2023 (11) TMI 1410 - AT - Income Tax

ITAT upholds restricting addition to 1% brokerage, rejects peak credit treatment of real estate receipts under s.68

ITAT Surat dismissed Revenue's appeal and upheld the CIT(A)'s order restricting addition to 1% of total gross transactions as brokerage income, instead of ... Additions of peak credit u/s 68 - documents seized containing the details of cash receipts and payment on booking/sale/resale of flats/shops/plots - HELD THAT:- The seized documents which have been considered in other years by the AO are clearly shown the rate of commission in the real estate brokerage earned by the assessee @ 1% on purchase/sale/resale of flats/shops/plots. The ld CIT(A) also noted that his predecessor has also accepted the contention for the earlier assessment years of the Assessee that he (assessee) is a real estate broker and thus, he restricted the addition to the tune of 1% of the total gross transactions for A.Y.2010-11, 2011-12, 2013-14, 2014-15 & 2015-16. The assessing officer while making the additions has taken the peak credit of the transactions of the receipts and payment and made the additions of such peak credit u/s 68 of the Act. But once, it is decided that the brokerage income only has to be brought to tax, it has to be on the total transactions or total turnover of the assessee. As per the assessing officer, the total turnover of the assessee is Rs. 34,84,81,157/-. Assessee submitted before ld CIT(A) that there were repetitive transactions in the seized documents; some relief may be given in the rate of brokerage. Assessee has not been able to conclusively prove which are the repetitive transactions. Hence, the said contention of the assessee was not accepted by ld. CIT(A). CIT(A) held that the addition (i.e. 1% of total gross receipts ) should be confirmed and balance addition was deleted by ld CIT(A). This way, ld CIT(A) allowed the appeal of the assessee partly. We have gone through the above findings of ld CIT(A) and noted that there is no any infirmity in the conclusion reached by the ld CIT(A). Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether cash transactions recorded in seized cash book and diaries found during search could be treated as unexplained cash credits/investments of the assessee or as transactions of a real estate brokerage business yielding only brokerage income. (2) Whether the Assessing Officer was justified in applying the peak credit theory to the seized cash transactions and making addition under section 68 on that basis, in the absence of corroborative evidence of actual investments or ownership of properties. (3) Whether estimation of brokerage income at 1% of the total gross receipts recorded in the seized material, as done by the appellate authority, was reasonable and sustainable in law on the facts found. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Characterisation of seized cash transactions - unexplained credits vs. brokerage transactions Interpretation and reasoning (a) The seized material (cash book and diaries) was found during a search under section 132 at a third party premises. The assessee was present and the documents were found in his possession. They contained numerous cash entries relating to loans, chit funds, cash receipts/payments on sale/purchase of shops, plots and land etc. (b) In statements recorded on oath under section 131 during search and post-search proceedings, and again during assessment, the assessee consistently stated that he was a real estate broker, had just started brokerage activities at a young age, and that the notings in the seized material were fake, prepared only to 'show off' that he had many customers and was doing well in business. (c) Notices under section 133(6) were issued by the Assessing Officer to some persons whose names appeared in the seized material. The replies of at least two such parties categorically denied having entered into any transaction with the assessee. The Tribunal treated these denials as strengthening the assessee's stand that the transactions in the seized material were not actual transactions but, at best, notings in connection with brokerage activities. (d) No immovable property was found to be owned, purchased or sold by the assessee as per the seized material or otherwise. No asset or investment traceable to the alleged cash transactions was found during search or post-search investigation. (e) The seized pages themselves contained the word 'Dalali' on several pages, and the Assessing Officer had acknowledged in the assessment order that the documents contained details of cash receipts and payments on booking/sale/resale of flats/shops/plots and that the persons named therein were 'clients' of the assessee. (f) The appellate authority found, and the Tribunal affirmed, that the entries did not contain clear particulars: there were no details of to whom the payments were made, for what purpose, or full particulars of properties; only some unit numbers and abbreviated project names, without clarity. There was also no indication that the assessee had capacity to invest in so many real estate transactions on his own account. (g) On these cumulative facts, the Tribunal held that the Assessing Officer had brought no cogent or concrete material to demonstrate that the assessee was an 'investor' and that the cash transactions recorded were his own investments or unexplained cash credits. Mere possession of such