SUBHASH PARETA,KOTA vs. ACIT, KOTA

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 434/JP/2016 fu/kZkj.k o"kZ@Assessment Year :2011-12 cuke Subhash Pareta, ACIT Vs. Prop. Pareta Circle-1 Associates, Kota 3/148 Ganesh Talab, Kota LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGGPP4046H vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 617/JP/2016 fu/kZkj.k o"kZ@Assessment Year :2011-12 cuke Asstt. Commissioner of Shri Subhash Pareta, Vs. Income-tax, Circle-1, Prop. Pareta Associates, Kota 3/148, Ganesh Talab, Kota-324009 LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGGPP4046H vihykFkhZ@Appellant izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Shri S.L.Chandel (Addl. CIT) fu/kZkfjrh dh vksj ls@ Assessee by : None lquokbZ dh rkjh[k@ Date of Hearing : 10/08/2017 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 09/10/2017

vkns'k@ ORDER

2 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

PER: VIKRAM SINGH YADAV, A.M.

These are two cross appeals filed by the assessee and the Revenue against the order of Ld. CIT (A), Kota dated 11.03.2016 for A.Y. 2011-12. None appeared on behalf of the assessee. The assessee’s appeal was filed on 28.04.2016 and first listed for hearing on 8.09.2016, and the revenue’s appeal was filed on 03.06.2016 and first listed for hearing on 14.09.2016. Since then, both these appeals had come up for hearing on numerous occasions but no hearing has taken place, it was decided at the time of scheduled hearing on 10.08.2017 in the open Court that no useful purpose would be served in adjourning the matter any further. Accordingly, based on material available on record and taken into consideration the contentions of the ld. DR, both the appeals are being disposed off on merits.

ITA No. 434/JP/16 (Grounds of Assessee’s appeal):- “1. That the Ld. CIT(A) grossly erred on law & facts in not adjudicating the ground No. 1 to 4 raised before him. The grounds are as under: 1. That on the facts and in the circumstances the assessment order of the learned Assessing Officer is against the law and facts of the case. 2. That on the facts and in the circumstances of the case the learned Assessing officer grossly erred appointing the special auditor u/s 142(2A) of the Income Tax Act, 1961. 3. That the special audit report as submitted by the special auditor is not as per law on the facts and in the circumstances of the case.

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4 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

451,513/- on account of undisclosed income and the Ld. CIT(A) also erred in sustaining the same. ITA No. 617/JP/16 (Grounds of Revenue’s appeal):-

“On the facts and in the circumstances of the case, the ld. CIT(A) has erred in:-

(i) deleting the addition of Rs. 12,35,000/- made u/s 69 of the Act on account of unexplained cash credit;

(ii) deleting addition of Rs. 1,41,34,476/- made u/s 40A(3) of the Act;

(iii) deleting addition of Rs. 1,18,34,723/- made u/s 69C of the Act on account of unexplained expenditure;

(iv) deleting addition of Rs. 14,72,000/- made on account of unaccounted income;”

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Particulars Amount (Rs) Remarks

Now, the assessee is in appeal against various additions sustained by the ld CIT(A) and the Revenue is in appeal against the additions so deleted by the ld CIT(A).

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ITA No. 434/JP/16

“As regards Ground No. 2, looking at the poor level of cooperation from the assessee’s side to explain the books of accounts related entries as found in the loose papers, and the mention in the Assessment order that “A/R, of the assessee, failed to provide reconciliation of expenses & income as well as other details. Given the volume of impounded books of accounts and complexity therein, the case was recommended for special audit by another chartered accounted under section 142(2A) of the I.T. Act, 1961. The final opportunity was given to the assessee on 24.03.2014 to submit the reply. However, A/R, submitted that he has nothing more to explain on this issue, I do not find fault with the action of the A.O to refer the matter for Special Audit looking to the provisions of Section 142(2A) of the Act.

The HIGH COURT OF GUJARAT in Neesa Leisure Ltd. V. Deputy Commissioner of Income-tax, Central Circle 2(2) & 1 reported in 35 taxmann.com 216 (Gujarat) has held that-

“Section 142 of the Act pertains to inquiry before assessment. Sub-section (2A) thereof provides that if, at any stage of proceedings the Assessing Officer, having regard to the nature

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and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, may with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in Explanation below to sub-section (2) of Section 288, and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require. Said section reads as under:-

“142 Inquiry before assessment.

(1) (2)** ** **

(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below subsection (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require:

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Provide that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.”

….In the present case, the Assessing Officer had issued notices to the assessee under section 142(1) of the Act. When there was no compliance, notice for appointment of special auditor came to be issued. Petitioner’s objections were considered, approval from the Commissioner was sought. On the strength of such approval so granted by the Commissioner, the Assessing Officer on the basis of his opinion that the accounts of the assessee were complex and in the interest of the Revenue, it was so required, directed that the accounts be audited by the special auditor.”

Considering the facts in this case as well, the opportunity was reasonably provided to the Assessee to represent its case and the A.O followed the provisions of law in recommending Special Audit with due approval of the Commissioner.’

