firm. When confronted with the queries of cost of construction and purchase of material and sale price of the flats, Shri Ravi Khandelwal came forward to offer a sum of Rs.10 crores as firm's unaccounted income for taxation for Asst. Year 2007-08 relevant to Asst. Year 2008-09. He also gave a bifurcation of expenditure/investment incurred out of the income of Rs.10 crores as under :-
(i) Unaccounted investment in model town park Rs.5,00,00,000/- scheme (in 17 towners under construction)
(ii) Unaccounted stock of cement, steel, reti and other Rs.90,00,000/-
material found at the site office at Model Town Park, Magob, Surat.
(iii) Unexplained investment/expenses in the papers Rs.2,00,00,000/- found and impounded from the office at Model Town Park, Magob, Surat.
(iv) Payment of on money made, in cash during the Rs.2,10,00,000/- year through the brokers for the purchase of land for Model Town Park, Magob, Surat which is not recorded anywhere in the books of accounts of the assessee firm or its partners Total Rs.10,00,00,000/-
However, the assessee did not declare the said sum of Rs.10 crores in the return of income nor paid taxes thereon. Notices u/s 142(1) were issued but there was no compliance. Thereafter notice u/s 148 was issued on 19.2.2009 to file return for this Asst. Year . The return of income was filed in response to above notice on 22.3.2009 declaring total income at 2 ITA No.2735/Ahd/2010 Asst. Year 2008-09 Rs.NIL. The AO further noticed a remark by the auditor in para 3 of form No,3CD of audit report as under :-
"Assessee firm has declared Rs.10 crores in the course of survey conducted u/s 133A under the Income-tax Act, 1961 on 19.09.2007 entry made in the books of accounts have been verified with reference to the statement recorded during the survey. The receipt of Rs.10 crores by way of booking advance are represented against as revenue expenditure and assets."
Thereafter the AO gave a detailed show cause notice to the assessee mainly calling for his explanation for not declaring Rs.10 crores in the return of income as promised/stated by him during the course of survey. The detailed show cause notice and the reply of assessee are quoted in the assessment order in para 4.2 and para 4.3. After considering the reply of the assessee, the AO proceeded to tax the sum of Rs.10 crores as assessee's undisclosed income for the following reasons:-
"4.5 During the course of survey proceedings, a statement was recorded from Shri Ravi Khandelwal. Once the assessee had made the disclosure by way of admission during the course of survey u/s 133A, the onus of proving or disproving the same shifts on him. The statement incorporating the admission given by the assessee, at the time of survey is not a mere piece of paper, but a document which is sanctified under oath. In the course of statement u/s 133A, specific questions, regarding the books of accounts and documents found during the course of survey, were put up to the assessee. The assessee gave detailed explanation regarding entries in most of these books of accounts and documents. Similarly, during the course of survey, the records loose papers and documents found from the assessee's premises were also shown to Shri Ravi Khandelwal and he had given opportunity to verify the contents therein and then only he admitted the figures shown in the papers as unaccounted income. If there was any mistake, it was upto the partner of the firm to point out then and there and clarify the matter.
4.6 Although the assessee has not retracted his statement, making the disclosure of Rs.10,00,00,000/-, however, the assessee has taken 'on money' which was the unaccounted income of the assessee and the same was utilized for various purposes. The application of unaccounted income has been submitted by the assessee which has already been mentioned at various places in the order. The said amount should have been shown as income by the assessee which he has not done."3 ITA No.2735/Ahd/2010
Asst. Year 2008-09 The reasons for making addition of Rs.10 crores were that assessee has taken 'on money' which was unaccounted income of the assessee and same was applied/utilized for various purposes as stated by Shri Ravi Khandelwal during the course of survey.
3. When the matter came up before the ld. CIT(A), he examined the issue afresh and confirmed the addition for various reasons. They are summarised as under :-
(1) The disclosure was made after satisfying himself by Shri Ravi Khandelwal from his records, notings in the diary and loose papers and it is stated that such disclosure is true and correct. Break up of above disclosure under various heads have also been given.
(2) The disclosure made by the assessee has not been disputed and has not been retracted.
(3) The assessee has incorrectly shown the above sum of Rs.10 crores as advances in the books and has passed corresponding debit entries as investment made in WIPs etc. The assessee has thus by passing above entries nullified the effect of disclosure.
(4) The assessee has, as per bifurcation given, shown a payment of Rs.2.10 crores as 'on money' for purchase of land which is not recorded in the books. Similarly, the disclosure of Rs.5 crores and Rs.2 crores being unaccounted investment in Model Town Park, Magob, Surat and expense has no relation with the advances as they are unaccounted investment on the date of survey. In any case the investment/expenditure incurred by the assessee has no co-relation with advance, if any.4 ITA No.2735/Ahd/2010
Asst. Year 2008-09 (5) What is declared by the assessee is unaccounted investment/expenditure which has to be taxed u/s 69C separately. The ld. CIT(A) relied on the decision of Hon. Gujarat High Court in Fakir Mohamed Haji Hasan vs. CIT (2001) 247 ITR 290 (Guj). Thus once it is deemed income then it has to be taxed separately and no expenditure can be allowed against this income, as per proviso to section 69C.
(6) Assessee has claimed to have followed project completion method but such project completion method cannot be applied. He has to show income every year on percentage completion method as per revised accounting standard -AS-7.
(7) The assessee might make any entry in the books of account showing, first advances received and then passing debit entries showing expenditure/investment against such advances, but accounting entries cannot over ride the provisions of the Act inasmuch as such income has to be taxed as deemed income u/s 69C and it cannot be nullified by passing book entries. In support of his reasons ld. CIT(A) relied on the decision of Hon. Patna High Court in Sukhdev Jalan vs. CIT 26 ITR 617 (Pat), decisions of Hon. Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT 227 ITR 172 (SC) and in the case of CIT vs. British Paints India Ltd. 188 ITR 44 (SC).
