Section 68 Addition- ITAT remands back the case to CIT(A)

ACIT Vs Rohini Hotel (Madras) Pvt. Ltd. (ITAT Chennai)

A perusal of the Page Nos. 6-13 of the Paper Book filed by the assessee shows that the assessee has filed certain reconciliation statements in respect of the shortfall of investments u/s. 68 added by the AO. The same are scanned and made a part of this order. As these additions were not produced before the AO or the Ld. CIT(A), in the interest of natural justice, the issues in these appeals are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity of being heard. Here, we must mention that as the Ld. CIT(A) has accepted the explanation and has given the benefit of telescope for the AY, in respect of which, the Revenue is on appeal, it would not be appropriate to restore only those appeals where the assessee is on appeal on account of the addition being confirmed by the Ld. CIT(A). In these circumstances, as the investment in the Hotel building in its entirety is under consideration, all the issues in the two appeals filed by the Revenue and in the two appeals filed by the assessee are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity of being heard.

FULL TEXT OF THE ITAT JUDGEMENT

ITA Nos.1627 & 1687/Chny/2017 are the appeals filed by the Revenue and ITA Nos.1841 & 1842/Chny/2018 are the appeals filed by the assessee against the consolidated Order of the Commissioner of Income Tax (Appeals)-3, Chennai, in ITA Nos.60, 61, 62 & 63/2013-14/CIT(A)-3 dated 31.03.2017 for the AYs 2006-07, 2007-08, 2005-06 & 2008-09 respectively.

2. Shri R.Clement Ramesh Kumar, Addl.CIT, represented on behalf of the Revenue and Shri R.S.Balaji, Adv., represented on behalf of the assessee.

3. The appeals filed by the assessee are time barred by 355 days, for which, the assessee has filed the necessary affidavit for condonation of delay, wherein, it has been submitted that the delay was on account of change of Auditor of the assessee as the Auditor at that time 80 years old and suffering from multiple illnesses. It was a further submission that as the assessee’s counsel fallen sick, the assessee had to get the seized material from the AO again and also on account of the damage to the computer systems of the assessee. The affidavit filed by the assessee has not been found to be false nor as the Revenue has been able to produce any ground against the said affidavit filed, consequently, the delay in filing of the assessee’s appeals stand condoned and the appeals are disposed off on merits.

4. It was submitted by the Ld.AR that there was a survey on the premises of the assessee on 27.02.2008, certain incriminating material have been found in the course of survey. On the basis of survey, the assessments had been completed, wherein, substantial additions had been made representing the investments in the hotel building which is assessed as unexplained investments. It was a submission that in course of the appeal before the Ld.CIT(A), evidences had been produced to show that certain term loans from ITDC and TFCI had not been taken into consideration though evidences were available. It was a further submission that certain sundry creditors/payables had also not been considered though substantiated. It was a submission that consequently, the Ld.CIT(A) had considered various evidences as extracted, the addition made in Table-A at Page No.4 of his order had re-worked the additions at Page No.5 of his order at Page No.4 in Table-B. It was a submission that consequently, it was found for the AY 2005-06, there was a shortfall representing unexplained investment to the extent of Rs.34,90,817/-. It was a submission that in respect of the same, the Ld.CIT(A) had confirmed the addition. Similarly, for the AY 2006-07, it was found that there was surplus funds available for investments to the extent of Rs.22,21,613/- and consequently, he had deleted the addition made by the AO. For the AY 2006-07, the Ld.CIT(A) considered the addition made for the AY 2005-06 as also the surplus available for the AY 2006-07 and telescoped the same when considering the addition for the AY 2007-08 and consequently, as there was adequate funds on account of the telescope deleted the addition for the AY 2007-08. For the AY 2009-10, again, it was found that there was a shortfall of Rs.72,38,948/-, for which, the assessee was not able to give any explanation and consequently, he confirmed the addition to the extent of Rs.72,38,948/-. It was a further submission that there was an issue of pre-operative expenses which had been raised by the assessee before the Ld.CIT(A). The Ld.CIT(A) had restricted the disallowance in respect of pre-operative expenses @ 20%. It was a submission that the assessee is on appeal for the AY 2005-06 & 2008-09, which are the AYs, in respect of which, the Ld.CIT(A) has confirmed the addition. The Revenue is on appeal for the AYs 2006-07 & 2007-08 being the AYs, in respect of which, the Ld.CIT(A) has deleted the addition. It was a submission that the assessee has raised Ground No.5 in respect of the issue of the pre-operative expenses. It was a submission that the assessee did not wish to press the ground in respect of the disallowance @20% of the pre-operative expenses and has also signed to that effect. In respect of the unexplained investments, the Ld.AR placed before us a copy of the statement of reconciliation. It was a submission that no addition was liable to be made in respect of the investments in so far as the total investments stand fully explained. The same are as follows:

D) Assessment year 2008-09

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Grounds:

1) Less of investments then surveys investments Added credit and Disallowed in CIT(A) Taken as undisclosed income by A.O and CIT (A) Confirmed.

2 (d) 1) The grounds of 2(a) as per 2005-2006 hold goods.

2) As per grounds (2) (a) holds good.

As per A.O order in page 4 in impounded instruments.

The Rs.1169.00 lakhs investment is only “demand of amount for the above work” and this is not taken as work for the investments in the impounded search asset. Thus Rs.1169 lakhs to be deleted from the value of order in total investment.

In B/S 2008 total assets come Rs.3537.42 lakhs (before depreciation) As per assessment order impounded comes Rs.2954.95 lakhs as per revised. In search investments is lesser than audited B/S the addition of Rs.72,38,948 is to be dropped.

(A) TABLE SHOWING OF PRE-OPERATIVE EXPENSES AT 20%

All expenditure and audited and supported by vouchers. The A.O and CIT(A) ought not to have disallowed 20% an estimate in pre-operative expenses.

3 (B) Disallowing pre-operative expenses of Rs.23,60,150/-

The learned officer made double disallowance of pre-operative expenses of Rs.10,29,63,412/-@40% for 2007-08 and 2008-2009 Assessment years copies of earlier years orders are enclosed. (Encl…………… ) Thus disallowance of Rs.23,61,150/- in pre­operative expenses is un warranted and to be dropped

The learned officer has not given deduction of depreciation as per IT Act amounting to Rs.1,86, 93,063/- from the actual income of Rs.56,23,125/-returned by the Appellant.

The learned A.O failed to consider FIR return of lost of records due to fire.

PRAYER

(A) To disallow addition of cash credit in each assessment years as per submission.

(B) To disallow addition of 20% pre-operative expenses every year.

(C) To disallow completely 20% on pre operative expenses in 2008, 2009 assessment year since it is double addition as per grounds. (D) To allow depreciation claimed as per Return.

Place:

Date:

Appellant

6) Legal Grounds and Rulings

Loose Sheets and estimates found on survey should not be taken for income

A) The Assessing Officer and The Commissioner of Income tax Appeals has completed the assessment without giving copies of the impounded materials to the assessee. The officer has recorded that certain incriminating materials were come across during the survey on 27/2/2008. She had not recorded In her order what where the contents of the certain incriminating materials and how she happened to believe that there had been escapement of income to an extent of Rs. 10,70,89,000. Copy applied to AO for copy’s of incriminating materials ( Enclosed page-7)

According to the incriminating materials the investment in the hotel had been Rs.24,30,70,000 disclosed. But the investment admitted in the return had been Rs.13,59,81,000 had been lesser disclosed year wise as fully as per notice dated 15-01­2012. The difference of Rs. 10,70,80,000 shift fully in investments noticed between the incriminating materials and the return of income can be believed to be true only when the Office had collected corroborative materials that the incriminating materials seized on the date of survey had been true and authentic.

