Case Law Details
Prime Developers Vs DCIT (ITAT Mumbai)
Summary: The appeals before the ITAT Mumbai arose from cross appeals filed by both the assessee and the Revenue for Assessment Years (AYs) 2004-05 to 2007-08 concerning the taxation of profits from the “Prime Mall” project. The principal dispute related to the determination of taxable profits, alleged receipt of unaccounted “on-money” from sale of commercial units, the accounting method adopted by the assessee, additions relating to car parking sales, unexplained cash credits under Section 68, and other consequential issues.
The assessee, a construction firm, followed the Project Completion Method of accounting and recognized project profits in AY 2006-07, when the project was completed. A search under Section 132 resulted in seizure of numerous documents, including Annexures A to L, which the Assessing Officer (AO) relied upon to conclude that the assessee received substantial sale consideration in cash outside the books. According to the AO, only about 35% of the actual sale consideration was recorded in the books, while the remaining 65% represented unaccounted “on-money.” On this basis, the AO estimated total unaccounted receipts of ₹108.70 crore across the relevant assessment years, rejected the Project Completion Method, applied the Percentage Completion Method, and made corresponding additions. Separate additions were also made towards alleged sale of car parking and unexplained cash credits under Section 68.
Before the Commissioner (Appeals), the assessee disputed the AO’s conclusions regarding alleged on-money, the extrapolation of seized material to the entire project, rejection of the Project Completion Method, and the quantification of unaccounted sales. Without prejudice, the assessee identified certain transactions reflected in the seized documents and suggested that only the profit element should be taxed rather than the entire unaccounted receipts. The assessee also contended that substantial unaccounted expenditure would have been incurred in executing such a large construction project.
The CIT(A) accepted the AO’s conclusion that the seized material demonstrated receipt of on-money and agreed with extrapolating the findings to the entire project, thereby sustaining the estimated gross turnover of ₹167.23 crore and unaccounted turnover of ₹108.70 crore. However, the CIT(A) disagreed with the AO’s approach of treating the entire unaccounted turnover as taxable income. Observing that construction projects necessarily involve unaccounted and hidden expenditure, the CIT(A) estimated taxable profit at 40% of the total accounted and unaccounted sales after allowing set-off for such expenditure. This resulted in sustained additions aggregating ₹66.89 crore while granting relief of about ₹41.81 crore. The CIT(A) also noted evidence of unaccounted expenditure such as compensation paid to tenants and deleted the addition relating to alleged sale of car parking.
Both parties challenged the CIT(A)’s order. The Revenue argued that no deduction for unaccounted expenditure should be allowed without supporting evidence and sought restoration of the AO’s addition of the entire unaccounted turnover. The assessee challenged the continued reliance on extrapolation, the estimation of profits at 40%, and the rejection of lower profit percentages suggested with reference to judicial precedents. During the Tribunal proceedings, however, the assessee stated that it would not press its objections to extrapolation and the determination of total turnover if a reasonable net profit percentage was adopted and statutory deductions under Section 40(b) were allowed.
The Tribunal examined the seized Annexures A to L and held that they adequately established the assessee’s practice of collecting on-money. It agreed that the seized material justified extrapolation to the entire project and upheld the determination of gross turnover at ₹167.23 crore, including unaccounted turnover of ₹108.70 crore. The Tribunal accepted the principle that best judgment assessments may involve reasonable estimation where supported by material and approved the AO’s extrapolation based on the seized evidence.
At the same time, the Tribunal rejected the Revenue’s contention that the entire unaccounted turnover should be taxed as income. It held that construction activity necessarily involves expenditure, including unaccounted expenditure, and that settled legal principles require only the profit element to be brought to tax rather than the entire receipts. The Tribunal endorsed the CIT(A)’s view that reasonable allowance must be made for such expenditure and observed that the assessee cannot ordinarily be expected to produce evidence of unaccounted expenses. It therefore upheld the principle adopted by the CIT(A) of allowing deduction for hidden expenditure while estimating taxable profits, though it proceeded to examine whether the 40% profit rate itself satisfied the test of reasonableness.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
There are eight appeals under consideration involving four AYs ie 2004-05 to 200708. These are four sets of cross appeals against the orders of the CIT (A) commonly dated 30.10.2009. The issues raised in all these appeal are inter-connected, therefore, all these appeal are consolidated and are being disposed of in this composite order. The issue common to all these appeals for all four AYs relates to profits of the Prime Mall project and it has genesis in AY 2004-05 and therefore, to start, we shall take up the cross appeals for the said AY.
ITA No.175/M/2010 & I.T.A. NO.323/M/2010 ( AY: 2004-05)
2. Grounds raised by the assessee in its appeal read as under:
“1. The Ld CIT (A) has erred in law and in the facts in partly confirming the order passed by the Ld AO.
2. The Ld CIT (A) has erred in law and in facts in holding that the principles of natural justice has been followed by the AO. The appellant was not apprised about the proposed addition and the case was not made out in spite of specific requests made in this respect.
3. The Ld CIT (A) has erred in law and in facts in confirming the addition of Rs. 4,64,31,144/- being alleged cash receipt on account of booking of units in the project “Prime Mall”.
4. The Ld CIT (A) has erred in law and in facts in confirming the taxing of alleged cash receipt in the year of booking in total disregard to the “Project Completion Method of Accounting” followed by the appellant and accepted by the Department.
5. The Ld CIT (A) has erred in law and in facts in enhancing the income of Rs. 1,62,50,900/- being alleged on money computed @ 40% of sales as per books of accounts amounting to Rs. 4,06,27,251/-.
6. The Ld CIT (A) has erred in law and in facts in not granting the appropriate set off of returned income of the project amounting to Rs. 5,11,69,416/- before partner’s remuneration and interest declared in the AY 2006-2007.
7. The Ld CIT (A) has erred in law and in facts in not granting the appropriate set off of income of the project amounting to Rs. 58,80,990/- declared in the assessment year 2007-2008.
8. The Ld CIT (A) has erred in law and in facts in taxing the enhanced income amounting to Rs. 1,62,50,900/- in the AY 2004-2005.
9. The Ld CIT(A) has erred in law and in facts in confirming the addition of Rs. 2,85,000/- being alleged unexplained credits u/s 68 of the Act in respect of loan taken from Nenbai Gala.
10. The Ld CIT (A) has erred in law and in facts in confirming the addition u/s 68 in proceedings under section 153A and is outside his jurisdiction and is bad in law and the addition made u/s 68 on account of unexplained cash credit deserves to be quashed.
11. The Ld CIT (A) has erred in law and in facts in confirming the order of AO in not allowing deduction of 4,55,000/- being compensation charges paid to tenant during the AY 2003-04.
12. The Ld CIT (A) has erred in law and in facts in confirming the charging of interest u/s 234B and 234C of the Act.”
3. Similarly the grounds raised by the revenue are reproduced as under:
1,. On the facts and in the circumstances of the case and in Law, the Ld CIT(A)erred in reducing the addition on account of on money to rs 4,64,31,144/- in the AY 2004-05 thereby allowing a relief of rs 2,90,19,465/- to the assessee by considering 40% of the total sale consideration received as additional income of the assessee on account of on money received after allowing set off of unaccounted expenditure of the assessee instead of 65% estimated by the AO.
2. On the facts and in the circumstances of the case and in Law, the Ld CIT(A) erred in estimating unaccounted expenditure without any evidence found during the search or produced by the assessee.
3. On the facts and in the circumstances of the case and in Law, the Ld CIT(A) erred in deleting the addition of Rs 3,00,00,000/- on account of car parking sale.
4. From the above set of grounds raised by the assessee and the revenue, there arise (i) various issues relating to the determination of taxable profits of the project of Prime Mall; various facets of this issue include: (a) the core issue relates to if the on money is rightly determined for turnover purpose and if the 40% of the same is rightly taken as the profits earned out of the project; (b) if the project completion method adopted by the assessee is rightly rejected; (c) if the denial of statutory deduction ie remuneration, interest etc out of the estimated profits is rightly done etc. (ii) if the issue of sale of the car parking is rightly decided; (iii) confirming of the addition of Rs 2,85,000/- being alleged unexplained credits u/s 68 of the Act in respect of loan taken from Nenbai Gala; (iv) allowability of deduction of Rs. 4,55,000/- being compensation charges. The issues relating to enhancement by the CIT(A) and failure to grant set off towards the income offered by the assessee in other AYs are consequential in nature. However, the core issue mentioned at sl no (i) above is commonly agitated in appeals by the assessee as well as the revenue.
5. Briefly stated, relevant facts relating to all the appeals under consideration are that the assessee belongs to the Prime Group of cases which is engaged in the business of construction. During the years, the assessee undertook the project of construction of ‘Prime Mall’. There was search and seizure action u/s 132 of the Income Tax Act, 1961 (in short ‘ITA’) on 20.4.2006 (AY 2007-08) at the residential and business premises of the directors/ partners/ related persons/ group cases. The project-Prime Mall (project) is located at Irla, Vile Parle (W), Mumbai and Shri Praful Satra, Smt Meenaxi Satra, Shri Premal Parekh and Shri Sunil V. Sangoi (alias Shah) are the main partners. Project consists of 474 units and it has basement parking, lower ground floor with 112 units; upper ground floor with 119 units; first floor with 108 units; second floor with 115 units and third floor with 18 units. The total saleable carpet area is 66,693 sq.ft whereas, the super built area is 1,33,386 sq.ft. The numbers as given in the para 2 of the assessment order being different needs correction with reference to the figures. The Project was admittedly completed in the AY 2006-2007. Assessee follows ‘Project Completion Method’ and accordingly, filed the return disclosing sales turnover at Rs 33,42,79,998/- (sic- Rs 61,99,87,046/-) for the AY 2006-2007 with the net profit of 15.50% (=Rs. 5,18,11,498/-). Similarly, for AY 2007-08 assessee disclosed sales turnover and profit of Rs 18,33,77,600/- and Rs. 2,15,56,481/- respectively. Assessee did not disclose any profits for the AYs 2004-05 and 2005-06 as the project is completed only in AY 2006-07. Returns are filed after search action. As a result of search and seizure action in April 2006, assessee offered undisclosed income of Rs. 15,25,01,564/- in respect of all the group assessees and the share of the assessee works out to Rs 5,11,69,416/-(before partner’s remuneration and interest) for the AY 2006-2007 and it is part of the above said profits of Rs. 5,18,11,498/-.
