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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
Before: Shri Rajesh Kumar & Shri Sonjoy Sarma]
ORDER
Per Shri Rajesh Kumar, AM
This is an appeal preferred by the assessee against the order of Ld. CIT(A_- 7, Kolkata dated 21.03.2017 for AY 2012-13.
The issue raised in ground no. 1 is against the confirmation of addition of Rs.73,10,784/- by Ld. CIT(A) as made by the AO on account of capital balance in the proprietary capital account.
The facts in brief are that the assessee filed the return of income on 23.03.2013 declaring total income of Rs.5,44,840/-. The assessee is running a business of retail sale of Footwear in the name and style of M/s. Khadims, which is a brand of Kolkata based company M/s. Khadims India Ltd. and assessee is running the shop for its products exclusively. The assessee has filed return of income on presumptive basis u/s. 44AD of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) by declaring 8% of the total turnover. A survey u/s. 133 of the Act was conducted at the business premises of the assessee on 20.03.2012. Subsequent to the survey action, the assessee filed return of income and assessment was framed u/s. 143(3) of the Act vide order dated 30.03.2015. Besides, the assessee was also earned income from supply of building materials. Assessee filed ITR for four assessment years and as per the Balance sheet drawn on 31.03.2012, the opening capital balance was Rs.73,10,874/- and after adding thereto the net
Narayan Chandra Jana, AY 2012-13 profit u/s. 44AD, interest of saving bank and subtracting the withdrawals of Rs.1,50,000/-, a net balance of Rs.76,44,401/- was calculated. The assessee has shown cash balance of Rs.50,66,287.93 at the year end. During the course of survey, the survey team could find only Rs.2,670/- in the shop and assessee explained cash balance to be lying at his residence for the safety reasons. The shop is located in the far-flung area and, therefore, the cash could not have kept in the shop premises. The AO did not accept the said contention of the assessee and treated the capital of Rs.73,10,874/- as capital built up and added the same to the income of the assessee in the assessment framed u/s. 143(3) of the Act.
In the appellate proceeding, the appeal of the assessee dated 31.03.2015 also dismissed by the Ld. CIT(A). The Ld. CIT(A) while dismissing the appeal of the assessee observed that the profit of the business of the assessee was much more than as contemplated u/s. 44AD of the Act and actually declared by the assessee and therefore, assessee was not eligible for the purpose of benefits as provided u/s. 44AD of the Act. The Ld. CIT(A) noted that assessee has undisclosed income from his business which was shown as opening balance as on 01.04.2011. The Ld. CIT(A) noted that huge cash balance was shown in hand of Rs.17,10,099/- and Rs.50,66,288/- on 31.03.2011 and 31.03.2012 respectively while at the time of survey conducted on 20.03.2012 only Rs.2,670/- was found with the assessee which showed that assessee has huge income which was not truly and correctly declared in the return of income but brought back in the books of account through opening capital. Finally, the Ld. CIT(A) confirmed the addition as made by the AO.
We have heard rival contentions and perused the material available on record including the Balance Sheets as placed before us for AYs 2011-12and 2012-13. We observe that the addition of opening capital balance of capital of Rs.73,10,874/- on the ground that survey team could not find the cash at Narayan Chandra Jana, AY 2012-13 the time of survey in the shop of the assessee and disbelieved the explanation that the cash was lying at his residence. The Ld. CIT(A) has simply confirmed the finding of AO that assessee has not returned the true and correct income and the income of the assessee was much higher than the limit as contemplated u/s. 44AD of the Act. We note that the capital of Rs.73,10,874/- was closing capital balance as on 31.03.2011 and opening capital as on 01.04.2011. In our opinion, the genuineness of the opening capital cannot be adjudicated by the AO in the current year and consequently, the opening capital cannot be added either as unexplained cash credit u/s. 68 or unexplained investment u/s. 69 of the Act. The case of the assessee finds support from the decision of Coordinate Bench in the case of ITO, Ward- 1(4), Kolkata Vs. M/s. jellotic Supply Pvt. Ltd. (ITA No. 1972/Kol/2016) and Hon’ble Rajasthan High Court in the case of CIT Vs. Parmeshwar Bohra 267 ITR 698 (Raj.) wherein it has been held that no addition can be made on account of opening capital either u/s. 68 or u/s. 69 of the Act. Considering these facts and circumstances and in the light of aforesaid decisions, we are inclined to set aside the order of Ld. CIT(A) and direct the AO to delete the addition. Therefore, this ground of appeal of the assessee is allowed.
6. The issue raised in ground no. 2 is against the direction given to AO by Ld. CIT(A) to reopen the assessments of the assessee for AYs 2010-11 and 2011-12 for protective addition on account of alleged brought forward build up capital.
7. After hearing the rival contentions and perusing the material available on record, we observe that while passing the appellate order, the Ld. CIT(A) has given a direction to AO to reopen the previous two assessments namely AYs 2010-11 and 2011-12 which were not in appeal before the Ld. CIT(A), while disposing of the appeal for AY 2012-13. We find that the said power of the Ld. CIT(A) is beyond his jurisdiction. We have perused the provisions of section 251 of the Act which governs the power of Ld. CIT(A). In our
Narayan Chandra Jana, AY 2012-13 opinion, the direction of the Ld. CIT(A) to reopen the assessment for preceding two assessment years is against the provision of the Act. We find that the case of the assessee finds support from the order of Hon’ble Calcutta High Court in the case of R. S. Davey Vs. CIT 140 ITR 1035 (Cal) wherein a similar issue relating to scope of power of the first appellate authority has come up for consideration before the Hon’ble Court and it was held by the Court that Ld. CIT(A) was not competent to give direction to AO in respect of an assessment year which is not in appeal before him and the said decision has been followed by Coordinate Bench in the case of Shalini Agarwal, AY 2013-14, ITA No. 957/Kol/2017. Accordingly, we quash the said direction of the Ld. CIT(A) given to AO to reopen the two assessment years as being contrary to law. Therefore, ground no. 2 is allowed.
Ground nos. 3 and 4 are in respect of confirmation of addition of Rs.27,30,994/- by Ld. CIT(A) as made by the AO on account of payment made to Khadim India Ltd. by invoking the provision of sections 40A sub- section (3) of the Act.
Facts in brief are that the assessee has made cash payment to Khadim India Ltd. against purchases which were disallowed by the AO u/s. 40A(3) of the Act to the tune of Rs.87,30,994/-. Ld. CIT(A) confirmed the addition solely on the ground that M/s. Khadim India Ltd. is located in the prime location of Kolkata city and, therefore, the payments made were in complete violation of section 40A(3) of the Act.
