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Facts
The assessee firm engaged in civil construction filed a return of income for AY 2013-14 declaring NIL income. The case was reopened under Section 147 based on an audit objection comparing advance payment for land with work-in-progress (WIP), alleging escaped income. The AO added Rs. 2,08,05,352/- on account of unexplained investment.
Held
The Tribunal held that the Assessing Officer (AO) and the Commissioner of Income-Tax (Appeals) [CIT(A)] demonstrated ignorance of accounting principles. They misunderstood the separate accounting of advance for land and WIP. The AO's reassessment proceedings were based on a flawed understanding and incorrect comparison, making the assumption of jurisdiction bad in law.
Key Issues
Whether the reassessment proceedings under Section 147 were validly initiated based on a comparison of land advance and WIP, and if the addition made under Section 69 was justified.
Sections Cited
147, 148, 143(3), 69, 151, 2(40)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
The above appeal has been filed by the assessee against order passed by the Ld.Commissioner of Income-Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “ld.CIT(A)] dated 26.07.2024 under section 250 of the Income Tax Act, 1961 ("the Act" for short) dismissing the appeal of the assessee against the order of the Assessing Officer (AO) passed under section 147 of the Act pertaining to Assessment Year 2013-14.
2. As transpires from the orders of the authorities below, the case of the assessee was reopened and order passed u/s 147 of the Act on the ground that the income chargeable to tax had escaped assessment 2 on account of mismatch in the amount of advance against purchase of land and Work In Progress(WIP) reflected by the assessee. The assessee was engaged in the business of civil construction and originally, the assessee had filed its return of income for the impugned assessment year i.e. Asst.Year 2013-14, declaring total income at NIL. Thereafter the case of the assessee was selected for scrutiny assessment and order passed under section 143(3) of the Act by determining total income at NIL i.e. accepting the returned income filed by the assessee. Subsequently, notice under section 148 of the Act was issued to the assessee by the AO assuming jurisdiction to reopen the case of the assessee vide its notice dated 26.2.2014. The assesse was provided with copy of the reasons for reopening ,to which objection was filed by the assessee, which were disposed of by the AO by a speaking order, and thereafter after giving due opportunity of hearing to the assessee, the assessment framed on the assessee, and addition made to its income of Rs.2,08,05,352/- under section 69 of the Act on account of unexplained investment, being the difference in the figure of Advance for sale of land and WIP recorded by the assessee in its Books of accounts. The order of the AO was confirmed by the ld.CIT(A) in the appeal filed by the assessee before it.
3. The assessee before us, has raised grounds, both legal, challenging the validity of the assessment framed under section 147 of the Act, and also on the merits of the addition made in its case. The grounds raised by the assessee are as under:
1. That the Ld. CIT(A) has erred both in law and on facts as appeal dismissed without providing any opportunity of being heard to the appellant. Hence order of the Ld. CIT(A) is invalid itself on account of violation of principle of natural justice, needs to be set aside.
The reassessment proceedings initiated merely on account of audit objection wherein closing balance of WIP (Rs.7,32,45,648/-) is compared with advance payment for purchase of land (Rs. 9,40,51,0007-) and difference of both is treated as unexplained income of the appellant firm ignoring the fact that appellant has shown advance payment of land separately in books of account under the head advances and WIP did not include such advance payment, and both are two different head of account. Hence comparing two different accounting terms are like comparing apple with banana which shows incorrect observation of the Revenue Audit. Hence, initiation of reassessment proceedings merely on incorrect audit objection and without independent application of mind of the Ld.AO is bad in law which render the reassessment proceeding invalid itself.
The learned AO has no valid jurisdiction as re- assessment proceedings is initiated after four years of relevant assessment year without any finding of any failure on part of assessee to disclose fully and truly all material facts at time of original assessment u/s 143(3). Hence, reassessment proceedings initiated after expiry of four year is invalid itself.
4. The learned AO has erred both on facts and in law by initiating re- assessment proceedings u/s 147 of the Act, on account of change of opinion as during the original assessment proceedings detailed verification of WIP and advance payment of land is done by the then Ld. AO and duly accepted by him. Hence, initiation of reassessment proceedings on issue, which was part of the original assessment, is shows change of opinion of the Ld. AO, not allowable in the Act.
