2011 (4) TMI 1343 - AT - Income Tax

Unaccounted expenditure - receipt of on money - In the present case assessee is dealing in several immovable property i.e. flats and shops which he has constructed. A single flat is a capital asset for the purchaser but for the assessee all the flats together constitute stock-in-trade. HELD THAT - it is undisputed position that out of this on money assessee has incurred various expenditure/investment. Therefore, on money as such and as a whole cannot be taxed over and above the income accruing on the basis of entries recorded in the books of account. on the basis of decision held in E.D. Sassoon Co.Ltd. Ors. vs. CIT 1954 (5) TMI 2 - SUPREME COURT we hold that advance money received either by way of cheque or by way of cash will partake the character of taxable income when registered sale deed of the flats is executed in subsequent years. As a result, the sum of ₹ 10 crores will not taxable in Asst. Year 2008-09. The appeal of assessee is accordingly allowed. Regarding interest bearing fund - If assessee is able to show the nexus that interest bearing funds or part thereof was given as advance on which assessee has earned interest, to that extent netting can be allowed. If assessee is not able to establish such nexus of interest bearing funds and advances on which assessee has earned interest netting will not be allowed and interest income to that extent would be taxed separately. This ground of assessee is, therefore, allowed but for statistical purposes. Regarding interest free advances - In our considered view this issue is also required to be examined afresh from the point of view of nexus. AO has to show that interest bearing funds were advanced as interest free to these partners. If it is so then rather taxing interest income, part of interest expenditure can be disallowed. But where assessee has sufficient personal capital or interest free funds then no such addition can be made. With these observations we restore this issue also to the file of AO. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of Rs. 10,00,00,000/- as undisclosed income.
2. Addition of Rs. 13,35,593/- on account of interest income from advances.
3. Addition of Rs. 2,69,690/- as interest on alleged interest-free advances.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10,00,00,000/- as Undisclosed Income:

The assessee, engaged in the construction business, was subject to a survey under section 133A, during which Rs. 10 crores was disclosed as unaccounted income. However, this amount was not declared in the return of income. The AO taxed this amount as undisclosed income, reasoning that the assessee had admitted to receiving 'on money' (unaccounted cash) and utilizing it for various purposes. The CIT(A) upheld this addition, emphasizing that the disclosure was made after verifying records and was not retracted. It was also noted that the assessee incorrectly showed this amount as advances in the books to nullify the effect of the disclosure. The CIT(A) cited several judicial precedents to support the decision that the unaccounted income should be taxed separately under section 69C without allowing any expenditure against it.

The assessee argued that the 'on money' was received against the booking of flats and was invested/spent accordingly. It was contended that the income should be declared in the year the flats were sold, not in the year of receipt. The Tribunal agreed with the assessee, noting that the receipt of 'on money' and the corresponding expenditure were part of the same transaction. Therefore, the Rs. 10 crores could not be taxed as income for the assessment year 2008-09. Instead, it should be recognized as revenue when the flats are sold, following the project completion method.

2. Addition of Rs. 13,35,593/- on Account of Interest Income from Advances:

The AO added Rs. 13,35,593/- as interest income from advances, treating it as income from other sources. The CIT(A) confirmed this addition. The Tribunal directed that if the assessee can establish a nexus between the interest-bearing funds and the advances on which interest was earned, netting of interest expenses against interest income should be allowed. This issue was remanded to the AO for verification of the nexus.

3. Addition of Rs. 2,69,690/- as Interest on Alleged Interest-Free Advances:

The AO added Rs. 2,69,690/- as notional interest on interest-free advances given to partners and related parties, arguing that the assessee should have declared interest income on such advances. The CIT(A) upheld this addition. The Tribunal held that the AO must establish a nexus between the interest-bearing funds and the interest-free advances. If such a nexus is found, the interest expenditure should be disallowed proportionately rather than taxing notional interest income. This issue was also remanded to the AO for fresh examination.

Conclusion:

The Tribunal allowed the appeal partly, holding that the Rs. 10 crores should not be taxed in the assessment year 2008-09 but in the years when the flats are sold. The issues regarding interest income and interest-free advances were remanded to the AO for verification of the nexus between interest-bearing funds and advances. The appeal was partly allowed for statistical purposes.