Loading judgment…
Facts
The assessee, a builder and developer, sold residential flats and shops. The Assessing Officer (AO) reopened assessments for AYs 2008-09 to 2010-11, 2012-13, and 2013-14, alleging suppression of sale receipts due to variations in selling prices. The AO's additions were based on inferences drawn from a real estate website and an earlier assessment for AY 2011-12.
Held
The Tribunal held that the AO's reopening of assessments for AYs 2008-09 to 2010-11 was invalid as it was based on suspicion without tangible material and that the additions for AYs 2012-13 and 2013-14 were also not justified due to lack of credible evidence and incorrect estimation of profit.
Key Issues
Whether the reopening of assessment for AYs 2008-09 to 2010-11 was valid without tangible material? Whether the additions made for AYs 2012-13 and 2013-14 based on estimated profit were justified?
Sections Cited
148, 143(3), 143(1)
AI-generated summary — verify with the full judgment below
made in all these years are based on common set of facts. Hence, all these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
The assessments of AYs.2008-09 to 2010-11 were reopened by the AO by issuing notices u/s.148 of the Act. Hence, the assessee is challenging the validity of reopening of assessment in these three years. As noticed earlier, the addition made in all the five years are based on same set of facts and the assessee is also challenging the additions made by the AO in all the five years.
The facts relating to the case are discussed in brief. The assessee is a builder and developer. It developed an apartment complex titled as “Bhoomi Colossa” in Airoli Area of Navi Mumbai. The project consisted of 96 residential flats and 30 shops. The commencement certificate for the project was obtained on 13-09-2007 and occupation certificate was received on 24-10-2011. The assessee has sold the residential and commercial units during the financial years relevant to AYs.2008-09 to 2014-15. The construction took place from FY.2008-09 to FY.2012-13. The aggregate amount of construction cost was shown as Rs.52.83 crores by the assessee. The total area constructed in this project was 69912.65 sq. ft. Hence, the average cost of construction worked out to Rs.7557/- per sq.ft. The assessee had followed percentage completion method for offering profit from the above said project.
The status of assessments of various years is detailed below:- (a) The return of income filed by the assessee earlier for AY 2008- 09 was processed u/s 143(1) of the Act. The AO has reopened the assessment of this year and the reassessment order passed by him is under challenge in this appeal.
3 Anjali Bhoomi Developers, batch
(b) The returns of income filed for AY 2009-10 and 2010-11 were taken up for scrutiny earlier and the original assessments u/s 143(3) were completed, wherein no addition on account of project executed by the assessee was made. The AO has reopened the assessment of these two years and the reassessment orders passed by him are under challenge in these appeals. (c) The addition made in the original assessments framed for AY 2012-13 and 2013-14 are under challenge in these appeals.
The additions made by the AO in all these five years are based upon the observations made and view taken by the AO in AY.2011-12. In all these assessment orders, the AO also refers to the assessment order passed by him for AY.2011-12. We shall discuss in brief about the same. During the course of scrutiny proceedings relating to AY.2011-12, a detailed investigation was done by the AO with regard to the selling rate of the flats. The AO noticed that the selling rate of various flats was not uniform, i.e., there were wide variations in the sale price collected for the flats. The AO noticed that the minimum sale rate was Rs.3962/- per sq.ft and the maximum sale rate was Rs.8,390/- per sq.ft. He also noticed that the assessee had booked 22 flats for prices ranging from Rs.5,618/- to Rs.8,390/- per sq. ft during the period from 22-08-2007 to 01-09-2007. The assessee submitted various reasons for the variation in the sale prices. However, the AO was not convinced with those explanations. He referred to the reputed real estate website named www.magicbricks.com, wherein the prices trend in Airoli locality was shown. The website also mentioned about the price change in the past five years and it was around 20%. Accordingly, the AO took the view that the explanations given by the assessee for the variation in sale prices are general, non-specific and 4 Anjali Bhoomi Developers, batch without support of any documentary evidence. Accordingly, he rejected the explanations given by the assessee for the variation in the sale price of flats and rejected the book results also. In view of variation between the selling price, the AO drew inference that the assessee has taken sizable portion of sale proceeds in cash and did not account for the same. Accordingly, the AO determined the probable standard selling rate per sq.ft on some basis. Accordingly, the difference between the probable standard selling rate and the actual rate was considered by the AO as suppressed sale receipts, which have been received in cash and remained unaccounted. The AO determined unaccounted sale receipts at Rs.3,59,74,546/- in AY 2011-12 and added the same to the total income of the assessee in that year.