6. Further, the incriminating material seized during the search action includes several documents exceeding 2000 pages. AO/Investigation wing analysed the said documents and finally the AO appended some of such incriminating papers to the assessment order and they are marked as Annexures-A to L. Actual page numbers (ie page numbers given by the Investigation Wing) of these Annexures are correspondingly mentioned in the table given in the subsequent paragraphs of this order. Briefly, the contents of these Annexures are narrated as follows. Annexure-A refers to correspondence with Shri Bhushan Sheth, regarding payment of cash of Rs. 4,76,000/-; Annexure-B refers to list of shops allotted in Prime Mall (Numbering 53 shops) showing the same shops sold to different persons; Annexure-C shows the list of 34 shops; Annexure-D gives details of sales as on 31.03.2007 referring to 356 shops; Annexure-E relates to shops from L-1 to L-116 and G-1 to G-112 (‘L’ refers to lower ground floor and ‘G’ refers to upper ground floor) showing the carpet area and super built area. It also mentions purchase rates and name of the parties. Annexure-F refers to sales of shops and their rates etc. Annexure-G refers to correspondence between the assessee and Shri Surendra Rikibda, Pune in connection with Shop No.F-72; Annexure-H refers to Shop Nos. L-83 and L-92 involving Anil and Augustin; Annexure-I relates to list of shops for which allotment letter was issued and it contains the area, total consideration and rate per sq.ft. Annexure-J is hand written details relating to some shops giving particulars of value of the shop, due, received and balance. Annexure-K is a provisional statement of Estimated Conservative Profitability of the Project ‘Prime Mall’ showing estimated net profit of the project and the percentage thereof at Rs 38.73 Cr and 47.41%. the figure of 47.41% is wrongly calculated and correct working if done, the correct percentage figure is lessor. and finally, Annexure-L relates to another similarly worked out statement showing the estimated net profit of the project at Rs. 33.93 Cr which works out to net profit percentage of 28.18%. These Annexures L and K do not indicate that the they reflects complete picture of the project in terms of amounts spent or capital raised or profits earned or per unit sales rates or profit percentages etc. However, these figures indicate actual scenario of the assessee on the that particular day of period, these statements are made for the use of the assessee and its partners. In that sense of the matter, these figures and profit percentages appearing in these Annexures-L and K assume significance for adjudication of these appeals for the reason that eventually, it is a case of best judgment assessments of the AO and relevant discussion will follow in the subsequent paragraphs.
7. The Annexure-A to L which are appended to the assessment were relied heavily by the AO for demonstrating the assessee’s business modus operandi ie (a) collection of on money in cash from the buyers of the shops/units and unaccounting the same in the books; (b) the said on money is proportionate to the area/common area (difference between the super built up area and carpet area) and in other words, it is described as loading the carpet area to that extent; (c) for determining extent of such unaccounted on money which is placed at 65% of the total sale consideration; (d) for inferring that the sale turnover, what is accounted in the books relates to only 35% of the actual sale consideration; (e) no deduction towards hidden or unaccounted expenditure needs to be allowed in the absence off the evidences; (f) finally for arriving at the unaccounted income of Rs 108.70 cr which is equivalent of the said 65% in absolute figures; (g) further, also for making addition of Rs 3 cr on account of sale of parking area etc. The details of Annexures vis a vis the pages as per the Inventory to Panchanama are tabulated for convenience and they are:
| Sl.No. | Page No. as per the inventory | Annexure No. as per seized record | Annexure No. as per AO |
| 1 | 35 | A-3 | A |
| 2 | 42 | A-3 | B |
| 3 | 119 | A-3 | C |
| 4 | 86 TO 94 | A-8 | E |
| 5 | 78 | A-8 | F |
| 6 | 40 Premal Parekh | A-1 | G |
| 7 | 43 Premal Parekh | A-1 | H |
| 8 | 25 TO 27 | A-3 | I |
| 9 | 79 AND 80 | A-3 | K |
8. Further, AO made elaborate discussion in her order granting detailed insight into the ‘modus operandi’or manner of earning of ‘on money’ out of the transaction of sale of the shops/units. She also mentioned specific cases of transactions for affirming the conclusion that the assessee suppressed the turnover of sales to the tune of 65% of the actual sales turnover. The contents of para 6 with its sub-paras running into (i) to (xxv) are exhaustive and it is space consuming to narrate the same here in this order. To sum up the findings of the AO, we rely on the following conclusions as summed up by the CIT (A) vide para 3.20 of the impugned order. They are as under:
“The basis of huge addition made by the AO is mainly based on the allegations mentioned herein below:-
i) The appellant is engaged in selling the units on super built-up basis where as loading on carpet area is 100% and that the agreement is made for carpet area.
The loading to carpet area is nothing but alleged on-money received.
ii. Based on the impugned loose papers, the AO has drawn presumption that alleged on-money is inherent in the nature of appellant’s business and presumed that the same is to the extent of 65% in the present case.
iii.Based on page 42, the appellant is engaged in selling same units to two or more persons and has recorded sales on ly in respect of one person.
iv. The AO also referred to certain other loose papers to draw the presumption by picking holes there from.
v. The AO then compared the total of the assets side of the balance sheet of partners and group concerns to draw conclusion that assets have been accumulated over the period which has not been disclosed…
9. Basing on the above conclusions as supported by the papers tabulated above, AO came to the conclusion that the assessee has not reported 65% of the actual sales turnover and derived that what is reported in the books accounts for only 35%. Assessment wise details of number of units sold, the accounted & unaccounted total consideration involved (equalant of 35% and 65% of actual sale turnover) are tabulated. Paragraphs 8, 9, 10 of the AO’s order are reproduced as under:
“8. Taking into account the entire facts of the case, the various issues discussed above, the clinching evidences gathered during the course of the search action and the submissions filed by the assessee during the course of the assessment proceedings, it is clear that the assessee receives almost 65% of the sale consideration in cash. It is also a known fact that the on-money payment has to be made on the date of booking / atleast before the agreement is executed. During the course of assessment proceedings (on 18/12/2008), the assessee has filed the year wise details of sales as above.
| AY | No. of units sold | Total consideration involved (Rs.) |
| 2004-05 | 14 | 4,06,27,251/- |
| 2005-06 | 63 | 2,70,35,000/- |
| 2006-07 | 208 | 33,42,79,998/- |
| 2007-08 | 70 | 18,33,77,600/- |
| 2008-09 | 16 | 32,64,62,000/- |
| Total | 371 | 91,17,81,849/- |
| Tenants | 24 | |
| Stock | 77 | |
| Total | 472 |
9. As discussed above, total sales recorded by the assessee is only 35% approximately of the actual sale consideration. Thus, the balance 65% (approx) consideration is received in cash and the same has not been recorded in the books of account. Here, it would be pertinent to mention that the clinching evidences found by the search party regarding acceptance of part of the sale consideration in cash by the assessee, relates to various shops and is respect of sale transactions executed at various points of time. Thus it is not a case where the assessee has received on-money only in respect of a particular sale transaction or in respect of sales affected during a particular point of time. The clinching evidences gathered by the search parties (which contains entries in respect of sale transactions effected over a period of time, right from the year 2004 onwards) clearly indicate the general modus operandi adopted by the assessee while effecting sale of shops ( ie acceptance of a considerable portion of the sale consideration in cash). It is for this reason that the addition on account of receipt of on-money is being made in all the AYs, where the assessee has declared sale of shops.”
10. In view of the above discussion, the unrecorded component of the sale consideration is being added back to the total income of the various AYs concerned as under: (column 4 of this modified table is relevant)
| AY | No. of units sold | Sales as per Books of account (Rs.) | On money received @65% of total sales (Rs.) | Gross sales (Rs.) |
| 1 | 2 | 3 | 4 | 5 |
| 2004-05 | 14 | 4,06,27,251 | 7,54,50,609 | 11,60,77,860 |
| 2005-06 | 63 | 2,70,35,000 | 5,02,07,857 | 7,72,42,857 |
| 2006-07 | 208 | 33,42,79,998 | 62,08,05,711 | 95,50,85,669 |
| 2007-08 | 70 | 18,33,77,600 | 34,05,58,400 | 52,39,36,000 |
| Total | 58,53,19,849 | 108,70,22,577 | 167,23,42,426 |
10. Accordingly, under the heading “on money”/ consideration received in cash, the AO made total addition of Rs 108.70 cr for the entire project for four AYs under consideration. In addition, AO made other additions on account of sale of car parking amounting to Rs 3 cr and also as cash credits u/s 68 of the Act. Relevant paragraphs of the said AYs showing the exact details of the additions are given as under. To start with AY 2004-05, para 14 of the assessment order is relevant and the same reads as follows. Similarly, details of the additions for the other AYs 2005-06 to 2006-07 are narrated subsequently. Data relevant for 2004-05 are:
“14. In view of the above discussion, the total income of the assessee is computed as under:
| Particulars | Amount (Rs.) |
| Income from Business (as per statement) | Nil |
| Addition on account of undisclosed car-parking | 3,00,00,000 |
| Addition on account of consideration received in cash | 7,54,50,609 |
| Total Business Income | 10,54,50,609 |
| Income from Other Sources – Addition on account of unsecured loans u/s 68 | 2,85,000 |
| Total Income | 10,57,35,609 |
For AY 2006-2007:
| Particulars | Amount (Rs.) |
| Income from Business (as per statement) | Nil |
| Addition on account of consideration received in cash | 5,02,07,857 |
| Total Income | 5,02,07,857 |
For AY 2006-2007:
| Particulars | Amount (Rs.) |
| Income from Business (as per statement) | 2,52,84,264 |
| Addition on account of consideration received in cash | 62,08,05,711 |
| Business Income (Total) | 64,60,89,975 |
| Income from Other Sources – Unsecured loan u/s 68 (as discussed above) | 12,48,150 |
| Total income | Rs.34,81,39,394/-“ |
For AY 2007-2008:
“14……..
Income from Other Sources
| Particulars | Amount (Rs.) |
| Income from House Property (as per statement) | 26,89,568 |
| Income from Business | 31,91,426 |
| Addition on account of consideration received in cash | 34,05,58,400 |
| Business Income (Total) | 34,37,49,826 |
| Income from Other Sources | 17,00,000 |
| Total Income | 34,81,39,394 |
11. Thus, to sum up, relying on the discoveries in the search, AO brought out a patter on the way the assessee sells ‘super built up area’ to the customers and accounts only the sales relatable to the ‘carpet area’ and not the sale relatable to the super built up area. Based on the seized papers appended to the assessment order, AO made out that the assessee collects the unaccounted portion in cash and outside the books and further, AO quantified such unaccounted segment of the sales at 65% of the total sales ie accounted and unaccounted sale consideration. In obsolete figures, such unaccounted sale turnover works out to Rs 108,70,22,577. AO apportioned the same among four AYs, which are under consideration. AY wise unaccounted sale turnover/profits are mentioned in the table above (vide column 4 of the table). AO rejected the assessee’ method of recognizing income ie Project completion method and invoked the ‘percentage completion method’ instead. Aggrieved with the above assessment orders, assessee filed the appeals before CIT (A).
12. During the proceedings before the CIT(A), assessee made various submissions and contested the conclusions and additions of the AO vehemently. In principle, the assessee objected to the conclusions of the AO on the issue of loading of carpet area with the unaccounted segment of the sales, receiving of on money in cash in lieu of such loading, extrapolation/multiplication of the incriminating information to the entire project, quantifying such unaccounted sales turnover at 65% of the actual sales consideration for entire salable constructed area, finally the quantification of such unaccounted turnover of sales of units/shops at Rs 108.70 cr and deeming whole of it as the unaccounted income of the assessee earned out of the project- PRIME MALL.
