ANNAPURNA PROPERTIES,MUMBAI vs. DCIT, CENTRAL CIRCLE 1, THANE, THANE

The common issue urged by the assessee in all the assessment years under consideration relates to the profit estimated by the AO on the alleged on-money receipts.

AY. On-money Profit estimated receipts (Rs.) @ 15% (Rs.) 2016-17 35,00,000 5,25,000 2018-19 1,15,00,000 17,25,000 2019-20 3,35,00,000 50,25,000 2020-21 8,25,00,000 1,23,75,000 2021-22 2,48,56,700 37,28,516 Accordingly, the AO added the respective amount of profit so estimated by him @ 15% of on money receipts in the above said assessment years. The Ld.CIT(A) also confirmed the same.

4 Annapurna Properties, (Batch) 6. The Ld.AR submitted that the assessee is engaged in the business of developing residential projects for lower middle class and middle class people. The carpet area of flats promoted by the assessee in these years was in the range of 372.20 sq.ft. to 766.10 sq.ft only in the project named „Annapurna Acquarius‟. Further, this project was developed in Bhayander area of Thane District, which is far away from the Mumbai region. He submitted that the assessee cannot earn higher profits in these projects for the specific reasons narrated above. He submitted that the AO did not take into account these factual aspects relating to the assessee while determining the rate of profit. Accordingly, the Ld A.R submitted that the AO was not justified in estimating the profit @ 15% of the alleged on- money receipts. Further, he submitted that the AO did not bring any comparable cases to support the rate of profit of 15% determined by him. The Ld.AR further submitted that the average rate of net profit declared by the assessee in its books of accounts during the period from AY. 2014-15 to 2021-22 was 9.01% only. No other material to show that the assessee had earned profit at higher rate than that disclosed by the assessee was found. Further, during the course of search, no unaccounted cash was seized from the assessee. Even though physical cash amounting to Rs. 3.48 crores was seized from certain persons as belonging to the „Span Group‟, but it has been accepted to belong to another concern named M/s. Span Venture, wherein the above said cash was telescoped against the profit estimated in its hands in respect of the alleged on-money received by that assessee. Accordingly, the Ld.AR submitted that the AO was not justified in estimating the profit of the assessee @ 15%, ignoring the peculiar facts surrounding this case. The Ld.AR further submitted that in the case of M/s. Platinum Properties Vs. DCIT, the net profit on on-money receipts has been estimated

5 Annapurna Properties, (Batch) @ 8%. Accordingly, the Ld.AR prayed that the profit from alleged on-money receipts may be estimated at the rate of 8%.

8. We heard rival contentions on this issue and perused the record. We notice that the AO, after having observed that the rate of profit in real estate business ranges from 10% to 15%, has decided to adopt the higher range of rate of profit of 15% to estimate income from alleged on-money receipts. However, we notice that the AO did not bring any material or comparable cases on record to support rate of profit of 15% adopted by him. There should not be any dispute that the estimate made by the assessee or AO should not only be reasonable, but also justifiable vis-à-vis the facts surrounding the case. We notice that, in the instant case, the AO did not take into account the peculiar facts prevailing, viz., that it is promoting the real estate projects in Bhayander area, which is far away from Mumbai region; that the projects are targeted for middle class and lower middle class people; that the carpet area is very less. It is in the common knowledge of everyone that the cost of construction of a smaller area will be more than the cost of construction of a larger area due to involvement of fixed costs. Further the construction of larger area would enable efficient utilization of all resources. Hence the cost of construction of smaller size flats is always higher than the large sized flats. Consequently, the profit on sale of smaller size flats is expected to be lower. Accordingly, we are of the view that there is merit in the contentions of the assessee that the profit from those projects will be lower.

6 Annapurna Properties, (Batch) 8.1. We notice that the contention of the assessee with regard to the rate of profit is supported by its books of accounts, wherein the average rate of profit declared by the assessee works out to 9.01% only. We also noticed earlier that the AO did not bring any material or comparable cases on record to support the rate of profit of 15% estimated by him. Hence, we are of the view that there is merit in the prayer of the assessee for lowering the rate of profit on alleged on-money receipts.

