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Facts
The assessee, a partnership firm of builders and developers, failed to file its income tax return. The AO issued a notice and referred the case for special audit. The assessment was completed ex-parte. The CIT(A) partly allowed the assessee's appeal. Both Revenue and assessee are in cross-appeal before the Tribunal.
Held
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. It held that the CIT(A) correctly estimated net profit at 5% in most cases where books were rejected, and disallowed certain additions made by the AO. For unexplained bank deposits, the Tribunal directed deletion of the addition as net profit was already estimated.
Key Issues
Whether the CIT(A) erred in estimating net profit at 5% instead of 3% for unrecorded sales and whether the additions for unrecorded cash sales and unexplained bank deposits were justified when books were rejected.
Sections Cited
142(1), 142(2A), 144, 43CA, 40(a)(ia)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
Assessment Year : 2017-18 Bhujbal Brothers Vs. ACIT, Central Circle- Construction Company, 1(3), Pune. Shop No.21, 22, Damodar Villa, Karve Road, Kothrud- 411029. PAN : AAGFB7974A Appellant Respondent Revenue by : Shri Chandra Vijay & Ms. Shilpa N. C. Assesee by : Shri Saurabh J. Patil Date of hearing : 21.01.2025 Date of pronouncement : 21.04.2025 आदेश / ORDER PER VINAY BHAMORE, JM: These cross-appeals filed by the Revenue as well as by the assessee are directed against the order dated 30.07.2024 passed by Ld. CIT(A), Pune-11 [‘Ld. CIT(A)’] for the assessment year 2017-18.
Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of builders and developers and has not filed its return of income, the Assessing Officer issued notice u/s 142(1) but the assessee failed to furnish the return of income. Considering the nature and complexities of the accounts, the Assessing Officer referred the case for Special Audit u/s 142(2A) of the IT Act. The Auditor has submitted his report in the prescribed Form 6B along with his comments on 31.03.2021, the time allowed by the PCIT-2, Pune. On receipt of the Audit report from the Auditor, a notice u/s 142(1) of the IT Act along with a show cause letter dated 15.04.2021 was issued to the assessee through e-filing accounts and also sent through registered post whereby the assessee was asked to furnish the information and explanation on the issues raised therein. In the absence of any explanation from the assessee, the assessment is completed ex-parte to the best of judgement and on the basis of material available on records as stipulated u/s 144 of the IT Act.
In first appeal, after considering the reply of the assessee Ld. CIT(A) partly allowed the appeal of the assessee. It is this order Revenue as well as the assessee is in cross appeals before this Tribunal.
First, we shall take up the appeal of the assessee in for adjudication. By Assessee : 5. The assessee has raised the following grounds of appeal :-
1. The Learned assessing officer has erred in not granting proper opportunity of being heard and passed the Assessment order during the COVID period.
2. The AO has erred in appointing the special audit u/s 142(2A) and accepting the Audit report from special auditor after prescribed maximum extended time limit to submit the Audit report from Special Auditor appointed under section 142(2A). The AO also did not give the opportunity of being heard while passing the order for Special Audit. The very purpose of appointing Special audit was to avoid the time barring of the assessment.
3. On the facts and circumstance of the case, the learned Assessing officer has erred in making the addition on basis of Estimated Profit 20% (Rs. 17,19,80,000/-) and CIT(A) has erred in making addition at 5% despite the low profit margin and request for assessee to make addition at 3% (Rs. 2,57,97,000/-) which was the last accepted ITR for the AY 2015-16.
4. On the facts and circumstance of the case, the learned CIT(A) has erred in making addition @ 5% on unrecorded sales of Rs.38,18,000/.
5. On the facts and circumstance of the case, the learned Assessing officer and CIT(A) has erred in adopting the Stamp duty value u/s 43CA and not referring the matter to DVO.
6. On the facts and circumstance of the case, the learned Assessing officer and CIT(A) has erred in adding the amount as unrecorded cash of Rs. 23,09,494/- despite the fact that the books of accounts have already been rejected and profit is estimated at % basis.
7. On the facts and circumstance of the case, the CIT(A) has erred in adding the amount as Unexplained deposits of Rs. 25,44,381/- despite the fact that the books of accounts have already been rejected and profit is estimated at % basis.
