ACIT Vs Educomp Infrastructure & School Management Ltd. (ITAT Delhi)
it is beyond doubt that the relevant capital asset in the form of the building of the assessee corresponding to the expenditure not incurred actually by those two contractors mentioned above, did not come into existence and thus the assessee cannot be entitled for depreciation in respect of the capital asset which has never come into existence. The bills raised by the contractors on the assessee are inflated one and not of actual amount of the work done for the assessee. Consequently, the cost debited by the assessee in respect of the building, which has been capitalized is inflated and not the actual cost. The reliance placed by the Ld. counsel of the assessee in the case of M/s SSIPL Luxury Fashion Private Limited (supra) and Discovery Estate Private Limited (supra) is of no assistance as facts and circumstances of those case are different from the case of the assessee. In the case of SSIPL Luxury Fashion Private Limited (supra) a particular receipt was already taxed in the hands of the holding company and thus the assessee contested that it should not be taxed in the hands of the assessee, whereas the learned DR contested that receipt should be taxed in the hands of the correct person. The Tribunal held that same income cannot be taxed twice unless so provided in the Act. In the case of discovery Estate Private Limited (supra) , the observation of the Hon’ble High Court are regarding that no addition should be made on the basis of the suspicion or surmises or by taking note of notorious practice prevailing in that trade circles.
In the facts of the case the preponderance of the probability suggests that raising of bogus bills by the subcontractors to the contactors and then routing back of the money in the form of the cash definitely must have been done on the direction of the assessee as assessee is the ultimate beneficiary by way of excess deduction of depreciation on the capital asset in the form of building.
In view of the facts and circumstances discussed above, in principle we hold that the assessee is not entitled for the depreciation on the inflated portion of the cost of capital asset shown by the assessee as incurred through two contractors, namely, OSN and JDMS.
FULL TEXT OF THE ITAT JUDGEMENT
These three appeals by the Revenue are directed against three separate orders dated 07/10/2015; 03/11/2015 and 10/11/2016 passed by the learned Commissioner of Income-tax (Appeals)-23 , New Delhi, for assessment years 2012-13 ; 2013-14 and 2014-15 respectively. As common issue in dispute permeating from same set of facts is involved in all the three appeals, same were heard together and disposed off by way of this common order for the sake of convenience and to avoid repetition of facts.
ITA No.6894/Del/2015
Assessment year 2012-13
2. First we take up the appeal having ITA No. 6894/Del/2015 for assessment year 2012-13. The grounds raised by the Revenue are reproduced as under:
1. The order of Ld. CIT(A) is not correct in law and on facts.
2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition made on account of disallowance of excessive depreciation of Rs. 2,10,53,292/- claimed by the assessee company, by ignoring the admitted fact that the contractors who had constructed the building for the assessee company inflated the cost of construction and thereby increased the value of capital assets which had resulted in excessive claim of depreciation.
3. The appellant craves leave to add, amend any/all the ground of appeal before or during the course of hearing of the appeal.
3. Briefly stated facts of the case are that the assessee company is one of the group company of M/s Educomp Group and was incorporated on 02/09/2006. It was engaged in business of providing infrastructural facilities to educational institution of the Educomp group. A search and seizure action under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) was carried out on 18/08/2011 in the case of ‘Educomp Group’ including the assessee and its contractors. For the year under consideration, the assessee filed return of income on 29/09/2012 declaring total income of Rs. 4,58,60,417/-. The statutory notices for commencing scrutiny proceedings were issued and complied by the assessee. The Assessing Officer confronted the contents of seized material found during the course of such proceeding at the premises of M/s Educomp Group, including the assessee and its contractors. The Assessing Officer found that the assessee in its books of account has shown capital work-in-progress in respect of building construction, but its contractors, namely, M/s Jubilant Developers and Management Services Pvt. Ltd and M/s OSN Infrastructure and Project Ltd. has admitted claiming of bogus expenditure on building construction for the assessee without incurring actual expenses on construction. The Assessing officer has noted that aggregate amount of ₹ 75 Crores had been disclosed by those two contractors as their undisclosed income. The Assessing Officer has summarized the factual observation based on the seized material as under:
“4. During the course of search action at the business premises of the assessee company situated at 308, Udyog Vihar, Phase-ll, Gurgaon, various documents were found and seized which insinuated that the assessee company has colluded with the various contractors to inflate the carrying cost of its capital assets through booking of inflated bills in their books of account. It was found that the employees of the assessee company were managing/supervising the affairs of the companies or business entities of its contractors to whom funds were given in the forms of advances for construction/development work.
