9911796707
TMI Blog2016 (6) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... 1261/Hyd/2013, ITA No. 1306, 1307, 1308, 1309, 1310, 1311 & 1305/Hyd/2013 - - - Dated:- 29-4-2016 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri K.C. Devdas For The Revenue : Shri B. Kurmi Naidu ORDER PER BENCH: This group of appeals filed by the assessee and revenue are against a common order of the learned Commissioner of Incometax( Appeals) IV, dated 10/07/2013 for AYs 2000-01 to 2006-07. As the issues involved are common, these appeals are disposed in this combined order. 2. Briefly the facts of the case are that the assessee is a private limited company promoted in the year 1995 and regularly assessed to tax. The assessee company consists of two directors by name Sri Mala Kondaiah and Smt Bala Kondamma. The assessee company is engaged in the business of real estate i.e. purchase of lands, developing of the plots and selling of the same on installment basis. The assessee laid out ventures at various places at Vizag, Rajamundry, Vijayawada and Hyderabad. The assessing officer made a reference u/s.142(2A) of the Income Tax Act (in short Act ) for special audit. After receipt of the speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et instead of the same being reflected as sales in the original return. later the same was regrouped after search. iv) The figures of purchases, sales, opening and closing stock were adopted by the auditor without proper verification. v). There was suppression of sales in respect of Lankepalem land. vii). The assessee himself revised the sales figure consequent to search which according to the assessing officer, amounted to suppression of sales. viii) The assessee deliberately manipulated the opening and closing stock figure to neutralize profit on account of suppression of sales. ix) In the original return purchases were shown inclusive of other allied expenses and the same was changed in the revised return to a higher figure. x) In course of hearing, the assessee claimed huge marketing commission paid to various agents. It was observed that marketing commission related to sales and under no circumstances the same can be treated as a component of purchases. [xi] The accounts are maintained branch wise in different formats viz., accounts at Visakhapatnam in Tally 6.3 package , Gajuwaka in accountrix package, Rajahmundry manually etc. It was claimed that the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no basis for apportionment of these receipts as sales and advances. In the sworn deposition during the. course of original assessment (post search), the C.A firm Durgarao Co who audited these accounts has admitted to such inconsistencies. Relevant portion is reproduced below: I confirm that I have examined ledger and cash book of Vijayawada and Rajahmundry branches which were maintained manually and also computerized. For the two branches at Vizag and Hyderabad I have done audit on the basis of computerized statements and party ledgers maintained manually as well as computerized which were submitted by the assessee. 2.5 Thus it was admitted by the auditor that only for Rajahmundry branch, where the books of account are manually maintained were examined by him. But for two branches at Vizag audit was made on the basis of computerized statements only. It was not based upon any other supporting evidences as vouchers or bills. Sri Durgarao, C.A has clarified that there is no basis for sales figure shown in the return as stated on oath reproduced below: I am not aware of the basis for the figures of purchases, sales, opening stock and closing stock balances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was that there is no complexity in the accounts of the assessee and therefore reference u/s.142(2A) of the IT Act was not warranted. 2.9 After taking into consideration the objections filed by assessee company, the same were rejected for the detailed reasons given in this office letter dated 21-12-2011 and a special audit u/s.142[2A] was ordered and the terms of reference of the special audit was as under: 1) Please examine whether the claim of expenditure under all heads is based on proper evidences / vouchers for all the ventures for the assessment years under consideration. 2) Please validate the figures of opening stock and closing stock (quantitative details and values). 3) Please examine the correctness of purchases and sales for all the years in question. 4) Please examine the sales in respect of lankapalem land. 5) Please examine the bills and vouchers in respect of marketing commission payments. 6) Please also examine the sale of plots on outright basis as well as on instalment basis . 7) Please examine the transfer entries from advance from customers account to sales account 8) Please verify all bank statements vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is inability to produce even a single voucher or other record from their side other than whatever is available with the Department. 2.3 The correspondence with the assessee company at various points of time with regard to the furnishing of Books of Accounts and other evidence in conducting the Special Audit is enclosed herewith. (Annexure - 2 ). 2.4 In view of non cooperation of the assessee and non availability of any information from the assessee, we have with the permission of the Assessing Officer perused the entire seized material and collated the various information required for the purpose of conducting the Special Audit. in accordance with the scope and mandate. 3.0 : Details of seized material relied upon for the Special Audit 3.1 It is observed from the details of the seized material as per Annexure - 3 that it contains various Books of Accounts and loose sheets etc. However no vouchers are available in the seized material. 