GANGOTHRI VENTURES,BANGALORE vs. INCOME-TAX OFFICER, WARD-5(2)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

Gangothri Ventures, Bangalore Page 2 of 12 Bangalore vide sale deed dated 17-05-2013, intended and planned construction of 40 residential flats and the construction was commenced in the year 2013 and completed in the year 2016 and the opening Stock was related to the F.Y 31-03-2016 amounting to Rs.11,42,11,060/-. In spite of completion the flats could not be sold owing to certain constraints caused by the marketing agency against whom Criminal cases were filed for cheating the Assessee and therefore the returns could not be filed for earlier years. However, the Assessee has sold 28 flats during the FY 31.03.2018 relevant to the asst year 2018-19 out of the brought forward opening stock of Rs. 11,42,11,060/- as on 01.04.2017 for a consideration of Rs. 8,78,58,864/-and the remaining flats were sold in subsequent year, and thereafter the Assessee Firm was dissolved on 31.03.2021 due to the loss incurred in the business.

3.1 He submitted that the Assessee in view of the loss in business for the AY 2018-19 has not filed its return of income but in response to notice u/s 148 of the Act dated 31.03.2022 a return of income was filed for the impugned AY on 21.12.2022 declaring a net loss of Rs 1,31,422/-. Thereafter the case of the assessee was migrated to NAFC and a show cause notice was issued on 24.02.2023 proposing the addition of Rs 8,44,24,940/-. The proposal was based on the following items. a) Cash withdrawal of Rs.1,17,19,000/- Rs. 73,140/- b) Interest income c) Purchase of immovable property Rs.7,26,32,800/- Rs.8,44,24,940/- Gross alleged escapement of Income.

3.2 He submitted that the Assessee in response to the show cause notice has filed the submissions on 14.12.2022, 21.12.2022, 24.12.2022, 21.01.2023 and 13.02.2023. However, the NFAC has not appreciated the submissions and documents furnished and ultimately it was held that the Assessee has failed to explain the bogus entries debited in his P&L A/c under the heads Salary of Rs 90,43,515/-, Conveyance

Gangothri Ventures, Bangalore Page 3 of 12 of Rs 9,51,496/-, Entertainment Expenses of Rs 8,72,144/-, Stamp Duty of Rs 22.669/- and Vehicle Maintenance of Rs 6,08,442/- and therefore the aggregate expenditure of Rs 1,14,98,266/- was disallowed and the same was brought to tax rejecting the explanation offered by the Assessee solely on the ground that the amount of expenditure booked in the books and reflected in narrations in bank statement was completely mismatched.

3.3 He submitted that the expenditure as admitted in para 3.1 on page 26 of Asst. Order was recorded in the books but the disallowance made mainly on account of mismatched narrations between the books - and the bank statements without bring on recorded as to the quantum of amount of expenditure said to be mismatched. The NFAC without bringing on record the details of mismatch, arbitrarily disallowed the entire expenditure of Rs 1,14,98,266/- even without considering the expenditure of Rs 94,80,778/- for which the payments were made through the bank accounts. He submitted that the expenditure of cash payment was of Rs 20,17,488/- and the balance was paid through the bank account. However, the NAFC has not examined properly the payment of expenditure made through the bank accounts amounting to Rs 94,80,778/-, but track was completely shifted that the expenditure recorded in books and the bank statements was said to be mismatched. The Assessee submits that the arbitrarily disallowance for the alleged mismatch of entries between the books and bank statements ought to have not been a justifiable ground for making addition without appreciating the payment of major chunk was paid through bank accounts and hence the addition made was not justifiable in law and the same is liable to be deleted.

