Full Judgment
K. Raviraja Pandian, J.
1. The appeals are filed against the order of the Income-tax Appellate Tribunal, Madras 'B' Bench, dated January 12, 2007, made in I.T.SS. A. Nos. 87/Mds/2005 and 98/Mds/2005 for the assessment year April 1, 1990, to September 26, 2000 (block period). The substantial questions of law formulated for entertainment of the appeals are as follows:
1. Whether the Tribunal is correct in law in concluding that the expenses incurred were illegal, not allowable in spite of the admitted position of such expenses incurred in order to complete the construction process including the provision for amenities such as electricity, water connection, sewerage, etc., which are essential and not against public purpose could not be termed as illegal ?
2. Whether the Tribunal is correct in law in rejecting the claim of the appellant on the inclusion of unaccounted portion to the extent of Rs. 27,29,500, in the offer of Rs. 40 lakhs in the block return especially in the context of the seized materials identifying the expenses to the extent of Rs. 67,79,900 ?
3. Whether the Tribunal is correct in law in concluding that the expenses incurred were illegal, camouflaged as labour/construction expenses in spite of the contradictory evidence available in the seized records especially in the light of the definition of undisclosed income in Section 158B(b) of the Act?
2. The facts of the case are as follows:
3. The assessees is engaged in the construction of residential flats at Bangalore. There was a search under Section 132 on September 26, 2000, at the assessee's business premises and the residence of the senior partner at Chennai. The search revealed that the assessees received unaccounted money towards the sale of flats in Krishnanagar projects apart from certain illegal payments such as bribes debited as construction expenses, which are disallowable against gross receipts. Certain unexplained investments in the property made by the senior partner were also detected. During the course of search, cash of Rs. 2.10 lakhs was found in excess of cash balance recorded in the books. During the enquiry, it was found that a sum of Rs. 93,23,261 was received from the flat owners on various dates towards various expenses involving additional amount paid for acquisition of land and extra amenities provided in the flats. Out of these certain amounts had already been accounted for in the earlier years' books of account leaving a balance of Rs. 39,68,999 and towards this the assessee offered a sum of Rs. 40 lakhs as undisclosed income. However, the Assessing Officer after considering the assessee's explanation and evidences proceeded to estimate the cost of construction and arrived at an additional sum of Rs. 30,79,298 for the block period being illegal expenses accounted for in the books as construction expenses. The assessee carried the matter on appeal before the Commissioner of Income-tax (Appeals) who reduced the same to Rs. 15,39,501. The assessee has taken the matter on further appeal. The Revenue for its turn has questioned the correctness of the order of the Commissioner of Income-tax (Appeals) before the Tribunal. Thus, the present appeals.
4. While in the course of arguments, it is submitted by the learned Counsel appearing for the assessee that questions of law Nos. 2 and 3 do not arise for consideration in these appeals, the same is recorded.
5. With reference to the first question of law, the Tribunal has given reason that the Commissioner of Income-tax (Appeals) failed to note that the cash expenses incurred to an extent of Rs. 95,08,500 represent illegal expenditure, which are prima facie disallowable particularly, view of the fact that the quantum of inflation has been arrived at by the Assessing Officer with reference to the average cost per sq. ft. of construction. There was also no answer from the assessee's counsel before the Tribunal to contradict the fact that while accounting for the expenses, they were, camouflaged as labour expenses or other construction expenses. Further, the Tribunal has also taken into consideration the Explanation to Section 37(1) of the Income-tax Act, wherein it is stated that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. With the abovesaid reasoning, the Tribunal confirmed the addition of Rs. 30,79,298 made by the Assessing Officer towards undisclosed income for the block period being illegal expenses accounted for in the books as construction expenses. The reasoning so stated by the Tribunal is strictly in accordance with the statutory provisions. As the first question of law is framed against the statutory provision with reference to the Explanation to Section 37(1) of the Income-tax Act, the same has to be answered against the assessee.
6. For the foregoing reasons, we do not find any merit in these appeals and the same are dismissed. Consequently, the connected M.P. is closed.