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Income Tax Appellate Tribunal, CHANDIGARH BENCH ‘A’, CHANDIGARH
Before: SHRI SATBEER SINGH GODARA & SMT.ANNAPURNA GUPTA
Per Annapurna Gupta, Accountant Member:
The present appeal has been preferred by the assessee against the order of the Learned Commissioner of Income Tax(Appeals)-I, Chandigarh [(in short the ‘Ld.CIT(A)] dated 27.08.2019 relating to assessment year 2014-15, passed u/s A.Y. 2014-15 Page 2 of 32 250(6) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).
2. Brief background of the case is that assessment for the impugned year was completed u/s 143(3) of the Act. During assessment proceedings a reference was made by the Assessing Officer (AO) for audit of accounts of the assessee u/s 142(2A) of the Act (hereinafter referred to as “special audit”)and after obtaining the report of the special auditor, assessment was framed by making various additions under different heads amounting in all to Rs.6889,06,69,100/-, as detailed in para 2 of the CIT(A)’s order.
3. The assessee challenged the order of the AO before the Ld.CIT(A) on various grounds, including challenging the reference made by the AO to special audit. The Ld.CIT(A) thereafter adjudicated the various grounds raised and partly allowed the assessee’s appeal. The grounds raised regarding the challenge to the reference to special audit was dismissed by the Ld.CIT(A) holding that the said reference was not appealable before him.
Aggrieved by the order of the Ld.CIT(A) the assessee has now come up in appeal before us. Besides the grounds raised
in its appeal filed before us in Form No.36, the assessee also A.Y. 2014
15. Page 3 of 32 raised an additional ground vide its letter dated 07.12.2020, which reads as under:
"That the assessment order passed u/s 143(3) is prima face illegal, bad in law, without jurisdiction, void ab-initio and is thus barred by time limitation as the very reference to the special audit u/s 142(2A) of the act is illegal and bad in law." 5. The Ld.Counsel for the assessee pleaded that the ground raised being a legal ground and the entire facts and details required for adjudicating the same being a matter of record and no further investigation being required, the same be admitted for adjudication. He relied upon the order of the Hon'ble Supreme Court in the case of National Thermal Power Corporation Vs. CIT, 229 ITR 383 (SC).
6. The Revenue on the other vehemently opposed the prayer for admission of the additional ground contending that the additional grounds challenged the reference to special audit which it was settled law was not appealable. In this regard Ld.DR relied heavily on the decision of the Hon'ble Apex Court in the case of Rajesh Kumar & Others Vs. DCIT 287 ITR 91(SC).
7. To this the Ld.Counsel for the assessee countered by placing before us various decisions of the Tribunal and High Courts holding to the contrary. The submissions in writing to A.Y. 2014-15 Page 4 of 32 this effect were also filed alongwith the copies of the case laws relied upon by the Ld.Counsel for the assessee.
We have heard both the parties. We have also gone through the various case laws relied upon by them. We find that the decision of the Hon’ble Apex Court in the case of Rajesh Kumar(supra), relied upon by the Ld.DR to support her contention that the reference to special audit is not appealable, has been considered in various decisions of the Tribunal and High Courts where the Revenue had identically opposed the adjudication of this issue. We find that taking note of the said decision this argument of the Revenue has been dismissed by the ITAT, holding that though order directing special audit is otherwise not appealable but while challenging the assessment order as being barred by limitation, the validity of the order directing special audit u/s 142(2A) can be challenged, albeit for this limited purpose alone. It has been held that for coming to a conclusion that the assessment order is barred by limitation, all aspects integral to the process and ultimate completion of assessment can be challenged and considered for deciding the same. The relevant decisions are:
1) Unitech Limited Vs ACIT in /Del/2013 dated 08.04.2016:
A.Y. 2014-15 Page 5 of 32
“Furthermore, the judgments relied upon by the revenue also do not lead us to take different view of the matter The first judgment relied upon is the case of Rajesh Kumar and Ors v CIT (supra). In this case the Hon'ble Court has held in para 34 that the order of assessment can be subject matter of an appeal; and not, a direction issued u/s I42(2A) of the Act. In this appeal there is no challenge to the directions u/s 142(2A) of the Act. The challenge is that order of assessment is barred by limitation which is a valid contention supported by the judgment of Hon'ble Supreme Court in the case of Sahara India (Firm) v CIT (supra). The challenging to the validity of order u/s 142(2A) of the Act is confined to the extent that order is barred by limitation and not to the extent of refunding the fees or any other consequence flowing out of the order u/s 142(2A) o f the Act. Further observation of Hon'ble Court that principles of natural justice arc required to be complied with has also been reaffirmed in the case of Sahara India (Firm) (supra). The judgment of AT&T Communication Services India (P) Ltd. v CIT (supra) is on facts and has no application to the case of appellant company. Also the judgment in the case of DLF Ltd. v Addl. CIT (supra), has no application as hereto none of the contentions raised before us have been decided to the contrary. The learned counsel for the revenue has not been able to point out any material so as to arrive at different view of the matter.”
