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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
The captioned are seven appeals, out of which five appeals have been preferred by the assessee and the other two appeals by the Revenue. Since all the appeals relate to the same assessee and involve a common issue relating to the assessability of the income offered by the assessee-company in the course of search, the appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
Briefly put, the relevant facts are that the assessee is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of development of real estate properties. A search action under section 132 of the Income Tax Act, 1961 (in short “the Act”) was carried out in the case of the assessee group on 11/4/2007,wherein certain incriminating material/documents were found and seized, and in particular, we are concerned with a record found which showed receipt of money and incurrence of expenditure on construction, etc. relating to projects undertaken by the assessee, such amounts not being found recorded in the regular books of accounts maintained. In the course of search action, the assessee group made declaration of additional income of Rs.10.00 crores under section 132(4) of the Act. Out of the total surrender of Rs.10.00 crores, an amount of Rs.9.20 crores (approximately) was offered for tax in the hands of the assessee company for the captioned assessment years relating to A.Y 2002-03 to 4 Arth Housing Development Pvt. Ltd. 2007-08. Notably, in the surrender made at the time of search, additional income was offered for each of the assessment years under consideration. At the time of filing of returns in response to notices under section 153A of the Act, the assessee company offered additional income for each of the individual assessment years differently than the amounts surrendered at the time of search, though in totality there was no difference. The aforesaid difference is the bone of contention between the assessee and Revenue before us.
In order to appreciate the controversy, brief background of the dispute can be summarized as follows. At the time of search the additional income was offered for the assessment years 2002-03 to 2007-08 as follows:-
Assessment Amount (Rs. In Basis Year Lac) 2002-03 84.51 Gross Receipts 2003-04 220.81 Gross Receipts 2004-05 97.35 Gross Receipts 2005-05 154.00 Gross Receipts 2006-07 115.00 Gross Receipts 2007-08 250.52 Remaining balance out of 10 crores disclosed. Total 922.19 3.1 At the time of search, the amount was disclosed year-wise on the basis of the year of receipt. In other words, undisclosed amounts found recorded in the seized material was declared in the respective years of receipt. However, in the returns of income filed for the assessment
5 Arth Housing Development Pvt. Ltd. years 2002-03 to 2007-08 in response to the notices issued under section 153A of the Act, assessee disclosed the incomes as under:-
Assessment Amount (Rs. In Basis Year Lac) 2002-03 0.00 2003-04 1.00 Project completion 2004-05 0.65 method 2005-06 175.00 2006-07 0.00 2007-08 743.35 Remaining balance out of 10 crores disclosed Total 920.00 3.2 However, the AO differed with the assessee, as according to him, the undisclosed receipst found at the time of search were liable to be taxed in the year when such amount was actually received by the assessee. The stand of the assessee, on the other hand, was that the income with respect to such unrecorded receipts be taxed on the basis of the method of accounting regularly employed. Notably, in the regular returns of income filed the assessee-company was declaring the income from the business of development of real estate properties by adopting the Work-in-progress cum Project completion method. The methodology adopted by the assessee was to declare in each year a certain percentage ( 6% to 7%) of the expenses incurred in particular year, as income for that year. Additionally, in the case of a project being completed in a particular year, the sales/revenues were matched with the costs and the balance of the profit was also declared. Thus, in a given year, profit declared by the assessee from the business of development of real estate properties was a mix of percentage of expenses incurred on the project plus balance of the profit in the case
6 Arth Housing Development Pvt. Ltd. of a completed project. In the returns of income filed in response to the notices issued under section 153A of the Act, amount of additional income surrendered during the course of search was offered for taxation in each of the captioned assessment years by adopting the aforesaid methodology. The aforesaid stand of the assessee was not accepted by the Assessing Officer, who instead taxed the income surrendered by the assessee on the basis of the year of receipt of such amounts. Accordingly, the assessment finalized by the Assessing Officer for the assessment years 2002-03 to 2007-08 contained assessment of undisclosed receipts as follows:-
Assessment Amount (Rs. In Basis Year Lac) 2002-03 84.51 Gross Receipt 2003-04 224.81 Gross Receipt 2004-05 97.35 Gross receipt 2005-06 846.66 Gross Receipt (154.0)+ Sec 69 Unexplained expenditure (690.66) 2006-07 115.00 Gross Receipt 2007-08 8.33 -- (742.85 on protective) Total 1375.66 3.3 Notably, in relation to assessment year 2005-06 the Assessing Officer noticed that the seized record showed receipt of Rs.140.00 lacs as against Rs.154.00 lacs reflected by the assessee and further noticed an unexplained expenditure of Rs. 845.66 lacs. Considering that the receipt of Rs.140.000 Lacs was available, the balance of Rs.690.66 lacs was treated as unexplained expenditure and has been added to the total income under section 69 of the Act. Further, for assessment year
7 Arth Housing Development Pvt. Ltd. 2007-08 an amount of Rs.742.85 lacs was added by the Assessing Officer on protective basis since the assessee had returned additional income on account of undisclosed receipts in the respective years.
The assessee carried the matter in appeal before the CIT(A) challenging the action of the Assessing Officer on varied grounds. The primary plea of the assessee before the CIT(A) was that the undisclosed receipts found at the time of search should be subject to tax on the basis of the accounting method regularly followed by the assessee and not merely on the basis of actual receipts. The CIT(A) disagreed with the assessee and has upheld the stand of the Assessing Officer to the effect that the undisclosed cash receipts are liable to be taxed as income in the year in which it is received. However, CIT(A) allowed partial relief to the assessee with respect to assessment years 2005-06 and 2007-08 and for assessment year 2006-07, he has enhanced the income to Rs.129.00 lacs as against Rs.115.00 lacs assessed by the Assessing Officer. For assessment year 2005-06, the CIT(A) allowed telescoping of the preceding three year’s receipts against the unrecorded expenditure noticed in the seized record. In this manner, the total income was assessed at Rs.446.67 lacs as against Rs.846.66 lacs computed by the Assessing Officer on this count. In so far as the protective addition for assessment year 2007-08 is concerned, the CIT(A) has deleted the same.
