2017 (9) TMI 1684 - HC - Income Tax

Addition on the ground of unexplained construction and working in progress expenses - profit estimation - no books of accounts and supporting bills/vouchers were maintained by the assessee at the time of search - Held that - Tribunal considering gross profit of the assessee for the previous year has rightly estimated 1% of the total turnover. In that view of the matter, the view taken by the Tribunal is required to be affirmed. Decided in favour of assessee and against the department.

Issues Involved:
1. Justification of Tribunal's decision on unexplained construction and work-in-progress expenses.
2. Deletion of additions made for expenditure paid in cash violating Section 40A(3) of the Act.
3. Deletion of additions made on account of suppressed sales.
4. Deletion of additions made under Section 68 of the Act for unexplained cash credits.
5. Deletion of additions made for unexplained investments in various properties.
6. Deletion of additions made for unexplained cash deposits in benami bank accounts.
7. Deletion of additions made for unexplained cash found during search.
8. Deletion of additions made for unexplained investment in the Global City Project.
9. Tribunal's direction on net profit application and interest paid on borrowed capital.

Issue-wise Detailed Analysis:

1. Justification of Tribunal's Decision on Unexplained Construction and Work-in-Progress Expenses:
The Tribunal upheld the finding that no books of accounts and supporting bills/vouchers were maintained by the assessee at the time of search, thereby confirming the rejection of books of accounts. However, it reduced the additions made on the grounds of unexplained construction and work-in-progress expenses significantly. For instance, in ITA No. 37/2012, the addition was reduced from ?40,00,000 to ?1,00,000. The Tribunal's rationale was based on the estimation of gross profit and other expenses, considering the historical gross profit rates and other relevant factors.

2. Deletion of Additions Made for Expenditure Paid in Cash Violating Section 40A(3) of the Act:
The Tribunal deleted the additions made by the Assessing Officer (AO) for expenditure paid in cash in violation of Section 40A(3), on the grounds that since other additions had been made, disallowance under this Section was not required. For example, in ITA No. 50/2012, an addition of ?18,02,064 was deleted. The Tribunal relied on the Supreme Court's decision in Attar Singh Gurmukh Singh vs. Income Tax Officer, which highlighted that Section 40A(3) should not restrict business activities and genuine transactions could be exempted from the requirement of payment by crossed cheque or bank draft.

3. Deletion of Additions Made on Account of Suppressed Sales:
The Tribunal deleted the additions made by the AO on account of suppressed sales shown by the assessee, even when documents found during the search were corroborated by the assessee's statement recorded under Section 132(4) of the Act. For instance, in ITA No. 43/2012, an addition of ?1,38,70,000 was deleted. The Tribunal found that the AO had not provided sufficient evidence to establish the excess consideration received by the assessee, thus placing an impossible burden on the revenue.

4. Deletion of Additions Made Under Section 68 of the Act for Unexplained Cash Credits:
The Tribunal deleted the additions made by the AO under Section 68 of the Act on account of unexplained cash credits, despite the assessee failing to furnish any documentary proof in support of the said cash credits. For example, in ITA No. 44/2012, an addition of ?3,22,64,594 was deleted. The Tribunal justified the deletion by stating that the AO had not afforded adequate opportunity to the assessee to explain the cash credits.

5. Deletion of Additions Made for Unexplained Investments in Various Properties:
The Tribunal deleted the additions made by the AO and confirmed by the CIT(A) on account of unexplained investment of the assessee in various properties, when no evidence in support of the said investment was submitted by the assessee. For instance, in ITA No. 50/2012, an addition of ?33,00,000 was deleted. The Tribunal found that the AO had not provided sufficient grounds to substantiate the addition.

6. Deletion of Additions Made for Unexplained Cash Deposits in Benami Bank Accounts:
The Tribunal deleted the additions made by the AO on account of unexplained cash deposits of the assessee in bank accounts in the name of various persons, even after confirming the finding that the assessee was maintaining the said benami bank accounts. For example, in ITA No. 43/2012, an addition of ?83,91,000 was deleted. The Tribunal found that the AO had not provided conclusive evidence to support the addition.

7. Deletion of Additions Made for Unexplained Cash Found During Search:
The Tribunal deleted the addition made on account of unexplained cash found during the search of ?10,00,000, which was accepted and offered by the assessee for taxation, with no retraction filed by the assessee. The Tribunal relied on a cash book prepared by the assessee after the search proceedings to justify the deletion.

8. Deletion of Additions Made for Unexplained Investment in the Global City Project:
The Tribunal deleted the addition of ?2,10,00,000 made by the AO and confirmed by the CIT(A) on account of unexplained investment of the assessee in the Global City Project, when no evidence in support of the said investment was submitted by the assessee. The Tribunal found that the AO had not provided sufficient evidence to substantiate the addition.

9. Tribunal's Direction on Net Profit Application and Interest Paid on Borrowed Capital:
In ITA No. 7/2016, the Tribunal directed the revenue to apply a net profit rate of 10% subject to interest and depreciation, whereas for earlier assessment years, a net profit rate of 12% was upheld by the ITAT. The Tribunal found no change in the business of the assessee in the current assessment year to justify a different rate. Additionally, the Tribunal allowed the assessee to claim interest paid on borrowed capital as a business expense without any evidence or material on record of having utilized the said amount towards business.

Conclusion:
The Tribunal's decisions across various issues were primarily based on the lack of sufficient evidence provided by the AO and the need to afford the assessee adequate opportunity to explain the discrepancies. The Tribunal's orders were upheld by the High Court, affirming the Tribunal's approach in estimating profits and allowing genuine business expenses. All issues were answered in favor of the assessee and against the department, leading to the dismissal of the appeals.

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