2025 (6) TMI 36 - AT - Income Tax

ITAT reduces profit estimation to 10% but remands unexplained credits case for violating Rule 46A(3)

DCIT Central Circle-2 (4), Ahmedabad Versus Hiralal Dayaram Thakkar, Ahmedabad. And (Vice-Versa)

DCIT Central Circle-2 (4), Ahmedabad Versus Hiralal Dayaram Thakkar, Ahmedabad. And (Vice-Versa) - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in the appeals and cross objections arising from assessment years 2012-13, 2013-14, and 2014-15 are:Whether the Commissioner of Income Tax (Appeals) was correct in deleting the addition of Rs. 3,45,46,640/- made on account of unexplained income under section 68 of the Income Tax Act, 1961.Whether the Commissioner of Income Tax (Appeals) was justified in reducing the addition on account of suppression of income on sale of flats/plots by determining the profit at 10% instead of 20%, without providing reasons.Whether the Commissioner of Income Tax (Appeals) erred in upholding the addition of profit estimation at 10% against the assessee's claim of 3% profit on sale of flats/plots.Whether the Commissioner of Income Tax (Appeals) erred in deleting a substantial portion of addition on account of suppression of income on sale of plots for A.Y. 2014-15.Whether the Commissioner of Income Tax (Appeals) violated procedural requirements under Rule 46A(3) of the Income Tax Rules by admitting additional evidence without providing the Assessing Officer an opportunity to examine the same.Whether the delay in filing cross objections by the assessee should be condoned.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Deletion of addition of Rs. 3,45,46,640/- as unexplained income under section 68Legal framework and precedents: Section 68 of the Income Tax Act requires unexplained credits to be added to income unless the assessee satisfactorily explains the source. The procedure under Rule 46A(3) mandates that additional evidence filed during appeal must be shared with the Assessing Officer (AO) to allow examination.Court's interpretation and reasoning: The AO treated the entire contractual receipt of Rs. 3,45,46,640/- as unexplained due to non-furnishing of details regarding additions to capital accounts and unsecured loans. The Tribunal found that treating the entire contract receipt as unexplained was incorrect, as the AO's queries related specifically to capital additions and loans. The AO's approach was thus overbroad.The CIT(A) deleted the addition after considering additional evidence filed by the assessee. However, the Tribunal noted that the CIT(A) did not provide the AO an opportunity to examine this new evidence, violating Rule 46A(3). Consequently, the Tribunal set aside the matter to the CIT(A) for fresh adjudication after obtaining a remand report from the AO.Key evidence and findings: The assessee's failure to provide explanations during assessment proceedings was noted, but additional evidence was filed during appeal. The AO was not given a chance to verify this evidence.Application of law to facts: The Tribunal emphasized procedural compliance with Rule 46A(3) and held that evidence admitted without AO's opportunity to examine is impermissible. The deletion of addition on unexplained income was premature without AO's examination of fresh evidence.Treatment of competing arguments: The Revenue contended that the deletion was incorrect and that the matter should be remanded to the AO. The assessee argued that the CIT(A)'s order was correct and requested remand only to the CIT(A). The Tribunal sided with the Revenue's approach, directing remand to the CIT(A) with instructions to seek AO's report.Conclusion: The ground was allowed for statistical purposes, with the matter remanded to the CIT(A) for reconsideration after AO's examination of additional evidence.Issue 2: Reduction of addition on estimation of profit from 20% to 10%Legal framework and precedents: Under section 145(3), the AO can reject books of account if they do not comply with prescribed accounting standards. When books are rejected, income can be estimated on a reasonable basis. The principle of res judicata does not apply in income tax matters, allowing reassessment of profit rates.Court's interpretation and reasoning: The AO rejected the assessee's books for lack of clarity and incomplete records, estimating profit at 20% without stating reasons. The CIT(A) upheld the rejection but reduced the estimated profit to 10%, considering it reasonable compared to the presumptive profit rate of 8% under section 44AB.The Tribunal found no error in the CIT(A)'s decision, noting that the assessee's claimed profit of 3% was arbitrary and unsupported by any scientific method or detailed accounting. The CIT(A) correctly identified the deficiencies in the assessee's accounts, including lack of project-wise accounting and absence of unit-wise or party-wise sales data.Key evidence and findings: The audited accounts were cryptic and incomplete; no project-wise accounting was maintained; the 3% profit figure was self-declared without basis; the AO's 20% estimate lacked justification.Application of law to facts: The rejection of books was justified under section 145(3). Estimation of profit at 10% was reasonable and supported by the facts and circumstances.Treatment of competing arguments: The Revenue argued for restoration of 20% profit addition, while the assessee contended for acceptance of 3%. The Tribunal sided with the CIT(A)'s moderate estimate of 10%.Conclusion: The CIT(A)'s order upholding rejection