In the above background, before us, Ld. Representative for the assessee vehemently argued that the methodology adopted to assess the income of the assessee in the regular assessment under section 8 Arth Housing Development Pvt. Ltd. 143(3) of the Act for the captioned assessment years be followed in order to assess the income relating to the undisclosed receipts found during the course of search. Ld. Representative emphasized that the income on account of undisclosed receipts be computed on the basis of the regular method of accounting because it would ensure consistency.
On this aspect, Ld. Departmental Representative appearing for the Revenue has defended the orders of the authorities below by pointing out that the undisclosed receipts found at the time of search ought to be assessed in the year to which they relate.
We have carefully considered the rival submissions. The short point involved before us relates to the year of taxability of the undisclosed receipts of business found during the course of search. Section- 4 of the Act prescribes charge of income tax on the total income of the previous year of an assessee and section -5 of the Act postulates the scope of such total income. Notably, the income chargeable under the head ‘profits and gains of business or profession’ is liable to be computed in accordance with method of accounting prescribed under section 145 of the Act. Therefore, the income chargeable to tax for any particular assessment year under the head ‘profits and gains of business or profession’ is computed as per the methodology of accounting prescribed in section 145 of the Act. In the present case assessee company is engaged in the business of development of real estate properties and is declaring income from such business on the basis of a particular methodology, which has been accepted in the course of regular assessments. The assessee company
9 Arth Housing Development Pvt. Ltd. declares profit based on certain percentage ( 6 or 7%) of the expenses incurred on a project during the year plus balance profit of the project which is completed during year, which is computed by matching the sales/revenues with the costs incurred. Thus, the profit declared by the assessee under the head ‘profits and gains of business or profession’ is a combination of a percentage of expenses incurred on the on-going projects plus the balance of the profit of projects completed during particular year. The methodology of accounting is not disputed by the Revenue. So however, the dispute relates to assessing of income in relation to such undisclosed receipts of business, which were found in the course of search and were not declared in the regular books of account. Notably, in so far as the nature of such unrecorded receipts is concerned, there is no dispute between the assessee and the Revenue. Both sides agree that the undisclosed receipts found during the course of search are a part and parcel of the business of the assessee of developing real estate properties. In this factual background, in our view, the same methodology ought to be adopted to assess income embedded in such undisclosed receipts, as has been accepted by the Revenue in the regular assessments. No doubt, at the time of search assessee offered income from such undisclosed receipts in the respective years of receipt, which was a departure from the regular methodology of computing, income accepted by the Revenue. Notwithstanding the aforesaid, in the returns of income filed in response to the notices issued under section 153A of the Act for the captioned assessment years, the assessee- company declared income from such undisclosed receipts as per the regular methodology accepted by the Revenue in the regular
10 Arth Housing Development Pvt. Ltd. assessments. The stand of the Assessing Officer, in our view, leads to an inherent contradiction in the final assessment because the resultant income would be a mix of two methodologies. Firstly, the resultant income contains income from business computed on the basis of regular methodology and secondly, income in relation to undisclosed receipts of the same business, which is assessed on receipt basis. To obviate such inherent contradiction, in our view, assessee- company had rightly asserted at the time of filing of returns of income under section 153A of the Act that the income from undisclosed receipts be also computed as per the regular methodology accepted by the Revenue in the past. Therefore, on this aspect we uphold the plea of the assessee.
7.1 As a consequence, we set aside the orders of the CIT(A) for all the captioned assessment years and direct the Assessing Officer to recompute the income as per aforesaid directions and as per law.
In so far as the appeal of the Revenue for assessment year 2007- 08 is concerned, there is no merit in the same in as much as the CIT(A) has merely deleted the amount assessed by the Assessing Officer on protective basis, even though such amount was assessed in the respective assessment years. Thus, in so far as appeal of the Revenue for assessment year 2007-08 is concerned, the same is dismissed.
In assessment year 2005-06, the plea of the Revenue is against the action of the CIT(A) in allowing telescoping benefit against the unexplained expenditure found noted in the search material. In this 11 Arth Housing Development Pvt. Ltd. context, brief facts are that the search material revealed that in assessment year 2005-06 certain expenditure of Rs.845.66 lacs was incurred, which was not recorded in the regular books of account. The Assessing Officer assessed the same to tax as unexplained expenditure under section 69 of the Act. The CIT(A) however, allowed benefit of the receipts available with the assessee of the earlier three years of 2002- 03, 2003-04 and 2004-05. Consequently, the CIT(A) restricted the addition made under section 69C of the Act for unexplained cash expenditure to Rs.306.67 lacs as against Rs.845.66 lacs determined by the Assessing Officer. Against such a decision of the CIT(A), Revenue is in appeal before us.
After considering the rival stands, we do not find any infirmity in the decision of the CIT(A), which is ostensibly based on the facts emerging from the record. Thus, the order of the CIT(A) on this aspect is affirmed and Revenue fails in its appeal for assessment year 2005- 06.
Resultantly, whereas the five appeals of the assessee pertaining to assessment years 2002-03 to 2006-07 are allowed, the two appeals of the Revenue pertaining to assessment years 2005-06 and 2007-08 are dismissed. Order pronounced in the open court on 30/10/2015.