2020 (11) TMI 907 - AT - Income Tax

Tribunal revisits undisclosed income estimation and loan verification, providing relief and remitting certain issues for review.

Asst. Commissioner of Income Tax, Circle 2 (1), Cuttack Versus M/s. Computer Lab, 2nd floor, Meghamala Complex, Bajrakabati Road, Cuttack

The Tribunal partly allowed the appeals, directing the AO to re-examine issues related to the estimation of net profit on undisclosed receipts and ... Undisclosed Receipts from ECIL & BEL - undisclosed turnover - Accrual of income - HELD THAT:- We are satisfied that the assessee has correctly shown the amounts certified by the respective authorised supervisors and as we have noted above that ld CIT(A) after considering the entire facts and circumstances and relevant books of account and financial statements of the assessee for A.Y. 2012-13 has rightly concluded that the expenditure booked by him for assessment year 2012-13 was against the income received only and no expenses has been booked against much higher contract receipts as picked up and assessed by the AO. Inflated amounts are not the actual amount accrued to the assessee by ECIL and BEL, respectively and are not the amount of actual turnover which has accrued to the assessee for assessment year 2012-13. Since the assessee has satisfactorily established that the amount of work certified by the respective supervisors has been claimed and shown as turnover and the expenditure booked by the assessee for assessment year 2012-13 was against the income received and shown in the profit and loss account, no expenditure has been booked against impugned higher contract amount as assessed by the AO, therefore, we decline to accept the contention of ld CIT DR that the ld CIT(A) in the last sentence at top para 6 has considered and appreciated wrong fact that the assessee has not shown these receipts as income and not claimed expenses linked with them. CIT(A) after observing that the assessee has claimed higher TDS in the compelling circumstances under the given totality of the facts and circumstances of the case, it would be appropriate to levy an appropriate rate of net profit on the differential amount between the bill raised by the assessee and the amount claimed by it and compute the profit element embedded in these gross receipts. Estimation of profit - percentage of net profit - CIT(A) should have directed the AO to adopt the gross profit rate (before salary & interest to partners) of 39.87% instead of net profit rate of 16.22% (after salary & interest to partners) on the undisclosed turnover - HELD THAT:- In the facts and circumstances of the present case, the total impugned amount from the respective service receivers and the amount of work which was not certified by the authorized officers of ECIL and BEL cannot be treated as income of the assessee, only an element of income calculated on the logical percentage of net profit can be taxed in the case of unaccounted sales/turnover pertaining to which expenditure has not been claimed by the assessee in calculating the net profit of a particular assessment year. Therefore, in our humble opinion, the ld CIT(A) was right in directing the AO to calculate and tax only profit element embedded in the impugned amount of turnover. CIT(A) directing the AO to estimate only 16.22% on the undisclosed receipts based on the net profit rate disclosed by the assessee - HELD THAT:- In F.Y. 2010-11 to 2017-18 pertaining to assessment year 2011-12 to 2018-19, respectively, that the assessee provided service to private customers including ECIL and BEL and in the case of ECIL and BEL, some mismatch is there which has been observed by the authorities below but in the last, the total amount of turnover as per assessed income and as per balance sheet submitted by the assessee is almost similar. Therefore, if the figures of turnover is disturbed in one year then that would have consequent effect on the subsequent year and since the assessee is in the highest tax slab rate, therefore, such an exercise would be revenue neutral and there is no loss of revenue to the exchequer in this regard. Therefore, the ld CIT(A) was right in directing the AO to estimate and calculate the net profit embedded in the undisclosed turnover/receipts. Unexplained expenditure u/s 69C - HELD THAT:- Merely mismatch between the amount of TDS claimed by the assessee and amount of turnover shown by the assessee does not raise a question about the expenditure incurred by the assessee against the part receipts/turnover which was not shown in the P&L account and balance sheet due to non-certification by the Supervisors of the service recipients and non receipt of payment during the relevant financial period. Therefore, the contention of the AO in the grounds that the amount of expenditure should be included and taxed in the hands of the assessee u/s.69C of the Act being “unexplained expenditure” has no legs to stand in the totality of the facts and circumstances of the case as noted above and hence, we dismiss the same. Estimation of percentage of net profit in the hands of the assessee - HELD THAT:- Percentage picked up by the AO, ld CIT(A) and percentage of calculation submitted by the