9911796707
TMI Blog1999 (9) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by the contractees. Since its beginning, it is being assessed to income-tax. 3. In addition to the above, the assessee also obtained a contract from Jalgaon Municipal Committee (hereinafter called JMC) to construct a high-rise building at Jalgaon on the land provided by JMC. The relevant details relating to such contract are hereby stated : 4. JMC, Jalgaon had awarded the job of development of V.V. Market, with high-rise administrative building at Jalgaon, to the appellant, vide an agreement dated 18-10-1988, which has been amended from time to time by supplementary agreements. (In all seven supplementary agreements). The project was in respect of the development of a plot of land ad-measuring about 5 acres, by constructing on it a shopping complex, vegetable market and a high-rise administrative building of 17 storeys, as per the drawings and designs to be supplied by the JMC through their architect, Kabre Choudari, Nasik. The aforesaid vegetable market, shopping complex and high-rise administrative block are not separate buildings but all of them are a part of a single building complex. The aforesaid building complex was named as V.V. Market. The aforesaid scheme was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sell the same on the aforesaid lines as per the previous supplementary agreement. 5. The JMC was agreeable to the aforesaid proposal. However, the Collector, Jalgaon again stayed the relevant Resolution of the JMC. This gave rise to yet another dispute and the work on the project suffered yet another setback. After lot of wrangling the Urban Development Minister, Maharashtra intervened and gave this approval to the aforesaid proposal. Accordingly 6th & 7th supplementary agreements were entered into with the JMC and the work on the project was restarted from 1-8-1996. The entire commercial complex has been completed and handed over to the JMC on 20-5-1999. The high-rise administrative building is almost complete except for some minor work. 6. The appellant was to provide the following shops, stalls, or premises at concessional rates to JMC or/and its nominees : (i) 472 Vegetable stalls in basement at the rate of Rs. 3,000 per stall. (ii) 74 Shops in basement at the rate of Rs. 40,000 per shop. (iii) 39 shops without mezzanine floor, on first floor at the rate of Rs. 40,000 per shop. 7. The following building(s)/shops were to be provided free of cost. (i) Complete Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1994-95 - Rs. 20,00,000 Assessment year 1995-96 - Rs. 20,00,000 11. As per the statement of the said partner dated 13th August, 1994 (date of search), investment recorded in the books was Rs. 6,42,53,318 as on 31-3-1994 and thereafter till 13th August, 1994, it was Rs. 35,80,328 aggregating to Rs. 6,77,79,946. 12. In view of the above, seized material in the course of search action, the assessments for assessment years 1990-91 to 1993-94 were reopened under section 148 vide notices dated 22-9-1994. The returns were filed in response to such notices. 13. After the search operation, the assessee was advised to change the method of accounting in respect of V.V. Market from project completion method to work-in-progress method. All expenses and income to the extent considered payable and receivable unless stated otherwise were accounted for on mercantile basis. The closing stock, stores, spares, consumables and work-in-progress were valued at cost. The aforesaid facts were clearly mentioned in the audit report under the head "General Remarks" for assessment year 1994-95. On the basis of the changed method of accounting, the assessee declared loss of Rs. 69,36,378 for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. Some other minor defects were also pointed out. Hence, books of account maintained by the assessee were liable to be rejected. 2. As a consequence of the above finding, the trading result declared by the assessee were rejected. In respect to civil contract, he applied flat rate on net profit of 8% on the total contract receipts subject to depreciation. 3. In addition to the above, other income like hire charges, rent, interest, commission etc., were added to the income separately. 4. In respect to the V.V. Market project, he accepted the second valuation report of the D.V.O. and determined the unrecorded investment in the years under consideration as per Annexure 'A' II to the assessment order and the same were added as unexplained investment under section 69. 5. He estimated the income on the sale of shops at V.V. Market at the rate of 12% of the consideration recorded by the assessee. In addition to that, he estimated 'on money' at the rate of 105.78% of the total consideration recorded by the assessee. This percentage was arrived at on the basis of seized material relating to 28 shops. The sale of shops was considered in the year in which posses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection, he referred to the following decisions :--- 1. MD. Umer v. CIT [1975] 101 ITR 525 (Pat.) 2. Sriram Arora v. CIT [1971] 80 ITR 78 (All.) 3. S. Veeriah Reddiar v. CIT [1960] 38 ITR 152 (Ker.) 4. Uttam Chuna Pathar Udyog v. ITO [1998] 65 ITD 460(Jp.) 5. Asstt. CIT v. Rahamat Khan Chandan Khan & Party [1995] 83 Taxman 45 (Jp.) 6. Dr. Rajni Kant Dave v. CIT [1996] 58 ITD 510 (All.). 