Under the circumstances, there is no justification for upholding this Ground of Appeal of the assessee that the AO “erred in appointment of the special auditor” and the same is accordingly dismissed.”

“As regards Ground No. 3, even with the Special Auditor, the assessee was unable to get fully reconciled and explain the books of accounts related entries as found in the loose papers with the Special Auditor, the details of which are a part of the record. In the absence of the same the Auditor appointed by the Department had no basis but to reach conclusions based on the available impounded documents. The

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CD of the books presented by him to the Special Auditor was given only 15 days before the report was finalized. Therefore, I am of the opinion that since the Auditor had to submit the report within the limitation period prescribed in the statute, he may not have fully considered the late submissions of the assessee but he had initially provided adequate opportunity to the assessee to represent his case with documentary evidences regarding the loose papers impounded during the survey proceedings.

Thus the report being based on the available materials with the Special Auditor cannot be considered as being “not as per law” mentioned in this ground of appeal.

I accordingly am unable to agree with the assessee’s contention on this Ground and the same is accordingly dismissed.”

As regards Ground No. 4, the contention raised will be dealt with while disposing off the other Grounds of Appeal following this and is not being adjudicated separately.”

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recommending the appointment of the special auditor after taking appropriate permissions from the ld CIT after providing reasonable opportunity to the assessee. Further, it is noted that based on documents impounded during the course of survey and the fact that the assessee failed to reconcile the same with the books of accounts, the special auditor has come to specific findings which are contained in his special audit report. In the result, ground no. 1 of the assessee’s appeal is dismissed.

“As regards Ground No. 5, pertaining to rejection of books and estimation of Net Profit rate, the AO in the entire gamut of the lack of proper presentation of the books of accounts by the Assessee before the Special Auditor and later before him, reached a conclusion that the books were not proper and needed to be rejected. After providing opportunity to the assessee with his intention to do so highlighting the defects raised at page to 6 of the Assessment order, he adopted a N.P. rate of 12.5% in the assessee’s case.

The main defects highlighted were-

-That the Assessee has not produced any labour wages register nor any other documentary evidence in support of claim regarding labour wages payment.

Therefore, actual verification of wages/salary paid cannot be ascertained and that genuineness of expenses is doubtful.

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-The inventory of raw material consumed in execution of work contract has not been maintained.

-Also, site wise stock register of fuel consumed has not been mentioned. Therefore, exact consumption of raw material & fuel cannot be verified.

-The Assessee did not produce any documentary evidence like stock register/inventory in support of closing stock and work-in-progress.

-The Annexure-9 & 10 of Audit report of Special Auditor which points to voucher/bills which are not verifiable from the books of accounts submitted by the A/R. In view of this, the genuineness of expenses cannot be ascertained and profits of the assessee cannot be deduced in accurate and fair manner.

Thus, the admitted facts of the case are that the assessee is a civil contractor who did not maintain proper books of account. The assessee did not furnish relevant bills and vouchers of purchase and expenses before the Special Auditor and later the assessing officer. These are defects worth note and under the circumstances of the case, the decision of the AO to reject the books of accounts cannot be faulted. In the light of the facts, I uphold the order of the Assessing Officer in rejecting the books of account.

After rejecting the books of account, the issue to be decided is estimation of income.

In a case where the provisions of section 145(3) are attracted, although the assessment is made in the manner provided in Section 144,

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nevertheless the assessment is made under section 143(3) of the Act. A clearcut distinction between Best Judgment Assessment and in the manner provided under section 144 is required to be understood while resorting to the provision of Section 145(3). Under Section 145(3) the assessment is required to be in the manner under Section 144 of the Act only. However, it is well known that in the case of Best Judgment where resort is taken to Section 144, the Assessing Officer exercising his jurisdiction cannot act arbitrarily or capriciously. The assessment must proceed on judicial considerations in the light of relevant material that may be brought on record. The Hon’ble Allahabad High Court in the case of CIT vs. Surjeetsingh Maheskumar (1994) 210 ITR 83 has held that in every case of best judgment, the element of guess work cannot be eliminated so long as best judgment has a nexus with material on record and discretion in that behalf has not been exercised arbitrarily or capriciously.

Hon’ble Supreme Court in the case of CIT vs. H.M Esufali, H.M. Abdulali reported at 90 ITR 271 (SC) mentioned that-

The AO is not duty bound the state precisely the account of suppressed turnover where it is obvious that the assessee is maintaining false accounts. The assessee cannot plead that it is the duty of the AO to prove conclusively the amount of suppressed turnover, as this fact is in his personal knowledge;

….The burden of proving the fact is on the assessee who cannot be permitted to take advantage of his own illegal acts;

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…Estimate of income is allowed and there may be an overestimate or an underestimate. As the estimate is not arbitrary, has nexus with facts discovered and basis adopted is relevant, there can be no ground for interfering with the best Judgment” for that of the AO.