Based upon the observations made in AY.2011-12, the AO took the view that the income chargeable to tax has escaped assessment in AYs. 2008-09 to 2010-11 also. Accordingly, he issued notices u/s.148 of the Act in the Financial Year 2016 and reopened the assessments of those years. The assessee, vide its letter dated 26-07-2016, requested the AO to provide the reasons for reopening of assessments, which was supplied by the AO. The assessee filed objections to the reopening of assessments and the same was rejected by the AO. Thereafter, he rejected the books of the accounts also, as according to him, they do not reflect correct income. Accordingly, in each of these three years, the AO determined the probable standard sale rate and accordingly computed the unaccounted cash receipts as under:- AY.2008-09 - 88,48,167/- AY.2009-10 - 36,42,468/- AY.2010-11 - 96,23,266/-
5 Anjali Bhoomi Developers, batch However, the AO made the above said additions on “protective basis” in the above said three assessment years, since the above said amounts had already been included in the addition made by him in AY.2011-12. At that point of time, the assessments of AYs.2012-13 and 2013-14 were pending. On the very same reasoning, the AO added a sum of Rs.1,03,69,427/- in AY.2012-13 and Rs.40,47,580/- in AY 2013-14 in the original assessment proceedings.
The assessee filed appeals before the Ld.CIT(A) challenging the rejection of books of accounts; validity of reopening of assessments and the validity of additions made. The Ld.CIT(A) upheld the rejection of books of accounts. Though he did not discuss much on validity of reopening of assessments, it appears that he has rejected that ground also in AYs. 2008-09 to 2010-11.
With regard to the merits of additions made in respect of unaccounted cash receipts, the Ld.CIT(A) noticed that the additions have been made on the basis of assessment order passed for AY.2011-12. Further, the appeal filed by the assessee against the assessment order passed for AY.2011-12 has since been disposed of by the first appellate authority on 24-01-2018, i.e., after passing of the impugned assessment orders. In that appeal, the Ld.CIT(A) had accepted the contentions of the assessee that the addition of entire unaccounted sale proceeds should not be added and only the profit element embedded therein alone should be assessed. The relevant portion of the decision rendered by the Ld.CIT(A) in AY 2011-12 are extracted below:- “5.8 The appellant has stated that it is following the “percentage completion method” for this project and the accordingly profit from this project has been shown in several assessment years. In this respect a chart showing the profit appearing in respective assessment years along with the cost of construction was also submitted. The appellant has also submitted copies of return of income, computation of income,
6 Anjali Bhoomi Developers, batch profit and loss account and balance sheet for AYs 2008-09 to AY 2014- 15. Perusal of the appellant’s financials and the chart shows that all the flats/shops of the project were sold out by AY 2014-15. The total cumulative sales have been shown at Rs.52,00,06,515/- against which cumulative profit of Rs.5,62,05,289/- has been shown before interest to partners’ capital for AYs 2008-09 to AY 2014-15. However, it is seen that this cumulative profit of Rs.5,62,05,289/- includes indirect incomes by way of interest etc amounting to Rs.2,25,05,707/- which are not related to the construction and sale of flats/shops. The actual profit pertaining to the project, therefore, comes to Rs.3,36,99,582/- which translates into a GP rate of 6.48% only. I am of the considered opinion that the GP rate disclosed by the appellant is too low considering the appellant’s line and scale of business. The assessing officer is therefore directed to adopt the GP rate of 12% of the total sales which should reasonably cover the undisclosed income on account of unjustified variation in sale. This works out to Rs.6,24,00,781/-. Since the appellant has already disclosed profit of Rs.3,36,99,582/- (Rs.5,62,05,289 – 2,25,05,707) from the project in various assessment years, the differential amount of Rs.2,87,01,199/- is to be added back as the appellant’s income from the project. The appellant is stated to be following percentage completion method. This addition of Rs.2,87,01,199/- is to be apportioned in the ratio of revenue to be recognized (booking/sale) for each AY to the total sales of the project. The AO is directed to take remedial measures wherever applicable.”