8. On the facts and circumstance of the case, the learned Assessing officer has erred in adding the amount as Unexplained Interest of Rs. 1,07,08,047/-.”
At the time of hearing, Ld. Counsel of the assessee furnished a letter wherein it has been stated that the assessee do not want to press ground nos.1, 2 and 8 of its appeal. Accordingly, ground nos.1, 2 and 8 are dismissed as not pressed.
In ground no.3, the assessee has challenged the order passed by Ld. CIT(A) wherein he has estimated 5% net profit on gross receipts instead of 3% as requested by the assessee. In this regard, we find that Ld. CIT(A) has restricted the addition of 20% net profit as estimated by the Assessing Officer to 5% and accordingly substantial relief has been granted by observing as under :- “13.1 I have considered the facts of the case, submissions made by the appellant and the remand report of the AO. There is no dispute on the fact that the appellant was developing projects namely Forest Mist, Vatika and Misty Trail. It is also not under dispute that the project namely Forest Mist was 85% complete, project namely Vatika was 95% complete and project namely Misty Trail was 65% complete. It is also an undisputed fact that during the assessment proceedings or Special Audit, the appellant did not produce its books of accounts nor it filed any P&L account. It is also seen from the assessment order that the AO repeatedly requested the appellant to file project-wise details for working out net profit by following the percentage of completion method as prescribed by ICAI in its guidance note. However, despite of repeated opportunities, no such details were filed during the assessment proceedings. Now, during the appellate proceedings, the Rs.5,78,09,682/-. However, no supporting documents for this P&L Account has been filed. The appellant has not substantiated the basis on which the revenue has been recognized and neither any supporting documents for various expenses debited in the P&L account have been filed. The appellant has also failed to explain as to why the same could not be produced before the Special Auditor or the AO. The appellant has also not filed the project-wise working of revenue recognized by it by following the percentage of completion method. In such situation, the said P&L Account which is based upon unaudited books of accounts and is unsigned, cannot be accepted. Thus, the working of business profit of the appellant for the year under consideration cannot be determined on the basis of this unaudited P&L account. 13.2 On the other hand, it is seen that the appellant has not disputed the extant of percentage of work completion for three projects under discussion. Neither the appellant has disputed the amount of advances received by it for each of these three projects namely Forest Mist, Vatika and Misty Trail. The appellant has taken an alternate ground that it had earned net profit rate of 3% during AY 2015-16 which stands accepted in the assessment completed u/s. 143(3) of the Act and therefore the same NP rate can be applied on the revenue estimated by the AO. In this manner, the appellant has requested that the net profit from these three real estate projects may be restricted to Rs.2,58,00,000/- for the year under consideration. 13.3 I have considered this alternate contention of the appellant. A perusal of the assessment order suggests that the AO has not given any basis of adopting the NP rate @20% for the year under consideration. It is a well-settled legal position that while completing the best judgement assessment, the income must be estimated on some reasonable basis and the AO cannot adopt any unreasonable profit rate. A perusal of assessment order suggests that no basis for adopting the NP rate of 20% is mentioned in the assessment order. On the other hand, a perusal of statement of the partner of the appellant firm, recorded during the survey operation on 16.11.2018, suggests that at that time, GP rate was estimated @18%. Once, the GP rate was estimated @18%, NP rate cannot exceed the same and therefore the estimated NP rate of 20% as adopted by the AO, appears to be excessive. 13.4 It is also seen from the P&L Account filed for AY 2015-16 that NP rate of about 3% was declared by the appellant at a turnover of Rs.28.42 crore which has been accepted by the AO while completing the assessment u/s. 143(3) of the Act on 26.12.2017. 13.5 It is further seen that after completion of assessment for the year under consideration, the AO had completed the assessment u/s. 143(3)
r.w.s 147 of the Act for AY 2016-17 on 26.03.2022 wherein the findings of survey were also considered by the AO. It is seen that during these assessment proceedings for AY 2016-17, the AO initially proposed to estimate the net profit by taking the NP rate @10% but the appellant had requested to adopt NP rate of 3% on the basis of book results of AY 2015-16. While completing the assessment for AY 2016-17, the AO finally estimated the net profit by taking the NP rate of 5% to the total sales. 13.6 It is seen that for AY 2016-17 also, the books of accounts for the appellant firm were not properly maintained and no return of income was filed u/s. 139 of the Act and the same was filed only when notice u/s 148 of the Act was issued on 23.03.2021. Thus, the facts for the year under consideration are similar to the facts for AY 2016-17 wherein after considering the past history of the appellant firm, the AO estimated the net profit by taking NP rate @5%. As discussed above, for the year under consideration, the AO has not given any basis of adopting the NP rate of 20% which appears to be unreasonable especially when the NP rate of 3% declared for AY 2015-16 stands accepted in the scrutiny assessment. Since, the AO has adopted the NP rate of 5% for AY 2016-17, it will be fair to both the revenue as well as the appellant to adopt the same NP rate for the year under consideration, i.e. AY 2017-18. Accordingly, the AO is directed to recompute the profit from sales of flats and shops by adopting the NP rate of 5% instead of 20%. The AO is directed accordingly. The ground no.3 raised by the appellant is PARTLY ALLOWED.”