of books and fixing profit at 10% was affirmed; both Revenue's appeal and assessee's cross objections on this issue were dismissed.Issue 3: Delay in filing cross objections by the assesseeLegal framework and precedents: Limitation periods for filing cross objections are prescribed; delay requires explanation and may be condoned at the Tribunal's discretion.Court's interpretation and reasoning: The assessee filed cross objections with a delay of 449 days, explained as due to late communication of Revenue's appeals and the assessee's old age and hospitalization. The Tribunal noted that hospitalization occurred after the limitation period expired and the explanation was not fully convincing.However, since the grounds in the cross objections were also contested by the Revenue, and for the sake of adjudicating relevant issues, the delay was condoned.Conclusion: Delay in filing cross objections was condoned to enable substantive adjudication.Issue 4: Deletion of addition on account of suppression of income on sale of flats/plots for A.Y. 2014-15Legal framework and precedents: Income suppression can be estimated based on prior years' ratios and evidences. Rule 46A(3) requires AO's opportunity to examine additional evidence filed during appeal.Court's interpretation and reasoning: The AO made addition based on AIR information and prior years' suppression ratios, as the assessee failed to produce sale deeds and purchase documents. The CIT(A) deleted a large portion of the addition after considering additional evidence filed by the assessee, without allowing the AO to examine it.The Tribunal found this to be a violation of Rule 46A(3) and set aside the matter to the CIT(A) for fresh adjudication after obtaining AO's remand report.Treatment of competing arguments: The Revenue sought remand to the AO, while the assessee emphasized partial confirmation of addition by the CIT(A). The Tribunal directed remand to the CIT(A) with instructions to involve AO.Conclusion: The ground was allowed for statistical purposes, with remand for reconsideration.Issue 5: Applicability of res judicata and prior acceptance of profit ratesCourt's interpretation and reasoning: The Tribunal reaffirmed that the principle of res judicata does not apply to income tax proceedings. Acceptance of a profit rate in earlier years does not preclude reassessment in subsequent years if facts or circumstances differ or accounts are found deficient.Application to facts: The assessee's claim of 3% profit based on prior years' acceptance was rejected as arbitrary and unsupported in the current assessments.3. SIGNIFICANT HOLDINGS'The action of the AO in treating the entire contract receipt of the assessee as unexplained can't be held as correct. The AO had made queries in respect of addition to capital accounts and fresh loans taken during the year. If the assessee did not comply in respect of these issues, the additions should have been restricted to these specific items.''As per provision of Rule 46A(3) of the IT Rules, the Ld. CIT(A) was prevented from taking into account any additional evidence filed in the course of appeal proceeding, without allowing a reasonable opportunity to the AO to examine the fresh evidences. The order of the Ld. CIT(A) on this issue is patently in contravention to the provisions of Rule 46A(3) of IT Rules and can't be sustained for this reason.''The AO has rejected the books of accounts by invoking provisions of section 145(3) of the Act and therefore the profit shown by the appellant. It is very clear from perusal of the audited accounts of the appellant that information contained therein is very cryptic in nature... The rationale provided that why it chose 3% as the net profit rate for each of the project is unacceptable as it has no basis at all... Therefore, I uphold the action of the AO to reject the book results as they are incomplete and incorrect.''When the books of accounts are rejected, the profit has to be worked out on estimate basis. The AO had applied a rate of 20% to work out the net profit out of the gross booking receipts. However, the AO didn't give any reason or any basis for application of this rate. On the other hand, the Ld. CIT(A) had restricted the addition @10% of the contract receipts... the net profit rate of 10%, as applied by the Ld. CIT(A), is found to be reasonable.''The principle of res judicata is not applicable to income tax proceedings. When the assessee was engaged in the construction activity, he was duty bound to follow the prescribed accounting standard of either project completion or percentage completion method.''The order of the Ld. CIT(A) is in contravention to Rule 46A(3) of the IT Rules as the AO was not allowed any opportunity to examine the fresh evidences filed in the appellate proceeding. We, therefore, deem it proper to set aside the matter to the file of the ld. CIT(A) with a direction to call for a remand report from the AO on the additional evidences filed by the assessee in the course of appeal proceeding and thereafter re-adjudicate the matter.'Final determinations:The Revenue's appeals were partly allowed for statistical purposes, remanding issues relating to deletion of unexplained income and suppression on sale of plots to the CIT(A) for fresh adjudication after AO's examination of additional evidence.The CIT(A)'s reduction of profit estimation from 20% to 10% was upheld.The delay in filing cross objections by the assessee was condoned.All cross objections filed by the assessee were dismissed.