(8) The ld. CIT(A) referred to large number of decisions in support of his reasoning that income has to be computed and taxed each year without waiting for the completion of projects. These decisions are as under :-
5 ITA No.2735/Ahd/2010Asst. Year 2008-09 Tirthram Ahuja (P) Ltd. vs. CIT 103 ITR 15 (Del) CIT vs. Nandram Huntram 103 ITR 433 (Ori) Uttam Singh Duggal & Co. (P) Ltd. vs. CIT 127 ITR 21 (Del) Champion Construction Co. vs. ITO 5 ITD 495 (Mum Trib) Shree Nirmal Commercial Ltd/ 193 ITR 694 (Bom) Goodyear India Ltd. vs. State of Haryana 188 ITR 402, 428(SC) Rajpur Ruda Meha vs.State of Gujarat AIR 1980 (SC) 1707, 1708.
Finally the ld. CIT(A) gave following decision :-
"5. In view of the above discussion, I hold that against the unaccounted income of Rs.10 crores offered by the appellant during the course of survey, no expenses can be claimed in any manner whatsoever, viz., by debiting corresponding expenses a/c and transferring it to WIP a/c as done by the appellant. The appellant has, in the written submission, also made a claim that if addition of Rs.10 crores is not deleted, corresponding deduction u/s 80IB(10) may kindly be directed to be allowed as profit derived from the housing project, as the appellant is eligible for deduction u/s 80IB(10) of the Act. This claim of the appellant is not sustainable as already held above the unaccounted income offered by the appellant is not the income from the regular books of account upto the date of the survey and, therefore, in the nature of deemed income against which, as seen in the earlier paras, no deduction or set off is allowable. Accordingly, the first ground of appeal is dismissed."
9. Against this order of ld. CIT(A), the ld. AR for the assessee submitted that -
(1) In the statement recorded by authorised officers during the course of survey assessee has clearly stated that it has received 'on money' against the booking of flats and it has been invested/spent in the manner whose details are also given by the assessee.
6 ITA No.2735/Ahd/2010Asst. Year 2008-09 (2) Thus assessee has given the source of expenditure/investment which is the receipt of 'on money' against booking of flats.
(3) The statement of Shri Ravi Khandelwal should not be read in isolation and entire statement should be read as a whole. Then it would be clear that on one hand Shri Ravi Khandelwal referred to receipt of 'on money' on booking of flats and on the other hand he referred to investment/expenditure out of such 'on money'.
(4) The assessee has not retracted the statement and he has all the intention to declare the same in the year of income in appropriate year. It was a mistake on the part of Shri Ravi Khandelwal to say that this disclosure would be declared in Asst. Year 2007-08 which in fact could not be legally done as no income accrued to the assessee during this year.
(5) There is no evidence in support of the claim of the department that assessee has made investment/expenditure over and above what is recorded in the books except the statement of Shri Ravi Khandelwal which was given to support the receipt of 'on money'.
(6) Since assessee has not sold any flat during this year the revenue would not accrue to the assessee and, therefore, no receipt whether by way of cheque or by way of cash can be taxed this year. The assessee has himself offered/declared the 'on money' in the year when flats are sold. He referred to the account for Asst. Year 2009-10 and also 2010-11 wherein flats have been sold and accordingly receipt of 'on money' has also been declared in the return.
7 ITA No.2735/Ahd/2010Asst. Year 2008-09 (7) The ld. AR submitted that entire advances against flats have been accounted for and have been shown as advances which included sum of Rs.10 crores received as booking advance in cash and against which various expenses have been booked and shown against WIP.
He submitted that in FY ending 31st March, 2010 assessee has sale receipt of Rs..13,13,54,304/- for sale of 141 flats and 8 shops totaling to 149 units. In FY 2010-11 upto 15.3.2011 assessee has sold total 55 units including 53 residential units for a sum of Rs.5,47,37,970/-. In the two years assessee has taken proportionate booking advances of 'on money' of Rs.4,18,68,899/- and of Rs.1,82,09,630/-respectively. Present FY has not yet ended and assessee may further sell the flats and further adjust 'on money' against sale of such flats. He has still to sell 204 units. As and when these units are sold, the balance of 'on money' amounting to Rs.6,00,78,529/- will be accounted for against sales. Therefore, it is incorrect on the part of the revenue to say that assessee has not disclosed 'on money' component declared during the course of survey.
(8) It is incorrect to tax cheque amount in the year when sales of the flats are made but tax 'on money' in one go in Asst. Year 2008-09 merely on the basis of statement given by the partner Shri Ravi Khandelwal as legally it cannot be done so. Shri Ravi Khandelwal was not aware about the correct legal position as to when such 'on money' should be taxed. He was under lot of mental pressure due to survey and could not realize as to when this amount should be legally offered for taxation and when it should be legally assessed.
8 ITA No.2735/Ahd/2010Asst. Year 2008-09 (9) Once assessee has offered the same in the year when revenue accrued, it should not be again taxed in Asst. Year 2008-09 as it will amount to double taxation.
