2014 (5) TMI 1073 - AT - Income Tax

Tribunal Guidelines on Income Estimation & Exemptions: Unaccounted Income, Investments, & Assessments

The Tribunal directed the Assessing Officer to estimate profit at double the average net profit rate declared by the assessee, excluding disclosed ... Estimation of profit at 10% on unaccounted turnover - Held that:- In the present case, when the assessee has admittedly not produced its books of accounts before the revenue authorities, there is no option left with them but to estimate the profit of the assessee. However, profit has to be estimated applying a reasonable rate. In the present case search has taken place on 12-9-2006 i.e., in financial year 2006-07 relevant to the asst. Year 2007-08. Therefore, taking it as a base we direct the Assessing Officer to estimate the profit on unaccounted turnover at double the rate of the average net profit declared by the assessee for the asst. Year 2007-08 and the preceding two assessment years i.e., asst. year 2005-06 and 2006-07. Further, the Assessing Officer must ensure that there cannot be inclusion of disclosed turnover while estimating profit from undisclosed turnover as per the seized material. In other words, turnover already disclosed should be excluded from the unaccounted turnover. Following the decision of co-ordinate bench in case of Sri Ravinder Kumar (2013 (6) TMI 739 - ITAT HYDERABAD), we direct the Assessing Officer to allow telescoping of the unaccounted income at the hands of the partners while considering investments made by them.- Decided in favour of assessee in part Addition u/s 69C on account of unexplained purchases - Held that:- It is not disputed that the Assessing Officer himself has accepted the fact that the entries made in the loose papers represent unaccounted sales of the assessee. It is also a fact that the Assessing Officer has estimated profit on such unaccounted sales turnover. That being the case, it is not reasonable on the part of the Assessing Officer to make additions on account of unaccounted purchases on the basis of the same entries as found recorded in the seized documents. Therefore, the finding of the CIT (A) in this regard appears to be just and reasonable - Decided in favour of assessee Addition of unaccounted interest income - Held that:- Assuming for the sake of argument that the amounts mentioned by the Assessing Officer is correct, then it actually represent the sale shown on credit basis (sundry debtors) as held by the CIT (A). That being the case, no addition can be made at the hands of the assessee on account of interest on such credit sales as the sales relate to the firm “Jai Balaji Sanitary Stores and not the assessee. In the aforesaid circumstances, in our view, the addition made by the Assessing Officer has no legs to stand. - Decided in favour of assessee Addition as unexplained investment - Held that:- AR at the time of hearing before us as well in his written submission has submitted that assessee has neither purchased the land nor has paid the amount of ₹ 4,60,000/- to the persons concerned. In view of such submission, we are inclined to remit this issue to the file of the Assessing Officer to verify the claim of the assessee and decide the issue accordingly after affording a reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Entitlement to exemption u/s 54F - Held that:- It is worthwhile to note here the co-ordinate bench of this Tribunal in case of Sri M.V. Subramanyeswara Reddy and others (2014 (4) TMI 71 - ITAT HYDERABAD ) and Shyamlal Tandon vs. ITO (2014 (4) TMI 867 - ITAT HYDERABAD ) held that if the property is a residential property but used for commercial purpose the nature and character of the property would not change so as to invalidate the claim of exemption u/s 54F of the Act. Following the aforesaid view of the co-ordinate bench and considering the factual aspect of this issue, we allow the claim of the assessee u/s 54F of the Act. - Decided in favour of assessee Addition as unaccounted income - Held that:- The amount received by the assessee on the dissolution of the firm was towards contribution made by him in the partnership business. Therefore, the amount received by him being a capital invested by him earlier in the partnership business cannot be treated as income of the assessee. We therefore direct the Assessing Officer to delete the same. - Decided in favour of assessee Issues Involved:1. Estimation of profit on unaccounted turnover.2. Addition on account of unexplained purchases.3. Addition of unaccounted interest income.4. Addition of unexplained investments.5. Denial of exemption under Section 54F of the Income Tax Act.Detailed Analysis:1. Estimation of Profit on Unaccounted Turnover:The primary issue was the estimation of profit at 10% on the unaccounted turnover discovered during a search and seizure operation. The assessee contended that the loose sheets found were 'dumb documents' and not reliable for estimating sales or profits. The Assessing Officer (AO) did not accept this explanation, arguing that the loose sheets represented unaccounted sales not recorded in the regular books of accounts. The AO estimated the profit at 10% on the unaccounted turnover, which was upheld by the CIT (A). However, the Tribunal found that the estimation of profit at 10% was high and directed the AO to estimate the profit at double the average net profit rate declared by the assessee for the relevant assessment years, ensuring that disclosed turnover was excluded from the unaccounted turnover.2. Addition on Account of Unexplained Purchases:The department appealed against the deletion of additions made under Section 69C of the Act on account of unexplained purchases. The AO had worked out unaccounted purchases by reducing the gross profit from the unaccounted sales turnover. The CIT (A) deleted the addition, reasoning that the AO could not tax both the unaccounted sales and the purchases. The Tribunal upheld the CIT (A)'s decision, agreeing that taxing both sales and purchases would be unreasonable.3. Addition of Unaccounted Interest Income:The issue was the addition of unaccounted interest income based on seized documents. The AO assumed that the entries in the loose sheets represented interest income from money lending, which the assessee denied. The Tribunal found that the loose sheets did not conclusively prove money lending business and directed the deletion of the addition.4. Addition of Unexplained Investments:Several appeals involved additions for unexplained investments based on seized documents. The Tribunal directed the AO to verify the claims regarding the sources of these investments, including cash flow statements and availability of funds within the group, and to allow telescoping of unaccounted income in the hands of the partners where applicable. Specific instances included:- An agreement for the purchase of land where the assessee claimed the deal was canceled and the amount was returned.- Investments in properties where the Tribunal directed a re-examination of the source of funds and the transactions involved.5. Denial of Exemption Under Section 54F:The AO denied exemption under Section 54F, claiming the property was commercial. The assessee contended it was residential and provided plans and approvals to support this. The Tribunal found the evidence favored the assessee and allowed the exemption, noting that the nature of use (commercial or residential) did not change the character of the property for Section 54F purposes.Conclusion:The Tribunal provided detailed directions for re-assessment and verification of facts in several instances. It emphasized the need for reasonable estimation and verification of the source of investments and income, ensuring that the same income was not taxed multiple times. The Tribunal allowed part of the assessee's appeals and dismissed the department's appeals, providing relief to the assessees on several counts.