ITO 25(1)(2), MUMBAI vs. SHREE KRISHNA CHAITANYA ENTERPRISES, MUMBAI

This is the appeal by the Revenue against the order of the CIT(A) dated 26.2.2014 for the AY 2010-11. There is no appeal by the assessee. Revenue raised nine grounds in toto and there are three main issues raised in them. The following are the said three issues and they are:

Assessee filed the NIL return of income recognizing the income in respect of the building named “Radha Govind” and after claiming the deduction of the said profits u/s 80IB(10) of the Act. However, in the assessment and based on the said Annexures A1 to A9, AO made addition of Rs 6,22,67,448/- as “the income not accounted for”. AO granted relief of Rs 42,52,267/- only out of the expenditure, being the cash payments below Rs 20,000/- (para 4.14 of the Assessment order). In other words, entire illegal payments or the payments exceeding Rs 20,000/- were disallowed in the assessment. This is the first addition and the contents of the para 4 and its sub-paragraphs are relevant.

Further, AO denied the claim of deduction u/s 80IB(10) in respect of the profits of the Radha Govind building of the project. Otherwise, the assessee reported the profits from the said building amounting to Rs 4,07,41,393/- and claimed deduction of entire profits under section 80IB(10) of the Act. The reasons include that two Flats of the said building namely Flat Nos. 901 and 902 had violated the specified area of 1000 sq ft. AO relied on the DVO‟s report in this regard. Further, these two Flats are owned by one person (para 5.3 are relevant). For the violation, AO denied the claim of deduction in respect of the entire profits of the Radha Govind building.

During the first appellate proceedings, CIT(A) deleted the aforesaid addition of Rs 6.23 cr and restricted the said addition to Rs 5,10,410/-. Further, FAA restored fully the claim of deduction u/s 80IB(10) of the Act in respect of the profits relatable to the Radha Govind building. Finally, CIT(A) deleted the addition of Rs 29,26,940/-. Aggrieved with the above deletion of additions, the Revenue is in appeal with the aforesaid issues mentioned in the first paragraph of this order. We shall now take up the arguments and the counter arguments of the parties and the decision of the Tribunal in the following paragraphs of this order.

Regarding the issue of deletion of addition of Bogus Purchases of Rs 29,26,940/-, last issue first, at the outset, Dr Shivram, Ld Counsel for the assessee submitted that the Tribunal has passed cretena of orders involving the similar issues of bogus purchases from the suppliers whose names figured on the website of the Sales tax Department, Maharashtra. Bringing our attention to the Bombay High Court Judgment in the case of Nikunj Eximp Enterpries P Ltd (372 ITR 619) (Bom) and Gujrath High Court Judgment in the case of CIT vs. Simit P Sheth [2013] (356 ITR 451) (Guj.), Ld Representatives of both parties submitted that given the cited judgments and other orders of the Tribunal, restriction of the addition to 12.5% of the said purchases would meet the both ends of justice. On hearing both the parties and perusing the orders of the Revenue, we are of the considered opinion that AO should be directed to restrict the addition to 12.5 % of the entire purchases of Rs 29,26,940/-. We order accordingly. In effect, this part of the issue raised by the Revenue is partly allowed.

Regarding the issue of reversal of decision of denial of deduction u/s 80IB(10) in respect of the profits relatable to the RADHA GOVIND building of the project, the limited dispute for adjudication by us relates to if the FAA is justified in allowing the said deduction when there is area and ownership violation, if any, of a couple of flats ie Flats No. 901 and 902 in the said building. On this issue, Ld CIT-DR is of the opinion AO‟s views are required to be upheld. Per contra, Ld AR for the assessee brought our attention to various binding judgments and submitted that the denial of deduction on proportionate basis would meet the requirements of the said judgments and the principles of the natural justice. Some of the said decision relevant 4 for the proposition of proportionate allowance of deduction includes Elegant Estates (383 ITR 49) (Bom); G V Corporation (38 SOT 174) (Mum. Trib); Nagarjun Homes (46 SOT 287) Hyd Trib etc. Further, notwithstanding the said argument, Ld Counsel also submitted that the provisions of clause (f) to section 80IB(10) of the Act are prospective in application and they will not apply to the building of Radha Govind under consideration. For this proposition, Ld Counsel for the assessee relied on the order of the Tribunal in case of Emgreen Holiday P Ltd (47 SOT 98) (Mum Trib) and Apex Court Judgment in the case of Veena Developers (277 ITR 392). At the end of the hearing proceedings, Ld Counsel submitted that there is no area violation and the report of the DVO supports to the assessee. Regarding ownership related violation, there are decisions to support the legal proposition that the provisions of said clause (f) are prospective qua the date of approval of the Housing project. After hearing the parties, on perusal of the orders of the Revenue Authorities and the paper books filed along with the written submissions, we are of the view that AO should be directed to examine the date of approval of the project in question and apply the said decisions on the said clause (Ex. Emgeen Holdings (P) Ltd (47 SOT 98) (Mumbai) (para 8 is relevant). Accordingly we order. AO shall grant reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, relevant grounds are partly allowed for statistical purposes.

