2025 (9) TMI 974 - AT - Income Tax

Rs 11 crore unexplained investment addition under Section 69 deleted; on-money treated as partner income, AO to compute 15% profit

ITAT held the Rs.11 crore addition u/s 69 for unexplained investment in land was misplaced and deleted, finding on-money receipts funded the cash payments ... Unexplained investment u/s 69 - on-money payment towards purchase of land - estimate profit on such on-money payment @ 15% as directed by CIT(A) - HELD THAT:- Assessee had paid cash of Rs. 11 crores as on-money for purchase of land. In fact, the A.O. had given a categorical finding that the assessee was accepting cash from the customers against the booking of the shops and flats and on the other hand, the assessee had also paid cash against acquisition of land. Thus, the source of on-money paid by the assessee for purchase of land was already explained i.e. the amount of on-money received by the assessee towards booking of shops and flats. Therefore, no addition u/s. 69 of the Act was called for to the extent of Rs. 9,63,63,652/-. Source of balance cash payment A.O. had referred to the cash ledger account of the partners and discussed about the cash brought in by the partners on different dates. In view of this categorical finding of the A.O. that the cash was brought in by the partners in the partnership firm to purchase the land, the addition, if any, in respect of cash payment, was required to be made in the hands of the individual partners and not in the hands of the assessee firm. Otherwise also, no business activity was carried on by the assessee firm during the year and there was no other source of income, other than the booking amount receipts by the assessee as already discussed earlier. Therefore, the entire addition of Rs. 11 crores as made by the A.O. in respect of unexplained investment in land u/s. 69 of the Act, is found to be misplaced and is liable to be deleted. At the same time, there is no denial to the fact that the assessee had received on-money of Rs. 9,63,63,652/- during the period from 25-10-2018 to 20-04-2019, which was not accounted for in the books of accounts of the firm and which should have been brought to tax in the respective years in which the cash was received. It is a trite law that the income has to be assessed to tax in the correct year. Only the on-money received during the F.Y. 2019-20 (from 01.04.2019 to 20.04.2019) can be considered as income of the assessee pertaining to AY 2020-21. We, therefore, deem it proper to set-aside the matter to the file of the AO with a direction to work out the on-money received by the assessee during the financial year 2019-20. Further the entire online receipt also cannot be considered as income of the assessee. It was rightly held by the Ld. CIT(A) that only the net income earned by the assessee was required to be taxed. We find that the profit estimated by the Ld. CIT(A) @ 15% of the on-money was reasonable. Therefore, the AO is directed to work out the income by applying profit rate of 15%, as upheld by the Ld. CIT(A), on the on-money received during the year. As regard on-money received during the earlier period, the AO is free to proceed in the matter in accordance with the provisions of the Act and bring to tax the on-money receipt in the correct year on the same basis, if the time limit so permits. ISSUES PRESENTED AND CONSIDERED 1. Whether cash payment of Rs. 11,00,00,000/- treated by the Assessing Officer as unexplained investment under section 69 of the Income Tax Act could be sustained against the assessee where impounded documents and statements showed receipt of on-money by the assessee and cash payments by the partners. 2. Whether the Commissioner of Income Tax (Appeals) was justified in limiting the addition to an estimated profit of 15% on the on-money instead of treating the entire cash outflow as unexplained investment. 3. Whether the source of on-money receipts and the timing (relevant assessment year) for taxation of such on-money receipts were correctly dealt with, i.e., whether on-money received earlier than the relevant financial year could be assessed in the AY 2020-21. 4. Whether any addition in respect of cash payments for purchase of land ought to be made in the hands of the partnership firm or in the hands of the individual partners who brought cash into the firm. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of addition under section 69 for cash payment of Rs. 11 crores Legal framework: Section 69 treats unexplained investments as income of the assessee where the assessee is unable to satisfactorily account for investments. Evidence discovered during a survey under section 133A and statements recorded under section 131 may be used to establish source and ownership. Precedent treatment: No precedents were cited or relied upon by the parties or the Tribunal; the decision rests on documentary evidence and statutory provisions. Interpretation and reasoning: The seized documents and the partner's statement admitted receipt of on-money totaling Rs. 9,63,63,652/- during the period 25-10-2018 to 20-04-2019. The Assessing Officer himself found that the firm received cash from customers for bookings and paid cash for land acquisition. Those findings explain the source of a large part of the cash used for land purchase. Where the Assessing Officer's own findings establish a legitimate source for the cash, treating the entire cash outflow as unexplained investment in the hands of the firm is inappropriate. Ratio vs. Obiter: Ratio - where the