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Facts
The assessee, M/s Meena Jewellers Extension Private Limited, a jewellery trader, filed its return for AY 2017-18 declaring Nil income after carrying forward losses. The case was selected for scrutiny, but the assessee failed to appear or provide information. The Assessing Officer (AO) completed the assessment ex-parte under Section 144, making additions for estimated profit, unexplained cash credits, and unexplained cash deposits during demonetisation.
Held
The Tribunal held that the AO made additions on an estimation basis without properly rejecting the assessee's books of accounts with valid reasons. The Tribunal also found that the AO made additions towards liabilities and cash deposits without sufficient analysis and without providing the assessee with adequate opportunities to explain. Consequently, the matter was set aside to the CIT(A) for fresh examination.
Key Issues
Whether the AO was justified in making additions based on estimation without rejecting books of accounts and without providing sufficient opportunity to the assessee for assessment and appeal proceedings.
Sections Cited
147, 148, 143(3), 144, 68, 69A, 270A, 271AAC, 133(6)
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: Shri Vijay Pal Rao & Shri Manjunatha G.
(Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri P.Murali Mohan Rao, Ld.AR रधजस् व द्वधरध/Revenue by: Shri M.Vijay Kumar, CIT-DR सुिवधई की तधरीख/Date of Hearing: 05/12/2024 घोर्णध की तधरीख/Date of 10/01/2025 Pronouncement: आदेश / ORDER PER. MANJUNATHA G., A.M: These four appeals filed by the assessee are directed against separate, but, identical orders of the Commissioner of Income Tax (Appeals) [“CIT(A)”], National Faceless Appeal Centre Delhi all dated 19.02.2024, 23.02.2024, 21.02.2024 and 20.02.2024, pertaining to A.Y.2017-18 and 2018-19. Since the facts are identical and the issues are common, for the sake of 2 convenience, the appeals filed by the appellant are heard together and disposed of by this consolidated order.
The order passed by the Ld.CIT(A) u/s 250 of the Act dated 12.02.2024 is erroneous both on facts and in law to the extent the order is prejudicial to the interest of the appellant.
The Ld.CIT(A) erred in upholding the order of assessment passed by the AO on 29.12.2019 without actually appreciating the facts of the case and submissions made by the assessee, which is against the provisions of law and principles of natural justice.
The Ld.CIT(A) ought to have appreciated the fact that the appellant has reasonable cause for non- compliance to notice issued during the assessment proceedings and that completing the assessment by the AO by applying the provisions of Section 144 of the Act is not correct, which is liable to be quashed. 4. The Ld.CIT(A) ought to have quashed the assessment made u/s 144 of the Act and ought to have appreciated the fact that when the assessment itself is invalid, the additions made in such assessment are invalid and are liable to be deleted. 5. The Ld.CIT(A) erred in upholding the addition of Rs.27,70,67,789/- made towards ad-hoc 10% of sale of services, which is purely based on surmised and assumptions. 6. The Ld.CIT(A) ought to have appreciated the fact that the appellant has reasonable cause for non- compliance and that estimating the profit at a higher profit percentage is not correct in law.
3 7. The Ld.CIT(A) erred in confirming the addition f Rs.27,70,67,789/- by holding that the AO has a rationale for estimating the profit @10%.
The Ld.CIT(A) erred in observing that gross profit margin of jewellery stores was 43.5% in 2013 without considering the recent comparables and ought to have appreciated that the rates of profits in similar line of business stands between net profit of 2-3% and estimating the profit @10% is on the higher side and bad in law.
9. The Ld.CIT(A) erred in not appreciating the fact that Assessing Officer ought to have taken into account both purchases and the turnover as true as admitted by assessee and ought to have worked out the business results.
10. The Ld.CIT(A) erred in not deleting the addition made u/s 68 of the Act for Rs.2,25,17,243/- towards loans and advances taken by the assessee, which is against the provisions of the Act.
11. The Ld.CIT(A) erred in not appreciating that no other additions can be made when estimation of profit is done by the AO and that the additions made u/s 68 and 69A of the Act are against the provisions of the Act.
