DCIT, BANGALORE vs. SRI. H. NAGARAJA, BANGALORE

1. This appeal by the revenue was disposed of by the Tribunal vide order dated 05.09.2014 for the assessment year 2008-09 and on appeal by the assessee, the Hon’ble High Court of Karnataka in of 2005 dated 08.02.2021 framed the following substantial questions of law:-

Accordingly the appeal was taken up for hearing. The primary contention of the ld. AR is that the grounds set aside by the Hon’ble High Court is with regard to ground Nos. 5 to 7 raised by the revenue in its appeal and the tax effect on this issue is less than Rs.50 lakhs which is covered by the CBDT Circular No.17 of 2019 dated 8.8.2019. As such, the revenue’s appeal is to be dismissed on the reason that the tax effect is below Rs.50 lakhs on this issue.

We have heard both the parties on this issue. On earlier occasion, the revenue came up in appeal before the Tribunal raising ground Nos.2 to 7 where the tax effect is more than Rs.50 lakhs. The tax effect in the whole appeal filed by the revenue is to be considered and not on the issue remitted by the High Court vide its judgment dated 8.2.2021 in of 2015. As such, there is no merit in the argument of the ld. AR that the tax effect is below Rs.50 lakhs in the revenue’s appeal. Accordingly, the primary objection of the ld. AR for the assessee is rejected.

The issue set aside by the High Court and remitted to the Tribunal in this appeal is limited to consideration of the applicability of Hon’ble Supreme Court judgment in the case of J.K. Industries Ltd. & Anr. v. UOI [2007] 13 SCC 673 / 297 ITR 176 (SC) with regard to assessee’s entitlement to the benefit of matching principle. In this judgment, the Hon’ble Supreme Court on the issue of matching principle has held as follows:-

It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS 22 is to reconcile the matching principle with the Fair Valuation Principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is done only by Accounting Standards and not by provisions of the Companies Act.”

Now let us understand the concept of matching principle. Matching principle is an accounting concept that dictates that assessee report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time. In other words, as per the matching principle, any expenses incurred must be recorded in the same period as related to the revenue. E.g., if the assessee declares bonus to be paid to its employees @ 5% of the revenues in one assessment year, the same to be provided in the books of account, though it was not actually paid by the assessee during the financial year relevant to the assessment year when the assessee took up the corresponding revenue/sales in the financial year. If the assessee declared bonus to the employees at a fixed percentage of sales and bonus has to be booked when the sales has been recorded in the books of account, though bonus was not paid by the assessee. Thus, the sales will be recorded and bonus also be accounted and shown as outstanding liability in the balance sheet of the assessee so as to disclose the true and fair view of the assessee’s position.

The brief facts of the case are that during the course of search proceedings on 6.1.2009, the assessee was asked to give the details of payments made for development works undertaken in respect of lands sold to Brigade Enterprises Ltd. In reply to question No.11 of his statement u/s. 132(4) recorded on 6.1.2009, the assessee sated that the development works were carried on by him through contractors and the total development expenses incurred amounted to Rs.20,87,471. When asked to produce the evidence for his claim for expenses on commission and development expenses, it was stated by him that the vouchers for the same would be submitted later and that he was not in a position to substantiate the development expenses incurred and voluntarily offered a sum of Rs.50,00,000 as his income for AY 2009-09. In reply to Q.No.23, the assessee admitted amount of Rs.50 lakhs as his income as he was not in a position to produce all the vouchers for development expenses. However, on perusal of return of income filed in response to notice u/s. 153A, it was noticed that the assessee has not offered the same for taxation. The AO proposed to treat Rs.50 lakhs as income and brought to tax in response to which the assessee vide his submission dated 14.10.2010 stated he has no objection in accepting Rs.50 lakhs as additional income

The assessee claimed development expenses of Rs.20,87,92,471 in respect of properties sold to M/s. Brigade Enterprises Pvt. Ltd. Since the assessee was not in a position to substantiate his claim, the AO proposed to disallow the entire amount to development expenses. There was no response from assessee and in one more opportunity provided, the assessee furnished the names and address of the party and their PANs. However, no bills and vouchers were produced. Subsequently the assessee filed a letter on 8.12.2010 admitting Rs.2,00,00,000 as additional income towards development expenditure and this declaration was made for the AY 2009-10. By another letter dated 9.12.2010 the assessee clarified that he has already declared Rs.50 lakhs for the AY 2008-09 and Rs.2,00,00,000 for AY 2009-10 in respect of development expenses. The AO accordingly treated these amounts as assessee’s undisclosed income and brought to tax Rs.50 lakhs for AY 2008-09 & Rs. 2 crores for AY 2009-10.

Regarding unexplained investments, during the course of search a list of properties belonging to Nagaraja was drawn and he was asked to prepare the cash flow statement and explain the sources of acquisition of various immovable properties. From the cash flow statements, it was found that investments totalling to Rs.1,21,36,580 for FY 2004-05 and Rs.1,10,00,000 for the FY 2007-08 were not taken into account. The assessee in reply to Q.No.6 explained that part of the payments had been sourced from the income earned from Ink Builders & Developers and partly from Sri Krishna Associates and Sri Krishna Properties. The AO noticed that there was cash deficit in relation to the assets for the FYs 2007-08 and 2004-05 to the tune of Rs.32,50,000 and Rs.58,61,779 respectively. The assessee did not have source to explain the source for Rs.58,61,779 for FY 2004-05 and admitted the same as undisclosed income for AY 2005-06. For the deficit of Rs.32,50,000 pertaining to investments in FY 2007-08, the assessee stated he has already admitted a sum of Rs.50,00,000 as his undisclosed income for the AY 2008-09 towards development expenses incurred on lands transferred to M/s. Brigade Enterprises which remained unsubstantiated and stated that this deficit of Rs.32,50,000 was part of that declaration.

