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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Before: SHRI A.T. VARKEY & SHRI PRASHANT MAHARISHI
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘B’: NEW DELHI) BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER and SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.1137/Del./2012 (ASSESSMENT YEAR : 2007-08) JCIT (OSD), Central Circle, vs. Shri D.M. Aggarwal, Dehradun. 363/218, Park Road, Dehradun. (PAN : AGVPA7376G) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Somil Agarwal, CA REVENUE BY : Ms. Nandita Kanchan, CIT DR Date of Hearing : 15.10.2015 Date of Pronouncement : 10.11.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal, at the instance of the revenue, is directed against the order of the Commissioner of Income-tax (Appeals)-I, Dehradun dated 30.12.2010 for the assessment year 2007-08.
The assessee is an individual. The assessee is an Advocate and Deed Writer in the Civil Courts at Dehradun and the income received was shown as professional receipts of the assessee; and there was also income from interest on FDR's and Bank Accounts. The assessee was also engaged in the business of real estate transactions.
The Revenue has taken the following grounds of appeal which are as under :-
“1. The Ld. CIT has erred in law and on facts in deleting the addition of Rs.11,35,949/- made by the A.O. on account of unverifiable construction expenses, without appreciating the fact that the CIT (Appeals) had himself admitted in his order that the assessee was not maintaining adequate books of account, and further that the assessee’s case was not covered under the provisions of Section 44AD of the Act as the turnover of the business exceeded Rs.40.00 lacs, therefore, accepting profit equivalent to 10% of the gross receipt was perverse application of law in the assessee’s case.
2. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.1,00,000/- made by the A.O. u/s 40(A)(3) of the Act on account of cash expenditure exceeding Rs.20,000/- without appreciating the fact that the payment of stamp duty were not covered under the exception provided in Rule 6DD of the I.T. Rules and neither the expenditure made on account of sellers was covered under the exception of Rule 6DD of the I.T. Rules.”
3. Ground no.1 is against the deletion of addition of Rs.11,35,949/-made on account of unverifiable construction expenses.
A search under section 132 of the Income-tax Act, 1961 (hereinafter ‘the Act’) was initiated and took place in the business and residential premises of the assessee on 04.03.2009. A notice under section 153A (1)(a) of the Act was issued on 31.12.2009 and served upon the assessee on 06.01.2010. Further, a questionnaire and notice under section 142(1) was issued on 20.09.2010 on the basis of seized material as the assessee had not filed any return in response to the notices issued earlier. In response to this notice, the assessee filed a return on 22.11.2010 declaring an income of Rs.5,79,030/-, as against an income of Rs.3,60,850/- disclosed in the return of income filed earlier under section 139 of the Act.
4.1 During the course of assessment proceedings, the assessee produced the details of income and balance sheet showing investments and liabilities which were prepared on the basis of accretion to the assets, as no books of accounts were maintained by the assessee. After perusing the documents produced before him, the AO observed that the assessee had incurred an expenditure of Rs.1,13,59,499/- on the construction. He observed that the assessee had not produced the complete accounts and details of all these expenses and from the seized material, he also found that no regular books of account were being maintained and there were half complete instances and ledger etc. of the expenditure from where the complete accounts were not emerging. The AO further observed that the assessee had increased the receipts after the search and accordingly the expenditure part was bound to go up. He observed that it has to be backed by the credible data and details which were missing in this case.
Accordingly, the AO made a disallowance of Rs.11,35,949/- which is 10% of the expenditure on construction at Rs.1,13,59,499/-. The AO further observed that the assessee's case was not entirely that of a civil contractor where profits were determined on percentage in view of the provisions of section 44AD. He observed that this was a case of a builder, developer and the construction activities were a part of that business.
