ACIT 25(2), MUMBAI vs. SAHAKAR DEVELOPERS, MUMBAI

We shall first take up the appeal of revenue and cross objection of the assessee filed for AY 2003-04. The assessee herein belongs to Gangar Group. The assessee is engaged in the business of builders and developers. A survey operation u/s 133A of the Act was conducted in the premises of Gangar Group. During the course of survey proceedings, incriminating documents reflecting details of cash transactions of various concerns, details of on-money receipts against sale of flats & shops in various projects executed by the assessee’s group were found. At the conclusion of survey, the group agreed to offer additional income of Rs.5.00 crores in the hands of various concerns of the group.

Subsequently the assessee’s group including the assessee herein filed settlement application u/s 245C of the Act before the Settlement Commission. The assessee filed settlement application for AY 2005-06. The assessee also filed petitions u/s 245E of the Act with a request to the Settlement Commission to reopen the assessment of AY 2003-04 and 2006-07 also. The Settlement Commission admitted the application filed for AY 2005-06 and rejected the application filed u/s 245E of the Act for other years. For AY 2003-04, the assessee had offered additional income of Rs.20,00,000/-.

Based on the information obtained from the Settlement application filed by the assessee, the AO reopened the assessment of AY 2003-04. The AO assessed the above said sum of Rs.20.00 lakhs declared in the settlement application as income of the assessee. The AO also noticed that the materials impounded during the course of survey operations disclosed that the assessee has made payments by way of cash to certain suppliers. The payments so made aggregated to Rs.41,95,100/-. The assessee explained that the cash payments reflect money paid to the suppliers to enable them to supply materials without any interruption. It was submitted that the assessee would pay the cheque subsequently, upon receipt of sufficient bank balance, to the suppliers and would receive back the cash. It was submitted that book balance of cash available in various concerns were used for such kind of rotation on short term basis. The AO did not accept the said explanations and assessed the above said amount of Rs.41,95,100/- also.

The Ld CIT(A) confirmed the addition of Rs.20.00 lakhs and deleted the addition of Rs.41,95,100/-. The revenue is aggrieved by the decision of Ld CIT(A) in granting relief to the assessee. The assessee has filed Cross objection to support the order passed by Ld CIT(A).

We have heard the parties and perused the record. We notice that the Ld CIT(A) has deleted the addition with the following observations:-

The Ld A.R submitted that the assessee has been following project completion method for offering income. He submitted that the sale of flats has started only in AY 2005-06. Inviting our attention to the order passed by Settlement Commission for AY 2005-06, the Ld A.R submitted that the Settlement Commission has taken note of on-money receipts and agreed with the contention of the assessee that there is no case for taxing entire on-money. Accordingly the Settlement Commission has estimated income out of the on- money receipts, meaning thereby, the deduction for unaccounted expenditure, if any, has already been granted by the Settlement Commission. He submitted that income estimated by the Settlement Commission for Ay 2005-06 includes the expenditure incurred on the project till that year which would cover impugned payments also. The Ld A.R submitted that the Ld CIT(A), upon examination of ledger accounts, has accepted the explanations of the assessee that it was constrained to rotate the cash balance available with the group out of business expediency. However the payments have actually been made by way of cheques subsequently. Accordingly he submitted that the Ld CIT(A) was justified in deleting the addition of Rs.41,95,100/- made by the AO.

On the contrary, the Ld D.R supported the order passed by the assessing officer.

Having heard rival submissions, we are of the view that there is no reason to interfere with the order passed by Ld CIT(A). We notice that the Ld CIT(A) has given finding that the explanations of the assessee about temporary rotation of ITA N0.6235, 6236/M/12 & 7529/M/13 & C.O. 265 & 266/M/13 Ms. Sahakar Developers. funds are supported by the ledger accounts. Further, the Ld A.R has submitted that the income from the project in respect of on-money receipts has been estimated by the Hon’ble Settlement Commission, which would cover, the unaccounted expenditure, if any. The Ld A.R also submitted that the sale of flats has commenced only in AY 2005-06 and the Settlement Commission has estimated the income of that year. Accordingly we confirm the order passed by Ld CIT(A) and reject the appeal filed by the revenue.

The assessee has filed C.O only to support the order passed by Ld CIT(A). Hence the same does not require adjudication.

We shall now take up the appeal filed by the revenue for AY 2006-07. The assessee did not respond to the notices issued by the AO during the course of assessment proceedings of the above said year. Since the assessee had accepted receipt of on-money to be in the range of 40% – 55% before the Settlement Commission, the AO estimated the on-money receipts at Rs.1,19,87,810/- and assessed the same as income of the assessee.