3.2 In respect of Books of Accounts namely cash book and ledgers, it is found that few Books of Accounts were available. It is observed that no Books of Accounts relating to Hyderabad branch are available in the seized material. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry out any verification of the genuineness of the expenses recorded in the books of accounts. Accordingly we do not express any opinion on the genuineness and otherwise of the expenses claimed by the assessee. 4.2 We have relied upon the Audited Financial statements filed along with the original Return of Income filed before the search for the assessment years 2000-01 to 2005-06 and Audited Financial Statements filed subsequent to search alone with the return of income for the assessment year 2006-07, the starting point to recast the Profit and Loss account giving effect to the specific findings of the Special Audit. 4.3 The information pertaining to monies received from the customers have been collated from the customers ledger and summarized project wise and year wise. In respect of projects where customers ledger are not available, the break up is collated from other evidences such as branch wise financial statements, agent wise summary statements of collections etc. The aggregate advances classified as Current Liability in the Balance Sheet and the amounts disclosed as Sales in the Profit and Loss account is reconciled with the aggregate of collections, as arrived at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime to time through the respective branches. The records of such land payments were also maintained at the respective branches. It is observed that in respect of its branches at Visakhapatnam and others detailed manual ledgers titled as land payment registers were maintained. We have summarized the said purchases as year wise and project wise as is enclosed in (Annexure -5). In so far as the Hyderabad branch ventures are concerned the seized material does not contain any manual registers/ since the details seem to have been maintained in the computer hard disk. However even the soft copy is not available in the seized material. The assessee immediately after the search has compiled detailed statements of purchase of land giving the particulars of each transaction of purchase and the value thereof. On verification of the same with the Books of Accounts, it is found that the statements are correct and are reliable. Therefore we have adopted the cost of purchase of land from the said statements which are enclosed in paper book 2. 5.2 The two other major direct expenses claimed by the assessee are commission payments for purchase of land and for collections from customers and site d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which cannot be verified or justified is carried forward as Closing Stock. By this Modus Operandi, the income is suppressed i.e. as against actual income of 20 only 5 is shown as income. Further the value of Closing Stock is inflated without any reference to the reality or the actual underlying quantitative factors. It is clarified that the above is only an illustration to explain the modus operandi of the assessee, and does not represent the actual figures. The above illustration is made only to explain the modus operandi of the assessee and the consequences thereof on the Profit and Loss account and the income offered to tax. The above modus operandi is accepted by the assessee also and in fact revised Audited Financial Statements were sought to be filed by correcting the above wrong preparation of Financial Statements. However such revised Audited Financial Statements filed during the course of search assessment proceedings are also not correct since the assessee could not furnish proper details for the amounts reclassified from the Balance Sheet into the Profit and Loss account. 6.2 The said aberrations in the preparation of Financial Statements are rectified to the extent p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99, made during the assessment proceedings could. not be verified by us since during the Course of Special Audit since the assessee did not furnish any particulars, nor made any such claim. The assessee did not insist on any revision of the Opening Stock value as on 1.4.1999 during the Special Audit and hence the same is ignored. 7.0 Recasting the Profit and Loss Account 7.1 It is to be noted that the assessee has maintained contemporaneously books of account in which all its transactions are recorded. Part of the records were also maintained in the computer system particularly in respect of Hyderabad branch and Vijayawada branch. It is also observed that subsequent to the search the assessee has filed detailed statements compiled from the said books of accounts / computer data base. It is also noted that the assessee has recorded all its transactions in its Books of Accounts, but has only made a mistake in recognizing the revenue and expenses appropriately. While a part of the collections, namely amount referable to the Stamp Duty value, is recognized as income in the Audited Profit and Loss account and the balance of collections have been accumulated and shown in the Bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and (ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods 7.5 Thus the sales income is to be recognized when significant risks and rewards are transferred to the customer. An analysis of the collections register shows that the detailed year wise payments by the customers and accordingly the year in which the full amount of consideration paid is available. In the facts of the assessee s case it can be said that the risks and rewards are transferred to the customers the moment the customer pays the full installments. Accordingly the income is to be recognized in the year in which the last installment is paid or the full amount of purchase price of plot is paid by the customer. The sales collections are re-stated on the above basis and the correct amount of income to be recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Loss account and partly to the Balance Sheet. Moreover/ the assessee had followed income recognition at the time of registration of the plots/ whereas we have changed it to a method in conformity to the applicable Accounting Standard. Therefore the method as adopted by us results in matching the revenue and expenses proportionately. The method adopted by us is in accordance with the ratio laid down by the Honorable Supreme Court in the case of Calcutta Co. Ltd (37 ITR 1). 