Director surrenders diary amounts as gross income but only profit element should be added not full amount

The ITAT Jaipur held that where a director surrendered amounts found in diary as gross undisclosed income, only profit element should be added rather than full amount. The tribunal sustained addition of Rs. 10 lacs out of Rs. 1.35 crores, allowing expenditure claim on gross revenue. Regarding accounting method, the tribunal upheld assessee's consistent use of project completion method over percentage completion method, noting revenue's past acceptance and that immovable property transfers require complete consideration receipt and possession handover under Transfer of Property Act. The AO failed to justify departure from established practice between assessee and department.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

(i) Whether the assessment orders passed under sections 143(3)/254 read with section 153B(1)(b) for A.Y. 2013-14 and 2017-18 were devoid of jurisdiction, making them void ab initio.

(ii) Whether the approval granted under section 153D was mechanical and without application of mind, rendering the assessment order invalid.

(iii) Whether the additions made by the Assessing Officer (AO) for Rs. 1,16,10,000/- and Rs. 3,71,74,468/- were justified and in accordance with the law.

(iv) Whether the method of accounting followed by the assessee, particularly the Project Completion Method, was appropriate and consistently applied.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Jurisdiction of Assessment Orders

- Legal Framework: The relevant sections under consideration are sections 143(3), 254, and 153B(1)(b) of the Income Tax Act, 1961, which govern the assessment procedures following a search action.

- Court's Interpretation: The Tribunal found that the assessment orders were passed in compliance with the directions issued by the coordinate bench in the first round of litigation. The orders were not found to be legally tenable as the earlier orders had merged with the coordinate bench's decision.

- Conclusion: The Tribunal dismissed the grounds challenging the jurisdiction of the assessment orders for A.Y. 2013-14 as they were not legally tenable.

Issue (ii): Validity of Approval under Section 153D

- Legal Framework: Section 153D mandates that approval must be obtained before passing an order under section 153B.

- Court's Interpretation: The Tribunal did not find sufficient evidence to conclude that the approval was mechanical or without application of mind.

- Conclusion: The Tribunal dismissed the grounds challenging the validity of the approval under section 153D.

Issue (iii): Additions Made by AO

- Legal Framework: The assessment of undisclosed income and the application of section 144 for best judgment assessment were considered.

- Court's Interpretation: The Tribunal noted that neither the Revenue nor the assessee could substantiate their claims regarding the figure of Rs. 1.35 Cr. The Tribunal relied on the principle of taxing real income and the judicial pronouncement in Brij Bhushan Lal Parduman Kumar vs. CIT.

- Conclusion: The Tribunal allowed a partial addition of Rs. 10 Lacs, considering it a reasonable estimate of income, and dismissed the full addition of Rs. 1.35 Cr.

Issue (iv): Method of Accounting

- Legal Framework: The Tribunal considered the applicability of Accounting Standards 7 and 9, and the consistency of the Project Completion Method followed by the assessee.

- Court's Interpretation: The Tribunal found that AS-7 was not applicable as the assessee was not a construction contractor. The Project Completion Method was consistently followed and accepted by the Revenue in the past.

- Conclusion: The Tribunal upheld the method of accounting followed by the assessee and dismissed the Revenue's appeal challenging it.

3. SIGNIFICANT HOLDINGS

- The Tribunal emphasized the principle of taxing real income and the necessity of reasonable estimation in cases where the exact figures are not substantiated.

- The Tribunal concluded that the full amount of Rs. 1.35 Cr. could not be added as undisclosed income, and only a reasonable profit element should be considered.

- The Tribunal upheld the consistent application of the Project Completion Method by the assessee, noting its acceptance in past assessments and the lack of justification for changing the method.

- The Tribunal dismissed the Revenue's appeal, supporting the assessee's method of accounting and the principle of avoiding double taxation.

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