2016 (10) TMI 1024 - AT - Income Tax

Assessment u/s 153A - addition on basis of seized papers - Held that - When dumb documents like the present loose sheets of papers are recovered and the Revenue wants to make use of it, the onus rests on the Revenue to collect cogent evidence to corroborate the noting therein. The Revenue has failed to corroborate the noting by bringing some cogent material on record to prove conclusively that the noting in the seized papers reveal the unaccounted on-money receipts of the assessee. Further, no circumstantial evidence in the form of any unaccounted cash, jewellery or investments outside the books of account was found in course of search in the case of assessee. Thus, the impugned addition was made by the AO on grossly inadequate material or rather no material at all and as such, deserves to be deleted. Hence, we are of the view that an assessment carried out in pursuance of search, no addition can be made simply on the basis of uncorroborated noting in loose papers found during search because the addition on account of alleged on-money receipts made simply on the basis of uncorroborated noting and scribbling on loose sheets of papers made by some unidentified person and having no evidentiary value, is unsustainable and bad-in-law. - Decided in favour of assessee. Addition made on account of extrapolation of alleged on-money receipts purportedly recorded in loose sheets of papers - differences in the BMC built up area and built up area as per agreement - Held that - The differences are on account of valid reasons and the assessee has not made any contradictory claims in respect of saleable area of flats. But, we are of the view that, since, we have given a find that the impugned papers do not contain recordings of any on-money receipt by the assessee, the question of extrapolating on-money receipts on the basis thereof does not arise. Even otherwise, we are in agreement with the argument of assessee that additions in search assessments are required to be made on the basis of tangible evidence and not solely on the basis of estimations and extrapolation theory. Thus, we delete the addition made on account of extrapolation of alleged on-money receipts purportedly recorded in loose sheets of papers. Accordingly, this issue of extrapolation in all the three years is allowed in favour of the assessee and against the Revenue. Addition on account of unaccounted money on account of extrapolation and validity of method of accounting followed by the assessee - Held that - As up to 31-03-2008 the sale agreements entered into were approximately in respect of 60% of the flats only. It further shows that the agreed sale consideration for all the flats for which sale agreements were entered into comes to ₹ 175.03 crores. The agreed sale consideration for the flats for which the agreement were executed before 31.03.08 is ₹ 66.49 crores out of this agreed transfer consideration the amount received 31.03.08 by way of advance is ₹ 47.27 crores. Thus the amount received up to 31.03.08 by way of advance in regard to the flats for which sale agreements had been entered into is less than 25% of the expected sale consideration for all the flats. Further, the fact that the construction of the project was not completed up to 31.03.2008 has also been discussed with corroborating evidences in the preceding paragraphs. Thus, in light of the aforesaid discussion we are of the view that no income was recognizable from the impugned project for AY 2008-09 under project completion method followed by the assessee. Hence, the issue relating to the method of accounting followed by the assessee is allowed. Further, we have already held that the seized documents marked as Annexure A-1, pages 1 to 19 are held as dumb documents and even otherwise, the assessee explained the entries, no addition on account of receipt of moneys on extrapolation can be added in the hands of the assessee. Accordingly this issue of the assessee s appeals is allowed and the issue of Revenue s appeals is dismissed. Disallowance of compensation and interest paid to Videocon Group - Held that -no incriminating material or documents were found in course of the search at any of the premises of group concerns or premises of the assessee company with respect to the allowability or otherwise of the impugned compensation or interest expenses. In the original assessment framed u/s 143(3) of the Act for AY 2006-07, the AO after application of mind and detailed scrutiny of accounts had consciously allowed the said expenses. However, later on while framing assessments u/s 153A of the Act, under identical circumstances vis-a-vis the past, the AO opined that such expenses were not allowable u/s 37(1) of the Act. Accordingly, the same was illegally added back by the AO u/s 143(3) r. w. s. 153A of the Act merely on the basis of change of opinion in the guise of search assessment. Such an action is vitiated in law. It is an accepted principle of law that the AO does not have jurisdiction to review his own order. As such, since between the date of the order of original assessments u/s 143(3) of the Act and the date of framing assessment u/s 153A of the Act, no new material had come on record, no fresh information had been received in respect of the impugned compensation and interest expenses, the A.O could not add back items of regular assessment on the basis of mere change of opinion by resorting to materials already on record at the time of original assessment merely because a search action had been undertaken in the group case - Decided in favour of assessee Disallowing proportionate expenses incurred for constructing saleable area for alleged bogus tenants - Held that - It is not a case where the assessee has been found having constructed the property in violation of the sanctioned plan or the relevant provisions of law governing the activity. It is also not the case where any part of the costs incurred on construction of the property has been found to be illegal, non-genuine or incurred for extraneous purposes. It is a case where the construction is legal and as per plan. The entire construction cost claimed by the assessee has actually been incurred by it on construction of the property. There is however, surplus constructed area intended for the occupiers of the erstwhile property. Since the claim of some of the occupiers was not found admissible, the surplus area has been transferred to the assessee for a consideration. Subsequently, the surplus area has been dealt with by the assessee in a commercial manner and the sale consideration for the same has been duly accounted for as and when so required. It is therefore, perfectly clear that the entire amount incurred on the construction of the property is legal, genuine and in accordance with law and therefore admissible as business expenditure. Since the entire sale consideration for the impugned surplus area (which was later on transferred to the assessee for a consideration) has been duly accounted for as and when sold by the assessee, the corresponding construction cost is also perfectly allowable as business expenditure. Further, the amount paid to MHADA is also in the nature of cost of construction and admissible as business expenditure. The provisions of MHADA Act do not, in any manner, provide for its treatment as anything in the nature of penal payment. The payment is neither in the nature of fine nor in the nature of penalty. It is not attributable to any irregularity or infringement of law. The claim is therefore properly admissible for deduction as business expenditure.- Decided in favour of assessee

