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AO cannot disallow interest payment based on general observations of Special Auditor’s report, while ignoring the specific findings therein: ITAT

2019-TIOL-1572-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’ MUMBAI

ITA No.3735/Mum/2017
Assessment Year: 2011-12

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE – 4(1), AAYAKAR BHAVAN
M K ROAD, MUMBAI – 400020

Vs

M/s AHINSA INFRASTRUCTURE AND DEVELOPERS LTD
60, MULJIJETHA BUILDING, 3RD FLOOR, 185/187
PRINCESS STREET, MUMBAI – 400001
PAN NO: AADCA3891R

ITA No.3990/Mum/2017
Assessment Year: 2011-12
&
CO No.282/Mum/2018
Arising out of ITA No.3735/Mum/2017
Assessment Year: 2011-12

M/s AHINSA INFRASTRUCTURE AND DEVELOPERS LTD
60, MULJIJETHA BUILDING 3RD FLOOR, 185/187
PRINCESS STREET, MUMBAI – 400001
PAN NO: AADCA3891R

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE – 4(1), AAYAKAR BHAVAN
M K ROAD, MUMBAI – 400020

Sandeep Gosain, JM & G Manjunatha

Date of Hearing: May 09, 2019
Date of Decision: June 27, 2019

Appellant Rep by: Shri Vipul Joshi & Ms Namrata Kasate
Respondent Rep by: 
Shri Anadi Varma & Shri Satishchandra Rajore

Income Tax – Interest expenses – Construction cost – Capitalized expenses.

THE assessee company engaged in the business of infrastructure development and trading in various goods, filed return of income for the relevant AY. During assessment the AO made disallowance of interest expenses on the ground that Special Auditor had observed that the assessee had primarily utilized the funds towards construction cost incurred in the four on going projects and hence, substantial part of interest expenses were liable to be capitalized. On appeal, CIT(A) removed the disallowance made.

On appeal, Tribunal held that,

Whether by ignoring the clear findings of the Special Auditor’s report relating to interest payment, AO cannot disallow the same based on general observations of report – YES : ITAT

Whether no disallowance of interest payment can be made if interest bearing funds are not used towards construction business – YES : ITAT

++ as per the claim of the assessee, the expenditure was incurred in connection with buying and selling of the land and also for the purpose of the business for working capital for the business. According to the assessee no expenditure out of this amount was incurred for its construction project. It is an undisputed fact that assessee is a limited company whose accounts are certified by the statutory auditors as depicting true and fair view of the affairs of the assessee. The accounts had also certified as showing true and correct in form 3CD which include specific examination of the issue concerning claiming any expenditure of capital nature debited to profit and loss account as well as the amount of interest in admissible u/s.36(1)(iii);

++ assessee had also received interest income and importantly its position was accepted in past in subsequent years. There was no such disallowance of interest expenditure either on the ground of it being related to construction business or it being incurred for non-business purposes. From the record, it was noticed that the AO had placed reliance on the comments by the Special Auditor appointed by the department u/s.142(2A) of the Act. However, the Special Auditor nowhere held in his report that interest bearing funds were used towards construction business infact, the report of the Special Auditor goes to support the contentions of the assessee. The Special Auditor had also called for various details, including specifically, segmental P & L Account and details of loan utilized for various businesses. We further noticed that assessee had filed exhausted details, including books of accounts alongwith supporting of income and expenses, cumulative statement, agreement with contractors, permission letter for consent of project, statement etc. Thereafter, the assessee had also filed other documents called by the Special Auditor. The specific mandate was also given to the Special Auditor to verify all accounts of expenses debited to profit and loss account including their genuineness as well as to verify whether any capital expenditure was debited to profit and loss account towards this Special Auditor after appreciating the documents and details filed by the assessee, give clear finding that the same were in agreement with the audited accounts of the assessee and the assessee had not debited any capital expenditure to the profit and loss account. The Special Auditor also verified the cost of work in progress of the project and also approved signatory profit and loss account in which no interest expenditure was debited to construction activity, but interest expenses were debited to land business. It was also acknowledged by the Special Auditor with the major source of funds for the assessee company was the fundings received from the sale of flats and the sale proceeds received from sale of plot of land. The AO had ignored the clear findings of the Special Auditor and interest relied upon the couple of general observations as contained in the report;

++ AO had not denied the availability of huge interest free funds with the assessee for its construction activity. At the same time, the revenue has not brought on record any cogent material to support its action. Thus, it appears that the disallowance made by the AO was passed purely on the basis of surmises. There was contradiction of inconsistency in the approach of the AO as much as he did not allege interest component to the work in progress either. It was further noticed that nowhere in the past or even in subsequent years any such disallowance is made, although the principle of fast Res judicata will not apply to the assessment proceedings, however, the settled legal position is that the rule of consistency equally applies to the assessment proceedings. More particularly, when a position was accepted in the past years in subsequent years then the same cannot be altered by the AO for a particular year except if there are changes in facts of legal position but nothing of this kind has been demonstrated by the AO, therefore, in these circumstances, it was decided to agree with the findings recorded by CIT(A) to the effect that the additions made by the AO on account of disallowance out of interest expenses is not justifiable.

Revenue’s appeal dismissed

ORDER

Per: Sandeep Gosain:

These cross appeals in ITA Nos.3735/Mum/2017 & 3990/Mum/2017 for A.Y.2011-12 and cross objection No.282/Mum/2018 filed by assessee arise out of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai dated 14/02/2017 in appeal No.CIT(A)-9/Cir.4/222/2014-15 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 142(2A) of the Income Tax Act, 1961 (hereinafter referred to as Act) by the ld. Dy. Commissioner of Income Tax-Circle-4(1), Mumbai (hereinafter referred to as ld. AO).

ITA No.3735/Mum/2017

2. The brief facts of the case are that the assessee company is engaged in the business of infrastructure development and trading in various goods. The return of income for the year under consideration was filed on 29/09/2011 declaring total income of Rs.2,19,64,310/-. The same was processed u/s.143(1) of the Income Tax Act 1961 accepting return of income. Thereafter, the case was selected for scrutiny and after serving statutory notices seeking reply of the assessee, the assessment u/s.143(3) of the Act was completed by AO on determining the total income of Rs.24,67,68,540/- after making certain additions/disallowances.

3. Aggrieved by the order of AO, the assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) after considering the case of both the parties partly allowed the appeal. Against this, both assessee as well as revenue has filed their respective appeals.

Since first of all we are dealing with the appeal filed by the revenue, the grounds of which are reproduced below:-

1. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the assessing officer to delete the disallowance of interest expenses of Rs.1,34,90,530/- without appreciating the facts that special auditor has observed that the assessee has primarily utilized the funds towards construction cost incurred in the four ongoing projects and hence substantial part of the interest expenses was liable to be capitalized.

2. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the assessing officer to delete the addition of unexplained cash receipts of Rs. 20,86,37,000/- without appreciating the facts that the assessee is segregating/the cash and bank receipts by maintaining the record and that only entries received in cheque are entered in the regular books of the assessee.

“The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

Ground No.1:-

3.1. This ground raised by the revenue relates to challenging the order of CIT(A) directing the AO to delete the disallowance of interest expenses of Rs.1,34,90,530/-. The ld. DR relied upon the orders of the AO and submitted that the ld. CIT(A) has erred in directing the AO to delete the disallowance of interest expenses without appreciating the fact that Special Auditor has observed that the assessee has primarily utilized the funds towards construction cost incurred in the four on going projects and hence, substantial part of interest expenses were liable to be capitalized.

3.2. It was further submitted that the AO had categorically observed in para 5.3 of its order that assessee company has not utilized its funds in the construction cost in the four projects of the company. In this respect, the ld. DR also relied upon para 7.1 of the order of CIT(A). The same is reproduced hereinbelow:-

7.1. During the course of assessment proceedings, the A.O. submitted as under:

“5.1. The assessee has shown income from Sale of Fabrics at Rs. 163.61 lakhs, Sale of Land at Rs.1587.46, plus other income from Interest & rent. Against the same, the assessee has claimed purchase of Fabrics at Rs.161.68 lakhs, Purchase of land at Rs.791.80 lakhs, Construction cost of Rs.956.07 lakhs, & Expenditure (Office & Administration Expenses/interest/depreciation, etc.) at Rs. 316.56 lakhs. The assessee has also credited Increase in stock at Rs.681.58 lakhs to the P & L account. The Profit Before Tax shown by assessee is at Rs.220.36 lakhs.

5.2. Under the terms of reference, the Special Auditors have arrived at the Segment-wise Profit & Loss Account of the assessee, which is reproduced below:

ParticularsFabricsLand BusinessConstruction businessTotal
Sales1,63,60,73515,87,46,06217,51,06,797
Purchase Cost1,61,67,7277,91,79,8859,53,47,612
Closing Stock15,03,41,35415,03,41,354
Opening Stock18,98,72,39918,98,72,399
Transfer in WIP(1,20,81,700)1,20,81,700
Construction cost  7,08,87,227 
Closing WIP10,76,88,636
Opening WIP2,47,19,709
Gross Profit1,93,0085,21,16,8325,23,09,840
Indirect Income13,82,81313,82,813
Expenses(3,16,56,172)3,16,56,172
Net Profit1,93,0082,18,43,4732,20,,36,481

5.3. A reference to above would show that the assessee has claimed the entire expenditure of Rs.316.56 lakhs against Land Business. The said expenditure includes Interest Paid of Rs.2,36,67,597/-, among other office & administrative expenses etc. The Special Auditors, while making comment on the Application of Funds of the assessee company have stated that” On the analysis of the bank account of the assessee company and based on the explanation given to us, we observe that the assessee company has utilised its fund for the constructions cost incurred in the four projects of the company, Further, the assessee company has also paid advances to various parties for the acquisition of land and has also made further investments for acquiring the stake in Bhilwara Spinner Limited”. In view of the same, it is clear that the assessee has not made allocation of interest expenses to its construction business, though the funds have been utilized for the construction cost incurred in the four projects of the company. It is also observed that the assessee had not recognized any revenue in respect of Construction Business, since the assessee is following Project Completion Method, and its ongoing four projects are reportedly not completed in the financial year under consideration. In such situation, it was imperative upon the assessee to capitalize the part of interest attributable to its construction business towards cost of the project, which is clearly not done.

5.4 During the course of assessment proceedings, the assessee was asked to submit a statement showing proportionate interest allocable to each of its business segments, and accordingly show the interest allowable against revenue recognized in current assessment year. The assessee was also show caused as to why the balance interest expenses should not be disallowed. In response, vide letter dated 23.07.2014, the AR of assessee submitted that all the projects under construction are funded by advance payments from customers of Rs. 1407.24 Lahhs which is more than the amount spent on construction till date, and further the amount invested in acquiring stake in Bhilwara Spinners Ltd, was out of own funds only. The AR, therefore submitted that the interest charged to land business is correctly charged. The AR, in his letter dated 24.03.2014, further clarified that the interest expenses of Rs.2.36 crores are related to working capital of the company, and the company has not incurred interest on term loan taken for construction, hence it was not capitalized/added to the incomplete projects.

5.5 The details filed by the assesses has been considered and it is found that the assesses has utilized the loans taken by him for the construction cost incurred in the 4 projects of the company for which he has paid interest of Rs.2,36,67,597/-. The Special Auditor has also ‘observed that the assessee has acquired land and made further investments in acquiring the stake in Bhilwara Spinners Ltd and based on that fact he was having the opinion that this needs to be capitalized and is not the part of revenue expenditure., The assesses in his reply has merely submitted that all the projects under construction are funded by the advance payment from customer of Rs. 1407.24 lakhs which is more than the amount spent on construction till date, and further the amount invested in acquiring state in Bhilwara Spinners Ltd was out of his own funds. He has not even given the cash flow chart in which he may establish that investment in Bhilwara Spinners Ltd is from his own funds and advance payment from customers has been utilized for construction of project. It was the duty of the assessee to submit the cashflow and statement with respect to cash received from the customers and then utilized for the construction of the project. Therefore, on the failure on the part of the assessee to establish that the Bhilwara Construction Ltd investment was funded by his own fund and construction has been undertaken out of advance payment from customers, the submission made by him is not acceptable. The perusal of the balance sheet shows that the assessee has Secured Loans of Rs.422.09 lakhs & Unsecured loans of Rs.2323.37 lakhs, therefore, it is observed that the substantial portion of interest expenses is attributable to the unsecured loans from directors/others, which funds are not meant for any specific business, and are available for use in common pool of various business activities of the company.

The assesses has shown WIP of construction projects at Rs.956.10 lakhs and Advances received against property sale at Rs. 1407.24 lakhs. The assessee has not submitted any explanation as to the source of huge advances made against property purchase. It is also the fact to be noted here that on the query raised in the assessment proceedings with respect to present status of said advances ofRs.1911.99 lakhs, the assessee has submitted details whereby:-

(i) Advances aggregating to Rs.1115.00 lakhs under 6 different deals have been returned back due to said deals cancelled, (ii) Advances aggregating to Rs.732.50 lakhs stand as it is in respect of 4 deals, (iii) Advances for balance figure ofRs.64.49 lakhs only in respect of 3 deals have been resulted in making registry of lands. No prudent businessman would make such huge advances without entering into registered agreements, which the assessee company has failed to explain, find hence the nature of said advances is highly questionable. These facts amply show that the assessee company is diverting interest – free funds available in the business for non-business purposes, hence the assessee’s aforesaid contention does not hold any ground. In these circumstances, the disallowance of interest expenses attributable to construction business is justified.