2.11. In the re-casted Profit Loss a/c. the Special Auditor has taken into account certain heads of expenditure as claimed by the assessee viz., expenditure on site development and Sales, administrative other expenses. To continue with the assessment proceedings consequent to the receipt of Special Audit Report, Assessing Officer sent a letter dated 16-07-2012 to the assessee calling for production of bills and vouchers in support of the expenditure claimed towards site development, Sales, administrative other expenses, etc. In the said letter instances of violation of the provisions of section 40A(3) were also brought to the notice of the assessee and seeking its objections for disallowance of the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be taken into consideration will be from the next day on which the said notice is received i.e. in this case, it is received on 22-12-2011. Hence, the extension of time upto 18-06-2012 is in order. Assessee has also raised an objection that the due date for passing order u/s.143[3] r.w.s. 153A r.w.s. 254 is 28-06-2012 [18-06-2012 + 10 days available between date of reference i.e., 21-12-11 and limitation of assessment 31-12-11]. As per the Assessing Officer, this objection is baseless and invalid in view of the Proviso to explanation u/s.153B. Assessing Officer rejected the above objection and opined that the time available for completion of assessment was sixty days after the receipt of the report of Special Audit u/s.142(2A). In the instant case, the report was received on 18-06-2012 and sixty days expires on 17-08-2012. [III] Issues arising out of recasted profit and loss account as per the special audit report u/s 142[2A). Assessee objected to the recasting of profit loss a/c made in the special audit report as under: 1. In the case of the assessee, the profit has to be arrived at basing on concluded sales only which were recorded in the sales registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions as well as advances into the fold of sales. As can be seen from the show cause notice letter the assessing officer proposes to adopt such gross sales figures worked out u/s.142(2A) of the IT act and further proposes to disallow 30% of other expenses without any basis. 7. It is also to be mentioned that as can be seen from the accounts during the financial year 2005-06 there was collection to the tune of Rs.l.83 crores which was paid back in financial year 2006-07 to 2008-09. The same is evidenced by the accounts. The special auditor did not take into consideration the same fact. 8. It is also to mention that even while working out the purchasers the special auditor worked out the un-reconciled purchases at ₹ 27.48 crores. This figure was arrived at on the basis of their own assumed figures of purchases and difference in closing and opening balances of land advances as well as advance commission. The Special auditor further proceeded to allocate the so called uti-reconciled purchases on certain proportions to various asst. years. It may be mentioned that either the investigation wing or the assessing officer who completed the original assessments never pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the satisfaction of the authorities. The orders passed by the assessing officer originally and the appeal orders passed by the Hon ble CIT(A) establish the fact that the turnovers mentioned by the special auditor does not find support from the seized material. It is further mentioned that the special auditor during the course of proceedings u/s.142(2A) called for various details in support of various items recorded in the account books for the fin. Years 1999-2000 to 2005-06. Thus, the period for which the information required varies from 12 years to 5 years. Generally no business man may keep up the misc. vouchers etc. for a period of 6 to 12 years. It is only because of setting aside of the assessments by the Hon ble ITAT, Vizag the unexpected contingency cropped up. The assessee never visualized such situation. Further, at the time of search and seizure itself the department seized all most all the material available with the assessee. This fact clearly establishes that the assessee was not in a position to produce any other materiel called for by the special auditor. Therefore, as there was no material that was required by the special auditor in the possession of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh exceeding ₹ 20,000/- for purchase of land and the same are to be considered for disallowance in the assessment. 