13.Without prejudice, the assessee identified the list of units/shops from the said Annexures- A to L and quantified relatable unaccounted sale turnover at Rs 21,34,48,983/-. Assessee is for assessing the profit segment of the same adopting 8%. In that sense, in principle, the assessee accepted the modus operandi made out by the AO and however, the extrapolation is vehemently opposed. Otherwise, the assessee opposed and contested every conclusion of the AO emanating from the said Annexures A to L. We do not file necessary to discuss the merits of the same in view of the assessee’s submissions before Tribunal. The CIT (A) analyzed the submissions of the assessee afresh and summarized the order of the assessment in his order, which could be seen in para 3 of the impugned order. Para 3.20 of the impugned order contains the submissions of the AO’s decision in figures and in points. CIT (A) also summarized the relevant material, incriminating documents and the same are summarized in a tabular form. Considering its significance, the said para 3.20 is reproduced here under:
“3.20. The appellant has submitted the details as and when called by the Assessing Officer from time to time and has cooperated with the department whole-heartedly throughout the assessment proceedings. Not only so the partners / directors appeared before the Assessing Officer during the assessment proceedings from time to time. The Assessing Officer has conjured up sordid saga of allegations to cover up the failure in making enquiry and made a case of high pitch assessment by picking holes in the loose paper, which are picked and chosen to suit her convenience. The same is evident from the fact that the assessments for the AY 2004-2005, 2005-2006, 20062007 and 2007-2008 have been made on presumptions making huge additions of Rs. 112.02 Cr as tabulated herein below. The Assessing Officer deemed it very convenient to adopt short cut to estimate income on percentage basis on the year wise sales of the units in the project ‘Prime Mall’.
| Assessment Year |
Accounted Sales in Rs. |
Addition of income @ 65% of total sales…. |
| 2004-05 | 4,06,27,251 | 7,54,50,609 |
| 2005-06 | 2,70,35,000 | 5,02,07,857 |
| 2006-07 | 33,42,79,998 | 62,08,05,711 |
| 2007-08 | 18,33,77,600 | 34,05 58,400 |
| Total | 58,53,19,849 | 108,70,22,577 |
| Add:2004-05 | Alleged sale of car parking | 3,00,00,000 |
| 2004-05
2006-07 |
Alleged unexplained credits in respect of unsecured loans | 2,85,000
12,48,150 |
| 2007-08 | Alleged unexplained cash in search….added protectively | 17,00,000 |
| GROSS TOTAL | 112,02,55,727 |
14. Further, based on the seized material/ incriminating material annexed to A to L, the CIT (A) discussed the extent of on-money ie generated in this project and arrived at a figure of Rs. 21,34,48,983/- and the reliance is place on the Annexures A, B, C, F, H in this regard. As per the CIT (A), the on money received by the assessee ranges from 40% to 75% depending on the allocation of the shops, floor in the mall, location of shops ie either front or back etc. The contents of para 4.47 of the impugned order are relevant for the above. Basing on the above working of on-money, varying from 40% to 75%, the extrapolation was made to salable area and that is how, CIT (A) agreed with the views of the Assessing Officer who kept the unaccounted portion of the turnover at 65% of the actual sale consideration. Thus, the CIT (A) agreed with the AO’s extrapolations and multiplications and at the end, the unaccounted turnover is finalized at Rs. 108,70,22,577/-. However, CIT(A) rejected the AO’s decision in treating whole of it as the income of the assessee earned from the project. CIT (A) did not agree with the conclusion of the AO that the assessee has not incurred any hidden expenditure or unaccounted expenditure for earning the said unaccounted turnover of Rs 108.70 cr and therefore, whole of the said 65% of the total sales constitutes the profit of the assessee. CIT(A) also referred to one such an unaccounted expenditure came to the notice of the search team and it amounts to Rs. 4,55,000/- which was paid as compensation charges to the tenants. Thus, the CIT (A) took a view that there must be a lot of hidden expenditure qua unaccounted sales and held reasonable expenditure is required to be given set off against the unaccounted turnover of the assessee. Instead of deeming the whole of the 65% of the profits of the assessee, the CIT (A) worked out the total turnover of the assessee ie accounted as well as unaccounted sales of the assessee, for all these four assessment years and arrived at the figure of Rs. 167,23,42,426/- (accounted sales @ 35% works out to Rs. 58,53,19,849/- + unaccounted turnover @ 65% worked out to Rs. 108,70,22,577/- = Rs. 167,23,42,426/-). On the issue of what constitutes reasonable percentage of net profit that should be applied to the unaccounted turnover, CIT (A) analyzed various decisions that suggest the reasonable percentage of profit in respect of assessees with similar business operation. Of course, assessee relied on various decisions in support of adopting only 5% of gross receipts as a reasonable income as per the decision of Hon’ble Bombay Bench of ITAT in the case of Mrs. Mehroo N Irani vs. ACIT (75 Taxman (Mag.) 123); 8% of the gross profit unaccounted income instead of fully taxing it in the absence of evidences of expenditure ie decision of Hon’ble Gujarat High Court in the case of ITO vs. Anand Builders (ITA No.52 of 2002), the Revenue’s SLP was dismissed as reported in 265 ITR 337 (Statutes); 15% profit rate of on-money is reasonable rate as held in the case of Nalini V Shah vs. ACIT vide ITA No.6183/M/2006 dated 20.5.2009. Considering the above submissions of the assessee, CIT (A) examined the same and rejected the assessee’s proposals of the profit rates @ 5%, 8% and 15% mentioning that the facts of each case are different and therefore, the percentages are varying from case to case and held that “the profit out of on-money has to be estimated as per the material found during the search and seizure operation and replies filed by the assessee from time to time.” Finally, he proceeded to estimate the profits of the assessee on the total accounted income as well as unaccounted turnover 40% of the sale consideration received, accounted and unaccounted income of the assessee, after allowing the set off of the unaccounted expenditure of the assessee.
15. The relevant discussion given in para 4.56 is relevant and the same is reproduced here under:
“4.56. Perusal of the Annexure-A to Annexure-L seized from the premises of the appellant there are evidence of receiving on-money ranging from 40% to 70%. Once it is found that the appellant is receiving on-money over and above of the sale recorded in the books of account, it cannot be said the appellant is not making any expenditure out of books when such a huge project has been taken into hands by the appellant. There are some unaccounted payment, hidden payment and the other payments which cannot be claimed as business expenditure although such expenditure are incidental and run the construction business to get the sanction of the project from various authorities and purchase of land for construction. Examination of seized material it is found that the appellant has received on-money of Rs. 21,34,48,984/- as per Annexure A to L of the assessment order. The appellant itself work out unaccounted turnover of Rs. 20,63,80,933/- but stated that profit should be estimated @ 8% of unaccounted turnover, which cannot be accepted as discussed above. Once it is established that the appellant received on-money on the sale of shops mentioned in seized material it cannot be said that it has not received on-money on the sale of other shops which are not mentioned n seized material although the percentage may vary. Keeping in view these facts, it would be fair and reasonable to estimate 40% of the total sale consideration received accounted and unaccounted as additional income of the appellant on account of on-money received after allowing set off of unaccounted expenditure of the appellant instead of 65% estimated by the AO.”
16. From the above it is evident that the CIT (A) agreed with the assessee’s contentions that there are some unaccounted payments, hidden payments and other payments which cannot be claimed as business expenditure. Although, such expenditures are incidental to run the construction business, to get sanctions of the project from various authorities and purchase of land for construction and eviction of the illegal occupants and vacation of the legal tenants etc. From the above, it is evident that the CIT (A) was with the AO in matters of arriving at the total sale consideration received, accounted or unaccounted, at Rs. 167,23,42,426/-. He was also with the AO in quantifying the unaccounted sales at Rs. 108,70,22,577/-. However, he departed from the AO’s working that the total 65% of unaccounted sales is the income of the assessee. He arrived at the taxable profits of the project for the AY 2004-05 to 2007-08 at Rs. 66,89,36,953/- adopting the 40% as the net profit. In the process, the CIT (A) allowed 60% of the total sales towards expenditure of every account discussed above. Further, the CIT (A) is in tune with the settled judicial proposition that the assessee need not have to establish the genuineness of the expenditure with evidences. CIT (A) also worked out year wise addition vide col 5 of table modified:
| AY | No. of units sold | Sales as per Books of account (Rs.) | On money received @65% oftotal sales(Rs) | Gross sales (Rs.) |
Addition Sustained @ 40% of sales |
| 1 | 2 | 3 | 4 | 5 | 5 |
| 2004-05 | 14 | 4,06,27,251 | 7,54,50,609 | 11,60,77,860 | 4,64,31,144 |
| 2005-06 | 63 | 2,70,35,000 | 5,02,07,857 | 7,72,42,857 | 3,08,97,142 |
| 2006-07 | 208 | 33,42,79,998 | 62,08,05,711 | 95,50,85,669 | 38,20,34,267 |
| 2007-08 | 70 | 18,33,77,600 | 34,05,58,400 | 52,39,36,000 | 20,95,74,400 |
| Total | 58,53,19,849 | 108,70,22,577 | 167,23,42,426 | 66,89,36,953 |
For all four AYs, the part relief given by the CIT(A) works out to Rs 41,80,85,624/-.
17. The revenue is aggrieved with the said relief and filed the impugned appeals before
18. In this regard, the core argument of the revenue is that the CIT(A) should grant relief if any only on the basis of the evidence in support of the unaccounted expenditure. Revenue also aggrieved against the decision of the CIT(A) with regard to sale proceeds on sale of ‘car parking’ and the cash credits as well as the cash of Rs 17 lakhs found in the search action.
18. On the other hand, thus, the assessee is aggrieved with the confirmation of addition made on account of cash receipts /on money receipts and followed by the same, the extrapolation to the entire project and also against the profit percentage of 40% adopted by the CIT(A) without any basis. There are other issues too. Aggrieved with the above conclusions of the CIT(A), both the assessee and the revenue filed the cross appeals.
Taxable profits of the project –PRIME MALL
19. Determination of the taxable profits of the Project is the core issue and it has many facets as raise the parties in their respective grounds. We shall deal with the same under the following headings, namely,-
a. Arguments of the Parties
b. Disputed areas and Summaries of the stand of the Party
c. Decision of the Tribunal
a. Arguments of the Parties
20. During the proceedings before us, Shri Vijay Mehta, Ld Counsel for the assessee narrated the above facts and mentioned there are number of apparent mistakes in the order of the AO. Referring to para 2 of the AO, he mentioned that the numbers mentioned against each of the floor of the Prima Mall and also the sales turnover for the AY 2006-07 require corrections. Further, he explained the manner, in which AO made the addition of Rs. 108.7 Cr which is 65% of the extrapolated gross sales (35% was accounted) and the manner the best judgment assessments done by her without formally rejecting the books of accounts and the ‘Project Completion Method’ consistently followed by the assessee. Ld Counsel is also critical of the way the extrapolation was done to all the shops merely based on the scanty data dug out from the Annexures-A to L. Further, Ld Counsel was critical of the conclusions inferred by the AO and CIT(A) based on the incomplete and incomprehensive data available from these questionable Annexures-A to L. Annexure wise submission of Ld Counsel is briefly discussed in the succeeding paragraphs.
20.1. Regarding Annexure-A, which is a letter of the assessee dated 6.6.2005, addressed to Mr. Bhushan Sheth, a proposed buyer of the shop, contains reference to cash of Rs. 4.76 lacs. AO alleged that the cash referred in the letters relates to the on-money segment relatable to the loaded super build up area of the shop No 15 purchased by Mr Sheth. In this regard, Ld Counsel submitted that the said letter is a normal business letter written to the proposed buyer for collection of the outstanding dues on account of sales as per agreement of sale in respect of unit No.G-15. The said party was defaulted in making payment at various instances. However, no alleged cash has been received from Mr. Bhushan Sheth. The entire consideration of Rs. 13,24,000/- received by cheque on different dates between 17.3.2004 and 25.3.2008. One cheque was received before search instead of cash. Whereas, as per letter (seized document) only Rs. 50,000/-is to be received in cheque. No enquiry has been conducted by the Department to prove that any part of the consideration was received in cash. The document does not state that the cash referred therein is cash over and above the sale consideration as per agreement to sale.
