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Facts
The assessee company, engaged in steel fabrication, was selected for scrutiny for AY 2013-14. The Assessing Officer (AO) made additions for share capital and unsecured loans under Section 68 of the Income Tax Act and also rejected the books of account, estimating profit. The CIT(A) granted partial relief.
Held
The Tribunal held that the rejection of books of account by the AO was improper. Consequently, the estimation of income based on rejected books was also not sustainable. Additions made under Section 68 for share capital and unsecured loans were also directed to be deleted.
Key Issues
1. Whether additions under Section 68 for share application money and unsecured loans were justified. 2. Whether the rejection of books of account and subsequent estimation of income was valid.
Sections Cited
68, 145(3), 143(2), 131, 133(6)
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Income Tax Appellate Tribunal, DELHI BENCH, ‘F’: NEW DELHI
Before: MS. MADHUMITA ROY & SHRI KHETTRA MOHAN ROY
ORDER PER KHETTRA MOHAN ROY, AM
These are cross appeals filed by the assessee as well as by the Revenue, against the order of the Ld. Commissioner of Income Tax (Appeals), Meerut, dated 18.01.2018 pertaining to Assessment Year 2013-14. Since, the issues are common and connected, hence, the appeals were heard together and are being consolidated and disposed of by this common order.
The assessee has raised following grounds of appeal:-
1. That the ld. CIT(A) has erred in law as well as on the facts of the case by confirming the addition of Rs.3,00,000/- u/s 68 of the Income Tax Act, 1961 holding the receipt of share application/allotment money from Mr. Pranav Rajeev as unexplained and the findings & observations made by the authorities below are unlawful and the material on record has not been considered in right perspective thereof.
2. That the ld. CIT(A) has erred in law as well as on the facts of the case by confirming the addition of Rs.3,00,000/- u/s 68 of the Income Tax Act, 1961, treating the part amount of unsecured loan of Rs.3,00,000/-, out of total loan of Rs. 12,00,000/- borrowed from Manu Rishi HUF, as unexplained and the action of the ld. CIT(A) is illegal and is based upon incomplete appreciation of facts on record. 3. a) That the ld. CIT(A) has erred in law as well as on the facts of the case by confirming and upholding the action of the Id. A.O. to reject the books of account of the appellant by invoking the provisions of section 145(3) of the Income Tax Act, 1961 and the action of the authorities below to invoke the provisions of section 145(3) is illegal & unwarranted. b) That the ld. CIT(A) has erred in law as well as on the facts by confirming G.P. addition to the extent of Rs.67,54,705/- by applying the G.P. rate of the appellant for A. Y.2010-11 of 11.14% to the year under reference and the various observations made are untenable in law and are based on hypothecations & assumptions and the explanations of the appellant and the supporting evidences produced in support of book results have not been considered in right perspective thereof.
The Revenue has raised following grounds of appeal:-
1. Whether in the facts and circumstances of the case, the ld. Commissioner of Income Tax (Appeals) has erred in law and fact in accepting the submissions of the assessee on the issue of addition on a/e of unexplained share application money and unsecured loans without giving opportunity of being heard to the A.O. or without calling for a remand report? 2. Whether in the facts and circumstances of the case, the ld. Commissioner of Income Tax (Appeals) has erred in law and fact in deleting the addition of Rs. 47,00,000/- out of total addition of Rs. 50,00,000/- made on account of unexplained share application money, by relying on the submission of the assessee and by ignoring the findings of the AO that the assessee failed to furnish satisfactory explanation regarding source of share capital before him? 3. Whether in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) has erred in law and fact in deleting the addition of Rs. 57,15,406/- out of total addition of Rs. 60,15,406/- made on account of unexplained unsecured loans, by relying on the submissions of the assessee and by ignoring the findings of the AO that the assessee failed to furnish satisfactory explanation regarding the genuineness of transaction and creditworthiness of the lenders before him? 4. Whether in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) has erred in law and fact in deleting the addition of Rs. 3,04,37,349/- out of total addition of Rs. 3,71,92,054/- made on account of estimation of net profit @ 2.12@ and other income of Rs. 3,54,00,871/- by ignoring his own decision regarding upholding the rejection of the books of account by the AO? 5. Whether in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) has erred in law and fact in estimating the gross profit even on other income of Rs. 3,54,00,871/- which was to be added over and above the gross profit estimated by him as no expenses were incurred during the year against this income and also no submissions were made by the assessee in this regard even in appellate proceedings? 6. That in the facts and circumstances of the case, the order of the Id. Commissioner of Income Tax(A), Meerut may be set aside and that of the AO be restored.
