2015 (8) TMI 1285 - HC - Income Tax

Estimating the profit at 8% of the sale consideration - Appellate Authorities directing the Assessing Officer to allow the expenditure incurred towards 8 acres for development, when the Assessing Officer has taken into consideration the land developed in respect of 6 acres - Held that - The Assessing Officer having accepted the fact that the agreement entered with S.N.Krishnaiah Setty is only in respect of 6 acres of land, while assessing the undisclosed income, had taken into consideration the entire 8 acres of land , which is contrary to law. In the real estate business the department had accepted the net profit of 8% on the turnover for the last so many years in respect of the M/s.Skytop Builders Pvt.Ltd. The same benefit was extended in case of assessee also. Section 44-AD of the Act contemplates that in the case of an eligible assessee engaged in an eligible business, a sum equal to 8% of the total turnover or gross receipt of the assessee in the previous year on account of such business or, as the case may be. In the instant case, admittedly, the assessee had not maintained books of accounts. The assessee is a doctor by profession, his father and brother are involved in the real estate business. For the last so many years, the Department has accepted the net profit at 8% on the total turnover of the company M/s. Skytop Builders Pvt. Ltd. Accordingly, the Appellate Authority as well as the Tribunal accepted the contention of the assessee and taken 8% of the total turnover as the income. The Assessing Authority during the course of assessment proceedings admitted the f act that the assessee has entered into an agreement and issued power of attorney to Sri.S.N.Krishnaiah Setty for marketing the sites formed in 6 acres of land. In respect of remaining 2 acres of land, the dispute is pending before the Arbitrator. Such being the case, the Assessing Authority ought to have taken the income from 6 acres of land. We find no infirmity or irregularity in the finding arrived at by the First Appellate Authority as well as the Tribunal. The appellants have not made out a case to interfere with the order passed by the Tribunal. - Decided in favour of assessee.

Summary

Issues Involved:
1. Estimation of profit at 8% of the sale consideration.
2. Consideration of expenditure incurred towards 8 acres for development.

Detailed Analysis:

1. Estimation of Profit at 8% of the Sale Consideration:
The core issue was whether the Appellate Authorities were correct in estimating the profit at 8% of the sale consideration when the seized material found during the course of the search reflected the actual expenditure incurred by the assessee. The Revenue challenged the Tribunal's decision to uphold the First Appellate Authority's order, which had modified the Assessing Authority's determination of undisclosed income. The Assessing Authority had initially calculated the profit at 26%, which was contrary to the method of accounting followed by the assessee and the historical acceptance by the Department of an 8% profit margin in real estate business cases. The Tribunal found that the assessee had disclosed all transactions and had not suppressed any facts, thus justifying the 8% profit estimation. The High Court agreed with the Tribunal, noting that Section 44-AD of the Income-Tax Act allows for an 8% profit estimation for eligible businesses, and the Department had consistently applied this rate to similar cases.

2. Consideration of Expenditure Incurred Towards 8 Acres for Development:
The second issue was whether the Appellate Authorities were correct in directing the Assessing Officer to allow the expenditure incurred towards 8 acres for development when the Assessing Officer had considered only 6 acres as contended by the assessee. The Tribunal and First Appellate Authority found that the agreement with S.N. Krishnaiah Setty, which included a power of attorney for marketing the sites, pertained only to 6 acres of land. The Assessing Officer had erroneously included the entire 8 acres in the undisclosed income calculation. The High Court upheld the Tribunal's decision, noting that the correct approach was to consider only the 6 acres as per the agreement, and the remaining 2 acres were subject to a pending dispute before an Arbitrator. The Tribunal's decision to accept the 8% profit estimation on the 6 acres was found to be consistent with the Department's historical treatment of similar cases.

Conclusion:
The High Court concluded that the Appellate Authorities had correctly applied the 8% profit estimation and appropriately limited the consideration of land development expenditure to 6 acres. The Revenue's appeal was dismissed, and the substantial questions of law were answered in favor of the assessee. The judgment emphasized the importance of consistency in the application of profit estimation rates and the necessity of adhering to the factual basis of agreements and transactions disclosed by the assessee.