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2025 (5) TMI 499 - AT - Income TaxUnaccounted business receipts ( on-money ) and associated expenditures - net profit @ 20% on unaccounted business receipts as offered by assessee - as submitted Assessee had offered the entire on-money spread during the period of five years - HELD THAT - In the present set of facts that income element offered by the assessee towards on-money receipts is not out of mere guess work but based on seized material which relates to both receipts as well as expenses and have been duly explained in the course of search as well as in the post-search assessment proceedings. There is nothing brought on record to establish that expenses incurred by the assessee were prohibited by law or amounted to offence. Explanations furnished for explaining the entries found recorded in the seized material have also not been controverted in the assessment so made. Also what is found in the course of search cannot be used in piecemeal to advantage of the revenue and adversely for the assessee. The income component of on-money receipts has been fairly arrived at by the assessee and offered to tax in its returns. Accordingly considering the factual matrix of the case elaborate submissions made buttressed by relevant judicial precedents detailed analysis done by the ld. CIT(A) we find no reason to interfere with the findings so arrived at by the ld. CIT(A) in granting relief to the assessee. Addition u/s. 69C towards unexplained expenditure - AO had made addition of unaccounted business receipts u/s 28 and did not allow deduction of expenses against the same - HELD THAT - AO made the addition as unexplained expenditure even though source for the same was explained to be the same business receipts for which separate addition was made. The said addition relates to payment made to construction contractor which forms part of the seized document. In terms of our observations and findings on ground no. 2 in the above paragraphs wherein treatment of expenses found recorded in seized material has been extensively dealt with in our considered view no separate addition in respect of unexplained expenditure can be made u/s 69C. We do not find any reason to interfere with the finding arrived at by the ld. CIT(A) in this respect. Accordingly ground no. 3 raised by the revenue dismissed. Disallowance of expenditure from unaccounted business receipts made on protective basis without there being any addition on substantive basis - HELD THAT - As considering the on-money receipts as offered by the assessee on substantive basis in the return for AY 2018-19 we have already dealt in ground no. 2 with the issue on the income component of the on-money receipts offered by the assessee in its return. Specific to ground no. 1 on addition made on protective basis according to the assessee since no addition has been made on substantive basis the impugned addition made on protective basis is unsustainable in the law. We find ourselves in agreement with this submission drawing force from the decisions of Ramesh Chand Soni 2006 (10) TMI 197 - ITAT JODHPUR Kanav Metals 2023 (9) TMI 949 - ITAT DELHI . Accordingly addition made by the ld. AO in AY 2018-19 on protective basis without making substantive addition of the same in the assessment made for other assessment years for the assessee or for persons other than assessee is not sustainable in law. However since we have already affirmed the deletion of addition in ground no. 2 finding in this ground no. 1 has no bearing to alter the outcome in the appeal. Ground no. 1 raised by the revenue is dismissed.
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) (CIT(A)) relate primarily to the treatment of unaccounted business receipts ("on-money") and associated expenditures in the assessment years 2018-19, 2019-20, and 2021-22. The key issues are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Estimation of Net Profit @ 20% on Unaccounted Business Receipts Relevant Legal Framework and Precedents: The Tribunal examined principles governing taxation of undisclosed income, particularly the principle that entire undisclosed receipts cannot be taxed as income; rather, only the net profit embedded in such receipts is taxable. The Tribunal relied on judicial precedents including decisions of coordinate benches and High Courts such as Prime Developers vs. DCIT, CIT vs. Indeo Airways Pvt. Ltd., CIT vs. Golani Brothers, and CIT vs. President Industries. Court's Interpretation and Reasoning: The Tribunal noted that the assessee, a partnership firm engaged in real estate development, had received substantial on-money (unaccounted cash receipts) during the relevant years, as revealed during search proceedings under section 132 of the Act. The assessee offered income from on-money receipts on a net basis, claiming that approximately 80% of such receipts were incurred as business expenses, though these expenses were not recorded in the books of accounts. The AO rejected the claim of expenses due to lack of documentary evidence and disallowed the deduction, adding the entire on-money receipts as income on a protective basis. However, the CIT(A) accepted the assessee's contention, relying on seized documents, detailed statements recorded during search, and the nature of the real estate business where unaccounted cash transactions are typical. The CIT(A) held that a reasonable net profit of 20% on the on-money receipts was acceptable and deleted the addition made by the AO. Key