Brief facts of the case are that the appellant company is engaged in the business of steel fabrication work, manufacturing of vessel pressure tanks, metal crash barriers, steel structures as per drawings and execution of works contracts. The appellant company filed its return showing income of Rs.25,80,360/ on 30.09.2013.
During the year under consideration, the appellant raised share capital of Rs.50 Lacs from five share applicants. The Appellant also raised unsecured loans of Rs.60,15,406 from eight unsecured creditors. The case was selected for scrutiny and accordingly notice u/s 143(2) of the Income Tax Act, 1961 (‘Act’) dated 02.09.2014 was issued. Vide Order dated 31.03.2016 the Assistant Commissioner of Income Tax, Circle 2, Meerut (‘Ld. AO’) after examining the books and records of the Appellant made the following findings and additions to the total income of the Appellant: The Ld. AO issued summons u/s 131 of the Act to the share subscribers and also asked the Appellant to file complete details of share application money which was complied with by the Appellant. However, despite the necessary evidence placed on record, the Ld. AO proceeded to add the entire amount of share application money i.e. Rs. 50 Lacs to the income of the Appellant u/s 68 of the Act, citing the reason that the Appellant failed to provide any satisfactory explanation and also failed to produce the share applicants for verification and made addition of Rs.50,00,000/- on account of share capital u/s 68 of the Act:
4.1. The Ld. AO issued notice u/s 133(6) of the Act to the creditors and also asked the Appellant to file complete details and documents of unsecured loans which was complied with by the Appellant.
However, despite the necessary evidence placed on record, the Ld. AO proceeded to add the entire amount of unsecured loan i.e. Rs. 60.15 Lacs to the income of the Appellant u/s 68 of the Act, citing the reason that the Appellant failed to provide any satisfactory documents in support of creditworthiness and genuineness of the transaction and made Addition of Rs.60,15,000 on account of unsecured loans u/s 68 of the Act.
4.2. Further, Ld. AO rejected the books of accounts of the Appellant on various grounds which are as under:
- Two Different balance sheets were filed with two 3 different sundry creditors making the books of accounts defective and rejectable. [RE: Page 10-13 of AO’s Order] - There was deficiency and incorrectness in the valuation of closing stock of finished goods. [RE: Page 2 of AO’s Order] - Books are not correct and have material discrepancies and therefore the profit from the business to be estimated rejecting the books of accounts by invoking the provisions of section 145(3) of the Act. [RE: Page 13 of AO’s Order] 4.3. The Ld. AO, after rejection of the books of accounts, calculated the average Net Profit rate for the past three years i.e. AYs 2010-11 to 2012-13 and arrived at an average Net Profit rate of 2.12%. He thereafter applied this rate at the sales of the current year amounting to 20.62 crores and arrived at the Net Profit of Rs. 43.71 lakhs (20.62 X 2.12%). Apart from the above, the Ld. AO also added an amount of Rs.3.54 crores on account of amount received as arbitration award of years 1999-2000 and 2000-2001 as ‘other income’ thereby resulting in an addition of Rs. 3.97 crores to the total income of the Appellant.
Aggrieved with the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) has given part relief. The relevant extract of the order of the Ld. CIT(A) ground wise is reproduced as under:-
I. Addition on account of share capital u/s 68 of the Act: The Ld. CIT(A), upheld the upward adjustment made by the Ld. AO to the tune of Rs. 3,00,000 citing the reason that the availability of cash amounting to Rs. 3,00,000 is not established in the case of Mr. Pranav Rajeev thereby treating his investment amounting to Rs. 300,000 unexplained. The rest of the addition amounting to Rs. 47,00,000 was deleted by the Ld. CIT(A). [RE: Page 19 of CIT(A) Order]
II. Addition on account of unsecured loans u/s 68 of the Act: The Ld. CIT(A) held that the appellant had discharged the primary onus cast upon it to prove the source of unsecured loans. With regard to amount of Rs. 300,000 from Manu Rishi HUF, the CIT(A) held that creditworthiness of the depositor to the extent of Rs. 300,000 deposited by him in cash on 15.07.2012 is not established and therefore, the Ld. CIT(A) upheld the addition of Rs. 300,000 and granted relief of Rs. 57,15,406.[RE: Page 20-21 of CIT(A) Order]
III. Rejection of Books of Accounts: The Ld. CIT(A) held that the Appellant had not substantiated its submission for producing 2 balance sheets and two different lists of sundry creditors. Therefore, he rejected the books of accounts of the Appellant. [RE: Page 24 of CIT(A) Order].
