Tribunal rules on treatment of profit from on-money receipts for assessment year 2016-17

The Tribunal held that only the profit element embedded in on-money receipts should be treated as income, applying an 8% profit rate as declared by the assessee for the assessment year 2016-17. The CIT(A)'s estimation of 20% was deemed unreasonable, and the AO's inclusion of the entire gross amount as unexplained income was rejected. The assessee's appeal was partly allowed, directing the AO to assess income based on the 8% profit rate. The Revenue's appeal was dismissed, and other grounds raised by the assessee were rejected.

---

---

Issues Involved:
1. Treatment of on-money receipts as unexplained income.
2. Determination of the profit percentage to be applied to on-money receipts.

Issue-Wise Detailed Analysis:

1. Treatment of on-money receipts as unexplained income:

During a search at the assessee's premises, evidence of on-money receipts (cash received over the booking amount) was found. The Assessing Officer (AO) treated the gross amount of these receipts as unexplained income. However, on appeal, the CIT(A) determined that only the profit element embedded in such cash receipts should be treated as the assessee's income. The CIT(A) estimated this profit element at 20% of the gross receipts, resulting in an income calculation of Rs. 4,48,63,600/- from on-money receipts for the assessment year 2016-17, significantly lower than the AO's addition of Rs. 22,43,18,000/-. The Revenue challenged the CIT(A)'s decision, arguing that the entire gross amount should be treated as unexplained income, while the assessee contended that only 8% of the receipts should be considered as income.

2. Determination of the profit percentage to be applied to on-money receipts:

The Tribunal had previously addressed a similar issue for the assessment years 2012-13 to 2015-16, where the profit element embedded in on-money receipts was debated. The Tribunal concluded that the profit percentage should be 8%, as declared by the assessee, rather than 20% as determined by the CIT(A) or the gross amount as assessed by the AO. This decision was based on the principle that the gross on-money receipts included certain unrecorded expenditures, and thus, only the profit element should be considered as income.

The Tribunal emphasized that the AO must exercise discretion in estimating income, ensuring that the estimate is fair and based on reasonable judgment. The Tribunal found that the CIT(A) had not provided sufficient reasoning for estimating the profit at 20%, while the assessee's estimation of 8% was supported by precedent and considered reasonable.

Conclusion:

The Tribunal, following its earlier decision, held that the profit element embedded in the on-money receipts for the assessment year 2016-17 should be computed at 8%, as declared by the assessee. Consequently, the appeal of the assessee was partly allowed, and the AO was directed to assess the income by adopting an 8% profit rate on the unaccounted on-money receipts. The Revenue's appeal was dismissed, and other grounds raised by the assessee were rejected as they were consequential to the main issue. The judgment was pronounced in the Open Court on 27th July 2021.

---