ESQUE FINMARK PVT LTD,MUMBAI vs. ITO, WARD 5(1)(1), MUMBAI

The relevant facts borne out from the assessment records are that the assessee company was engaged in the business of real estate development and construction activities. It had undertaken a redevelopment project at Kalachowki, Mumbai. The original return of income for the year under consideration was filed declaring a loss of Rs.18,27,080/-. Subsequently, a search action under section 132 was carried out in the group cases on 26.05.2011. Pursuant thereto, notice under section 153A was issued and assessment under section 143(3) read with section 153A came to be completed on 28.03.2014 accepting the returned loss. Thereafter, information was received by the Assessing Officer from the Investigation Wing, Mumbai, on the basis of which he formed a belief that income chargeable to tax had escaped assessment and accordingly initiated proceedings under section 147 by issuance of notice under section 148.

The basis of reopening, as discernible from the reasons recorded and the reassessment order, was a report forwarded

During the course of reassessment proceedings, the assessee was confronted with the aforesaid information and called upon to explain the difference. In response, the assessee submitted that the entire premise adopted by the Investigation Wing was fundamentally erroneous. It was explained that what had been issued were merely allotment letters indicating the proposed consideration of the flats and that no agreements for sale had been executed with the concerned parties. The assessee further submitted that only advances had been received from the proposed purchasers and the actual receipts were duly recorded in the books of

The assessee also placed reliance upon its books of account and ledger accounts of the respective allottees to demonstrate that the amounts reflected therein represented the actual advances received. It was specifically contended that the information received from the Investigation Wing itself contained discrepancies and that in some cases the figures reflected by the Investigation Wing did not tally with the ledger accounts maintained by the assessee. The assessee further pointed out that the project was being accounted for under the Project Completion Method and no revenue had been recognized because the project had not reached a stage of substantial completion. In support of this contention, the assessee had also referred to the ICAI Guidance Note on Accounting for Real Estate Transactions and explained that the significant risks and rewards associated with the project

The Assessing Officer, however, was not convinced with the explanation furnished by the assessee. According to him, the allotment letters represented the total consideration agreed between the parties and it was improbable that flats situated in Mumbai would remain blocked for several years against receipt of only a fraction of the agreed consideration. Proceeding on this assumption and relying upon the principle of human probabilities as propounded by the Hon’ble Supreme Court in the case of Sumati Dayal, the Assessing Officer inferred that the difference between the consideration mentioned in the allotment letters and the amounts reflected in the books must necessarily have been received in cash. On this reasoning alone, he treated the differential amount of Rs.3,68,46,000/- as unaccounted receipts of the assessee and added the same to its income.

The assessee carried the matter in appeal before the learned CIT(A). However, the appeal was unfortunately not adjudicated on merits. From a perusal of the impugned appellate order, it is seen that the learned CIT(A) observed that despite opportunities granted, the assessee had not furnished a copy of the impugned assessment order and certain base documents. On that basis, the appeal was

Before us, the learned counsel submitted that the entire addition is based upon a wholly untenable presumption that the difference between the proposed consideration mentioned in the allotment letters and the actual receipts reflected in the books represented cash received by the assessee. He drew our attention to the fact that no agreement for sale had ever been executed with any of the purchasers and that the project itself had come to a halt. It was emphasized that even the purchasers examined by the Department had never stated that they had paid any cash amount to the assessee. Thus, according to him, there was absolutely no evidence whatsoever to support the conclusion reached by the Assessing Officer.

We have carefully considered the rival submissions and perused the material available on record. Having examined the entire factual matrix, we find that the addition made by the Assessing Officer proceeds entirely on a presumption unsupported by any substantive evidence. The sole foundation of the addition is that the consideration mentioned in certain allotment letters exceeded the amounts reflected in the books of account. From this circumstance alone, the

A crucial fact which emerges from the record is that the documents relied upon by the Revenue are merely allotment letters. Admittedly, no agreement for sale had been executed with any of the concerned purchasers. An allotment letter merely records the proposed allotment of a flat and the consideration payable therefor. It does not establish that the entire consideration mentioned therein has actually been paid. The distinction between an amount agreed to be paid and an amount actually received is fundamental. Unless there is evidence demonstrating that the purchaser has discharged the liability by making payment, the amount mentioned in the allotment letter cannot be treated as actual receipt in the hands of the developer.

Equally important is the undisputed factual position that the project itself had not progressed in the normal course. The assessee had consistently maintained before the authorities that the project had become embroiled in disputes and litigation and that construction activity had substantially stopped. This assertion finds support from the written submissions filed before the first appellate authority wherein

What, however, completely demolishes the Revenue’s case is the absence of any direct evidence from the purchasers themselves. The entire allegation of cash receipt necessarily presupposes payment of cash by the purchasers. Therefore, the most direct and best evidence would have been statements from the concerned purchasers admitting payment of such cash consideration. However, no such material has been brought on record. On the contrary, the purchasers examined by the Department never stated that they had made any cash payment to the assessee. There is not a single statement, document, receipt, diary, loose paper, cash ledger or any other incriminating material evidencing receipt of on-money by the assessee. Thus, the very source from which the alleged cash is stated to have emanated does not support the Revenue’s allegation.

We further find that the Assessing Officer has proceeded on the basis of what, according to him, ought to have happened in the ordinary course of business. According to him, it was improbable that a builder in Mumbai would keep flats blocked for years against receipt of only a small advance. Such reasoning may perhaps justify further enquiry, but it cannot constitute evidence of receipt of income. The issue before us is not whether the assessee’s conduct was commercially prudent; the issue is whether the Revenue has established receipt of cash. Tax liability cannot be fastened merely because the Assessing Officer believes that a different commercial course would have been more probable. The burden was upon the Revenue to establish by cogent material that the differential amount was actually received. That burden has remained wholly undischarged.

In fact, the entire addition is built upon a chain of assumptions. First, it is assumed that the consideration mentioned in the allotment letters necessarily became payable. Secondly, it is assumed that the purchasers paid the entire consideration. Thirdly, it is assumed that the difference was paid in cash. Finally, it is assumed that such cash was received by the assessee. None of these assumptions is supported by any independent evidence. The settled principle of law is that suspicion, however strong, cannot substitute

Having regard to the entirety of the facts and circumstances, we are unable to sustain the conclusion reached by the Assessing Officer. The Revenue has failed to establish that the assessee received any amount over and above the advances reflected in its books of account. The differential figure between the amount mentioned in the allotment letters and the amount actually recorded in the books cannot, in the peculiar facts of the present case, be treated as undisclosed cash receipt merely on assumptions and conjectures. We accordingly hold that the addition of Rs.3,68,46,000/- lacks any evidentiary foundation and is liable to be deleted.

In view of the foregoing discussion, the addition of Rs.3,68,46,000/- is directed to be deleted. Since the assessee succeeds on merits, the grounds challenging the validity of reopening under section 147 are left open and are not adjudicated, the same having become academic in nature.