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2018 (4) TMI 1998 - AT - Income TaxDisallowance on account of administrative and selling expenses - AO was of the opinion that since the projects were not completed and no transaction of sale has been made, it cannot be said that the assessee has commenced its business and therefore the expenses charged to the profit and loss account should be treated as pre-operative expenses - HELD THAT - There is no dispute that the assessee had purchased the lands in earlier years on which it has started constructing flats. Therefore, it cannot be said that the assessee has not commenced its business. As only indirect expenses have been charged to the Profit and Loss account and all other direct expenses have been shown as part of work-in-progress. As decided in Dhoomketu Builders Development (P.) Ltd. 2013 (4) TMI 668 - DELHI HIGH COURT the commencement of Real Estate business would normally start with the acquisition of land or immovable property. In another case, the Hon'ble High Court of Delhi in ESPN SOFTWARE INDIA P. LTD. 2008 (3) TMI 90 - DELHI HIGH COURT has held that business commenced with first purchase of stock in trade, the date when the first sale is made is not material in that respect. Moreover, Accounting Standard 7 issued by the ICAI states that in cases where the expenditure could not be attributed to a particular activity carried on by the assessee, the same may be allowed as a period cost. Thus, as the indirect expenses debited to the Profit and Loss account are not pre-operative expenses and these deserve to be allowed as expenses and carried forward or set off as per the provisions of the Act. We do not find any error or infirmity in the findings of the ld. CIT(A). Ground No. 1 is accordingly dismissed. Disallowance u/s. 40A(3) - AO found that the assessee has incurred expenditure of substantial amounts towards purchase of lands and the payments have been made in cash in violation of provisions of Section 40A(3) - HELD THAT - On identical set of facts, the Hon'ble High court of Gujarat in the case of Anupam Tele Services 2014 (2) TMI 30 - GUJARAT HIGH COURT held neither the genuineness of the payment nor the identity of the payee were in any case doubted. These were the conclusions on facts drawn by the Appellate Commissioner. The Tribunal also did not disturb such facts but relied solely on Rule 6DD (j) of the Rules to hold that since the case of the assessee did not fall under the said exclusion clause nor was covered under any of the clauses of rule 6DD, consequences envisaged in section 40A(3) must follow. As in the present case also neither the genuineness of the payment nor the identities of the payee were in any case doubted. Considering the totality of the facts qua the business of the assessee. Profit on sale of flats - additions made on the basis of loose papers found from the premises of a third party - A.O. observed that the loose papers give record balances in different brokers accounts and the transaction with the brokers are also found to be recorded in the books of accounts of the assessee - HELD THAT - As loose papers were found during the course of the survey operation at the premises of V.K. Nagwani. It is also not in dispute that the loose papers did not contain the name of the assessee firm nor its partner. The loose papers may contain some notings relating to the Real Estate brokers to whom the assessee has given commission/brokerage but at the same time no enquiry has been made by the A.O. from those brokers/commission agents. Loose papers and documents cannot possibly be construed as books of accounts regularly kept in the course of business. Therefore, in our considered opinion, the A.O. is not justified in resting findings based on the loose papers and documents found from the premises of a third party even if such document contain narration of transaction with the assessee company. See V.C. Shukla ORs. 1998 (3) TMI 675 - SUPREME COURT and Chuharmal 1988 (5) TMI 1 - SUPREME COURT Addition made on account of Short Term Capital Gain - There is no dispute that the sale consideration was duly shown as part of sales in the Profit and Loss account meaning thereby that the impugned profit has already been reflected in the Profit and Loss account, therefore, there is no occasion for making further addition under the head 'Short Term Capital Gain'. We decline to interfere. Ground No. 4 is dismissed. Addition of undisclosed income on the basis of entries on loose papers recovered from the premises of a third party - As the loose papers were found from the premises of a third person which did not bear the name of the assessee nor its partner nor any enquiry/verification has been done by the A.O. to substantiate its claim that the entries in the loose papers belong to the assessee. Further, as mentioned elsewhere, while deciding the appeal for A.Y. 2011-12, the indirect expenses have to be debited to the Profit and Loss account which the assessee has rightly done so and therefore the quantum of indirect expenses cannot be a basis for the rejection of the book results. In our understanding of the law, the presumption u/s. 132(4A) of the Act would in any case be applicable to a third party from whose possession such papers/documents have been found by the revenue - addition of undisclosed income could not be made simply on the basis of entries on loose papers recovered from the premises of a third party. Addition made u/s. 40(a)(ia) - As assessee has never claimed such payments as expenditure in its books of accounts. It is also true that the A.O. has not brought anything on record which could suggest that the assessee has actually spent these expenditures on the persons found to be mentioned in the loose papers. In the absence of any enquiry made by the A.O, the impugned additions cannot be sustained and the ld. CIT(A) has rightly deleted the same which calls for no interference. Appeal filed by the Revenue is dismissed.
