2014 (6) TMI 137 - AT - Income Tax

Estimation of profits @12% on total receipts Addition of members contribution and the closing stock - Addition made u/s 41(1) of the Act - Rejection of books of accounts Held that - The accounting method followed by the Assessee was not as per the established accounting principles as the Assessee had not accounted the receipts on the basis of booking amount and nor the receipts were accounted on the basis of actual sales made when the possession was given and proceeds realized but had stated to have accounted on the basis of Architects Certificate regarding construction completed during the year. The accounting method followed by the Assessee was not proper and it was impossible to work out true profit on the basis of entries made in the books of accounts and the accounts of the Assessee as not correct or complete and the proper course would be to reject the books of accounts and estimate the profits the Assessee had shown members contribution which was not shown in earlier years - the net profit received since inception of the project and applying the profit rate of 12% and after giving the credit of the amount shown by the Assessee, held the balance amount as the income of the Assessee - the accounts of the Assessee has been found to be incorrect and the method adopted to be improper and the book entries to be not reliable and the percentage of the total receipts was already added for working out the income, no addition separately on account of closing stock could be added - Revenue has not brought any material on record to controvert the findings of CIT(A) thus, there was no reason to interfere in the order of CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Rejection of books of account and estimation of profit.
2. Addition of Rs. 69,42,515/- under section 41(1) towards members' contribution.
3. Addition of Rs. 30,59,301/- as credit under the building construction account.

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Profit:
The CIT(A) rejected the books of account due to the peculiar accounting method adopted by the assessee, which did not adhere to established accounting principles. The assessee accounted for receipts based on an Architect's certificate regarding construction completed during the year, rather than on actual sales made or booking amounts. The CIT(A) found this method unreliable and impossible to determine true profit. Consequently, the CIT(A) decided to reject the books of account and estimate the profit by applying a 12% profit rate on the total receipts since the inception of the project. The CIT(A) calculated the total receipts to be Rs. 6,85,70,521/- and the total income shown year-wise to be Rs. 43,66,118/-. After applying the 12% profit rate, the taxable income was determined to be Rs. 38,62,344/- for the current year.

2. Addition of Rs. 69,42,515/- Under Section 41(1) Towards Members' Contribution:
The A.O. added Rs. 69,42,515/- to the assessee's income, considering it as income from undisclosed sources. The A.O. believed that the assessee failed to prove the identity, genuineness, and creditworthiness of the members' contributions shown as liabilities. However, the CIT(A) found that while the accounting method was improper, the entire amount of members' contributions could not be considered as income since these were sale proceeds. The CIT(A) concluded that the proper approach would be to estimate the income by rejecting the books of account rather than treating the entire members' contribution as income under section 41(1).

3. Addition of Rs. 30,59,301/- as Credit Under the Building Construction Account:
The A.O. added Rs. 30,59,301/- to the income, considering it as part of the closing stock. The CIT(A) disagreed, noting that the building construction account balance represented expenditure met from sale receipts. Since the receipts had already been considered for income calculation, adding the closing stock separately would result in double taxation. Therefore, the CIT(A) allowed this ground, recognizing that the method adopted by the assessee was improper, and the closing stock could not be added separately once a percentage of the total receipts had been applied to determine the income.

Conclusion:
The ITAT upheld the CIT(A)'s decision, finding no reason to interfere with the order. The revenue's appeal was dismissed as it failed to bring any material to counter the CIT(A)'s findings. The judgment emphasized the importance of adhering to established accounting principles and the proper estimation of income when the books of account are found unreliable. The appeal of the Revenue was dismissed, and the order was pronounced in open court on 16-05-2014.