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Facts
During a survey, discrepancies were found in the assessee's books, leading to an agreement to declare Rs. 2 crore as income. However, only Rs. 1.30 crore was offered under 'Income from Other Sources' and set off against business losses. The AO estimated net profit at 2.24% and taxed the surrendered income under Section 115BBE.
Held
The Tribunal held that the AO's estimation of net profit without rejecting the books was premature. It also ruled that Section 115BBE was not applicable as the income was offered as business income and not assessed under deeming provisions like Section 68/69.
Key Issues
1. Whether the addition made by estimating net profit without rejecting books of accounts is sustainable. 2. Whether Section 115BBE of the Income Tax Act is applicable to the surrendered income offered as business income.
Sections Cited
133A, 143(2), 142(1), 127, 270A, 271AAC, 115BBE, 68, 69, 69A, 69B, 69C, 69D
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Income Tax Appellate Tribunal, DELHI BENCH ‘A’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI AVDHESH KUMAR MISHRA
A.Y.2018-19 Assistant Commissioner of Arihant Textiles, Income Tax, 52, 53, 54, 54A, 55, Central Circle, Ghaziabad, Vs. Rural Industrial Estate, CGO Complex-I, Ghaziabad Loni, Ghaziabad Uttar Pradesh- 201102 PAN: AAGFA4902R (Appellant) (Respondent) Appellant by Sh. Jitender Singh, CIT-DR Respondent by None Date of Hearing 02/07/2025 Date of Pronouncement 18/07/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal of the Revenue for the Assessment Year (‘AY’) 2018-19 is directed against the order dated 02.06.2023 of the Commissioner of Income Tax (appeal)-3, Noida [‘CIT(A)’].
2. The Revenue has raised following grounds: “1. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition of Rs.1,00,55,208/- made by the AO by estimating NP 2.24% of the turnover, without considering the fact that the AO has cited following defects that proves that books of account was manipulated by the assessee: - (ii) In Trial Balance cash of Rs. 14,54,196/- was there and in another trial balance, cash in hand was of Rs 7,07,625/-, however, no cash in hand was found at the premise of assessee firm during the course of survey operation.
(iii) On account of discrepancies in the books of accounts, the assessee firm had agreed to declare taxable income of Rs. 2.00 Cr. in its ITR for F.Y. 2017-18.
(iv) On perusal of the ITR and P& L account of the assessee firm, it is seen that its turnover, GP & NP have substantially fallen during the F.Y. 2017 18.
(v) Despite availing sufficient opportunities, books of accounts and bills & vouches for verification have not been furnished by the assessee.
2. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to tax the surrendered amount on normal rate without appreciating the fact that the assessee disclosed the surrendered amount in its ITR under the head "Income From Other Sources" and the same was set off by the assessee firm against its business losses and further since the assessee firm failed to disclose the source of the said surrendered income, the provisions of section 115BBE are applicable in the matter.
3. That the appellant craves leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
3. The relevant facts giving rise to this appeal are that the respondent assessee, engaged in business of Textiles & related activities, e-filed its Income Tax Return (‘ITR’) on 31.10.2018 declaring income of Rs.39,00,040/-. The business premises of the respondent assessee was Arihant Textiles surveyed under section 133A of the Income Tax Act, 1961 (‘Act’) on 28.02.2018. Surplus stock and various discrepancies in regular books of accounts were found/noticed by the Survey Team. On account of discrepancies in books of accounts, the assessee agreed to surrender Rs.2,00,00,000/- as income in ITR. However, the assessee offered Rs.1,30,00,000/- as income under the head ‘Income from Other Sources’ in ITR of the relevant year. The Assessing Officer (‘AO’) worked out business income @ 2.24% of gross receipts. Further, the AO taxed surrendered income of Rs.1,30,00,000/- under section 15BBE of the Act. Since the assessee did not ensure proper compliance during the assessment proceedings; therefore, the AO completed the assessment as under: “In this case, the assessee firm has e-filed its return of income on 31/10/2018 declaring total income of Rs.39,00,040/-. The case of the assessee firm was selected for scrutiny through CASS and notice u/s 143(2) of the Income Tax Act, 1961 was issued to the assessee firm on 22/09/2019 by NeAC. The case of the assessee firm was centralized with this office vide order u/s 127 of the Income Tax Act, 1961 dated 10/12/2020. Subsequently, notice u/s 142(1) of the Income Tax Act, 1961 along with questionnaire was issued to the assessee firm on 15/01/2021 & 21/01/2021. Thereafter, notice u/s 142(1) of the Income Tax Act, 1961 was issued to the assessee firm on 30/01/2021. Further, a show cause notice was also issued to the assessee firm on 09/02/2021. In response to these notices, the assessee firm has filed written submissions and supporting documents during the course of assessment proceedings which are placed on record.
