2023 (4) TMI 1427 - AT - Income Tax

Taxation of on-money receipts - contention of the Assessee is that only 20% of the on-money receipts should be brought to tax as income - Revenue contends that the CIT (A) committed error in allowing deduction for expenses in absence of any proof of the same having been furnished by the Assessee during the assessment or first appellate proceedings and therefore entire amount of on-money receipts should be taxed in the hands of the Assessee. HELD THAT - Unaccounted sale and expenditure has been worked out based on the seized documents. However in our view given the facts and circumstances of the case it cannot be said that in the income of the Appellant has not been estimated. The income of the Appellant has been estimated by the Assessing Officer after taking into account the information/material gathered. In our view where income has estimated on the basis of information/material gathered as is the situation in the present case an Assessee cannot be deleted to a possession worse than in a case where income has estimated on ad-hoc basis say in a case where an Assessee chooses not to furnish relevant document/details or not to participate in the assessment proceedings and the estimate is made on ad-hoc basis any supporting information/details. A perusal of the decision relied upon by the Assessee during the course of hearing (placed at pages 15 to 38 of the Compendium of Cases) shows that estimation of profits as ad-hoc percentage of the cash receipts has been accepted. Only profit element embedded in cash/on-money receipts could be brought to tax in the hands of the Assessee. Therefore we find no infirmity in the order passed by the CIT (A) to the extent that the CIT (A) holds that only profit element embedded in the cash receipts is liable to be taxed in the hands of the Assessee. In view of the aforesaid we reject the contention of the Revenue that entire cash receipts should be brought to tax. Computation of profit element - CIT (A) has concluded that 45% of the on-money receipts are the profit element liable to tax in the hands of the Assessee - For the Assessment Year 2009-10 to 2015-16 the maximum net profit rate declared by the Assessee was 25.75%. The average of the profit for the Assessment Year 2009-10 to 2015-16 comes to around 14.15% whereas it has been contended on behalf of the Assessee that rate of 20% be adopted for determining the profit element embedded in cash receipts. Keeping in view the facts and circumstances of the case and to meet the ends of justice we hold that 22.5% of on-money receipts would be fair estimate of profit element which should be brought to tax in the hands of the Assessee. Year in which 22.5% of on-money receipts should be brought to tax - As in appellate proceedings before us the Ld. Authorised Representative for the Assessee reiterated the submission that Assessee has offered the on-money receipts to tax in subsequent years and has provided the above details. The on-money receipts offered to tax by the Assessee in the subsequent assessment years have been accepted by the Revenue. It is settled legal position that same income cannot be taxed twice. We have allowed already held that only the profit element consisting of 22.5% of on-money recipes can be brought to tax (as opposed to the entire on-money receipts as contended by the Revenue). Accordingly we restrict the addition under consideration for the Assessment Year 2012-13 to 22.5% of INR 1, 90, 71, 000/- being the balance amount of on money receipts not offered to tax by the Assessee till the date and the same shall be taxed in the year of sale of flats booked by the Assessee. Benefit of deduction u/s 80IB(10) - on-money receipts pertaining to the eligible projects brought to tax in the hands of the Assessee - HELD THAT - The CIT (A) has followed the decision Jupiter Construction 2021 (12) TMI 537 - ITAT MUMBAI while holding that the Assessee would be entitled to claim deduction under Section 80IB(10) of the Act in case of additional income arising from on-money receipts pertain to eligible projects provided the Assessee had claimed deduction under Section 80IB(10) of the Act in the original return of income and had not made claim for deduction under Section 80IB(10) of the Act for the first time for the relevant assessment year in the return of income filed response to notice issued under Section 153A of the Act. No infirmity in the order passed by CIT (A) on this issue. Accordingly Ground No. 3 to 5 raised by the Revenue in the appeal are dismissed.

