By Dr. Manoj Fogla
1. Introduction
1.1 The Finance Bill, 2014 has brought a very radical and far reaching amendment, as far as CSR expenditures are concerned.
1.2 There was a lot of expectation that as a corollary to the CSR related amendment in the Companies Act there will be a corresponding amendment in the Income Tax Act, allowing CSR expenditures as deductions under section 37.
1.3 On the contrary the Finance Bill as proposed that CSR expenditure shall not be allowed as expenditure under section 37. However, any CSR expenditure which is allowed as deduction under other sections such as section 35 is permissible.
2. CSR Related Amendments
2.1 The Finance Bill, 2014 has proposed to insert a new Explanation in sub-section (1) of section 37 so as to clarify that for the purposes of sub-section (1) of the said section, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. The proposed amendments are as under:
13. In section 37 of the Income-tax Act, in sub-section (1), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted with effect from the 1st day of April, 2015, namely:—
"Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.".
2.2 This proposed amendment is a great setback and may defeat the real purpose of bringing CSR related amendments in the Companies Act, 2013. For example a corporate now will be motivated to contribute to those statutory funds were 100% deduction is available. For instance a corporate can implement a CSR programme by contributing to the various development programme. It can also comply with CSR provision by contributing to funds like National Defence Funds or other funds where 100% tax exemptions are available. After the proposed amendments the companies would be motivated to spent CSR money only on those areas where tax exemptions are available. In other words all other areas will virtually become redundant. There is a strong need to revisit this provision and the companies should be allowed to deduct CSR expenses under Section 37.
3. Overview of the Tax Implications
3.1 The Companies Act requires at least 2% of average Net Profit to be spent on CSR. In other words the requirement of Companies Act essentially indicates appropriation of surplus net income for charitable purposes. It does not indicate any statutory charge against the gross income. It may be noted that all expenditures are legal charge against the gross income. On the contrary, CSR expenditure is an appropriation of net income. Therefore, the provisions of the Companies Act create confusion by making CSR a post 'net profit' issue. Ideally, CSR expenditure being a legal requirement should be permitted to be deducted as expenditure under section 37(1) of the Income Tax Act, though there is no statutory clarity in this regard.
3.2 CSR being a statutory requirement should be treated as a valid charitable expenditure, otherwise it would be big disincentive to the Companies. If CSR is not treated as a valid expenditure, then the Companies would be motivated to give funds to only those organisations where they get maximum tax benefit. For instance, Prime Minister Relief Fund, National Defence Fund or organisations notified under Section 35 or 35AC or 80G. Such organisations provide 100% tax benefit. It may be noted that only few organisations such as Prime Minister Relief Fund, National Defence Fund provide 100% benefit, under Section 80G only 50% benefit is available to the donor.
3.3 CSR laws permit expenditure on capacity building of employees and on local area development. Such expenditures, could earlier be directly claimed as CSR expenditures under section 37(1) of the Income Tax Act. In other words, there are certain categories of CSR expenditures which can be charged against income within the existing provisions of the Income Tax Act. However, with the proposed amendments any expenditure under CSR will not be allowed as deduction under section 37.
3.4 There were many case laws where it was held that such expenditures should be treated as admissible expenditure. Now all such judicial precedence will be nullified from a CSR prospective. For instance a company can claim expenditure towards local area development as CSR expenditure. Now with the proposed amendments the company will be motivated to claim such expenditure as normal business expenditures and not CSR expenditures, in the light of the case laws discussed under.
3.5 Afforestation expenses: In the case Orissa Forest Development Corp. Ltd. v. Jt. CIT [2002] 80 ITD 300 (Cuttack), it was held that expenses incurred by the corporation in plantation of new trees was a revenue expenditure, even though there was no statutory obligation on the part of the assessee to incur such an expenditure.
3.6 Drinking water facilities to local residents: In the case CIT v. Madras Refineries Ltd. [2004], 266 ITR 170/138 Taxman 261 (Mad.) it was held that development of local and establishing drinking water facility for local area people was a valid expenditure. It was observed that the concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and for the people of the locality, in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water, as also for establishing or improving the schools meant for the residents of the locality in which the business is situated cannot be regarded as actually outside the ambit of the business concerns of the assessee, especially when the undertaking owned by the assessee is one which is to some extent a polluting industry. Hence, expenditure incurred by the assessee for establishing drinking water facilities for the residents in the vicinity of its refinery and for providing aid to the schools run for the benefit of the children of those residents was allowable as deduction.
3.7 Donation can also be claimed under section 37(1): If the contribution made by an assessee is in the form of donations of the category specified under section 80G, but it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied - Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836/30 taxman 467 (Kar.).
3.8 Admissibility of donation if proved as relatable to carrying on of business : In the case CIT v. Industrial Development Corp of Orissa Ltd. [2001] 249 ITR 401/115 Taxman 626 (Orissa) the Hon'ble Odisha High Court held that even donation can be treated as business expenditures, provided such donation can be related with the business of the assessee. In this case the donation was disallowed as there was nothing on record to establish that the donation made by the assessee to the Chief Minister's Relief Fund was directly connected with and related to the carrying on of the assessee's business. However, this case provides a landmark ratio of allowing donation as business expenditure. In the case of mining Companies as the funds are specifically for the local area development under CSR, there is no reason why such expenditures should not be allowed under section 37(1).
4. Concluding remarks
4.1 Overall the proposed Finance Bill, 2014 has created a fix with regard to the admissibility of the CSR expenditures. It is the job of the government to align various legislations. The Companies Act mandates various types of CSR expenditures. As discussed above, giving grant to Prime Minister Relief Fund, National Defence Fund is a CSR expenditure at the same time there is a list of priority activities, which the companies should do under CSR. The Hon'ble Finance Minister in his budget speech declared that slum development will also be included as CSR expenditure.
4.2 However, differential tax treatment of the legally permissible CSR expenditure will defeat the very purpose of enacting CSR. Why should a company incur CSR expenditure on priority areas without having any tax benefit, when it can incur the same expenditure with 100% tax deductions. The Government should provide a level playing ground for all kind of CSR expenditure.
S.KRISHNAN
1. Amendment Proposed
Section 54EC is proposed to be amended by the Finance Bill 2014 by insertion of another proviso in sub-section (1), after the first proviso (now existing) with effect from the 1st day of April, 2015, namely:
"Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees."
2. Why was this amendment thought of?
This amendment is proposed to be brought in because in the following cases the ITAT benches have held that the assessee can invest up to Rs. 1 Crore in capital gain bonds under section 54EC which is spread over a period of two financial years at Rs. 50 lakhs in each financial year. However, such investment should be made within a period of 6 months from the date of transfer:
i) Aspi Ginwala, Shree Ram Engg. & Mfg. Industries v. Asst. CIT [2012] 20 taxmann.com 75/52 SOT 16 (Ahd.)
ii) Vivek Jairazbhoy v. Dy. CIT [ITA No.236/Bang/2012 vide their order dated 14.12.2012]
iii) Smt. Sriram Indubal v. ITO [2013] 32 taxmann.com 118 (Chennai)
iv) ITO v. Ms. Rania Faleiro [2013] 33 taxmann.com 611 (Panaji - Trib.)
CBDT vide its Circular No. 3/2008, dated 12-3-2008 explains the (existing) proviso introduced by the Finance Act, 2007 as under:
"28.2 The quantum of investible bonds issued by NHAI and REC being limited, it was felt necessary to ensure that the benefit was available to all the investors. For this purpose, it was necessary to ensure that the limited number of bonds available for subscription is also available for small investors. Therefore, with a view to ensure equitable distribution of benefits amongst prospective investors, the Government decided to impose a ceiling on the quantum of investment that could be made in such bonds. Accordingly, the said section has been amended so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail of exemption under section 54EC, on or after April 1, 2007 will not exceed fifty lakh rupees in a financial year."
It was sought to be argued from the language used in the aforementioned circular that the cap of Rs. 50 Lakhs in the proviso to section 54EC(1) was only an investment cap and not a deduction cap. In order to get over such argument which appears to be reasonable and the above stated decisions the proposed amendment restricting the claim to Rs. 50 lakhs is brought through necessary amendment to sub-section (1) of section 54EC by adding one more proviso by restricting the total deduction to just Rs. 50 lakhs. The proposed amendment has been carefully worded in such way to cover even cases of transfer of capital asset in the second half of the financial year whereby the assessee gets time till the beginning of the next financial year to make investment under section 54EC of the Act.
3. One Redeeming Feature
However one redeeming feature is that the assessees who resorted to this kind of tax planning by disposing of capital asset in the second half of financial year 2013-14 are still not affected by this proposed amendment as they can invest additional sum in the current financial year (2014-15) provided such investment is made within 6 months from the date of transfer as the proposed amendment would take effect only from the Assessment Year 2015-16 corresponding to the financial year 2014-15. The assessees who would have resorted to tax planning as stated above are liable for capital gains, subject to available exemptions, for the assessment year 2014-15 and as a matter of policy/principle none of the proposed amendments has been given retrospective effect.
By
Mr Pavan Kakade, Director, BMR & Associates LLP*
Mr Puneet Singh Putiani, Senior Associate, BMR & Associates LLP*.
Section 32AC: Investment Allowance to Manufacturing Companies
1. Existing provisions:
a) Under Section 32AC of the Income-tax Act, 1961 ('Act'), a manufacturing company is entitled to an investment allowance at the rate of 15 percent of actual cost of new asset acquired and installed during the Financial Years ('FYs') 2013-14 and 2014-15, if the actual cost of such new assets exceeds INR 100 Crore;
b) The quantum and manner of deduction has been provided as under:
(i) For the Assessment Year ('AY') 2014-15, a deduction of 15 percent of the aggregate amount of actual cost of new assets acquired and installed during the FY 2013-14 shall be allowed, if the cost of such assets exceeds INR 100 crore;
(ii) For the AY 2015-16, a deduction of 15 percent of aggregate amount of actual cost of new assets acquired and installed during the period beginning on April 1, 2013 and ending on March 31, 2015 shall be allowed, as reduced by the deduction allowed, if any, for the AY 2014-15;
c) The phrase 'new asset' has been defined to mean any new plant or machinery with certain exceptions;
d) Further, suitable safeguards have been provided so as to restrict the transfer of the new asset for a period of 5 years (sub-section 2 of Section 32AC of the Act). However, this restriction does not apply in a case of transfer by reason of an amalgamation or demerger.
2. Proposed amendments:
a) Sub-section (1A) is proposed to be introduced which expands the scope of this section to provide for an investment allowance of 15 percent as a deduction to a manufacturing company which acquires and installs new assets and the actual cost of such new assets acquired exceeds INR 25 Crores in that previous year.
b) For Financial Year 2014-15, this proposed deduction under sub-section (1A) will not be allowed to a company which is eligible to claim a deduction under sub-section (1).
c) No deduction under sub-section (1A) will be allowed after March 31, 2017.
d) The restrictions on transfer under sub-section (2) have been extended to assets acquired as per sub-section (1A).
e) These amendments have been made to simplify the provisions of Section 32AC and to make medium size investments in plant and machinery eligible for deduction.
This amendment will take effect from 1st April, 2015.
Section 35AD: Investment-linked incentive for specified business
1. Existing provisions:
a) Section 35AD of the Act provides an investment-linked tax incentive by providing a deduction in respect of whole of the capital expenditure incurred (except expenditure on land, goodwill and financial instrument) wholly and exclusively for the purposes of any specified business carried on by an assessee, during the previous year in which such expenditure is incurred by the assessee.
b) Specified business has been defined in clause (c) of sub-section (8). Further sub-section (5) also mentions the period within which specified business should commence.
c) Sub-section (3) of Section 35AD of the Act states that where an assessee has claimed and been allowed a deduction under Section 35AD of the Act, no deduction shall be allowed under the provisions of Part C of Chapter VI-A for the same or any other assessment year.
d) The section does not lay out a requirement that the capital assets on which deduction has been claimed should be used in the specified business for a particular time period.
2. Proposed amendments:
a) The coverage of specified business has been extended to include the following two businesses:
(i) Laying and operating a slurry pipeline for the transportation of iron ore;
(ii) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the CBDT in accordance with the prescribed guidelines.
These businesses need to be commenced post April 1, 2014 to avail of the deduction under Section 35AD of the Act. This amendment has been made to promote investment in these sectors.
b) Further, sub-section (3) has been amended to state that where an assessee has claimed and been allowed a deduction under Section 35AD of the Act, no deduction would be allowed under Section 10AA of the Act and under the provisions of Part C of Chapter VI-A for the same or any other assessment year.
c) With a view to ensure that the capital asset on which deduction is claimed is used for purpose of specified business, sub-section (7A) has been introduced to state that the capital asset on which deduction has been claimed under sub-section (1), shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset was acquired.
d) Sub-section (7B) has been introduced to state that where the capital asset is used for a purpose other than for the specified business within the period mentioned in sub-section (7A), otherwise than by way of a mode referred to in sub-section (vii) to Section 28 of the Act, then the total deduction claimed and allowed in one or more previous years as reduced by the amount of depreciation which would have been allowed under Section 32 of the Act had no deduction been claimed under Section 35AD of the Act, shall be considered as income of the assessee under the head 'Profits and gains from business and profession' in the previous year in which the asset is so used.
e) Sub-section (7C) has been introduced to provide an exception to sub-section (7B) for a sick industrial company as per the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985.
These amendments will take effect from 1st April, 2015.
3. Issues:
(i) Whether the amount, if any, taxed as business profits under sub-section (7B) would be allowed as deduction in the form of depreciation under Section 32 of the Act?
(ii) Whether the requirement that the asset should be used only for specified business for eight years would mean that the asset should be actively used in the specified business? Would passive use of the capital asset be allowed? In case the asset is given on lease by the assessee, does it result in use of asset for purpose other than specified business?
4. Resolution of the issues:
Issue no (i)
With respect to this issue, there exists no judicial pronouncement since this provision is a new provision and a similar provision does not exist under any other section of the Act.
Sub-section (4) of Section 35AD states that no deduction in respect of an expenditure referred to in sub-section (1) shall be allowed to the assessee under any other section in any previous year. Sub-section (1) allows the deduction of any capital expenditure incurred wholly and exclusively for the purposes of any specified business.
Accordingly, an interpretation may be drawn that only in a case where the expenditure is allowed as a deduction under sub-section (1), should the restriction mentioned in sub-section (4) apply. In case the provisions of the proposed sub-section (7B) apply, the deduction claimed under sub-section (1) would be reversed. Accordingly, a possible position may be taken that no deduction under Section 35AD of the Act has in effect been claimed and hence the depreciation should be allowed in the future years when the asset is used for purposes other than specified business, subject to compliance with Section 32 of the Act.
