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Facts
The Revenue appealed against the order of the CIT(A) for AY 2017-18. The appeal was filed with a delay of 103 days, which was condoned. The primary issues involved the CIT(A)'s acceptance of additional evidence and the deletion of additions made by the AO on account of sundry creditors and unsecured loans.
Held
The Tribunal held that the CIT(A) did not violate Rule 46A by admitting additional evidence, as the assessee did not file it suo-motu and the CIT(A) had called for it. The Tribunal also held that the CIT(A) was justified in deleting the additions on account of sundry creditors and unsecured loans, as these were part of the business transactions and the AO had already rejected the books of accounts and estimated income. The Tribunal further confirmed the CIT(A)'s action of restricting the estimated income at 6% of the turnover.
Key Issues
1. Whether the CIT(A) erred in admitting additional evidence under Rule 46A. 2. Whether the CIT(A) was justified in deleting additions made by the AO on account of unsecured loans and sundry creditors when the AO had already rejected the assessee's books of accounts and estimated income.
Sections Cited
46A, 250, 68, 145(3), 44AD, 115BBE, 41(1), 143(1), 133A, 147, 148, 29, 30, 43D, 40, 145, 40A(3)
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI S.R. RAGHUNATHA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Delhi, dated 05.02.2024 for the Assessment Year (hereinafter in short "AY”) 2017-18.
At the outset, it is noted that there is a delay of ‘103’ days in filing of the appeal, for which, the DCIT has filed an affidavit for condonation of delay, and the Ld.Counsel of the assessee didn’t raise any serious objection. Consequently, the delay of ‘103’ days in filing of the appeal stands condoned and the appeal filed by the Revenue is taken up for hearing on merits.
The first ground is general in nature, so dismissed.
The second ground of the Revenue is against action of the Ld.CIT(A) admitting additional evidence in violation of provisions of Rule 46A of Income Tax Rules, 1962 (hereinafter in short “Rules”). On this issue, the Ld.AR submitted that there has been no violation of Rule 46A, since assessee didn’t file any additional evidences on its own (suo-motu)
1. before the Ld.CIT(A). According to the Ld.AR, the Ld.CIT(A) while exercising his jurisdiction u/s.250 of the Act, had called upon assessee to file documents vide his letter dated 05.10.2023 and drew our attention to page no. 3 to 6 of the paper book and especially, to page no. 6, wherein the Ld.CIT(A) has asked, inter-alia for producing details/supporting documentary evidences in respect of sundry creditors, ledger extract, nature of transaction of Rs.4,87,51,001/-, [which amount was added by the AO] as well as documentary evidences in respect of unsecured loan of Rs.60,00,000/- taken from M/s.AKR Agencies along with proof of identity of creditors, nature of transaction, creditworthiness of creditors, ledger extract, confirmation from party etc. [which amount was also added by the AO u/s.68 of the Act]. According to the Ld.AR, pursuant to the aforesaid direction of the first appellate authority, the assessee had filed relevant documents and therefore, there is no violation of Rule 46A, and in addition, submitted that sub-rule (4) of Rule 46A permits additional evidence to be adduced, if directed by the first appellate authority and in such an event, Rule 46A(1) to (3) of the Rules are not applicable.
We have heard both the parties and perused the material available on record. The short question raised by the Revenue is whether in this case, the Ld CIT(A) violated Rule 46A by accepting evidences not produced before AO; and if the answer is in the affirmative then, whether Ld.CIT(A) / First Appellate Authority erred in passing the impugned order without following Rule 46A. Having gone through the relevant records, we note that assessee didn’t file any additional evidence on its own during the appellate proceedings, but the Ld. First Appellate Authority exercising his co-terminus as that of AO has called for evidence and in such an event, there is no violation of Rule 46A of the Rules, because Rule 46(4) permits such a course of action by the Appellate Authority and in such an event, Rule 46A (1)to (3) are not applicable. For such a proposition, we rely on the decision in the case of CIT v. Sanu Family Trust (2012) 19 taxmann.com 105 (Kar), wherein substantial question of law which was raised before the Hon’ble Karnataka High Court was that whether the CIT(A) was correct in relying on fresh evidence filed before him contrary to provisions of Rule 46A of the Rules; and the Hon’ble High Court was pleased to uphold similar action taken by the First Appellate Authority as in this case and answered substantial question of law as under:-
“8. The material on record would clearly show that the Assessing Officer had the benefit of looking into the books of account maintained by the assessee. There is no merit in the contention of learned counsel appearing for the appellant that documents were permitted to be produced for the first time at the request of the assessee and the said documents were not available before the Assessing Officer and therefore, reasons ought to have been awarded by the appellate authority for accepting the said documents and unless the conditions specified in Rule 46A of the Rules are satisfied, the documents could not be looked into. A copy of the letter along with which extract of the accounts and receipts which were produced would clearly show that the said information was being furnished in view of the direction of the first appellate authority that the assessee should produce the said documents for effective decision of the appeal and the conditions specified under Rule 46A(1) to (3) of the Rules is not applicable to sub-rule (4) which would clearly says that the said provision permitting additional evidence to be adduced in Appellate Court would not be subjected to the power of the Appellate Authority to direct the parties to produce any documents which in the opinion of the authority is necessary for the effective decision of the case. Further, it is clear that before the ITAT, no ground was raised regarding reception of additional evidence by the First Appellate Authority in contravention of Rule 46A of Rules and in any view of the matter, we hold that the first appellate authority was justified in relying upon the material produced and there is no violation of Rule 46A of the Rules and accordingly, answer the said question of law against the revenue and in favour of the assessee.”