The assessee firm is engaged in business of Textiles & related activities. During the course of assessment proceedings, the assessee Arihant Textiles firm has filed various details/documents including statement of bank account that were looked into. The accounts of the assessee firm were audited and copy of audit report along with Profit & Loss A/c and Balance Sheet was furnished.
In this case, a survey operation u/s 133A of the Income Tax Act, 1961 was conducted on 28/02/2018 and various documents, register & loose papers were found and impounded. During the course of survey, verification of physical stock was done. After verification, excess stock was found at the premises of the assessee firm in comparison to the stock in the books of the assessee company. Also, in Trial balance, cash of Rs.14,54,196/- was there and in another Trial balance, cash in hand was of Rs.7,07,625/-. However, no cash in hand was found at the premises of the assessee firm during the course of survey operation. On account of discrepancies in the books of accounts, the assessee firm had agreed to declare taxable income of Rs. 2 Crore in its ITR for F.Y. 2017- 18. However, in its ITR, the assessee firm has shown amount of only Rs.1,30,00,000/- under head ‘Income from Other Sources’ and that has also been set off against the business loss of Rs.90,99,960/- declared in its ITR for A.Y. 2018-19. On perusal of the ITR and P & L account of the assessee firm, it is seen that its turnover, GP & NP have substantially fallen during the F.Y. 2017-18. The rate of GP/NP and cost of goods sold is for 02 years is tabulated as under:
Particulars A.Y. 2018-19 A.Y. 2017-18 Sales 3,94,36,242 11,08,13,255 Purchases 3,69,35,260 9,18,14,380 % to Sales 93.65% 82.85% Direct Expenses 3,24,43,942/- 2,37,97,752 % to Sales 82.27% 21.47% Opening Stock 3,05,25,617 2,89,60,683 Closing Stock 69,27,743 3,05,25,617 Cost of Goods Sold 6,05,33,134 9,02,49,446 % to Sales 154% 82% GP 1.54% 9.95% NP (-) 23.26% 1.94% Arihant Textiles 3.1 As can be seen from the above table that sales of the assessee firm have fallen substantially but also the percentage of purchases & direct expenses to sales have increased substantially thereby reducing the Gross Profit. Also the cost of goods sold was 82% of total turnover during F.Y. 2016-17 and it is 154% in F.Y. 2017-18. In fact, the cost is unreasonably high compared to sales resulting in losses. It is also pertinent to mention in the subsequent year i.e. F.Y. 2018-19, the turnover has increased and GP is 15.05% and NP is 2.24%. It is really peculiar to see that in the survey year, the turnover as well as GP & NP have fallen and business has gone into losses and in the next year, the business is showing a high GP & NP. On a very cursory perusal of this state of affairs, it becomes clear that the books have been manipulated and loss generated to set off the surrendered income of Rs.1,30,00,000/- 3.2 During the course of assessment proceedings, vide notice u/s 142(1) dated 21/01/2021, the assessee firm was specifically asked to furnish books of accounts and bills & vouchers for verification. However, the same were not furnished. Again, vide show cause notice dated 09/02/2021, the assessee firm was specifically asked the reason for fall in turnover, GP & NP and to produce books of accounts and bills & vouchers for verification. However, the same were again not furnished. Vide reply dated 15/02/2021, the reason for increase in direct expenses has been given as expense on “Purchase of Steam Coal, increase in cost of power consumed and GST compensation cess”. It has been stated by the assessee that the use of petroleum coke was banned by the Hon’ble Supreme Court and they had to shift to steam coal. However, apart from the Hon’ble Supreme Court’s order, no cogent evidence of use of steam coal or additional expenses on consumption of power has been produced. Also, if the direct expenses have increased, these should also have been reflected in financials of subsequent year. However, in F.Y. 2018-19, the assessee firm is showing GP of 15.05% and NP of 2.24% which is much more than GP and NP of any previous year of the assessee firm. Thus, the reasoning given by the assessee firm is not acceptable. Also, the assessee firm has not produced its books of accounts for verification which clearly shows that the assessee firm is manipulating its books of accounts to suppress its profits. The loss has been shown in order to set off the same against the surrendered amount of Rs. 1,30,00,000/- as shown in income from other sources.