Issue no (ii)
The term 'used' has not been defined in the Act. However, the word used does find place in Section 32 of the Act, which allows depreciation for assets used for the purpose of business or profession. In the context of depreciation, it would be relevant to refer to judicial precedents which have explained the term 'used'. In this regard, it would be relevant to refer to the principles laid down in the following rulings:
• CIT v. Vishwanath Bhaskar Sathe, (1937) 5 ITR 621 (Bom.) - The word 'used' should be understood in a wider sense so as to give a wider meaning and embrace passive as well as active use.
• Whittle Anderson Ltd. v. CIT, (1971) 79 ITR 613 (Bom.) - Held that when the machinery is kept ready for use it will be said to be used for the purpose of business.
• Capital Bus Service (P) Ltd. v CIT, (1980) 123 ITR 404 (Del.) - Held that the allowance for depreciation does not depend on the actual working of the machinery; it is sufficient that the machinery in question is employed by the assessee for the purpose of the business and for no other business and it is kept ready by him for actual use.
• CIT v. Refrigeration & Allied Industries Ltd., (2000) 113 Taxman 103 (Delhi) – Held that used includes passive use of asset
Basis the aforesaid judgments, it may be considered that in case the asset is not actively used for the specified business but is available for use in specified business (ie passive use) and not being used for any other business, the condition mentioned in the proposed sub-section (7A) is complied with. However, in case the asset is given on lease by the assessee, the asset may be said to be used for purposes other than specified business and hence the consequences under the proposed sub-section (7B) may be triggered.
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Budget 2014 – Changes In Abatement Rates
Budget 2014 – Changes In Abatement Notification No. 26/2012,Service Tax Dated- 20.06.2012 Vide Notification No. 8/2014-ST Dated 11-7-2014 (Effective From 11-7-2014 Unless Otherwise Stated).
Notification No. 08/2014 – Service Tax
New Delhi, the 11th July, 2014
G.S.R….(E)- In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No.26/2012-Service Tax, dated the 20th June, 2012, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 468 (E), dated the 20th June, 2012, namely:-
1. In the said notification, in the TABLE,-
(i) against serial number 7, in column (4), after the words "has not been taken", the words "by the service provider" shall be inserted;
(ii) in serial number 8, for the entry in column (4), the following entry shall be substituted, namely:-
"CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.";
(iii) in serial number 9,-
(a) in column (2), for the words "any motor vehicle designed to carry passengers", the words "motorcab" shall be substituted with effect from the 1st day of October, 2014;
(b) for the entry in column (4), the following entry shall be substituted with effect from the 1st day of October, 2014, namely:-
"(i) CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004;
(ii) CENVAT credit on input service of renting of motorcab has been taken under the provisions of the CENVAT Credit Rules, 2004, in the following manner:
(a) Full CENVAT credit of such input service received from a person who is paying service tax on forty percent of the value; or
(b) Up to forty percent CENVAT credit of such input service received from a person who is paying service tax on full value;
(iii) CENVAT credit on input services other than those specified in (ii) above, has not been taken under the provisions of the CENVAT Credit Rules, 2004.";
(iv) after serial number 9 and the entries relating thereto, the following serial number and entries shall be inserted, namely:-
| "9A | Transport of passengers, with or without accompanied belongings, by a contract carriage other than motorcab. | 40 | CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004."; |
(v) in the serial number 9A, so inserted, for the entry in the column (2), the following entry shall be substituted with effect from such date as the Central Government may notify for omission of the words "radio taxis" in the section 66D(o)(vi) of the Finance Act 1994, namely:-
"Transport of passengers, with or without accompanied belongings, by-
a. a contract carriage other than motorcab.
b. a radio taxi.";
(vi) in the serial number 10, for the existing entry in column (3), the entry "40" shall be substituted with effect from the 1st day of October, 2014;
(vii) against serial number 11, in column (4), for the words "input services", wherever occurring, the words "input services other than the input service of a tour operator" shall be substituted with effect from the 1st day of October, 2014.
2. Save as otherwise provided in this notification, the amendments shall come into force on the 11th day of July, 2014.
[F.No. 334/15/2014 - TRU]
(Akshay Joshi)
Under Secretary to the Government of India
Note.- The principal notification was published in the Gazette of India, Extraordinary, vide notification No. 26/2012 – Service Tax, dated 20th June, 2012, vide number G.S.R. 468 (E), dated the 20th June, 2012 and was last amended by notification No.9/2013- Service Tax, dated the 8th May, 2013 vide G.S.R. 296 (E), dated the 8th May, 2013.
Budget 2014 - I-T Officers are given power to survey so as to verify deduction of tax at source
CA Dindayal Dhandaria
B.Com. (Hons.), F.C.A.
1. The Existing Provisions of Section 133A
a) The existing provisions of Section 133A of the Income Tax Act, 1961 ("the Act") provides that an income tax authority may enter
(i) any place within the limits of the area assigned to him, or
(ii) any place occupied by any person in respect of whom he exercises jurisdiction, or
(iii) any place in respect of which he is authorised for the purposes of this section by such income-tax authority, who is assigned the area within which such place is situated or who exercises jurisdiction in respect of any person occupying such place, at which a business or profession is carried on, whether such place be the principal place or not of such business or profession.
b) andrequire any proprietor, employee or any other person who may at that time and place be attending in any manner to, or helping in, the carrying on of such business or profession—
(i) to afford him the necessary facility to inspect such books of account or other documents as he may require and which may be available at such place,
(ii) to afford him the necessary facility to check or verify the cash, stock or other valuable article or thing which may be found therein, and
(iii) to furnish such information as he may require as to any matter which may be useful for, or relevant to, any proceeding under this Act.
(c) For the purposes of this sub-section, a place where a business or profession is carried on shall also include any other place, whether any business or profession is carried on therein or not, in which the person carrying on the business or profession states that any of his books of account or other documents or any part of his cash or stock or other valuable article or thing relating to his business or profession are or is kept.
(d) An income-tax authority may enter any place of business or profession referred to in sub-section (1) only during the hours at which such place is open for the conduct of business or profession and, in the case of any other place, only after sunrise and before sunset.
(e) An income-tax authority acting under this section may,—
(i) if he so deems necessary, place marks of identification on the books of account or other documents inspected by him and make or cause to be made extracts or copies therefrom,
(ia) impound and retain in his custody for such period as he thinks fit any books of account or other documents inspected by him:
Provided that such income-tax authority shall not—
(a) impound any books of account or other documents except after recording his reasons for so doing; or
(b) retain in his custody any such books of account or other documents for a period exceeding ten days (exclusive of holidays) without obtaining the approval of the Chief Commissioner or Director General therefor, as the case may be,
(ii) make an inventory of any cash, stock or other valuable article or thing checked or verified by him,
(iii) record the statement of any person which may be useful for, or relevant to, any proceeding under this Act.
(f) An income-tax authority acting under this section shall, on no account, remove or cause to be removed from the place wherein he has entered, any cash, stock or other valuable article or thing.
(g) Where, having regard to the nature and scale of expenditure incurred by an assessee, in connection with any function, ceremony or event, the income-tax authority is of the opinion that it is necessary or expedient so to do, he may, at any time after such function, ceremony or event, require the assessee by whom such expenditure has been incurred or any person who, in the opinion of the income-tax authority, is likely to possess information as respects the expenditure incurred, to furnish such information as he may require as to any matter which may be useful for, or relevant to, any proceeding under this Act and may have the statements of the assessee or any other person recorded and any statement so recorded may thereafter be used in evidence in any proceeding under this Act.
(h) If a person under this section is required to afford facility to the income-tax authority to inspect books of account or other documents or to check or verify any cash, stock or other valuable article or thing or to furnish any information or to have his statement recorded either refuses or evades to do so, the income-tax authority shall have all the powers under sub-section (1) of section 131 for enforcing compliance with the requirement made :
(i) Provided that no action under sub-section (1) shall be taken by an Assistant Director or a Deputy Director or an Assessing Officer or a Tax Recovery Officer or an Inspector of Income-tax without obtaining the approval of the Joint Director or the Joint Commissioner, as the case may be.
(j) In this section,—
(a) "income-tax authority" means a Commissioner, a Joint Commissioner, a Director, a Joint Director, an Assistant Director or a Deputy Director or an Assessing Officer, or a Tax Recovery Officer, and for the purposes of clause (i) of sub-section (1), clause (i) of sub-section (3) and sub-section (5), includes an Inspector of Income-tax;
(b) "proceeding" means any proceeding under this Act in respect of any year which may be pending on the date on which the powers under this section are exercised or which may have been completed on or before such date and includes also all proceedings under this Act which may be commenced after such date in respect of any year.
2. The proposed amendment by way of insertion of sub-section (2A)
(a) The proposed sub-section (2A) of section 133A provides that without prejudice to the provisions of sub-section (1), an income-tax authority acting under this sub-section may for the purpose of verifying that tax has been deducted or collected at source in accordance with the provisions under sub-heading B of Chapter XVII or under sub-heading BB of Chapter XVII, as the case may be, enter any office, or a place where business or profession is carried on.
(b) An income-tax authority acting under section 133A(2A) can enter, after sunrise and before sunset, any office, or any other place where business or profession is carried on, within the limits of the area assigned to him, or any place in respect of which he is authorised for the purposes of this section by such income-tax authority who is assigned the area within which such place is situated, where books of account or documents are kept.
(c) An income-tax authority acting under section 133A(2A) can require the deductor or the collector or any other person who may at that time and place be attending in any manner to such work:
(i) to afford him the necessary facility to inspect such books of account or other documents as he may require and which may be available at such place, and
(ii) to furnish such information as he may require in relation to such matter.";
(d) An income-tax authority acting under section 133A(2A) cannot also impound and retain in his custody books of account or other documents inspected by him.
(f) An income-tax authority acting under section 133A(2A) cannot also make an inventory of any cash, stock or other valuable article or thing checked or verified by him.
(g) An income-tax authority acting under section 133A(2A) cannot record the statement of any person which may be useful for, or relevant to, any proceeding under this Act.
Further Sub-clause (b) of section 133A(3)(ia) is substituted to provide that income-tax authority shall not retain in his custody any such books of account or other documents for a period exceeding fifteen days(earlier it was 10 days) (exclusive of holidays) without obtaining the approval of the Principal Chief Commissioner or the Chief Commissioner or the Principal Director General or the Director Generalor the Principal Commissioner or the Commissioner or the Principal Director or the Director therefor,as the case may be";
The above-stated proposed changes would be effective from October 1, 2014.
3. Power of Enquiry
The Finance Bill 2014 proposes to insert section 133C to provide that the prescribed income-tax authority, may for the purposes of verification of information in its possession relating to any person, issue a notice to such person requiring him, on or before a date to be specified therein, to furnish information or documents verified in the manner specified therein, which may be useful for, or relevant to, any inquiry or proceeding under this Act and for the purpose of this section, the term "proceeding" shall have the meaning assigned to it in clause (b) of the Explanation to section 133A.'
The above-stated proposed changes would be effective from October 1, 2014.
4. Changes in brief
(a) As per the existing provisions, an income tax authority has powers to enter certain places of business for the purposes of (i) inspecting books of account or other documents, (ii) verifying cash, stock or other valuable article or thing and (iii) collecting information which may be useful for any proceeding under the Act. The proposed amendment empowers the income tax authority to exercise some of these powers for the purpose of verifying whether tax has been deducted at source or collected at source in accordance with law or not.
(b) As per the existing provisions, an income tax authority exercising the powers under section 133A(1) can retain in his custody the impounded books of account or other documents for a period of ten days (exclusive of holidays) without obtaining the approval of the prescribed authorities. The proposed amendment extends this time limit from 10 days to 15 days.
(c) With a view to enable prescribed income-tax authority to verify the information in its possession relating to any person, it is proposed to insert a new section 133C in the Act so as to provide that for the purposes of verification of information in its possession relating to any person, prescribed income-tax authority, may, issue a notice to such person requiring him, on or before a date to be therein specified, to furnish information or documents, verified in the manner specified therein which may be useful for, or relevant to, any enquiry or proceeding under this Act.
Budget 2014- Changes in Place of Provision of Services Rules, 2012
Budget 2014- Changes in Place of Provision of Services Rules, 2012 Vide Notification No. 14/2014-ST Dated 11-7-2014 (Effective From 1-10-2014).
Notification No. 14/2014 – Service Tax
New Delhi, the 11th July, 2014
G.S.R…..(E).- In exercise of the powers conferred by sub-section (1) of section 66C and clause (hhh) of sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules to amend the Place of Provision of Services Rules, 2012, namely:—
(1) (1) These rules may be called the Place of Provision of Services (Amendment) Rules, 2014.
(2) They shall come into force on the 1st day of October, 2014.
(1) In the Place of Provision of Services Rules, 2012,–
(a) in rule 2 for clause (f), the following clause shall be substituted, namely:-
'(f) "intermediary" means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the 'main' service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;';
(b) in rule 4, in clause (a), for the second proviso, the following proviso shall be substituted, namely:-
"Provided further that this clause shall not apply in the case of a service provided in respect of goods that are temporarily imported into India for repairs and are exported after the repairs without being put to any use in the taxable territory, other than that which is required for such repair;‖;
(c) in rule 9, for clause (d), the following clause shall be substituted, namely:-
"(d) Service consisting of hiring of all means of transport other than,-
(i) aircrafts, and
(ii) vessels except yachts,
upto a period of one month.
[F.No. 334 /15/ 2014-TRU]
(Akshay Joshi)
Under Secretary to the Government of India
Note: The principal notification was published in the Gazette of India, Extraordinary, by notification No. 28/2012 – Service Tax, dated the 20th June, 2012 vide number G.S.R. 470 (E), dated the 20th June, 2012.
Budget 2014: Amendments proposed in connection with Tax Deducted at Source (TDS)
By KrishanMalhotra
Head Taxation - Amarchand & Mangaldas & Suresh A. Shroff & Co.
Set out below are the amendments proposed in the Finance Bill in connection with TDS:
1. Disallowance for non-deduction or non-payment of TDS:
a) The existing provisions of section 40(a)(i) of the I-T Act provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the IT Act.
The I-T Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to the residents. Under section 40(a)(ia) of the I-T Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified or filing of return of income under section 139(1) of the I-T Act. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.
In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed to amend section 40(a)(i) of the I-T Act to provide that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.
b) It is proposed to amend section 40(a)(ia) of the I-T Act to provide that in case of non-deduction or non-payment of TDS on payments made to tax residents , the disallowance will be restricted to 30% of the amount of the expenditure claimed. Currently, 100% of such amount is disallowed.
c) Currently, the non-deduction or non-payment of TDS on payments made to residents results in disallowance only with respect to certain specified categories of payments (viz. interest, commission, brokerage, rent, royalty, fee for technical services or fee for professional services). It is proposed to amend section 40(a)(ia) of the I-T Act to increase the scope of disallowance to every category of payment made to a resident on which tax is required to be deducted at source under Chapter XVII-B of the I-T Act.
