AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 106
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.... the same on installment basis. The assessee laid out ventures at various places at Vizag, Rajamundry, Vijayawada and Hyderabad. The assessing officer made a reference u/s.142(2A) of the Income Tax Act (in short "Act') for special audit. After receipt of the special audit report the assessing officer finalized the assessment proceedings for all the assessment years 2000-2001 to 2006-07 vide order u/s.143(3) r.w.s 153A r.w.s. 254 of the IT Act dated 16.08.2012. While completing the assessment, the assessing officer not only adopted the income figures as suggested in special audit report but also made certain other additions. The present appeals are against the above orders of the assessing officer for the asst. years 2000-01 to 2006-07. 2.1 There was a search and seizure operation conducted in the business premises of the assessee at Vijayawada, Vizag, Rajamundry and Hyderabad and also residential premises of the director as well as connected employees on 12.12.2005. During the course of search and seizure operation, the officials of the department identified certain account books and other materials and seized them. In response to notices issued u/s.153A of the IT Ac....
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....r no circumstances the same can be treated as a component of purchases. [xi] The accounts are maintained branch wise in different formats viz., accounts at Visakhapatnam in 'Tally 6.3 package', Gajuwaka in 'accountrix' package, Rajahmundry manually etc. It was claimed that the accounts were corrupted and only part could be retrieved. [xii] As per the sworn deposition of Sri P. Durga Rao, CA, there was no basis for the figures of purchases, sales, opening and closing balances of the stock etc adopted in the trial balances and he has adopted the same basing on the trial balances prepared by the assessee. 2.3. Re-assessment proceedings were initiated by issue of notice u/s.143(2), dated 01-07-2011 by the Asst. Commissioner of Income Tax, Circle-2(1), Vijayawada. Consequent to change of jurisdiction over the case, assessment proceedings were carried further by the JCIT(OSD), Circle-3(1), Hyderabad. 2.4 During the course of re-assessment proceedings, the Assessing Officer found that various transactions and other evidences relating to the accounts of the assessee company found during the course of search operations were not properly accounted for in the regular books of acco....
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....on any other supporting evidences as vouchers or bills. Sri Durgarao, C.A has clarified that there is no basis for sales figure shown in the return as stated on oath reproduced below: "I am not aware of the basis for the figures of purchases, sales, opening stock and closing stock balances etc., adopted in the trial balance. I haven't examined the supporting evidences for those' figures in the trial balances submitted before me by the assessee. Further, he added that I confirm that the figures of purchase and sales reflected in the revised profit and loss account along with the opening and closing balances of the stock were adopted by me basing on that trial balances prepared by the assessee." e] that the figures of purchase of land as well as sale of plots have undergone a total change in the revised returns of income. f] the quantification of closing stock disclosed in the return of income is not authenticate and that there is no break up in the case of purchases of land and sale of plots venture-wise. g] in the revised trading and Profit & Loss a/c., the sales, purchases, marketing commission, closing stock and gross! profit figure....
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.... the bills and vouchers in respect of marketing commission payments. 6) Please also examine the sale of plots on "outright basis" as well as on "instalment basis" . 7) Please examine the transfer entries from "advance from customers account" to "sales account" 8) Please verify all bank statements vis-a-vis the bank accounts in the books of the assessee. 9) It is requested to recast the profit & loss accounts and balance sheets showing true state of the assessee for all the assessment years under consideration. 10) Please also cover all items covered in the tax audit u/s 44AB of Income Tax Act, 1961." 2.10 The Special auditor has furnished a report u/s.142[2A] on 18-06-2012 along with the re-casted Profit & Loss A/c. Based on the recasted P&L A/c, the taxable income of the assessee was computed. In the said report, the Special Auditor has made the observations and assumptions to complete the recasted P&L A/c. For convenience, we are reproducing the observations and assumptions as under: [as per annexure 9 of the Special audit report] "2.0 Status of Books of Accounts and other Records 2.1 Since this is a case where search and seizure operations were carried ou....
