THE COMMISSIONER OF INCOME TAX, GANDHINAGAR vs. A.D. INFRACON PVT. LTD

C/TAXAP/1083/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1083 of 2018 ========================================================== THE COMMISSIONER OF INCOME TAX, GANDHINAGAR Versus A.D. INFRACON PVT. LTD ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 MR SN SOPARKAR, SENIOR ADVOCATE with MR BS SOPARKAR with MR VIJAY S RANJAN(6126) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA

Date : 17/09/2018 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The   Revenue   has   filed   this   appeal challenging   the   judgment   of   the   Income­tax Appellate

Tribunal

dated

22.3.2018. Respondent   assessee   is   a   private   limited company   and   is   engaged   in   the   business   of real   estate   development.   On   5.12.2012,   the assessee was subjected to a survey operation. During   the   course   of   survey   proceedings, several documents were seized and impounded. Statements   of   the   representatives   of   the company   were   recorded.   During   assessment, notices   were   issued.   Several   details   were called for from the assessee in such notices. Assessing Officer         put the assessee to notice   about   not   being   satisfied   with   the Page 1 of 10

C/TAXAP/1083/2018 ORDER declaration   of   profit   by   the   assessee   in which he referred to the impounded documents which included loose papers indicating cost of construction, cost of land, money received etc.,   in   the   hand   writing   of   the representative   of   the   company.     Assessee strongly   objected   to   the   Assessing   Officer invoking best judgment assessment principles. The   Assessing   Officer   passed   the   order   of assessment  on  31.3.2016,   in which  he  noted that the company had not maintained scheme­ wise   details   of expenses.  It  was  therefore impossible   to   work   out   the   scheme­wise profit. It was also not possible to work out the   expenses   not   recorded   in   the   books   of accounts. He recorded detailed reasons why in his   opinion   the   books   were   liable   to   be rejected. He concluded that since correct and complete   records   pertaining   to   expenditure incurred are not available, it was reasonable to estimate the income from all projects of the   assessee   company   by   applying   the reasonable   net   profit   rate   of   15%   on   the gross   sales   as   noted   in   the   loose   papers found   impounded.   He   accordingly   worked   out the assessee's revised liability. He assessed the   assessee's   total   income   at   Rs.15.02 crores (rounded off). In one of the notices that   Assessing   Officer   had   issued   in   the Page 2 of 10

C/TAXAP/1083/2018 ORDER course  of  the  assessment   on 30.10.2015,  he had,   besides   other  details,  called  for  the TDS deducted and deposited by the assessee on the   expense   claimed   on   interest,   royalty commission,   brokerage,   rent,   as   also   the payment

professional,

technical, managerial   services.   It   was   further   stated that if TDS was not deducted with respect to any   of   these   expenditures,   the   assessee should   give   detailed   item­wise   reasons   for the same. The assessee had replied to such query in response letters.

however

gave

certain consequential directions for recomputing such net profit.

C/TAXAP/1083/2018 ORDER in exercise of his powers under Section 263 of the Income­tax Act, 1961 ('the Act' for short) passed an order on 31.3.2017. In the notice that he had issued to the assessee for exercising   revisional   powers   and   the   final order that he passed he had touched on two issues.   His   first   concern   was   that   the Assessing   Officer   had   not   adopted   correct rate   of net  profit.  He  was  of  the  opinion that the assessee had disclosed profit at the rate   of   27.48%   and   the   Assessing   Officer therefore   could   not   have   estimated   such profit at the rate of 15%. Second aspect was that certain statutory liabilities like TDS of Rs.5.62 lacs (rounded off), VAT of Rs.2.35 lacs and unpaid service tax of Rs.3.59 crores etc.,   had   to   be   verified   by   the   Assessing Officer in absence of production of books of accounts.   He   further   elaborated   the   second aspect by noting that the possible violation of   Section   40(A)(3)   of   the   Act   cannot   be ruled   out,   since   the   assessee   had   not produced   the   books   of   account   and   the verification could not be done on the basis of loose papers impounded during the survey.

C/TAXAP/1083/2018 ORDER prejudicial   to   interest   of   Revenue.   He rejected the assessee's contention that once the   books   of   accounts   were   rejected   and profit was estimated, no other additions or disallowances can be made.

recorded

that

unless

the Commissioner   holds   and   records   the   reasons how  the  assessment  is  erroneous,   he cannot set aside the same merely on the ground that the   Assessing   Officer   had   not   conducted proper inquiry. The Tribunal also noted that as   the   issue   of   determination   of   the assessee's   undisclosed   income  had   travelled to   the   Appellate   Authority,   action   under Page 5 of 10

C/TAXAP/1083/2018 ORDER Section 263 of the Act could not be taken by the Commissioner.

