Deputy Commissioner of Income-tax, V. M/s. New Front Construction Co., Pune

ITA 753/PUN/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7148 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-11-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 21-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH JHA
• Keywords: Unexplained investment; Unexplained expenditure; Business expenditure; Revenue expenditure
• Section: 69C

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.753/PUN/2015 / ASSESSMENT YEAR : 2007-08 DCIT, CIRCLE-2, PUNE . /APPELLANT VS. M/S. NEW FRONT CONSTRUCTION COMPANY, 769/6, KSHITIJ APARTMENTS, DECCAN GYMKHANA, SHIVAJINAGAR, PUNE 411 005 PAN : AAFFN2095P . / RESPONDENT / APPELLANT BY : SHRI MUKESH JHA / RESPONDENT BY : SHRI NIKHIL PATHAK / DATE OF HEARING : 01.11.2017 / DATE OF PRONOUNCEMENT: 15.11.2017 / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER OF CIT(A)-3, PUNE DATED 08-01-2015 FOR THE A.Y. 2007-08 IN CONNECTION WITH THE PENALTY LEVIED BY THE AO U/S.271(1)(C) OF THE ACT. AO LEVIED THE PEN ALTY AMOUNTING TO RS.12,00,059/- WHICH WAS DELETED BY THE CIT(A) ON T HE GROUND OF DEBATABILITY. THEREFORE, THE REVENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. ON THE FACTS AND C I RCUMSTANCES OF THE CASE AND I N LAW , THE LD. CIT ( A ) ERRED IN DELETING THE PENALTY LEVIED BY THE ASSESSI NG OFFICER OF RS.12 ,00, 159/- U/S . 271(1)(C) OF THE I . T . ACT IN RESPECT OF UNEXPLAINED EXPENDITURE INCURRED BY THE ASSESSEE . 2. T HE LD . CIT ( A ) , WH I LE DELETING THE PENALTY , FA I LED TO APPRECIATE THAT THE ASSESSEE . HIMSELF HAD ACCEPTED I NCURRING OF UNACCOUNTED EXPENDITURE ON THE BASIS OF EV I DENCE FOUND DURING THE SU R VEY , THE SOURCE OF WH I CH COULD NOT BE EXPLA I NED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDIN GS. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT WHETHER THE UNACCO UNTED EXPENDITURE RESU L TED IN ENHANCEMENT OF THE VALUE OF ANY ASSET OR WHE THER SUCH EXPEND I TURE WAS ASSESSABLE AS SUCH U/S . 69C OR 69B WAS NOT GERMANE TO THE ISSUE OF CONCEALMENT OR FURNISHING INACCURATE PARTI CULARS OF INCOME SO LONG AS THE SOURCE OF SUCH EXPENDITURE REMAINED EXPLAINED . ITA NO. 753/PUN/2015 M/S. NEW FRONT CONSTRUCTION COMPANY 2 4. THE LD . CIT(A) FACTUALLY ERRED I N HOLDING THAT THE ENTIRE FACTS RELATING TO THE EXPEND IT URE HAVE BEEN BROUGHT ON RECORD WHEN IT I S A FACT THAT THE ASSESSEE H I MSELF HAD ADMITTED OF HAVING INCURRED EXPEND I TURE FROM UNDISCLOSED SOURCES . 5. THE LD . CIT(A) ERRED IN APPLYING THE RATIO OF THE DECISION OF THE HON'BLE SUPREME COURT I N THE CASE OF RELIANCE PETRO PRODUCTS (322 ITR 158) AND THE DECIS I ON OF THE ITAT , PUNE IN THE CASE OF HON ' BLE ITAT IN KANBAY SOFTWARE (INDIA) LTD . (122 ITR 271) EQUATING THE CLAIM OF THE ASSESSEE AS A LEGAL CLA I M WHEN THE D I SCLOSU R E OF UNEXPLAINED EXPENDITURE WAS MADE AND ASSESSED ON THE BAS I S OF EVIDENCE FOUND DURING THE SURVEY . 6. T HE APPELLANT PRAYS THAT THE ORDER OF THE ID . CIT(A) BE HELD TO BE BAD IN LAW AND QUASHED AND THAT OF THE ASSESSING OFFICER B E RESTO R ED . 