…..In judging a best judgment assessment, the powers of appellate authority are restricted. They have merely to see whether the books of account were rightly rejected or not any thereafter if the conclusion is positive, then whether or not the basis for estimation has reasonable nexus with the estimate.

…….While making best judgment assessment :

d) The conclusion drawn should be unbiased and rationally made,

e) The authority should not be vindictive or capricious,

f) Estimate should be bona fide.

…Good proof is not required while making an estimate provided the accounts are rightly rejected and estimate is fair and reasonable.

Now coming to the estimation resorted by the AO in this case, he had the entire material impounded in the course of Survey proceedings in the case of the assessee. He had already taken the benefit of the advise of the Special Auditor and after finding all the discrepancies in the books of accounts, he had rejected the same as being unreliable. Thus while considering the nature of the assessee’s business being that of a Contractor, he used the example of the available comparative cases and resorted to his best estimate of Profits in my opinion. He has followed the order of the jurisdictional High Court in the case of M/s Jain

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Construction Company where the Hon’ble Rajasthan High Court has upheld the N.P. rate of 12% in the business of the civil Construction. The AO held that “as the case of assessee is comparable with case of Jain Construction Company, it would be appropriate to apply net profit of 12.5% subject to interest and depreciation, in the case of assessee as well.”

Further, he has relied on the Orissa High Court in the case of CIT vs. Builders Union (211 ITR 993) which has also considered reasonable N.P rate of 12.5% in the case of Contractor.

However, he has fairly reduced the Sub-contract work from the purview of such profit estimation and also fairly allowed Interest and Depreciation on the estimated Net Profit.

Under the above circumstances, I am in agreement with the estimation done by the AO especially considering the facts highlighted related to incompleteness of books of accounts, unverifiable expenses and the comparable cases cited.

The Net profit rate @ 12.5% subject to the above mentioned deductions is accordingly held to be proper and fair and the addition of Rs. 2,77,049/- made on this account is upheld.

The Ground of appeal is accordingly dismissed.”

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determining his business and financial results, labour/employee expenses and material expenses forms a critical component of his costs and where so required by the AO, he has to demonstrate the incurrence of these expenses through verifiable evidence/documentation. In the instant case, the AO has specifically asked the assessee to produce labour/wages register and other related details in support of labour/employee expenses which the assessee failed to produce inspite of adequate opportunity being provided to him. Similarly, particulars about the raw material consumed in execution of work contracts being carried out at various sites could not be produced and verified by the AO. The assessee is a civil contractor and has executed various government and other contracts. We fail to understand if the assessee doesn’t maintain details of labour employed and raw material consumed, as so claimed during the assessment proceedings, on what basis he will be raising invoices for the work done at those sites and how its customers would be verifying those invoices. Besides, the AO has stated about lack of supporting documentation in respect of closing stock and work in progress which remain unverifiable. Further, the special auditor has pointed out various discrepancies in terms of 62 entries relating to various vouchers/bills/challans etc which could not be verified from the books of accounts. The special auditor also pointed out 251 entries of cash payments exceeding Rs 20,000 in violation of section 40A(3) of the Act. In our view, these are serious discrepancies as pointed by the AO based on review of assessee’s books of accounts, special audit report and other details on record, and we accordingly don’t see any justifiable basis to deviate from the view taken by the AO

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in rejection of the books of accounts of the assessee and invoking the provisions of section 145(3) of the Act.

PARETA ASSOCIATES Annexure 12 CAPITAL INTRDOUCED BY PROPRIETOR DURING THE YEAR S. No. Date Particulars Amount

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(As per Tally) 1. 4/8/2010 Cash from S. Pareta 180,919.00 2. 4/18/2010 Cash from Subhashji 10,000.00 3. 6/18/2010 Cash received from House 5,000.00 4. 6/12/2010 Cash from old Saving 2,000.00 5. 1/7/2011 Cash from old Saving 300,000.00 6. 1/7/2011 Cash from old Saving 50,000.00 7. 1/28/2011 From Bank (car sold to 150,000.00 Navratanji Dangal

Total Rs. 697,919.00

As per Assessing officer, the above amount is fresh capital introduced by the assessee in the books of accounts and the source of which has not been explained satisfactorily, hence the same was added as undisclosed capital of the assessee from undisclosed sources of income.

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capital introduced could not be said to be out of excess withdrawals and the explanation given is not acceptable as these have not been linked with any earlier withdrawals date wise etc. Under the circumstances involved, I am in agreement with the AO and accordingly, the addition of Rs. 6,97,919/- is accordingly confirmed.”

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M/S PARETA ASSOCIATES Annexure:7 DETAILS OF CAPITAL EXPENSES CLAIMED AS REVENUE EXPENDITURE S. Ann. Page Date Particulars Amount Claimed No. No. No. As 1. A-2 3 30.04.2010 Cooler 8200 Site Purchased Expenses 2. A-4 119 31.08.2010 Fan 1725 Site Purchased Expenses

Total Rs. 16225

The assessee has debited capital expenses of Rs. 16,225/- as revenue expenditure. The assessee has, vide order sheet entry no. (ix) dated 09.10.2014, surrendered Rs. 16,225/- as addition in the total income of the assessee.

