ACIT, NEW DELHI vs. M/S. EDUCOMP INFRASTRUCTURE & SCHOOL MANAGEMENT LTD., GURGAON

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ITA 6894/DEL/2015Status: DisposedITAT Delhi29 November 2019AY 2012-1332 pages

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Lalchand Bhagat Ambica Ram v. CIT
37 ITR 288 · 1959 · SC
570 citing

Income Tax Appellate Tribunal, DELHI BENCH: ‘B’, NEW DELHI

Before: SHRI SUDHANSHU SRIVASTAVA & SHRI O.P. KANT

For Appellant: Shri V.K. Aggarwal, AR, Ms. Shweta Bansal, CA

For Respondent: Shri G. Johnson, Sr.DR;, Shri V.K. Aggarwal, AR, Ms. Shweta Bansal, CA

Hearing: 03.09.2019Pronounced: 29.11.2019

ORDER PER O.P. KANT, AM:

These three appeals by the Revenue are directed against three separate orders dated 07/10/2015; 03/11/2015 and 10/11/2016 passed by the learned Commissioner of Income-tax (Appeals)-23 , New Delhi, for assessment years 2012-13 ; 2013-14 and 2014-15 respectively. As common issue in dispute permeating from same set of facts is involved in all the three appeals, same were heard together and disposed off by way of this common order for the sake of convenience and to avoid repetition of facts.

2. First we take up the appeal having 2012-13. The grounds raised

by the Revenue are reproduced as under:

1. The order of Ld. CIT(A) is not correct in law and on facts.

2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition made on account of disallowance of excessive depreciation of ^ 2,10,53,292/- claimed by the assessee company, by ignoring the admitted fact that the contractors who had constructed the building for the assessee company inflated the cost of construction and thereby increased the value of capital assets which had resulted in excessive claim of depreciation.

3. The appellant craves leave to add, amend any/all the ground of appeal before or during the course of hearing of the appeal.

Briefly stated facts of the case are that the assessee company is one of the group company of M/s Educomp Group and was incorporated on 02/09/2006. It was engaged in business of providing infrastructural facilities to educational institution of the Educomp group. A search and seizure action under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) was carried out on 18/08/2011 in the case of ‘Educomp Group’ including the assessee and its contractors. For the year under consideration, the assessee filed return of income on 29/09/2012 declaring total income of ₹ 4,58,60,417/-. The statutory notices for commencing scrutiny proceedings were issued and complied by the assessee. The Assessing Officer confronted the contents of seized material found during the course of such proceeding at the premises of M/s Educomp Group, including the assessee and its contractors. The Assessing Officer found that the assessee in its books of account has shown capital work-in-progress in respect of building construction, but its contractors, namely, M/s Jubilant Developers and Management Services Pvt. Ltd and M/s OSN Infrastructure and Project Ltd. has admitted claiming of bogus expenditure on building construction for the assessee without incurring actual expenses on construction. The Assessing officer has noted that aggregate amount of ₹ 75 Crores had been disclosed by those two contractors as their undisclosed income. The Assessing Officer has summarized the factual observation based on the seized material as under: “4. During the course of search action at the business premises of the assessee company situated at 308, Udyog Vihar, Phase-ll, Gurgaon, various documents were found and seized which insinuated that the assessee company has colluded with the various contractors to inflate the carrying cost of its capital assets through booking of inflated bills in their books of account. It was found that the employees of the assessee company were managing/supervising the affairs of the companies or business entities of its contractors to whom funds were given in the forms of advances for construction/development work.