8.2. We also notice the above said plea of the assessee would also get support from certain decisions rendered by co-ordinate benches and also by Hon‟ble High Courts. In the case of Platinum Properties (supra) and also in the case of Dhanlaxmi Builders Vs DCIT (ITA No. 504/Mum/2009), the Tribunal estimated the rate of profit from on-money receipts @ 8%. In an unreported decision rendered by Ahmedabad bench of Tribunal in the case of Anand Builders, the Ahmedabad bench of Tribunal had estimated the profit from on-money receipts @ 8% and the same was upheld by Hon‟ble Gujarat High Court. It was submitted that the SLP filed by the revenue has been dismissed by Hon‟ble Supreme Court in the same case of ITO Vs Anand Builders reported in 265 ITR 37(Stat.). 8.3. We noticed that the assessee has declared average profit @ 9.01%. Accordingly, we are of the view that, in the facts and circumstances of the present cases, the profit from alleged on-money receipts may be estimated @ 9%. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in AY 2015-16 to 2020-21 and direct the AO to assess the profit from on-money receipts @ 9% thereon in the above said years. 8.4. In the appeals of the assessee filed for AYs. 2016-17 and 2018-19 to 2021-22, the above said issue alone is being contested. With the 7 Annapurna Properties, (Batch) adjudication of this issue, the appeals of above said years would get disposed of.

9.1. The facts relating to the same are discussed in brief. During the course of pre-search investigation carried out by the department, it was noticed that the assessee group has taken accommodation entries by way of loans from various dummy companies. The AO took the view that the accommodation entries by way of loans are usually obtained by paying equal amount of unaccounted cash to the lending companies. It was noticed that the assessee herein has taken an aggregate amount of Rs. 4.90 crores as loans during the years relevant to AYs. 2015-16 to 2018-19. Accordingly, he proposed to assess the loans taken by the assessee as its income. In response thereto, the assessee contended that the loans taken by it are genuine loans. In the alternative, the assessee submitted that, if at all the AO proposes to assess loans as income of the assessee, then telescopic benefit should be given to the amount of loan repaid by it and also to the profit estimated on the on-money receipts. The AO accepted the alternative contentions of the assessee and accordingly he prepared a cash flow statement by treating

(a) the loan received by the assessee as „cash outflow‟ (b) loan repaid by the assessee as „cash inflow‟. (c) income estimated by the AO on the alleged on-money receipts as „cash inflow‟.

8 Annapurna Properties, (Batch) 9.2. The above said workings made by the AO revealed that there was negative peak balance of Rs.4,55,15,136/- and Rs.62,52,550/- in the financial years relevant to AY. 2015-16 and 2017-18, meaning thereby, there was cash outflow in the above said two years to the extent mentioned above. The AO treated the excess cash outflow as unaccounted income of the assessee and assessed the above said amounts in the respective years. The Ld.CIT(A) also confirmed the same.

9.3. The Ld.AR submitted that both the assessment years, viz., AY 2015-16 and 2017-18 would fall under the category of “unabated assessment years”. Accordingly, the Ld.AR submitted that the AO could not have made addition on peak balance of loan entries, without there being any incriminating material found during the course of search. In support of this proposition, the Ld.AR placed reliance on the decision rendered by the Hon‟ble Supreme Court in the case of Abhisar Buildwell (P) Ltd., [2023] 454 ITR 212 (SC). He submitted that the search officials did not find any incriminating material during the course of search conducted in the hands of the assessee in order to show that the loans taken by the assessee from various companies are in the nature of accommodation entries.

9.4. The Ld.DR, on the contrary, contended that the AO has received „Incriminating information” regarding accommodation loans taken by the assessee from various paper companies. He also submitted that the enquiries/search conducted in the hands of those paper companies have brought to light that they were providing only accommodation entries to the beneficiaries. He submitted that the revenue has found incriminating materials in respect of on-money receipts for both these years, which were unabated assessment years. Hence the AO has validly assumed

9 Annapurna Properties, (Batch) jurisdiction to assess or reassess the total income of these two years. He submitted that the AO was in the possession of incriminating information that the assessee had availed accommodation loans at the time at the time the assessment of AY 2015-16 was completed. Hence the said incriminating information could also be used by the AO in the case of unabated assessment year as held by Hon‟ble Supreme Court in the case of Abhishar Buildwell P Ltd (454 ITR 212)(SC). In this regard, the Ld D.R placed his reliance on the following observations made by Hon‟ble Apex Court in paragraph 14(iii) of its order:- “in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume jurisdiction to assess or reassess the „total income‟ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns” Accordingly, the Ld D.R contended that incriminating information received in respect of accommodation loans shall constitute „other material‟ which could be used by the AO in the unabated assessment year 2015-16. Accordingly, he contended that the addition made by the AO u/s 68 of the Act was justified.

