2012 (2) TMI 536 - AT - Income Tax

Determination of unaccounted investments - Held that - Deletion of addition on the reason that there is no seized material to estimate the turnover and thereby estimate the income. Similarly, for determination of expenditure which was claimed in the regular returns cannot be disallowed in the block assessment consequent to the search action as the disallowance is only could be subject matter in regular assessment not in the block assessment. Estimation of the income at 15% of the undisclosed turnover and disallowing net cash expenditure at 7% - Held that - Assessing Officer has not only enhanced the gross profit rate but also increased the estimate and increased the quantum of turnover. The assessee has not disputed the quantum of suppressed turnover. However, the assessee challenged the rate of net profit and filed a chart as above. As regards the net profit, we find that in earlier years records and past history could be the basis to determine the rate of profit provided if the book results are actually accepted by the Department in earlier years. In the present case all the assessments from 2002-03 to 2008-09 are subject matter of dispute before us and we cannot take the result of these assessment years as base to determine the net profit. In our opinion, considering the nature of industry and prevailing market conditions, it is reasonable to estimate net profit at 8% of the suppressed turnover. Accordingly, we direct the Assessing Officer to estimate the income of the assessee at 8% of the suppressed turnover in addition to the income from regular business. The ground raised by the assessee for these three assessment years i.e., 2006-07, 2007-08 and 2008-09 is partly allowed. Disallowance on chance of inflation of expenditure under the head production expenditure, employee benefits and administrative expenditure - Held that - The assessee is a subcontractor. Assessee is engaging labour at site at far flung places. In such circumstances, it is difficult to have documents for such expenditure, to the satisfaction of the assessing officer. It is also difficult to verify the identity of the labour, after lapse of many years. The accounts of the assessee have been audited and auditor s certificate under section 44AB has also been furnished. The assessing officer has not analysed the expenses compared to the turnover for the earlier years. A search has been made in the premises of the assessee and no incriminating evidence in this regard has been found. Only an ad hoc disallowance of expenditure claimed by the assessee has been made. However, from the observations of the lower authorities it can be inferred that full details of expenditure have not been properly documented. Hence, the possibility of some inflation of such expenses cannot be ruled out. Considering totality of facts and circumstances of the case, we are of the opinion that disallowance of 5% of labour and site expenses are reasonable

Issues Involved:
1. Legality of estimating suppressed turnover and income.
2. Disallowance of expenditures debited to Profit and Loss account.
3. Determination of undisclosed income on suppressed turnover for specified assessment years.
4. Calculation of net profit on suppressed turnover.
5. Disallowance of cash expenditures.

Detailed Analysis:

1. Legality of Estimating Suppressed Turnover and Income:

The assessee objected to the Assessing Officer's (AO) estimation of suppressed turnover for assessment years 2002-03 to 2005-06 based on evidence from 2006-07 and 2008-09. The CIT(A) agreed with the assessee, noting that no incriminating material was found for the earlier years. The CIT(A) referenced ITAT Ahmedabad's decision in DCIT Vs. Royal Marawar Tobacco Products, which held that additions based on assumptions without specific evidence are unjustified. Consequently, the CIT(A) deleted the additions made by the AO for these years.

2. Disallowance of Expenditures Debited to Profit and Loss Account:

The AO disallowed certain expenditures on the grounds of potential inflation. The assessee argued that most payments were made through banking channels and supported by statutory payments. The CIT(A) deleted these disallowances, citing ITAT Kolkata's decision in LMJ International Ltd Vs. DCIT, which held that only items found during the search should be assessed. The CIT(A) emphasized that disallowances without specific seized material are not legally sustainable.

3. Determination of Undisclosed Income on Suppressed Turnover for Specified Assessment Years:

For assessment years 2006-07 to 2008-09, the AO estimated net profit on suppressed turnover and made disallowances of various expenditures. The CIT(A) directed the AO to adopt a net profit figure of 15% on the suppressed turnover, based on the Managing Director's statement and the nature of the business. The CIT(A) also instructed the AO to verify and adjust the income based on any undisclosed income already admitted by the assessee.

4. Calculation of Net Profit on Suppressed Turnover:

The assessee disputed the AO's high net profit rates, arguing that the actual net profit rate should be lower based on past records and industry standards. The Tribunal agreed that the AO's method was erroneous and directed the AO to estimate the income at 8% of the suppressed turnover, considering the nature of the business and prevailing market conditions.

5. Disallowance of Cash Expenditures:

The AO disallowed a flat percentage of production, employee benefits, and administrative expenditures, suspecting inflation. The assessee provided evidence of payments through banking channels and statutory remittances. The Tribunal found the AO's flat disallowance unwarranted and reduced it to 5% of cash expenses, excluding statutory payments and amounts subjected to TDS, citing the Tribunal's decision in M/s GSP Infratech Development Ltd.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the additions for the earlier years due to lack of specific evidence. For the later years, it adjusted the net profit rate to 8% and reduced the disallowance of cash expenditures to 5%, ensuring a fair and reasonable assessment based on the nature of the business and available evidence. The Tribunal's decision emphasizes the importance of specific evidence in making additions and disallowances in search assessments.

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