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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU
PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:
This appeal filed by the assessee are against the order of CIT(A)-9, Bengaluru dated 28.02.2020 for the assessment year 2018-19.
The brief facts of the case are that the assessee filed return of income on 31/10/2005 declaring an income of
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Page 2 of 34 Rs.40,642/-. The assessee was engaged in the business of gold and diamond jewellery. A survey u/s 133A was conducted u/s 133A of the Act on 21/04/2005. During the course of survey, inventory of stock of gold and diamond jewellery was prepared and found a lot of discrepancies, huge difference was also found in the cash balances to which the assessee failed to explain even during the post survey also. A lot of documents like purchases and sales vouchers and loose papers, stock register and other documents were impounded during the course of survey which indicates lot of incriminating details against the assessee. The case was selected for compulsory scrutiny and notice u/s 143(2) was issued and other statutory notices were issued to the assessee. The assessee was asked to file details for justifying the discrepancies found during the course of survey and other questions were also raised by a notice u/s 142(1) of the Act dated 26.05.2006. It was also asked to the assessee that the loose sheets found were also recorded in the books of accounts or not and further asked to the asseseee as to why books of accounts may not be rejected u/s 145(3) of the I. T. Act. and then profit may not be estimated by applying on certain percentage of the turnover. Against these questionnaire the assessee fled reply dated 12.06.2006 and 18.07.2006 and finally on 19.06.2006 which was considered by the AO. In regard to discrepancies found during the course of survey the submitted that it will fall in the next year because the survey was conducted on 21.04.2005
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Page 3 of 34 3. The AO has accepted the contention that the discrepancies in the stock of gold and diamond and cash will be examined in the assessment year 2006-07 for which the proceedings u/s 143(2) have already been initiated. Further the AO after examining the loose sheets observed that some of the transactions which were for the impugned financial year. The loose sheets were marked as under:- loose sheets numbered From 1 to 82 marked as L1, ------do------- From 1 to 21 marked as L2, ------do------- From1 to 25 marked as L3 ------do------- From 1 to 15 marked as L5 -------do------ From 1 to 118 marked as LP4
During the course of assessment proceedings ,the above documents were examined and assessee was asked to explain the same against which assessee submitted replied vide letter dated 19/09/2006 that these papers were only working papers and were not relatable to any particular transactions of sale or purchase. The AO was not satisfied from the submissions of the assessee and after examining the details he observed that the assessee has not recorded the entire sale of diamond jewellery for the period from 1/4/2005 to 21/04/2005 as on the date of survey which is running over Rs. 5 lakhs. Further on examination of the loose sheets, he observed that huge discrepancies were noted by the AO in the stock of gold/diamond and cash which indicate that there were unaccounted trading activities were coming in the assessee’s
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Page 4 of 34 business. There was discrepancies noted on purchase of jewellery also, because as on the date of survey a lot of unaccounted stock was detected and in this regard, the assessee explained that some of the jewellery lying in two particular bags came from two different jewellers and was to be purchased by him and this is only a stand taken by the assessee. After analyzing the details, the loose sheets found and the proper entry were not made upto the date of survey. The AO observed that the assessee’s books of accounts did not reflect the complete state of affairs and therefore liable to be rejected u/s 145(3) of the Act for determining net profit on the business transactions. The turnover recorded in the books of account were Rs.4,64,79,756/- and net profit was shown at Rs.18,49,242/- which works to about 3.9% net profit rate. The AO after analyzing all the loose documents, estimated the turnover of the assessee at Rs.6.00/- crore which results in increase of Rs.1.36 crore in the turnover then disclosed by the assesese and observed that it appears to be reasonable under the given circumstances. He further observed that the assesee has himself shown the net profit @9.6% in the return filed for the assessment year 2006-07, therefore, he also applied 9.6% net profit on the turnover on estimated turnover of Rs.6.00/- crore which came out to Rs.57,60,000/- and accordingly the difference was added into the total income of the assessee for Rs.39,10,758/-.
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Page 5 of 34 5. The AO further observed that the assessee has debited interest and financial charges of Rs.39,54,938/- and has raised unsecured loan amount of Rs.4,37,94,766/-. It was also observed that the assessee has given interest free loan to close relatives and sister concern to which no interest has been charged as per the balance sheet schedule Q. It was noticed that Rs.1,74,64,404/- were given as interest free loan, this fact is confronted to the assessee and her explanation was sought and assessee was unable to give satisfactory explanation, therefore, the proportionate interest was disallowed which works out as under:- Rs.39,56,938 X 1,74,67,404/- ---------------------------------------- Rs.4,37,94,766/- 6. As per the above proportionate calculation of interest amount of Rs.15,75,158/- was disallowed and added back in the hands of the assessee. On scrutiny of accounts, he further observed that the assessee has claimed of Rs.4,17,006/- as business promotion expenses and the details were asked for from the assessee against which the assessee submitted that it was incurred towards gift articles, payments to Bishop cotton school and road campaign etc. considering the nature of explanation, it was noted by the AO that it hardly linked with the business of the assessee, therefore, 25% from the total expenditure were disallowed which works out to Rs.1,04,252/-. He further noted that there was debit of Rs.3,20,000/- under the head "consultancy" in the profit & loss account . The details were asked for regarding payments but the assessee could not give convenience reply, accordingly
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Page 6 of 34 considering the details a sum of Rs.2,75,000/- were disallowed under the head ‘consultancy expenditure’.
He further noted that assessee has written off bad debts amounting to Rs.29,437/-. The details were asked for from the assessee for justification as to bad debts actually become bad but assessee failed to give reply. Accordingly the entirebad debts expenditure were added back in the hands of the assessee. He further noted that the assessee claimed Rs.43,595/- has holiday allowances and Rs.34,836/- as staff welfare. On examination of the ledger extract, it was noted that the entire payment was made in cash and no supporting documents are forthcoming for verification. Accordingly 50% of the expenses were disallowed and resulting Rs.39,215/- is added back in the hands of the assessee.
