ARIHANT ENTERPRISE,AHMEDABAD vs. THE ITO, WARD-7(2)(1), AHMEDABAD

Both the lower authorities have failed to appreciate that additions u/s. 68 & 36(1)(iii) of the Act cannot be made based on rejected books of accounts.

The Ld. CIT(A) has erred in law and on facts of the case in confirming invocation of provisions of Section 115BBE of the Act.

Alternatively and without prejudice, the Ld. AO has erred in law and on facts of the case in computing tax at the rate of 60% by applying amendment to Section 115BBE of the Act retrospectively.

Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld.AO in levying interest u/s.234A/B/C/D of the Act.

The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld.AO in initiating penalty proceedings u/s.270A & 271AAC of the Act.

The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.

The assessee is partnership firm, which is engaged in the business of trading of Plastic Polyfilm in the trade name of Arihant Enterprise. It has filed its return of income for the year under consideration on 29.10.2017, declaring total income of Rs.7,45,230/-. After considering submissions, the Assessing Officer passed an assessment order dated 27.12.2019, making following disallowances/additions:- Asst. Year : 2017-18 - 3–

On appeal, the Ld. CIT(A) upheld the rejection of books, sustained disallowance of interest, partly restricted the addition on suppressed sales to Rs.1,90,470/-, and confirmed the addition u/s. 68 with taxability u/s 115BBE.

Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.

Before us, the Ld. AR, with regard to rejection of books of accounts u/s 145(3) of the Act, contended that the Assessing Officer the Assessing Officer rejected the books of accounts of the assessee u/s. 145(3) of the Act without finding any material defects therein. The Ld. AR submitted that the major reasons for rejection of books of accounts were the reduction in cash sales & closing stock in comparison to the preceding year, high transactions near demonetization period and non-furnishing of stock register. The Ld. AR submitted that the Assessing Officer failed to appreciate that business transactions do not take place necessarily as per past trends and mere variation from the same does not constitute a defect in books of accounts. The Ld. AR further submitted that non-maintaining of day to day stock register is not a ground to reject books of accounts and reliance was placed on the decision of Hon’ble Gujarat High Court in the case of Jaytick Intermediates Pvt. Ltd. v. ACIT - [2016] 73 taxmann.com 195 (Gujarat). The Ld. AR also submitted that it is well settled that the books of accounts cannot be rejected Asst. Year : 2017-18 - 4–

1 With regard to the addition of Rs.43,88,500/- as unexplained cash credit u/s 68 of the Act, the Ld. AR submitted that the Assessing Officer considered cash sales of Rs. 43,88,500/- being the source of cash deposits during demonetization period as unexplained cash credit u/s. 68 of the Act. The Ld. AR contended that cash sales has been duly established by the assessee with documentary evidences viz Cash book, Sales register, Stock summary, Item-wise monthly stock summary, Purchase register etc. The Ld. AR also submitted that the cash sales forms part of the total sales reflecting in the VAT return which are accepted by the VAT department. The Ld. AR submitted that the Revenue authorities have merely considered the variation from historical trends of cash sales and closing stock balance and disbelieved the cash sales. The Ld. AR contended that it is a settled law that when sales are recorded in books of accounts & supported by documentary evidences, same cannot be disregarded merely on the basis of assumptions and presumptions., for which reliance was placed on the following judgments:- a) ACIT v. Radhika Jewellers - ITA No. 201/Ahd/2023; b) Amikrupa Education Trust v. ITO - [2024] 159 taxmann.com 1658 (Ahmedabad); c) ITO v. Rajeshkumar Chhanalal Patel - ITA No. 2159/Ahd/2016; d) R.S. Diamonds India P. Ltd Vs. ACIT, [2022] 198 ITD 545 (Mum.) Asst. Year : 2017-18 - 5–

2 The Ld. AR also submitted that it is also a settled law that no addition can be made u/s. 68 of the Act in respect of sales already offered to tax, otherwise it will lead to double taxation. Reliance was placed on the following:

The Ld. DR, on the other hand, supported the order of the authorities below. The Ld. DR submitted that the average closing stock was found to be drastically down at the end of the previous year. It was also submitted by the Ld. DR that the stock registers were not furnished by the assessee, so that the movement of stock could be ascertained. The Ld. DR submitted that the month-wise and item-wise stock details, along with computerized sales and purchase registers, were submitted by the assessee vide reply to the show cause notice through a letter dated 23.12.2019, however, the stock register was not furnished. The Ld. DR submitted that the sales and purchases were made by the assessee for the first time in the months of October and November 2016, in respect of some items such as plastic films, plastic bags, metalized film, corona treated polyester film, etc. Out of these, one item, namely 'plastic bags', was included in the assessee's stock for the first time in November 2016, as per the chart showing the monthly summary of stock items filed. The Ld. DR contended that the assessee dealt mostly in these items in the months of October and November 2016, which generated cash and Arihant Enterprise Vs. ITO Asst. Year : 2017-18 - 6–

1 The Ld. DR also submitted that, apart from the difference in sales reported in the ITR and VAT return, it is also pertinent to mention that, according to the auditor in Form 3CD, the quantitative details of principal items traded did not contain the name 'plastic bags', despite the fact that a transaction involving approximately 54,59,420 kg of stock was claimed to have been traded by the assessee as per the stock summary furnished.

2 The Ld. DR contended that an inquiry made with one of the purchase parties, i.e., M/s Yogeshwar Polymers, revealed that total sales as per the assessee’s books were shown at Rs. 39,58,258/-, whereas the reply received from the corresponding party indicated total purchases from the assessee during the relevant period at Rs. 40,08,904/-. Hence, suppressed sales amounting to Rs. 50,646/- were found in the assessee’s books.

3 Asst. Year : 2017-18 - 7–

4 The Ld. DR also submitted that the details furnished earlier, vide submission dated 26.11.2019, consisted of the names and addresses of the top 10 sales and purchase parties; however, the details of the parties with whom cash transactions or cash sales were made were not furnished, which is the core issue. The Ld. DR, therefore, submitted that the complete sales and purchase details could not be provided.

5 The Ld. DR also submitted that only the sales and purchase registers, furnished after the show cause notice, disclosed the details of stock traded during the year and the identity of the purchase parties. However, this left insufficient time to ascertain the genuineness of the transactions. Hence, the non-filing of crucial details required to determine the genuineness of the transactions— especially those carried out beyond the regular business pattern of the assessee— led to the conclusion that the identity and genuineness of such transactions could not be proved by the assessee. The Ld. DR contended that such cash sales were not shown despite a higher volume of sales in the preceding year. The Ld. DR, thus contended that the cash sales made during the year and the subsequent cash deposits were not explained by the assessee and, therefore, the cash deposit amounting to Rs. 43,88,500/- during the demonetization period remains unexplained. Asst. Year : 2017-18 - 8–

Heard the arguments of both the parties and perused the material available on record. The assessee has sold plastic bags which have been purchased from M/s Jindal Poly Films Limited and M/s Delux Packaging. The inquiry made by the Revenue with regard to the purchases from M/s. Yogeshwar Polymers revealed a total sales of Rs.39.58 crores which have been sold in cash by the assessee. It is well settled that only ‘profit element’ embedded in ‘sales value’ can be brought to tax and ‘not the entire transaction value'. Reliance is being placed on the following:-

It is an equally settled principle that the addition shall be made on the basis of estimation of “profit on turnover” when books of accounts are rejected. Thus, addition, if any, shall be restricted to the profit amount embedded in sales. Hence, keeping in view the profit percentage of the assessee, in the specific facts of this case, 2% profit is estimated on the sale of the plastic bags and the same is to be treated as business income.

Not pressed, hence dismissed.

The assessee claimed interest expenditure of Rs.22,50,130/- on unsecured loan received from M/s. Tube Traders. The Assessing Officer found three parties namely (i) Dhruvil Enterprise, (ii) Jayantibhai K. Viradia & (iii) Mihir Enterprise being Asst. Year : 2017-18 - 9–

Before us, Ld. AR submitted that the disallowance of interest expenditure cannot be made when advances are made on account of commercial expediency. The Ld. AR submitted that the assessee had purchase and sale transactions with Dhruvil Enterpirese Depo and Mihir Enterprises; therefore, owing to business relations, the assessee and such entities also help each other with short term advances as and when required and it is well settled that when advances are made for commercial expediency, interest expenditure needs to be allowed. Reliance was placed on the judgment of S.A. Builders Ltd Vs. CIT(A) [2007] 288 ITR 1 (SC) and CIT Vs. Jugal Kishore Dangayach [2014] 49 taxmann.com 486 (Raj.).

In the result, the appeal of the assessee is partly allowed.