2) Consulting Engineering Services India Pvt. Limited vs ACIT (2019) 198 TTJ 0121 (Del):
“17. The quarrel before us is as to whether the assessment order framed u/s 143(3) is passed within the period of limitation period prescribed under the Act or not. In our considered opinion, for coming to such a conclusion, we can examine whether the order passed u/s 142(2A) of the Act is in accordance with law or not. It is true that the order passed u/s 142(2A) of the Act is not appealable but when an assessment order is challenged, then the different aspects, which are integral to the process and ultimate completion of the amount can be challenged in appeal and since the ground before us is challenged for assessment being barred by limitation, we are well within our rights to consider all material A.Y. 2014-15 Page 6 of 32 aspects which were considered while framing the assessment order u/s 143(3) of the Act.”
Further, the Hon’ble Delhi High Court in the case of Consulting Engineering Services Private Limited Vs. ITAT & Another in WP(C)7734/2017 dated 01.09.2017, has categorically held that it is well within the jurisdiction of the ITAT to entertain the grounds relating to validity of reference to special audit, after noting that the observation to the contrary by the Apex Court in the case of Sahara India (supra) was specific to those cases. The relevant findings are as under:
4. The Petitioner challenges an interim order dated 8th August, 2017 passed by the Income Tax Appellate Tribunal (‘ITAT’) in Petitioner’s appeal being for the Assessment Year (‘AY’) 2008 – 2009. By the said impugned order, the ITAT has declined to permit the Petitioner to raise additional ground ‘22’ which reads as under:
22. That the assessment order passed on 25.06.2012 is illegal, bad in law, without jurisdiction & barred by time limitation as the reference & order under section 142(2A) of the Act is illegal and bad in law."
5. According to the ITAT in view of the decision in Sahara India (Firm) v CIT (2008) 169 Taxmann 328 (SC), it was impermissible to permit the ITAT to examine the validity of order passed under Section 142(2A) of the Income Tax Act, 1961 (‘the Act’) in order to hold that the assessment has been barred by limitation. In other words, the said decision of the Supreme Court was understood by the ITAT as holding that the challenge to the order under Section 142(2A) of the Act cannot be raised before the ITAT
A.Y. 2014-15 Page 7 of 32 while examining whether the assessment order has been barred by limitation.
6. The Court finds that the ITAT itself has been taking a different position in many other cases, the orders in which have been enclosed with the present petition. For instance, in its order dated 9th December, 2015 passed in (PHI Seeds Ltd. New Delhi v. Dy. Commissioner of Income Tax, Circle 14(1), New Delhi), the ITAT after noticing the aforementioned decision of the Supreme Court in Sahara India (Firm) v CIT (supra) held: “7.4. In the present proceedings what we are examining, is whether the extended period of limitation as provided under Explanation l (iii) of Section 153 is available to the Assessing Officer for completion of assessment u/s 143(3), or not. The assessee contends that the order u/s 142(2C), extending the period granted for completion and submission of audit report is made without an application being made for W.P.(C) 7734/2017 extension by the assessee and for any good and sufficient reason, and hence the extension is bad in law and hence the AO would not get the benefit of the extended period of time to specified in Explanation l(iii) of Section 153 of the Act. In our view, the Tribunal has jurisdiction to adjudicate the issue as to whether an order of assessment 143(3), is passed within the period of limitation prescribed under the Act or not. For coming to such a conclusion, in our view the Tribunal can examine whether the order passed u/s 142(2A) or u/s 142(2C) is in accordance with law or not. The order passed u/s 142(2A) or u/s 142(2C) cannot be appealed separately. But when an assessment order is challenged, then the different aspects which are integral to the process and ultimate completion of amount can be challenged in Appeal. For example a notice u/s 148 or reasons recorded by the A.0 prior to re-opening of assessment cannot be challenged separately. But an assessment order can be challenged in an Appeal before the Ld. CIT(A) or the ITAT on the ground that the re-opening itself is bad in law, as the notice is illegal or not served or that there is no material based on which reasons were recorded etc. Every facet of an assessment can be A.Y. 2014-15 Page 8 of 32 challenged in appeal to deny once liability to be charged to tax or to challenge the quantum of tax demanded. In the case of hand, the legality of the orders passed u/s 142(2A) or u/s 142(2C) can be challenged to demonstrate that the order of assessment has been passed beyond the period of limitation. Thus, we reject this contention of the Ld. CIT. DR.”
7. A similar view was taken by the ITAT in Unitech Ltd. v. Additional Commissioner of Income-tax, Range- [2016] 74 taxmann.com 121 (Delhi-Trib.). The order of the ITAT on the same lines was upheld by this Court in Principal Commissioner of Income-tax v. Nilkanth Concast (P.) Ltd. [2016] 70 taxmann.com 157 (Del).
