2019 (3) TMI 1133 - AT - Income Tax

Addition as a result of search conducted wherein loose sheet found - Additions based upon selective scribbling in rough note de hors - HELD THAT - Addition in this case is a result of search conducted wherein loose sheet being page no. 9 and scribbling in front of the said page is the sole basis. While analyzing the scribbling as mentioned in the order of the A.O. reproduced in para 5 above, the A.O. has considered that it reveals undisclosed sales of ₹ 5.22 crores and cash component of ₹ 4.32 crores which has been added to the income of the assessee. CIT(A) while considering the issue has noted that the scribbling in the said front side of page no. 9 show that the disclosed profit would be ₹ 4.62 crores. Hence, he was of the opinion that only ₹ 4.62 crores can be added and no further addition is justified. In this regard, we note that the A.O. in his order has noted that on the reverse side of page no. 9, the assessee has noted sales of ₹ 5.82 crores. That the assessee has recorded sales of ₹ 4 crores based on total expenses of ₹ 17 crores. However, the A.O. has rejected this notings by observing that loss of ₹ 4 crores is not actually a loss, since unsold stock has not been included in this calculation which has been done on the front page where the figure arrived is ₹ 4.62 crores. Submissions of the assessee that loose sheet scribbling are merely estimates and de hors any corroborative evidence, the additions solely based on these loose sheets scribbling cannot be made has considerable cogency. The said loose sheet was found from the residence of one of the partners. It does not mention the name of the assessee firm directly or indirectly. Moreover, the said notings are also not claimed to be recorded in the handwriting of Shri Shankarlal Virji Thakkar or any other partners of the assessee firm. In this regard, we place reliance upon the Hon ble Apex Court decision in the case of CIT vs. P. V. Kalyanasundaram 2007 (9) TMI 25 - SUPREME COURT OF INDIA , wherein it was held that the addition solely based upon loose sheets scribbling de hors any corroborative findings, is not justified. We hold that the additions based upon selective scribbling in rough note de hors any corroborative finding, is not justified. Moreover, if the scribbling in the note is examined on the touch stone of the common law maxim of approbate and reprobate, the addition is further not justified. 20. In the result, this appeal by the Revenue is dismissed and that by the assessee stands allowed.

Issues Involved:
1. Addition of ?4,26,00,000 as undisclosed profit from the real estate project.
2. Method of accounting for revenue recognition.
3. Inclusion of estimated profit on closing stock and unconsidered expenditures.
4. Reduction of addition by CIT(A) from ?9,54,00,000 to ?4,26,00,000.
5. Presumption under Section 132(4A) of the Income Tax Act.
6. Validity of additions based on loose sheets and rough notings.
7. Completion status of the project and its impact on taxable income.

Detailed Analysis:

1. Addition of ?4,26,00,000 as Undisclosed Profit:
The assessee contested the addition of ?4,26,00,000 as undisclosed profit from the Prime Mall project, arguing that the transactions recorded on the seized loose papers did not pertain to their firm. The CIT(A) rejected this argument, stating that the documents were found in the possession of a partner, thus the presumption under Section 132(4A) applied. The Tribunal upheld this presumption but noted that the loose sheets alone, without corroborative evidence, could not justify the addition.

2. Method of Accounting for Revenue Recognition:
The assessee argued that they followed the project completion method of accounting, and since the project was not completed by 31st March 2012, the revenue should not be recognized in the year under appeal. The CIT(A) disagreed, noting that the project was substantially complete and that a major part of the sales consideration had already been received. The Tribunal found merit in the assessee's argument, emphasizing that the project was not completed in the current assessment year, thus supporting the assessee's method of accounting.

3. Inclusion of Estimated Profit on Closing Stock and Unconsidered Expenditures:
The assessee argued that the estimated profit of ?4,26,00,000 included profit on closing stock recorded at market value and did not consider several expenditures. The CIT(A) acknowledged that the AO could not selectively accept entries from the seized papers and directed the addition to be limited to ?4,26,00,000, considering all entries in totality. The Tribunal agreed, noting that the AO's selective acceptance of entries was not justified.

4. Reduction of Addition by CIT(A) from ?9,54,00,000 to ?4,26,00,000:
The CIT(A) reduced the addition from ?9,54,00,000 to ?4,26,00,000, considering the total profit calculation from the seized papers. The Revenue appealed against this reduction, arguing that the entire amount should be added as unexplained receipts. The Tribunal upheld the CIT(A)'s decision, emphasizing that the addition should reflect the net profit after considering all entries in the seized documents.

5. Presumption under Section 132(4A) of the Income Tax Act:
The CIT(A) applied the presumption under Section 132(4A) to the seized papers, treating them as belonging to the assessee firm. The Tribunal noted that this presumption is rebuttable and found that the assessee provided a reasonable explanation, undermining the presumption's application in this case.

6. Validity of Additions Based on Loose Sheets and Rough Notings:
The Tribunal emphasized that additions based solely on loose sheets and rough notings, without corroborative evidence, are not justified. It referenced the Supreme Court's decision in CIT vs. P. V. Kalyanasundaram, which held that such additions require corroborative findings.

7. Completion Status of the Project and Its Impact on Taxable Income:
The Tribunal found that the project was not completed in the current assessment year, supporting the assessee's method of accounting. It noted that the assessee had consistently followed the project completion method, and no defects were found in the books of accounts for the preceding and succeeding years.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, concluding that the additions based on selective scribbling in rough notes, without corroborative evidence, were not justified. The Tribunal emphasized the importance of considering the entire document and the method of accounting consistently followed by the assessee. The final order was pronounced on 07th March 2019.

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