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....etc. However no vouchers are available in the seized material. 3.2 In respect of Books of Accounts namely cash book and ledgers, it is found that few Books of Accounts were available. It is observed that no Books of Accounts relating to Hyderabad branch are available in the seized material. These Books of Accounts to the extent available were perused and relied upon by us. 3.3 It is observed that the seized material contains customers ledger wherein the details of monies received from the customers are recorded. The perusal of the same shows that the said records are genuine and have been maintained contemporaneously. However, the customer ledgers are not available for some projects / periods. We have relied upon the above said customers ledger to the extent available for the purpose of arriving at the collections from the customers and the income to be recognized year wise. 3.4 Perusal of the seized material shows that land payments register has been maintained in respect of payments made for the purchase of land from various vendors. These records have been maintained at the respective branches. It is also seen that these records are genuine and have been maintaine....
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....ences such as branch wise financial statements, agent wise summary statements of collections etc. The aggregate advances classified as Current Liability in the Balance Sheet and the amounts disclosed as Sales in the Profit and Loss account is reconciled with the aggregate of collections, as arrived at above. 4.4 As admitted by the assessee, the collections from the customers are fully recorded in the Books of Accounts. However the classification of the same between Capital and Revenue was not carried out properly in the Audited Financial Statements. Therefore, after reconciling the figures as above, we have re-cast the amounts received from the customers between advances and sales on the basis of certain assumptions and principles and in accordance with the applicable Accounting Standards as discussed in detail in the subsequent paras. 4.5 In respect of Hyderabad branch, no manual customers ledger were available in the seized material. It appears that the collections from customers have been maintained in a data base at the Hyderabad branch. During the course of assessments made earlier, the Assessing Officer has summarized the collections from the customers, on t....
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....he statements are correct and are reliable. Therefore we have adopted the cost of purchase of land from the said statements which are enclosed in paper book 2. 5.2 The two other major direct expenses claimed by the assessee are commission payments for purchase of land and for collections from customers and site development expenses. These expenditure have been partly debited to the Profit and loss account as allied expenses and the balance has been shown as advances in the Balance Sheet. The project wise/ year wise break up of such expenses as is available in the Audited Financial Statements is taken into account. 5.3 The aggregate of land Purchase & Allied Costs for each project is calculated on the basis of above said methodology which is available in (Annexure 6). 6.0 Valuation of Opening and Closing Stock 6.1 It is observed that in the Books of Accounts, the assessee has fully recorded the collections from the customers and payments made towards purchase of land, commission and other expenses. However while preparing the Financial Statements, the correct amount of income/expenses have not been accrued; For example/ if the total collections are 100 only 25 is c....
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....nts filed during the course of search assessment proceedings are also not correct since the assessee could not furnish proper details for the amounts reclassified from the Balance Sheet into the Profit and Loss account. 6.2 The said aberrations in the preparation of Financial Statements are rectified to the extent possible on the basis of information available to us, in the Special Audit and correct state of affairs are being arrived at. However in view of the non cooperation of the assessee in furnishing the particulars, and in view of non availability of part of the records, the re-casting exercise carried out by us in the Special Audit Report is based on certain reasonable and necessary assumptions. The model for recast followed by us is based on fair and equitable principles and is in-line with the relevant Accounting Standards and therefore in our opinion the best Possible model under the given facts and circumstances. The onus is on the assessee to supply the missing particulars / information so that any consequent changes to the income as computed in the Special Audit Report can be made. 6.3 During the course of Special Audit the assessee did not furnish any particular....
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....f Accounts, but has only made a mistake in recognizing the revenue and expenses appropriately. While a part of the collections, namely amount referable to the Stamp Duty value, is recognized as income in the Audited Profit and Loss account and the balance of collections have been accumulated and shown in the Balance Sheet as advances collected from the customers. Similarly in respect of land payments also the cost of purchase referable to the stamp duty value has been debited to the Profit and Loss account under the head purchase, a portion of the commission has been debited to Profit and Loss account and the balance has been accumulated and shown under the head loans and advances in the Balance Sheet. Nevertheless, the aggregate figures as per Profit and Loss account and Balance Sheet reflect the actual receipts / payments by the assessee, which in-fact is also corroborated from other subsidiary records such as collections register, land payments register, statement compiled and filed during assessment proceedings, branch wise financial statements and other such seized material. Therefore the books of accounts maintained by the assessee need not be rejected and can be used f....