9.5. On the contrary, the Ld.AR submitted that the interpretation given by the Ld D.R is not in accordance with the ratio laid down by Hon‟ble Supreme Court in the case of Abhisar Buildwell P Ltd (supra). He submitted that the ratio of the decision rendered by Hon‟ble Supreme Court should be understood by reading entire order. He submitted that a careful reading of entire order passed by the Hon‟ble Supreme Court in the above said case would show that the Hon‟ble Apex Court has completely agreed with the decisions rendered by Hon‟ble Delhi High Court in the case of Kabul Chawla and by Hon‟ble Gujarat High Court in the case of Saumya Construction, wherein it has been clearly held that the addition in the case

10 Annapurna Properties, (Batch) of unabated assessment should be based on incriminating material found during the course of search conducted in the hands of the assessee. Further, the Hon‟ble Supreme Court has also held that the foundation for making assessment u/s 153A can be said to be existence of incriminating material showing undisclosed income detected as a result of search. Once an incriminating material relating to an unabated assessment year is found, then the AO assumes jurisdiction to assess or reassess “total income” of that year. The Ld A.R submitted that, under the erstwhile scheme of block assessments made u/s 158BA to 158BD of the Act, the AO was required to assess only the “undisclosed income” found during the course of search. However, under the present scheme of assessment u/s 153A of the Act, the AO is required to assess or reassess the „total income‟, which can be arrived at by adding the undisclosed income found during the course of search to the total income already assessed by the assessing officer. He submitted that the Hon‟ble Supreme Court has used the expression, viz., „other material available with the AO including the income declared in the returns‟ only to make it clear that the final total income of an unabated assessment year can be arrived by consolidating the undisclosed income and other income already known to the AO. Accordingly, he submitted that the AO could not get power to consider any other addition in the case of an unabated assessment year, which was not supported by the incriminating material found during the course of search conducted in the hands of the assessee. Accordingly, he submitted that the alleged incriminating information about accommodation loans cannot partake the character of „incriminating material‟ unearthed during the course of search.

9.6. We heard rival contentions and perused the record. There is no dispute with regard to the fact that the assessment years 2015-16 and 11 Annapurna Properties, (Batch) 2017-18 would fall under the category of „unabated assessment years‟. The law is now well settled that the AO can make any addition in an unabated assessment year only on the basis of any incriminating material found during the course of search conducted in the hands of the assessee. In this regard, we may take support of the decision rendered by the Hon‟ble Supreme Court in the case of Abhisar Buildwell P Ltd (supra).

9.7. Under the scheme of assessments to be made u/s 153A of the Act, we noticed that the “total income” has to be assessed or reassessed for each of the assessment years falling in the block. Under the erstwhile scheme covered by the provisions of sec.158BA to 158BD of the Act, only „undisclosed income‟ shall be assessed for the block period, while the assessment of regular income shall be carried out separately in the normal course. Hence, under the erstwhile scheme, there were two parallel assessments, viz., one regular assessment for assessing regular income of each of the year and second one for assessing the „undisclosed income‟ for the block period. This distinction between old scheme and new scheme was elaborately brought out by Hon‟ble Supreme Court in the above said case as under:- “9.1 That prior to insertion of Section 153A in the statute, the relevant provision for block assessment was under section 158BA of the Act, 1961. The erstwhile scheme of block assessment under section 158BA envisaged assessment of 'undisclosed income' for two reasons, firstly that there were two parallel assessments envisaged under the erstwhile regime, i.e., (i) block assessment under section 158BA to assess the 'undisclosed income' and (ii) regular assessment in accordance with the provisions of the Act to make assessment qua income other than undisclosed income. Secondly, that the 'undisclosed income' was chargeable to tax at a special rate of 60% under section 113 whereas income other than 'undisclosed income' was required to be assessed under regular assessment procedure and was taxable at normal rate. Therefore, section 153A came to be inserted and brought on the statute. Under Section 153A regime, the intention of the legislation was to do away with the scheme of two parallel assessments and tax the 'undisclosed' income too at the normal rate of tax as against any special rate. Thus, after introduction of Section 153A and in case of search, there

12 Annapurna Properties, (Batch) shall be block assessment for six years. Search assessments/block assessments under section 153A are triggered by conducting of a valid search under section 132 of the Act, 1961. The very purpose of search, which is a prerequisite/trigger for invoking the provisions of sections 153A/153C is detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in ordinary course of regular assessment. Thus, the foundation for making search assessments under sections 153A/153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of search.”

