2022 (2) TMI 311 - AT - Income Tax

Taxation of money found during the search proceedings - Whether the on money found during the search proceedings are liable to be taxed in the hands of the assessee or in the hands of MOPL? - HELD THAT - There are certain undisputed facts that both assessee and MOPL are related parties and chargeable to tax at the maximum marginal rate. Thus, effectively there is no loss to the revenue as far as the collection of taxes is concern after ascertaining the party in whose hand, the income needs to be taxed. In either of the case, the tax money will flow to the Government Exchequer. We do not find any infirmity in the order of the learned CIT (A) in so far, the issue in whose hands the income has to be taxed. Hence, we direct that there cannot be any addition to the total income of the assessee on account of the receipt of on money discussed above. As such, such amount of on money is liable to be taxed in the hands of MOPL Whether the gross amount of on money received should be subject to tax without allowing the deduction of the expenditure recorded in the seized documents? - As it is a fact on records that on money was reflecting in the seized documents. Such seized document was the basis of making the addition of such on money. It is also a fact on record that there were expenditures incurred against the on money as evident from the same set of seized documents. In our considered view these documents should be read as a whole. Such seized documents cannot be used as the basis for making the addition without giving the deduction of the expenses appearing in the seized documents - we hold that the assessee (MOPL) is very much entitled for the expenses appearing in the seized documents against the on money which was not recorded in the books of accounts like the expenses as discussed above. Income reflecting in the on money can be determined based on some percentage basis - Whether the entire amount of on money should be included in the taxable income or some percentage of profit embedded therein should be worked out? - HELD THAT - Admittedly, the money which have been treated on money is the business receipts. Therefore, the entire amount of on money cannot be treated as income - we do not find any infirmity in the order of the learned CIT (A) so far, to determine the income of on money receipts on the percentage basis is concern. Determination of percentage to be applied on the on money - There is no standard jacket formula to work out the income embodied in the receipt of unaccounted money based on the documentary evidence in the given facts and circumstances. Thus, we are of the view that some element of guesswork is required to work out such income of the assessee. At the time of hearing the ld. DR has not brought anything on record against the finding of the ld. CIT-A. Thus we don t finding any infirmity in the order of ld. CIT-A in the light of the above stated facts and discussion. Payment throgh Unexplained sources - Whether the payment was made from the unexplained sources? - HELD THAT - CIT (A) has duly explained the payment made to the parties against the expenses as recorded in the seized documents. In other words, there were certain expenses which were recorded in the seized documents. Likewise, the cash payment of such expenses were also recorded on the seized documents. As we have already held that the expenses were incurred out of the on money and therefore there cannot be any other addition with respect to the payment of such expenditure. At the time of hearing, the learned DR has not brought anything on record contrary to the finding of the learned CIT (A). Accordingly, we do not find any infirmity in the order of the learned CIT (A). Receipt shown by the assessee in the books of accounts subjected to tax on percentage basis - HELD THAT - In this regard we note that the assessee is a builder and developing a residential cum commercial project. The Accounting Standard 7 provides to recognize the income on progressive method. But the Accounting Standard 7 namely Accounting for the Construction Contract is not applicable to a builder. The income of the assessee being a builder has to be recognized in pursuance to the provisions of Accounting Standard 9 namely Revenue Recognition. We have already applied the rate of 10% somewhere in the preceding paragraph. Accordingly, we take the same rate and direct the AO apply percentage of profit on the gross receipt of ₹ 2,25,92.350/-. Hence the ground of appeal of the assessee is partly allowed whereas the ground of appeal of the revenue is hereby dismissed Whether the assessee is acting as a mutual concern and therefore there cannot be any tax liability on the assessee on mutuality concept? - It is also pertinent to note that there was a ground raised by the assessee in the memo of appeal by stating that the assessee is working in the capacity of mutual organization having no profit motive. Therefore, based on the principles of mutuality there cannot be any income in the hands of the assessee. However, at the time of hearing, we note that the learned AR has not made any argument on this issue. Unexplained peak cash loan - AO during the assessment proceedings based on the seized documents found that the assessee has incurred/paid the interest expenses on the money borrowed in cash - CIT-A has deleted the addition made by the AO by observing that the amount of loan taken in cash was not recorded in the regular books of accounts - HELD THAT - Whether the loan amount represents the income of the assessee. The answer stands in negative. The loan cannot be treated as income. However, there is a presumption under section 68 of the Act which states that if any cash that is found in the books of accounts which has not been explained by the assessee with respect to the identity, creditworthiness and genuineness of transaction has to be treated as unexplained cash credit. The same shall be presumed as unexplained cash credit under section 68 and the same will be liable to be taxed. However, it is a fact on record that the impugned amount of interest as well as the amount of loan computed by the AO based on such interest, was not recorded in the regular books of accounts. Therefore, in our considered view the impugned amount of loan not recorded in the regular books of accounts cannot attract the provisions of section 68 of the Act. Hence, we do not find any reason to interfere in the finding of the learned CIT (A). Accordingly, we uphold the same. Likewise, on the same reasoning the income added by the AO on protective basis in the hands of MOPL is also liable to be deleted. Thus, the ground of appeal raised by the Revenue is dismissed. Addition on account of difference in cost of construction determined by the DVO and recorded by the assessee in the books of account - HELD THAT - AO has already made addition of different types to the total income of the assessee particularly on account of on money involved in the project and expenditures incurred in cash on the project. Thus, there cannot be any further addition based on the valuation report as discussed above. If it is done so, it would lead to the double addition to the total income of the assessee which is not desirable under the provisions of the Act. Hence, we do not find any reason to interfere in the finding of the learned CIT (A). Accordingly, we uphold the same. Likewise, on the same reasoning the income added by the AO on protective basis in the hands of MOPL is also liable to be deleted. Hence the ground of appeal of the revenue is dismissed. Unexplained cash in hand - HELD THAT - As there was the cash found from the premises of the assessee during the search proceedings. The onus lies upon the assessee to explain the source of the same. However, we find that the assessee failed to offer the source of the same, therefore the addition was made by the AO which was subsequently confirmed by the learned CIT (A). At the time of hearing the learned AR has not brought anything on record about the source of cash. Accordingly we do not find any reason to interfere in the finding of the authorities below. Hence the ground of appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Jurisdiction of CIT(A) to adjudicate afresh.
2. Status of assessee as a mutual benefit society.
3. Taxability of on-money receipts.
4. Deduction of expenses from on-money receipts.
5. Estimation of profit from on-money receipts.
6. Unexplained payments/investments.
7. Rejection of books of accounts and estimation of net profit.
8. Unexplained cash loans.
9. Difference in cost of construction determined by DVO and recorded in books.