The final issue for adjudication relates to the addition of Rs 6,22,67,448/- being the „unaccounted receipts‟ calculated from the impounded material in the form of Annexures A1 to A9. The basis of the said addition income is the entries in the diary (Annexure A1 to A4) maintained by the assessee. The contents in these Annexures (A1 to A4) suggest that the assessee had unaccounted receipts worth Rs 6,65,19,715/- and unaccounted expenditure of Rs 5,01,65,977/-. These expenditure include illegal payments of Rs 88,19,000/-. However, in the assessment and based on the said Annexures A1 to A9, AO made addition of Rs 6,22,67,448/- as “the income not accounted for”. AO granted relief of Rs 42,52,267/- only out of the expenditure, being the cash payments below Rs 20000/-(para 4.14 of the Assessment order). In other words, as stated above, entire illegal payments or the payments exceeding Rs 20,000 were disallowed in the assessment. However, the CIT(A) restricted the addition to Rs 5,10,410/-. The contents of para 5.1 deals with the reasons leading to such restriction. Relevant lines from the said para on page 31 of his order are extracted as under:

Before us, Ld CIT-DR for the Revenue relied heavily on the order of the AO and requested for reversing the order of the CIT(A). Further, Ld DR filed written submissions. However, on the issue of making multiple additions in the AYs 2009-10; 2010-11 and AY 2011- 12, Ld DR has nothing to contribute.

Per contra, Ld AR for the assessee mentioned that the similar addition made in the AY 2009-10 was deleted and the Department has accepted the said decision of the CIT(A). Therefore, the addition of an identical nature in this year of assessee should also meet the same fate. As such, the Revenue accepted the order of the CIT(A) for the AY 2009-10. Further drawing our attention to the chart showing the analysis of the entries in the impounded diary/documents during the survey action, Ld AR submitted that the CIT(A) gross receipts of Rs 6.65 cr pertains to all three buildings of the housing project. Building wise analysis shows that the unaccounted receipts of the three buildings namely Radha Govind, Radha Krishna and the Radh Madhav worked out to Rs 3.52 cr; Rs. 2.58 cr and Rs. 0.55 cr respectively. These receipts are spread over AYs 2006-07; 2008-09; 2009-10 and the current AY 2010-11. Referring to the unaccounted receipts for the current AY 2010-11, Ld Counsel submitted that the unaccounted receipts for all the three buildings including that of the Radha Govind amounts to Rs 1.03 cr ( Rs 32,43,750 + Rs 55,94,050 + Rs. 14,87,500). Similarly, the legal and illegal unaccounted expenditure relevant to the year under consideration are Rs 95.76 lakhs and Rs 22.82 lakhs respectively. It is the claim of the assessee that there is no building wise segregation of expenditure for the said sum of Rs 95.76 lakhs. Therefore, entire AY-specific on money of Rs 1.03 cr has to be considered against the said expenditure of Rs 95.76 lakhs while determining 6 the net on money of Rs 5,10,410/- for this year. Further, Ld AR also demonstrated that the said illegal payment of Rs 22.82 lakhs was not claimed as allowable expenditure in any form. Drawing out attention to the finding of the CIT(A) in restricting the addition to Rs 5,10,410/-, Ld Counsel explained that the CIT(A) taxed the AY specific gross all „on money‟ receipts of all the entire project with three buildings after deducting the all legal expenditure including the expenditure below Rs 20,000/-. Relying on various decisions of the binding judgments, Ld AR submitted that the AO cannot pick and choose when an assessment is made based on the impounded documents or diaries. Referring to the method of accounting also, Ld AR repeatedly asserted that the assessee follows Project Completion Method and therefore, the housing project since completed in AY 2011-12 only the sum offered during the survey action and discrepancies, if any, need to be taxed in that year only. Ld AR also argued that the AY 2010-11 is year of survey and not the year of completion of the „housing project‟. Therefore, Ld AR justified the order of the CIT(A) by stating that recognizing the income of the building „Radha Govind‟ which enjoys the benefits of section 80IB(10) of the Act does not make substantial difference as there is no tax implication and the entire profits of the building – Radha Govind are exempt from tax as per the said provisions. As such, according to Dr Shivram, Ld AR, any addition made on account of related business profits of the housing projects, is eligible for the benefits of the said deduction. In this regard, Ld AR relies on various binding judgments. Therefore, Ld AR argued stating that the CIT(A) has taken one possible view and the same is required to be confirmed in toto.