10. Against this, the ld. DR submitted that it is the assessee who himself declared the sum as his income for Asst. Year 2008-09 in the statement recorded during the course of survey on 19.9.2007 and he has not retracted this statement then assessee should not be allowed to revert back and say that it would not be taxable now in Asst. Year 2008-09 but would be taxable in Asst. Year 2009-10 or 2010-11 when flats were allegedly sold. The ld. DR referred to the statement of Shri Ravi Khandelwal and in particular question no.26, 27 & 28 thereof and answers to them to support his argument that it is Shri Ravi Khandelwal himself who has said that this amount is his income for Asst. Year 2008-
09. The relevant part of statements are as under :-
Q: 26: Today on 19.9.2007 during the course of survey in the Model Town Park, we have seen the loose papers filed A/1/5 and A/2/17 and A/2/16 found from hand bag which was kept near the table and as per data entered into these pages and as per evolution of facts therefrom (it is noticed you have made lot of unaccounted investment in the Model Town Park constructed by DR Construction. This (unaccounted investment) is not entered in the books of account and also the 'on money taken as booking receipt is also not shown in the books anywhere (on money is 14% of total receipt approximately), whatever flats/units you have sold their sale is not fully declared anywhere, in the same way after analysis of these facts it is noticed that whatever real income, expenditure, investment which you have done in Model Town Park is concealed. Therefore, I give you more time so that you after thinking and looking into the papers found in the file, explain the real position and give us to bring out the real facts."
A: 26: Yes, Sir, as stated by you whatever investment in land I have made the whole of investment is not disclosed by me and similarly, whatever 9 ITA No.2735/Ahd/2010 Asst. Year 2008-09 'on money' per dwelling unit which has also not been disclosed but real data can be stated only after discussion and advice with my father. (adjourned for discussion as suggested by Shri Ravi Khandelwal) "Q. 27: Mr. Ravi Khandelwal. If you have talked and discussed with your father Vishwanath Khandelwal and other known persons then answer the question no.26 ?
A. 27: Yes, I have discussed with my father & other known persons. Along with this I have also seen all the documents which were in impounded files. After considering, analyzing & thinking over them, further after proper keeping of all loose papers etc. I along with my partners disclose Rs.10,00,00,000/- as unaccounted income or investment of Ms. D.R. Construction for FY 2007-08 (Asst. Year 2008-09).This unaccounted is over & above the regular income of me & my partners for FY 2007-08 (Asst. Year 2008-09) which is brought by us in Ms. D.R. Construction in FY 2007-08 & the same has not been disclosed in the books of account. We promise to pay the tax along with interest on the unaccounted income which is disclosed by us in the form of receipts & investment for the FY 2007-08 (Asst. Year 2008-09).
Q.28 : You have given answer in response to Q.No.27. Either again clarify and disclose the details or completely explain it?
A.28: In answer 27, I have stated that I accepted the unaccounted income earned in year 2007-08 by M/s D.R. Construction, after consulting my father Shri Vishwanath Khandelwal and others. In this regard, we disclose that whatever papers are being impounded have been seen by us, totaled by us and even on totaling and understanding the different items shown in the paper which is of our Model Town Park which is being constructed by M/s D.R. Construction. In this project, whatever investment and stock on site is their and the on-money taken from buyers (which has not been disclosed in the books) aggregates to Rs.10,00,00,000/- (10 crores) which is over and above the regular or different from the regular income of Ms D.R. Construction for FY 2007- 08 (Asst. Year 2008-09).
We have accepted in answer 27 and its disclosure is as under
Unaccounted investment in respect of 17 towers which are under construction at model town park (Annexure A2/16 of impounded diary page 57 & 58 Rs.5,00,00,000/-10 ITA No.2735/Ahd/2010
Asst. Year 2008-09 The stock of shed, sand, cement etc. at the model town park site Rs.90,00,000/- The loose papers at the model town site office relating to the project which were impounded Rs.2,00,00,000/-
Payment made for purchase of land of Model town park is not recorded in books (annexure A 2/16 of impounded diary page 60 lower L side) Rs.2,00,00,000/-
All the above items have not been recorded in the books of M/s D R Construction but have been disclosed during survey and agreed to pay tax thereon Rs.10,00,00,000/- At the end, whatever amount I (we) have disclosed, we have promised to pay tax along with interest on the same."
(Q.Nos.27 & 28 as per translation given by the assessee and question no.26 and its answer is translated by us from vernacular).
(2) The ld. DR submitted that assessee has not been co-operating after survey. He did not declare this disclosure in the return of income. The return was not filed in the normal course but was only filed in response to notice u/s 148(1) showing NIL income.
(3) The ld. CIT(A) has discussed this issue in detail and held that amount is taxable in the current Asst. Year. He referred to para 4.1 of CIT(A)'s order as under :-
"4.1 The first ground of appeal is against the addition of Rs.10 crores on account of income, which is admitted and disclosed as unaccounted income during the course of survey proceedings, not offered for taxation in the return of income. In so far as the disclosure of Rs.10 crores made at the time of survey is concerned, the same has not been disputed by the appellant and the appellant has also not retracted from the statement of disclosure of Rs.10 made by Shri Ravi Khandelwal, partner of the firm while giving his statement on oath u/s 131 of the Act, at the time of survey u/s 133A of the IT Act. Further, disclosure of unaccounted income of Rs.10 cr. was made after Shri Khandelwal had verified the books of account and documents of the firm found during the course of survey, as also various entries found in the books of a/c at that time. The appellant has, however, not shown the disclosure amount as income in the return of 11 ITA No.2735/Ahd/2010 Asst. Year 2008-09 income filed for the year under consideration on the ground that the above amount has been shown as advances in the books of a/c. and corresponding debit entries have been made to the WIP a/c. The appellant's submission is that Rs.10 crores is included in the booking advances of Rs.11,74,81,450/- shown in the balance-sheet as on 31.3.2009 and is also included in the construction, administrative and other expenses aggregating to Rs.12,95,73,503/-, which have been transferred to the WIP a/c. The appellant has, thus, by passing the above entries in the books of a/c post survey, nullified the effect of disclosure of income of Rs.10 crores made during the course of survey. The moot question arising, therefore, is whether the income offered by the appellant at the time of survey can