assessee is not similar and there is vast difference between them, therefore, this requires examination and verification at the end of the AO. Ld Representatives of both the parties have agreed that the percentage of net profit of undisclosed receipts/turnover has to be estimated before payment of salary and interest on capital to partners. Therefore, we direct the AO to estimate the net profit before payment of salary and interest on capital to partners on the amount of undisclosed turnover/receipts. Accordingly, Ground Nos.1 to 5 of appeal of revenue are dismissed. Unexplained unsecured loan - FAA right or indeed the duty to admit additional evidence which is wilfully withheld from the Assessing Officer - HELD THAT:- As alleged by ld CIT DR, has been considered by the ld CIT(A) at appellate stage without confronting the same with the Assessing officer, we deem it fit and proper to remit the issue back to the file of the Assessing officer with the direction to the assessee to furnish the contracts/agreements alongwith confirmations with the three service providers and all other relevant documents before the Assessing officer. AO is directed to consider the said contracts/agreements duly entered into by the assessee with the service providers and all other relevant documents without being prejudiced from earlier assessment order. AO is also directed to examine and verify the relevant contracts and all other relevant documents entered into by the assessee with service providers and also verify that as to whether these service providers were hired to assist the assessee in carrying out the biometric enrolment programme in the State of West Bengal and often times, expenditure incurred by these service providers on behalf of the assessee were subsequently reimbursed by the assessee and in fact, these are “business/ sundry creditors” and no ‘loans’ were taken and repaid by any one of the three parties. AO is also directed to verify the explanation of the assessee submitted during first appellate proceedings and after verification of the correctness of the same pass an appropriate and justified order considering the entire facts and circumstances related to this issue. Issues Involved:1. Undisclosed Receipts from ECIL & BEL2. Nature of Advance Receipt from OCAC3. Unexplained Unsecured Loan4. Undisclosed Receipts from Hindustan Unilever Ltd.Detailed Analysis:1. Undisclosed Receipts from ECIL & BEL:The primary issue revolves around the addition of undisclosed receipts amounting to Rs. 4,23,65,658/- from ECIL and BEL. The Assessing Officer (AO) added this amount as suppressed work receipts, arguing that the assessee followed a cash system of accounting instead of the mercantile system, as mentioned in the auditor's report. The AO believed that the entire bill amount should be recognized as revenue for the year, not just the amounts received per the terms of payment. The CIT(A) partly allowed the appeal, calculating the income of the assessee at Rs. 68,71,709 (16.22% of Rs. 4,23,65,658/-) and allowed relief of Rs. 3,54,93,949/-. The Tribunal upheld the CIT(A)'s decision, agreeing that revenue becomes due only after certification by the supervisors of ECIL and BEL, and thus, only the certified amount can be considered as accrued income. The Tribunal directed the AO to estimate the net profit before salary and interest on capital to partners on the undisclosed turnover/receipts.2. Nature of Advance Receipt from OCAC:The AO disallowed Rs. 1,56,245/- received from OCAC, as the assessee could not explain its nature. The CIT(A) found that this amount was an advance for preparation of Electoral Photo Identity Cards and, after deducting the expenditure, the balance was booked as income. The Tribunal confirmed the CIT(A)'s findings, noting that the AO's disallowance was incorrect.3. Unexplained Unsecured Loan:The AO added Rs. 38,88,773/- as unexplained unsecured loans from three entities, as the assessee failed to file confirmations and establish the genuineness of the transactions. The CIT(A) deleted the addition, noting that these were actually sundry creditors, not unsecured loans. The Tribunal found that the CIT(A) admitted fresh evidence without confronting the AO, violating Rule 46A of the I.T. Rules. The issue was remitted back to the AO for verification of the contracts/agreements and other relevant documents, directing the AO to pass an appropriate order after due verification.4. Undisclosed Receipts from Hindustan Unilever Ltd.:The AO added Rs. 50,562/- as undisclosed receipts from Hindustan Unilever Ltd., which the assessee claimed was salary for staff members. The CIT(A) deleted the addition, finding that the amount represented salary for services rendered. The Tribunal upheld the CIT(A)'s decision, noting no violation of Rule 46A and confirming that the amount was indeed salary for staff.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, directing the AO to re-examine certain issues, particularly the estimation of net profit on undisclosed receipts and the verification of alleged unsecured loans. The Tribunal upheld the CIT(A)'s decisions on the nature of advance receipts from OCAC and the undisclosed receipts from Hindustan Unilever Ltd.