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2025 (2) TMI 535 - AT - Income TaxUnaccounted receipts and Unaccounted payments in relation to hotel and restaurant business carried out by the assessee - During the course of search action certain incriminating material was found and seized - whether the entire unaccounted receipts should be taxed as income or whether only the profit element embedded in these receipts should be considered? HELD THAT - Percentage of profit as per the books of accounts is ranging from 47.69% to 31.16% for the asst. years 2015-16 to 2019-20 and the average of the same is 36.21% whereas the CIT A estimated the profit margin at 50% on the unaccounted sales which in our considered view is a higher figure when the Revenue failed to prove any evidence of undisclosed investments by the assessee in terms of Assets. After the search and seizure action the profit margins as per books are 33.57% and 31.16% respectively. We deem it to estimate 40% as profit margin will be found reasonable considering the facts and figures in the present case. Thus the Jurisdictional Assessing Officer is directed to adopt 40% profit margin in the place of 50% as directed by the Ld CIT A . Unaccounted receipts as well as unaccounted expenses in relation to the Real-estate business - It is well settled principle of law laid down in case of Navjivan Oil Mills 2001 (7) TMI 81 - GUJARAT HIGH COURT that seized material has to be read and accepted as a whole and it is not permissible to Pick and Choose theory or make further estimates therefrom unless and until there is cogent material in support of undertaking such an exercise. As in the case of Godhra Electricity Co. Ltd. 1997 (4) TMI 4 - SUPREME COURT held that only real income has to be taxed in the hands of the assessee. No income can be brought to tax as of now for the simple reason that the amounts received by the assessee are only advances which does not fall under the category of income accrued or due and no agreements have been executed till date. It is undisputed fact that till the date of search and seizure action no formal agreement for purchase of land has been entered into or any approvals for construction activities have been received by the assessee. Considering the actual profit ratio as per the books of accounts at 12.98% as well as profit ratio on actual unaccounted transactions at 6.75%. Therefore in the interest of justice we deem it to estimate 13% as the reasonable profit margin considering the facts and figures in the present case. Thus the Jurisdictional Assessing Officer is directed to adopt 13% profit margin on real estate business in the place of 17% as directed by the Ld CIT A . Addition of unsecured loan made u/s.68 - Sh. Jigar Trivedi has filed affidavit of having paid commission @ of 0.60% on the unsecured loan - absence of incriminating material found during the search - CIT(A) deleted addition - HELD THAT - It is undisputed fact that the Ld AO made entire addition of addition on the unsecured loan u/s.68 of the Act and on account of bogus commission payments though there is no seized material during the course of search proceedings. The Hon ble Supreme Court in the case of Abhisar Buildwell 2023 (4) TMI 1056 - SUPREME COURT has held that no addition can be made in respect of completed assessments in the absence of any incriminating material. In the present case during the search action certain incriminating materials were found and seized which revealed there were certain unaccounted receipts and unaccounted payments in relation to hotel restaurant and real estate business carried out by the assessee firm. The present additions made on account of unsecured loans and commission thereon are other materials available with the AO including the income declared in the returns for the Asst. years 2015-16 and 2016-17. Thus the findings arrived by the Ld CIT A is against the verdict of Hon ble Supreme Court in Abhisar Buildwell. Therefore the findings arrived by the CIT A is liable to be reversed and the additions made by the Ld AO is to be upheld since assessee failed to make any submissions on merits of the case. Decided against assessee.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment are:
ISSUE-WISE DETAILED ANALYSIS 1. Unaccounted Receipts and Expenses in Franchisee/Hospitality Business The relevant legal framework includes the provisions of the Income Tax Act, particularly sections related to undisclosed income and expenses. The Court considered various precedents, including the Gujarat High Court's decision in President Industries, which held that only the profit element in unaccounted receipts should be taxed. The CIT(A) determined that the profit margin for unaccounted business transactions should be higher than recorded sales, estimating it at 50%. However, upon appeal, the Tribunal found this estimate to be excessive, considering the average profit ratio from the books was 36.21%. The Tribunal revised the profit margin to 40% for unaccounted sales. 2. Unaccounted Receipts and Expenses in Real Estate Business The CIT(A) initially estimated the profit margin for unaccounted real estate transactions at 17%, based on discrepancies found during the search and judicial precedents. The Tribunal, however, adjusted this to 13%, citing the actual profit ratio from the books and the absence of formal agreements or approvals for certain projects. 3. Additions on Unsecured Loans and Commission Payments The AO made additions for unsecured loans and commission payments based on statements and affidavits from third parties, without any incriminating material found during the search. The CIT(A) deleted these additions, referencing the Gujarat High Court's decision in Saumya Construction, which requires incriminating material for additions in completed assessments. The Tribunal, however, reversed this decision, citing the Supreme Court's ruling in Abhisar Buildwell, which allows for jurisdiction to reassess based on other material available with the AO, including income declared in returns. SIGNIFICANT HOLDINGS The Tribunal held that:
The Tribunal's final determinations included partial allowance of the assessee's appeals and dismissal of some of the Revenue's appeals, with specific adjustments to the profit margins and upholding of certain additions.
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