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Irrespective of the cost involved, since these are expenses an items which have long term benefit, the amounts spent needed to be capitalized, which the AO has rightly done. There is no reason to interfere with the addition of Rs. 16,225/- made in this regard. This ground of appeal is treated as dismissed.”

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Annexure-6 of the audit report of special auditor report points to certain unexplained Investments made by the assessee during the relevant assessment year as under: M/s PARETA ASSOCIATES Annexure:6 DETAILS OF UNEXPLAINED INVESTMENT S. Ann. Page Date Particular Amount Remarks No No. No. s . 1 A-4 17 03.08. NSC 30000 i) NSC of Rs. 10000 to 2010 Each total Rs. 19 100000/- was purchased by Shri Subhash Pareta on dated 03/08/2010 and it appears that on pledge of these new NSCs department has released the NSC to Subhash Pareta (Ref Page 10) but entry of Rs. 70000/- only was found in books of accounts and balance investment of Rs. 30000/- not found entered in books of

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accounts on 03/08/2010. 2 A-5 161 27.12. NSC 1235000 The assessee has 2010 taken loan from bank of Baroda on lien of NSC of Rs. 12,35,000/- . The letter is written by Bank of Baroda to Postmaster Head Office, Kota for lien on NSC of Rs. 12,35,000/- . We observed that these NSCs are not reflected in audited financial statements. 3 A-5 44 08.12. LIC 29873.46 Deposited in HDFC 2010 Premiu Bank, explained as m paid out of withdrawals 4 A-8 164 29.10. NSC 1235000 The letter from PWD 2010 Jhalawar to Post Master Kota for release of NSCs in favour of Subhash Pareta, earlier pledged with the department of Rs.

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12,35,000/-. The letter is dated 29.10.10 but it is noticed that no such investment is available in audited financial statement of the assessee.

After considering the submissions of the assessee, the AO made an addition of Rs 12,94,873 out of above.

“ I have gone through assessee’s submission and AO’s findings. As regards to entry no. 1 of Annexure-6, there is no evidence that the amount of Rs. 30,000/- pertains to recirculation of investment and to consider it as a technical mistake as per the assessee’s explanation is not possible as there is no evidence in favour of the same. Accordingly, this amount of Rs. 30,000/- is held to be unexplained investment as worked out by the AO and is accordingly confirmed.

As regards entry no. 3, related to the LIC premium of Rs. 29,873/- mentioned to be paid from drawings, since no evidence of such payment is linkable, the explanation of the assessee is not acceptable and the addition made by the AO is confirmed.

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However, as regards entry no. 2, pertaining to NSCs amounting to Rs. 12,35,000/- claimed as purchased during financial year 2005-06, a perusal of the EMSD account (earnest money and security deposit) in the balance sheets as early as AY 2006-07 it is seen that amounts as big as 13,35,000/- are appearing towards NSCs. The EMSD account in the Balance Sheet for financial year ended 31.03.2009 shows balance of 42,15,228/-. Thus the explanation given by the assessee was verifiable and matching his accounts of earlier years if the AO had made proper efforts and only on the ground that “Without breakup of opening balance of EMSD account, it is difficult to ascertain whether said NSCs are reflected in books of accounts of the assessee or not”, the A.O should not have considered these as unexplained.

Further the letters of two other responsible organizations namely, PWD Jhalawar and Bank of Baroda writing to the postmaster, Kota regarding release of these NSCs to the assessee/bank respectively goes to justify the explanation given by the assessee that the NSCs of Rs. 12,35,000/- were already a part of balance sheet and that logically would date back to at least 4-5 years earlier and could not have been added as unexplained investment in this particular year under any circumstances.

In view of the above, the addition of Rs. 12,35,000/- made on account of unexplained investment in the NSCs by the AO cannot be sustained and is directed to be deleted.

Thus out of the total addition Rs. 12,94,873/-, the amount confirmed is Rs. 59,873/-.This ground of appeal is treated as partly allowed.”

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As regards the other entries, the AO has made out a case that these DDs etc were made out of unaccounted receipts and made the addition on the ground that these were not entered in the books of accounts

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and were to be considered unverified deposits for lack of supporting evidence produced before AO.

Since there is no direct linkage of these payments found with the Bank accounts, the AO’s argument cannot be totally discounted. Hence, except for the amount of Rs. 14,72,000/- mentioned above, the remaining amount is to be considered as unexplained deposits for whatever purposes used. Since the explanation in respect of the other amounts was not found to be satisfactory, the addition to the extent of balance amount of Rs. 8,32,667/- is accordingly confirmed. This ground of appeal is treated as partly allowed.”

“I have gone through assessee’s submission and AO’s findings. The AO has detailed specific entries and also taken assessee’s response on the same. After a perusal of the amounts involved in the addition, the

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additions of Rs. 89,000/-, 27,950/- and 9,000/- appear justified. As regards the “Pool” related Income, though the AO has not been able to prove that it pertains to the assessee but considering the linkage with various works these appear to be for some payments received from other pool partners. In the absence of any conclusive evidence from the assessee’s side to justify his version, the addition of Rs. 3,25,563/- is also held to be justified and is sustained. This ground of appeal is treated as dismissed.”

