ITAT Ahmedabad Caps Realty On-Money Profit at 8%, Cites Precedent

Greenfield Reality P. Ltd. Vs ACIT (ITAT Ahmedabad)

Income Tax Appellate Tribunal (ITAT) of Ahmedabad has ruled that only the profit element embedded in unaccounted “on-money” receipts can be taxed, and pegged the rate at 8% in a case involving a real estate developer. In the matter of Greenfield Reality P. Ltd. vs. ACIT, the tribunal set aside a higher profit estimation by tax authorities and quashed separate additions made for unexplained expenditure and cash credits, providing significant relief to the company.

The case emerged from a search operation where tax officials found documents detailing unaccounted cash received by Greenfield Reality as “on-money” for booking flats and shops in its “Vesu Project.” The seized papers also revealed certain cash expenditures, including payments for land purchase, that were not recorded in the official books of accounts.

Following the search, the Assessing Officer (AO) initiated assessment proceedings. The primary dispute revolved around how to treat the on-money receipts. The Commissioner of Income-tax (Appeals) [CIT(A)] had observed that the entire gross receipts could not be taxed as income, since unrecorded expenditures were evidently incurred from these funds. However, the CIT(A) estimated the income component at 20% of the on-money receipts. The company, on the other hand, had offered to tax at 8%.

The ITAT was tasked with determining a fair profit rate and adjudicating on other related additions. The tribunal concurred with the CIT(A)’s initial premise that only the income element within the on-money was taxable. It leaned on judgments from the jurisdictional Gujarat High Court in cases like CIT vs. Panna Corporation and CIT vs. Koshor Mohanlal Telwala, which established the principle of assessing only the profit embedded in such unaccounted transactions.

The central question then became the quantum of this profit. The tribunal scrutinized the basis for both the 20% rate estimated by the CIT(A) and the 8% rate proposed by the assessee. It noted that a best judgment assessment under Section 144 of the Income Tax Act, while involving an element of guesswork, must not be arbitrary or capricious. It requires the tax officer to make a fair estimate based on available material and rational principles.

The tribunal found that the tax authorities had failed to provide any basis, comparable industry data, or specific circumstances to justify the 20% profit estimate. In contrast, the assessee’s claim of 8% found support in judicial precedent. The ITAT referred specifically to the Koshor Mohanlal Telwala case, where the tribunal, with subsequent approval from the Gujarat High Court, had deemed an 8% profit rate on on-money receipts as “fair and reasonable.” That decision had taken guidance from the presumptive taxation scheme under Section 44AD, which allows for an 8% deemed profit for certain civil contractors.

Adopting this reasoning, the ITAT held that the 8% profit rate offered by the company was justified. It directed the AO to re-compute the income based on 8% of the on-money receipts, thereby allowing the company’s appeal on this ground.

No Separate Addition for Unexplained Expenditure

The Revenue had also appealed against the CIT(A)’s decision to delete separate additions made by the AO for unexplained expenditure under Section 69C. The AO had treated cash expenditures found in the seized documents as unexplained.

The ITAT upheld the CIT(A)’s decision, explaining the rationale with a simple illustration. If Rs. 100 is received as on-money and the profit is determined to be Rs. 8 (i.e., 8%), the remaining Rs. 92 is implicitly treated as the cost incurred to generate that receipt. Therefore, any unexplained expenditure found is deemed to have been met from this Rs. 92 portion. Making a separate addition for the expenditure would amount to taxing the same funds twice. The tribunal affirmed that once income is estimated at a certain percentage of gross receipts, it subsumes the expenditure incurred, and no separate addition is warranted.

Unexplained Cash Credits Deleted

Finally, the tribunal addressed the Revenue’s challenge against the deletion of additions made under Section 68 for unexplained cash credits. The AO had treated certain amounts received by the company as unexplained. The company contended these were booking advances from various parties, not loans.

The CIT(A) had deleted the addition after the company furnished confirmations from the payers, including their names, PANs, and addresses, and showed that the amounts were received via account-payee cheques. The ITAT termed the CIT(A)’s order on this issue as “well-reasoned,” holding that the company had successfully discharged the initial burden of proof required under Section 68 by establishing the identity of the creditors and the genuineness of the transactions.

In its final order dated February 21, 2020, the tribunal dismissed all appeals filed by the Revenue and partly allowed the appeals of the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The ld.CIT(A)-11, Ahmedabad has decided four appeals of the assessee vide separate orders dated 14.8.2018 for the Assessment years 2012-13 to 2015-16. These orders of the ld.CIT(A) in four assessment years are being challenged by the assessee as well as by the Revenue. Since issues are common in all these eight appeals, therefore, we heard them together and deem it appropriate to dispose of them by this common order.

2. A perusal of the record would indicate that except variation in quantum, the assessment orders as well as orders of the ld.CIT(A) are verbatim same. Therefore, for the facility of reference we are referring facts from the assessment year 2012-13 as well as assessment year 2015­16, because Asstt.Year 2012-13 is the first assessment year in this group, and Asstt.Year 2015-16 is the last assessment year.

3. The assessee has filed an application for permission to admit additional grounds. This application was allowed vide order dated 8.1.2020. The grounds were taken up on record for adjudication. Order dated 8.1.2020 reads as under:

“08.01.2020 Present : Shri S.N. Soparkar, AR

Shri Subhash Bains, CIT-DR

Present six cross appeals for the Asstt.Years 2012-13 to 2015-16 came up for hearing. In the Asstt.Year 2012-13, the assessee has filed an application in IT(SS)A.no.289/Ahd./2018 for permission to raise additional grounds of appeal. It has sought to raise the following two grounds:

1. Both the lower authorities erred in law and on facts in framing assessment under section 143(3) r.w.s. 153A ignoring fact that material relied on making addition is found from the premises of third person and addition was made without recording satisfaction in case of third person and also in case of the appellant and accordingly assessment is required to be quashed. It be so held now.

