2022 (6) TMI 19 - AT - Income Tax

Rejection of books of accounts - estimation of sales - addition based on statement recorded during survey operations - estimation of rate of sale of plots at Rs.1,500/- per square yard - HELD THAT - As statement of Reetesh Accountant and Rajesh Pengawala recorded by survey team on 06.01.2010, it cannot be inferred that they admitted the rate of plots at Rs. 1400/- or Rs. 1500/- per square yard. Rather by bringing the sufficient material on record the assessee has proved that the alleged entry in the seized material / diaries are no where related with the plot No. A-306 or B-102 of water word project developed by the assessee. Therefore, the first basis of rejection of books of account has no leg to stand. Second ground of rejection of the books of accounts was non-recording the commissions payment - We find that Hon ble Supreme Court in CIT Vs Padam Chand Ram Gopal 1970 (4) TMI 2 - SUPREME COURT held that insignificant mistake noticed in one year cannot be a ground of rejection of books of accounts, when no other mistake was found in any other year s books. Further, Hon ble Andhra Pradesh High Court in CIT Vs Margadarsi Chit Funds (P) ltd 1984 (6) TMI 17 - ANDHRA PRADESH HIGH COURT held that the Income Tax Officer is obliged to state the defects inherent in the method followed by the assessee and also to record a clear finding that system of accounting is such that correct profit cannot be deducted from the books before rejecting the books. We have noted that the AO has not pointed out any other serious mistake in the books of assessee. Moreover, the additional income of Rs. 1.50 Crore disclosed by the assessee was included in the profit and due tax has been paid thereon. Therefore, in our considered view the rejection of books of account by AO is not justified in absence of serious defects. Hence, the action of AO in rejecting the books of the assessee is set-aside. Estimation of income by the assessing officer on the basis of statement of Reetesh Accountant and the partner of the assessee - When the revenue authorities have not demonstrated from the material as to whether the assessee failed to co-operate, which is an eventuality where the income tax authority would required to record its reasons to resort to the provisions of section 131(1) and convert the whole process into a search and seizure. When such facts are completely missing in the process and that such violation is fatal which can turn draconian to inherent safe guard of at least recording of such reason and satisfaction of non-cooperation to resort to other coercive steps needs to be set clearly by the income tax authority. We further find that the AO has not investigated in the facts, either by examining the purchaser in the project of the assessee-firm nor collected any evidence from the officer of sub-registrar about the rate of sale of the various plots. No adverse material collected by AO except rely of the statement recorded during the survey. It is settled law that the statement recorded during the survey is not admissible in evidence unless it is corroborated with the material evidences. The AO worked out average rate of all the plots in the project. It is a matter of general practice that no uniform rate of sale is applicable in the private projects, the rate may vary depending on various factors like size, location, time of booking and number of bookings. So uniform rate is not applicable is such private project. We also held that the recording of the statement by survey team under section 131(1) is not valid. Thus, no cognizance of such statement could be taken. Hence, the addition which is also based on the statement is not legally sustainable. In view of the aforesaid factual and legal discussions, we hold that rejection of books of accounts was not valid and further no such estimation of rate of plot which is based on the statement of partner and accountant is not legally sustainable in absence of other corroborative evidence on record. Thus, the assessee also succeeded on this submission as well.

Summary

Issues Involved:
1. Rejection of Books of Accounts under Section 145(3).
2. Estimation of Sale Rate at Rs. 1,500 per square yard.
3. Addition based on Unaccounted Income.
4. Revenue Recognition and Profit Taxable.
5. Setoff of Undisclosed Income Admitted during Survey.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The Assessing Officer (AO) rejected the books of accounts on grounds that the sale consideration recorded was significantly lower than the actual sale consideration, and a commission payment of Rs. 15,000/- was not reflected in the cash book. The CIT(A) upheld the AO's decision, noting that the accounts were incomplete and did not record all material transactions. However, the Tribunal found that the discrepancies cited by the AO were not substantial enough to justify the rejection of the books of accounts. The Tribunal emphasized that the books were audited without any adverse findings and that the additional income declared during the survey was included in the profit and loss account. Consequently, the rejection of the books of accounts was set aside.

2. Estimation of Sale Rate at Rs. 1,500 per square yard:
The AO estimated the sale rate at Rs. 1,500 per square yard based on statements made during the survey. The Tribunal noted that the statements were recorded under Section 131(1) without any indication of non-cooperation by the assessee, making the statements inadmissible. The Tribunal also highlighted that the AO did not corroborate the statements with any material evidence, such as examining purchasers or obtaining records from the sub-registrar. The Tribunal concluded that the estimation of the sale rate was not legally sustainable and allowed the assessee's appeal on this ground.

3. Addition based on Unaccounted Income:
The AO made an addition of Rs. 7.96 crore based on unaccounted income, estimating that the assessee received on-money payments at Rs. 1,500 per square yard. The CIT(A) upheld the AO's estimation but directed that the addition be restricted to 50% of the difference between Rs. 1,500 and the recorded sale price. The Tribunal found that the addition was based solely on statements recorded during the survey, which were not corroborated by any other evidence. The Tribunal held that the addition was not legally sustainable and allowed the assessee's appeal on this ground.

4. Revenue Recognition and Profit Taxable:
The CIT(A) directed the AO to determine the income chargeable during the year for plots either registered in the name of customers or given possession under Section 53A of the Transfer of Property Act, 1882. The Tribunal noted that the provisions of Section 2(47) of the Income Tax Act apply to capital assets and not to stock-in-trade, as in the case of the assessee. The Tribunal held that the profit can be considered earned only in respect of immovable property for which a registered sale deed is executed. The Tribunal allowed the assessee's appeal on this ground.

5. Setoff of Undisclosed Income Admitted during Survey:
The assessee argued that the undisclosed income of Rs. 1.50 crore admitted during the survey should be set off against the undisclosed income finally determined. The Tribunal agreed with the assessee, noting that the income declared during the survey was included in the total income and due tax was paid. The Tribunal directed the AO to give setoff of the undisclosed income admitted during the survey against the undisclosed income finally determined.

Conclusion:
The Tribunal allowed the assessee's appeals for both AY 2010-11 and AY 2009-10, setting aside the rejection of books of accounts, the estimation of sale rate, and the addition based on unaccounted income. The Tribunal also directed the AO to recognize revenue only for plots with executed sale deeds and to set off the undisclosed income admitted during the survey. The cross-appeal by the Revenue was dismissed.