12. The Ld.CIT(A) ought to have appreciated that the loan of Rs.2,25,17,243/- has been taken through proper banking channel and that the assessee has proved the identity, creditworthiness and genuineness of the transaction.
The Ld.CIT(A) erred in confirming the addition of Rs.10,83,99,500/- made u/s 69A towards cash deposits in the bank account during the FY 2016-17, without considering the facts of the case and submissions made by the assessee.
The Ld.CIT(A) erred in upholding the addition of Rs.10,83,99,500/- towards cash deposits without appreciating the fact that the said cash deposits are made in the normal course of business.
The Ld.CIT(A) ought to have appreciated the fact that the gross receipts and the collection of debtors have 4 been duly accounted for in the books of accounts of the assessee and the same were considered in the Profits & Loss a/c for the AY under consideration.
16. The Ld.CIT(A) erred in not appreciating the fact that the cash deposits stand explained and the addition of the same as unexplained is not correct as per the provisions of the Act. 17. The assessee may add, alter, or modify or substitute any other points to the grounds of appeal at any time before or at the time of hearing of the appeal.
3. The brief facts of the case are that the assessee, M/s Meena Jewellers Extension Private Limited is into the business of trading in jewellery, filed its return of income, for the A.Y.2017-18 on 07.11.2017, declaring Nil income, after carrying forward current year losses of Rs.37,31,97,233/-. The case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 (“the Act”) dated 08.08.2018 and notice u/s 142(1) of the Act were issued from time to time to the assessee company through ITBA portal, calling for relevant information / documents. However, the assessee neither appeared, nor filed any details. Therefore, the AO issued final show cause notice dated 29.11.2019 and called upon the assessee to explain as to why the assessment proceedings shall not be completed u/s 144 of the Act, based on the material / information available on record. Since there is no response and compliance from the assessee, the AO has completed the assessment u/s 144 of the Act on 29.12.2019 and determined total loss of the assessee under normal provisions at Rs.9,61,29,444/-, by making addition of Rs.27,70,67,789/- towards estimation of income @10% on sales turnover of the 5 assessee under the head ‘income from business and profession’. Further, the AO had also made addition of Rs.2,25,17,243/- u/s 68 of the Act towards non-current liabilities as unexplained cash credits. Similarly, the AO had made addition of Rs.10,83,99,500/-u/s 69A of the Act as unexplained money towards cash deposited in the bank account during the demonetisation period.
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld.CIT(A), the assessee challenged the assessment order passed by the AO u/s 144 of the Act, on the ground of violation of principles of natural justice. The assessee had also contested the additions made by the AO towards rejection of books of accounts and estimation of profit @10% on the total turnover on the ground that going by the nature of business of the assessee, the profit estimated by the AO is on higher side. The assessee had also challenged the additions made by the AO towards liabilities u/s 68 of the Act on the ground that the assessee has filed relevant evidences and proved that the said liabilities are sundry creditors, arising in the normal course of business of the assessee. Similarly, the assessee had also challenged the additions towards cash deposited into bank account during the demonetization period u/s 69A of the Act and argued that the AO made additions towards cash deposits separately, even though the said cash deposits pertains to sales turnover declared by the assessee for the relevant period, which is already part of books of accounts.