The assessing officer and The Commissioner of Income tax Appeals had referred the valuation of the hotel to the departmental valuer and the departmental valuer had valued the expenditure at Rs.15,4343,21,000. Having referred the valuation to the departmental valuer the Assessing Officer is duty bound to adopt the valuer’s figures only. Further the Having referred the case to the departmental value and when the valuation report did not meet the Assessing Officer and The Commissioner of Income tax Appeal’s expectations the officer cannot ignore the same and rely upon the incriminating materials the veracity of which is in doubt. (Encl page 45)

According to the assessee the incriminating materials had been only some rough estimates on loose papers. The entries in the loose papers were not in the handwriting of the assessee. There had been nothing in the loose papers that they contained the real expenditure on the investment in the hotel. When there are no other contemporary records to bolster the reliability of the loose sheets and when the assessee has not admitted the correctness of the loose sheets its the duty of the Assessing Officer and The Commissioner of Income tax Appeals officer to produce other external materials to the fact that the contents of the loose sheets are reliable. The loose sheets are dumb documents and in the

absence of any independent corroboration from the Assessing Officer’s side they cannot be acted upon. The assessment had been made without following the principles of natural justice. Since the assessment had been made keeping the assessee in dark with regard to the certain incriminating materials and without giving a copy of the departmental valuer’s report the assessment made is one behind the back of the assessee. Since the commissioner of Income Tax is restrained from setting aside the assessment the assessment deserves to be annulled by the Commissioner of Income tax.

Difference between notice and impounded Materials

The following case laws throw light on the procedure to be followed for acting upon the loose sheets or estimates that had been found during survey or search.

1. Dhakeswari Cotton Mills Ltd Vs CIT 26 ITR 775

2. Kishinchand Chellaram Vs CIT (1980) 125 ITR 713(SC)

3. Amar Natwaralal Shaw Vs ACIT (1967) 60 ITD 560(Ahd)

4. lAshwani Kumar Vs ITO (1991) 39 ITD 183 ITAT (Delhi)

5. ACIT Vs Shallesh S shaw (1997) 63 ITD 153(Bom)

6. CIT Vs Daya Chand Vaidya (1975) 98 ITR 280(A11)

7. ITO Vs Chimbareswara Rao (1986) 15 ITD 471(Hyd Trib)

Submission on facts on legal for valuation reports and certifying accounting books Assessment year 2005-2006 to 2008-2009

B) Notwithstanding the main submission on violation of principles of natural justice the following submissions are made on the facts that were not properly appreciated by the Assessing Officer.

The hotel had been under construction from 2000 onwards. Commercial activities started only from the assessment year 2008-2009. There had been therefore no business income. No books of accounts had been produced and none of the books had been examined. With regard to the productions of accounts relating to the construction of the hotel the bills, vouchers and other records were lost in a riot in the Hotel. An FIR issued by the Police Department about the complaint made to them about the loss of records relating to the construction had been filed before the Assessing Officer and Commissioner of Income Tax Appeals. An affidavit also had been filed. The assessee is punishable under the Indian Penal Code where false affidavits are made. Since there is adequate safe guard for the department regarding false affidavit the constructions account of the Hotel ought to have been accepted by the Officer. The Assessing Officer did not apply her mind at all the FIR copy and the affidavit. (Encl: Page 74 to 79)

The additions that had been made in the assessment had been on the basic of the rough estimate that was found during the survey. The Assessing Officer had referred the valuation of the Hotel to the departmental value and the Valuer had also given his valuation report. According to the valuer the cost of the hotel project had been only Rs.15,43,21,000. The assessing Officer is duty bound to rely only upon the valuation done by the Valuation Cell and not upon the rough estimate impounded during the survey.

The cost of construction as per books excluding land lanes Rs.15,43,21,000 as on 1-04­2007. There is excess only in cost of building of Rs.73,75,600 more than valuation certificate (16,16,96,000 – 15,43,21,000) Plant and machinery consist of Rs.1,89,26,037, which includes Ac, Generator, Machinery etc., Total pre operate expenses is Rs.3,06,76,157 certified and allocated to fixed assets as per as on 31.03.2008. (Encl Page 52).

This Plant and Machinery cost Rs.1,89,26,037 and pre-operative expenses Rs.3,06,96,157

are not takes in arriving difference of investments Rs.4,96,02,194 is 2007-2008.