3.1 Thus, according to the Assessing Officer, the assessee has claimed excess expenditure on construction of the building through these two contactors, and thus claimed excess capitalization of asset of building and consequently claimed excess depreciation on building, which the assessee was not entitled for. 3.2 The Assessing Officer issued a detailed show cause notice to the assessee, the reply of which has been reproduced by the Assessing Officer in the assessment order. The assessee explained that various advances are given to contractors on account of construction contract on a progressive basis and those contractors furnished the various running bills against which the payment was released by the assessee. Regarding booking of bogus bills by contactors and inflated cost of construction of the projects of the assessee, it was submitted that the assessee was neither aware nor colluded in their misdemeanors. It was explained by the assessee that none of the proceeds of their misdemeanors were either received or utilized by the assessee or the assessee is benefited in any manner from the acts or misdeed of their contactors. The assessee submitted that it had acted in the most bonafide manner and given the impugned advances under trust and cost of improvement/construction of its capital assets can neither be reduced not disturbed. Accordingly, the assessee claimed that no depreciation can be disallowed to the extent of such abortive expenditure in the case of the assessee company. The Assessing Officer rejected the contention of the assessee and asked the assessee to file details of bills raised by the above referred two contactors and the corresponding expenditure capitalised in books of accounts. On the basis of the details submitted, the Assessing Officer worked out excess depreciation of ₹ 2,10,53,292/- claimed by the assessee. The finding of the Assessing Officer reproduced in para 12 of the assessment order is extracted as under: “12. In view of the above, the capital cost of assets as mentioned in the financial results of the assessee company is in excess to the extent of Rs. 21,05,32,916/-. Therefore, a sum of Rs. 21,05,32,916/- is hereby reduced from the Written Down Value of the block of assets being 'Building' which is eligible for depreciation at the rate of 10% as per the Income Tax Act, 1961. Consequently, depreciation amounting to Rs. 2,10,53,292/- is hereby disallowed and added back to the income of the assessee for the F.Y. 2011-12 relevant to the A.Y. 2012-13. Since the assessee has furnished inaccurate particulars of its income, penalty proceedings u/s. 271(l)(c) of the Act is being separately initiated. (Addition: Rs. 2,10,53,292/-)”

3.3 On further appeal, the Ld. CIT(A) deleted the disallowance observing as under: “4.2.3 During the appellate proceedings it has been submitted that the directors of the contractors are different persons who are not related to the directors of the appellant company, and that the allegations of the AO that the activities of sub-contractors were being managed by the personnel of appellant is against the material on record, and that neither any document nor any evidence was found to establish the fact that the appellant had authorized its personnel to manage or supervise the affairs of subcontractors, nor any benefit in the form of salary or otherwise was derived by the personnel of the appellant from the contractors which may suggest in any manner that the operations of the sub-contractor companies were being used to inflate capital cost of assets. It has also been submitted that the total receipts offered by the sub-contractors is same as the cost of assets accounted for by the appellant and the appellant accounted for as the cost of assets the amount which was paid to the sub- contractors and it is not the case of the AO that the cost of assets is more than the expenditure incurred by the appellant, nor has the AO brought on record any material to establish that the cost of assets accounted for in the books of accounts is more than the expenditure incurred, and that the sub-contractors offered the inflated expenditure in their accounts as their income in their cases and they have been assessed accordingly, and therefore the question of alleged inflation of cost of assets by the appellant doesn’t arise. They have also submitted copies of their audited accounts for F.Ys. 2009-10, 2010-11 and 2011-12. It has been also submitted that the amount of Rs.147,51,91,619/- taken by the AO as the cumulative capitalization of assets by the appellant is incorrect in as much as it includes Rs.21,35,32,916/- related to work contracts given to companies/persons other than the above two contractors, and after reducing this' amount of Rs.213532916/- from the figure adopted by the AO, the balance amount is Rs,126,16,58,703/-. The date wise invoice amounts of which have been submitted, and is summarized hereunder:

In support of grounds raised, the Ld DR submitted that the learned CIT(A) has ignored the incriminating material referred by the Assessing Officer substantiating collusion of the employees of the assessee with the contractors and subcontractors. He submitted that it was found from the papers seized from the premises of the assessee that two of its employee ‘Sh. Shalabh Raizada’ , Senior Executive and ‘Brig. (retired) Vikram Singh’, Vice president of the assessee company, acted in the capacity of authorised signatory of those contractor companies. He submitted that the contractors has further subcontracted the work and computed the actual rate of the construction work, which is very small as compared to the payments made to those subcontractors and the contractors have accepted in their assessment, the receipt of the money by way of cash from those subcontractors. According to the Ld. DR, the documents seized in Annexures A-3, A-4, A-5 and A-8 seized from the premises of the assessee, wherein the actual low rate of the work is mentioned, clearly indicated that the assessee was aware of the actual rate of work and money which flowed back to the contractors. According to the learned DR, it is apparent that the money has actually routed back to the assessee as flow of cash back from the subcontractor to the contractor was within the knowledge of the assessee. In view of the learned Departmental Representative, it is against human probability that assessee would allow such bogus payment to the contractor knowingly that actual rate of the work is very low and money is routed back from the subcontractor to the contactor. Regarding the computation of the depreciation by the Ld. CIT(A), the learned DR submitted that in case of Jubilant Developers and Management Services Private Limited, the amount of excess capitalisation has been computed at ₹ 15 croress, whereas it should have been the amount of ₹ 25 crores, i.e., the amount which has been offered by the contactor as undisclosed income. The Ld. DR also filed copy of the assessment order in the case of two contractor companies.

