In the absence of any incriminating and corroborative evidence, extrapolation of on-money received in one transaction cannot be done to the entire sales Addition u/s 68 in respect of unsecured loans cannot be made merely on the basis of statement of entry operators Only real income can be subject to tax – Addition cannot be made on the basis of notings in loose sheets which are not corroborated by any credible evidence

FACTS
1. The assessee was engaged in real estate development. A search action u/s 132 was undertaken on the assessee. Prior to this, a search action was undertaken on one of the buyers (an HUF) wherefrom certain documents were seized which suggested that the assessee had received on-monies for sale of the flat to that buyer. Based on those documents, the A.O. concluded that a certain percentage of the actual sale consideration for the flat and car parking was received in cash and was unaccounted. Thereafter, the A.O. extrapolated the on-money on the entire sales. The CIT(A) confirmed the addition in respect of the single flat sold to the HUF but deleted the balance addition in case of all other buyers on the ground that a singular instance cannot be extrapolated without evidence.

2. Addition was also made u/s 68 in respect of loans taken from parties allegedly linked to entry operators.

3. A further addition was made by the A.O. in respect of interest income receivable from a party. To put it briefly, in the course of the search at the assessee’s premises a document was recovered, containing notings which suggested a unilateral claim raised by the assessee against a third party. However, there was nothing in these documents which proved that the third party had ever accepted such claim of the appellant and nothing was brought on record by the A.O., too, to prove acceptance of the appellant’s claim by the third party. However, the A.O. made an addition on the basis of notings contained in the recovered document.

HELD
1. Addition u/s 68 on account of alleged on-money on sale of flats
The ITAT observed that the documents found in the course of third party search were loose sheets of paper which could not be construed as incriminating material qua the assessee. These documents neither contained the name of the assessee nor any mention of the assessee’s project, nor did it suggest that the seized document was prepared at the instance of the assessee and hence there was no mention of any cash payment to the assessee. No additions were made in the case of assessments of the parties, alleged to have given cash to the assessee, and hence addition was not warranted in the hands of the assessee, too.

In a subsequent search on the assessee’s premises, no corroborative material was found and in the absence of any incriminating material no addition was warranted. The extrapolation of unaccounted sales across all units sold by the assessee had no legs to stand on.

The A.O. had made an independent inquiry from each flat purchaser; however, he did not find any statement or material which could even suggest receipt of cash consideration not disclosed by the assessee. Therefore, based on legal as well as factual grounds, the ITAT upheld the CIT(A)’s decision to hold that the theory of extrapolation could not be applied on theoretical or hypothetical basis in the absence of any incriminating and corroborative evidence or material brought on record by the A.O.

2. Addition u/s 68 in respect of unsecured loans (from parties linked to entry operators)
The ITAT observed that, other than recording the statement of entry operators on oath, the A.O. had not shown any credible link between the person whose statement was relied upon and the company from whom loans were received by the assessee; the A.O. had neither personally nor independently examined even a single entry operator to verify the correctness of facts contained in the statement and to establish the link with the assessee if any, neither had he allowed the assessee to cross-examine the witnesses whose statements were extracted in the assessment order. The A.O. had also failed to objectively take into consideration the financial net worth of the creditors having regard to the facts and figures available in the audited accounts. Based on these grounds, the ITAT deleted the impugned additions.

3. Addition in respect of interest income
The ITAT held that the subject matter of tax under the Act can only be the ‘real income’ and not hypothetical or illusory income. The two methods recognised in section 145 only prescribe the rules as to when entries can be made in the assessee’s books but not the principles of time of ‘revenue recognition’. The same has to be judged with reference to the totality of the facts and surrounding circumstances of each case. Hence, the overall conduct of the third party and the fact that it has till date not made any payment whatsoever to the assessee indicates that notings on loose papers did not represent ‘real’ income accrued to the assessee and was rightly not offered to tax. The ITAT, accordingly, held that the alleged interest income was not taxable.