We heard both the parties, perused the orders of the revenue and the documents/written submissions filed by both the parties. Revenue is aggrieved against the deletion of the addition of Rs 6.23 crores, which was taxed by the AO being the “on money” earnings for entire project based on the said diaries/documents in the year AY 2010-11. AO did not reduce the legally allowable unaccounted expenditure mentioned in the said diaries. In fact, the assessee offered the adjusted on money in the year of the completion of the project ie AY 2011-12. In the AY 2009-10, AO made similar addition to as in the current AY and the CIT (A) deleted the same. The decision of the CIT (A) was accepted by the Revenue and revenue did not file appeal before the Tribunal. Therefore, the assessment for the 2009-10 has attained the finality. Of course, when it comes to the deduction of illegal expenditure out of the said on money receipts, there is no dispute and assessee does not intend to claim as allowable expenditure. Therefore, we need to decide if the AO was justified in making addition of entire „on money receipts‟ relating to the all the buildings of the project without granting set off to the entire unaccounted expenditure. In the current AY, the CIT(A) deleted the entire addition and 7 however, he sustained the addition to the extent of Rs 5,10,410/-. Deviating from the assessee and the AO, the CIT(A) considered the on money receipts earned during the current AY and granted the deduction of all unaccounted legal expenses of the year before confirming the addition of the said Rs 5,10,410/-. For deciding the correctness of the same, we need to examine the method of accounting followed by the assessee for this project and also the finalized decision on the similar addition for the AY 2009-10 etc. A. Method of accounting: It is the declared policy of the assessee to follow the „Project Completion method‟. The project consists of completion of all three building. Notwithstanding the said policy, during the survey action, the assessee offered to recognize the income relatable to the „Radha Govind‟ which is actually completed by that date. But for certain violation with reference to flat 901 and 902, it is eligible for deduction u/s 80IB(10) of the Act. He accordingly, quantified the related profits and claimed the said deduction. Of course, AO denied the said claim as in AY 2009-10. This issue is also the subject matter of the litigation in this appeal. After considering the facts and the judicial precedents relating the allowing of the proportionate deduction, as discussed above, we ordered the AO to grant the same and implement the said judicial orders. Therefore, in principle, the building – Radha Govind is an eligible one for deduction u/s 80IB(10). On the peculiar facts of this case and the commitments of the assessee during the survey action, assessee volunteered to disclose the profits of Radha Govind. Therefore, in principle, we approve the finding of the CIT(A) relating to deletion of receipts of Rs 6.26 crores and also the amended project completion method followed by the assessee. Assessee did not wait to offer the income of Radha Govind building in the year of completion. Rather, Assessee offered the same in the current year. He however, did not offer any income on account of relatable „on money‟. Therefore, regarding confirming of the addition of Rs 5,10,410/-, we find CIT(A) is not consistent with the recognized profits of the said Radha Madhav building. In quantifying the said sum of Rs 5,10,410/-, the CIT(A) considered the AY specific „on money receipts‟ and expenditure instead of building-wise unaccounted receipts/ expenditure. In our view, there is need for slight amendment to the order of the CIT (A) on this issue. We proceed to examine this part in the following paragraphs. B. Correctness of deletion of addition of entire On money Receipts of Rs 6.26 cr: We have discussed the relevant facts leading to the addition of Rs 6.26 cr before giving some deductions of expenditure not exceeding Rs 20,000/- based on the diaries/documents impounded during the survey action. In this connection, the dispute between the assessee and the revenue in our view revolves around the taxing of the entire on 8 money receipts of Rs 6.26 cr after deducting only the expenditure below Rs 20,000/-. Whereas, the CIT(A) and the assessee are for taxing of entire on money receipts minus all the legal expenditure and the amounts below to the said limit of Rs 20,000/- in the year of completion of the entire project in AY 2011-12. In the process, what has happened is that the assessee recognized the accounted profits in the year under consideration ie the year of completion of the building and not the project per se and the on money income in the year of completion of the project. This part of the approach of the assessee is not in tune with the method of recognizing the income. Therefore, as stated above and as argued by the Ld DR, the order of the CIT(A) needs correction to the extent that the entire income