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2016 (6) TMI 106 - ITAT HYDERABAD

2016 (6) TMI 106 - ITAT HYDERABAD - TMI - Computation of income - sales computation - reference to special audit u/s.142(2A) - Held that:- In the present case, the books of the assessee cannot be accepted due to the complexity of the nature of business and maintenance of books of account at the same time the recasted profits & loss computed by the special auditor also has reliability issue, which were computed based on presumptions. This is the fit case to estimate the income of the assessee. In .....

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AY 2000-01 to 2006-07. - Decided against revenue - ITA No. 1255, 1256, 1257, 1258, 1259, 1260 & 1261/Hyd/2013, ITA No. 1306, 1307, 1308, 1309, 1310, 1311 & 1305/Hyd/2013 - Dated:- 29-4-2016 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri K.C. Devdas For The Revenue : Shri B. Kurmi Naidu ORDER PER BENCH: This group of appeals filed by the assessee and revenue are against a common order of the learned Commissioner of Incometax( Appeals) .....

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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 .....

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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 Act, the assessee company filed returns of income for the asst. years 2000-01 to 2006-07. Scrutiny assessments were completed vide orders u/s.153A of the IT Act dated 31.12.2007. On appeals, the CIT(A) directed the assessing officer to estimate the profit rejecting the book results. On further appeals filed by the ass .....

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rrived at a conclusion that income cannot be computed basing on the account books and other seized material as the same were complex in nature. The assessing officer vide his letter dated 21.12.2011 communicated various facts relating to accounts maintained by the assessee as enumerated in the order of the Hon ble !TAT, Vizag dated 24.01.2011: i) The trading result is not fully supported by bills and vouchers. ii) Substantial portion of purchases and sales were carried out in cash. iii) The basi .....

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onsequent to search which according to the assessing officer, amounted to suppression of sales. viii) The assessee deliberately manipulated the opening and closing stock figure to neutralize profit on account of suppression of sales. ix) In the original return purchases were shown inclusive of other allied expenses and the same was changed in the revised return to a higher figure. x) In course of hearing, the assessee claimed huge marketing commission paid to various agents. It was observed that .....

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ng 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 proceedin .....

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are recorded in the books as receipt but not as sales whereas actual amount paid to landlords was recorded as purchases. The ledger accounts of numerous customers for plot purchases and also ledger accounts of landlord have reveals the same facts. [b] the accounts are maintained branch-wise in different formats, Visakhapatnam City is maintained in computer (Tally package), Gajuwaka branch is maintained in a different package known as Accountrix and assessee claimed that the accounts are corrupte .....

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ales were accounted as advance received from customer and grouped as current liabilities in the balance sheet. In the P & L a/c. only certain portion of these collections were accounted as sales and that there is no basis for apportionment of these receipts as sales and advances. In the sworn deposition during the. course of original assessment (post search), the C.A firm Durgarao & Co who audited these accounts has admitted to such inconsistencies. Relevant portion is reproduced below: .....

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r two branches at Vizag audit was made on the basis of computerized statements only. It was not based upon 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 t .....

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ncome 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 figures have undergone a total change. 2.6 In view of the above facts, the Assessing Officer felt that the accounts of the assessee company are rendered complex and difficult to comprehend and that the transactions as well as the accounts connected .....

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de order dated 24.01.2011, the assessing officer took up the case for making fresh assessments. In that process, as can be seen from the records, the assessing officer issued a show cause notice letter dated 16.12.2011 proposing to refer the case for Special Audit u/s.142(2A) of the IT Act. The case was posted for hearing 20.12.2011. The assessee filed a detailed letter objecting for the proposed action of the assessing officer for invoking the provisions of section 142(2A) of the IT Act on 20/1 .....

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were rejected for the detailed reasons given in this office letter dated 21-12-2011 and a special audit u/s.142[2A] was ordered and the terms of reference of the special audit was as under: 1) Please examine whether the claim of expenditure under all heads is based on proper evidences / vouchers for all the ventures for the assessment years under consideration. 2) Please validate the figures of opening stock and closing stock (quantitative details and values). 3) Please examine the correctness o .....