2. Correction/ Rectification of TDS Quarterly Statements:
Currently, a deductor is allowed to file correction statement for rectification/updation of the information furnished in the original quarterly statement as per the Centralized Processing of Statements of Tax Deducted at Source Scheme, 2013. However, there is no express provision in the I-T Act for enabling a deductor to file correction statement. To bring clarity in the law, Finance Bill proposes to amend section 200 of the I-T Act to expressly provide that the deductor can deliver a correction statement in the prescribed form.Consequently, it is also proposed to amend section 200A (1) of the I-T Act for enabling processing of correction statement filed.This amendment is proposed take effect from October 1, 2014.
3. Time limit for deeming a person assessee in default:
Currently, section 201(3)(i) of the I-T Act provides a time limit for passing of an order for holding a person to be an assesse in default for non deduction or non payment of TDS. Such time limit is two years from the end of the financial year in which the quarterly TDS statement was filed. It is proposed to delete such provision because there is norationale for not treating the deductor as assessee in default after two years only on the basis thatthe deductor has filed TDS statement as TDS defaults are generally in respect of the transaction not reported in the TDS statement.
Additionally, section 201(3)(ii) of the I-T Act is proposed to be amended to increase the time limit for passing an order deeming a person to be an assessee on default for non payment and non deduction of TDS on payment made to residents to 7 years from 6 years. This is to align section 201(3)(ii) of the I-T Act with section 148 of IT Act (which relates to time limit for reassessment proceedings).
These amendments are proposed to take effect from October 1, 2014.
4. Penalty under Section 271H:
Section 271H of the I-T Act is proposed to be amended to provide that penalty there under will be levied by the assessing officer. This amendment is proposed take effect from October 1, 2014.
Budget 2014- Changes In Cenvat Credit Rules, 2004
Budget 2014- Changes In Cenvat Credit Rules, 2004 Vide Notification No. 21/2014-Central Excise (N.T.) Dated. 11-7-2014 (Effective From 11-7-2014).
Notification No. 21/2014-Central Excise (N.T.)
New Delhi, the 11th July, 2014
G.S.R….(E)- In exercise of the powers conferred by section 37 of the Central Excise Act,1944 (1 of 1944) and section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules further to amend the CENVAT Credit Rules,2004, namely:-
1. (1) These rules may be called the CENVAT Credit (Sixth Amendment) Rules, 2014.
(2) Save as otherwise provided in these rules, they shall come into force on 11th day of July, 2014.
2. In the CENVAT Credit Rules, 2004 (herein after referred to as the said rules), in rule 2, after clause (q), the following clause shall be inserted, namely -
„(qa) "place of removal" means-
(i) a factory or any other place or premises of production or manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,
from where such goods are removed;‟
3. In the said rules, in rule 4, -
(a) in sub-rule (1), after the second proviso, the following proviso shall be inserted with effect from first day of September 2014, namely :–
"Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub- rule (1) of rule 9.";
(b) in sub-rule (7),-
(i) for the first and second provisos the following provisos shall be substituted, namely:-
"Provided that in respect of input service where whole of the service tax is liable to be paid by the recipient of service, credit shall be allowed after the service tax is paid:
Provided further that in respect of an input service, where the service recipient is liable to pay a part of service tax and the service provider is liable to pay the remaining part, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:
Provided also that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, except in respect of input service where the whole of the service tax is liable to be paid by the recipient of service, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules :"
(ii) after the fifth proviso, the following proviso shall be inserted with effect from first day of September, 2014, namely :–
"Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub-rule (1) of rule 9.".
4. In rule 6 of the said rules, in sub-rule (8), after clause (b), the following proviso shall be inserted, namely;
"Provided that if such payment is received after the specified or extended period allowed by the Reserve Bank of India but within one year from such period, the service provider shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier in terms of sub rule (3) to the extent it relates to such payment, on the basis of documentary evidence of the payment so received.".
5. In rule 12A of the said rules, in sub-rule (4), for the words "available with one of his registered manufacturing premises", the words, figures and letter "taken, on or before the 10th July, 2014, by one of his registered manufacturing premises " shall be substituted.
[F.No. 334/15/2014-TRU]
(Akshay Joshi)
Under Secretary to the Government of India
Note.- The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), dated the 10th September, 2004, vide notification No.23/2004 – Central Excise (N.T.) dated the 10th September, 2004 vide number G.S.R. 600(E) dated the 10th September, 2004 and last amended vide notification No. 15/2014 – Central Excise (N.T.) dated 21st March 2014 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), by number G.S.R. 203 (E), dated the 21st March, 2014
The addition confirmed by ITAT amounts to Rs. 36390315 ( 70% of Rs. 51986163). Learned CIT(A) has restricted the addition to tune of 30% of Rs. 51986163 and has deleted the rest of the addition made by the Assessing Officer. So , a very good case to charge interest while effect to ITAT's order. The tax @ 33.99 % comes around Rs. 1,23,69,068.
If assessment order was passed in March , 2012, then interest is leviable from 1st may 2014 up to the date of giving effect to ITAT, order.
The amount will be substantial.
IT: Audited books of account cannot be discarded by assessee in absence of any material or evidences to show that same were incorrect
IT: Where books of account are not rejected under section 145(3), question of application of rate of net profit does not arise
■■■
[2013] 35 taxmann.com 383 (Rajkot - Trib.)
IN THE ITAT RAJKOT BENCH
Assistant Commissioner of Income-tax, Central Circle-1, Rajkot
v.
Rushabh Vatika*
T.K. SHARMA, JUDICIAL MEMBER
AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER
AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER
IT APPEAL NO. 51 (RJT.) OF 2013
[ASSESSMENT YEAR 2010-11]
[ASSESSMENT YEAR 2010-11]
MAY 30, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of income [Application of Net profit rate] - Assessment year 2010-11 - Assessee was engaged in business of real estate development - During search conducted at business and residential premises of assessee, incriminating materials were found evidencing receipt of sale consideration in cash for sale of plots (being impugned sum), which was duly accepted by assessee - Assessee credited impugned sum to its profit and loss account which was accepted by auditor - However, in its return of income, assessee first excluded impugned sum from net profit and thereafter added 20 per cent thereof - Assessing Officer taxed entire sum - Commissioner (Appeals) directed Assessing Officer to apply net profit rate of 30 per cent - Whether net profit shown by assessee in its audited profit and loss account, which was also certified by tax auditor to be true and correct, could not be discarded by assessee without bringing any material to establish that said profit and loss account and audit report were incorrect - Held, yes - Whether, therefore, net profit rate of 20% could not be taken by assessee, in absence of any detail or material to show that expenses to extent of 80 per cent were at all incurred - Held, yes - Whether, where books of account were not rejected under section 145(3), question of application of rate of net profit did not arise, and therefore, order of Commissioner (Appeals) was to be set aside - Held, yes [Paras 16,25,28 & 29] [In favour of revenue]
FACTS
| ■ | The assessee was engaged in the business of real estate development. During search carried out at the business and residential premises of assessee, incriminating materials were found evidencing receipt of cash on sale of plots over and above the money received through cheques. | |
| ■ | The assessee accepted the receiving of the impugned sum in cash. | |
| ■ | Following search operations, return was filed by the assessee along with the computation of income. In computation of income net profit shown in the audited profit and loss account was inclusive of the impugned sum. However, for tax purposes assessee first excluded the impugned sum from the net profit and thereafter added back only 20 per cent of the impugned sum. | |
| ■ | The Assessing Officer however not accepting the treatment given to the impugned sum in the computation of income brought the entire sum being collection of on-money in cash to the charge of income tax. | |
| ■ | On appeal, the Commissioner (Appeals) directed the Assessing Officer to apply net profit rate of 30 per cent (as against 20 per cent offered by the assessee) of the impugned sum on ground that possibility of incurring expenditure towards development of land, maintenance and security charges etc. could not be ruled out. | |
| ■ | On appeal by the revenue, before the Tribunal, it contended that the direction of Commissioner (Appeals) to exclude 70 per cent of the impugned sum from net profit without there being any material to justify such exclusion was improper. |
HELD
| ■ | The substance of the matter is whether the order passed by the Commissioner (Appeals), which is essentially based on facts, is sustainable on merits. The claim or controversy as made out by the assessee before the Commissioner (Appeals) is that what can be taxed is the real profit embedded in the impugned sum, which, according to the assessee, is only 20 per cent. It is quite obvious that the assessee claims remaining 80 per cent of the impugned sum as expenditure and it is on this basis that it has offered only 20 per cent thereof to tax. It is viewed that the real issue or controversy is not the one that is made out by the assessee. The real controversy on the facts of the case, is whether the net profit shown by the assessee-firm itself in its audited profit & loss account, which has also been certified by the tax auditor in terms of section 44AB to be true and correct profit of the assessee from its business, can be discarded by the assessee without bringing any material on record to establish that the said profit & loss account and audit report is incorrect. Another related issue that needs to be considered is whether net profit shown by the assessee-firm in its audited profit & loss account can be reduced by 80 per cent of the impugned sum without there being any detail or material on record to show that expenses to the extent of 80 per cent of the impugned sum were at all incurred by the assessee and allowable as such under section 37. Facts of the case are plain, simple and incontrovertible and hence a fair decision as to the sustainability of the order passed by the Commissioner (Appeals), which is essentially based on facts, can safely be reached. [Para 16] | |
| ■ | Section 145(1) provides that the income chargeable under sections 28 and 56 shall, subject to the provisions of section 145(2), be computed in accordance with each or mercantile system of accounting regularly employed by the assessee. Section 145(2) empowers the central government to notify accounting standards to be followed by any class of assessees or in respect of any class of income. Section 145(3) empowers the Assessing Officer to discard the books of account if he is not satisfied about their correctness or completeness or where the method of accounting provided in section 145(1) or accounting standards as notified under section 145(2) have not been regularly followed by the assessee. It is therefore clear that, barring the cases covered by section 145(3), the books of account maintained by an assessee are binding on the Assessing Officer and will therefore, from the basis for computation of income subject, of course, to statutory allowances/disallowances. Same logic applies to the assessee. He is bound by the entries made in his books unless he can show that they are incorrect. [Para 17] | |
| ■ | In CIT v. Amitbhai Gunvantbhai, [1981] 129 ITR 573 (Guj.), the Hon'ble jurisdictional High Court has held that the basic principle is the same in law relating to income-tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries, then it is not open to the revenue or other side to contend that what is shown by the entries is not the real state of affairs. [Para 18] | |
| ■ | It therefore follows that when a return is furnished and accounts are put in, in support of that return, the accounts should be taken as the basis for assessment and that an assessee cannot discard his own profit & loss account and balance sheet and more particularly the audit report in form No. 3CB signed by a Chartered Accountant in terms of section 44AB. The accounts audited by Chartered Accountant have very high evidentiary value. His report cannot be lightly ignored. It is binding on the Assessing Officer expect in cases falling under section 145(3) as also on the assessee. His audit report cannot be discarded by an assessee at his convenience. In order to deprive the audit report of its high evidentiary value, the assessee must establish that the Report given by the tax auditor is incorrect. The assessee was therefore under a very heavy burden to establish that its accounts, which have been duly audited and certified by the auditors to be correct, were, in fact, incorrect and that the audit report given by the tax auditor was also incorrect. In the present case the assessee has led no evidence either before the Assessing Officer or the Commissioner (Appeals) to prove that the profit & loss account the correctness of which has been certified by the tax auditor is factually incorrect or does not correctly record the details of sales /receipts/turnover and expenses. And therefore the net profit shown in the audited profit and loss account and certified by the tax auditor to be correct cannot be ignored. [Para 19] | |
| ■ | As stated, net profit from the business of the assessee was inclusive of the impugned sum in its audited profit and loss account. The aforesaid net profit has been worked out by the tax auditor after providing for all expenses. The assessee had not furnished any detail, material or evidence either before the Assessing Officer or before the Commissioner (Appeals) or otherwise placed them on record to show that the details of expenses and profit incorporated in the said profit and loss account are incorrect. In this view of the matter, the Assessing Officer was justified in taking the net profit as shown in the audited profit and loss account as profit of the business of the assessee and taxing the same accordingly. [Para 21] | |
| ■ | It shall now be considered whether there is any substance in the submission of the assessee before the Commissioner (Appeals) that it is the element of real profit in sales which alone could be brought to tax and not the entire amount of sales. The assessee has invoked real income theory in support of its claim for exclusion of 80 per cent of the impugned sum from net profit as shown in the audited profit and loss account. According to the assessee, the element of real profit in the impugned sum was only 20 per cent and therefore only 20 per cent was offered by it to tax. In the present case, the assessee has indeed collected the impugned sum in cash on sale of plots. Such collections are not illusory. They are real and represent the return in money in the hands of the assessee from its own business. The Tax auditor was obliged by law to ensure correctness of accounts and also to ensure that the profit and loss account and balance sheet reflected true state of affairs and not illusory state of affairs. It is after due verification of bills, vouchers, accounts of the parties, bank accounts, cash book, etc., as maintained by the assessee and due diligence exercised by the tax auditor in the matter that the Tax auditor has certified not only the correctness of net profit but also the correctness of the impugned sum as part of the net profit. No material has been placed either before the Assessing Officer or before the Commissioner (Appeals) to establish that the expenses debited and receipts/income credited to profit and loss account are incorrect. Therefore, the amount of net profit as shown in the audited balance sheet has to be taken as real profits of the assessee from its business. It is simply a case of under-reporting of sale price, which would have gone undetected if it had not been unearthed by the revenue authorities. The tax auditor has since incorporated the correct amount of sale price and thereafter worked out net profit in the audited profit and loss account after providing for all expenses. The net profit so worked out by the tax auditor cannot, by any stretch of imagination, be said to be illusory or unreal profit of the assessee from its business. Net profit shown in the audited profit & loss account represents real profits of the assessee's business worked out after excluding all the expenses from sales/turnover/receipts. In the face of such incontrovertible facts on record, it is difficult to hold that the impugned sum is not real profit. [Para 22] | |
| ■ | It shall now be examined as to whether there is any basis in the action of the assessee in offering 20 per cent of the impugned sum to tax before the Assessing Officer and resultantly in excluding remaining 80 per cent of the impugned sum from its net profit as shown in the audited profit & loss account. No plausible explanation or detail or evidence for seeking such exclusion has been given by the assessee either before the Assessing Officer or the Commissioner (Appeals). The only ground on which such exclusion could be sought would perhaps be on the ground that 20 per cent of the impugned sum represents net profit while remaining 80 per cent represents expenses. In this connection, reference may be made to the provisions of section 37 of the Income-tax Act which deals with deduction of expenses incurred wholly and exclusively for the purposes of business. Deduction on account of expenses incurred by an assessee is permissible only when it is established by him that (i) expenses have been incurred wholly and exclusively for the purposes of business and such expenses are not in the nature of personal or capital expenditure; (ii) such expenses have been incurred in the year in which deduction is clamed; and (iii) deductibility of such expenditure is not hit by Explanation to sub-section (1) of section 37. It is the assessee-firm which was claiming deduction of 80 per cent of the impugned sum from net profits and hence the burden was obviously on it to establish that the requirements of section 37 were satisfied. The assessee-firm has failed to discharge that burden. The claim of the assessee is thus inconsistent with the statutory provisions also. [Para 23] | |