Detailed Analysis:

1. Jurisdiction of CIT(A) to Adjudicate Afresh:
The assessee contended that the CIT(A) erred in holding that he had no jurisdiction to adjudicate the issue afresh in line with the ITAT's directions, due to the absence of an application before the Settlement Commission. The Tribunal noted that this issue was previously decided in similar cases where CIT(A) was found to have no jurisdiction without an application to the Settlement Commission. Therefore, the grounds of appeal decided by the predecessor will prevail, and the Tribunal dismissed the assessee's appeal on this ground.

2. Status of Assessee as a Mutual Benefit Society:
The assessee claimed to be a mutual benefit society, thus not liable for tax. However, the Tribunal noted that the assessee did not argue this point during the hearing. Consequently, the Tribunal dismissed this ground, considering it infructuous.

3. Taxability of On-Money Receipts:
The Tribunal examined whether on-money found during the search should be taxed in the hands of the assessee or MOPL. The Tribunal concluded that the on-money had a direct nexus with the assessee’s business activities, thus should be taxed in the assessee's hands. However, since both entities were related and taxed at the maximum marginal rate, it directed that the on-money be taxed in MOPL's hands to avoid double taxation.

4. Deduction of Expenses from On-Money Receipts:
The Tribunal held that the seized documents should be read as a whole, allowing the deduction of expenses recorded therein from the on-money receipts. This view was supported by the Supreme Court's ruling in CIT vs. S.C. Kothari, which allows the deduction of actual business expenses even if the business is illegal.

5. Estimation of Profit from On-Money Receipts:
The Tribunal agreed with the CIT(A) that the entire on-money cannot be treated as income. Instead, a percentage of the on-money should be considered as profit. The CIT(A) had applied a 20% rate, which the Tribunal found reasonable and upheld.

6. Unexplained Payments/Investments:
Regarding unexplained payments of ?42,12,425/-, the Tribunal upheld the CIT(A)’s view that these payments were made out of on-money receipts, thus not requiring separate addition. The Tribunal found no contrary evidence from the Revenue to overturn this finding.

7. Rejection of Books of Accounts and Estimation of Net Profit:
The Tribunal noted that the assessee followed the project completion method for accounting, and the CIT(A) had rightly estimated the net profit at 10% of the accounted receipts. The Tribunal upheld this estimation, considering it reasonable and aligned with industry standards.

8. Unexplained Cash Loans:
The Tribunal agreed with the CIT(A) that the cash loans, not recorded in the regular books, cannot be treated as income under Section 68 of the Act. Thus, the addition made by the AO was deleted.

9. Difference in Cost of Construction Determined by DVO and Recorded in Books:
The Tribunal upheld the CIT(A)’s deletion of the addition based on the DVO’s valuation, noting that such an addition would result in double taxation, as the on-money and related expenses had already been accounted for.

Conclusion:
The appeals filed by different assessees were partly allowed, while the appeals filed by the Revenue were dismissed. The Tribunal's detailed analysis ensured that the taxability of on-money receipts was appropriately addressed, along with the deduction of related expenses and the correct estimation of profits. The Tribunal also reinforced the need for consistency in the treatment of accounted and unaccounted receipts, maintaining fairness in the adjudication process.