2. Both the lower authorities erred in law and on facts in framing assessment on the basis of material found from the premises of third person and addition was made on that basis ignoring fact that amended provision is brought in statute from 01/06/2015 and applicable prospectively. It be so held now.

The ld.counsel for the assessee on the strength of Hon’ble Supreme Court’s decision in the case of National Thermal Power, 229 ITR 383 contended that both these issues are jurisdictional issues. They go to root of the dispute, and go to affect taxability of the assessee. Therefore, these grounds required to be admitted for adjudication.

On the other hand, the ld.DR was unable to controvert this contention of the ld.counsel for the assessee. He submitted that there is no finding qua this aspect in the impugned order nor relevant facts are available. He further submitted that paper book in these appeals have been filed two days back, and therefore, Revenue wants more time to go through the record.

On due consideration of the above facts and circumstances, we are of the view that both the grounds raised by the assessee are legal grounds, and therefore, considering judgment of Hon’ble Supreme Court in the case NTPC (supra) we allow this application and admit both the grounds for consideration on merit. Since paper books were not filed seven days in advance, and the ld.DR made prayer for adjournment, we adjourn the hearing to 22^nd January, 2020. Meanwhile, if department feels necessity of any information on these additional grounds of appeal that may be sought. It is also pertinent to mention that these are early hearing appeals and no further opportunity will be granted to either party.

Copy of this order be supplied to both the parties.

Sd/-
(AM)
WSA

Sd/-
(JM)
RJY”

4. However, at the time of hearing, the ld.counsel for the assessee did not press these additional grounds in all these assessment years. Therefore, they are rejected.

5. First common issue involved in all these eight appeals relates to determination of income required to be added out of on-money received by the assessee on its real-estate projects qua which incriminating materials were found and seized during search proceedings.

6. Before adverting to the controversy, we find that before the ld.first Appellate Authority, the assessee has filed written submissions pleading therein the background of the assessee-company, and how search has been conducted upon its business premises as well as residential premises of the directors. It has also highlighted material found during the course of search which was seized by the department, and brief description of inference from these materials drawn by the AO as well as reply by the assessee. Therefore, in order to understand the background in more scientific way, we deem it appropriate to take note of these facts from the submissions of the assessee filed before the ld.CIT(A) which is common in all these four assessment years. Therefore, these facts are being taken from the submissions made in the Asstt.Year 2012-13. It reads as under:

“1. Background of the appellant company :-

The appellant is a Private Limited Company engaged in the business of builders and developers. The appellant company was incorporated on 21.12.2006 and is engaged in real estate business. The appellant company submits that initially the said company was owned by other third party group and the name of shareholders and shareholding is as under:-

The appellant company submits that the shares of said company was purchased by Anushthan Buildcon Pvt. Ltd. in piecemeal from F.Y. 2011-12 to F.Y. 2013-14. Thus, Anushthan Buildcon Pvt. Ltd. is 91.12% holding company of the appellant company. The Directors of the appellant company are as under:-

List of directors of Greenfield Reality Pvt. Ltd. is as under:-

The shareholders and directors of Anushthan Buildcon Pvt. Ltd. is as under:-List of directors of Anushthan Buildcon Pvt. Ltd. is as under:-

List of shareholders of Anushthan Buildcon Pvt. Ltd. is as under:-

The project for the construction of residential cum commercial building was launched by the appellant company in the F.Y. 2011-12 and since the project was launched and announced, the appellant company started receiving the booking amounts from the prospective customers. The project named as ‘Shiv Kartik’ project comprises of 2 residential towers i.e. building A and building B, each having 10 floors having total 4 units of residential flats per floor i.e. total 80 units in both the buildings. The project also has commercial construction having ground floor (47 shops), upper floor (35 shops), mezzanine floor (35 shops), first floor (9 showroom) and second floor (9 showroom). The total area constructed is 2,63,048 sq. ft. on the total area of land of 8220 sq. yards. The appellant company submits that the entire project was booked in the financial years 2011-12, 2012-13 & 2013-14. The construction of the project was concluded in the financial year ending on 31.03.2016 and some of the agreements for sale are yet to be registered.

Search u/s. 132

A search and seizure action u/s. 132 of the Act was conducted on 04.12.2014 on AtuI Hiralal Shah Group and the appellant company was also covered since ShriAtuI Hiralal Shah is 50% shareholder in Anushthan Buildcon Pvt. Ltd., 100% owner of the appellant company. The search action was conducted at Surat at the business premises of the appellant company as well as at Ahmedabad in the residential and business premises of Shri AtuI Hiralal Shah.

The search was finally concluded on 05.12.2014. Search action was also simultaneously conducted at other residential premises of the directors of the appellant company. During the course of search action, loose papers and other documents were found and seized.

The appellant company submits that Anushthan Buildcon Pvt. Ltd. is also having majority of controlling interest in another project undertaken by other group entity i.e. Shah Hiralal Buildcon LLP. The appellant company submits that the project in this entity is also residential cum commercial project and this project was also launched simultaneously along with the project launched in the case of the appellant company. Further, the booking receipt and other project related expenses in respect of this project were also done simultaneously as in the case of the appellant company. The loose papers found and seized in the course of search action relate to both the projects.

3. Detailed discussion on the Seize Material / Explanation for seized papers

The appellant company submits that in the course of search action, loose papers pages no. 1 to 5 of Annexure A-3 & page no. 36, 37, 38, 39, 43, 44, 46, 47 of Annexure A-l and pages 10 to 12 of Annexure A-10 were seized from the residence of Shri Ashit Hirabhai Vora, one of the Directors of the appellant company.

The appellant company submits that as per pages 2 & 5 of Annexure A-3, the purchase cost of the land is noted at Rs.42,68,00,000/- (total land 8220 sq. yards). Further, on page no. 5 of seized annexure A3, the details of amounts collected by the group members towards booking receipts as well as the booking details of the 14 units have been mentioned and noted and also on the same page the land cost of Rs. 42,68,00,00/- is ‘ also mentioned and the aggregate amount is stated at Rs. 48,65,76,625/­. The appellant company submits that the payment for land in cash of Rs. 22.75 crores is made out of the booking amount for the project received in cash.

