HIGH COURT OF DELHI
DLF Commercial Projects Corporation
versus
Assistant Commissioner of Income-tax
W. P. (C) NO. 1868 OF 2012
OCTOBER 15, 2012
ORDER
R.V. Easwar, J.
This is a writ petition filed by DLF Commercial Projects Corporation under Article 226/227 of the Constitution of India in the following circumstances. The petitioner is a partnership firm engaged in the business of construction and sale of real estate. In respect of the assessment year 2009-10, it filed a return of income on 25th September, 2009 declaring a loss of Rs. 20,12,82,857/-. A notice under Section 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued by the ACIT, Circle-31(1), New Delhi, who is the first respondent in this petition and in response thereto the petitioner, between 7th September, 2011 and 4th November, 2011, explained its business model, the method of revenue recognition and the arrangement with DLF Land Limited, another company, for rendering various services in connection with obtaining approvals and licences relating to land development rights. On 21st November, 2011 the first respondent issued a show cause notice under Section 142(2A) of the Act, proposing to refer the accounts of the petitioner for special audit. In this show cause notice, a copy of which has been annexed as Annexure H to the writ petition, the first respondent observed that he noticed certain complexities in the accounts of the petitioner on going through the books of accounts and the audited financial statements which necessitated the reference of the accounts of the petitioner to a special auditor in terms of Section 142(2A) of the Act. In particular, it was stated that the following complexities in the accounts were noted:-
(a) The petitioner had received business advances of Rs. 3717.42 crores from one of its partners, that is, M/s DLF Limited on which no interest was paid. This amount was invested in more than hundred companies which were part of the DLF Group of Companies. The petitioner has been used as a conduit to make huge advances to companies of the same group with a view to avoiding the applicability of the provisions of Section 2(22)(e) relating to deemed dividend and Section 40A(2)(b) of the Act.
(b) The petitioner was showing various payments made to companies on account of development rights under the head “stock”. No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex.
(c) No details were available in the accounts with regard to the deduction of Rs. 25.40 crores claimed in the profit and loss account under the head “reimbursement of expenses”.
(d) The petitioner in the relevant accounting year was dealing only in the purchase and sale of development rights on behalf of DLF Ltd. However, no revenue is recognized on receipt of the sale consideration, which is given a colour of advances by the petitioner. This is contrary to the significant accounting policy stated to be followed by the petitioner for revenue recognition-i.e., that revenue would be recognized in the financial year in which the agreements of sale are executed.
In view of the above four issues, the Assessing Officer was of the view that the accounts of the petitioner were complex. He, therefore, called upon the petitioner to show cause why the accounts should not be got audited by special auditor under Section 142(2A), as it would be necessary to determine the taxable income for the year.
2. Annexure I to the writ petition is a copy of the petitioner’s reply to the show cause notice dated 21st November, 2011. The reply is dated 24th November, 2011 and it runs to about 21 pages (excluding annexures). A perusal of the reply shows that the petitioner had strong objections to the proposal of the first respondent to get the accounts of the petitioner audited by a special auditor. It was pointed out that in the assessment year 2007-08 an addition of Rs. 37.4 crores had been made on account of profit and sale of development rights, but it was deleted by the CIT (Appeals) as being without any basis, whose order was confirmed by the Tribunal. It was pointed out that the petitioner had followed a certain basis of revenue recognition and the facts being the same, the order of the Tribunal should govern the case for the assessment year 2009-10 also. It was claimed that this issue, which was already adjudicated upon by the Tribunal, cannot form the basis for the conclusion that the accounts of the petitioner are complex. It was further pointed out that on 18th November, 2011 the petitioner had produced the books of accounts before the first respondent who had test-checked them but had not raised any queries or explanation thereafter which implied that there was no complexity in the accounts. It was submitted that the petitioner maintained its books of account as per the accounting standards issued by the Institute of Chartered Accountants of India and that the accounts were also audited in terms of Section 44AB.
3. As regards the observation of the first respondent that there was a diversion of the borrowed funds to sister concerns in order to avoid the provisions relating to Section 2(22)(e) and Section 40A(2)(b), the petitioner sought to explain the facts and in particular pointed out that DLF Ltd. is a company in which the public was substantially interested and when advances were made by it to the petitioner-firm, the provisions of Section 2(22)(e) of the Act were not attracted and that in any case, the advances were in the nature of business advances. As regards the applicability of Section 40A(2)(b), the petitioner drew the attention of the Assessing Officer to the tax audit report in which the transactions covered by the Section have been specifically mentioned, without any adverse inferences being drawn.
4. The petitioner also objected to the proposal of the first respondent to consider the question of showing the payments made on account of development rights as its stock as resulting in complexity of the accounts, in the absence of any details with regard to the quantum of the development rights. It was pointed out that the parawise details with regard to the cost of development rights along with the relevant agreements had been furnished under cover of letters dated 4th and 11th November, 2011. It was claimed that the same method of accounting which was followed by the assessee previously was being continued without any deviation in the relevant previous year and, therefore, no adverse inference can be drawn by merely observing that the accounts involve complexity. There was only a difference of opinion between the assessee and the assessing authority on the question of revenue recognition which was also tested before the appellate authorities.
5. In respect of the reimbursement of Rs. 25.40 cores, the petitioner drew the attention of the first respondent to the note filed by it on 4th and 11th November, 2011 along with complete details and invoices on account of service charges and reimbursement of expenses aggregating to Rs. 25.40 crores. It was claimed that after the details were submitted, the first respondent had not raised any queries. It was pointed out that the reimbursement of expenses was in pursuance of the services provided by the DLF Land Ltd. under agreements dated 1st April, 2007 and 16th July, 2007 which contemplates the maintenance of books of accounts, secretarial record, filing of various statutory return forms, managing the bank accounts, taking steps for obtaining licences relating to land etc. It was in consideration of such services rendered by DLF Ltd. that the petitioner was liable to pay service charges at 15% of the expenses incurred. It was thus submitted that there was no complexity with respect to this issue.
6. With regard to the revenue recognition on sale of development rights on behalf of DLF Ltd., it was pointed out that the first respondent did not appreciate or comprehend the nature of the business activities of the petitioner. Strong objection was taken to the observation of the respondent that the petitioner was trying to colour the nature of business receipts by showing them as advances. The petitioner thereafter sought to explain in detail the nature of its activities. It was urged that by no stretch of imagination can the relationship between the petitioner and DLF Ltd. lead to an inference that the accounts maintained by the petitioner were complex, necessitating a special audit under Section 142(2A).
7. In addition to the aforesaid submission the petitioner drew the attention of the first respondent to Circular No. 204 dated 24th July, 1996 issued by the CBDT in connection with the scope of Section 142(2A). It also brought to the notice of the Assessing Officer the instruction No.1076 issued by the CBDT on 12th July, 1977 laying down guidelines for the selection of cases for special audit. The attention of the Assessing Officer was also drawn to several authorities.
8. It appears that after the receipt of the reply of the assessee dated 24th November, 2011, the assessment proceedings went ahead pursuant to the notices issued earlier under Section 143(2) and Section 142(1) of the Act. This is evident from the order sheet notings dated 5th December, 2011, 16th December, 2011 and 19th December, 2011. These order sheet notings were been obtained by the assessee under the Right to Information Act, 2005 by an application made on 20th February, 2012 and is annexed to the writ petition as annexure B. It may be relevant to reproduce the order sheet notings, so far as is necessary for our purpose, as follows:-