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.... the customers the moment the customer pays the full installments. Accordingly the income is to be recognized in the year in which the last installment is paid or the full amount of purchase price of plot is paid by the customer. The sales collections are re-stated on the above basis and the correct amount of income to be recognized each year, project wise is computed. Such revised statement of income (sales) to be recognized project wise, year wise is enclosed in (Annexure - 7 ) 7.6 In so far as Hyderabad ventures are concerned, as detailed in para 5.1 above, the assessee has reconciled year wise, project wise collections and the summary statements thereof is available on records. The said statements has been prepared from the data base which was maintained at Hyderabad office. Therefore, the income is recognized in the same year in which the collections are made. The onus is on the assessee to provide details and prove that the year of collections is different from the year in which full instalment amounts are paid. In the absence of the same and particularly the non cooperation of the assessee, it would be fair and equitable to assume that the collections reflect income....
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....sessee calling for production of bills and vouchers in support of the expenditure claimed towards site development, Sales, administrative & other expenses, etc. In the said letter instances of violation of the provisions of section 40A(3) were also brought to the notice of the assessee and seeking its objections for disallowance of the same. In the absence of production of bills and vouchers for the claim of expenditure under the heads of site' development and Sales, administrative & Other expenses, it was proposed to disallow an amount equivalent to 30% of the claim. 2.12 The assessee made objections before the Assessing Officer and Assessing Officer had dismissed the same, which are reproduced below: (I) Objection for reference to special audit u/s.142(2A] Assessee company objected to the directions issued to get the accounts audited u/s.142[2A] on various grounds. The objections raised were rejected holding that there is 'complexity of the accounts of the assessee and the interests of the revenue" and the case was referred to special audit u/s.142[2A]. Assessee company also made further objections regarding the Special Audit u/s.142[2A] vide letter filed on ....
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....012. [III] Issues arising out of recasted profit and loss account as per the special audit report u/s 142[2A). Assessee objected to the recasting of profit & loss a/c made in the special audit report as under: 1. In the case of the assessee, the profit has to be arrived at basing on concluded sales only which were recorded in the sales register. Thus, the basis should be sales register only and the figure of advances collected which may spread over for 60 monthly installments subject to cancellations, refunds, defaults etc. cannot form part of such sales figures. 2. As per accounting standard 9 of ICAI,' where the purchaser makes payment in installments to the seller and the seller delivers the goods only on final payment of installment, the income has to be recognized after completion of payment of all installments 3. Because of the procedure followed by the special auditor, as mentioned, it amounted to taxation of the same amount twice i.e. recognition of income in respect of advances included in the turnover and subsequently when actual sales were recognized and brought into the total turnover in the account books. Such taxation of the same amount t....
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....res of purchases and difference in closing and opening balances of land advances as well as advance commission. The Special auditor further proceeded to allocate the so called uti-reconciled purchases on certain proportions to various asst. years. It may be mentioned that either the investigation wing or the assessing officer who completed the original assessments never pointed out any reconciled purchases. Those proceedings did not indicate any un-reconciled purchases as mentioned by the special auditor. The working out made by the special auditor by bringing difference in opening and closing balances of land advances and advance commission never reflect any purchases and therefore there is no scope to work out the figure of un-reconciled purchases at Rs. 27.48 crores. 9. From the audit report furnished by the special auditor it can be seen that: i. The sales figures recorded in the account books and financial statements for the respective assessment years were completely altered on the basis of certain presumptions and assumptions. ii. The purchases figures recorded in the account books and financial statements for the respective assessment years were c....
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..... The assessee never visualized such situation. Further, at the time of search and seizure itself the department seized all most all the material available with the assessee. This fact clearly establishes that the assessee was not in a position to produce any other materiel called for by the special auditor. Therefore, as there was no material that was required by the special auditor in the possession of the assessee they could not comply with the communications issued by the special auditor. There is no intention on the part of the assessee not to co-operate with any authorities including special auditor. It is because of the fact that the matter pertains to very old asst. years the assessee could not produce the details required by the special auditor. 2.13 According to Assessing Officer, the objections raised by the assessee are not acceptable because of the following reasons: 2.14 As per the provisions of section 142[2A], the directions are to the assessee to get the accounts audited by an accountant and furnish a report setting forth such particulars as may be prescribed and such other particulars as the AO may require. Hence, it is for the assessee to furnish all ....