The AO noted from the balance sheet that there is unsecured loan of Rs. 4,37,94,766/- from the schedule attached to the balance sheet , major portion of unsecured loan was fixed deposits amounting to Rs.3,96,58,851/- As per questionnaire dated 26/05/2006. The assessee was asked to produce the confirmation form each one of the unsecured loan and later on the assessee was asked to submit confirmations from whose balance is more than Rs. 1,00,000/-. Further from the questionnaire dated 19/06/2006, the assessee was reminded that no details of deposits have been furnished and she was asked to do on the next date of hearing. In
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Page 7 of 34 response, the assessee filed reply vide letter dated 18/07/2006, which is as under:-
"1.1) Out of the total unsecured loans of Ps. 43795 lacs, Rs. 396.59 lacs are fixed deposits from over 700 individual depositors. Since it is difficult to obtain confirmations from all such parties and hence you may let us know the names of a few large parties from whom we can obtain confirmations.”
Accordingly the AO completed the assessment as under:-
Aggrieved from the above order, the assessee filed appeal before the CIT(A). The details were filed and remand report was also called from the Assessing Officer(AO) by the CIT(A). After considering the details, the CIT(A) upheld/dismissed which is as under:- Disallowance of business framed - confirmed Bad debts written off - confirmed Staff welfare expenses - confirmed
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Page 8 of 34 Disallowance of interest paid - confirmed Addition on account of NP rate - confirmed
On account of addition on cash credit, he partly allowed the appeal of the assessee by holding as under:- “48 . The nest ground of appeal pertains to disallowance of unexplained credits amounting to Rs. 2,67,91,512/-. —The appellant has contended that the disallowance is not justified and the AO was free to invoke 133(6) to get verification from parties from whom the loans had been obtained and the appellant may not be burdened with the addition of unexplained credits. I have examined the submissions of the appellant in this regard. The assessment order and the remand report are also examined.
From the records it is seen that the appellant has received fixed deposits from various parties amounting to Rs.3,96,58,581/-. However, the appellant could produce confirmations from various parties amounting to Rs. 1,28,67,339/-. The same was allowed by the AU. However, the AU disallowed Rs. 2,67,91,512/- as no confirmations have been produced before the AU during assessment stage. the remand report however, the AU has further confirmed that the appellant could produce further confirmations amounting to Rs.65,232/- For the remaining amount of Rs. 2,03,26,280/- the AU in his remand report submitted that the appellant brought approximately 700 certificates. On random checking only 1 or 2 out of every 30 certificates were found genuine. Thus, it is difficult to establish the correctness of the claim made by the appellant. Therefore, the AU submitted that the appellant could not establish his claim. 50. I have examined the submissions made by the appellant also. The appellant argues that the AU could have obtained confirmations by conducting enquiries u/s 133(6). 1 find that wherever there are unsecured loans obtained by the assessees, it is a settled proposition that the assessee has to provide for confirmations and establish the genuineness, identity and creditworthiness of the creditors failing which
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Page 9 of 34 the additions have to be made u/s 68. The AG is 1nder no obligation to use his powers u/s 133(6) to obtain all the confirmations. Further since the number of parties from which the loans were obtained is almost 700, it is practically not even possible for A0 to obtain information from them individually. 51. During appellate proceedings also, the appellant could not establish these loans and hence the addition has to be sustained. However, since the AO in his remand report submitted that during remand stage the appellant could produce confirmations of additional amount of Rs. 64,65,232/-, the addition to this extent is deleted. Hence, the disallowance is limited to Rs. 2,03,26,280/-. Hence, this ground is partly allowed.”
Accordingly he partly allowed the appeal of the assessee.
Aggrieved from the order of the CIT(A), the assessee filed appeal before the ITAT.
The ld.AR reiterated the submission made before the lower authorities and relied on the entire submissions before the lower authorities. He also filed written synopsis dated 07/09/2022 and 26/09/2022 which are as under:-
“The appellant has raised grounds on the legal issues and on the merits of the matter in the appeal before your Honours in ITA No. 398/Bang/2020. The Authorized representative upon instructions from the appellant, during the course of submissions has submitted before your honours, that the estimate if on an average was restricted to 5% of gross turnover reported, the remaining grounds on the merits of the matter would be rendered academic considering the grounds raised without prejudice to the grounds on merit, which are reproduced below.