8. The Court notices that the observation in Sahara India (Firm) v CIT (supra) was in the peculiar facts of that case and was not meant to be a general observation applicable across the board for all cases. This is W.P.(C) apparent from the observations in the following paras: “24. The upshot of the entire discussion is that the exercise of power under Section 142 (2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142 (2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar's case (supra). ......
There is no denying the fact that the law on the subject was in a flux in the sense that till the judgment in Rajesh Kumar (supra) was rendered, there was divergence of opinion amongst various High Courts. Additionally, even after the said judgment, another two-Judge Bench of this Court had expressed reservation about its correctness. Having regard to all these peculiar circumstances and the fact that on 14th December, 2006, this Court A.Y. 2014-15 Page 9 of 32 had declined to stay the assessment proceedings, we are of the opinion that this Court should be loathe to quash the impugned orders. Accordingly, we hold that the law on the subject, clarified by us, will apply prospectively and it will not be open to the appellants to urge before the Appellate Authority that the extended period of limitation under Explanation 1 (iii) to Section 153 (3) of the Act was not available to the Assessing Officer because of an invalid order under Section 142 (2A) of the Act. However, it will be open to the appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under sub-section 2A of Section 142 of the Act.”
9. In the considered view of the Court, the ITAT ought to have permitted the Petitioner to raise the aforementioned additional ground and ought to have decided the said additional ground on its merits in accordance with law.
10. The writ petition is allowed and the impugned order dated 8th August, 2017 passed by the ITAT is set aside. The petitioner is permitted to urge the additional ground no.22 before the ITAT, which would decide the Petitioner’s appeal including the above additional ground, in accordance with law, while passing the final order.” 9.1 It is, therefore, evident from the above that the validity of reference u/s 142(2A) of the Act is appealable when it has been so challenged for the purpose that the assessment order so passed, in consequence to the extended time available on account of the said reference, was time barred. In the present case the additional ground raised
before us is to this effect only that the assessment order was barred by limitation, on account of the reference to special audit being illegal. The A.Y. 2014
15. Page 10 of 32 objection of the Ld.DR therefore to the admission of the additional grounds raised by the assessee, are dismissed.
10. Further considering that the additional ground raised before us challenges the validity of the assessment order passed on account of it being barred by limitation, the said additional ground is a legal ground and considering the decision of the Hon'ble Apex Court in the case of National Thermal Power Corporation (supra) the same is being admitted for adjudication.
11. We shall now proceed to adjudicate the additional ground raised, more specifically whether reference made for special audit u/s 142(2A) of the Act was in accordance with law or not.
Detailed arguments were made by the assessee both orally and in writing before us on the additional ground raised
, referring to various documents placed before us in a paper book compilation of 444 pages and also relying upon various case laws. The Ld.Counsel for the assessee contended that the ingredients/preconditions for invoking the provisions of section 142(2A) were not satisfied, no complexity in the accounts was pointed out, order was passed without giving due opportunity of hearing to the assessee, the approval of the PCIT to the A.Y. 2014
15. Page 11 of 32 special audit was mechanical, that the entire effort was only with the motive to extend the period of limitation.
The Ld.DR vehemently contested all the charges and contentions of the Ld.Counsel for the assessee.
We have heard both the parties and have also carefully gone through the documents referred to before us as also the case laws relied upon.
As per the provisions of law relating to reference by AO to special audit of accounts of an assessee, as part of the process of inquiry conducted during assessment, contained u/s 142(2A) of the Act, the same can be referred only if the AO is of the opinion that the special audit is necessary after taking into consideration the nature and complexity of the accounts and the interest of the Revenue. This is evident from a bare perusal of section 142(2A) of the Act itself which is being reproduced hereunder:
“Section 142(2A)
(2A) If, at any stage of the proceedings before him, the Assessing] Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner], direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub- section A.Y. 2014-15 Page 12 of 32
(2) of section 288, nominated by the Chief Commissioner or Commissioner] in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing] Officer may require.”
The Hon’ble Apex Court has interpreted the said provision in two decisions, repeatedly emphasizing therein that the AO’s opinion has to be based on fulfillment of the twin conditions of the(i)nature and complexity of accounts, and (ii) the interest of Revenue, and has interpreted the term “complexity” to mean state of being intricate or complex. It went on to hold that what is complex depends on each persons understanding and what is complex for one may be simple for another. It was held therefore, that the opinion of the AO must be based on objective criteria and not just a subjective satisfaction. That the reference cannot be made merely for shifting his responsibility of scrutinizing the accounts to a special auditor.
