M/S ARGENT CONSTRUCTION,MUMBAI vs. DCIT, CENTRAL CIRCLE - 4(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

404/Mum/2019 M/s. Argent Constructions CIT(A)-52/IT-536/DCIT-CC 4(1)/2016-17 dated 31/12/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.153C r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 23/12/2016 by the ld. Dy. Commissioner of Income Tax, Central Circle- 4(1), Mumbai (hereinafter referred to as ld. AO).

As identical issues are involved in all these appeals, with the consent of both the parties, the appeal for A.Y.2011-12 is taken as the lead case and the decision rendered thereon would apply with equal force for other assessment years in respect of identical issues except with variance in figures.

2.1 The effective issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in granting deduction @50% of unaccounted on- money receipts on adhoc basis in the facts and circumstances of the instant case.

3.1. A statement on oath was recorded from Mr. Vipul Mangal, partner of the assessee firm u/s.132(4) of the Act at the time of search proceedings by the search party. In that sworn statement, the partner of the assessee firm had categorically stated that there was on-money receipts on sale of flats in the project carried out by the assessee and which were duly reflected in the seized documents found during the search. The said partner had also stated that in the very same seized documents, there were certain details of expenditures incurred by the assessee in the very same project carried out by the assessee which were also kept outside the books of accounts. Accordingly, the said partner had pleaded before the Search authorities that the net profit emanating out of such unaccounted transactions shall be offered to tax by him in the return filed in response to proceedings pursuant to search and survey. The relevant questions in this regard from the said sworn statement recorded u/s.132(4) of the Act from the partner of the assessee firm during the course of search proceedings are reproduced hereinbelow for the sake of convenience.

“Q.16. I am showing you Annexure-A-3, One planner of Extramarks written pages from 1 to 74 found and seized during the course of search proceedings u/s.132 from your black colour bag found in your bedroom at your residence on 26.02.2015. Please confirm the same and explain the contents thereof. Ans: Yes, I confirm the same. These are details of flat sales, cash received and cash expenses which is also available in soft copy in data backup. For eg. Pg no.24, sale consideration of Rs.125 lakhs is received out of which 20 lakhs is cash. Pg.33 Sale consideration of Rs.128 lakhs out of 23 lakhs is received in cash. “B” is abbreviation for Black and “W” is abbreviation is 404/Mum/2019 M/s. Argent Constructions for White. Total amount of cash received on sale of flats is Rs.9.75 crore which is not recorded in regular books of accounts. Now I am offering the same for taxation in respective A.Y.” “Q.No.22. Do you want to say anything else? Ans. As mentioned in answer no.16, against the amount of 9.75 crores received from sales of flats, Argent Constructions have incurred several expenses and hence, the net amount may be offered for taxation.” 3.2. We find from page Nos.63-69 of the paper book containing a letter dated 18/06/2015 addressed by assessee to the Investigation Wing, DDIT, Unit-2(1), Mumbai wherein it has been categorically stated by the assessee that on-money receipts on sale of flats was Rs.9,75,50,000/-, out of which Rs.6,01,09,970/- totally spent by the assessee for the purpose of construction of the project belonging to the assessee firm which are not recorded in the books of accounts of the assessee. The details of these expenses were duly listed out in the seized document diaries and assessee sought deduction for the same. In this regard, the assessee also filed the entire details together with the narration and the nature of payment and the name of the party to whom such payments were made together with the complete break-up with dates for the total unaccounted expenditure of Rs.6,01,09,970/-. Accordingly, the assessee offered for all the years put together unaccounted income as under:-

Gross receipts representing on-money on sale of flats - Rs.9,75,50,000/- Less unaccounted expenses used in Construction of the project belonging to the firm. Rs.6,01,09,970/- --------------------- Net unaccounted income offered to tax For all the years put together Rs.3,74,40,030/- ==========