IV. The Ld. CIT(A) negated the working of the Ld. AO and upheld the use of GP rate analysis and applied an ad hoc GP rate of 11.4% declared by the Appellant during AY 2010-11 on the total sale of Rs. 20.62 crores thereby resulting in gross profit of 2.29 crores and reduced an amount of 1.62 crores (i.e. the GP declared by the Appellant) which resulted in an addition of Rs. 67,54,705 lakhs. [RE: Page 26-27 of CIT(A) Order].
Aggrieved with the order of the ld. CIT(A), the assessee is in appeal before us.
Both parties relied on the portion of the order ie. favourable to them and submitted that their respective cases may be allowed.
We have heard the rival submissions and perused the materials available on record. We take up the matter issue wise.
Share Capital (i) Share capital of Rs.50 Lakhs added by the AO. The Ld. CIT(A) has already given relief of Rs.47 lakhs based upon the documentary evidence. We do not find any infirmity in the same as the ld. CIT(A) has passed a watertight order and need not be tinkered with. Mere deposit of cash because funds were transferred to company may be suspicious but link nexus with the unaccounted income of the investee has to be established.
(ii) Only addition sustained in respect of Mr. Pranav Rajeev of Rs.3 lakhs is not sustainable because the very fact of the cash deposit is borne out from the cash flow submitted on record. Further, there is no enquiry by the AO to link it with the company. Moreover, the identity, creditworthiness and genuineness of the transaction have been established by the appellant beyond doubt. The assessee placed reliance on following judicial precedents:-
I. Commissioner of Income Tax vs Lovely Export (P.) Ltd.(MANU/SC /8539/2008) II. CIT vs AKJ Granites Pvt. Ltd. 212 CTR 25 III. CIT vs Dolphin Canpak Ltd. 283 ITR 119 (Del.) IV. ACIT vs Lesh Industries Ltd. (18.04.2023 ITAT Ahmadabad) 9. Since, the assessee has established the identity, genuineness of the transaction and creditworthiness of the Creditors/share holders, we direct the addition of Rs.3 lakhs so sustained by the Ld. CIT(A) is required to be deleted.
Unsecured loan (iii) Here also, the addition of Rs.3 lakhs from Manu Rishi HUF has been sustained by the Ld. CIT(A). As already held above, the deposit of cash has not been linked with the company. Moreover, the AO did not make any enquiry whatsoever regarding the source of cash with the lender. Accordingly, the addition of Rs.3 lakhs is also directed to be deleted. Particularly, in view of the fact that the ld. CIT(A) has given relief of Rs.9 lakch out of Rs.12 lakhs given as loan. We further hold that once when books of accounts are rejected no separate addition u/s 68 is possible.
Rejection of books of accounts (iv) Under section 145 sub-section(3) of the Act, where the AO is not satisfied with the correctness and completeness of the accounts of the assessee or the method of accounting has not been regularly followed by the assessee or income has not been computed in accordance with notified standards, the Assessing Officer may reject the books of accounts and continue to pass a best judgment assessment. In this case, the Ld. CIT(A) has noted that the list of sundry creditors has filed later on though could not be faulted by the Assessing Officer but the same cast shadow of doubt on the accuracy of the books of accounts maintained by the appellant. The appellant has explained that there was a data corruption in tally software by subsequently it got corrected and the correct financial statements were subjected to verification and examination, the books of accounts was subject to regular audit. No flimsy explanation can be made to challenge the correctness and completeness of the accounts. Accordingly, we hold that the rejection of books of account is improper and non-est in the eyes of law. Once a rejection of books of accounts is demolished, these cannot be an application of estimation of income as a natural corollary. We do not countenance the methodology adopted by the ld. CIT(A), which is completely at tangent with the route adopted by the ld. Assessing Officer. Be it as my, the estimation is nebulous and bereft of any rhymes or reasons. In view of the contentions considered above, the appeal of the Department is dismissed, on the other hand the appeal of the assessee is allowed and the Assessing Officer is directed to accept the returned memo.
To sum up, we direct the deletion of Rs.3 lakhs u/s 68 towards share application money as well as Rs.3 lakhs u/s 68 towards unsecured loan and ad-hoc G.P. addition of Rs.67,54,705/-.
In the result, the Departmental appeal is dismissed and the assessee’s appeal is allowed.
Order pronounced in the open court on 30th May, 2025.