3.4 He further submitted that the NFAC in para 6 has held that the expenses booked under different heads were bogus and they are not tallied as per bank Account statement and the same was proposed to be brought to tax u/s. 69C/68 of the Act. However, the addition was made

Gangothri Ventures, Bangalore Page 4 of 12 u/s. 37 of the Act as per para 3.6 of the Assessment Order. In this regard the assessee submits that the NFAC has not issued any Show cause Notice for the proposed addition u/s. 37 of the Act and therefore the addition made by causing disallowance of Rs. 1,14,98,2667- on the various heads such as Salary, Conveyance, Entertainment, Stamp Duty and Vehicle Maintenance was not in accordance with law. The NFAC is not empowered under the law to make an addition without providing the Show Cause Notice on the relevant issues. It is evident from the Show cause Notice that the addition was proposed u/s. 69C/68 which are absolutely not applicable to the facts and circumstances of the case of the Assessee. Section 69C relates to disallowance of unexplained expenditure for which source was not explained and section 68 of the Act relates to any sum found credited for - which no explanation was offered or the explanation offered was not found satisfactory. However in the case of the Assessee as alleged the NFAC was of the view that the entries recorded in the Books of Account were said to be bogus and mismatched with the Bank Statement and for the said alleged default, section 69C and 68 are not applicable. On the other hand, the addition was made u/s. 37 of the Act which is a beneficial provision which enables the allowability of expenditure which was incurred wholly and exclusively for the purpose of business. If any expenditure is not allowable in the normal course u/s. 30 to 36 of the Act. Section 37 is an omni-clause to provide the expenditure which was incurred wholly and exclusive for the purpose of business, but the case of the NFAC was not that the expenditure was not incurred but it was claimed on bogus expenditure for which section 37 is not applicable and hence the addition u/s. 37 of the Act amounting to Rs. 1,14,98,266/- on the various head mentioned above is not permissible under the law and therefore the same is liable to be deleted as the addition was made on improper provision of the Act.

3.5 The ld. A.R. submitted that the Ld. CIT(A) has arbitrarily confirmed the addition of Rs 1.14,98,266/- being the disallowance made

Gangothri Ventures, Bangalore Page 5 of 12 by the AO relating to the expenditure incurred on Salary, Conveyance, Entertainment, Stamp duty and Vehicle Maintenance, mainly for the same reasons mentioned by the AO in the Assessment Order where the AO has held that the entries made in the books were said to be bogus and also mismatched to the Bank Statement. The contention of the NFAC is contrary.to the admitted fact. On one side it is said that the entries of expenditure was-bogus on the other hand they were mismatched. If the entries were to be held as bogus then the question of mismatch would not arise and therefore the addition confirmed by the Ld. CIT(A) NFAC mainly placing reliance on the AO's view is not sustainable in law.

3.6 He submitted that the addition made amounting to Rs.1,14,98,266/- on heads of expenditure relating to Salary of Rs.90,43,515/-, Conveyance of Rs. 9,51,496/-, Entertainment of Rs.8,72,144/-, Stamp Duty Expenses of Rs. 22,669/- and Vehicle maintenance of Rs. 6,08,442/- by causing disallowance solely on the ground of alleged bogus entries and mismatch of narration found recorded between the Books and Bank Statements was not sustainable in law. The AO has admitted the fact that the entries recorded were said to be mismatched but on the other hand contrarily held as bogus entries. If the entries were held to be bogus as alleged, the question of the said same entries would not have found in the Bank Statement. The mismatch of the expenditure cannot be considered as a justifiable ground without reconciliation head-wise between the bank entries and the entries of the books of account.

3.7 He submitted that the disallowance of Rs.1,14,98,266/- on the heads of account mentioned above was in fact proposed in the show cause Notice as income chargeable to tax u/s. 69C/68 of the Act whereas the addition was made u/s. 37 of the Act which is not applicable to the facts and circumstances of the case. In this regard the Assessee placed reliance on the Gangothri Ventures, Bangalore Page 6 of 12 detailed submissions made above para nos.3 to 3.3 explaining the facts of the case.

a) Salary - Rs.90,43,515/- b) Conveyance - Rs. 9,51,496/- c) Entertainment expenditure - Rs. 8,72,144/- d) Stamp duty expenses - Rs. 22,669/- e) Vehicle maintenance - Rs. 6,08,448/- Total: - Rs.1,14,98,266/- 5.1 Out of this, an amount of Rs.94,80,778/- has been paid through banking channel and balance amount of Rs.20,17,488/- has been incurred by way of cash payment. In our opinion, the assessee has real estate business, which includes acquisition of land, sites and construction of residential apartments. In the assessment year under consideration, assessee has planned to construct 40 flats and construction commenced in the year 2013 and completed in 2016. It cannot be said that the assessee has inserted any bogus expenditure though there may be inflation of expenditure, if any. If there is any inflation of expenditure, which is required to be examined by AO and he cannot outrightly reject the incurring of any expenditure on the reason of claiming bogus expenditure. On this point of view, we are not in agreement with the lower authorities.

