2017 (1) TMI 1813 - AT - Income Tax

Unrecorded and unexplained transactions - Addition made on the basis of seized loose papers - treatment ot voluntary disclosure made u/s 132(4) - HELD THAT - When entire entries of seized documents are to be considered it cannot be taken in part or peace-meal and whole document should be considered as a whole. We find that the seized material documents were found during the course of search therefore the entries recorded thereon whether it is a receipt or expenditure has to be accepted as genuine. Therefore for taxing the real income is required to be taxed and not the receipts when document contains receipts and expenditure. Therefore peak of the debit and credit entries of the seized documents is to be considered and set off of carried forward disclosure or income being taxed either being accounted or unaccounted income is to be allowed. Therefore to this extent we find that the findings given by the ld. CIT(A) is justified. We find support from case of Tirupati Construction 2015 (8) TMI 83 - ITAT AHMEDABAD relied upon by assessee wherein it was held that only peak of debit and credit entries of the seized papers/diaries could be assessed in the hands of the assessee and there was no justification for adding the entire receipts side of the seized papers and accordingly there is no merit in the grounds of appeal of the Revenue with regard to this issue and accordingly dismissed. In the light of these facts all the grounds of the Revenue are treated as dismissed for all the assessment years under appeal. Net profit estimation - Taking highest of the adjusted NP ratio - HELD THAT - CIT(A) has applied uniform net profit rate of 5% for all the assessment years under appeal which in our view is not correct approach as each assessment year is a separate assessment year and net profit rate of the same can be varied for assessment year to assessment year. We note that net profit ratio @ 5% for adjusted profit and loss account for each of the assessment year cannot be applied while considering net profit rate of on unaccounted sales and expenses resulting into unaccounted transaction. Therefore the net profit rate for the relevant assessment years under appeal as worked out by the ld. CIT(A) after analyzing transaction from each year would be most appropriate to apply for working out net profit on account of unaccounted sales for the respective assessment years. Therefore we are of the considered opinion that adjusted net profit rate pertaining to concerned assessment years as worked out by the ld. CIT(A) for each assessment year under appeal would be reasonable to apply while calculating unrecorded profit. Accordingly the sustainable addition would be worked out after allowing the peak set off of brought forward balances as allowed by the ld. CIT(A). Directions to compute adjusted net profit ratio.

Summary

Issues Involved:
1. Deletion of additions made by AO on account of unrecorded and unexplained transactions.
2. Application of highest adjusted NP ratio of 4.76% rounded to 5% uniformly for all assessment years.
3. Consideration of peak credit and set-off of carried forward balances.

Detailed Analysis:

1. Deletion of Additions Made by AO on Account of Unrecorded and Unexplained Transactions:
The Revenue challenged the deletion of additions made by the AO based on unrecorded transactions in LPS-14 to LPS-21. The AO had added higher figures of either total receipts or payments for each assessment year without considering peak credit or set-off of carried forward balances. The CIT(A) found no merit in the AO's approach, noting that the transactions were recorded on a day-to-day basis, with each day's balance carried forward to the next. The CIT(A) concluded that adding the entire receipts or payments without considering the net profit element was unjustified. The Tribunal upheld the CIT(A)'s findings, emphasizing that the entire document should be considered as a whole, and only the peak of debit and credit entries should be assessed.

2. Application of Highest Adjusted NP Ratio of 4.76% Rounded to 5% Uniformly for All Assessment Years:
The assessee argued that the CIT(A) erred in applying a uniform NP ratio of 5% for all assessment years. The CIT(A) had adjusted the NP ratio by excluding certain expenses from the audited accounts, resulting in varying NP ratios for different years. The Tribunal agreed with the assessee, noting that each assessment year should be considered independently. The Tribunal directed the AO to apply the adjusted NP ratio specific to each assessment year, rather than a uniform rate.

3. Consideration of Peak Credit and Set-off of Carried Forward Balances:
The CIT(A) had allowed the set-off of peak credit and carried forward balances while computing the additions. The Tribunal upheld this approach, emphasizing that the real income should be taxed, not just the receipts. The Tribunal directed the AO to compute the total income by considering the adjusted NP ratio for each year and allowing the set-off of carried forward balances.

Conclusion:
The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals. The AO was directed to compute the total income by applying the adjusted NP ratio specific to each assessment year and allowing the set-off of carried forward balances. The Tribunal's decision emphasized the importance of considering the entire document as a whole and taxing the real income, not just the receipts.