5.6 It has been observed from Special Audit report that the assessee company has primarily utilized the funds towards construction cost incurred in the four ongoing projects, and hence a substantial part of interest expenses is liable to be capitalized. Still, a reasonable estimate of the same may be made on the ratio of stock-in-trade/WIP of two business, which are (i) Rs. 1503.41 Lakhs for land business & (ii) Rs.2032.96 Lakhs.(ie. 1076.89 being WIP of land plus Rs.956.07 Lakhs being WIP of construction cost) for Construction business. Therefore 57% of the funds {Total WIP of construction cost and land business Rs.3536.37, the WIP of construction business constitutes 57% of total WIP are blocked in construction business and the advances received in construction business are already used for making advances for purchase of other assets as discussed above. In view of the above, 57% of the interest expenses of Rs.2,36,67,597/- which works out to Rs.1,34,90,530/- are disallowed and added to the total income of the assessee”.

3.3. It was also submitted that since the present case is a case of Special Audit u/s.142(2A) and the AO in para No.5.2 of its order had given the details of the results of the audit and thereafter, the findings contained in para No.5.3 of the order of the AO is vital and uncontroverted. It was further submitted that the comments of the Auditors are vital thus, all interest expenses cannot be said to be towards acquisition of land. As far as the claim of own funds of assessee is concerned, in that reply, it was submitted that customer advances etc., being utilized for construction projects is a claim which was never supported by evidence by the assessee. It was further submitted that the CIT(A) has given a critic, laconic and perfunctory ruling inspite of apparently voluminous information being utilized for the same. It was further submitted that the finding of the ld. CIT(A) ignores crucial part of ITO findings and the ld. CIT(A) had given distorted facts and thus, in these circumstances, the findings recorded by the ld. CIT(A) are liable to be set aside and the order of AO is to be upheld.

3.4. On the other hand ld. AR reiterated the same arguments as were raised by them before the ld. CIT(A) and also relied upon the order passed by the ld. CIT(A). Ld. AR submitted that AO had erred in determining the assessee’s income at Rs. 24,67,68,540/- as against income of Rs.2,19,64,310/-. It was submitted that the Assessing Officer failed to appreciate that assessee is a company engaged in the business of purchase and sale of lands, fabricate and development of infrastructure and construction of apartments and commercial premises in Bhilwara, small town in Rajasthan. The interest debited to profit and loss account only relates to purchase and sale of land and fabric. It was submitted that the Assessing officer who was seized of the assessment and had before him the special data report but still the AO on an adhoc basis disallowed Rs.1,34,90,530/-. It was submitted that the AO after observing in para No.5.3 of its order that assessee company should not utilize its funds in the construction cost incurred in the four projects of the company and further confirming from the assessee about the source of investments in Bhilwara Spinners Ltd., and scrutiny of the accounts and details on the basis of erroneous reading of the Special audit report had observed that the Special Auditor was having the opinion that the interest needs to be capitalized and is not a part of revenue expenditure. It was further submitted that the AO on the basis of his unsubstantiated and erroneous reading or by ignoring the contentions resorted to “adhoc” disallowance of interest thereby defeating the purchase of special audit, scrutiny of records and evidences and “recording” a finding for portion of interest has to be capitalized. The ld. AR drawn our attention to para No.7.2 of the order of the CIT(A) where the detailed written submissions were filed. The same is reproduced hereunder:-

“7.2. During the course of appellate proceedings, the AR of the appellant filed written submissions vide letter dated 09.09.2016, contents of the same are reproduced hereunder;

7.2.1. “In this regard, the following points are noteworthy:

(i) The Appellant submits that the Appellant is a company engaged in purchase and sale of lands and fabrics and development of infrastructure and construction of apartments and commercial premises in Bhilwara, a small town in Rajasthan. The interest debited to P&L Account wholly relates to purchase & sale of lands and fabrics. The A.O, made adhoc disallowance of Rs. 1,34,90,530/-, on the basis of erroneous reading of the Special Audit Report and observed that Special Auditor was having the opinion that this interest needed to be capitalized and was not a part of the revenue expenditure. The A.O. defeated the purpose of Special Audit, “recording” a finding that a portion of interest has to be capitalized,

(ii) It is important to note that, infact report of the Special Auditor supports the case of the Appellant [Ref: Pg. 124 of the P.B.)

(iii) After due verification of the audited accounts, the auditor had certified that no capital expenditure was debited in any of the item of Profit & Loss Account, this included interest expenses.

(iv) As will be evident from the above submission referred, it was repeatedly submitted before the A.O. that the interest bearing funds were used exclusively for land business. The construction cost was met exclusively from the advance received from flat purchasers. The Appellant had already submitted enough explanations and documents in support of the above during the assessment proceeding. The Appellant had explained that it had received an amount of Rs. 1,56,56,420/- as advance against flat booking and Rs. 27,10,240/- as advance against commercial booking and Rs. 6,53,51,000/- as advance against property sale in the earlier year. For the assessment year under consideration, the Appellant had received advance of Rs. 4,07,03,745/- against flat booking and 2,55,75,242/- against commercial bookings and Rs. 7,44,44,700/- as advance against property.

The nexus of the funds is shown as under.

ParticularsAmountAmount
Advance against property sale7,44,44,700/- 
Advance against commercial booking2,55,75,242/- 
Advance against flat booking4,07,03,745/- 
Less: Construction Cost 9,56,06,936/-

(v) It should be noted that the Appellant had very huge dealings in land and plots running into lacs of square feet area [Ref: Pg. 30 to 34 and also as certified by the Special Auditor at Pg. 95 of the P.B.J.

(vi) It is to be noted that the secured loans were procured by the Appellant strictly to be used for the purpose of business.

(vii) In this regard, it will be useful to refer the report of the Special Auditor, in which the Special Auditor, after full verification, has reported as under:

(a) Proper books of accounts were maintained

(b) There is integrity of books of accounts

(c) Proper records of incomes and expenditures were maintained

(d) No capital expenditure was debited to Profit & Loss Account

(e) All the expenditure were fully verifiable and genuine [Ref: Pg. 102 to 105 of the P.B.].

The Special Auditor has also prepared/approved segmentwise Profit & Loss Account, in which the interest expenditure was debited to land dealing business [Ref: Pg. 140 of the P.B.].

(viii) It is important to note that the A.O. has not controverted/disputed the above explanations and evidences. As against that, the A.O. has not brought on record any material, much less, cogent material, in support of his action and, instead, has simply gone by surmises and conjecture.

2. Thus, the Appellant submits that addition on account of interest of Rs. 1,34,90,530/-be deleted”.

7.2.2. The AR of the appellant, further made submission vide letter dt. 04.01.2017, contents of the same is reproduced thereunder:-

A. Para – wise summary

5.1: “Facts pertaining to the income and expenditure accounted in the books or accounts are discussed.

5.2: Segment – wise Profit and Loss Account arrived at by the Special Auditors is reproduced.

5.3: A.O has reproduced the comment of the Special auditors on application of funds of the Assessee Company the contents of which are self explanatory. However, after so referring, the A.O came to wrong conclusion that the interest cost has not been allocated to the construction cost and in such a situation it was imperative to capitalise part of the interest towards the construction cost. In fact, the Special Auditor, after due verification had given the finding that “the assessee has utilised its funds for the construction cost incurred in the four projects of the company.”…

5.4 A.O has questioned why the balance interest expenditure should not be disallowed and assessee has explained how the interest expenditure is correctly charged and why the same should not be capitalised or added to the construction cost.

5.5 A.O has stated that in the opinion of the Special Auditors, the interest expenditure pertaining to the construction business needs to be capitalised. As already submitted earlier, there was no such finding by the Special Auditor. The A.O has doubted the nature of the advances which the assessee claims to have used for the construction business.

5.6 However, the A.O has appropriated 57% of the interest expenditure to the construction business and disallowed the same, stating that 57% of the funds are blocked in construction business and the contention of the assessee that the advances received in the construction have been utilised towards construction cost is not accepted by the A.O.”‘.

B. In this regard, the following points are noteworthy:

(i) The Appellant submits that the Appellant is a company engaged in purchase and sale of lands and fabrics and development of infrastructure and construction of apartments and commercial premises in Bhilwara, a small town in Rajasthan. The interest debited to P&L Account wholly relates to purchase & sale of lands and fabrics. The A.O. made adhoc disallowance of Rs. 1,34,90,530/-, on the basis of erroneous reading of the Special Audit Report and observed that Special Auditor was having the opinion that this interest needed to be capitalized and was not a part of the revenue expenditure. The A.O. defeated the purpose of Special Audit, “recording” a finding that a portion of interest has to be capitalized.

(ii) It is important to note that, in fact, report of the Special Auditor supports the case of the Appellant [Ref: Pg. 124 of the P.B.].

(iii) After due verification of the audited accounts, the auditor had certified that no capital expenditure was debited in any of the item of Profit & Loss Account, this included interest expenses.

(iv) As will be evident from the above submission referred, it was repeatedly submitted before the A.O. that the interest bearing funds were used exclusively for land business. The construction cost was met exclusively from the advance received from flat purchasers. The Appellant had already submitted enough explanations and documents in support of the above during the assessment proceeding. The Appellant laid explained that it had received an amount of Rs. 1,56,56,420/- as advance against flat booking and Rs. 27,10,240/- as advance against commercial booking and Rs, 6,53,81,000/- as advance against property sale in the earlier year. For the assessment year under consideration, the Appellant had received advance of Rs. 4,07,03,745/- against flat booking and Rs. 2,55,75,242/- against commercial bookings and Rs. 7,44,44,700/- as advance against property. The nexus of the funds is shown as under:

ParticularsAmountAmount
Advance against property sale7,44,44,700/- 
Advance against commercial booking2,55,75,242/- 
Advance against flat booking4,07,03,745/- 
Less: Construction Cost 9,56,06,936/-

(v) It should be noted that the Appellant had very huge dealings in land and plots running into lacs of square feet area [Ref: Pg. 30 to 34 and also as certified by the Special Auditor at Pg. 95 of the P.B.].

Letter/Pg. No.Remark
Order appointing Special Auditor dated,, 26.03.20U [75 (back)]Ref: The terms of reference at Sr. No. 2, 5, 6, 12, 13, 14, 1$,. 23 & 24. As such, very clear and specific mandate to verify allowability of interest expenses.
Letter of Special Auditor dated 10.04.2014 [77 – 78]Requiring specific profit & loss account for each project, details of all the projects including details of amount received from flat purchasers and details of loan taken for all the businesses as well as specifically for construction and land business.
Reply of Appellant dated 10.05.2014 [79 -80]Submitted basis of valuation of WIP [flat and plot], details of advances received, valuation of closing stock and segment profit & loss account.
further reply of the Appellant dated 03.06.2014 [82]Submitted seven box files of WIP vouchers, ban
Letter from Special auditor dated 09.06.2014 [84 – 85]Required details of work, WIP, etc.
Reply of the Appellant dated 16.06.2014 [86 – 89]Field various details including WIP ledger and invoice copies [two box files]
Audit report of Special Auditor dated 25.06.2014 [90 – 148]Gave clean chit as far as the issues referred were concerned after full verification. Ref: Its findings at Sr. No. 1, 2, 4, 5, 6, 10, 12, 17, 23 & 24 at Pg, 102 to 105 of the P.B. In short, the Special Auditor clearly certified that:(i) Assessee had maintained proper books(ii) Integrity of books could not be questioned(iii) Proper records were maintained(iv) No capital expenditure was debited to Profit & Loss Account(v) All expenditure were verified and found genuine; no other discrepancy was noticed(vi) The Special Auditor also approved Segment wise Profit & Loss Account, which included debit of interest expenses [Pg. 140 to 146]

(vi) It is to be noted that the secured loans were procured by the Appellant strictly to be used for the purpose of business.

(vii) In this regard, it will be useful to refer the report of the Special Auditor, in which the Special Auditor, after full verification, has reported as under:

(a) Proper books of accounts were maintained

(b) There is integrity of books of accounts

(c) Proper records of incomes and expenditures were maintained

(d) No capital expenditure was debited to Profit & Loss Account

(e) All the expenditure were fully verifiable and genuine

[Ref: Pg. 102 to 105 of the P.B.].

The Special Auditor has also prepared/approved segment wise Profit & Loss Account, in which the interest expenditure was debited to land dealing business [Ref Pg. 140 of the P.B.].

(viii) It is important to note that the A.O. has not controverted/disputed the above explanations and evidences. As against that, the A.O. has not brought on record any material, much less, cogent material, in support of his action and, instead, has simply gone by surmises and conjecture.

(ix) Thus, the Appellant submits that addition on account of interest of Rs. 1,34,90,530/- be deleted.”