In the case of Sahara India(Firm) vs CIT 300 ITR 403(SC) the Apex Court analyzed and interpreted the provisions of section 142(2A) to the above effect as under:
“A bare perusal of the provisions of sub-s. (2A) of the Act would show that the opinion of the AO that it is necessary to get the accounts of assessee audited by an Accountant has to be formed only by having regard to : (i) the nature and complexity of the accounts of the assessee; and (ii) the interests of the Revenue. The word "and" signifies conjunction and not disjunction. In other words, the twin conditions of "nature and complexity of the A.Y. 2014-15 Page 13 of 32 accounts" and "the interests of the Revenue" are the prerequisites for exercise of power under s. 142(2A) of the Act. Undoubtedly, the object behind enacting the said provision is to assist the AO in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, in order to protect the interests of the Revenue, recourse to the said provision can be had. The word "complexity" used in s. 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. vs. CIT (1987) 63 CTR (All) 335 : (1988) 171 ITR 634 (All), it is a nebulous word. Its dictionary meaning is : "The state or quality of being intricate or complex or that is difficult to understand. However, all that is difficult to understand should not be regarded as complex. What is complex to one may be simple to another. It depends upon one’s level of understanding or comprehension. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully." Thus, before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the AO to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the AO for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the AO merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief CIT or the CIT in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the AO, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the Section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief CIT or the CIT, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the AO. The approval must reflect the application of mind to the facts of the case.”
In the case of Rajesh Kumar & Ors vs DCIT & ors 287 ITR 91(SC), the section was interpreted likewise as under: A.Y. 2014-15 Page 14 of 32 “Interpretation and application of s. 142(2A) of the Act, thus, falls for our consideration.
We may at the outset notice that the following are the relevant factors for invoking s. 142(2A) of the Act : (i) The nature of accounts (ii) Complexity of accounts and (iii) Interest of the Revenue. The formation of opinion of the AO must be on the premise that while exercising his power regard must be had to the factors enumerated therein. The use of the word 'and’ shows that it is conjunctive and not disjunctive. All the aforementioned factors are conjunctively required to be read. The formation of opinion indisputably must be based on objective consideration.
The expression "complexity" would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. No order can be passed on whims or caprice.”
In the facts of the present case, after perusing all the documents referred to before us, we are in agreement with the Ld.Counsel for the assessee that the AO has not pointed out any complexity in the accounts of the assessee while referring for special audit and the sole purpose of the AO for the reference was only to buy extended time to cover up his short coming of commencing inquiry at the fag end of the time period statutorily provided for completing assessment, and shift his responsibility of scrutinizing the accounts to the special auditor. The facts of the case clearly bring out the aforesaid. A.Y. 2014-15 Page 15 of 32
The impugned assessment year before us is A.Y. 2014-15.
As per section 153 of the Act, the limitation for passing assessment order in this case was 31.12.2016. There is no quarrel with respect to the aforesaid. The order sheet entries made by the AO during assessment proceedings, filed before us at P.B 254-279, reveal that while the assessment proceedings commenced on 31.08.2015 with the issuance of notice u/s 143(2) of the Act, except for a standard questionnaire issued to the assessee on 26.10.2015, to which due reply was filed by ,no substantial queries were raised till 16.12.2016, i.e. almost the fag end of the period for passing assessment order u/s 143(3) of the Act, i.e. 31.12.2016.The assessee in the intervening period, we have noted from the order sheet ,was asked to furnish reasons for revising his return and furnish details of computation of income from industrial and finance activity, which reply was filed on 11.07.2016. On 16.12.2016,when the assessment was getting time barred on 31.12.2016 the assessee was asked to answer a slew of queries, in all 9 as under, the reply being required to be filed within 4 days by 20/12/16. The queries raised, as noted in the order sheet are as under:
16/12/16 Sh.AK Jindal, CA/AR attended. He is asked to furnish following details:- (1) Explain how figures of Industrial A.Y. 2014-15 Page 16 of 32 area activity shown till 31/3/13 have been incorporated in Balance Sheet & P/L Ac for 31/3/14. (2) Detailed calculation with year wise bifurcation of expenses and recoveries on Industrial area activity. (3) Why company from Industrial area activity should not be computed in a manner adopted in earlier Asst years. (4) Detailed of unclaimed refunds and why same be not disallowed. (5) Why profit on sale of shares may not be treated as business income. (6) Details of how inventory determined as on 31/3/14 vis-a-vis previous year. (7) How POCM method appealable to assessee on meets criteria under POCM. (8) Bais of ascertaining revenue from operations. (9) Showcause why not an amount of Rs.1050.40 cr be added back to the returned income as same has been reduced in revised return. Adjourned to 20/12/16 at A.M. Sd/- 19. On the said date the assessee filed reply and the order sheet entry notes “case adjourned to 23/12/16”. But another entry on the same date subsequently records issuance of show cause notice to the assessee u/s 142(2A) of the Act. On 26/12/2016 the assessee files reply to the show cause notice which, the order sheet entry notes as “discussed with the counsel” and thereafter on 29/12/2016 the special auditor is issued letter of appointment. Subsequently the proceedings are A.Y. 2014-15 Page 17 of 32 completed after considering the report of the special auditor, on 21/06/2017, i.e. the extended time period statutorily provided on account of reference made of the accounts of the assessee to special audit.
The above facts reveal that it was only at the fag end of the limitation period for framing the assessment that substantial queries were raised for the assessee to respond to.
And after the assessee had responded to the same, proceedings for initiating reference for special audit of accounts were commenced beginning with issuance of show cause notice .
