2015 (10) TMI 2824 - AT - Income Tax

Taxability of the undisclosed receipts of business found during the course of search - HELD THAT - Notably, in so far as the nature of such unrecorded receipts is concerned, there is no dispute between the assessee and the Revenue. Both sides agree that the undisclosed receipts found during the course of search are a part and parcel of the business of the assessee of developing real estate properties. In this factual background, in our view, the same methodology ought to be adopted to assess income embedded in such undisclosed receipts, as has been accepted by the Revenue in the regular assessments. No doubt, at the time of search assessee offered income from such undisclosed receipts in the respective years of receipt, which was a departure from the regular methodology of computing, income accepted by the Revenue. Notwithstanding the aforesaid, in the returns of income filed in response to the notices issued under section 153A of the Act for the captioned assessment years, the assesseecompany declared income from such undisclosed receipts as per the regular methodology accepted by the Revenue in the regular assessments. The stand of the Assessing Officer, in our view, leads to an inherent contradiction in the final assessment because the resultant income would be a mix of two methodologies. Firstly, the resultant income contains income from business computed on the basis of regular methodology and secondly, income in relation to undisclosed receipts of the same business, which is assessed on receipt basis. To obviate such inherent contradiction, in our view, assessee- company had rightly asserted at the time of filing of returns of income under section 153A of the Act that the income from undisclosed receipts be also computed as per the regular methodology accepted by the Revenue in the past. Therefore, on this aspect we uphold the plea of the assessee. Addition made under section 69C of the Act for unexplained cash expenditure - CIT-A restricted the addition telescoping benefit against the unexplained expenditure found noted in the search material - HELD THAT - We do not find any infirmity in the decision of the CIT(A), which is ostensibly based on the facts emerging from the record. Thus, the order of the CIT(A) on this aspect is affirmed and Revenue fails in its appeal for assessment year 2005- 06.

Summary

Issues Involved:
1. Year of taxability of undisclosed receipts found during the search.
2. Methodology for computing income from undisclosed receipts.
3. Telescoping benefit against unexplained expenditure.

Detailed Analysis:

1. Year of Taxability of Undisclosed Receipts:
The primary issue in the appeals was the year in which the undisclosed receipts found during the search should be taxed. The assessee had offered additional income during the search for the assessment years 2002-03 to 2007-08 based on the year of receipt. However, in the returns filed in response to notices under section 153A, the assessee disclosed the income differently, following the project completion method. The Assessing Officer (AO) taxed the undisclosed receipts in the year they were actually received, which was contested by the assessee.

2. Methodology for Computing Income from Undisclosed Receipts:
The assessee argued that the income from undisclosed receipts should be computed using the regular method of accounting, which was the work-in-progress cum project completion method. This method involved declaring a certain percentage (6% to 7%) of the expenses incurred in a particular year as income, plus the balance profit in the case of a completed project. The AO, however, computed the income based on the year of receipt of such amounts. The Tribunal upheld the assessee's plea, stating that the income from undisclosed receipts should be computed using the regular methodology accepted by the Revenue in the past to ensure consistency and avoid inherent contradictions.

3. Telescoping Benefit Against Unexplained Expenditure:
In assessment year 2005-06, the AO noticed unexplained expenditure of Rs. 845.66 lacs and added it to the total income under section 69 of the Act. The CIT(A) allowed the benefit of receipts from the preceding three years against the unrecorded expenditure, reducing the addition to Rs. 306.67 lacs. The Tribunal affirmed the CIT(A)'s decision, finding no infirmity in it.

Separate Judgments:
- For the assessment years 2002-03 to 2006-07, the Tribunal set aside the orders of the CIT(A) and directed the AO to recompute the income as per the regular methodology.
- For assessment year 2007-08, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the protective addition.
- For assessment year 2005-06, the Tribunal upheld the CIT(A)'s decision to allow telescoping benefit against unexplained expenditure, dismissing the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 2002-03 to 2006-07, directing the AO to recompute the income using the regular methodology. The Revenue's appeals for the assessment years 2005-06 and 2007-08 were dismissed. The order was pronounced in the open court on 30/10/2015.