7.2.3. The appellant’s relevant submission vide letter dt. 09.02.2017 is reproduced hereunder:

“2.1 It is important to note that this disallowance is made contrary to the specific and clear findings given by the Special Auditor, appointed by the A.O. himself u/s. 142 (2A) of the Act. For ready reference, we attach complete correspondence in this regard [Ref: Pg, 75 to 148 of the P.B.]. The following points are noteworthy:

For ready reference, we reproduce the relevant findings of the Special Auditors as under:

In continuation to special audit report in form No. 6B we are submitting our further report based on the various points outlined on terms of reference latter dated 26/03/2014 as under:-

Sr. No.Ref. in form 6BParticulars of terms of referenceRemarks
1Point 1Whether proper books of accounts are maintained ?Based on our review and understanding of various records and documents, we believe that the assessee has maintained proper books of accounts. The assessee has maintaineda) Cash bookb) Bank bookc) General ledgerd)Journale) Purchase registerf) Sales register, etc.
2 Integrity of the books of accountsWe have verified the stamp duty paid land purchase agreements/agreements for sale of land vouchers & invoices of expenses & WIP; which are in agreement to the books of accounts maintained by the assessee.
3 Whether proper record of income and expenses are maintained.The assessee has maintained books of accounts as mentioned at Sr. No. 1 above along with vouchers, invoices and agreements, wherever applicable, in respect of the income and expenses.
4 Whether capital expense is debited to P&L A/c.On review of various expenses debited to profit & loss account we understand that the assessee has not debited any capital expenditure to the profit and loss account
5 Whether WIP (flats/plots) has been properly valued and when was flats/projects substantially completed as per project completion method of revenue recognitionWhether WIP mats/plots) has been properly valued and when was flats/projects substantially completed as per project completion method of revenue recognition[The assessee does not have any work in progress relating to plots. assessee company has launched four projects under the name of Navkra Geen, Navkar City Center, RIICO shops & Ahinsa bungalows. The WIP of these projects comprise of cost of land and cost of construction. We have verified the agreements for purchase of land and the invoices of construction material utilized in these projects. Based on the agreements and invoices verified, we are of the view that the WIP of the flat projects have been valued at cost. Based on the information and explanation provided to us we understand that the assessee company has been consistently following project completion method of accounting of recording of revenues. As a policy company recognizes the revenue when 100% of the projects gets completed as the company believes that the significant risk in term of cancellation of the flats & other units in various projects is still borne by the company.Hence, the company believes the revenue can only be recognized when:-a) The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership.b) no significant uncertainly exists regarding the amount of the consideration that will be derived from the real estate’s sales; andc) it is not unreasonable to expect the ultimate collection.The assessee company believes that significant risks and rewards of ownership are normally considered to be transferred when legal title passes to the buyer (e.g., at the time of registration/with the relevant authorities, of the real estate in the name of buyer) or when the seller enters into an agreement for sale and gives possession of the real estate to the buyer under agreement.Based on the certificate received from the Architect we understand that the projects are still under construction and are expected to be complete during F.Y. 2014-15/2015-16. Copy of architect certificate is enclosed for your perusal.
10 Profits derived by the assessee from sale of land since April 2007. Whether any cash receipt has been considered by the assessee for calculation of profit from safe of landAnnexure – 4
10 Profits derived by the assessee from sale of project since April 2007. Whether any cash receipt has been considered by the assessee for calculation of profit from sale of flatDuring the year, the assessee has received an amount of Rs. 56976027/- (including cash received for Rs. 1920000/-) as advance in relation to sale of flats. However, based on the review of the accounts and further to the information and explanation given to us we understand that the assessee is consistently following project completion method of accounting. Revenue form the sale of flats is only recognized when the 100% project is completed and legal title and possession of the property is handed over to the buyers during F.Y. 2010-11, none of the projects were substantially completed and hence no revenue has been recognized.
12 Examination of all expenditures required with the help of audited accounts.We have verified the expenditure debited to the profit and loss account along with the supporting vouchers and invoices and the same are in agreement with the audited accounts of the assessee.
17 Profit ratio of fabric, construction and plotting business separately.Annexure-9
23 Any other discrepancies in the books of accounts or as may be further directedBased on the review of audited accounts and the information and explanation provided to us we have not observed any other discrepancies in the nooks of accounts.
24 Any other issues arisen during course of auditNot applicable

Profit Derived From Sale of Plot of Land

Annexure 4

S.No.Name of Party From Whom PurchasedDate of purchaseArea As Per AgreementValueRegn./Stamp DutyOther ExpensesTotal CostArea In Sq.ftSale DateName Of The Party To Whom soldArea SoldSale ValueProportionate costProfitRemark Note 1
1Surbhi Holdings21/03/20079100 Sq.ft4,000,000415,59044155909100.0021/07/2010Neelam Jain & Aarti Jain280021470001358643788357Rs. 103000 recd. In cash
2Khuman Gadri25/07/20071 BIGA 17 NISWA150,00011,99016199050366.2520/09/2010Evergreen Texpark Pvt Ltd503661123000161990959010 
3Bhilwara Spinners Ltd11/09/20099 BIGA 13 BISWA33,900,0001,747,080452079040167874262721.25Several DatesDifferent Parties10103560587525958943009981 
4Keventer Agro Ltd09/12/20091050216 SXQ MT89,000,0005561,2000125163921070775831128922.00Several DatesDifferent Parties108079414987218710251270347359484 
       153823046    15874606210662823052116832 

Note 1 
The assessee has considered and recognized the consideration received in cash in books of accounts.

Copy of sales ledger is enclosed

AHINSA INFRASTRUCTURE & DEVELOPERS LTD. SEGMENTAL PROFIT & LOSS ACCOUNT F.Y. 2010-11

Annexure 9

PARTICULARSFABRICSLAND BUSINESSCONSTR. BUSINESSTOTAL
SALES16,360,735158,746,062 175,106,797
PURCHASE COST16,167,72779,179,885 95,347,612
CLOSING STOCK150,341,354 150,341,354
OPENING STOCK189,872,399 189,872,399
TRANSFER IN WIP (12,081,700)12,081,700
CONSTRUCTION COST  70,887,227 
CLOSING – WIP  107,688,636 
OPENING – WIP  24,719,709 
GROSS PROFIT193,00852416,83252,309,840
INDIRECT INCOME 1,382,813 1,382,813
EXPENSES 31,656,172 31,656,172
NET PROFIT193,00821,843,47322,036,481
NET PROFIT RATIO1.1813.76 12.58

2.2 Neither in past nor in subsequent year, any such disallowance is made. It is well – established Principles of Consistency that given same fact and legal position, the stand of the Department on a particular aspect has to be consistent.

2.3 It is very important to note that the A.O. has not rebutted these important and basic factual findings as arrived at by his own appointed Special Auditor. In fact, he has completely ignored/bypassed this Special Auditor’s report. As against that, he has not brought on record any material, much less cogent material to support his action for making the disallowance out of such expenses. Even otherwise, even independent to the Special Auditor’s report, the A.O. has not disputed/controverted the basic facts and figures and explanations as submitted by the Appellant, including the facts about the Appellant having huge interest – free funds for its construction activity. Before the A.O., the Appellant had submitted its full books of accounts, basic statements as well as vouchers and valuation of WIP. The claim of the Appellant was self-evident from these documents. The A.O. has not disputed/doubted even these documents nor have found any discrepancy.

2.4 In the circumstances, there was absolutely no case for making such huge disallowance of interest on fact as well as in law”.

4. We have heard the Counsel for both the parties at length and we have already perused the materials placed on record, the submissions filed by the parties and the judgments relied upon by the respective parties. Before we decide the merits of this ground, it is necessary to evaluate the order passed by the ld. CIT(A) before disposing this ground. The ld. CIT(A) has dealt with this ground in para No.7.3 of its order and the same is reproduced herein below:-

7.3. I have considered the stand of the AO in the assessment order as well as the submissions of the appellant and on careful perusal of the assessment order as well as submission of the Appellant, the following facts emerge:

(i) The total interest expenditure of Rs. 2,36,67,597/- are debited to profit & loss account. It is die claim of the Appellant that the expenditure were incurred in connection with buying and selling of land and also for the purpose of business, for working capital for the business. No expenditure out of this was incurred for its construction project.

(ii) The Appellant is a limited company whose accounts are certified by the statutory auditors as depicting true and fair view of the affairs of the Appellant The accounts are also certified as showing true and correct in Form 3CD, which include specific examination of the issue concerning claiming any expenditure of capital nature debited to profit & loss account [Clause 17 (a)] as well as amount of interest inadmissible u/s. 36 (l)(iii) [Clause 17 (m)].

(iii) In course of the assessment proceeding, the Appellant had submitted various explanations and details as under:

Letter datedSubmissions in brief
30.12.2013– Details of bank accounts along with bank statements
03.02.2014 & 12.02.14– Details of advances received against sale of property
24.02.2014– Details of advance received in’ earlier year and subsequent years
24.03.2014– Submitted detailed statement of working of profit in land business, including interest cost therein– Three distinct business activities, viz., trading in fabrics, trading in land and construction– The expenses relating to construction not debited to Profit & Loss Account but added to work – in -progress. Details already submitted before.– Expenses in respect of land in stock added to the closing stock valuation.– Interest expenses of Rs. 2.36 crores for the purpose of business relating to working capital. No interest expenses incurred on construction. Construction business funded by the interest free advances received from the buyers.
10.05.2014– Submitted basis of valuation of work-in- progress along with cumulative statement.– Submitted statement of amount received as advance against flat sales as well as details of plot sales– Submitted statement of closing stock– Submitted copy of bank accounts– Submitted 7 box files of WIP vouchers and 3 files of bank statements– Submitted 2 box files containing WIP ledger and supporting documents for earlier year.– Submitted explanation regarding allocation of interest expanses, highlighting the fact that advances received from buyers [Rs. 1407.24 lacs were more than the project expenses.– Submitted details of advances against property purchases and property sales.– The investments were out of own funds.
21.08.2014– Submitted detailed explanation on allowability of interest as well as nexus of funds.

Significantly, the above submissions, the facts and the figures remain undisputed/uncontroverted by the A.O.

(iv) It appears that the heavy reliance is placed by the A.O. only on the comments by/the Special Auditor appointed by Department u/s. 142 (2A) of the Act in his report/dated 25.06.2014. I have carefully gone through the copy of the report and I find that/the action of the A.O. to support this disallowance on the basis of the Audit Report of/the Special Auditor is misplaced. Nowhere the Special Auditor held that interest bearing funds were used towards construction business. In fact the report of the Special Auditor goes to support the contentions of the Appellant. It is noticed mat one of the specific mandate given to the Special Auditor was to verify all items of expenses debited to profit and loss account, including their genuineness, as well as to verify whether any capital expenditure was debited to profit and loss account. Towards this, the Special Auditor had, among other, called for details of loan taken for all the businesses, specifically for the construction and land business. The Special Auditor reviewed/verified the expenses debited to Profit and Loss

Account, along with supporting vouchers and invoices and gave clear findings that the same were in agreement with the audited accounts of the Appellant and that the Appellant had not debited any capital expenditure to the profit & loss account. The Special Auditor also verified the cost of work – in – progress of the project. The Special Auditor also approved Segmental Profit & Loss account in which no interest expenditure was debited to construction activity but interest expenses were debited to land business. The Special Auditor has acknowledged that the major source of funds for the assessee company was the advance received from the sale of flats and the sale proceed received from sale of plots of land. The AO has chosen to completely ignore the clear findings of the Special Auditor and, instead, has relied upon couple of general observations as contained in the Report/completely devoid of their context which, in any case, does support the A.O’s case. As such, this main ground of the A.O. to support the disallowance – Report of the Special Auditor – fails and, in fact, completely supports the Appellant’s claim.

(v) The A.O. has also commented upon prudence of the Appellant to make huge advances without entering into registered agreement. I find that, apart from the lack of jurisdiction of the A.O. to comment upon business prudence or otherwise of an iis, in any case has absolutely no relevance to the issue on hand.

(vi) Even independent to the report of Special Auditor it is significant that the A.O. has not disputed the basic facts and figures as placed on record by the Appellant He has not denied availability of huge interest free funds with the Appellant for its construction activities. He has also not brought on record any cogent material to support his action. It appears that this disallowance is based purely on the basis of and conjecture. The Appellant had discharged its preliminary onus in support availability of the interest expenses/by bringing on record various submissions/facts has not found any discrepancy, including from the bank statements which clearly depict fund flow position. Besides/the Report of Special Auditor, appointed by the A.O. himself, clearly supported the Appellant’s claim. As against that, the A.O. has miserably failed to bring any convincing material to support his action.

(vii) The A.O. has also not given any benefit of addition to work in progress to the extent the interest expenses were so held by him to be relatable to the construction business, in contradiction and in inconsistent to his own stand.

(vii) It is important to note that no where it past or even in subsequent ear any such disallowance is made though the principle of Res judicata does not strictly apply to assessment proceeding, another equally well settled legal position is that Rule of “Consistency equally applies to assessment proceedings. In other words, a position Accepted in past as well as in subsequent year cannot be altered by A.O. only for a particular year, unless there is change in fact or legal position.

In view of the above, the addition of Rs. 1,34,90,530/- made by the A.O. on account of disallowance out of interest expenses is not justifiable and therefore directed to be deleted.

In the result, this ground of appeal is to be treated as ALLOWED.