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Page 10 of 34 4 (iv): Without further prejudice, no additions under section 68 could have been made, when the income of the appellant was estimated, on the facts and circumstances of the case. 5. The learned CIT(A)failed to appreciate that that the advances made were in the normal course of business and hence the interest incurred of Rs. 15,75,1581- was allowable as a business expenditure, on the facts and circumstances of the case. (page - 95-99 - for AY 2006-07, ITA No.67/Bang/2012 dated 28.10.2015) 6 (v): Without prejudice, no disallowance of business expenditure could have been made, when the income of the appellant was estimated, on the facts and circumstances of the case. The assessee has placed reliance upon the decision of the Jurisdictional High Court in the case of Commissioner of Income-tax, Belgaum v. Bahubali Neminath Muttin [2016] 388 ITR 608 (Karnataka) (page - 339-344), wherein the Honorable court held; ii. Alternatively, and without prejudice to the preliminary objections raised above, he would submit that, on merits it should be noted that admittedly the books of accounts of the respondent have been rejected by the assessing authority. The profit of the respondent is estimated as provided under Section 145 () of the I.T. Act. When the gross profit rate is applied, it would cover any infirmity and there was no need for the Assessing Officer to make a scrutiny of the amounts incurred on the purchases by the respondent. In any event, the revenue would not be in a position to rely on the rejected books of account for making the additions on account of trade creditors and also for the purpose of arriving at a closing stock. This is the view taken by at least four High Courts in thefollowing reported judgments: 1. Indwell Constructions v. CIT [1998] 232 ITR 776 (AP) @ 778, 779 2. CIT v. Banwari Lal Banshidhar [1998] 229 ITR 229 (All.) @ 232 3. CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246/2006] 156 Taxman 40 (Punj. & Har.) @ 249 4. CIT v. Amman Steel & Allied Industries [2015] 377 ITR 568 (Mad.) @ 580
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Page 11 of 34 15. The principle that if a finding offact is not challenged as being perverse, the High Court is bound to accept such finding. Therefore, as no such substantial question of law has been framed and the questions pertain to findings offact, which cannot be said to be perverse as it is evident that the books of accounts of the respondent had been rejected by the assessing authority, in which case the same books of accounts could not be relied upon in an addition on account of trade creditors and also for arriving at the closing stock. This is an established principle as has been held in the decisions relied upon by the respondent namely Indwell Constructions case ('supra), Banwari Lal Banshidhars case (supra), Aggarwal Engg. Co.'s case (supra) and Amman Steel & Allied Industries case (supra). It is prayed that your honours hold that no additions of the creditors or disallowance was warranted by relying upon the books of account, which was rejected. It is prayed accordingly. The Honorable bench during the course of hearing queried the applicability of the decision in the case of Basir Ahmed Sisodia v. Income Tax Officer [2020] 424 ITR 1(SC)[24-04-2020]. A copy of the order is attached for your honours perusal. The appellant has made submissions that the said case was rendered in the context of deletion of additions made under section 68, by placing reliance upon the findings of the CIT(A), who had deleted penalty on the merits of the matter and when the penalty was deleted on appreciation of evidence on merits, the same treatment was required to be adopted to the additions made under section 68 of the act and the additions were deleted. The honorable Supreme Court has not rendered a finding on the contention that the books of accounts when rejected shall not be relied upon by the revenue, to make additions or disallowance and the revenue has not brought on any decision of any High court to the contrary before the honorable Supreme court. The relevant arguments are reproduced below”- The appellant/assessee in the present civil appeal has reiterated the argument that the Officer, having made the addition under Section 144 of the 1961 Act being "best judgment assessment", had invoked powers under sub-Section () of Section 145. For, assessment under Section 144 is done only if the books are rejected. In that case, the same books cannot be relied upon to impose subsequent additions, as has been done in this case
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Page 12 of 34 under Section 68 of the 1961 Act. The appellant/assessee adopted a three-pronged plea in support of the above contention; First, that assessment order refers to Section 145(2) of the 1961 Act. It should have mentioned Section 145(3) of the 1961 Act. For that, the appellant/assessee relies on the amendment of the 1961 Act which came into effect from 1.4.1997. It is urged that Section 145(2) prior to 1.4.1997 (pre- amendment) is akin to Section 145(3) post 1.4-1997 (post- amendment). It is thus urged that the Department committed error in mentioning Section 145(2) and not Section 145(3); Second, that the assessment order in reference to the first addition has incorrectly mentioned the term "not". According to the appellant/assessee, the prefix of the paragraph and the language used, makes it abundantly clear that the Department had relied upon Section 145(3) of the 1961 Act to impose the addition. The appellant/assessee has also placed reliance on the Hindi version of the assessment order to buttress this submission; Third, that the assessment was made under Section 144 as the same refers to Section 145(3). Under Section 144, the Officer has to make "best judgment assessment". The appellant/assessee urges that the purport of the stated provision is that the Officer re-assesses the entire accounts and makes the assessment of total income and thereafter computes the income tax liability. Resultantly, the Officer (after rejecting the books of account) cannot then rely on the same books of account to make any subsequent addition(s). The appellant/assessee also argues that the approach adopted by the Officer would have the effect of taxing the same transaction twice. S. To buttress the aforesaid contentions, reliance is placed on Maddi Sudarsanani Oil Mills v. CIT [1959] 371TR 369 (AP); CIT v. Aggarwal Engg. Co. (Jal.) [2006]156 Taxman 40/[2008] 302 ITR 246 (Punj. & Har.)and CIT v. G.K. Contractors [ITAppeal No. 13 of 2009, dated 28-1-20097. The revenue in reply has made the following arguments; 9. Per contra, the respondent urged that the assumption of the appellant/assessee that the assessment order had rejected the books of accounts under Section 145(3) of the 1961 Act is preposterous. In that, the assessment in question came to be made under Section 143(3) of the 1961 Act. Thus, the Officer was justified in relying upon the said books for making
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Page 13 of 34 addition's). The respondent would also urge that while imposing the first addition, the assessment order does not reject the books of accounts, but only that part which pertained to assessing the gross profit, as the assessee had not maintained day to day stock registers, nor had produced or maintained other necessary vouchers while determining the gross profits. Additionally, the respondent would also urge that the amount mentioned under "Credits" in the Balance Sheet is incorrect and qualifies as "Cash Credits" under Section 68 of the 1961 Act, as stated in the assessment order. Indisputably, the Officer gave several opportunities to the appellant/assessee to prove the authenticitp of the entries in question. As a matter of fact, summon notices were issued to the named fifteen creditors, but no evidence/explanation was forthcoming. The finding of fact so recorded by the Officer is unexceptionable. The respondent thus contends that the finding relating to the cash credits, does not give rise to any substantial question of law. The relevant findings are extracted for your Honours perusal and easy reference; 15. To put it differently, the factual basis on which the Officer formed his opinion in the assessment order dated 30.11.2000 (for assessment year 1998-1999), in regard to addition ofRs.2,26,000/- (Rupees two lakhs twenty six thousand only), stands dispelled by the affidavits and statements of the concerned unregistered dealers in penalty proceedings. That evidence fully supports the claim of the appellant/assessee. The appellate authority vide order dated 13.1 .2011, had not only accepted the explanation offered by the appellant/assessee but also recorded a clear finding of fact that there was no concealment of income or furnishing of any inaccurate particulars of income by the appellant/assessee for the assessment year 1998-1999. That now being the indisputable position, it must necessarily follow that the addition of amount of Rs.2,26,000/- (Rupees two lakhs twenty-six thousand only) cannot be just jfied, much less, maintained. 16. Accordingly, this appeal ought to succeed on this count alone and it would be unnecessary for us to dilate on other questions/contentions urged by the parties as referred to in the earlier part of this judgment. (emphasis supplied).