9.8. The scope of assessments to be framed u/s 153A/153C of the Act has been explained by Hon‟ble Delhi High Court in the case of Kabul Chawla (380 ITR 573)(Delhi) and by Hon‟ble Gujarat High Court in the case of Saumya Construction (387 ITR 529)(Guj). The Hon‟ble Supreme Court has approved the interpretations given by the Hon‟ble Delhi and Gujarat High Court in the above said cases. The relevant observations made by Hon‟ble Supreme Court are extracted below:- 7.1 In the case of Kabul Chawla (supra), the Delhi High Court, while considering the very issue and on interpretation of section 153A of the Act, 1961, has summarised the legal position as under: Summary of the legal position 38. On a conspectus of section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under section 132 of the Act, notice under section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six

13 Annapurna Properties, (Batch) years. In other words, there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e., those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment." 7.2 Thereafter in the case of Saumya Construction (supra), the Gujarat High Court, while referring the decision of the Delhi High Court in the case of Kabul Chawla (supra) and after considering the entire scheme of block assessment under section 153A of the Act, 1961, had held that in case of completed assessment/unabated assessment, in absence of any incriminating material, no additional can be made by the AO and the AO has no jurisdiction to re-open the completed assessment. In paragraphs 15 & 16, it is held as under: "15.On a plain reading of section 153A of the Act, it is evident that the trigger point for exercise of powers there under is a search under section 132 or a requisition under section 132A of the Act. Once a search or requisition is made, a mandate is cast upon the Assessing Officer to issue notice under section 153A of the Act to the person requiring him to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the 14 Annapurna Properties, (Batch) previous year in which such search is conducted or requisition is made and assess or reassess the same. Since the assessment under section 153A of the Act is linked with search and requisition under sections 132 and 132A of the Act, it is evident that the object of the section is to bring to tax the undisclosed income which is found during the course of or pursuant to the search or requisition. However, instead of the earlier regime of block assessment whereby; it was only the undisclosed income of the block period that was assessed, section 153A of the Act seeks to assess the total income for the assessment year, which is clear from the first proviso thereto which provides that the Assessing Officer shall assess or reassess the total income in respect of each assessment year, falling within such six assessment years. The second proviso makes the intention of the Legislature clear as the same provides that assessment or reassessment, if any, relating to the six assessment years referred to in the sub-section pending on the date of initiation of search under section 132 or requisition under section 132A, as the case may be, shall abate. Sub-section (2) of section 153A of the Act provides that if any proceeding or any order of assessment or reassessment made under sub-section (1) is annulled in appeal or any other legal provision, then the assessment or reassessment relating to any assessment year which had abated under the second proviso would stand revived. The proviso thereto says, that such revival shall cease to have effect if such order of annulment is set aside. Thus, any proceeding of assessment or reassessment falling within the, six assessment years prior to the search or requisition stands abated and the total income of the assessee is required to be determined under section 153A, of the Act. Similarly, sub-section (2) provides for revival of any assessment or reassessment which stood abated, if any proceeding or any order of assessment or reassessment made under section 153A of, the Act is annulled in appeal or any other proceeding.

The above said decisions rendered by Hon‟ble Delhi High Court and Hon‟ble Gujarat High Court bring out the proposition of law that the completed assessments (unabated assessments) can be interfered with only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. The Hon‟ble Supreme Court has approved the above said interpretation given by both the High Courts. 9.9. A careful reading of the decision rendered by the Hon‟ble Gujarat High Court in the case of Saumya Constructions(supra) would show that there are two aspects involved while framing assessment u/s 153A of the Act. One is making addition and another one is computing total income.