The Ld CIT(A) noticed that the issue relating to receipt of on-money was adjudicated by the Settlement Commission in AY 2005-06 in the hands of the assessee and the Settlement Commission has worked out net profit @ 17% of the on-money receipts. It is pertinent to note that the Settlement Commission had agreed with the contentions of the assessee that only the income element included in the on-money receipts can be assessed to tax. Accordingly the assessee pleaded before Ld CIT(A) that the entire amount of on-money receipts cannot be assessed, but only the income included therein can be assessed. The assessee also placed reliance on the decision rendered by the co-ordinate bench in the case of Pranav Construction Co. Vs. ACIT (1998)(96 Taxman 323)(Mum). Accordingly the Ld CIT(A) held that the income should be estimated as per the decision rendered by the Settlement Commission for AY 2005-06. Accordingly he determined the income from on-money receipts at Rs.44,46,333/- and sustained the addition to that extent. Accordingly he granted ITA N0.6235, 6236/M/12 & 7529/M/13 & C.O. 265 & 266/M/13 Ms. Sahakar Developers. relief to the assessee to the extent of Rs.75,41,477/-. The revenue is aggrieved by that decision. The assessee has filed Cross objection to support the order passed by Ld CIT(A).

We heard the parties and perused the record. We notice that the assessing officer has determined the on-money receipts as per the disclosure made by the assessee before the Settlement Commission. There is no dispute that the Settlement Commission has agreed with the contentions of the assessee that the entire amount of on-money receipts cannot be considered as income of the assessee. Accordingly the Settlement Commission has estimated the income from on-money receipts @ 17% in AY 2005-06. Since the assessing officer has estimated the on-money receipts as per the disclosure made before Settlement Commission, we are of the view that the Ld CIT(A) was justified in estimating the income from the on-money receipts @ 17% for this year also by following the order passed by the Settlement Commission. Accordingly we confirm the order passed by Ld CIT(A). Accordingly we reject the appeal filed by the revenue.

Since the assessee has filed the Cross objection for AY 2006-07 only to support the order passed by Ld CIT(A), the same does not require adjudication.

We shall now take up the appeal filed by the assessee for AY 2004-05 challenging the revision order passed by Ld CIT u/s 263 of the Act. The assessment of AY 2004-05 was completed in the hands of the assessee u/s 143(3) of the Act determining the total income at Rs.2,14,500/-. The AO noticed from the Settlement Application filed by the assessee that the assessee has offered a sum of Rs.24,00,000/- over and above the assessed income for AY 2004-05 before the Settlement Commission u/s 245E of the Act. As noticed earlier the Settlement Commission did not admit the application of the assessee filed for AY 2004-05. Hence the AO reopened the assessment and assessed the above said amount of Rs.24.00 lakhs as income of the assessee. The AO also initiated penalty proceedings u/s 271(1)(c) of the Act. The assessee filed replies on ITA N0.6235, 6236/M/12 & 7529/M/13 & C.O. 265 & 266/M/13 Ms. Sahakar Developers.

The Ld CIT noticed that the AO has dropped the penalty proceedings without assigning any reason. The Ld CIT took the view that the said action of the AO is erroneous in so far as it is prejudicial to the interests of the revenue. Accordingly he initiated revision proceedings u/s 263 of the Act. The assessee pleaded that the assessing officer has applied his mind on the submissions made by the assessee and accordingly taken the decision to drop the penalty proceedings. Accordingly the assessee contended that the revision proceeding was not valid and in that regard, the assessee placed reliance on various case laws.

However the Ld CIT was not convinced with the contentions of the assessee. The Ld CIT took the view that the assessee did not disclose the income of Rs.24.00 lakhs in the return filed in response to the notice u/s 148 of the Act. He also took the view that the disclosure of Rs.24.00 lakhs before the Settlement Commission will not absolve the assessee from levy of penalty. The Ld CIT also expressed the view that the various case laws relied upon by the assessee are distinguishable. The Ld CIT also took support of the decision rendered by Hon’ble Supreme Court in the case of MAK Data P Ltd Vs. CIT (Order dated 31-10-2013) to observe that the surrender of income u/s 133A in order to buy peace and avoid litigation without offering any explanation will not absolve the assessee from penalty. Accordingly he directed the AO to levy a penalty of Rs.7,20,000/- on the concealed income of Rs.24.00,000/-. Aggrieved by the order passed by Ld CIT, the assessee has filed this appeal before us.

