THE ACIT-2(1), UJJAIN vs. SHRI SANJAY BAGDI, UJJAIN

PER MANISH BORAD, AM.

The above captioned appeal is filed at the instance of Revenue

pertaining to Assessment Year 2012-13 and is directed against the

orders of Ld. Commissioner of Income Tax (Appeals)(in short

‘Ld.CIT(A)’], Ujjain dated 06.02.2017 which is arising out of the

order u/s 143(3) r.w.s. 144 of the Income Tax Act 1961(In short the

‘Act’) dated 9.02.2015 framed by ACIT-2(1), Ujjain.

Sanjay Bagdi ITA No.327Ind/2017 2. Briefly stated facts as culled out from the records are that the

assessee is an individual engaged in the business of civil

construction. Income at Rs.31,34,530/- declared in the return of

income submitted on 28.09.2012. The case was processed u/s

143(1)(a) of the Act dated 18.6.13. Thereafter case selected for

scrutiny assessment, followed by issuance of notices u/s 143(2)

and 142(1) of the Act. On the initial date of hearing, written

submissions were filed along with the financial statements and

thereafter none appeared on the date of hearing. Learned Assessing

Officer (In short ‘Ld.A.O’) had no option except to frame ex-parte

assessment. Ld.A.O made addition on unexplained sundry

creditors at Rs.60,42,964/- as the assessee failed to submit the

confirmation and other details. Addition for unexplained unsecured

loan of Rs.9,48,000/- from M/s. Amt Construction and Shri Sheikh

Allabakash was also made for lack of supporting documents. Also

the assessee failed to produce books of accounts and other relevant

details Ld.A.O rejected the book results u/s 145 of the Act and

estimated income @10% of the total turnover of Rs.7,29,45,673/-

thereby making addition on account of net profit at Rs.39,10,039/-

after giving set off of profit shown by the assessee. Income assessed 2

Sanjay Bagdi ITA No.327Ind/2017 at Rs.1,40,35,533/-.

three grounds for alleged three additions. However Ld.CIT(A) took a

view that when the book results have been rejected and profit have

been estimated then no further addition should have been made.

Ld.CIT(A) further adopted 8% of net profit rate as against 10%

adopted by the Ld.A.O and partly allowed assessee’s appeal

observing as follows;

“Ground No.1, 2, 3:- Through these grounds of appeal the appellant has challenged the addition of Rs.60,42,964/~ on account of unexplained creditors, Rs.9,48,000/- on account of unsecured loan and Rs.39,10,039/- on account of estimation of net profit. In the case of Shri Ghanshyarn Sharma, Ujjain Vs. ITO-I (1), Ujjain, the Hon'ble IT A T, Indore while deciding the ITA No.686/Ind/20 15 dated 02.02.2016, it has been held that once the income has been estimated by rejecting the books of accounts no further addition can be made. The AO has rejected the books of account of the appellant u/s. 145 of the 1. T. Act and estimated the net profit @ ! 0%. It has been held by various Judicial Authorities that once the books of account have been rejected, the AO is' not empowered to make any further addition. It is also to be mentioned that appellant is carrying out Civil Construction Work. In some cases the appellant is taking direct contract and in some cases the appellant is taking sub-contract from other contractors. In the appellant's own case, the same AO has adopted 8% net profit on direct contract receipts and 4% net profit on sub-contract receipts pertaining to A. Y. 2011-12 and 201 0-1l. Both the above assessments 3

Sanjay Bagdi ITA No.327Ind/2017 have been completed u/s 143(3) of the I.T. Act. It will be appropriate to adopt similar net profit in this year also in order to meet the end of the justice. During this year the appellant is in receipts and Rs.6,04,82,012/- as contract receipts.

Rs.1,24,63,661/- - Rs.4,98,546/- 2. Profit @ 8% on other contract receipts of

Rs.6,04,82,012/- - Rs.48,38,561/-

Total Rs.53,37,107/-

The appellant himself has shown the income at Rs.31,34,530/-. Therefore, the addition to the extent of Rs.22,02,577/- (Rs.53,37,107 – Rs.31,34,530) is confirmed. The appellant will get the relief of Rs.86,98,426/-. Therefore, the appeal of these grounds is partly allowed.”

