Tribunal overturns tax assessments for 2012-15, citing unreliable evidence & lack of basis.

The Tribunal allowed the appeals for the assessment years 2012-13, 2013-14, and 2014-15. The additions made on account of alleged on-money and the application of a net profit rate of 17.5% were deleted. The Tribunal held that the statement of Mr. Devji Sorathia was unreliable, and there was no basis for the additions made by the Assessing Officer and Commissioner of Income Tax (Appeals).

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Issues Involved:
1. Addition made to the income of the assessee on account of alleged on-money received in the business of real estate development.
2. Estimation of profits by applying a net profit rate of 17.5% to the total turnover of the assessee, including both disclosed and undisclosed sales.

Issue-wise Detailed Analysis:

1. Addition on Account of Alleged On-Money Received:

The primary issue in all the appeals was the addition made to the income of the assessee due to alleged on-money received in the real estate business. The addition was based on a statement recorded during a survey under section 131(1A) of the Income Tax Act, 1961, from Mr. Devji Sorathia, who allegedly purchased four shops from the assessee at a rate higher than recorded in the books of accounts. The Assessing Officer (AO) held that the difference between the recorded rate and the alleged rate was on-money received by the assessee. The AO applied this differential rate across all properties sold by the assessee during the relevant assessment years, resulting in significant additions to the assessee's income for the years 2012-13, 2013-14, and 2014-15.

The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the quantum of undisclosed sales by calculating the same on the carpet area sold rather than the super built-up area, as done by the AO. The CIT(A) also applied a net profit rate of 17.5% to the total turnover, including both disclosed and undisclosed sales, and made additions based on the difference between the enhanced net profit and the business income originally returned by the assessee.

The assessee contended that the addition was based entirely on the unreliable statement of Mr. Devji Sorathia, who was not the actual allottee of the property. The actual allottees, Mr. Sorathia's wife and son, denied paying any on-money through affidavits. The assessee also argued that no other incriminating material was found during the survey or search operation to support the statement. The assessee further argued that even if the statement was considered believable, it could not be applied across all transactions in the absence of incriminating material.

The Revenue argued that Mr. Sorathia's statement was reliable and that the fluctuation in property prices within a short period indicated on-money receipts. The Revenue also pointed out that other group companies had admitted to receiving on-money before the Settlement Commission.

The Tribunal found merit in the assessee's argument, noting that Mr. Sorathia's statement was based on hearsay and not on his own knowledge. The Tribunal also noted that the actual allottees had denied paying on-money, and the Revenue had not disproved their affidavits. The Tribunal held that no credence could be given to Mr. Sorathia's statement and that the addition based on it was not sustainable.

2. Estimation of Profits by Applying a Net Profit Rate of 17.5%:

The CIT(A) had applied a net profit rate of 17.5% to the total turnover, including both disclosed and undisclosed sales, based on the disclosure made by other group entities to the Settlement Commission. The assessee argued that the net profit rate applied was based on unrelated cases and that the assessee had returned net profits of 10%, 10%, and 15% for the relevant years, which should be applied instead.

The Tribunal found that the application of the net profit rate of 17.5% was not justified, as it was based on unrelated cases without demonstrating the parity of facts and circumstances. The Tribunal held that there was no basis for rejecting the books of accounts maintained by the assessee, as no other reason was brought to notice for finding them unreliable.

Conclusion:

The Tribunal concluded that there was no basis for the addition made on account of alleged on-money received by the assessee. Consequently, the addition made by applying a net profit rate of 17.5% to the total turnover was also not sustainable. The Tribunal deleted the additions made for all three assessment years and allowed the appeals of the assessee.

Summary of Judgments:

- The appeals for the assessment years 2012-13, 2013-14, and 2014-15 were partly allowed.
- The additions made on account of alleged on-money and the application of a net profit rate of 17.5% were deleted.
- The Tribunal held that the statement of Mr. Devji Sorathia was unreliable and that there was no basis for the addition made by the AO and CIT(A).

Order Pronounced:
The order was pronounced in the open court on 31-08-2022.

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