We have heard Ld. Counsels from both the sides and perused the material available on record. From perusal of the above order of Ld. CIT(A), we find that in assessee’s own case for assessment year 2016-17 on the similar facts and circumstances of the case, the Assessing Officer has also estimated net profit at the rate of 5% on gross turnover. It is worthwhile to mention here that for assessment year 2016-17 the books of accounts were also not maintained and regular return of income was also not furnished by the assessee.
Although, it is also an admitted fact that for assessment year 2015- 16, regular return of income was furnished by the assessee and a net profit of 3% was adopted by the Assessing Officer in 143(3) proceedings. It is true that the business of the assessee remains same for assessment years 2015-16, 2016-17 and 2017-18, the only difference in these three years is that the assessee has maintained regular books of accounts and furnished its return of income for assessment year 2015-16 whereas for assessment year 2016-17 and for assessment year 2017-18 i.e. for the period under consideration neither regular books of accounts were maintained nor regular return of income was furnished. Accordingly, Ld. CIT(A) was of the view that 5% net profit was appropriate and it was so decided in 143(3) proceedings for assessment year 2016-17 also. Accordingly, we do not find any error in the order passed by Ld. CIT(A) wherein he has already allowed substantial relief by estimating net profit at 5% of gross receipts whereas the same was estimated at 20% by the Assessing Officer. We also do not find any force in the arguments of Ld. Counsel of the assessee that the profit should be estimated at 3% as was estimated in 143(3) proceedings for assessment year 2015-16. Since the facts of the case for assessment year 2015-16 are different from that of the period under consideration. Since the books of accounts were not regularly maintained neither they were audited and even regular return of income was also not furnished by the assessee for the period under consideration. Accordingly, ground no.3 raised by the assessee is dismissed & order passed by Ld. CIT(A) in this regard is confirmed.
In ground no.4, the assessee has challenged the order passed by Ld. CIT(A) wherein he estimated 5% net profit on unrecorded sales of Rs.38,18,000/-. In this regard, we find that Ld. CIT(A) has deleted the addition of Rs.38,18,000/- made by the AO & restricted the same to 5% net profit only on above unrecorded sales of Rs.38,18,000/- by observing as under :- “15. I have considered the facts of the case, submissions of the appellant and the comments made by the AO. The appellant has not disputed the findings that the sales to the extent of Rs.38,18,000/- was not recorded in its books of accounts. The only contention of the appellant is that only profit element embedded in such sales should be considered as income and not the entire sale receipts. I have considered this contention of the appellant. As discussed above, in the present case, the income of the appellant has been determined by applying a net profit rate to the total turnover of the appellant, thus the comments of the AO that in the absence of any evidences for expenses, the contention of the appellant should not be accepted, does not have any force. Since the income in the present case is being estimated by applying a net profit rate to the turnover of the appellant, therefore it will only be fair that the said amount of Rs.38,18,000/- (which is not recorded in the books of accounts), should be added to the turnover estimated by the AO in para 9.3 of the assessment order and thereafter net profit rate of 5% should be applied for determining the income on such sales. The ground no. 4 raised by the appellant is PARTLY ALLOWED.”