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ITA No. 617/JP/2016

“1. Cash payment exceeding Rs. 20000/- u/s 40A(3): As we have mentioned earlier that the Assessee is a contractor and works on so many sites in the state of Rajasthan and Madhya Pradesh, there was responsibility to execute the work within prescribed time period. To running smoothly work on site, there is a practice to give advance and received back the amount whenever requirement at other sites. The site in charge incurred the expenses like labour payment, wages, material, plant & machinery rent etc. due to nature of business. The payment has been made on various dates in cash below than Rs.

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20000/-, however the assessee has mentioned in the seized records total amount in the particular head as and when information received from the sites in charge and the Assessee has prepared just for his own purpose.

There are no such amount exceeding Rs. 20,000/-, we have mentioned the nature of expenses and the place of entry in the records along with report of the sites as an evidences. Please keep attention on the explanation in previously submitted in Annexure-A and after that the copy of accounts, reported on 07.10.2014, on the records and in the records of the Site Incharge, We are enclosing herewith the copy of labour register for your ‘kind reference’.

The reply of the assessee was considered by the AO and found to be unsatisfactory and unacceptable. As the labour register provided by the assessee pertains to only to few months of the year and not of the entire year. The copies of labour register provided by the assessee have been considered by the special auditor in point 4 of working notes dated 21.08.2014 of the special audit report which is reproduced as follows:- “The Annexure-A-17 checked in the presence of Gopal Sharma, accountant and following observations were made: Annexure-A-17 is a salary/wages register of the month of July to October 2010. We have verified the payment details from the books of accounts and found that on last page on 26.10.10 and 27.10.10 salary payment of rupees 240/- each is mentioned whereas in the books, cache entry of rupees 220/- each is found. Further on the last page salary/wages payment of Rs.

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2550/- is mentioned for 24.10.10 but in cashbook entry for the month of October found entered on 24.08.10, which clearly indicated that books are prepared after date of survey on the basis of seized record.”

Further, it is also found that A/R, has been modifying his books of account as per queries of AO. The ledgers of various site incharges produced before Special Auditor in soft form (Tally) & those produced before AO on various dates are modified to cover up inadequacies in books of accounts. Therefore, submissions of A/R, were just an afterthought to cover up the inadequacies in his books of accounts.

However, during the assessment proceedings it was found that out of 251 entries in others, payments that were made in cheque and certain entries were in the nature of drawings by the assessee. It may be noted that the loan entries have been considered in Annexures-1,2 & 5 of audit report are being referred for penal proceedings under section 269 SS and 269T to the Additional/Joint CIT separately. Therefore, the 73 entries have been dropped for purpose of addition as they do not violate the provisions of section 40A(3) of the I.T. Act, 1961. The remaining 178 entries were not satisfactorily explained by the assessee and no evidence was provided to substantiate the claim that earlier the payments have been made below Rs. 20,000/- or they have not been debited from the profit and loss account of the assessee.

It also may be noted that there are certain violations against which asessee has given explanation that these cash payments above Rs. 20,000/- pertain to earlier years but have been incurred in the relevant

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assessment year. The explanation of the assessee is unacceptable because under provisions of section 40A(3) of the I.T. Act, 1961, any liability incurred by the assessee for any other year for which expenditure has been made in cash above Rs. 20,000/- in the relevant assessment year then no deduction shall be allowed in respect of such expenditure. Further, the assessee claimed that expenses made by the site in charges (Khalil Bani & Munna Bhai) are below Rs. 20,000/-, however, no documentary evidence has been furnished by the assessee to substantiate his claim.

In view of above, the cash payments made by the assessee in violation of provisions of the section 40A (3) in 178 entries amounting to Rs. 1,41,3 4476/- were added to the total income of the assessee.

“As regards the finding on cash payments exceeding Rs. 20000/-, the Special Auditor initially made a list of 251 entries which was later reduced by 73 entries as these were relatable to payments made by cheque as per the AO. This makes it clear that the Auditor also did not carry out an in-depth investigation, maybe due to lack of proper detailing from the assessee’s side.

As per the assessee’s reply, certain entries pertained to AY 08-09 and for others, he has mentioned in his replies dated 25.09.2014, 7.10.2014 and 15.10.2014 that these were site material and labour related

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advances given to his site supervisors and imprest expenses, which the auditor had not accepted earlier mentioning that there were credit entries also against these payments.

While not accepting the assessee’s explanation mainly on the basis of the Auditor’s report and the lack of supporting evidences and documents like bills, vouchers etc, the AO held that the A/R had been modifying books as per queries of AO stating that the ledgers of sites produced before the Special Auditor in soft loan (tally) - & those produced before AO were modified to cover up inadequacies.

However, he accepted 73 entries pertaining to loan given by assessee to others where the payments were by cheques and being those for drawings of the assessee.

