2020 (12) TMI 861 - AT - Income Tax

Unaccounted on-money receipts - Whether CIT(A) granting deduction @50% of unaccounted on-money receipts on adhoc basis - HELD THAT - Considering the fact that these are unaccounted expenses and all these unaccounted expenses could not be fully substantiated by the assessee with proper supporting documents and also considering the fact that assessee s declared profit was 19.97% as per its regular books of accounts which is also categorically admitted by the ld. CIT(A) we hold that the assessee would have made profit of 40% approximaterly on these unaccounted transactions by having the benefit in the form of huge cash discounts huge savings in levy of indirect taxes better negotiation of prices of materials due to cash purchases etc. Hence we direct the ld. AO to add 40% of 9, 75, 50, 000/- (gross receipts) as the unaccounted income which has to be distributed to all the assessment years in accordance with the percentage of work competed by the assessee. Deduction of unaccounted expenses from Unaccounted income - Applicability of provisions of Section 40A(3) - Section 40A(3) of the Act are concerned in respect of unaccounted business expenses incurred in cash we find admittedly that these are unaccounted transactions and hence the same would have to be obviously incurred in cash and accordingly the provisions of Section 40A(3) cannot be brought into operation at all. Admittedly the seized document contains unaccounted income as well as unaccounted expenditure both were duly transacted only in cash. Hence the applicability of provisions of Section 40A(3) of the Act to the said payments would not serve the scheme of taxation and would ultimately result only ending up in taxing the entire unaccounted gross receipts alone without giving benefit of deduction to the assessee. This is certainly not the intention of the legislature and more so the provisions of the Act. Accordingly the grounds raised by the assessee in this regard for all the assessment years are partly allowed. Addition made on account of capital contribution in the assessee firm by the partner - HELD THAT - We hold that the benefit should be given to the assessee by holding that the on-money receipts that pertaining to the entire project were received by the assessee in the initial year itself and the said money is certainly available for making capital contribution into the assessee firm irrespective of the fact that only part of the such on-money receipts has been offered to tax in A.Y.2011-12. What is to be seen is the availability of cash in the hands of the partner to make the capital contribution in the assessee firm which is explained by on-money receipts. Hence we direct the ld. AO to delete the addition made being the deficit and unexplained capital contribution. Accordingly the ground No.3 raised by the assessee is allowed.

Issues Involved:
1. Deduction of unaccounted on-money receipts.
2. Addition on account of partner's capital contribution.
3. Applicability of Section 40A(3) of the Income Tax Act, 1961.
4. General grounds raised by the assessee.

Detailed Analysis:

1. Deduction of Unaccounted On-Money Receipts:
The primary issue in this appeal is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in granting a deduction of 50% of unaccounted on-money receipts on an ad-hoc basis. The assessee, a partnership firm engaged in the construction of residential complexes, was subject to a search and seizure operation, which revealed unaccounted 'on-money' receipts from the sale of flats. The seized documents also indicated various unaccounted expenses related to the construction business.

The assessee's partner admitted to the on-money receipts during the search proceedings and offered the net profit from these transactions for taxation. The assessee claimed that out of the total on-money receipts of ?9,75,50,000, an amount of ?6,01,09,970 was spent on unaccounted construction expenses, leaving a net unaccounted income of ?3,74,40,030, which was offered for taxation.

The Assessing Officer (AO) denied the deduction for these expenses, citing a lack of documentary evidence and other discrepancies. However, the CIT(A) allowed a 50% deduction of the gross receipts on an ad-hoc basis, considering the inherent nature of unaccounted transactions and minimal documentation.

The Tribunal agreed with the CIT(A) that the seized documents should be considered in toto and that the revenue cannot selectively use parts of the documents. The Tribunal directed the AO to add 40% of the gross receipts as unaccounted income, distributed across the assessment years according to the percentage of work completed.

2. Addition on Account of Partner's Capital Contribution:
The AO added an amount of ?2,54,000 to the assessee's income, representing unexplained capital contribution by the partners. The assessee argued that the capital contribution was made from the on-money receipts, which were already offered for taxation. The Tribunal found that the on-money receipts were available for capital contribution and directed the AO to delete the addition of ?2,54,000.

3. Applicability of Section 40A(3) of the Income Tax Act, 1961:
The AO had argued that the unaccounted business expenses incurred in cash violated Section 40A(3) of the Act, which disallows cash payments exceeding ?20,000. However, the Tribunal held that these provisions could not be applied to unaccounted transactions, as the entire scheme of taxation would be disrupted. The Tribunal emphasized that both unaccounted income and expenses were transacted in cash, and disallowing these expenses would result in taxing the entire gross receipts, contrary to legislative intent.

4. General Grounds Raised by the Assessee:
The general grounds raised by the assessee for A.Y. 2011-12 were found to be general in nature and did not require specific adjudication.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to consider 40% of the gross receipts as unaccounted income and to delete the addition of ?2,54,000 made on account of unexplained capital contribution. The Tribunal also held that Section 40A(3) could not be applied to unaccounted cash transactions.

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