Going further, A perusal of this show cause notice(P.B 214-221) reveals that there is no complexity worth its while pointed out by the AO in the accounts of the assessee but on the contrary points out certain deficiency /shortcomings in the reply of the assessee to the queries raised on 16.12.2016, which we find are primarily to the effect that certain information/explanation remained to be filed by the assessee.
The contents of the notice clearly revealing the said facts as under:
A.Y. 2014-15 Page 18 of 32
“GOVERNMEN T O F IND IA MINISTRY O F FINANCE INCOME TAX DEPARTMEN T Office of the Deputy Commissioner of Income-tax Panchkula Circle, Aayakar Bhawan, Sector 2, Panchkula – 134 112 F.No.DCIT/Pkl/Cir/PKL/2016-17/ Dated: 20/12/2016
To M/s Haryana State Infrastructure Development Corporation Ltd., C-13 & 14, Sector 06, Panchkula.
Sub:- Notice u/s 142(2A) OF THE I t Act 1961 for the assessment for the A.Y. 2014-15 – reg. – ******* Please refer to the assessment proceedings for the A.Y. 2014-15 pending in this office. 2. In this regard, during the course of assessment proceedings you were asked to provide the information as per noting sheet entry dated 16.12.2016 vide your reply dated 20.12.2016 you have provide the following explanation:-
Sr.No. Information Reply/Explanation Desired 1. It is submitted that the Explain how figures Corporation has changed its system of IA Activity shown till of accounting from cash to accrual 31.03.2013 have been w.e.f. Financial Year 2013-14 incorporated in the relevant to the Assessment Year Balance Sheet and 2014-15 and the cumulative effect Statement of Profit & of all the heads of revenue, Loss for 31.03.2014. expenditure, inventories, fixed assets etc., have been accounted for in the said assessment year. It is stated as under:
The books of the accounts of the Corporation were being maintained under "Cash System of Accounting" and all the cost of the Project & other expenditure incurred thereon were accounted for in one control account i.e. infrastructure and Industrial Area Development Expenses Recoverable" and recoveries from the allottees were netted in said control
A.Y. 2014-15 Page 19 of 32 account. Said control account reflects excess of developmental expenditure over recoveries and is disclosed in the financial statements under "Other Current Assets". A sum of Rs.5671.59 Crore (net of recoveries] was parked in the control account as at 31st March, 2013.
After review of the control account i.e. "Infrastructure and Industrial Area Development Exp. Recoverable", it has been bifurcated into various functional heads of accounting e.g. - Inventories in the form of unsold land/plots -Cost of the land acquired for existing projects as well as future projects. -Developmental expenditure of the site e.g. Road construction, electrification cost, public utilities work, sewerage treatment plant, CETP and other direct capital expenditure. -Cost of the Unsold plots i.e. Inventories. -Enhancement cost paid to land owners. -Annuity payment to land owner. -Fixed Assets like office building, furniture & fixture, office equipment etc. -Expenditures incurred on developmental activities out of matching grant received from State Govt. -Recoveries from Allottees netted in control account bifurcated into relevant heads of accounting e.g. O Recoveries of the cost of the plot, enhancement cost and maintenance charges. O Interest received on deferred installment of cost of lot/enhancement cost etc. O Other recoveries e.g. Processing fees
A.Y. 2014-15 Page 20 of 32
Transfer fees. Extension charges, Leasing fees, Surrender/resumption charges Water and sewerage charges, Misc. Income etc.
Detailed calculation The bifurcation of expenses and with year-wise recoveries of IA Activiity as on bifurcation of expenses 31.03.,2013 is given as per Annexure- and recoveries of IA 1. Activity.
We submit that the Corporation was Why income from IA following cash system of accounting Activity should not be for maintaining its accounts till F.Y. computed in a manner 2012-13 and had been showing adopted in earlier certain income from Industrial Area Assessment Year(s). Activity by allocating expenses between Industrial Area Activity and Finance Activity. However, the Corporation has changed its system of accounting from cash basis to accrual basis w.e.f. 01.04.2013 i.e. F.Y.2013- 14. Accordingly, the Finance Statements for the F.Y. 2013-14 have been prepared on Accrual Basis, in accordance with the generally accepted accounting principles in India and to comply with the Accounting Standards prescribed in the Companies Act and also in accordance with the Government Notification No.GSR 550 (E) dated 16.05.1989 and 770 (E) dated 10.09.1990 which provide for accounting of interest income on loans financed to industrial projects and interest on instalments due on the cost of industrial plots/sheds etc., on cash basis. In Assessment Year 2014-15, the Corporation has computed the income from Industrial Area Activity earned till 31.03.2014 in A.Y. 2014-15. Due to change in the system of accounting from cash basis to accrual basis, the income from IA Activity should not be computed in a manner adopted in earlier Assessment Year(s). 4. We submit that the Corporation was Detail of how inventory following cash system of accounting determined as on A.Y. 2014-15 Page 21 of 32 for maintaining its accounts till F.Y. 31.03.2014 viz-a-viz 2012-13, therefore, no inventory was 31.03.2013. recognized in the books of accounts till 31.03.2013. However,, the Corporation changed its system of accounting from cash basis to accrual basis w.e.f. 01.04.2013 i.e. F.Y. 2013-14 and accordingly, inventory has been determined and accounted for in the books of accounts on the basis of “Percentage of Completion Method” (POCM) read with Guidance Note on “Accounting for Real Estate Transactions” issued by Institute of Chartered Accountants of India (ICAI). Closing stock of land/work in progress is valued at lower of cost (Weighted Average Method) or net realizable value. Cost includes acquisition cost, enhancement compensation cost, annuity cost and internal and external development expenditure etc. incurred and other directly identified attributable expenses pertaining to projects.