16 Annapurna Properties, (Batch) In case of an unabated assessment year, the Hon‟ble Gujarat High Court has made it clear that any addition or disallowance can be made only on the basis of material collected during the search or requisition. It was further held that, in case no incriminating material is found, as held by the Rajasthan High Court in the case of Jai Steel (India) v. Asst. CIT (36 taxmann.com 523), the earlier assessment would have to be reiterated. 9.10. The Hon‟ble Supreme Court has extracted the submissions made by the assessee in a tabular form in paragraph 4.1 of the order. A perusal of the same would show that the assessees have stated that the addition u/s 153A can be made only on the basis of any incriminating material found during the course of search. It is further contended that, if the AO was having any other information available with him or any other information was found from external sources, then the AO can use those information in a separate proceeding initiated u/s 147 of the Act or u/s 263 of the Act. 9.11. The Hon‟ble Supreme Court has again explained the scope of provisions of sec.153A of the Act in paragraph 11 and 12 of its order, wherein Hon‟ble Apex Court has again reiterated that the AO is required to compute „total income‟ u/s 153A of the Act. The relevant observations are extracted below:- “…..Therefore, the intention of the legislation seems to be that in case of search only the pending assessment/reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the 'total income' for the entire six years period/block assessment period. The intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search. Therefore, on true interpretation of Section 153A of the Act, 1961, in case of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the 'total income' taking into consideration the incriminating material collected during the search and other 17 Annapurna Properties, (Batch) material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income. However, in case during the search no incriminating material is found, in case of completed/unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147/48 of the Act, subject to fulfilment of the conditions mentioned in sections 147/148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case of block assessment under section 153A and in case of unabated/completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147/148 of the Act has to be saved, otherwise the Revenue would be left without remedy.

9.12. The above said discussions would show that the AO is entitled to make addition in an unabated assessment year only on the basis of 18 Annapurna Properties, (Batch) incriminating material found during the course of search conducted in the hands of an assessee. Once the undisclosed income is determined on the basis of said incriminating material in the case of an unabated assessment year; then the AO should proceed to determine the total income by making addition of undisclosed income to the total income already determined on the basis of return of income and other material. 9.13. The Ld D.R submitted that the assessing officer was in possession of information that the loans already taken by the assessee was only accommodation entries and the same would constitute „incriminating information‟. According to Ld D.R, the said incriminating information could be used by the AO while computing total income of unabated assessment year, viz., AY 2015-16, since the revenue has unearthed incriminating material relating to on-money receipts during the course of search conducted in the hands of the assessee. The Ld D.R also furnished a copy of report received from the assessing officer. However, on a perusal of the same, we notice that the AO has furnished following details:- (a) A brief note about M/s Span Group (b) Details of entities under M/s Span Group (c) Details of projects undertaken by M/s Span Group (d) Details of Unsecured loans taken by M/s Span Group and it is titled as “Accommodation entries in the form of Unsecured loans received by M/s Span Group”. (e) Copy of seized materials relating to on-money receipts. We notice that the incriminating materials, which were found during the course of search, were related to the on-money receipts only. We notice that the search team did not find any material to support the case of the 19 Annapurna Properties, (Batch) Revenue that the loans taken by the assessee were in the nature of accommodation entries. We noticed earlier that the AO has observed in the assessment order that the search action u/s 132 of the Act was undertaken in the hands of the group on the basis of pre-search information that the assessee group has availed accommodation entries in the form of loans. However, it is no where stated that the revenue could find any incriminating material during the course of search proceedings in order to support the above said view of the revenue/AO. Accordingly, in our view, that the AO has only entertained presumption that the loans taken by the assessee are in the nature of accommodation entries and further, the assessee would have paid equal amount of cash to the lender in order to get the loans through banking channels by way of accommodation entries. 9.14. First of all, the above said suspicion of the revenue cannot be termed as „incriminating information‟ as contended by the Ld.DR. Secondly, even if it is accepted as incriminating information, the same was not unearthed during the course of search conducted in the hands of the assessee. Thirdly, the said information would only trigger further investigation and hence it cannot be said to be concrete proof to show that the assessee has availed accommodation entries. Fourthly, as observed by the AO in the assessment order, the search itself was conducted on the basis of above said information, but the search did not bring out any incriminating material to support the view of the revenue that the loans taken by the assessee were in the nature of accommodation entries. Fifthly, it is not the case that the AO had already computed the total income earlier by making addition of loans/peak credit of loans. Accordingly, in our view, the AO could not have made any addition of the peak credit of loans in the unabated assessment years and hence the Ld DR was not correct in law in contending that there was incriminating information with the AO and the 20 Annapurna Properties, (Batch) same would constitute „other material‟, as mentioned in the order passed by the Hon‟ble Supreme Court in the case of Abhisar Buildwell P Ltd. (supra). 9.15. In view of the foregoing discussions, we are of the view that the AO was not correct in law in making addition of peak credit of loans in AYs. 2015-16 and 2017-18, being unabated assessment years, in the absence of any incriminating material found during the course of search conducted in the hands of the assessee. Accordingly, we set aside the order passed by the Ld CIT(A) on this issue in AY 2015-16 and 2017-18 and direct the AO to delete this addition made in these two years.