2026 (1) TMI 878 - AT - Income Tax

Cash withdrawals linked to land purchase and contested net profit rate - remitted for AO rehearing; 8% profit disallowed

Issue 1 - Unexplained investment u/s 69A: The tribunal examined the drawings ledger and monthly summaries showing cash withdrawals with narration linking ... Unexplained investment u/s 69A - addition made as cash book does not reflect the cash payments and also copy of the drawings account ledger was not produced - assessee argued addition made u/s. 69A is not correct since the cash payments were made out of the drawings - HELD THAT:- As perused the monthly summary of drawings account as well as the ledger account of the drawings account in which the cash withdrawals were duly reflected and in the narration it was also mentioned that the withdrawal was used to purchase the site. Even though the ledger of the drawings account were available with the assessee, the same was not produced before the AO. As considered the said documents and also the financial statements submitted by the assessee and found that the assessee had source for effecting the said purchases which is from the drawings account of the assessee’s proprietary concern. Therefore, we are satisfied that there are evidences for the withdrawal of the cash and therefore there are enough source available with the assessee for making the cash payments for purchasing the property. Anyhow this drawings ledger account was not produced before the AO and therefore we remit this issue to the file of the AO for considering the documents filed before us and to take a decision in accordance with law, after hearing the assessee. We also permit the assessee to produce any other evidences, if available to be produced before the AO in support of their contention. Net profit determination - addition by estimating profit at 8% of turnover, despite the Appellant having already declared 7%, which aligns with industry standards - AO had mainly relied on the statement given by the assessee and the non-retraction of the said statement. We do not think that the AO can estimate the net profit based on the statement when the assessee is having the audited books of accounts. As considered the comparable statement given by the assessee in the industries similarly situated and their profit margins ranges from 4.07 to 6.57%. In fact, in the present case, the assessee had declared a higher margin of 7% which in our view is a reasonable margin arrived by the assessee. We do not find that the inclusion of the other expenses would be a reason for estimating the net profit at 8% instead of 7%. We have also found that based on the search and survey operations, no incriminating materials were seized or impounded except the regular books of accounts maintained by the assessee. Adoption of net profit at 8% instead of 7% by the AO which was confirmed by the Ld.CIT(A) is not in order and also without any basis. We, therefore set aside the order of the lower authorities and allow the appeal filed by the assessee. Issues: (i) Whether the addition made under section 69A in respect of cash payments for purchase of property (A.Y. 2019-20) was justified where the assessee now produces drawings ledger and audited financial statements asserting withdrawals as source of funds; (ii) Whether the assessment officer was justified in estimating net profit at 8% of turnover (A.Y. 2020-21) contrary to the assessee's audited books showing 7%.Issue (i): Whether addition under section 69A for cash payments is sustainable where the assessee has ledger entries of drawings and supporting financial statements.Analysis: The assessee's ledger extracts and monthly summary of drawings account, now produced, indicate cash withdrawals linked to the property purchase and audited financial statements show available funds. These documents were not placed before the AO during assessment. The Tribunal finds evidential material on record supporting the contention that cash payments originated from drawings of the proprietary concern and permits the AO to reassess the issue after giving the assessee an opportunity to be heard on documents produced before the Tribunal.Conclusion: Addition under section 69A is not finally sustained by the Tribunal; the matter is remitted to the AO for fresh consideration after hearing the assessee. The appeal in respect of this issue is partly allowed for statistical purposes.Issue (ii): Whether the AO can estimate net profit at 8% when the assessee's audited books report net profit at 7% and comparable industry data support the declared margin.Analysis: The assessee maintained audited books supporting a 7% net profit. The nature of the construction business reasonably involves cash disbursements (e.g., wages) and the Tribunal finds no convincing material or seized incriminating evidence to justify increasing the profit rate to 8%. Comparable entities' margins submitted by the assessee further support the declared rate. The AO's reliance on statements and non-retractions, absent material defects in the audited accounts, is insufficient to disturb the audited profit margin.Conclusion: The AO's estimation of net profit at 8% is set aside and the declared 7% net profit is accepted; the appeal for A.Y. 2020-21 is allowed in favour of the assessee.Final Conclusion: One assessment (A.Y. 2019-20) is partly allowed and remitted to the assessing officer for fresh consideration of the documents produced before the Tribunal; the other assessment (A.Y. 2020-21) is allowed in favour of the assessee, producing an overall outcome partly in favour of the assessee.