2012 (12) TMI 778 - AT - Income Tax

Additions u/s 40A(3) - assessee had shown 19.27% Gross Profit (GP), AO fixed the GP at 26.52%. FAA reduced it to 25% - Held that - Additional residential accommodations granted to the tenants upto 10% and assumed for commercial premises that additional area would be 20%. It is a fact that the rates for commercial premises on ground floor command higher rates than the residential flat on ground floor. The very fact that the stamp duty rate at the relevant time was Rs.9830/- per sq ft against the residential premises rate of Rs.4660/- per sq ft also substantiates the contention of the appellant - it is established by the appellant that the premises held by Mrs. Chandrika Shah was a commercial premise as certified by the Government agency. Also appellant stated that if the commercial area originally held is converted into residential area based on the rate prevailing in that area, the space allocable to Mrs. Chandrika Shah would be higher than the area considered by the AO. Considering all the above and considering the fact that the net profit is estimated at 25% of the sales As it is a matter of estimation and that also in a search and seizure related matter & assessee has admitted that expenses outside the books were incurred opined here that 2% reduction in the formula adopted by the FAA will meet the end of justice. AO is directed to recalculate the income of the assessee @ 23% of the cost of the sales (sales minus profit). Section 40 A(3) disallowance - As in a matter where income is determined on estimate basis, there is no need to make further additions including additions made u/s. 40A. Upholding the order of the FAA, in this regard, the appeals filed by the Revenue dismissed.

Summary

Issues:
1. Estimation of net profit at 25% of sales by CIT(A) compared to AO's determination of 26.52%.
2. Deletion of additions made under section 40A(3) by CIT(A).
3. Addition of difference consideration received from a specific party in the Assessment Year 2006-07.

Analysis:

1. Estimation of Net Profit:
The appellant, engaged in construction and development, underwent a search operation revealing unaccounted expenses. The AO determined profit at 26.52%, whereas the CIT(A) reduced it to 25% based on the nature of activities, unaccounted cash expenses, and unreliable books. The ITAT found the CIT(A)'s estimation justifiable, reducing it further to 23% for fairness. The appeal was partly allowed.

2. Additions under Section 40A(3):
The CIT(A) deleted the additions under section 40A(3) due to estimating net profit at 25% of sales, rendering further additions unnecessary. The ITAT upheld this decision, dismissing the Revenue's appeals.

3. Addition of Difference Consideration:
In the Assessment Year 2006-07, the AO added a specific amount to the appellant's income for a difference in consideration received from a party. The CIT(A) disagreed, considering the commercial nature of the premises and lack of provision to tax notional profit. The ITAT supported the CIT(A)'s decision, ruling against the Revenue.

In conclusion, the ITAT upheld the CIT(A)'s decisions on all issues, emphasizing fair estimation of profits, avoiding additional disallowances when income is estimated, and rejecting notional income taxation. The appeals filed by the Revenue for both Assessment Years were dismissed.