2 BRIEFLY STATED RELEVANT FACTS INCLUDE THAT THE AS SESSEE IS A PROMOTER AND BUILDER. A SURVEY ACTION WAS CONDUCTED ON 27-09-20 06 AND THE SAME RESULTED IN IMPOUNDING OF CERTAIN PAPERS. THESE PAPERS INDICAT E THE UNACCOUNTED EXPENDITURE ON ACCOUNT OF PURCHASE OF RAW MATERIAL FOR CONSTRUCTION BUSINESS AND LABOUR CHARGES FOR THE SAME. COPIES OF THE SAI D PAGES ARE PLACED IN PAGES 36 AND 37 OF THE PAPER BOOK FILED BEFORE US. THE S AID UNACCOUNTED EXPENDITURE IS RELATABLE TO THE MONTHS OF APRIL AND AUGUST, 200 6, I.E. RELEVANT FOR A.Y. 2007- 08. FOR THE SAKE OF EXAMPLE, THE CONTENTS ON PAGE 36 ARE EXTRACTED AS UNDER : NFCC AUGUST MATERIAL 2,95,000/ - LABOUR 1,54,950/ - 3. SIMILAR IS THE CONTENTS ON PAGE 37 WHICH READS A S UNDER : NFCC APRIL 06 MATERIAL 4,25,7 00/ - LABOUR 2,24,35 0/ - 4. THERE IS NO DISPUTE ABOUT THE QUANTUM ADDITIONS OF THESE AMOUNTS. AO MADE REQUISITE ADDITIONS AND THE SAME ARE CONFIRMED BY THE FIRST APPELLATE AUTHORITY. BEFORE THE SECOND APPELLATE AUTHORITY, THE ASSESSEE WITHDREW THE APPEAL BEFORE THE TRIBUNAL. THUS, THE SAID ADDITIO NS ATTAINED THE FINALITY. ITA NO. 753/PUN/2015 M/S. NEW FRONT CONSTRUCTION COMPANY 3 5. AO INITIATED PENALTY PROCEEDINGS U/S.271(1)(C) O F THE ACT AND LEVIED THE PENALTY RELATING TO THE SAID ADDITIONS BASED ON THE CONTENTS OF THE SAID IMPOUNDED DOCUMENTS. 6. BEFORE US, LD. DR FOR THE REVENUE FILED A WRITTE N NOTE DATED 15-06-2017 STATING THAT ASSESSEE OFFERED ADDITIONAL INCOME OF RS.40 LAKHS ON ACCOUNT OF UNEXPLAINED EXPENDITURE BY WAY OF UNACCOUNTED RAW M ATERIALS AND LABOUR. THIS EXPENDITURE WAS INCURRED IN CASH. DURING THE ASSES SMENT PROCEEDINGS, ASSESSEE CLAIMED THAT THE SAID EXPENDITURE CONSTITUTES NOT EXPLAINED EXPENDITURE BUT AN UNEXPLAINED INVESTMENT AS THESE ITEMS OF EXPENDITU RE ULTIMATELY ARE BOOKED TO WIP ACCOUNT. THE WIP ACCOUNT CONSTITUTES A BALANCE SHEET ITEM TILL THE SAME IS CONVERTED INTO STOCK IN TRADE, AS MARKETABLE PRODUC T. HE MADE A PROPOSAL FOR MAKING AN ADDITION INVOKING THE PROVISIONS OF SECTI ON 69B OF THE ACT RELATING TO AMOUNT OF INVESTMENTS ETC. NOT FULLY DISCLOSED IN THE BOOKS OF ACCOUNT INSTEAD OF SECTION 69C RELATING TO UNEXPLAINED EXPENDITURE ETC . CANVASSING THE SAID STAND OF THE ASSESSEE THAT THESE EXPENSES ARE INCUR RED ON ACCOUNT OF PURCHASE OF RAW MATERIAL AND LABOUR CHARGES, ASSESSEE ARGUED THAT THEY CONSTITUTE AN INVESTMENT TILL THE WORKING CAPITAL IS EVENTUALLY C ONVERTED INTO STOCK IN TRADE. IN THE SAID SUBMISSIONS, LD. DR ARGUED THAT ASSESSEE B EING BUILDER AND DEVELOPER THE EXPENSES CONSTITUTES BUSINESS EXPENSES AND TH EREFORE, THE EXPENDITURE DOES NOT CONSTITUTE INVESTMENTS. THEREFORE, THE PROVISIONS OF SECTION 69B DO NOT APPLY. TO SUPPORT THE SAME, LD. DR ARGUED THAT THE SAID EXPENSES ARE NEVER CLASSIFIED BY THE ASSESSEE AS AN INVESTMENT TO FI GURE IN BOOKS AS A BALANCE SHEET ITEM. THE WORK-IN-PROGRESS ACCOUNT MAY BECOM E AN ITEM OF BALANCE SHEET EVENTUALLY AND THEREFORE, TILL SUCH TIME THE SAME I S NOT AN INVESTMENT. ACCORDING TO LD. DR, THE DEBATE RAISED BY THE ASSES SEE IS AN ARTIFICIAL AND AIMED AT GETTING RELIEF FROM THE PENALTY ON THE GROUND OF DEBATABILITY OF AN ISSUE. FURTHER, HE RELIED ON THE JUDGMENT OF HONBLE SUPRE ME COURT IN THE CASE OF CIT ITA NO. 753/PUN/2015 M/S. NEW FRONT CONSTRUCTION COMPANY 4 VS. RELIANCE PETROPRODUCTS PVT. LTD. REPORTED IN 32 2 ITR 158 (SC) AND REQUESTED FOR REVERSING THE ORDER OF THE CIT(A). 7. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE BALANCE SHEET, A COPY OF WHICH IS PLACED AT PAG E 52 OF THE PAPER BOOK AND SUBMITTED THAT THE SAID CLOSING WORK-IN-PROGRESS AM OUNTING TO RS.137,049,951.65 AS PART OF THE INVENTORY AT SCHED ULE-6 OF THE BALANCE SHEET. THE INVENTORIES ARE SHOWN UNDER THE HEADING INVEST MENTS. THIS WORK-IN- PROGRESS ALWAYS CONSTITUTES A BALANCE SHEET ITEM TI LL THE SAME ARE COVERED INTO STOCK IN TRADE. THE EXPENSES ON ACCOUNT OF RAW MAT ERIALS SUCH AS STEEL, CEMENT, BRICKS ETC., AND LABOUR EXPENSES ARE LOADED TO THE WORK-IN-PROGRESS ACCOUNT TILL THE PROJECT IS COMPLETED, IF THE PROJECT METHOD OF ACCOUNTING IS FOLLOWED OR THE PERCENTAGE OF WORK-IN-PROGRESS IS CONSIDERED AS INC OME, IF PERCENTAGE COMPLETION METHOD IS ADOPTED. IN ANY CASE, THIS KI ND OF EXPENDITURE ALTHOUGH IS REVENUE IN NATURE HAS A CAPITAL OUTLOOK TILL THE SA ME ARE CONVERTED AS STOCK IN TRADE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. AS SUCH, REVENUE ACCEPTED THE INITIAL ADMISSION DURING SURVEY ACTION AS A TAXABLE ITEM U/S.69C OF THE ACT TILL ASSESSEE REQUESTS FOR TREATING THE SAME AS TAXABLE U/S.69B OF THE ACT. 8. FACTS INCLUDE THAT THE SAID ITEMS OF EXPENDITURE , I.E. RAW MATERIAL PURCHASE AND THE LABOUR CHARGES CONSTITUTE REVENUE IN NATURE. HOWEVER, THE FACT THAT THESE EXPENDITURE LOADED TO THE WIP ACCOU NT, THE NATURE UNDERGO CHANGE AND TAKE A COLOUR OF THE CAPITAL NATURE. C ONSIDERING THE ABOVE FACTUAL MATRIX AS WELL AS THE SUBMISSIONS OF THE PARTIES, W E ARE OF THE OPINION THAT IT IS DIFFICULT TO SAY THAT EXPENDITURE IS NOT OF INVEST MENT NATURE AND THE DEBATABILITY DOES NOT EXIST SO FAR AS THE REVENUE OR CAPITAL NA TURE OF THE EXPENDITURE ITEMS. FROM THIS POINT OF VIEW, WE PERUSED THE ORDER OF TH E CIT(A) IN GENERAL AND THE CONTENTS OF PARA 3.4 ALONG WITH ITS SUB PARAGRAPHS AND FIND THAT CIT(A) HELD THAT IT IS A CASE OF UNDERREPORTING OF WORK-IN-PROGRESS IN THE BOOKS OF ACCOUNT CANNOT ITA NO. 753/PUN/2015 M/S. NEW FRONT CONSTRUCTION COMPANY 5 REALLY CALLED A REVENUE ITEM FROM THE ACCOUNTING PO INT OF VIEW TILL THE SAME ARE COVERED AS STOCK IN TRADE. RELEVANT LINES FROM THE SAID PARAGRAPH 3.4, PARA NOS. 3.4.1, 3.4.2 AND 3.5 ARE EXTRACTED AS UNDER : 3.4THE UNACCOUNTED EXPENDITURE ACCEPTED BY THE A PPELLANT TOWARDS PURCHASE AND LABOUR CHARGES CERTAINLY RESULTED IN I NCREASE IN WIP, AN ASSET MAKING THE PROVISION U/S 69B APPLICABLE WHERE THE A SSESSEE INCURS AN EXPENDITURE WHICH IS NOT RESULTING IN ANY VALUABLE ARTICLE OR THING WHEREAS IN THE PRESENT CASE THE EXPENDITURE RESULTED IN THE CREATI ON OF VALUABLE ARTICLE OR THING. 