2018 (12) TMI 760 - AT - Income Tax

Addition on account of unaccounted income earned by way of suppression of professional receipts - rejection of books of accounts - profits declared on suppressed receipts - Held that - Once the AO has worked out unaccounted receipts for the whole year on the basis of evidence found for the period of six months, then such working is based on an estimate and assumption, and in the same manner corresponding expenditure ought to be assumed and estimated, because no entity could earn gross receipts. This fold of dispute has been ignored by the AO on the ground that evidence was not submitted by the assessee exhibiting incurrence of expenditure. To our mind, this was not correct approach at the end of the AO. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of ?2,07,41,751/- on account of unaccounted income earned by suppression of professional receipts.
2. Correctness of the method used by the AO to estimate unaccounted receipts and the corresponding expenses.
3. Determination of whether gross receipts or only profit embedded in those receipts should be added to the total income.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?2,07,41,751/-:
The Revenue's sole grievance is that the CIT(A) erred in deleting the addition of ?2,07,41,751/-, which was added by the AO due to unaccounted income from suppressed professional receipts. The AO found loose papers during a survey, reflecting unaccounted receipts for six months amounting to ?1,62,77,798/-. By extrapolating this for the entire year, the AO estimated unaccounted receipts at ?3,25,55,596/- and added ?2,57,41,751/- to the assessee's total income after giving credit for declared income and recorded receipts.

2. Method Used by AO to Estimate Unaccounted Receipts:
The CIT(A) upheld the AO's conclusion regarding the estimation of unaccounted receipts but noted that the books of accounts did not reflect the true picture and thus had to be rejected. The CIT(A) observed that once the books are rejected, the profit for the year should be estimated based on the average profit of the assessee for the last five years. The CIT(A) found that the additional income of ?50 lakhs declared by the assessee during the search was sufficient to cover the profit from unaccounted receipts, leading to the deletion of the addition made by the AO.

3. Gross Receipts vs. Profit Embedded in Receipts:
The DR argued that the CIT(A) erred in accepting that only the profit embedded in unaccounted receipts should be added. The AO's approach of adding gross receipts was challenged by the assessee, who contended that only the profit portion should be added. The Tribunal noted that Section 145 of the Income Tax Act provides the mechanism for computing income and allows the AO to reject the book results if not satisfied with their correctness. The Tribunal agreed with the CIT(A) that the AO's estimation of unaccounted receipts should also consider corresponding expenses, as no entity could earn gross receipts without incurring expenses.

The CIT(A) relied on the judgment of the Hon’ble jurisdictional High Court and other superior courts, which held that only the profit embedded in suppressed receipts should be added. The CIT(A) worked out the net profit ratio from past years, excluding fixed expenses, and found the declared additional income of ?50 lakhs reasonable. The Tribunal upheld the CIT(A)'s order, finding no error in the reasoning that the profit declared was reasonable and that any further addition was uncalled for.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) that the addition of ?2,12,91,706/- was correctly deleted, as the profit embedded in the unaccounted receipts had been reasonably estimated and declared by the assessee. The Tribunal found the CIT(A)'s approach and reliance on judicial precedents appropriate and well-reasoned.

Order Pronouncement:
The appeal of the Revenue was dismissed, and the order was pronounced in the Court on 13th December 2018.