Tribunal rules on tax treatment of on-money receipts and inflated expenses

The Tribunal allowed the assessee's appeals, directing the AO to tax only 12% of the on-money receipts as undisclosed income. The Revenue's appeals were dismissed, upholding the treatment of on-money as business receipts and not unexplained cash credits under Section 68. The Tribunal also ruled in favor of the assessee regarding the inflation of expenses, estimating income at 12% of the inflated expenses. The application of Section 115BBE became academic as the main issue was decided against the Revenue.

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Issues Involved:
1. Taxability of on-money receipts.
2. Applicability of Section 68 of the Income Tax Act, 1961.
3. Year of taxability of on-money.
4. Percentage of on-money to be taxed.
5. Treatment of on-money as business receipts.
6. Inflation of expenses.
7. Application of Section 115BBE.

Issue-wise Analysis:

1. Taxability of On-Money Receipts:
The assessee, engaged in the construction business, was found to have received on-money from the project "Prasadam" during a search operation. The Assessing Officer (AO) proposed to tax the on-money received based on incriminating evidence found during the search, which was corroborated by the promoter's admission. The AO issued a show cause notice and subsequently made additions based on year-wise receipts of on-money.

2. Applicability of Section 68 of the Income Tax Act, 1961:
The AO treated the on-money received as unexplained cash credit under Section 68, as the assessee failed to provide details of the payers. The learned CIT(A) observed that the on-money should be treated as business receipts, not as unexplained cash credits under Section 68, as it was recorded in the parallel books of account.

3. Year of Taxability of On-Money:
The assessee argued that the on-money should be taxed in the year of completion of the project or when the sales are offered to tax. The learned CIT(A) rejected this, holding that the on-money should be taxed in the year of receipt since the assessee failed to provide specific details of the transactions and parties involved.

4. Percentage of On-Money to be Taxed:
The learned CIT(A) concluded that only a percentage of the on-money should be taxed, not the entire amount. He relied on various court decisions and determined that 25% of the on-money should be brought to tax. However, the assessee contended that the Settlement Commission had accepted 12% of on-money as income for other group entities, and the same should apply here.

5. Treatment of On-Money as Business Receipts:
The learned CIT(A) treated the on-money as business receipts, noting that the on-money was recorded in the parallel books of account. The AO's report did not dispute this status but focused on the lack of party-wise details and confirmations.

6. Inflation of Expenses:
For the assessment year 2015-16, the learned CIT(A) confirmed an addition of Rs. 1,07,703/- as income from inflation of expenses, estimating 25% of the inflated expenses. The assessee argued that the AO failed to provide detailed bifurcation and correlation with the profit and loss account. The assessee contended that the Settlement Commission had accepted 12% of inflated expenses as income for other group entities.

7. Application of Section 115BBE:
The Revenue raised an issue regarding the application of Section 115BBE, arguing that the proviso came into effect from 01.04.2017 and should apply to the brought forward business loss. However, since the main issue was decided against the Revenue, this ground became academic.

Judgment:
The Tribunal considered the rival submissions and material on record. It noted that the issue of on-money was proved beyond doubt from the search records and subsequent acceptance by key personnel. The Tribunal followed the decisions in the cases of Tulip Land And Developers P. Ltd. and Bhalchandra Trading P. Ltd., where it was held that only the profit element of on-money should be taxed, and 12% of on-money was considered reasonable based on the Settlement Commission's orders.

Conclusion:
- The appeals filed by the assessee were allowed, directing the AO to tax only 12% of the on-money receipts as undisclosed income.
- The appeals filed by the Revenue were dismissed, upholding the decision to treat on-money as business receipts and not as unexplained cash credits under Section 68.
- The issue of inflation of expenses was also decided in favor of the assessee, following the precedent of estimating income at 12% of the inflated expenses.
- The application of Section 115BBE became academic as the main issue was decided against the Revenue.

Order Pronounced:
The order was pronounced in the open court on 11.06.2021.

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