2014 (11) TMI 797 - HC - Income Tax

Addition of undisclosed income on money receipts and sale of row houses - Whether the Tribunal is right in law and on facts in deleting the addition made on account of undisclosed income earned by the assessee out of on money receipts from the sale of row houses done during the block period Held that - The partnership firm received on money of ₹ 62 lakhs during the block period for sale of the flats - the Tribunal rightly confirmed the findings arrived at by the AO - However, the Tribunal did not permit the revenue to collect the tax on the entire receipt believing the it was only the income embedded in such receipt which can be subjected to tax in Commissioner of Income Tax v. President Industries 1999 (4) TMI 8 - GUJARAT High Court the same was decided by court - the entire sales could not have been added as income of the assessee, but only to the extent the estimated profits embedded in the sales for which the net profit rate was adopted entailing addition of income on the suppressed amount of sales - unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods which have been sold has been made by the assessee and that has also not been disclosed, such addition could not be sustained - even upon detection of on money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves thus, not the entire receipts, but the profit element embedded in such receipts can be brought to tax the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Whether the Tribunal was correct in deleting the addition made on account of undisclosed income earned by the assessee from "on money" receipts?

Analysis:
The appeals in question arose from a common factual and legal background and were disposed of together. The respondent, a partnership firm engaged in construction, started building flats in a complex in Surat. A search revealed undisclosed income, and the Assessing Officer estimated unaccounted cash collection from flat buyers, resulting in an order for tax payment. The Tribunal confirmed cash collection findings but held that only the profit embedded in such receipts could be taxed. The revenue challenged this decision.

The main issue was whether the Tribunal was justified in deleting the addition of undisclosed income from "on money" receipts. The revenue contended that the Tribunal erred in reversing the Assessing Officer's order, emphasizing the established on money collection. The respondent argued that only the income, not the entire receipt, should be taxed, citing legal provisions.

The Court considered past judgments, including one involving President Industries, where only profits from undisclosed sales were taxed, not the entire amount. Similarly, in Gurubachhan Singh J. Juneja's case, only the gross profit on undisclosed sales was taxable. The Court also referenced the principle that profit embedded in unaccounted receipts should be taxed, not the entire receipts themselves.

Ultimately, the Court upheld the Tribunal's decision, accepting the disclosed profit of Rs. 26 lakhs out of total undisclosed receipts of Rs. 62 lakhs as taxable income. The Court concluded that the legal position supported taxing the profit element in such receipts. Therefore, no interference was warranted, and the tax appeals were dismissed.