Remaining 178 entries were held to be not satisfactory explained. In his submission dt. 13.01.2016 in the course of the appellate proceedings, the appellant mentioned that some of the entries are based on memo books maintained at site where lump sum amounts given to site incharge for onward distribution & entries made in regular books based on a/c given by the person incharge at site.

As examples of the shortcomings in the version of the AO he has mentioned that Entry nos 44-76 pertain to AY 09-10 on the basis of diary considered by AO.

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Entry no. 2 to 8 direct site labour/payment-made to each labour below Rs. 20000/- & that in the Assessment proceedings he had already highlighted the fact that amounts were paid on various dates but the same has been ignored by the AO.

Certain points which emerge out of the discussion made in the Assessment order as well as the assessee’s submissions are- 1) The AO has not made out a case of unaccounted receipts having been found against which additional out of books expenses could have matched. 2) There is no evidence in the Auditor’s note or the Assessment order whether any effort to reconcile the cash expenses of sites with any regular bills or expenses vouchers was made so as to reach a logical conclusion that the expenses claimed at site were much higher than the total expenses against works executed so as to then add the difference as unexplained cash payments. 3) There is no evidence in the Auditor’s note or the Assessment order as to whether any reconciliation was attempted with bank withdrawls by the AO as to disprove the argument of the assessee that these were given to site in charges for regular expenses and were later reconciled with them. The Bank accounts could not have been modified or changed. At least the AO should have worked out the receipts in the Bank and withdrawals in Cash and brought out a possible cash withdrawal statement to link it to the maximum allowable expenses in cash as claimed by the assessee if he wanted to disprove the assessee’s Cash payment theory. On the other hand in case there were sufficient withdrawals from the bank account, the

34 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

assessee’s stand on payment to site supervisors for labour, site expenses and petty materials etc. would be justified.

4) No statements of site persons have been referred to cross verify the assessee’s version. No list of Contractors, Employees etc has been examined to believe or disbelieve the names of the person claimed as employees/supervisors etc. 5) Where the special auditor & the AO have already made out a case of expenses not being supported by evidences and the AO applied the NP rate at the maximum, what else could they prove out of this theory of cash expenses, which could even otherwise be covered in the exceptions as per rule 6DD considering the nature of the assessee’s business being that of a contractor, having to pay to URDs, labour etc. through the supervisors acting on behalf of the assessee, and who were required to be paid in cash for the site related works. The AO did not bring on record any enquiries or other persons who had business dealings with the assessee.

6) The main reasons which are given by the Spl. Auditor & the AO while proposing the additions to the assessee’s income were lack of proper explanations given in the course of examination of books of accounts regarding the income and expenditure. The AO has taken the receipts from form No. 26AS and not given any other sources which could be linked to generation of unaccounted receipts/income and which could then be also linked to the making of unaccounted expenditure as is deduced from the impounded papers in the course of survey proceedings. The sum total of all the expenses disallowed

35 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

by the AO is well within the receipts shown by the assessee. The AO has already formed an opinion on the net profit and if he still had bouts on these expenses, no one stopped him from adopting a higher than normally acceptable net profit rate based on the discrepancies pointed out in the other grounds of appeal. He cannot have an addition on account of estimation of profit separately & then make other additions to the expenses which would disturb the Net Profit on a basis to the verge of perversity of business results as happened in this case.

7) While passing the assessment order, the AO has given a thorough description of the various discrepancies found in the books of accounts and rejected the books of accounts at pages 4 to 11 of the assessment order and then gone on to apply maximum NP rate @ 12.5% citing various judgments of the courts in support of the view adopted by him.

8) Net profit in a contractor’s case is the ultimate figure of profit which has been estimated by the AO as per his best judgment and the legal precedents he has thought relevant to this case. There remains no further items of expenditure to be examined once that exercise is completed. It is a best judgment order. At that time it is open to the AO to estimate logically what rate of Net Profit he thinks fit that covers all the defects found in the books of accounts. This would include expenses made in cash those not allowable, those not supported by vouchers, bills etc. or other such discrepancies.

36 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

9) Further, if he thought certain expenses to be outside the books of accounts, he should also have tried to link them to the unaccounted receipts from where these could have been made. Once he did not do so, then only half the picture was clear. He could at best say that these expenses were bogus or given another name in the claims made in the P & L accounts. For that again he would have to go back to unreliability of the books and estimation the N.P. which he already did. 10) The AO disregarded that the Net Profit of the assessee had increased from 5.60% in AY 08-09 to 8.94% in 2011-12 though contract receipts reduced to Rs. 4.38 crores from Rs. 8.64 crores in the corresponding period.

Therefore, the entire picture as it emerges is that without bringing out the additional source of receipts in the assessee’s hands, the AO has tried to first reject the books & estimate the Net profits and then make further additions as found in the assessee’s books or relevant evidence impounded in the survey proceedings.