| ■ | The reasoning given by the Commissioner (Appeals) for excluding 70 per cent of the impugned sum from net profit are not backed by any detail or evidence and therefore do not justify his order for exclusion of 70 per cent of the impugned sum. [Para 24] | |
| ■ | The issue as to whether rate of net profit could at all be applied, as done by the assessee and accepted by the Commissioner (Appeals), to assess the profits of the business of the assessee notwithstanding the fact that the assessee-firm itself has worked net profit in its profit and loss account. After careful analysis of the nature of the impugned receipts, it is convinced that the assessee has rightly recorded the amount of sale price in its books following recovery of incriminating material at the time of search and therefore the net profit shown on that basis in the audited profit & loss has rightly been certified by the tax auditor as giving a true and fair view of the profit of the assessee from its business in the year under appeal. Rate of net profit cannot be applied so as to reduce the net profit shown in the audited profit and loss account unless the expenses, sales, turnover, receipts, etc. shown in audited profit and loss account are proved to be incorrect. Application of rate of net profit is one of the methods to assess the income of an assessee where the books of account maintained by the assessee are found by the Assessing Officer to be incorrect or incomplete or not in conformity with the accounting standards notified by the central government or in the circumstances mentioned in sub-section (3) of section 145. In the present case, neither the Assessing Officer has invoked section 145(3) nor has the assessee led any evidence to prove that the items shown in the books of account or profit and loss account and balance sheet drawn on that basis are incorrect. Therefore, the question of application of rate of net profit, be it 20 per cent or 30 per cent of the impugned sum, does not arise on the facts of the case. [Para 25] | |
| ■ | In the present case the revenue could detect realizations of sale proceeds in cash on sale of plots of land as a result of incriminating materials recovered during search. On being confronted, the assessee had no option except to admit collection of part of sale proceeds in cash. It is in this background that the impugned sum has been credited by the assessee to its profit and loss account. Tax auditor has also certified the correctness of the impugned sum as part of net profit of the assessee. All the expenses on the development of plot were duly recorded in the books. Placed in this fact-situation, the assessee, with a view to reduce its tax liability, returned 20 per cent of the impugned sum as income and resultantly claimed 80 per cent thereof as expenses without furnishing even the details of expenses or evidence in support thereof. The burden was obviously on the assessee to substantiate its claim for expenses to the extent of 80 per cent of the impugned sum, which the assessee failed to discharge. Perusal of the order passed by the Assessing Officer and the Commissioner (Appeals) shows that the assessee has never furnished any detail or evidence in support of such expenses either before the Assessing Officer or the Commissioner (Appeals). Such details or supporting vouchers were not given to the tax auditor also else he would have recorded them in the profit and loss account or made a comment in this behalf in his audit report. In the absence of details of such expenses and evidence in support thereof, it cannot be said that net profit as worked out by the tax auditor in profit & loss account is incorrect or does not represent the real income of the assessee. Having admitted in the profit and loss account that the impugned sum represents part of its net profit from the operations of business, the assessee cannot be allowed to plead that the said net profit should not form the basis for assessment of its income and tax thereon. There cannot be two sets of net profits:one for the general public, financial institutions, stakeholders and for distribution amongst partners and the other for income-tax authorities. [Para 26] | |
| ■ | In view of the foregoing, we are unable to agree with the Commissioner (Appeals) that 30 per cent of the impugned sum alone is liable to be taxed. His order suffers from several infirmities some of which are as under: | |
| ■ | He acted upon those submissions of the assessee which were neither supported by any detail or evidence. He straight away applied certain decisions referred to by the assessee without examining as to whether the case of the assessee fits in those fact-situations or not. | |
| ■ | Having noted that there was no evidence to establish that the assessee-firm had incurred any expenditure to earn the impugned sum, the Commissioner (Appeals) still allowed 70 per cent of the impugned sum as expenditure ignoring the fact that the claim for such deduction was not only inconsistent with the assessee's own audited books of account but also the statutory provisions contained in the income-tax Act. He proceeded to assume without there being any evidence on record that the assessee-firm must have paid unaccounted money for purchasing the land and developing it before selling them. [Para 28] | |
| ■ | Materials available on record clearly indicate that the impugned sum would have gone completely untaxed if the revenue authorities had not carried out search operations. No evidence was found even at the time of search that the assessee had incurred any expenditure over and above those reflected in the books. In the face of recovery of such materials during search operations, the assessee had no option except to credit the impugned sum as a whole to its profit and loss account. After crediting the impugned sum to the profit and loss account as a result of detection by the revenue, the assessee made yet another attempt to evade payment of legitimate taxes due to the State by excluding 80 per cent of the impugned sum from net profit worked out by the tax auditor in the audited profit and loss account, which the assessee failed to substantiate. The assessee has deliberately suppressed and thereby concealed the particulars and/or furnished inaccurate particulars of its true income in the return of income by claiming deduction to the extent of 80 per cent with full knowledge that claim for such deduction was inconsistent with its own audited books of account and statutory provisions of the Income-tax Act and therefore completely untenable on facts and in law. It is an open and shut case of bogus claim for deduction to the extent of 80 per cent of the impugned sum so as to evade payment of legitimate taxes due to the State. [Para 29] | |
| ■ | In view of the foregoing, we are unable to sustain the impugned order passed by the Commissioner (Appeals). His order is therefore reversed and that of the Assessing Officer restored. Resultantly, the appeal filed by the revenue is allowed. [Para 30] |
CASE REVIEW
CIT v. Gurubachhan Singh J. Juneja [2008] 302 ITR 63/171 Taxman 406 (Guj.); CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj)and CIT v. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.) (para 27) distinguished.
CASES REFERRED TO
Shiv Cotex v. Tirgun Auto Plast (P.) Ltd. [2011] 9 SCC 678 (para 12), Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC)(para 17), CIT v. Amitbhai Gunvantbhai, [1981] 129 ITR 573 (Guj.) (para 18), Regina v. Inland revenue Commissioner, Ex Parte Matrix-Securities Ltd.[1994] 1 WLR 334 (HL) (para 26), CIT v. Gurubachhan Singh J. Juneja [2008] 302 ITR 63/171 Taxman 406 (Guj.) (para 27), CIT v. President Industries[2002] 258 ITR 654/124 Taxman 654 (Guj.) (para 27) and CIT v. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.) (para 27).
D.R. Soni for the Appellant.
ORDER
D. K. Srivastava, Accountant Member - The appeal filed by the Revenue is directed against the order passed by the learned Commissioner (Appeals) {"CIT(A)" in short} on 19-12-2012, on the following grounds:-
| "1. | The Ld. CIT(A) has erred in law and on facts in restricting the addition to Rs.51,98,616/- out of total addition of Rs.4,15,88,930/- made on account of suppression of profit on sale of plots and accordingly given relief of Rs.3,63,90,314/-." | |
| "2. | On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer on the above point." |
2. Relevant facts of the case as culled out from the records are as under:
| (i) | The assessee is a partnership firm. It is engaged in the business of real estate development. Search and seizure operations u/s 132 of the Income-tax Act were carried out at the business and residential premises of Seth Group including the partners of the assessee-firm on 15-09-2009. The assessee-firm is one of the business concerns of the said Group. | |
| (ii) | It was found that the assessee-firm had developed a project known as "Rushav Vatika" at Ahmedabad. During the course of search, incriminating materials were found evidencing receipt of on-money (being cash component of the transactions) on sale of plots over and above the money received through cheques. On being confronted, the assessee-firm admitted to have realized on-money (being cash component of the transactions) on sale of plots, which has since been quantified at Rs.5,19,86,163/- as "Additional cash sales disclosed during search" and credited as such to the audited profit & loss account over and above the amount received through cheques. The said sum of on-money (Rs.5,19,86,163/-) shall here-in-after be referred to as the impugned sum. It is admitted by the assessee and accepted by both the AO and the ld. CIT(A) that the impugned sum has been collected in cash on sale of plots of land over and above the amount collected through cheques. | |
| (iii) | Following search operations u/s 132, proceedings were initiated by the AO u/s 153C of the Income-tax Act pursuant to which return was filed by the assessee-firm on 29-09-2010 returning total income at Rs.1,67,36,540/-. The said return of income was accompanied by "Computation of income" the details of which are given in Para 4.0 of the assessment order as under: | |
| "4.0 As per the computation of income accompanying the audit report, the assessee had worked out income for the purpose of tax, as under:- |
| Net profit as per P&L account | 5,31,03,690 | ||
| Less: Additional cash sales disclosed during search credited to P&L account, separately treated | 5,19,86,163 | ||
| | 11,17,527 | ||
| Add: TDS interest | 11,776 | | |
| Add: Provision for Income-tax | 52,00,000 | ||
| Add: Donation u/s 80G treated separately | 20,000 | ||
| Add: GP @ 20% on account of additional sales disclosed during search (Rs.5,19,86,163 x 20%) | 1,03,97,233 | 1,5629,009 | |
| Less: Ded. u/s 80G | 10,000 | ||
| Taxable profit | 1,67,36,536" |
| (iv) | Net profit shown at Rs.5,31,03,690/- in the audited profit & loss account is inclusive of the impugned sum. For tax purposes, the assessee proceeded to work out its taxable income in the said Computation of Income in which the assessee first excluded the impugned sum from the net profit shown in the audited profit & loss account and thereafter added back only 20% of the impugned sum with the result that the amount of net profit as shown in the audited profit & loss account stood reduced by 80% of the impugned sum in the Computation of Income for income-tax purposes. | |
| (v) | In the Computation of Income filed with the return of income on the basis of which total income has been returned, the assessee has thus excluded 80% of the impugned sum (Rs.5,19,86,163/-) and resultantly reduced its net profit to Rs.1,67,36,536/- for tax purposes as against Rs.5,31,03,690/- shown in the audited profit & loss account and accordingly offered such reduced amount of net profit to tax. |
3. The Assessing Officer ("AO" in short) however did not accept the aforesaid treatment given to the impugned sum in the Computation of Income and therefore brought the impugned sum being entire collection of on-money in cash to the charge of income tax. Since the assessee had already offered a sum of Rs.1,03,97,233/- being 20% of the on-money for tax, the AO brought the remaining sum, i.e., Rs.4,15,88,930/-, to the charge of income-tax, with the following observations:
"6. The reply of the assessee has been considered, but the same is not acceptable. Vide para (2) of the above submission, the assessee had taken the plea that, the entire undisclosed sales should not be treated as income since sales do not constitute income, particularly when no evidence of undisclosed income is found. However, this is false, in light of the detailed discussion of incriminating evidence made in the first part of this order. Further the assessee had not furnished any details of expenses to justify his offering of only 20% profit from sale of plots. In fact, all the expenses have already been booked in the regular books of accounts. The sale price was suppressed, but for the seized materials, which threw light to the extent of suppression of sale price and quantified the sale price. The difference between the purchase price/documented price plus the expenses and the sale price is the profit margin of the assessee, which has to be brought to tax. Therefore, the assessee has failed to justify its claim of having earned only 20% from sale of plots.
6.1 Again, vide para (1) of the above submission, the assessee had relied upon the decision of the Hon. Gujarat High Court in the case of CIT Vs Gurbachan Singh Juneja (215 CTR 509) in order to justify that, there are costs always associated with any kind of real estate development, be it plotted development or otherwise and that the matching principles of revenue and cost is universally recognized in accounting theory and hence whenever revenue is shown to have been earned and is recognized for the purpose of taxing the same, the associated and matching cost would also have to be allowed as a deduction therefrom and such costs are deemed to have been incurred irrespective of the material found during search. However, all the above relied judgment is distinguishable from the facts and circumstances of the case because, the assessee is not in any manufacturing activity where the argument of considering only the gross profit as income could be taken. In the business of purchasing and selling of land, question of any other unaccounted expenditure does not arise. Moreover, no such details could be furnished by the assessee. Further, as discussed supra, the onus is on the assessee to justify the claim of expenses (with supporting evidences) in which he has failed. Hence, there is no alternative presumption but to conclude that the entire suppressed sale is the neat profit from such venture.
6.2 Again para (1) supra, it is the contention of the assessee that, in a scheme of plotted development, costs were incurred for various purposes such as internal roads, land improvement, land leveling, marketing charges, administrative charges, maintenance of fencing, security charges, borrowing charges, etc and if the corresponding expenditure is also unaccounted but not found, it cannot be presumed, in the light of aforesaid theory, that such expenditure would not have been incurred at all, because, there could be no supporting evidence required in respect of unaccounted expenditure. However, this contention is also not acceptable because, the entire cost of development has already been accounted for by the assessee in its books.
Hence, there is no reason to believe that the assessee has actually incurred expenditure out of case sales.
6.3 Vide para (3) supra, the assessee had contended that, percentage of profit on sales is around 10% in respect of builders and developers and under the presumptive scheme of taxation for construction business, the rate of profit provided for in the Act is 8% and that, the department itself, in the assessee's own group cases in earlier years, had adopted such percentage profit at 10% and therefore, the profit margin of 20% is justified. However, this argument is not acceptable because, no real estate development activity was carried out on these plots. These plots were purchased and basic amenities developed thereon, and sold thereafter. Hence, the resemblance of assessee's activities to a builder, for this particular venture, is not correct. So far as the assessee's contention that the department had accepted 10% profit in earlier search relevant assessment proceedings u/s 158BC are concerned, it is pertinent to bring on record that, the evidences gathered during search clearly indicated the extent of suppression of receipt and hence, adopting an ad-hoc percentage of profit is quite illogical. Therefore, the assessee's plea to take cue from department's own findings in various group cases, of the orders passed u/s 158BC is also not acceptable. Further, the profit margin of 10% so cited by the assessee to have been accepted by the department, was not during assessment stage, but at a later appellate stage, wherein, it may be possible that, due to smaller tax effect or absence of substantial question of law, the matter may not have been contended further. This in no way makes the profit margin of 10% or 20% sacrosanct. In light of the above, the approach of the assessee to offer only 20% as profit earned from sale of plot is not acceptable because, the assessee has failed to justify such margin and that, the balance of alleged cost is not supported by any evidence and further, whatever legal and allowable expenses would have been there, the same has already been debited. It would be pertinent to mention here that, statement of Shri Mukesh M Sheth, a key member of the Sheth group, was recorded u/s 132(4) on 23.10.2009. During the course of search and in the statement recorded u/s 132(4), he had categorically stated that, income from this sale, not taken in the books, is offered for taxation. However, it was never stated that the income would only be 20% of the unaccounted receipts. In light of the above discussion, the whole of the unaccounted receipt, determined at Rs.5,19,86,163/- is taken as income of the assessee, not fully disclosed in the books of accounts. Since the assessee has offered in the return of income, only 20% i.e. Rs.1,03,97,233/-, out of the total unaccounted receipts of Rs.5,19,86,163/-, accordingly the difference of Rs.4,15,88,930/- is added to its total income. Since the assessee had furnished inaccurate particulars of income, penalty proceedings u/s 271(1)(c) is initiated."
