M/s. Mega Aims, Bharuch V. Deputy Commissioner of Income Tax, Bharuch Circle, Bharuch

ITA 25/SRT/2017

AI Insights

The case involves M/s. Mega Aims, a firm engaged in construction, which faced additions to its income tax assessment for the Assessment Year 2011-12 based on discrepancies between declared profits during a survey and those in the filed return. The Assessing Officer added amounts to the income citing suppression of profit based on the estimated profits declared during the survey for advance tax payments, which were not realized in actual sales. The Tribunal's decision emphasized that the estimates made for advance tax do not constitute final income declarations and should not be the basis for tax assessments.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301827 (ITAT-SURAT)
• Duration Of Justice: 5 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 30-01-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 08-08-2017
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 143(3); 133A; 192; 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकर अपील सं./ITA No.25/SRT/2017 Assessment Year: (2011-12) (Virtual Court Hearing) M/s. Mega Aims, B-1, Gokuldham Complex, Dahej Bypass Road, Bharuch – 392001. Vs. The DCIT, Bharuch Circle, Bharuch. èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAQFM1615F (Assessee) (Respondent) Assessee by Shri P. M. Jagasheth, CA Respondent by Shri Vinod Kumar, Sr. DR Date of Hearing 31/01/2023 Date of Pronouncement 30/03/2023 आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2011-12, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-3, Vadodara [in short “the ld. CIT(A)”] in Appeal No. CAB-3/403/2014-15, dated 12.01.2017, which in turn arises out of an assessment order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 21.03.2014. 2. Grounds of appeal raised by the assessee are as follows: “1) The learned Commissioner of Income Tax (Appeals)-3, Vadodara has erred in law and in facts in holding that – a) The disclosure of income made on the basis of comparison of profit determined on the basis of statement in the course of survey proceedings u/s 133A vis-a-vis the profit declared was to be accepted as correct ignoring the explanation of the assessee. b) The estimation of additional profit resulting into an addition of Rs.95,30,006/- was justified. 2. The Ld. CIT(A)-3, Vadodara has erred in law and in facts in confirming the addition of Rs.95,30,006/- made ignoring the fact that no defect was observed Page | 2 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims or pointed out in the maintenance of the books of accounts and as such the addition made could not be sustained. 3. The Ld. CIT(A)-3, Vadodara has erred in law and in facts in disregarding the contention of the assessee that the statements made in the course of survey proceedings could not be the basis of the addition. 4. Your assessee craves liberty to add, alter, amend or substitute or withdraw any of the ground(s) of appeal hereinabove contained.” 3. Succinct facts are that assessee before us is a firm and engaged in doing business of Contractor, Developers, Architecture and Civil construction and had embarked on a three project. First being "Manorathum Bunglows", Near GEB Substation, Bharuch, consisting of 60 Bunglows, which commenced its` activates on 02/05/2008. The second project is "Maha Mangaliya Residency" at Zadeshwar, Bharuch consisting of 192 flats and 32 Pent Houses, commenced its activities on 01/01/2010 while the third project is "Mangaliya Bunglow" at Chavaj, Bharuch consisting of 176 Bunglows, commenced its activity in the year under consideration on 01/10/2011. A survey action was conducted on the assessee on 20.10.2010. In the course of scrutiny, the Assessing Officer noted that there are two agreements made with the buyer of flats. One is a FSI-Sale for which "Sale Deed" is made, which is in respect of construction of Beam, Column slab, while the other is a “Construction Agreement” in regards to construction of other accessories. During the year under consideration, the assessee has shown total sale of Rs.9,25,00,000/-, the break up as regards sale agreement and Construction agreement in respect of each flat and pent houses reflected in total sales is as under: Page | 3 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims 4. On perusal of the profit and loss account, it was observed by Assessing Officer that assessee has credited a sum of Rs.328.68 lakhs on “Sale of flats”, while an amount of Rs.166.74 lakhs has been credited on account of “Construction Income”. As such during the year under consideration, the assessee had shown total gross receipts on this account of Rs.495.42 lakhs. The gross profit declared is Rs.86.34 lakhs, which works out to 13.92% and the Net profit declared which is Rs.60.92 lakhs i.e. 9.82% of the gross receipts. However, during the relevant financial year, a Survey action was conducted on 28/10/2010 at the office premises and business premise of M/s Mega Aims (assessee). In the course of survey, on verification of cash book of both the project, negative balance was observed accordingly, in the voluntary statement recorded of the main partner being Shri Manishbhai M Patel, as per question, the assessee was asked to clarify as under: “During the course of survey, cash book of Manoratham Division from the period 01.10.2010 to 22.10.2010 has been found in which negative balance of Rs.23,68,431.38 shown and cash book of Mahamangalaya for the period 1.10.2010 to 25.10.2010 has been found in which negative balance of Rs.45,37,120/- is shown. Please explain.” 