Evidence and Findings: The Tribunal observed that the seized documents contained detailed entries of expenditures such as brokerage, steel and tiles purchases, contractor payments, salaries, and administrative expenses, amounting to substantial sums. Statements recorded under section 132(4) of the Act confirmed that unaccounted cash received was spent on business projects. The assessee's accounting followed the percentage of completion method, and net profit margins as per audited financial statements ranged from 3% to 21% over the relevant years, supporting the 20% net profit estimate. Application of Law to Facts: The Tribunal applied the principle that in cases of unaccounted income, evidencing expenses is often impossible, and the AO must estimate reasonable expenses and net profits based on facts and industry standards. The Tribunal held that the CIT(A)'s approach of estimating net profit at 20% was justified and consistent with judicial precedents. Treatment of Competing Arguments: The revenue argued that the assessee failed to produce documentary evidence for the claimed expenses and that the CIT(A) relied on distinguishable High Court decisions. The Tribunal rejected this, emphasizing that the nature of unaccounted transactions precludes documentary proof and that the CIT(A) correctly applied settled legal principles. The revenue's reliance on section 40(A)(3) disallowance was also addressed, with the Tribunal noting that when gross profit rate is applied, such provisions are not applicable. Conclusions: The Tribunal upheld the CIT(A)'s order allowing net profit at 20% on unaccounted business receipts, dismissing the revenue's grounds challenging this estimation for all three assessment years. Issue 2: Consideration of On-Money Receipts on Substantive vs. Protective Basis Relevant Legal Framework and Precedents: The Tribunal examined the legality of making additions on a protective basis under section 147 of the Act when no substantive addition is made in the same or other assessment years. It referred to coordinate bench decisions such as Ramesh Chand Soni vs. ACIT, Kanav Metals vs. ITO, and Pravinkumar Valgibhai Pujara vs. ITO. Court's Interpretation and Reasoning: The AO had made additions on a protective basis for AY 2018-19, contending that substantive additions were made in subsequent years. However, the assessee demonstrated through assessment orders of subsequent years that no substantive additions were made for the on-money receipts in those years or in the hands of other assessees. Application of Law to Facts: The Tribunal held that additions made on a protective basis without corresponding substantive additions in other years or other assessees are unsustainable. The CIT(A) rightly directed the AO to consider the on-money receipts as offered by the assessee on a substantive basis for AY 2018-19. Conclusions: The Tribunal dismissed the revenue's ground challenging the CIT(A)'s direction, affirming that protective additions without substantive basis are not sustainable in law. Issue 3: Deletion of Addition under Section 69C Relating to Unexplained Expenditure Relevant Legal Framework and Precedents: Section 69C deals with unexplained expenditure. The Tribunal relied on the principle that where the source of expenditure is explained by unaccounted receipts already brought to tax, no separate addition under section 69C is warranted, as held in CIT vs. Golani Brothers. Court's Interpretation and Reasoning: The AO made an addition of Rs. 50,00,000 under section 69C for unexplained expenditure relating to payments to construction contractors, despite the source of such expenditure being the on-money receipts already added as income. The CIT(A) deleted this addition, holding that double addition would be impermissible. Application of Law to Facts: The Tribunal agreed with the CIT(A), noting that since the on-money receipts were treated as revenue receipts and taxed, the expenditure incurred out of such receipts cannot be treated as unexplained expenditure for separate addition under section 69C. Conclusions: The Tribunal upheld the deletion of the addition under section 69C. Issue 4: Disallowance of Expenses Due to Lack of Documentary Evidence and Applicability of Section 40(A)(3) Relevant Legal Framework and Precedents: Section 40(A)(3) disallows expenditure in cash exceeding prescribed limits. The Tribunal considered judicial precedents holding that when gross profit rate is applied to estimate income, disallowance under section 40(A)(3) is not necessary. Court's Interpretation and Reasoning: The AO disallowed expenses incurred in cash on the ground of violation of section 40(A)(3). The assessee contended that since income was computed by applying a gross profit rate, such disallowance was not warranted. The Tribunal agreed with the assessee, relying on relevant judicial decisions. Conclusions: The Tribunal held that disallowance under section 40(A)(3) is not applicable where gross profit rate method is used to compute taxable income, thus supporting the assessee's position. 3. SIGNIFICANT HOLDINGS The Tribunal established the following core principles and made crucial determinations:
Final determinations were that the CIT(A)'s orders allowing net profit estimation at 20% on unaccounted business receipts, deleting additions under section 69C, and directing consideration of on-money receipts on substantive basis were upheld. All appeals filed by the revenue were dismissed.
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