20. Regarding the rejection of account books vis-a-vis the V.V. Market Project, it has been submitted on behalf of the assessee that no incriminating material was found in the course of search to prove the falsity of the entries made by the assessee except to the extent of the "on money" received by it as per the seized material. All the entries are supported by vouchers. There is no material on the record to prove that expenditure claimed by the assessee was bogus. The method of accounting adopted by the assessee was also in accordance with accounting standard approved by the Institute of Chartered Accountants. According to the ld. counsel for the assessee, the book result cannot be disturbed except to the extent of "on money" found to be received by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order do not relate to civil contracts and in fact, these payments were made in connection with the construction of V.V. Market. According to him, these payments have been mentioned by the Assessing Officer on the basis of loose-papers found from the premises of V.V. Market and he drew our attention to such loose papers. He took us through such loose-papers to show that these payments related to V.V. Market and in various loosepapers, the words JMC were written which means Jalgaon Municipal Committee. Therefore, according to him, these payments cannot be considered while deciding the issue of rejection of account books vis-a-vis civil contracts. 23. Rival submissions of the parties as well as the materials produced before us have been considered/perused carefully. The main reason for rejecting the books of accounts vis-a-vis the civil work given by the Assessing Officer was that the assessee had made payments, as mentioned in paras 14.1 and 14.2 of his order, outside the books of accounts. After perusing the relevant materials, it is not possible to accept the reasoning given by him. The payments mentioned in paras 14.1 and 14.2 of the assessment order were taken from the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that no discrepancy was found in the preceding years and the books of accounts were accepted subject to minor adjustment. For the benefit of this order, paras 2 and 3 of the said assessment order are being reproduced :--- "2. In response to notices issued under sections 143(2) and 142(1), Shri N.T. Shurpatne, Advocate attended Shri H.R. Shimpi, Accountant of the assessee firm and explained the return. The assessee firm continues to derive income from contracts from Government and semi Government. Assessee maintains four sets of books of accounts. One set belongs to Head Office and other set is for Bombay Office. Third set is for Poladpur, Dist : Raigad and the last set is for M/s. T. Deepchand & Sons, Bombay. The books of accounts are closed, adjusted and audited. The assessee maintains all vouchers for expenses. 3. During the year under consideration, the total work done is shown at Rs. 3,20,61,441. As the books of accounts are closed, adjusted and audited, the book results are accepted. The past records reveals that thorough verification was carried out in this case and no discrepancy was noticed. This year also there is no major flow noticed in the books of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby accepted. The orders of CIT(A) for all the years sustaining the estimate of profit made by the Assessing Officer in this regard are set aside. Consequently, the additions sustained by him in this regard for all the years are hereby deleted. 30. Before parting with this issue, we would like to refer the contention of the assessee that Assessing Officer was not justified in assessing the income by way of interest, commission, hire charges etc., under the head 'income from other sources". In our opinion, this plea of the assessee is misconceived. The perusal of the assessment orders passed by the Assessing Officer does not show that such income was assessed under the head "income from other sources". Except for assessment year 1990-91, the Assessing Officer has not referred even to the words ''income from other sources". He has simply stated "other income". The entire computation is only under one head and depreciation has been allowed after assessing all business income from civil works. He has only segregated various business income from civil works. In assessment year 1990-91, he has referred to the words "income from other source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of "on money" i.e. 105.78% of the amount recorded in the books of accounts. Annexures "E 3 & 4" to the assessment order show the details of "on money" received in respect of 201 shops upto 25th March, 1990. The gist in respect of these shops shows that assessee had received excess amount of Rs. 53,09,500 upto 25th March, 1990 against recorded consideration of Rs. 50,76,500 giving rate of "on money" at 104.59%. On the basis of these details, the Assessing Officer was of the view that assessee must have received "on money" in respect of all the shops sold by it. The assessee disputed the receipt of "on money" before the Assessing Officer which was rejected in view of the above materials and the statement of the senior partner Mr. S.D. Golani, under section 132(4) who in answer to question No. 8 deposed that the sum of Rs. 75,00,000 spent on the construction of V.V. Market outside the books were gene-rated from the sale/booking of the shops. In view of these clinching materials, the Assessing Officer following the decision of the Supreme Court in the case of CST v. H.M. Esufali H.M Abdulali [1973] 90 ITR 271 estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgaon. Aggrieved by such orders of the CIT(A), both the assessee as well as the Revenue are in appeal before the Tribunal. 