How POCM is applicable The Corporation is a wholly owned to Assessee i.e. how Government Company (as defined meets criteria under under section 617 of the Companies POCM. Act, 1956) and was incorporated in 1967 with an objective of promoting industries in the State of Haryana Government. The Corporation has been given the mandate to develop industrial infrastructure and thereby facilitate development and growth of industry in the State of Haryana. The Corporation has developed industrial estates/IMTs throughout the State in this process. The process of development of industrial infrastructure necessarily involves acquisition of land, planning, exclusion of development works e.g. roads, water supply and electrical infrastructure. This is followed by provision of secondary level of facilities such as the STP/CETP, development of plantation/green belts, commercial and institutional sites common parking facilities, etc. The Income from Industrial Area Activity has been computed in A.Y. 2014-15 Page 22 of 32 accordance with the Guidance Note on “Accounting for Real Estate Transactions” issued by ICAI which covers all forms of transactions in real estate. The transactions which are covered by this Guidance Note are as under: (a) Sale of plots of land (including long term sale type leases) without any development (b) Sale of plots of land (including long term sale type leases) with development in the form of common facilities like laying of roads, drainage lines and water pipelines, electrical lines, sewage tanks, water storage tanks, sports facilities, gymnasium, club house, landscaping etc. (c) Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land. (d) Acquisition, utilisation and transfer of development rights. (e) Redevelopment of existing buildings and structures. (f) Joint development agreements for any of the above activities. Since the activities undertaken by the Corporation fall under the scope of transactions covered under the Guidance Note on “Accounting for Real Estate Transactions”, therefore, the POCM is applicable to the Corporation.
Revenue from Industrial Infrastructure Basis of ascertaining activities is recognized in accordance revenue from with the provisions of Accounting operations. Standard (AS) 9 on Revenue Recognition, read with Guidance Note on “Recognition of Revenue by Real Estate Developers (Revised 2012)”. Revenue is computed based on the “Percentage of Completion Method (POCM)” when following conditions are satisfied: - All critical approvals such as environmental clearances, approvals of plan and design, title to land or other development right have been obtained. - The stage of completion of the project has reached reasonable level. A reasonable level of development is achieved if A.Y. 2014-15 Page 23 of 32 expenditure incurred on construction and development cost (excluding cost of land cost) is not less than 25% of the estimated construction and development cost and - At least 25% of the saleable project area is secured by the agreement or the allotment letter and - At lease 10% of the total revenue as per agreement/allotment letter are realized in respect of these cases. In case of sale/auction of sites of non- industrial area/infrastructure activity, the revenue is recognized when al the significant risks and rewards are transferred and also when all the requisite approvals are obtained by the Corporation as required under the agreement. Interest on non-industrial area projects is accounted for on accrual basis.