In the process what he has not realized is that- (i) In case he added items in the P & L account again through disallowance, the N.P becomes disproportionately high and unrealistic to any business and there is no meaning of the entire exercise made for and after the rejection of the books of accounts. (ii) All the withdrawals from the banks which could be possible explanations for cash expenses at sites, to labour & UR Dealers were totally ignored in the assessment order.

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(iii) Once book were rejected, it was open to the AO to estimate the N.P based on all such expenses which he thought were bogus or outside the books. He could have taken any net profit with justifications, but there he chose to follow the legal precedents & took the highest accepted profit in such cases as per case laws referred. So he could not have the assessee suffer from a ‘double taxation’ by adding more P & L items after estimating a ‘best judgment’ net profit at highest rate.

(iv) There appears to be very less application of independent judgment, rather the AO has relied mostly on the discrepancies mentioned in the special auditor’s report without himself carrying out post survey enquiries even when he had sufficient time to do so to reinforce the findings he brought out in the order passed by him.

It is settled law that where the income of the assessee for a captioned year is estimated by applying net profit rate after rejecting the books of accounts, in view of the provisions of section 145(3) of the Act, no further addition can be made in the hands of the assessee on account of various disallowances by relying on the aforesaid entries in the books of account, which have been rejected.

Reliance can be placed on the following decisions:

In the case of Brahamanand Agarwal, Thekhedar Vs. DCIT Jaipur Bench of ITAT have held that when net profit is estimated by AO by rejecting the book result U/s 145(3) of the Act, no separate addition

38 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

can be made on account of cash creditor. ITAT relied upon the decision of Rajasthan High Court in the case of CIT vs. G.K. Contractor 19 DTR 305 (Raj) wherein the Hon’ble Jurisdictional High Court held that when net profit is estimated by the Assessing Officer by rejecting the book result u/s 145(3) of the Act, no separate addition can be made on account of cash creditor.

In the case of Indwell Constructions vs. CIT 232 ITR ITR 776 (AP) it was held that- “Where the books of accounts have been rejected, the revenue cannot rely on the same books for addition of an exact item (of expenditure) in the profit and loss account.”

In CIT Vs. Banwari Lal Bansidhar 229 ITR 229 (All) it was held that- “No disallowance u/s 40A(3) of the Act could be made when the gross profit rate was applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on purchases made by the assessee.”

In CIT Vs. Pursuhottam Lal Tamarakar 270 ITR 314 (MP), the High Court held that the tribunal has rightly held that section 40A (3) was not applicable when the net profit rate was applied by the AO.

ITAT JODHPUR BENCH in JAGDISH LAL v. INCOME-TAX OFFICER in 150 TAXMAN 59 (JODH.) (MAG.) has held that-

39 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

“Once the GP rate was applied to compute the income, the expenses are deemed to be considered while applying the GP rate and that therefore, no further disallowance under section 40A(3) could be made. This view finds support from the judgment of Allahabad High Court in the case of CIT v. Banwarilal Bansidhar [1998] 229 ITR 229 (All.) and recent judgment of Madhya Pradesh High Court in the case of CIT v. Purshottamlal Tamrakar Uchehra [2004] 270 ITR 314 (MP). Accordingly, we set aside the order of CIT(A) and delete the impugned disallowance. This ground of appeal is allowed.”

THE ITAT KOLKATA BENCH (SPECIAL BENCH) in Income-tax Officer, Ward-1, Murshidabad v. Kenaram Saha & Subhash Saha 116 ITD 1 (Kolkata) (SB) held that-

“Now coming to departmental appeal in the case of Sri Shyamal Kr. Dey (supra), the Assessing Officer has determined the income by applying a net profit rate of the turnover. The Assessing Officer in addition to the determination of net profit as a percentage of turnover, made further disallowance under section 40A (3). The CIT(A) deleted the disallowance made under section 40A(3). Revenue aggrieved with the order of the CIT(A) is in appeal before us. It is contended by the learned counsel that once a net profit rate is applied, no further addition/disallowance can be made under section 40A(3). In support of this contention he has relied upon the decision of Hon’ble Allahabad High Court in the case of Banwarilal Bansidhar (supra) in which their Lordships held as under:-

40 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

“affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of section 40A(3) read with rule 6DD(j) of the Income-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchased made by the assessee.” The above decision of Hon’ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon’ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under section 40A(3) made by the Assessing Officer. Accordingly, we uphold the order of the CIT(A) and dismiss the revenue’s appeal.”

In CIT Vs. Smt. Santosh Jain 159 Taxman 392 (P & H) also it was confirmed that when the GP rate is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee.

In ITO Vs. M/s Banas Sand Toll Tax Collection in ITA No. 1028/JP/2013, it was also observed that no disallowance could be made u/s 40(a)(ia) and 40A(3) of the Act when assessment is made computing income by application of NP rate.

