2014 (3) TMI 176 - AT - Income Tax

Estimation of profit @ 16% - Rate of profit charged high and excessive - Held that - CIT(A) was of the view that the income has to be determined by estimation only - The CIT(A) has also accepted additional turnover as business receipts the assessee is engaged in construction business thus, considering the nature of business of the assessee, estimation of profit at 16% is certainly on the higher side - More so, when it is found that assessee is found to have offered the total receipts as income and even has shown advances received for future projects as income - The Tribunal has been consistently taking a view that in case of estimation of profit in respect of construction business on rejection of books of account, net profit rate would be 12.5% before depreciation or 8% including depreciation thus, the net profit adopted at 16%, being on the higher side, it has been held that the profit rate of 8% would be fair and reasonable considering the nature of business carried on by the assessee thus, the AO is directed to estimate the profit by applying rate of 8%, net of all deductions, on the turnover declared by the assessee Decided partly in favour of Assessee. Disallowance of expenditure u/s 40(a)(ia) of the Act Held that - The decision in Commissioner Of Income-Tax Versus Banwari Lal Banshidhar 1997 (5) TMI 37 - ALLAHABAD High Court followed - When a net profit rate is applied, there remains no scope for further disallowance of any expenditure thus, no separate disallowance u/s 40(a)(ia) of the Act can be made when the profit of the assessee has been estimated thus, the AO is directed to delete the addition made Decided partly in favour of Assessee. Addition on account of incorrect credits in bank accounts - Chit loss - Held that - The CIT(A) was justified in deleting the addition as the so-called unexplained credits in the bank have been reconciled by the assessee and considered as a turnover in the return filed in response to section 153A of the Act - the addition would not survive - Similarly with regard to chit loss of the CIT(A) has noted the fact that the chit in fact was subscribed by him with Margadarshi Chit Fund Pvt. Ltd. - the bid amount was taken to the books of account thus, when the amount was utilized for the purpose of business, the chit loss arising becomes allowable expenditure thus, there is no reason to interfere in the findings of the CIT(A) Decided against Revenue. Addition on account of negative cash balance Held that - The addition is not justified, as it is not disputed that book cash negative balance was on the basis of original set of books - The CIT(A) has also not disputed the fact that as per the revised books of account based on the seized material the resultant incremental turnover as well as the incremental expenditure have been considered and there is no negative cash balance - assessee has filed the return of income in response to notice u/s 153A of the Act on the basis of revised books of account thus, when the profit is estimated by rejecting the books of account, no separate addition can be made the AO is directed to delete the addition made Decided in favour of Assessee. Addition made on account of unaccounted investment in jewellery Held that - The CIT(A) made clear that he did not dispute the fact that gold jewellery belongs to the assessee as well as other family members who are also staying with the assessee thus, without quantifying the amount of jewellery actually belonging to each family member, the CIT(A) could not have treated the amount of 460 grams as belonging to assessee thus, the addition made by the CIT(A) set aside Decided in favour of Assessee. Disallowance of expenditure on estimate basis Held that - The CIT (A) has proceeded to estimate the profit from business by observing that the assessee s books of accounts is deemed to have been rejected - once the CIT (A) has resorted for estimation of profit by rejecting the books of account, he cannot again pick up individual items of expenditure for disallowance - When profit is estimated by applying a fixed rate, then it is deemed that all other expenditure/disallowances have been taken care of Relying upon Assistant Commissioner Of Income-Tax. Versus Indwell Lianings (P) Limited. 2008 (6) TMI 281 - ITAT MADRAS-A the AO is directed to delete the addition made Decided in favour of Assessee. Estimation of income by applying the rate of 15% of the total turnover Held that - The net profit of 15% adopted by the CIT (A) is on the higher side - the Tribunal is consistently holding the view that in case of civil construction work estimation of profit after rejection of books of accounts is to be made at 12.5% before depreciation or at 8% net of depreciation - a net profit rate of 8% net of all deductions would be just and reasonable thus, net profit rate of 8% will be fair and reasonable thus, the AO is directed to estimate the net profit at the rate of 8% on the total turnover disclosed by the assessee Decided partly in favour of Assessee. Addition on account of difference in bank balance Held that - It was incumbent on the part of the Assessing Officer as well as CIT (A) to verify the actual cash balance as shown in the bank account vis-a-vis reconstructed books of accounts on the basis of which return was filed in response to notice issued u/s 153A of the Ac - The revenue authorities having not made any effort to verify this aspect, the addition cannot be sustained Decided in favour of Assessee. Addition on account of unexplained expenditure Held that - The CIT (A) was not justified in sustaining the addition which was made on the basis of old set of books of accounts - Without verifying the revised books of accounts, and claim of the assessee that as per which there is no negative cash balance the revenue authorities are not justified in making the addition on the basis of old books of accounts which admittedly were found to be defective thus, the addition cannot be sustained and set aside Decided in favour of Assessee. Addition on account of money receipts Held that - The remand report submitted by the AO as well as the observations made by the CIT(A) would clearly show that they have accepted the fact that the said amount has been accounted for thus, there cannot be any scope for further addition on that account - the CIT(A) has noted that the assessee has offered the amount as additional income in the form of extra receipts for the year under reference - If it has already been offered as additional income, then, it cannot be again added to the income of the assessee thus, the matter is remitted back to the AO for verification Decided partly in favour of Assessee. Addition on account of money Held that - There was no infirmity in the finding of the CIT(A) - the assessee apart from stating that the amount represented the cost of extra work which has not been paid by the customer has not brought any material on record to substantiate such claim - the assessee having failed to explain with evidence that the amount of Rs. 9,04,750/- was not received by him, the addition is required to be sustained Decided against Assessee. Addition in absence of seized material Held that - While in the original return the assessee has disclosed gross receipts at Rs. 22,85,000/-, in the return filed in response to notice u/s 153C the assessee disclosed gross receipts of Rs. 42,52,000 thus, the contention of the assessee that there was no seized material is without any basis - It is very much clear from the materials on record that at the time of filing of original return, the assessee only disclosed gross receipts through cheques totally suppressing receipts in cash which came to light only as a result of search thus, the contention of the assessee that the addition cannot be made in absence of seized material is without any basis Decided against Assessee. Addition on account of difference between actual and admitted consideration Held that - There is no other evidence before the AO either by way of seized material or any other material to show that the assessee has suppressed the receipt in respect of all the flats - by applying the single instance of suppression of receipt, if at all there be any, the AO could not have quantified the unaccounted receipt that too by assuming that receipts shown by the assessee represents 60% of the total consideration - the assessee taking into consideration the information available in the seized materials has declared the gross receipts of Rs. 1,20,10,000/- in the return furnished in response to notice issued u/s 153C as against the receipts of Rs. 26,40,000/- shown in the original return thus, the conclusion drawn by the CIT(A) that the unaccounted receipts from sale of flat has already been taken care of by enhancing gross receipt of Rs. 1,20,10,000/- cannot be disregarded thus, there was no infirmity in the order of the CIT(A) in deleting the addition Decided against Revenue. Addition of 10% of expenses Held that - The CIT(A) has held that no disallowance can be made u/s 40(a)(ia) as the AO has not established the default by assessee - Even so far as allegation of non-furnishing of bills and vouchers are concerned, the CIT(A) has observed that though vouchers were available with the assessee, the AO refused to verify them and made the addition solely on the basis of special audit report - The CIT(A) restricted the disallowance to 10% of the expenditure claimed the AO is directed to disallow 5% instead of 10%, considering the fact that some amount of inflation on expenditure cannot be ruled out Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Estimation of profit percentage.
2. Disallowance of expenditure under various sections (e.g., 40(a)(ia), 40A(3)).
3. Unexplained credits and cash receipts.
4. Negative cash balance.
5. Unaccounted investments and unexplained expenditure.
6. Protective vs. substantive additions.