be shown as advances received from the customers and taken to WIP a/c. by making corresponding debits under various expense heads. It is seen that out of Rs.10 crores of disclosure made, Rs.2.10 crores only related to payment of 'on money' made in cash during the year through the brokers for purchase of land for Model Town Park, Magob, Surat which is not recorded anywhere in the books of a/c. of the appellant firm on the date of survey. Thus, as far as this amount is concerned, partner of the firm himself admitted that on the date of survey it is 'on money' payment made for purchase of land not recorded in the books of a/c., which clearly means that this amount has been paid out of the books of a/c as on the date of survey and, therefore, could not have been brought by the appellant in the regular books of a/c by way of advances and making corresponding debit in the WIP a/c. Similarly, out of the above Rs.10 crores, disclosure of Rs.5 crores and Rs.2 crores (total Rs.7 crores) has been made on account of unaccounted investment in Model Town Park and unexplained investment/expenses in the papers found and impounded from the office at Model Town Park. The appellant, therefore, at the time of survey admitted that the above two amounts have no relation with the advances and they are unaccounted investment on the date of survey and obviously not recorded in the books of account. The balance of Rs.90 lacs was disclosed on account of unaccounted stock of cement, steel, reti and other building material found at the site office at Model Town Park on the date of survey. These materials were also not recorded in the books of account and admitted by the appellant to be unaccounted stock. Therefore, this amount was also not represented by any advances. The appellant has not retracted from the disclosure made during the course of survey to the extent of Rs.10 crores. It means the appellant has no explanation to establish the source of Rs.10 crores represented by unaccounted investment, stock and 'on money' made in cash for the purchase of land, and, it is because of this reason that the income from which the above amount has been paid or expended and has not been offered to tax either in earlier years or not recorded in the books 12 ITA No.2735/Ahd/2010 Asst. Year 2008-09 of account in the year under consideration upto the date of survey, the same has, therefore, been offered for taxation as unaccounted income. The appellant has, in this regard also disregarded the proviso to section 69C of the Act which provides 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 the income." It is also relevant to note that the income offered by the appellant as unaccounted income during the course of survey is in the nature of 'deemed income'. The issue of head of deemed income u/s 69, 69A, 69B and 69C has since been considered on first principles in the Gujarat High Court decision in the case of Fakir Mohamed Haji Hasan vs. CIT (2001) 247 ITR 290 (Huj)."
(4) On the basis of decision of Hon. Gujarat High Court in the case of Fakir Mohamed Haji Hasan vs. CIT (supra) the ld. DR submitted that by virtue of deeming provisions of section 68, 69, 69A, 69B & 69C the expenditure incurred by the assessee as admitted by him in the statement recorded u/s 133A will not form part of book profit but would be taxed as deemed income separately. He also emphasized upon the observation of the Hon. Court from that judgment as referred to by ld. CIT(A) on pages 20 & 21 of his order.
(5) The ld. DR further pointed out that in view of above decision of Hon. Gujarat High Court, the expenditure so incurred by the assessee outside the books would be deemed income and no other expenditure would be allowed as set off against it including the expenditure which is taxed as deemed income u/s 69C. He submitted that unaccounted expenditure taxed as deemed income cannot be set off against the same expenditure otherwise provisions of section 69C would become otiose.
(6) The ld. DR submitted that the project completion method on which assessee is heavily relying on, cannot be invoked in the construction cases. The project completion method in respect of contracts entered into 13 ITA No.2735/Ahd/2010 Asst. Year 2008-09 above projects undertaken after 1.4.2003 cannot be applied. The revised accounting standard AS-7 pointed out that project completion method as one of the two methods for accounting construction contract was erroneous even for accounting purposes. The ld. DR referred to the judgment and other references as pointed out by the ld. CIT(A) on page 24 to 28 of his order.
(7) So far as unaccounted investment in land to the extent of Rs. 2,10,00,000/- is concerned this could be done only prior to initiating the project and 'on money' allegedly received on booking of flats. When flats are ready and the project has not taken shape investment in land will have to be made from assessee's own pocket and, therefore, such unaccounted investment in land cannot be covered by any alleged receipt of 'on money' from booking of flats.
(8) The ld. DR submitted that assessee has tried to show and cover the unaccounted expenditure by receipt of 'on money'. Since assessee has not given details of the parties from whom such 'on money' was received the unaccounted expenditure cannot be set off or cannot be said to be explained from the alleged receipt of 'on money'. The assessee has stated that Rs.10 crores is unaccounted expenditure and he is not able to co- relate any item of the expenditure with the receipt of 'on money' then assessee should be taxed only on the basis of unaccounted expenditure which remained unexplained and, therefore, Rs.10 crores should be taxed in Asst. Year 2008-09 only as undeclared expenditure. It is a trite law that if investment is unexplained it should be taxed u/s 69C. The assessee has declared unaccounted expenditure as his income and not receipt of on money as his income. Since unaccounted expenditure sought to be explained from unaccounted on money and such explanation is prima 14 ITA No.2735/Ahd/2010 Asst. Year 2008-09 facie not satisfactory in the sense that there is no details as to from whom such on money was received, the source of unaccounted expenditure should be treated as not satisfactorily explained and thus covered by section 69C.
(9) It is not believable as claimed by the assessee that he would have received on money from 130 persons. Assessee is only trying to give twist to the case and avoiding to pay taxes on accounted expenditure of Rs.10 crores.
(10) Finally the ld. DR summarised his arguments saying that -
(i) That there is an unequivocal disclosure of income in Asst. Year 2008-09 in terms of unaccounted expenditure.
(ii) No detail as to how disclosure represented in various assets is given.
(iii) Statement is not retracted which still stands.
(iv) Not offering disclosure amount as on money, now, is only an after thought.
(v) The certificate of auditor is self serving and cannot be relied upon that sum of Rs.10 crores is on money.
(vi) Stand of ld. CIT(A) that this sum is taxable u/s 69C is correct.
(vii) It is not possible to collect sum of Rs.10 crores from 130 persons. No details of such persons are given.
