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2025 (5) TMI 341 - AT - Income TaxAdditions on account of undisclosed receipts after reducing amount of expenditure which are allowable expenditure under the Income Tax Act - AO has disallowed those expenses which are in violation to section 40A(3) 40(a)(ia) and under other provisions of the Act - HELD THAT - Admittedly the undisclosed receipts as well as undisclosed expenditures were found noted in the loose papers and excel sheets etc. found and seized during the course of search. It is settled proposition that in case where undisclosed receipts were found as a result for search such entire receipt cannot be taxed as income. As in the case of The Godhara Electricity Co. Ltd. 1997 (4) TMI 4 - SUPREME COURT as held it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the income tax officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant commissioner was right in deleting the said addition made by the income tax officer and the tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the income tax officer did represent the income which had really accrued to the assessee-company during the relevant previous years. The High court in our option was in error in upsetting the said view of the Tribunal. As in the case of CIT vs. President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT has held that only profit in embedded in undisclosed receipts could be taxed and not the entire undisclosed receipts. Before us the Ld. CIT-DR failed to controvert the findings given by Ld. CIT(A) made while deleting the additions by applying profit rate of 10% as against the addition of entire undisclosed receipts. CIT(A) has deleted the amount of unaccounted expenditure recorded in the same pages by holding the same are not required since net profit rate on undisclosed receipts was applied and addition of Rs. 68, 21, 171/- is sustained as profit on such undisclosed receipts. Accordingly we find that no infirmity in the orders of the Ld. CIT(A) which is hereby upheld. Decided against revenue.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals filed by the Revenue against the orders of the Commissioner of Income Tax (Appeals) for Assessment Years 2018-19 and 2019-20 are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Entire Undisclosed Receipts versus Net Profit Embedded Relevant Legal Framework and Precedents: The Income Tax Act, 1961, defines "income" under Section 2(24) and "total income" under Section 2(45). Section 4 charges tax on total income computed as per the Act. The Supreme Court in CIT vs. Williamson Financial Services emphasized that tax is on income/profits and gains, not on gross receipts. The Godhra Electricity Co. Ltd. case held that entire receipts cannot be taxed as income if there is no real accrual of income. Similarly, the Gujarat High Court in CIT vs. President Industries held that only the profit embedded in undisclosed receipts is taxable, not the entire amount. Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s approach that only the net profit portion of the undisclosed receipts is taxable. The Tribunal noted that the Assessing Officer had made additions by disallowing certain expenses under Sections 40A(3), 40(a)(ia), and others, but the entire receipts cannot be treated as income. The CIT(A) applied a net profit rate of 10% on undisclosed receipts to estimate taxable income. Key Evidence and Findings: The undisclosed receipts were evidenced by seized documents including an excel workbook "Pendrive-000641" and loose papers found during search. The Assessing Officer computed undisclosed receipts at Rs. 6.82 crores approximately. The assessee had commenced business from 11.11.2017, and receipts prior to this date were excluded. The CIT(A) considered these facts and applied a 10% profit rate on Rs. 6.82 crores. Application of Law to Facts: The Tribunal relied on the principle that tax is chargeable on real profits and gains, not gross receipts. Given the competitive nature of the business and the seized material, applying a net profit rate was appropriate. The Tribunal found no infirmity in the CIT(A)'s approach and rejected the Revenue's plea for taxing the entire undisclosed receipts. Treatment of Competing Arguments: The Revenue contended that the entire undisclosed receipts should be added as income since the assessee failed to produce evidence to disprove unaccounted receipts and expenses. The assessee argued that only net profit is taxable, supported by judicial precedents. The Tribunal sided with the assessee, emphasizing the settled legal position that gross receipts cannot be taxed as income. Conclusions: The Tribunal upheld the CIT(A)'s order restricting additions to 10% of undisclosed receipts, rejecting the Revenue's claim for addition of the entire amount. Issue 2: Additions on Account of Unexplained Expenditure Relevant Legal Framework and Precedents: Expenditure disallowed under Sections 40A(3), 40(a)(ia) and related provisions cannot be allowed as deduction. However, unexplained or unaccounted expenditure recorded in seized documents must be supported by evidence to be disallowed. The Delhi High Court in CIT vs. Indeo Airways Pvt. Ltd. held that presumption of truth of seized documents cannot be selectively applied to deny expenses without proof. Court's Interpretation and Reasoning: The CIT(A) deleted additions made on account of unexplained expenditure, reasoning that since net profit rate was applied on undisclosed receipts, separate addition of expenses would be double counting. The Tribunal agreed, noting that the Assessing Officer had disallowed