404/Mum/2019 M/s. Argent Constructions 3.3. We find that the assessee had submitted that the said net income of Rs.3,74,40,030/- being the unaccounted income offered for all the years put together alone represented 38.38% of the gross unaccounted receipts. The main belief of the assessee is that the seized document in the form of diaries which contains details of unaccounted receipts on sale of flats as well as unaccounted expenses which were used for the purpose of assessee’s business should be considered in toto and benefit of deduction for the said expenditure be given. In support of this, the ld. AR placed reliance on various decisions. We find that the break-up offered by the assessee for various years are as under:-

A.Y. % Gross Receipts Expenses Net Income 2011-2012 10 9,755,000 6,010,997 3,744,003 2012-2013 17 16,583,500 10,218,695 6,364,805 2013-2014 23 22,436,500 13,825,293 8,611,207 2014-2015 22 21,461,000 13,224,193 8,236,807 2015-2016 28 27,314,000 16,830,792 10,483,208 TOTAL 97,550,000 60,109,970 37,440,030 3.4. The assessee had offered aforesaid income in the respective assessment years by filing returns to the search and survey.

3.5. We find that the assessee is following percentage of completion method in respect of its project and accordingly had offered the unaccounted receipts to the extent of work completed in the respective assessment years as tabulated above. There is absolutely no dispute with regard to the method of accounting followed by the assessee and the lower authorities have duly accepted the percentage of completion

404/Mum/2019 M/s. Argent Constructions method followed by the assessee in the instant cases. We find that the ld. AO observed that the expenses as detailed in the seized diaries are not proved to be meant for the purpose of business of construction in the assessee firm and accordingly denied deduction for the same and brought to tax only gross on-money receipts in the relevant years as under:-

Sr.No A.Y Returned Assessed Difference due Addition on Income Income to non- account of allowance of partners’ expenses capital contribution 1 2011-12 37,44,003 97,55,000 60,10,997 2,54,000 2 2012-13 63,64,805 1,65,83,500 1,02,18,695 3 2013-14 86,11,207 2,24,36,500 1,38,25,293 4 2014-15 82,36,807 2,14,61,000 1,32,24,193 5 2015-16 67,39,205 2,73,14,000 1,68,30,792 TOTAL 3,74,40,030 9,75,50,000 6,01,09,970 2,54,000 3.6. From the above table, it could be seen that for A.Y.2011-12 alone, the ld. AO had made further addition of Rs.2,54,000/- on account of partner’s capital contribution.

3.7. The ld. AO disregarded the claim of deduction towards expenses recorded in the seized diaries for the following reasons:- a) The assessee has not produced any documentary evidence to substantiate its claim of expenses.

404/Mum/2019 M/s. Argent Constructions b) On perusal of the list provided towards expenses incurred, the ld. AO observed that assessee has provided only the nature of expenses, or the name of the person to whom payments were made. Assessee has not furnished the full name of the persons to whom payments were made. c) In majority of the cases address of the persons and PAN were not provided by the assessee. d) In most of these cases, expenses were incurred in cash in excess of Rs.20,000/- thereby violating the provisions of Section 40A(3) of the Act. e) The claim of the assessee that the expenses reflected in the seized diary are in the nature of architecture fees, the stamp duty, made to tenants as compensation for eviction, electrification fees, court case expenses, brokerage, parking lot eviction expenses, land demarcation expenses, NOC from various regulatory departments, revalidation fees, marble expenses, furniture expenses, plumber expenses, substation charges, legal charges etc., cannot be believed as the same were not substantiated by the assessee.

3.8. We find that the assessee has also furnished the name and address of the parties together with the specific amounts paid to them and also mobile number of those parties before the ld. AO which are tabulated in pages 16 & 17 of the assessment order to the tune of Rs.500,06,930/- out of the total expenditure of Rs.601,09,970/-. No cross verification whatsoever was sought to be made by the ld. AO even in respect of details submitted by the assessee for Rs.500,06,930/-. Despite this fact, the ld. AO had resorted to disallow the entire expenditure reflected in the very same seized documents which contains the details of on-money

404/Mum/2019 M/s. Argent Constructions receipts which had been duly considered in the income offered by the assessee in the returns for the A.Yrs. 2011-12 to 2015-16.

3.9. Before the ld. CIT(A), the assessee had also made an additional claim of expenses of Rs.1,88,51,945/- representing additional claim of expenses which were omitted to be claimed before the ld. AO at the time of assessment proceedings. The assessee submitted before the ld. CIT(A) that the details of the said claim were also reflected in the same seized document Annexure A-3 in pages 42,44,46,48,50,52,54,56,58,60,62,64,66,68,70 & 71. Accordingly, the assessee pleaded for claim of fresh deduction in the sum of Rs.1,88,51,945/- before the ld. CIT(A).

3.10. We find that the ld. CIT(A) without getting into these intricate details of expenses which were corroborated with entries in the seized documents proceeded to allow deduction towards unaccounted expenses to the extent of 50% of gross receipts on adhoc basis and distributed the same to various years in accordance with percentage completion method followed by the assessee. The relevant observation of the ld. CIT(A) in this regard are reproduced herein for the sake of convenience:-

“6.11. From the decisions of the Hon‟ble High Courts cited above, it can be concluded that if the notings in the seized documents in respect of the unaccounted receipts are being considered to be true and considered while determining the undisclosed income of an assessee, the notings on the same seized documents in respect of the expenses are also required to be considered while determining its undisclosed income. It is also relevant to note that the unaccounted transactions are carried out primarily on trust and considering the inherit nature, the level of documentation is minimal. Therefore, it is not fair on the part of AO to insist on the complete details as well as documentation in respect of the said unaccounted cash expenses as held in the aforesaid two decisions of the Hon‟ble High Courts. Therefore, in principle, it is held that the AO should have allowed set off of the unaccounted cash expenses as per the notings on the seized documents.

404/Mum/2019 M/s. Argent Constructions

However, only those unaccounted cash expenses an be allowed as a deduction which relate to the said unaccounted on-money receipts of Rs.9,75,50,000/-. Also, such unaccounted cash expenses should be revenue in nature and also not prohibited by law. Moreover as per the matching principle only such unaccounted expenses can be allowed as a deduction where the corresponding receipts have been booked. 6.12. In course of the appellate proceedings, it was noted that the said total amount of unaccounted cash expenses of Rs.6,01,09,970/- also includes cash payment of Rs.50,00,000/- for buying land at Taloja which clearly cannot be allowed to be set off against the said on-money receipts. Further, the assessee itself in course of the appellate proceedings has quantified the payments which are prohibitied by law to be of Rs.10,50,000/- and the expenses of capital nature to be of Rs.1,00,000/-. Further, as mentioned earlier, it is a fact that the level of documentation in respect of the said unaccounted cash expenses is minimum and therefore, it is almost impossible to ascertain as to what portion of the said unaccounted expenses relate to (i) the project of „Silver Arch‟, (ii) is not capital in nature, (iii) not prohibited by law and (iv) whether the corresponding income as per matching principle has duly been accounted. In view of such a factual position, the profit on the said on-money receipts of Rs.9,75,50,000/- has to be reasonably estimated since the exact amount out of the said unaccounted expenses which can be allowed as a deduction while computing the undisclosed income of the assessee cannot be quantified. Moreover, once the undisclosed income is being determined in an estimation basis, the provisions of Section 40A(3) cannot be applied as held by the Hon‟ble High Courts in the cases of Smt. Santosh Jain (296 ITR 324) (P & H) and Banwari Lal Banshidhar (229 ITR 229) (All.) 6.13. On the issue of what should be the reasonable profit margin which should be applied, the assessee contends that the profit margin shown by it in its books of 19.97% is much higher than the margin shown in the construction industry where even margin of 8% is considered to be reasonable. It was further submitted that on the said on-money receipts of Rs.9,75,50,000/- it has offered a very high margin of 38.38% and therefore, the assessee contended that the action of the AO of making further additions, is not correct. These contentions of the assessee cannot be accepted since, the margin earned by an assessee is to be decided on a case-to-case basis. If an assessee has claimed the entire expenses related to its project in its books, in that case, the entire on-money receipts have to be considered while determining its undisclosed income. Further, if the component of on-money vis-à-vis the accounted / cheque receipt is higher, the profit embedded in the on-money component will be lower since more proportion of the on-money will be used for the unaccounted expenses as well as the regular expenses. In the instant case, the assessee itself has determined the net surplus/profit; to be of Rs.3,74,40,030/- @38.38% after considering the unaccounted cash

404/Mum/2019 M/s. Argent Constructions expenses in respect of the said on-money receipts. Moreover, as noted above primary verification itself revealed that the said unaccounted cash expenses of Rs.6,01,09,970/- includes expenditure of Rs.50,00,000/- related to some other project, expenses of Rs.10,50,000/- which are prohibited by law and expenses of Rs.1,00,000/- which are capital in nature. Moreover, as noted earlier, in terms of the matching principle, only that portion of such expenses can be allowed for which corresponding on-money receipts have been booked during the relevant year. Therefore, it will be fair and reasonable to estimate the profit in respect of the on-money receipts of Rs.9,75,50,000/-by applying a margin of 50% which will factor the non-allowable expenses out of the said unaccounted cash expenses of Rs.6,01,09,970/-. Accordingly, the profit of the assessee on the said on-money receipts works out to Rs.4,87,75,000/-. Since, only 10% of the project was incrementally completed during the relevant year, the profit for the relevant year is therefore, estimated at Rs.48,77,500/-“

3.11. It is not in dispute that the details of unaccounted expenses in the sum of Rs.6,01,09,970/- were part of the very same seized documents vide seized documents referred in Annexure-A3 which also contained details of on-money receipts to the tune of Rs.9,75,50,000/- for all the assessment years put together. It is trite law that the said seized documents should be considered in toto and the revenue cannot leave that part of the seized documents which is detrimental to it and consider only that part of the seized document which is favourable to it while framing the assessment. Reliance in this regard has been rightly placed by the ld. AR at the time of hearing on the following decisions:-

A] CIT vs Indeo Airways (P.) Ltd – 349 ITR 85 (Delhi High Court) B] CIT vs Damac Holdings (P.) Ltd – 401 ITR 495 (Kerala High Court) C] Chander Mohan Mehta vs ACIT – 71 ITD 245 (Pune Tribunal) D] DCIT vs Kanakia Hospitality (P.) Ltd – 179 ITD 1 (Mum Tribunal)

3.12. Hence, certainly deduction towards unaccounted expenses reflected in the very same seized documents need to be granted.

404/Mum/2019 M/s. Argent Constructions

However, what is relevant to be considered is whether those expenditure are revenue in nature, whether they are not personal in nature and allowable as deduction within the meaning of Section 37(1) of the Act. We find that the ld. CIT(A) had categorically observed that out of the total expenditure of Rs.6,01,09,970/-, the sum of Rs.50,00,000/- pertains to land at Taloja, which represents amount spent for some other project of the assessee and expenses of Rs.10,50,000/- which are prohibited by law and Rs.1,00,000/- which are capital in nature. There is a categorical finding to this effect in para 6.13 of the ld. CIT(A) as reproduced supra. Against this finding, the revenue is not in appeal before us. Hence, the various arguments made by the ld. DR by way of a separate tabulation in excel sheet sent to us in email which was also screen shared at the time of hearing by the ld. DR need to be looked into from the perspective of finding given by the ld. CIT(A) in his order which is not appealed by the revenue before us. We find that the ld. DR was trying to point out that assessee had incurred various expenses which are prohibited by law and the same is not restricted to Rs.10,50,000/- alone as mentioned in the order of the ld. CIT(A). We find that the ld. DR was trying to improve the case of the revenue before us which is not permissible as per law. Reliance in this regard is placed on the Special Bench of Mumbai Tribunal in the case of Mahindra and Mahindra Ltd., vs. DCIT reported in 2009-TIOL-255-ITAT-Mum-SB. In case if the revenue is aggrieved against a particular finding of the ld. CIT(A), the revenue should have preferred appeal before us or cross objections before us which was admittedly not done in the instant case. Hence, the finding given in this limited aspect in the order of the ld. CIT(A) need not be disturbed at this second appellate forum. We also find that assessee had also tried to match the total expenses to the tune

404/Mum/2019 M/s. Argent Constructions of Rs.5,00,06,930/- out of the total expenses of Rs.6,01,09,970/- by giving the name, address, mobile number, nature of payment of the parties for their respective amounts before the ld. AO itself. However, considering the fact that these are unaccounted expenses and all these unaccounted expenses could not be fully substantiated by the assessee with proper supporting documents and also considering the fact that assessee’s declared profit was 19.97% as per its regular books of accounts which is also categorically admitted by the ld. CIT(A) in page 25 of his order, we hold that the assessee would have made profit of 40% approximaterly on these unaccounted transactions by having the benefit in the form of huge cash discounts, huge savings in levy of indirect taxes, better negotiation of prices of materials due to cash purchases etc. Hence, we direct the ld. AO to add 40% of Rs.9,75,50,000/- (gross receipts) as the unaccounted income which has to be distributed to all the assessment years in accordance with the percentage of work competed by the assessee.

3.13. With regard to yet another observation made by the ld. AO with regard to applicability of provisions of Section 40A(3) of the Act are concerned in respect of unaccounted business expenses incurred in cash, we find admittedly that these are unaccounted transactions and hence, the same would have to be obviously incurred in cash and accordingly, the provisions of Section 40A(3) of the Act cannot be brought into operation at all. It is not the case of the revenue that the various expenses reflected in the seized documents are not meant for the purpose of assessee’s business other than the specific instances pointed out by the ld. CIT(A) in para 6.13 of his order such as expenses that are capital in nature, expenses which are prohibited by law and expenses that are relevant for the different project of the 404/Mum/2019 M/s. Argent Constructions assessee. Admittedly, the seized document contains unaccounted income as well as unaccounted expenditure both were duly transacted only in cash. Hence, the applicability of provisions of Section 40A(3) of the Act to the said payments would not serve the scheme of taxation and would ultimately result only ending up in taxing the entire unaccounted gross receipts alone without giving benefit of deduction to the assessee. This is certainly not the intention of the legislature and more so, the provisions of the Act. Accordingly, the grounds raised by the assessee in this regard for all the assessment years are partly allowed.

4.1. We have heard rival submissions and perused the materials available on record. We find that the partners of assessee firm have made capital contributions for an aggregate amount of Rs.1,00,09,000/-. It is not in dispute that assessee’s partner had categorically stated in the statement of oath recorded u/s.132(4) of the Act at the time of search that capital contribution in the assessee firm has been made out of on-money receipts on sale of flats. Hence, the source of capital contribution gets duly explained by the on- money receipts. We find that the assessee had offered on-money pertaining to A.Y.2011-12 at Rs.97,55,000/- and accordingly, the ld. AO had allowed telescoping of the same with capital contribution made by the assessee to that extent. This evidently led to a difference of Rs.2,54,000/- in capital contribution (Rs.1,00,09,000-97,55,000/-) which remain unexplained, which was sought to be added by the ld.

404/Mum/2019 M/s. Argent Constructions

AO. We find that the seized documents does not state the year of receipts of on-money by the assessee. In this regard, we hold that the benefit should be given to the assessee by holding that the on- money receipts that pertaining to the entire project were received by the assessee in the initial year itself and the said money is certainly available for making capital contribution into the assessee firm, irrespective of the fact that only part of the such on-money receipts has been offered to tax in A.Y.2011-12. What is to be seen is the availability of cash in the hands of the partner to make the capital contribution in the assessee firm which is explained by on-money receipts. Hence, we direct the ld. AO to delete the addition made in the sum of Rs.2,54,000/- being the deficit and unexplained capital contribution. Accordingly, the ground No.3 raised by the assessee is allowed.