2025 (9) TMI 940 - AT - Income Tax

Additions and Percentage of Completion enhancements quashed for lack of corroboration; s.132(4) statements insufficient and procedural opportunities absent

ITAT DELHI - AT set aside additions and enhancements upheld by the AO/CIT(A), directing reversal of impugned additions. The tribunal found seized diary ... Undisclosed income - entries found recorded in the diary seized from the residential premises of Director in the assessee company is inter-alia under challenge -enhancement towards accrual of income under ‘Percentage of Completion Method’ (“PoCM”) - Assessee primarily contends that most of the transactions relate to Golf View-I Project which is developed by Antariksh Developers. The transactions/entries recorded in the diary includes both projects i.e Golf View I as well as Golf View II and both projects are developed by different promoters HELD THAT:- The assessee states that it had already included the entries relating to Golf View-II projects in its books. Some of the documents found in the course of search actually relate to Golf View-I project belonging to Antariksh Developers. The AO in the assessment order for AY 2013-14 in the case of Antariksh developers admits as a matter of fact that impugned entries include the entries belonging to that assessee which testifies the version of the assessee. Thus, making additions towards such entries without concrete proof is wholly justified and opposed to the facts available on record as held in the earlier years. In the absence of any adverse material having been brought against the assessee in relation to impugned entries by way of statement u/s 132(4) or statements of any other stake holders or independent corroborative material, the additions cannot be sustained on the strength of suspicion or surmises. The factual position being similar, we do not wish to reiterate the process of reasoning adopted in earlier years. In consonance with the view expressed earlier year AY 2011-12, the additions made is held to be without legal foundation and thus cannot be countenanced in law. The additions sustained by the CIT(A) thus deserves to be cancelled and set aside. AO is directed to reverse the impugned additions based on such entries. The Assessee thus gets relief on this score. Estimated additions on account of accrual of income under PoCM from real estate project undertaken by the assessee - AO has not controverted the working of PoCM in the Remand Report pointed out on behalf of the assessee and admitted by the Ld.CIT(A) himself. Thus, the responsibility on the Ld.CIT(A) is on a far more higher pedestal to make departure. Furthermore, the Ld.CIT(A) himself has not disputed the PoCM working in the subsequent AY 2014-15 which is in continuity of the PoCM working provided by the assessee for AY 2013-14. Thus, one year cannot be disturbed in isolation to other AYs without showing reasonable basis for doing so. Assessee claims to have eventually subjected the entire revenue receipts to taxation over the period of construction. Hence there is no eventual loss of Revenue over a period of time. Coupled with, the AO was also satisfied with working of PoCM dispute by Ld.CIT(A) leading to enhancement. Thus, when the facts and circumstances are seen in the holistic manner, enhancement carried out by the Ld.CIT(A) fails on legal ground of absence of opportunity as well as on factual matrix. The enhancement made also fails owing to tax neutrality spamming over the years of realization of sale proceeds and also contradictory stand in AY 2013-14 vis-à-vis 2014-15. The enhancement made by the Ld.CIT(A) thus stands quashed. The additions made by AO towards revenue recognition based 20% of advance received from customers as well as enhancement made by Ld.CIT(A) on this score thus do not survive. Additions based on so-called statement u/s 132(4) of the Act, is in the nature of enhancement for which there is no mention of issuance of any show cause notice to the effect - The assessee is not estopped from demonstrating the factual incorrectness in the statement recorded on facts. The assessee has provided working of Revenue recognition under PoCM which has not been faulted by the AO in the remand proceedings. Thus, the income offered by the assessee becomes sacrosanct and based on material available on record and cannot be ordinarily disturbed without plausible reasons. Furthermore, the identity of persons giving statement under s. 132(4) to this effect is not known. The corroboration is otherwise necessary to support the enhancement which is also not present. Some bald statement of deponent of the statement ipse facto cannot be a legally sound basis to make such enhancement, that to, without issuing any show cause notice and providing reasonable opportunity mandated under s. 251(2) of the Act ISSUES PRESENTED AND CONSIDERED 1. Whether additions based on entries found in a diary seized from the residential premises of a third person (director of multiple companies) can be sustained against a company in proceedings under section 153A when there is no independent corroborative material or statement implicating that company. 2. Whether the Assessing Officer's adhoc estimate of income by applying a deemed net profit rate (20% of advances received) and adding the resulting amount as income under the Percentage of Completion Method (PoCM) is permissible where the assessee follows PoCM consistent with AS-9/Guidance Note and has produced project-specific PoCM workings and supporting approvals/certificates. 3. Whether the Appellate Authority (CIT(A)) may enhance income determined under PoCM during appellate proceedings without issuing a show cause notice and affording opportunity as required by section 251(2) of the Act; and, relatedly, whether additions/enhancements founded on statements recorded under section 132(4) can be sustained without corroboration and issue of a show cause notice. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of additions founded on diary entries seized from third person Legal framework: Under search and seizure provisions, documents found in the possession of the person searched give rise to statutory presumptions under section 132(4A) and section 292C only against the person from whose possession the material was seized. For assessment of a distinct assessee in proceedings under section 153A, revenue must establish nexus by independent evidence or admissible statements. Precedent treatment: The Tribunal in earlier assessment years (AYs 2011-12 & 2012-13) had considered identical facts and held that obscure diary entries without adverse statement of the person in possession or other tangible material cannot sustain additions against other companies; statutory presumption does not extend to third parties absent corroboration. Interpretation and reasoning: The Court examined the diary entries seized from the residential premises of an individual who is director in multiple development companies. The entries were of an 'obscure' nature and the records show that identical or overlapping entries were the subject of substantive assessment in the hands of another company (the promoter). There was no adverse statement under section 132(4) implicating the company under appeal, nor independent corroborative material linking the impugned entries exclusively to that company. The onus to prove that the entries relate to the company under appeal remained on revenue and was not discharged. Ratio vs. Obiter: Ratio - Obscure entries seized from a third person and unexplained by independent corroboration cannot be treated as income of another company in section 153A proceedings; statutory presumptions apply only against the person in whose possession material was found. Conclusion: Additions made solely on the basis of diary entries seized from the residential premises of a third person are without legal foundation and are to be reversed; the Assessing Officer is directed to delete such additions. Issue 2 - Legality of AO's adhoc addition by applying 20% of advances (PoCM dispute) Legal framework: Business income under section 145 is to be computed in accordance with the consistent system of accounting followed by the taxpayer unless defective; recognition of revenue for real estate contracts by PoCM is governed by Accounting Standard 9 and the ICAI Guidance Note which prescribe threshold conditions (critical approvals, stage of completion >=25% of construction cost, at least 25% of saleable area secured, and at least 10% revenue realization per contract) before revenue is recognized under PoCM. Precedent treatment: Accounting standards and guidance note are applied to determine whether revenue recognition under PoCM is appropriate; mechanical or adhoc estimation by revenue (e.g., fixed percentage of advances) without considering prescribed thresholds or the assessee's audited PoCM workings is not a correct application of law. Interpretation and reasoning: The assessee produced detailed PoCM computations, project approvals, environmental clearance, registered documents, bills, ledger details and year-wise PoCM workings showing that PoCM conditions were satisfied from AY 2013-14 onwards and that revenue was recognized in the P&L for AYs 2013-14 and 2014-15. The AO's approach of applying an adhoc 20% NP on advances ignored the thresholds and the audited/consistent accounting treatment followed by the assessee; the AO subsequently reduced the figure on rectification but the essential method was the same. The appellate record (remand report) did not contain adverse findings displacing the assessee's PoCM working for the years in question. Given the evidentiary material and the accepted accounting treatment in subsequent years, a blanket adhoc addition was held unjustified. Ratio vs. Obiter: Ratio - Revenue cannot substitute a considered, documented PoCM computation by applying a mechanical percentage of advances to determine taxable income where the assessee follows AS-9/Guidance Note and supplies project-specific supporting material; such adhoc estimation is unsustainable. Conclusion: The adhoc additions by AO based on 20% of advances are not sustainable and are to be deleted for the years where PoCM conditions and supporting records are established (deletion affirmed). Issue 3 - Enhancement by CIT(A) without issuing show cause under section 251(2); reliance on section 132(4) statements Legal framework: Section 251(2) mandates that where the Appellate Authority proposes to increase the assessment or enhance income on appeal, it must give the assessee a notice specifying the grounds for proposed enhancement and afford opportunity to respond. Statements recorded under section 132(4) raise a presumption against the deponent but are not conclusive; corroboration and fair opportunity are required before enhancing assessment. Precedent treatment: Consistent case law requires issuance of enhancement show cause notice and opportunity before appellate enhancement; mere reliance on section 132(4) statements without corroboration and without confronting the assessee is not permissible. Interpretation and reasoning: The CIT(A) cancelled AO's adhoc additions but nonetheless independently increased income under PoCM by a quantified amount without serving any show cause notice or communicating the basis of enhancement to the assessee. The assessee had not been confronted with the proposed enhancement and remained unaware of the basis; the AO's remand report did not controvert the PoCM workings. Where enhancement is effected on the basis of alleged statements under section 132(4) or other material, statutory protocol requires the assessee be informed and heard. The absence of any enhancement notice and lack of corroborative material rendered the appellate enhancement vitiated. The Court noted that section 132(4) statements are presumptive and that identity and corroboration of deponents were not established. The CIT(A)'s enhancement was therefore unlawful on both procedural (non-compliance with section 251(2)) and substantive grounds (lack of corroboration and inconsistency with accepted PoCM treatment in adjacent years). Ratio vs. Obiter: Ratio - Enhancement of declared income by an appellate authority is invalid where no show cause notice under section 251(2) is issued and the assessee is not afforded opportunity to meet the proposed enhancement; enhancements based only on uncorroborated section 132(4) statements are unsustainable. Conclusion: The CIT(A)'s enhancement without issuance of show cause notice and without confronting the assessee with material relied upon is set aside; additions/enhancements founded on uncorroborated section 132(4) statements are cancelled. Final Disposition (as reflected in the reasoning) The Court affirmed deletion of the AO's adhoc additions based on 20% of advances and reversed additions founded solely on diary entries seized from a third person. The Court set aside and cancelled appellate enhancements effected without compliance with section 251(2) and without corroborative material, including those based upon alleged section 132(4) statements.