Thus, the Ld.CIT(A) determined the profit element involved in the suppressed sale receipts at Rs.2,87,01,199/- and the same was directed to be apportioned in various years. The Ld.CIT(A) noticed that the above said order of Ld.CIT(A) passed in AY.2011-12 has been upheld by the ITAT, meaning thereby, the above said decision of the Ld.CIT(A) rendered in AY 2011-12 has attained finality. Accordingly, the Ld.CIT(A) directed the AO to follow the directions given by him in the above said order, in all the years under consideration, i.e., Rs.2,87,01,199/- should be apportioned in all the years in the ratio mentioned by the Ld.CIT(A) in AY 2011-12.
Aggrieved by the orders passed by the Ld.CIT(A) in all the years under consideration, the assessee has filed all these appeals.
7 Anjali Bhoomi Developers, batch ASSESSMENT YEARS 2008-09 TO 2010-11: 10. In AYs.2008-09 to 2010-11, the assessee is challenging the validity of reopening of assessment.
The Ld A.R submitted that the AO has reopened the assessments of these three years in 2016, i.e., after expiry of four years from the end of relevant assessment years. However, the AO has not brought any new tangible material to show that there was escapement of income in these three years. Further, the assessment of AY 2009-10 and 2010-11 were completed u/s 143(3) of the Act earlier and hence it is imperative for the AO to show that there was failure on the part of the assessee to disclose fully and truly all material facts in the original assessment proceedings. Further, the assessing officer has made addition on protective basis only, meaning thereby, he himself was not sure as to whether there was escapement of income in these three years. Accordingly, she submitted that the reopening of assessments of these three years was not valid.
We heard the parties on this legal issue. We noticed that the AO has reopened the assessments of these three years on the basis of assessment order passed by him for AY.2011-12, wherein the AO has “drawn inference” that the assessee has suppressed a part of sale receipts by accepting cash without accounting for the same. Thus, we notice that the addition made in assessment year 2011-12 was not based on any cogent material, but on inferences. If we refer to the appellate order passed by the Ld.CIT(A) in Asst. Year 2011-12, the Ld.CIT(A) has given a finding that the addition made by the assessing officer in that year included the alleged cash receipts in respect of flats sold/booked for the entire project, i.e., the addition made by the AO in AY 2011-12 has already included the alleged cash receipts in respect of entire project, I.e., including that related to the flats sold during the AY 2008-09 to 2010-11. In that case, we are unable
8 Anjali Bhoomi Developers, batch to understand as to how that AO could entertain a belief that there was any escapement of income in the years relevant to AYs.2008-09 to 2010-11. The fact that the AO could not have entertained such a belief is further fortified by the fact that the AO himself has made addition only on protective basis in these three years in the reopened assessments. Thus, in our view, it is very well established that the assessing officer did not entertain belief that there was escapement of income in these three years. In the absence of any reason to believe that there was escapement of income, we are of the view that the reopening of assessments of these three years is bad in law. Accordingly, we quash the orders passed by the tax authorities in these three years. ASSESSMENT YEARS 2012-13 & 2013-14: 13. We shall now take up the appeals filed for AYs.2012-13 and 2013-14. In these two years also, the AO has followed the methodology adopted in Asst. Year 2011-12 for determining the alleged unaccounted cash receipts. As noticed earlier, the AO made addition of Rs.1,03,69,427/- and Rs.40,47,580/- respectively in AY 2012-13 and 2013-14. The Ld.CIT(A) took the view that the profit element involved in the above said unaccounted receipts should alone be brought to tax. In AY 2011-12, the Ld.CIT(A) had determined profit on unaccounted cash receipts at Rs. Rs.2,87,01,199/- and held that this profit should be apportioned in all the years in the ratio as mentioned by the Ld.CIT(A) in AY.2011-12. The Ld.CIT(A) followed the said decision in these two years also and accordingly restricted the addition to the extent of proportionate profit. The assessee is still aggrieved.