“ 1.Whether on the facts and in the circumstances of the case Ld.CIT(A) has erred in deleting the addition of Rs.60,42,964/- on account of unexplained creditor holding that once net profits is estimated no addition can be made, without appreciating the fact that identity of creditors and genuineness and rather of said transactions was not explained & roved by assessee.

Sanjay Bagdi ITA No.327Ind/2017 balance sheet”.

The matter is covered under the exception as mentioned in para 8(c) of Circular 21/2015.

rejection of book results and assuming net profit is only confined to

the treatment of trading and profit & loss account. It however

cannot be applied for the items of balance sheet. In this case

alleged unexplained creditor as well as unsecured loans there is no

connection of these two items with the business turnover and the

expenditure incurred during the year. He further submitted that

Ld.CIT(A) has not given any finding of fact relating to the alleged

addition for unexplained creditors and unexplained unsecured

loans at Rs.60,42,964/- and Rs.9,48,000/- respectively and the

same should have been examined in the light of necessary

documents which should have been placed by the assessee for

necessary verification.

of Ld.CIT(A) raised no objection to the plea of the Ld. Departmental

Representative that the issue is raised on merits may be set aside to

the file of Ld.CIT(A) for necessary adjudication. 5

Sanjay Bagdi ITA No.327Ind/2017 7. We have heard rival contentions and perused the records

placed before us. Revenue is aggrieved with the deletion of addition

of Rs.60,42,964/- on account of unexplained sundry creditors and

deletion of addition of Rs.9,48,000/- on account of unexplained

unsecured loan raised at Ground No.1 & 2. Without reiterating the

facts in detail as the same have been discussed earlier, we find that

the assessee did not cooperate during the assessment proceedings

which leadg to framing of ex-parte assessment order. Books results

were rejected and net profit estimated at 10%. Addition was also

made for unexplained sundry creditors at Rs.60,42,964/- and

unexplained unsecured loan at Rs.9,48,000/- as the identity,

genuineness and creditworthiness of these were not proved by the

assessee.

that when the book results have been rejected and profits have

been estimated, no other addition should have been made and he

also gave relief to the assessee by estimating profit at 8% as against

10% made by the Ld.A.O.

Sanjay Bagdi ITA No.327Ind/2017 9. For better understanding of the issue before us, we wouldlike

to mention below the provisions of Section 145 of the Act.

Section: 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

Sub Section 3 of Section 145 of the Act it emanates that the

Assessing Officer may make best judgment assessment in the

manner provided in Sub Section 144 of the Act in case he is not

satisfied about the following;

(a) Correctness of completeness of the accounts of the assessee;

Sanjay Bagdi ITA No.327Ind/2017 (b) where the method of accounting provided in Sub Section 145(1) of the Act have not been regularly followed by the assessee; (c) Income has not been computed in accordance with the sub standards notified under sub-section 145(2) of the Act.

results and computed the net profit by applying the net profit rate

of 10% on the total turnover of Rs.7,2945,673/- observing as

follows;

“4. As per the audit report submitted by the assessee (col no.32), the assessee has shown contract receipts amounting to Rs.7,29,45,673/- and shown Net Profit of Rs.3384528/-, which comes out to 4.64%. The assessee was asked to produce books of accounts and other relevant details of expenses along with bills/vouchers. However, in spite of providing sufficient opportunity of being heard, the assessee failed to submit even a single bill/voucher related to the expenses claimed in P&L account. The assessee was given a show cause as to why book results should not be rejected u/s 145 of the ‘Act” and Net Profit should not be applied @10% of the ‘Act”.

Assessee did not make any submission regarding the Show Cause under Section 144 of the ‘Act’. As the assessee failed to submit the supporting bills/vouchers of expenses claimed and books of accounts, book results are rejected u/s 145 of the ‘Act’ and net @10% which comes out to Rs.72,94,567/-. The assessee has shown Net Profit amounting to Rs.33,84,528/-. Therefore difference of s.39,10,039/- (72,94,567 – 8