26. The ld. counsel for the assessee initially contested the finding of the lower authorities that "on money" was received in respect of sale of shops as per the seized material, but later on gave up this issue and admitted before us the fact of receiving "on money" on the sale shop as per the seized material. However, it was contended by him that receipt of "on money" should be restricted to the amount actually received by it as per the seized material inasmuch as there was no scope of estimating in the case of search. According to him, whatever "on money" was received was reflected in the seized material. Alternatively, it was submitted by him that "on money" as per the seized materials related to 201 shops only and therefore, there was no scope to assume the receipt of "on money" in respect of balance 67 shops. According to him, 268 shops were sold between, assessment year 1990-91 to assessment year 1994-95 and Assessing Officer has wrongly and illegally estimated the "on money" in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT (A) in this regard be set aside and order of the Assessing Officer be restored. 29. In reply, the ld. counsel for the assessee has supported the order of CIT (A) in view of the factors taken into consideration by CIT (A). According to him, there was loss of Rs. 69 lakhs in this project upto 31-3-1994 and net loss of Rs. 2.91 crores by the completion of the project even after considering the "on money" received by the assessee. Therefore, the question of assessing the assessee on positive income does not arise. Even the rate of "on money" applied by him is too excessive and only reasonable rate of G.P. should be applied as contended by him in respect of his own appeal. 30. Rival submissions of the parties and the materials placed before us have been considered carefully. There is no dispute before us of the fact that "on money" was received by the assessee in respect of shops sold by it. Annexure 'E' clearly shows the quantum of excess money received by the assessee in respect of 28 shops and the assessee also has no objection if the same is taken into consideration for determining the profits from this project. However, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seized material. Once it was established on the basis of seized material that assessee received ''on money'' at 100% or above of the recorded price, there was no scope for reducing the rate of "on money" drastically. The senior DR., in our opinion, was justified in contending that circumstantial evidence could be taken into consideration only in the absence of direct evidence. Annexure 'H' prepared by Assessing Officer on the basis of seized material and account books maintained by the assessee clearly shows that in respect of 27 shops the "on money" charged by the assessee in most of the cases was more than 100%. Only in some cases, it was slightly less than 100%. For example, Rs. 1,27,000 against recorded price of Rs. 1,31,000 in respect of shop No. 84, Rs. 1,25,500 against Rs. 1,33,500 for shop No. 87 and Rs. 1,21,500 against Rs. 1,33,500 in respect of shop No. 88. It is only in respect of one shop i.e. shop No. 1 that "on money" was only Rs. 88,620 against the recorded price of Rs. 2,75,000. But, the overall calculations made by the Assessing Officer shows "on money" at 105.78% of the recorded price. The perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn at 'Nit. So, the entire amount is considered as "on money" which cannot be the factual position at any cost. Similarly, reference can be made for other shops at sl. Nos. 87, 93, 108, 109 and 111. However, it further appears that in most of the cases, the ''on money" has shown at 100% of the recorded price. In few cases, it is either more or less of the recorded price. In respect of shop Nos. 218 and 320, there is no "on money". Even after excluding these anomalies, we find that there is not much difference in rate of "on money" than what has been applied by the Assessing Officer. Therefore, in our view, there is no reason to disturb the estimate of the Assessing Officer in respect of shops at ground floor. 33. In view of the above discussion, it is held as under :--- 1 . That Assessing Officer was justified in estimating the "on money" in respect of all the 268 shops sold during years under consideration. 2. That the CIT (A) was not justified in determining the rate of "on money" at 45% of the recorded price. 3. That Assessing Officer was justified in assessing the "on money" in respect of 27 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,25,496 1992-93 Rs. 23,72,458 1994-95 Rs. 30,30,355 At this stage, it is clarified that the Assessing Officer deducted the aforesaid amounts from the "on money' assessed by him pertaining to assessment years 1991-92 to 1994-95 so that double addition was not made. However, in respect of assessment year 1990-91, no such set off was allowed since no "on money" was assessed by him. 35. The ld. counsel for the assessee has seriously assailed the validity of the reference made by the Assessing Officer to the DVO by contending that the provisions of section 55A could not be invoked by the Assessing Officer inasmuch as the fair market value of a capital asset was not required to be determined in the present case. He drew our attention to the letter of DVO dated 20th September, 1994 addressed to the assessee to show that reference was made under section 55A of the Income-tax Act though in the body of the valuation report reference is made to the provisions of section 131(1)(d). It was further contended by him that even reference under section 131(1)(d) could not have been made by the Assessing Officer since no proceeding was pending on the date of such reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report cannot be challenged. Therefore, the Assessing Officer was justified in law in determining the cost of construction of the project in accordance with the second valuation report. 