2024 (9) TMI 1707 - AT - Income Tax

Tribunal upholds 12% net profit rate on unaccounted receipts, deletes poker income additions preventing double taxation

Sankalp Recreation Pvt. Ltd. Versus The ACIT Central Circle-1 (2) Ahmedabad And (Vice-Versa)

The ITAT Ahmedabad ruled on multiple issues in a search and seizure case. The tribunal upheld the CIT(A)'s application of 12% net profit rate to ... Unaccounted Receipts and Unaccounted Expenses - AO treated the entire unaccounted cash receipts as the income of the assessee for the relevant assessment years - AO did not allow for any deductions or expenses related to these receipts, effectively treating the gross receipts as taxable income and also made an addition u/s 69C, treating the unexplained expenditure as deemed income of the assessee - AO also did not allow any set-off against the unaccounted receipts, effectively treating the expenditures as independently unexplained and taxable. Whether the entire unaccounted receipts should be taxed as income or whether only the profit element embedded in these receipts should be considered? - We find that the CIT(A) has correctly applied the net profit rate to the unaccounted receipts based on the principle laid in President Industries case. There is no material evidence to suggest that the entire unaccounted receipts represent the income of the assessee. DR’s submissions, while highlighting procedural violations, do not justify taxing the gross receipts without considering the expenses involved in generating such receipts. Once profit is estimated, no further additions can be made for procedural violations like cash payment limits or TDS non-compliance. This is consistent with judicial principles that when profit is computed based on estimation, it covers all aspects of the business, including potential violations. We also find that the 12% Net Profit Rate (NPR) applied by the CIT(A) is reasonable, given the nature of the case. The assessee was found to have engaged in unaccounted cash transactions, and in such cases, where the full details of receipts and expenses are not available, higher profit rates are often justified. The application of a higher NPR ensures that any profit derived from undisclosed income is appropriately taxed, and it compensates for the lack of documentation. We find that no concrete evidence has been provided by the assessee to substantiate a lower profit rate. Assessee has not demonstrated, with comparable industry data or business-specific records, that a lower NPR should be applied. In cases involving unaccounted income, courts have consistently upheld the application of a higher NPR. We further note that the assessee has not provided any alternative basis for applying a lower NPR. In the absence of any detailed documentation or business records from the assessee, the CIT(A)’s estimation of 12% NPR stands justified. Estimation by nature requires some discretion, and it must account for the lack of transparency in the assessee’s accounts. Therefore, the assessee’s ground of appeal challenging the 12% NPR is dismissed. Additions related to the poker income and expenses, which arose from noting found in the seized material during the search operation - CIT(A) deleted addition - HELD THAT:- For both the Assessment Years 2017-18 and 201819, the CIT(A) rightly observed that the poker-related amounts had already been addressed under the general headings of unaccounted receipts and unaccounted expenditures. Hence, making separate additions for these items would result in double taxation of the same income. CIT(A)’s decision was based on a thorough examination of the facts, supported by the principle that seized material should be considered in its entirety. This approach ensured that the assessment captured the real income of the assessee without inflating the tax liability through double additions. CIT(A) correctly deleted the separate additions for poker income and expenses for both Assessment Years 2017-18 and 2018-19, as these were already included in the broader unaccounted receipts and expenditures. Accordingly, the grounds of the Revenue on this issue are dismissed. Assessment u/s 153A - Delayed PF/ESIC Contributions u/s 36(1)(va) - In the present case, the additions made by the Assessing Officer (AO) regarding the delayed deposit of employees' contributions to PF and ESI for the assessment years 2013-14 to 2017-18 fall under unabated assessment years, as no proceedings were pending for these years when the search was initiated. As per the judgment in Abhisar Buildwell [2023 (4) TMI 1056 - SUPREME COURT] for completed assessments, no additions can be made unless they are based on incriminating material found during the search. The revenue and CIT(A) both failed to point out any incriminating material found during the course of the search that would warrant the disallowance under section 36(1)(va) of the Act for these assessment years 2013-14 to 2017-18. As the assessment year 2019-20 was an abated assessment year due to the search proceedings, the AO made additions for late deposit of employees' contributions, citing a delay for contributions related to June 2018, which were deposited on 16th July 2018. The CIT(A) rightly deleted the addition, noting that 15th July 2018 was a Sunday, and hence the payment on the next working day (16th July 2018) was within the permissible time limit. This finding aligns with the judicial principles governing General Clauses Act, where payments made on the next working day following a holiday are treated as timely payment. Accordingly, the corresponding grounds of appeals filed by the assessee are allowed and grounds of revenue deserve to be dismissed. Treatment of unexplained cash discovered during the search and seizure operation carried out at the assessee’s premises - AO made an addition based on the cash seized during the search, treating it as