3.1 In reply to the show-cause letter issued, proposing to make disallowances u/s.40A[3], assessee submitted as under: the assessee make payments to land owners for purchase of land from them during the course of our business routinely. Most of the land owners from whom we purchase lands are agriculturists, illiterate and hail from rural areas which are more than 10 KM from the city. The banking facilities of these places are also limited. In view of the above, they normally insist on making payments in cash mode. In fact there are numerous situations, wherein the assessee issued cheques, but they were unable to cash the Same due to limited banking facilities in the villages. The assessee had to make payments in cash by taking back the cheque issued to them earlier. All these expenditures are genuine and supporting evidences is also available in respect of purchases. So, in view of the same the assessee would like to submit that the same may not be disallowed. 3.2 After considering the above submissions, the Assessing Officer observed that the evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account, the assessee claimed the following expenditure: [a] Site Development Expenditure ₹ 1,82,40,705 [b] Sales, Administrative other expenses ₹ 37,73,727 4.1 The Assessing Officer observed that as the assessee could not submit bills/vouchers in support of the above expenditure, it was disallowed 30% of sales, administrative and other expenses and assessee submitted that disallowance is not warranted as the AO is proposing to compute the income on the basis of account books maintained and there is no scope for making any adhoc disallowance. It was further submitted by the assessee that the expenditure claimed by it was nominal when compared to the estimation of turnover and assessee cannot carryon business without incurring certain expenses. 4.2 The objections raised in this regard are not acceptable to the Assessing Officer as the assessee could not furnish any sort of evidences in support of the expenditure claimed, as above, even during the course of special audit or during the assessment proceedings. Assessing Officer observed that the business activity of the assessee company is sale of house plots involving purchase of vast tracts of plain lands a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order, it is seen that the assessing officer did not bring any fresh material on record to establish that the appellant inflated expenditure with a view to reduce the profits. This fact is important because the assessing officer who completed the assessment u/s,153A of the IT Act originally did not doubt either the genuineness of expenditure or reasonability of the expenditure. 10.6 The assessing officer while proceeding with the set aside proceedings u/s.153A rws 254 of the IT Act did not mention convincingly as to how he was not convinced with the expenditure claimed by the appellant under the above heads, Further, the assessing officer also did not spell out any reasons as to why the figures suggested by the Special Auditor in his special audit report were not acceptable for him. Further, the assessing officer did not mention as to disallowance of 30% expenditure would meet the ends of justice. 10.7 While deciding the ground nos. 10,11and 12, the expenditure as worked out by the Special Auditor in the course of special audit has also came for consideration, The Special Auditor himself adopted the following percentage of expenditure for un-reconciled land paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble CIT(A) ought to have held that such conclusion arrived at by the assessing officer for making reference u/s.142(2A) was invalid and without any basis. 4. The Hon ble CIT(A) ought to have observed that the fact of making reference u/s.142(2A) of the IT Act just a few days before limitation for completion of assessment expire clearly show that the reference was made to gain time for finalization of assessment proceedings and therefore the Hon ble CIT(A) ought to have held that such action of the assessing officer cannot be considered as valid in law. 5. The Hon ble CIT(A) ought to have observed that the assessing officer made the reference u/s.142(2A) of the IT Act without considering the objections filed by the assessee vide their letter dated 20.12.2011 and hence ought to have held that the reference made was not a valid one in the eye of law. 6. The Hon ble CIT(A) ought to have observed that the assessing officer made the reference ujs.142(2A) of the IT Act without proper compliance with the procedure laid down u.js.142(2A) of the IT Act and therefore the reference cannot be held as a valid one. 7. The Hon ble CIT(A) ought to have observed that the assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ravelled beyond his powers in the process of carrying on special audit by preparing a fresh profit and loss account ignoring the original one which was prepared in compliance with the provisions of Companies Act and approved by the Board of Directors of the company and therefore the Hon ble CIT(A) ought to have held that the fresh profit and loss account prepared by the special auditor cannot be considered as a valid document for the purpose of making assessment. Objections with regard to re-casted profit and loss account: 14. The Hon ble CIT(A) ought to have observed that the assessing officer erred in adopting re-casted profit and loss account ignoring the financial statements filed by the assessee without mentioning any specific and valid reasons. 15. The Hon ble CIT(A) ought to have observed that the assessing officer erred in rejecting various objections raised by the assessee with regard to contents of the audit report u/s.142(2A) without mentioning any valid reasons and hence additions made on the basis of such audit report by the assessing officer and upheld by the Hon ble CIT(A) are liable to be deleted. 