The Ld A.R submitted that the revenue has not impounded any incriminating material concerning the assessment year 2004-05 during the course of survey operations. He submitted that the assessee has been following project completion method for offering income. He submitted that the assessee has not sold any of the flats during the year relevant to AY 2004-05. He submitted that ITA N0.6235, 6236/M/12 & 7529/M/13 & C.O. 265 & 266/M/13 Ms. Sahakar Developers. the assessee has been receiving only booking advances only up to AY 2004-05 and the sale of flats have started from AY 2005-06 onwards only. Accordingly he submitted that the assessing officer did not have any material to show that the income of Rs.24.00 lakhs has accrued to the assessee. The Ld A.R submitted that the assessing officer has made the addition of Rs.24.00 lakhs only on the basis of application filed before the Settlement Commission.

The Ld A.R further submitted that the assessing officer has initiated the penalty proceedings without specifying the charge prescribed in sec. 274 of the Act. He further submitted that the Ld CIT has directed the AO to levy penalty for concealment of income. He submitted that the direction of the Ld CIT is against the facts available on record as discussed above, i.e., the sale of flat has started only in the succeeding year and hence the income shall accrue to the assessee only in the succeeding year. Accordingly he submitted that the order of Ld CIT got vitiated on this count alone. He submitted that, merely because the assessee has accepted the addition of Rs.24.00 lakhs, it cannot be said that the income has accrued to the assessee.

He further submitted that the assessee has offered detailed explanations to the assessing officer; vide letters filed on 22.12.2011, 24.12.2012 and 15.05.2012 against the penalty notice issued by the assessing officer. He submitted that the assessing officer has dropped the penalty proceeding after duly considering the submissions made by the assessee, i.e., he has taken a possible view by duly applying his mind. By placing reliance on the decision of Hon’ble Supreme Court rendered in the case of Malabar Industrial Company (243 ITR 83), the Ld A.R submitted that the initiation of revision proceedings was not justified if the assessing officer has taken one of the possible view of the matter. He submitted that the Ld CIT, no where alleges in his order that there was non-application of mind on the part of the AO. Accordingly the Ld A.R submitted that the Ld CIT has taken a particular view in this matter and has thrust the same on the assessing officer by directing him to impose the penalty of Rs.7,20,000/-.

On the contrary, the Ld D.R submitted that the assessee did not offer the impugned amount of Rs.24.00 lakhs in the return filed in response to the notice u/s 148 of the Act, even though the assessee has offered the same before the Settlement Commission. He submitted that the agreed additions are also susceptible to penalty u/s 271(1)(c) of the Act as per the decision of Hon’ble Supreme Court rendered in the case of MAK Data P Ltd (supra). He further submitted that the assessing officer did not give any reason for dropping penalty proceedings and hence the Ld CIT was justified in revising the penalty order.

We have heard rival contentions and perused the record. It is a well settled proposition of law that an order passed by the assessing officer can be revised by Ld CIT u/s 263 of the Act if it is found to be erroneous and prejudicial to the interests of the revenue, i.e., both the conditions have to be satisfied. The Hon’ble Supreme Court has held in the case of Malabar Industrial Company (supra) that an order cannot be held to be prejudicial to the interests of the revenue, if the assessing officer has taken one of the possible views.

In the instant case, we notice that the assessee has furnished explanations before the assessing officer during the course of penalty proceedings three times, viz., on 22.12.2011, 24.12.2011 and 15.05.2012. It is not the case of Ld CIT that the assessing officer has dropped the penalty proceedings without considering the explanations of the assessee, meaning thereby, the AO was convinced with the submissions made by the assessee and accordingly dropped the penalty proceedings. It is pertinent to note that the Ld CIT did not discuss anything about the explanations furnished by the assessee before the AO and did not show that the said explanations are not acceptable in law. Under these set of facts, we are of the view that there is merit in the contentions of the assessee that the assessing officer has taken a possible view of the matter and hence the order passed by the AO dropping the penalty proceedings cannot be considered to be prejudicial to the interest of the revenue.

The Ld A.R further demonstrated that the assessee has been receiving only booking advances during the year under consideration and the first sale has taken place only in the succeeding year. He further submitted that the revenue did not unearth any incriminating material relating to AY 2004-05 during the course of survey operations. Accordingly the Ld A.R submitted that there was no necessity for the assessee to declare any income for the AY 2004-05, but the assessee has accepted the addition made by the AO on the basis of settlement application filed by the assessee. This explanation of the assessee is also a plausible explanation and hence, on this count also, the penalty u/s 271(1)(c) of the Act will not lie on the addition of Rs.24.00 lakhs.

In view of the foregoing discussions, we are of the view that there is merit in the contentions of the assessee that the revision order passed by Ld CIT u/s 263 of the Act for AY 2004-05 is not valid. Accordingly we set aside the same.

In the result, both the appeals of the revenue and both the cross objections of the assessee filed for AY 2003-04 and 2006-07 are dismissed. The appeal of the assessee filed for AY 2004-05 is allowed.