unaccounted income u/s 69A - assessee’s contention that the cash represents business receipts from daily operations aligns with the nature of its business activities and the usual practice in the hospitality industry of dealing with cash transactions - HELD THAT:- AO's invocation of Section 69A to treat the seized cash as unexplained income is not justified in this case. Section 69A applies when money is found in possession of the assessee for which no explanation is provided. However, the assessee has provided a plausible explanation supported by evidence that the cash was generated from the business and was not accounted for yet. Since the unaccounted receipts and payments for the relevant period were already considered for taxation, adding the seized cash separately would lead to taxing the same income twice. The CIT(A) rightly deleted the addition, recognizing that a substantial portion of the unaccounted income had already been brought to tax and that the addition would result in duplication. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the assessments under Section 153A r.w.s. 143(3) were validly conducted in the absence of incriminating material found during the search.Whether the entire unaccounted receipts should be taxed as income or only the profit element embedded in these receipts should be considered.Whether the disallowance of employee contributions to PF & ESIC under Section 36(1)(va) was justified, particularly in the context of unabated assessment years.Whether the CIT(A) properly applied the principle of telescoping by setting off unaccounted income against unaccounted expenditure.Whether the seized cash for A.Y. 2019-20 was correctly treated as explained and accounted for, hence not subject to addition under Section 69A.Whether the estimation of a 12% net profit rate on unaccounted receipts was reasonable and justified.2. ISSUE-WISE DETAILED ANALYSISValidity of Assessments under Section 153AThe relevant legal framework involves Sections 153A and 143(3) of the Income Tax Act, which allow for assessments following a search operation. The court considered the principle that such assessments require incriminating material found during the search. The CIT(A) upheld the assessments, noting that incriminating material was indeed found, justifying the proceedings. The court referenced precedents such as CIT vs. Kabul Chawla and PCIT vs. Saumya Construction Pvt. Ltd., which emphasize the necessity of incriminating material for additions in completed assessments.The court concluded that the assessments were valid, as the search revealed substantial unaccounted transactions, providing a foundation for the assessments. The rejection of books under Section 145 was also upheld due to the discovered discrepancies.Taxation of Unaccounted ReceiptsThe court examined whether the entire unaccounted receipts should be taxed or only the profit element. The CIT(A) applied a 12% net profit rate on the unaccounted receipts, recognizing that the gross receipts included business expenditures. This approach aligns with the principle established in President Industries, where only the profit element is taxed.The court found the 12% rate reasonable, considering the lack of detailed records and the nature of unaccounted transactions. The decision to apply this rate was supported by industry standards and the absence of evidence for a lower rate.Disallowance of PF & ESIC ContributionsThe disallowance under Section 36(1)(va) was upheld by the CIT(A) based on the Supreme Court's decision in Checkmate Services Pvt. Ltd., which mandates timely deposit of employee contributions. For unabated assessment years, the court noted that additions require incriminating material, as reaffirmed in Abhisar Buildwell.The court directed the deletion of disallowances for AYs 2013-14 to 2017-18 due to the absence of incriminating material. For AY 2019-20, the court upheld the CIT(A)'s decision to delete the disallowance, recognizing the payment within the permissible time due to a public holiday.Telescoping of Unaccounted Income and ExpenditureThe CIT(A) allowed telescoping, setting off unaccounted income against unaccounted expenditure, to avoid double taxation. The court agreed with this approach, recognizing the logical connection between the receipts and expenditures and the principle of taxing real income.Seized Cash for A.Y. 2019-20The court examined the treatment of seized cash under Section 69A. The CIT(A) found the cash to be part of regular business receipts, supported by the assessee's explanation and cash flow evidence. The court upheld the CIT(A)'s decision, noting the lack of justification for treating the cash as unexplained income.3. SIGNIFICANT HOLDINGSThe court preserved key legal reasoning, including:'The mere initiation of proceedings under Section 153A, following a valid search under Section 132, is sufficient to justify the assessment, provided there is evidence to support it.''The CIT(A) correctly applied the net profit rate to the unaccounted receipts based on the principle laid in President Industries case.''The Apex Court, in the case of Abhisar Buildwell, reaffirmed the principle that in the case of a completed or unabated assessment, any addition can only be made if it is based on incriminating material found during a search or survey.''The CIT(A) correctly observed that the seized cash was part of the normal business income and not unexplained.'The court's final determinations included upholding the validity of assessments under Section 153A, confirming the 12% net profit rate on unaccounted receipts, allowing the set-off of unaccounted income against expenditure, and directing the deletion of PF & ESIC disallowances for certain years. The court dismissed the Revenue's appeals and partly allowed the assessee's appeals, aligning with the principles of natural justice and established legal precedents.