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ecast 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 observati .....

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ooks of accounts, details and basis of revised return and the evidence relied upon by the assessee in support of its returns. 2.2 However, the approach of the assessee from the beginning has been non cooperative. The assessee did not respond to the mails or to the telephonic calls made by us. After much persuasion and follow up, the accountant of the company appeared and furnished only copies of Audited Financial Statements (without complete schedules), returns of income filed, assessment orders .....

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rector also expressed his inability to furnish vouchers or other supportings on the ground that due to passage of time and shifting of the business premises, adverse business circumstances and such other reasons. the vouchers and records have been either misplaced or lost. The Managing Director has expressed his inability to produce even a single voucher or other record from their side other than whatever is available with the Department. 2.3 The correspondence with the assessee company at vario .....

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ils of seized material relied upon for the Special Audit 3.1 It is observed from the details of the seized material as per Annexure - 3 that it contains various Books of Accounts and loose sheets 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 .....

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ng 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 maintained contemporaneously. We have relied upon the above said records to the extent available for the purpose of arriving at .....

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are prepared from the Books of Accounts and are reliable. We have used the said financial statements, subject to necessary modifications wherever required and as discussed in detailed herein below in the relevant paras, for the purpose of our Special Audit. 3.7 In addition to the above, there were also certain loose papers and other statements which also have a bearing on the financial statements and which have been relied upon by us. 3.8 The index of panchnama of the search conducted at variou .....

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ion on the genuineness and otherwise of the expenses claimed by the assessee. 4.2 We have relied upon the Audited Financial statements filed along with the original Return of Income filed before the search for the assessment years 2000-01 to 2005-06 and Audited Financial Statements filed subsequent to search alone with the return of income for the assessment year 2006-07, the starting point to recast the Profit and Loss account giving effect to the specific findings of the Special Audit. 4.3 The .....

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conciled 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 .....

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rvations about the method by which the Assessing Officer arrived at the collections from the customers. However no objection was raised about the reliability or correctness of the data base itself. In fact on the basis of the very same data base, the assessee reconciled collections from the customers and furnished a statement thereof. The difference between the gross collections arrived at by the Assessing Officer and as compiled by the assessee on account of proper adjustments of the refunds gi .....

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ssessee in the Profit and Loss account from 2000-01 to 2005-06 plus the outstanding advances from the customers as per the Audited Balance Sheet as on 31.3.2006 and or collections from the customers. The said consolidated statement of collections from the customers in project wise and year wise is enclosed as (Annexure - 4 ) . 5.0 Purchases and Allied Expenses 5.1 The assessee has made purchase of land for its various projects from time to time through the respective branches. The records of suc .....

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isk. However even the soft copy is not available in the seized material. The assessee immediately after the search has compiled detailed statements of purchase of land giving the particulars of each transaction of purchase and the value thereof. On verification of the same with the Books of Accounts, it is found that the 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 ma .....

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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 2 .....

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advances are carried year after year even long after the purchases are completed, which cannot be a real situation since no customer would leave the monies with the assessee long after the transactions are over. Since the revenues are under stated in the Profit and Loss account, the assessee is forced to understate the expenditure also in the Profit and Loss account though actually incurred by it. In the case for example as against revenue of 100 if the actual expenditure incurred is 80, in the .....

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onsideration paid in cash which cannot be verified or justified is carried forward as Closing Stock. By this Modus Operandi, the income is suppressed i.e. as against actual income of 20 only 5 is shown as income. Further the value of Closing Stock is inflated without any reference to the reality or the actual underlying quantitative factors. It is clarified that the above is only an illustration to explain the modus operandi of the assessee, and does not represent the actual figures. The above i .....

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sessee 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-cas .....