Show cause why not an It is submitted that the accounts of the amount of Rs.1050 Corporation were being maintained on crore be not added as cash basis till Assessment Year 2013- the same has been 14. The Corporation had been showing reduced in Revised certain income from Industrial Area Return of Income. Activity by allocating expenses between Industrial Area Activity and Finance Activity. The method of accounting had been accepted by the Income Tax Department till A.Y. 2004- 05. After that, the Department has computed income from Industrial Area Activity, the detail of which as under: Assessment Year Amount(Rs.) 2005-06 354587944/- 2006-07 329359489/- 2007-08 1187882027/- 2008-09 2548011251/- 2009-10 1525532251/- 2010-11 1801666232/- 2011-12 1364170957/- 2012-13 351339526/- 2013-14 1041425872/-
A.Y. 2014-15 Page 24 of 32
Total 10503975549/- Thus, the Department has already imposed tax on income of Rs.1050.40 crore between A.Y.2005-06 to A.Y. 2013-14. The appeals of the Corporation have been dismissed by CIT(A) and the Corporation is in appeal before ITAT. In Assessment Year 2014-15, the Corporation has changed its method of accounting from cash to accrual and has computed the income from Industrial Area Activity earned since inception till 31.03.2014 (including the years during which income has been computed at Rs.1,050.40 Crore) in Assessment Year 2014-15 and the original return was filed showing entire income of Industrial Area Activity earned till 31.03.2014. The Corporation has revised the return by reducing income of Rs.1,050.40 Crore out of total income for Assessment Year 2014-15 because tax has already been levied by the Department on the amount of Rs.1,050.40 Crore. In case, the said income is not reduced out of taxable income of Assessment Year 2014-15 it would amount to double taxation i.e. once paying tax in Assessment Year 2005-06 to Assessment Year 2013-14 on the basis of assessment made by the Department and again paying tax in Assessment Year 2014-15 on the basis of income declared in accounts. In case at a later stage, the appeals of the assessee are allowed by ITAT and income assessed from Industrial Area Activity is deleted, in that case, assessee Corporation agrees to pay the tax in Assessment Year 2014-15 as the same can be done u/s 154/155 while giving appeal effect to the orders of ITAT for years in appeal. The above explanation has been considered and examined and is discussed as under A.Y. 2014-15 Page 25 of 32
Regarding explanation No.1&2, i) You have explained that cumulative effect of all head of revenue, expenditure, inventories, fixed assets etc. have been accounted for A.Y.2014-15. But no explanation was given as to how cumulative calculations were made ii) You have shown a sum of Rs.5671.59 crore was parked in the control account as on 31.03.2016, further for determination of this amount various heads/details of expenditure and recovery upto 31.03.2013 has been shown as under: Details of Expenditure upto 31.03.2013
S.No. Particulars Amounts 1. Land Cost (including Enhanced 1,11,66,13,67,007.00 Compensation 2. IA Development Expenditure 23,52,39,15,541.00 3. Development works(old) 7,77,90,292.00 4. Village development 7,46,08,195.00 5. Development Udyog Kund 2,92,68,338.00 6. Details of fixed assets 11,95,92,404.00 7. Deposit works 44,33,66,599.00 8. Annuity Land 76,73,92,038.00 9. Details of contribution 1,97,11,26,275.00 10. Details of incentive to allottees 11,34,21980.00 11. Expenses to be allocated 67,69,79,591.00 12. Advances to Parties 12,96,95,537.00 13. Details of SME R/Funds Accounts 1,00,00,000.00 Grand Total(A) 1,39,59,85,23,797.00
Details of Recovery upto 31.03.2013
S.No. Particulars Amounts 1. Allottees Account 65,23,39,11,006.00 2. Enhanced cost recovery 5,26,99,81,180.00 3. Interest on allottees 5,39,94,85,248.00 4. Rent 10,08,845.00 5,87,50,28,173.00 5. Misc. Income 6. Surrender/Resumption 21,67,66,905.00 49,19,306.00 7. Lease Rent 8. Processing Charges 17,13,22,463.00 680935032 9. EDC Charges (DATED & P-HR) 10. Internal Development Charges 19351482 6092.00 11. Licence fee Karnal 12. Contractor Accounts 98,81,231.00 1,00,00,000.00 13. Grand Total Grand Total(A) 82,88,25,96,963.00
A Total Expenditure Control Account 1,39,59,85,23,797.00
A.Y. 2014-15 Page 26 of 32
Recovery from allottees 82,88,25,96,963.00 Net Expenditure as on 56,71,59,26,834.00 31.03.2013 (A-B)
No detailed breakup of Expenses recoverable and recoveries from allottees is proved. However no working/calculation of these amounts have been explained. Such as Rs.1,11,66,13, 67,007. 00/- Land cost, year when the land was acquired, amount of enhanced compensation, year-wise, site-wise breakup of the same is not furnished. Infrastructure and Industrial Area Development Expenses recoverable has been bifurcated into various head of accounting eg. Cost of land acquired for existing projects as well as future projects, Infrastructure and industrial area development expenses recoverable. The bifurcation of expenses and recoveries of Ind. Area activity was given as annexure-i. But no year- wise, site-wise, head wise breakup is given e.g as per details of expenditure of Gurgaon site the cost of land is shown as 529,242, 907/-, but from this amount it is not verifiable that when the land was acquired, when the construction was begun and how much work is pending. No working and breakup has been provided on this point also. Regarding explanation No. 3, no tenable reply regarding the reason of change of method of accounting by HSIIDC has been provided. Regarding explanation No. 4, you have replied that valuation of closing stock/work in progress is valued at lower of cost or net relizable value. No detailed calculation/working has been given in support of amounts shown and where shown it is not substantive. For example the work in progress, the explanation of the same was not provided. Regarding explanation No. 5, As the corporation was established in 1967 and it is developing Indl. Estates and IMTs throughout the State and the activities have been computed in accordance with the guidance note, then why the same method was not applied in the earlier years. You have also not explained treatment of books of previous years under POCM. Regarding explanation No. 6, revenue from operations is not verifiable as the projects passes from various stages and no specific information/no detailed working in this regard is provided. Regarding explanation No. 7, you have replied that the corporation revised its return by reducing income of A.Y. 2014-15 Page 27 of 32 Rs.1050.40 Cr. because tax has already been levied by the department on this amount it would be double taxation. In case at later stage the appeals of the assessee are allowed by ITAT the assessee agrees to pay tax in A.Y.2014-15, The explanation provide by you not seems to be contradictory On one side you are reducing the amount and other side the appeals also being contested. In view of the above facts and circumstances of your case and considering the nature and complexity of accounts, volumes of accounts and multiplicity of transactions, your case is proposed for audit u/s 142(2A) of the IT Act, 1961. You are hereby given an opportunity of being heard in this regard and your case is fixed for 26.12.2016 at 11.00 AM.”