The appellant company submits that the seized papers also give details of the aggregate amount of on money received towards booking of the units in the construction project undertaken by the appellant company as also by the group concern Shah Hirlal Buildcon LLP. Further the applellant would also like to state that the seized papers contains the details of the unaccounted booking receipts as well as the details of the unaccounted payments for the land as well the expenses which have been incurred.

In furtherance to the same the appellant company would like to submit that there are other pages of seized Annexure Al, A3 & AID which are also required to be considered for getting the perfect, true and fair facts of the case of the appellant company. However, the learned A.O. has not considered the same for the reasons unknown to the appellant company. The appellant would like to state that the Ld. A.O. has only relied upon the pages which are favourable to the Revenue but has not considered the pages wherein the details of the expenses which have been incurred have been mentioned. The copy of the said pages of seized Annexure Al and A3 are enclosed in the paper book at page no. 534 to 543, to highlight and understand the modus operand! and facts of the case.

The appellant would like to draw your honour’s attention to the page’s of the seized material which have been neglected by the A.O. for framing the Assessment Orders arbitrarily and making high pitched additions in the case of the appellant company: –

Seized Annexure Al Page No 36

Details of various expenses incurred on building and developing of Shiv Kartik Enclave scheme at Vesu till 02/11/2012 and the amount received for the booking has been mentioned. The appellant would like to state the expenses regarding the registration, salary , legal, commission etc have been clearly mentioned and the same justifies that against the uaccounted booking receipts there were unaccounted expenses which have been clearly mentioned in the seize material which also have to be considered by the A.O.

Page No.38

Details of booking receipt in cash and expenses from the same for building and developing for Shiv Kartik Enclave scheme at Vesu till 31/03/2013 have been mentioned.

On verification of the page the appellant company would like to state that the details of the amount received against the bookings as well as the details of the expenses have been mentioned which clearly reflect the fact that the A.O. has arbitrarily only considered the unaccounted receipt for framing the Assessment orders which is unjustified and bad in law.

Page No.43

Details of booking receipts in cash and various expenses incurred on building and developing Shiv Kartik Enclave scheme at Vesu till 18/04/2012.

The appellant would like to state the expenses regarding the registration, salary , legal, commission etc have been clearly mentioned and the same justifies that against the uaccounted booking receipts there were unaccounted expenses which have been clearly mentioned in the seize material which also have to be considered by the A.O.

Page No.46

Details of various expenses incurred on building and developing Shiv Kartik Enclave scheme at Vesu till 17/05/2012.

The appellant would like to state the expenses regarding the registration, salary , legal, commission etc have been clearly mentioned and the same justifies that against the uaccounted booking receipts there were unaccounted expenses which have been clearly mentioned in the seize material which also have to be considered by the A.O.

Seize Annexure A3 Page No.03

Working of 14 Units Sold of Shiv Kartik Enclave developed by the appellant company which detail working of flat wise area,rate and total flat sales value (accounted and unaccounted). The appellant would like to state that the Page no, 3 is important as the details of the booking collection has been duly reflected on Page No. 5 which has been relied upon by the A.O.

Hence in a nut shell from the detailed explanation of the seized pages we can draw a conclusion that there were details of unnaccounted receipts found as well as the unaccounted expenses have been found in the seize material and hence the A.O. has to take into consideration the seize material in its totality and cannot apply the pick and choose theory, which is totally unjustified and bad in law in view of the decision of the Hon’ble Supreme Court in the case of Indore Malwa United Mills Ltd. vs. State of Madhya Pradesh (1966) 60 ITR 41 wherein it has been held that ” it is not open to the assessing authorities to pick and choose some of the part of the records before them which were more favourable to them revenue. Being Tribunals of fact, it was their duty to consider the contents of the records before them in toto”.

7. With the assistance of ld.representatives, we have gone through the record. As observed earlier, findings of the AO qua main issue is common in all these assessment years except variation in the quantum. We take note of these findings from the Asstt.Year 2012-13, which reads as under:

Receipts of unaccounted cash as on-money —

In submissions filed vide letter dated 26.10.2016 received on 27.10.2016, assessee firm had submitted and accepted to have received cash of Rs. 66,40,00,0007-being on-money from sale of property of Vesu project and offered 8% profit on the total accounted and unaccounted receipt. It stated that out of this on-money, cash expenses had been incurred of Rs. 22 Crores to purchase the shares by existing share-holders & Rs. 5.97 Crores incurred after purchase of land (as in preceding paras) & that it has offered 8% of profit on total receipts including cash receipts.

It has been established in preceding paras that cash of Rs. 22 Crores on purchase of shares was not out of on-money received from customers but contributions from various persons. Further, it has also been established in preceding paras that cash expenses of Rs. 5.97 Crores (subsequent to purchase of land) also were not explained & supported by any evidences.

Also, the assessee failed to provide proper evidence to convey the basis for estimating profit at 8% on total receipt of Vesu project. In any case, until & unless assessee provides details (PAN, Name, address etc.) with confirmations from parties to whom payments/expenses have been made out of this unaccounted money, no benefit of deductions can be allowed to assessee. The assessee failed to produce cash book of the project in support of its claim. Without prejudice to above, even if the claim of assessee for expenses is considered, the same is not allowable as per section 40A of the IT Act.

9.1 It is evident from the seized material and submission of the assessee that assessee had received cash of Rs. 66,40,00,0007- on sale of property of Vesu project. Assessee had submitted flat/shop wise details of cash receipt, cash flow and copy of cash voucher only on 27.02.2017 which is after 80 days of issuance of final show cause notice. This proves that such details were prepared in haste in support of its claim and without any documentary evidence. Also from the submission dated 27.02.2017, following fact emerges:

• • Assessee shows booking of 15 crore in FY 2011-12, however, assessee had purchased the land in March-2012, hence as per assessee’s claim, it had received advance even before investment in land fit purchase of shares. This goes against preponderance of probabilities.
  • Assessee also failed to substantiate its claim of receipt of on-money during FY 2011-12 by not submitting any document as to when shares were not even purchased and project was not started, how & on what basis the buyers had given huge cash advances. Assessee did not furnish confirmations of such persons who had given huge advance to the assessee.