4. On appeal, the learned CIT(A) however directed the AO to apply net profit rate of 30% (as against 20% offered by the assessee) of the impugned sum being on-money collected by the assessee with the following observations:-
"6. I have carefully considered the submissions made by the appellant and have gone through the assessment order passed by the Assessing Officer.
6.1 The AO has determined the on-money receipts arising from sale of plots in Rushabh Vatika project at Rs.5,19,86,163/-. The quantum of on-money receipts is not disputed by the appellant. The appellant has disclosed net income @ 20% on the unaccounted receipts in the return of income. However, the AO has taxed the entire unaccounted receipts of Rs.5,19,86,163/- as income of the assessee, not disclosed in the books of account. The appellant having already disclosed profit of Rs.1,03,97,233/- @ 20% on unaccounted receipts, the balance amount of Rs.4,15,88,930/- is added by the AO to the total income.
6.2 The germane issue that needs to be decided is as to whether the entire unaccounted receipts can be taxed as income or only the profit element on such unaccounted sales/unaccounted receipt/on-money receipts can be brought to tax. This is a fact that the details relating to unaccounted expenditure have not been found during the course of search proceedings. However, that does not mean that there would be no associated expenditure at all for the purpose of making unaccounted sales. The definite possibility of having expenditure towards development of land, maintenance and security charges, administrative and marketing costs etc. cannot be ruled out even if no such expenditure has been debited in the books of accounts even partially. It is also an undisputed reality that even purchase of land requires unaccounted consideration to be paid in addition to the amount of such consideration recorded in the books. The entire unaccounted sales/unaccounted receipts/on-money receipts cannot be subjected to tax as income of the assessee. Only the estimated profits on such unaccounted sales can be assessed to tax with a macro-perspective view of the issue under consideration. Further, I do not agree with the AO that only in respect of manufacturing concerns, the gross profits can be taxed in respect of unaccounted sales. The concept and principle of taxing only the estimated profits in respect of unaccounted sales applies to all concerns/entities including trading concerns, developers, builders etc. There is a consistent view of the Courts that the entire amount of unaccounted receipts / unaccounted sales/on-money receipts cannot be brought to tax in the cases of builders and developers. Only the net profit embedded in the gross unaccounted receipts can be taxed. In the case of CIT vs Gurubachhan Singh J. Juneja [2008] 302 ITR 63 (GUJ.) it has been held by the Hon'ble High Court of Gujarat that:-
'In absence of any material on record to show that there was any unexplained investment made by the assessee which was reflected by the alleged unaccounted sales the finding of the Tribunal that only the gross profit on the said amount can be brought to tax does not call for any interference'.
6.3 Similarly the facts of the case of CIT vs. Samir Synthetics Mill [2010] 326 ITR 410 (GUJ.) are that as a result of search by the Excise Department in the business premises of the assessee, various discrepancies were noted in the production of the assessee. The assessee could not even be able to reconcile the production, sales and the closing stock although the specific opportunity was provided by the Assessing Officer. Accordingly addition to the assessee's income was made on account of suppression of sale consideration. It was held by the Tribunal as under:
'Under these circumstances, we agree with the Commissioner of Income-tax (Appeals) that the assessee failed to explain the suppression of production of 18,80,500 meters of cloth. We also fully agree that any addition that is to be made is not in respect of the sale consideration but only in respect of the profit. As in this case no evidence has been brought out on record which may prove that the assessee has claimed all the expenses in the profit and loss account it is a case only of suppression of the sale consideration. In our opinion, in this regard, the judgment of the jurisdictional High Court in the case of CIT v. President Industries [2002] 258 ITR 654 (Guj.) is fully applicable.'
Considering the concurrent findings of CIT(A) as well as Tribunal regarding the amount of addition on account of papers found during the search, it has been held by the Hon'ble High Court of Gujarat that there is no merit in the Department's appeal since whether there was any suppression of sale or not is basically a question of fact. Thus, in the above case the addition was justified on account of suppression of the sale consideration but only to the extent of profit.
6.4 So far as the contention of the AO, that in the present case complete evidence of on-money receipts in respect of all the cases was found and, therefore, there was no requirement of any extrapolation as well as estimation of income unlike other cases/projects of the same group like Silver Springs, is concerned, it makes no difference at all as to whether the entire unaccounted receipts is determined by way of extrapolation based on the single instance of on-money receipts or on the basis of complete evidence of on-money receipts. The moot issue is that the entire quantum of unaccounted receipts is not disputed by the appellant at all in both the projects. Once the quantum of entire unaccounted receipts /sales is undisputed, the manner of arriving at the same by way of extrapolation or on the basis of complete evidence is hardly a relevant factor for the purpose of estimation of profits on such unaccounted sales.
6.5 In view of the above, I am of the considered opinion that the entire unaccounted sales/on-money receipts cannot be taxed in the hands of the appellant and only estimated profits on such unaccounted receipts can be taxed in the hands of the appellant.
6.6 So far as the estimation of profit which should be taxed in the hands of the appellant is concerned, it is pointed out by the appellant that the Hon'ble Commission has determined the net profit which should be charged in respect of the projects Kothariya 172, Silver Stone and Silver Springs @ 30% in place of 20% disclosed in the returns of income as well as in the application submitted before the Settlement Commission. This is also a fact that both Silver Springs and Rushabh Vatika are nearby projects situated in Chekhla Village having identical business of selling of plots of land. The Hon'ble Commission while estimating the profits of silver springs @ 30% has duly considered the business activities of nearby Rushabh Vatika Project for the purpose. Therefore, it cannot be disputed that the estimation of profits of the appellant in respect of Rushabh Vatika Project has to be in tune with the estimation of profits in the cases of Silver Springs as settled by the Commission unless any differentiating evidence in respect of Rushabh Vatika Project is brought on record. It is further noted that Shri Mukesh M. Sheth, a key person of the group in the statement recorded u/s 132(4) of the Act has clearly admitted the fact of unaccounted sales and offered to tax the income or profit arising out of the said unaccounted sales. The entire unaccounted sales has not been offered/disclosed as income as is evident from the perusal of the statement recorded.
6.7 It is further noted that the appellant has shown the gross profit of Rs.67,34,398/- on its accounted sales of Rs.3,69,66,577/- in respect of Rushabh Vatika Project. Thus, the gross profit shown on the accounted sales is 18.22%. Therefore, the contention of the appellant, that for the same scheme of land plots, the Department has taxed the income @ 12% for block period ending on 12.09.2002 which has become final, is not justified so far as the present year is concerned wherein disclosed gross profit on accounted sales is 18.22%. It is also an admitted fact that in respect of unaccounted sales, the margin of profit is always higher.
6.8 In view of the above and considering the order of the Settlement Commission in respect of Silver Springs wherein profit has been estimated @ 30% instead of 20% offered in the return of income, it would be fair and reasonable to adopt the same rate of estimated profit even in the case of Rushabh Vatika Project of the appellant. The total unaccounted sales in the present case is Rs.5,19,86,163/-. The estimated profits on such unaccounted sales @ 30% amounting to Rs.1,55,95,849/- is accordingly taxed in the case of the appellant. Since the appellant has already disclosed profit of Rs.1,03,97,233/- @ 20% on the quantum of unaccounted sale, the balance amount of Rs.51,98,616/- is, therefore, sustained out of total addition made by the AO at Rs.4,15,88,930/-"
5. Aggrieved by the order passed by the learned CIT(A), the Revenue is now in appeal before this Tribunal. In support of appeal, the learned Departmental Representative relied upon the assessment order passed by the AO. He reiterated the facts admitted by the assessee before the Revenue authorities and also brought on record by the AO. According to him, there is no dispute that the assessee has received the impugned sum representing cash received on sale of plots (termed as on-money), which has since been credited to its profit & loss account and therefore it was not open to the assessee to artificially reduce the same by 80% in its Computation of Income filed along with the return. He further submitted that the assessee gave no detail or basis for excluding 80% of the impugned sum from net profit shown in the profit & loss account. And yet the CIT(A) directed the AO to exclude 70% of the impugned sum from net profit without there being any material on record to justify such exclusion. According to him, the order of the CIT(A) should therefore be vacated and entire net profit as shown in the profit & loss account be brought to the charge of income-tax as done by the AO.
6. The appeal was listed for hearing on 11-04-2013. Notice of hearing was sent by RPAD, vide RPAD No.1022 dated 28.2.2013 from Rajkot HO 360 001, to the respondent-assessee, as per records available with the Registry and verified by us. Acknowledgement slip has been received back from the postal authorities evidencing service of the said notice on the assessee. On the aforesaid date of hearing, i.e., 11.4.2013, application for adjournment was received on the letter head of a firm of chartered accountants, namely, M/s M. J. Rindani & Associates, seeking adjournment, which reads as under:
"In the matter of
| M/s. Rushbh Vatika | … … … | Respondent | |
| Appeal No | . … … … | 51/Rjt/13 | |
| Date of hearing | … … … | 11.04.2013 |
The above matter is fixed for hearing before Your Honours on 11.04.2013. We most respectfully request that above matter kindly be adjourned to a date convenient to the Bench.
Yours Sincerely,
Sd./- Illegible
For M.J. Rindani & Associates
CC to Sr. D.R."
7. The said firm of chartered accountants could however neither produce a duly executed power of attorney by which it was authorized by the assessee-firm to represent it before this Tribunal nor could give any cause for seeking adjournment.
8. Section 288 of the Income-tax Act contains provisions relating to "Appearance by authorized representative" before the Income-tax authorities as well as before this Tribunal. According to sub-section (1) of section 288, any assessee who is "entitled or required to attend" before any income-tax authority or this Tribunal in connection with any proceeding under the Income-tax Act otherwise than when required under section 131 to attend personally for examination on oath or affirmation may, subject to the other provisions of section 288, attend by an authorized representative. Sub-section (2) of section 288 defines "authorized representative" as a person authorized by the assessee in writing to appear on his behalf, being a person specified in seven clauses of section 288(2). A chartered accountant is one of the persons who can be authorized by the assessee in writing to appear on his behalf before this Tribunal. Rule 17 of the Income-tax (Appellate Tribunal) Rules also requires such an authorization in writing to be filed by the authorised representative for the assessee before the commencement of the hearing. Papers/documents filed or submissions made by a chartered accountant on behalf of an assessee cannot be acted upon unless he files a valid authority in writing duly executed by the assessee authorizing him to appear on his behalf, as required by section 288(2), before commencement of hearing. In the present case, date of hearing was set more than a month in advance and therefore the chartered accountants, if they were really engaged by the assessee-firm to represent it before this Tribunal, had ample time after service of notice of hearing to get the requisite authority in writing from the assessee and file the same before this Tribunal either before or at least at the time of seeking adjournment. Apparently, they did not file any such authority in terms of section 288(2) and yet purported to file application for adjournment in the matter. The representative (office staff) from the said firm of chartered accountants, who had placed the adjournment application for consideration, was specifically called upon to produce the authority from the assessee in terms of section 288(2). He could not do so.
9. Perusal of the application for adjournment shows that it has been filed "For M.J. Rindani & Associates" and not on behalf of the assessee. In Circular No. F.161-Ad.(AT)/70 dated 30th December 1971 issued by this Tribunal, it has been clarified that an authorized representative can only be an individual and not a firm or legal body. Therefore, the said firm of Chartered Accountants can neither act on behalf of the assessee nor be authorized by the assessee as authorised representative and therefore the application for adjournment filed by the said firm of chartered accountants cannot be considered for this reason also as valid application for adjournment.
10. Parties are expected to prepare for the hearing and be ready to attend once the date of hearing is set. However, in some unavoidable circumstances, it may not be possible for the parties to the proceeding to proceed on the scheduled date in which case they can request for adjournment. It is a fairly settled proposition of law of adjournments that adjournments cannot be sought at leisure or pleasure of a party to proceeding and that adjournment can be granted only if sufficient cause is shown for seeking adjournment. The aforesaid principle is now statutorily recognised by Rule 1 of Order XVII of the Code of Civil Procedure which provides that the Court may, if sufficient cause is shown, at any stage of the suit grant time to the parties or to any of them, and may from time to time adjourn the hearing of the suit for reasons to be recorded in writing. The adjournment application filed by the said firm of chartered accountants does not contain any cause for seeking adjournment. In the absence of "sufficient cause" being shown in the application for adjournment, the application for adjournment cannot be entertained.
11. A court or tribunal has general power to postpone or adjourn a hearing to such time and place, and on such terms, as are just. An adjournment is, for the most part, a matter of discretion for the court. This means that the court does not have to grant an adjournment but must consider what the parties say are the reasons for seeking adjournment. Adjournments are not given automatically or at the leisure or pleasure of parties. Support for this proposition can be drawn from Proviso (b) to Rule 1 of Order XVII of the Code of Civil Procedure which provides that no adjournment shall be granted at the request of a party, except where the circumstances are beyond the control of that party. In deciding an adjournment request, the court/tribunal will consider whether an adjournment is necessary in order to provide an opportunity for a fair hearing. In making its decision, the court will balance the interests of the parties and the interests of the administration of justice in the orderly disposal of matters before it on their merits. The party seeking adjournment is obliged by law to apprise the court/tribunal of all the reasons on the basis of which adjournment is sought. In a case where sufficient cause is shown for seeking adjournment, the court/tribunal may, at its discretion, grant adjournment if it is satisfied that the party seeking adjournment has made all reasonable efforts to avoid the need for an adjournment. Adjournment requests not supported by any cause or reason are liable to be rejected.
12. In Shiv Cotex v. Tirgun Auto Plast (P.) Ltd. [2011] 9 SCC 678, the Hon'ble Supreme Court has held that a party to the suit is not at liberty to proceed with the trial at its leisure and pleasure and has no right to determine when the evidence would be let in by it or the matter should be heard. The Hon'ble Supreme Court has expressed its displeasure and disapproval in the practice of litigants seeking unnecessary adjournments and courts granting them. It has also been held that the parties to a suit, whether plaintiff or defendant, must co-operate with the court in ensuring the effective work on the date of hearing for which the matter has been fixed. If they don't, they do so at their own peril.