5. To which assessee has replied as under: "At present I am unable to explain the reason of negative balance in cash book in both the cases. I declare Rs.69,05,551/- being negative cash balance as my undisclosed income for the current Financial Year. This may be considered as Rs.70,00,000/-" 6. Further in reply to Q. No.9, in regards, to advance tax payment, it was stated by assessee, as follows: “At present we have undertaken two schemes Manoratham and Mahamangalya Residency. In case of scheme of Manoratham we expect to complete 36 Duplex on which estimated profit would be 1.27 crore and in the case of scheme of Mahamangalaya Residency we expect to complete 64 flats on which estimated profit would be 1.28 crore. We will make payment of Advance tax on the dates falling due. I further state as under: (1) Disclosed Income- Rs.0.70 lacs. (2) Estimated Profit for the current F.Y Rs.2.55 crore Total Income for the current F.Y- Rs.3.25 crore I will pay advance tax for the current F. Y on the dates of advance tax” Page | 4 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims 7. However, on perusal of the return of Income it was noted by Assessing Officer that the total income declared by the assessee was Rs.1,43,93,510/-, after excluding payment of Remuneration of Rs.12,00,000/- and Interest of Rs.9,04,249/- paid to partners, as against income declared of Rs.3,25,00,000/-. Therefore, there is a shortfall in income, in view of the disclosure made at the time of survey. Accordingly, assesse was asked to clarify the same, to which vide his submission dated 4/03/2014, it was contended that: “We would like to draw your attention to the fact that we have made disclosure of estimated profit on estimated sales. In the scheme of Manoratham we estimated that 36 tenaments would be sold but actually only 30 tenaments have been sold, therefore amount of profit disclosed is reduced to Rs.1,05,83,333.40 from Rs.1,27,00,000/- however profit per unit is same as what we have declared during the course of survey proceedings i.e. Rs.3,52,777.78/- per unit. In the scheme of Mahmangalaya, we have estimated that 64 units would be sold whereas only 49 units have been sold, therefore amount of profit disclosed is reduced to Rs.98,00,000/- from Rs.1,28,00,000/- however profit per unit is same as what we have declared during the course of survey proceedings i.e. Rs.2,00,00,000/- per unit. Because of the facts narrated above, there is a difference of Rs.51,16,666.60 between estimated profit which was declared during the course of survey proceedings and actual profit earned which is because of lesser no of units sold then what we have estimated. Please find attached herewith, detailed statement of computation for your ready reference." 8. From the above contention of the assessee, it was observed by Assessing Officer that the fall in profit (Net Profit) declared is only on account of fall in sale of no of units as against estimated during the course of survey. However it is pertinent to note that during the course of survey what was estimated was completion and not sale of Flats/tenements. Further it is to be noted that in respect of “Mahamangalaya Residency” the estimated profit was Rs.128.00 lakhs on completion/sale of 64 units/flats, and the estimated sale price of each flat was stated by the partner to be Rs.14.5 lakhs. As such the total estimated sale consideration was to the tune of Rs.928.00 lakhs (14.5 x 64), on which the estimated profit declared by the assessee was Rs.128.00 lakhs, on which assessee had agreed to pay advance tax, accordingly the profit i.e. net profit works out to 13.79%. However, it is seen that assessee has declared net profit of Page | 5 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims Rs.92,72,364/- on sale of Rs.925.00 lakhs, which works out to 10.02% only. As such there is a shortfall of Net profit declared of 3.77 % (13.79 - 10.02), i.e. a short fall of Rs.34,83,386/-. Accordingly, a show cause notice was issued on 07/03/2014, where in assessee was asked to explain as under: “During the course of survey an amount of Rs.128.00 lakhs was declared as profit (net profit on which advance tax was agreed to be paid) in respect of Mahamangalaya Residency however it is seen on perusal of the P & L a/c, (that only Rs.92,72,364/- has been declared. When confronted vide your letter dtd.4/03/2014, you have stated that the same is on account of fall in actual sale in flats of only 49 units as against estimated sale of 64 units at the time of survey. However, it is to be seen that during the course of survey you had stated that the sale price of each flat is Rs.14.5 lakhs, as such the estimated sale would be of Rs.928.00 lakhs (14.5 x 64) on which the profit estimated by you was Rs.128.00 lakhs, which works out to 13.79%. However, in the P& L a/c, sales is shown of Rs.925.00 lakhs on which profit is offered of Rs.92,72,364/- only, which works out to 10.02%. As such there is a shortfall of 3.77% in the profit declared on sales in the return of Income filed by you, as against percentile profit estimated at the time of survey. In view of this there is a suppression of profit to the tune of Rs.34,83,386/-(3.77% of Rs.925.00 lakhs). You are therefore show caused as to why an amount of Rs.34,83,386/- be not added to total income, on account of suppression of profit relating to 'Mahamangalaya Residency.” 