Hence, considering all the facts discussed above, it is to be concluded that assessee has received Rs.66,40,00,000/- from sale of property of Shiv Kartik Project which are also not reflected in assessee’s books of accounts and the same represents assessee’s unaccounted receipt and therefore total receipt of Rs. 66,40,00,000/- requires to be added to the total income of the assessee. This cash receipt of Rs. 66,40,00,000/- remains unaccounted receipt in the hands of the assessee in different assessment year as given below. The basis of this bifurcation is that assessee had shown the receipt of advances from customers only in FY 2013-14 onwards & hence cash component is also to be taxed in FY 2013-14 onwards only in proportion to the booking/advances receipts shown in books of accounts.

In fact, following para shows that assessee has been changing its stance frequently in so far as details of on-money are concerned.

9.2 As shown above, in October 2016, assessee submitted that it had received cash on-money of Rs. 66.4 crores. In submissions filed on 27/02/2017, assessee stated that year-wise cash receipt is totaling Rs. 58,76,00,000/-from AY 2012-13 to 2015-16 as under:

Assessee stated that difference between earlier figure of Rs. 66.4 Crores & new figure of Rs. 58.76 crores arise since the earlier figure included cheque receipts also. However, assessee has not given any reconciliation of the same. The above shows that assessee has been changing its stand continuously.

Even as per this new stand of assessee, the unaccounted receipt of the assessee for A.Y. 2012-13 comes to Rs. 15,25,00,000/- which is not shown by assessee in its books of accounts and also not offered in return of income. Also, the same is not substantiated with any supportive evidence. On the other hand, the seized documents clearly shows that no project was initiated during AY 2012-13 and assessee had itself shown booking from AY 2014-15 onwards as tabulated above.

Since assessee had itself claimed total on-money receipt of Rs. 15,25,00,000/-during AY 2012-13 and substantive additions for receipt of on-money has been made in AY 2014-15 to 2015-16, protective addition of Rs. 15,25,00,000/- is made on this ground as unexplained money from unaccounted receipt as discussed in preceding para.

I am satisfied that assessee has concealed the particulars of its’ income and also furnished inaccurate particulars of its income by not recording above discussed cash transaction and therefore, this is a fit case for initiating penalty proceedings. Penalty proceeding u/s.271 r.w.s. 274 are separately initiated for levy of u/s. 271(1)(c).

Pursuant to the above and subject to the details made available by the assessee, the total income of the assessee is computed as under:

11. This order is passed after obtaining approval of JCIT.CR-1, Ahmedabad. The approval was communicated vide letter No.Joint.CIT.CR-1/Approval 153D/2016-17 dated 01.03.2017.

12. Assessed u/s. 143(3) r.w.s. 153A(1)(b) of the Income-tax Act, 1961. Charge interest u/s. 234A, 234B, 234C & 234D of the Act, as applicable. Give credit for pre­paid taxes after due verification. Issue notice u/s.271 r.w.s. 274 for concealing the particulars of his income. Issue demand notice/challan/RO as applicable.

Sd/-
(Dr. K. K. RUPAVATIYA)
Asst. Commissioner of Income-tax
Central Circle-1 (2), Ahmedabad

8. On appeal, the ld.CIT(A) has in principle confirmed that total amount of Rs.58.76 crores was received by the assessee in the shape of on-money for sale of flats and shops in “Vesu Project”. Element of income embedded in these receipts deserves to be assessed in the hands of the assessee in respect of gross amount worked out by the AO. The ld.CIT(A) further observed that the assessee has offered profit element in these receipts at 8% whereas the AO has assessed the gross receipts. The ld.CIT(A) directed the AO to adopt 20% of these gross on-money received by the assessee towards booking of the flats/shops in “Vesu Project”. The finding recorded by the ld.CIT(A) in the Asstt.Year 2012-13 reads as under:

“DECISION

5. Submission of the appellant and the assessment order has been carefully considered. Facts of the case in brief are that the appellant filed return of income for AY 2012-13 on 29.09.2012 declaring total income of Rs. Nil. On 4.12.2014, the appellant’s business premises was covered under search action u/s. 132 of the Act alongwith “Accommodation entry’ provider group of Ahmedabad”. At the premises of one of the group person of “Accommodation entry’ provider group of Ahmedabad”, namely Shri Asit Vora at 5-B, Vasupujya Society, Paldi, Ahmedabad, papers annexurised as page no.1 & 5 of Ann-3 & page no. 36, 37, 38, 39, 43, 44, 46, 47 of Annexure A-1 and pages 10 to 12 of Annexure A-10 were found & seized. In the above mentioned pages, details of “Vesu” Project are mentioned. This project has been under taken by the appellant, therefore, proceedings u/s. 153A of the Act were initiated by issuing notice dated 22.07.2015, which was duly served upon the appellant. Vide letter dated 26.10.2016, the appellant stated that return filed on 29.09.2012 may be considered as return filed in response to notice issued u/s. 153C of the Act. The notice u/s.143(2) dated 26.10.2016 was issued & served upon the appellant. Meanwhile the appellant filed appeal before the Settlement Commission, Mumbai vide application dated 20.12.2016 for AY 2012-13 to 2015-16. But the same was rejected by the Settlement Commission vide order dated 02.01.2017. Hence fresh opportunity of being heard was provided by the AO to the appellant and assessment was finalized vide order dated 01.03.2017. The appellant is in appeal against the additions made in the said assessment order.

