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Facts
A search was conducted on the assessee, engaged in selling farm fresh milk, and the case was centralized. The assessee declared a total loss. The AO made an addition on account of unexplained incremental creditors, which was partially deleted by the CIT(A).
Held
The Tribunal held that the CIT(A) made an addition by estimating net profit at 8% of turnover without issuing a notice of enhancement to the assessee, which is a fatal flaw. Therefore, the addition made by the CIT(A) on account of net profit was deleted.
Key Issues
Whether the CIT(A) was justified in estimating net profit without issuing a notice of enhancement to the assessee, and if the addition on account of incremental creditors was valid.
Sections Cited
132, 143(3), 68, 115BBE, 269SS, 271D, 145(3), 251(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: The appeal in AY 2021-22, arises out of the 1. order of the ld. Commissioner of Income Tax (Appeals), Kanpur-4 [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. CIT(A)- IV/KNP/10074/2020-21 dated 27.02.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.09.2022 by the Assessing Officer, DCIT, Central Circle-II, Noida (hereinafter referred to as ‘ld. AO’).
The only effective issue to be decided in this appeal is as to whether 2. the Learned CITA was justified in making a fresh addition on account of net profit at the rate of 8% of turnover in the facts and circumstances of the instant case.
None appeared on behalf of the assessee despite issuance of notice on 3. several occasions. Hence we proceed to dispose of this appeal on hearing the Learned DR and based on materials available on record.
The assessee is engaged in the business of selling farm fresh milk. A 4. search and seizure operation under section 132 of the Act was conducted on 27-11-2020 on the premises of M/s. Shiv Shakti Construction. Various residential and business premises of the firm and its partners and their associates were also covered under the search operation. During the course of search operation, the premises of the assessee were also covered. Accordingly, the case of the assessee along with the group cases was centralized to Central Circle 2, Noida. The assessee electronically filed the return of income for Assessment Year 2021-22 on 31-12-21 declaring total loss of Rs 1,77,869/-.
The Learned AO on perusal of the balance sheet filed by the assessee 5. observed that assessee has shown trade payables / sundry creditors of Rs 25,17,800/-, whereas they were Rs 5,26,289/- in the balance sheet for financial year 2019-20. Accordingly, the assessee was asked to furnish the details of trade payables along with their confirmations and income tax returns in order to prove their identity and credit worthiness. The Learned AO noted that no compliance was made by the assessee in this regard. Even the names and addresses of the creditors were not furnished by the assessee. However, the assessee finally furnished the reply on 29-9-22 furnishing the list of creditors without their addresses and PAN details. Accordingly, the Learned AO proceeded to treat the incremental creditors of Rs 19,91,511/- as unexplained credit under section 68 read with section 115BBE of the Act and made an addition to the total income in the assessment completed under section 143(3) of the Act on 29-9-2022.
The assessee received loan of Rs 90,40,265/- from Shri Chandra Pal.
In this regard, the assessee was asked to furnish the confirmation, ITR and bank statement of the lender. On perusal of the lender account, it was found that the assessee has received cash of Rs 5,00,000/- on 10-10-2020 and Rs 20,00,000/- on 22-1-2021, which was sought to be treated by the Learned AO as violation of provisions of section 269SS of the Act for which proposal for initiation of penalty proceedings under section 271D of the Act was sought to be mooted. The assessment was completed by merely making the addition on account of incremental sundry creditors of Rs 19,91,511/- as stated supra.
Before the Learned CITA, the assessee furnished the ledger accounts 7. of various major creditors for subsequent year i.e. Financial Year 2021-22 relevant to Assessment Year 2022-23 together with the respective bank statements to prove the fact that these major sundry creditors had been duly paid by the assessee in subsequent year. It was pleaded that the Learned AO had not disputed the quantum of work carried out by the assessee. The purchases made by the assessee had been accepted but only the other side of the same transaction i.e. Sundry Creditors was sought to be doubted by the Learned AO. It was pointed out that the year under consideration is the second year of operation of the assessee. The assessee furnished the data in tabular form the details of turnover, purchases, net profit for the year and immediately preceding year as under:-
31s' March, 2020 31st March, 2021 Particulars Turnover (Rs) 25,87,198 1.54,10,905 Net profit / (loss) (Rs) (declared) (5,71,768) (1,77,870) Net profit % (22.10) (1.15) Doubtful purchases - 19,91.511 Net profit (Rs) (if creditors are accepted as (5,71,768) 18,13,641 bogus) Net profit % (22.10) 11.77 The assessee pleaded that the provisions of section 68 of the Act per 8. se could not be made applicable for making addition on account of trade creditors. Reliance in this regard was placed on the decision of the Hon’ble Punjab & Haryana High Court in the case of PCIT vs Kulwinder Singh reported in 99 taxmann.com 449 (P&H HC) and the decision of Hon’ble Allahabad High Court in the case of CIT vs Pancham Dass Jain reported in 205 CTR 444 (All).
The Learned CITA in Para 6.6 of his order observed that the onus of 9. proving the genuineness of purchases is on the assessee and since the same was not done by the assessee, the addition of incremental creditors had been rightly made by the Learned AO. Having observed that, the Learned CITA proceeded to reject the books of accounts of the assessee and the resultant book results under section 145(3) of the Act and proceeded to estimate the net profit at the rate of 8% of turnover. Accordingly, he proposed an addition of Rs. 12,32,872/-. After adjusting the returned loss of Rs. 1,77,869/-, the net profit addition was made by the Learned CITA at Rs. 14,10,741/- ( 12,32,872 + 1,77,869).
The Learned CITA further observed that since the net profit has been estimated at Rs. 14,10,741/- as above, there cannot be any separate addition that could be made on account of incremental sundry creditors of Rs. 19,91,511/- and accordingly, he deleted the said addition of Rs 19,91,511/-.
We find that the addition made on account of trade creditors under 11. section 68 of the Act by the Learned AO in the assessment stood deleted by the Learned CITA, against which the revenue had not preferred any appeal before us. However, during the course of first appellate proceedings, the Learned CITA had proposed a net profit addition at the rate of 8% of Rs. 14,10,741/-. But on perusal of the entire order of the Learned CITA, we find that there is absolutely no whisper about issuance of notice of enhancement in terms of section 251(2) of the Act by the Learned CITA for proposing the addition on account of net profit. Hence the assessee was never given an opportunity for responding to the enhancement notice, which is a statutory notice to be issued to the assessee. Failure of the issuance of the statutory enhancement notice to the assessee would become fatal to the entire addition proposed thereon on account of net profit at the rate of 8% of turnover. Hence, we have no hesitation to hold that the addition made on account of net profit at the rate of 8% in the sum of Rs. 14,10,741/- is to be deleted on this count itself and is accordingly deleted. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed. 12.
Order pronounced in the open court on 04/06/2025.