9. In response to the show cause notice, the assessee has submitted its reply which is reproduced below: “With the captioned subject and reference, hereunder submissions are made in respect of proposed additions in respect of scheme of Malta Mangalya and Manorathum. We would like to inform your goodness that we have gone through the contents of the referred show cause notice and methodology of computation of amount of profit. We do not accept the contention and methodology of computation of amount of profit as discussed during the course of hearing and basis of proposed addition in the shown cause notice. Please note that no. of units sold is lesser than what we have declared in the statement recorded during the course of survey proceedings carried out at our business premises. Detailed computation of no. of units sold and profit arrived have already been submitted to your good office. Page | 6 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims We request your goodness to kindly accept the return of income filed on the basis of submissions made to your good office from time to time during the course of hearing. We would like to further state that amount of profit declared in the return of income after charging partner interest and partner remuneration. Therefore, it cannot be concluded that we have shown lesser amount of profit then what we have declared in the statement recorded during the course of survey proceedings carried out at our business premises.” 10. However, the Assessing Officer rejected the contention of the assessee and observed that the profit declared in the return of income is after charging partners’ interest and remuneration. However, it is pertinent to note that during the course of survey assessee's status was a firm, and was aware of the fact that estimated profit so declared would be after considering all the aspects or heads of expenses, including that of Interest and Remuneration. The same is amply clear since in the voluntary statement it has been spelled out in clear terms that on the estimated profit of Rs.128.00 lakhs that advance tax would be paid by the assessee. Since the assessee is a firm, assessee would have stated clearly that on the estimated profit from the project and after excluding the remuneration and interest, on the balance figure would be paying advance tax. But it could be seen that there is no such statement made by the partner of the firm in his voluntary statement. As such the contention put forth now is an afterthought. The Assessing Officer observed that assessee's attempt to wriggle out of the situation now caught on account of the observation made by the Assessing Officer as regards to supersession of profit could be well understood from the fact that in fact at the time of survey the estimated profit declared was on basis of estimated number of units to be completed, however assessee has declared less receipts by contending that there has been less sale than estimated at the time of survey. But this was not what the assessee had intended or contended during survey, and had offered profit in clear terms on completion of 64 units and not on sale of same. Therefore, based on these facts, the AO noted that assessee has indulged into suppression of profit as compared to what he had declared in the course of survey proceedings. Accordingly, a sum of Rs.34,83,386/- was Page | 7 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims added to total income on account of suppression of profit relating to 'Mahmangalaya Project'. 11. In respect of fall in net profit percentage of “Manoratham Project” the assessing officer noted that in the 'Manoratham' Project assessee had ventured into construction of 60 Bunglows, however assessee did not own the land. Accordingly, he had contracted two agreements, one in regards to sale of land, and other in respect of construction thereon. The sale receipts in respect of only construction activity was credited into assessee's account, while receipts received regarding sale of land was credited into account of the land owner. The total receipts credited under 'Manoratam' project was Rs.9,25,68,044/-. Further it was noted that assessee had also credited P & L a/c by an amount of Rs.2,99,31,093/- and Rs.63,36,951/- on account of 'Construction of Hotel' and on account of 'Extra Work'. As such the actual receipt on account of 'Manoratham' project was Rs.563.00 lakhs. It was contended during the course of scrutiny hearing vide letter dtd.28/02/2014, that, the profit earned on construction of Hotel and extra work carried out was approximately 3%, which works out to Rs.8,97,933/- & Rs.1,90,109/- respectively totaling to Rs.10,88,042/-. The total profit declared by the assessee against 'Manoratham' project