6. The First ground of appeal is against the additions of Rs.2,92,76,625/- made by the AO as unexplained expenditure incurred in cash by the appellant for the project. The AO stated that as per the seized papers, the appellant had incurred expenditure of Rs.5,97,76,625/- in cash, out of which Rs.2,92,76,625/- pertains to this assessment year. The appellant could not produce the cash book to substantiate its claim that these are shown in regular books of accounts. The appellant submitted flat/shop wise cash receipt, cash flow & copy of cash vouchers on 27.2.2017 which is 80 days after the show cause notice issued in this regard. The AO stated that these vouchers are for the dates before the date of purchase of land i.e. date of registration of sale deed. The AO stated that most of the Vouchers are without TIN, few vouchers do not contain name of the supplier, some pages are simple calculation. All these facts prove that the vouchers produced by the appellant are not reliable, hence, rejected by the AO. The AO verified from the ITD data, that none of the supplier is registered with (except one out of 29) Sales Tax Department or Income-tax Department. With these reasons, the AO made the additions of Rs.2,92,76,625/- pertaining to this year. The appellant contended that figures of Rs.5,97,76,625/- taken by the AO from page No.5 of Annexure-3 and considering the same as unexplained expenditure is factually incorrect. This figure is balance figure, which has been obtained after reducing from the total receipts figures of Rs.48,65,76,625/- by land amount of Rs.42,68,00,000/-. Difference of these two figures Rs.5,97,76,625/-. It is nowhere mentioned that it is expenditure incurred in cash. Thus, AO’s conclusion that it is unexplained cash is not factually correct. The appellant further contended that the AOs finding about not registering the supplier with Sales Tax is also partly incorrect. As these expenditure were incurred out of books, thus, all the supplier may not be having TIN etc. On going through the submission of the appellant, it is found that it is contradictory. One side the appellant contended that this figure of Rs.5,97,76,625/- not represents expenditure in cash which remains unexplained, other side the appellant contended that as these expenditure were unaccounted, therefore, all the suppliers did not have TIN etc. This show that the appellant is not sure about the arguments to be taken to justify the unaccounted expenditure. The contentions of the appellant are contradictory, misleading, therefore, are not reliable, hence rejected. However, if the unaccounted income from this project is to be determined on the basis of all unaccounted cash receipts and all the expenditure’ including the unexplained expenditure incurred in cash has been taken care of while determining the unaccounted income from this project, as mentioned in para 7, no separate addition is required to be made on this account. Thus this addition is deleted. This ground of appeal is allowed.

7. The Second ground of appeal is against the additions of Rs.15.25 core on protective basis made by the AO considering the receipts as unaccounted for this year. The AO stated that out of total cash amount of Rs.66.40 crore received by the appellant on booking/sale of units of the project, Rs.15.25 Or. has been estimated for this year on this proportionate basis of amount shown in regular books of accounts. The receipts of Rs.15.25 crore remain unaccounted in the hands of the appellant, thus, it was added on protective basis till the appellant provides details (PAN, Name, address etc) with confirmation from the parties to whom payment/expenses have been made out of this unaccounted money, no benefit of the deduction can be allowed. The AO rejected the claim of the appellant showing 8% income on the total receipts. The AO further stated that without prejudice to the above, even if the claim of the appellant for expenses is considered, the same is not allowable u/s. 40A of the Act. Therefore, made the addition of Rs.15.25 crore for this year on protective basis. The appellant contended that the receipt of cash amount of Rs.66.40 crore was reduced to Rs.58.76 cr. Because there is duplication of Rs.7.64 crore on land amount and the same was reduced from the total receipts mentioned on the page. Rs.7.64 crore was wrongly mentioned on receipt side, which is clear from the seized document.

7.1 Regarding the findings of the AO that expenditure in cash not allowable till the appellant submit details of name, PAN, address etc of the persons to whom such payments are made is not justified as these are unaccounted receipts as written on the seized documents and admitted by the appellant on higher side than the amount written on seized documents. Therefore, the appellant requested that protective addition of Rs.15.25 crore may be deleted. The appellant also contended that payment were totally out of books. The appellant cited several case laws in support of this contention.

7.2 Facts of the case, assessment order and submissions of the appellant thoroughly considered. The additions made by the AO on protective basis considering the total receipts in the year is not found justified as these receipts are in cash and out of regular books of accounts. Additions should be made on substantive basis in the hands of the appellant during the year under consideration. The appellant has shown on money receipt of Rs. 15.25 crore for the year under consideration, which is partly supported by the seized documents. The AO has considered expenditure incurred for the project under consideration in the above para during the year under consideration, which prove that work on the project has been started during this year. The appellant is also showing booking receipts of Rs.15.25 crores for this year. As the appellant is showing booking in year before the year considered by the AO, hence, it is pro-revenue, thus there is no reason for not accepting the same. There is no basis for non-believing the appellant’s books of accounts to this extent. Therefore, on money receipts of Rs.15.25 crores is considered in the hands of the appellant for the year under consideration. But additions cannot be made considering the total on money receipt as income of the appellant for the year. The seized documents proved that the appellant had paid Rs. 42.68 crore in cash for purchase of land, which also remain unaccounted. Thus, receipts of on money and payment for purchase of land in cash, both remain out of the regular books of accounts. It is legally settled principle that the real income should be taxed and not the notional income. It has been held in several judgements delivered by the higher judicial authorities that some percentage should be taken as income from the total on money receipts. It has been held reasonable to consider income from 12.5% to 20% of the total on money receipt as income of the appellant. The basis for taking percentage as income of the total amount is that the assessee has to incur expenditure in purchasing land & for other items, which also remain out of books. Keeping in view the facts of the case in totality, it is reasonable to consider 20% of the total on money receipts as income of the appellant for the year under consideration. The appellant itself has shown 8% of total on money receipts, as income, which is too low. 8% is considering reasonable in case of civil contractor but the appellant is builder/developer, hence, 8% income returned by the appellant is inadequate. The AO is directed to consider 20% of Rs.15.25 crore (total on money receipts) as income of the appellant for the year under consideration. This comes to Rs.3,05,00,000/- (20% of Rs.15.25 crore). Thus, additions of Rs. 3,05,00,000/-are confirmed on substantive basis. This ground of appeal is partly allowed.”

