Only Profit Element must be Taxed in unrecorded Business Receipts: ITAT Directs Estimation of Profit at 7% on Cash Receipts [Read Order]

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) that the provision of Section 69A was not applicable to unrecorded cash transactions that represent business receipts found in documents during a survey and held that in such cases, only the profit component of the unrecorded receipts should be brought to tax rather than the entire gross amount.

Educo Ventures Pvt. Ltd. (assessee) was subject to a survey action under Section 133A on November 4, 2019. During the survey, documents were discovered revealing cash receipts of ₹32,70,000 and cash payments of ₹6,00,000 that were not recorded in the official books of accounts.

The Assessing Officer (AO) treated the gross receipt of ₹32,70,000 as unexplained money under Section 69A and added it to the assessee's income. The assessee contended that the cash originated from the sale of scrap at a construction site and was part of its business operations.

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While admitting the transactions were unrecorded, the assessee requested that only the net amount of ₹26,70,000 receipts minus payments be taxed as business income and allowed for set-off against returned losses.Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].

The [CIT(A)] deleted the separate addition of ₹6,00,000 for unexplained expenditure and treated it as sourced from the unaccounted receipts. The CIT(A) confirmed the addition of the entire ₹32,70,000 gross receipt as unaccounted income.

The CIT(A) rejected the claim to treat the amount as business income due to a lack of corroborative evidence. Aggrieved by the confirmation of the gross amount, the assessee appealed to the ITAT.

The two-member bench comprising Rajesh Kumar (Accountant Member) and Pradip Kumar Choubey (Judicial Member) observed that Section 69A applies to physical assets like money, bullion, or jewellery found during a survey that are not recorded in the books.

The Bench noted that unrecorded cash transactions found in documents typically represent unrecorded sales. It concluded that since these transactions represented unrecorded business activity, it would be reasonable and fair to tax only the estimated profit.

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The Bench directed the AO to assess the income at a profit rate of 7% on the net cash receipts of ₹26,70,000. The appeal of the assessee was partly allowed.