10. We have heard Ld. Counsels from both the sides and perused the material available on record. From perusal of the above order, we find that an amount of Rs.36,18,000/- was not considered in its books of accounts and therefore the Assessing Officer has added whole of the amount to the income of the assesse & the same was restricted to 5% net profit by Ld. CIT(A). As we have already confirmed the order passed by Ld. CIT(A) regarding estimation of 5% net profit on gross receipts, we confirm the order passed by Ld. CIT(A) on this ground also, and accordingly ground no.4 raised by the assessee is dismissed.
In ground no.5, the assessee has challenged the order passed by Ld. CIT(A) wherein he has confirmed the order passed by the Assessing Officer wherein the difference of Rs.1,07,39,310/- in stamp duty value and registry value of certain flats/ shops has been added to the income of the assessee as per section 43CA of the IT Act. In this regard, we find that Ld. CIT(A) has dismissed this ground by observing as under :- “17. I have considered the Special Audit report and it is seen that in the Annexure-4 to this report, the Special Auditor has given 7 instances wherein the sale consideration is lower than Stamp Duty Valuation. The only argument of the appellant is that there was massive recession during the year and therefore, it had to sell the units at a value lower than the Stamp Duty Valuation. This argument of the appellant is factually incorrect because had it been the case, most of the units sold Stamp Duty Valuation but this is not the case and there are only few instances where the sale consideration is lower than the Stamp Duty Valuation. Accordingly, the contention of the appellant cannot be accepted and the addition of Rs.1,07,39,310/- made by the AO u/s. 43CA of the Act is upheld. The ground no. 5 raised by the appellant is DISMISSED.”
We have heard Ld. Counsels from both the sides and perused the material available on record. From perusal of the above order, we find that Ld. CIT(A) has dismissed this ground by observing that the assessee has only argued that due to massive recession during the year some units are sold lower than the stamp duty valuation and therefore he dismissed the said ground raised by the assessee. In this regard, we find that the assessment order was passed ex-parte i.e. in the absence of assesse, thereafter in first appeal before Ld. CIT(A) it was contended by the assessee that due to market position certain units were sold at a price lower than the stamp duty valuation. We find that no specific request was made by the assessee before Ld. CIT(A) to refer the matter to the DVO for valuation of the impugned flats/shops which were sold at lower than the stamp duty valuation. However, we also find that Ld. CIT(A) could have referred the matter to the DVO on his own, but the need to refer the valuation of the impugned property to the DVO arises only if there are no similarly situated or comparable property, but in the instant case only a few flats/ shops were sold at a value lower than the stamp duty valuation and rest of the units were sold at regular prices, therefore there was no occasion for Ld. CIT(A), to refer the matter to the DVO. Accordingly, we do not find any substance in the arguments of Ld. Counsel of the assessee that the matter of valuation of some of the flats/ shops should be referred to the DVO. Accordingly, we do not find any error in the order passed by Ld. CIT(A) wherein he confirmed the order passed by the Assessing Officer wherein the addition of Rs.1,07,39,310/- was made by him as per section 43CA of the IT Act since they were sold at a price lower than the stamp duty valuation. Accordingly, ground no.5 raised by the assessee is dismissed.
In ground no.6, the assessee has challenged the order passed by Ld. CIT(A) wherein Ld. CIT(A) has confirmed the addition made by the Assessing Officer regarding unrecorded cash sales of Rs.23,09,494/- despite the facts that books of accounts have been rejected and profit is estimated at percentage basis. In this regard, we find that Ld. CIT(A) has confirmed the addition of Rs.23,09,494/- made by the Assessing Officer on account of unrecorded cash sales by observing as under :-
23.1 I have considered the facts of the case and the submissions made by the appellant as well as the remand report. It is an undisputed fact that during the survey, the late partner of the appellant firm had accepted the receipt of certain on-money which was not recorded in the books of accounts. The appellant has now submitted a copy of cashbook claiming that the said amount has been included in the books of accounts. This claim of the appellant cannot be accepted, firstly because no such cashbook was produced before the Special Auditor nor before the AO, secondly the books of accounts including the cash book filed now, are not audited and therefore cannot be relied upon. Moreover, as mentioned in the remand report, during the survey operation, the appellant's partner had categorically admitted that the said cash amount was not included in the books of accounts. Thus, the cash book now filed by the appellant cannot be considered at this stage. 23.2 The appellant has taken an alternate contention that the AO has made addition u/s. 43CA and therefore no separate addition for cash receipts can be made as the same shall amount to double addition. This contention of the appellant cannot be accepted because the units for which addition u/s. 43CA was made are different than the units for which the appellant received on-money. Thus, this contention of the appellant stands rejected. 23.3 To sum up, the appellant has received cash amounting to Rs.23,09,494/-which has not been recorded in the books of accounts and accordingly the addition of Rs.23,09,494/- as made by the AO stands upheld. The ground no. 7 raised by the appellant stands DISMISSED.
