2023 (11) TMI 183 - AT - Income Tax

Undisclosed income addition deleted due to insufficient evidence linking WhatsApp communications to all assessed property transactions

ITAT Surat upheld CIT(A)'s deletion of addition for undisclosed income from on-money received through inflated flat purchase prices. WhatsApp ... On-money - extrapolation of undisclosed income - corroborative evidence for seized/incriminating material - project completion method for revenue recognition - taxability of income on execution of sale deed or handing over possession - burden of proof on revenue to establish undisclosed receipts from seized material - taxation of profit element only (not gross receipt) from alleged on-moneyOn-money - corroborative evidence for seized/incriminating material - extrapolation of undisclosed income - burden of proof on revenue to establish undisclosed receipts from seized material - Validity of addition of undisclosed 'on-money' for A.Y. 2014-15 made by extrapolating rates found in seized WhatsApp chats to all booked flats - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the incriminating WhatsApp material related only to seven flats and lacked particulars (area, buyer identity, date of receipt) necessary to prove receipt of on money in respect of all 31 booked flats. The Assessing Officer did not produce corroborative evidence such as statements of purchasers or other material to connect the seized messages to the wider set of bookings, nor did the search/assessment proceedings examine purchasers. The authorities relied upon by the Tribunal show that extrapolation is permissible only where documents indicate a regular, systematic occurrence; in the absence of cogent corroboration, hypothetical extrapolation from loose papers is unsustainable. Consequently the addition computed by a straight formula (applying the higher rate to the entire booked area) was deleted for A.Y. 2014-15. [Paras 11, 12, 13, 14]Addition of Rs.5,48,19,600 for A.Y. 2014-15 deleted; revenue's grounds dismissed.On-money - extrapolation of undisclosed income - consistency of treatment across assessment years - Whether the addition by extrapolation in A.Y. 2015-16 should be sustained where facts and material are similar to A.Y. 2014-15 - HELD THAT: - The Tribunal applied the principle of consistency and the same analysis as for A.Y. 2014-15: since the facts and basis for extrapolation in A.Y. 2015-16 were materially similar and the CIT(A) had deleted the addition for the lead year on lack of corroboration, the revenue's grounds for A.Y. 2015-16 were dismissed as well. [Paras 15]Appeal for A.Y. 2015-16 dismissed.On-money - corroborative evidence for seized/incriminating material - taxation of profit element only (not gross receipt) from alleged on-money - Correctness of CIT(A)'s partial confirmation for A.Y. 2016-17: confirmation of addition limited to transactions relating to seven flats and taxation of only the profit element (20% as taken by CIT(A)) instead of the entire on money figure - HELD THAT: - The Tribunal agreed with the CIT(A) that only the incriminating material relating to seven flats could be regarded as connected to alleged on money, and that the Assessing Officer had not established on money for the remaining booked flats. While the CIT(A) had quantified the on money in respect of those seven flats and, relying on precedent, taxed only the profit element (applying 20%), the Tribunal considered the assessee's declaration of Rs.19.50 lakhs and the appellate record and, to meet the revenue's legitimate concern of leakage, reduced the measure of taxation to 10% of the on money estimated by CIT(A). The Tribunal therefore disallowed the revenue appeal but partly allowed the assessee's cross objection by moderating the quantum confirmed by the CIT(A). [Paras 20, 24, 25]Appeal for A.Y. 2016-17 dismissed; assessee's cross objection partly allowed by restricting taxable element to 10% of the on money estimated by CIT(A) in respect of the seven flats.Final Conclusion: The Tribunal dismissed the revenue appeals for A.Y. 2014-15 and A.Y. 2015-16 (deleting the additions made by extrapolation for lack of corroborative evidence) and dismissed the revenue appeal for A.Y. 2016-17 while partly allowing the assessee's cross objection by reducing the taxable element in respect of the seven implicated flats to 10% of the on money estimated by the CIT(A). Issues Involved:1. Deletion of addition made by the Assessing Officer on account of 'On-Money' received.2. Sufficiency of incriminating material for concluding the receipt of on-money.3. Taxability of on-money on the actual receipt basis versus the year of executing the registered document.4. Application of taxability of on-money to the entire project.5. Justification of addition based on extrapolation of on-money.6. Consideration of the 'Human Probability Test' in income tax proceedings.7. Directions regarding chargeability of on-money receipt in the year of executing the registered document.Summary:1. Deletion of Addition on Account of 'On-Money' Received:The Assessing Officer (AO) made additions based on the difference between the documented sale price and the alleged on-money received, calculated from WhatsApp messages indicating higher rates for seven flats. The CIT(A) deleted these additions, stating that the WhatsApp chats did not provide sufficient evidence of on-money transactions for all flats and lacked corroborative material.2. Sufficiency of Incriminating Material:The CIT(A) noted that the WhatsApp chats related to only seven flats and were incomplete, lacking details such as buyer names, flat areas, and actual receipt dates. The CIT(A) emphasized the need for corroborative evidence beyond the incriminating material to prove the receipt of on-money, as established in CIT Vs Maulik Kumar K Shah.3. Taxability on Actual Receipt Basis:The CIT(A) upheld that income accrues only when the sale is materialized, not at the time of booking. The assessee followed the project completion method of accounting, recognizing revenue at the time of executing the sale deed or handing over possession, consistent with CIT Vs Shivalik Buildwell Pvt. Ltd. and CIT Vs Happy Home Corporation.4. Application to Entire Project:The CIT(A) rejected the AO's extrapolation of on-money receipts to the entire project, noting that the WhatsApp chats pertained to only seven flats. The Tribunal concurred, finding no scope for extrapolation without cogent evidence, as supported by CIT Vs Standard Tea Processing Co. Ltd. and CIT Vs B. Nagendra Baliga.5. Justification of Addition Based on Extrapolation:The Tribunal affirmed the CIT(A)'s finding that extrapolation was unjustified without rejecting the assessee's books of account and without evidence of systematic receipt of on-money. The AO's addition based on a straight formula was deemed speculative and unsupported by concrete evidence.6. Consideration of 'Human Probability Test':The CIT(A) and Tribunal found that the AO's reliance on human probability and preponderance of probabilities was insufficient without corroborative evidence. The Tribunal emphasized the need for fair and reasonable assessment, aligning with judicial precedents like Dhakeshwari Cotton Mills Ltd. Vs CIT.7. Directions on Chargeability of On-Money Receipt:The CIT(A) did not issue specific directions regarding the chargeability of on-money in the year of executing the registered document, as the addition itself was found unwarranted based on the evidence available.Conclusion:The Tribunal dismissed the revenue's appeals for A.Y. 2014-15 and 2015-16, affirming the CIT(A)'s deletion of additions. For A.Y. 2016-17, the Tribunal partly allowed the assessee's cross-objection, reducing the addition to 10% of the on-money estimated by the CIT(A), considering the possibility of revenue leakage. The Tribunal emphasized the need for corroborative evidence and adherence to established accounting principles for recognizing income.