9. The ld.counsel for the assessee while impugning orders of the Revenue authorities contended that the assessee has given bifurcation of on-money received by it in each assessment year. Such bifurcation has been reproduced by the AO while taking cognizance of the assessee’s submission in para-9.2 of the assessment order. He pointed out that the assessee has shown cash receipt totaling to Rs.58.76 crores as under:

10. According to him, there is a difference between Rs.66.40 crores and Rs.58.76 crores shown by the assessee. In the earlier figure, the assessee has included cheque receipts also. The exact figure is Rs.58.76 crores. He submitted that assessee has offered income at 8% of the alleged on-money received by it in cash in these different assessment years. The short question for adjudication before the Tribunal is, whether profit element embedded in this receipt is to be added in the hands of the assessee or gross on-money receipts is to be added ? In case it is to be added as element of profit then, at what percentage such profit is to be worked out i.e. 8% offered by the assessee or 20% estimated by the Revenue.

11. The ld.counsel for the assessee pointed out that the assessee in its appeal is impugning estimation of this profit at 20% at the end of the ld.CIT(A). According to the assessee, it should be 8% only whereas the Revenue is impugning estimation of profit at 20%. According to it, the gross receipts as added by the AO ought to have been upheld by the ld.CIT(A). The ld.counsel for the assessee appraised us the position of law on this point and emphasized that only element of profit is to be assessed in the hands of the assessee. For buttressing his contention, he drew our attention towards the order of the ITAT, Ahmedabad Bench in the case of Kishor Mohanlal Telwala, 64 TTJ 543 = 107 taxman 86 (Ahd). He submitted that in this case a search was carried out at the residence of the assessee on 6.10.1995. During the course of search a piece of paper was found exhibiting the fact that in the project, “Hare Krishna Apartment” the assessee has received on-money on sale of flats. The alternative contention was raised before the Tribunal whereby it was contended that only element of profit in the alleged on-money is to be assessed as income of the assessee. He took us through paragraph 4.1 where this pleading was raised by the assessee before the Tribunal. Thereafter, he took us through paragraph 6 of the Tribunal’s order wherein the Tribunal has accepted the assessment of income out of such on-money at 8%. The Tribunal took guidance in section 44AD whereby it has been provided that in case of civil contractor, if the gross receipts are less than Rs.40 lakhs, then income of such assessee should be taken at 8%. Since this was the rate provided by the Legislature for small assessees the Tribunal took guidance from this for estimating the income. This order of the Tribunal travelled upto the Hon’ble High Court in Tax Appeal No.411 of 1999, and the Hon’ble Court has framed two questions, out of which question no.2 is relevant for the purpose of controversy in our hand. He drew our attention to the question (2), which reads as under:

Whether, on the facts and circumstances of the case, the ITAT having held that only the profit of the undisclosed income has to be taxed in the block assessment was justified in admitting the claim of expenditure on the basis of oral evidences though the department had clearly discharged its onus to prove the undisclosed receipt in the form of on-money on the basis of material found and seized during the course of search?

12. Hon’ble High Court has upheld finding of the Tribunal. The ld.counsel for the assessee took us through the finding of the Hon’ble High Court recorded in para-10 of the judgment, which reads as under:

“10. Even so far as the second question is concerned, we are of the view that the said question also does not involve any question of law especially in view of fact that the Tribunal has rightly considered that in absence of any financial record or accounts being maintained by the respondent assessee, the profit earned by the respondent assessee for the block assessment was presumed to be more than 8% as per the provisions of sec. 44AD of the Act. We do not agree with learned advocate, Shri Naik that as no accounts have been maintained or nothing to substantiate the amount of expenditure incurred by the respondent assessee had been shown, the entire amount received by the respondent assessee should be treated as income. We do not think that the Tribunal was not justified in considering the fact that the respondent assessee ought to have spent reasonable amount for the purpose of receiving the gross receipt. If the legal provisions provide that in absence of accounts, the person should be presumed to have earned 8% profit if he is in the business of civil construction, we do not think that the findings of the Tribunal could be treated as perverse. In any case, we do not think it necessary to call for statement of case from the Tribunal for our consideration.”

13. The ld.counsel for the assessee further took us through the judgment of Hon’ble jurisdictional High Court in the case of DCIT Vs. Panna Corporation, Tax Appeal No.323 of 2000. He placed on record copy of this judgment. He took us through the following question of law. Hon’ble High Court after taking into consideration its judgment in the case of Koshor Mohanlal Telwala (supra) upheld order of the ITAT, and held that element of profit is to be identified in on-money receipts. We have been taken through the following finding of the Hon’ble High Court:

“14. We may recall that the Tribunal, in the impugned judgement, relied on its previous judgement in case of Kishor Mohanlal Telwala. The said judgement of the Tribunal was apparently carried in appeal by the revenue. The High Court by a speaking order dated 24.4.2000, dismissed the appeal holding that no question of law was involved. Significantly, in case or Kishor Mohanlal Telwala, the assessee was engaged in the business of construction. In his case, unaccounted receipt of Rs.1.47 crores was detected. In this background, the Division Bench confirmed the view of the Tribunal and did not accept the contention of the revenue that as no accounts had been maintained to substantiate the expenditure incurred by the assessee, the entire amount received by the respondent should be treated as income. The Court concluded that the Tribunal was justified in considering that the respondent – assessee ought to have spent reasonable amount for the purpose of receiving such gross receipt.

15. It can, thus, be seen that consistently, this Court and some other Courts have been following the principle that even upon detection of on money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves. If that be the legal position, what should be estimated as a reasonable profit out of such receipts, must bear an element of estimation.

16. In view of the legal position that not the entire receipts, but the profit element embedded in such receipts can be brought to tax, in our view, no interference is called for in the decision of the Tribunal accepting such element of profit at Rs.26 lakhs out of total undisclosed receipt of Rs.62 lakhs. In other words, we accept the legal proposition, the Tribunal accepting Rs.26 lakhs disclosed by the assessee as profit out of total undisclosed receipt of Rs.62 lakhs, would not give rise to any question of law.”