3.3 In view of the facts mentioned above and the noncompliance of the assessee firm with respect to production of books of accounts like sales register, purchase register and stock register for verification, it is deemed fit to re-compute NP of the assessee firm as per NP ratio of the assessee firm for F.Y. 2018-19 which is 2.24%. Hence, NP rate of 2.24% is applied in the case of the assessee firm and accordingly, NP of the assessee firm comes out to be Rs.8,83,372/-. Hence, the difference in NP of Rs.1,00,55,208/- is added to the total income of the assessee firm. Penalty proceedings u/s 270A of the Income Tax Act, 1961 is also being initiated separately. Addition-Rs.1,00,55,208/-
The assessee firm had surrendered Rs. 2 Crore during the course of survey operation. Out of this amount, Rs. 1.30 Crore has been shown by the assessee firm in its ITR under the head 'income from other sources'. The remaining amount of Rs. 70 Lacs was added by the Assessing Officer during the course of assessment proceedings for A.Y. 2017-18. The amount of Rs. 1,30,00,000/- was set off by the assessee firm against its business losses which has now been recomputed at profit of Rs. 8,83,372/-. Accordingly, the surrendered amount of Rs. 1,30,00,000/- becomes its taxable income to be taxed as per provisions of section 115BBE of the Income Tax Act, 1961. Penalty proceedings u/s 271AAC of the Income Tax Act, 1961 is also being initiated separately.
5. After verification, the income of the assessee is computed as under: - Income as per ITR Rs. 39,00,040/- Addition-As per para No. 3.3 Rs. 1,00,55,208/- Total Income Rs. 1,39,55,248/- Rs. 1,39,55,250/- 3.1 Aggrieved, the assessee filed appeal before the CIT(A), who allowed the appeal as under:
“6.11 From the facts of the case it has been found that survey proceedings u/s 133A of IT Act have been conducted in the premise of the appellant on 28.02.2018 and various documents, registers and loose papers were found and impounded. As claimed by appellant all the Arihant Textiles computerized books of accounts have also been impounded in the survey proceedings including the books of accounts of the current year from 01.04.2017 to 28.02.2018. Further the appellant has surrendered income of Rs. 2 crores in the survey proceedings and the same has been assessed as Rs. 30 lacs in AY 2017-18 and Rs. 1,70,00,000/- included as income from other sources in AY 2018-19 i.e. the year under consideration. Further though Ld. AO brought to the fore that GP has reduced from 9.95% in AY 2017-18 to 1.54% in AY 2018-19 and NP has reduced from 1.94% in AY 2017-18 to net loss of 23.26% in AY 2018-19, but reasons of the same have been explained in detail by the appellant. In the survey proceedings it has been found that the appellant was maintaining its books of accounts at Tally software. The hard disk of the same was impounded by the survey team during the survey along with the purchase and sale bills and other loose papers. The stock difference of Rs. 2,48,850/- has been explained by Sh. Ravindra Jain that the difference was mainly on account of wrong mentioning of quantity at item no. 8 as the actual physical quantity was 7000 mtrs. but the same was recorded as 700 mtrs. in the physical verification sheet and due to this the value of stock was computed short by Rs. 2,06,500/- and balance amount of Rs. 42,350/- was on account of estimation made by the partner. In the matter of shortage of cash it was explained that the cash was kept at the residence of the partner. The partner of the appellant firm had surrendered a sum of Rs. 2,00,00,000/- during the survey as business income to buy the peace of mind. During assessment proceedings, the reasons of lower turnover, GP & NP rate were explained. It was submitted that the turnover during the year of own product was lower at Rs. 394.36 lacs as compared to Rs. 1108.14 lacs in AY 2017-18 as due to slow down in economy and intense competition, the appellant was not able to market its products at reasonable profits. However, to utilize its capacity, the appellant had entered into long term contracts for doing job works for others which had resulted in the increase in job work charges from Rs. 142.55 Lakhs in AY 2017-18 to Rs. 541.47 Lakhs in AY 2018-19. Further the material consumption ratio during the year is lower at 64.68% as compared to 72.16% in AY 2017-18. It was explained that the main reason of fall in gross profits was increase in the cost of fuel and electricity. The cost of fuel was higher due to sudden ban on use of petroleum coke by the Arihant Textiles Hon’ble Supreme Court of India and due to which the appellant was forced to shift to use costly steam coke to honour its contracts of job works. It was explained that since the job work price was contracted without factoring in the increase in the cost of fuel and electricity, the appellant incurred losses or earned nominal gross profits in those contracts resulting in decrease in the gross profit rates from 9.95% to 1.54% during the year as compared to AY 2017-18. The appellant has also explained that the net loss during the year was on account of lower gross profits earned during the year, the appellant had earned gross profit of Rs. 6.05 lacs during the year as compared to gross profit of Rs. 110.21 lacs in AY 2017-18 and that there was no major increase in indirect expenses during the year and the loss during the year was on account of lower gross profit. The appellant explained that the indirect expenditure during the year mainly consisted of Bank interest of Rs. 21.92 lacs, interest on partners’ capital of Rs. 12.31 lacs, Salary of Rs. 19.61 lacs and depreciation of Rs. 29.80 lacs which were fully verifiable and were allowable as per provisions of the Act. The appellant explained that the fall in gross profit during the year under consideration was on account of unforeseen circumstances which resulted in the net loss and hence the loss shown by the appellant should be accepted. From the facts of the case, it has been found that Ld. AO could not cite any instance of manipulation of books of accounts and has just made an observation that books were manipulated to adjust the surrendered income. Therefore, it is observed that the decision of Ld. AO to estimate NP without rejecting books of accounts was premature and hence the same cannot be sustained. 6.12 Looking to the facts and circumstances of the case, addition of Rs. 1,00,55,208/- made by estimating NP @2.24% is hereby deleted. All the concerned grounds of appeal are adjudicated accordingly. 6.13 In the matter of invoking provisions of section 115BBE of IT Act on the surrendered income of Rs. 1,30,00,000/- it is observed that the appellant claims that the same was offered as ‘business income’. In the appellate proceedings, Ld. AR submitted that this income was undisclosed business income and was surrendered under the same head and the same was accepted by the survey team accordingly. Ld. AR submits that inadvertently this surrendered income of Rs.
