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2023 (3) TMI 141 - AT - Income TaxUnexplained cash credit u/s 68 - difference in the opening capital account - CIT (A) deleted the addition made by the AO by observing that credit in the capital account is reflecting mainly on account of the merging of the books of accounts - HELD THAT - All the personal assets and liabilities shown in the personal financial statement as on 31 March 2010 have been transferred to the financial statements of the proprietary concern which has certainly resulted in the addition of the capital account in the year under consideration. In simple words, capital account of the proprietary concern was credited in the year under consideration but with respect to those transactions, belonging to the personal capacity, pertaining to the earlier years. As such, it is only the accounting adjustment which has been made by the assessee in the proprietary concern for the transactions which were carried out by him in the earlier years. Thus, the question arises whether the provisions of section 68 of the Act can be attracted on account of cash credit shown by the assessee in the year under consideration. In the given case, the answer stands in negative. It is for the reason that there is a single assessee maintaining two sets of financial statements. Transactions shown by the assessee in the personal capacity can only be disturbed in the year to which it pertains. As far as, the year in dispute is concern, there is no addition in the capital account of the assessee to be verified in pursuance to the provisions of section 68 - Hence on this score only, the finding of the learned CIT (A) is not required to be interfered. Addition in the capital account of the assessee - we note that it was representing the duplicate entry made in the books of accounts inadvertently. As such the amount of ₹1.96 gross was already part of the personal assets shown by the assessee in the personal capacity. This error was rectified by the assessee subsequently in the financial year 2014-15. This fact has not been doubted by the AO. Accordingly we hold that, such addition of ₹1.96 crores is not sustainable and the finding on this issue of the learned CIT (A) does not required to be disturbed. Difference in the opening capital of the assessee - we note that there was no addition in the capital account of the assessee, rather the difference in the opening capital account of the assessee for Rs. 10,48,002/- was representing the debit entry. Therefore, the same cannot be subject matter of addition under 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). We uphold the finding of the learned CIT (A). Hence the ground of appeal of the revenue is held by dismissed. Addition after rejecting the books of accounts u/s 145(3) - profit was not determined as per accounting standard 7 i.e. construction contract issued by the ICAI - HELD THAT - We note that the assessee has already recognized the gross revenue taking into consideration the 30% completion of the project and 45% of the booking amount which is as per the accounting standard 7 issued by the ICAI. Besides the above the assessee has already offered income in different assessment years almost at the same rate in the assessment year 2012-13 and 13-14 which was duly accepted in the assessment framed under section 143(3) - As such in all the years beginning from assessment year 2010-11 to 2016-17, the income declared by the assessee was duly accepted by the revenue except for the year under consideration. The assessee against the total project cost of ₹11.78 crores has offered total income over the project life at ₹1.43 crores i.e. during A.Y. 2010-11 to 2016-17. Assessee has declared the profit shown by him against the cost of project in the different assessment years and the overall profit from the entire project comes to 12.37% which is reasonable in the real estate activities. At the time of hearing, the learned AR has not brought anything contrary to the finding of the CIT (A). Thus, keeping in view the principles of consistency, we do not find any reason to disturb the finding of the CIT (A). Hence the ground of appeal of the revenue is hereby dismissed. Estimating the profit only on WIP - AO held that the assessee was liable to offer profit on such WIP in the year under consideration and accordingly estimated the profit at the rate of 15% on such WIPs and added the same to the total income of the assessee - CIT(A) deleted the addition made by the AO by observing that no income has accrued to the assessee as per accounting standard 7 issued by the ICAI - HELD THAT - WIP-Heights we note that such WIP was transferred to the company namely Classic Build Project Pvt. Ltd which was shown as loan by the assessee in his books of accounts. Thus in such a situation we are of the view that no profit can be estimated on such WIP. WIP Kankariya we note that such WIP consist amount incurred for purchase, expenses for demolition of old structure on land and certain initial expenses. The total cost incurred till the year under consideration was less than 10 % of estimated project cost (2.5 crore). Therefore, considering the fact that project was in early stage the question of estimating any income from such WIP does not arise. WIP - Marathas Society we note that such WIP was representing the cost of the land with minor expense such as security and electricity. With respect to such WIP no project was approved yet. In other words, no activity of whatsoever was carried out on such land shown as WIP by the assessee. Accordingly, we are of the view that there is no question of estimating the profit with respect to such WIP shown by the assessee. In view of the above and after considering the facts in entirety, we