20.2. Regarding Annexure-B, AO alleged that the same contains list of 53 shops books by various parties. Duplicate entries in respect of shop units like L-13, L-14, L-20, L-21, L92, L-95 and L-99 etc are nothing but sale of the same unit to two different parties and half of it was accounted for on the basis of carpet area whereas the total sale is on super built up area and the consideration of 40 to 45% was not accounted for in the books of account. In this regard, Ld Counsel submitted that the duplicate entries are nothing but reference of earlier negotiated price with the same buyer who either wanted to cancel the unit for the price or the said unit being cancelled was later resold to another proposed buyer. The amount mentioned under the head ‘amount received on the said page is duly accounted for in the books of account and the details of the same were submitted and proved before the He further submitted that if there was any receipt of alleged on-money, that would not be reconciled with the books of account. Details of payments received against alleged duplicate / unaccounted sale was also accounted in the books of account and also filed the affidavits of the concerned parties. Assessee itself filed an affidavit furnishing all the relevant documents.
20.3. Regarding Annexure-C, AO alleged that the assessee sold the units on the super built up area whereas, the agreement were made on the carpet area and assessee allegedly recorded sale consideration to the extent of 30% to 40% and balance consideration received in cash. In this regard, assessee submitted that the said annexure was some rough appropriation of the proposed sales consideration of the block deal with M/s. ABC Corporation for sale of all these shops/units. As per the allotment letter issues to M/s. ABC Corporation, for block deal of units on first floor and ground floor, Rs. 10 Cr was received against units at first floor, whereas in the seized paper the said amount was apportioned against the unit of ground floor.
20.4. Regarding Annexure-E, AO alleged that the same proves 100% loading on carpet area to determine super built up area. In this regard, assessee submitted that in a project like ‘Mall’ there will be heavy loading on carpet area of shops because of large commonly used space by the public. But that does not prove that the assessee has earned on-money by selling common areas and submitted that the sale of shops was on super built up area.
20.5. Regarding Annexure-F, AO alleged that the amount mentioned under the year ‘70%’ was nothing but alleged on-money to the extent of 70%. In this regard, assessee submitted that the said annexure was found from the project site office belonging to the site contractor, Mr. Jaysukhlal Sapra and the said page is not in the hand writing of any of the partner or of the employee of the firm. The transactions mentioned in the said annexure have not been carried out.
20.6 Regarding Annexure-G, the AO alleged that shop no.72 was first sold to Mr. Surendra Rikibda for consideration of Rs. 52,50,000/- and the same was later sold to Mr. Hiral Engineering for Rs. 24,00,000/- in AY 2007-08. In this regard assessee submitted that the said letter was an offer of sale of unit to Mr. Surendra Rikibda, which was not materialized and later the same was sold to M/s. Minal Engineering for Rs. 24 lacs and accordingly disclosed in the AY 2007-08.
20.7. Regarding Annexure-H, the AO alleged that as per this annexure, 50% of the sale consideration has been received as alleged on money and relied on the statement of Mr. Premal Parekh. In this regard, assessee submitted that Mr. Premal Parekh, one of the partners of the firm, initially admitted that the alleged on money was received from Mr. Anil and Mr. Augustin which was retracted by him before the investigation officers. Further, no transaction was carried on with the person named Mr. Anil or Augustin and no enquiry was done in respect of the alleged persons.
20.8. Regarding Annexure-I & J, AO alleged that the rates mentioned on the 25th and 27th page (Rs. 16,000 per sq.ft) varies with that of rate mentioned on page 79 and 80 (Rs. 8000/-). In this regard, assessee submitted that the rate mentioned in 25th & 27th pages based on carpet area whereas the rate mentioned in 79th & 80th pages was based on saleable super built up area and the difference of rate was on account of unit of measurement and not on account of on-money.
20.9. Regarding Annexure-K & L, AO alleged that these annexures contains reference to the projected estimated profit figures ie Rs. 38.73 Cr as per Annexure K and Rs. 33.93 cr as per Annexure L and the income of Rs. 5,11,70,000/- offered in the returns is based on the conclusive statements after Audit by the statutory auditors. In this regard assessee submitted that the projections were only for the purpose of getting financial assistance from the banks and the net profit disclosed was the actual profit. It was mentioned that the Net profit percentage mentioned 41.41% is statistically wrong due to calculation mistakes. As per the Counsel, these figures are incomplete and inconclusive and not dependable. Refering to Annexure-L, Ld counsel stated that the same is prepared subsequent to Annexure-K and comparatively the same is latest in time and mentioned that it refers to net profit percentage of 28.18% and again it is an incomplete and inconclusive. In this regard, Sri Mehta, mentioned that the interest expenditure relating to unsecured loans is more than Rs 72.84 lakhs which can be evidenced from the books. If such expenditure is considered, the projected percentage of net profit shall have to be accordingly adjusted downwards from 28.18%. Further, he also mentioned that the “sale of car parking” is not real entry as the car parking was never sold in the commercial projects of this kind. With the exception of these papers, there is no evidence what so ever to demonstrate that the car parking is sold by the assessee and received ‘on money’ on this account. Refuting the AO’s allegation that the assessee has sold car parking area for a consideration of Rs. 3 Cr, Ld Counsel for the assessee submitted that the entire car parking of the Mall is meant for common use of the general public and was neither salable nor sold. He also mentioned that after examination of the seized papers, CIT(A) deleted the addition. Therefore, the said percentage of 28.18% is required to be further adjusted downwards.
21. Thus, Ld Counsel for the assessee attempted to demonstrate that the said Annexures relied heavily by the revenue are not free from debate and dispute. They are not credible. Ex consequenti, allegation of loading of carpet area, on money receipts, extrapolation/multiplication to the entire project, rejection of books of accounts duly audited by the statutory auditors, generation of 65%:35% formula for unaccounted sales: accounted sales of the gross sales turnover, addition of Rs 108.70 cr as the profits of the assessee as per AO or 40% of the gross sales of Rs 167.23 cr as profits of the project as per CIT(A) etc, constitutes pigment of weird guess work of the revenue authorities without any base and therefore, it should be dismissed.
22. Without prejudice, Ld Counsel brought out attention the figure of Rs 21,34,26,983/-which is worked out as unaccounted sales turnover of the project as discussed by CIT(A) vide para 4.47 on page 49 to 53 of the impugned order and stated that the same may be deemed as unaccounted sales and work out the 8% of the same as taxable profits. Further, without prejudice, referring to a letter of the assessee duly signed by the partners of the firm, Ld counsel mentioned that the assessee decides to concede the arguments/objections on the issues of (a) extrapolation/multiplication to entire project; (b) determination of actual sale consideration of Rs 167.23 cr ie 65% as unaccounted sale turnover, provided the profits are reasonably estimated adopting say 15% as the profits of the project and allow deductions allowable u/s 40b of the Act.
23. Further, on the issue of reasonable net profit percentages, Ld Counsel strongly argued for adopting 8% of the unaccounted sales as the taxable profits and not the entire unaccounted turnover as done by the Assessing Officer or 40% of the combined turnover as confirmed by the CIT (A). In continuation, Ld Counsel mentioned that the CIT (A) erroneously and arbitrarily considered 40% of the turnover as the profits of the project “Prime Mall” and the same is unheard in this line of business, considering the unaccounted and hidden expenditure of the project. In this regard, Ld Counsel brought to our notice that such hidden expenditure of Rs. 4.55 lacs unaccounted in the books of account which was paid as compensation to the tenants for vacating the premises occupied by them. Ld Counsel also take an objection to the manner in which the best judgment assessment was made without formally rejecting the books of account and adopting 40% as the profit segment of the turnover. Further, Ld Counsel raised an objection to the manner “Project Completion Method” was rejected by the Revenue and estimating the year wise profits based on the “Percentage Completion Method” basing on the sale of shops effected on yearly basis. Further, he also pointed out certain mistakes in determining the number of shops sold in each year and filed a copy showing correct number of shops sold in each of the assessment year under consideration.
24. In support of his argument in favour of 8% of the turnover as profits of the project, Ld Counsel relied on various decisions. Ld Counsel relied on the decision of Ahmedabad Bench of this Tribunal in the case of Kishore Mohanlal Teliwala vs. ACIT 64 TTJ 543, in which 8% of the unaccounted turnover has been found reasonable by the ITAT. Further, the assessee has also relied on the decision of Bombay Bench, ITAT in the case Mrs. Mehroo N Irani vs. ACIT 75 Taxman (Mag.) 123, wherein the Tribunal held that 5% of the gross receipts was found reasonable for determining the income of the assessee on account of the unaccounted turnover. Further, assessee also relied on the judgment of the Hon’ble Gujarat High Court in the case of ITO vs. Anand Builders vide ITA No. 52 of 2002 in which, the High Court upheld the order of the ITAT, directing the AO to consider only 8% of the unaccounted money received as income of the assessee instead of treating the whole of the unaccounted turnover. It is also brought to our notice that the Revenue’s SLP was dismissed as reported in 265 ITR 337 (Statutes). Further, referring to another decision of ITAT, Mumbai Bench in the case of Nalini V Shah vs. ACIT vide ITA No.6183/M/2006 for AY 2002-03, dated 20.5.2009, Ld Counsel mentioned that in that case, the Tribunal was of the opinion that estimation of the profits @ 15% of the on-money is held reasonable.
25. Further, before us, on the issue of adopting reasonable percentage, Ld Counsel informed that the project in question is a complete failure and therefore, estimating the profits of the project @ 8% is unreasonable as the same is on higher side. It is also a fact that no assets were found during the search and seizure, justifying the unaccounted income of such magnitude. Obviously, if the income is earned has to reflect in the name of the company or in the name of the partners of the company in the form of assets. Further, he mentioned that what can be taxed should be the reasonable amount of profit and not to the receipts. Considering the fact that there exists unaccounted and hidden expenditure, a fair percentage of profit @ 8% to 15% should be considered for estimation for arriving at the final quantum of addition.
26. Further, referring to the assessment relating to Neptune group cases, Ld Counsel brought our attention to the information relating to the said group filed for the first time before us and mentioned that the issues in that case have come to end based on the disclosure u/s 132(4) of the Act. Whereas in the instant case, the disclosures made u/s 132(4) and other statements were retracted and, therefore, the facts of the present appeals are distinguishable from that of the Neptune group cases. Ld Counsel relied on various decisions in favour of his above submissions. Ld Counsel also filed copies of orders establishing the finality in their cases. Further, Ld Counsel mentioned that the assessee offered certain portion of the income in the various assessment years and sought direction to ensure that income is not taxed more than one assessment year.
27. Referring to a submission filed in the form of letter to the Tribunal, at the end, Ld counsel categorically stated that the assessee has decided to not press on the argument relating to exercise of extrapolation and determination of the gross sales turnover of Rs 167.23 cr and prayed for ordering for downward revision of 40% adopted by the CIT(A) to 15% at the maximum and sought for bringing finality on the litigation. Otherwise, the assessee prayed for deciding the reasonable net profit percentage of the project – Prime Mall. As per the assessee, normally, 8% to 15% are the most accepted reasonable percentages which are relied upon by the assessee in all the proceedings ie assessment and first appellate proceedings.
28. Further, mentioning that the assessee offered profit percentages of the project for the AY 2006-07 and 2007-08 at the rate of 15.50% and 11.76% respectively and justified the same on the grounds of full disclosures attributable to the search action. These returns are filed after the search action in April 2006.
