ITAT deletes unexplained investment addition under section 69, reduces profit estimation rate from 5% to 4%

The ITAT Nagpur-AT ruled in favor of the assessee on multiple grounds. Regarding unexplained investment in immovable property under section 69, the tribunal deleted the addition made by AO based on audio recordings, following the CIT(A)'s decision in the vendor's case where parties denied on-money exchange during cross-examination. For profit estimation on seized materials, the tribunal reduced the profit rate from CIT(A)'s 5% to 4%, considering the assessee's Kirana trading business and previous years' declared rates. The tribunal found that the assessee's additional income declaration of Rs. 75 lakh adequately covered the 4% profit estimation, warranting telescoping and deletion of separate additions.

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Issues Involved:
1. Legality of the order framed under Section 250 by the CIT(A).
2. Addition of Rs. 33,00,000/- for unexplained investment under Section 69.
3. Estimation of Net Profit (NP) ratio at 5% instead of 3%.
4. Consideration of additional income of Rs. 75,00,000/- declared by the assessee.

Detailed Analysis:

1. Legality of the Order Framed under Section 250 by the CIT(A):
This ground was considered general in nature and thus did not require separate adjudication.

2. Addition of Rs. 33,00,000/- for Unexplained Investment under Section 69:
The assessee challenged the addition of Rs. 33,00,000/- made by the Assessing Officer (AO) on the grounds of lack of legal evidence and failure to provide cross-examination. The AO had based this addition on an audio recording suggesting that the assessee paid on-money for purchasing an immovable property. The CIT(A) confirmed this addition, citing substantial evidence in the form of a recorded video conversation.

However, the Tribunal found that the same addition was made in the hands of the vendor, which was later deleted by the CIT(A) during the appellate proceedings. The Tribunal noted that the audio recording was taken at the back of the assessee and was never provided to him, violating principles of natural justice and Section 65B of the Indian Evidence Act, 1872. Consequently, the Tribunal deleted the addition of Rs. 33,00,000/- made by the AO and confirmed by the CIT(A), aligning with the decision in the vendor's case.

3. Estimation of Net Profit (NP) Ratio at 5% Instead of 3%:
The AO estimated the profit at 8%, which the CIT(A) reduced to 5%. The assessee argued that the profit ratio in the trading business should not exceed 3%, based on historical data. The Tribunal agreed that the profit should be estimated based on comparable profits declared in preceding years and reduced the NP ratio to 4%, considering the nature of the assessee's business in trading Kirana items.

4. Consideration of Additional Income of Rs. 75,00,000/- Declared by the Assessee:
The issue was whether the additional income of Rs. 75,00,000/- declared by the assessee covered the addition based on the 4% NP estimated on the turnover. The CIT(A) recorded that this additional income, declared under the head Business and Profession, covered the profit at 4% on the total turnover. The Tribunal agreed, stating that the additional income needs to be telescoped, and no separate addition is warranted. The returned income was directed to be modified accordingly.

Conclusion:
The appeal filed by the assessee was allowed. The Tribunal deleted the addition of Rs. 33,00,000/- and reduced the NP ratio to 4%, while also considering the additional income of Rs. 75,00,000/- declared by the assessee. The order was pronounced in the open Court on 02/09/2024.

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