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Facts
The assessee firm's return was not accepted as books of accounts were rejected under Section 145(3). The Assessing Officer (AO) estimated income at 8% of turnover and made an addition of Rs. 2,11,99,523/- for unexplained sundry creditors. The CIT(A) deleted this addition, leading to an appeal by the revenue.
Held
The Tribunal held that since the income was estimated based on the rejection of books, and the sundry creditors were related to the business for which the estimate was made, no separate addition could be made for them. The addition made by the AO was therefore uncalled for.
Key Issues
Whether the addition for unexplained sundry creditors is sustainable when the business income itself was estimated due to rejection of books. Whether the net profit estimation rate should be consistent with other assessment years.
Sections Cited
144, 145(3), 68, 143(3)
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Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: Ms. MADHUMITA ROY & SHRI NAVEEN CHANDRA
O R D E R
PER Ms. MADHUMITA ROY, JM:
The instant cross-appeals filed by the Revenue and the Assessee are directed against the order passed by the Learned Commissioner of Income-Tax (Appeals), & 2805/Del/2019 M.M. Construction A.Y. 2014-15 Moradabad, dated 25.01.2019 arising out of the Assessment Order dated 16.12.2016 under Section 144 of the Income-Tax Act, 1961 (hereinafter referred to as "the Act") passed by the ITO, Ward -1(1), Moradabad for A.Y. 2014-15. Since, both the appeals relate to the same assessee, these are heard analogously and are being disposed of by this common order.
2 The appeal filed by assessee is time barred by 4 days. The learned AR during the course of hearing has made request for condonation of delay. In view of the application dated 07.05.2024 and the learned DR has not seriously disputed the delay aspect, the delay of 4 days in filing the instant appeal by assessee is, thus, condoned.
3 The Revenue has filed the appeal (ITA No. 2805/Del/2019) with the following grounds:
“1) On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeal), Moradabad erred in deleting the addition of Rs.2,11,99,523/- made by the Assessing Officer on account of unexplained sundry creditors without appreciating the fact that the addition was made because of the failure on the part of the assessee in discharging its primary onus of proving identity and creditworthiness of the suppliers and genuineness of the transactions of sundry creditors shown in the Balance Sheet as on 31.3.2014.
(2) On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeal), Moradabad erred in deleting the addition of Rs.2,11,99,523/- made by the Assessing Officer on account of unexplained sundry creditors and treating it as income covered under business income estimated by AO without appreciating the fact that the addition was made u/s 68 and thus, the case of the assessee was covered as per the ratio laid down by the Allahabad High Court in the case of CIT Vs. M/s G.S.Tiwari and Co. reported in of 2008(357 ITR 651).
(3) On the facts and in the circumstances of the case the order of the Ld. Commissioner of Income Tax(Appeal) Moradabad be set aside and the order of the Assessing Officer be restored.
(4) The appellant may kindly be allowed to add, amend, alter and/or withdraw any or all the above grounds of appeal.”
4 All ground of revenue’s appeal relate to addition of Rs. 2,11,99,523/- on account of unexplained sundry creditors.
5 The brief facts leading to the case are that the assessee firm has filed a return of income on 30.11.2014 declaring total income of Rs. 5,30,190/-. However in absence of verification of books of accounts, bills and vouchers and identity of creditors the return shown by the assessee firm was not accepted by the Learned AO and the books of accounts was rejected by him u/s 145(3) of the Act. Thus, the learned AO proceeded to make assessment u/s 144 of the Act by estimating the income of the assessee being Net Profit at the rate of 8% of total receipts of Rs. 9,53,89,375/- computed at Rs. 76,31,350/-. Ld. AO has further made addition of Rs. 2,11,99,523/- being unverified creditors from rejected books of accounts u/s 68 of the Act and interest income of Rs. 21,63,594/- (Rs. 21,20,573/- being interest income on FDR and Rs. 43,021/- being interest income on Income Tax refund). Thus he assessed the income at Rs. 3,09,94,267/-.