Arguments of the DR
29. Per contra, Ld DR for the revenue relied vehemently relied on the AO’s order and prayed for confirming the whole of addition of Rs 108.70 cr as the income earned from the project-Prime Mall. To start with, Ld DR mentioned that assessee was non-cooperative all through the assessment proceedings and the information was not forthcoming. Further, he mentioned that the unaccounted sales turnover of Rs 108.7 Cr was determined by the AO should be taken as income of the assessee. As per the Ld DR, the CIT (A) has erroneously granted relief to the tune of Rs. 41,80,85,624/- by way of estimation of profits adopting 40% on the gross-up sales, and the same is unacceptable for the reason that the said 40% has no basis whatsoever. Ld DR mentioned that in matters of best judgment assessment, arbitrariness and unreasonableness should be avoided. Further, as per Ld DR, no set off towards any expenditure must be allowed unless assessee produce evidences in support of such incurring of expenditure. Ld DR relied on the Hon’ble Supreme Court judgment in the case of CST v. Esufali (H.M.) Abdulali (H.M.) 90 ITR 271 for the proposition that extrapolation within the year is permissible based on the incriminating data discovered during the search for 19 days. Thus, Ld DR is of the firm opinion that the unaccounted turnover of Rs. 108.7 Cr should be taxed as profits of the project in the assessment year as determined by the Assessing Officer. Referring to the retraction of the statements recorded in the search action, Ld DR mentioned that such retraction made after lapse of sufficient time must not be entertained. Referring to NP percentages in the returns filed by the assessee, Ld DR submitted that the assessee’s prayer for adopting 5%, 8%, 10%, 15% etc must be rejected. Ld DR also referred to the NPs emanating from the Annexures L and K. On other issues, Ld DR relied on the orders of the AO.
30. We have heard the parties and perused the orders of the revenue. The annexures to the assessment order were also perused. To start with, the details of the undisputed facts are narrated here and the same are that assessee-firm constructed a “Prime Mall” and its Super Built up and carpet areas are 1,33,386 sq ft and 66,693 sq ft respectively. The project is completed in the AY 2006-07 and on following ‘project completion method’ of accounting, the firm filed the returns of income for the AY 2006-07 and 2007-08 declaring the net profit at 15.50% and 11.76%. The average of the said NP percentages works out to 13.63%. There is no dispute about the genuineness of the seized papers and the contents therein annexed to the assessment orders. At the end of the hearing proceedings, Ld Counsel categorically mentioned about the concessions given by the assessee with reference to the issue of extrapolation and consequent generation of 65:35 formula of unaccounted sales: accounted sales turnover and therefore, for deeming of Rs 167.23 cr as the actual sales turnover of the assessee out of the project. Otherwise, the Annexures K and L, under the sub-heading C relating to “profitability” contains repeated reference to the figure of Rs 120,41,80,000/-, which is less than the deemed sales turnover figure of Rs 167.23 cr. Undisputedly, the figures of cost of project, amount spent, profitability percentages appearing on these Annexures, being compiled during the construction period and not on completion of the project, are mere provisional figures and inconclusive. Undisputedly, these Annexures K and L mention of estimated NP of the project in percentages and the as per the Annexure L, which is latest in time, the NP is 28.18%. The assessee sums up that the final figures relating to (a) actual cost of project and (b) actual sales turnover being different, need to be considered for working out the reasonable NP and in that sense of the matter, the said NP needs downwards revisions to 15.50% or 11.76% as the case may be, as per the discussion given above.
b. Disputed facts/Conclusions – Summaries of the party’s stand
31. Disputed facts/conclusions before the AO and CIT(A): Regarding incriminating nature of the material/Annexures A to L, right from the search days, assessee holds that they do not establish conclusively the receipt of ‘on money’ in principle. Per contra, AO/CIT(A) rely heavily on them only to derive ‘modus operandi’ of on money earnings and the said formula of 65:35 ie unaccounted and accounted sales turnovers. Relying on the same Annexures –A to L to the assessment orders, AO made addition of Rs 108,70,22,577/- (Rounded off to ‘Rs 108.70 cr) for the four AYs namely AY 2004-05 to AY 2007-08 as unaccounted on money receipts. Thus in principle, the dispute relates to which is correct unaccounted income ie Rs 5,11,69,416/- vs Rs 108.70 cr. Further, other disputes revolves around denial of deduction towards the hidden expenditure relatable to the said unaccounted sales/on money and what constitutes reasonable percentage in this regard. On this issue, the assessee vehemently objected to AO’s decision in considering whole of the said estimated unaccounted money/on money as the NP of the assessee instead of estimating the profits ie say 8% – 15% of the on money. In fact, assessee filed a letter before the Tribunal offering the profits of the project at the NP rate of 15% on the said estimated gross turnover of Rs 167.23cr before grant of statutory deduction on account of remuneration u/s 40b of the Act. Thus, but for the concessions narrated above, and in principle, the assessee disputes the AO’s (i) allegation of collection of the on money in cash, (ii) attempt of considering the Annexures A to L as basis for coming to the conclusion that the assessee has loaded the carpet area price with the unaccounted price in cash relatable to the super built up area; (iii) the extrapolation of the seized material to the entire project; (iv) disputes the AO’s conclusion that the accounted and unaccounted turnovers for the said four AYs 35% and 65% respectively; (v) the AO’s conclusion in taxing whole of the impugned unaccounted on money equivalent of 65% of the gross sales instead of adopting the fixed % of the same; (vi) denial of deduction towards the unaccounted expenditure in the process, AO has not followed binding judgments cited by the assessee; (vii) for different reasons, the parties disputes the NP 40% as taxable profits of the project; (viii) there are other miscellaneous disputes too.
32. At the end of the first appellate proceedings, the assessee got partial relief on some of the disputed facts narrated above. So far as the disputes at (i) to (iv) above are concerned, the assessee has not got any relief and to that extent, the assessee is still aggrieved. On the disputed narrated at (v) and (vii), ie considering part of the on money as the profits relatable to the unaccounted turnover, relying on the judgmental law, the CIT(A) held that the considering 40% of the grossed up turnover of Rs 167.23 cr ie accounted and unaccounted sales (Rs 58.53 cr+Rs 108.70cr) as profits of the project, is held reasonable. In the process, the CIT(A) granted relief of Rs 41.81 crore towards to hidden expenditure. Otherwise, there is direct evidence of such hidden expenditure only to the tune of Rs 4.55 lakhs only. Of course, the CIT(A) granted relief in matters of taxing of the notional sales of parking space too. The assessee’s proposal to restrict the addition computing the NP at 8% on the unaccounted turnover of Rs 21,34,48,984/- only, which is worked out based on the transaction qua the tainted shops/units is also in dispute. This offer was rejected by the CIT(A) before considering 40% of the grossed up turnover of Rs 167.23 cr. Aggrieved with the relief of Rs 41.80,85,624/- granted by the CIT(A), the revenue filed appeals for all the four years. Further, assessee also filed the appeals for all four years questioning the decision of CIT(A) in confirming of the additions to the tune of Rs 66,89,36,953/- adopting the NP at 40% over the grossed up turnover of Rs 167.23 crores.
33. Thus, we have so far discussed the relevant facts of the case, decision of the AO and the CIT(A), arguments of the parties in dispute on the issue of determination of the taxable profits of the project. We have also analysed the likely undisputed and disputed areas between the parties on the above issue.
34. In our opinion, the case of the assessee is that the incriminating nature of the said Annexures is debatable and therefore, deriving 65% as the unaccounted turnover and ex consequinti, extrapolating to the entire project to arrive at the total turnover of Rs 167.23 cr is unreasonable. Further, rejecting the various percentages ie 5%, 8%, 10%, 15%, which constitutes approved reasonable percentages by various judgmental laws of the land, and considering whole unaccounted turnover of Rs 108.70 cr (without granting any relief towards unaccounted expenditure) as held by the AO or adopting 40%, which is prima facie unreasonable percentage, over the grossed up turnover of Rs 167.23 cr (accounted sales as per books at Rs 58.53 cr + unaccounted sales estimated at Rs 108.70cr) is extremely on high side. Of course, it is the case of the assessee submitted that he shall not press the issues relating to extrapolation issues, derivation of 35:65 formula relating to accounted and unaccounted sales of the project; determining the gross turnover of sales at Rs 167.23 cr, provided reasonable percentage as approved by various decisions cited is adopted for determining the net profit of the project and grant statutory deduction u/s 40b of the Act thereafter.
35. In our opinion, per contra, the case of the Revenue is that the order of the AO must be upheld without any changes and the addition of Rs 108.70 cr over the four AYs must be confirmed after set aside the impugned order of the CIT(A).
C. Tribunal’s Decision on the said core issue for AYs 2004-05 to 2007-08
36. We have examined the above mentioned divergent stands of parties in disputes. Further, we have also considered the concessions offered by Ld Counsel for the assessee. On considering the same, we find that what constitutes reasonable percentage of net profit is a matter of dispute and the same varies from one case to the other and the one business to the other and from city to city. Therefore, in principle, we cannot entertain this conditional offer of 15% as the NP of the impugned project and proceed to decide the issue based on the facts available on records only.
37. For adjudication of the core issue, we need to address to various related issues and the issue wise adjudication is provided in the succeeding paragraphs of this order.
a. Does the Annexure A to L is proper basis for inferring the unaccounted turnover of Rs 108.70 crores by way of principle of Extrapolation:
38. Ld Assessee’s counsel has laboured a lot in attempting to show that the said annexure A to L does not conclusively demonstrate that the assessee has not collected larger part of the sales proceeds in cash. Details of the arguments are given in the arguments section of this order. Per contra, the inference of the AO and CIT(A) on these documents are entirely opposite. On considering the divergent view of the parties as well as the said Annexures, we find force in the conclusions of the revenue. We find from Annexure A there is reference to cash component issues. The Annexures B, C, D, F and H (vide para 4.47 of impugned order) adequately confirms the modus operandi of loading of recorded sales price of carpet area with the on money component, the same is prevalent in respect of sale of substantial carpet area and undisputedly, it covers the unaccounted turnover to the tune of Rs 21.35 crores out of the gross turnover estimated of Rs 167.23 cr. Further, Annexure F is rightly relied upon by the AO for arriving or evolving at the 35:65 formula of accounted and unaccounted sales turnover/on money receipts, which led to working out the gross sales turnover of Rs 167.23 cr. Therefore, we agree with their inference that the assessee resorted to the practice of loading, which is in a way conceded by Sri Mehta, Ld Counsel conditionally, thus, we conclude that the sale prices on the carpet area is jacked up to cover the super built up area and the price relating to that jack up portion is collected by way of ‘on money’, which is unaccounted in the books. Such on money collection may be a rule in this kind of business but said incriminating material suggest that the quantum/percentage is not uniform and it vary from one customer to other and one unit/shop to other. Therefore, in principle, the opprobrium of Ld Counsel against the use of the contents on Annexures A to L stands disapproved. In the process, we disapprove the arguments of ld Counsel that the unaccounted sales turnover should be restricted to Rs 21.35 cr, the on money relatable to the tainted shops. In this regard, we adopt the ratio of Apex Court’s judgment in the case of HM Esuf Ali & H M Abdul Ali reported in 90 ITR 271, where the unaccounted turnover of sale for the period of 19 days was extrapolated to full year for estimating the escaped turnover and for making additions and the same was approved by the Hon’ble SC in principle in the penalty proceedings. This proposition shall apply to the facts of the present case and unaccounted turnover of Rs 21.35 cr which is equalant of nearly 13% of Rs 167.23 cr of estimated gross sale turnover. Assessee failed to establish that ‘on money’ issue does not arise in other untainted units/shops of the project. Relevant extract of ‘Held’ portion is extracted as under:
“In estimating any escaped turn, it is inevitable that there is some guess work. The AO while making the best judgment assessment, no doubt, should arrive at his conclusion without any bias and on a rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his best judgment and not any one else’s. …
39. Therefore, we approve the best judgment of the AO in arriving at the said turnover of Rs 167.23 Cr following the formula of 35:65 of accounted and unaccounted sales turnovers. As such assessee gave in writing in favour of adopting Rs 167.23cr as the gross turnover too. Thus, the exercise of extrapolation is justified and reasonable. Therefore, the determination of the unaccounted sales turnover at Rs 108.70 cr is proper and it does not call for any interference. Next we shall take up the other related issues.
b. What is reasonable profit of the project – whole of ‘on money’ of Rs 108.70 cr or 40% of the gross sale turnover of Rs 167.23 cr? Why not one of the various profit percentages ie 8%, 10%, 15%, 15.50% etc constitutes reasonable NP? Why not search material based NP of 28.18% be the reasonable NP after incorporating necessary averages and adjustments?