We have heard rival submissions of the parties and perused the relevant material on record including the paper-book filed by the assessee. In the instant case, the assessee has filed balance sheet along with the details of fixed assets for the year ending on 31/03/2012, which are available on page 59 and 71 of the paper book containing 104 pages. According to the detail of fixed assets as per the books maintained by the assessee, building was having grass block value as on 31.03.2012 of ₹ 314,90,38,122/- and after claiming depreciation of ₹ 20,71,79,834/-, the net block of the building stood at ₹ 294,18,58,288/-. The assessee claimed depreciation on the capital cost of asset being building in the return of income filed as per the Income-tax provisions and rates prescribed in Income-tax Rules, 1962. Out of the depreciation claimed on building in the Income-tax Return, the Assessing ₹ Officer has disallowed depreciation to the extent of 2,10,53,292/-being depreciation on account of no assets created in respect of the contracts given to M/s OSN Infrastructure and Project Private Limited (in short ‘OSN’) and M/s Jubilant Developers and Management Services Private Limited ( in short ‘JDMS’) to the extent of amount accepted by them in the return of income as expenditure not incurred actually. Thus, the Assessing Officer has excluded out of cost of building, the amount which has been admitted by the two contractors as not actually incurred. In facts of the case, the issue in dispute is what should be the depreciation which the assessee should have been allowed. In terms of section 32 of the Act and Rule 5(1) of Income-tax Rules 1962, the deduction of depreciation is allowed on building owned, wholly or partly by the assessee , and used for the purposes of the business or profession at the rate of 10 % of the written down value of the capital asset of building. The term “written down value” has been defined in section 43(6) of the Act means in the case of assets acquired in the previous year, the actual cost to the assessee. The term “actual cost” has further been defined in section 43(1) as actual cost to the assessee deduced by the portion of the cost which has been met directly or indirectly by any other person or the authority. In the facts of the case, we have thus, to examine what is the actual cost in respect of the building, on which, the assessee has claimed depreciation. 6.1 Regarding the claim of Assessing Officer as no capital asset came into existence corresponding to the expenditure not incurred actually by those two contractors, the Assessing Officer in the case of OSN Infrastructure & Projects Pvt. Ltd. has brought on record the facts in details. For ready reference, the relevant part of the assessment order in the case of OSN Infrastructure & Projects Pvt. Ltd. for assessment years 2012-13 is reproduced as under: “5.1 Initially, survey action was conducted at the business premises of assessee company situated at 301/18, Udyog Vihar, Gurgaon. Various evidences were found and impounded which raised sufficient doubt about the genuineness of various expenditures claimed by the assessee company. It was also found during the course of search action at Educomp Group that one room at the premises situated at H 35/1, DLF Phase 1, being the office premises of Mr. Ashish Mittal, the advisor of the assessee company was also utilized by the assessee company for its business. Various incriminating documents were also found and seized from the said premises, the details of which are being narrated at length in the succeeding paragraphs of this order 5.2 In response to summons u/s. 131 of the Income Tax Act, statement of Sh. Sanjay Saini, D rector, M/s. OSN Infrastructure & Projects Pvt. Ltd. (OIPPLj was also recorded on oath on 25 08.2011 at the office of M/s. Educomp Solutions Limited situated at 514, Udyog Vihar, Phase-lll, Gurgaon. After detailed questioning and confrontation of various papers and events which occurred during the course of search/survey operations, he offered an undisclosed income of Rs.75 crores to tax, out of which Rs. 59.25 crores was offered to tax in the hands of the assessee company. Relevant extracts of his statement are as follows:

6.3 On perusal of the above finding in the case of OSN and JDMS, it is evident that OSN and JDMS in their books of account had shown receipt from the assessee and expenditure towards construction of the building for the assessee and claimed that they further paid to subcontractors for such construction expenditure by cheque. However, as a result of documents found and investigation during search and survey proceeding on the premises of Educomp group and those contractors, they admitted that no such construction work was actually done or value of such construction done was actually very less and the payment made to the subcontractors by way of cheque was returned back in cash to them. 6.4 In the case of the assessee, the Assessing Officer has observed that employees of the assessee Sh. Shalabh Raizada (Senior Executive) and Brig (retired) Vikram Singh (Vice President of the assessee company) has signed documents in the capacity of authorised signatory of those contractors, namely, OSN and JDMS. He also noted that the fact of actual value of the construction being less as compared to the value shown by contractors in their books of accounts as paid to the subcontractor and this fact was within the knowledge of the assessee. Based on these facts, the Assessing Officer concluded that the assessee was in collusion with the contractors for artificially raised or inflating capital cost of the building in order to claim enhanced depreciation. 6.5 The assessee on the other hand submitted that there is no evidence on record that assessee authorised its personal to manage or supervise the affairs of the contractor and no benefit in the form of salary or otherwise derived by the personnel of the assessee from said contactors. In our opinion, the personnel of the assessee shall not act for the contractors in their own sweet will without any remuneration by the contractors and they can act without remuneration only on the implied direction of the assessee for managing the entire game of claiming excess depreciation for reducing the tax liability of the assessee. When documentary evidence of managing affairs of the contractor by the personnel of the assessee are found during search action and the Assessing Officer duly notified the assessee regarding those evidences to suggest that the assessee has acted in collusion with the contractors for enhancing cost of construction of the building, the onus was on the assessee to produce those personnel before the Assessing Officer to bring the truth as on whose direction they signed document as authorised signatory of the contactors. The assessee has failed to discharge its onus and cannot shift the burden on the Revenue that no document authorising those persons to manage the affairs of the contractor was found during the course of the search. The assessee contended that the cost of the assets accounted for in the books of account of the assessee is not more than the receipt offered by the contractors in their books of accounts. This argument is also of no help to the assessee, as the contactors have already accepted the fact of obtaining bogus bills from the subcontractors and routing of the money back in the form of cash, without doing actual work or doing work less than billed for. 6.6 In view of the above factual observations, it is beyond doubt that the relevant capital asset in the form of the building of the assessee corresponding to the expenditure not incurred actually by those two contractors mentioned above, did not come into existence and thus the assessee cannot be entitled for depreciation in respect of the capital asset which has never come into existence. The bills raised by the contractors on the assessee are inflated one and not of actual amount of the work done for the assessee. Consequently, the cost debited by the assessee in respect of the building, which has been capitalized is inflated and not the actual cost. The reliance placed by the Ld. counsel of the assessee in the case of M/s SSIPL Luxury Fashion Private Limited (supra) and Discovery Estate Private Limited (supra) is of no assistance as facts and circumstances of those case are different from the case of the assessee. In the case of SSIPL Luxury Fashion Private Limited (supra) a particular receipt was already taxed in the hands of the holding company and thus the assessee contested that it should not be taxed in the hands of the assessee, whereas the learned DR contested that receipt should be taxed in the hands of the correct person. The Tribunal held that same income cannot be taxed twice unless so provided in the Act. In the case of discovery Estate Private Limited (supra) , the observation of the Hon’ble High Court are regarding that no addition should be made on the basis of the suspicion or surmises or by taking note of notorious practice prevailing in that trade circles. The relevant paragraph of the decision of the Hon’ble Delhi High Court in the case of Discovery Estate Private Limited (supra) is reproduced as under: “17. It only remains for us to refer to the observations of the assessing officer to the effect that no one makes a loss in real estate business and that the market perceptions indicate that the prices of the immoveable properties are always on the upward trend. These observations have, inter alia, formed the basis of the additions made by the assessing officer. It was even suggested before us on behalf of the revenue that it is a "notorious practice" prevailing in real estate circles that in all property transactions there is non-disclosure of the Tull consideration. As pointed out earlier, this cannot per se constitute the basis of the addition, though we must hasten to add that it can very well be a starting point for further investigation. In Lalchand Bhagat Ambica Ram vs. CIT: (1959) 37 ITR 288, the Supreme Court disapproved the practice of making additions in the assessment on mere suspicion and surmises or by taking note of the "notorious practice" prevailing in trade circles. It was observed as under: "Adverting to the various probabilities which weighed with the Income-tax Officer we may observe that the notoriety for smuggling food grains and other commodities to Bengal by country boats acquired by Sahibgunj and the notoriety achieved by Dhulian as a great receiving centre for such commodities were merely a background of suspicion and the appellant could not be tarred with the same brush as every arhatdar and grain merchant who might have been indulging in smuggling operations, without an iota of evidence in that behalf."