6 Being aggrieved by the said order the assessee preferred appeal before the Learned First Appellate Authority. Appellant though raised ground in context of rejection of books of accounts u/s 145(3) of the Act in appeal memo, however, later on has not pressed the same. Thus, the rejection of books of accounts of assessee firm attains finality as the same has not even been challenged by assessee & 2805/Del/2019 M.M. Construction A.Y. 2014-15 before us. As far as addition of Rs. 2,11,99,523/- on account of unexplained sundry creditors as reflected in rejected books of accounts, Learned First Appellate Authority has deleted the addition. Thus, the instant appeal filed by the Revenue before us. 7 We have heard the rival submissions made by the respective parties and we have also perused the materials available before us including the remand report of the Learned AO, copy of written synopsis and paper book filed by assessee and judicial pronouncements relied upon by both the parties.
8 Undisputed facts between the assessee and the revenue is that the Learned AO has rejected the books of assessee firm by invocation of provisions of section 145(3) of the Act, which attains finality. In the said rejected books of accounts, there was closing balance of sundry creditors at Rs. 2,11,99,523/-. Learned First Appellate Authority has deleted the addition on the basis of judicial precedents relied upon by the assessee and the remand report of the Learned AO, wherein AO has himself accepted that the creditors reflected in the balance sheet are genuine. Relevant portion of the order passed by the Learned First Appellate Authority is reproduced hereunder: “7.3 Remand Report of the AO
Ground No. 3 relates to disallowance of sundry creditors to the tune of Rs. 2,11,99,323/- The sundry creditors were disallowed and added back to the income of the assessee by the Assessing officer for the reason that the assessee did not explain the identity and creditworthiness of the depositors and genuineness of the transactions during the assessment proceedings. The burden to prove identity, creditworthiness and genuineness of transactions lies with the assessee as the assessee failed to do so, therefore, it was rightly disallowed and added to his income. The case laws mentioned by the AR to the assessee are irrelevant.
The AO further submitted as under through second remand report.
“The assessee gave reply in respect of sundry creditors. In its reply it stated that sundry creditors at Rs. 1,47,03,737/- pertains to preceding year, i.e. opening balance as on 31.03.2013, and sundry creditors of Rs. 64,90,524/- pertains to the year under consideration. It means sundry creditors amounting to RS.64,90,524/- were the sundry creditors from whom purchases were made during the year under consideration. List of such creditors was furnished by assessee alongwith their copy of ledgeraccount. The list perused and found tallied with the ledger accounts of the persons(sundry creditors) submitted by the assessee. He was also asked to produced the Bills and vouchers relating to sundry creditors. In compliance, he produced copies of some vouchers of payments made to creditors during the year under consideration. He also submitted ledger account of some of the creditors wherein payments were made in subsequent year i.e. A.Y.2015-16. However, the complete details such as complete postal address etc. were not submitted by the assessee stating that most of the creditors were unregistered dealers/boogiwalas/tractor-trolleywalas who did petty work for short period, therefore, their complete addresses were not kept. However, the creditors reflection in the balance sheet are genuine. The reply considered but not fully acceptable.
Findings & Decision:
7.4.1 The AO made the addition on account of unexplained sundry creditors relying on the decision of Allahabad High Court in the case of G.S. Tiwari & Co. (Supra). The Hon'ble Court in that case has held as under:
"Where unexplained sundry creditors are not referable to business income of assessee, which was estimated, then AO is not precluded from treating the unexplained sundry creditors as income from other sources such as salary, securities or any other income from business, the source of which was not disclosed by assessee. Assessee should prove that sundry
7.4.2 Hon'ble High Court of Allahabad has in another case of Banwari Lal BanshiDhar (229 ITR 229) (1998) has laid down that when G.P. rate is applied, that takes care of everything and there is no need of any further addition.
7.4.3 Hon'ble Supreme Court in the case of Devi Prasad VishwaNath Prasad (1969)(72 ITR 194) held as under:
"When there is unexplained cash credit, and income is finalized by AO on estimation basis, it is open for ITO to hold that it is income of the assessee. No further burden lies on the ITO to show that the income is from a particularsource. It is for the assessee to prove that even if cash credit represents income, it is income from a source, which has already being taxed.