documents, without corroboration, was held insufficient to attribute substantive investment transactions to the assessee. Conclusions (h) The transactions recorded in the seized material were held to pertain to the assessee's real estate brokerage activities and not to his own investments or unexplained cash credits. (i) The Assessing Officer was not justified in treating the figures in the seized cash book and diaries as actual cash receipts and payments of the assessee as an investor in real estate. Issue (2): Validity of addition under section 68 by applying peak credit theory to seized transactions Legal framework (as discussed) (a) The addition was made under section 68, on the basis of 'peak credit' worked out from the cash book and diaries seized during search, treating the entries as unexplained cash credits/transactions of the assessee. (b) The Revenue also relied on the presumption under section 292C in respect of seized documents, contending that the incriminating documents found in the assessee's possession should be presumed to belong to him and their contents to be true. Interpretation and reasoning (c) The Tribunal noted that, even assuming the documents belonged to the assessee, the presumption regarding ownership and contents could not, by itself, substitute the requirement of corroborative evidence to show that the assessee had actually carried out the alleged cash transactions as his own investments. (d) The Tribunal emphasised that before applying the peak theory and taxing the peak of cash credits, the Assessing Officer was duty bound to bring on record some cogent material to demonstrate that:    (i) the assessee was indeed an investor; and    (ii) the transactions recorded in the seized material were real transactions executed by the assessee on his own account. (e) The Tribunal found that:    * No asset or investment corresponding to the alleged transactions was discovered in search/post-search proceedings.    * Several parties named in the documents denied any transaction with the assessee in response to section 133(6) notices.    * The seized material itself, read as a whole, supported the assessee's status as a broker ('Dalali') rather than as an investor.    * The Assessing Officer had largely ignored these facts and proceeded directly to compute and add the peak of cash transactions. (f) Given these deficiencies, the Tribunal held that the foundational requirement for invoking section 68 on the basis of peak credit from seized documents was not met. Conclusions (g) The addition of Rs. 6,97,62,157/- on account of peak credit under section 68, based solely on the seized cash book and diaries, without corroborative evidence of actual investment or unexplained credits of the assessee, was held unsustainable. (h) The approach of treating the entire cash flow as assessee's own unexplained investments/cash credits and taxing the peak thereof was rejected. Issue (3): Estimation of brokerage income at 1% of total gross receipts recorded in seized material Interpretation and reasoning (a) Having accepted that the assessee was engaged in real estate brokerage and that the seized documents represented, at most, brokerage-related notings/transactions, the appellate authority held that only the embedded brokerage income on such turnover could be brought to tax. (b) It was observed that in other assessment years, on the basis of the same or similar seized material, the Assessing Officer himself had proceeded on the footing that the assessee was a broker, and the predecessor appellate authority had restricted additions to 1% of the gross transactions, treating such percentage as brokerage commission. (c) The seized documents, as considered in other years, were found to clearly show the commission rate in real estate brokerage at 1% on purchase/sale/resale of flats, shops and plots. The appellate authority followed this factual pattern and consistency with earlier years. (d) For the year under consideration, the Assessing Officer had worked out the total turnover/gross receipts from the seized material at Rs. 34,84,81,157/-. Once it was held that only brokerage income was to be taxed, the appellate authority treated this figure as the total relevant turnover. (e) The appellate authority therefore estimated the assessee's brokerage income at 1% of Rs. 34,84,81,157/-, i.e. Rs. 34,84,812/-, and sustained addition to that extent, deleting the balance. (f) The assessee's plea that there were repetitive transactions in the seized material, warranting some reduction in the estimated brokerage, was rejected because the assessee failed to conclusively identify and substantiate which entries were repetitive. (g) The Tribunal examined these findings and found no infirmity, noting that:    * The rate of 1% was supported by the seized documents themselves and past accepted practice in earlier years; and    * On the facts, treating the total recorded turnover as brokerage-related and estimating commission at 1% was reasonable and logical. Conclusions (h) The estimation of brokerage income at 1% of the total gross receipts of Rs. 34,84,81,157/-, resulting in an addition of Rs. 34,84,812/-, was upheld as a fair and justifiable basis of assessment. (i) The order of the appellate authority restricting the addition to Rs. 34,84,812/- and deleting the balance amount added by the Assessing Officer was confirmed, and the Revenue's grounds challenging such restriction were dismissed.