4.1. After having gone through the orders passed by the ld. CIT(A) and hearing the parties at length, we found that total interest expenditure of Rs.2,36,67,597/- was debited to profit and loss account. As per the claim of the assessee, the expenditure was incurred in connection with buying and selling of the land and also for the purpose of the business for working capital for the business. According to the assessee no expenditure out of this amount was incurred for its construction project. It is an undisputed fact that assessee is a limited company whose accounts are certified by the statutory auditors as depicting true and fair view of the affairs of the assessee. The accounts had also certified as showing true and correct in form 3CD which include specific examination of the issue concerning claiming any expenditure of capital nature debited to profit and loss account as well as the amount of interest in admissible u/s.36(1)(iii). In the course of assessment proceedings, the assessee had submitted various explanations and details which are given in detail in para 7.3 of the order of the CIT(A). It is also mentioned here that assessee had also received interest income and importantly its position was accepted in past in subsequent years. There was no such disallowance of interest expenditure either on the ground of it being related to construction business or it being incurred for non-business purposes. From the record, we noticed that the AO had placed reliance on the comments by the Special Auditor appointed by the department u/s.142(2A) of the Act. However, the Special Auditor nowhere held in his report that interest bearing funds were used towards construction business infact, the report of the Special Auditor goes to support the contentions of the assessee. The Special Auditor had also called for various details on the above aspect, including specifically, segmental P & L Account and details of loan utilized for various businesses. We further noticed that assessee had filed exhausted details, including books of accounts alongwith supporting of income and expenses, cumulative statement, agreement with contractors, permission letter for consent of project, statement etc., vide letter dated 10/05/2014. Thereafter, vide letter dated 03/06/2014 and 16/06/2014, the assessee had also filed other documents called by the Special Auditor. The specific mandate was also given to the Special Auditor to verify all accounts of expenses debited to profit and loss account including their genuineness as well as to verify whether any capital expenditure was debited to profit and loss account towards this Special Auditor after appreciating the documents and details filed by the assessee, give clear finding that the same were in agreement with the audited accounts of the assessee and the assessee had not debited any capital expenditure to the profit and loss account. The Special Auditor also verified the cost of work in progress of the project and also approved signatory profit and loss account in which no interest expenditure was debited to construction activity, but interest expenses were debited to land business. It was also acknowledged by the Special Auditor with the major source of funds for the assessee company was the findings received from the sale of flats and the sale proceeds received from sale of plot of land. The AO had ignored the clear findings of the Special Auditor and interest relied upon the couple of general observations as contained in the report.

4.2. Even independent to the report of Special Auditor, it is significant to note that the AO has not disputed the basic facts and figures as placed on record by the assessee. The AO had not denied the availability of huge interest free funds with the assessee for its construction activity. At the same time, the revenue has not brought on record any cogent material to support its action. Thus, it appears that the disallowance made by the AO was passed purely on the basis of surmises. There was contradiction of inconsistency in the approach of the AO as much as he did not allege interest component to the work in progress either. We have further noticed that nowhere in the past or even in subsequent years any such disallowance is made, although the principle of fast Res judicata will not apply to the assessment proceedings, however, the settled legal position is that the rule of consistency equally applies to the assessment proceedings. More particularly, when a position was accepted in the past years in subsequent years then the same cannot be altered by the AO for a particular year except if there are changes in facts of legal position but nothing of this kind has been demonstrated by the AO, therefore, in these circumstances, we are in agreement with the findings recorded by CIT(A) to the effect that the additions made by the AO on account of disallowance out of interest expenses is not justifiable. No new facts have been brought before us in order to controvert and lawful findings recorded by CIT(A). Therefore, we have no other option except to upheld the finding of the ld. CIT(A) and dismissed this ground raised by the revenue.

Ground No.2:

5. The revenue challenging the order of CIT(A) in directing the AO to delete the addition of unexplained cash receipts of Rs.20,86,37,000/-.

5.1. The ld. DR relied upon the order of AO and submitted that the CIT(A) erred in directing the AO to delete the addition of unexplained cash receipts without appreciating the fact that assessee is segregating the cash and bank receipts by maintaining the record and that only entries received in cheque are entered into regular business of assessee. The ld. DR further submitted that they have clinched the evidence against assessee. There is no primary and direct evidence which is in the form of mandated material detailed in para 8.1 of AO”s order and the same is reproduced hereinunder:

8.1. During the course of assessment proceedings, the A.O. has made this addition in the following words:

“6.1 During the course of Survey action at assessee’s premises on 13/14 31.03.2014, the Survey team found and impounded some incriminating documents, from which it is observed that the assessee company has accepted cash of Rs. 36 crores or more against sale of flats which have not been recorded in books of accounts. The relevant papers extracted from impounded material (Annexure Al Page No. 13,11,10& 29) are reproduced as below and forms part of assessment order.

The above loose papers found and impounded during the survey proceedings reflects the details such as flat no., area of the flat, name of the purchaser, mobile no., value of the flat with break up of the bank received and cash received etc. it is evident from the above mentioned Xerox of the loose papers that the assesses has received the part of sale price in cash. In this regard, Statement u/s 131 were taken of two of the employees of the assessee company on 13.03.2014. The relevant portions of said statements are reproduced below:

Statement of Shri Ram Gopal Sharma, Accountant Assistant :

“7. How the sales of flats are arranged?
The sales of flats are arranged by directors only

8. How the prices of the flats are fixed?
The prices of the flats are fixed by the directors only.

9. What are paper found in your office?
Sir, these are the list of the flats with their prices.

10. Whether these papers are related to the company?
Sir, I have seen all the papers and these are related to the company only. I have already signed on the paper.

11. What are bank received and cash received in the paper?
Sir, the bank received are the payment for sale of flats received by cheque and cash received are received in cash only.

Statement of Shri Ranjeet Singh fain, Accountant Assistant:

“7. How the sales of flats are arranged?
The sales of flats are arranged by directors only.

8. How the pi-ices of the flats are fixed?
The prices of the flats are fixed by the directors only.

9. What are paper found in your office?
Sir, these are the list of the flats with their prices.

10. Whether these papers are related to the company?
Sir, I have seen all the papers and these are. related to the company only. I have already signed on the paper.

11. What are bank received and cash received in the paper?
Sir, the bank received are the payment for sale of flats received by cheque and cash received are received in cash only

12. How much cash you receive for the sale of flats?
Sir we take cash amounting to atleat 30% of the cost of the flat.

13. In how many flats you have receive the cash?
Sir we have received cash for the sale of flats.

14. Who receive the cash amount from the purchaser of the flat? Sir, I and the directors both receive the cash, Whatever cash we receive, I give it to the director Ashok Kothari or Ansul Kothari.”

6.2 On being confronted, the director of assessee company, Shri Ashok Kumar Kothari, expressed his ignorance about the paper found in his office. The relevant portion of his statement recorded u/s 131 on 14.03.2014 is reproduced below(as translated in English):

“Q. 11 You are shown Annexure A-1, containing page nos. 1 to 108. These are the collection of hose papers found in your office. Please give details.

Ans. I have no knowledge.

Q. 12 These loose papers are found at Computer & Table desk of your office. Please see these again and give details.

Ans. I have no knowledge.

Q. 13 One of the employees of your office has admitted in his statement that these papers contain the details of flats sold.

Ans. I have no knowledge.

6.3 The incriminating documents found from the premises of the assessee during time of survey action was scanned and some of the pages have already been reproduced.

The copies of agreement to sell the flats had been called for. The assessee has not submitted any copy of agreement till date. The assessee has only submitted the copy of sample agreement of sale which is reproduced below.

It is evident from the copy of agreement that there is no details of full consideration, saleable area, rate and other administrative charges in the agreement. There is no details regarding how much percentage of total sale consideration has been received as booking amount.

No full set of agreement of even a single flat has been submitted by the assesses, The assessee has only submitted the list of purchasers of flats during the A. Y. 2009-10 & 2021-12 which is reproduced below.

The extract from the incriminating paper found and impounded during the course of survey proceeding is reproduced for A.Y. 2011-12 herewith.

The names of flat owner and flat no appearing in both the data extracted from seized material and submission of the assessee is as under;

From comparing the two data submitted by the assessee and extracted from the seized material, it is evident that

a) The names of the flat purchases corresponding to their flat Nos. are the same.

b) The assessee has not shown the amount received in cash in the list submitted by them.

c) The assessee has shown the accounted money upto 31.03.2011, however the seized documents are having details of the money received in cash also upto 31.12.2013.

d) The assessee has shown the rate of flat Rs. 2632 per sq feet, however the rate of flat is Rs.2040 sq feet as per that documents seized from the premises of the assessee.

e) The sheet in which the details of cash received is found is self explained and the flat No., Name, Ph No., area, rate, cheque, cash all are written. The accountant has acknowledged the existence of document receipt of cash in the sale of flats. The issue has been confessed to assessee during the assessment proceeding and assessee has tried to deny it without giving all the details. The rate of flat submitted by assessee and rate of seized documents confirmed with the statement of the accountant then there is a gap of around 30% of cheque and cash.

The documents after been interpreted in its entirely has given full and logical meaning and effect so that very purpose of investigation by the Income Tax Authority is not stonewalled and frustrated by the indigenous methods adopted by the tax evaders. It is clear from the above that at one hand, the assessee company’s employees have admitted in their statement under oath that the loose papers found during survey at assessee’s business premises contained details of flats sold, and that the “cash received” shown therein represented the amounts received in cash; on the other hand, the director of assessee company Shri Ashok Kumar Kothari simply chose to show his ignorance. Such ignorance of the director of assessee company does not any way prove his innocence, rather it shown that he had nothing to explain on the spot, after being caught with incriminating papers in his own office. The employees of assessee company have however spoken the truth behind such loose papers, wherein the cash received indicated the cash received against sale of flats. In the above instance, the onus was on the assessee to prove that such transaction including transaction in cheque had never taken place.

6.4 During the course of assessment proceedings, the assessee was asked to submit explanation in respect of the cash received of Rs. 36 crores, and show cause as to why the said amount should not be added to total income u/s 68 of the Act. In response, vide letter dated 23.07.2014, the AR of assessee has submitted as under:

“Our client is called upon to explain ‘cash receipts” of Rs. 36 crores. The amount has no relevant to any facts. It may be some rough projection. In the circumstances of our client is hard put to explain.”

6.6 The assessee has requested for the copy of statement and discriminatory papers seized during the survey. The same has been provided to the assessee. The assessee has made his submission.

6.7 The submissions of the assessee have been considered but not found acceptable. The assessee has not submitted any explanation about the loose papers found at its premises during Survey action u/s 133A. The papers belong to the assessee which has been evidenced by the signature of the director of the company Shri Ashok Kumar Kothari on the seal of the annexure. Even during scrutiny proceedings, the AR of assessee has only referred to the remarks of Special Auditors. The aforesaid “terms of reference” at sr. no.22 shows that the same were restricted to analysis of transactions indicated from documents/back up taken by the survey team from computer data of the assessee, i.e. what were recorded in the computer system. It may be understood that the cash received on the sale of flats is never recorded in the computer system, and hence the same were not a part of the terms of reference for special audit. The Special Auditors, in their aforesaid remarks, have only clarified their position vis-a vis the said terms of reference, which does not anyway help in the assessee’s case.

6.8 It is on record that the incriminating loose papers have been found and seized from the business premises of assessee company, which indicates certain cash receipts against sale of flats, and the said loose papers have also been identified & signed by employee of assessee company. The employee Shri Ranjit Singh Jain, accountant assistant, has admitted of the assessee receiving al least 30% of cost of flats in cash. The exact quantum & timeliness of cash received could not be ascertained due to evasive reply given by the director of assessee company during survey action, as well by the AR of assessee during present assessment proceedings. In these circumstances, The amount of cash received by assessee company in A.Y. 2011-12 under consideration can be brought to tax only on the basis of a fair calculation based on facts on records, which is without prejudice to assessment of further cash receipt in subsequent assessment years.

6.9 During A.Y. 2011-12 under consideration, the details submitted by assessee (dated 23.07.2014) show that as on 31.03,2011; ‘if assessee has made total sales of flats/plots at Rs. 4868.21 lakhs, against which it received advances of Rs. 1407.24 lakhs, as summarized below:

 (Rs. in Lakhs)
ParticularValue of Total Sale(Received or receivable)
Navkar City Centre377.99
Navkar Green Project(i) Gulmohar(ii) Chinar(iii) Amaltas1335.79934.642002.26
RIICO Shop Project58.53
Land Sale159.00
Total4868.21

On the basis of Statement of Mr.Ranjit Singh Jain, Accountant Assistant corroborated by the documents the assessee company has received 30% in cash on sale of flats. It means that 70% of the value of flat is received in cheque and 30% in cash. There is normal practice in the building construction business, all the cash component part is received well before booking of the flats. Only after receiving the cash component, the flats are booked on the price which was to be received by cheque i.e. 70%

As per the page No. 25 of Annexure Al of seized materials, the assessee is maintaining records in following formats.

s, NoFloorFlat no.BH KBooking dateNameAddressContac (No,Saleable AreaRateValue70%Bank Reed.Cash ReedTotal ReedDot eTolal Due

It is evident from the above table that the assessee is segregating the cash and bank receipt while maintaining the record. However at the. time of making the entries in the books of account only the cheque part is entered. As per the statement corroborated by the seized documents, an amount of Rs.4868. 211 lakhs is only 70% of the total value of flats which is received by the assessee through cheque. The total value of the flats i.e. 100%, would be Rs.6954,58 Lakhs. The cash component of the total value of the flat which has been received during the year as per statement of Mr.Ranjit Singh Jain corroborated by the documents impounded during the survey works out to Rs.2086.37 Lakhs being 30% of total value of flats.

