Kaizen Enterprises Pvt. Ltd. Vs ACIT (ITAT Jaipur)
The Income Tax Appellate Tribunal (ITAT), Jaipur, has partly allowed the appeal of Kaizen Enterprises Pvt. Ltd. for the assessment year 2013-14, providing relief on an addition made towards undisclosed income. This is the second round of litigation before the ITAT in this matter, with the case having been previously restored to the Assessing Officer (AO) by a coordinate bench. The central issue revolved around the treatment of Rs. 1.35 crore, originating from a seized diary noting and the statement of a company director, surrendered as undisclosed income.
The AO had initially made a substantial addition, which was partly reduced by the Commissioner of Income Tax (Appeals) [CIT(A)]. In the second round of assessment following the ITAT’s directions, the AO maintained a significant addition. Before the ITAT, the assessee argued that the surrendered amount represented gross receipts, and therefore, consequential expenses should be allowed. However, neither the Revenue could definitively prove the income figure nor the assessee could provide concrete evidence of related expenditures.
The ITAT observed that while the AO did not explicitly invoke Section 144 (best judgment assessment) of the Income Tax Act, the assessment was effectively carried out in that manner due to the lack of cooperation from the assessee in providing expense details. The tribunal referred to the Supreme Court’s judgment in Brij Bhushan Lal Parduman Kumar vs. CIT, which established that while a best judgment assessment can involve some arbitrariness, it must be an honest and fair estimate based on available material and circumstances, not capricious.
Considering the inability of both parties to fully substantiate their claims regarding the nature of the surrendered amount and related expenses, the ITAT opined that a complete addition of Rs. 1.35 crore was not justified. Relying on the principle of taxing real income, the tribunal held that a reasonable estimate of income was necessary. It noted that the CIT(A) in the first round had also partly accepted the assessee’s explanation and granted substantial relief. Consequently, the ITAT deemed a lump sum addition of Rs. 10 lakh as appropriate to account for potential revenue leakage while acknowledging the assessee’s claim of incurred expenditure. Thus, the ITAT sustained an addition of Rs. 10 lakh to the income already disclosed by the assessee.
ITAT Dismisses Revenue’s Appeal on Accounting Method for AY 2017-18
In a separate appeal for the assessment year 2017-18, the ITAT, Jaipur, dismissed the Revenue’s appeal and upheld the CIT(A)’s decision to delete an addition of Rs. 3,71,74,468/-. The issue concerned the method of accounting followed by the assessee, a real estate developer. The AO had made the addition, contending that the assessee should have followed the percentage completion method instead of the completed contract method.
The ITAT observed that Accounting Standard 7, which mandates the percentage completion method, applies to construction contractors, not real estate developers like the assessee. It noted that Accounting Standard 9 governs the recognition of revenue for such businesses. The tribunal further emphasized that the assessee had consistently followed the completed contract method, and this method had been accepted by the Revenue in previous assessment years, ranging from 2007-08 to 2014-15. The AO had not presented any specific reasons for deviating from this past practice.
The ITAT also took note of the fact that the assessee had offered to tax the income from the project in question (“Aashirvad Gokul”) in subsequent assessment years (2017-18 and 2018-19) following the completed contract method. The advances received from customers were credited to an “Advances from Customers against Project” account and later adjusted against sales in the year of project completion. The tribunal found that taxing the entire advance in the current year would result in double taxation, which is impermissible as established by the Supreme Court in Mahaveer Kumar Jain vs. CIT.
The ITAT relied on the Supreme Court’s ruling in CIT vs. Excel Industries Ltd., which held that when the dispute is merely about the timing of taxability and the tax rate remains the same, the litigation may be considered academic. Similarly, the Bombay High Court in CIT vs. Taparia Tools Ltd. had held that the burden lies on the Department to prove that the existing accounting method distorts profits before substituting it. In this case, the AO had not demonstrated any such distortion. Given these precedents and the consistent accounting practice of the assessee accepted in the past, the ITAT found no merit in the Revenue’s appeal and dismissed it.
Assessee was represented by Adv. Mahendra Gargieya and Other Advocates