do not find any infirmity in the order of learned CIT(A). Hence the ground of appeal of the revenue is hereby dismissed. Unexplained cash credit under section 68 - As per CIT-A amount received by the assessee represents the business receipts which is outside the purview of the provisions of section 68 - HELD THAT - On perusal of the details of the parties/customers/members who have acquired the property in the scheme developed by the society, we note that the amount was received by the assessee for the purpose of the construction. The assessee against such money has shown work-in-progress as evident from the financial statement which are placed - it is also important to note that the assessee following the project completion method has also offered the income on the amount of money received by him and therefore we are of the view that no separate addition under the provisions of section 68 is warranted. DR has not brought any iota of evidence contrary to the finding of the learned CIT(A). Hence, the ground of appeal of the revenue is hereby dismissed. Disallowance of labor expenses - determine the genuineness of the Labour expenses in the absence of supporting documents - CIT(A) restricted the disallowance to the tune of ₹1 lakh only - HELD THAT - AO in the absence of necessary supporting vouchers should have made reference to the earlier year and subsequent year labour expenses in order to find out whether the assessee has claimed excessive Labour expenses. But no such comparison was made by the AO. Likewise, the AO has also not made any comparison with the comparable cases qua the Labour expenses. Furthermore, there is no provision under the Act to make the disallowance of the expenses on ad hoc basis. If, sufficient supporting vouchers are not available, the AO cannot make the disallowance on ad hoc basis without comparing the reasonableness of expenses in comparison to the earlier and later years and after taking into account the comparable cases. In view of the above and after considering the facts in totality , we do not find any infirmity in the order of the learned CIT ( A ) . Hence the ground of appeal of the revenue is hereby dismissed.
Issues Involved:
1. Deletion of addition on account of unexplained cash credit under section 68. 2. Deletion of addition after rejecting the books of accounts under section 145(3). 3. Deletion of addition by estimating profit on Work-in-Progress (WIP). 4. Deletion of addition on account of unexplained credits. 5. Deletion of addition on account of disallowance of labor expenses. Detailed Analysis: 1. Unexplained Cash Credit under Section 68: The Revenue contested the deletion of Rs. 2,92,54,271/- added under section 68 for unexplained cash credit. The Assessing Officer (AO) noted discrepancies in the capital account, including a difference in opening and closing capital, personal assets brought into the business, and investment in land. The AO found no supporting evidence for these entries and treated them as unexplained cash credits. The assessee argued that the entries were due to the merger of personal and business accounts and provided supporting documents. The CIT(A) accepted the explanation, noting that the transactions pertained to earlier years and were merely accounting adjustments. The Tribunal upheld the CIT(A)'s decision, stating that the provisions of section 68 were not applicable as the transactions were already accounted for in earlier years. 2. Rejection of Books of Accounts under Section 145(3): The Revenue challenged the deletion of Rs. 71,81,534/- added after rejecting the books of accounts. The AO argued that the assessee failed to follow Accounting Standard 7 (AS-7) for construction contracts. The assessee contended that the project was 30% complete and revenue was recognized accordingly. The CIT(A) found that the assessee's method was consistent with previous years and accepted by the Revenue, and therefore, the addition was unwarranted. The Tribunal agreed, emphasizing the principle of consistency and the reasonableness of the profit declared over the project period. 3. Estimated Profit on Work-in-Progress (WIP): The AO added Rs. 22,86,644/- by estimating profit on WIP from previous years, arguing that the assessee did not carry forward these projects. The assessee explained that some projects were transferred or inactive. The CIT(A) accepted the explanation, noting that no significant work was done on these projects. The Tribunal upheld this decision, stating that estimating profit on inactive or transferred projects was unjustified. 4. Unexplained Credits: The AO added Rs. 7,79,32,338/- for unexplained credits from a housing society. The assessee explained that these were advances for development work, and provided detailed documentation. The CIT(A) accepted the explanation, noting that the receipts were business transactions and already accounted for in the work-in-progress. The Tribunal upheld this decision, emphasizing that the receipts were part of the business and properly documented. 5. Disallowance of Labor Expenses: The AO disallowed 20% of labor expenses (Rs. 9,10,355/-) due to lack of supporting documents. The CIT(A) reduced the disallowance to Rs. 1 lakh, considering the nature of the construction industry. The Tribunal agreed, noting that labor expenses in construction are often poorly documented and that the AO did not compare expenses with previous years or similar cases. The Tribunal found the CIT(A)'s reduction reasonable. Conclusion: The Tribunal upheld the CIT(A)'s decisions on all issues, emphasizing the importance of consistency, proper documentation, and reasonable judgment in the absence of complete records. The appeal by the Revenue was dismissed.
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