We have heard Ld. Counsels from both the sides and perused the material available on record. From perusal of the above order, we find that the survey proceedings were conducted at the premises of the assessee and the assessee himself has accepted the receipt of above cash of Rs.23,09,494/- from various purchasers, since the same was not recorded in the books of accounts, the Assessing Officer added the whole of the amount as income of the assessee and Ld. CIT(A) also confirmed the same. In this regard, we find 5% has been estimated by Ld. CIT(A) on business receipts. In these circumstances, we deem it appropriate to delete the addition of Rs.23,09,494/- & estimate the net profit at 5% on above cash sales and accordingly direct the Assessing Officer to delete the addition of Rs.23,09,494/- and add 5% net profit of Rs.1,15,475/- as income of the assessee on above unrecorded cash sales. Accordingly, ground no.6 raised by the assessee is partly allowed.
In ground no.7, the assessee has challenged the order passed by Ld. CIT(A) wherein he confirmed the addition of Rs.25,44,381/- regarding unexplained deposits in bank accounts despite the fact that the books of accounts have been rejected and profit is estimated at percentage basis. In this regard, we find that the Assessing Officer has made addition of Rs.48,53,875/- regarding unexplained deposits in bank accounts and Ld. CIT(A) by providing telescopic benefit of other addition of Rs.23,09,494/- has restricted the same to Rs.25,44,381/- by observing as under :- “25. I have considered the facts of the case and the submissions made by the appellant as well as the remand report. This is not under dispute that there were cash deposits amounting to Rs.48,53,875/- in the bank account of the appellant which did not reconcile with the books of accounts at the time of Special Audit. Neither the appellant filed any explanation when the Special Audit report was forwarded to it and show cause was issued by the A.O. During the appellate proceedings, the appellant has tried to submit that the said cash was deposited out of 'cash in hand' but no supporting evidence for same has been filed. Further no explanation has been filed by the appellant that if the said cash deposits were out of accounted cash amount, why the same was not reflecting in the books when Special Audit was under process. Accordingly, the explanation of the appellant that the said cash deposits were made from disclosed 'cash in hand' is rejected.
However, as discussed earlier in this order, the appellant had received cash amounting to Rs.23,09,494/- in the form of on-money which is not accounted in the books of accounts. The said amount has been added to the income of the appellant and such addition of Rs.23,09,494/- has been upheld by me. In this manner, the availability of cash to the extent of Rs.23,09,494/-can be considered out of such unaccounted on-money and therefore to be fair to the appellant, the appellant is being allowed the telescoping benefit of Rs.23,09,494/-. Accordingly, the addition on account of unexplained cash deposits in the bank account is restricted to Rs.25,44,381/- (48,53,875/- - 23,09,494/-). Thus, the addition is upheld to the extent of Rs.25,44,381/-. The ground no. 8 raised by the appellant is PARTLY ALLOWED.”
We have heard Ld. Counsels from both the sides and perused the material available on record. From perusal of the above order, we find that the assessee has deposited certain amounts in its bank accounts and the same was added by the Assessing Officer to the income of the assessee since the same does not find place in its books of accounts. We further find that the books of accounts have already been rejected and net profit has been estimated at the rate of 5% on gross receipts, the question of any addition on the basis of bank deposit does not arise since the net profit has already been estimated at the rate of 5% on gross receipts. In this regard, the assessee has also relied on various decisions. We find force in the Ld. Counsel of the assessee that once the books of accounts have been rejected and profit has been estimated no separate addition is required on the basis of bank deposit since the bank deposit is result of turnover determined by the Assessing Officer. Accordingly, we direct the Assessing Officer to delete the addition of Rs.48,53,875/- which was reduced by Ld. CIT(A) to Rs.25,44,381/-. Accordingly, ground no.7 raised by the assessee is allowed.