5. The learned AO has erred both on fact and in law by passing the assessment order u/s. 143(3) r.w.s 147 of the Act dt.30/11/2019, neither considered the material placed on record nor followed various judicial pronouncements including latest citation of Supreme Court and High Court in favour of the assessee on identical issue.
6. The learned AO has erred on both on the fact and in law by passing the assessment order u/s. 143(3) r.w.s 147 of the Act dt.30/11/2019, making unfair and frivolous additions which are not at all expected by the learned AO. The Ld. AO raised huge demand of Rs. 1,15,71,970/-by determining total income of Rs.2,08,05,352/- on account of unexplained investment u/s 69 of the Act, ignoring the fact that appellant has duly disclosed both WIP and advance payment in its Balance Sheet. Hence, unfair addition needs to be deleted.
We have heard both the parties. Copy of the reasons for reopening of the case of the assessee was placed before us at paper book page no.43-46 and the same are as under:
As is evident from a bare perusal of the same, the AO formed a belief of escapement of income, noting that, the records of the assessee revealed the assessee to have made advance payment for purchase of land amounting to Rs.9,40,51,000/-. But the work-in- progress shown by the assessee amounted to only Rs.7,32,45,648/-. Both these figures were noted to be recorded in the audited results of the assessee. As per the AO, the entire amount paid for the purpose of land ought to have been reflected in the WIP and since the assessee had not reflected the same, the difference of Rs. Rs.2,08,05,352/- (Rs.9,40,51,000/- minus Rs.7,32,45,648/-) needed to be added to the income of the assessee as unexplained investment. There is no iota of doubt from the bare reading of the reasons itself, that all these facts came to the notice of the AO from the audited results of the assessee, which formed part of the assessment record; that the assessee had reflected an amount of Rs.9,40,51,000/- as advance for the land and had shown Rs.7,32,45,648/- as WIP in its balance sheet itself. This 7 fact was also pointed out to us during the course of hearing before us by drawing our attention to the audited financial results of the assessee for the impugned year, i.e year ending 31-03-2013 relevant to A.Y 2013-14 the impugned year before us, placed at PB page no.132 to 153, more particularly, to page no.151 which reflected the balance sheet of the assessee for the impugned year, clearly showing the closing stock of WIP of Rs.7,32,45,648/- and advance recoverable on account of land of Rs.9,73,25,253/-.
Having noted the above facts, it is crystal clear that both the AO and the ld.CIT(A) are totally ignorant of the method of accounting /the basics of accounting. Without even going through the explanation, which was given by the assessee to the AO when filing objections to the reasons recorded, we can state that the AO and the ld.CIT(A) have completely misappreciated and misunderstood the entries made by the assessee with respect to both these items.
While the advances for land of Rs.9,40,51,000/- as per its terminology itself reveals, that Rs.9,40,51,000/- was paid by the assessee as advance for purchase of the land, and the land had not been registered in the name of the assessee as at the end of the year; that the land was not the asset of the assessee as at the close of the impugned year i.e. 31.3.2013 and the assessee had only made an advance payment for the same. Even the reasons recorded by the AO reveals this fact that while total consideration for the purchase of the land was Rs.12.00 crores, the assessee had paid advance of Rs.9,40,51,000/- during the impugned year, and the balance of Rs.2,08,05,352/- was paid in the succeeding year, when the purchase deed was registered in the name of the assessee. Therefore, clearly
As for the work-in-progress of Rs.7,32,45,648/-,the same had nothing to do with the advance paid of land. The said amount clearly reflected expenses incurred by the assessee during the year in its ongoing project which remained incomplete as at the close of the year. Both the advance for land and WIP have been reflected by the assessee separately as its assets in its balance sheet. Which means both have been separately accounted for and there is no connection between the same. Meaning thereby that land has not been included in WIP by the assessee but reflected separately as advance paid in its books, since it is not owned by the assessee admittedly.
The AO, however has completely misunderstood the accounting done by the assessee. The AO has believed the land still to be acquired by the assessee to form part of its WIP since he noted WIP to be short reflected as compared to amount paid by the assessee for land. And this led him to the absolutely wrong belief that WIP had not been completely reflected by the assessee and was short reflected to the extent of difference between advance for land and WIP. This he believed, therefore led to investment in WIP remaining unexplained to the extent of difference.