16.The Hon ble CIT(A) ought to have observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of business, the income was estimated. Since ITAT, Vizag Bench has advised AO to utilize the services of a Chartered Accountant to complete the assessment, based on the above directions, AO has appointed special auditor u/s 142(2A) of the Act. He submitted that the special audit report contains full of contradictions and such observations cannot be the basis for recasting accounts of the assessee. The accounts are recasted on the basis of the observations of the special auditor cannot be the basis for computing the total income. Moreover, the special auditor adopted various figures in purchases, sales, opening stocks and closing stocks were not on the basis of material available on record, but, the same were adopted on the basis of certain presumptions. He also submitted that special auditor travelled beyond his power in the process of carrying on special audit by preparing fresh P L account ignoring the P L a/c originally prepared in compliance with the provisions of the Companies Act and the same was approved by the Board of Directors of the Company. The recasted P L A/c prepared by the special auditor cannot be considered as valid document for completing the assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimated at 8% but the benefit of interest and depreciation should also be allowed. For this proposition, he relied on the decision of AP High Court in the case of CIT Vs. Ramachandra Reddy, 372 ITR 77. Relying on the judgment of the Kerala High Court in the case of Samurai Techno Trading Co. (P) Ltd. Vs. CIT, [2010] 37 DTR 386 (Ker.), he submitted that the income may be estimated at 8% of the sales. He also relied on the decision in the case of CIT Vs. Bishambhar Dayal Co., [1994] 210 ITR 118 (All.) to allow depreciation as deduction even after estimation of income. 11.3 Ld. AR also submitted that the ITAT Delhi Bench in case of ITO Vs. Madhav Propcon Pvt. Ltd., 6011/Del/12, held that profit to be determined at 2.24% of the sales in the case of business of land development. 12. The ld. DR, on the other hand, submitted that four out of seven years, the assessee had declared the income as loss. The ITAT already adjudicated that the books of account cannot be relied upon and accepted on the proposal of estimation of income. The ld DR submitted that there is no direct ground of appeal for estimation of income from the assessee. It is not a fit case for estimation as assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of the assessee. The values adopted for arriving purchases, sales, opening stock, closing stock and other items were worked out by special auditor based on certain presumptions but not based on the material available. At the same time, the special auditor re-casted the P L account based on the data and information which were extracted from the books of account maintained by the assessee and opined in special audit report at para 7.1 that the books of account need not be rejected and can be used for recasting/recomputation of income and expenses. The assessee also submitted that the original books of account were prepared in compliance with the provisions of companies Act and objected for adoption of recasted P L A/c as the same was computed on presumptions. The assessee was suggesting either to adopt the original books of account or estimate the income by rejecting the special audit report. Whereas the ld. DR strongly objected to adopting the original books of account as the same was rejected by the AO and ITAT, Visakhapatnam Bench due to the complexity of the nature of business and the method of book keeping adopted by the assessee. 13.2 There is no doubt that the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant data before us are (extracted from paper book Submitted by the assessee) Cumulative figures a) Cumulative turnover for 7 AYs 100.61 crores (As per special audit report accepted by the assessee) b) Income assessed by ACIT 21.20 crores(21.07%) c) Income assessed by CIT(A) 11.64 crores(11.57%) d) Income computed by special auditor 9.71 crores(9.65%) While analyzing the above values, we are of the view that income assessed by ACIT is ruled out as it is at 21.07% as the above % is more than 15%, which was already rejected by ITAT and also the profit arrived were before special audit. Similarly, the assessee had submitted relied on the case law in the case of Madhav Propcon Pvt. Ltd., of Delhi ITAT, wherein it was held that the income of the assessees at 2.24% of the total gross receipts, who are engaged in the business of land development activities. We cannot follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered view, in the present case, the books of the assessee cannot be accepted due to the complexity of the nature of business and maintenance of books of account at the same time the recasted profits loss computed by the special auditor also has reliability issue, which were computed based on presumptions. This is the fit case to estimate the income of the assessee. In this given situation, the presumptive rate available in the section 44AD may be adopted even though the turnover of the assessee is more than the turnover of the eligible assessee as prescribed in the section 44AD. This is the rate which is near to the percentage arrived after factoring the reliability and the income computed by the special auditor. Hence, we direct the AO to adopt 8% of the sales as determined by the special auditor, to compute the income of the assessee year to year basis for AY 2000-01 to 2006-07. 13.9 With regard to revenue appeals, as we have directed the AO to estimate the income of the assessee. The grounds raised by revenue become infructuous. Considering the fact that the coordinate bench of this Tribunal has held in many cases consistently that while making estimate of income, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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