In the result, the appeal filed by the assessee in is partly allowed.
Now, we shall take up the appeal of the Revenue in for adjudication. ITA No.2119/PUN/2024 – By Revenue : 19. The Revenue has raised the following grounds of appeal :- “1) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition of Rs. 17,19,80,000/-to Rs. 4,29,95,000/-, without appreciating the fact that profit @ 20% was determined on unaccounted sale of Rs.85.99 Cr, on the basis of documents found and impounded during the survey action showing that significant percentages of various project were completed, assessee's non-cooperation during the assessment proceedings and special audit proceedings, profit ratio based on industry standards and available data. 2) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition of Rs.38,81,0000/- to 5% of profit, on account of unrecorded sale of flats, without appreciating the fact that the assessee had not recorded this sale in his books of account and no evidence has been furnished by the assessee to establish that corresponding expenses were also not recorded in the books of accounts. 3) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made u/s. 40(a)(ia) of the Act without appreciating the fact that disallowance made on the basis of the special audit report that for the A.Y 2017-18, the assessee had incurred expenditure totalling to Rs.1,52,10,370/- on account of various expenses on which the assessee was liable to deduct TDS but the assessee failed to do so, thereby it was liable for disallowance u/s 40(a)(ia). 4) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the unexplained cash deposits by giving telescoping benefits of on-money received without appreciating the fact that the assessee has failed to submit cogent and reliable evidences to establish that the said cash deposits were made from 'on money' receipts. 5) The appellant craves to add, amend, alter or delete any of the above ground of appeal
during the course of appellate proceedings before the Hon'ble Tribunal.”
20. In ground nos.1 and 2, the Revenue has challenged the order passed by Ld. CIT(A) wherein profit has been estimated at the rate of 5% on gross receipts of Rs.17,19,80,000/- declared by the assessee and also on unrecorded sale of flats of Rs.38,81,000/-. In this regard, we find that the Assessing Officer has estimated net profit of 20% on gross receipts of Rs.17,19,80,000/- and also added Rs.38,81,000/- regarding unrecorded sale of flats to the income of the assessee and Ld. CIT(A) has estimated the net profit at the rate of 5% on both the above amounts and the same is challenged before us. Since we have already decided the appeal filed by the assessee Ld. CIT(A) wherein he estimated the net profit at 5% on gross turnover and also on unrecorded sale of flats. In the light of detailed and reasoned order passed by Ld. CIT(A) we do not find any error in the order passed by him and accordingly ground nos.1 and 2 raised by the Revenue are dismissed.
21. In ground no.3, the Revenue has challenged the order passed by Ld. CIT(A) wherein disallowance made u/s 40(a)(ia) on Rs.1,52,10,370/- at the rate of 30% i.e. Rs.43,63,111/- was deleted by Ld. CIT(A) by observing as under :- “19. I have considered the facts of the case. As discussed earlier in this order, the appellant has not maintained proper books of accounts and in fact he did not file any P&L Account before the Special Auditor or before the AO. Accordingly, the AO had estimated the revenue for the year under consideration and then estimated the net profit by applying an estimated NP rate. In this manner, no specific expenditure has been considered by the AO while completing the assessment. It is a well- settled legal position that when the profit is estimated by applying a net profit rate and ignoring the books results, the Assessing Officer is precluded from making specific disallowance towards expenses debited in the P/L Account. This issue has been a matter of examination by several High Courts and ITAT and some of these decisions are as under: 20.1 In the case of Indwell Constructions vs CIT 232 ITR 776 (AP), the High Court of Andhra Pradesh has held as under- 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 account. 20.2 In the case of Malpani House of Stones vs CIT 395 ITR 385 (Rajasthan), the Hon'ble High Court of Rajasthan after relying the decision in the case of Indwell Constructions (supra) held that where assessee's books of account were rejected and its income were assessed on basis of estimation, it would not be appropriate to simultaneously rely on such rejected books of account, for the purposes of adding undisclosed income by rejecting some of purchases. 