2017 (10) TMI 874 - AT - Income Tax

Addition of business income - compensation received by the assessee from Bhuminath Construction - addition on estimation basis - Held that - There is no dispute about the fact that the assessee and Bhuminath Construction have entered into MoU for development of a Hotel. It is also a fact that as per the terms of MoU, Bhuminath Construction will advance a sum of ₹ 5 crore in installments to the assessee for development of the project. It is also made clear in the MoU that the said amount of ₹ 5 crore shall be interest free. Neither of the Departmental Authorities have taken into consideration the advantage derived by the assessee from the interest free fund received by it from Bhuminath Construction. Moreover, it appears that in case of Bhuminath Construction, the Assessing Officer has accepted the compensation paid of ₹ 6,75,150 to the assessee while completing the assessment. Therefore, if actually higher compensation has not been paid to the assessee, no addition can be made notionally and on mere presumption and surmises that the assessee might have received excess compensation or the compensation received is meager. Commissioner (Appeals) has categorically stated that the Assessing Officer had never doubted the genuineness of the purchases and total cost incurred towards the construction, however, he has sustained the addition primarily for the reason that expenditure incurred by the assessee on account of interest payment at ₹ 9,60,000 is more than the compensation received. However, on a perusal of the audited Profit & Loss account for the year ending 31st March 2007, we find the total expenditure debited to the Profit & Loss account of ₹ 6,30,617, including interest expenditure of ₹ 1,59,706. Thus, we are unable to understand where from the learned Commissioner (Appeals) has obtained the interest payment amount of ₹ 9.60 lakh. Thus, on the basis of such half baked facts addition cannot be made on mere presumption and surmises. Therefore, we have no hesitation in deleting the addition made on estimate basis.

Summary

Issues:
1. Addition of amount to business income
2. Rejection of books of account
3. Violation of rules of natural justice

Analysis:

Issue 1: Addition of amount to business income
The appeal was against the addition of ?36 lakh to the business income for the assessment year 2007-08. The Assessing Officer estimated the profit on the construction project at 8% of the cost incurred by the assessee, leading to the addition. The assessee contended that the compensation received on cancellation of the project was justified based on mutual agreement. However, the Commissioner (Appeals) upheld the addition as the assessee failed to provide authentic evidence regarding the project's progress and termination reasons. The Tribunal noted that the interest-free fund received by the assessee from Bhuminath Construction was not considered, and if no excess compensation was paid, the addition based on presumption was unwarranted. The Tribunal deleted the addition made on an estimate basis but directed the Assessing Officer to tax the compensation received from Bhuminath Construction.

Issue 2: Rejection of books of account
The Assessing Officer did not reject the books of account but estimated the profit without pointing out any defects. The Tribunal emphasized that without rejecting the books of account, such estimation was not justified. The Tribunal found discrepancies in the interest payment amount cited by the Commissioner (Appeals) and ruled that additions based on half-baked facts and presumptions were unsustainable. Consequently, the addition was deleted, and the compensation received was to be taxed.

Issue 3: Violation of rules of natural justice
The assessee argued that proper opportunity was not provided during assessment. The Tribunal observed that the assessee failed to substantiate claims regarding project termination and progress. Lack of evidence regarding work status and utilization of goods in construction raised doubts about the termination reasons. The Tribunal noted that the termination seemed aimed at converting the project into a residence building. Despite objections, the Tribunal found no violation of natural justice in the assessment proceedings.

In conclusion, the Tribunal partly allowed the assessee's appeal, directing the Assessing Officer to recompute the income considering the findings and legal provisions.