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port can be made. 6.3 During the course of Special Audit the assessee did not furnish any particulars regarding the quantitative details and value of opening stock and closing stock with respect to various projects carried out by it. The seized material also did not contain sufficient data to re-compute the Opening and Closing Stock value. The projects of the assessee on an average are spread over from 3 to 4 years. The collection/sales are progressive. Having regard to the facts and circumstanc .....

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regard to the profitability in the real estate industry, we ignore the value of Closing Stock as arrived at by the assessee. 6.5 As far as the Opening Stock as on 1.4.1999 being the first year of the Special Audit is concerned, the same has been added to the total purchase cost and allowed as deduction in the recast Profit and Loss account, since the same was accepted in the assessment for the Assessment Year I999-2000 and has become final. The value adopted is ₹ 2,53,99,150/- as per the o .....

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be noted that the assessee has maintained contemporaneously books of account in which all its transactions are recorded. Part of the records were also maintained in the computer system particularly in respect of Hyderabad branch and Vijayawada branch. It is also observed that subsequent to the search the assessee has filed detailed statements compiled from the said books of accounts / computer data base. It is also noted that the assessee has recorded all its transactions in its Books of Accoun .....

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unt 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 .....

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stration expenses e) interest and financial expenses f) depreciation and g) miscellaneous expenses. 7.3 The only items which require recasting are the sales income and the purchase and allied costs and Closing Stock. The other items debited to Profit and Loss account are correct and does not require any change. Therefore they are adopted as it is as per the Audited Financial Statements. 7.4 In so far as the sales revenue is concerned, the question of income recognition is important. The assessee .....

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e transferred. The relevant paragraphs are extracted below for ready reference : 11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually asso .....

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e said that the risks and rewards are transferred to 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 .....

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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. Accordingly in respect of Hyderabad ventures income is recognized in the same year in which the collections are made. 7.7 Similarly in respect of certain projects where customer wise/ date wise details are not available/ the same are taken as unreconciled .....

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re that the revenue and direct expenses are recognized proportionate to sales income (revenue) recognized. Therefore the total cost of purchase of land and other allied costs which have arrived at is apportioned to the various branches/ year wise in proportion to their sales. These calculations are available and are enclosed in (Annexure - 6 ). Further the cost of goods sold/ taking into account the adjustments for opening and closing stock is enclosed in (Annexure 8). 7.9 An important aspect to .....

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ard. Therefore the method as adopted by us results in matching the revenue and expenses proportionately. The method adopted by us is in accordance with the ratio laid down by the Honorable Supreme Court in the case of Calcutta Co. Ltd (37 ITR 1). 2.11. In the re-casted Profit & Loss a/c. the Special Auditor has taken into account certain heads of expenditure as claimed by the assessee viz., expenditure on site development and Sales, administrative & other expenses. To continue with the a .....

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duction 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 .....

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r the AO obtained the requisite permission/approval of the CIT to make such a reference. [b] Assessee should be allowed proper and sufficient time to make submissions and the speed at which the developments took place indicate that the AO has already made up his mind to make a reference to special audit and the sole purpose of invoking of provisions of sec.142[2A.) is to get benefit of extended time to finalize the set aside assessment proceedings. [c] The power to direct special audit should no .....

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ceipt of the direction u/s.142[2A] by assessee on 21-12-2011. As per the Assessing Officer, the objection was not correct as the maximum time limit allowed as per the provisions of sec. 142[2A] was 180 days from the date on which the direction u/s.142[2A] was received by the assessee which means that the number of days that should be taken into consideration will be from the next day on which the said notice is received i.e. in this case, it is received on 22-12-2011. Hence, the extension of tim .....

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xty days after the receipt of the report of Special Audit u/s.142(2A). In the instant case, the report was received on 18-06-2012 and sixty days expires on 17-08-2012. [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 s .....

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ause 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 twice never envisaged in the I.T. Act. 4. As already mentioned the profits worked out by the special auditor for various asst. years fluctuate in an uneven manner an .....

