2025 (3) TMI 1523 - AT - Income Tax

Embedded profit on alleged on-money fixed at 8% not 15%; section 68 additions deleted; section 153A reopening quashed

Annapurna Buildcon Infra Private Limited Versus DCIT, Central Circle-1, Thane

Annapurna Buildcon Infra Private Limited Versus DCIT, Central Circle-1, Thane - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the AO was justified in estimating embedded profit on alleged unaccounted 'on-money' receipts at 15% for multiple assessment years, instead of the 8% rate proposed by the assessee, having regard to the facts and books of account. 2. Whether additions by treating peak negative cash flow arising from unsecured loans as unexplained income (u/s 68) in an unabated/completed assessment year are permissible where no incriminating material relating to those loans was unearthed in the search in the hands of the assessee. 3. Whether reopening/reassessment of a 'relevant assessment year' (seventh year) under the fourth proviso to section 153A is valid where the alleged escaped income (cash outflow on account of loans) is not shown to be represented in the form of an 'asset' as required by the proviso and no books/documents/evidence showing escapement are in the AO's possession. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Estimation of profit on alleged on-money receipts (rate of profit) Legal framework: In search assessments under section 153A the AO may estimate undisclosed income based on seized material; any estimation must be reasonable, supported by facts and/or comparable material, and consistent with the nature of the business and books of account. Precedent treatment: Tribunals and High Courts have in multiple co-ordinate decisions accepted an 8% embedded profit rate on on-money receipts in real estate cases where factual matrix and account books warranted that rate; such precedents have been followed where facts are similar. Interpretation and reasoning: The AO adopted a 15% profit rate on the premise that real estate profit margins range between 10-15%, but failed to place any comparable data or material on record to substantiate selection of the higher bound. The assessee's projects related to smaller carpet areas, targeted at lower/middle income purchasers in a peripheral locality-factual circumstances that increase fixed-cost intensity and tend to depress net margins. The assessee's own books reflected an average net profit of ~7.21% for the relevant years. Given absence of AO's supporting comparables and presence of contemporaneous accounting evidence and relevant factual features, the higher 15% rate lacks reasonable foundation. Ratio vs. Obiter: Ratio - estimation must be reasonable and supported by record and facts; where assessor fails to produce comparables and ignores material factual features and books, the Tribunal may recalibrate the profit rate. Obiter - references to general market ranges (10-15%) without evidentiary support. Conclusion: The profit embedded in alleged on-money receipts is to be estimated at 8% for the specified assessment years; AO/CIT(A) orders adopting 15% are set aside and remitted for assessment applying 8%. Issue 2 - Addition of peak loan credit as unexplained income in an unabated assessment year (scope of section 153A vis-à-vis incriminating material) Legal framework: Under the post-search regime, section 153A requires computation of 'total income' for affected years; however, completed/unabated assessments can be reopened under section 153A only if incriminating material relating to that specific assessment year is found during the search in the hands of the person whose assessment is sought to be interfered with. In absence of such incriminating material, additions in completed assessments are not permissible under section 153A and the remedy of the Revenue lies in initiating reassessment under sections 147/148 if conditions for those provisions are satisfied. Precedent treatment: Higher court interpretations accepted that the trigger for reassessment of completed years under the search regime is the discovery of incriminating material relating to those years and that arbitrary additions without nexus to seized material are impermissible. Interpretation and reasoning: The AO treated loans as accommodation entries and computed peak negative cash flow as unexplained income, using a cash-flow statement that treated loans as outflows and repayments plus estimated profit on on-money as inflows, arriving at a peak balance assessed as income. The material seized in the search pertained to on-money receipts but did not contain incriminating documents establishing that the loans taken by the assessee were accommodation entries. The AO's presumption that equivalent cash had been paid to lenders was not supported by incriminating material found in the search of the assessee's premises. The record furnished by the AO comprised a general note and seized material regarding on-money but not documentary proof linking the loans to accommodation entries in the hands of the assessee. Suspicion or pre-search information alone does not qualify as incriminating material satisfying the strict requirement for reopening completed years under section 153A. Ratio vs. Obiter: Ratio - completed/unabated assessments can only be disturbed under section 153A if incriminating material pertaining to that assessment year is found in the search in the hands of the assessed person; mere presumption or extraneous information is insufficient. Obiter - comments on the reliability of cash-flow telescoping method when not supported by evidentiary links to seized material. Conclusion: Addition of peak loan credit as unexplained income in the unabated assessment year is unsustainable in absence of incriminating material discovered in the search in the assessee's hands; the addition is deleted and related appellate confirmations set aside. Issue 3 - Validity of reopening a 'relevant assessment year' under the fourth proviso to section 153A (requirement of escaped income represented in the form of an asset and possession of books/documents/evidence) Legal framework: The fourth proviso to section 153A permits reopening of 'relevant assessment years' (seventh to tenth years) only if cumulatively (i) the AO has books/accounts/documents/evidence revealing escapement of income; (ii) the escaped income is represented in the form of an asset (as defined, including immovable property, shares/securities, loans/advances, bank deposits); and (iii) the value of such escaped income/asset equals or likely equals Rs. 50 lakh or more for the relevant year(s). Precedent treatment: Judicial analysis has treated the proviso conditions as cumulative and strict; the presence of tangible evidence linking escapement to specified asset forms is necessary before reopening relevant years. Interpretation and reasoning: The AO's case rested on a presumption that loans were accommodation entries and thus cash outflows represented escaped income; however, no books, documents or seized evidence from the assessee's premises demonstrated escapement of income or that the alleged cash outflows were represented as assets of the kind enumerated in the proviso. Loans taken by the assessee were not established as constituting an 'asset' in the sense contemplated by the proviso. The search did not uncover material showing that the loans resulted in acquisition/representation of assets meeting the statutory threshold; therefore, two essential conditions of the proviso (possession of evidence showing escapement and representation as an asset) were not fulfilled. Ratio vs. Obiter: Ratio - reopening of relevant assessment years under the fourth proviso requires specific documentary/evidentiary foundation demonstrating escapement and representation as an enumerated asset of requisite value; absent such foundation reopening is invalid. Obiter - analytical observations on the inapplicability of treating cash outflow on account of loans as assets for proviso purposes where not evidenced. Conclusion: Reopening and assessment of the relevant assessment year under the fourth proviso to section 153A is invalid on the facts; the assessment order for the relevant year is quashed and the appellate confirmation set aside. Cross-references Issues 2 and 3 are interrelated: both turn on the presence of incriminating material/evidence in the search record and on statutory thresholds for invoking section 153A powers (completed vs. relevant years). The absence of seized material linking loans to accommodation entries undermines both the addition in the unabated year and the reopening of the relevant year.