A perusal of the above show cause notice reveals that on the query raised asking explanation of how figures of Industrial activity upto 31.03.2013 were incorporated in the impugned years balance sheet, the assessee had explained that it had switched over from cash system of accounting done upto 31/03/13 to accrual system and had also explained the manner of doing so as also furnishing year wise bifurcation of expenses and recoveries in the IA account as on 31.03.2013. To this the AO notes that no explanation has been furnished as to how cumulative calculations were made no break up of certain details provided and site wise break also not provided.
Similarly the assessee explanation regarding why income be not computed as in earlier years the assessee justified the change in system of accounting as being in compliance with accounting standard issued by the ICAI and also in accordance with government notifications, to which the AO merely brushes A.Y. 2014-15 Page 28 of 32 aside the explanation as not being tenable without assigning any reason for stating so.
On the query regarding method valuation of closing stock for year ending 31/03/2013 and 31/03/2014 the assessee replied that upto 31/03/13 since it was following cash system of accounting no stock was accounted for while thereafter it followed the Percentage Completion Method (PCOM) for accounting for inventory, valuing it at cost or net realizable value which ever was less. To this the AO notes that no calculation of working of inventory has been provided by the assessee.
To the query raised regarding how PCOM method was applicable to the assessee, the assessee replied that its activities fell under the scope of transactions covered By the guidance note issued by ICAI on Accounting for real estate transactions which recommended PCOM method. It was also explained as to how its activities fell under the said guidance note. To this the AO noted that why this method was not adopted in earlier years also.
On being asked to explain basis of ascertaining revenue from operations, due reply explaining the same was filed. To this the AO notes simply that it is not verifiable since assessee A.Y. 2014-15 Page 29 of 32 passes through various stages and no specific information/no detailed working has been provided by the assessee.
To the query as to why Rs.1050 crores has been reduced from the income of the assessee in the revised return filed .the assessee explained in detail that the department had already collected taxes on the same in earlier years when it had rejected its cash basis of accounting and taxed income on accrual basis. To this the AO notes that the assessee has filed appeal against the said additions made by the department and therefore by reversing the income in the impugned year it was taking a contradictory stand.
29. After so stating the AO notes that considering the facts and circumstances and the nature and complexity of accounts of the assessee, volume of transactions and multiplicity of transactions, special audit u/s 142(2A) of the Act is proposed.
As is evident from the above the reason for referring the accounts of the assessee to special audit, highlighted above in italics by us, by the AO does not point out a single complexity in the accounts of the assessee. On the contrary he has only pointed out certain information still lacking in the reply submitted by the assessee. With regard to each explanation he has stated that the assessee has either not given certain A.Y. 2014-15 Page 30 of 32 explanation required by him or certain working or calculations had not been explained. It is not coming out from the notice, therefore, that there was any complexity in the nature of the accounts of the assessee which had come to the notice of the AO. Nor has the Ld.DR been able to enlighten us as to what complexity was pointed out by the AO in the accounts of the assessee for enabling reference to a special audit.
What is clearly evident is that the reference for special audit was merely made for obtaining certain explanation and information which were further required by the AO for the purposes of assessment of income of the assessee. In effect ,the AO ,was shifting his responsibility to the special auditor. This is surely not the purpose for which special audit can be referred to under law.
Further, we find, the assessee filed a detailed reply to the show cause notice explaining at length all doubts and queries raised by the AO in its previous reply and furnishing all information which he found lacking (P.B 222-252), but despite the same, the AO sought approval of the PCIT for special audit on the same day the reply was filed by the assessee and after obtaining the same ordered special audit on the very same day. A.Y. 2014-15 Page 31 of 32
The only inference which can possibly be drawn in the facts of the present case as narrated above, is that the reference to special audit was made only to buy further time for completing the assessment, having been made at the fag end of the period for completion of assessment that too merely for obtaining further details and information and not because any complexity was noted in the accounts of the assessee. The reference to special audit, therefore we hold, is an invalid reference, contrary to law.
The assessment order passed therefore in the extended period, as a consequence of the invalid reference, we hold, is barred by limitation and hence void.
Since we have held the assessment order to be void on account of an invalid reference to special audit for the aforesaid reasons, the remaining arguments with respect to the same are not being dealt with by us.
The additional ground of appeal raised by the assessee is, therefore, allowed.
36. Both the parties were heard only on the additional ground raised
which has been allowed by us and the assessment order passed has been held to be void. The remaining grounds, A.Y. 2014
15. Page 32 of 32 relating to merits of the case, therefore, are rendered academic in nature.