AARYALAND ENTERPRISE,RAJKOT vs. THE DY. CIT- CIRCLE-1 (2), RAJKOT

The facts in brief are that the assessee in the present is a partnership farm and engaged in the business of developing and building housing project. There was a survey under Section 133A of the Act at the premises of the assessee dated 22.03.2012 wherein an unaccounted income of Rs. 2,01,50,000/- was disclosed from the business of land dealings. The assessee has disclosed such income in the Profit & Loss Account. However, the assessee against such income has also deducted an expense of Rs. 1,35,80,000/- representing the construction expenses which were also added in the work-in-progress shown at the end of the financial year under consideration. As per the AO, such WIP will become the opening stock of next year which will certainly be set off against the sales to be made by the assessee. Accordingly, he was of the view that the assessee will get the benefit of Rs. 1,35,80,000/- against the income disclosed during the survey proceedings.

Besides the above, the AO also found that the impugned amount of expenditure of Rs. 1,35,80,000/- was incurred in cash and therefore, the same cannot be allowed as deduction by virtue of the provision of Section 40A(3) of the Act. Thus, the AO disallowed the same and added to the total income of the assessee.

Aggrieved assessee preferred an appeal to the Ld. CIT(A) who has confirmed the order of the AO by observing as under: “…From these findings of the AO, it can be seen that there is no impact on the profit of the appellant for the year under consideration as no any addition has been made by the AO to the total income of the appellant for such year. Any grievance from the point of view of the appellant can arise in subsequent year when the benefit of above expenditure of Rs. 1,35,80,000/- is denied by the AO by not treating the same as part of closing stock and by not allowing the same to be reduced from the profit in such subsequent year and accordingly the appellant will have right to file the appeal against the order of the AO for that year only. Considering these facts, the ground of appeal of the appellant as reproduced in earlier paragraph of this appeal order is hereby dismissed as issue raised as per such ground of appeal is not relevant for the year under consideration.”

Being aggrieved by the order of the Ld. CIT(A) the assessee in appeal before us.

The Ld. A.R. before us filed a Paper Book running from Pages 01 to 44 and contended that the genuineness of the expenses has not been doubted by the authorities below which were incurred out of the unaccounted income. Therefore, the same should be allowed as deduction. The Ld. A.R. further contended that the expenditure of Rs. 1,35,80,000/- were representing the unaccounted expenses. Therefore, the same cannot be made subject to be disallowance under the provisions of Section 40(A)(3) of the Act.

On the other hand, the Ld. DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the assessee in the course of survey proceedings dated 22.03.2012 under Section 133A of the Act has admitted unaccounted income to the tune of Rs. 2,01,50,000/- which was duly disclosed in the profit and loss account of the assessee which are placed on Page 33 of the Paper Book. The nature of income disclosed by the assessee during the survey operation was also explained by it in the statement recorded under section 131 (1A) of the Act stating that the entire income was generated from the land dealing activities. Part of such income was distributed among the partners of the firm and part of it was utilized for the construction of the expenses precisely amounting to Rs.1,35,80,000/-. The relevant extract of the statement recorded during survey is placed on Pages 10 to 11 of the Paper Book. However, the authorities below have denied the deduction claimed by the assessee on account of construction expenses amounting to Rs.1,35,80,000/- on the reasoning that the assessee has also increased the work-in-progress as closing stock WIP by the same amount which will make the profit of the year under consideration as tax neutral but the assessee in the subsequent year will claim the deduction of such expenses.

From the above discussion, we find that the genuineness of the construction expenses has nowhere been doubted by the authorities below. What has been doubted is this that the assessee will claim the WIP as an express in the subsequent year against the sales. Thus, effectively the assessee will get the benefit of Rs.1,35,80,000/- representing the construction expenses. Once the undisclosed income of the assessee has been admitted by the revenue then the corresponding expenses incurred out of such income should also be allowed as deduction until and unless claim of the assessee is bogus. However, the case before us is not of bogus expenses.

We also note that the Delhi Tribunal involving identical facts and circumstances in the case of Shri Dinesh Chand Jain vs. ACIT, reported in 116 Taxman 225 has decided the issue in favour of assessee. The relevant extract of the order is reproduced below: “On facts as they emerged from the material placed, the inference of the authorities below that as a result of entries in respect of stock of Rs. 4,65,000, the effect of surrender was nullified, was misconceived. If the excess stock was not introduced in the trading account, sales of Rs. 3,57,703 could not be effected in the post-search period and yet leaving a closing stock of Rs. 2,26,785 the stock on the date of search, as per books, being only Rs. 1,81,700. The Assessing Officer had not drawn a separate trading account as per book, for the pre-search period. He had gone by the trading Profit & Loss Account filed by the assessee and had computed the total income starting from the net profit of Rs. 5,22,945 as per that account. The correctness of the total sales shown at Rs. 23,11,451 was not disputed. No discrepancy in the trading Profit & Loss Account was pointed out. The total addition to be made, quantified at Rs. 8,77,092, was only on a hypothetical working. This was a search & seizure case and the entire position had to be considered as a whole. When so done, the surrender of Rs. 7,65,000 made by the assessee could be held to take care of the excess stock, unaccounted for sales and unexplained investment and profit thereon, particularly when no other specific discrepancy was pointed out by the Assessing Officer.

With respect to the disallowance made under the provisions of Section 40A(3) of the Act, we note that expenses claimed by the assessee were incurred out of the unaccounted income which has already been suffered to tax. Therefore, any further disallowance under the provisions of Section 40A(3) of the Act would lead to the double addition to the total income of the assessee which is unwanted under the provisions of law. Furthermore, if the assessee claims the expenses of Rs.1,35,80,000/- but at the same time the assessee has also increased its WIP by the said amount which makes the same as tax neutral. Thus, the claim as such was not made by the assessee for any deduction in the year under consideration. In view of the above and after considering the facts in totality, we are not inclined to uphold the finding of the authorities below. Accordingly, we set-aside the order of the Ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

In the result, the appeal of the assessee is allowed.