Arihant Textiles 1,30,00,000/- was included as 'income from other source’ while filing ITR of AY 2018-19. Ld. AR submits that in this situation also the provisions of section 115BBE of IT Act cannot be invoked. It is submission of Ld. AR that unless some addition is made u/s 68/69/ 69A/ 69B/ 69C/ 69D of IT Act, the provisions of section 115BBE cannot invoked. Ld. AR submits that neither the appellant has offered this income under these sections nor Ld. AO could give any reasons as to why this amount should be considered as income under these sections, hence the provisions of section 115BBE of IT Act cannot be invoked for taxation of this income of Rs. 1,30,00,000/-. This submission has been found correct; hence it is concluded that the income of Rs. 1,30,00,000/- declared as business income and shown in the return of income as income from other sources cannot be taxed as deemed income u/s 68/ 69/ 69A/ 69B/ 69C/ 69D of IT Act without giving any cogent reasons. 6.14 Looking to the facts and circumstances of the case, this decision of Ld. AO to invoke provisions of section 115BBE of IT Act for taxation of income of Rs. 1,30,00,000/- is not sustained and relief is allowed to the appellant. All the concerned grounds of appeal are adjudicated accordingly.” [Emphasis supplied.]
4. The Ld. CIT-DR argued the case vehemently and prayed for setting aside the impugned order with restoration of the assessment order.
The respondent assessee was not represented by anyone.
We have heard the Ld. CIT-DR and have perused the material available on the record. We have perused orders of the authorities below. We find the impugned order as well-reasoned. The Ld. CIT-DR did not bring any material on the record to contradict the finding of the Ld. CIT(A). Based on the discrepancies in books of accounts, the assessee has already Arihant Textiles offered the income of Rs.1,30,00,000/- as income under the head ‘Income from Other Sources’ in ITR of the relevant year, which has not been disputed by the AO. The surrendered income of Rs.1,30,00,000/- has been accepted by the AO; however, the dispute is with the rate of taxability of the same; i.e. @ 60% or 30%.
The AO has not rejected the books of accounts of the assessee. The AO has not accepted the net profit shown in the books of accounts. It is the fact that the books of accounts, etc. of the assessee have been impounded by the AO during the course of the survey operations and the income of Rs.1,30,00,000/- has been offered for tax over & above the profit as per the Profit & Loss Account of the assessee to cover-up discrepancies noticed/found in the books of accounts by the Survey Team. We are of the considered view that the surrendered income of Rs.1,30,00,000/- includes the addition made by the AO by disturbing the net profit rate of the assessee as the income of Rs.1,30,00,000/- has been admitted having disclosed based on the discrepancies in books of accounts. Hence, the addition of Rs.1,00,55,208/- made by disturbing the net profit rate of the assessee, according to us, tantamount to double taxation. Therefore, we do not see any infirmity in the finding of the Ld. CIT(A) deleting the addition of Rs.1,00,55,208/-. Accordingly, the Ground No. 1 fails.
Arihant Textiles 8. The 2nd ground relates to the taxability of income of Rs.1,30,00,000/- under section 115BBE of the Act. Since the income of Rs.1,30,00,000/- disclosed under the head ‘Income from Other Sources’ in ITR has not been assessed as deeming income under section 68/69/69A/ 69B/69C/69D of the Act; therefore, the same cannot be taxed section 115BBE of the Act. Thus, we do not see any infirmity in the finding of the Ld. CIT(A) directing the AO to not tax income of Rs.1,30,00,000/- under section 115BBE of the Act. Accordingly, the Ground No. 2 fails.
In the result, the appeal of the Revenue is dismissed.