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t possible in the line of the business of the assessee. 5. The assessing Officer is requested to observe the recognition of profit on advances can never be made and the same has to be recognized after execution of the sale deed only. The assessee is catering the needs of middle and lower segments of the society by selling plots in instalments. Considering the time period spread over for collection of installments the profit that would be available for the assessee was less than 8% after meeting .....

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fficer proposes to adopt such gross sales figures worked out u/s.142(2A) of the IT act and further proposes to disallow 30% of other expenses without any basis. 7. It is also to be mentioned that as can be seen from the accounts during the financial year 2005-06 there was collection to the tune of Rs.l.83 crores which was paid back in financial year 2006-07 to 2008-09. The same is evidenced by the accounts. The special auditor did not take into consideration the same fact. 8. It is also to menti .....

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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 ₹ 27.48 crores. 9. From the audit re .....

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arrived at 30% of the reconciled purchases On estimation basis. iv. The Special auditor proceeded to work out the incomes on the basis of assumed opening stocks and closing stocks for the asst. years involved in the proceedings. The above facts clearly indicate that the audit report furnished u/s.142(2A) is not based on the account books and seized material identified at the time of search and seizure operation. Hence, such report u/s.142(2A) of the I. T. Act need not be given cognizance and the .....

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edings. On appeal the Hon ble CIT(A) allowed certain reliefs. On further appeals by the assessee as well as by the department the Hon ble ITAT, Vizag set aside the assessments with a direction for redoing the same. The assessing officer made a reference u/s.142(2A) for special audit. It may be mentioned that in the case of the assessee there is no complexity of the accounts. The only deficiency is that the accounts maintained by the assessee are not upto the satisfaction of the authorities. The .....

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rom 12 years to 5 years. Generally no business man may keep up the misc. vouchers etc. for a period of 6 to 12 years. It is only because of setting aside of the assessments by the Hon ble ITAT, Vizag the unexpected contingency cropped up. 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 oth .....

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. 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 the information called for by the Special Auditor during the Course of Spec .....

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age of time and shifting of the business premises, adverse business circumstances and such other reasons, the vouchers and records have been misplaced or lost and accordingly he expressed his inability to produce even a single voucher or other record from their side other than whatever is available with the Department. In view of the non Cooperation of the assessee and non availability of any information from the assessee, the Special Auditor perused the entire seized material and collated the v .....

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₹ 36,56,077/- were made in cash exceeding ₹ 20,000/- for purchase of land and the same are to be considered for disallowance in the assessment. 3.1 In reply to the show-cause letter issued, proposing to make disallowances u/s.40A[3], assessee submitted as under: the assessee make payments to land owners for purchase of land from them during the course of our business routinely. Most of the land owners from whom we purchase lands are agriculturists, illiterate and hail from rural area .....

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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 ₹ 20,000/-contravening the provisions of section 40 .....

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ere also some instances where cash payments were made to business entities, viz., Swagat Roadlines. 3.4 The Assessing Officer further observed that Assessee has claimed that the sellers were agriculturists, illiterates and hailed from rural areas which are more than 10 Kms from the city. Though lands were purchased from as many as 159 persons, copies of pattadar pass books were furnished in 19 cases only and these documents do not evidence that the sellers are residents of the Village in which l .....

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and other expenses: In the profit and loss account, the assessee claimed the following expenditure: [a] Site Development Expenditure ₹ 1,82,40,705 [b] Sales, Administrative & other expenses ₹ 37,73,727 4.1 The Assessing Officer observed that as the assessee could not submit bills/vouchers in support of the above expenditure, it was disallowed 30% of sales, administrative and other expenses and assessee submitted that disallowance is not warranted as the AO is proposing to compute .....

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ove, even during the course of special audit or during the assessment proceedings. Assessing Officer observed that the business activity of the assessee company is sale of house plots involving purchase of vast tracts of plain lands and convenient division into plots of different size, ground levelling, 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 .....

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idences 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. ₹ 1,82,40 705 - ₹ 54,72,212 [2] Disallowance of 30% of Sales, Administrative & other expenses of ₹ 37,73,727 Rs.11,32,l18 5. Aggrieved with the above order, assessee filed appeal before the CIT(A) and raised various grounds with r .....

