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Income Tax Appellate Tribunal, JAIPUR BENCH ‘B’, JAIPUR
Before: Shri Ramesh C.Sharma, AM & Shri Vijay Pal Rao, JM vk;dj vihy la-@ITA No. 548/JP/2019
per the provision of Section 144 of the Act for making best judgement assessment. The AO instead of framing the assessment by estimating the income has made disallowance of expenditure which is not permissible.
Even in the case of best judgement assessment, the AO cannot act arbitrarily for which he is bound by judicial principles and assessment should be guided by rules of justice after taking into account all the materials available as well as gathered by the AO. The ld.AR of the assessee relied on the decision of Hon'ble Jurisdictional High Court in the case of CIT vs K.N. Construction Co. (2015) 371 ITR 325.
2.5 On the other hand, the ld. DR has submitted that the assessee has not produced even the books of account before the AO but only ledger accounts were produced in support of the claim. Therefore, the claim of the assessee could not be verified from any supporting evidence. Hence, the AO has rejected the books of account and made part disallowance of the expenditure due to failure on the part of the assessee to substantiate the claim. He relied on the orders of the authorities below.
2.6 We have considered the rival submissions as well as the relevant materials available on record. Admittedly, the assessee has failed to produce the books of account before the AO. Even the supporting documents like vouchers and bills for the claim of purchase and direct expenses were not produced before the AO to verify the correctness of the claim. Consequently, the AO rejected the books of account of the assessee by invoking the provisions of section 145(3) of the Act. We do not find any error in such decision of the AO in rejecting the books of account. Even the assessee has also not challenged the decision of the AO rejecting the books of account. In case the AO invoked the provisions of Section 145(3) due to the reason that the correct results of business activities of the assessee could not be deduced from the record then the AO ought to have framed the assessment based on best judgement u/s 144 of the Act. The best judgement means that the income of the assessee has to be estimated based on the material available with the AO. The AO instead of estimating the income on the basis of some reasonable and proper criteria being GP or NP has resorted to make disallowance of expenses which is not a permissible course of action under the provisions of section 145(3) of the Act read with section 144 of the Act. It is settled principles of law that after rejection of books of account, the income of the assessee should be based on average GP declared by the assessee in the preceding years or the prevailing GP in the same trade or business. In the case in hand, since it is the first year of reporting the income by the assessee, therefore, the past history of the GP is not available and hence the only option for making the estimation of income of the assessee is to adopt reasonable and proper GP/NP prevailing in the industry. Since the assessee is in the business of real estate and construction, therefore, the provisions of section 44AD of the Act also provides guidance for estimation of income. The decision relied on by the ld.AR of the assessee though rendered in the case of the partnership firm engaged in the business of construction, however, the Hon'ble High Court after taking the note of the NP Rate declared at 5.38% by said firm held that the addition made by the AO was not justified. In the case in hand, the assessee has declared NP at 1.22%, therefore, the decision of Hon'ble Jurisdictional High Court cannot be applied to the facts of the present case. Since the income of the assessee is required to be estimated on some reasonable and proper basis, therefore, in the facts and circumstances of the case, we set aside this issue to the record of the AO for estimation of income by applying a proper and reasonable basis of GP/NP. Needless to say that the assessee be given proper opportunity of hearing before passing the afresh order.
3.1 Ground N. 2 is regarding disallowance of indirect expenses.
3.2 The assessee claimed indirect expenses of Rs.1,38,490/-. The AO has made disallowance of 20% of the said expenses for want of supporting evidence. The ld. CIT(A) has confirmed the disallowance made by the AO on this account.
3.3 Before us, the ld.AR of the assessee submitted that looking at the turnover of the assessee for the year under consideration at Rs. 2,46,39,390/-, the expenditure claimed by the assessee is just 0.56% which is very reasonable for carrying out the day to day operation. Hence, no disallowance of indirect expenses is called for.
3.4 On the other hand, the ld. DR has relied on the orders of the authorities below and submitted that the assessee has failed to discharge its onus to prove the correctness of the claim and further the expenditure claimed by the assessee has been incurred wholly and exclusively for the purpose of business. Since the assessee has failed to produce any supporting evidence, therefore, 20% of the disallowance is justified and reasonable.