The assessing officer Had not given any reasons for rejecting the departmental valuation of Rs.15,43,21,000. The difference of Rs.8,87,49,000 between the value as per the rough estimates found during the survey and the departmental valuation report represents over estimation of the expenses. There had been no corroborative evidences either during the survey or after wares that the over stated sum of Rs.8,87,49,000 had been really incurred by the company.

The expenses admitted by the assessee up to the date of survey as per the return of income had been Rs.13,59,81,000. There is a difference of Rs.1,83,40,000 between the value as per the departmental valuation and as per admission made by the assessee. This difference works out to 13.48% of the admitted cost of Rs. 13,59,81,000.

The valuation done by the valuation cell also suffers from human succeptibilites of committing errors of omission and commission. The courts had therefore held in the following case that where the difference between the valuation admitted and the valuation done by the Valuer is not more than 15% of the admitted cost the difference should be ignored and there is no case for assessment of any undisclosed investment.

Honest Group of Hotels (P) Ltd Vs CIT (2002) 123 Taxman 464(J.K)

Amir Chand Vs ACIT (2002) 124 Taxman 162 (ITAT Chd)

Further the assessee had been maintaining accounts for the constructions made by them in the hotel project on an year wise basis and such construction accounts has been audited by qualified chartered Accountant. (Encl: Page 83 & 84)

The Assessing Officer had not rejected the construction accounts as filed by the Auditor pointing out any specific defects. When the Assessing Officer not rejected the construction accounts as filed by the Auditor quoting her reasons for such rejection even the valuation report of the departmental values does not deserve to be acted upon. The following case laws are relevant in this regard,

1. Sayar Engineering (P) Ltd Vs ITO (1992) 43 TTJ23(JP) AT

2. Nishant Housing Development (P) Ltd Vs ACIT (1995) 52 ITD 103 (Patna) (AT)

3. Patil Enterprise Vs ACIT (1995) 53 TTJ 279 (Bang) (AT)

4. ITO Vs Pitambar industries (P) Ltd (1992) 42 ITD 373 (Delhi) AT

5. ITO Vs Dream land Enterprise (1995) 81 Taxman 143 (And) (AT)

6. Rekha Devi Vs ACIT (1995) 78 Taxman 143 30(JP)

Attention is also invited to the decision of Allahabad High Court in the case of CIT Vs Daya Chand Jain Vaidya where it has been held that onus is upon the department to prove that higher investment was made by the assessee. The rough estimate being a dumb document without any authenticity attached to it and being not supported by any other extraneous corroborative evidences of higher investment at all the additions made relying upon the rough estimate may have to be deleted by the Commissioner of Income (Tax Appeals) as not sustainable under law.

Leaving the additions that were made on the basis of rough estimate found during the survey as not sustainable there are no other disputed additions and hence the returns of income as filed by the assesses deserve to accept.

Place:
Date:

Appellant

It was a prayer that the issues may be restored to the file of the AO for re-adjudication and the assessee would be able to reconcile the alleged shortfall investment which has resulted in the addition.

5. In reply, the Ld.DR submitted that the assessee has produced reconciliation statement for the first time before the Tribunal and the same was liable to be looked into by the AO.

6. We have considered the rival submissions.

7. A perusal of the Page Nos.6-13 of the Paper Book filed by the assessee shows that the assessee has filed certain reconciliation statements in respect of the shortfall of investments u/s.68 added by the AO. The same are scanned and made a part of this order. As these additions were not produced before the AO or the Ld.CIT(A), in the interest of natural justice, the issues in these appeals are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity of being heard. Here, we must mention that as the Ld.CIT(A) has accepted the explanation and has given the benefit of telescope for the AY, in respect of which, the Revenue is on appeal, it would not be appropriate to restore only those appeals where the assessee is on appeal on account of the addition being confirmed by the Ld.CIT(A). In these circumstances, as the investment in the Hotel building in its entirety is under consideration, all the issues in the two appeals filed by the Revenue and in the two appeals filed by the assessee are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity of being heard.

8. In the result, the appeals filed by the Revenue and the appeals filed by the assessee are partly allowed for statistical purposes.

Order pronounced on the 01^st August, 2019 in Chennai.