(viii) Apparently the date of application of money is earlier as compared to date of collection.
(ix) If sum of Rs.10 crores is treated as credit in the books as on money and since it is not explained it should be alternatively taxed u/s 68.
15 ITA No.2735/Ahd/2010Asst. Year 2008-09
(x) No deduction u/s 80IB should be allowed as it is not proved that Rs.10 crores is booking receipt.
(xi) The decision of Hon. Gujarat High Court in Radhy Developers is not applicable which was applicable prior to 1.4.99 and not in Asst. Year 2008-09.
(xii) There is an amendment in the Act in section 69 C by way of insertion of proviso which prohibits allowing any expenditure against deemed income taxed under section 69C.
(xiii) According to the ld. DR such expenditure which is treated as deemed income, cannot be allowed as deduction under any other head as well,
11. In rejoinder the ld. AR submitted that there is no evidence in support of the statement that either there is any expenditure or there is any "on money" received. The statement should be read as a whole. If there is a statement for expenditure then there is also a statement for "on money". Revenue has not relied upon any document though claimed but no copy thereof has been provided to us. The disclosure was taken just for the sake of taking disclosure. Statement u/s 133A is not binding on the assessee, because there is no material evidence in support of such statement. Even the question No.26 put up by Survey Officers talked about 'on money' received on booking of flats, then there is no question of ignoring the same. As per statement itself expenditure is directly related to receipt of 'on money'. Therefore, such expenditure is explained from the source which is "on money". Thus it cannot be taxed u/s 69C. The onus is on the Revenue that "on money" so received is taxable in Asst. Year 2008-09. Further revenue can tax "on money" along with sale proceeds of the flats and cannot be taxed separately i.e. "on money"
receipt in cash in Asst. Year 2008-09 on cash basis and cheque money 16 ITA No.2735/Ahd/2010 Asst. Year 2008-09 received on booking of flats in Asst. Year 2009-10 and 2010-11. Since both relate to same item, both can be taxed together. Both will accrue as income simultaneously in the mercantile system of accounting. Accounting AS-7 is applicable in case of builder but is not applicable in the case of contractor. Assessee is not a contractor but he is a builder and, therefore, his income can only be taxed on project completion method, when both income and expenditure can be considered together. Even though partner of the assessee firm has stated that it is his income for Asst. Year 2008-09 but he is talking in terms of receipt and he is not expected to understand it in legal sense. If assessee has right to revise a return and then assessee has also a right to revise his statement wrongly given that it is income for Asst. Year 2008-09. A legal mistake done by the assessee can always be rectified.
12. We have considered the rival submissions and perused the material on record. Undisputed facts of the case are that during the course of survey Shri Ravi Khandelwal partner of the firm has stated as per translation of statement referred to above, that he has received 'on money' on booking of flats which has been spent as per details given above. Both the elements i.e. receipt of 'on money' and incurring of expenditure/investment are stated in the statement. Revenue is relying merely on one part of the statement that assessee has made unaccounted investment and, therefore, it should be taxed u/s 69C whereas assessee is emphasizing that expenditure is only out of 'on money. The statement is not retracted. Shri Ravi Khandelwal has also stated that sum of Rs.10 crores is his income for Asst. Year 2008-09 but the same has not been declared in the return filed in response to notice u/s 148(1) wherein the income is declared NIL. The assessee has sought now to take the stand that the sum of Rs.10 crores is not an income for Asst. Year 2008-09 but 17 ITA No.2735/Ahd/2010 Asst. Year 2008-09 would be the income when flats are sold. It has also taken the stand that it is following project completion method and, therefore, entire income/expenditure would be taxed only when project is completed which is not in Asst. Year 2008-09. Further, after examining AS-7 we are of the considered view that this would be applicable to builder and not to the contractor. In the revised AS-7 contract revenue and expenditure are recognized on completion of the project as under :-
"21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognized as an expense immediately in accordance with paragraph 35."
However, in the present case we notice that assessee has not exactly followed project completion method as the date of completion of the project and realizing of revenue are different. It has continued to sell the flats in 3 different Asst. Years ending on March 2010 and March, 2011 and, therefore, revenue has to be recognized on mercantile basis as and when flats are sold. The auditors have given a certificate as to how different flats are sold as under :-
Sl.No. Particulars 31.03.2010 15.03.2011 Total 1 No. of residential units 141 53 194 sold No. of shops sold 8 2 10 Total units sold 149 55 204 2 Area sold (sq.ft.) 129879 56487 186366 Total saleable area 310204 sq.ft.
3 Sales consideration as 89485405 36525340 126010745
per document (Rs.)
18
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Asst. Year 2008-09
4 Proportionate booking 41868899 1,82,09,630 6,00,78,529
advance out of
disclosure of Rs.10
crores (Rs.)
5 Total sales 131354304 54734970 186089274
Further we also notice that even though Revenue has heavily relied upon the statement of Shri Ravi Khandelwal but documents which would have reflected expenditure or receipt of 'on money' and which is claimed to be the basis for disclosure is not provided to us. Even the assessee has alleged that copy of such document is not provided to him. Therefore, it is not proved that any statement given by the assessee is supported by any material evidence in the form of loose paper etc. which is claimed to be found during the survey. If there were such documents Revenue should have produced them before us so as to strengthen the disclosure made in the statement.