14. On the strength of these decisions, he submitted that the income offered by the assessee at 8% of the alleged gross receipts ought to have been assessed as income of the assessee in all these assessment years.

15. On the other hand, the ld.CIT-DR relied upon the assessment orders. He took us through the assessment order and appraised with the various documents found during the course of search. He pointed out that the assessee has paid Rs.22,74,60,000/- in cash for purchase of land. If income of the assessee is to be estimated at 8% of the gross receipts with i.e. 8% of 66.40 crores, then what is the source of payment of cash for purchase of the land in this project ? The assessee might have been debited the expenditure in the regular books of accounts. Therefore, benefit of such expenditure cannot be allowed to the assessee from these gross receipts, and corresponding element of income is not required to be identified, rather gross receipts is the income of the assessee because corresponding expenditure qua this on-money has been already debited in the regular books of accounts. He emphasised that if the search was not carried upon the assessee, this fact would not have been unearthed.

16. We have duly considered rival submissions and gone through the record carefully. On an analysis of the record, it would reveal that during the course of search not only details of on-money received by the assessee on booking of flats and shops in “Vesu Project” was found, but details of certain expenditure, which are not recorded in the books were also found. This included cash payment for purchase of land. Therefore, the ld.CIT(A) has rightly observed that the gross on-money noticed on the seized paper cannot be considered as income of the assessee. There are certain expenditures which were not recorded in the books. Those expenditure must have been made from this on-money. Therefore, after going through the well reasoned order of the ld.CIT(A), and in the light of judgment of Hon’ble jurisdictional High Court in the case of Panna Corporation (supra) as well as Koshor Mohanlal Telwala (supra), we are of the view that only element of income embedded in the on-money received by the assessee for booking of flats/shops in “Vesu Project” is required to be assessed in its hand in all these years.

17. Next question arose, what is the element of income involved in this on-money. On one hand, the assessee is showing income at 8%, on the other hand, the ld.CIT(A) is estimating it at 20%. It is pertinent to observe that section 144 of the Income Tax Act provides discretion in the AO to pass best judgment when an assessee failed to appear before him, and to submit requisite details. In other words, it provides power in the AO to estimate an income of the assessee. We deem it appropriate to take note the relevant part of this section. It reads as under:

18. For exercising the best judgment, section 144 of the Income Tax Act provide the guidance to the ld.AO. This section reads as under:

“144. [(1)] If any person—

(a) fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 [or fails to comply with a direction issued under sub-section (2A) of that section], or

(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

the [Assessing] Officer, after taking into account all relevant material which the [Assessing] Officer has gathered, [shall, after giving the assessee an opportunity of being heard, make the assessment] of the total income or loss to the best of his judgment and determine the sum payable by the assessee [* * *] on the basis of such assessment :

[Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.]

[(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.]”

19. It is pertinent to note that that section 144 would suggest that in order to estimate income, learned Assessing Officer has to exercise his discretion which should be in consonance with best of his judgment. We are conscious of the fact that in various authoritative pronouncements, it has been propounded that in making a best judgment assessment, the Assessing Officer must not act dishonestly or vindictively or capriciously. He must make, what he honestly believe to be a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration, local knowledge, reputation of the assessee about his business, the previous history of the assessee or the similarly situated assessee. It is also pertinent to mention that judgment is a faculty to decide matter with wisdom, truly and legally. Judgment does not depend upon the arbitrary, caprice of an adjudicator, but on settled and invariably principles of justice. Thus, in a best judgment, even if, there is an element of guess work, it should not be a wild one, but shall have reasonable nexus to the available material and circumstances of each assessee.

20. During the course of hearing, we have confronted the ld.counsel for the assessee to show the basis for estimating income at 8%. Similarly, we have confronted the ld.CIT-DR as to how the figure of 20% should be taken up. The ld.counsel for the assessee drew our attention towards page nos.50-51 of the paper book wherein the assessee has kept the details of receipts received through account payee cheque as well as received cash in the booking of flats as well as shops. In the case of Koshor Mohanlal Telwala (supra) the Tribunal has observed that 8% profit offered by the assessee on the alleged gross receipts of on-money received in cash is fair and reasonable. This figure was construed as fair and reasonable by taking guidance from section 44AD of the Act, wherein it was provided by the Legislature that in case an assessee is engaged in civil construction, and if gross receipts remains under a particular slab, then such assessee needs not to maintain books of accounts, and its profit can be assumed at 8%. Though this special provision is not applicable in the present case, because gross receipts exceeded the turnover provided under section 44AD, but again we are required to find out a reasonable percentage of income which could have been alleged as earned by the assessee out of such gross receipts. This formation of opinion at the end of the Tribunal met the approval of Hon’ble Gujarat High Court in the case of Koshor Mohanlal Telwala (supra). As against this, the AO has not collected any data either from other assessees who are engaged in this line of business, and who have developed identical projects. We have perused the finding of the ld.CIT(A) also, but the ld.CIT(A) has also not mentioned any attending circumstances for harbouring a belief that 20% could have been earned from this activity. Thus after taking guidance from the judgment of Hon’ble Gujarat High Court in the case of Koshor Mohanlal Telwala (supra), we deem it proper that the assessee has rightly disclosed the profit element embedded in the gross profit at 8%. Accordingly, we allow the ground of appeal raised by the assessee, and hold that profit which has been directed to be adopted by the ld.CIT(A) at 20% of the alleged turnover should be taken at 8%. The income of the assessee is to be computed thereafter. Consequently, ground no.2 and 3 raised by the Revenue in the Asstt.Years 2012-13, 2013-14 and 2014-15, and ground nos.1 to 3 in the asstt.Year 2015-16riased by the Revenue are rejected.

21. Now we take ground no.1 of Revenue’s appeal in the Asstt.Year 2012-13 and 2014-15. In this ground of appeal, Revenue has pleaded that the ld.CIT(A) has erred in deleting the addition of Rs.2,92,76,625/-and Rs.3,05,00,000/- in the Asstt.Years 2012-13 and Rs.13-14. While dealing with the first issue, we have extracted complete order of the ld.CIT(A) in the Asstt.Year 2012-13 in para-6 of the impugned order where the ld.CIT(A) has discussed this issue.