37. Rival submissions of the parties as well as both the valuation reports have been considered carefully. It is not necessary for us to decide the validity of the reference made by the Assessing Officer and DVO in the present case, because in our opinion, such valuation reports can be considered as evidence even assuming that reference made by the Assessing Officer was not in accordance with the law. Somewhat similar question arose before the constitutional Bench of the Hon'ble Supreme Court in the case of Pooran Mal v. Director of Inspection [1974] 93 ITR 505. The question before the Hon'ble Court was whether the materials seized in the course of search which is declared illegal can be used as an evidence against the assessee. The answer given by the court was in affirmative. In the head-note of the report at page 506, the following observations of their Lordships are reproduced as under :--- ''In India, as in England, where the test of admissibility of evidence lies in releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve prompted him to ask the DVO to revise the valuation in accordance with the seized material which was not taken into consideration while preparing the first report. The cost of construction as per the second report was determined at Rs. 871.78 lakhs which was nearer to the estimate disclosed by the assessee in his statement under section 132(4). The ld. counsel for the assessee before us could not point out any defect in the figures relating to the cost of the material, measurement of the area etc., adopted by the DVO. The only stand taken by him was that DVO had not inspected the premises before making the second report. But, perusal of the second report shows that DVO had inspected the premises again before making the second report. Since the measurement had already been taken by him at the time of first inspection, there was no need to take the measurement again. In the absence of any defect in such valuation report, in our opinion, the Assessing Officer was justified in relying on the second valuation report while determining the cost of construction of this project. 38. At this stage, it is necessary to appoint out that two mistakes apparent from the record were noticed whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the cost of the project. Similarly, the sum of Rs. 59,83,625 shall be considered while determining the unaccounted receipts of ''on money''. 39. Having determined the unaccounted expenditure the question for consideration is whether the Assessing Officer was justified in making addition under section 69C for the years under consideration. After considering the relevant facts of the case, it is our view that no addition can be made under section 69C. There is no dispute about the fact that assessee received 'on money' at the time of booking/sale of shops. The senior partner of the assessee had stated in his statement under section 132(4) that unaccounted investment was made in the construction of the project out of the money generated on the sale of shops by way of 'on money'. Therefore, both the amounts of 'on money' as well as unexplained expenditure cannot be brought to tax. If the unaccounted expenditure was incurred out of 'on money' received by the assessee, then question of making any addition under section 69C does not arise because the source of expenditure is fully explained. In such case, it is only the 'on money&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are rejected, then some guess-work is bound to be there. The rate of 8% as adopted by the CIT(A) is quite reasonable and therefore, should be upheld. 41. After giving our deep thoughts to this aspect of the matter, it is not possible for us to uphold the order of CIT(A), determining the rate of profit at 8%. The books of account have already been rejected by us. The provisions of section 145(2) provides that where accounts are rejected, the assessment is to be made in the manner provided in section 144 which in turn provides assessment to the best of judgment. It is the settled law that even the best judgment of assessment must be rational and cannot be arbitrary though some guess-work may be involved. In this connection, reference may be made to the decisions of Hon'ble Supreme Court in the case of Raghubar Mandal Harihar Mandal and in the case of Dhakeswari Cotton Mills Ltd. In the present case, the Assessing Officer has simply applied 12% rate of profit which has been reduced to 8% by CIT(A). Neither the Assessing Officer nor the CIT(A) has given any basis for such rate of profit adopted by them. Further, neither of them has taken into consideration the contractual obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illustrated by an example. Suppose the total cost of project is Rs. 1,00,000 in respect of total area to be constructed of 1000 sq. fts. out of which saleable area is 400 sq. fts. The sum of Rs. 1,00,000 would be spread over 400 sq. fts. which would give cost of construction at Rs. 250 per sq. ft. of the saleable area. If 100 sq. fts. of area is sold by the assessee in a year for consideration of Rs. 15,000 in addition to the "on money" of Rs. 15,000, then the total receipts would be Rs. 30,000 in that year against the cost of saleable area of Rs. 25,000 (250 X 100). Thus, the profit for this year chargeable to tax would be Rs. 5000. 