2022 (5) TMI 1670 - AT - Income Tax

Section 68 cash credit additions limited to 8% profit element instead of entire gross receipts following Delta Engineering precedent

The ITAT Surat upheld the CIT(A)'s decision to restrict additions under Section 68 for unexplained cash credits to profit element only, rather than entire ... Unexplained cash credit u/s. 68 - Determination of profit element from the 'on-money' receipts - assessee itself accepted that On-Money receipts as unaccounted income in the form of advances -additions of total gross receipts have been made and not the profit amount - CIT(A) restricted the addition to 20% of gross receipts, assuming profit element @ 20% HELD THAT:- The assessees own records are one of the factors which has to be considered and kept in mind while estimating the profit as has been held in the case of Delta Engineering Co [1990 (5) TMI 25 - ALLAHABAD HIGH COURT] Net profit is taxable income. Hence, considering the facts and circumstances of the case, we direct the assessing officer to compute the net profit @ 8% of the gross receipts. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment were:Whether the addition of Rs. 2,57,76,000/- as unexplained cash credit under Section 68 of the Income Tax Act was justified.Whether the 'on-money' receipts should be treated as regular business income or as unexplained cash credit subject to taxation under Section 115BBE of the Act.Whether the profit element from the 'on-money' receipts should be taxed at 20% as determined by the CIT(A) or at a lower rate as contended by the assessee.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Addition as Unexplained Cash CreditRelevant Legal Framework and Precedents: Section 68 of the Income Tax Act allows for the addition of unexplained cash credits to the income of the assessee. The provision is triggered when the assessee fails to satisfactorily explain the nature and source of any cash credits found in their books.Court's Interpretation and Reasoning: The Tribunal noted that the assessing officer had based the addition on impounded materials and WhatsApp chats, which allegedly indicated 'on-money' receipts. However, the Tribunal observed that these materials did not conclusively prove the receipt of 'on-money' as unexplained cash credit.Key Evidence and Findings: The Tribunal considered the statement of Mr. Rajesh Ahir, a partner in the assessee firm, who admitted to the receipt of 'on-money' and its representation in two columns (cash and cheque) in the firm's records.Application of Law to Facts: The Tribunal found that the 'on-money' was indeed part of the business receipts and should be taxed as such, rather than as unexplained cash credit.Treatment of Competing Arguments: The Tribunal rejected the assessing officer's treatment of the 'on-money' as unexplained cash credit, agreeing with the CIT(A) that it was part of the regular business income.Conclusions: The Tribunal concluded that the addition under Section 68 was not justified as the 'on-money' was part of the business income.Issue 2: Taxation of 'On-Money' ReceiptsRelevant Legal Framework and Precedents: The taxation of 'on-money' receipts as regular business income or under Section 115BBE, which applies to unexplained income, was considered.Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the 'on-money' receipts should be taxed as business income, given their nature as part of the business transactions.Key Evidence and Findings: The Tribunal relied on the evidence of business receipts and the admission by the assessee's partner regarding the nature of the 'on-money'.Application of Law to Facts: The Tribunal applied business income taxation principles, rejecting the application of Section 115BBE.Treatment of Competing Arguments: The Tribunal dismissed the revenue's argument for treating the 'on-money' as unexplained cash credit, emphasizing its business nature.Conclusions: The Tribunal upheld the CIT(A)'s decision to treat the 'on-money' as regular business income.Issue 3: Profit Element Taxation RateRelevant Legal Framework and Precedents: The determination of the appropriate profit rate for taxation, considering the assessee's historical profit rates and judicial precedents.Court's Interpretation and Reasoning: The Tribunal found the CIT(A)'s 20% profit rate excessive, given the assessee's historical profit rates between 4% and 6%.Key Evidence and Findings: The Tribunal considered the assessee's audited books and historical profit rates.Application of Law to Facts: The Tribunal directed the assessing officer to apply an 8% profit rate, aligning with the assessee's historical performance.Treatment of Competing Arguments: The Tribunal balanced the arguments, considering both the revenue's and the assessee's positions, ultimately favoring a more moderate profit rate.Conclusions: The Tribunal adjusted the profit rate to 8%, reflecting a more reasonable estimate of taxable income.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else. It is one tax, not a collection of taxes essentially distinct.'Core Principles Established: The judgment emphasizes that 'on-money' receipts, when part of business transactions, should be treated as business income rather than unexplained cash credits. It also underscores the importance of aligning profit rate estimations with historical performance and reasonable assumptions.Final Determinations on Each Issue: The Tribunal dismissed the revenue's appeal, upheld the CIT(A)'s decision to treat 'on-money' as business income, and adjusted the profit rate to 8% for tax computation.