In light of the ratio laid down by the Hon’ble Karnataka High Court in the case of CIT Vs. Sanu Family Trust (supra), we do not find any infirmity in the action of the Ld.CIT(A) calling for relevant documents in respect of both the aforesaid issues and admitting the same and adjudicating the grounds of Appeal, and hold that in this case, there is no violation of Rule 46A of the Rules; and therefore, we don’t find any merit in Ground No.2 of the Revenue and therefore, it stands dismissed.
7. The other ground of the Revenue is mainly assailing action of the Ld.CIT(A) deleting separate additions made by the AO in respect of sundry creditors and unsecured loans u/s.68 of the Act.
Brief facts relating to the same are that assessee, an individual, who is involved mainly in executing civil contract for the Government Departments, had filed his original return of income (RoI) for the AY 2017-18 on 01.11.2017 declaring total income of Rs.1,01,51,160/- which was processed u/s.143(1) of the Act. Thereafter, a survey u/s.133A of the Act was conducted on 06.02.2018 in the group cases of Shri A.Kamaraj (father of the assessee) and therefore, RoI of the assessee was reopened u/s.147 of the Act by issuance of notice u/s.148 dated 27.03.2019. The AO noted that for the year under consideration, assessee had claimed Rs.8,35,49,814/- as expenses under the head wages & coolie in his profit & loss account, which expenses worked out to 40% of the total receipts i.e., turnover of Rs.20,47,87,318/-. The AO directed the assessee to submit evidences regarding expenses and pursuant to which, the assessee brought to his notice that he was in civil contract business and was executing civil work for public authorities / government authorities. According to the AO, despite his direction, the assessee failed to produce supporting evidence/material to justify expenses, therefore, he rejected the books of accounts of the assessee estimated net profit/income of the assessee at 8% of the total receipts by relying on the Hon’ble Jurisdictional High Court decision in the case of CGT Vs. A.Vajjram Bros. (326 ITR 551) (Mad) and thus made an addition of Rs.1,63,82,985/- i.e., 8% of Rs.20,47,87,318/-. Thereafter, he made separate addition u/s.68 r.w.s 115BBE of the Act towards sundry creditors of Rs.4, 87, 51,001/- and unsecured loan of Rs.60 lakhs u/s.68 of the Act.
Thus, the AO made the following additions:
Addition of Rs.1,63,82,985/- as the business income which was estimated at 8% of the gross receipts.
2. Addition on account of unexplained sundry creditors amounting to Rs.4,87,51,001/- 3. Addition on account of unexplained Unsecured loan amounting to Rs.60,00,000/-. 10. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) wherein the assessee is noted to have not challenged (i) rejection of books of accounts u/s.145(3) of the Act; and (ii) the estimation by adopting the rate prescribed u/s.44AD of the Act i.e. @8% of the turnover but pleaded to restrict the rate @6% on the gross receipts as
per the amendment made by the Finance Act, 2017 w.e.f.01.04.2017 (instead of @8% adopted by the AO).
The Ld.CIT(A) in his order is noted to have justified the action of the AO rejecting the books of accounts of the assessee though not contested by assessee; and adjudicated the plea of the assessee to restrict the rate adopted by the AO as per section 44AD while estimating the income, in the light of the amendment brought in by the Finance Act, 2017 in sec.44AD of the Act wherein, from AY 2017-18, the presumptive rate to be applied is @6% (instead of @8%) if the total turnover or gross receipts are received by ‘account payee cheque’ or ‘account payee bank draft’ or ‘use of electronic clearance system through a bank account’. In this regard, the Ld.CIT(A) found that assessee has received contract receipt from Government agencies through cheque after deduction of TDS reflected in 26AS and thus satisfies the condition stipulated in sec 44AD to adopt rate @ 6% instead of 8%. And since, the AO has adopted the gross-receipts at Rs.20,47,87,318/- as appearing in Form 26AS, the Ld.CIT(A) rightly concluded that the AO might have erred in determining the gross-receipts based only on data from Form 26AS; and taking note of the assessee’s financials wherein assessee had admitted Rs.20,90,96,821/- as his turnover, the Ld CIT(A) rightly adopted the same and computed the profit from business at the rate of 6% of Rs.20,90,96,821/- and computed Rs.1,25,45,809/- as against net profit declared by the assessee at Rs.1,06,53,769/-. It is further noted that this action of the Ld.CIT(A) adopting 6% of the gross receipts of Rs.20,90,96,821/- has not been challenged by the department [by raising any grounds of appeal] before this Tribunal. Therefore, the action of the Ld.CIT(A) estimating income of the assessee as noted supra stands confirmed.