3.5 Having considered the rival submissions as well as the relevant materials available on record, we note that the assessee has failed to produce the books of account as well as the supporting bills and vouchers regarding claim of indirect expenses. The AO consequently made the disallowance of 20% of the indirect expenses which was confirmed by the ld. CIT(A). Though there is a failure on the part of the assessee to substantiate its claim, however, once the claim is found to be reasonable and by nature all the expenses itself reveals that the said expenditure was incurred for the purpose of the business of the assessee then the disallowance of 20% without giving any basis is highly arbitrary. Since the issue of best judgement on the basis of estimation of income of the assessee has been set aside to the record of the AO, accordingly this issue is also set aside to the record of the AO to reconsider and decide afresh after giving a proper opportunity of hearing. We may clarify if the income of the assessee is estimated applying GP Rate then only issue of disallowance of indirect expenses arises. On the other hand, if the income of the assessee is estimated on the basis of NP Rate then no question of disallowance of indirect expenses arises.
4.1 Ground No. 3 is regarding addition made u/s 68 of the Act.
4.2 During the course of assessment proceeding, the AO noted that the assessee has taken loan from various persons. The assessee was asked to furnish the confirmation of the loan / cash creditors . The AO also issued notices u/s 133(6) of the Act calling information from the loan creditors.
After considering the details of confirmations received from the loan creditors, the AO noted that there are discrepancies in the loans shown by the assessee in the books of accounts and the confirmations furnished by the loan creditors. So far as the transactions which were not loan/cash credits taken during the year under consideration, the AO has taken no action. However, for the transactions of the loans where there was discrepancies in the amounts of the loans shown in the books and in the confirmation, the AO has made the addition of Rs. 9.00 lacs u/s 68 of the Act.
4.3 On appeal, the ld. CIT(A) confirmed the addition made by the AO.
4.4 Before us, the ld.AR of the assessee has submitted that the AO has made addition of Rs. 9.00 lacs u/s 68 of the Act in respect of 04 loan creditors. The AO has made this addition only due to reason that there was discrepancy in the names against which assessee has shown the loans whereas the confirmation was given by another persons. The ld.AR of the assessee pointed out that though the loan was shown in the name of Shri Prakash Chand Jain of Rs. 3.00 lacs yet the amount was received from Smt. Vidya Devi Jain w/o Shri Prakash Chand Jain. Since the amount was received from the bank account, therefore, there was some discrepancy and mistake in the accounts regarding the correct name of the creditor. He has further contended that similar mistake and discrepancy occurred in the case of other loan creditors who belonged to the same group.
Therefore, the total amount of the loan is not in dispute and only some cross entry occurred in the books regarding the amount and one creditor has been shown against the name of another creditor. The ld.AR further submitted that correctness of the loan taken by the assessee can be verified from the bank statement where this amount has been shown to each loan creditors. He has referred to the bank statement at page 47 of the paper book and submitted that since these cheques were received from the accounts of these parties, therefore, the entries in the books of account is only against one party whereas the confirmation was given by other parties. Accordingly, he has submitted that the transactions can be verified from the bank statement as well as loan creditors. The mere discrepancy in the names of the loan creditor on respective amount due to cross entry cannot be treated as unexplained cash credit.
4.5 On the other hand, the ld. DR has submitted that when the assessee is not clear about the loan creditors then the explanation of the assessee is not satisfactory to accept the claim of loan. He has relied on the orders of the authorities below.
4.6 We have considered the rival submissions as well as relevant materials available on record. The AO after conducting enquiry regarding loan creditors shown in the books of account made the addition u/s 68 of the Act in respect of 04 parties. The names and amounts of 04 parties are as under:-
S.N. Name of the lender Amount 1. Shri Prakash Chand Jain Rs. 3,00,000/- 2. Prakash Chand Shanti Lal Rs. 1,00,000/- HUF 3. Sushil Kumar Jain Rs. 4,00,000/- 4. Sanjay Jain Rs. 1,00,000/- Total Rs. 9,00,000/- Since the assessee has now explained the reasons of discrepancy in recording the transactions in the books of account which could be verified from the bank statement of the assessee as well as loan creditors, therefore, this issue requires a proper verification and examination at the level of the AO. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the AO for conducting a proper verification by taking into consideration the bank statement of the assessee as well as loan creditors for reconciliation of the discrepancy as noted during the assessment proceeding. Needless to say that the assessee be given proper opportunity of hearing before passing afresh order.
5.0 In the result, the appeal of the assessee is allowed for Statistical purposes.
Order pronounced in the open court on 04/07/2019.