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TMI Blog2018 (4) TMI 1998X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in-progress. On this belief, the A.O. disallowed Rs. 1,33,26,552/-. 6. Assessee vehemently agitated the matter before the ld. CIT(A) and strongly contended that only the indirect expenses have been charged to the Profit and Loss account. It was brought to the notice of the ld. CIT(A) that the assessee has commenced its business and therefore as per the provisions of Section 145 of the Act. The profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. 7. After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the observation of the A.O. that the assessee has not commenced its business is completely wrong as the commencement of Real Estate business would normally start with the acquisition of land or immovable properties. The ld. CIT(A) was convinced with the claim of expenditure and accordingly deleted the disallowance of Rs. 1,33,26,552/-. 8. Before us, the ld. D.R. strongly supported the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. 9. We have given a thoughtful consideration to the orders of the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 13. Ground No. 2 relates to the deletion of the disallowance u/s. 40A(3) of the act amounting to Rs. 56.26 lacs. 14. During the course of the scrutiny assessment proceedings and drawing support from the entries found on loose papers impounded from the premises of the assessee, the A.O. 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) of the Act. The A.O. was of the opinion that since the assessee is a developer and builder and the said expenditure was essentially incurred for purchase of stock in trade and since the said expenditure has been incurred in violation of Section 40A(3) of the Act, the amount of Rs. 56.20 lacs was disallowed. 15. Assessee carried the matter before the ld. CIT(A) and pointed out that the impugned lands were purchased as capital assets and were converted into stock in trade on 31.03.2011. Therefore, it cannot be said that the lands were purchased as stock in trade. The assessee furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion for the following reasons: (a) The paramount consideration of section 40A(3) is to curb and reduce the possibilities of black money transactions. As held by the Supreme Court in Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11. section 40A(3) does not eliminate considerations of business expediencies. (b) In the present case, the appellant assessee was compelled to make cash payments on account of peculiar situation. Such situation was as follow - (i) the principal company, to which the assessee was a distributor, insisted that cheque payment from a co-operative bank would not do, since the realization takes a longer time; (ii) the assessee was, therefore, required to make cash payments only; (iii) Tata Tele services Limited assured the assessee that such amount shall be deposited in their bank account on behalf of the assessee; (iv) It is not disputed that the Tata Tele services Limited did not act on such promise; (v) if the assessee had not made cash payment and relied on cheque payments alone, it would have received the recharge vouchers delayed by 4/5 days and thereby severely affecting its business operations. The payments between the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. 19. It was because of these considerations that this Court in case of Hynoup Foods (P.) Ltd. (supra) observed that the genuineness of the payment and the identity of the payee are the first and foremost requirements to invoke the exceptions carved out in rule 6DD(j) of the Income-tax Rules, 1962. 20. In the present case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 3 relates to the deletion of the addition on account of profit on sale of flats amounting to Rs. 3,69,625/-. 24. During the course of the scrutiny assessment proceedings, the A.O. noticed that in the course of survey in the case of V.K. Nagwani, Raipur, certain loose papers were found and impounded. When these loose papers were confronted to Shri Nagwani who stated that he did not have any information about these papers because the papers belong to their firm. When the assessee was confronted to those papers, the partners stated that the papers were not prepared from the premises of the firm but were found from the premises of V.K. Nagwani and therefore he is not able to give any answer. When the A.O. asked the partner of the assessee firm that how names in the loose papers tally with the customer list of the assessee firm, the partners stated that whatever goods were sold by them were recorded in the books of accounts and since most of the sales were made through brokers and therefore he cannot comment on the entries found in the loose papers. 25. The A.O. observed that the loose papers give record balances in different brokers accounts and the transaction with the broke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. The undisputed fact is that the 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. Moreover, the 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. For this proposition, we draw support from the decision of the Hon'ble Supreme Court in the case of V.C. Shukla Ors. (1998) 3 SCC 410 and Chuharmal 172 ITR 250. 30. Considering the facts of the case in the light of the judicial decision referred hereinabove, we decline to interfere. Ground No. 3 is dismissed. 31. Ground No. 4 relates to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,63,21,567/-. 41. At the very outset, we have to state that the amount of Rs. 1,63,21,567/- has to be read as Rs. 53,53,280/- in the light of the order dated 30.07.2014 framed u/s. 154 of the Act. 42. On the basis of the loose papers impounded from the premises of Shri V.K. Nagwani, the A.O. formed a belief that the assessee has not recorded sales to the tune of Rs. 4,08,03,918/-. The A.O. adopted the Profit rate of 40% on this alleged unrecorded sales and computed the income at Rs. 1,63,21,567/-. 43. Assessee strongly agitated the addition before the ld. CIT(A). It was brought to the notice of the ld. CIT(A) that the A.O. has rejected the books of accounts on flimsy ground. It was strongly contended that once the books of accounts are accepted, the A.O. has no power to make any further addition on the alleged unrecorded sales which was not found on the loose papers. 44. After considering the facts and the submissions, the ld. CIT(A) was convinced that the rejection of books of accounts on account of claim of indirect expenses is concerned is not correct. The ld. CIT(A) further observed that rejection of books of accounts on the basis of the entries found on the loose papers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. Therefore, the same cannot be disallowed u/s. 40(a)(ia). 53. After considering the facts and the submissions, the ld. CIT(A) observed that the conclusion drawn by the AO. appears to be one sided inasmuch as the inference drawn by the A.O. is not based on the results of any enquiry conducted by the A.O. with the persons whose names are appearing in the loose papers as commission agent. The ld. CIT(A) accordingly deleted the addition of Rs. 1,07,85,000/- and Rs. 27,49,000/-. 54. Before us, the ld. D.R. could not substantiate the additions made by the A.O. Ld. counsel for the assessee reiterated what has been stated before the lower authorities below. 55. We have carefully perused the assessment order. It is true that the A.O. has made the additions on the strength of the entries found in the loose papers. It is equally true that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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