40. The above issues are extremely important for adjudicating the issues raised in the ground. In the preceding paragraphs, we have concluded that Rs 167.23 cr constitutes the gross turnover of the assessee with an unaccounted turnover of Rs 108.70 cr as against the non-extrapolated sum of Rs 21.35 cr. In the back ground of the above, we need to decide if the CIT(A) is justified in rejecting various other percentages discussed above and finally zeroing on 40% as NP of the assessee. For adjudication of these issues, before arriving at the ‘reasonable’ NP rate, we need to analyse the following issues and they are: Best judgment assessment; Scope of Reasonable Expenditure; Reasonableness of 40% adopted by the CIT(A); Various available percentages of net profit of project-PRIME MALL; Why not 40% as reasonable?; Use of the data from the seized papers; Contents of Annexure L; Credibility of NP of 28.18% – requirements of Adjustments if any; Reasonable NP=Average of NPs in Returns & NP of 28.18% from Ann L; Allowability of Statutory Deductions u/s 40b of the Act etc. Each of these issues are discussed here as under:
41. Best judgment assessment: The provisions of section 144 and 145 (3) of the Act lays legal foundation for the impugned assessments. In the instant assessments made u/s 143(3) rws 153A of the Act, the AO rejected the books results informally in view of the incompleteness and inaccuracies in the books and also in view of the contents of the Annexures- A to L appended to her orders. In principle and in spirit, the assessments made are best judgment assessments. Despite the opprobrium displayed by Sri Mehta against the AO’s order and the Annexures, the assessee has not seriously contested the issue of rejection of books and therefore, there is no need to delve into this issue formally. However, Sri Mehta mentioned that the process of determination of NP as part of making of best judgment assessment should not be an arbitrary (Kachwala Gems 288 ITR 10 (SC). The whims and fancies of the AO should not play any role in the matter of such assessment but it should be based on some material either produced by the assessee or collected by the Investigation wing or AO. It should be based on fair and reasonable basis. The Court would not call for proof for establishing the nexus between the estimation of income and the facts of the case. The judgments in the case of HM Esufali & H M Abdulali reported in 90 ITR 271, Laxminarayana Badridas reported in 5 ITR 170 (PC); Maharaja Sri B P Singh Deo 76 ITR275(SC); R Narayana Rao and Others reported in 338 ITR 625 (AP) etc supports the above. Thus, the bottom-line is that the AO/CIT(A) must have some material/data to support the estimation of the Net profit of the Project. Other side of determination of material based net profit is obviously granting of relief on account of the hidden expenditure for earning of said net profit of the project. The legal scope on this topic is discussed in the next paragraphs.
42. Scope of Reasonable Expenditure: Assessee needs to expend in order to earn income/profit and it is basic and universal principle in any business. This principle applies to both accounted and unaccounted profits. In a case of unaccounted profits, due to its very nature of unaccounting, normally, the parties do not maintain evidences and therefore, evidencing such unaccounted evidences is impossibility. Probably, for this reason, the courts have taken conscious view that it is for the assessing authority to quantify reasonable expenditure considering the facts of the case and industry. Legally speaking, the judgments are uniform in asserting that entire sale proceeds should not be added as income. Honble High court of Ahmadabad ruled in the case of Panna Corporation that the “ assessee ought to have spent reasonable amount for the purpose of receiving such gross profit’(para 14 of Tax Appeal No 325 of 2000 dt. 16.6.2012). Further, Hon’ble High Court OF Madya Pradesh held in the case of President Industries 258 ITR 654 that ‘ entire sale proceeds of the assessee should not be added in his income’. Further, from the judgment in case of Panna Corporation (supra), it is settled proposition that there is no need for the assessee to demonstrate the genuineness of the claim of unaccounted expenditure in the cases of this kind. The underlined logic is that the unaccounted expenditure is always unevidenced and never maintained. Therefore, transferring onus on to the assessee in matters of this kind is not approved. Ex consequenti, it is for the AO allow necessarily reasonable deduction towards such unaccounted expenditure without demanding evidences, considering the nature of industry and also evidences relating to extents of net profits earned by the assessee. Considering the above legal position on the matter, we are of the clear-cut opinion, the AO’s conclusions on this issue are certainly erroneous. In principle, we uphold the views of the CIT(A) in this regard. Therefore, relevant grounds raised in the revenue’s appeals are dismissed.
43. Reasonableness of 40% adopted by the CIT(A): Thus, we have so far finalized the issue of gross sales turnover and the need for granting set off the unaccounted or hidden expenditure against the estimated turnover and the principles of reasonability is the underlying factor in these matters. Now, we shall examine if CIT(A) is justified in estimating the net profit at the rate of 40% of the gross sales of the project –Prime Mall and if the test of reasonableness is cleared. Generally, applying 40% as the profit percentage is seen as on the higher side as held by the Honble High Court of AP in the case of R Narayana Rao and Others reported in 338 ITR 625 (AP). In this regard, although an element of guess work is part of such best judgment assessment, AO must desist from being arbitrary and AO must ensure that his judgment has some basis by way of tangible material/document to justify his best judgment to avoid arbitrariness. Of course, the comparable cases help in such cases. However, it is nothing like having documents/material as a base. In our opinion, if some data or document belonging to the assessee giving details of the Net Profit percentages, the same should be preferred over the other sources. On the reasonableness issue, we find that the CIT(A) has not based his 40% on any comparable case or material seized during the search action. The contents of para 4.56 of the impugned order is relevant the same read as under:
4.56. ……… Examination of seized material it is found that the appellant has received on-money of Rs 21.34,48,984/- as per Annexure A to L of assessment order. The appellant itself worked out unaccounted turnover of Rs 21,60,80,933/- but stated that profit should be estimated @ 8% of unaccounted turnover, which cannot be accepted as discussed above. Once it is established that the appellant received on-money on the sale of shops mentioned in seized material it cannot be said that it has not received on-money on the sale of other shops which are not mentioned in seized material although the percentage may vary. Keeping in view these facts, it would be fair and reasonable to estimate 40% of the total sale consideration received account and unaccounted as additional income of the appellant on account of on money received after allowing set off of unaccounted expenditure … instead of 65% estimated by Assessing Officer”
44. The above paragraph is vivid that there is no basis/reasoning at all for supporting his decision to go for 40% and therefore, in our opinion, NP of 40% constitutes arbitrary, complete guess work and whimsical, which is not allowed in the matters of best judgment as discussed earlier.
44.1. Further, it is also relevant to mention here that in cases of arrack business, the estimation of profit at 40% is held unreasonable by the High Court of AP in the case of R Narayana Rao and Others reported in 338 ITR 625 (AP). Nevertheless, relevant HELD portions read as follows:
“HELD that the rejection of books of account and non substantiation of the turnover as well as the reasons for adopting 40% as the gross profit. The adoption of 40% as gross profit of purchase price of arrack was arbitrary and irrational….Therefore, estimating the net profit at 2% of the estimated sales or 16% of the purchase price would be reasonable”
44.2. Of course, the above case and its ratio of the judgment is distinguishable on facts in view of entirely different industry. Nevertheless, when it comes to the reasonableness of 40%, the Hon’ble High Court of AP is categorical in stating that, in the high margin business like the arrack trading, adopting 40% is ‘arbitrary and irrational’. But the underlined presumption of Honble High Court of AP is that the arrack business like in the construction business, equally huge hidden or unaccounted expenditure is a common occurrence and there would not be evidences with assessees to demonstrate before judicial forum. Therefore, in our considered opinion, CIT(A) has not provided any reasoning or base for picking up the said 40% and therefore, his decision on this limited issue is completely arbitrary and irrational and not sustainable. Consequently, the AO’s decision of considering 65% of the total sales as the income of the assessee is also arbitray and irrational and hence, the same is not approved. Having held 40% as unreasonable due to the arbitrary and irrational nature, we need to fish out reasonable net profit percentage. The same is taken up on the subsequent paragraphs.
45. It is surprising to note that the Annexures K and L, ie Provisional Statements showing the NP workings of the Prime Mall project, undisputedly make clear references to percentage of Net Profits, and they are completely ignored as evident from the orders. These NP% could have been made use of either by the AO or by the CIT(A) to ascribe ‘reasonability’, which is an important facet of such unspecified best judgment assessments. In our opinion, the search material based-NP percentage stands on higher pedestal and hence superior and credible in quality and acceptability vis a vis the 40% picked up by the CIT(A) from nowhere and without any basis. In that sense, the basic requirements relating to best judgment assessments are out of their mind when they considered both Rs 108.70 cr or 40% of Rs 167.23 cr as the assessable income of the project –Prime Mall. Therefore, we have no hesitation in rejecting the estimation of NP adopting the said baseless 40%. Therefore, we proceed to analyse if the data emanating from Annexures K and L are of any use for making ‘search material based’ best judgment assessment to avoid arbitrary and irrational assessment and generate an assessment of reasonable nature.
46. Various available percentages of net profit: Assessee filed the returns based on the books for the AYs 2006-07 and 2007-08 and concern NP percentages are 15.50% and 11.97% respectively. The average works out to 13.63% and the same is rejected by the revenue. This is one source of NPs directly belongs to assessee’s books and to the project in question; but, of course, relevant for sales turnover of merely Rs 58.53cr of gross turnover of Rs 167.23 cr. Further, the assessee relies on certain judgmental laws in favour of adopting 5%, 8%, 10%, 15% etc, which is again rejected by the revenue without sustainable reasons. Further, on perusal of the Annexures-L and K relating to Provisional statement of estimated conservative Profitability of the Project”, Project – Prime Mall of M/s Prime Developers, which are undated, we find there are references to the ‘net profits’ under the heading “C. PROFITABILITY”. While the Annexure K refers to net profit percentage, Annexure L which is subsequently prepared also makes reference to net profit figure of 28.18%, and it assumes significance as it belongs to the assessee and to the project under consideration. Thus, we have different NP% from three different sources namely (a) returns of the assessee – sources are assessee’s books of accounts on the project under consideration; (b) judgmental laws suggesting 5% to 15% and other percentages as offered by the assessee and (c) Annexures-L appended to the Assessment orders – seized material directly on the project. Thus, we have two sources of NPs directly on the project which is the subject matter ie Average NP of 13.63% on one side and 28.18% on the other. There is no dispute on the first and however, on the NP of 28.18%, there are number of disputes and therefore, we shall discuss them in the succeeding paragraph.