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Page 14 of 34 In view of the above findings, the Honourable Apex Court has not rejected the contention of the assessee that the books of account when rejected could not be relied upon to make additions or disallowances. Thus, the jurisdictional High Court along with other High Courts are still holding the fort on this issue, and it is prayed that the additions on the merits of the matter be deleted in full, since the same are emanating out of the rejected books of account is prayed accordingly.”
Written Synopsis 2 “The appellant in continuation to synopsis - 1, dt: 07/09/2022, is herewith supplementing the above with a short synopsis for the sake of convenience of your honours. A. Estimation of business income: a. The appellant has placed reliance upon the computation of rates of profit available for four years at pages 17 to 20 and the average of the three years (excluding the loss percentage of AY 2004-05) is arrived at 4.66% of gross turnover. b. The appellant has during the course of arguments on the issue of estimation of income, submitted that the average profit percentage was 4.66% and has also submitted that the appellant would not contest it further, if the estimation of the rate of profit was estimated at % of turnover of Rs. 4,64,79,756/-, i.e. as per the audited financials (page 5). B. Disallowance of Interest of Rs. 1,7!,18/- a. In so far as the ground on disallowance of interest expenditure of Rs. 15,75,158/-, the appellant has placed reliance upon the decision in the appellant's own case by this honorable Tribunal, for the AY 2006-07 which is on the same set of facts and also on the same head of expenditure and prays that the disallowance be deleted in full. b. The order has been attached along with the earlier synopsis, filed on 08/09/2022. C. Grounds on Disallowance of business expenditure: ' 6. Disallowance of business expenditure: i. The learned CIT(A) was not justified in confirming the disallowance of business promotion expenses of Rs. 1,04,252/- without appreciating that the same was inherent with the
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Page 15 of 34 nature of the business of the appellant, on the facts and circumstances of the case. Para 14 of assessment order: a. The appellant submits that the assessing officer has not appreciated the payments made to third parties as having a relevance to the promotion of business. The object of payment is to create awareness and this was achieved by sponsoring events in Schools and also for road campaigns. b. The assessing officer without appreciating that the object of business promotion was public awareness and there was no yard stick for determining the apt way to promote business. c. The disallowance of 25% of expenses was unwarranted, when the expenditure itself was not treated, as having being incurred for other than the business of the appellant and no disallowance could be made on a presumptive basis and the disallowance was required to be deleted in full. ii. The learned CIT(A) was not justified in confirming the disallowance of Rs. consulting expenditure of Rs. 2,75,000/- (2,50,000 + 25,000) without appreciating that the same was incurred for business purposes, on the facts and circumstances of the case. a. The learned assessing officer has preferred to sit in judgment on the sufficiency of the professional fees paid to the professional for designing of calendar. The learned AO has chosen to sit in the arm chair of the businessman to decide whether the fees paid for intellectual work was overpriced. b. The appellant submits that the nature of the payment and the modes of payment have not been dispute, rather the quantum of expenditure has been the sole criteria, while the appellant has preferred to accept the artwork and the resulting design, etc. c. Further, the appellant has received market survey information for which the appellant has paid an amount of Rs. 2,50,000/-, which essentially is for sensitive personal data and the same was obtained for marketing of its products and for advertising the appellant's business. d. The contract for purchase of the data was between the parties and the assessing officer was not justified in sitting in judgment on whether the consideration paid was adequate or
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Page 16 of 34 having any value to the appellant, which is the sole preserve of the appellant. iii. The learned CIT(A) was not justified in confirming the disallowance of bad debts of Rs. 29,437/- without appreciating that the bad debts were out of prior sales, and not recoverable, on the facts and circumstances of the case. Bad Debts: a. The appellant has sold jewellery over the years (page 21 to 25) and the claim of the appellant was not honoured by the credit card company and the appellant has written off the said trade receivables in the AY 2005-06, in the normal course of business. b. The write off is of a trade debt and the amounts were not recoverable in the perception of the appellant. The write off of the bad debt is sufficient to claim the same as an expenditure. iv. The learned CIT(A) was not justified in confirming the disallowance of Rs. 39,215/- paid to employees towards holiday and staff welfare expenses, incurred in the regular course of business, on the facts and circumstances of the case. a. The appellant has paid its employees in cash in respect of additional days worked at their stores, essentially being in the nature of overtime. The appellant's employees were from outside the state and they were offered additional salary for working on Sundays and holidays to supplement their income. The additional salary was settled in cash since the employees could use the same monies to fund their livelihood, while their salary could be sent back home. The nomenclature used was holiday expenses, i.e. salary paid for working on holidays. b. The staff welfare expenditure was incurred towards tea breaks for employees, for the whole year. The appellant has incurred the expenditure for the various employees and is accounted at actuals. c. The decision of the assessing officer in making a disallowance of 50% is without basis and the assessing officer has not stated that the said expenditure was unreasonable. The disallowance of the expenditure was unwarranted and the appellant submits that the expenditure is usually paid in cash since the vendor of the tea is required to be paid off on a weekly basis and this
