2021 (10) TMI 617 - AT - Income Tax

Undisclosed income - addition on the basis of amount reflected in Form No.26AS - difference in the gross receipts declared by the assessee in its P L A/c and as reflected in Form No.26AS - HELD THAT - AO has clearly brought out that there was difference in the gross receipts declared by the assessee in its P L A/c and as reflected in Form No.26AS. AO was justified in re-opening of the assessment. Regarding merit of the addition, the contention of the assessee is that the receipt pertained to one of the partners namely, Shri Harjot Singh Anand, who confirmed this fact on duly sworn affidavit. Without prejudice to other contention, it is also stated that the entire receipts as reflected in Form 26AS only profit element embedded in such receipt could be taxed. No dispute with regard to the fact that the AO taxed the entire difference of receipts - undisputedly, there is no finding by the AO or any material placed on record, suggesting that the assessee had made investment out of undisclosed source for earning of gross receipts. AO simply added the difference of receipts as recorded in Form 26AS and as disclosed by the assessee firm in its P L A/c. This action of the Assessing Officer is contrary to the settled principle of law. Therefore, such action could not be sustained. AO ought to have taxed the only profit element embedded into such receipts. As by any stretch of imagination, the gross receipt would not partake the character of income. Respectfully following the reasoning of the Co-ordinate Bench of this Tribunal rendered in the case of Raghubir Singh 2019 (11) TMI 706 - ITAT DELHI we hereby direct the Assessing Officer to apply net profit @ 8% on the difference of receipts that comes to ₹ 4,31,510/-. Hence, addition is sustained to the extent of ₹ 4,31,510/- and rest of the addition is, hereby deleted. Thus, grounds raised by the assessee are partly allowed.

Summary

Issues:
1. Validity of reopening the assessment under section 147 of the Income Tax Act, 1961.
2. Treatment of difference between receipts declared by the assessee and reflected in Form 26AS as undisclosed income.
3. Consideration of profit element in the receipts for taxation purposes.

Analysis:

Issue 1: Validity of reopening the assessment under section 147
The Assessing Officer reopened the case of the assessee under section 147 of the Income Tax Act, 1961, based on a significant difference between the gross receipts declared by the assessee and those reflected in Form 26AS. The Tribunal found the reopening justified as there was a clear disparity in the declared receipts, warranting further investigation. The contention of the assessee against the reopening was dismissed, affirming the Assessing Officer's decision.

Issue 2: Treatment of difference as undisclosed income
The Assessing Officer treated the entire difference in receipts as income of the assessee, disregarding the possibility that the receipts might pertain to a partner conducting business separately. The Tribunal noted that no evidence suggested the assessee had invested from undisclosed sources for the receipts. The Tribunal held that only the profit element embedded in the receipts could be taxed, not the entire gross amount. Relying on precedent, the Tribunal directed the Assessing Officer to tax the profit element at 8%, resulting in a sustained addition of ?4,31,510, while deleting the rest of the addition.

Issue 3: Consideration of profit element for taxation
The Tribunal emphasized that gross receipts cannot be equated to net income and that only the profit portion should be subject to taxation. By applying a net profit rate of 8% on the difference in receipts, the Tribunal determined the taxable amount. The decision was based on established legal principles and a previous Tribunal ruling in a similar case, ensuring fair treatment and accurate taxation of income.

In conclusion, the Tribunal partially allowed the appeal of the assessee, sustaining an addition of ?4,31,510 as taxable income while deleting the remaining addition. The judgment highlights the importance of considering the profit element in receipts for taxation purposes and ensuring assessments are based on sound legal principles and evidence.