expenses violating statutory provisions but the CIT(A) rightly held that further addition on unexplained expenditure was not sustainable. Key Evidence and Findings: The Assessing Officer found unaccounted expenditure recorded in the seized documents but allowed only Rs. 28 lakhs out of Rs. 6.35 crores claimed, disallowing the balance as inadmissible. The CIT(A) observed that the net profit rate applied already accounted for such expenses. Application of Law to Facts: Since the net profit rate was applied after considering the nature of business and seized material, further addition on unexplained expenditure would amount to taxing the same income twice. The Tribunal found the CIT(A)'s deletion of unexplained expenditure additions justified. Treatment of Competing Arguments: The Revenue argued that the unexplained expenditure should be added back as the assessee failed to produce evidence. The assessee argued that such expenses are subsumed in the profit rate applied. The Tribunal accepted the latter view. Conclusions: The Tribunal upheld the deletion of additions on account of unexplained expenditure by the CIT(A). Issue 3: Application and Justification of 10% Net Profit Rate on Undisclosed Receipts Relevant Legal Framework and Precedents: The principle of estimating income by applying a reasonable profit rate on undisclosed receipts is well recognized. The Supreme Court and various High Courts have accepted such an approach in cases where exact income cannot be determined but incriminating material indicates undisclosed turnover. Court's Interpretation and Reasoning: The CIT(A) applied a 10% net profit rate based on the nature of business, competitive market conditions, and seized documents showing receipts and expenses. The Tribunal found this approach reasonable and supported by judicial precedents. Key Evidence and Findings: The assessee's own profit and loss account prepared on the basis of seized documents showed net profit of approximately 1.5%, but the CIT(A) applied a higher rate of 10% considering the business realities and comparative evidence from related entities. Application of Law to Facts: The Tribunal observed that the 10% profit rate was a reasonable estimate of net profit embedded in undisclosed receipts. This method aligns with the real income theory and avoids taxing gross receipts. Treatment of Competing Arguments: The Revenue contended that no evidence supported the expenditure incurred to earn the receipts, hence the entire receipts should be added. The assessee contended that the profit rate method is appropriate and supported by case law. The Tribunal agreed with the assessee. Conclusions: The Tribunal confirmed the application of a 10% net profit rate on undisclosed receipts as a fair and lawful method of estimating income. Issue 4: Treatment of Rent Payments and Related Expenses Relevant Legal Framework and Precedents: Rent paid is a business expenditure deductible under the Act subject to its genuineness and compliance with provisions. Additions under Section 69C can be made for unexplained cash payments. Court's Interpretation and Reasoning: The CIT(A) found that the assessee was liable to pay rent of Rs. 5,00,000 per month from November 2017, not October 2017 as alleged by the AO. The AO had made additions of Rs. 1.2 crores on account of unexplained cash rent payments. The CIT(A) held that since the profit was estimated at 10% on undisclosed receipts, further addition on rent expenses would be double counting and deleted the addition. Key Evidence and Findings: Rent agreements and bills showed rent payable from November 2017. Seized documents indicated cash payments to a director on behalf of the landlord. The CIT(A) accepted the assessee's submissions and evidence. Application of Law to Facts: The Tribunal agreed with the CIT(A) that rent is an expense and since net profit was estimated after considering such expenses, separate addition on rent was not warranted. Treatment of Competing Arguments: The Revenue argued for addition on unexplained cash rent payments. The assessee argued that rent was a legitimate expense and already accounted for in profit rate. The Tribunal sided with the assessee. Conclusions: The Tribunal upheld the deletion of additions on account of unexplained rent payments. 3. SIGNIFICANT HOLDINGS "It is a settled proposition that in case where undisclosed receipts were found as a result for search such entire receipt cannot be taxed as income." "What is chargeable to tax under the Income Tax Act is not gross receipts but income." "Only net profit out of the out of books sales can be added to the income of the appellant." "Since the profit of the appellant has been computed @10% after considering out of books receipts and expenditure, and rent is also an expense, in my opinion, further addition on account of rent expenses is not sustainable." "In the absence of any materials in the form of documents, the Revenue could not have denied the benefit of any expenses which would otherwise have enured to the assessee, as an allowable deduction under section 37(1)." The Tribunal upheld the principle that tax is chargeable on real income/profits and gains and not on gross receipts. It confirmed the approach of applying a reasonable net profit rate (10%) on undisclosed receipts to estimate taxable income. The Tribunal sustained the deletion of additions on unexplained expenditure and rent payments on the ground of double counting and lack of evidence. The Revenue's appeals were dismissed for both assessment years, affirming the CIT(A)'s orders.
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