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Page 17 of 34 was the preferred mode of payment in the nature of the supply of tea, by vendors who did not have a permanent place of business. D. The appellant has made oral submission and also relied upon decisions, for the contention that no addition shall be made by relying upon the books of accounts, which have been rejected. The appellant has filed a synopsis to the above effect. The appellant has been put to notice on the decision of the apex court, in Kale Khan M Hanif v CIT 50 ITR 1 (SC) which the appellant humbly submits to be decided on different set of facts. b. The case of the assessee was reopened after estimation of income and the credits in the case of the assessee in the said case was not a business receipt and was a personal credit entry arising out of sale of gold, which was not the nature of the business of the assessee (General Merchandise and tobacco), thus there was different stream of revenue, i.e. other than business receipts and therefore cannot amount to double taxation. c. In the present case of the appellant, the credits are all business credits and the same are the source of the working capital of the business of dealing in gold. In view of the clear distinction on the facts of the case, the apex court decision is not a ratio decidendi for the proposition that, the books of account could be relied upon to make addition, though the same books were rejected to estimate the income of the appellant. d. The appellant further submits that a latter decision of the Apex court in CIT v IeIliappan 66 ITR 722 (SC) has taken a different view on the same aspect and thus there are two diametrically opposite decisions by the apex Court. e. It is settled position that when there are two contrary views on a certain point, the in favour of the assessee shall be followed. CIT v Vegetable Products Ltd 88 ITR 192 (SC) f. Without prejudice to the above and not conceding that no additions shall be made out of the same business books, which were rejected for making estimation of the profits, the appellant submits the following for your honours consideration;
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Page 18 of 34 g. The appellant has filed the details of every depositor with details of identity, complete dress, contact information, mode of receipt and repayment details through bank. The appellant has also filed the confirmation of a substantial portion of the depositors, the PAN etc, which the revenue has acknowledged and accepted to a large extent (pages 214 - 331, 353, 384, 386). h. The appellant has fulfilled the requirement of demonstrating the source of the credits, the identity and also furnished ample documentation to confirm that the nature of deposits were not unexplained. The appellant submits that the revenue has not taken steps to verify the same and has also admitted that it has not made any steps to verify the same. i. The appellant submits that the statement of the assessing officer in the remand report that only 1 or 2 of around 30 were genuine (page 89), was also contrary to record, since the revenue has already verified and accepted approximately 50% of the total deposits and is evident from the additions sustained at Rs. 2,03,26,280/- (Page 89). j. The remaining confirmations though filed at regular intervals, (page 66, 68, 70 (30/04/2011), 352, 353) and on the record of the revenue, has not been scrutinized and the AO was not justified in making a passing mention that a substantial portion of the confirmations were not satisfactory, without having verified the same. k. In view of the above, the appellant submits that she has made every effort to comply with the requirement of the law and has also been acknowledged by the revenue as having been substantially complied with, thus discharging the onus of furnishing of data and meeting the requirement of the section to demonstrate that the credits were genuine. 1. It is prayed that the credits of Rs. 2,03,26,280/- sustained by the learned CIT(A) is required to be delated in full. It is prayed accordingly. m. The appellant denies the liability to pay interest under section 234 of the Act in view of the fact that there is no liability to additional tax as determined by the assessing
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Page 19 of 34 officer. Without prejudice, the rate, period and on what quantum the interest has been levied are not in accordance with the law and are not discernable from the order and hence deserves to be cancelled on the facts and circumstances of the case.”
In addition to the written synopsis, he submitted that the AO cannot reject the books of account and the survey was conducted on 21/04/2005, which falls in the next financial year and no specific discrepancies were noted. Even there is no addition made by the AO in the next financial year, he produced the copy of assessment order which is placed on the paper book and further submitted that the net profit rate applied by the AO is very higher side in the line jewellery business, the net profit rate offered for three financial year is as under:-
Year page No. % of Profit 31/03/2003 17 2.91 31/03/2004 18 loss 31/03/2005 19 3.61 31/03/2006 20 7.45
The AO has wrongly applied the net profit rate ignoring the past performance as well as future performance as noted above. On 31/03/2006, the net profit rate is 7.45% after interest and depreciation, whereas the AO has considered it as 9.35%. At the last of argument on this issue, considering to the entire facts he was agreed after taking oral consent from the proprietor of the business that he was agreed for 5% on the turnover declared in the
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Page 20 of 34 audit report for the impugned assessment year on 07/09/2022 and he further submitted that once addition is made no further addition can be called for under the head profit and gains of business & profession whereas the CIT(A) upheld the addition made by the AO under the different heads as disallowance of business expenditure which is also not correct. The ld.AR further submitted in respect of unexplained cash credit, he strongly supported that once the books of accounts is rejected by the AO, for further addition under the other heads/sections he cannot rely on the same book. Therefore the entire addition made by the AO under the head unexplained cash credit is beyond the scope of law and he strongly supported the decision of the Hon’ble jurisdictional High Court in the case of – 1. CIT Vs. Bahubali Neminath Muttin reported in [2016] 73 taxmann.com 100 [Kar]
CIT Vs. Dulla Ram, Labour Contractor, Kotapura reported in [2014] 42 taxmann.com 349 (P&H)
CIT Vs. Anandha Metal Corporation [2006] 152 taxman.com 300 [Mad]
He further submitted that the judgment of Hon’ble Supreme Court in the case of Kale Khan Mohammad Hanif [1963] 50 ITR 1 (SC) and Devi Prasad Vishwanath [1969] 72 ITR 194 (SC) is not applicable in the present facts of the case as per his written synopsis.
He further submitted on merits of the case, strongly relied on the documents submitted by the lower authorities which was
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Page 21 of 34 also placed before us, and further submitted that the confirmations for more than Rs.1 lakh as required by the AO were filed before the AO and the amount which is lower than Rs.1 lakhs, the details of the fixed deposits were also filed which contains name, address and telephone numbers but the AO did not make any further enquiry from the fixed depositors. During the course of remand proceedings further details were submitted and details of the fresh fixed deposits were also submitted before the AO. The details of loan/Fixed Deposits received and repaid are placed at page Nos.190 to 194 of the paper book.
