2018 (7) TMI 1814 - AT - Income Tax

ITAT directs quantification of undisclosed income based on incriminating material

The ITAT partly allowed the appeal, directing the AO to restrict the quantification of undisclosed income to the extent of incriminating material found ... Undisclosed income - Addition on money received on sale of flats - method of accounting of the project - Held that:- In the case of Runwal Homes Pvt Ltd (2017 (12) TMI 1216 - ITAT MUMBAI), we are of the considered view that the AO was erred in quantifying undisclosed income by taking average rate of ₹ 21,400 per sq.ft. and applying such rate to 21 flats without any evidence found as a result of search. Hence, direct the AO to restrict the quantification of undisclosed income to the extent of incriminating material found as a result of search. We further direct the AO to delete addition made towards on-money received from sale of flats in the impugned assessment year and make addition in the year in which the project has been completed, since the assessee is following project completion method for recognition of revenue. Hence, we set aside the issue for the limited purpose of quantification of undisclosed income on the basis of incriminating material found as a result of search and to make addition in the year in which project is complete. In the result, the appeal filed by the assessee is partly allowed, for statistical purpose. Issues Involved:1. Addition of Rs. 18,82,59,020 as alleged on-money received on the sale of flats.2. Taxation of on-money receipts under the Project Completion Method.Detailed Analysis:1. Addition of Rs. 18,82,59,020 as alleged on-money received on the sale of flats:The case involves a private limited company engaged in the business of builders and developers. The assessee filed its return of income for AY 2015-16, declaring a total income of Rs. 2,390. A search and seizure action under Section 132 of the Income-tax Act, 1961, was carried out on the Runwal group on 17-11-2014. Incriminating material found during the search revealed that the assessee sold flats at rates ranging from Rs. 32,000 to Rs. 38,000 per sq.ft., whereas the books of account showed much lesser amounts. The assessee admitted to receiving on-money from the sale of flats. Statements from various personnel, including the Managing Director, confirmed the receipt of on-money. The assessee admitted additional income of Rs. 38.06 crores, including Rs. 18,82,59,020 towards the project Runwal Elegante for AY 2015-16.The AO observed that the assessee admitted undisclosed income of Rs. 18,82,59,020 but did not disclose it in the return of income, claiming the project completion method for revenue recognition. The AO made an addition of Rs. 18,82,59,020 towards on-money received from the sale of flats. The CIT(A) upheld the AO's decision, stating that the assessee accepted the receipt of on-money and failed to admit such undisclosed income in the return without valid retraction. The CIT(A) found no merit in the assessee's argument that the admission was under coercion and that the undisclosed income should be taxed in the year of project completion.2. Taxation of on-money receipts under the Project Completion Method:The assessee argued that it follows the project completion method for revenue recognition, and on-money should be taxed in the year of project completion. The ITAT, Mumbai, in a similar case of M/s Runwal Homes Pvt Ltd, held that additions cannot be made solely based on the assessee's admission and should be based on incriminating material found during the search. The ITAT also held that on-money receipts should be taxed in the year the project is completed.The ITAT noted that the AO quantified undisclosed income by taking an average rate of Rs. 21,400 per sq.ft. and applying it uniformly to all flats without evidence. The ITAT found a lacuna in the quantification of undisclosed income and held that the AO was incorrect in quantifying undisclosed income by adopting an average rate. The ITAT directed the AO to restrict the quantification of undisclosed income to the extent of incriminating material found during the search and to tax the on-money receipts in the year the project is completed.Conclusion:The ITAT partly allowed the appeal, directing the AO to restrict the quantification of undisclosed income to the extent of incriminating material found during the search and to tax the on-money receipts in the year the project is completed, as the assessee follows the project completion method for revenue recognition. The addition of Rs. 18,82,59,020 was set aside for limited quantification based on incriminating material and to be taxed in the appropriate year of project completion.