The Ld A.R contended that the assessing officer did not have any credible material to come to the conclusion that the assessee had received part of sale consideration in cash and did not account for same. She
9 Anjali Bhoomi Developers, batch submitted that the AO has referred to the selling rate mentioned in the website of some real estate company and has come to the conclusion that the assessee has suppressed the sale receipts. Accordingly, she submitted that the AO has done a mere guess work. She submitted that the flats are sold by the assessee under a contract entered with the prospective buyer and selling rate is determined as per the negotiations taking place between the assessee and the prospective buyers. Further, it is a known fact that the selling price of flats cannot be uniform and it would depend upon various factors. She submitted that the assessee had explained various factors that would determine the selling rate before the AO. However, they were rejected by the AO observing them as too general in nature, but the fact that would remain is that the AO himself did not show how those reasons are not correct. On the contrary, the AO himself has just estimated the alleged suppressed receipts by adopting an uncorroborated standard rate. Thus he has also made a guess work only. The Ld A.R submitted that the addition can be made by the AO only on the basis of any credible material that would show suppression of receipts by the assessee. Accordingly, she submitted that the entire addition made in these two years should be deleted.
Without prejudice to the above contentions, the Ld A.R also challenged the estimate made by the Ld.CIT(A). She submitted that the Ld.CIT(A) has adopted the profit rate @ 12%, while, in various decisions of Tribunal and Hon’ble High Courts, profit rate of 8% has been considered to be appropriate in case of construction businesses. Further, the Ld.CIT(A) has excluded interest and miscellaneous income from the business profits without properly appreciating the facts relating to the same. If the rate of profit is reduced to 8% and further the interest & miscellaneous income are treated as part of business profits, then no addition is warranted in these two years.
10 Anjali Bhoomi Developers, batch
On the contrary, the Ld D.R submitted that the Ld.CIT(A) has determined the profit element involved in the unaccounted cash receipts in AY.2011-12 and the same has been directed to be apportioned between the assessment years 2008-09 to 2013-14 by taking remedial measures. The decision so rendered by the Ld.CIT(A) in AY.2011-12 has been upheld by the Tribunal in its order dated 27-09-2019 passed by the ITAT in ITA No.1760/Mum/2018. The decision rendered in AY.2011-12 by the Ld. CIT(A) has been followed by him in these two years also. Accordingly, the Ld D.R submitted that there is no reason to interfere with the decision rendered by the Ld.CIT(A) in these two years.
In the rejoinder, the Ld A.R submitted that the various contentions on legal issue and on facts raised by the assessee in these years have not been raised before the ITAT in AY.2011-12. Further, the principle of res- judicata will not apply to income tax proceedings. Accordingly, the Ld A.R submitted that the Tribunal may decide the issue in these two years duly considering the new contentions raised in these proceedings, without being influenced by the co-ordinate bench in AY 2011-12.