6 5. The Ld.CIT(A) after considering the relevant submissions of the assessee and also taking note of certain judicial precedents, rejected the arguments of the assessee, on the violation of principles of natural justice and observed that the AO had given sufficient opportunities to the assessee, but the assessee neither appeared nor filed any details. The Ld.CIT(A) also rejected the arguments of the assessee on the issue of rejection of books of accounts by following the decision of Hon’ble Supreme Court in the case of Katchwala Gems Vs.JCIT 288 ITR 10 (2007)(SC) and held that when the assessee has not furnished relevant evidences, the AO is left with no option but to resort to estimation of profit from the business and such estimation is based on the material available on record, which also involved certain degree of guess work. The Ld.CIT(A) had also upheld the additions made by the AO towards estimation of net profit on total turnover by following the decision of Hon’ble Supreme Court in the case of Commissioner of Sales Tax Vs. H.M. Esufali H.M.Abdulali [1073] 90 ITR 271(SC) and observed that in this line of business, normal profit margin would be in the range of 43.5% in 2013 and 42.6% in 2017. Therefore, the AO has reasonably adopted 10% net profit, based on the material available on record. Therefore, the findings and facts recorded by the Assessing Officer, while estimating net profit on sales turnover cannot held to be on higher side. The Ld.CIT(A) had also upheld the additions made towards liabilities u/s 68 of the Act, by following certain judicial precedents and held that when the assessee had not filed relevant evidences to prove the identity, genuineness and creditworthiness of the parties, the additions made by the AO towards liabilities u/s 68 of the Act
7 needs to be upheld. Likewise, the Ld.CIT(A) upheld the additions made by the AO towards cash deposits during the demonetizaiton period u/s 69A of the Act on the ground that the assessee failed to file relevant evidences, to prove the source for cash deposited during demonetisation period, either during assessment proceedings or appellate proceedings. Therefore, there is no error in the reasons given by the AO to make additions towards cash deposited during demonetisation period as unexplained money u/s 69A of the Act.
Aggrieved by the Ld.CIT(A) order, the assessee is now in appeal before the Tribunal.
The learned Counsel for the assessee, Shri Murali Mohan Rao, CA submitted that the Ld.CIT(A) erred in upholding the additions made by the AO towards 10% profit on total turnover without rejection of books of accounts. It is a well settled principle of law by the decision of various courts that before estimation of profit, books of accounts should be rejected with valid reasons. Since the AO has not rejected the books of accounts, the profit estimated on total turnover cannot be sustained. The learned Counsel for the assessee further submitted that the assessee could not file relevant evidences before the learned AO during the assessment proceedings and even appellate proceedings, because the assessee group of companies were in the process of liquidation before the NCLT. Since the assessee company was not carrying any business activities, there was no staff to monitor or deal with income tax matters of the assessee company. Therefore, the assessee could
8 not gather relevant evidences and file before the AO. The AO made additions on estimation basis without providing reasonable opportunity to the assessee, therefore, the matter may be remanded back to the learned AO to give another opportunity of hearing to the assessee to explain its case. The learned Counsel for the assessee, further referring to the additions made by the AO towards liabilities u/s 68 of the Act, submitted that the AO has made addition to total liabilities appearing in the balance sheet which consist of provisions for expenditure and sundry creditors for trade. The assessee has maintained regular books of accounts and also explained the liabilities before the Ld.CIT(A). However, the Ld.CIT(A) did not consider the explanation furnished by the assessee and sustained the additions made by the AO. Similarly, the Assessing Officer has made additions towards cash deposited during demonetization period u/s 69A of the Act, even though the assessee has maintained regular books of accounts and the money deposited in their bank accounts were recorded in the books of accounts. The assessee had also explained the source for the cash deposited, out of sales declared for the relevant period. Since the assessee has not filed relevant evidences before the Assessing Officer, the Assessing Officer has made additions towards total cash deposits made during the demonetization period. These facts need to be examined by the Assessing Officer. Therefore, the matter may be set aside to the file of the Assessing Officer to give another opportunity of hearing to the assessee.
9 8. The learned DR, on the other hand, supporting the order of the Ld.CIT(A) submitted that admittedly, assessment proceedings before the Assessing Officer are ex-parte. The assessee neither appeared nor filed any details, therefore, we cannot find any fault with the best judgment assessment order passed by the Assessing Officer. Further, the assessee could not file any details before the Ld.CIT(A). Even though the assessee claims that it has filed relevant details, from the observation of the Ld.CIT(A), it is undoubtedly clear that the assessee could not file relevant evidences to justify its arguments in respect of various additions made by the Assessing Officer including estimation of profit @10% on total turnover, additions towards unexplained cash credit u/s 68 of the Act, addition towards cash deposited into bank account during demonetization period u/s 69A of the Act. Even during the appellate proceedings before the Tribunal, the assessee did not file any evidence except filing ITR filed copy and unaudited and unsigned balance sheet and profit and loss account. Since the assessee could not file any evidences to justify its case, the Assessing Officer and the Ld.CIT(A) has rightly made additions towards profits from the business by estimating @10% on total turnover and also made addition u/s 68 of Act towards loans and advances taken by the assessee and addition u/s 69A of the Act towards cash deposited during demonetization period. Therefore, he submitted that the additions made by the Assessing Officer and sustained by the Ld.CIT(A) should be upheld.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below.