13. In cases where date of hearing is set quite well in advance giving parties sufficient time to prepare their cases, as in the present case, requests for adjournments can be rejected if such requests are made (i) by persons not authorized in terms of section 288 of the Income-tax Act; (ii) without giving sufficient cause for seeking adjournment; (iii) to prolong the disposal of a case; (iv) without satisfying the court that party seeking adjournment has genuinely made all reasonable efforts to avoid the need for adjournment; or (v) in matters where relevant details including legal position governing the issue are on record and the matter can be disposed of on merits even without the presence of the parties. The adjournment request received from M/s M.J. Rindani & Associates deserves to be rejected on each of the aforesaid grounds.
14. It is relevant to mention that the tax implication in the matter under appeal is well above 10 millions of rupees. The assessee-firm has already got substantial relief from the first appellate authority {i.e., CIT(A)} on the basis of elaborate submissions, both on facts and in law, made before him. It is no longer under pressure to get the appeal filed by the Revenue disposed off at an early date as the appeal filed by the Revenue may go against the assessee in which case the assessee would be liable to discharge entire tax liability including the one which has been knocked down by the ld. CIT(A). It is now the Revenue which is aggrieved by the order of the first appellate authority. The assessee had more than one month after service of notice of hearing to prepare for the hearing and be ready to attend on the date of hearing. It is in the interest of both the parties if the appeal is disposed of at the earliest as all the relevant facts/details including legal position governing the issue are on record.
15. In view of the aforesaid, the application for adjournment was rejected and the factum of rejection was announced in the open court. Nobody entered appearance on behalf of the assessee. On the facts found by the AO/CIT(A) and the law applicable to those facts, it was felt that the appeal could be disposed of on merits after rejecting the application for adjournment. In this view of the matter, the appeal was heard ex-parte qua the assessee.
16. We have heard the ld. Departmental Representative and also perused the materials available on record including the submissions made on behalf of the assessee before the AO/CIT(A). Leaving aside the issue of adjournment, the substance of the matter is whether the order passed by the ld. CIT(A), which is essentially based on facts, is sustainable on merits. The claim or controversy as made out by the assessee before the CIT(A) is that what can be taxed is the real profit embedded in the impugned sum, which, according to the assessee, is only 20%. It is quite obvious that the assessee claims remaining 80% of the impugned sum as expenditure and it is on this basis that it has offered only 20% thereof to tax. In our view, the real issue or controversy is not the one that is made out by the assessee. The real controversy on the facts of the case, in our considered view, is whether the net profit shown by the assessee-firm itself in its audited profit & loss account, which has also been certified by the Tax Auditor in terms of section 44AB to be true and correct profit of the assessee from its business, can be discarded by the assessee without bringing any material on record to establish that the said profit & loss account and audit report is incorrect. Another related issue that needs to be considered is whether net profit shown by the assessee-firm in its audited profit & loss account can be reduced by 80% of the impugned sum without there being any detail or material on record to show that expenses to the extent of 80% of the impugned sum were at all incurred by the assessee and allowable as such u/s 37 of the Income-tax Act. Facts of the case are plain, simple and incontrovertible and hence a fair decision as to the sustainability of the order passed by the CIT(A), which is essentially based on facts, can safely be reached. They are as under:
| (i) | Incriminating materials were found at the time of search evidencing receipt of a part of sale consideration in cash on sale of plots (being the impugned sum), which has been duly accepted by the assessee. | |
| (ii) | No material was found at the time of search or even thereafter to show that any extra expenditure was incurred over and above those shown in the books of account and profit & loss account prepared on that basis on development of plots sold. | |
| (iii) | The assessee also could not furnish any detail or evidence either before the AO or before the ld. CIT(A) to show that any expenditure other than that shown in the audited profit & loss account was incurred or that the cost of sales was higher than the one shown in the profit & loss account. | |
| (iv) | The impugned sum has been credited to profit & loss account and therefore stands treated by the assessee-firm itself as part of its net profit. | |
| (v) | Net profit inclusive of the impugned sum as credited to audited profit & loss account stands not only incorporated as sources of funds in the books but also applied as per books otherwise the balance sheet would not tally. | |
| (vi) | The assessee-firm has first excluded the impugned sum from the net profit as per audited profit & loss account and thereafter added 20% thereof to such net profit, in its Computation of Income filed along with the return of income without furnishing any detail or evidence at any stage of the proceedings to substantiate its claim for exclusion of 80% of the impugned sum from net profit as shown in the audited profit & loss account. |
17. Section 145(1) provides that the income chargeable under sections 28 and 56 of the I-T Act shall, subject to the provisions of Section 145(2), be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Section 145(2) empowers the Central Government to notify accounting standards to be followed by any class of assessees or in respect of any class of income. Section 145(3) empowers the AO to discard the books of account if he is not satisfied about their correctness or completeness or where the method of accounting provided in section 145(1) or accounting standards as notified under section 145(2) have not been regularly followed by the assessee. It is therefore clear that, barring the cases covered by section 145(3), the books of account maintained by an assessee are binding on the AO and will therefore form the basis for computation of income subject, of course, to statutory allowances/disallowances. Same logic applies to the assessee. He is bound by the entries made in his books unless he can show that they are incorrect. The aforesaid view is duly supported by the judgment of the Hon'ble Supreme Court in Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, in which a Bench of three Judges of the Hon'ble Supreme Court has held as under:
"It is no doubt true that the entries in the account books of the assessee amount to an admission that the amount in question was laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income was derived during the previous year. An admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the person who made the admission to show that it is incorrect."
18. In CIT v. Amitbhai Gunvantbhai [1981] 129 ITR 573 (Guj.), the Hon'ble jurisdictional High Court has held that the basic principle is the same in law relating to income-tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries, then it is not open to the Revenue or other side to contend that what is shown by the entries is not the real state of affairs.
19. It therefore follows that when a return is furnished and accounts are put in, in support of that return, the accounts should be taken as the basis for assessment and that an assessee cannot discard his own profit & loss account and balance sheet and more particularly the Audit Report in Form No.3CB signed by a Chartered Accountant in terms of section 44AB of the Income-tax Act. Section 44AB has been inserted in the Income-tax Act with effect from 1.4.1985 to provide for audit of accounts in cases specified therein. Rule 6G(1)(b) and (2) of the Income-tax Rules provides that the report of audit of the accounts of a person required to be furnished u/s 44AB shall be in Form No.3CB and the particulars which are required to be furnished u/s 44AB shall be in Form No.3CD. Perusal of Report of Audit in Form No.3CB shows that the Tax Auditor is required to certify that the balance sheet and the profit & loss account/income & expenditure account are in agreement with the books of account maintained by the assessee and also that the profit & loss account/income & expenditure account give a true and fair view of the profit/loss or surplus/deficit of the assessee for the relevant year. In pursuance of the aforesaid statutory requirements, the assessee-firm filed Audit Report in Form No.3CB accompanied by "Statement of particulars required to be furnished u/s 44AB" in Form No.3CD, before the AO. A Tax Auditor is required not only by professional ethics but also by law (i.e., the legislative scheme of section 44AB) to be impartial and objective in his reporting. Apart from being an expert in accounting, audit, tax and financial matters, a Chartered Accountant in his role as Tax Auditor is also trusted by the Legislature and that is why he has been assigned the role of a Tax Auditor under several provisions of the I-T Act. The accounts audited by him have very high evidentiary value. His report cannot be lightly ignored. It is binding on the AO except in cases falling u/s 145(3) as also on the assessee. His Audit Report cannot be discarded by an assessee at his convenience. In order to deprive the Audit Report of its high evidentiary value, the assessee must establish that the Report given by the Tax Auditor is incorrect. Unless an assessee proves that the Audit Report given by a Tax Auditor u/s 44AB is incorrect, he cannot discard it. The assessee was therefore under a very heavy burden to establish that its accounts, which have been duly audited and certified by the auditors to be correct, were, in fact, incorrect and that the audit report given by the Tax Auditor was also incorrect. In the case before us, the assessee has led no evidence either before the AO or the ld. CIT(A) to prove that the profit & loss account the correctness of which has been certified by the Tax Auditor is factually incorrect or does not correctly record the details of sales/receipts/turnover and expenses. And therefore the net profit shown in the audited profit & loss account and certified by the Tax Auditor to be correct cannot be ignored.
20. Apparent state of affairs shown in the profit & loss account would have to be treated as real unless the contrary is proved. It is reiterated too often by the courts/tribunals that the onus to prove that the apparent is not real is on the party who claims it to be so. The assessee has not discharged the aforesaid burden. Resultantly, it has to be held that the net profit of the assessee as shown at Rs.5,31,03,690/- in its audited profit & loss account is the amount of net profit on which tax has to be levied subject to the adjustments carried out in the assessment order. And we hold accordingly.
21. As stated earlier, net profit from the business of the assessee has been shown at Rs.5,31,03,690/- inclusive of the impugned sum in its audited profit & loss account. The aforesaid net profit has been worked out by the Tax Auditor after providing for all expenses. The assessee has not furnished any detail, material or evidence either before the AO or before the ld. CIT(A) or otherwise placed them on record to show that the details of expenses and profit incorporated in the said profit & loss account are incorrect. In this view of the matter, the AO was justified in taking the net profit as shown in the audited profit & loss account as profit of the business of the assessee and taxing the same accordingly.
22. We shall now consider whether there is any substance in the submission of the assessee before the CIT(A) that it is the element of real profit in sales which alone could be brought to tax and not the entire amount of sales. The assessee has invoked real income theory in support of its claim for exclusion of 80% of the impugned sum from net profit as shown in the audited profit & loss account. According to the assessee, the element of real profit in the impugned sum was only 20% and therefore only 20% was offered by it to tax. Let us therefore examine as to whether net profit as shown in the audited profit & loss account is real profit or illusory profit. Real profits are those which are not illusory. In the case before us, the assessee has indeed collected the impugned sum in cash on sale of plots. Such collections are not illusory. They are real and represent the return in money in the hands of the assessee from its own business. Income, according to Black's Law Dictionary (Sixth Edition), is the return in money from one's business, labour or capital invested; gains, profits, salary, wages, etc. Tax Auditor was well aware of the entire position. The Tax Auditor was obliged by law to ensure correctness of accounts and also to ensure that the profit & loss account and balance sheet reflected true state of affairs and not illusory state of affairs. It is after due verification of bills, vouchers, accounts of the parties, bank accounts, cash book, etc., as maintained by the assessee and due diligence exercised by the Tax Auditor in the matter that the Tax Auditor has certified not only the correctness of net profit at Rs.5,31,03,690/- but also the correctness of the impugned sum as part of the aforesaid net profit. No material has been placed either before the AO or before the CIT(A) to establish that the expenses debited and receipts/income credited to profit & loss account are incorrect. Therefore, the amount of net profit as shown in the audited balance sheet has to be taken as real profits of the assessee from its business. It is simply a case of under-reporting of sale price, which would have gone undetected if it had not been unearthed by the Revenue authorities. The Tax Auditor has since incorporated the correct amount of sale price and thereafter worked out net profit in the audited profit & loss account after providing for all expenses. The net profit so worked out by the Tax Auditor cannot, by any stretch of imagination, be said to be illusory or unreal profit of the assessee from its business. Net profit shown in the audited profit & loss account represents real profits of the assessee's business worked out after excluding all the expenses from sales/turnover/receipts. In the face of such incontrovertible facts on record, it is difficult for us to hold that the impugned sum is not real profit
23. We shall now examine as to whether there is any basis in the action of the assessee in offering 20% of the impugned sum to tax before the AO and resultantly in excluding remaining 80% of the impugned sum from its net profit as shown in the audited profit & loss account. No plausible explanation or detail or evidence for seeking such exclusion has been given by the assessee either before the AO or the ld. CIT(A). The only ground on which such exclusion could be sought would perhaps be on the ground that 20% of the impugned sum represents net profit while remaining 80% represents expenses. In this connection, reference may be made to the provisions of section 37 of the Income-tax Act which deals with deduction of expenses incurred wholly and exclusively for the purposes of business. Deduction on account of expenses incurred by an assessee is permissible only when it is established by him that (i) expenses have been incurred wholly and exclusively for the purposes of business and such expenses are not in the nature of personal or capital expenditure; (ii) such expenses have been incurred in the year in which deduction is claimed; and (iii deductibility of such expenditure is not hit by Explanation to sub-section (1) of section 37. It is the assessee-firm which was claiming deduction of 80% of the impugned sum from net profits and hence the burden was obviously on it to establish that the requirements of section 37 were satisfied. The assessee-firm has failed to discharge that burden. The claim of the assessee is thus inconsistent with the statutory provisions also. There are three principal reasons as to why 80% of the impugned sum {or 70% as determined by the ld. CIT(A)} cannot be allowed as deduction towards expenditure. One, such expenditure has not been shown in the books of account and therefore claim for such expenditure is completely inconsistent with the books of account maintained by the assessee and audited by the Tax Auditor. Two, the assessee has never furnished any detail of expenditure incurred over and above those recorded in its books of accounts or evidence in support thereof either before the AO or the ld. CIT(A) and therefore they cannot be allowed as expenditure for this reason also. Three, the claim for exclusion of 80% towards expenses is also inconsistent, in the absence of relevant details, with the provisions of section 37. In this view of the matter, we hold that the assessee has completely failed to substantiate its claim for exclusion of 80% of the impugned receipts from net profit shown the audited profit & loss account.