(i)    The main issue of appropriate rate of return was subject matter of appeal filed by the assessee. It was thereafter not open for the Commissioner to touch this aspect of the matter.

(ii)       Once   the   Assessing   Officer   had rejected the book results and made additions on   the   basis   of   estimated   net   profit,   no further   disallowance   or   additions   could   be Page 6 of 10

C/TAXAP/1083/2018 ORDER made.   In   this   context   he   relied   on   the following decisions :­ (a)     Order   dated   1.2.2016   passed   by   the Division Bench of this Court in Tax Appeal No.911   of   2015,   in   case   of   Principal Commissioner   of   Income­tax   vs.   Backbone Construction P. Ltd. (b)       Judgment   of   Supreme   Court   dated 10.3.2017 in case of M/s. Pradeep Singh Wazir vs. Commissioner of Income­tax and Anr.

(iii)   Counsel   lastly   contended   that   the  Assessing Officer had made detailed inquiry  with   respect   to   all   aspects   of   the   matter  including the TDS required to be deducted on  the   payments   made   by   the   assessee.   The  Commissioner   without   recording   any   reasons  asked  the  Assessing  Officer  to  examine  the  claim of expenditure of statutory liabilities  in   the   context   of   actual   deposit   of   such  amounts   with   the   Government   revenue.   He  submitted that essentially, the Commissioner  has ordered a fishing inquiry.

C/TAXAP/1083/2018 ORDER for examination in the revision proceedings. We may recall, his objection to the order of assessment   was   that   the   assessee   itself having   offered   net   profit   at   27.48%,   the Assessing   Officer   could   not   have   computed profit   at   the   rate   of   15%   of   the   total receipt. Quite apart from our serious doubt about the assertion of the Commissioner that the assessee had offered profit at the rate of   27.48%,   the   fact   remains   that   the Assessing Officer had after detailed inquiry, come   to the  conclusion  that  the  assessee's projection of 12.5% of profit on the gross receipts was not substantiated. He therefore rejected   the   assessee's   accounts   and proceeded   to   estimate   the   net   profit independently.   That   is   how   he   came   to   the conclusion   that   15%   would   be   a   reasonable profit and that is how he taxed the assessee. It was the assessee who was aggrieved by this order   and   carried   the   matter   before   the Commissioner   (Appeals).   The   Commissioner (Appeals) substantially confirmed the view of the Assessing Officer but placed the matter back   before   the   Assessing   Officer   for   re­ computation of scheme or project­wise profit at the same rate of 15% of net profit ratio. In terms of the Clause (c)  in Explanation 1 to sub­section 1 of Section 263, the powers Page 8 of 10

C/TAXAP/1083/2018 ORDER of   the   Commissioner   would   extend   to   such matters   as   had   not   been   considered   and decided   in   an   appeal   arising   out   of   such order   of   assessment.   In   the   present   case, this   issue   having   been   subject   matter   of appeal  and  duly  discussed  by  the  Appellate Authority,   was   beyond   the   purview   of   the Commissioner's revision powers. 9.  With respect to the statutory payments, a ground on which the Commissioner desired that further   inquiries   be   made,   for   several reasons,   the   order   cannot   be   sustained. Firstly,   the  Assessing  Officer  had  taken   a holistic   picture   and   arrived   at   the   net profit percentage that the assessee could be reasonably expected to have earned out of the ventures.   While   doing,   so   he   had   also examined   various   aspects,   including   the payments such as for commission, for interest etc., and whether the assessee had deducted tax   at   source   on   such   payments.   Thus,   the element   of   disallowing   certain   expenditure was in the mind of the Assessing Officer. It is   true   that   with   respect   to   statutory payments which may have bar of Section 43B of the  Act  on  claiming  without  actual  deposit with   the   Government   revenue,   there   was   no direct   inquiry   during   the   assessment   or Page 9 of 10

C/TAXAP/1083/2018 ORDER discussion   in   the   order   of   assessment. However, the Commissioner merely referred to some   possibility   on   such   expenditure   not being allowable without collecting proof of payment in the Government revenue. He did not even prima facie come to the conclusion that in  absence  of  such  deposit  the  expenditure was   not   allowable.   His   order   exercising revisional powers therefore on such grounds cannot be sustained. We may however clarify that   this   should   not   be   seen   as   our unconditional acceptance of one of the legal contentions raised by Shri Soparker that once the book results are rejected and profit is computed   on   estimation,   irrespective   of nature of expenditure, disallownace is simply not   permissible.   We   will   advert   to   such   a question   when   called   upon   in   appropriate situation.