2020 (2) TMI 884 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - On money receipt - estimation of income - addition on account of entire construction receipts as alleged unrecorded receipts - HELD THAT - CIT (A) was not justified in confirming the addition of entire on-money receipts amounting to Rs. 4, 72, 02, 368. Therefore only estimated net profit is required to be taxed. We find that the assessee has shown net profit at 4.55.% for the assessment year under consideration and 4.59% for A.Y. 2010-11. Further the Hon ble High Court in the case of CIT V. Abhishek Corporation 1998 (8) TMI 110 - ITAT AHMEDABAD-C has upheld the net profit at 1.31% as declared by the assessee in that case. The net profit rate disclosed at 4.55% during the assessment year under consideration by the assessee in books of accounts and considering the facts that the project undertaken by the assessee comes under deduction of section 80IB(10) hence there may not be any intention to disclose the lower rate of profit. Considering these facts and taking in to account net profit in construction business it would be reasonable to estimate 6% of net profit on total on-money receipts - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80IB(10) of the Income Tax Act.
2. Rejection of books of accounts under Section 145(3) and addition of unrecorded receipts.

Detailed Analysis:

1. Disallowance of Deduction under Section 80IB(10):
The assessee's grounds relating to the disallowance of Rs. 5,02,25,387 under Section 80IB(10) were not pressed. The learned counsel for the assessee conceded that the original return of income was not filed within the statutory period required to claim the deduction under Section 80IB(10). Consequently, these grounds of appeal were dismissed as not pressed.

2. Rejection of Books of Accounts and Addition of Unrecorded Receipts:
The primary contention revolved around the rejection of the assessee’s books of accounts and the addition of Rs. 4,72,02,368 as unrecorded receipts.

Facts and Findings:
- The assessee, engaged in the construction business, initially declared a turnover of Rs. 567.44 lakhs and other income of Rs. 123.49 lakhs, with a net profit of Rs. 25,54,547.
- A survey under Section 133A revealed discrepancies between the original and revised Profit & Loss Accounts, showing a significant increase in turnover and expenses.
- The AO noted the assessee’s revised turnover at Rs. 25,94,55,680 and additional expenditure of Rs. 4,29,02,369, leading to the rejection of the books under Section 145(3) due to unreliable cash payments and vouchers.
- The AO added Rs. 4,72,02,368 as unaccounted receipts based on impounded materials showing gross receipts of Rs. 10,39,86,000 against the declared Rs. 5,67,83,632.

CIT(A) Observations:
- The CIT(A) upheld the AO’s rejection of the books, noting the significant discrepancies and the use of unverified cash vouchers.
- The CIT(A) confirmed the addition of Rs. 4,72,02,368 as unaccounted receipts, rejecting the assessee’s claim for deduction of unaccounted expenses.

Tribunal’s Analysis:
- The Tribunal acknowledged the discrepancy between the declared and actual gross receipts, but emphasized that only the profit embedded in such receipts should be taxed, not the entire amount.
- Citing precedents, the Tribunal noted that the entire sales could not be added as income; only the net profit embedded in the sales should be considered.
- The Tribunal referred to various judicial pronouncements, including the Gujarat High Court’s rulings in CIT v. President Industries and DCIT v. Panna Corporation, to support the view that only the profit element in the on-money receipts should be taxed.

Conclusion:
- The Tribunal concluded that the CIT(A) was not justified in confirming the addition of the entire on-money receipts.
- It was deemed reasonable to estimate a net profit rate of 6% on the total on-money receipts of Rs. 4,72,02,368.
- The AO was directed to tax the net profit at 6% of the on-money receipts, amounting to Rs. 28,32,142.

Result:
The appeal of the assessee was partly allowed, with the Tribunal directing a reassessment of the net profit on the unaccounted receipts at a rate of 6%. The order was pronounced in the open court on 13.02.2020.