13. In our considered view if assessment has to be framed entirely on the basis of statement of Shri Ravi Khandelwal which is admittedly not retracted by the assessee then entire statement should be read as a whole and reliance cannot be placed or inference cannot be drawn from part of the statement. If investment/expenditure is accepted to have been made outside the books on the basis of statement given by Shri Ravi Khandelwal then receipt of 'on money' on booking of flats should also be accepted on the basis of same statement unless heavier evidence in the form of supporting evidence which could only show the incurring of expenditure/investment outside the books but no receipt of on money are produced before us, which in fact is not done, if there were any. Therefore, the factum of receipt of 'on money' is to be accepted in the same way as factum of income/expenditure is accepted on the basis of 19 ITA No.2735/Ahd/2010 Asst. Year 2008-09 same statement of Shri Ravi Khandelwal. No reasons are advanced as to why only the factum of incurring expenditure/investment should alone be accepted and not the receipt of 'on money'. The ld. DR had emphasized that there is no evidence/details of receipt of 'on money' then similarly there is no evidence of expenditure/investment outside the books. Therefore, reliance is only placed on the statement of Shri Ravi Khandelwal though it remained unsubstantiated. Only for the reasons that the same is not retracted its contents are accepted as representing the events actually happened. In other words, if events/transaction regarding incurring of expenditure/investment is accepted as actually happened then events/transactions representing receipt of 'on money' would also be accepted as happened. From this it follows that expenditure/investment is explained in the statement as coming out of 'on money' and, therefore, provisions of section 69C cannot be invoked and as such expenditure/investment is explainable from 'on money'. If we go through the statement of Shri Ravi Khandelwal which is clear that first event/transaction stated by him is about receipt of 'on money' and thereafter the details thereof expenditure/investment is given. Therefore, what can be taxed is only the 'on money' as income not expenditure/investment under section 69C. Therefore, the relevant part of the argument of ld. DR that provision of section 69C should be invokved and expenditure/investment should be taxed as deemed income rejecting the other part of the statement regarding receipt of 'on money' is not acceptable and hence rejected.
14. Once what is to be taxed is 'on money' then it has to be examined when can it be taxed. Whether it can be taxed in Asst. Year 2008-09 on the basis of statement of Shri Ravi Khandelwal alone? In our considered view the statement that on money is income is a generic form of saying 20 ITA No.2735/Ahd/2010 Asst. Year 2008-09 receipt as income and not in the sense of true interpretation of the term 'income' as per I.T. Act. 'On money' as such cannot be taxed alone unless it is proved that all the expenditure incurred on the project was recorded in the books of account and 'on money' component was over and above the receipts recorded in the books. No such evidence has been furnished. To the contrary it is undisputed position that out of this on money assessee has incurred various expenditure/investment. Therefore, 'on money' as such and as a whole cannot be taxed over and above the income accruing on the basis of entries recorded in the books of account. From this it follows that 'on money' has to be treated as revenue receipt and not purely income. The explanation of the ld. AR in this regard has to be accepted which is also supported by the statement of Shri Ravi Khandelwal when read as a whole. Thus Rs.10 crores as such cannot be income separately taxable taking it in isolation of expenditure incurred by the assessee against such receipt. Therefore, both 'on money' as well as expenditure/investment has to be separately accounted for/added to the declared receipts and declared expenditure/investment as per books to work out total income accrued to the assessee and total expenditure/investment incurred by it.
15. The next issue comes as to when the income out of such receipt would accrue to the assessee. In our considered view receipt of 'on money' is part and parcel of money received on sale of flats by cheque. The amount received by cheque before actually transferring the flats to the purchasers will be in the nature of advance and cannot be said to have accrued to the assessee. Assessee has incurred expenditure/investment in the project in various years but income to it will accrue only when flats are sold to the buyers. Advance money received by the assessee can never be his income. It would only be a liability shown in the balance sheet as 21 ITA No.2735/Ahd/2010 Asst. Year 2008-09 advances from the customers and will be adjusted against the sale proceeds of the flats when flats are transferred to the purchasers. Therefore, accrual of income to the assessee will not arise on the date when it receives cheque or cash against sale on flats but will arise when flats are transferred to the buyers. Till then it will only be an advance. We notice that assessee has booked the flats from Asst. Year 2008-09 on wards and received advances by way of cheque. It has also received advance in cash which is now declared as 'on money' in the statement given by Shri Ravi Khandelwal. In a chart given before us by the assessee, names of the prospective buyers and their PANs have also been given and also the date of booking. There were 122 such buyers and from whom 'on money' in cash to the extent of Rs.10 crores is stated to be received. The outstanding amount against them is also shown. The area of the premises booked, rate at which it is booked and the date of booking all fall in the FY 2006-07 and 2007-08. But as per certificate of the auditor whose contents are referred to above, assessee has sold total 149 units in FY 2009-10 and 55 units in FY 2010-11 upto 15.03.2011. It has shown to have adjusted a sum of Rs.4,18,68,899/- out of Rs.10 crores against sale of 149 flats/shops and of Rs.1,82,09,630/- against sale of 55 flats/shops. The revenue is accordingly recognized only when flats/shops are sold and, therefore, both cheque portion/cash portion being the 'on money' would accrue to the assessee in the year when flats/shops are sold. Therefore, in no way sum of Rs.10 crores as a whole can be taxed in Asst. Year 2008-09 on the basis of expenditure as deemed income u/s 69C.
22 ITA No.2735/Ahd/2010Asst. Year 2008-09
16. Now we discuss certain authorities referred to by the parties.
(1) The ld. DR has relied on the decision of Hon. Punjab & Haryana High Court in the case of National Legguard Works vs. CIT(A) & Anr. (2007) 288 ITR 18 (P& H). In this case income was surrendered during the course of survey following the detection of unexplained stock. Assessee sought to treat such income as income from exports and claimed deduction u/s 80 HHC. On the basis of this judgment ld. DR sought to argue that assessee would not be entitled to deduction u/s 80IB on such unaccounted receipt of 'on money' representing unaccounted expenditure/investment. In our considered view the issue whether assessee would be entitled to deduction u/s 80IB on the disclosed amount is not before us as we have held that no income accrued to the assessee in Asst. Year 2008-09 out of receipt of 'on money'.
