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Facts
The assessee declared an income of Rs. 12,55,430/-. The AO selected the case for scrutiny and found that the assessee had made sales of Rs. 40,08,60,057/- and purchases of Rs. 39,79,99,926/-. The AO doubted the genuineness of these transactions as the parties involved could not be verified and concluded that the sales were fictitious.
Held
The Tribunal held that the AO failed to provide specific defects in the assessee's books of account to justify the rejection under Section 145(3) of the Act. Relying on previous decisions with identical facts, the Tribunal directed the deletion of the addition made by estimating the profit at 1% of the turnover.
Key Issues
Whether the rejection of books of account under Section 145(3) by the AO and the subsequent addition were justified without establishing specific defects or verifying the genuineness of the transactions.
Sections Cited
143(1), 133(6), 133(1)(d), 145(3), 271(1)(c), 145
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 12.07.2023, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2013-14.
In this case, the Assessee by filing its return of income on dated 28.09.2013 had declared its total income at Rs.12,55,430/-, which was processed u/s 143(1) of the Act. Subsequently, the case of the Assessee was selected for scrutiny. The Assessing Officer (AO) on perusing the record found that the Assessee Company during the AY under consideration has made the sales of Rs.40,08,60,057/- and purchases of Rs.39,79,99,926/- , and therefore asked the Assessee to furnish the details of sales & purchases and the expenses of Rs.23,59,656/-. The Assessee filed the relevant details which read as under:
Description SR. Name & Address of Party Amount (Rs.) of Items no, Sold
Sales made in Globe Agro Division of M/s Nouveau Global Ventures Limited accounted in our books pursuant to Scheme of Demerger
1. Shiv Krishna Industries(PAN- Grains 33,15,75,703/- ABHFS8274J)
GIDC, Kuvadava Road, Rajkot, Gujrat,
2. Various Small Petty Parties Grains 7,14,400/-
Sales made in Pearl Agriculture Limited
Shiv Krishna Indus tries(PAN- Grains 2,45,19,440/- ABHFS8274J
GIDC, Kuvadava Road, Rajkot, Gujrat
2. Dwarkesh Polyplast Grains 12,99,564/-
3. Gurukripa Polymers Grains 3,57,90,000/-
4. Nirmal Agro Product Grains 69,60,950/-
Total 40,08,60,057/-
The AO in order to verify the purchase and sale transactions issued the notices u/s 133(6) of the Act to M/s. Shiv Krishna Industries and M/s. Champian Agro Ltd. The notice issued to M/s. Shiv Krishna Industries was returned by the Postal Authorities “unserved”, however, no reply was received from M/s. Champian Agro Ltd. Therefore, both the purchase and sales remained unverified. Thus the AO show caused the Assessee accordingly and in the meanwhile, issued a commission u/s 133(1)(d) of the Act, to the ITO, investigation wing, Rajkot on dated 11.03.2016 to verify physical existence of these companies and the genuineness of sales and purchases transactions of these companies with the Assessee company and to collect their ITR, bank statement, supporting ledgers etc. 3.1 In compliance to the commission issued u/s 133(1)(d) of the Act, ITO (Investigation), Rajkot submitted as under:
“ITO, Investigation Rajkot submitted that M/s Shiv Krishna Industries does not exist at the given address and in spite of the best effort of Inspector the said concerne could not be located and in case of M/s Champian Agro Limited, summon was issued by ITO Investigation Rajkot on 17.03.2016 and served on assessee company but none attended in compliance. Again Inspector of his office was deputed to collect the requisite details/documents / information but nothing was made available to the Inspector by the Joint MD of the company Shri Jitendra Patel. In his report, he has further submitted purchases/sales transaction made with
The Assessee in respect of M/s. Champian Agro Ltd. and M/s. Shiv Krishna Industries has submitted the copy of PANs, certificate of incorporation, copy of acknowledgment of ITR, electricity bill, telephone bill, write up about the company downloaded from Google and article in business standard of 28th May 2012 qua expansion plan of the above company.
