Addition based on projected income surrendered deleted as actual income was higher

Addition based on projected income surrendered during search deleted as actual gross income reported in audited accounts was higher

ABCAUS Case Law Citation:
ABCAUS 3738 (2023) (05) ITAT

In the instant case, the Revenue had challenged the order passed by CIT(A)/FAA deleting the addition for undisclosed profit made by the Assessing Officer (AO) based on incriminating material found during search u/s 132 of the Income Tax Act, 1961 (the Act).

Addition based projected income

The respondent assessee was a limited company engaged in the business of real estate. In the relevant assessment year, it furnished return of income along with its annual audited accounts declaring a loss.

During the pendency of the assessment, a search took place on the company.  At the time of search, a document was found which reflected projected profitability with projected income figures.

The Managing Director of the company in his statement recorded u/s 132(4) admitted the income and surrendered the same.

The AO issued notice u/s 142(1) of the Act directing assessee to furnish return of income for the assessment year. However, the assessee submitted that its return of income filed earlier be considered as return of income.

Based on the statement recorded u/s 132(4) with respect to document found, the AO made the impugned addition which was deleted by the CIT(A).

Before the Tribunal, the assessee submitted that the addition had been made on the basis of a document found at the time of search which only reflected projected income. It was submitted that the projected revenue mentioned in the said paper was lower than the actual gross revenue earned and reflected in profit and loss account. It was submitted that in these circumstances, the documents cannot be said to be incriminating document as what had been shown as projected income was part of the books and reported in the return.

The Tribunal observed that CIT(A) had taken into consideration the fact that the Managing Director of the assessee company had mentioned that the projected income was based on percentage completion method and therefore based upon the accounting practices, the books of accounts of the assessee were prepared and audited which became the basis of finalising the return of income.

The Tribunal observed that the AO had not doubted the books of accounts and CIT(A) took the same into due consideration to conclude that when the books of accounts are not doubted than a document reflecting any projection for the year under consideration and as it did not evidence the real actual transaction same cannot be considered to be a incriminating evidence.

The Bench also observed that CIT(A) had duly considered the fact that merely on the basis of statement recorded u/s 132(4) of the Act, the addition could not have been made when otherwise the projection/estimation of the income has culminated into reporting actual income.

The Tribunal opined that AO had fallen in error in relying the statement of the Managing Director which was not corroborated by any other material to show that the paper having projections was over and above the reported revenue. 

The Tribunal opined that the AO though observed that the assessee company earned more revenue from operation than shown in the profitability statement, concluded that the assessee had escaped from paying tax on the surrendered income without analyzing the reasons for lower reported profits than the projected one.

Accordingly, the ITAT dismissed the appeal of the Revenue.

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