2017 (5) TMI 1741 - AT - Income Tax

Tribunal Upholds Tax Decision on 'On-Money' Profit Element

The Tribunal upheld the CIT(A)'s decision to tax only the profit element embedded in 'on-money' receipts from the sale of flats. It also supported the ... On-money receipt - material found during the course of survey is to be taxed intoto or income is to be determined by applying a specific rate of profit out of this “on-money receipt” - HELD THAT:- Survey team was well aware about this aspect and that is why net income of ₹ 15 crores was accepted as a declaration on behalf of the assessee. Had that not been in the knowledge of the Department, then the survey team would have emphasized the assessee to declare ₹ 36.53 crores. Consistently approach of the Revenue was to work out profit element embedded in those on-money receipts. Tribunal has also considered this aspect in the case of Jay Builders [2010 (9) TMI 1194 - ITAT AHMEDABAD]. Thus, there was no clinching evidence with the Department to demonstrate that gross-receipts of on-money calculated out of impounded material found during the course of survey is deserved to be considered as net profit. As far as statement of Shri Murarilal Agarwal, that statement has duly been considered by the ld.First Appellate Authority. Reply to question no.7 has been specifically dealt by the ld.CIT(A) on pages 8, 9 and 10 of the impugned order. In other words, it is a cumulative analysis of all the facts at the end of the First Appellate Authority to demonstrate that alleged calculation of gross on-money at the end of AO was not the income of the assessee. It contained certain expenditure also which are noted on those very pages and credit of those expenditure are also to be considered. Taking into consideration these aspects, books were not considered as reliable and profit element embedded in the receipts has been added. This profit has been calculated at the rate of 16%. Therefore, we do not find any error in the order of the ld.CIT(A), and first ground of appeal is rejected. Applying net profit rate at 16% - HELD THAT:- As applied at the rate of 42%. We find that this rate has been applied by the ld.CIT(A) after taking into consideration comparable cases of eight assessees. Specific example has been given on page no.16 of the impugned order. Thus, in our opinion, the ld.CIT(A) has exercised his discretion after taking into consideration various other factors. Disallowance u/s 40A - HELD THAT:- Once income of the assessee has been estimated after rejection of the books of accounts, there cannot be other disallowance specifically under section 40A(2), 40A(3) etc. We do not find any error in the observation of the ld.CIT(A) in this regard. Therefore, this ground of appeal is also rejected. Profit from unaccounted business on the money attributable to the sale of flats during the year - According to the CIT(A), the income of the assessee would be assessed on the method of accountancy followed by the assessee and the revenue would be recoginised in the year in which the sales have been made by the assessee - HELD THAT:- After taking into consideration finding of the ld.CIT(A), we do not find any error because the assessee itself has offered an income of ₹ 15 crores in different years and recognized this income on sale of flats. In this year, the project was not completed. It was under construction, therefore, it cannot be said that the income has accrued to the assessee. In a given case, booking of flats may be canceled, advance taken by the assessee including on-money could be returned, therefore, the ld.CIT(A) has took a view in right perspective. We do not find any error in the finding of the ld.CIT(A) on this issue. Addition of investment added u/s 69/69C and u/s 68 - HELD THAT:- Once the receipts are accounted, expenditure cannot be added. The source of expenditure is on-money receipts. Out of the on-money receipts, the income would be assessed in the year when the flats would be sold. Similarly, the ld.CIT(A) has observed that ₹ 36.49 lakhs cannot be considered as cash credit because the assessee has already explained that these are on-money receipts. The assessee has also identified flat numbers against which such amounts have been received. CIT(A) has entertained additional evidence in violation of Rule, 46A of the Income Tax Rules - AO was not provided an opportunity of hearing on this issue - income of the assessee embedded in on-money receipts is to be estimated, then this should be estimated at the rate of 42% and not at the rate of 16.25% as done by the ld.CIT(A) - HELD THAT:- CIT(A) has not entertained any additional evidence, rather reappreciated existing material available on the file of the AO. Thus, there is no force in such ground. We find that the ld.CIT(A) has adopted rates after taking into consideration relevant material and comparable cases. The ld.CIT(A) made reference to eight comparable cases before adopting percentage of 16% required to be applied on on-money receipts. Similarly, thereafter, the ld.CIT(A) made reference to order of the ITAT in different cases. Thus, we are of the view that the ld.CIT(A) has appreciated the facts and circumstances in right perspective and has applied pragmatic rate of profit on-money receipts. We do not find any merit in these grounds