4.1 The AO though considered the said documents but did not get impressed and therefore raised further queries and asked the Assessee to produce the sale and purchase parties, against which the Assessee shown its inability. The Assessee in response to query submitted the books of accounts on 29.03.2016 but according to the AO, failed to produce the transportation and movement of goods claimed to have been purchased and sold. The AO also doubted the delivery challans on the reasons that the same do not bear the transportation and movement details viz. mode of transportation, lorry number etc. The AO ultimately rejected the books of account by invoking the provisions of section 145(3) of the Act and at the end, estimated the commission on the total sales shown by the Assessee to the tune of Rs.40,08,60,057/- treating the same as bogus/accommodation entries and consequently made the addition @ 1% of such amount which worked out to Rs.40,08,601/- and added the same in the income of the Assessee.
The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner and filed the following documents as filed before the AO: “i Party wise details of purchases & sales,
ii. Confirmation of the parties disclosing inter-alia their PAN & address and that the payments were made/received by/through banking channels, iii. Copy of purchase & sale bills which inter-alia disclose party's VAT/CST registration details, iv. Copy of delivery challans duly acknowledged by parties, V . Copy of sales-tax retum filed by the appellant, and Vi Appellant's books of a of account & the bank statements”. 5.1 The Assessee before the Ld. Commissioner also claimed as under: “It is submitted that the ITO cannot reject the books of account unless the accounts of the Assessee suffers from either of the twin conditions specified in the Act i.e., correctness or completeness. Without establishing the defects, incompletion and inaccuracies in the accounts of the Assessee, the ITO cannot expressively or otherwise invoke the provisions of sec. 145(3) of the Act. Unless the transaction is proved as sham or not bonafide, it is not open to the tax authorities to disregard the figures of transactions shown in the Assessee’s books of account. In the present case, the ITO has not painted out any specific defects in the maintenance of books of account and, therefore, rejection of book results on irrelevant consideration is not tenable, Reliance in support of the above proposition is placed on the following decisions:- “a. ACIT Vs. Intermedia Cable Communication Pvt. Ltd. ((2012) 19 Taxmann.com 190 (ITAT, Pune Bench)] b. BabuJewellers Vs. ITO ((2012) 23 Taxmann.com 278 (ITAT, Chandigarh Bench)] C. Keystone India Pvt. Ltd. Vs. DCIT [16 SOT 64 (ITAT, Ahmedabad Bench)] d. MD. UmerVs. CIT [101 ITR 525 (Pat)) e. MarghabhaiKishabhai Patel & Co. Vs. CIT ((1977) 10S ITR54 (Guj)]”
The Ld. Commissioner though considered the documents filed and submissions made by the Assessee, however, could not get
The Assessee, being aggrieved, is in appeal before this Court.
Having heard the parties and perused the material available on record, it is observed that from the documents available on record, that identical addition was also made by the Revenue in the Assessee’s cases pertaining to A.Y. 2014-15 & 2015-16, which travelled up to the Tribunal, who vide order dated 24.07.2023 in (AY 2014-15) and (AY 2015-16) dealt with the said identical addition and ultimately deleted the same by observing and holding as under:
“12. Ground No. 3 with its sub-grounds pertains to rejection of books of accounts applying provisions of section 145(3) of the Act. We have gone through the order of AO, order of the Ld. CIT (A) and submissions of the assessee. It is observed that to reject books result, AO is duty bound to specify the defects in the books of accounts maintained by the assessee. We have gone through para C2 vide page no. 17 of the assessment order wherein the AO has applied section 145(3) of the Act. For sake of ready reference, we are reproducing the relevant para of assessment order mentioned (supra) as under:-
Addition on account of bogus turnover on estimate basis @ 1% C-2.1 As discussed in the modus operandi, the penny stock scrips are shown to carry out some form of trading in shares or other commodities so as to create some credentials in its books. The assessee company following this the same modus, has shown fictitious sales at Rs. 23.89 crores out of bogus purchases booked at Rs. 22.73 crore. All these transactions and figures are fictitious, non genuine and manipulated with sole intention to record desired turnover so as to support the artificial spurt shown in the price of the penny stock at various timelines. C-2.2 In view of the above discussion, the books of account of the assessee company for the year under consideration are hereby rejected M/s. Mukta Agriculture Limited u/s. 145 of the IT Act, since the same do not reflect true and correct trade results. Accordingly, the profit for the is estimated at Rs.23,89,245/- being 1% of total turnover of company shown under the head income from operation' at Rs. 23, 89 ,24,455/- during the year under assessment Since the assessee has furnished inaccurate particulars and concealed its income, penalty u/s. 271(1) (c) is hereby initiated for the same.