As noted above by us, this is complete ignorance on the part of the AO/CIT(A) of accounting. The assessee, we have noted from the facts recorded by the AO in his reasons itself, recorded all payments made for land in its Books as advance paid for land. There is no question of any amount relating to the said investment remaining unrecorded at all. Also, as noted by us, WIP has been separately recorded from land, and there is no question therefore of land forming 9 part of WIP. There is absolutely no correlation between advance paid for land and WIP, as wrongly understood by the AO/CIT(A). And therefore no question of any investment in WIP remaining unexplained on account of difference between the two, i.e WIP and advance paid for land.
The co-relation drawn by the AO between the two accounts is totally misguided. Therefore, we hold, there could not have been any escapement of income in the hands of the assessee on account of difference in the amounts for advances paid for the land and WIP on account of no co-relation between the two at all.
Further, we find that the assessee had explained this position to the AO in its objection raised to the reopening, pointing out the fact as stated above by us that the two amounts were totally separate and unrelated, with the advances for the land reflecting the advance payment made by the assessee for acquisition of land, which land was acquired by the assessee only in the subsequent year, and the WIP. The assessee had pointed out, that WIP related to the expenses incurred for the project being carried out by it, which had remained incomplete as at the end of the year, and which expenses stood recorded in its profit & loss account. The assessee’s explanation/objection dated 27.7.2019 in this regard to the notice is placed before us at PB Page no.42 to 49, more particularly, page no.40 as under:
11 12. Having stated so, we find that the AO while disposing of the objection of the assessee, has not dealt with the objection raised by the assessee on the merits of the case at all, and even the ld.CIT(A) has not cared to apply his mind to the submissions made by the assessee on the merits of the case. In fact, the ld.CIT(A) has passed order in 26 pages, of which barely one page contains his decision, while the rest is merely reproduction of the assessment order, and the written submissions of the assessee, and even in decision portion of the order, there is no discussion of the contentions of the assessee relating to the facts of the case, as noted by us above, which is evident from the ld.CIT(A)’s order at page no.25 of his order as under:
Decision : I have carefully considered the submission made by the appellant and perused the order passed u/s 143(3) r.w.s 147 of the Income Tax Act, 1961. I find during the course of assessment, in absence of satisfactory explanation and legal documents the AO could neither receive any proper explanation regarding not showing the full transaction amount as WIP in the year under consideration nor the appellant could assign any cogent reason for violating the consistency of maintaining the principle of mercantile system of accounting. Despite making payment of Rs. 9,40,51,000/- in the A.Y 2013-14 , how the appellant recognize only Rs. 7,32,45,648/- as its WIP in the said year, is not clearly established by the appellant. Accordingly I am inclined to concur with the observation and decision of the AO in as much as the appellant was unable to recognize the entire amount of payment of Rs. 9,40,51,000/- during the year under consideration . Therefore, I do not find any infirmity in the order of the AO and I am of opinion that AO's decision of invoking provision of section 69 of the IT Act is justified and in accordance with law . Accordingly the addition of Rs.2,08,05,352/-by invoking provision of section 69 of the I.T Act stand confirmed . In view of the above discussion the grounds no. 4 to 6 of the appellant are dismissed.
In view of the above, we have no hesitation in holding that the AO had no reason at all to believe escapement of income of the assessee. That the reasons recorded by the AO only reflect his 12 ignorance of accounting; that the facts on record reveal that the assessee had followed correct accounting practice, and advance for land reflected at Rs.9,40,51,000/- was merely an advance, no asset had been acquired by the assessee by way of land which is also the case of the Revenue; and in the absence of any asset being acquired, the same could not have been reflected in the WIP. There was absolutely no co-relation between the advance paid for land and the WIP as made out by the AO in his reasons recorded for reopening the case of the assessee. All facts relating to the issue were duly and correctly disclosed by the assessee. Therefore, on the merits the issue itself, the AO has been unable, we hold, to make out a case of escapement of income and the jurisdiction assumed, therefore, to reopen the case of the assessee fails miserably for this reason alone. That the jurisdiction therefore assumed by the AO for reopening the case of the assessee, we hold, is bad in law. The order passed by the AO therefore u/s 147 of the Act is liable to be quashed as invalidly passed
In the result, the appeal of the assessee is allowed in above terms.
Order pronounced in the Court on 7th March, 2025 at Ahmedabad.