7.4.4 All the above decisions lay down only one principle. If the income has been finalized on the basis of estimation, then no further addition can be made with respect to any income which has already been estimated by the AO. However, any other income which has not been determined on estimated basis can be taxed by the AO over and above the estimated income. Therefore, if the estimate has been made and sundry creditors are also pertaining to the same trade whose estimate has been made, then no further addition can be made on those sundry creditors. However, if the source of sundry creditor is different from the source which has been estimated by the AO, then such sundry creditor may be taxed by the AO. However, the onus lies upon the assessee to prove that such sundry creditors related to a source, which was already determined through estimate by the AO.
7.4.5 In the instant case, the appellant has brought before the knowledge of the AO that the creditors are trade creditors from whom purchases are made from business. While submitting the remand report, vide letter dated 24.07.2017, the AO has also mentioned that the creditors reflected in the balance sheet are genuine. The AO has not made out an issue that the creditors are not related to the main & 2805/Del/2019 M.M. Construction A.Y. 2014-15 business of the appellant. Therefore, in view of the principle discussed above, I hold that the addition made on account of sundry creditors after determining the income on estimate basis is uncalled for. Therefore, the addition made on this account of Rs. 2,11,99,523/- is deleted. Appellant gets full relief on this ground.”
9 Having regard to the finding of learned First Appellate Authority and the remand report by the learned AO wherein he himself accepted that the creditors reflected in the balance sheet are genuine, we found that the decision of the Learned First Appellate Authority is just and proper so as not to warrant interference. Once it is an admitted position that the sundry creditors for sum of Rs. 64,90,524/- which has been increased during the year under consideration in the opening balance of sundry creditors of Rs. 1,47,03,737/- was on account of purchases made by assessee during the year under consideration and income from business has been computed at estimated basis after rejection of books of accounts, then separate addition on account of sundry creditors is rightly deleted by the Learned First Appellate Authority. In the result grounds raised by revenue are dismissed.
10 Though the assessee has raised numbers of grounds of appeal in instant appeal, however, has not pressed these grounds of appeal except ground No.
2. Therefore, other grounds of appeal are dismissed.
11. Thus, only ground in respect of assessee’s appeal is in respect of estimation of net profit at the rate of 8% of turnover instead of 3.5% as accepted by the revenue in preceding and succeeding assessment years.
& 2805/Del/2019 M.M. Construction A.Y. 2014-15 12 Learned AR during the course of hearing has submitted that the net profit for the year under consideration to be estimated at the rate of 3.5% instead of 8% of turnover as computed by the learned AO. In support of his contention he relies upon the judgment of Hon’ble Allahabad High Court in the case of CIT vs. Sahu Construction (P) Ltd., reported in 362 ITR 609 (All). The Learned AR further submitted that in the immediately preceding assessment year i.e. 2013-14, the Learned Commissioner of Income Tax (Appeal) has restricted the estimation of net profit at the rate of 3.5% as against 8% of turnover made by the Learned AO. It has also been submitted that even the Learned AO in succeeding assessment year i.e. 2015-16 in order of assessment dated 16.06.2017 u/s 143(3) of the Act, in identical circumstances has estimated the net profit at the rate of 3.5% of turnover. A copy of order of the assessment order for assessment year 2015-16 and copy of order of First Appellate Authority for assessment year 2013-14 are placed on record. Thus, he made submissions that the net profit for the year under consideration should be estimated at 3.5% of turnover as was in preceding and succeeding assessment year.
13 On the contrary, the Learned DR relies upon the order of lower authorities, however, could not rebut the submission of learned AR.
14 We have considered the rival submissions of respective parties and materials placed on record. Further we have also perused the order of assessment for immediate succeeding assessment year 2015-16 and the order of the First Appellate Authority for immediate preceding assessment year 2013-14 in the case of assessee. In the aforesaid factual background, where learned Assessing Officer in immediate succeeding assessment year, has himself estimated the net profit of the appellant at the rate of 3.5% of turnover. Likewise in preceding assessment & 2805/Del/2019 M.M. Construction A.Y. 2014-15 year the Learned Commissioner of Income Tax (Appeal) has restricted the estimation of net profit at the rate of 3.5% of the turnover by relying upon the judgment of Hon’ble Allahabad High Court in the case of CIT vs. Sahu Construction (P) Ltd. reported in 362 ITR 609 (All). We found no basis to deviate from that result in the year under consideration, thus we direct the Learned AO to restrict the net profit at the rate of 3.5% of the turnover. In the result only ground pressed by the assessee is allowed.