12. Coming to the issues raised by the Revenue regarding deletion of additions made by the AO regarding two issues i.e. (i) deletion of addition of Rs.60 lakhs added by AO being unexplained unsecured loan; and (ii) deletion of addition of unexplained Sundry Creditors amounting to Rs.4,87,51,001/-. In respect of Rs 60 lakhs deleted, the Ld.CIT(A) has noted that assessee received Rs.60 lakhs, from his mother [Smt. K.
Selvi, Proprietor of M/s.AKR Agencies] and that she/creditor was regularly assessed to Tax, and that the audited books of accounts of the creditor duly reflects transaction/giving of the unsecured loan to the assessee of Rs.60 lakhs. Thus, it is noted that the Ld.CIT(A) after going through relevant the RoI as well as the Tax Audit Report expressed his satisfaction about the nature and source of the loan taken from his mother and was pleased to hold that the same can’t be treated as unexplained cash credit u/s.68 of the Act which action of the Ld.CIT(A) can’t be held to be perverse, in the light of the supporting relevant materials which were produced by the assessee before the AO as well before the Ld.CIT(A) who called for it exercising his co-terminus power.
Therefore, there is no infirmity in the action of Ld.CIT(A) holding that unsecured loan of Rs.60 lakhs couldn’t be added u/s.68 of the Act.
Likewise, coming to the addition of Rs.4,87,51,001/- by the AO u/s.68 of the Act as unexplained sundry creditors, the Ld.CIT(A) noted that the assessee was asked to furnish the ledger accounts of each sundry creditors separately for the relevant AY 2017-18 and also for all the subsequent years. And pursuant to the directions of the Ld.CIT(A), the assessee produced the ledger extracts (of sundry creditors) and from perusal of which, the Ld.CIT(A) found that most of the sundry creditors were paid the amounts due in the subsequent years by the assessee. In such a scenario, the Ld.CIT(A) rightly found that there was no justification to make addition of sundry creditors u/s.68 of the Act, which action we concur; and also repel the contention of the Revenue that the impugned addition was sustainable u/s.41(1) of the Act; and thus, we find no infirmity in the action of Ld CIT(A) holding that the assessee succeeded on merits on these two issues/additions erroneously made by the AO.
Further, we note that the Ld.CIT(A) found force in the alternate submission of the assessee that AO having rejected the books of accounts and having resorted to estimation of the income of the assessee, no addition as made in respect of sundry creditors ought to have been made in the facts of the case. According to us, the Ld CIT(A) rightly noted that since the sundry creditors formed part of the business transaction of the assessee (trading of the assessee), therefore, no separate addition either u/s.68 of the Act or u/s.41(1) of the Act was legally tenable and therefore rightly deleted by the Ld.CIT(A) as held by the Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions Vs. CIT (1998) 232 ITR 776 (AP), wherein, the Hon’ble High Court has held as under:
“The pattern of assessment under the Income-tax 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 Income Tax 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 account.”
We also rely on the decision of Hon’ble Andhra Pradesh High Court in Maddi Sundarsanam Oil Mills Co. Vs. CIT (1959) 37 ITR 369 (AP) wherein the Hon’ble High court has observed as under:
“If once the income tax authorities have rejected the books, they cannot have it both ways, namely, adopting a flat rate to compute gross profit as well as rely on the books for the purpose of adding unexplained cash credits which were part of the scheme of balancing the accounts….. ”
The Ld.CIT(A) rightly took note of the following case laws to support his action:
(i) The Hon'ble High Court of Rajasthan in the case of CIT vs. G.K. Contractor, supra, where it was clearly held that "AO having estimated the profit by applying a higher net profit rate to total contract receipts after rejecting assessee's books of account by invoking the provisions of section 14(3), no separate addition can be made on account of cash credit u/s.68, even though the assessee has failed to discharge its onus of proof in explaining the amount shown in the books of account".
(ii) The Hon'ble High Court of Punjab and Haryana, in the case of CIT vs. Aggarwal Engg. Co., (2008) 302 ITR 0246 had considered an identical issue and held that "no separate addition on account of cash credit and on account of unexplained payments for purchases made outside the books can be made once the net profit rate is applied on contract receipts of an assessee for estimating his income from contract work".
(iii) The Hon'ble High Court of Allahabad in the case of CIT vs. Banwarilal Banshidhar, (1998) 229 ITR 0229 had taken a similar view and held that "where income is assessed at G.P. rate by rejecting the books of assessee u/s.145(3), no disallowance can be made separately u/s.40A(3) of the Act".
(AY 2017-18) Mrs. Rajpriyam 17. In the light of the aforesaid facts and law discussed, we don’t find any infirmity in the action of the Ld.CIT(A) deleting the two additions and restricting the estimated income @6% of the turnover of the assessee.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced on 10th January, 2025.