5. During the search & seizure operation at 308, Udyog Vihar, Phase-li, Gurgaon in the case of the assessee company on 18.08.2011 certain papers were found & seized which reflected that the business activities of the contractors of the assessee company namely M/s. OSN Infrastructure & Projects Pvt. Ltd were in fact prima facie managed by the personnel of the assessee company. It, is pertinent to mention that entire business of the said contractor was allotted by the assessee company. It was also revealed that the relatives/advisors of the said contractor also performed various services for the assessee company. Certain papers were found & seized from the business premises of the assessee company pertaining to its contractor group which were signed by Sh. Shalabh Raizada, Sr. Executive and Brig (Retd.) Vikram Singh, Vice President of the assessee company in the capacity of the authorized signatory of such contractor. Annexures A-3, A-4, A-5 and A-8 seized from the said premises contain details of the nature of work contracts given to the said contractor and sub contractors allotted by such contractor to its own parties at meager rate. Thus, substantial evidence was found and seized which reflected that various contractors are acting in collusion with the assessee company to enable it to raise its cost of capital asset in order to claim enhanced depreciation and evade tax.”
3.1 Thus, according to the Assessing Officer, the assessee has claimed excess expenditure on construction of the building through these two contactors, and thus claimed excess capitalization of asset of building and consequently claimed excess depreciation on building, which the assessee was not entitled for.
3.2 The Assessing Officer issued a detailed show cause notice to the assessee, the reply of which has been reproduced by the Assessing Officer in the assessment order. The assessee explained that various advances are given to contractors on account of construction contract on a progressive basis and those contractors furnished the various running bills against which the payment was released by the assessee. Regarding booking of bogus bills by contactors and inflated cost of construction of the projects of the assessee, it was submitted that the assessee was neither aware nor colluded in their misdemeanors. It was explained by the assessee that none of the proceeds of their misdemeanors were either received or utilized by the assessee or the assessee is benefited in any manner from the acts or misdeed of their contactors. The assessee submitted that it had acted in the most bonafide manner and given the impugned advances under trust and cost of improvement/construction of its capital assets can neither be reduced not disturbed. Accordingly, the assessee claimed that no depreciation can be disallowed to the extent of such abortive expenditure in the case of the assessee company. The Assessing Officer rejected the contention of the assessee and asked the assessee to file details of bills raised by the above referred two contactors and the corresponding expenditure capitalised in books of accounts. On the basis of the details submitted, the Assessing Officer worked out excess depreciation of Rs. 2,10,53,292/- claimed by the assessee. The finding of the Assessing Officer reproduced in para 12 of the assessment order is extracted as under:
“12. In view of the above, the capital cost of assets as mentioned in the financial results of the assessee company is in excess to the extent of Rs. 21,05,32,916/-. Therefore, a sum of Rs. 21,05,32,916/- is hereby reduced from the Written Down Value of the block of assets being ‘Building’ which is eligible for depreciation at the rate of 10% as per the Income Tax Act, 1961. Consequently, depreciation amounting to Rs. 2,10,53,292/- is hereby disallowed and added back to the income of the assessee for the F.Y. 2011-12 relevant to the A.Y. 2012-13. Since the assessee has furnished inaccurate particulars of its income, penalty proceedings u/s. 271(l)(c) of the Act is being separately initiated.
(Addition: Rs. 2,10,53,292/-)”
3.3 On further appeal, the Ld. CIT(A) deleted the disallowance observing as under:
“4.2.3 During the appellate proceedings it has been submitted that the directors of the contractors are different persons who are not related to the directors of the appellant company, and that the allegations of the AO that the activities of sub-contractors were being managed by the personnel of appellant is against the material on record, and that neither any document nor any evidence was found to establish the fact that the appellant had authorized its personnel to manage or supervise the affairs of subcontractors, nor any benefit in the form of salary or otherwise was derived by the personnel of the appellant from the contractors which may suggest in any manner that the operations of the sub-contractor companies were being used to inflate capital cost of assets. It has also been submitted that the total receipts offered by the sub-contractors is same as the cost of assets accounted for by the appellant and the appellant accounted for as the cost of assets the amount which was paid to the sub-contractors and it is not the case of the AO that the cost of assets is more than the expenditure incurred by the appellant, nor has the AO brought on record any material to establish that the cost of assets accounted for in the books of accounts is more than the expenditure incurred, and that the sub-contractors offered the inflated expenditure in their accounts as their income in their cases and they have been assessed accordingly, and therefore the question of alleged inflation of cost of assets by the appellant doesn’t arise. They have also submitted copies of their audited accounts for F.Ys. 2009-10, 2010-11 and 2011-12. It has been also submitted that the amount of Rs.147,51,91,619/- taken by the AO as the cumulative capitalization of assets by the appellant is incorrect in as much as it includes Rs.21,35,32,916/- related to work contracts given to companies/persons other than the above two contractors, and after reducing this’ amount of Rs.213532916/- from the figure adopted by the AO, the balance amount is Rs,126,16,58,703/-. The date wise invoice amounts of which have been submitted, and is summarized here under:
