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Before: Shri Sanjay Arora & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals), Salem, dated 29.01.2015 relevant to the assessment year 2004-05. 2. The assessee has raised the following grounds in her appeal: “1.1. The Commissioner of Income-Tax (Appeals) erred in not cancelling the assessment in toto as it had been passed in violation of the provisions of the Income- Tax Act and principles of natural justice. 1.2. The Commissioner of Income-Tax (Appeals) having found that all the documents sought by the Assessing Officer had been duly produced and even impounded; ought to have quashed the best judgment assessment. 1.3. The Commissioner of Income-Tax (Appeals) ought to have cancelled the assessment as no notice u/s. 143(2) was ever issued prior to the completion of assessment. 2.1 The Commissioner of Income-Tax (Appeals) erred in confirming and even in enhancing the addition towards cost of construction. 2.2 The Commissioner of Income-Tax (Appeals) having found that the provisions of Sec. 142A had not been followed ought to have cancelled the entire addition towards cost of construction. 2.3 The Commissioner of Income-Tax (Appeals) failed to note that the entire cost of constitution had been duly accounted for and all the sources had been duly explained not only during the assessment proceedings but also during the remand proceedings. 2.4 The Commissioner of Income-Tax (Appeals) erred in disposing of the grounds relating to cost of constitution in a summary manner I without application of mind to the various evidences submitted and the explanation offered. 3.1 The Commissioner of Income-Tax (Appeals) erred in sustaining a part of the interest disallowance in respect of loans from the appellant's relatives. 3.2 The Commissioner of Income-Tax (Appeals) failed to note that Son-in-law is not a relative as defined in Sec. 2(41) of the Income-Tax Act. 3.3 The Commissioner of Income-Tax (Appeals) also failed to note that 24% interest is not unreasonable and as such no portion of the interest is disallowable.”
3. Brief facts of the case are that the assessee is a partner in the firm M/s. Nandhi Dhall Mills. On 17.10.2003, there was a survey under section 133A of the Income Tax Act, 1961 [“Act” in short] was conducted in the business premises of the firm. During the course of survey, a sworn statement was recorded with regard to construction of new residential building. As the assessee has not filed the return of income for this assessment year within the due date, the Assessing Officer served notice under section 142(1) of the Act on 02.06.2005 calling for the return of income. But the assessee failed to comply with this notice. Hence another notice under section 142(1) of the Act, calling for details, was issued to her on 08.12.2005. But, the assessee had failed to comply with this notice also. Again, a fresh notice under section 142(1) of the Act was issued to the assessee on 10.11.2006, calling for details related to her income. But, she has failed to comply with that also. A summon under section 131 of the Act was issued to her on 29.11.2006 in order to verify the details with respect to construction. Against this summon, the assessee appeared before the Assessing Officer on 20.12.2006 and a sworn statement was recorded from her. The assessee produced books of accounts only on 21.12.2006. As the computerized book is very much required for verification of construction account, the same was impounded and an order under section 131(3) of the Act was passed and served on the assessee. Meanwhile, the assessee filed a return of income on 12.12.2006 admitting a total income of ₹.23,06,280/-. As this return of income was out of date as per the provisions of section 139 of the Act, the Assessing Officer has held that the return becomes non-est and hence the same has been lodged. Necessary details from the banks and benefit fund have also been gathered by the Department. By following various decisions of Courts, the Assessing Officer noted that the Assessing Officer can pass best judgement order under section 144 of the Act without giving any opportunities of being heard if the assessee fails to comply for the notice issued under section 142(1) of the Act. Accordingly, the Assessing Officer proceeded to conclude the assessment under section 144 of the Act on 29.12.2006 by making various additions.
The assessee carried the matter in appeal before the ld. CIT(A) and raised various grounds. After considering the submissions of the assessee and details filed by the assessee, the ld. CIT(A) partly allowed the appeal.
Against the order of the ld. CIT(A), the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has, by referring to the grounds of appeal, primarily challenged that without service of notice under section 143(2) of the Act even after filing of return of income on 12.12.2006, the assessment order passed under section 144 of the Act dated 29.12.2006 cannot be sustained under law and the same should be quashed.