Aggrieved, the assessee filed an appeal before the first appellate authority and the ld. CIT (A) deleted the addition by observing as under :-
“1.2 The submission has been considered. Admittedly, the assessee was a professional, working as an advocate-cum-deed writer, and also indulged in real estate business. He did not maintain adequate documentation which would satisfy the requirement of law in support of the real estate business. The documents seized during search also suggested that he had been earning unaccounted income in the same. In this connection, the assessee was required to furnish complete details of the disclosure made u/s 132(4) of the I.T. Act and the additional income actually disclosed in the returns of income furnished pursuant to the search. The following information was furnished by the assessee :-
Shri Ashish Mohan Agarwal:
Original filed u/s 139 Filed after search u/s Additional income 153A 50,000 1,05,000 55,000 59,500 1,24,290 64,790 1,05,600 7,22,600 6,17,000 1,40,000 36,07,830 34,67,830 2,92,280 37,71,920 34,79,640 9,95,230 36,32,100 26,36,870 Not due 45,31,800 45,31,800
Shri Devendra Mohan Agarwal:
Original filed u/s 139 Filed after search u/s Additional income 153A 50,000 3,35,380 2,85,380 67,500 3,73,890 3,06,390 1,07,000 3,07,770 2,00,770 1,20,000 31,66,890 30,46,890 3,60,850 5,79,030 2,18,180 44,363 15,55,410 15,11,047 Not due 4,29,050 4,29,050
The group consists of the assessee and his son Shri Ashish Mohan Agarwal. It was also submitted that, together, they had made disclosure of additional income of Rs.1,70,00,000/- during the search, as against which the additional income actually offered for taxation in the returns furnished pursuant to the search was Rs.2,16,42,960/. The purpose of search is to detect evidence relating to undisclosed income earned by the assessee and to collect tax on the same. If a person has earned undisclosed income, it is logical that such income would not form part of his regular books of account. Hence, if the person has offered the additional income (as is apparent with reference to the seized documents and any other evidence which the AO may gather), the AO should avoid making further addition to such income simply because such income was not recorded in the regular books of account in the first place. He would, of course, be justified in making further addition if he can marshal any evidence suggesting that the actual income earned by the assessee was more than what was disclosed by the latter in course of the search and subsequently in his returns. In this case, no such evidence is there. The addition was made simply because the assessee had not maintained regular books of account and the required documents in respect of such income. It is settled law that an estimate of income should be cogent and should not be capricious or whimsical. The assessee has claimed to have furnished his income and expenditure account as well as statement of his assets and liability year after year, incorporating the findings relating to undisclosed income and assets during the search. He has shown that the additional income actually offered in the returns furnished by him and his son pursuant to search exceeded the additional income disclosed by them during the search. On the other hand, the AO has not recorded any finding that there is any evidence of any unexplained expenditure/investment or any income which was not covered in the additional income disclosed by the assessee. In view of this, there is no justification for making ad hoc disallowance of 10% out of the expenditure claimed to have been incurred by the assessee in "is construction business. The debate whether he was a builder/developer or a civil contractor is not relevant. The issue is estimation of reasonable net profit of the assessee's business. Even if he were a civil contractor, his case would not be covered by section 44AD of the I.T. Act (because the turnover of the business exceeded Rs.40,00,000/). On the other hand, even if he were just a builder/developer, his net profit had still to be estimated at a reasonable figure. The rate of 8% given in section 44AD is taken only as a benchmark for purposes of estimation of net profit in such cases. The assessee has submitted that the net profit shown by him was a healthy 10% of his gross receipt. In view of this, there is no justification for any separate disallowance out of expenditure. The addition is deleted.”
Ld. DR relied on the order of the AO and submitted that the ld. CIT (A) deleted the addition made by the AO on account of unverifiable construction expenses without appreciating the fact that the assessee was not maintaining adequate books of account and further the assessee’s case was not covered under the provisions of Section 44AD of the Act as the turnover of the business exceeded Rs.40 lakhs, therefore accepting profit equivalent to 10% of the gross profit was perverse application of law in assessee’s case. So, she pleaded that the order of the Ld. CIT(A) be reversed and the order of AO be restored on this addition.
Ld. AR for the assessee reiterated his submissions made before the Ld. CIT (A) and relied on the order of the ld. CIT (A). Ld. AR submitted that the assessee had himself shown net profit rate of 10% which was in excess of 8% specified in section 44AD of the Act. He further submitted that the disallowance was arbitrary as the AO did not pinpoint any specific defect. In this regard, the ld. AR made a reference to the definitions of the terms 'builder' and 'developer' and reliance was placed on a number of decisions in support of the contention that arbitrary disallowance was not justified. Accordingly, ld. AR wants us not to interfere in the order of the ld. CIT (A).
We have heard both the sides and perused the material on record. We find that the assessee was a professional, working as an advocate-cum-deed writer, and also indulged in real estate business. However, the assessee did not maintain adequate books of account which would satisfy the requirement of law in support of the real estate business. We take note of the fact that the documents seized during search also suggested that he had been earning unaccounted income. Therefore, the assessee was required to furnish complete details of the disclosure made u/s 132(4) of the Act and we find that the additional income actually disclosed in the returns of income furnished pursuant to the search and accordingly, the assessee furnished the required information.
We find that the group consisted of the assessee and his son Shri Ashish Mohan Agarwal and together, they had made disclosure of additional income of Rs.1,70,00,000/- during the search, as against which the additional income actually offered for taxation in the returns furnished pursuant to the search was Rs.2,16,42,960/. We find that the ld. CIT (A) rightly observed that the purpose of search is to detect evidence relating to undisclosed income earned by the assessee and to collect tax on the same. The Ld. CIT(A) has also observed that if a person has earned undisclosed income, it is logical that such income would not form part of his regular books of account, hence, when that person has offered the additional income (as is apparent with reference to the seized documents and any other evidence which the AO may gather), the AO should avoid making further addition to such income simply because such income/expenditure was not recorded in the regular books of account. Further addition is warranted only if the AO has material/evidence unearthed during search suggesting that the actual income earned by the assessee was more than what was disclosed by the latter in course of the search and subsequently in his returns, however, we find that no such evidence was brought on record by the AO to justify the ad hoc disallowance. We agree with the ld. CIT (A) that the addition was made simply because the assessee had not maintained regular books of account and the required documents in respect of such income.
Estimation of income should not be capricious or whimsical as held by the Hon’ble Apex Court and High Courts in Plethora of judgments. Before the AO, the assessee has claimed to have furnished his income and expenditure account as well as statement of his assets and liability year after year, incorporating the findings relating to undisclosed income and assets during the search. We also take note of the fact that the assessee had shown the additional income in the returns furnished by him and his son and the AO had not recorded any finding that there was any evidence of any unexplained expenditure/ investment or any income which was not covered in the additional income disclosed by the assessee. In the light of the above facts, we are of the view that the ld. CIT (A) has rightly held that there was no justification for making ad hoc disallowance of 10% out of the expenditure claimed to have been incurred by the assessee in construction business. We agree with the Ld. CIT(A) that whether the assessee was a builder/developer or a civil contractor is not relevant and only the issue is estimation of reasonable net profit of the assessee's business. In any case, section 44AD of the Act is not applicable in the assessee’s case because the turnover of the business exceeded Rs.40,00,000/-. When the assessee is a builder/developer and is engaged in construction activities, and the assessee had shown a net profit rate of 10% of his gross receipt, whereas the rate of 8% is given in section 44AD for civil contractor is to be taken only as a benchmark for the purposes of estimation of net profit in such cases. Therefore, we concur with the ld CIT(A) that the ad hoc disallowance was not warranted and we find no merits in this ground of appeal of the department. In view of the above, we hold that the ld. CIT (A) rightly deleted the addition and accordingly, we uphold the order of the ld. CIT (A) on this addition. This ground fails.
9. Ground No.2 is against the deletion of addition of Rs.1 lakh made by the AO on account of cash expenditure exceeding Rs.20,000/-.
10. The AO observed that the assessee had made cash purchases exceeding Rs. 20000/- in the land purchase account and the total of this expenditure was Rs.5,00,000/-. He took note of the fact that the assessee was engaged in the business of a real estate developer and accordingly, these purchases were hit by the provisions of section 40A(3) of the Act. Accordingly, the AO made disallowance of 20% of such expenses being in violation of provisions of section 40A(3) and thus made an addition of Rs.1 lakh.
11. In the appeal before the ld. CIT (A), the ld. CIT (A), after taking note of the submissions of the assessee, observed that as regards the payments made to stamp vendors, the latter acted as the agents of the government for selling stamp papers, hence, he held that such payments were covered under the exception provided in Rule 6DD(b) and the said payments were duly vouched by the physical existence of stamp papers in question which were actually utilized for purpose of acquiring the land in question. Consequently, the ld. CIT (A) deleted the addition.
12. Ld. DR, while relying on the order of the AO, submitted that the ld. CIT (A) deleted the addition without appreciating the fact that the payment of stamp duty was not covered under the exception provided in Rule 6DD of the Income- tax Rules, 1962 (hereinafter ‘the Rules’) and neither the expenditure made on Rule 6DD of the Rules.
He accordingly pleaded to set aside the order of the ld. CIT (A) and restore the order of the AO on this issue.
Ld. AR reiterated the submissions made before the ld. CIT (A) and submitted that the assessee had incurred total expenditure of Rs.84,04,300/- on purchase of land which included cost of land (Rs.77,10,000/-), payment of stamp duty (Rs.6,21,000/-) and registration expenses (Rs.73,300/-). He submitted that the expenditure incurred in cash referred to by the AO was incurred on payment of stamp duty and registration expenses. He further submitted that the stamp duty had been paid to the government authority through the stamp vendors and the registration expenses were paid to advocate's head clerk which according to him were not hit by the mischief of 40A(3) of the Act. Ld. AR submitted that the land purchased by the assessee was situated at village Banjarawala in Dehradun District. He submitted that the sellers of the land as well as the assessee's office were situated at Banjarawala where no banking facilities were available and the persons from whom the land was purchased are farmers to whom the state government had allotted agricultural land on their rehabilitation pursuant to acquisition of their land at Tehri for purposes of building Tehri Dam. Ld.AR submitted that a photo copy of a certificate issued by the head of the Gram Panchayat, Banjarawala was furnished in support the aforesaid facts. Ld. AR relied on various judicial
4 of the ld. CIT (A)’s order, to support his contention that the provision of section 40A(3) should not be interpreted in a restrictive manner, so as to discourage business transactions.
Accordingly, he pleaded that the ld. CIT (A) has rightly deleted the addition and the same may be upheld.
We have heard both the sides and perused the material on record. We find that the payments were made in cash to stamp vendors who acted as the agents of the Government for selling stamp papers, hence, such payments were covered under the exception provided in Rule 6DD(b). We further find that these payments were duly vouched by the physical existence of stamp papers in question which were actually utilized for purpose of acquiring the land in question. Therefore, we uphold the order of the ld. CIT (A) deleting the addition of Rs.1 lakh made by the AO. Accordingly, we find no merits in this ground of the Revenue and thus this ground fails.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Open Court on this 10th day of November, 2015.