10 The facts borne out from the records indicate that the assessee company is into the business of trading in jewellery. During the assessment proceedings, inspite of issuing of repeated notices u/s 143(2) and 142(1) of the Act on various occasions, there was no compliance from the assessee. The assessee neither appeared nor filed any details to explain its case, therefore, we cannot find fault with the best judgment assessment order passed by the Assessing Officer u/s 144 of the Act and various additions made in the assessment proceedings. Further, although the assessee has filed appeal before the Ld.CIT(A) and challenged various additions made by the Assessing Officer, from the observation of the Ld.CIT(A), in their order, it is abundantly clear that the assessee neither filed any information nor justified its case with relevant evidences. The assessee explained the reasons for not furnishing evidences before the CIT(A) and according to the assessee, the group companies were undergoing IBC proceedings and in the process, the Directors were missed the proceedings before the Ld.CIT(A). Further, the assessee has maintained regular books of accounts and also obtained relevant information to justify its financial results declared for the year under consideration and given the chance, the assessee will produce all evidences to justify the case.
Having considered the arguments of both the sides, we find that admittedly, the AO has made additions towards net profit from business by estimating 10% profit on total turnover of the assessee. Although the AO has estimated profit from the business, there is no finding from the AO in respect of books of accounts maintained for the relevant assessment year and its 11 correctness. It is a well settled principle of law by the decision of various courts that before going for best judgement assessment u/s 144 of the Act, the AO needs to reject the books of accounts of the assessee with valid reason. In the present case, although the AO has discussed the financial results of the assessee declared for the impugned assessment year and observed that the net profit margin of 1.95% declared by the assessee is very low, there is no reason as to how the Assessing Officer has arrived at said conclusion with relevant evidences, including comparable cases and its own financial statement for earlier years. In our considered view, unless the Assessing Officer reject the books of accounts with valid reasons, he cannot resort to estimation of profit even in case of best judgement assessment. Although in best judgement assessment, there is certain degree of guess work, but the said guess work cannot arbitrary and without any basis. In the present case, the assessee claims that profit margin in this line of business is very low and compared to net profit rate adopted by the AO, it is on higher side. In our considered view, although no evidences have been filed to justify its argument that the net profit adopted by the AO is on higher side, in our considered view, since the AO has not given any reasons for rejection of books of accounts and also estimated 10% net profit on turnover without any basis, the matter needs to be set aside to the file of the lower authorities for reconsideration of the issue.
Coming back to the additions made u/s 68 of the Act towards liabilities. The assessee claims that the Assessing Officer made additions on total liabilities appearing in the 12 balance sheet of the assessee for the relevant assessment year and the said liabilities consist of long-term loans and advances from related parties and other loans and advances which are carried forward from earlier financial years. The assessee has filed unaudited, unsigned copy of balance sheet, but as per the said balance sheet, the total non-current liabilities under the long-term borrowings was at Rs.2,25,17,243/-. The assessee claims that it has received loans and advances from related parties and obtained all the information including confirmation letters from the parties and requested to give another opportunity to explain its case. Since the assessment order passed by the Assessing Officer is ex-parte and there is no occasion for the assessee to file relevant evidences, in our considered view, this issue also needs to go back to the file of the lower authorities for reconsideration.