Sanjay Bagdi ITA No.327Ind/2017 3384528) is hereby added back to the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the ‘Act’ are being initiated separately on this issue. – Addition Rs.39,10,039/-“

the Act referred above we find that the Ld. Assessing Officer in the

instant case is not satisfied about the correctness or completeness

of the accounts of the assessee. The reason for such non

satisfaction was that the assessee did not produce the books of

accounts before the Ld.A.O. It is not the case that the books were

produced with the documents and the Ld.A.O had examined them

and noticed some incorrectness and incompleteness. Rather he

had no opportunity to lay his hands on the books of accounts

maintained by the assessee. He only posessed the audited financial

statements but as the figures mentioned in the audited financial

statements could not be verified with the books of accounts he had

to frame a best assessment by following the provisions of Section

144 of the Act which reads as follows:-

Sanjay Bagdi ITA No.327Ind/2017 (b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub- section (2A) of that section, or (c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment : Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment : Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section. (2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.

Officer to frame the best judgment of assessment after taking into

account all the relevant material which he had gathered after giving

opportunity to the assessee in order to compute income or loss. In 10

Sanjay Bagdi ITA No.327Ind/2017 the case of the assessee the profit and loss account shows turnover

of Rs.7,29,45,673/-. Ld.A.O applied the net profit rate of 10% as

against 4.64% shown by the assessee under his powers under

Section 144 of the Act. As far as the audited balance sheet is

concerned Ld.A.O took up two figures relating to sundry creditors

and unsecured loans which he deemed necessary to be examined

about their identity, genuineness and creditworthiness in terms of

provisions of Section 68 of the Act. The assessee did not provide

any detail which paved the way to the impugned addition.

Therefore after examining the details and perusal of provisions of

Section 144 and 145 of the Act as well as the facts of the instant

appeal, we conclude that if the Assessing Officer is not provided the

books of accounts and he/she comes across the balance sheet and

the profit and loss account and if case he/she decides to reject the

book results then it is within the powers of the provisions of Section

144 of the Act to compute the income based on the turn over shown

in the audited profit and loss and account and simultaneously

Ld.A.O can also make additions with regard to the particulars

provided in the balance sheet. Certainly there should not be an

overlap of the addition. 11

Sanjay Bagdi ITA No.327Ind/2017 14. We therefore find force in the contention of Ld. Departmental

Representative that the unexplained sundry creditors and

unexplained unsecured loans are not the part of Profit and loss

account. By rejecting book results, profits have been estimated on

the basis of turnover. But the unexplained sundry creditors and

unexplained unsecured loans, which are basically credited in the

books of accounts needs to be explained by the assessee else he

may have to face provisions of Section 68 of the I.T Act which

relates to unexplained cash creditors. Unsecured loans need not

necessary be used only for the purpose of purchase as one cannot

deny the possibility that the unsecured loans can be used for

purchase of other assets, making investment or loans and advances

but if the impugned credit comes into the books of accounts then it

needs to be explained about their identity, genuineness and

creditworthiness. Similar is the fact of sundry creditors which are

for purchase of goods or capital assets or services. The onus to

prove their genuineness completely lies on the assessee. In the

instant case during the assessment proceedings assessee did not

cooperate with the Assessing authority and all the queries of the

Ld.A.O remain unanswered. Ld.CIT(A) did not adjudicate these two 12

Sanjay Bagdi ITA No.327Ind/2017 issues of unexplained sundry creditors and unexplained unsecured

loans by grossly taking a view that the profits are estimated as such

no other addition is called for.

circumstances of the case we are of the opinion that the issues of

identity, genuineness and creditworthiness of the sundry creditors

at Rs.60,42,964/- and unexplained unsecured loan of

Rs.9,48,000/- (Rs.6,48,000/- from M/s. Amit Construction and

Rs.3,00,000/- from Shri Sheikh Allabaksh) needs to be set aside to

the file of Ld.CIT(A) for afresh adjudication and if necessary a

remand report may be called from the Assessing Officer for verifying

the facts and thereafter Ld.CIT(A) should decide as to whether the

alleged amount of sundry creditors and unsecured loans are to be

treated as unexplained or explained and decide accordingly.

Needless to mention that proper opportunity of being heard should

be provided to the assessee.

purpose.

Sanjay Bagdi ITA No.327Ind/2017 The order pronounced in the open Court on 14.11.2018.

Sd/- Sd/-

( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 14 November, 2018 /Dev Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file.

By Order, Asstt.Registrar, I.T.A.T., Indore