24. We shall now take up the reasoning given by the ld. CIT(A) for excluding 70% of the impugned sum from net profit. In Para 6.2 of the appellate order passed by him, it is stated that the possibility of incurring expenditure towards development of land, maintenance & security charges, administrative and marketing costs cannot be ruled out. According to him, it is also an undisputed reality that purchase of land requires unaccounted money to be paid in addition to consideration recorded in the books. The aforesaid observations, on the facts of the case, are not backed by any detail or evidence and therefore do not justify his order for exclusion of 70% of the impugned sum, for several reasons some of which are as under:
| (i) | It is true that such expenses are inevitable but it is equally true that the assessee has maintained books of account in which such expenses, as rightly observed by the AO, have been recorded. It is not even the case of the ld. CIT(A) that such expenses have not been recorded in the books maintained by the assessee. Neither the ld. CIT(A) has given any basis to show that the assessee has incurred any expenditure over and above those recorded in the books nor has the assessee furnished any detail or evidence in support thereof. It was therefore not open to the ld. CIT(A) to imagine certain state of affairs, which are completely inconsistent with the audited books and the materials on record as also statutory provisions, and then allow relief to the assessee as he has done in the matter under appeal. | |
| (ii) | If the ld. CIT(A) had any material outside the audited books of account to support his aforesaid findings, it was incumbent upon him to bring them on record to support his finding and thereafter inquire into the nature and source of such unaccounted money if it was paid by the assessee for purchasing the land and for meeting other expenses and to tax the same in accordance with the provisions of section 69C. It is well established that the powers of the CIT(A) in this behalf are co-terminus with those of the AO. The fact that the ld. CIT(A) has not done so itself shows that he had no material in his possession to establish that the assessee had incurred any expenditure over and above those recorded in the audited books. | |
| (iii) | The impugned sum was collected by the assessee in the year under appeal as evident from the audited profit & loss account and incorporated in the books accordingly and hence it was obviously not available for payment at the time of purchase of land or at the stage of development of land. Besides, the impugned sum has been credited by the assessee to its audited profit & loss account and thus it stands not only incorporated as sources of funds in the books but also stands applied as per books. In this view of the matter, the impugned sum would not be available with the assessee-firm for meeting unaccounted expenditure or expenditure outside the books. | |
| (iv) | Use of unaccounted money in purchase of land is illegal in that it seeks to avoid payment of stamp duty and other dues to the State and therefore cannot be allowed as expenditure in view of Explanation to section 37(1). | |
| (v) | Such expenses, if they were incurred at all outside the books, would, apart from being liable to be taxed as unexplained expenditure u/s 69C, also not be available for adjustment against the impugned sum as such expenses were incurred out of unexplained sources and not out of the impugned sum as it was not available at that time for meeting such expenses. | |
| (vi) | All the aforesaid observations made by the CIT(A) in para 6.2 of his appellate order are not supported by any detail or evidence or entries in the books and therefore have no legs to stand. |
25. We shall now turn to the issue as to whether rate of net profit could at all be applied, as done by the assessee and accepted by the CIT(A), to assess the profits of the business of the assessee notwithstanding the fact that the assessee-firm itself has worked net profit in its profit & loss account. After careful analysis of the nature of the impugned receipts, we are convinced that the assessee has rightly recorded the amount of sale price in its books following recovery of incriminating materials at the time of search and therefore the net profit shown on that basis in the audited profit & loss has rightly been certified by the Tax Auditor as giving a true and fair view of the profit of the assessee from its business in the year under appeal. Rate of net profit cannot be applied so as to reduce the net profit shown in the audited profit & loss account unless the expenses, sales, turnover, receipts, etc. shown in audited profit & loss account are proved to be incorrect. Application of rate of net profit is one of the methods to assess the income of an assessee where the books of account maintained by the assessee are found by the AO to be incorrect or incomplete or not in conformity with the accounting standards notified by the Central Government or in the circumstances mentioned in sub-section (3) of section 145. In the case before us, neither the AO has invoked section 145(3) nor has the assessee led any evidence to prove that the items shown in the books of account or profit & loss account and balance sheet drawn on that basis are incorrect. Therefore, the question of application of rate of net profit, be it 20% or 30% of the impugned sum, does not arise on the facts of the case before us.
26. In Regina v. Inland revenue Commissioners Ex Parte Matrix-Securities Ltd. [1994] 1 WLR 334 (HL), Lord Templeman has observed: "Every tax avoidance scheme involves a trick and a pretence. It is the task of the revenue to unravel the trick and the duty of the court to ignore the pretence." In the case before us, the Revenue could detect realizations of sale proceeds in cash on sale of plots of land as a result of incriminating materials recovered during search. On being confronted, the assessee had no option except to admit collection of part of sale proceeds in cash. It is in this background that the impugned sum has been credited by the assessee to its profit & loss account. Tax Auditor has also certified the correctness of the impugned sum as part of net profit of the assessee. All the expenses on the development of plot were duly recorded in the books. Placed in this fact-situation, the assessee, with a view to reduce its tax liability, returned 20% of the impugned sum as income and resultantly claimed 80% thereof as expenses without furnishing even the details of expenses or evidence in support thereof. The burden was obviously on the assessee to substantiate its claim for expenses to the extent of 80% of the impugned sum, which the assessee failed to discharge. Perusal of the order passed by the AO and the CIT(A) shows that the assessee has never furnished any detail or evidence in support of such expenses either before the AO or the CIT(A). Such details or supporting vouchers were not given to the Tax Auditor also else he would have recorded them in the profit & loss account or made a comment in this behalf in his Audit Report. In the absence of details of such expenses and evidence in support thereof, it cannot be said that net profit as worked out by the Tax Auditor in profit & loss account is incorrect or does not represent the real income of the assessee. Having admitted in the profit & loss account that the impugned sum represents part of its net profit from the operations of business, the assessee cannot be allowed to plead that the said net profit should not form the basis for assessment of its income and tax thereon. There cannot be two sets of net profits: one for the general public, financial institutions, stakeholders and for distribution amongst partners and the other for income-tax authorities.
27. Perusal of the appellate order (Para 5) passed by the ld. CIT(A) shows that three judgments were cited by the assessee before the ld. CIT(A) in support of its submission that only net profit rate could be applied on the impugned sum. These judgments are: (i) CIT v. Gurubachhan Singh J. Juneja [2008] 302 ITR 63/171 Taxman 406 (Guj.); (ii) CIT v. President Industries [2002] 258 ITR 654/124 Taxman 654 (Guj.); and (iii) 201 ITR 008 (sic). First two judgments deal with assessment of profit on unaccounted sales outside the books of account. In the case before us, we are not concerned either with quantification of sales outside the profit & loss account or with application of net profit on sales detected outside the profit & loss account. In the case before us, both the sales, expenses and resultant net profit are duly reflected in the audited profit & loss account and therefore the fact-situation in the case of the assessee before us is altogether different from those in the aforesaid first two judgments. As regards third judgment, the assessee has not given full citation. However, we have perused the judgment available at page 8 of volume 201 of the Income Tax Reports, namely, the judgment in CIT v. Griffon Laboratories. The said judgment does not deal with the issue under appeal. The ld. CIT(A) has also relied upon the judgment in CIT v. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.) which deals with application of net profit rate on sales not recorded in the books. For reasons similar to those given earlier, this judgment is also not applicable. Even at the cost of repetition, it deserves to be mentioned once again that the real controversy before us is not the one made out by the assessee but as to whether (i) net profit shown by the assessee-firm itself in its audited profit & loss account can at all be discarded by the assessee without bringing any material on record to show that the items together with figures incorporated in the profit & loss account are incorrect; and (ii) 80% of the impugned sum can be treated as expenditure, as claimed by the assessee, in the absence of any even basic details, material or evidence in support thereof. None of the judgments cited by the assessee before the CIT(A) or relied upon by the CIT(A) says that the assessee can discard its own audited profit & loss account without bringing any detail or evidence on record to establish that the items and figures mentioned in the audited profit & loss account are incorrect. The assessee-firm has not proved that its own profit & loss account the correctness of which has been duly certified by the assessee as well as its auditor is incorrect. In this fact-situation, none of the judgments relied upon by the assessee or by the ld. CIT(A) would help the assessee.
28. In view of the foregoing, we are unable to agree with the ld. CIT(A) that 30% of the impugned sum alone is liable to be taxed. His order suffers from several infirmities some of which are as under:
| (i) | Ld. CIT(A) ought to have appreciated the fact that even the AO was not authorized by law to discard the net profit shown in audited profit & loss account without invoking section 145(3). It was not open to the ld. CIT(A) to discard audited profit & loss account without bringing any material on record to establish that the said profit & loss account was incorrect. He ought to have further appreciated that the net profit on the basis of which the AO has assessed the profits of the assessee's business was based on Audit Report and that the assessee gave no material to establish that the said audit report was incorrect. | |
| (ii) | He also failed to notice that the assessee-firm itself has shown the impugned sum as part of its net profit in the audited profit & loss account and therefore it was liable to be included in its entirety for tax purposes subject to statutory allowances/disallowances and not 70% thereof. There is no reference to the audited profit & loss account and audit report in the entire operative portion of his order, i.e., Para 6 of the order of CIT(A). He thus failed to consider the most relevant evidence, i.e., audited profit & loss a/c. | |
| (iii) | He acted upon those submissions of the assessee which were neither supported by any detail nor evidence. He straightaway applied certain decisions referred to by the assessee without examining as to whether the case of the assessee fits in those fact-situations or not. | |
| (iv) | Having noted that there was no evidence to establish that the assessee-firm had incurred any expenditure to earn the impugned sum, the ld. CIT(A) still allowed 70% of the impugned sum as expenditure ignoring the fact that the claim for such deduction was not only inconsistent with the assessee's own audited books of account but also the statutory provisions contained in the Income-tax Act. He proceeded to assume without there being any evidence on record that the assessee-firm must have paid unaccounted money for purchasing the land and developing it before selling them. |
29. Materials available on record clearly indicate that the impugned sum would have gone completely untaxed if the Revenue authorities had not carried out search operations. No evidence was found even at the time of search that the assessee had incurred any expenditure over and above those reflected in the books. In the face of recovery of such materials during search operations, the assessee had no option except to credit the impugned sum as a whole to its profit & loss account. After crediting the impugned sum to the profit & loss account as a result of detection by the Revenue, the assessee made yet another attempt to evade payment of legitimate taxes due to the State by excluding 80% of the impugned sum from net profit worked out by the Tax Auditor in the audited profit & loss account, which the assessee failed to substantiate. The assessee has deliberately suppressed and thereby concealed the particulars and/or furnished inaccurate particulars of its true income in the return of income by claiming deduction to the extent of 80% with full knowledge that claim for such deduction was inconsistent with its own audited books of account and statutory provisions of the Income-tax Act and therefore completely untenable on facts and in law. It is an open and shut case of bogus claim for deduction to the extent of 80% of the impugned sum so as to evade payment of legitimate taxes due to the State.
30. In view of the foregoing, we are unable to sustain the impugned order passed by the ld. CIT(A). His order is therefore reversed and that of the AO restored. Resultantly, the appeal filed by the Revenue is allowed.
ESHA IT : Where construction of residential house takes place prior to date of transfer of long term capital asset, assessee's claim for deduction under section 54F cannot be allowed
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[2014] 42 taxmann.com 175 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'A'
Smt. Ushaben Jayantilal Sodhan
v.
Income-tax Officer, Ward -10 (4), Ahmedabad*
D.K. TYAGI, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER
IT APPEAL NOS. 2394 & 2610 (AHD.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
OCTOBER 11, 2013
Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house [Construction] - Assessment year 2009-10 - Whether for grant of deduction under section 54F in case of construction of a residential house, condition is that assessee has within a period of three years after date of transfer of long-term asset, constructed a residential house and, therefore, where construction of residential house takes place prior to date of transfer of long term capital asset, assessee's claim for deduction under section 54F cannot be allowed - Held, yes [Para 12] [In favour of revenue]
CASES REFERRED TO
ITO v. Chimanlal Thakordas [1991] 39 ITD 159 (Ahd.) (para 10), CIT v. Gita Duggal [2013] 214 Taxman 51/30 taxmann.com 230 (Delhi) (para 10) andSmt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) (para 13).
J.P. Shah for the Appellant. O.P. Batheja for the Respondent.
ORDER
Anil Chaturvedi, Accountant Member - These cross appeals arise out of order of CIT(A)-XVI, Ahmedabad dated 09.08.2012 for A.Y. 2009-10.
2. The facts as culled out from the order of lower authorities are as under.
3. Assessee is an individual who filed her return of income for AY 2009-10 on 27.3.2010 declaring total income of Rs 2,57,080/-. The case was selected for scrutiny and thereafter the assessment was framed u/s 143(3) vide order dated 18.11.2011 and the total income was determined at Rs 1,29,72,360/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) vide order dated 9.8.2012 granted partial relief to the assessee. Aggrieved by the aforesaid order of CIT(A), the Assessee is now in appeal before us and has raised the following grounds.
| 1. | The CIT(A) erred in rejecting the claim of deduction u/s. 54F of the appellant of Rs. 58,87,176/- despite the fact that the appellant has invested in residential house Long Term Capital Gain arisen on sale of land. | |
| 2. | The CIT(A) erred in confirming the addition of Rs. 2,00,000/- as unexplained expenditure ignoring the explanation of the appellant in toto and offer to inspect the premises to verify use of old timber etc. in four own residential flats. | |
| 3. | The CIT(A) erred in making addition of Rs. 1,00,000/- as undisclosed income for sale of steel, timber, copper etc. ignoring the explanation of the appellant. |
4. In the cross appeal, the ground raised by the Revenue reads as under:
| 1. | The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.64,34,143/- made by the A.O. treating the same as the business income accrued to the assessee from business activity and/or adventure in the nature of trade, without appreciating the facts of the case and the findings brought out by the A.O. |
5. Since the grounds of Assessee and Revenue are interconnected, all the grounds are considered together.
6. During the course of assessment proceedings, AO noticed that Assessee's father owned a plot of land admeasuring 809 sq. Yds and the same was transferred in the name of Assessee vide gift deed dated 24.3.1969 and the Assessee's name was entered as owner in the Revenue records in 1975. Assessee constructed a bungalow on the said land in F.Y. 1969-70. The land was valued at Rs 45,600/- and the construction thereon at Rs 1,85,942/- was shown in the balance sheet till 31.3.2008. The bungalow was dismantled to construct 8 flats for which the Assessee applied for approval before Ahmedabad Municipal Corporation (AMC) and the same was approved on 29.7.2006 and thereafter the project was completed on 23.10.2008. Of the 8 flats constructed, 4 flats were retained by Assessee for her own use and the remaining 4 flats were sold. On the 4 flats sold, Assessee worked out Long term capital gain on sale of land and short term loss on sale of construction of flats and offered the same for tax. AO did not accept the submissions of the Assessee. He was of the view that the act of Assessee of construction of flats is to be considered as adventure in the nature of trade and therefore the income is to be treated as "business income" and not "capital gains" inter alia for the reasons that (1) Assessee had sold 4 flats during the construction stage itself proved that the Assessee had converted her plot of land into stock in trade and thereafter constructed flats for sale (2) the intention of the Assessee was to make profit out of sale of extra flats being constructed (3) Assessee had received the advance payments from some of the customers even prior to the commencement of construction (in financial years 2006-07, 2007-08 and 2008-09) (4) AMC had given commencement certificate in the name of the Assessee (5) Assessee had termed the construction as "construction WIP" in the balance sheet for AY 2008-09 (6) the copies of the bills reveal that the bills were in the name of Assessee's family members and therefore it proved that the adult family members were actively engaged in the activity of Assessee of construction business. He thus prepared the trading account and worked out the net profit of Rs 64,32,143/- (working at page 17 & 18 of the order) and considered it to be income from undisclosed sources and added to the income of the Assessee. He also noticed that the 4 flats retained by the assessee for her own use were on two different floors, independent units and not interconnected and municipal taxes were also levied for each unit separately and therefore according to him the 4 flats cannot be considered to be a single unit for the purpose of claiming exemption u/s 54F and therefore held that Assessee is not eligible for deduction u/s 54F. AO also noted that on the demolition of bungalow, Assessee would have incurred expenses. Since expenses on demolition was not accounted by the Assessee in her books and in the absence of details, he made an addition of Rs 2 lacs considering the same to be unexplained expenditure made out of income from undisclosed sources. He also noted that the demolition of bungalow would have resulted into generation of timber, steel, copper from electric wires, doors, windows etc. Since no income was reported by Assessee on account of sale of the aforesaid items, he estimated its sale to be of Rs 1 lacs and added it to the income. Aggrieved by the order of A.O., Assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the Assessee held that the income from sale is not be considered as business income by holding as under:
"2.5 A careful consideration of above facts indicate that the ld. A.O. have misinterpreted and misunderstood the statutory provisions governing the matter while estimating income from the transactions of the nature discussed above. The action of Ld. A.O. in applying provisions of section 45(2) rws 2(47)(iv) and the consequent drawing of appellants trading account appears to be based upon incorrect understanding of statutory provisions governing the matter.