Total value of flats (100%)Bank Received/receivable (70%)Cash Received (30%)
6954.584868.212086.37

6.9 The aforesaid amount of Rs. 2086.37 Lakhs is brought to tax in hands of the assessee u/s 68 of I.T, Act, 1961. Therefore, the said cash receipts is to be taxed as Unexplained Cash Credit u/s 68 of the Act. In the case of Haji Nazi Hussain vs. ITO {2004} 91 ITD 42 (Delhi) (TM), the Hon’ble ITAT, Delhi observed that the assessee could not explain source of various cash receipts entered in note book/rough cash book found during course of survey u/s 133A and therefore, an addition u/s 68 was made. It was contended in that case that section 68 was not attracted as no sums were found credited in anyone’s account in books of account maintained by assessee. It was, however, held by Hon’ble ITAT, Delhi that the failure on the part of assessee to make credit entry in respective accounts would not entitle assessee to claim that no amount was credited and assessee could not be allowed to take undue advantage of his own lapses/mistakes. Accordingly, the provisions of section 68 was held to be applicable in that case. Since the present case of assessee is similar to said case, the addition made of Rs.2086.37 Lakhs may alternately be considered under section 68 of the Act”.

5.2. The ld. DR further submitted that apart from above, they also corroborated statement from the key employee and during the course of investigation recorded their statements u/s.131 by clearly admitting the receipt of 30% cost of flat in cash, that means 70% of the value of the flat is received in cheque and 30% in cash. It was also submitted that from the statements it was also clear that only after receiving cash component the flat was booked on the price which was to be received by cheque i.e., 70%. In this respect, as per Annexure A1 of seized material, the assessee was maintaining records in a specific form and from the said table, it is evident that the assessee from the said table which is at page No.47 of CIT(A), it is clear that the assessee is segregating the cash and bank receipts while maintaining the record. However, at the time of making the entries in the books of accounts only cheque part was entered. Thus, the cash component of total value of flat which was received during the year as per the statement of Shri Ranjit Singh Jain corroborated by the documents. It was further submitted that since the assessee could not explain the source of various receipts and entered in the note book u/s.133A and therefore, the additions were rightly made by the AO u/s.16A of the IT Act.

5.3. On the other hand, ld. DR relied on the order of CIT(A) and also drawn our attention to the report statements as well as the submissions filed before the CIT(A) which are contained in para 8.2.1 to 8.2.5.

6. We have heard both the counsels at length and perused the material placed on record. passed by the ld. CIT(A) before disposing this ground. The ld. CIT(A) has dealt with this ground in para No.8.3 of its order and the operative portion which is contained in para 8.3.1 to 8.3.13 are reproduced hereunder:-

8.3. I have considered the stand of the AO as well as the submissions of the appellant. I have also considered the judicial pronouncements relied upon by the Ld.AR, The issue is discussed and decided hereinafter.

8.3.1. At the outset the entire addition is bad in law, as the section 68 that has been invoked to make such addition does not apply at all. This section 68 applies when a sum is found credited in the books of an assessee maintained for any previous year. As such, it is only when there is a credit entry in a book that is maintained by the assessee that the section gets triggered, not otherwise. In the present case, it not even the A.O/s case that this amount of alleged cash component was found credited in the books maintained by the Appellant. The only issue remains is whether the loose papers so found during the survey were part of the books maintained by the Appellant. Since they were not part of the books of the assessee maintained in the regular course nor was there any direct evidence to prove so, the onus was on the A.O. to prove so. In fact, the A.O. not even bothered to verify who was author of the documents and for what purpose and under what circumstances they were prepared. As will be discussed in subsequent para, these documents otherwise also were dumb documents. As such, the A.O. failed to establish with any cogent evidence that these loose papers were books of the Appellant maintained for its business, within the meaning of section 68 of the Act.

8.3.2. It is to be seen that the words used in section 68 are ‘books maintained for any previous year’ of the assessee and not any other document that may be found from the assessee’s premises and found related to the assessee. If section 68 was meant to cover each and every document in the name of the assessee or concerning the assessee, surely, nothing prevented the legislature to provide so specifically, instead of restricting the scope of section 68 only to ‘books maintained for any previous year’. Under general law and otherwise also, there is a vast difference between the word ‘book’ and the words ‘loose paper, bothare not synonymous. In this regard, the ratio of the decisions in the case of Common Cause (A Registered Society) & Ors. v/s. UOI & Ors. – [W.P. (Civil) No. 505 of 2015, Order Dated 11.01.2017] = 2017-TIOL-27-SC-MISC as well as In case of Sheraton apparels v/s. ACIT – [(2002) 256 ITR 20 (Bom)] clearly applies, in which it has been held that these two terminologies are different. As such, on this ground only the entire addition deserves to be quashed as bad in law.

8.3.3. The Appellant has filed certain documents, consisting of (i) Statements and working -which are based on the impounded papers as well as the books of accounts already produced for verification before the A.O., (ii) Agreements for flats in the surrounding area – which are registered documents with government authority and (iii) Stamp duty rates – which are publicly notified government data.

The Appellant has filed the reasons for filing the same before me. As is t from the sequence of events unfolded during the assessment proceeding, as from the assessment records and the submissions of the Appellant (as also will be highlighted in the following para), it is clear mat the Appellant was prevented by sufficient reasons from producing such documents at the assessment stage and also keeping in mind the nature of these documents, in the interest of justice and fair play, these documents deserve to be considered.

From the copies of order sheet of the assessment proceedings, which has been filed by the Ld.AR of the appellant, it can be inferred that the assessment order was passed at the eleventh hour without fully appreciating the details and evidences produced by the appellant during the assessment proceedings.

8.3.4. The Ld.AR emphasised that there was complete lap of application of mind by the AO which disregarded the details and evidences produced during the assessment proceedings. Referring to the copy of order sheet enclosed at paper book page no.35 to 47 read with appellant’s submission para 2 col. 26, which was filed along with the paper book on 09.09.2016, the Ld.AR further pointed out that, there was change in the office of Addl.CIT where the earlier Addl. CIT which called for various details on 23.07.2014 onwards and before whom the appellant had made submissions got transferred out and on his place another Addl CIT came and the case was heard by him also. However, at the fag end of the time available for passing the assessment order [since the case was referred to Special Auditor, namely Hari Bhakti & Co., C A firm, for audit, the assessment was to be passed within the time limit from the end of receipt of special auditors report dated 25.06.2014 (copy placed in paper book), or else the case gets time barred], the incumbent AO [DCIT-4(1), Mumbai], was passed the assessment order making additions without adequate and proper application of mind to arrive at the conclusions.

8.3.5. As explained earlier, the Ld.AR emphasised this issue was confronted to the Appellant at the fag end of the proceeding. The A.O. who has passed the order issued show cause notice on 14.08.2014/ without considering/taking into account the earlier submissions already made by the Appellant and also earlier specific request of the Appellant to provide copies of the seized material as well as statements taken during the survey [Ref: Letter of the Appellant dated 23.07.2014]. This was specially reiterated by the Appellant vide its letter dated 07.08.2014. It was only thereafter the A.O. supplied copies of the relevant material on 20.08.2014 at 6:30 p.m. However, the A.O., surprisingly, directed the Appellant to submit its comments by 3:00 p.m. of the next day. The A.O. was aware that the directors of the Appellant are at Bhilwara, Rajasthan. Even here, copy of not all documents was provided. While the reliance is placed by the A.O., for making such huge addition, to loose paper nos. 10,11,13 and 29 of Annexure A-1, copies provided were of page nos. 23 to 32 of Annexure 1, In terms of the ratio laid down by the Supreme Court in case of Kishinchand Chellaram [125 TTR 713] =2002-TIOL-922-SC-IT material, that is the material relied and used by the A.O. without confronting same to the assessee, is liable to be ignored all together and the legality of the addition is required to be adjudicated de hors such material. In the present case, if such loose papers are to be ignored, there was no material with the A.O. to make this addition.

In any case, even within such short time provided, the Chartered Accountant of the Appellant anyhow submitted details and very exhaustive submission on the next day, that is, 21.08.2014, explaining all the aspects in detail. Importantly, the C.A. clearly protested about such short time and lack of proper opportunity, vide this submission. It is worth reproducing entire content of this submission, the contents of which are very much self explanatory. This is crucial, as the A.O. has not denied/not controverted the contents hereof.

8.3.6. Re: Proposed addition of Rs. 36 crores on the basis of alleged documents found during the course of survey proceedings. The under mentioned submissions of the appellant are noteworthy.

“Your honors vide letter dated 20.08.2014 received at 6.30 PM has handed over the copies of the papers and statements recorded during the course of survey on the basis of which the said addition of Rs. 36 crores is proposed to be made. We however request you to provide the working of 36 Crores as made by your honors.

In this respect it is submitted that during the course of survey the statement of the accountant Shri Ranjeet Singh Jain was recorded u/s 133A. The relevant extract of the same is reproduced as under:

“5. What type of the job you do at M/s Ahinsa Infrastructure & Developers Limited, Bhilwara.
I do the job feeding work of computers and do the work of accounts.

6. Who are the persons who look after the accounts.
Mr. B.S. Choudhary and Ram Copal Sharma also perform the work of accounts.

7. How the sale of Flats are arranged. The sale of flats are arranged by directors only.

8. How the price of the Flats are fixed? The price of the flats are fixed by the directors only.

12. How much cash do you receive for the sale of flats? We take cash amounting to at least 30% of the cost of flat.”

Thus your honors will appreciate that the accountant was authorised to do data feeding and accounting jobs. He is nowhere mentioned to have authorised to look after the sales. He has categorically mentioned that the sales are arranged by the director and also the prices are fixed by them. Thus the accountant has no authority and knowledge of the sales and the components.

Further if the statement of the accountants are relied upon we request your honors to cross confirm the same. Further no unexplained cash is found during the course of survey. None of the seized papers are establishing rotation of cash or even receipt of the same. Further the Hon’ble Supreme Court has held that the statement u/s 133A Alone Can’t Be Reason for Addition. The Hon’ble Supreme Court has quashed Special Leave Petition of the Income Tax department against the Madras High court judgement that statement u/s.133A has no evidentiary value

The Hon’ble Supreme Court has dismissed the Special Leave Petition vide its order dated 20/09/2012 against the Madars High Court judgment in case of S. Kader Khan 300 ITR 157 (MAD.)/[2008J 214 CTR 589 (MAD.) = 2007-TIOL-824-HC-MAD-IT in which the Hon’ble high court had held that an ITO was not empowered u/s section 133A to examine any person on oath and therefore statement recorded in a survey wider section 133A has no evidentiary value and any admission made during such statement cannot be made basis of addition.

The exact issue before High Court of Madras was

“whether the materials collected and the statement elicited during the survey operation under section 133A of the Act had any evidentiary value”

The High Court held on the issue of evidentiary value of statement recorded during survey proceeding as under:

the following principles can be culled out:

(i) An admission is an extremely important piece of evidence but it cannot be said that it is conclusive and it is open to the person who made the admission to show that it is incorrect and that the assessee should be given a proper opportunity to show that the books of account do not correctly disclose the correct state of facts, vide decision of the apex court in Pulkngode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18;

(ii) In contradistinction to the power under section 133A, section 132(4) of the Income-tax Act enables the authorised officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act. On the other hand, whatever statement is recorded under section 133A of the Income-tax Act is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law, vide Paul Mathews and Sons v. CIT [2003] 263 ITR 101 (Ker.) = 2003-TIOL-1207-HC-KERALA-IT;

(iii) The expression “such other materials or Information as are available with the Assessing Officer” contained in section 158BB of the Income-tax Act, 1961, would include the materials gathered during the survey operation under section 133Af vide CIT v. G. K. Senniappan [2006] 284 ITR 220 (Mad.);

(iv) The material or information found in the course of survey proceeding could not be a basis for making any addition in the block assessment, vide decision of this court in T.C(A) No. 2620 of 2006 (between CIT v. S. Ajit Kumar [2008] 300 ITR 152(Mad.) = 2006-TIOL-400-HC-MAD-IT;

(v) Finally, the word “may” used in Section 133A(3)(iii) of the Act, viz., “record the statement of any person which may be useful for or relevant to any proceeding under this Act”, as already extracted above, makes it clear that the materials collected and the statement recorded during the survey under section 133A are not conclusive piece of evidence by itself.

For all these reasons, particularly, when the Commissioner and the Tribunal followed the circular of the Central Board of Direct Taxes dated March 20, 2003, extracted above, for arriving at the conclusion that the materials collected and the statement, obtained under section 133A would not automatically bind upon the assesses we do not see any reason to interfere with the order of the Tribunal.

When a survey u/s 133A is conducted, and any statement is recorded by the A.O, that statement itself can not be used for making any addition without any other material evidence in support of the said statement. Therefore, if at all under duress and pressure, a tax payer has signed a statement u/s 133A, he can very well retract from such statements without any legal consequences.

Further the seized papers nos. 23 to 32 are rough unsigned excel sheets. This do not belong to us. Further your honors may appreciate that the Papers are titled ” (Building name) 31.01.2014 while booting dates are mentioned from January 2010 to October 2011 i.e. more than 2 years backwards. There could be no logic of making the same on 31.01.2014. Further no cash was found during the course of survey proceedings. If these papers establish the practice of the assessee to collect cash the department could have found excess cash to that regard on the date of survey.

