Extrapolation of income of two months to arrive at income of the full year was not justified – ITAT
In a recent judgment, ITAT Chandigarh has deleted the addition to income holding that extrapolation of income of two months adopted by the AO for arriving at income of the whole year was not justified.
ABCAUS Case Law Citation:
4187 (2024) (08) abcaus.in ITAT
Important Case Laws relied upon:
Surinder Kumar vs. CIT [2012] 21 taxmann com 80
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) in making an addition on account of alleged unaccounted receipts using extrapolation of income.
The appellant was running a resort earning income inter alia from marriage bookings. A survey u/s 133A was conducted on the second month of the relevant Financial year. During the course of survey, a diary containing details of bookings accepted by the assessee firm was impounded which revealed that the assessee had received bookings of functions of approx. Rs. 40 lakhs for the first two months of the financial year. During the course of survey proceedings, the assessee surrendered an additional income of Rs. 40 lakhs over and above his regular business income for the relevant financial year.
In response to notice u/s 143(2) of the Act, the assessee filed his return of income. On the perusal of the return, the AO noted that total receipts shown by the assessee firm for the relevant Financial Year was less than Rs. 50 lakhs which already included surrendered income of Rs. 40 Lakh and balance the normal receipts.
Therefore, as per AO, if the survey action would not have been conducted, the total receipts of the assessee for the Assessment Year would have been less than Rs. 50 lakhs. Therefore, AO opined that the assessee was regularly suppressing his receipts and its books of accounts of the assessee cannot be relied upon. Hence, books of accounts of the assessee were rejected u/s 145 (3) of the Act.
The AO keeping in view the fact that the business of Marriage Palaces is a cyclical one, extrapolated the income of the first two months to arrive at the gross income for the whole year and after accounting for proportionate expenses, made an addition to the returned income of the assessee on account of unaccounted receipts of the assessee firm.
The CIT(A) upheld the addition holding that it is an established legal position that extrapolation of income can be carried out with respect to documents pertaining to particular year. According to the CIT(A), the extrapolation of income had been done only for a six-month period keeping in view the lull period in the wedding season and proportionate expenses have also been allowed during the estimation of income. Had the impounded documents pertained to a different year or the transactions had been few i.e. one or two and there was no pattern in the said transactions, the addition made by the AO would have been questionable. But in the present case, there was a clear pattern, the documents impounded were spread over approx. two months and they pertain to the same year under question, hence the addition made by the AO was on sound basis.
Before the Tribunal, the assessee contended since the incriminating documents were found for the period of April and May of the relevant year, the same cannot be used as a basis for extrapolation of income for the whole year, since no incriminating documents were found for rest of the year.
Further, it was argued that after survey operation, the business of the resort had gone down drastically because of the fact that there was some sort of rumor in the market that the Income-tax Department is keeping an eye on the business in this particular resort. It was also argued that the reputation of the resort became questionable in the eyes of customers and, therefore, that drastically affected the business of this resort after the survey.
The Tribunal observed that on the basis of business recorded in the diary for only 51 days of the relevant assessment year only, the Assessing Officer had made extrapolation of business for the entire period of the remaining year and calculated half of its notional income after giving benefit of proportionate expenses.
The Tribunal opined that it was difficult to accept extrapolation of income of the entire year on the basis of entries found of only 51 days of the year. It does not sound logical.
The Tribunal noted that the in the judgment relied upon by the CIT(A), the incriminating documents pertaining to the block period where the assessee had already earned income before the search and, therefore, the search could not make any difference on the future income of the assessee. But, in the instant case, the survey took place in the beginning of the assessment year. Thus, keeping in view this distinction, the Tribunal opined that the extrapolation adopted by the AO for making addition was not justified. Therefore, sustaining such addition made on the basis of extrapolation, action of CIT(A) did not look convincing and logical.
Accordingly, assessee’s appeal was allowed.
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