relatable to the Radha Govind both accounted and unaccounted income, needs to be taxed in the year under consideration. Therefore, in principle, we approve the finding of the CIT(A) in deleting such addition of Rs 6.65 cr. Therefore, we do not approve the addition of the entire on money receipts of Rs 6.65 cr made by the AOs repeatedly in AYs 2009-10 and 2010-11. C. Why to tax on money of two other building in this year?: Regarding the confirming of the addition of only Rs 5,10,410/-, as aggrieved by the revenue in the grounds, we find, the CIT(A) considered the sum of Rs 1.03 cr (Rs 32,43,750 of Radha Govind plus Rs 55,94,050/- of Radha Krishna plus Rs 14,87,500/- of Radha Madhav) ie the on money receipts relevant for all three buildings of this AY and reduced all the legal expenditure of Rs 95.76 lakhs plus other sum of Rs 2,39,110/- of this AY for arriving at the said net on money earned from 1.4.09 to date of survey of Rs 5,10,410/-. Why must the CIT(A) consider the on money receipts of the other two buildings in this year when their related accounted profits is offered to tax in the next AY , the year of completion of the project? In our view, such calculation is not proper for the reason the principle of offer of the building-specific-income is vitiated. The reason includes that the on-money receipts relatable to the other two buildings (Radha Krishna and Radha Madhav) whose income is not recognized in this year should be considered in the relevant year of completion of the said two buildings. In amended project completion method adopted by the assessee, it is not proper to tax any on money of the said two building in this year and the same should be in the year where relevant accounted money is offered to tax ie in the next year, the year of project completion. We order accordingly. D. Quantification of On money of Radha Govind building for taxing in the current year of income recognition: To elaborate further, the assessee recognized the profits of Radha Govind building in this year and therefore, we direct the AO to work out, with the help of the Assessee, the net on money relatable to the Radha Govind ie after deducting the 9 legal expenditure relatable to Radha Govind and tax the same in this year of recognizing the income of this sole building. If perfect and reliable working is not possible based on the diaries qua the legal expenditure relatable to this building, the AO may workout the said expenditure on proportionate basis ie proportion to the building wise on-money receipts. If the assessee offered any on money to tax relating to Radha Govind building in next AY, in compliance of the sworn statements, AO must grant corresponding relief in next year to avoid double taxation of same income twice. Thus, the principle is (i) whole of the income of the Radha Govind ( ie both accounted and unaccounted) needs to be tax in this year of income recognition and (ii) whole of the legal expenditure of the said building ( ie both accounted and unaccounted) based on the diaries needs to be allowed in favour of the assessee. AO cannot selectively ignore certain expenditure appearing on the impounded documents for any whimsical reasons. Now, we shall undertake to examine the deductibility of the “unaccounted profits” of the said building when the same were not audited by the Auditor and not filed in Form no 10CCB in the next paragraph. E. Whether the deduction available in respect of on money when the Audit Report does not cover the same? : Further, on the issue of allowing deduction u/s 80IB(10) of the Act in respect of such net on money specific to Radha Govind, we find there are binding judgments in favour of the assessee (Sheth Developers 254 CTR 127 (Bom)). However, there is procedural issues relating to Audit Report. As argued by the Ld DR, the said net on money if any of the building –Radha Govind is outside the Audit Report in Form 10CCB and thereby such on money income becomes ineligible for deduction u/s 80IB(10) of the Act for want of Audit Report. To the extent of such on money, there is no Audit Report. Assessee has not filed the revised Audit Report if any even before the appellate authorities. Therefore, relevant arguments of Ld AR are not approved fully. Further, we are aware about the existence of many helpful decisions on this issue in favour of the assessee and against the revenue. In principle, the deduction is allowable on such income. But the issue is existence of the Mandatory Audit Report covering the said on money receipts of this building. As such, CIT(A) has not given any categorical finding on this issue. Further, none of the decisions cited by the Ld AR has dealt with this issue of Audit Report. CIT (A) needs to adjudicate this part of the issue afresh after granting a reasonable opportunity of being heard to the assessee. the assessee may file revised audit report to perfect the deficiency and AO may consider the same before allowing the deduction. Accordingly, relevant grounds of the revenue are partly allowed for statistical purposes.