(2) D.M.Neterwalla vs. CIT (1980) 122 ITR 880 (Bom). This authority was cited by the ld. DR for the proposition that if unaccounted income/expenditure is sought to be explained by receipt of 'on money' then such on money remained unexplained and therefore, it should be taxed u/s 68 and such alternative new contention can be allowed by the Tribunal. There is no dispute about this proposition. However, neither unaccounted income/expenditure is recorded in the book nor the 'on money'. Unless a credit is found entered in the books, provisions of section 68 cannot be invoked.
(3) CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. (2005) 273 ITR 1 (SC). The ld. AR has referred to this authority. It related to taxing of casual and non-recurring receipts being surrendered of tenancy rights. As per law prior to amendment in section 55(2), Hon. Supreme Court held 23 ITA No.2735/Ahd/2010 Asst. Year 2008-09 that if an income is included under any one of the heads as specified in section 14 being items A to E then it cannot be brought to tax u/s 56 as casual and not receipt. If the income cannot be taxed u/s 45 it cannot be taxed at all. The ld. AR sought to draw parallal to the facts of the present case by arguing that if income does not accrue it cannot be taxed. In our considered view the facts of this case are different and cannot be applied the way it sought to be done by ld. AR.
(4) Krishna Textiles vs. CIT (2009) 310 ITR 227 (Guj). On the basis of this judgment ld. AR sought to argue that if an expenditure/investment is taxed u/s 69C then expenditure should be allowed u/s 37(1). However, this authority would not be applicable after 1.4.99 because of insertion of proviso to section 69C which prohibits allowability of any expenditure against deemed income as per section 69C.
(5) Fakir Mohmed Haji Hazan vs. CIT (2001) 247 ITR 290 (Guj). The ld. DR relied on this authority. It has already been observed above by us that provisions of section 69C would not be applicable on the facts of the present case, therefore, question of invoking the ratio of this decision would not arise.
(6) DCIT vs. Radhe Developers India Ltd.(Guj) in Tax Appeal No.171 of 1999. In this case applicability of ration of the decision of Hon. Gujarat High Court in the case of Fakir Mohmed Haji Hasan (supra) was considered. We have already held above that as provisions of section 69C are not applicable therefore, the ratio of this decision cannot be considered.
24 ITA No.2735/Ahd/2010Asst. Year 2008-09 (7) CIT vs. Ashaland Corporation (1982) 133 ITR 55 (Guj). In this judgment Hon. Gujarat High Court has held that income accrues on sale of land and arises in the year in which the title in the property is transferred and not in the year in which assessee received part of consideration and earnest money. Business of that assessee was to purchase and sale of land. The transaction of sale of land becomes complete only on possessing of title which takes place only when registered deed is executed. Some receipt of earnest money and advance receipt of money towards transaction would not by itself partake the character of taxable income as the registered sale deed was executed only in the subsequent year. In this regard we refer to following head notes from that judgment:-
"The land purchased by the assessee which forms part of its stock-in- trade, would continue to be so, until and unless it sells it. The business deal in respect of the land would be complete only when the assessee executed a sale deed. Since it was only on completion of the sale transaction that the assessee could be said to have earned profit or suffered loss, the earnest money and part payment of price would not constitute trading receipts for the assessment year in which they were received. Unless the title of the assessee is extinguished, the title to the purchaser cannot arise. Both cannot be the exclusive owners of the same property at the same time. It was exiomatic that an agreement to sell does not create any interest in favour of the purchaser. It is on completion of the transaction of purchase and sale culminating in the extinguishment of the title of the vendor and simultaneous creation of the title in the vendee that the assessee earns profit or suffers loss. A transaction which may or may not ultimately result in a completed sale by executing a registered conveyance, is no transaction at all for the purpose of working out profit. Receipt of sum amount would assume the character of income or profit only when the sale transaction is completed in accordance with law. The land does not cease to be the stock-in-trade of the assessee unless and until the sale is completed. Therefore, the amount received by the assessee by way of earnest money and party-payment of the purchase price cannot be treated as its trading receipt -Kunjamal & Sons. In re (1941) 9 ITR 358 (All), Chidambaram Chettiar vs. CIT (1936) 4 ITR 309 25 ITA No.2735/Ahd/2010 Asst. Year 2008-09 (Mad); TC39R, 210 and CIT vs. Shah Doshi & Co. (1981) 23CTR (Guj) 307: (1982) 133 ITR 23 (Guj): TC 39R, 936 followed.
Amount received by way of earnest money and advance amount towards transaction of sale of land would not by itself partake the character of taxable income."
17. There cannot be two opinions on the proposition that the sale of immovable property to purchaser would be complete on actual conveyance of the title. In K.C. Pal Chowdhury vs. CIT (1962)46 ITR 01(Cal) it is held even where there is an agreement for sale and delivery of possession and full consideration was paid but sale deed was executed on later date then title would pass when sale deed was executed. Capital gains would accrue at that point of time. However, after insertion of section 53A in Transfer of Property Act and clause (v) in section 2(47) the position of law has changed and capital gains would accrue on payment of full consideration and handing over of the possession. In Meccane Industries Ltd. vs. CIT (2002) 254 ITR 175 (Mad) Hon. Madras High Court held that capital gain would accrue in the year in which sale deed was executed. Hon. Andhra Pradesh High Court in CIT vs. Nawab Mahmood Jung Bahadur (1988) 172 ITR 592 held that capital gain would arise on transfer of asset liable to be taxed for the year in which transfer took place. Hon. Gujarat High Court in CIT vs. Mormasji Mancharji Vaid (2001) 250 ITR 542 (Guj) held that transfer of immovable property is effected on the date of execution of transfer deed and registration of transfer deed is effected from the date of execution. From these authorities it follows that there should be an immovable property in existence and transfer deed is executed which is later registered. Thus capital gain would accrue or arise only when transfer deed is executed. In the present case assessee is dealing in several immovable property i.e. 26 ITA No.2735/Ahd/2010 Asst. Year 2008-09 flats and shops which he has constructed. A single flat is a capital asset for the purchaser but for the assessee all the flats together constitute stock-in-trade. As assessee is dealing in capital asset, as stock-in-trade, the basic principle of accrual of income will remain the same i.e. profit on sale of flat will accrue to the assessee when flat is in existence and the same is transferred to the purchaser through the transfer deed. The profit would arise to the assessee only on execution of transfer deed which may be registered in the same year or may be in the subsequent year. Hon. Supreme Court had occasion to consider the concept of accrual or arising of income in the case of E.D. Sassoon & Co.Ltd. & Ors. vs. CIT (1954) 26 ITR 27 (SC) wherein it is held that there is no difficulty in understanding what is receipt. It conveys a clear and definite meaning and there cannot be any expression which makes its meaning plain then the word "receiving" itself. The words accrual/arise are not defined in the Act. Accruing is synonymous with arising in the sense of springing as a natural growth or a result. "Accrual" would indicate a sense of growing up by way of addition or increase or as an accession or addition while arise would mean coming into existence or notice or presenting itself.