Gangothri Ventures, Bangalore Page 7 of 12 5.2 The other contention of ld. A.R. is that show cause notice has been issued proposing addition u/s 69C/68 of the Act. However, the addition has been made disallowing the expenditure u/s 37 of the Act. In our opinion, section 68 of the Act is not applicable to the facts of the present case as there is no unexplained credit. Hence, section 69C/68 of the Act is not applicable. Section 69C of the Act is applicable with regard to any unexplained expenditure in the financial year which is in the opinion of the ld. AO not satisfactorily explained. In the present case, the ld. AO mentioned that it is a bogus expenditure and made addition as above. It means that it is an unexplained expenditure and the ld. AO has not mentioned about section 37 of the Act in his order. Hence, this argument of assessee’s counsel has no merit. 5.3 However, considering the facts and circumstances of the case, out of Rs.1,14,98,266/-, Rs.94,87,778/- has been incurred by banking channel, which cannot be considered as bogus payment without establishing the same by ld. AO and the claim of assessee is to be allowed as the genuineness of payment cannot be doubted on this count, more so, the payment has been made through the banking channel. Accordingly, the addition of Rs.94,87,778/- is deleted and the claim of assessee to be allowed on this count. 5.4 With regard to cash payment of Rs.20,17,488/-, the assessee has to prove the incurring of this expenditure by producing the bills, vouchers, receipts to prove the genuineness of the payment. 5.5 The contention of the ld. D.R. is that assessee has not produced all the details to prove the genuineness of this expenditure. In our opinion, if the assessee has not produced all the details for incurring expenditure before ld. AO/NFAC, it is not possible to say that assessee has not incurred this expenditure. The business of the assessee cannot be carried on without incurring of expenditure and the ld. AO has not stated in the order that assessee’s P&L account Gangothri Ventures, Bangalore Page 8 of 12 would not deduce the correct profit of the assessee firm. He made addition on the reason that assessee has shown expenses under different heads in P&L account as compared to bank statement of the assessee. The assessee has explained before the ld. AO/NFAC that its Accountant by mistake has wrongly posted the payments to different heads of account and there is no effect on the profit & loss account of the assessee, which is only Nil. The NFAC without agreeing with that contention of the assessee made addition holding that as bogus. In our opinion, that cannot be reason to disallow entire expenditure though there was every chance of inflating the cash expenditure. In view of this, we are of the opinion that to meet the ends of justice, it is appropriate to disallow 15% of cash expenditure of Rs.20,17,488/-, which works out at Rs.3,02,623/-. Accordingly, this ground of the assessee is partly allowed.

6.2 He submitted that the GP addition of Rs. 36.16,080/- was not the subject matter of the Show Cause Notice and it is not a fact that the Assessee has not furnished the details of Opening Stock of Rs. 11,42,11,060/-. Therefore, he submitted that the NFAC was not justified to enhance the GP without causing the service of Show Cause Notice and on this Ground alone the addition is liable to be deleted.

Gangothri Ventures, Bangalore Page 9 of 12 6.3 The ld. A.R. without prejudice to the above submissions in para 7, further submitted that the return of income and the Audit Report could not be filed as the Assessee firm did not derive any taxable income and non-filing of return of income cannot be construed as a ground for enhancing the GP addition. In fact, the Assessee has not incurred any direct expenditure in the impugned financial year and only sold a part of the Stock which was brought forward and hence the question of disallowance or enhancement of GP addition was not called for. He further submitted that the Opening Stock as on 01-04-2017 was nothing, but the closing stock as on 31-03-2017 and therefore it was not related to the-impugned F.Y and it was related to the earlier years and therefore the issue relating to the earlier years cannot be adjudicated in the later years relating to the opening stock. Therefore, he submitted that the addition made is opposed to the law and facts of the case and hence the same is liable to be deleted.