20.3 In the case of Dhiraj R Rungta 140 taxmann.com 284 (Gujarat), the Hon'ble High Court upheld the principle that once the books of accounts are found unreliable, same could not be relied upon for making further additions and it would have been better, if the Assessing Officer had estimated a reasonable profit of the assessee considering the history and nature of the business. This principle was reiterated by Hon'ble Gujarat High Court in the case of Prasant Oil Mill 72 taxmann.com 136 (Gujarat). 20.4 The Hon'ble ITAT, Pune in the case of ISMT Limited (ITA No. 2751 & 2752/PUN/2016) dated 06.12.2021 has reiterated this principle by observing as under:- 12. We have carefully gone through the orders of the lower authorities as well as the written submissions filed before us. We consider it not necessary to dwell into the rival submissions made by both the parties as we find the approach of both the authorities is totally flawed for the reason that when the books of accounts stood rejected by both the authorities and when the assessee not challenged the action of the lower authorities rejecting the books of accounts then the only course of action available to the Assessing Officer is to determine the profits by application of flat rate of profits by taking into consideration the business conditions of the assessee and compare it from the profits disclosed by the assessee in the similar line of businesses. In this connection, reference can be made to the following decisions:- (i) CIT vs. K.Y. Pilliah& Sons, 63 ITR 411 (SC); (ii) (Dabros Industrial Co. (P) Ltd. vs. CIT. 108 ITR 424 (Cal.); (iii) Badrinath Agarwal vs. CIT, 65 ITR 242 (All.); and, (iv) Shri Venkteshwar Sugar Mills vs. CIT, 341 ITR 588 (AII.). 13. it is also settled position of law that the Assessing Officer cannot rely on the same books of accounts which are rejected for the purpose of making any other additions as held by the Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions vs. CIT, 232 ITR 776 (Andhra Pradesh), Hon'ble Rajasthan High Court in the case of Malpani House of Stones vs. CIT, 395 ITR 385 (Rajasthan) and Hon'ble Punjab & Haryana High Court in the case of CIT vs. Gian Chand Labour Contractors, 316 ITR 127 (P&H).
14. In the present case, having rejected the books of accounts maintained by assessee, Assessing Officer cannot rely upon on the same books of account for the purpose of making addition in respect of sale of scrap etc.
21. Thus, above decisions suggests that unreliable/rejected books of accounts may not be relied upon for making specific disallowances including the disallowance u/s. 40(a)(ia) of the Act and in such cases, a better way of assessing total income is by applying a net profit rate to total turnover. In the present case, the appellant did not file any ITR. Since no books of accounts were produced by the appellant, the AO had estimated the revenue for the year under consideration and then estimated the net profit by applying an estimated NP rate. In this manner, no specific expenditure has been considered by the AO while completing the assessment. Therefore, by following the ratio laid down by above case laws, it is held that all the expenses are deemed to have been considered while estimating the income and the AO cannot resort to specific disallowance u/s. 40(a)(ia) of the Act. Accordingly, the addition of Rs.45,63,111/- made by the AO is directed to be deleted. The ground no. 6 raised by the appellant is ALLOWED.”
We have heard Ld. Counsels from both the sides and perused the material available on record. In the light of detailed and reasoned order passed by Ld. CIT(A) we do not find any error in the order passed by him wherein the disallowance made by the Assessing Officer u/s 40(a)(ia) of Rs.43,63,111/- has been deleted by relying on various judgements of Hon’ble Courts and also of Co- Benches of the Tribunal. Accordingly, ground no.3 raised by the Revenue is dismissed.
In ground no.4, the Revenue has challenged the order passed by Ld. CIT(A) wherein he provided the telescopic benefit of Rs.23,09,494/- regarding on-money receipts by the assessee and thereby restricting the unexplained cash deposit to Rs.25,44,381/-. Since we have already deleted the whole of the addition of Rs.48,53,875/- made by the Assessing Officer regarding unexplained deposits in bank account, the question of grant of telescopic benefit by Ld. CIT(A) does not arise, accordingly ground no. 4 raised by the Revenue is dismissed.