"Accrual" connotes an intangible growth while arise a tangible shape so as to be receivable. From these concepts it follows that accrual is anterior in point of time than arise. Point of taxability in the context of transfer of an immovable property would be the moment when transfer deed is executed and at that moment profit to the assessee would accrue and a right of the assessee to receive consideration for such transfer would arise. Prior to this, when assessee having no right accrued or arose as there was no transfer of any asset with the meaning of section 2(47) of the Act. Whatever the assessee had from the prospective buyer would only be a liability and the liability as such cannot be treated as income as no such income accrued or arose to the assessee. Merely receiving a sum for 27 ITA No.2735/Ahd/2010 Asst. Year 2008-09 future purchase of an immovable property cannot be a sale consideration even within the meaning of section 53A of Transfer of Property Act as property being not in existence. The possession thereof cannot be given to the prospective buyers and, therefore, the sum received for being adjusted against sale consideration will continue to carry the character of advance only and a liability in the books of the assessee. Merely because such receipt is not declared or recorded in the books of account will not change the character which has to be decided in the light of the purpose for which it is given. Further such receipt (on money in the present case) cannot be dissected from other part of receipt through banking channels as both are integral part of sale consideration. If the amount given by cheque carries the character as an advance against sale consideration then 'on money' in cash will also carry the same character. Both types of receipts i.e. receipt through cheques and receipt through cash as 'on money' will arise as income to the assessee as soon as transfer of immovable property is executed and not before, or possession thereof is handed over and for this it is necessary that such immovable property should be in existence. Therefore, we are of the considered that 'on money' received by the assessee did not have the character of income but was only an advance like the one received through cheque. Both will become part of the sale consideration to the assessee simultaneously on either handing over the possession of the flats or on execution of transfer deed whichever happens earlier.
18. Thus on the basis of above judgments we hold that advance money received either by way of cheque or by way of cash will partake the character of taxable income when registered sale deed of the flats is executed in subsequent years. As a result, the sum of Rs. 10 crores will 28 ITA No.2735/Ahd/2010 Asst. Year 2008-09 not taxable in Asst. Year 2008-09. The appeal of assessee is accordingly allowed.
19. The second ground is about setting off of interest income of Rs.13,39,593/- against interest expenses of Rs.56,49,225/-. The AO found that interest bearing funds were entirely not utilized for business purposes. Therefore, benefit of netting cannot be given.
20. The ld. CIT(A) confirmed the addition.
21. We have heard the parties. What is required to be found out is that the interest bearing fund were given as advances on which interest income of Rs.13,35,593/- is earned. If assessee is able to show the nexus that interest bearing funds or part thereof was given as advance on which assessee has earned interest, to that extent netting can be allowed. If assessee is not able to establish such nexus of interest bearing funds and advances on which assessee has earned interest netting will not be allowed and interest income to that extent would be taxed separately. This ground of assessee is, therefore, allowed but for statistical purposes.
22. The third ground relates to addition of Rs.2,69,690/- as interest on alleged interest free advances. The AO found that following amount is outstanding against various persons :-
Sl.No. Name of the persons Balance outstanding Interest as on 31.03.2008 @ 13.5% 1 Neeta Khandelwal 6,00,000 50,625 2 Vishwanath Khandelwal 11,41,000 87,191 3 D.R. Corporation 40,32,300 68,638 4 Ashwin Khandelwal 2,00,000 12,279 5 Suman Khandelwal 2,55,000 34,425 29 ITA No.2735/Ahd/2010 Asst. Year 2008-09 6 V.N. Khandelwal 1,50,000 16532 Total 2,69,690 According to the AO assessee earned interest on such interest free advances. Some of them included partners of the firm. Since the assessee has paid interest of Rs.56,49,225/- it should have declared interest income on such interest free advances. He accordingly calculated probable interest income on such advances and added in the total income.
23. The ld. CIT(A) confirmed the same.
24. We have heard the parties and carefully perused the material on record. In our considered view this issue is also required to be examined afresh from the point of view of nexus. AO has to show that interest bearing funds were advanced as interest free to these partners. If it is so then rather taxing interest income, part of interest expenditure can be disallowed. But where assessee has sufficient personal capital or interest free funds then no such addition can be made. With these observations we restore this issue also to the file of AO. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes.
25. In the result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes.
Order was pronounced in open Court on 8/4/11.
Sd/- Sd/-
(Bhavnesh Saini) (D.C. Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 8/4/11.
Mahata/-
30
ITA No.2735/Ahd/2010
Asst. Year 2008-09
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
1.Date of dictation 25/3/2011
2.Date on which the typed draft is placed before the Dictating 4/4/ 2011 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................
31