2020 (3) TMI 572 - AT - Income Tax

Tribunal adjusts business income to 8% under Section 44AD, deletes additions for seized cash & jewelry

Shri Panati Vittalnath Reddy Versus The Deputy Commissioner of Income Tax, Central Circle-2 (4), Bengaluru

Shri Panati Vittalnath Reddy Versus The Deputy Commissioner of Income Tax, Central Circle-2 (4), Bengaluru - TMI Issues Involved:1. Validity of proceedings initiated under Section 153C of the Income Tax Act.2. Justification of estimation of business income at 8.5% of gross receipts.3. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act.4. Sustaining addition of cash and gold seized during the search.Detailed Analysis:1. Validity of Proceedings Initiated Under Section 153C:The assessee challenged the initiation of proceedings under Section 153C, arguing that the conditions precedent to invoke the provisions were not satisfied. The assessee contended that no documents or assets belonging to them were discovered during the search. The search was conducted at a common residence, and the seized cash and jewelry did not solely belong to the assessee. The CIT(A) verified the assessment records and found that the AO had recorded the necessary satisfaction for initiating proceedings under Section 153C. The Tribunal upheld the CIT(A)’s findings, stating that the AO was duty-bound to issue notice under Section 153C once material belonging to the assessee was found, and the proceedings were validly initiated.2. Justification of Estimation of Business Income:For the assessment years 2013-14, 2014-15, and 2015-16, the AO estimated the business income at 12% of the gross receipts due to the non-maintenance of books of accounts. The CIT(A) reduced this estimation to 8.5%, considering the average income reported in previous years and the presumptive rate under Section 44AD. The Tribunal further reduced the estimation to 8%, aligning it with the presumptive rate under Section 44AD, as the average gross profit rate over the years was 7.918%. The Tribunal directed the AO to recalculate the business income based on this rate.3. Charging of Interest Under Sections 234A, 234B, and 234C:The assessee contested the charging of interest under Sections 234A, 234B, and 234C. The Tribunal upheld the charging of interest, citing the Supreme Court's decision in CIT v. Anjum M. H. Ghaswala, which held that charging interest is mandatory. However, the Tribunal allowed for consequential relief arising from the recalculated income.4. Sustaining Addition of Cash and Gold Seized During the Search:The AO added 1/3rd of the seized cash and jewelry to the assessee’s income, attributing it to them. The assessee argued that the cash withdrawal of Rs. 7 lakhs before the search should be considered, and the jewelry belonged to the entire family. The Tribunal found that the cash withdrawal could explain the cash found, and the nature of the business required holding cash. Therefore, the addition of Rs. 3.93 lakhs was deleted. Regarding the jewelry, the Tribunal noted that it belonged to 19 family members, and the assessee had only 261 grams reflected in their balance sheet. The Tribunal deleted the addition of Rs. 16,42,900, considering the CBDT Circular on jewelry holdings.Conclusion:The Tribunal partly allowed the appeals for the assessment years 2013-14, 2014-15, and 2015-16, making adjustments to the estimation of business income and deleting the additions related to cash and jewelry seized during the search. The charging of interest under Sections 234A, 234B, and 234C was upheld, with provisions for consequential relief.