The ld.DR relied on the order of the lower authorities and submitted that the lower authorities have rightly applied the provision of sec.145(3) of the Act. For estimating the business profits, he further submitted many loose sheets were found and the assessee was given ample opportunity to explain all the details of the loose sheets and assessee himself has accepted that various loose sheets were found during the survey proceedings but he could not establish that it does not belong to the assessee's business. As per AO many entries were found which were not recorded in the books of account, therefore, he has rightly rejected the books of accounts and estimated turnover of Rs.6.00/- crores and applied net profit after observing profit for the subsequent year which is correct. Further, he submitted that in the case of unsecured loan the assessee could not produce the confirmation from all the parties, whereas the ample opportunity was given during the course of assessment proceedings as well as the
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Page 22 of 34 appellate proceedings. At the time of remand proceedings he could not file the confirmations or confirmations filed were not correct, the deficiencies in the Fixed Deposit documents the AO has pointed out in the remand report. On the legal issue, the ld.DR strongly submitted that the AO rejected the books of accounts only for the purpose of estimation of the net profit from the business. The section 145 of the I. T. Act. is very clear. The AO can further rely the same books for other additions. The assessee has herself relied on the same books for arriving the final figures drawn from the books for preparation of financial statements which has been carried forwarded for the next financial year also. He can rely on the same books for other additions if the other financial transactions are to in conformity as per the provisions of the Act, therefore, entire arguments made by the ld. AR should be rejected.
After hearing the rival contentions, we observe that the survey was conducted on the business premises of the assessee on 21/04/2005 and certain documents were found and impounded which was marked as L1, L2, L3, L4 and L5 and survey team was noted discripencies in the stock of diamond and gold, sales and cash, which was not recorded in the books of accounts of the assessee. The AO rejected the books of accounts under section.145(3) of the I. T. Act. and applied net profit rate @9.6% on the estimated turnover of Rs. 6.00/- Crores instead of actual turnover of Rs. 4,64,69,765/- as reported in the Tax Audit Report for determining the true business profit from the business carried out by the assessee. The remand report was also called by the
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Page 23 of 34 CIT(A) during the appellate proceedings for substantiating the loose sheets found during the course of survey as well as for Fixed Deposits received by the assessee from the prospective buyers/investors. On going through the list of loose documents prepared by the assessee which is placed at page nos.195 to 202 marked as L1 to L5, there is no any amount in regard to sales which has not been recorded in the books of accounts as observed by us. There are so many entries with regard to figures but there are no date marked. On observation of paper book page no.195 which is marked as details of loose sheet- L1, the total amount is Rs.6,20,492/- but the no date marked, on observation of L2 which is placed at page 97 there is no date and amount mentioned, on observation of L3 which is placed at page 198 there is one entry at Sl.No. 11 the date of slip is 06/03/2005 which is invoice copy of Rs.2,825/-. Further on observation of details of loose sheets L-4 placed at paper book 199 to 201 at SL.No.29 on 07/10/2004 which is a quotation for 1809/- and further from Sl.No. 30 to 45 no date is mentioned but as per the assessee it has marked as shipping bill for Rs.1582528/- which will fall in the assessment year 2005-06. On the same sheet at Sl.No.47 the date is mentioned as 31/07/2004 which is quotation for Rs.20,000/-. We further observe at SN. 59, 60 and 61 the date is 26/06/2004 which is receipt of marine purchase for Rs. 6,281/- and marine insurance copy page 1 Rs.25,12,000/-. Further on observation of details a loose sheet L5 which is placed at paper book page no.202, the date of slip falls for the financial year 2005-06 for Rs.2,82,569/- but not for the financial year 2004-05. We also observe from the order of
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Page 24 of 34 the lower authorities that the assessee could not explain the entry made in the loose sheets but the assessee has prepared list which was produced before the lower authorities marked as L1 to L5,. Further on observation of the assessment order, the analysis made by the AO of entry made in loose sheets marked L1 to L5 the AO observed that at page No.17, the purchase bills dated 1/3/2005 for 30.5.44 cents of diamond Rs.39,500/- from J. Enterprises it was not recorded in the books of account and in loose paper at LP4 there is one invoice marked as Page No.89 dated 28/10/2004 for Rs.74,553/- was not recorded by the assessee. The AO has analyzed the loose paper and he observed that the some of the sales have not been recorded in the books of accounts but he has not marked the date/year of sales. Therefore, as per our considered opinion it should be considered for the year in which the survey was taken place. On observation of the entire assessment order nowhere the AO has mentioned that there was any defect on the quantity of stock found during the course of survey for the impugned assessment year. We further observe from the order of the AO at para No.3 which is as under:- The assessee furnshied her reply vide letter dated 12.06.2006, 18.07.2006 and finally 19th Sep. 200 which has been considered. In respect of discrepancy in the stock of gold, diamond jewellery and cash, the assessee’s contention was that it will fall in the next asst. Year because survey has been carried out as on 21.04.2005. I have considered the contention of the assessee and feel that it is reasonable and therefore, the issue of discrepancy in the stock of gold , diamond and cash will be examined in the A.Y. 06-07 for which proceeding s u/s 143(2) have already been initiated.
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Page 25 of 34 21. On going through the order for the assessment year 2006-07 nowhere any addition made by the AO in regard to defects found during survey for not recording the transactions and entry made in loose sheets , which is placed at paper book page No.90 to 94 dated 31/12/2008. Considering the entire observation, the increase in the sales made by the AO from 4.65 crores to 6 crores was without any basis, therefore, the actual sales reported in the audited financial statement is accepted. The AO has also not made out the case as per Chapter VI of the Act., The AO noted that the some of the purchases and expenditures were not recorded, therefore, the AO had sufficient reasons for rejection of books of accounts as per section 145(3) of the I.T. Act., in view of this , the AO had rightly applied the provision of section 145(3) for rejection of books of account for estimation of net profit from the business of the assessee, however, during the course of hearing, the ld.AR fairly accepted the 5% net profit may be considered on the turnover disclosed in the audited financial statements. Therefore, considering the profitability for the previous and subsequent assessment years, we accept the plea of the assessee for applying 5% net profit on the turnover of Rs.4,64,79,756/- which comes to Rs.23,23,988/-. The assessee has himself disclosed the net profit of Rs.18,49,242/-, therefore, we confirm the addition of Rs.4,74,746/-and the assessee gets relief of Rs.34,36012/-. We make it clear that from the estimated profit adopted @5% on the turnover, no further deduction shall be allowed under the head income from business and profession.