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Ltd Vs CIT (171 ITR 634) (All) iii. Sahara India Ltd Vs CIT (246iTR 475) (All) iv. Bata India Ltd Vs CIT (257 ITR 622) (Cal) 6. The CIT(A) rejected all the grounds raised by the assessee and upheld the order of the Assessing Officer with regard to special audit, recasted P&L a/c. CIT(A) has given partial relief to assessee by deleting the disallowance made on site development, sales, administrative and other expenses. The observations of the CIT(A) are reproduced below. 10.5 From the assess .....

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mention convincingly as to how he was not convinced with the expenditure claimed by the appellant under the above heads, Further, the assessing officer also did not spell out any reasons as to why the figures suggested by the Special Auditor in his special audit report were not acceptable for him. Further, the assessing officer did not mention as to disallowance of 30% expenditure would meet the ends of justice. 10.7 While deciding the ground nos. 10,11and 12, the expenditure as worked out by th .....

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r 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 belo .....

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ollowing grounds of appeal, which are common in all the appeals under consideration: 1. The order of the Hon ble CIT(A) is erroneous in law as well as on facts of the case. 2. The Hon ble CIT(A) ought to observed that the assessing officer erred in making reference u/s.142(2A) of the IT Act though there was no complexity in the accounts of the assessee. 3. The Hon ble CIT(A) ought to have observed that the assessing officer did not bring out the nature of complexity involved in the accounts of t .....

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ays before limitation for completion of assessment expire clearly show that the reference was made to gain time for finalization of assessment proceedings and therefore the Hon ble CIT(A) ought to have held that such action of the assessing officer cannot be considered as valid in law. 5. The Hon ble CIT(A) ought to have observed that the assessing officer made the reference u/s.142(2A) of the IT Act without considering the objections filed by the assessee vide their letter dated 20.12.2011 and .....

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e beyond the scope of special audit and hence such a reference by the assessing officer cannot be considered as a valid one in the eyes of law. 8. The Hon ble CIT(A) ought to have observed that the assessment completed by the assessing officer basing on such invalid reference cannot be considered as a valid one and hence the Hon ble CIT(A) ought to have held 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-coopera .....

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nnot 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 .....

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he IT Act. The Ho ble CIT(A) ought to have observed that the Audit report prepared u/s.142(2A) of the IT Act basing on such suggestion cannot be the basis for making the assessment and hence the Hon ble CIT(A) ought to have deleted the addition. 13. The special auditor travelled beyond his powers in the process of carrying on special audit by preparing a fresh profit and loss account ignoring the original one which was prepared in compliance with the provisions of Companies Act and approved by t .....

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any specific and valid reasons. 15. The Hon ble CIT(A) ought to have observed that the assessing officer erred in rejecting various objections raised by the assessee with regard to contents of the audit report u/s.142(2A) without mentioning any valid reasons and hence additions made on the basis of such audit report by the assessing officer and upheld by the Hon ble CIT(A) are liable to be deleted. 16.The Hon ble CIT(A) ought to have observed that assessee is a company came into existence as per .....

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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 vouc .....

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ee should be considered for determining the profit or if the books of account are being rejected, a proper method of estimation to be adopted to determine the taxable income as per the Income-tax Act. 11. The learned counsel for the assessee submitted that the assessee is only dealing in real estate business, which deals in purchase of land, developing the same and sell the land to the buyers and it is not into the development of construction or development of building. Ld. AR submitted that the .....

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appointed special auditor u/s 142(2A) of the Act. He submitted that the special audit report contains full of contradictions and such observations cannot be the basis for recasting accounts of the assessee. The accounts are recasted on the basis of the observations of the special auditor cannot be the basis for computing the total income. Moreover, the special auditor adopted various figures in purchases, sales, opening stocks and closing stocks were not on the basis of material available on re .....