6.4 The ld. A.R. for the assessee further submitted that the closing stock of Rs. 4,03,09,490/- as on 31-03-2018 was arrived at after the sale of flats brought forward as Opening Stock of Rs. 11,42,11,060/- and the closing stock so arrived as on 31-03-2018 amounting to Rs. 4,03,09,490/- was carried forward and the same was taken as opening Stock as on 01-04-2018 relevant to the A.Y 2019-20 and the return of income was filed along with the Tax Audit Report and the same was not disputed therefore the opening stock as on 01-04-2017 was not amenable for correction as it was related to the earlier years. He submitted that in the event of any GP Addition was considered necessary, then the issue ought to have been examined for the earlier years and not in the impugned A.Y 2018-19. Therefore, he submitted that the addition made was arbitrary and opposed to the law and facts of the case and hence the addition so made of Rs. 36.16,080/- is liable to be deleted in the interest of equity and justice, especially on the ground that the said addition was not proposed in the Show Cause

Gangothri Ventures, Bangalore Page 10 of 12 Notice dated 24-02-2023 and also the NFAC has not examined the details furnished relating to the opening Stock vide letter dated 25-02- 2023.

6.5 The ld. A.R. further submitted that the NFAC on page 26 of the Asst. Order has held that a sum of Rs 11,42,11,060/- was shown as apartment opening balance and same was said to have not seen explained by any document evidence and no working was provided. The NFAC has further held that the Assessee has neither filed any return of income for the preceding year nor furnished any audit report and therefore the amount of opening balance was held to be not genuine and Therefore the GP declared by the Assessee nearly 15% was enhanced to 20% as result of which addition was made amounting to Rs 36,16,080/-. He submitted that the GP addition of Rs. 36,16,080/- was not the subject matter of the Show Cause Notice and it is not a fact that the Assessee has not furnished the details of Opening Stock of Rs. 11,42,11,060/-. Therefore, the ld. A.R. submitted that the NFAC was not justified to enhance the GP without causing the service of Show Cause Notice and on this Ground alone the addition is liable to be deleted.

6.6 He submitted that the assessee has shown the opening balance of apartment at Rs.11,42,11,060/-. It was observed by lower authorities that the assessee has neither filed any return of income for the preceding year and not furnished any audited report and therefore, the amount of opening balance is held to be not genuine and therefore, GP declared by assessee nearly 15% was enhanced to 20% as a result of which addition was made amounting to Rs.36,16,080/-. 6.7 The contention of ld. A.R. is that this was the opening balance which is carried from the earlier assessment year and disturbing the opening balance gives the distorted picture of the true affair of the assessee and it cannot be made addition on this count as the Gangothri Ventures, Bangalore Page 11 of 12 assessee has constructed 40 flats and same has been subject to taxation in various assessment years and estimating addition of GP on opening stock of apartment, which gives the inflated result of the assessee, which should be avoided.

Gangothri Ventures, Bangalore Page 12 of 12 31 205 2730606 05.07.2018 3895 2998132 “ 32 203 3240838 26.07.2018 2641 3512200 “ 33 403 3240838 13.08.2018 1483 3512200 “ 34 103 3240838 18.08.2018 3124 3512200 “ 35 204 2812762 18.08.2018 3127 3048300 “ 36 405 3880790 12.09.2018 3879 4206000 “ 37 301 2838706 24.09.2018 4307 3076400 “ 38 201 2730606 05.10.2018 3890 2798132 “ 39 7 2730606 29.03.2019 9057 3084000 “ 40 401 2848602 29.03.2021 8223 3578000 2021-22 B/f Cost as on (Exclusive of Flat 01.04.2017 No-1 already Sold in AY 2017-18) 114211060 8.1 As seen from the above, the income realized from the sale of flats already subject to taxation in one or other assessment years. As such, it cannot be said that there is any undisclosed sale of apartments in the assessment year under consideration. Otherwise, it amounts to double addition. Accordingly, the estimated GP made on the opening stock of apartment is deleted.