Detailed Analysis:

1. Estimation of Profit Percentage:
The primary issue across multiple appeals was the estimation of profit percentage. The CIT(A) initially applied a profit rate of 16% on the turnover. However, the Tribunal found this rate to be on the higher side considering the nature of the construction business. The Tribunal consistently directed the AO to estimate the profit at a rate of 8% on the turnover declared by the assessee, net of all deductions. This decision was based on the Tribunal's precedent that in cases of estimation of profit for construction businesses, a net profit rate of 8% including depreciation is reasonable.

2. Disallowance of Expenditure:
Several appeals involved the disallowance of expenditures under sections 40(a)(ia) and 40A(3). The Tribunal held that when the profit is estimated by rejecting the books of account, no separate disallowance of expenditure can be made. This principle was supported by the Hon'ble AP High Court in the case of Indwell Constructions and ITAT Calcutta Special Bench in the case of ITO Vs. Kenaram Saha and Subhash Saha. Consequently, the Tribunal directed the AO to delete the additions made on account of disallowances under these sections.

3. Unexplained Credits and Cash Receipts:
The Tribunal addressed issues related to unexplained credits in bank accounts and cash receipts. It was noted that the CIT(A) had accepted the revised books of account which included these credits. Therefore, the Tribunal found no basis for treating these amounts as unexplained credits and directed the deletion of such additions.

4. Negative Cash Balance:
In cases where negative cash balances were identified, the Tribunal observed that these were based on the original set of books, which were not reliable. The revised books of account, which formed the basis for the return filed u/s 153A, did not show negative cash balances. Therefore, the Tribunal directed the deletion of additions made on account of negative cash balances.

5. Unaccounted Investments and Unexplained Expenditure:
The Tribunal found that unaccounted investments and unexplained expenditures were often based on old books of account and special audit reports. Since the revised books of account were considered for filing returns, the Tribunal held that these additions were not sustainable and directed their deletion.

6. Protective vs. Substantive Additions:
In cases involving protective assessments, where the income was already assessed substantively in another case, the Tribunal upheld the CIT(A)'s decision to delete the protective additions. The Tribunal emphasized that there was no need to uphold protective additions if the income was already assessed substantively in another case.

Conclusion:
The Tribunal's judgment consistently favored the assessee by reducing the estimated profit rate to 8%, deleting disallowances under sections 40(a)(ia) and 40A(3), and rejecting additions based on unexplained credits, negative cash balances, and unaccounted investments. The Tribunal also upheld the deletion of protective additions where substantive assessments were already made.