Further your honors have appointed special auditor to audit the books of the company. The special auditors have made no adverse comments as regards the receipt of undisclosed cash. The cash if any received is duly reflected in the books of account of the assessee.

Further we beg to state that the presumption under sub-section (4A) would not be available for the purpose of framing a regular assessment. There is nothing either in section 132 or any other provision of the Act to indicate that the presumption provided under section 132 which is a self contained code for search and seizure and retention of books etc. can be raised for the purposes of framing of the regular assessment as well. Wherever the legislature intended the presumption to continue, it has provided so. Reference may made to section 278D of the Act which provides that where during the course of any search under section 132, any money, bullion, jewellery or other valuable articles or things or any books of account etc. are tendered by the prosecution in evidence against the person concerned, then the provisions of sub-section (4A) of section 132 shall, so far as may be, apply in relation to such assets or books of account or other documents. Tins clearly spells out the intention of legislature that wherever the legislature intended to continue the presumption under sub-section (4A) of section 132, it has provided so. It has not been provided that the presumption available under section 132(4A) would be available for framing the regular assessment under section 143 as well.

Thus also evident from the fact that whereas the legislature under section 132(4) has provided that the books of account, money, bullion, jewellery and other valuable articles or things and any statement made by such person during examination may thereafter be used as evidence in any other proceedings under the Act but has not provided so under sub-section (4A) of section 132, It docs not provide that the presumption under section 134A would be available while framing the regular assessment or for that matter under any other proceeding under the Act except under section 378D.

Section 132 being a complete code in itself cannot intrude into any other provision of the Act. Similarly, other provisions of the Act cannot interfere with the scheme or the working of section 132 or its provisions.

Presumption under section 132(4A) is available only in regard to the proceedings for search and seizure and for the purpose of retaining the assets under section 132(5) and their application under section 132B. It is not available for any other proceeding, except where it is provided that the presumption under section 132(4A) would be available.

Thus, merely because the documents were found at the premises of the assessee does not bind the assessee. The assessee has time and again denied the ownership of same and also again beg to state that the same to not belong to us.

Thus in view of the above no addition on account of alleged cash received is warranted in the case of the assessee”.

From the above submissions, it is clear that the AO had made certain presumptions which are rebuttable presumption and which has been explained and clarified by the Ld.AR in the above submissions. Therefore, no adverse conclusion can be drawn on the presumptions assumed by the AO.

8.3.7. It is very important to note that the AO has not disputed/denied the contentions of the Appellant that are contained in this letter. From the copy of the order sheet submitted by the appellant it can be inferred that the assessment order was passed by the AO on 22-08-14 without giving any further opportunity to the appellant. The AO did not counter the various factual and legal aspects brought on record by the Appellant. Therefore, the submissions of the appellant regarding record by the appellant. Therefore, the submissions of the appellant regarding violation of natural justice has got some force. The judgments referred by the Appellant in this regard aptly apply to the facts of the present case and it will be difficult to uphold the conclusions drawn by the AO for making addition.

8.3.9 Going further for the merits of the addition/upon analysis/some of the important factual and legal aspects that emerge can be summarised as under:

(i) This addition is based only on the basis of the followings:

(a) Statement of two employees taken in course of survey proceeding; and

(b) Loose papers found in course of the survey

(ii) As far as the statements of two employees are concerned, I find that they cannot be relied upon for the following grounds:

a) First of all, the action of the A.O. in relying upon such confession in statement is contrary to Instruction No. F. No. 286/2/2003 – IT (Inv.’ II) dt. 10.03.2003 and Instruction No. F. No. 286/98/2013 – IT (Inv. II) dt. 18.12.2014 issued by Central Board of Direct Taxes.

b) In any case, in view of decision of the Hon’ble Supreme Court in the case of CIT v/s. S. Kader Khan – [(2013) 352 ITR 480 (SC)] = 2013-TIOL-68-SC-IT a statement taken during a survey proceeding is not binding/conclusive piece of evidence. This judgement has been followed in many cases thereafter, as already referred by the Appellant in its submission.

c) Even otherwise, no blind reliance could have been placed on the statement of these two employees/as is apparent from their statements itself. These statements are given by two low level employees (as is apparent from the amount of salary paid to them), whose job was only to do data feeding in computer. They were working in the back office (Navkar City Centre – as is apparent from their statement)/away from the main office of the Appellant where the directors operate and from where only the main activities, including sales, take place (Bazar No. 2 – as intimated to the A.&. as principle place of business of the Appellant). In fact, both persons categorically stated that the sales of flats were arranged and the prices of the flats were fixed by the directors only. Interestingly, their answers are word to word identical. The sales of flats were arranged and the prices of the flats were fixed by the directors only.. Neither they were author of such loose papers nor were they even aware about author of the papers. In such a situation, how they could straightway give answer, accepting truthfulness of the papers? As such, it was highly unlikely for they being privy to receipt, or even in knowledge, of such huge amount of unaccounted cash, along with the directors. Under the circumstances, keeping in mind the principle of Preponderance of Probability, blind reliance on their statements, especially without cross verifying with the directors themselves, was uncalled for. Their statements obviously could not have been relied upon exclusively, blindly and mechanically. This is specially so when such statements were confronted only one day prior, without giving any meaningful opportunity to the Appellant to meet the contentions in the statement, including by way of cross examining the concerned persons to enable it to bring out the truth.

d) It is surprising that neither the survey party nor the A.O. in course of the assessment proceeding chose to examine any of the directors/senior functionary of the Appellant Company. It appears that the AO ‘rest content with the statements of these two low level employees taken during the survey and did not do any verification or investigation, including cross – verifying such allegation either with the directors or with the flat purchasers when he had full time and authority to do so.lt is not understood why the survey party and/or the A.O. did not chose to examine the main persons, the directors, if at all they were interested to unearth the true state of affairs. This was specially so when these two employees themselves had clearly stated that the sales of flats were ranged and the prices of the flats were fixed by the directors only. Such lapse is unexplainable and inexcusable.

e) Otherwise also, it is a very well established legal position that no addition can be made merely on the basis of confession extracted during survey/search, especially when the concerned person has retracted and true state of affairs is clarified with evidence.

In the present case the AO has drawn adverse conclusion regarding the alleged sale of properties without making independent enquiry from the actual purchaser and confronting them and allowing cross examination to the appellant, It has been pleaded by the Ld. AR that under facts and the circumstances and under facts and the circumstances and under the law, such survey statement could not be relied upon to make such huge additions

(ii) As regards the loose papers, the AO has not been able co-relate the writings with the actual income/asset which could have been derived by the appellant form any other manner.

a) First of all, the Appellant was not provided with copies of the loose in the very beginning upon which the AO. addition has been made in the assessment order. Copy of the documents provided to the Appellant just few days before the assessment do not contain these documents (except page 29). {Ref: Letter of A.O. dated 20.08.2014]. It has been explained by the Ld.AR that although the appellant submitted its explanations and replies once it received the loose paper but the AO passed the assessment order immediately and could hardly appreciate the factual analysis given by the appellant in its submission. As such, in terms of the ruling of the Supreme Court in the case of Kishinchand Chellaram [125 ITR 713 (SC)] = 2002-TIOL-922-SC-IT, these papers have no evidentiary value to support the addition.

b) Even otherwise, these papers are basically unsigned as held in the case of Layers Exports P. Lp %$$$} 53 ITR (Trib) 416 (Mumbai), CIT v/s. P. V. Kalyansundaram – [(2007) 249 ITR 49 (SC) = 2007-TIOL-160-SC-IT at Pg. 52], Mohammed Yusuf v/s. D. – [AIR 1968 Bom 112], CIT v/s Mrugesh jaykrishna – [(2000) 245 ITR 638(Guj)], CIT v/s Chamanlal Dhingra – [(1994) 121 Taxation 272 (All)], Harish Inani v/s. DCIT – [(2008) 24 SOT 541 (Mum)] = 2008-TIOL-453-ITAT-MUM, ACIT v/s. Shailesh S. Shah -[(1997) 3 ITD 153 (Mum)], Atul Kumar Jain v/s. DCIT – [(1999) 64 TTJ (Del) 786], ACIT v/s. Sri Radhe Shyam Poddar – [(1992) 41 ITD 441 (Cal)], Ashwini Kumar v/s. ITO – [(1992) 42 TTJ (Del) 644)], D.A. Patel v/s. Dy. CIT- [(2000)72 ITD 340 (Mum)], ACIT v/s. Rakesh M. Shah – [(2004) ISOT (Mum) 224], S.P. Goyal v/s. Dy. CIT – [(2002) 82 ITD 85 (Mum) (TM)], Dy. CIT v/s Ex. Of the Estate of Late Shri D.K. Shah – [I.T.A. No. 2996/M/02, Order Dated 23 January, 2013 (Mumbai-Trib)], Amarjit Singh Bakshi [HUF] v/s. ACIT [(2003) 263 ITR (AT) 75 (Del) (TM)], S.K. Gupta v/s. Dy. CIT-[(1999)63 TTJ (Del) 532], Vijaybhai H. Shah v/s. Dy. CIT – [(2006) 6 SOT 75 (Ahd)], Pradeep Amrutlal Runwal v/s. TRO – [(2014) 149 ITD 548 (Pune)] = 2014-TIOL-1316-ITAT-PUNE, {ACIT v/s. Lata Mangekshkar – [(1974) 97 ITR 696(Bom)] =2003-TIOL-482-HC-MUM-IT relied on} unsigned documents is inadmissible documents. In this view of the matter itself the addition made on the basis of such documents deserve to be deleted.

c) Further, Loose papers found not from the main office of the Appellant, but from the back office. The papers are titled with building name and shown to be as on 31.01.2014, while booking dates are mentioned from 2010 to 2011, that is, more than two years prior. There are no entries thereafter. This defies logic and going by the project completion method, even these loose papers which belongs to financial year 2013-14 (i.e. A.Y. 2014-15), could not have been considered in A.Y. 2011-12.

d) The persons (two employees who supposedly have given statement confirming existence of cash receipt were not author of these documents, nor aware about the author. Significantly, neither survey party nor the A.O. bothered to ascertain this fundamental fact and to further examine the author of these loose papers. It is not known who had prepared these papers and for what purpose and under what circumstances. It is also not mention when such cash was allegedly received. As such in absence of such crucial facts having brought on record by the A.O., these documents are nothing but dumb documents and in any case do not provide cogent and definite material to justify such a huge addition.

e) It is a well – settled law that no addition can be made merely on the basis of loose paper/loose working, rather the co-relation between the loose paper or rough working needs to be co-related with reference to any income or any asset, then only, any addition can be sustained and in the absence of establishment of such co-relation between rough working and any income, it will be difficult to sustain any addition in the present case.

f) In any case, a perusal of the loose papers, as copied in the assessment order, reveals that this working did not reflect any actual cash transaction. As pointed out by the Appellant, these loose papers include names of the directors and shareholders and their family members/relatives, who had not booked any flat nor any amount was shown as having received from them at the time of booking [cheque receipts]. It is elementary that owner and/or his family will not pay any on-money to the owner himself. In any case, nobody would pay on money without booking a flat by making at least a token payment in cheque towards booking. As such, again going by the principle of preponderance of probability, this working does not seem to be depicting true state of affairs. Further, these papers include the agreements which were cancelled. Obviously, there cannot be any addition on account of on-money with respect to the agreements which are cancelled.

g) The Ld.AR has clarified that the loose papers were only rough working/tentative planning for the work that did not materialise and did not represent any actual transaction and therefore, mechanical reliance by the AO upon these loose papers is devoid from actual facts and figures.

Even otherwise, I find that the addition is not sustainable, on the following grounds:

(i) There was no unaccounted cash found during course of the survey proceeding. If the allegation of the A.O, about the Appellant receiving such huge on money had any truth, then surely some excess cash should have been found at the time of the survey,

(ii) No other discrepancy was found by the survey party.

(ii) Even the Special Auditor had not made any adverse comment about such receipt of on money.

(iv) “Most importantly, the agreement values are more than the prevailing stamp duty values/circle rates/rates of sale of surrounding flats. This is enough to discharge the onus of the Appellant.

(v) As regards one agreement referred by the A.O., first of all, this agreement pertains to the prior year and not the previous year concerning the present assessment year. In any case, this agreement was cancelled subsequently. Consequently, the question of placing reliance on such agreement does not arise.

(vi) As regards the observation of the A.O. that no final agreement was entered in to as explained by the Appellant, as per the practice prevailing in the city of Bhilwara, registration of flat agreement is done only at the time of giving possession of the flat, which was obviously was not the facts in the present case, as the project was not completed.

Another important factor is that the Special Auditor, after full verification, did not find any discrepancy in the accounts of the Appellant and had no adverse comments to offer on this crucial aspect.

Even otherwise, even if the addition is evaluated in the backdrop of the well -principle/of Preponderance of Probability, the probability is clearly in favour of Appellant for the followings reasons:

(a) Absolutely no incriminating material or document was found, no unaccounted asset or unexplained expenditure was found and no other discrepancy was found. This factor is very important because if at all the allegation of the A.O. is correct then such huge unaccounted cash received must find its destination in the form of either undisclosed investment or unexplained expenditure. This is specially so when the allegation is about receiving crores of rupees in cash. Absence of any evidence regarding application of such alleged huge cash amount negates the very theory propounded by the A.O.

b) The agreement values were more than the circle rate/stamp duty rate. This is also another important and crucial factor in favour of the Appellant, especially when the legislature itself regards stamp duty value as a barometer representing fair market value of immovable properties.