of appeal. They are rejected. Unexplained investment plus expenditure - HELD THAT:- The assessee has pointed out that entry of ₹ 1,14,12,000/- in the Asstt.Year 2009-10 has been made twice by the AO in table no.3 on page 36-38 of the assessment order. This aspect has been appraised from the seized material also. CIT(A) has considered it an error at the end of the AO. No material was brought to our notice pointing out as to how the ld.CIT(A) has erred in construing this figure. Therefore, after going through the order of the ld.CIT(A), we do not see any error in it. As far assessment of income from the on-money receipt is concerned, we have already adjudicated this issue in the Asstt.Year 2008-09, wherein we have upheld the finding of the ld.CIT(A) that gross-receipt of on-money cannot be taxed. Only income part embedded on this receipt is to be taxed. In view of our finding in the Asstt.Year 2008-09, we do not find any merit in other alternative arguments of the Revenue. Addition u/s 68 - share application money received during the F.Y.2007-08 that is relevant to Asstt.Year 2008-09 - AO treated this amount as unexplained cash credit and made addition - CIT(A) has deleted the addition on the ground that perusal of ledger account as well as bank account statement would indicate that these amounts have been received by the assessee in the accounting year relevant to A.Y.2008-09 and cannot be taxed in the Asstt.Year 2009-10 - HELD THAT:- Since this amount has not been received in this year and is not taxable in this year, therefore, the ld.CIT(A) has rightly deleted the addition. Issues Involved:1. Deletion of addition on account of 'on-money' receipt from the sale of flats.2. Exclusion of a specific amount from the total 'on-money' calculated by the AO.3. Application of net profit rate to determine unaccounted profit.4. Non-application of Section 40A(3) of the Act in respect of expenditure incurred.5. Admission of additional evidence without giving the AO an opportunity to respond.6. Recognition of income on an accrual basis.7. Deletion of additions under sections 68/69/69C of the Income Tax Act.Detailed Analysis:1. Deletion of Addition on Account of 'On-Money' Receipt from Sale of Flats:The core issue was whether the 'on-money receipt' should be taxed in its entirety or if only the profit element should be considered. The Tribunal upheld the CIT(A)'s decision that only the profit element embedded in the 'on-money' should be taxed. The CIT(A) referred to similar cases where only the net profit from such receipts was taxed, citing multiple judicial precedents to support this view. The Tribunal found no error in this approach and rejected the Revenue's appeal.2. Exclusion of a Specific Amount from the Total 'On-Money' Calculated by the AO:The CIT(A) excluded Rs. 61 lakhs from the total 'on-money' receipts calculated by the AO, noting that the correct price indicated in the impounded loose paper was not considered. The Tribunal found that the Department could not demonstrate any mistake in the CIT(A)'s finding and upheld the exclusion.3. Application of Net Profit Rate to Determine Unaccounted Profit:The CIT(A) applied a 16% net profit rate to the 'on-money' receipts, considering comparable cases and judicial precedents. The Revenue's contention that a 42% rate should be applied was rejected. The Tribunal agreed with the CIT(A)'s pragmatic approach and found no merit in the Revenue's argument.4. Non-Application of Section 40A(3) of the Act in Respect of Expenditure Incurred:The Tribunal upheld the CIT(A)'s observation that once the income is estimated after rejecting the books of accounts, specific disallowances under Section 40A(3) cannot be made. This ground of appeal was rejected.5. Admission of Additional Evidence Without Giving the AO an Opportunity to Respond:The Tribunal found that the CIT(A) did not admit any additional evidence but reappreciated the seized material. The assessee's submissions were based on the impounded material already considered by the AO. Thus, there was no violation of Rule 46A, and these grounds of appeal were rejected.6. Recognition of Income on an Accrual Basis:The CIT(A) accepted the assessee's method of accounting, where income from construction activity is recognized upon the sale of flats. The Tribunal found no error in this approach, noting that the AO had accepted this method in other assessment years. The income was to be recognized in the year of sale, not on a receipt basis.7. Deletion of Additions Under Sections 68/69/69C of the Income Tax Act:The CIT(A) deleted the addition of Rs. 88,29,000, which included investments and unexplained cash credits, noting that the source of these investments was the 'on-money' receipts. The Tribunal upheld this finding, agreeing that the nature and source of the investments were satisfactorily explained. Similarly, the deletion of Rs. 5,37,50,000 added under Section 68 was upheld, as the amount was received in a different assessment year.Conclusion:The Tribunal dismissed the Revenue's appeals and the assessee's cross-objections, upholding the CIT(A)'s decisions on all issues. The order emphasized the need for a pragmatic approach in assessing unaccounted income and the importance of considering the method of accounting consistently followed by the assessee.