With reference to the above findings of AO in the assessment order, it is clearly established that AO was not able to make out the case as required to apply the provisions of section 145(3) of the Act. The findings of AO are cursory in nature may be relevant for other purposes, but to apply section 145, a detail reasoning with specific defects pointed out during the assessment proceedings has to be mentioned and then only provisions of section 145(3) can be applied and the same are missing in the present case.
In his order, Ld. CIT (A) confirmed the action of AO and held as under vide para 7.6 page 46 of the appeal order:-
“7.6 The assessee has objected to the rejection of the books and estimation of an income on the ground that the reasons recorded in the show cause notice were different from the ones in the assessment order. It is observed that in the show cause notice the AO had pointed out that are no agricultural activities being carried out at Rajasthan and there is also no warehouse existing as was being claimed. It was also pointed out that the purchase/sale parties do not have any creditworthiness. Accordingly, the assessee was asked to show cause as to why it should not be treated as a paper concern with hardly any business activity. It is observed that in the assessment order, while rejecting the books, it has been mentioned that the purchases and sales shown are fictitious. Thus, it is noted that both in the show cause notice as well as the assessment order, the primary ground for rejection of books is that the sales/purchases of the assessee are fictitious and it is not carrying out any actual business activity. As noted earlier, the search action revealed that with certain parties, the assesses has entered into purchase transactions as well as sale transactions which made it obvious that the assessee had undertaken circular transactions to show fictitious turnover. It is also a fact that the assessee did not maintain any warehouse for storing the agricultural produce at Rajasthan which was being claimed by it. In view of such a factual position, the contention of the assessee of rejection of its books and M/s. Mukta Agriculture Limited estimation of its income in the assessment order on a ground which was different from the one mentioned in the show cause notice, is found to be erroneous and is therefore, rejected. Accordingly, all the additional grounds of appeal raised by the assessee are dismissed.
15. The findings of the authorities below mentioned (supra) to justify rejection of books of accounts u/s. 145(3) clearly reflects that whatever may be the show cause issued or enquiry conducted leads to specific additions /disallowance u/s 37/69C, etc. Legal position with reference to rejection of books of accounts is altogether different whereas the case made by AO and further confirmed by the Ld. CIT (A) leads the matter towards specific disallowance /addition. We found that revenue is failed to bring material on record which justify rejection of books of accounts leading to application of GP rate @ 1% on total revenue. In view of the above, we direct to delete the addition of Rs. 23,89,245/- being 1% of turnover and other operating income of Rs. 9,78,917/- (as the same is already part of revenue declared by the assessee) and returned income of Rs. 17,48,510/- declared by assessee is directed to be final figure. In the result, ground no. 3 with its sub grounds is allowed.”
9. This Court has given thoughtful considerations to the peculiar facts and circumstances of the case and observe that the Hon’ble Co-ordinate Bench of the Tribunal in the Assessee’s cases referred to above, has analyzed the provisions of section 145(3) of the Act, making and sustaining the identical addition @ 1% as made in the instant case and ultimately un-justified the rejection of the books of the Assessee leading to application of GP rate @ 1% of the total revenue. As the facts and circumstances except variation in the amounts, are same as dealt with by the Hon’ble co-ordinate Bench of the Tribunal in the aforesaid case, hence this Court is inclined to delete the addition under consideration. Thus, the addition under consideration is deleted.
In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 18.02.2025.