2014 (1) TMI 1402 - AT - Income Tax

Estimation of income from contracts - Held that - The assessee is covered under section 44AB - Where no books of account maintained and where provisions of sec. 44AB found applicable, the estimation of profit sat 12.5% held to be reasonable - The various judicial decisions in this regard also put the margins of the business in the range of 8 to 12.5%, depending on the facts of each case - Assessee is operating as an individual without borrowed funds so margin of 12.5% is reasonable - Decided against assessee. Unexplained expenditure - Held that - The assessee has paid the amount of Rs. 11 lakhs through his bank account to M/s. Sai Ganesh Builders - Once the amount has gone through the bank account out of the own sources of the assessee it cannot be said to be unexplained - When the flow of the money is explained, it is very difficult to accept the contention that the assessee has invested in an unexplained way - Even for argument sake if it is accepted that the same was advanced/invested by assessee, it still cannot be considered as unexplained as the source is assessee own funds on which there is no dispute - The order of the CIT(A) is not correct - Decided in favour of assessee.

Summary

Issues:
1. Estimation of net income from contracts at 12.5% of gross receipts.
2. Addition of Rs.11,00,000 as unexplained expenditure.

Analysis:

Estimation of Net Income from Contracts:
The appellant, an individual in the civil construction business, contested the estimation of income at 12.5% on gross receipts by the Assessing Officer (AO). The AO rejected the appellant's explanation for declaring higher contract receipts, estimating profit at 12.5%. The CIT(A) upheld this estimation, citing the applicability of sec. 44AB due to lack of maintained accounts. The judicial decisions supported margins of 8% to 12.5% for such cases. The appellant's argument for 8% estimation based on depreciation claim was dismissed due to lack of accounts. The Coordinate Bench decision cited by the appellant was deemed inapplicable due to differing facts. Ultimately, the Tribunal upheld the CIT(A)'s decision, considering the nature of the appellant's business and the absence of audited accounts.

Addition of Unexplained Expenditure:
The AO added Rs.11,00,000 as unexplained expenditure when the appellant paid this amount to a builder through bank transactions. The appellant claimed these payments were on behalf of others, supported by agreements and statements from parties involved. The CIT(A) upheld the AO's decision, stating that the investments represented the appellant's own funds. However, the Tribunal disagreed, noting that the payments were made from the appellant's bank account, indicating a clear source of funds. The Tribunal found no basis for treating the amount as unexplained expenditure under sec. 69. The CIT(A) mischaracterized the addition as unexplained investment, which was also deemed incorrect. The Tribunal concluded that the addition was unwarranted, as the source of funds was explained, leading to the allowance of the appellant's appeal on both grounds.

In conclusion, the Tribunal partly allowed the appellant's appeal, overturning the additions made by the AO and confirmed by the CIT(A) regarding the estimation of net income from contracts and the addition of unexplained expenditure.