8.3.10. In the backdrop of the above facts, the various very well settled legal positions, as pointed out by the Appellant, get fully applicable to the facts of the Appellant’s case. They are:

(i) Apparent is real

Apparent must be considered as real, until it is shown by the party alleging otherwise that it is not so by bringing cogent evidence on record. Under the Income tax Act, such onus is on the department. There should be some direct nexus between such conclusion and the primary facts.

(ii) Onus/Burden – Undisclosed Income

In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provisions.

(iii) Department – how to discharge the burden

If the explanation (given by the assessee) shows that the receipt was not of an income mature, the department cannot act unreasonably and reject that explanation to hold that it ‘was income. The department cannot be merely rejecting unreasonably a good explanation, convert proof into no proof.

iv) No addition of undisclosed income on merely suspicion

The Income – tax officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment.

(v) No addition can be made simply with respect to the transaction of immovable properties on the allegation of on money received/paid, without any cogent proof being brought on record.

(vi) Without prejudice, the addition on account of additional sale consideration received in cash is to be made, if at all, in the year of completion of project, where the method of accounting is Project Completion Method.

In this regard, various case laws, as referred in the submissions, get fully applicable.

Most of them are well known decisions of the respective subject matter, and which have been followed subsequently.

8.3.11. In any case, a particular reference may be made to a very recent decision of Mumbai Tribunal in a case of ACIT v/s. Layer Exports P. Ltd. – [(2017) 53 ITR (Trib) 416 (Mum)], in which similar issues were involved, the decision has been made in favour of the assessee by the Hon’ble Tribunal. After analysing precedents on various legal issues/some of which are already referred above, the Hon’ble Tribunal was pleased to hold and reiterate the above referred legal position and deleted the addition on account of alleged on – money received by the assessee therein. This one judgement itself takes care of most of the legal issues involved in the present appeal as well and fully supports the case of the Appellant. In the Legal Note, such various propositions are already analysed and they are found to be applicable to the present case as well.

Without prejudice even otherwise also no addition on account of on money was called for.. This is because, the amount mentioned against names of the directors/shareholders their relatives as well as other person who had not made any booking are to be excluded. Similarly, the flats for which the agreements are cancelled are also required to be excluded. Still further, the papers only related to the projects for construction of Gulmohur and Chinnair. Admittedly, no papers were found with respect to the other projects. Consequently, the addition with respect to such other projects also needs to be excluded. If this is done, the amount of such exclusion is more than the amount of the addition made. This is clear from the figures and the calculations as already referred earlier.

8.3.12. In any case, no addition could have been made in the present year on account of alleged on-money it is an admitted & accepted fact that the Appellant is following project completion method and the project was not completed substantially in the pervious year. In view of the decision in the case of “Layers Exports P. Ltd.[2017] 53 ITR (Trib) 416 (Mum), no income in the form of on – money can be taxed in the year in which the project is going on. Therefore the claim of the Appellant for deletion of such addition is sustainable on this ground as well.

8.3.13. In view of the above, neither on fact nor in law such addition is sustainable. Consequently, the addition of Rs. 20,86,37,000/- is directed to be deleted.

In the result the ground of appeal is allowed.

6.1. After having gone through the orders passed by the ld. CIT(A) and hearing the parties at length and judicial precedents cited by the parties, we find that the addition in the present case were made by the AO u/s 68 of the Act by holding “cash receipts” received by the assessee. At the outset it was contended that the additions made u/s.68 were applicable at all when the amount found credited in the books of accounts maintained for previous year. However, in the present case, this amount of alleged cash component even as per AO was not found credited in the books maintained by the assessee. The only reliance placed was “loose papers” which admittedly cannot be termed as “books of accounts” maintained by the assessee for the previous year.AO failed to establish with cogent evidence that loose papers were books of accounts of the assessee maintained for its business within the meaning of section 68 of the Act. In fact, the AO did not bother to verify who are the author of the documents and for what purpose and in what circumstances they were prepared, thus the said documents are to be considered as “dumb document”. In this respect reliance was placed on the judgment of Hon’ble Supreme Court in the case of Common Cause vs. Union of India (2017) 394 ITR 220 = 2017-TIOL-27-SC-MISC and in the case of Sheraton Apparels vs. ACIT (2002) 256 ITR 20 (Bom).

Even otherwise after analyzing the details filed by both the parties, the ld. CIT(A) rightly concluded that the additions in the present case were based only on the basis of i) statement of two employees taken in the course of proceedings. ii) loose papers found in the course of survey.

6.2. As far as the statement of two employees are concerned, they cannot be relied upon for the reasons recorded by Ld. CIT(A) in para No.8.3.8. and as far as loose papers are concerned, the AO has not been able to co-relate the said writing. As per the factual position, this issue was confronted to the assessee at the fag end of the proceedings. The AO has not considered the earlier detailed submissions already filed by the assessee and also requested the AO to provide copies of the seized material as well as statements taken during the survey. In this respect, letter as well reminder was also given, however the copies of some of the documents were only provided which have already been detailed in the order passed by Ld. CIT(A). Since it was the duty of the AO to confront the assessee with the material, which was being relied or used by the AO, but in the absence of said material, no additions could have been made as has already been held in the case of Kishanchand Chelaram 125 ITR 713 (SC) = 2002-TIOL-922-SC-IT. According to Hon’ble Supreme Court in such a scenario, the legality of the additions are required to be adjudicated de hors such material. Thus, if we go by the above analogy, then in the present case, if such loose papers relied upon by the AO are to be ignored, then in that eventuality, there was no material with the AO to make the additions. As far as the statement of two employees are concerned, the same cannot be relied upon as the action of the AO in relying upon such confession in statement is contrary to instruction no. F.No 286/2/2003-IT(Inv.II) dated 10.03.03 and instruction no. F.No 286/98/2013-IT(Inv.II) dated 18.12.14 issued by CBDT. Even otherwise as per the decision of Hon’ble Supreme Court in the case of CIT vrs. S. Kaderkhan (2013) 352 ITR 480 (SC) = 2013-TIOL-68-SC-IT, wherein it was held that statement taken during assessment proceedings is not binding/conclusive piece of evidence. It is also important to mention here that these two persons were neither the authors of such loose paper nor were they even aware about the author of the papers, therefore in such a situation, they cannot be treated as privy to the receipt or even in knowledge of such huge amount unaccounted cash. Thus in these circumstances, keeping in view the principles of pre-ponderance of probabilities, blind reliance on their statement, without even cross verifying with the directors itself is uncalled for. The said loose papers were not even co-related by the AO with the actual income/asset which could have been derived by the assessee from any other manner. Even otherwise, these papers were unsigned and could not be relied upon as has been held in the case of Layer Exports Pvt. Ltd. (2017) 53 ITR 416 (Mum). Thus in this way, no addition can be made merely on the basis of loose paper and the working on the said loose paper did not reflect any actual cash transaction.

6.3. Ld. CIT(A) after appreciating the entire facts and circumstances of the present case had rightly deleted the additions by holding as under:-

(i) This addition is based only on the basis of the followings:

(a) Statement of two employees taken in course of survey proceeding; and

(b) Loose papers found in course of the survey

(ii) As far as the statements of two employees are concerned, I find that they cannot be relied upon for the following grounds:

a) First of all, the action of the A.O. in relying upon such confession in statement is contrary to Instruction No. F. No. 286/2/2003 – IT (Inv.’ II) dt. 10.03.2003 and Instruction No. F. No. 286/98/2013 – IT (Inv. II) dt. 18.12.2014 issued by Central Board of Direct Taxes.

b) In any case, in view of decision of the Hon’ble Supreme Court in the case of CIT v/s. S. Kader Khan – [(2013) 352 ITR 480 (SC)] 2013-TIOL-68-SC-IT a statement taken during a survey proceeding is not binding/conclusive piece of evidence. This judgement has been followed in many cases thereafter, as already referred by the Appellant in its submission.

c) Even otherwise, no blind reliance could have been placed on the statement of these two employees/as is apparent from their statements itself. These statements are given by two low level employees (as is apparent from the amount of salary paid to them), whose job was only to do data feeding in computer. They were working in the back office (Navkar City Centre – as is apparent from their statement)/away from the main office of the Appellant where the directors operate and from where only the main activities, including sales, take place (Bazar No. 2 – as intimated to the A.&. as principle place of business of the Appellant). In fact, both persons categorically stated that the sales of flats were arranged and the prices of the flats were fixed by the directors only. Interestingly, their answers are word to word identical. The sales of flats were arranged and the prices of the flats were fixed by the directors only.. Neither they were author of such loose papers nor were they even aware about author of the papers. In such a situation, how they could straightway give answer, accepting truthfulness of the papers? As such, it was highly unlikely for they being privy to receipt, or even in knowledge, of such huge amount of unaccounted cash, along with the directors. Under the circumstances, keeping in mind the principle of Preponderance of Probability, blind reliance on their statements, especially without cross verifying with the directors themselves, was uncalled for. Their statements obviously could not have been relied upon exclusively, blindly and mechanically. This is specially so when such statements were confronted only one day prior, without giving any meaningful opportunity to the Appellant to meet the contentions in the statement, including by way of cross examining the concerned persons to enable it to bring out the truth.

d) It is surprising that neither the survey party nor the A.O. in course of the assessment proceeding chose to examine any of the directors/senior functionary of the Appellant Company. It appears that the AO ‘rest content with the statements of these two low level employees taken during the survey and did not do any verification or investigation, including cross – verifying such allegation either with the directors or with the flat purchasers when he had full time and authority to do so.lt is not understood why the survey party and/or the A.O. did not chose to examine the main persons, the directors, if at all they were interested to unearth the true state of affairs. This was specially so when these two employees themselves had clearly stated that the sales of flats were ranged and the prices of the flats were fixed by the directors only. Such lapse is unexplainable and inexcusable.

e) Otherwise also, it is a very well established legal position that no addition can be made merely on the basis of confession extracted during survey/search, especially when the concerned person has retracted and true state of affairs is clarified with evidence.

In the present case the AO has drawn adverse conclusion regarding the alleged sale of properties without making independent enquiry from the actual purchaser and confronting them and allowing cross examination to the appellant, It has been pleaded by the Ld.AR that under facts and the circumstances and under facts and the circumstances and under the law, such survey statement could not be relied upon to make such huge additions

(ii) As regards the loose papers, the AO has not been able co-relate the writings with the actual income/asset which could have been derived by the appellant form any other manner.

a) First of all, the Appellant was not provided with copies of the loose in the very beginning upon which the AO. addition has been made in the assessment order. Copy of the documents provided to the Appellant just few days before the assessment do not contain these documents (except page 29). {Ref: Letter of A.O. dated 20.08.2014]. It has been explained by the Ld.AR that although the appellant submitted its explanations and replies once it received the loose paper but the AO passed the assessment order immediately and could hardly appreciate the factual analysis given by the appellant in its submission. As such, in terms of the ruling of the Supreme Court in the case of Kishinchand Chellaram[ 125 ITR 713 (SC)] = 2002-TIOL-922-SC-IT, these papers have no evidentiary value to support the addition.

b) Even otherwise, these papers are basically unsigned as held in the case of Layers Exports P. Lp %$$$} 53 ITR (Trib) 416 (Mumbai), CIT v/s. P. V. Kalyansundaram – [(2007) 249 ITR 49 (SC) = 2007-TIOL-160-SC-IT at Pg. 52], Mohammed Yusuf v/s. D. – [AIR 1968 Bom 112], CIT v/s Mrugeshjaykrishna – [(2000) 245 ITR 638(Guj)], CIT v/s Chamanlal Dhingra – [(1994) 121 Taxation 272 (All)], Harish Inani v/s. DCIT – [(2008) 24 SOT 541 (Mum)] = 2008-TIOL-453-ITAT-MUM, ACIT v/s. Shailesh S. Shah -[(1997) 3 ITD 153 (Mum)], Atul Kumar Jain v/s. DCIT – [(1999) 64 TTJ (Del) 786], ACIT v/s. Sri Radhe Shyam Poddar – [(1992) 41 ITD 441 (Cal)], Ashwini Kumar v/s. ITO – [(1992) 42 TTJ (Del) 644)], D.A. Patel v/s. Dy. CIT- [(2000)72 ITD 340 (Mum)], ACIT v/s. Rakesh M. Shah – [(2004) ISOT (Mum) 224], S.P. Goyal v/s. Dy. CIT – [(2002) 82 ITD 85 (Mum) (TM)], Dy. CIT v/s Ex. Of the Estate of Late Shri D.K. Shah – [I.T.A. No. 2996/M/02, Order Dated 23 January, 2013 (Mumbai-Trib)], Amarjit Singh Bakshi [HUF] v/s. ACIT [(2003) 263 ITR (AT) 75 (Del) (TM)], S.K. Gupta v/s. Dy. CIT-[(1999)63 TTJ (Del) 532], Vijaybhai H. Shah v/s. Dy. CIT – [(2006) 6 SOT 75 (Ahd)], Pradeep Amrutlal Runwal v/s. TRO – [(2014) 149 ITD 548 (Pune)] = 2014-TIOL-1316-ITAT-PUNE, {ACIT v/s. Lata Mangekshkar – [(1974) 97 ITR 696(Bom)] = 2003-TIOL-482-HC-MUM-IT relied on} unsigned documents is inadmissible documents. In this view of the matter itself the addition made on the basis of such documents deserve to be deleted.

