2016 (6) TMI 883 - AT - Income Tax

Tribunal Rules on Income Tax Act Sections 69C, 68, and Capital Gains

The Tribunal ruled in favor of the assessee, holding that the addition of unexplained expenditure under Section 69C of the Income Tax Act was not ... Presumptive taxation under section 44AD - Unexplained expenditure under section 69C - Unexplained cash credits under section 68 - burden to prove genuineness and creditworthiness - Obligation to maintain books when claiming profits below presumptive rate (section 44AD(5))Presumptive taxation under section 44AD - Unexplained expenditure under section 69C - Obligation to maintain books when claiming profits below presumptive rate (section 44AD(5)) - Whether an addition under section 69C can be sustained when the assessee's business income is assessed under the presumptive scheme of section 44AD. - HELD THAT: - The Tribunal held that section 44AD deems a percentage of gross receipts to be income for tax purposes and, conversely, deem the remainder as expenditure only for assessment purposes; that deeming is not a finding of actual expenditure incurred. An assessee assessed under section 44AD is not obliged to maintain books unless he claims profits lower than the deemed rate, in which case section 44AD(5) imposes the requirement to maintain books and get them audited. In the present case the Assessing Officer accepted gross receipts and computed income at the presumptive rate but nonetheless proceeded to treat 92% of receipts as actual expenditure and required the assessee to substantiate it, thereafter making addition under section 69C. The Tribunal found this premise flawed: where income is assessed on a presumptive basis, the Assessing Officer cannot convert the deemed expenditure into an actual expenditure and then invoke section 69C without first excluding the case from the presumptive scheme by independent findings. No such exercise was undertaken here. Reliance on decisions turning on incorrect recording of turnover was distinguished on facts. The Tribunal therefore allowed the ground and quashed the addition under section 69C. [Paras 14, 15, 16, 17, 18]Addition under section 69C sustained on the basis of treating presumptive expenditure as actual was set aside; ground allowed in favour of the assessee.Unexplained cash credits under section 68 - burden to prove genuineness and creditworthiness - Whether credits of Rs.50,000 each in the assessee's bank account were to be treated as unexplained cash credits under section 68. - HELD THAT: - The assessee produced a confirmation claiming the amounts were loan repayments from a third party, giving the donor's PAN and a stated relationship. The Assessing Officer called for corroborative evidence and the CIT(A) noted the confirmation was undated and uncorroborated. The Tribunal found no infirmity in the appellate findings: in the face of a close relationship and the Assessing Officer's request for supporting documents, the assessee failed to discharge the onus to prove the genuineness of the transaction and the creditworthiness of the alleged creditor. [Paras 21, 22, 23, 24, 25]Addition under section 68 was confirmed; ground dismissed.Capital gains - proof of cost of acquisition and cost of construction - Whether the Assessing Officer correctly taxed the entire sale proceeds as long term capital gains by treating cost of acquisition and cost of construction as nil. - HELD THAT: - The Tribunal noted that the Assessing Officer taxed the entire sale proceeds without giving any benefit for cost of acquisition or construction. The office order of the housing authority establishing transfer from the earlier allottee was treated as equivalent to a transfer document establishing title, though it did not disclose the purchase consideration. The assessee asserted payments by cheque for acquisition and produced completion certificate and compounding/penalty receipts to show construction. The Tribunal observed that the Assessing Officer had earlier accepted cost of construction in the assessments of the relevant years and therefore could not now treat those amounts as nil. The Tribunal directed that the assessee be given an opportunity to produce evidence of purchase consideration and directed the Assessing Officer to allow the benefit of acquisition cost if proved, and to consider cost of construction at Rs.24 lakhs (accepted earlier) while computing capital gains. [Paras 31, 32, 33, 34, 35]Addition treated as undisclosed capital gain was set aside to the extent the assessee can establish cost of acquisition; Assessing Officer directed to allow proved acquisition cost and to consider accepted construction cost while recomputing capital gains.Final Conclusion: Both appeals were partly allowed: additions under section 69C were set aside in respect of assessments made under presumptive taxation (section 44AD); the addition under section 68 was confirmed for lack of corroboration; the capital gains addition was directed to be recomputed after permitting the assessee to produce evidence of acquisition cost and by allowing the construction costs already accepted in earlier assessments. Issues Involved:1. Addition of unexplained expenditure under Section 69C of the Income Tax Act, 1961.2. Addition of unexplained cash credits under Section 68 of the Income Tax Act, 1961.3. Addition of undisclosed capital gains.Detailed Analysis:1. Addition of Unexplained Expenditure under Section 69C:The assessee, a civil contractor, declared profits under Section 44AD of the Income Tax Act, 1961, amounting to Rs. 3,02,050 against gross receipts of Rs. 37,75,444. The Assessing Officer inferred that the assessee incurred expenses of Rs. 34,73,394 but observed a discrepancy with the cash flow statement showing Rs. 18,49,264. The assessee explained that Rs. 16,24,130 was paid from the bank account not reflected in the cash flow statement. The Assessing Officer added Rs. 32,24,130 as unexplained expenditure under Section 69C due to lack of documentary evidence.The CIT (Appeals) upheld the addition, stating the assessee failed to substantiate that the payments were related to the contract business. The assessee argued that under presumptive taxation (Section 44AD), the Assessing Officer cannot disturb the declared profits. The Tribunal noted that Section 44AD deems 8% of gross receipts as income, implying the remaining 92% as deemed expenditure. The Tribunal held that the Assessing Officer cannot make additions under Section 69C based on deemed expenditure without doubting the gross receipts. Therefore, the addition under Section 69C was not justified, and the ground was allowed in favor of the assessee.2. Addition of Unexplained Cash Credits under Section 68:The assessee had Rs. 50,000 credited twice in his bank account, claimed as a loan received back. The Assessing Officer added Rs. 1,00,000 under Section 68 due to lack of corroborative evidence. The CIT (Appeals) dismissed the assessee's appeal, noting the confirmation was undated and lacked supporting documents despite the close relationship between the assessee and the lender.The Tribunal upheld the CIT (Appeals)'s decision, stating the assessee failed to discharge the onus of proving the genuineness and creditworthiness of the transaction. Thus, the addition of Rs. 1,00,000 as unexplained cash credits was justified, and the ground was dismissed.3. Addition of Undisclosed Capital Gains:The assessee declared Long Term Capital Gain on the sale of a property but failed to provide documentary evidence for the cost of acquisition and improvement. The Assessing Officer considered the cost of acquisition and improvement as nil and taxed the entire sale proceeds of Rs. 40,00,000 as Long Term Capital Gain, adding Rs. 39,87,148 as undisclosed income.The CIT (Appeals) upheld the addition, noting the assessee failed to provide primary facts and corroborative evidence. The Tribunal observed that some value for the cost of acquisition must be given, directing the Assessing Officer to allow the assessee to produce evidence and give the resultant benefit of the cost of acquisition as per law. Regarding the cost of construction, the Tribunal noted that the Assessing Officer had accepted the costs in previous assessment years and directed to consider Rs. 24,00,000 as cost of construction while computing the capital gain. Thus, the addition for undisclosed capital gains was partly allowed in favor of the assessee.Conclusion:The appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the issues of unexplained expenditure and undisclosed capital gains, while upholding the addition of unexplained cash credits.