2011 (7) TMI 1180 - AT - Income Tax

Disallowance of interest and capital expenditure - Documents seized during the course of search - business by way of bogus unsecured loan - Income from undisclosed sources on receipt of money - deleting the addition u/s.68 - HELD THAT - In present case, we have no hesitation in deleting the addition made in respect of Fort Royal projects for asst. yr. 2007-08. In regard to Revenue's appeals, additions made by AO on account of on-money receipts for asst. yrs. 2002-03 to 2005-06 were also deleted by CIT(A) with the finding that since assessments for these years had already been completed under s. 143(3) before the date of search and nothing incriminating was found in course of search or survey in respect of receipt of on-money for these years, completed assessments for these years could not be disturbed and no addition on account of 'on-money' could be made merely on the basis of change of opinion. As the Revenue could not controvert the same. THAT, no incriminating material or documents were found in course of the search or survey action with respect to the allowability or otherwise of the expenditure or interest expenses for any of the years under consideration. In the original assessments framed under s. 143(3) of the Act for asst. yrs. 2002-03 to 2005-06, the AO after application of mind and detailed scrutiny of accounts had consciously allowed said expenses and interest On loan. However, later on while framing assessments u/s 144/153C for the said years, under identical circumstances vis-a-vis past, the AO opined that a part of such expenses and interest should have been capitalized to WIP. Accordingly, the same was added back by the AO u/s 144/153C merely on the basis of change of opinion in the guise of search assessment. Hence, CIT(A) has rightly deleted this addition. Accordingly, these two common issues of Revenue's appeals in IT(SS)A Nos. 15, 16, 17, 18, 19, 20 and 21/Kol/2011 are dismissed. THAT, AO alleged that the assessee company was specifically asked for explanation but had not complied. Thus, the said sum of Rs.,10 lacs was added as income of the assessee from undisclosed sources. we find that the allegations and so-called findings of AO serve no purpose as far as assessee is concerned. The AO has observed that 'few layers' had been identified with regard to the source of ₹ 10 lacs received from Toplight Vinimay (P) Ltd. but has not given any details regarding such layers. Further, the AO has failed to prove by bringing on record some cogent evidence that this amount of ₹ 10 lacs had actually been deposited by assessee company directly or indirectly through intermediaries into the account of Toplight Vinimay (P) Ltd. and as such, represented income from undisclosed sources of the assessee. it has successfully proved genuineness and source of loan by furnishing the requisite evidences in the form of IT return and financial statements of Toplight Vinimay (P) Ltd. evidencing receipt of loan for the relevant year and also confirmation of the said party. In view of these facts and circumstances, we confirm the order of CIT(A) deleting the addition and this issue of Revenue's appeal is dismissed.

Summary

Issues Involved:
1. Deletion of additions on account of alleged on-money receipts for ongoing projects.
2. Extrapolation of on-money receipts to other flats and projects.
3. Disallowance of interest and capital expenditure.
4. Addition on account of loan received from Toplight Vinimay (P) Ltd.

Detailed Analysis:

1. Deletion of Additions on Account of Alleged On-Money Receipts for Ongoing Projects:
The Revenue's appeal contested the deletion of additions made by the CIT(A) on account of alleged on-money receipts for ongoing projects. The CIT(A) had deleted the additions of Rs. 2,58,64,762, Rs. 1,73,16,880, and Rs. 64,83,07,492 for the assessment years 2006-07, 2007-08, and 2008-09, respectively. The CIT(A) relied on the project completion method of accounting followed by the assessee company. The Revenue argued that the on-money received should be added in the year of receipt as the books of account of the assessee were rejected. The Tribunal upheld the CIT(A)'s decision, stating that the on-money receipts should be taxed in the year of project completion as per the project completion method of accounting.

2. Extrapolation of On-Money Receipts to Other Flats and Projects:
The AO extrapolated the on-money receipts noted in the seized document RM/5 to all the flats in three projects, resulting in an addition of Rs. 64.83 crores for the assessment year 2008-09. The CIT(A) held that the projects were incomplete during the assessment year 2008-09, and the issue of on-money receipts should be considered in the year of project completion. The Tribunal agreed with the CIT(A), stating that the AO was not justified in extrapolating the notings in RM/5 to other flats and projects without any corroborating evidence. The Tribunal emphasized that only the profit element embedded in the trading receipts could be taxed, which could be determined only on the completion of the project.

3. Disallowance of Interest and Capital Expenditure:
The AO disallowed a sum of Rs. 19,92,060 being interest expense and Rs. 29,54,976 being 10% of the expenditure debited in the P&L account on an estimation basis for the assessment years 2002-03 to 2008-09. The CIT(A) deleted these disallowances, observing that the additions did not emanate from incriminating material found during the course of the search and that the assessments for these years had already been completed before the date of search. The Tribunal upheld the CIT(A)'s decision, stating that the valuation of work-in-progress (WIP) had been done strictly in compliance with AS-7 issued by the ICAI and that the AO's disallowance was merely based on a change of opinion.

4. Addition on Account of Loan Received from Toplight Vinimay (P) Ltd:
The AO treated a loan of Rs. 10 lakhs received by the assessee from Toplight Vinimay (P) Ltd. as bogus and added it as income from undisclosed sources for the assessment year 2006-07. The CIT(A) deleted the addition, observing that the AO had not provided any evidence to prove that Toplight Vinimay (P) Ltd. was a typical entry company and that the assessee had duly proved the nature and source of the loan by documentary evidence. The Tribunal upheld the CIT(A)'s decision, stating that the assessee had successfully proved the genuineness and source of the loan and that the AO had failed to prove that the loan represented income from undisclosed sources.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decisions on all issues, including the deletion of additions on account of alleged on-money receipts, the method of accounting for on-money receipts, the disallowance of interest and capital expenditure, and the addition on account of the loan received from Toplight Vinimay (P) Ltd. The assessee's appeal was partly allowed.