3.4.1 IN THE DECISION OF APEX COURT IN THE CASE DR . T.A. QURESHI, 287 ITR 547 RELIED UPON BY THE APPELLANT THE CONTENTION RAISED BY THE APPELLANT THAT STOCK-IN- TRADE I.E. WIP IS NOT COVERED BY THE PROVISO TO SEC TION 69C IS FOUND TO BE ACCEPTABLE. THE HON'BLE COURT HELD THAT THE EXPLANA TION IS APPLICABLE TO AN EXPENDITURE AND HEROIN WHICH WAS CONFISCATED WAS PA RT OF STOCK-IN-TRADE AND HENCE THE SAME WAS ALLOWABLE AS A DEDUCTION U/S 69. THUS TAKING INTO ACCOUNT THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND THE ISSUE INVOLVED CERTAINLY APPEARS TO BE A DEBATABLE ISSUE WHERE TWO OPINIONS ARE POSSIBLE AND IN SUCH A CIRCUMSTANCES COURTS HAVE HELD THAT WHEN THE ISSUE IS A DEBATABLE ISSUE NO PENALTY IS LEVIABLE. IN THIS CONTEXT THE APEX COURT IN THE CASE OF VEGETABLE PRODUCTS (CITED SUPRA) AND RELIED UPON BY THE APPEL LANT HAS HELD THAT NO PENALTY CAN BE LEVIED IN RESPECT OF A DEBATABLE ISSUE. THE ISSUE ALSO FINDS SUPPORT FROM THE OTHER DECISIONS RELIED UPON BY THE APPELLANT-FI RM. 3.4.2 THE APPELLANT'S CONTENTION THAT THE UNACCOUNTED PAY MENT MADE RESULTED IN INCREASE OF WIP AND HENCE NOT COVERED B Y THE PROVISIONS OF SECTION 69C MAY HAVE BEEN REJECTED BY BOTH THE AO AS WELL A S THE CIT(A), HOWEVER, IT DOES NOT MAKE OUT A CASE FOR LEVY OF PENALTY MORE S O BECAUSE THE ENTIRE FACTS HAVE BEEN BROUGHT ON RECORD WITH REGARD TO THE AFOR ESAID FACT. THE APEX COURT IN THE CASE OF RELIANCE PETRO PRODUCTS, 322 ITR 158 AL SO RELIED UPON BY THE APPELLANT HAS HELD THAT WHEN A LEGAL CLAIM MADE BY THE ASSESSEE IS NOT ACCEPTED, NO PENALTY CAN BE LEVIED. THIS VIEW HAS A LSO BEEN TAKEN BY THE HONBLE PUNE ITAT IN KANABAY SOFTWARE (INDIA) LTD., 122 ITR 721. 3.5 IN VIEW OF THE ABOVE FACTS AND RATIO OF THE JU DICIAL DECISIONS CITED SUPRA, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE PENALTY IMPOSED AND GROUNDS OF APPEAL NO. 3 TO 8 RAISED BY THE APPELLANT ARE ALLOWED. 9. ON PERUSAL OF THE ABOVE REASONING OF THE CIT(A) AND ALSO CONSIDERING THE WRITTEN SUBMISSIONS GIVEN BY THE LD. DR FOR THE REV ENUE, WE ARE OF THE OPINION THAT THE DEBATE RAISED BY THE ASSESSEE IS NOT ARTIF ICIAL IN NATURE. IT IS A FACT THAT SUCH EXPENSES WHICH IS GOING TO CREATE A WIP ACCOUN T, AN ASSET OF CAPITAL IN NATURE, TILL THE SAME ARE CONVERTED INTO STOCK IN T RADE, IS NOT FREE FROM ANY DEBATE. AS SUCH, IT IS THE CASE THAT ADDITIONAL INC OME IS DECLARED BY THE ASSESSEE ON ACCOUNT OF SUPPRESSION OF WIP ACCOUNT. IT IS NO T A SIMPLE CASE OF INCURRING OF REVENUE EXPENDITURE OUTSIDE THE BOOKS. AFTER ALL, THE PRESENT UNACCOUNTED EXPENDITURE CREATES AN ASSET IN THE FORM OF WIP ACC OUNT, WHICH IS THE SOURCE OF ITA NO. 753/PUN/2015 M/S. NEW FRONT CONSTRUCTION COMPANY 6 INCOME OF THE ASSESSEE. THE REASONING GIVEN BY THE CIT(A) APPEARS TO BE A POSSIBLE VIEW. THEREFORE, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DELETING THE PENALTY, IS FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, ALL THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 15 TH DAY OF NOVEMBER, 2017. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 15 TH NOVEMBER, 2017. / COPY OF THE ORDER FORWARDED TO : BY ORDER // TRUE COPY // //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE THE APPELLANT THE RESPONDENT THE CIT(A) - 3, PUNE CIT - 3, PUNE , , B BENCH PUNE; / GUARD FILE.