On the other hand, the ld. DR has submitted that despite of service of notices under section 142(1) of the Act, the assessee has not filed her return of income within the period stipulated under the provisions of section 139 of vide letter dated 26.12.2006, but the assessee has not responded to this letter also. Therefore, the ld. DR has submitted that the assessee cannot question the validity of assessment order passed under section 144 of the Act.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. Admittedly, the assessee has not filed her return of income within the time stipulated under section 139 of the Act. Despite services of notice under section 142(1) of the Act, the assessee has not responded to file the return of income within the extended time limited permitted under section 139(5) of the Act. Therefore, the Assessing Officer issued summon under section 131 of the Act on 29.11.2006 in order to verify the details with respect to construction. Against this summon, the assessee appeared before the Assessing Officer on 20.12.2006 and a sworn statement was recorded from the assessee. Based on the impounded materials during the course of 133A survey conducted in the business premises of the firm, in which the assessee is one of the partners of the firm, an order under section 131(3) of the Act was passed and served on the assessee. Since the return of income filed by the assessee on 12.12.2006 is out of date as per the provisions of section 139 of the Act, the return becomes non-est and hence the same has been lodged. Before concluding the assessment under section 144 of the Act, as per the proviso to clause (c) to section 144 of the Act, the Assessing Officer gave an opportunity to file complete details with regard to investment in the residential building vide his letter dated 26.12.2006. However, the assessee has failed to reply to the letter dated 26.12.2006 and availed the final opportunity given to her. In view of the above, we are of the considered opinion that, after following all procedures, the Assessing Officer has rightly concluded the assessment under section 144 of the Act and thus, the ground raised by the assessee is dismissed.
The next ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in confirming and enhancing the addition towards cost of construction.
8.1 With regard to investment in the residential building, the assessee has stated that the total cost of construction incurred by her for the residential building in which she is residing was ₹.37 lakhs, whereas, as per the details gathered from the Central Bank of India, the assessee has filed estimate as well as completion certificate both were drawn by Shri R. Nagarajan, which shows that the cost of construction of the above residential building was ₹.48 lakhs. Without filing the building plan, etc., the valuation report drawn by the same engineer Shri R. Nagarajan and filed before the Assessing Officer shows only a sum of ₹.38,18,583/- without giving any details of expenditure incurred towards construction. The computer printout taken and endorsed by assessee’s husband Shri S.A. Kumar, during the course of survey, reveals that a sum of ₹.37,43,404/- was debited towards the new building expenses.
8.2 As per the books which were impounded by the Department during the course of survey under section 133A of the Act, the assessee has not shown any expenditure. It was noticed that the opening balance as on 01.04.2003 was ₹.77,60,189/- and there were entries from 01.04.2003 to 31.03.2004 for a sum of ₹.2,18,986.70. But, on 31.03.2004, there was an entry stating that the sum of ₹.2,18,986/- has been transferred to “New Building account”. Under “New Building Account”, the account was written for the period 01.04.2003 to 09.09.2003 and the closing balance shown was ₹.22,74,679/- including the sum of ₹.2,18,986/- being transferred from Building Account. The entry in the account of Nandhi Associates was from 10.11.2003 to 31.03.2004 and the total expenditure shown was ₹.18,21,933.50. When the assessee and her husband was asked to explain the above three accounts, during the deposition made on 20.12.2006 and 18.12.2006, they have stated that all the three account are related to the residential building and hence admitted that the total cost of construction of the residential building was ₹.40,96,619/-, which is exceeding the amount of ₹.37 lakhs, as stated during the course of survey. It was further noticed that the assessee and her husband has started the construction of new mill just opposite to this residential house.
8.3 As the assessee and her husband themselves admitted that the cost of construction of the residential building is around ₹. 40,96,619/-, their own valuer who had given the valuation report stating that the cost of building was ₹.48 lakhs, the books of account of the assessee has been rejected, as per the computer print out(annexure-IV)the cost of the building as on 17.10.2003 was ₹. 37,43,404/-, as per the Inspector report the valuation is around ₹.48,73,000/-, and as the assessee failed to tender any explanation, the Assessing Officer has adopted the value of the building at ₹.48,73,000/-.
8.4 The Assessing Officer found following deficiencies in the source for the construction;
(1) It is seen that in your books of account, you have not shown any of the expenditure. In the balance sheet also you have not shown this residential building, being in your name. (2) The source for the same was explained by you was a loan of ₹.18 lakhs from Central Bank of India and the rest had been drawn from your firm M/s. Nandhi Dhall Mill, in which you are a partner. (3) But on perusing the return of income and the entries in tile books of account, it is seen that you had not utilized the loan amount of Rs.18 lakhs as averred by you. (4) The above sum of ₹.18 lakhs had not passed to the firm M/s. Nandhi Dhal Mill. (5) In the firm books being produced and impounded, only a sum of ₹.22,74,678/- had been debited up to 31.03.04 in ledger “New Building House". (6) On perusing the details and the fact that you have stated that the new mill just opposite to your house in the month of November,2003 itself, and the entries shown under the head "Nandhi Associates", the sum of ₹.18,21,933/-should be considered as expenditure incurred towards the construction could not be considered as if the same was incurred for your residential building. (7) You have not produced any bills and vouchers in support of the construction of this residential building. All the above facts clearly reveal the fact that the assessee has already incurred entire expenditure towards the cost of construction with her own money and the said loan created above with the Central Bank of India was just to show as if the loan was taken for the construction. Thus, the assessee was asked to explain why a sum of ₹.25.99 lakhs should not be considered as income at her hands for this asst. year, as the source for the same had not been properly explained with any cogent evidences.
8.5 Since the assessee failed to file any reasons and in the absence of any explanation from the assessee, the Assessing Officer proceeded to assess the difference in the cost of construction based on the materials. On perusing the return of income as well as the books of account, the Assessing Officer has observed that though the assessee has availed a loan of ₹.18 lakhs from the Central Bank of India, she had not utilized the same towards the construction but shown as cash balance as on 31.03.2004. In view of the 22,74,678.51. As the assessee has failed to express any explanation for the source and the source for ₹.22,74,678.51 alone is established, the remaining amount of ₹.25,98,322/- with which the assessee had constructed the residential building was assessed as income in the hands of the assessee [as the source for that had not been explained]. However, as this construction was just adjacent to the old mill in existence and the assessee would have purchased the materials directly, 5% of the cost of the building is allowed for self-supervision. Accordingly the cost of the building was worked out to ₹.46,29,350/- (₹.48,73,000/- (-) ₹.2,43,650/-). As the source for ₹.22,74,678/- has been established, the remaining sum of ₹.23,54,672/- was assessed to tax as unexplained investment on the residential building.
Before the ld. CIT(A), the assessee has filed a detailed written submissions and the same was sent to the Assessing Officer for furnishing of report. Since the written submissions of the assessee was not supported by any cogent evidence with regard to the cost of construction admitted by the assessee and the assessee has not explained the basis for filing completion certificate before the Bank and the value estimated by the engineer was probable cost and not exhaustive estimate, the Assessing Officer, in his remand report recommended for enhancement of the assessment under section 251 of the Act.
After considering the remand report, submissions of the assessee and materials available on record, on verification of bank statement and the books of Nandhi Dall Mills, the ld. CIT(A) has observed that the Assessing Officer has ignored the facts that the bank loan was drawn and credited into Nandhi Dall Mills books even before the date of survey on 17.10.2013. Further, the ld. CIT(A) was of the opinion that the Assessing Officer has not referred the matter to the valuation cell for valuation of the building and merely adopted the valuation report of the Inspector was not correct. In the remand report, the Assessing Officer has dealt the issue on piecemeal method and not addressed it on total basis. In all the file figures of the valuation, the ld. CIT(A) was of the view that the valuation submitted to the Bank would be the most perfect value of the cost of construction of ₹.48 lakhs. By giving 7.5% relief for own supervision the ld. CIT(A) has determined the unexplained investment at ₹.33,00,458/- by enhancing the addition to the extent of ₹.9,45,786/-. In totality, the ld. CIT(A) has given relief to the extent of 7.5% towards self supervision. In many cases, the Tribunal has granted 10% towards self supervision to various assessees and accordingly, we enhance the same from 7.5% to 10% and thus, the addition enhanced by the ld. CIT(A) was reduced to ₹.8,25,786/-. The ground raised
by the assessee is partly allowed to the extent stated hereinabove.
11. The next ground raised in the appeal of the assessee is that the ld. CIT(A) has erred in sustaining a part of the interest disallowance in respect of loans from the assessee’s relatives. During the course of assessment proceedings, the Assessing Officer has noticed that the assessee has offered interest @ 20.8% to mother-in-law of the assessee and 24% to her son-in-law. In the absence of any explanation from assessee’s side, the Assessing Officer has restricted the interest to 12% as per section 40A(2)(b) of the Act. The contention of the assessee before the ld. CIT(A) was that the mother-in-law and son-in-law are not identified as relatives as per section 40A(2)(b) read with section 2(41) of the Act and should be allowed the rate of interest as claimed by the assessee. On perusal of the records, the Assessing Officer has not disputed the rate of interest of 18% p.a. from outside borrowals. By considering the submissions of the assessee, the ld. CIT(A) has magnanimously enhanced the rate of interest from 12% to 18% and we find no infirmity in the order passed by the ld. CIT(A) on this issue.