c) Further, Loose papers found not from the main office of the Appellant, but from the back office. The papers are titled with building name and shown to be as on 31.01.2014, while booking dates are mentioned from 2010 to 2011, that is, more than two years prior. There are no entries thereafter. This defies logic and going by the project completion method, even these loose papers which belongs to financial year 2013-14 (i.e. A Y 2014-15), could not have been considered in A Y 2011-12.

d) The persons (two employees who supposedly have given statement confirming existence of cash receipt were not author of these documents, nor aware about the author. Significantly, neither survey party nor the A.O. bothered to ascertain this fundamental fact and to further examine the author of these loose papers. It is not known who had prepared these papers and for what purpose and under what circumstances. It is also not mention when such cash was allegedly received. As such in absence of such crucial facts having brought on record by the A.O., these documents are nothing but dumb documents and in any case do not provide cogent and definite material to justify such a huge addition.

e) It is a well – settled law that no addition can be made merely on the basis of loose paper/loose working, rather the co-relation between the loose paper or rough working needs to be co-related with reference to any income or any asset, then only, any addition can be sustained and in the absence of establishment of such co-relation between rough working and any income, it will be difficult to sustain any addition in the present case.

f) In any case, a perusal of the loose papers, as copied in the assessment order, reveals that this working did not reflect any actual cash transaction. As pointed out by the Appellant, these loose papers include names of the directors and shareholders and their family members/relatives, who had not booked any flat nor any amount was shown as having received from them at the time of booking [cheque receipts]. It is elementary that owner and/or his family will not pay any on-money to the owner himself. In any case, nobody would pay on money without booking a flat by making at least a token payment in cheque towards booking. As such, again going by the principle of preponderance of probability, this working does not seem to be depicting true state of affairs. Further, these papers include the agreements which were cancelled. Obviously, there cannot be any addition on account of on-money with respect to the agreements which are cancelled.

g) The Ld.AR has clarified that the loose papers were only rough working/tentative planning for the work that did not materialise and did not represent any actual transaction and therefore, mechanical reliance by the AO upon these loose papers is devoid from actual facts and figures.

Even otherwise, I find that the addition is not sustainable, on the following grounds:

(i) There was no unaccounted cash found during course of the survey proceeding. If the allegation of the A.O, about the Appellant receiving such huge on money had any truth, then surely some excess cash should have been found at the time of the survey,

(ii) No other discrepancy was found by the survey party.

(ii) Even the Special Auditor had not made any adverse comment about such receipt ‘of on money.

(iv) “Most importantly, the agreement values are more than the prevailing stamp duty values/circle rates/rates of sale of surrounding flats. This is enough to discharge the onus of the Appellant.

(v) As regards one agreement referred by the A.O., first of all, this agreement pertains to the prior year and not the previous year concerning the present assessment year. In any case, this agreement was cancelled subsequently. Consequently, the question of placing reliance on such agreement does not arise.

(vi) As regards the observation of the A.O. that no final agreement was entered in to as explained by the Appellant, as per the practice prevailing in the city of Bhilwara, registration of flat agreement is done only at the time of giving possession of the flat, which was obviously was not the facts in the present case, as the project was not completed.

Another important factor is that the Special Auditor, after full verification, did not find any discrepancy in the accounts of the Appellant and had no adverse comments to offer on this crucial aspect.

Even otherwise, even if the addition is evaluated in the backdrop of the well -principle/of Preponderance of Probability, the probability is clearly in favour of Appellant for the followings reasons:

(a) Absolutely no incriminating material or document was found, no unaccounted asset or unexplained expenditure was found and no other discrepancy was found. This factor is very important because if at all the allegation of the A.O. is correct then such huge unaccounted cash received must find its destination in the form of either undisclosed investment or unexplained expenditure. This is specially so when the allegation is about receiving crores of rupees in cash. Absence of any evidence regarding application of such alleged huge cash amount negates the very theory propounded by the A.O.

b) The agreement values were more than the circle rate/stamp duty rate. This is also another important and crucial factor in favour of the Appellant, especially when the legislature itself regards stamp duty value as a barometer representing fair market value of immovable properties.

6.4. It is a settled proposition of law that no addition of undisclosed income on mere suspicion can be made. In this respect we rely upon the decision in the case of Common Cause vs. Union of India (2017)394 ITR 220 2017-TIOL-27-SC-MISC and in the case of Sheraton Apparels vs. ACIT (2002) 256 ITR 20 (Bom) and even no addition on the basis of statement of third party is sustainable and in this respect we draw strength from the following judgments. It was held as under:-

1. M/s. Prem Ex-Servicemen Co.op v/s. State of Haryana – [AIR 1974 SC 1121]

It is well settled that the effect of an alleged admission depends upon the circumstances in which it was made.

2. Ambika Devi v/s. Balmakund Pandey – [AIR 1981 Patna 111]

An admission must be a clear and unambiguous statement. The value of admissions must depend upon the circumstances in which they are made and possible motives for incorrect statements by interested persons should not be ignored.

(II) UNDER INCOME TAX ACT, 1961

1. CIT v/s. Mantri Share Brokers (P.) Ltd – [(2018) 96 taxmann.com 279 (Raj -HC]

The addition in hands of assessee merely on basis of statement of director when there was no other material either in form of cash, bullion, jewellery or document or in any other form to conclude that statement made was supported by some documentary evidence.

SLP dismissed in; [(2018) 96 taxmann.com 280 (SC)]

2. CIT v/s. Supertech Diamond Tools (P.) Ltd. – [(2014) 44 taxmann.com 460 (Raj -HC)]

FACT

The Assessing Officer relied upon the statements made by the persons related with the said companies. According to those persons, these companies were engaged in the business of sale and purchase of shares and providing accommodation entries in lieu of commission. Thus, the Assessing Officer concluded that the assessee had routed its undisclosed funds through the banking channels of the accommodation entry providers.

HELP

The reference to the statements made by some of the persons related with the said investing companies is of no effect because such statements could not have been utilized against the assessee company when the assessee company had not been afforded an opportunity of confronting and cross examining the persons concerned. There does not appear anything occurring in the statements of the persons relating with the assessee-company so as to provide a basis for the findings recorded by the Assessing Officer.

3. DCIT v/s. Mahendra Ambalal Patel- [(2010) 40DTR (Guj) 243] = 2010-TIOL-931-HC-AHM-IT

The Tribunal has rightly found that the basis for making the addition in the case of the assessee is merely a bald statement of the third party, which is not corroborated with any documentary evidence. The Tribunal was justified in law and on facts in deleting the addition.

4. Jawaharbhai Hathiwala v/s. ITO – ((2010) 128 TTJ (Ahd) (UO) 36]

Merely recording made by a third party or statement of a third party cannot be treated as so sacrosanct so as to read as a positive material against the assessee.

5. ITO v/s. Smt. Neelam Chawla – [(2008) 6 DTR (Del) (Trib) 141]

The statement of a person may give rise to conduct further enquiry but that cannot be held as a sacrosanct particularly when a person challenges the contention of such statement in view of specific proof.

6. First Global Stockbroking Ltd. v/s. ACIT – [(2008) 4 DTR 172 (Mum)]

There should be some more corroboration for putting the assessee under a burden of. v, tax. Simply on the basis of statement of third person it cannot be held that this amount has been remitted by assessee from undisclosed sources, more so, when an opportunity to cross examine this person was not granted to the assessee. This statement can at best be information for probing the issue further.

7. ACIT v/s. Ramanbhai Patel – [(2008) 12 DTK (Ahd) (Trib) 471]

The law on the statement is very much clear. No addition can be made merely on the basis of the statement recorded under s. 132 (4) during the course of regular assessment until and unless the statement is supported by corroborative evidence.

8. Bansal Strips (P) Ltd. v/s. ACIT – [(2006) 99 ITD 177 (Del)] = 2006-TIOL-76-ITAT-DEL

The only basis on which the additions have been made is the first statement of third party. Apart from this statement there is not an iota of corroborative material in the possession of the Department that alleged commission was indeed paid to third party. No reasons have been given as to why the statement of third party should be accepted to be true while the statement of the assessee well supported by regular books of account should be assumed to be false….

9. ITO v/s. Rajiv Aggarwal- [(2004) 89 TTJ (Del) 1095]

The mere reliance on the statement of third parties who were never examined by the : AO himself cannot be held to be sufficient to come to the finding that the transaction was not genuine and more so when there are other material and evidence to support the transaction.”

6.5. Ld. CIT(A) had also rightly held that no addition on account of on money was called for, because the amount mentioned against the names of Directors/shareholders and their relatives as well as other persons who had not made any booking were excluded. Similarly, the flats for which the agreements are cancelled were also rightly excluded. Since the papers only related to the projects for construction of Gulmohar & Chinnair and as per record, no papers were found with respect to other projects. Thus, considering the totality of the facts that Ld. CIT(A) had rightly conclude that if this is done, then the amount of such exclusion would be more than the amount of the addition made, which is clear from the figures and the calculations as already referred in the order of CIT(A). We have also gone through the decision in the case of Layers Exports P. Ltd., (2017) 53 ITR (Trib)(Mum) wherein it was held that no income in the form of alleged on-money can be taxed in the year in which the project is going on. Admittedly, assessee was following project completion method and thus while these principles in the present case, the claim of the assessee for deletion of such addition is sustainable on this ground also. Therefore, the ld. CIT(A) has rightly found the additions are unsustainable and deleted the same. No new facts have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, we find no reasons to interfere in to the findings so recorded by the ld. CIT(A), hence this ground raised by the revenue stands dismissed.

C.O. No. 310/Mum/2017 for AY 2012-13

7. Now we take up C.O. No. 310/Mum/2017 for AY 2012-13 filed by the assessee. Since we have already decided the similar ground of appeal in ITA No. 2926/Mum/2016 for AY 2012-13 on merits. Therefore, following our own decision in ITA No. 2926/Mum/16, we apply the same findings in the present appeal in order to maintain judicial consistency which is applicable mutatis mutandis.

ITA No.3990/Mum/2017

8. The following grounds have been taken by the assessee:-

1. DISALLOWANCE U/S. 14A

1.1 The Learned Commissioner of Income – tax (Appeals) – 9, Mumbai [“Ld, CIT (A)”], erred in confirming the action of the A.O. of making disallowance under section 14A of the Income – tax Act, 1961 read with Rule 80 of the Income -tax Rules, 1962 at Rs. 3,16,865/-.

1.2 It is submitted that in the facts and the circumstances of the case, and in law, the case of the Appellant was not covered under section 14A of the Act and, in any case, no disallowance was called for under this section.

1.3 Without prejudice to the above, it is submitted that assuming – but not admitting – that some disallowance was required to be made under section 14A of the Act, the calculation of the disallowance is not in accordance with the law, is arbitrary and is excessive.

2. The Appellant craves leave to add, alter, delete or modify all or any the above ground at the time of hearing.

8.1. All the grounds raised by the assessee are interrelated and inter connected and are challenging the order of CIT(A) in confirming the action of AO in making disallowance u/s.14A of the IT Act r.w.r. 8D. At the very outset, it was submitted that the ld. AR appeared on behalf of the assessee reiterated the same arguments. The ld. Counsel submitted that the investment in the equity shares of Bhilwara Spinners Ltd., had its sources in assessee’s own funds and not borrowed funds carrying interest. It was further submitted that the assessee has not earned any exempt income during the year under consideration therefore, in these circumstances, the provision of u/s.14A do not apply at all. Even otherwise, it was submitted that the assessee was having sufficient own funds which were interest free funds and those relied upon the decision in the case of Cheminvest Limited vs Commissioner Of Income Tax 378 ITR 33 (Delhi) =2015-TIOL-2070-HC-DEL-IT, where the Tribunal had deleted the disallowance made by the AO u/s.14A on the ground that assessee had not shown any exempt income during the relevant assessment year. It was also submitted that in the subsequent years in Rule 8D(2)(ii) was included in A.Y.2012-13 and A.Y.2013-14.

8.2 On the other hand, ld. DR relied upon the order passed by the revenue authorities.

8.3. We have heard the Counsel for both the parties at length and we have already perused the materials placed on record, the submissions filed by the parties and the judgments relied upon by both the parties. The AO had made additions by holding that possibility of having incurred some expenses on such investments cannot be ruled out therefore had made additions. From the records, we notice that assessee had taken a categorical stand that assessee had not earned any exempt income during the year under consideration, therefore question of application of section 14A simply does not apply. Keeping in view the submissions of the assessee and while drawing strength from the judgment of Hon’ble Delhi High Court in the case of Cheminvest Limited vs Commissioner Of Income Tax 378 ITR 33 (Delhi) = 2015-TIOL-2070-HC-DEL-IT. We restore this ground back to the file of AO with a direction to verify as to whether the assessee has earned any exempt income during the year under consideration or not and incase, it is found that assessee has not earned any exempt income, then in that eventuality while following the judgment in the case of Cheminvest Ltd. (supra), no disallowance be made. It is needless here to mention that before passing afresh order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee. With these directions, this ground of appeal raised by the revenue is partly allowed for statistical purposes.

9. In the net result, appeal filed by the revenue and CO filed by the assessee are dismissed and the appeal filed by the assessee is allowed for statistical purposes.

(Order pronounced in the open court on this 27.06.2019)

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