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Page 26 of 34 22. Therefore, ground No.3 is partly allowed.
In regard to ground No.5 and 6, the ld.AR of the assessee stated that once the books of accounts have been rejected and profit has been estimated by applying sec.145(3) no further disallowance can be made under the head “income from business and profession” for tax computation of taxable income of the assessee The contention of the assessee has been carefully considered and we note that once the books of accounts have been rejected by the AO for determination of net profit from the business of the assessee u/s 145(3) no further disallowance can be made for the expenditure for computation of business income. The pattern of assessment under the Act is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Assessing Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under section 29. In other words, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into
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Page 27 of 34 account. Considering the above observations, the other additions made by the AO towards disallowance of certain expenses cannot be made. Therefore, the ground no.5 and 6 is allowed.
In respect of ground No.4 regarding unexplained cash credit, the ld.AR vehemently argued that once the AO applied sec.145(3) the same books cannot be relied by the AO for making other additions whereas the AO has made addition u/s 68 for unexplained cash credit in regard to fixed deposits received from the customers and in respect of his case he has relied on the judgment which has been cited (supra), the contention of the assessee is not acceptable. On going through the order of the assessment we observe that the AO has rejected the books of account for determination of the net profit only from the business carried out by the assessee . The other additions cannot be made towards the disallowance of expenses under the profits and gains of business or profession as we have decided supra by relying on the judgments of two Honb’le High Courts but for addition under other heads u/s 68 towards unexplained cash credit which is not addition towards computation of business profit can be made by AO and our view is supported by the judgment of Hon’ble Supreme Court in the case of Basir Ahmed Sisodia Vs. ITO reported in [2020] 116 taxmann.com 375 (SC), Kale Khan Mohammad Hanif vs. Commissioner of Income Tax reported in (1963) 50 ITR 1 (SC) and in the case of CIT Vs. Devi Prasad Vishwanath reported in [1969] 72 ITR 194 (SC)
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Page 28 of 34 25. During the course of hearing, it was brought to the notice of both the parties that these above decisions were not cited by both the parties but it has brought into the notice of both parties that recent judgment of Hon’ble Supreme Court in the case of Basir Ahmed Sisodia (cited Supra) but the ld.AR stated that first two judgments of Hon’ble Supreme Court is very old judgment, therefore, it cannot be accepted and in the case of Basir Ahmed Sisodia he stated that it is not directly related to the additions made, therefore, recent judgment of Hon’ble Supreme Court in the case of Basir Ahmed Sisodia is not applicable because it relates to penalty. We reject the entire arguments of the ld. AR on the issue of no further addition can be made after rejecting the books of accounts u/s 68 towards unexplained cash credit. The ld.AR also relied on the judgment of hon’ble jurisdictional High Court and other High Courts also , on perusal of the same we did not find any reference of the judgement of the Hon’ble Supreme Cort cited by us supra, therefore, it appears that before the Hon’ble High Courts the judgement of Hon’ble Supreme Court on the very same issue was not cited by both the parties, therefore, judgement of the Hon’ble High Court will not be applicable in the case of the assesee, accordingly, considering the above judgments of Hon’ble Supreme Court, we hold that if the books of accounts are rejected and pplied sec.145(3) for determining net profit from the business carried on by the assessee, the AO is free to make additions u/s 68 towards unexplained cash credit. Accordingly, this legal ground raised by the assessee is rejected.
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Page 29 of 34 26. Now we come to the merit of the case in regard to the addition of unexplained cash credit.
On observation of the assessment order, the AO made addition that there was outstanding fixed deposits of Rs.3,94,58,851/- out of which Rs.2,67,91,500/- was disallowed and for the difference amount the assessee submitted confirmations and during the appellate proceedings, the assessee submitted additional confirmations for Rs.64,65,232/- and which was accepted by the appellate authority and rest of the amount of Rs.2,03,26,280/- was confirmed. On observation of the financial statements for the financial year 2003-04 which is placed at paper book page no.148 to 157 of the schedule “B” there is fixed deposits balance of Rs.3,64,72,448/- which is placed at paper book page No.150 is opening balance for the impugned assessment year, which cannot be added because it was received in earlier years. In support of our decisions we rely on the judgment of Hon’ble High Court of Gujarat in the case of CIT Vs. Jagatkumar Satishbhai Patel reported in [2014] 45 taxmann.com 441 (Guj). We also observe at paper book from page No.166 to 171, the assessee during the year received an amount of Rs.1,86,81,079/- out of which, sum of Rs.45,49,574/- was refunded to the depositors, on perusal of the columns of this page, as per the last column ( Confirmation available) , the assessee has produced confirmation from many depositors which has been marked as ‘YES”. The assessee has also refunded to the old Fixed Depositors also. During the course of assessment proceedings the assessee was asked to file
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Page 30 of 34 confirmation from the depositors whose balance is more than 1 lakh vide AO’s order para No. 20, as per this direction , the assessee has submitted confirmations vide her letter dated 20th January 2007 and in the remand proceedings the assessee filed confirmations which has been accepted by the revenue authorities. On perusal of the chart in most of the cases, the balances which is less than 1.00/- lakh have not been filed.