We heard rival contentions and perused the record. It is an admitted fact that the assessing officer did not have any credible material to support his conclusions that the assessee had collected part of sale consideration by way of cash without accounting for the same. We also notice that the AO did not conduct any enquiry with anyone including with any of the buyers of the flats to find out as to whether they had paid any money outside the books of accounts. We notice that the assessee has cited following factors are responsible for the variation in the selling price of flats:-
11 Anjali Bhoomi Developers, batch
(a) Size of flats/shops (b) Location of flats/shops, i.e., various rooms in the flat is as per vaastu, number of floors, on which floor flat is located, the shops are facing road or it is on the backside of the building etc. (c) Outside view from flats (d) Completion status of the project at the time/date of booking. (e) Financial status of the customer/payment conditions with the customers etc. (f) Business relation with the customer (g) Type of customer, i.e., whether the customer is investor or actual buyer. (h) Additional fittings/amenities asked by the customers (i) Superstition and sentiments of the customers, i.e., customers are agreed to pay higher price for the flat numbers whose total is say “4” of “7” etc. (j) Whether the sale transaction involves any middle man (broker) (k) Availability of flats/shops with our client. Also the prices depend upon the macro factors such as 12 Anjali Bhoomi Developers, batch (i) Financial requirement of the company/opportunity available with the company to invest the sale proceeds in some other projects. (ii) Funding availability of the company from banks/financial institutions/friends and relatives etc. (iii) Various market conditions related to real estate industry, overall demand and supply in the real estate industry. (iv) Economic development, i.e., recession in the market. (v) Funding norms/restrictions declared by various regulatory authorities with respect to funding of housing projects. Besides the above, the assessee has furnished specific reasons in respect of certain flats, where the variation in sale price was more than 25%. Those reasons have been extracted by Ld CIT(A) in his order passed for AY 2012-13 at pages 3 to 5 of his order. Those flats are flat nos. 2003, 2401, 2201, 1504, 2104, 2103, 2402, 1403, 1104, 2102, 2702, 301, 2404, 1304.
Thus, we notice that the assessee has given credible explanations for the variation in sale prices. Apart from explaining general factors influencing the sale price, the assessee has also given specific explanations with regard to certain flats. None of these explanations was found to be incorrect by the AO. As noticed earlier, the AO did not conduct any enquiry to prove that the above said explanations given by the assessee are false. The AO also did not conduct any enquiry with any of the buyers to substantiate his inference. He also did not bring any credible material on record to prove that the assessee had collected money from the prospective
13 Anjali Bhoomi Developers, batch buyers outside the books of accounts. We noticed that the AO has adopted a standard selling rate and accordingly determined the alleged unaccounted receipts. However, he did not discuss about the basis for arriving at such a standard selling price and the reason for treating the same as actual selling price. Accordingly, we find merit in the contentions of the assessee that the AO has done mere guess work for making the impugned additions.
There should not be any dispute that the sale of flats by the assessee is a business transaction and the selling price would be determined as per the negotiations taking place between the assessee and the prospective buyer. Thereafter a contract is entered between them for compliance of terms and conditions. Hence, it is a business decision reached between both the parties under the Contract, which included the selling prices of flats. In this kind of situation, the question arises is whether the tax authorities could disturb the contract so entered between the parties. It is well settled proposition that the tax authorities are not entitled to sit in the arm chair of a business man and regulate the manner of conducting the business. It is within the ambit of wisdom of a businessman. Hence, the selling price agreed between the parties could be disturbed by the AO, only if he is able to bring any credible material to show that the contract entered between the parties did not depict true terms and conditions including that relating to selling price of flats and that there was suppression of sale price.
In the instant case, we notice that the AO has made the additions on suspicion, surmises and conjectures. It is well settled proposition of law that the suspicion how so strong it may be, cannot replace the evidence. The Hon'ble Punjab & Haryana High Court in the case of CIT vs Jawaharlal Oswal and Others (I.T.A. No. 49 of 1999, Judgment delivered
14 Anjali Bhoomi Developers, batch on 29-01-2016) dismissed the Department's appeal by holding that suspicion and doubt may be the starting point of an investigation but cannot, at the final stage of assessment, take the place of relevant facts, particularly when deeming provision is sought to be invoked. “……..The revenue cannot draw an inference based upon suspicion or doubt or perceptions of culpability or on the quantum of the amount, involved. Any ambiguity or any ifs and buts in the material collected by the Assessing Officer must necessarily be read in favour of the assessee, particularly when the question is one of taxation, under a deeming provision. Thus, neither suspicion/doubt, nor the quantum shall determine the exercise of jurisdiction by the Assessing Officer....... It is true that inferences and presumptions are integral to an adjudicatory process but cannot by themselves be raised to the status of substantial evidence or evidence sufficient to raise an inference. A deeming provision, thus, enable the revenue to raise an inference against an assessee on the basis of tangible material and not on mere suspicion, conjectures or perceptions."