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ssessment. He also brought to our knowledge that the special auditor has opined at para 7.1 of his report that the books of account maintained by the assessee need not be rejected and can be used for recasting of P&L and it shows that the books of account are proper and he also submitted that the department has already rejected the books of account because of complexity of the nature of business and relying on the special audit alone cannot be the basis of determining the income of the asses .....

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000-01 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. Con .....

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n the case of CIT Vs. Ramachandra Reddy, 372 ITR 77. Relying on the judgment of the Kerala High Court in the case of Samurai Techno Trading Co. (P) Ltd. Vs. CIT, [2010] 37 DTR 386 (Ker.), he submitted that the income may be estimated at 8% of the sales. He also relied on the decision in the case of CIT Vs. Bishambhar Dayal & Co., [1994] 210 ITR 118 (All.) to allow depreciation as deduction even after estimation of income. 11.3 Ld. AR also submitted that the ITAT Delhi Bench in case of ITO Vs .....

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t is not a fit case for estimation as assessee is a developer of land and the profit should be much higher than the profit determined by the ITAT at 15% in AY 2007-08. He relied on the orders of lower authorities and submitted that the special audit conducted u/s 142(2A) is proper and it is on the assessee to cooperate with the special auditor to complete the special audit properly, in order to complete the assessment and not on the department. 13. We have considered the rival submissions and pe .....

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vices 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 th .....

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asically, 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 complete the audit considering the fact that the assessment under consideration was 153A assessment. The special auditor submitted observations which are full of contradictions and the accounts re-casted based on above observations cannot be the basis for computing the total income of the assessee. The valu .....

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tation of income and expenses. The assessee also submitted that the original books of account were prepared in compliance with the provisions of companies Act and objected for adoption of recasted P&L A/c as the same was computed on presumptions. The assessee was suggesting either to adopt the original books of account or estimate the income by rejecting the special audit report. Whereas the ld. DR strongly objected to adopting the original books of account as the same was rejected by the AO .....

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tion adopted by the special auditor is the main grounds of appeal by the assessee. There is no dispute that the special auditor had to rely on the information available with him & with the AO which were acquired due to search and seizure operation. The assessee also expressed in one of the communication with the special auditor that due to efflux of time, the assessee was not in a position to submit the relevant bills and vouchers either because of seizure or not in a position to submit due .....

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t 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 t .....

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real estate dealing only in buying, developing and selling lands. 13.5 The relevant data before us are (extracted from paper book Submitted by the assessee) Cumulative figures a) Cumulative turnover for 7 AYs 100.61 crores (As per special audit report accepted by the assessee) b) Income assessed by ACIT 21.20 crores(21.07%) c) Income assessed by CIT(A) 11.64 crores(11.57%) d) Income computed by special auditor 9.71 crores(9.65%) While analyzing the above values, we are of the view that income as .....

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ies involved were only for land development activities but in the present case the assessee is in the activities which involve purchase, development and sale of land. With respect to CIT(A) arrived at the profit of ₹ 11.64 crores as cumulative profit for 7 years (i.e. 11.57%). But he had accepted the special audit profit as the base and gave partial relief to assessee by deleting the disallowance made on site development etc. After deleting the disallowance made by the AO, the profit arriv .....

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ed by special auditor at 9.65%. But this income arrived by special auditor by adopting presumptions and modifying the values 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 p .....

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tained 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, who are in the similar business of assessee. In our considered view, in the present case, the books of the assessee cannot be accepted due to the complexity of the nature of business and main .....

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centage arrived after factoring the reliability and the income computed by the special auditor. Hence, we direct the AO to adopt 8% of the sales as determined by the special auditor, to compute the income of the assessee year to year basis for AY 2000-01 to 2006-07. 13.9 With regard to revenue appeals, as we have directed the AO to estimate the income of the assessee. The grounds raised by revenue become infructuous. Considering the fact that the coordinate bench of this Tribunal has held in man .....

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its and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Assessing Officer may reject those books and estimate the income to th .....

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