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....ities in the villages. The assessee had to make payments in cash by taking back the cheque issued to them earlier. All these expenditures are genuine and supporting evidences is also available in respect of purchases. So, in view of the same the assessee would like to submit that the same may not be disallowed." 3.2 After considering the above submissions, the Assessing Officer observed that the evidences furnished were examined. The present assessment proceedings involved seven assessment years from the assessment year 2000-01 to 2006-07. Verification of the records revealed instances of payments in cash in excess of Rs. 20,000/-contravening the provisions of section 40A(3) as under: F.Y. No. of instances No. of persons Total amount 1999-2000 59 29 36,56,077 2000-01 29 14 56,66,150 2001-02 23 13 26,27,200 2002-03 63 31 1,91,21,853 2003-04 22 7 41,80,000 2004-05 108 38 5,13,49,400 2005-06 43 27 57,31,955 3.3 Referring to the above table, the Assessing Officer observed that the instances of cash payments were not solitary but on repeated occasions. It was noticed that ther....
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....velling, etc. Assessing Officer further examined that examination of case records does not evidence expenditure incurred on laying of BT Roads, sewage pipes and electricity lines etc. He opined that mere placement of corner stones/wiring does not involve such huge expenditure as claimed and the expenditure stated above i.e, expenditure on site development is on higher side. Similarly, with regard to Sales, administrative and other expenses, considering the nature of business, volume of the business and the locations wherein the house plots were made and sold, the expenditure is on higher side. Though expenditure is a must component of any business, as assessee could not produce any supporting evidences and could not substantiate the reasonableness of the expenditure claimed, the complete expenditure claimed cannot be allowed. Accordingly, he disallowed the expenditures as under: [1] Disallowance of 30% of site development expenses of Rs. Rs. 1,82,40 705 - Rs. 54,72,212 [2] Disallowance of 30% of Sales, Administrative & other expenses of Rs. 37,73,727 Rs.11,32,l18 5. Aggrieved with the above order, assessee filed appeal before the CIT(A) and raised var....
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....44% 2003-2004 17.88% 2004-2005 11.97% 2005-2006 15.12% 2006-2007 25.99% Thus, the Special Auditor himself proceeded with certain estimated figures of expenditure for arriving at the conclusions. In the light of the same, the action of the assessing officer with regard to further restriction of such estimated expenditure in the course of re-assessment proceedings cannot be considered as reasonable, 6.1 The CIT(A) also relied on the decision of ITAT Bangalore Bench in case of Vinaram Ltd., 104 ITD 234 and the decision of ITAT Mumbai Bench in the case of Kellogs India Pvt. Ltd. Vs. ACIT, ITA No. 6005/Mum/2010, dated 10/08/2012. The CIT(A) finally held as below: "10.11 In the light of the above facts and circumstances and judicial decisions, I feel that no adhoc disallowance of expenditure as done by the Assessing Officer is warranted. Therefore, the addition made by the Assessing Officer under the heads site development expenses and sales, administrative and other expenses is not sustainable and hence deleted. Thus, the ground nos. 19 and 20 are allowed." 7. Aggrieved by the order of the CIT(A), the assessee is in appeal before us an....
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....ld the same as void. Validity of report u/s 142(2A) of the IT Act: 9. The observation of the special auditor that the assessee was non-cooperative in furnishing of information is improper and incorrect as .the case referred to them was a search case in which all the relevant materials were seized by the department and available with the department. 10. The Hon'ble CIT(A) ought to have observed that the observations contained in the special audit report are full of contradictions and hence such observations cannot be the basis for re-casting the accounts of the assessee. Hence the accounts re-casted on the basis of such observations cannot be the basis for computing the total income and hence the additions ought to have been deleted by the CIT(A). 11. Various figures such as purchases, sales opening stock, closing stock and other items worked out by the special auditor in the special audit report were not on the basis of the material available but the same were worked out on the basis of certain presumptions. Hence the Hon'ble CIT(A) ought to have observed that adoption of such figures by the assessing officer should not form the basis for computation of income and there....
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....- by invoking provisions of section 40A(3) of the IT Act and therefore the same is liable to be deleted. 18. Any other ground will be raised at the time of hearing." 8. The revenue is also aggrieved against the order of the CIT(A) and has raised the following grounds of appeal, which are common in all the appeals filed by the revenue: "1. The ld. CIT(A) erred both in law and on facts. 2. The ld. CIT(A) erred in deleting the disallowance made by the AO of 30% of expenditure on site development, commission, sales, administrative and others, which was made in the absence of vouchers/supporting evidence." 9. The assessee has filed 18 grounds of appeal out of which the assessee has pressed only ground Nos. 9 to 13 and, therefore, the other grounds are treated as dismissed as not pressed by the assessee. 10. The main contention of the assessee is that the report of the special audit conducted u/s 142(2A) of the Act is not valid and proper. The books of account maintained by the assessee is proper and as per the Companies Act, 1956. Hence, the books of account of the assessee should be considered for determining the profit or if the books of account are being....