27.1 Once the AO has fixed the limit for producing confirmations from the depositors, thereafter those depositors whose balance is less than Rs.1.00/- lakh cannot be added by the AO. For the rest amount whose balance is more than Rs. 1.00/- lakh , we observe that during the course of assessment proceedings, the assessee had asked the AO for issuing summon u/s 131 which has not been done by the AO, The content of the submission before the AO dated 12th March 2007 at Sl.No. 10 placed at page No. 50 of the paper book is as under:- “In respect of Fixed Deposits, these deposits are taken aganist a well defined scheme where a signed application form with all particulars are obtained from each depositor. Since it is difficult to obtain confirmations from all 755 depositors I request you to consider only those depositors with a balance of more than Rs. 1.00/- lakh as was done in the previous assessment year . I am enclosing herewith a statement of the list of such depositors ( Annexure III) and the confirmations received. In respect of a few depositors who are not available presently please allow us one month time to submit balance confirmation. I request your good self to invoke your power u/s 131 and verify the same from the list of address and names given”. 27.2. From the above it is clear that the name and address were provided to the AO by the assessee and she had also requested to the AO for exercising his power u/s 131 of the I. T. Act. The specimen copy of application for Deposit has been placed by the
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Page 31 of 34 assessee at P.B. No.63 to 65 and further at page No. 214 to 331 in the Fixed Deposit certificates with ID No. is enclosed, the name and address is also mentioned therein. But the AO did not issue any notice to the Fixed Depositors. A similar issue has been decided by the co-ordinate bench of ITAT Chandigarh Bench in the case of Smt. Jagmohan Kaur Bajwa vs. ITO reported in [2021] 133 taxmann.com 406, the relevant paragraphs are reproduced here under:-
9.4 In the present case also the assessee furnished the details relating to the source of advance received by him, the amount in question was received from Shri Maninder Singh Sahi S/o Shri Hardev Singh of Canada which was received through banking channel, the assessee furnished all the details and informed the address of the person from whom the amount was received and also requested the A.O. to summon the person if there was any doubt. But the A.O. had not taken any step for issuance of the summon under section 131 of the Act, therefore the addition made by the A.O. and sustained by the Ld. CIT(A) was not justified. A similar view has been taken by the ITAT, Banglore "SMC" Bench in the case of Suraj Stones Corporation Ltd. (supra) wherein the relevant findings have been given as under: 9. I have carefully considered the rival submissions. It is clear from the orders of the revenue authorities that they not made any reference to the documentary evidence filed by the assessee. The case of the Revenue appears to be that M/s. Sneha International was rotating cash by transferring funds to various entities. M/s. Sneha International received cash and thereafter transferred funds to M/s. Sherawali Corporation and M/s. Venkata Industries who in turn transferred funds to the Assessee in the form of RTGS bank Transfer. The claim of the Assessee was that the receipts by the Assessee from the aforesaid two parties was for sale of shares of a company by name Mag Impex Ltd., was not disbelieved either by the AO or the CIT(A). As far as the assessee is concerned, he has filed confirmation of Sherawali Corporation and Venkata Industries. Copies of which are at pages 32 and 33 of the Paper Book. The CIT(A) has ignored this confirmation on the ground that the signature of the confirming parties were barely visible. The address of the confirming parties are very much available in the confirmation and if any doubt persisted on the veracity of the confirmation, then the proper course would have been to issue summons to the confirming parties to find out the truth or otherwise of the transactions on sale of shares on account of which monies were received by
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Page 32 of 34 the assessee through banking channels. Without resorting to such process, I am of the view that the CIT(A) has confirmed the addition made by AO ignoring the evidence available on record. In my view the evidence filed by the assessee satisfactorily explains the credits in question and the impugned addition has been made ignoring the material on record on the basis of surmises and conjectures. There is an allegation that it is Assessee's money which went to Sneha International and that was deposited by Snehal International in a bank account and from that bank account funds were transferred to M/S.Sherwali Corporation and M/S.Venkata Industries, but there is no evidence to substantiate such allegation. 10. As far as the decision cited by the learned DR is concerned in the decision rendered in the case of Mohana Kala (supra), the Hon'ble Supreme Court has emphasized that the assessee did not contend with the material and circumstances available on record not justifying credit being treated as income. In the present case, I am of the view that the assessee has produced material evidence to show that the sum in question was received on account of sale of shares and no evidence has been brought on record to counter the plea of the assessee. In the case of Vikram Singh (supra), the Hon'ble Delhi Court held that the facts and circumstances of the case established that transactions were dubious. As already stated, no such evidence has been brought on record in the present case except to make an allegation that Sneha International was involved in rotating cash and the bank transactions in question had been made by Sneha International in favour of M/S. Sherwali Corporation and M/S. Venkata Industries after depositing such cash in their bank account. The learned Counsel has rightly placed reliance on the decision of the Hon'ble Supreme Court rendered in the case of Orissa Coporation Pvt. Ltd., 159 ITR 78 (SC) and Hon'ble Patna High Court in the case of ACIT v. Hanuman Agarwal 151 ITR 150 (Patna) for the proposition that without issuing summons under section 131 of the Act to a party who filed confirmation, no adverse inference can be drawn by the AO. In the light of the facts and circumstances of the case, I am of the view that the addition made by the AO and sustained by the CIT(A) deserves to be deleted and the same is directed to be deleted. Appeal of the assessee is accordingly allowed. 9.5 In the present case also the assessee received the impugned amount through banking channel from Shri Maninder Singh Sahi of Canada for making the investment in the property. The assessee also furnished the relevant details to the A.O. and also requested to summon the concerned parties under section 131 of the Act but the A.O. did not accede to the request of the assessee and made the addition, therefore, the addition made by the A.O. and sustained by the Ld. CIT(A) was not justified.
27.3. In the case on hand, the AO had to enquire only those fixed depositors from whom the assessee has received Rs.1.00/-
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Page 33 of 34 lakh or more for fixed deposits during the year in respect of whom the confirmations have not been received. On perusal of chart produced at paper book page no.166 to 171 in most of the cases the assessee submitted confirmations but the AO did not issue any summons to the rest of the fixed depositors whose balance is more than Rs.1.00/- lakh or more. Considering the above judgments cited supra the addition made by the AO towards unexplained cash credit is not justified. Accordingly, we delete the addition. Therefore, the ground No.4 is allowed. 28. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 28th October, 2022.
Sd/- Sd/- (Beena Pillai) (Laxmi Prasad Sahu) Judicial Member Accountant Member
Bangalore, Dated 28th October, 2022. Vms
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore
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Page 34 of 34 1. Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. Date on which the approved draft comes to Sr. P. S 3. .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. Date on which order goes for Xerox & 9. endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order ………………………………..
Dictation note enclosed………………………………………