Summary

The core legal questions considered by the Tribunal in this batch of appeals primarily revolve around the tax treatment of "on-money" receipts (undisclosed cash receipts) in the hands of the Assessee, a partnership firm engaged in real estate development. The key issues are:

• Whether the entire amount of on-money receipts should be treated as income in the year of receipt or only the profit element embedded in such receipts should be taxed.
• The appropriate percentage of profit element to be applied on the on-money receipts for taxation purposes.
• The year of assessment in which the profit element of on-money receipts should be brought to tax, considering the Assessee's method of accounting.
• Whether the Assessee is entitled to claim deduction under Section 80IB(10) of the Income Tax Act in respect of additional income arising from on-money receipts relating to eligible housing projects.
• Whether the claim of deduction under Section 80IB(10) can be allowed in search-related reassessment proceedings if such claim was not made in the original return.
• The validity of the Assessing Officer's and CIT(A)'s estimation and treatment of cash expenses and income in the absence of complete documentary evidence.

Issue 1: Taxability of On-Money Receipts - Entire Amount or Profit Element Only

The legal framework involves the provisions of the Income Tax Act relating to income computation and the principles governing the taxation of undisclosed income discovered during search and seizure operations under Section 132 and reassessment under Section 153A. The Tribunal also examined judicial precedents including decisions by various High Courts and the Tribunal itself which have held that only the profit element embedded in on-money receipts should be taxed as income, not the entire receipt.

The Assessing Officer (AO) treated the entire on-money receipts as income, disallowing any deduction for expenses due to lack of documentary evidence. The CIT(A) partially allowed the Assessee's contention by estimating 45% of on-money receipts as profit element taxable in the year of receipt, allowing deduction of 55% as expenses. The Assessee argued for a 20% profit element based on net profit percentages declared in audited accounts, contending that the entire on-money receipts were advances and should be taxed on project completion.

The Tribunal noted that the AO had estimated income after considering seized documents but rejected expense claims for non-compliance with sections 30 to 36, 37, and 40A(3) of the Act. However, the Tribunal emphasized that the income was estimated based on material and not arbitrarily, placing the Assessee in a better position than cases where income is estimated ad hoc. The Tribunal relied on precedents where profit elements ranging from 12% to 17% of cash receipts were accepted as taxable income, and upheld the principle that only the profit element embedded in on-money receipts is taxable.

Accordingly, the Tribunal rejected the Revenue's contention to tax the entire on-money receipts as income.

Issue 2: Appropriate Percentage of Profit Element to be Taxed

The CIT(A) adopted 45% as the profit element based on a detailed computation that accounted for cash expenses quantified from seized documents, including stamp duty and registration charges, and other cash expenses. The CIT(A) also relied on profit rates adopted for sister concerns engaged in similar business activities.

The Assessee contended that 45% was excessive and urged adoption of 20%, supported by net profit percentages declared in audited returns ranging from 8.48% to 25.75%. The Tribunal observed that the CIT(A) had not considered cash expenses incurred for purchase of land, which if accounted for, would reduce the profit percentage to approximately 39.43%. Considering the nature of the Assessee's business (low-income group housing in Virar, Palghar) and the disclosed net profits, the Tribunal held that a fair estimate of the profit element would be 22.5% of on-money receipts.

This approach balanced the evidentiary deficiencies with the Assessee's business realities and prior disclosures, ensuring taxation of a reasonable profit element without being punitive.

Issue 3: Year of Taxation of Profit Element on On-Money Receipts

The Assessee followed the completed contract method of accounting, treating advances (including on-money receipts) as liabilities until project completion, when income is recognized. The Assessee argued that on-money receipts should be taxed in the year of project completion, consistent with its accounting method.

The Revenue contended that since on-money receipts were undisclosed and not recorded in books, they should be taxed in the year of receipt.

The CIT(A) had rejected the Assessee's claim for subsequent year taxation due to lack of substantiation. However, before the Tribunal, the Assessee furnished details showing that significant portions of on-money receipts had been offered to tax in later years, and the Revenue accepted these disclosures.

