2016 (12) TMI 1013 - AT - Income Tax

Income accrual - Addition of commission as an advance in AY. 2003-04 but offered to tax in AY. 2008-09 - Held that - The Hon ble Supreme Court in the above case of CIT Vs. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT has held that it is well settled that income tax cannot be levied on hypothetical income. Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount only, then can it be said that for the purpose of taxability that the income is not hypothetical and it has really accrued to the assessee . Keeping the principles in mind, we are of the opinion that the advance receipt of commission cannot be brought to tax in AY. 2003-04 and assessee has correctly accounted for the same in AY. 2008-09. In view of that, AO is directed to delete the said addition made in this assessment year. The grounds raised by assessee on this issue are accordingly allowed. In case, AO gave relief in AY 2008-09 consequent to Ld.CIT(A) order the same can be modified. Partial confirmation of election expenditure - Held that - CIT(A) has accepted only the amounts pertaining to Sri Teju Maaraju, Sri Rana Pratapu Maaraju and Sri Sukhender Reddy, whereas Sri Muralidhar Reddy, Shri Yadi Reddy and Raghuveer Singh also have contributed to an extent of ₹ 24 Lakhs. Accordingly, no amount could be brought to tax in the hands of assessee. Moreover, assessee has admitted an amount of ₹ 9 Lakhs in his cash flow statements which the AO has not given credit. Even if the amount of ₹ 19 Lakhs is to be considered as expenditure spent by assessee towards election, the amount of ₹ 9 Lakhs which he himself has admitted should have been given credit. That leaves us with a balance of ₹ 10 Lakhs for which the entries in the diary itself shown that he has received more than ₹ 24 Lakhs from others. In view of this, we are of the opinion that no amount can be brought to tax in the hands of assessee. In view of that, grounds raised by assessee are allowed. AO is directed to delete the amount of ₹ 19 Lakhs as the same was received from others as noted in the diary. Unexplained investment in the house - Held that - Bringing the entire amount to tax in this assessment year per se is not correct. Moreover, the building was constructed in the village and assessee being Sarpanch of the village could have invested less, so his claim for rebate not only on the rates for valuation adopted by the CPWD but also on the personal supervision are appropriate. We are unable to understand, why Ld.CIT(A) restricted the rebate for the rates adopted by the CPWD to 5% when ITAT in various cases was allowing 15% rebate. Following the Co-ordinate Bench decision, we direct the AO to reduce the valuation by 15% from the CPWD rates and by 10% for the personal supervision already granted by the CIT(A). Thereafter, only proportionate investment pertains to this year should be considered as unexplained . To that extent, the addition is sustained. Assessee gets relief partially on the grounds. AO is directed to re-work out the unexplained investment accordingly. With these directions, the grounds in this appeal are partly allowed.

Summary

Issues Involved:
1. Addition of commission income in AY 2003-04.
2. Election expenditure treated as income from undisclosed sources in AY 2007-08.
3. Unexplained investment in house construction in AY 2008-09.

Issue-wise Detailed Analysis:

1. Addition of Commission Income in AY 2003-04:
The primary issue in ITA No. 1195/Hyd/2014 pertains to the addition of ?5 Lakhs as commission income for AY 2003-04, which the assessee claimed was offered to tax in AY 2008-09. The Assessing Officer (AO) based the addition on entries in a seized diary, while the assessee argued that the commission was related to a transaction finalized in December 2007 and thus should be taxed in AY 2008-09. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition for AY 2003-04 but directed the AO to verify and provide relief for AY 2008-09 if the amount was indeed offered to tax.

The Tribunal, after reviewing the facts and the Supreme Court's decision in CIT Vs. Excel Industries Ltd., concluded that the commission income should be taxed when it is actually earned and not when received as an advance. Therefore, the Tribunal directed the AO to delete the addition in AY 2003-04, as the income was correctly accounted for in AY 2008-09.

2. Election Expenditure Treated as Income from Undisclosed Sources in AY 2007-08:
In ITA No. 1196/Hyd/2014, the issue revolves around the addition of ?19 Lakhs as unexplained expenditure for the Sarpanch election. The AO noted a total expenditure of ?40 Lakhs based on a seized diary, of which ?21 Lakhs were explained and accepted by the CIT(A) as received from third parties. The remaining ?19 Lakhs were treated as unexplained and added to the assessee's income.

The Tribunal observed that various entries in the diary indicated receipts from multiple individuals, which were not fully considered by the AO or CIT(A). The Tribunal concluded that the entire amount of ?40 Lakhs was received from third parties, and thus, no amount should be added as unexplained expenditure. The Tribunal directed the AO to delete the addition of ?19 Lakhs.

3. Unexplained Investment in House Construction in AY 2008-09:
The issue in ITA No. 1197/Hyd/2014 concerns the addition of ?9,34,865 as unexplained investment in house construction. The AO referred the matter to the Valuation Cell, which valued the house at ?25,27,165, leading to the addition. The CIT(A) provided partial relief by allowing a 15% deduction (10% for personal supervision and 5% for CPWD rate adjustment), sustaining an addition of ?5,55,790.

The Tribunal noted that the house was constructed over several years, and the investment should be proportionately attributed to each year. Additionally, the Tribunal directed a 15% rebate on CPWD rates and 10% for personal supervision, as per ITAT precedents. The AO was instructed to re-calculate the unexplained investment proportionately for the relevant year, providing partial relief to the assessee.

Conclusion:
- Appeals in ITA Nos. 1195 & 1196/Hyd/2014 are allowed.
- Appeal in ITA No. 1197/Hyd/2014 is partly allowed.

Order pronounced in the Open Court on 9th December, 2016.