42. In view of the above discussion, the orders of CIT(A) are set aside on this issue and the Assessing Officer is directed to re-compute the taxable profit/loss from this project i.e. V.V. Market Project in the following manner :--- 1st Step To take the total cost of this project as per the books of account which has been stated by the assessee before us at Rs. 15,82,33,695 (page No. 199 of the paper-book). However, this figure is subject to verification by the Assessing Officer. 2nd Step To increase the above cost by the unaccounted e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off/carry for ward and set off in accordance with the provisions of Chapter VI. The amount of profit or loss computed in accordance with the above formula shall be taxable in respect of each year. 43. The next issue relates to the addition made by Assessing Officer on account of cash credits under section 68 in respect of assessment years 1990-91, 1991-92 and 1993-94. The cash credits relating to assessment years 1990-91 and 1991-92 represented the amount of booking deposit in respect of shop/flat booked in the name of family members of the partners of the assessee firm. Cash credits relating to assessment year 1993-94 represent the loans received by various parties. Firstly, we deal with the cash credits pertaining to assessment years 1990-91 and 1991-92. During the course of assessment proceedings, it was noticed by the Assessing Officer that certain shops at the around floor in the V.V. Market Project were booked in the name of various family members of the partners of the assessee firm, details of which is given at page 24 of the assessment order. When asked to explain the deposit amount for such booking, the assessee furnished confirmatory letters as well as the statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1990-91 in respect of booking deposits in the names of Vasu Brijlani, Vimla Brijlani and Sapna Punjabi and Rs. 2,15,000 for assessment year 1991-92 in respect of the above three persons. The ld. senior D.R. has simply relied on the order of Assessing Officer and further submitted that these persons were not assessed to income-tax and the CIT(A) has merely deleted the addition on the ground that repayments were recorded in the books of accounts ignoring the fact that the deposit as well as repayments were made in cash. On the other hand, the ld. counsel for the assessee has supported the order of CIT(A). 46. After hearing both the parties, we do not find any merit in the appeal of the Revenue. The CIT(A) has found that booking deposits were made by these parties out of their capital accounts. It was also found by him that such bookings were cancelled and the amounts were returned by the assessee on account of cancellation. Besides this, these parties had confirmed the receipt of the refund of such amounts. It is important to note that CIT(A) has recorded a finding that the amounts refunded by the assessee to Vasu Brijlani and Vimla Brijlani appeared in the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties also appeared at page 6 of appellate order. The total amount in this respect was Rs. 3,15,000. in the appellate proceedings, the CIT(A) asked the assessee to furnish confirmation letters with supporting evidence to prove the genuineness of such loans in respect of the depositors who could not be contacted. The assessee filed the supporting evidence such as confirmation letters, xerox copies of the Bank slips, extract of the balance-sheet and the details regarding repayment of loans. On perusal of these details, it was found by the CIT(A) that the cash credits in the name of seven persons were repaid by cheques. Three of these parties were assessed to income-tax. All the parties had confirmed the amounts given to the assessee and repayment made by the assessee. On the basis of these materials, the CIT(A) deleted the addition of Rs. 3,15,000 in respect of the persons who could not be contacted by the Assessing Officer. In respect of other two parties i.e. Suresh Advani and Manju Advani, it was found by the CIT(A) that both of them had produced copies of their capital account, balance-sheet and details of their assessments. Both the parties had categorically admitted that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of earning "on money" in assessment year 1989-90 as neither the shops were not ready for sale nor sold and further no "on money" has been recd. for the assessment year 1990-91." The above grounds are inter-connected and relate to the direction given by the CIT(A) in para 7.9 of his order which may be quoted "however, following the same principle and the line of action adopted by the Assessing Officer for adjusting part of the difference of Rs. 1.63 crores on account of unrecorded investment for assessment years 1991-92 to 1994-95 out of the sale of shops and "on money" received, the addition on this ground for assessment years 1989-90 and 1990-91 be adjusted as and when sales affected in future against the said construction commenced in these years." After hearing both the parties, we agree with the ld. Senior D.R. that CIT(A) had no jurisdiction to travel beyond the assessment years involved before him. Therefore, it is held that CIT(A) was not justified in giving any direction with reference to the addition made for assessment year 1989-90. Since assessment year 1990-91 was before him, the CIT(A) could issue the directions. ..... 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