Summary

Issues Involved:
1. Interpretation of seized papers and alleged on-money receipts.
2. Extrapolation of on-money receipts.
3. Method of accounting and year of taxability of unaccounted cash receipts.
4. Disallowance of compensation and interest paid to Videocon Group.
5. Disallowance of proportionate expenses for constructing saleable area for alleged bogus tenants.
6. Legal validity of assessments under section 153A.

Detailed Analysis:

1. Interpretation of Seized Papers and Alleged On-Money Receipts:
The primary issue was whether the addition of ?57,14,15,087/- was based on incorrect interpretation of notings on loose sheets seized from the premises of Prime Down Town Estates Pvt. Ltd. (PDTEPL). The assessee argued that the papers did not lead to any discovery of unaccounted assets or incriminating evidence. The AO interpreted the notings as receipts of on-money for flats in the Legend project, which the assessee contended were rough estimates related to discussions with prospective clients. The Tribunal noted that the AO's interpretation was based on conjectures and surmises without corroborative evidence. Statements from directors and flat purchasers denied any on-money transactions, and affidavits supported the assessee's interpretation. The Tribunal concluded that the seized papers were dumb documents and could not be used as the sole basis for such high additions.

2. Extrapolation of On-Money Receipts:
The AO extrapolated the on-money rate of ?16,230/- per sq. ft. to other flats in the project, resulting in additional income for subsequent years. The Tribunal found that since the seized papers did not conclusively prove on-money receipts, extrapolating these figures to other flats was unjustified. The Tribunal emphasized that additions in search assessments must be based on tangible evidence, not estimations or extrapolation theories, and thus deleted the extrapolated additions.

3. Method of Accounting and Year of Taxability of Unaccounted Cash Receipts:
The AO argued that the assessee should follow the percentage completion method as per AS-7 (revised 2002), while the assessee followed the project completion method. The Tribunal held that AS-7 applies to construction contracts and not to projects executed on an ownership basis. The assessee's method of accounting had been consistently accepted in previous years, and there was no justification for the AO to deviate from this method. The Tribunal concluded that the income from the project should be recognized only upon completion, in line with the project completion method.

4. Disallowance of Compensation and Interest Paid to Videocon Group:
The AO disallowed ?6.5 crores as compensation and ?1.37 crores as interest paid to Videocon Group, alleging it was not for business purposes. The Tribunal found that these payments were made under a court settlement and were thus business expenses. Furthermore, these expenses were already scrutinized and allowed in the original assessment, and no new incriminating evidence was found during the search. Therefore, the Tribunal deleted the disallowance.

5. Disallowance of Proportionate Expenses for Constructing Saleable Area for Alleged Bogus Tenants:
The AO disallowed expenses related to the construction of areas for bogus tenants. The Tribunal noted that MHADA had legalized the disputed area upon payment by the assessee. Since the area was legally sanctioned, the expenses incurred were allowable under section 37(1). The Tribunal also found that the AO's disallowance resulted in double addition, as the construction cost was not deducted while computing profits. The Tribunal deleted the disallowance.

6. Legal Validity of Assessments Under Section 153A:
The Tribunal did not explicitly address the legal validity issues, as it had already decided the substantive issues on merits. However, it was implied that the assessments under section 153A were flawed due to the lack of incriminating evidence found during the search.

Conclusion:
The Tribunal ruled in favor of the assessee on all substantive issues, emphasizing the need for tangible evidence in search assessments and rejecting the AO's interpretations and extrapolations based on uncorroborated loose papers. The appeals of the assessee were allowed, and those of the Revenue were dismissed.