47. Use of the data from the seized papers: Annexure K and Annexure L are the seized papers and formed part of the assessment orders. Both these annexures are identically titled as “Provisional statement of estimated conservative Profitability of the Project”, Project – Prime Mall of M/s Prime Developers. These statements contain exhaustive working on the profitability qua the gross sale consideration. Prima facie, it is obvious that Annexure L with NP of 28.18% is made subsequent in time qua to Annexure with NP of 47.41%. We ignore the NP data on Annexure K for the following reasons namely, (a) it should lapse when Annexure L is prepared; (b). While Ann K is made on the day when the “amount spent is only Rs 26.06 cr” where as the Ann-L is made on the day when the “amount spent is higher and the same Rs 28.56 cr”; (c) 47.41% is not the case of the revenue and if now considered by us, it may amount to enhancement of income by the Tribunal, which does not have such power. Hence, the data on Annexure L becomes significant and consists of three segments namely A. COST OF THE PROJECT (Rs 86.49 cr);
B. AMOUNT SPENT ON THE PROJECT (Rs 28.56 cr); C PROFITABILITY (Rs 33.93 cr). The ‘percentage of Net Profit to the cost of project’ (sic-read as ‘sales’) is worked out at 28.18%.
48. Contents of Annexure L: For the sake of completeness of the order, Annexure L which is latest in time is extracted and inserted here.
49. The above statement in Annexure-L undisputedly suggests the status report on the profitability of the project –Prime Mall and it was prepared on the date, when the “Amount spent on the project is Rs 28.56 cr” and in our opinion, this data, being the one belonging to the Project Prime Mall, become credible for generation of ‘reasonable NP’ of the project.
50. Annexure-L extracted above shows that the same is made on the days, when the amount spent is around Rs 28.56 cr and a sum of Rs 25.65 cr was spent on the land acquisition itself, which is normally done in the very initial stages of the project. Section B of Annexure L also suggest that the amount spent on actual construction is only Rs 1.16 cr. Therefore, this annexure suggests that the figures mentioned therein are obviously provisional in nature and in that sense, the NP% mentioned there in is only and certainly suggestive and therefore, inconclusive. Therefore, before considering 28.18% for any purpose, the said percentage deserves certain adjustments as advocated by Sri Mehta.
Some of the adjustments sought by Ld Counsel are: (a) Rs 3 cr formed part of the “profitability” working on account ‘car shop’ ie car parking sales. Considering the fact such sale of car parking is merely a provisions working and certainly is not a fact as held by the CIT(A), also considering the fact that assessee is not allowed to sell any parking slots in Mall like the present one and also in the absence any incriminating material to suggest such sale, the ‘sales’ figure in Annexure-L goes down to Rs 117.42 cr instead of Rs 120.42cr. Prima facie, we agree with the views of Sri Mehta on this issue. (b) Regarding ‘Finance cost (interest cost)’, Sri Mehta mentioned that it is another area that requires adjustment. Elaborating the same, he mentioned that the Ann-L mentions the figure of Rs 5,51,82,000/-against actual finance cost of Rs 8,28,22,000/-. If the above adjustments are allowed, the sales turnover shall be Rs 117,41.80 lakhs against Rs 120,41.80 lakhs (Rs 120.41.80 lakhs minus Rs 300 lakhs) and cost of project will shoot up to Rs 8925.02 lakhs against Rs 8648.62 lakhs. In our opinion, considering the actual, the assessee’s request for adjustment to that extent is allowable. In principle, we agree with the Sri Vijay Mehta’s contention that the NP figure of 28.18% needs to be revised to 24% (23.99%) for ascribing ‘reasonability’ to the data from Annexure-L.
51. Reasonable NP of the Project = Average of Returns based NPs & Adjusted NP from Annex-L: In the preceding paragraphs, we have discussed occurrence of various NP percentages from at least three different sources namely (a) average NP% at 13.74% (NPs of AY 2006-07 and 2007-08 are 15.50% and 11.76% respectively) having source base in the assessee’s books of accounts; (b) NP as per Ann L after allowing a couple of adjustments having regard to the seized material; and (c) Minimum and Maximum NPs of 5% to 15% having source base in different judgmental case laws cited above. Net profit percentage of any comparable case may help for arriving at reasonable profit of the project. But there is no such data before us for use. Further, from the case laws cited by Ld Counsel, we find that none of them relates to mall-based shops of commercial nature and therefore we agree with the CIT(A) in rejecting the 8% and further, we also reject the 15.50% or 15% admitted by the assessee in the return or during the appellate proceedings considering the provisional workings of the assessee in Ann-L. Further, we also reject the 40% which basically is a pick from the air and absolutely without any basis. In fact, it is the finding of Honble AP High Court in the case of R Narayana Rao and others (supra) that estimating the profits at 40% shows the obvious nature of the unreasonable and irrationality.
52. What is fair and reasonable estimation of profits of the project than what is based on the assessee’s own books of account on one hand and the assessee’s seized documents on the other? Ex consequeinti, we restrict ourselves to the data pertaining to the assessee’s own case ie average NP 13.735% ie data emanating from the returns filed u/s 153A of the Act and NP of 23.99%. Thus, we are of the opinion, the reasonable percentage of profits of the project – Prime Mall lies somewhere in the range of said NPs ie 13.735%-23.99%. In cases of this kind where there is various data and reasonable figure has to be worked out, it is a settled principle of statistics that principle of averaging provides statistics of reliable nature. Such average minimizes the errors and brings out reasonable and reliable results. Therefore, we are of the opinion, the average of the 13.735% and 23.99% must give rise to a reasonable percentage of NP ie 17.08%. It is directly linked to material gathered in search on one side and audited books of course in respect of accounted sales of Rs 58.53cr on the other. Accordingly, the AO is directed to work out the taxable profits of the project – Prime Mall for each of the AYs ie 2004-05 to 2007-08 adopting the above reasonable NP of 17.08% over year-wise sales accrued, which finally forms part of the gross sales turnover of Rs 167.23 cr. As per our calculations, the such sales for the said four AYs works out to Rs.11,60,77,860, Rs 7,72,42,857, Rs 95,50,85,669, Rs 52,39,36,000 (= Rs 167.23 cr) respectively. The net profits for the same AYs after subtracting returned profits works out to Rs 1,98,26,099/-, Rs 1,31,93,080/-, Rs 11,13,17,134/-, Rs 6,79,31,788/-. AO may adopt correct figures if necessary. As regard to the ground relating to project completion method, since this is not pressed before us, the basis adopted in the impugned order of the CIT(A) remains undisturbed. The grounds relating to ‘enhancement’ and the prayer for setting off of income offered in AY, the same becomes academic exercise in view of our above calculations. AO shall verify the above calculations considering the related conclusions in the order while giving effect to the order. That leaves the other dispute relating to allowing deduction in respect of the statutory deduction u/s 40b of the Act from the estimated profit.
53. Statutory Deductions u/s 40b of the Act- Remuneration & Interest to Partners: During the proceedings before us, referring to ground no 6 of the appeal of the assessee, Ld Counsel mentioned that the assessee is entitled to allowing of statutory deduction. In this regard, Ld Counsel filed copies of various decisions to demonstrate that, in cases of estimation of net profits of this nature, the deduction towards remuneration and interest must be granted as per the provisions of section 40b of the Act. Ld DR relied on the orders of the AO and CIT(A) in the matter.
54. We have perused the cited orders on the issue and find in principle, the ratio of Rajasthan High court decision in the case of Shri Ram Jhanwar Lal Vs. ITO & Ors. 321 ITR 400 helps the assessee. Para 6 to 8 are relevant in this case which are as under:
6. The grievance of the appellant is, that when the best judgment assessment of net profit is made, thereafter, depreciation is required to be allowed to be deducted therefrom, and for that purpose, reliance is placed on judgments of this Court, in CIT Vs. Jain Construction Co…. (2000) reported in 245 ITR 527 (Raj), and …Bharat Construction Co. …172 CTR (Raj) 408.
7. ….
8. In our view, so far as the question no.1 is concerned, it is clear from the judgments of this Court in Jain Constructions (supra) and Bharat Construction’s cases (supra), that where the AO has adopted net profit rate in making assessment on best judgment assessment basis, even in that case allowance of depreciation is required to be made. The question no.1 is accordingly, answered in favour of the assessee, and against the Revenue.
54.1. Of course, in the above case, the claim relates to depreciation u/s 32 of the Act. Whereas, in the present case, the claims of the assessee relate to ‘remuneration and interest’ to the partners of the assessee. Further, we also find these claims stand covered in favour of the assessee and relevant ratios are inserted here for completeness of the order and they are:
1. “Even where profit is computed by applying net profit rate, deduction for salary and interest is separately allowable under section 40(b)” – CIT vs. Heera Lal Bhat [2003] 131 Taxman 257 [2000] 158 CTR 59 (Raj.) (High Court)
2. “When the assessee contractor carried out contract work in three different ways, when the books of account rejected income is estimated, the assessee is entitled to depreciation, remuneration to partners and interest to partners (AY: 2005-06)” – Teja Constructions vs. ACIT 129 TTJ 57 (UO) / 36 DTR 220 (Hyd.) (Trib.)
55. The above Judgments are directly relevant for deciding the assessee’s grounds in the matter and in that sense of the matter, in principle, the issue stands covered and in favour of the assessee. The perusal of the impugned order does not provide any reason for denial of such statutory deduction u/s 40b of the Act. Even before us, revenue has not filed any contrary decision in support of the denial of deduction on accounts of remuneration and interest to the partners. Accordingly, relevant grounds are allowed in favour of the assessee. Thus, the issues relating to determination of taxable profits of the Project Prime Mall and related issues raised before us by the parties are partly allowed pro-tanto.
56. In the process, the revenue’s core grievances raised in its ground 1 and 2 that the Rs 108.70 cr should be the profits of the assessee’s project-Prime Mall and against the grant of set off of the unaccounted expenditure against the estimated income of the project without support of evidences are dismissed.
57. Accordingly, from the assessee’s appeal, the grounds 1, 4, 8 and 12 are dismissed either as academic or not pressed or as consequential, as the case may be. Grounds 2,3,5,6 and 7 relating to the core issue are allowed. Ground 11 is allowed for statistical purpose.
Other Issues Belonging to Cross appeals for AY 2004-05
58. In the assessee’s appeal for the AY 2004 – 05, the only other stand alone issue left for adjudication relates to addition of Rs 2.85 lakhs on account of unexplained credits u/s 68 of the Act and the Grounds 9 & 10 of the appeal vide ITA No. 175/M/2010 are relevant.
59. During the assessment proceedings, AO observed an unsecured loans of Rs. 2,85,000/- claimed in the name of Smt. Nenbai L Gala. As per AO, assessee failed to explain the identity, creditworthiness of the lender and genuineness of the transactions. Accordingly, he made an addition of Rs. 2,85,000/- u/s 68 of the Act. On appeal, the CIT (A) confirmed the addition made by the AO vide para 6.3 of his order which is reproduced here under:
“6.3 I have considered the reply of the appellant and perused the assessment order. The appellant has stated that it has given GIR No. and name of the Assessing Officer in respect of the creditor. Therefore, the initial burden has been discharged. The appellant has filed confirmation of his legal heir of Mr. Nenbai Gala, who has expired. The appellant has not filed any copy of balance sheet and profit and loss account and source of income of the creditor and also not filed copy of statement of income. Therefore, the creditworthiness of the creditor is not proved. As far as identity of the creditor is concerned, the appellant has alleged that the creditor has been expired; therefore, it is difficult to establish her identity. As regards quoting of GIR No. in the confirmation the same is not relevant as new series of PAN were in existence prior to taken loan ie 26.2.2004 and it was mandatory to obtain PAN to certain class of persons. In view of this fact, the Assessing Officer is justified in making addition of Rs. 2,85,000/- in the income of the appellant under section 68 of the IT Act. The addition made by the AO is confirmed.”