2.7 The A O is of the opinion that, provisions of section 45(2) r w s 2(47)(iv) are attracted in appellants case when the bunglow was broken down for conversion into flats. It appears that the A O has not correctly appreciated the provisions of section 45(2) r w s 2(47)(iv). There is no denying the fact that the term 'transfer' u/s. 2(47)(iv) includes cases where an asset is converted by the owner thereof into stock in trade of a business carried on by him. There is also no denying the fact that section 45(2) is attracted in a case where an asset is converted by the owner thereof into stock in trade of a business carried on by him. The primary condition however for applicability of section 45(2) r w s 2(47)(iv) is that it speaks of cases where the owner of the asset is engaged in some kind of business activity, holding certain asset and thereafter converts such assets into stock in trade. Thus, the principle requirement is that at the time of conversion of an asset into stock in trade, some business activity must have been carried on by the assessee. In the instant case, facts available on records, as also admitted by the A O in his narration of facts, clearly indicate that at the time of conversion the appellant was not engaged into any business activity. She was merely a lady owning a residential property, acquired by gift from her father, which was demolished to be converted into a multi storied residential premise. Thus the basic condition enunciated in section 45(2) r w s 2(47)(iv) are not fulfilled and consequently Id A.Os. argument that the same are applicable in appellants case fails. In the case of CIT v. BK Bhaumik [2000] 245 ITR 614/[2001] 116 Taxman 189 (Delhi), Hon'ble Delhi High Court had held that even though it is true that question whether profit in a transaction has arisen out of adventure in the nature of trade is a mixed question of law and facts, it is equally well settled that the expression " adventure in nature of trade" postulates the existence of certain elements in the adventure, which in law would invest it with the character of trade or business. Further, the question whether the transaction is an adventure in the nature of trade has necessarily to be determined in the light of cumulative effect of the entire set off of facts to be gathered from material on records. In this case, the assessee had entered into an agreement with the builder to get the multi storied unit constructed on the plot of land where originally a single storied house existed and which was in occupation of the assessee since 1973. The Hon'ble Court held that the intention at the time of purchase of the house, contemporaneous conduct and the circumstances peculiar to the assesses case left no room for doubt that the transaction resulted only in capital gains. It is pertinent to note that the SLP filed by the Department, against the order of the Hon'ble Delhi High Court, was not entertained by the Hon'ble Apex Court. Further, in the case of CIT v. Dr D L Ramachandra Rao, Hon'ble Madras High Court was also ceased with a matter identical to facts of the present case. In this case, the assessee had constructed a building on a plot of land and subsequently disclosed profits on the component of land as LTCG and STCG in respect of the superstructure therein. The argument of the assessee that Indian Law recognises separate ownership of the land and building as recognised by Hon'ble Madras High Court in the case of Park View Enterprises v. StateGovt. of Tamil Nadu [1991] 189 ITR 192 was upheld by the Hon'ble Madras High Court. While laying down this ratio, the Hon'ble Court followed the decision of Privi Counsel in the case of Narayandas Khetty v. Jatindranath Roy Chaudhary AIR 1927 PC 135. The court observed that the decision of the Privi Counsel that it is possible to have separation of ownership of building from the ownership of the land has also been affirmed by Hon'ble Apex Court in the case of Bishandas v. State of Punjab AIR 1961 SC 1570.
Therefore, as the basic premise on which the Id. A O has placed his arguments for making the additions fail, the consequent action of estimating business income by drawing a trading account of the appellant also becomes erroneous and bad in law. Accordingly, it is held that the addition of Rs. 64,32,143/- made by the A O treating the transactions of the assessee as a business or adventure in nature of trade cannot be sustained and hence the same is deleted. The ground of appeal raised by the appellant is therefore allowed."
7. With respect to claim of deduction u/s 54F, the claim of Assessee was negated by CIT(A) by holding as under:
"2.10 As far as facts of the present case are concerned, there is no dispute regarding the status of the assessee being an individual. There is also no dispute as the amount of capital gains has been earned, by the assessee on transfer of a long term capital asset not being a residential house, since in this case the long term capital gains has primarily been earned on the transfer of 50% ownership of the land hitherto owned by the assessee. The fundamental controversy however lies in the satisfaction of condition at c) above. As per the I T Act, the assessee claiming deduction ought to have purchased a residential house within a period of one year before or two years after the date on which the transfer takes place. In the present case, there is no occasion of any purchase of residential house. Thus, the appellant case falls in the second limb of the condition i.e. construction of residential house should have been completed within three years from the date on which the transfer takes place. The appellant incidentally does not satisfies this condition also for several reasons. To begin with the transfer of property i.e. the sale of four flats took place on the date on which the sale deed was executed. As per the details filed by the appellant, the sale deeds for all the four flats sold were executed between the appellant and flat buyers as per following :—
| No. | Name of the buyer | Date of sale deed | |
| 1 | Kankuben Mansingbhai Patel & Vipulbhai Mansingbhai Patel | 10.09.2008 | |
| 2 | Naishadh Rajendra Diwanji & Toral Naishadh Rajendra Diwanji | 15.12.2008 | |
| 3 | Pavni Naishadh Diwanji | 15.12.2008 | |
| 4 | Equipment & Space Engineering India Ltd | 09.01.2009 |
2.11 A perusal of the above shows that transfer of asset took place in F Y 2008-09 relevant to A Y 2009-10. It will be seen from the definition of the transfer in relation to a capital asset that the capital gain will be chargeable to tax only on account of sale or any transaction involved allowing of the possession of any immovable property to be taken or in part performance of an contract of the a nature referred to in section 54(a) of the Transfer of Property Act. Since the registered deed was not executed with the aforesaid persons with whom the agreement to sale (banakhat) was executed therefore it cannot be treated as the sale of land. The assessee's case cannot be covered by clause (v) of section 12(4) of the Act because the possession of the land and property was not given to the aforesaid five persons with whom the agreement to sale (banakhat) was executed. Therefore it cannot be said that the assessee has sold his property to the aforesaid four persons. The agreement was executed with the above persons and therefore actual sale of property was made on above dates by the registered deed. The issue regarding legal and lawful transfer of immovable property has been decided by the Hon'ble Supreme Court in the case of Suraj Lamp & Inds(P.) Ltd. v. State of Haryana [2012] 340 ITR 1/[2011] 202 Taxman 607/14 taxmann.com 103 wherein it has been laid down that:………………………
2.12 Now, since the transfer of assets by the appellant itself takes place in the months of Sept and December, 2008 and in January, 2009, the appellant can rest her claim of any deduction u/s. 54F only on the amounts of monies spent on construction within the period three years thereafter. The same is not the case in the impugned case. As per evidence on record, the B U Permission of the building was given by the Ahmedabad Municipal Corporation vide its certificate dated 23-10-2008. Thus, no construction activity was carried out after the said date. As per details / evidences on record, the permission to construct the building was obtained by the appellant from Ahmedabad Municipal Corporation vide their approvals given on 26-07-2006 & 01-02-2007. Thus, the building under consideration was constructed between the period 01-02-2007 to 23-10-2008. Consequently, the fundamental conditions of constructing a residential house within three years after the date of transfer is not fulfilled by the appellant. The appellant has actually constructed the building / residential house in a period before the actual date of transfer. Hypothetically assuming that the appellant rests her claim from the date of banakhats or agreement to sale executed with the buyers of flat in 2007. It is seen that Hon'ble Apex Court has categorically laid down in the case of Suraj Lamps, supra that agreements to sale are not to be considered for the purposes of transfers. In the instant case, the ownership and possession of the property i.e. the flat has been given by the appellant to the flat owners only from the date of sale-deed. Naturally speaking on the date of banakhat, no possession of flat could have been given as the same was not in existence. Without prejudice to the above, the ld A O has brought on records, the evidence that the flats in possession of the appellant, are being used as registered offices of the company owned and operated by sons of the appellant. Sub section 4 of section 54F further provides that the amount of LTCG received at the time of transfer of asset which could not be utilized for purchase / construction of another asset is required to be deposited in a specified account of a nationalize bank before the due date of filing of return of income u/s. 139(1). There is no evidence on record that the same was done in this case.
2.13 In this regard, it is noted that in the case of Pankaj Wadhwani v. CIT [2012] 18 taxmann.com 33 Hon'ble ITAT, Indore has dismissing assesses appeal for grant of deduction u/s. 54F, held as under :-……………………..
Accordingly, in view of the discussions made in preceding paras, it is held that as the appellant has failed to satisfy the basic conditions laid down u/s. 54F, no deduction is admissible to her in that section. The claim of deduction u/s. 54F is accordingly rejected and the ground of appeal dismissed."
8. CIT(A) confirmed the addition on account of undisclosed demolition expenditure and undisclosed income from generation of scrap by holding as under:
"3. In the appellants case, the A O has made additions of Rs. 2,00,000/-and Rs. 1,00,000/- aggregating to Rs. 3,00,000/- as deemed income. The same has been discussed by the A O in para-5.7 & 5.8 of assessment order, mentioned supra. The addition was made on the presumption that the appellant had incurred expenses of Rs. 2,00,000/- towards demolition of the old bunglow and earned an amount of Rs. 1,00,000/- as income from the sale proceeds of items like timber, steel, copper, door, windows etc as extracted from the old bunglow. The A O had noted that the appellant had neither disclosed any expenses towards demolition of the bunglow nor had shown any income from sale of scrap items in her books of accounts. Consequently, the A O had made his estimations as above and made addition of Rs. 3 ,00,000/- to the total income of the appellant. It is pertinent to note that the A O had given adequate opportunities to the appellant before making the impugned additions. The arguments furnished by the appellant, inter alia, that the old items were reused in the new structure were found to be unsatisfactory. There is no denying the fact that demolition of a bunglow for construction of new structure involves cost. The appellant by not disclosing such cost, in her books of account has thus committed the default of not disclosing the true cost of construction. The estimation made by the ld A O, of Rs. 2,,00,000/- on this account has found to be absolutely fair and reasonable. Similarly, there can be no dispute that the demolition of the bungalow resulted in scrap items of the nature discussed by the ld A O in his order. The argument forwarded by the appellant that the same were reused is a totally unacceptable hypothesis since as rightly observed by the ld A O, no person would put old items in a new building. The estimation made by the ld A O, of Rs. 1,00,000/- on this account has also been found to be absolutely fair and reasonable. It is pertinent to note that during the course of current appellate proceedings also the appellant has not been able to bring forth any cogent evidence that could have indicated that the additions were unwarranted. The appellant has merely repeated the arguments taken before the ld A O. As discussed above, the arguments forwarded by the A O as also the estimations made by him for making this additions have been found to be fair and reasonable, it is held that no interference is required to be made in the additions made by the ld A O to the returned income of the appellant. Consequently, the addition of Rs. 2.00,000/- on account of undisclosed demolition expenses and Rs. 1,00.000/- on account of undisclosed income earned from sale of scrap items aggregating to Rs. 3,00,000/- made by the ld A O is confirmed and the ground of appeal raised is dismissed."
9. Aggrieved by the aforesaid order of CIT(A), the Revenue and Assessee are now in appeal before us.
10. Before us, the Ld .A. R. reiterated the submissions made before AO and CIT(A). He further placed reliance on decisions in the case of ITO v. Chimanlal Thakordas [1991] 39 ITD 159 (Ahd.), CIT v. Gita Duggal [2013] 214 Taxman 51/30 taxmann.com 230 (Delhi) and other cases. He further submitted that since provisions of section. 54F are beneficial provisions, the same have to be construed liberally. The Ld D.R, on the other hand strongly supported the order of AO and submitted that the decisions relied by the Assessee are distinguishable on facts.
11. We have heard the rival submissions and perused the material on record. With respect to the action of treating the transaction of sale of flats to be in the nature of trade by the AO, we find that CIT(A) by a well reasoned order has concluded that the AO has misinterpreted and misunderstood the provisions and accordingly held that the transaction of the Assessee cannot be treated as business or adventure in nature of trade. Before us, the Revenue could not controvert the findings of CIT(A) nor could it bring any contrary material on record in its support. In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) with respect to deleting the addition of Rs 64,32,143/- as "business income" and thus this ground of the Revenue is dismissed.
12. With respect to holding the Assessee to be not eligible for deduction u/s 54F, it is an undisputed fact and also noted by CIT(A) that the transfer with respect to 4 flats by means of registered sales deed took place in FY 2008-09 relevant to AY 2009-10. He has also given a finding that the building was constructed between 1.2.2007 and 23.10.2008 and the BU permission was granted by AMC on 23.10.2008 meaning thereby that no construction activity took place after 23.10.2008. For grant of deduction u/s 54F in case of construction of a residential house, the condition is that the assessee has within a period of three years after the date of transfer of long term asset, constructed a residential house. In the present case, since the construction took place prior to the date of transfer, we are of the view that CIT(A) has rightly appreciated the facts and by his well reasoned order held that Assessee is not eligible for deduction u/s 54F. Before us, the Ld. A.R. could not bring any decision of any High Court in support of his contention where it has been held that even the construction of residential house before the date of transfer would be eligible for deduction u/s 54F. Further, the case laws relied upon by the Ld. A.R. are distinguishable on facts.
13. In the case Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) the Hon'ble Apex Court has held that there is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. The intention of the legislature is primarily to be gathered from the words used in the statute. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be.
14. In view of the aforesaid ratio, we are of the view that the contention of the ld. A.R. that the provisions of section 54F being beneficial provision, cannot be accepted more so when the language of the section is very clear and since section 54F (1) states "has with a period of three years after that date constructed a residential house." In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) and thus dismiss this ground of Assessee.
15. As far as the addition made on account of demolition expenses and income from sale proceeds of items extracted from old bungalow is concerned, we find that AO has made an estimation of income and also of the expenses. He has not brought on record any single evidence in support of his contention. CIT(A) has also upheld the view of AO. We are of the view that the view of CIT(A) is also not on the basis of any tangible material on record. We are therefore of the view that in such circumstances no addition can be made only on the basis of estimation. We thus direct its deletion. Thus this ground of the Assessee is allowed.
16. In the result the appeal of the Assessee is partly allowed and that of Revenue is dismissed.
SUNILRegards,
Pawan Singla , LLB
M. No. 9825829075__._,_.___
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