AO's findings disclose that the assessee had received on-money (cash) which was applied towards the cash payment, the addition under section 69 cannot be sustained to the extent the receipts explain the payments. Obiter - none material on other modes of proof. Conclusion: The addition of Rs. 11 crores under section 69 against the firm is not sustainable to the extent of Rs. 9,63,63,652/-, as the source for that amount is satisfactorily explained by on-money receipts reflected in the impounded materials and admissions. Issue 2: Appropriateness of estimating income at 15% on on-money (CIT(A)'s treatment) Legal framework: When unaccounted cash receipts are found, tax authorities may estimate taxable income by applying a reasonable profit rate to the receipts, provided the method is rational and related to the nature of the transaction; income must be assessed in the correct year and only net/profitable portion may be taxed if sales receipts are not fully profit. Precedent treatment: No judicial authorities were cited by the parties or Tribunal to displace or mandate a different profit rate; reasoning is based on facts and reasonableness. Interpretation and reasoning: The CIT(A) estimated profit at 15% on on-money receipts and treated that net income component as taxable. The Tribunal found that only net income earned by the assessee should be taxed and that the 15% estimate was reasonable on the factual matrix. The Tribunal directed the AO to apply the 15% profit rate on the on-money actually received during the relevant financial year (2019-20 portion), leaving earlier periods to be examined for assessment in their correct years if time permits. Ratio vs. Obiter: Ratio - where receipts represent booking/on-money and are not accounted in books, the taxation may be confined to net profit reasonably estimated (15% on facts here) rather than treating full receipts as income; it is necessary to apply estimate to the correct accounting period. Obiter - the precise choice of 15% is fact-specific and not stated as a universal rule. Conclusion: The CIT(A)'s estimation of taxable income at 15% of on-money receipts is upheld as reasonable for the on-money attributable to the relevant year; the AO is directed to compute income accordingly for the portion falling in FY 2019-20. Issue 3: Year of taxation - whether on-money received prior to FY 2019-20 can be taxed in AY 2020-21 Legal framework: Income must be assessed in the year in which it is received/earned; receipts received in earlier years cannot be treated as income of a later assessment year except as allowed by law or where time-bar permits reopening. Precedent treatment: No authorities were cited; Tribunal applied well-settled principle of year of assessment. Interpretation and reasoning: The impounded records covered receipts from 25-10-2018 to 20-04-2019. The Tribunal noted that the entire on-money receipts cannot be treated as income for AY 2020-21; only on-money received during FY 2019-20 (01-04-2019 to 20-04-2019) pertains to AY 2020-21. For receipts in earlier periods, the AO may proceed in the correct year if time limits permit. Ratio vs. Obiter: Ratio - taxable income must be assessed in the correct year; only the on-money falling in the relevant financial year can be assessed in that assessment year. Obiter - procedural steps for earlier years depend on limitation rules and are left to AO. Conclusion: Only the on-money actually received during FY 2019-20 is taxable in AY 2020-21; earlier receipts must be assessed in their correct years subject to time-bar considerations. Issue 4: Proper entity for addition - firm versus individual partners Legal framework: If cash is proved to have been brought into the firm by partners for a transaction, unexplained cash should be assessed against the person in whose hands the income arose or against the person who is the real owner/source, consistent with facts and documentary evidence. Precedent treatment: No precedents relied upon; Tribunal relied on AO's own findings and documentary ledger entries. Interpretation and reasoning: The AO's assessment record and seized excel ledger (Pages 110-120) recorded individual cash ledgers of partners and contained findings that partners brought cash into the partnership for the land purchase. Given that the AO had found the partners as source of the balance cash, any addition in respect of that balance should be in the hands of the partners and not the firm, particularly where the firm carried out no other business activity during the year. Ratio vs. Obiter: Ratio - where documentary evidence and AO's findings identify the partners as the source of cash, additions for such cash belong to the partners, not to the firm. Obiter - none significant. Conclusion: The unexplained portion of the cash payment (balance after set-off of on-money receipts) if any, if attributable to partners, should be considered for assessment in the hands of the individual partners and not the firm; hence the AO's addition of the entire Rs. 11 crores to the firm is misplaced. Overall Disposition and Directions The Tribunal deleted the full addition of Rs. 11 crores made by the AO against the firm under section 69; directed the AO to work out taxable income by applying 15% profit rate (as held by CIT(A)) on on-money received during FY 2019-20 and to proceed in respect of on-money received in earlier periods in accordance with law and limitation provisions. The Revenue's appeal was dismissed; the assessee's appeal was partly allowed for statistical purposes.