Issues Involved:
1. Dismissal of appeals due to low tax effect. 2. Deletion of disallowance of administrative and selling expenses. 3. Deletion of disallowance under Section 40A(3) of the Income Tax Act. 4. Deletion of addition on account of profit on sale of flats. 5. Deletion of addition on account of short-term capital gain. 6. Deletion of disallowance of loss on account of administrative and selling expenses. 7. Deletion of addition based on loose papers found from a third party. 8. Deletion of addition under Section 40(a)(ia) of the Income Tax Act. Detailed Analysis: 1. Dismissal of Appeals Due to Low Tax Effect: The appeals in ITA Nos. 351 & 352/Raipur/2014 were dismissed as the tax effect was less than Rs. 10 lakhs, in accordance with CBDT Circular No. 21 of 2015, which directs the revenue not to prefer appeals before the Tribunal where the tax effect is below this threshold. 2. Deletion of Disallowance of Administrative and Selling Expenses: The assessee, engaged in the real estate business, was initially disallowed Rs. 1,33,26,552/- by the A.O. as pre-operative expenses. The CIT(A) deleted this disallowance, recognizing that the business had commenced with the acquisition of land and that indirect expenses charged to the Profit and Loss account were legitimate. The Tribunal upheld this view, noting that the commencement of business begins with acquiring land, and indirect expenses are allowable as per Accounting Standard 7. 3. Deletion of Disallowance under Section 40A(3): The A.O. disallowed Rs. 56.26 lakhs for cash payments made in violation of Section 40A(3). The CIT(A) deleted this disallowance, accepting the assessee's argument that the lands were capital assets converted to stock-in-trade and that the cash payments were due to business expediency. The Tribunal agreed, citing precedents where genuine transactions and business exigencies justified cash payments. 4. Deletion of Addition on Account of Profit on Sale of Flats: The A.O. added Rs. 3,69,625/- based on loose papers found during a survey. The CIT(A) deleted this addition, noting the lack of evidence linking the papers to unrecorded transactions by the assessee. The Tribunal supported this decision, emphasizing that loose papers found at a third party's premises cannot substantiate unrecorded income. 5. Deletion of Addition on Account of Short-Term Capital Gain: The A.O. treated a gain of Rs. 9,35,284/- from the sale of land as a short-term capital gain. The CIT(A) deleted this addition, as the sale was already included in the Profit and Loss account. The Tribunal upheld this, confirming that the gain was accounted for in the financials, negating the need for further addition. 6. Deletion of Disallowance of Loss on Account of Administrative and Selling Expenses: Similar to the earlier issue, the Tribunal dismissed the ground concerning the disallowance of Rs. 65,93,561/- for administrative and selling expenses, following the same rationale applied in the previous assessment year. 7. Deletion of Addition Based on Loose Papers Found from a Third Party: The A.O. added Rs. 1,63,21,567/- based on alleged unrecorded sales inferred from loose papers. The CIT(A) deleted this addition, finding the rejection of books and reliance on third-party documents unjustified. The Tribunal agreed, emphasizing the lack of corroborative evidence and the inadmissibility of third-party documents without substantiation. 8. Deletion of Addition under Section 40(a)(ia): The A.O. added Rs. 1,07,85,000/- and Rs. 27,49,000/- for alleged unrecorded payments without TDS. The CIT(A) deleted these additions, noting the absence of evidence of such payments in the assessee's books. The Tribunal concurred, highlighting the lack of enquiry by the A.O. and the absence of claimed expenses in the assessee's accounts. The Tribunal, in conclusion, dismissed the appeals filed by the Revenue, finding no errors in the CIT(A)'s decisions across the various grounds.
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