60. From the above, it is evident that the loan creditor has expired and the legal heir has confirmed the genuineness. Of course, creditworthiness is the issue which is not gone into meaningfully by the AO. In our opinion, considering the fact that the original creditor is there to defend the transaction, in our opinion, assessee must be given another opportunity to file relevant details to support the creditworthiness and genuineness of transaction too. Accordingly, ground nos. 9 and 10 raised by the assessee are allowed for statistical purposes.
61. In the revenue’s appeal for the AY 2004 – 05, the only other stand alone issue left for adjudication relates to Car parking issue and the Ground 3 of the appeal vide ITA No. 323/M/2010 are relevant.
62. During the assessment proceedings, AO observed from Annexure L and K that assessee considered a sum of Rs 3 crores as sales of car parking and the same are not disclosed in the books of accounts. AO also found that the stock of the parking space also does not appear in the closing stock statement submitted by the assessee. Accordingly, AO made addition of Rs.3,00,00,000/- on account of undisclosed sale of car parking. Para 11 of the assessment is relevant and the same read as under:
11. Moreover, … the seized materials clearly indicate that the assessee has sold the parking lot of the Mall for the total consideration of Rs 3 crores. However, the sale of such parking has not been disclosed in the books of accounts. Also, stock of the parking space does not appear in the closing stock statement submitted by the assessee. This being so, the entire consideration of Rs 3 cr is being added in the first year when the sale of shops had commenced. Accordingly, in the AY 2004-05, ….a further addition of Rs 3 cr is being made on account of undisclosed sale of car parking area”
63. Aggrieved with the above conclusion of the AO, the assessee filed appeal before the CIT(A). During the proceedings, refuting the AO’s allegation that the assessee has sold car parking area for a consideration of Rs. 3 Cr, Ld Counsel for the assessee submitted that the entire car parking of the Mall is meant for common use of the general public who visit the malls for shopping and was neither saleable nor sold. On considering the fact that the reference to the sale car parking in the Annexures K and L are mere estimations and also considering the absence of any direct evidence to suggest such sale of car parking in the seized papers, CIT(A) deleted the addition of Rs 3 cr.
“5.6. I have considered the reply of the appellant and perused the assessment order The appellant in the projected profit sale of car parking has been shown but fact remains neither in agreement of sale or allotment of letter sale or car parking has been mentioned. Moreover, in the seized documents also there is no mention of sale of car parking except Annexure-L, which was a projection of profit only for financial institution. This fact has also been admitted by the AO in the body of the assessment order. These car parking is nothing but part of amenities provided to the shop owners and visitors and not for sale. It is also not correct to say that the entire parking were sold in AY 2004-2005 while 25% of the shops are still not sold. Even if presumed that some on-money has pass on to appellant on account of parking, the same has already been considered and on money loading on carpet area has been taken @ 40% of sales for AY 2004-2005, 2005-06, 2006-2007 and 2007-2008 therefore, no further addition of Rs. 3,00,00,000/- is justified on account of sale of car parking. The AO is directed to deleted the addition of Rs. 3,00,00,000/-. The ground of appeal no.4 is allowed.”
64. Aggrieved with the same, the revenue raised this issue before us.
65. Before us, referring to the contents of Annexure K and L, Ld DR in general and with special reference to “C. Profitability” in particular, the counsel read out the said section C relating to Profitability and highlighted the item “Car Shop (200 @ 150000)—300.00” (lakhs) which formed part of the estimated turnover of Rs 120.42cr”. Ld DR relied on the same and mentioned that the addition of Rs 3 cr is required to the confirmed. On the other hand, Ld AR for the assessee is of the opinion that these annexures relating to “Provisional statement of estimated conservative Profitability of the Project”, Project – Prime Mall of M/s Prime Developers.”Search action has not yielded any material to suggest that the car parking area is for sale. Further, he mentioned that in principle, the assessee is not allowed to sell the car parking area.
66. We heard the parties and perused the orders of the revenue and the annexures appended to the assessment order. With the exception of Annexure K and L, there is no other source of information to the AO relating to the impugned issue relating to ‘sale of the car parking’. Based on the scanty information, AO made the said addition of Rs 3 crores merely based on the said provisional statement and the entries therein. Thus, there is neither clinching evidence nor the corroborative evidences to suggest the sale of the car parking areas. We have examined the relevant entry in this regard appeared on Annexures K and L and as stated in the earlier paragraphs, we find the said statements are made in the initial stages of the project and not at the time of sale of the shops. Such unsubstantiated data or information which prima facie constitutes provisional and uncorroborated data, which should be dismissed as done by the CIT(A), with which we agree. Therefore, AO is not justified in making such additions and therefore, order of CIT(A) does not call for any interference. Accordingly, the grounds raised by the revenue in this regard are dismissed.
67. In the result, the appeal of the assessee for AY 2004-05 is partly allowed and the appeal of the revenue for the same AY is
Other Cross-Appeals relating to AYs 2005-06 to 2007-08
68. The common issue in the appeals of the assessee for these AYs relates to the core issue of quantification of profits of the Prime Mall project. In the above paragraphs of this order, we have considered various facets of the said issue and decided the ground partly in favour of the assessee and against the revenue. In this regard, we have examined issue thread-bare and prescribed reasonable method of quantifying the taxable profits of Prime Mall Project adopting 17.08% as reasonable percentage of net profits on the extrapolated sales of Rs 167.23 cr and allow statutory deduction u/s 40b of the Act thereafter. As admitted by Ld Counsel, the project completion method is disapproved. The said direction is applicable to all these AYs and therefore, the AO is directed to apply to these appeals too the said decisions, guidelines given in connection with the AY 2004-05 as indicated above. Accordingly, relevant grounds in the rest of the appeals of the assessee under consideration are partly allowed. Ex consequinti, the relevant grounds of the revenue appeal stand dismissed.
69. Further, there are a couple of standalone issues for adjudication. One of them relates to assessee’s appeal ITA No. 177/M/2010 for AY 2006-07 and the other relates to revenue’s appeal ITA no 324/M/2010 for AY 2007-08. We shall take up the one in the assessee’s appeal for AT 2006-07 first.
ITA No. 177/M/2010 (AY: 2006-2007): (By Assessee)
70. Ground no.10 and 11 relate to the addition of Rs. 12,48,150/- on account of unexplained cash credits u/s 68 of the Act involving Shri Kishore Lehrani. During the assessment proceedings, AO observed that the unsecured loan of Rs. 13,40,86,756/-outstanding in the balance sheet as on 31.3.2006, includes loan amount of Rs. 12,48,150/-shown in the name of Shri Kishore Lehrani. AO further observed that, despite various opportunities granted, the assessee could not establish the identity / creditworthiness of the lender (Shri Kishore Lehrani) and has not discharged the onus in proving the genuineness of the transaction. Accordingly, AO made addition of Rs. 12,48,150/- on account of unexplained cash credits u/s 68 of the Act. On appeal, during the first appellate proceedings, CIT (A) confirmed the addition made by the AO of Rs. 12,48,150/- vide para 5.3 of his order which is reproduced here under:
“5.3. I have considered the reply of the appellant and perused the assessment order. The appellant has failed to produce the confirmation of the creditor, Mr. Kishore Lehrani during the assessment proceeding before the Assessing Officer and also in the appellate proceeding before me. In absence of any confirmation of the party, identity of the creditor, its creditworthiness and genuineness of the transaction cannot be stated as proved. The appellant has given reason for non-filing of confirmation on the ground that the party is not available and not contactable. It is strange that the party who has given loan of Rs. 12,48,150/- is not contactable and not traceable. This shown that neither the identity of the creditor not its creditworthiness and genuineness of the transaction has been proved by the appellant. In view of the above, the AO is justified in making addition of Rs. 12,48,150/- u/s 68 of the IT Act to the income of the appellant. The addition made by the AO is confirmed. This ground of appeal is not allowed.”
71. From the above, it is evident that the assessee has not been able to discharge his onus in establishing the genuineness of the transaction as well as the identity and creditworthiness of the lender Shri Kishore Lehrani and CIT (A) has rightly confirmed the action of the AO, making addition of Rs. 12,48,150/- u/s 68 of the Act. In our opinion, considering the fact that the assessee failed to discharge the initial onus, CIT (A) order on this issue needs no interference and accordingly, ground no.10 and 11 raised by the assessee are dismissed.
ITA No.324/M/2010 (AY: 2007-2008) – (By Revenue)
722. Ground no.3 relates to the deletion of addition of Rs. 17 lacs. Briefly stated facts in this regard are that during the assessment proceedings, AO observed that at the time of search action at the residence of one Shri Premji T Shah, cash of Rs. 52.36 lacs was found, out of which Rs 51.50 lacs was seized. Shri Premji T Shah, being unconnected with the business activities of Prime / Satra Group of cases made a statement that the said cash belongs to Shri Mayur Shah, who is a son of one of the partners of M/s. Prime Developers. However, Shri Mayur Shah denied the fact of having kept cash with anybody. However, during the course of assessment proceedings, M/s. Prime Developers, M/s. Satara Property Developers Pvt. Ltd. and Shri Praful Satara owned up that out of the seized cash of Rs. 52.36 lacs, cash of Rs. 17 lacs, Rs. 30 lacs and Rs. 3 lacs belong to them respectively. Considering the fact that they owned up after lapse of two and a half years from the date of search action, the claim was not accepted by the AO. Accordingly, AO made an addition of a sum of Rs. 17,00,000/- out of total cost of Rs. 50,00,000/- as unaccounted income of the assessee for the AY 2007-2008. On appeal, during the first appellate proceedings, CIT (A) deleted the addition made by the AO of Rs. 17,00,000/- and para 5.8 is relevant in this regard which is reproduced here under:
“5.8. The appellant has explained that during the search and seizure operation, cash of Rs. 19,49,727/- was available with the assessee as per its cash book on the date of search. The appellant has filed copy of cash book in which the cash balance of rs. 19,49,727/- was available on the date of search. This fact was also confirmed by Shri Praful Satra in his statement recorded during the search and seizure operation. The AO has already made addition of Rs. 50,00,000/- in the hands of Shri Prekji T Shah in AY 2007-2008 as unexplained cash found during the search on substantive basis.This addition of Rs. 50,00,000/- also include cash of Rs. 17,00,000/- pertain to the appellant, which has been claimed in the assessment proceeding in the case of Shri Premji T Shah. But the Assessing Officer has not accepted this explanation being afterthought and made substantive addition in the hands of Shri Premji T Shah. In view of this fact, since cash of Rs. 19,49,727/- was available with the appellant at the time of search as per its cash book, therefore no addition on account of unexplained cash for Rs. 17,00,000/- can be made in the hands of the assessee that too on protective basis. Since, the addition of Rs. 50,00,000/- has been confirmed in the appeal in the hands of Shri Premji T Shah in AY 2007-2008 on substantive basis, therefore, the Assessing Officer is directed to delete the addition of Rs. 17,00,000/- on protective basis in the income of the appellant. The appellant would get relief of Rs. 17,00,000/-. This ground of appeal is allowed.”
73. Considering the above, we are of the opinion that as per the books of account shows the cash balance of Rs. 19,49,727/- which is available with the assessee at the time of search and therefore, no addition can be made on account of unexplained cash for Rs. 17,00,000/-. This finding of the fact by the CIT (A) is correct and his order regarding deletion of addition, made by the AO, does not call for any interference. Accordingly, ground no.3 raised by the Revenue is dismissed.
74. In the result, for the AY 2004-05 to 2007-08, the appeals of the assessee are partly allowed. Further, the appeals of the revenue are dismissed.
Order pronounced in the open court on this 22nd day of March, 2013.
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