22. Brief facts of the case are that during the course of search certain loose papers were found and seized. According to the AO a perusal of those loose papers would indicate that the assessee has incurred expenditure of Rs.5,97,76,625/- in cash. Out of the above expenditure Rs.2,92,76,625/- were alleged to be found incurred for the Asstt.Year 2012-13. The remaining amounts were found to be incurred for the Asstt.Year 2013-14. The AO has made addition on account of unexplained expenditure. In other words, according to him, the assessee failed to explain the source of expenditure. On appeal, the ld.CIT(A) deleted such addition on the ground that the income of the assessee is being estimated at a particular percentage of profit. In such scenario, separate addition on account of unexplained expenditure cannot be made.

23. The ld.DR while impugning the order of the ld.CIT(A) contended that he has not recorded any categorical finding as to how such expenditure should be deleted. He took us through orders of the ld.CIT(A) and contended that observation of the CIT(A) is contradictory and without any coherence. On other hand, the ld.counsel for the assessee relied on the orders of the ld.CIT(A).

24. We have considered rival submissions and gone through the record carefully. There is no dispute that during the course of search certain material/loose papers were found exhibiting the fact that the assessee has received cash, over and above, the amounts stated in the booking register. This cash was not accounted for in the books. It has been treated as on-money for sale of flats/shops. Simultaneously certain loose papers were found disclosing the fact that the expenditure were incurred in cash and accounted in the books. The ld.CIT(A) made an analysis of this, and then held that the moment assessees’ income is being assessed at 8% of the gross on-money, then the remaining amount 92% could take care of unexplained expenditure. It can be explained by a simple, an assessee has received Rs.100/- in cash for sale of flat. Out of that, element of income embedded in this Rs.100/-has been determined by us at Rs.8/-. Remaining Rs.92/- must have been incurred by the assessee for developing that flat. Thus, in other words, the expenditure whose details were found being incurred in cash could be construed as coming out of these Rs.92/-. Thus, there cannot be any separate addition of unexplained expenditure. The ld.CIT(A) has rightly deleted the addition.

25. Ground no.4 in the Asstt.Year 2014-15 and Asstt.Year 2015-16. In these grounds of appeal, grievance of the Revenue is that the ld.CIT(A) has erred in deleting the addition of Rs.26,49,500/- and Rs.16,81,600/-added by the AO with aid of section 68 of the Income Tax Act.

26. Brief facts with regard to the addition of Rs.26,49,500/- is concerned, the AO has treated this amount as unexplained credit under section 68 of the Act. The assessee has contended that these are not loans rather these are booking amount and the assessee has produced necessary details viz. PAN, addresses etc. The ld.CIT(A) after going through the details deleted the addition by recording the following finding in the Asstt.Year 2014-15. The facts in the Asstt.Year 2015-16 are identical. The assessee has alleged that these are booking amount of Rs.16,81,600/-. The AO has treated it has unexplained cash credit.

27. With the assistance of the ld.representatives, we have gone through the record carefully. The ld.CIT(A) has recorded a finding that the assessee has submitted confirmation from each person from whom booking amount was taken which also contained PAN, addresses et. It was also contended that these amounts were received through account payee cheques and the details of their returns were also filed. The ld.CIT(A) was of the view that initial burden under section 68 of the Act was discharged by the assessee by filing all these details. After considering the details furnished by the assessee, the ld.CIT(A) deleted the impugned addition. The relevant part of his order reads as under:

“7. The Second ground of appeal is against the additions of Rs.26,49,500/- made by the AO considering loan as unexplained credit u/s. 68 of the Act. During the year, the appellant had shown loan of Rs. 26,49,500/- from various parties. The AO held that the lender entities & individual neither had any identity nor creditworthiness and these transactions are not genuine. Therefore, made the additions. The appellant contended that this amount is not loan parties the amount has been received towards booking collection. During the course of assessment proceedings, confirmations, with details of name,- PAN, address, were submitted before the AO in the submission dated 22.10.2017 filed on 24.10.2017. On going through the facts of the case, it is found that for the year under consideration, the AO in respect of the unsecured loans of Rs. 26,49,500/- from various parties which according to the appellant is booking collection from the members on the basis of the regular trade practice prevailing in the market there are investors those who invest in the new real estate property but they are not the ultimate buyers, however, they invest in the property at the initial stage i.e. at the time of launching of the scheme to get the benefits of low rate and when the property is fully marketed and is in full swing and the property is developed they sell them in the market to the real buyers and earn the difference. Further the appellant has also submitted the confirmations, with details of name, PAN, address before the AO in the submission dated 22.10.2017 filed on 24.10.2017 and also stated that the entire funds have been received through account payee cheques and the details of the Income Tax Returns have been mostly filed by the parties. The appellant has also stated the fact that as the amount are booking advances no interest has also been paid. The A.O. is his assessment order has only not accepted the contention stating that booking advances have been shown under the head of ” Other liabilities” and as interest has not been paid on such amounts it should be considered as unexplained credits. Looking to the discussion above, once the appellant has established that he has taken money by way of accounts payee cheques from the lenders who are all income tax assessees whose PAN have been disclosed, the initial burden under Section 68 of the Act was discharged. It further appears that the assessee had also produced confirmation letters given by those lenders. It has been held in several judgments delivered by jurisdictional Gujarat High Court as well as other higher judicial authorities that no addition u/s. 68 are sustainable, if amount has been received through regular banking channel. Therefore, the additions made by the AO are not found justified, hence, these are deleted. This ground of appeal is allowed.”

28. In view of above well-reasoned order of the ld.CIT(A), no interference is called for in his order on this issue. It is confirmed and the grounds of the appeals of Revenue are rejected.

29. In the result, appeals of the assessee are partly allowed; whereas the appeals of the Revenue are devoid of any merit, hence dismissed.

Pronounced in the Open Court on 21st February, 2020.