Coming back to additions made towards cash deposits during the demonetization period. During the assessment proceedings, the AO obtained bank statements from Bank of Maharashtra and Vijaya Bank u/s 133(6) of the Act and observed that during the demonetization period, the assessee has made cash deposit of Rs.10,53,48,500/-. The AO made additions towards cash deposits during demonetization period u/s 69A of the Act as unexplained money. It was the argument of the assessee that the cash deposited during the demonetization period is out of sales recorded in the books of accounts of the assessee during the relevant period. The assessee has maintained books of accounts and explained sources for cash deposited. The bank accounts considered by 13 the AO are part of regular books of accounts of the assessee and therefore requested to set aside the issue to the file of the AO for examination of the facts. In our considered view, the AO has made additions towards total cash deposited during demonetization period without any analysis, whether it is recorded in the books of accounts of the assessee or it is unexplained money, not recorded in the books of accounts of the assessee, to make additions u/s 69A of the Act. In our considered view, in order to make additions u/s 69A of the Act, the AO has to give a clear finding that the assessee is owner of the money and could not explain the source of the said money to the satisfaction of the AO. Since the AO has not recorded any findings as to how the money is as in the nature of unexplained money and made additions only on the basis of bank statements, in our considered view, this issue also needs to go back to the file of the lower authorities for reexamination of the facts.
13. In view of this matter and considering facts and circumstances of the case, we are of the considered view that since the assessment proceedings are ex-parte u/s 144 of the Act and further during the appellate proceedings, the assessee could not file relevant evidences to justify its case, the matter needs to be set aside to the file of the Ld.CIT(A) for fresh examination and to give another opportunity of hearing to the assessee. Thus, we set aside the order of the Ld.CIT(A) and restore the matter back to the file of the Ld.CIT(A) for denovo consideration of the issue involved in the appeal. The Ld.CIT(A) is directed to reconsider the issues after providing reasonable
14 opportunity of hearing to the assessee. Needless to say, the assessee shall appear and file necessary details as and when the case is listed for hearing without seeking any adjournment.
15. These two appeals filed by the assessee are against the order passed by the Ld.CIT(A), confirming the penalty levied by the Assessing Officer u/s 270A of the Act for under reporting of income as a consequence of misreporting and penalty levied u/s 271AAC of the Act towards additions made u/s 69A of the Act. The appeal filed by the assessee, challenging the additions made by the Assessing Officer towards estimation of profit @10% on total turnover and additions made by the Assessing Officer towards cash deposited during the demonetization period u/s 69A of the Act has been set aside to the file of the Ld.CIT(A) for denovo consideration. Since the addition made by the Assessing Officer on both the issues has been set aside to the file of the Ld.CIT(A) for denovo consideration, in our considered view, the consequent penalty levied by the AO u/s 270A and 271AAC of the Act and confirmed by the Ld.CIT(A) also needs to be set aside to the file of the Ld.CIT(A) for reconsideration. Thus, we set aside the order passed by the Ld.CIT(A) and restore the issue of penalty levied u/s 270A and 271AAC of the Act to the file of the Ld.CIT(A) for reconsideration. The Ld.CIT(A) is directed to reconsider the issue of penalty levied by the AO, after deciding
15 the main appeal filed by the assessee on the issue of additions made by the AO towards estimation of profit, addition towards unexplained cash credit u/s 68 of the Act and also additions made towards cash deposited during the demonetization period.
In the result, appeal filed by the assessee in ITA 329/Hyd/2024 and 285/Hyd/2024 are allowed for statistical purpose.
The facts and issues involved in this appeal filed by the assessee are identical to the facts and issues, which we had considered in A.Y.2017-18. But for figures, the facts and issues involved in this appeal are identical to the issues, which we had considered in for the A.Y.2017-18. The reasons given by us in preceding paragraph No.8 to 13 shall mutatis-mutandis apply to this appeal, as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) and restore the issue to the Ld.CIT(A) for denovo consideration of the issue. The Ld.CIT(A) is directed to reconsider the issue, after providing reasonable opportunity of hearing to the assessee. Needless to say, the assessee shall appear and file necessary details, without seeking any adjournment.
In the result, appeal filed by the assessee in is allowed for statistical purpose.
16 19. As a result, all the appeals filed by the assessee are allowed for statistical purpose.
Order pronounced in the Open Court on 10th January, 2025.