including that of Hotel and extra work was Rs.50,78,645/-. As such the actual profit on sale of Bunglows was to the tune of Rs.39,90,604/- (50,78,645/- - 10,88,042/-), which works out to 7.09% (39,90,603 x 100 / 5,63,00,000). However as pointed out above, that during the course of survey it was stated in the voluntary statement recorded of the partners, that there would be estimated 36 Bunglows completed, on which estimated profit would be Rs.127.00 lakhs. It has been contended now that against the estimated sale of 36 Bunglows there has been sale of only 30 Bunglows, as such there is a fall in profit declared in the return of income as against declared during the course of survey proceedings. It was noted by the Assessing Officer that the project consists of three types of bunglow being A -Type, A A-Type and AAA- Type. The number of each type of bunglow, average sale price excluding land price, and the estimated total sales is as under: Page | 8 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims S. No. Type No. of units Average cost of each unit TOTAL 1 A- Type 47 19.5 916.50 2 A A- Type 10 20 200.00 3 A A A - Type 3 23.5 70.50 TOTAL 60 1187.00 From the above table, the AO noted that the total estimated sale consideration on 60-units would be Rs. 1187.00 lakhs, i.e. at an average of Rs.19,78,333/- per unit (1187.00/ 60), and that the total sale consideration on 36- units would work out to Rs.712.20 lakhs. The assessee had estimated of Rs.127.00 lakhs on the same which works out to 17.83%. However, as stated above, assessee has declared net profit of 7.09%. As such there is a shortfall of Net profit declared of 10.74 % (17.83 - 7.09), i.e. a short fall of Rs.60,46,020/-. Accordingly a show cause notice was issued to the assessee on 07/03/2014, as under: "5 Similarly as regards 'Monotathnam' project, you have stated that the shortfall in profit, is on account of fall in actual sale in units of only 30 units as against estimated sale of 36 units at the time of survey. However it is to be seen that during the course of survey based on the statement recorded the sale price of each bunglow is worked out as under: S.No Type No. of units Average cost of each unit TOTAL 1 A- Type 47 19.5 916.50 2 A A- Type 10 20 200.00 3 A A A- Type 3 23.5 70.50 TOTAL 60 1187.00 7. From the above it could be seen that the total estimated sale consideration on 60-units would be Rs.1187.00 lakhs, i.e at an average of Rs.19,78,333/- per unit (1187.00/60), as such the estimated sale would be of Rs.712.20 lakhs (1978333/- x 36) on which the profit estimated by you was Rs.127.00 lakhs, which works out to 17.83%. However, in the P & L a/c, sales is shown Rs.5,63,00,000/- on which profit is offered of Rs.39,90,604/- (50,78,645/- - 10,88,042/-), which works out to 7.09% (3990603 x 100/56300000). As such there is a shortfall 10.74 % (17.83 - 7.09), i.e. a shortfall of Rs.60,46,620/- (10.74% x 563.00 lakhs). In view of this there is a suppression of profit to the tune of Rs.60,46,620/-. 8. You are therefore show caused as to why an amount of Rs.60,46,620/- be not added to total income, on account of suppression of profit relating to 'Manorathnam' project.” Page | 9 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims 12. In response to this notice, the assessee submitted its reply on 20.03.2014. However, Assessing Officer rejected the contention of the assessee and held that the main contention is that the profit declared in the return of income is after charging partners’ interest and remuneration. However, the same is not acceptable. In view of the ongoing discussion and observation, making it very clear, that the assessee has indulged into suppression of profit as compared to what he had declared in the course of survey proceedings. Accordingly, a sum of Rs.60,46,620/- was added to total income on account of suppression of profit relating to ‘Manorathnam’ Project. 13. Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the action of the Assessing Officer.Aggrieved by the order of ld. CIT(A), the assessee is in further appeal before us. 14. Shri P. M. Jagasheth, Ld. Counsel for the assessee, submitted before the Bench that during the survey proceedings, the assessee has declared the estimated profit only for the purpose of payment of advance tax. Such estimation should not be treated as a final figure to pay the taxes. Besides, in the statement recorded, the assessee has clearly mentioned that he would pay advance tax based on estimation, however the Assessing Officer has treated such estimation as if, it is a final amount to pay tax liability at the end of the year, which was wrong. Thus, the entire addition was based on estimation, which is not tenable. 15. Shri Jagasheth, also pointed out that during the survey proceedings, statement was taken on oath. Such statement on oath, during the survey proceedings is not permitted, therefore, addition made by the assessing officer should be deleted. 16. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. Page | 10 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims 17. We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. A survey action under section 133A of the Act was conducted in the case of assessee-firm on 28/10/2010. The statement of the main partner of the assessee firm i.e. Shri Manishbhai M. Patel was recorded and in response to query no. 9, in respect of payment of Advance Tax he clearly and without any pressure stated that the assessee-firm had undertaken two schemes i.e. Manoratham and Mahamangalya Residency. Shri Manishbhai M. Patel in his statement as recorded at the time of survey action stated that in the case of scheme of Manoratham, the assessee firm expected to complete 36 Duplex on which the estimated profit would be Rs.1.27 crore and in the case of scheme of Mahamangalya Residency, the firm expected to complete 64 Flats on which estimated profit would be Rs.1.28 crore. Shri Manishbhai M. Patel promised the survey party that the assessee-firm will make payment of Advance tax on the dates which will be falling due. Shri Manishbhai M. Patel disclosed the income of Rs.70,00,000/- and also disclosed the estimated profit of Rs.2.55 crores total of which was coming to Rs.3.25 crores ( 1.28+1.27+0.70) for the current year i.e. for the year under consideration. Shri Manishbhai M. Patel promised the survey team to make Advance Tax for the current Financial Year on the due dates. Since the assessee -firm was builder and was engaged in construction activities of the residential building and therefore it had made the above disclosure on the basis of completion method. The assessee in the return of income has shown the profit which is less than what was declared by the partner of the firm in the statement recorded and thus the assessing officer observed that assessee has not offered and declared the profit in the return of income, as per statement recorded in survey proceedings therefore assessing officer made two additions Viz: Rs.34,83,386/- on account of suppression of Page | 11 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims profit relating to 'Mahmangalaya Project' and Rs.60,46,620/- on account of suppression of profit relating to ‘Manorathnam’ Project. 18. We find merit in the submission of ld Counsel, as he pointed out that profit as per declaration made in survey by Shri Manishbhai M. Patel on behalf of the assessee firm could not be shown in the return of income as the actual sales of tenaments/units were less than what were expected at the time of survey action. It is the main partner of the assessee who had worked out the estimated profit in respect of above two projects and had promised to pay the Advance Tax on such estimated profit. Thus, at the time of survey the estimated profit declared was on the basis of estimated number of tenaments/units to be completed. The assessee in its return of income filed for the year under consideration has declared less receipts/profit, as there was less sale of tenaments/units than what was estimated. 19. We note that in the return of income, the assessee has declared actual profit/income earned by him, which is based on audited books of accounts. Hence, we are of the view that statement on oath u/s 133A of the Act in these circumstances of the case could not be relied upon. The ld Counsel has further stated that there is no power vested in the assessing authorities to record a statement on oath in the course of survey proceedings and therefore the statement so recorded do not have any evidentiary value unless corroborated by other evidences. Thus, we note that addition was made by the assessing officer based on the statement and in such statement only estimated profit for the purpose of payment of advance tax, has been predicted. Hence, based on such predication by the assessee, final tax liability should not be determined, therefore addition made by the assessing officer, deserves to be deleted. 20. Quite clearly, the income offered at the time of survey was on an estimate basis, which cannot be disputed by the Revenue. The manner in which assessee proceeded to offer the income at the time of survey, on an estimate basis, to pay advance tax, has already been reproduced by us in the earlier part of this order. Page | 12 ITA 25/SRT/2017/AY.2011-12 M/s. Mega Aims We note that after survey the assessee filed his return of income wherein audited net income was declared by him. Notably, the return of income was accompanied by the statement of total income, including the audited Balance- sheet and Auditors report. When assessee was show-caused during the assessment proceedings, assessee explained the basis on which the income was drawn-up at the time of filing of return of income and assessee also explained the reasons for the difference between the income offered at the time of survey and that declared in the return of income. Taking into consideration the above facts and circumstances, we note that tax liability should not be imposed based on estimation and predication made by the assessee, verbally in survey statement, for the purpose of payment of advance tax only, without referring the audited books of accounts. Therefore, we delete the addition made by the assessing officer. 21. In the result, appeal filed by the assessee is allowed. Order is pronounced on 30/03/2023 by placing result on notice board. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat Ǒदनांक/ Date: 30/03/2023 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat