M/S. KRISHNA DEVELOPERS,,JAMNAGAR vs. THE DY. COMMR. OF INCOME TAX, CEN. CIR.2,, RAJKOT-GUJARAT

आयकर अपीलीय अिधकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (CONDUCTED THROUGH E-COURT AT AHMEDABAD) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.458-459/Rjt/2015 िनधा�रण वष�/Asstt. Years: 2011-2012 & 2012-2013 M/s. Krishna Developers, D.C.I.T, 402, 4th Floor, Oscar Apartment, Vs. Central Circle-2, Limda Lane, Rajkot. Jamnagar.

PAN: AAJFK0115D

(Applicant) (Respondent) Assessee by : Shri M.J. Ranpura, A.R Revenue by : Shri B.B. Rajendra Prasad, CIT. DR सुनवाई क� तारीख/Date of Hearing : 03/06/2019 घोषणा क� तारीख /Date of Pronouncement: 25/06/2019 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeals have been filed at the instance of Assessee against the orders of the Learned Commissioner of Income Tax(Appeals)-11, Ahmedabad [Ld.CIT (A) in short] of even dated 28/07/2015 arising in the matter of assessment order passed under s. 153C r.w.s 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years (A.Ys) 2011-2012 and 2012-2013.

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First, we take ITA No.458/Rjt/2015 for A.Y. 2011-12. The assessee has raised the following grounds of appeal:

1.0 The grounds of appeal mentioned hereunder are without prejudice to one another. 2.0 The initiation of action u/s 153C of the Act is totally bad on facts as also in law and the same may kindly be dropped. 3.0 The learned Commissioner of Income-tax (Appeals)-l 1, Ahmedabad [hereinafter referred to as the CIT(A)] erred on facts as also in law in retaining disallowance of Rs.1,95,000/- made out of interest expenses on account of alleged diversion of interest bearing funds for non business purpose. The disallowance confirmed is totally unjustified on facts as also in law and may kindly be deleted. 4.0 The Id. CIT(A) erred on facts as also in law in sustaining the addition of Rs.5,98,0007-made by the AO on account of alleged on money receipt. The addition confirmed in total disregards to the facts on record and submissions furnished from time to time is totally unjustified and deserves to be deleted may kindly be deleted. 5.0 Your Honor's appellant craves leave to add, amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.

The next issue raised by the assessee in the ground No. 3 is that the learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of interest expenses at Rs. 1,95,000.00 on account of diversion of interest-bearing fund for non business purposes.

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the assessee has diverted the interest-bearing fund for non-business purposes by giving temporary loan to its associated concern. Thus the AO was of the view that the assessee, on the one hand, has claimed the interest expenditure on the loan borrowed by it and on the other hand it has given loan to the associated concern without charging any interest. The amount of interest expenditure incurred by the assessee is of ₹3,90,255.00 only. Accordingly, the AO disallowed the 50% of interest expenses amounting to ₹1,95,000.00 only and added to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A).

4.1 The assessee also claimed to have given temporary loan to its associated concern for the business expediency.

4.2 However, the learned CIT (A) disregarded the contention of the assessee by observing that the temporary loan was provided to the associated concern to extend the financial help which does not have any connection with the business activities of the assessee. Accordingly, the learned CIT (A) held that there could not be any deduction on account of such interest expenses on the funds diverted for the non-business purposes.

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Hon'ble High Court of Delhi in the case of CIT vs. Dalamia Cement (P) Ltd. (2002) 254 ITR 377 (Delhi) Hon'ble Supreme Court of India in the case of S.A. Builders vs. CIT (2007) 288 ITR 1(SC) Hon'ble Supreme Court of India in the case of Hero Cycles (P) Ltd. vs. CIT (2015) 379 ITR 347 (SC) Once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit and that the revenue authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. [Para 13] (vii) Without prejudice to the above, the Appellant and M/s. Shivkrupa Buildcon, both are assessed to tax in same tax bracket and therefore, even if interest would have been charged by the Appellant from M/s. Shivkrupa Buildcon, the same would be claimed as deduction by M/s. Shivkrupa Buildcon from its taxable business income. Hence, apparently, there is no loss to revenue in such arrangement.

(viii) In view of the above, the disallowance retained by the Ld. CIT(A) may kindly be deleted.’’

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7.1 We find support and guidance from the judgement of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- “The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”.

7.2 Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:-

“Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”

7.3 Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : “If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.

In view of the above, we reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

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The 2nd issue raised by the assessee in ground No. 4 is that the learned CIT (A) erred in confirming the addition of ₹5,98,000.00 on account of on money received.

In view of the above, and after considering the statement of Shri Pankaj V Patel dated 25 August 2011, the AO worked out the on money of ₹3,63,000.00 and proposed to make the addition to the total income of the assessee.

8.1 In response to it, the assessee claimed that there was no evidence found during search suggesting that it was engaged in collecting on money from the parties.

8.2 However, the AO disagreed with the contention of the assessee by observing that there were several documents found during the search proceedings which are marked as Annexure A-6 containing pages 1 to 66 including the trial balance. However, the entries shown in the trial balance were not matching with the entries recorded by the assessee in the regular

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books of accounts. Accordingly, the AO rejected the books of accounts under section 145(3) of the Act.

8.3 The AO further found that the assessee has received on money of ₹6,98,000.00 from Shri Maheshbhai Gordhanbhai against the sale of flat No. 205 which was treated as undisclosed income of the assessee. As the assessee has already disclosed ₹1 lakh on ad hoc basis, therefore the balance amount of ₹5,98,000.00 was added to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A).

8.4 The assessee before the learned CIT (A) submitted that the entries, as shown in the seized trial balance were recorded very unsystematically and in a haphazard manner. Accordingly, the assessee claimed that the reconciliation of the entries reflected in the trial balance with the regular books of accounts was not possible.

8.5 However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: “The submission of the appellant and the contention of the AO have been perused. As discussed above, all the notings recorded in the seized material were not recorded in the regular books of accounts of the assessee. The appellant during appeal proceedings also repeated the submissions which he furnished before the AO. After perusal of the contents of the assessment order and the submissions of the appellant it was observed that admittedly most of the transactions noted in the seized documents could not be reconciled with the books of accounts by the assessee. Thus, it was abundantly clear that the books of accounts of the-assessee were not showing correct and complete state of affairs of the business of the assessee. The appellant did not rebut the finding of the AO about the amount mentioned in the trial balance of Rs.6,98,000/- as on money. In view of the facts and circumstances, in my considered opinion, the action of the AO was in order.

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Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.

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after applying net profit rate of 20% on such unaccounted receipts, additional income works out to Rs. 60,000/- to Rs. 80.000/- only. Therefore, additional income offered by the Appellant at Rs. 1,00,000/- on ad-hoc basis takes care of the alleged discrepancies in the seized documents. (vii) In connection with the above, the Appellant relies on following decisions holding that what is to be taxed is only profit embedded on unaccounted taxable receipts and not the entire receipts. Hon'ble High Court of Gujarat in the case of CIT vs. Abhishek Corporation in Income Tax Reference No. 15 of 2003 Hon'ble High Court of Gujarat in the case of CIT vs. President Industries - 258 ITR 654 (Guj) Hon'ble High Court of Gujarat in the case; of CIT vs. Gurubachhan Singh J. Juneja - 302 ITR 63 Hon'ble High Court of Gujarat in the case of Jay Builder vs. ACIT (2013) 215 Taxman 50 (Gujarat) (viii) It is also submitted that the trial balance seized contains noting of receipts and payment both. The AO has only considered the receipts for determimrg unaccounted additional income and ignored the payment / expense side. This action of the AO in totally unjustified as it is well settled law that the seized documents has to be read as a whole, and the revenue cannot pick and choose favorable part and ignore unfavorable. (ix) Also, in the case of other group cases, i.e., M/s. Shivkrupa Buildcon and M/s. Aditi Infrastructure and Developers, Hon'ble Settlement Commission has estimated Net Profit on unaccounted receipts for working out true and correct additional income. (x) In view of the above, addition made by the AO in respect of entire alleged unaccounted receipts of Rs. 5,98,000/- may kindly be deleted.’’

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section 145(3) of the Act. In our considered view, once the books of accounts have been rejected, the only resort available to the Revenue is to estimate the income of the assessee on a reasonable/scientific basis. However, in the case on hand, we note that the revenue had made the addition on account of on money after referring to the seized material which appears contrary to the law settled by the courts in various judgments wherein it was held that the profit of the assessee has be determined on estimated basis in the event of the rejectetion of the books.

8.1 We also note that the on money represents the business receipts. Therefore the entire amount cannot be treated as income of the assessee unless it is extablished that the assessee has claimed the corresponding expenses against such income. In this regard, we find support and guidance from the judgement of Hon’ble Gujarat High Court in the case of President Industries reported in 258 ITR 654 wherein it was held as under: “The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that the investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sales proceeds can be treated as income, answers by itself in the negative.”

8.2 We further note that the AO made the addition on account of the revenue transactions. As such, there was no incriminating document found during the search evidencing that the assessee has received on money in respect of its project except the statement recorded under section 132(4) of the Act. In our considered view in the absence of any evidence regarding the on

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money, the income can be decided on an estimated basis after considering the history of the assessee and the comparable cases.

8.3 We also note that in the given facts and circumstances in the own group of the assessee the net profit at the rate of 20% of the gross receipt has been determined by the Income Tax Settlement Commission. Therefore we are of the view that the justice will be served to the revenue and the assessee if the income of the assessee is determined at the rate of 20% of the gross receipts. Hence the ground of appeal of the assessee is partly allowed.

In the result, the appeal of the assessee is partly allowed.

Coming to the ITA No. 459/Ahd/2015 for A.Y. 2012-13. The assessee has raised the following grounds of appeal: 1.0 The grounds of appeal mentioned hereunder are without prejudice to one another. 2.0 The initiation of action u/s 153C of the Act is totally bad on facts as also in law and the same may kindly be dropped. 3.0 The learned Commissioner of Income-tax (Appeals)-11, Ahmedabad [hereinafter referred to as the "CIT(A)"] erred on facts as also in law in holding that the AO's action of rejection of books of account is in order. The order of the Id. CIT(A) in this regards is totally unjustified and the AO may kindly be directed to accept the book results. 4.0 The Id. CIT(A) erred on facts as also in law in sustaining the addition of Rs. 29,80,200/-made by the AO on account of alleged on money receipts. The addition confirmed in total disregards to the facts on record and submissions furnished from time to time is totally unjustified and deserves to be deleted may kindly be deleted. 5.0 The Id. CIT(A) erred on facts as also in law in confirming the addition of 8,10,0007- made on account of alleged unaccounted income on sale of flats / advances received. The addition made in total disregards to the facts on record is totally unjustified and deserves to be deleted, may kindly be deleted. 6.0 Your Honor’s appellant craves leave to add, amend, alter, or withdraw any or more gronds of appeal on or before the hearing of appeal.’’

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The next interconnected issue raised by the assessee in the ground No. 3 to 5 is that the learned CIT (A) erred in rejecting the books of accounts and confirming the addition of ₹37,90,200.00 on account of on money received/ unaccounted income on the sale of the flats.

In the result the appeal of the assessee is partly allowed.

Order pronounced in the Court on 25/06/2019 at Ahmedabad.

-Sd- -Sd- (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 25/06/2019 manish