In the instant case, the reasons cited by the AO to disbelieve the sale value disclosed by the assessee are that there are huge variations in the sale prices and that such variation is not supported by the rates quoted in website of real estate companies. Thus, we notice that the AO has only drawn adverse inferences on the basis of suspicions, that too without addressing the explanations given by the assessee and further, without conducting any enquiry or bringing any material on record. Accordingly, we are of the view that the AO was not justified in making the impugned additions in both the years under consideration.
We notice that there is some obscurity in the determination of alleged unaccounted sale receipts also. We noticed that all these assessments have been framed on the basis of view taken/inference drawn by the AO in AY.2011-12. The Ld.CIT(A) has also followed the decision rendered by him in that year only. In AY.2011-12, the Ld.CIT(A) had held that the profit element alone should be assessed to tax and also 15 Anjali Bhoomi Developers, batch determined the suppressed profit for the entire project. He further held that the same should be spread over the years depending upon the booking/sale amount for each of the assessment year. This action of Ld. CIT(A) would show that the assessing officer had assessed entire amount of alleged suppressed sale receipts in AY.2011-12 itself, meaning thereby, the entire unaccounted receipts have been presumed to have been received by the assessee in the year relevant to AY.2011-12 itself. In that case, the question of apportionment of profit between various other years should not arise. Hence, the additions made by the AO in these two years would result in double addition, which is not permitted under the Act.
We noticed that the Ld.CIT(A), in these years, has followed the decision rendered by him in AY.2011-12. The Ld D.R submitted that the ITAT has also upheld the said decision of Ld CIT(A). However, in these two years, the Ld A.R raised following new contentions before us:- (a) The AO has made the addition only on suspicions and surmises without bringing any credible material on record. He did not conduct any enquiry even with the buyers of the flats. (b) The suspicion will not replace the actual evidence. The addition has been made only on inferences. (c) No enquiry was made by the AO to substantiate his views that the assessee has suppressed the sale receipts. (d) The Ld.CIT(A) has estimated the business profit at 12% of the gross receipts, while the normal rate of profit estimated in construction business is 8%. Further, he had excluded interest and miscellaneous income of Rs.2,25,05,707/- while computing business profits from the project without appreciating the fact that they form part of business profits. Accordingly, the Ld.CIT(A) has arrived at the 16 Anjali Bhoomi Developers, batch suppressed profit at Rs.2,87,01,199/-. It was submitted that the Ld. CIT(A) has omitted to consider the fact that the assessee has parked surplus funds on temporary basis with banks and earned interest income. Some deposits were made on some legal requirements. Hence the interest income and miscellaneous income should have been considered as business income only and the rate of profit should have been adopted @ 8%. In that case, the profit declared by the assessee would be more than 8% and hence no addition is warranted.
We notice from the order passed by the Tribunal for AY.2011-12 that there is no clarity as to whether the above said contentions were raised by the assessee before the Tribunal in that year. The order passed by the Tribunal in AY.2011-12 does not refer to any of the above said contentions. Since the assessee has raised various contentions both on legal points and on facts, it is imperative for us to consider them for arriving at just decision in accordance with law. We notice that the Hon’ble Delhi High Court has upheld adoption of net profit rate of 8% in construction business in the case of CIT vs. Subodh Gupta (ITA No.80/2014 dated 9th December, 2014. We notice that the ld CIT(A) has adopted the profit rate @ 12% without bringing any comparable case. Further, the contention of the assessee that the interest and miscellaneous income would form part of the business income has not been properly addressed by Ld CIT(A) in AY 2011-12. In our view, there is merit in the above said contentions of the assessee. It is settled proposition of law that the interest earned on temporary parking of surplus funds in fixed deposits with banks and other miscellaneous receipts arising out of carrying on business shall be assessed under the head “Income from business” only. Accordingly, if both these contentions of the assessee are 17 Anjali Bhoomi Developers, batch taken into consideration, there would be no requirement of making any addition in these two years in the facts discussed above.
Accordingly, we set aside the orders passed by the Ld.CIT(A) in AYs. 2012-13 and 2013-14 and direct the AO to delete the additions made by the AO in these two years. 26. In the result, all the appeals of the assessee are allowed.