After hearing the rival contentions and perusing the material available on record, we find that profits have been declared by the assessee u/s. 44AD of the Act on presumptive basis which has been accepted by the revenue. Besides, the AO applied the provisions of section 40A(3) of the Act in respect of cash payment made to the supplier. In our opinion, by declaring profit u/s. 44AD of the Act, the presumption is that the assessee has Narayan Chandra Jana, AY 2012-13 considered the purchases as well as sales for the purpose of arriving at the profit which was finally declared u/s. 44AD of the Act. In our opinion, when the assessee has declared his income u/s. 44AD the provisions of section 40A(3) cannot be invoked. The case of the assessee finds support from the decision of Coordinate Bench in the case of Sanjay Vasantrao Wani, wherein the Bench has held as under: “7. On hearing both the sides on this limited issue, we find there is no dispute on facts. The dispute is only on the legal issue if the provisions of section 40A(3) of the Act are rightly applied in the case where presumptive profits are determined u/s.44AD of the Act by the assessee and undisturbed by the AO in the assessment. On perusal of the said provisions, we find even if the maintenance of books of account or otherwise, is not a condition precedent/or invoking the provisions of section 44AD of the Act by the assessee. Once the said provisions are invoked by the assessee and undisturbed by the AO, it is common sense that the provisions of section 40A(3) of the Act cannot be invoked separately and therefore, making addition on account of the violation of section 40A (3) of the Act over and above the said presumptive profits. This issue was answered by the Hon'ble Gujarat High Court in the case of CIT Vs. M. V. Construction (supra). For the sake of completeness, we proceed to extract the relevant paras from the said judgment and the said paras read as under:
“3. As can be seen on a plain reading of the provision, all that it requires is that, (1) an assessee must be engaged in the business of civil construction or supply of labour for civil construction, (2) in case of such an assessee, a sum equal to 8% of the gross receipts received or accrued to the assessee in the previous year, have to be compared with the sum declared by the assessee in his return of income, (3) then, the higher of the two figures has to be adopted for the purposes of assessing the assessee. The opening portion, namely, non obstante clause, stipulates that, for the purposes of working out the figure of 8% of gross receipts, the provisions contained in sections 28 to 43C of the Act have to be ignored. The said provision, namely, the non-obstante clause, does not have any further role to play. Similarly, insofar as the return of income is concerned, it is the figure declared by the assessee, and that is what is stated by the provision, has to be adopted. No processing at that stage is permissible. Therefore, the provisions of Section 40A (3) of the Act cannot be pressed into service at this stage." 7.1 Similarly, we also perused the order of Pune Bench of the Tribunal in the case of Shri Sanjay Javerilal lain Vs. DCIT (supra) and found that the facts before the Tribunal are similar to the facts of the present case. For the sake of completeness of this order, we proceed to extract the finding given by the Tribunal here as under: "11. We have considered the rival submissions, orders of the authorities below and perused the case laws relied upon. The only question for determination is whether estimated purchases entry in the Profit & Loss Account prepared for reconciliation and matching the estimated declared income from unrecorded sales at the time of survey are subjected to disallowance under section 40A(3) of the Act on the assumption that these
Narayan Chandra Jana, AY 2012-13 purported unaccounted purchases are impliedly made in cash. We notice that there has been consistent plea of the assessee that the estimated purchases are only in the nature of balancing entry to arrive at the pre- determined profit from undisclosed sale transactions as declared in survey which has remained uncontroverted by the Revenue. Another noticeable fact is that the income declared from these unaccounted transactions are consistent with the estimated income declared in the course of survey. It is also undisputed fact that the estimated purchases stated to be a balancing accounting entry to arrive at the income declare towards unaccounted business activities is not corroborated by any tangible evidence found during the course of search/survey. In other words, the alleged cash purchases as shown in the Profit & Loss Account prepared to declare the unaccounted income is not backed any underlying document. We find that the Pune Bench of the Tribunal in the case of to 271/PN/2014 Kirtikumar Vishnudas Bhutada (supra) after taking cognizance several decisions of various High Courts on the issue has held in essence that once the income emanating from unrecorded and undisclosed transactions outside of account are declared and accepted, no additional disallowance under section 40A (3) of the Act is called for. Respectfully following the decision of the Pune Bench of the Tribunal, we hold that further disallowance under section 40A(3) on purported unaccounted purchases is not justified in the facts of the case and therefore is directed to be deleted.” From the above, it is now binding on us to hold that in cases where presumptive profits are eventually offered by the assessee for taxation uls.44AD of the Act and the same is .finally accepted by the CIT(A), then the provisions of section 40A(3) of the Act cannot be pressed into service. Accordingly, the legal grounds raised by the assessee stand allowed."
In view of these facts, we are inclined to set aside the order of Ld. CIT(A) on this issue and direct the AO to delete the addition. Therefore, both these grounds of appeal of the assessee are allowed.
In the result, the appeal of assessee allowed.
Order is pronounced in the open court on 22nd September, 2023