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March 6, 2021

Addition for on-money received on sale of flats restricted to 12% by ITAT

by CA Jessica Nagaonkar in Income Tax

Addition for on-money received on sale of flats restricted to 12% by ITAT

Bogus basically means something which is counterfeit or fake, something which is not genuine. Section 68 of the Income Tax Act pertains to Cash Credits. According to Section 68, where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offered no explanation about the nature and source thereof or the explanation offered by him was not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

In case such credit is not offered to tax by the taxpayer, taxpayer is required to offer explanation as to why the same is not offered to tax and what is the source of such credit. Knowing the source of income is relevant as the same might be belonging to a third person (i.e., any person other than taxpayer) and might have to be taxed in the hands of such third person. It might have to be taxed in the hands of the third person as he might have diverted the funds to the taxpayer with the intention of evading taxes.

Let us refer to the case of M/s. Bhalchandra Trading P. Ltd. Vs DCIT (ITAT Mumbai), which pertained to applicability of Section 68 on on-money for sale of flats.

Facts of the Case:

  • AO had proceeded to make an addition u/s.68 towards on-money received by the assessee for sale of flats.
  • It was also submitted by the assessee before the AO that there were certain unaccounted business expenses made by the assessee out of the on-money received and hence, only profit element thereon could be added and not the entire on-money receipts.
  • AO ignoring the entire contentions of the assessee proceeded to tax the net on-money received of Rs.2,20,00,000 by applying the provisions of Section 68 as unexplained cash credit.
  • The AO also observed that assessee has not provided the party-wise details of on money receipt.
  • The assessee’s group concerns also had offered 12% of on-money receipts as its income before the Income Tax Settlement Commission.

Order of CIT(A)

  • The CIT(A) categorically admitted in his order that the said receipt represents on-money received on sale of flats from which certain expenses were also incurred by the assessee and hence, only the profit element thereof could be brought to tax and not the entire on-money receipts.
  • CIT(A) accordingly estimated the profit element to be at 25% and restricted the addition to Rs.55 lakhs as against Rs.2,20,00,000 made by the AO.
  • Against this finding of the CIT(A), the revenue appealed before the ITAT.

Observations of ITAT

  • It was not in dispute that assessee had indeed received on-money for sale of flats to the tune of Rs.2,20,00,000 during the year under consideration.
  • It was not in dispute that the assessee had incurred certain business expenses out of such on-money which are kept outside the books of accounts.
  • Hence, it would be just and fair that only the profit element embedded on any such undisclosed transaction could be brought to tax on an estimated basis.
  • The assessee had already pleaded that on money transactions were offered by the assessee’s group concerns @12% of on-money receipts before the Income Tax Settlement Commission and the same has been accepted by the Settlement Commission.
  • Hence, the data and information were indeed available with the CIT(A) to have some rational basis to make profit estimation in the hands of the assessee herein by following 12% thereof from the order of Income Tax Settlement Commission.

Accordingly, ITAT directed the AO to add only 12% of on-money receipts as undisclosed income of the assessee for the year under consideration.

Another issue was raised in the same appeal where the issue to be decided was as to whether the CIT(A) was justified in confirming the addition of Rs.5,34,819 as income from inflation of expenses

Facts of the Case:

  • The search operation u/s.132 was conducted in the Ahuja group of cases and certain loose papers and digital forms were found and seized.
  • Pursuant to the said search, the assessee was issued notice u/s.153A for AY 2013-14.
  • The assessee filed return in response to notice u/s.153A of the Act on 29/12/2016 declaring income of Rs.2,11,77,461
  • AO had mentioned in the assessment order that parallel books of accounts maintained by the assessee evidenced booking of expenses in the form of cheque payment and receiving back cash for the same.
  • The inflation of expenses was accepted by the assessee group and the assessee group concerned had approached the Income Tax Settlement Commission wherein 12% of this expenditure was offered by them as income.
  • AO had sought to add a sum of Rs. 21,39,275 towards inflation of expenses for the AY 2013-14.
  • In response, the assessee stated that no addition towards inflation of expenses could be made on mere allegation of suspicion.
  • However, on without prejudice basis, the assessee submitted that 8% of such expenditure could be added as undisclosed income of the assessee.
  • AO had rebutted this plea of the assessee by stating that the fact of maintaining parallel books of accounts was accepted by the assessee’s group even before the Income Tax Settlement Commission and 12% of the expenditure was offered as income.
  • AO also observed that the fact of handing over of all the seized documents was also accepted by the assessee’s group before the Income Tax Settlement Commission.
  • Accordingly, AO sought to add the entire amount of Rs.21,39,275 on account of inflation of expenses for AY 2013-14.

Appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]

  • Assessee had pleaded on without prejudice basis before the CIT(A) that additional income offered by the assessee’s group before the Income Tax Settlement Commission at 12% of inflation of expenses was accepted by the Settlement Commission and requested the CIT(A) to follow the same in assessee’s case also.
  • This was made on the plea that the cash which was received back by the assessee after issuance of cheque payments was utilised for incurring various business-related expenses.
  • The CIT(A) however, ignored this submission of the assessee and proceeded to make an adhoc disallowance at 25% of inflated expenses for the assessment year under consideration after accepting to the contentions of the assessee that cash received back was indeed utilised for certain business-related expenses which were kept outside the books.
  • Aggrieved, the assessee appealed before the Income Tax Appellate Tribunal (ITAT)

Observations of ITAT

  • ITAT found the facts prevailing in assessee’s case and facts prevailing in assessee’s group cases who had preferred application before the Income Tax Settlement Commission were identical. There is no dispute on that aspect.
  • It was not in dispute that assessee had resorted to inflation of expenses by making certain cheque payments and receiving back cash in return.
  • It was not in dispute that the said cash had already also been utilised for the purpose of meeting business related expenses by the assessee.
  • In this background what was to be taxed was only the left-over portion of the cash remaining with the assessee on this subject mentioned transaction, being the profit element, which had been already accepted by the Income Tax Settlement Commission at 12% in assessee’s group company cases.
  • ITAT held that the CIT(A) ought to have followed the same in view of identical facts in the assessee herein also.

Accordingly, ITAT directed the AO to make an addition @12% of inflation of expenses for the relevant assessment year in line with the direction of the Income Tax Settlement Commission in assessee’s group company cases.

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