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.... assessee considering the fact that various figures adopted by the special auditor in purchase, sales, opening and closing stocks were based on presumptions and surmises. The only way out left is to estimate the income of the assessee in case books of account are rejected as well as special audit report is not considered. 11.1 The Ld. AR submitted that without considering the nature of the business of the assessee, which is into the development of land and selling them , the profit determined for AY 2000-01 to 2005-06 by the Special Auditor, CIT(A) and AO are as under: AY Special Auditor CIT(A) AO 2000-01 33.95% 33.76% 41% 2001-02 25.92% 36.26% 27.1% 2002-03 Loss Loss Loss 2003-04 10.94% 13.06% 22.64% 2004-05 Loss Loss Loss 2005-06 Loss 0.644% 9.89% 2006-07 24.31% 24.7% 33.53% 11.2 The ld. AR submitted that the profit determined by the special auditor and AO are not based on matching principle, as the profit in the real estate will be constant year to year basis in relation to the sales. Considering the fact that the related cost apportioned to the relevant year in line w....
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.... direction, AO sought the services of CA by invoking provisions of section 142(2A) of the Act. The special auditors has completed the special audit assignment by submitting the special audit report along with recasted P&L A/c. In the special audit report, the auditor has submitted the basis of audit, observation on completion of special assignment and assumptions applied to complete the re-casted P&L A/c. There is no doubt that the special auditor has done the audit within the scope of his assignment and based on the scope of audit, he has completed the re-casted P&L for all the AYs. Based on the above report, AO completed the reassessment. 13.1 The assessee objected to such recasted P&L and made representation before AO and CIT(A) against adopting such recasted P&L as the income and expenditure of the company for the purpose of determining the taxable income of the assessee. The assessee raised grounds 9 -13 against adopting the whole special audit u/s 142(2A) for determining taxable income. Basically, the assessee objected that the relevant vouchers & papers were with the department, the assessee was not in fault for not presenting the bills/vouchers before special auditor to ....
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....ssee that the reliability of the special audit report and recasting of P&L A/c were computed based on the information available and presumptions adopted by special auditor. It is worthwhile to mention here that the income status generated by special auditor are not correlating to the turnover of the company, i.e. out of seven AYs, in three AYs are loss. In the real estate business, the profit generated against sales has to be on the band range, it cannot be fluctuating in such high degree. The profit has to be arrived based on the matching principle, in our considered view, the special auditor has failed in this regard. The related cost has to be aligned with the relevant sales/collection. In the above stated situation, we are inclined to suggest that the books of account maintained by the assessee must be rejected, at the same time, the recasted account cannot be relied upon due to reliability factor. 13.4 We are left with the overall turnover of the assessee and net income determined by the AO, CIT(A) , special auditor and estimated profit @ 15% in the subsequent year by this coordinate bench. We cannot adopt 15% of sales simply because the coordinate bench treated the busines....
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....of purchase, sales, opening and closing stock. Based on the submissions of DR and assessee, we are of the view that the reliability of the special audit could be in between 80-85%. On applying the reliability factor to the income determined by special auditor of 9.65%, we will end up arriving the income at 8%, which is similar to section 44AD. 13.7 On the other hand, the provisions of section 44AD proposed to adopt 8% of the total turnover or gross receipts of the assessee shall be deemed to be profits & gains of the business chargeable to tax. This section prescribes a thumb rule or presumptive net profit rate applied for those assessees whose turnover are less than one crore. No doubt, the turnover of the assessee is more than the prescribed limit in the section 44AD but it gives thumb rule to estimate the income of the assessee. When the books are not maintained or rejected, flat rate of 8% can be adopted as decided by the Hon'ble Delhi High Court in the case of CIT Vs. Subodh Gupta, ITA N 80 of 2014, dated 09/12/2014. 13.8 The above decision is relevant particularly when the revenue could not submit or ascertain who had declared higher percentage of income, wh....