The AO on perusal of return filed in response to notice u/s. 153A for AY 2005-06 observed that the assessee had not offered the amount of Rs.58,61,779 for taxation and as admitted by him in the statement u/s. 131 dated 27.4.2009, this amount was treated as undisclosed income and brought to tax for AY 2005-06. The AO observed that in reply to Q.No.7 in his statement u/s. 131 dated 27.4.2009, the assessee requested to treat the shortfall of Rs.32,50,000 relating to investments for FY 2007-09 as part of undisclosed income of Rs.50,00,000 as unsubstantiated development expenses for AY 2008-09. The AO noted that since the amount of Rs.50 lakhs has been expended on development of lands, this amount cannot be available for the assessee to invest in other assets and proposed to treat the amount of Rs.32,50,000 as investment from undisclosed source and brought to tax for AY 2008-09. The assessee vide letter dated 14.10.2010 agreed to offer both the amounts of Rs.58,61,779 and Rs.32,50,000 as undisclosed income for the AYs 2005-06 & 2008-09 respectively. Accordingly, the AO made an addition of Rs.32,50,000 on this count for AY 2008-09.

The AO noted from pages 45 to 51 of the seized materials marked A/HN/5, the assessee entered into agreement for purchase of a property with Shri L Gopalakirshna for a total consideration of Rs.1.22 crores. This property was registered in the name of assessee’s father Sri Hanumappa vide Sale Deed dated 26.2.2009 for a total consideration of Rs.1.22 crores. However, on a consideration of receipt by L. Gopalakrishna at page 44 of the seized material, it was noticed that the actual consideration paid by the assessee is Rs.1.56 crore. Further from pages 50 & 51 of the seized material, an amount of Rs.30 lakhs was paid by way of cash. The balance of Rs.30 lakhs was not disclosed in the Sale Deed. The assessee was called to explain the same.

The assessee submitted that out of total amount of Rs.1.56 crores paid for the property, an amount of Rs.30 lakhs has been paid out of the inflated expenses admitted for AY 2008-09. The AO was of the view that the admitted Rs.50 lakhs as additional income for AY 2008-09 on account of development expenses could not be substantiated by the assessee and further the assessee has also admitted RS.2 crores which was also not substantiated. On verification, the AO noticed that the assessee has shown the property under the head ‘advance for purchase of property’ and since the assessee’s claim is that the amount has been paid out of income offered as additional income for the assessment year, the AO allowed telescoping of the amount. However, since the assessee is engaged in in the business of purchase and sale of land, the assessee incurred the above expense for purchase of his stock-in-trade and since the assessee incurred the expenses exceeding Rs.20,000 and payment made otherwise than by account payee cheque or bank draft, the entire expenditure incurred of Rs.30 lakhs was disallowed and added back by the AO.

The CIT(Appeals) observed as follows:-

Now applying the matching principle to the assessee’s case, the contention of the ld. AR is that assessee voluntarily offered Rs.50 lakhs towards development expenses claimed by the assessee at Rs.20,87,92,471. As the assessee was not in a position to produce all the vouchers before the authorities and this income of Rs.50 lakhs as additional income over and above what has been reflected in the return of income for the 2008-09. The contention of the ld. AR is that the AO made further addition towards the unexplained investments at Rs.32,50,000 and Rs.30 lakhs on account of cash payments exceeding Rs.20,000. He submitted that on this count, the total addition amounts to Rs.112,50,000 which is incorrect and the assessee should get relief of telescoping of Rs.50 lakhs out of Rs.62,50,000 lakhs addition made by the AO and the net addition should be Rs.12,50,000 only. According to him, the matching principle to be applied on this issue.

The ld. DR submitted that each addition is independent and there is no co-relation to each other and all the additions made by the AO are to be sustained.

We have heard both the parties. There are 3 additions made by the AO as follows:-

As seen from the above, addition of Rs.50 lakhs is relating to non- production of vouchers towards development expenditure. The next addition is Rs.32,50,000 on the reason that there was investment of Rs.1,10,00,000 in the AY 2007-08 and the assessee was having source of only Rs.77,50,000 which was sourced as follows:-

The next addition was Rs.30 lakhs on account of cash payments exceeding Rs.20,000 otherwise than by cheque/DD. The assessee purchased a property for a consideration of Rs.1.56 crores from L. Gopalakrishna which is evident from the seized material. Out of this, the assessee paid a sum of Rs.30 lakhs by cash towards purchase of property to L. Gopalakrishna. Hence, the AO invoked the provisions of section 40A(3) of the Act and made addition.

As discussed above, all the three additions are mutually exclusive and not related to each other, as such the concept of matching principle cannot be applied to these additions as each addition is independent and distinct. Accordingly, the grounds 5 to 7 raised by the revenue in its appeal are allowed pro tanto.

In the result, the appeal by the revenue is allowed.