Only Profit Embedded in Unaccounted Receipts can be Taxed, Not the Entire Receipts: ITAT [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) held that only the profit element embedded in unaccounted receipts can be taxed, not the entire amount of such receipts.

Robin Ramavtar Goenka, (assessee) engaged in the real estate business. During a search action conducted on 30.10.2018 at the premises of the Sankalp Group, incriminating materials such as handwritten diaries, loose papers, unrecorded bills, and other documents were seized.

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These materials revealed evidence of on-money transactions, unaccounted cash sales, and unexplained cash payments related to land purchases, brokerage, salaries, personal expenses, and jewellery. The AO made substantial additions to the income of Sri Robin Ramavtar Goenka and protective additions in the hands of his accountant.

The Assessing Officer (AO) treated the unaccounted receipts as undisclosed income and the unaccounted payments as unexplained expenditure under Section 69C of the Act. The assessee argued that both receipts and payments were part of normal business activities and that only the profit element, estimated at 8-10%, should be taxed.

Aggrieved by AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) partly allowed the assessee’s appeal, restricting the addition to the profit element at 14% of the unaccounted payments, amounting to Rs. 3,46,50,000, as the unaccounted payments exceeded the receipts.

Aggrieved by the CIT(A)’s order, both the assessee and the Revenue appealed to the ITAT. The assessee contended that the 14% profit rate was excessive and did not reflect the real income. The counsel argued that the seized materials clearly indicated that both unaccounted receipts and payments were incurred in the course of business.

The counsel argued that only the profit embedded in the receipts, should be taxed. The assessee relied on several judicial precedents, including Sankalp Recreation P. Ltd. vs. ACIT and Godhra Electricity Co. Ltd. vs. CIT, which established that only the profit element of unaccounted receipts is taxable.

The two-member bench, comprising T.R. Senthil Kumar (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member), observed that the seized materials confirmed that both unaccounted receipts and payments were related to the assessee’s real estate business.

The Tribunal observed that it is a well-settled legal principle that only the real income, i.e., the profit embedded in unaccounted receipts, can be taxed, as supported by the cited judicial precedents.

The bench found the CIT(A)’s methodology of applying a 14% profit rate to unaccounted payments reasonable but agreed with the assessee that the rate was on the higher side given the actual profit ratios in the real estate business.

The bench directed the AO to reassess the income by applying a more reasonable profit rate, closer to the industry standard of 8-10%, to the unaccounted receipts, ensuring that only the real income is taxed.

The tribunal set aside the CIT(A)’s order to the extent of the profit rate applied and remanding the matter to the AO for fresh adjudication. It upheld the CIT(A)’s decision to restrict the addition to the profit element. The appeal of the assessee was partly allowed and the appeal of the Revenue was dismissed.

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