The Tribunal applied the settled legal principle that the same income cannot be taxed twice. It held that only the profit element (22.5%) of the balance on-money receipts not yet offered to tax should be brought to tax in the year of sale of flats booked by the Assessee, i.e., in the year of project completion.

Issue 4: Deduction under Section 80IB(10) on Additional Income from On-Money Receipts

The Revenue challenged the CIT(A)'s grant of deduction under Section 80IB(10) to the Assessee in respect of additional income arising from on-money receipts related to eligible housing projects. The Revenue argued that such deduction cannot be claimed if not made in the original return and that new claims cannot be allowed in reassessment proceedings under Section 153A.

The CIT(A) allowed the deduction, relying on judicial precedents including a Bombay High Court decision and Tribunal rulings holding that additional income discovered during search proceedings, which enhances business income from eligible projects, qualifies for deduction under Section 80IB(10) if the Assessee had claimed such deduction in original returns for the same projects.

The Tribunal upheld the CIT(A)'s reasoning, noting that the Assessee's claim was a continuation of the original claim and that the prohibitory conditions of Section 80A(5) did not apply. The Tribunal distinguished the facts from cases where no original claim was made and emphasized that denial of deduction would be unjust when the additional income clearly relates to eligible projects.

Issue 5: Estimation and Treatment of Cash Expenses and Income in Absence of Complete Documentary Evidence

The AO disallowed deductions for cash expenses due to lack of corroborative documentary evidence and non-compliance with statutory provisions. The CIT(A) accepted that expenses were incurred in cash but estimated profit element based on seized documents and remand reports.

The Tribunal held that estimation of income based on seized material and documents is permissible and not arbitrary. It recognized that incomplete records justify adoption of a higher profit rate but also acknowledged that some expenses were incurred and should be allowed. The Tribunal emphasized that the Assessee was in a better position than cases where no evidence is furnished, and thus a reasonable profit percentage should be adopted.

Application of Law to Facts and Treatment of Competing Arguments

The Tribunal carefully balanced the evidentiary deficiencies and the Assessee's submissions. It rejected the Revenue's demand to tax the entire on-money receipts as income, finding support in judicial precedents. It modified the CIT(A)'s 45% profit element to 22.5%, considering land purchase expenses and the nature of the business. The Tribunal accepted the Assessee's accounting method for taxing on-money profit element in the year of project completion, subject to the condition that income already offered to tax in subsequent years would not be taxed again. It upheld the grant of deduction under Section 80IB(10) on additional income from on-money receipts, following binding precedents. The Tribunal also recognized the legitimacy of estimating income and expenses based on seized materials in absence of full documentary proof.

Significant Holdings

"Only the profit element embedded in the cash/on-money receipts could be brought to tax in the hands of the Assessee."

"Where income has been estimated on the basis of information/material gathered, an Assessee cannot be placed in a position worse than in a case where income is estimated on ad-hoc basis without any supporting information."

"The net profit rate estimated in sister concerns engaged in similar business can be taken as basis for estimating net profit rate in group concerns."

"The same income cannot be taxed twice. Therefore, the profit element of on-money receipts already offered to tax in subsequent years cannot be taxed again."

"Additional income arising from on-money receipts pertaining to eligible housing projects enhances the business income and is eligible for deduction under Section 80IB(10), provided the deduction was claimed in original returns."

Final determinations:

• The appeals by the Revenue for Assessment Years 2010-11, 2012-13, 2013-14, and 2014-15 are dismissed.
• The appeals by the Assessee for Assessment Years 2012-13 to 2015-16 are partly allowed by restricting the addition of on-money receipts' profit element to 22.5% of the balance amount not yet offered to tax, to be taxed in the year of project completion.
• Deduction under Section 80IB(10) is allowed in respect of additional income from on-money receipts relating to eligible projects, consistent with original claims.