41 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

In the appeal in the case of M/s Sadhwani Brothers, ITA No. 847/JP/2009, Assessment Year 2002-03, Hon’ble ITAT, Jaipur Bench has observed as under:- “Since the books of account are being rejected, therefore, the provisions of section 40A(3) will not be applicable. The Hon’ble Allahabad High Court in the case of CIT Vs Banwari Lal Bansi Dhar, 229 ITR 229 held that no disallowance u/s 40A(3) can be made when the income is computed by applying the gross profit rate. The Hon’ble Himachal Pradesh High Court in the case of Amrit Singh & Co. Vs. ITO 2010-TIOL-832-HC-HP has held that no disallowance is to be made u/s 40A(3) if the books of account are being rejected. Since the AO has rejected the books of account and has applied the net profit rate for the purpose of computing income then no disallowance could have been made u/s 40A(3) of the Act. Hence the addition made u/s 40A(3) is deleted.”

Thus in view of the facts involved and the legal precedents available, the addition made on account of Cash payments exceeding Rs. 20,000/- as held by the AO amounting to Rs. 1,41,34,476/- cannot be sustained in view of the fact that the AO has already estimated the N.P rate after rejection of the books of accounts u/s 145 (3). The addition of Rs. 1,41,34,476/- is therefore directed to be deleted. This ground of appeal is treated as allowed.

42 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

High Court in case of Indwell Constructions vs CIT 232 ITR 776 (AP) has held that where the books of accounts are rejected, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate of income and where such an estimate is made, it is in substitution of the income that is to be computed under section 29. All the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. In the instant case, this will also mean that the embargo placed in section 40A(3) is also taken into account and there cannot be a separate disallowance under 40A(3) of the Act.

“24. Now coming to departmental appeal in the case of Sri Shyamal Kr. Dey (supra), the Assessing Officer has determined the income by applying a net profit rate of the turnover. The Assessing Officer in addition to the determination of net profit as a percentage of turnover, made further disallowance under section 40A(3). The CIT(A) deleted the disallowance made under section 40A(3). Revenue aggrieved with the order of the CIT(A) is in appeal before us. It is contended by the learned counsel that once a net profit rate is applied, no further addition/disallowance can be made under section 40A(3). In support of this contention he has relied upon the decision of Hon'ble Allahabad

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High Court in the case of Banwarilal Bansidhar (229 ITR 229) in which their Lordships held as under :— "affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of section 40A(3) read with rule 6DD(j) of the Income-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases made by the assessee." The above decision of Hon'ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon'ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under section 40A(3) made by the Assessing Officer. Accordingly, we uphold the order of the CIT(A) and dismiss the revenue's appeal.

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made by the assessee. The explanation of the assessee was sought by the AO vide show cause dated 10.09.2014 stating that “You are required to explain major irregularities, illegal or unlawful transaction not permitted under the law as pointed out by the special auditor in Annexure-4 (pages 1 to 3). Please explain why this should not be treated as unexplained expenditure under section 69C of the IT act, 1961.”

“Please refer to Annexure-4 of the special auditor’s report which pertains to unexplained/not accounted for expenditure including illegal payment and point no. 5 of showcause dated 22.09.2014. In your reply dated 25.09.2014, you have submitted following reply.”Once there are seized and cashbook of the assessee, there was no such entry and no any expenditure debited in profit and loss account. No such contact work received and executed by the assessee on that prescribed sites.”

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Further, in explanation enclosed in sheet No. 5 of your reply, it is noted that: i) For entries numbered 1, 2, 3,4,5,6,7,8,9,10,11,12,13,14,23,20,24,28,30,31,33,35,36,45,49,50,60,6 5,66,67,75,76,79,80,81,93, the Assessee has given no reply or explanation. ii) For entries numbered 68,69,70,71,72,73,74,85,86,87,88 which pertain to illegal payments made by the assessee during the relevant assessment year, the assessee has submitted that the pool expenses are only discussion points and estimations. However there was no any work order. Also, assessee submitted that there was no work order from RIICO and therefore, the illegal payments and pull payments are simply for discussion and estimation. No other documentary evidence has been furnished by the assessee to prove his explanation. However, the DD of Rs. 14,72,000/- was drawn in favour of senior manager, RIICO. Further, 26 AS of the assessee for financial year 2011-12 reflects contract receipts from RIICO. Further, assessee in his reply dated 2011- 12 reflects contract receipts from RIICO. Further, assessee in his reply dated 25.09.2014 pertaining to cash payment more than rupees 20,000 for entries numbered 209,210,211 has narrated that this is “site advance to RIICO Ramganj Mandi for expenses Imprest account.” In view of this, assessee’s argument than no work order has been executed for RIICO is untenable.

iii) For entry No. 75 pertaining to jewellery purchased, the narration of special auditor states that “amount appears to be in short form.” The

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assessee has not given any explanation regarding amount spent on jewellery purchased.

iv) For other entries of Annexure-4 entries other than mentioned above, the assessee has given reply as ”amount debited to ……”. However, the reply was not backed by any bills or vouchers to substantiate the claim that these entries where debited as expenses under various heads. In view of above, why the amount of Rs. 1,18,35,956/- should not be treated as a unexplained expenditure under section 69C?.”

47 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

Only a simple paper whereas nowhere is mentioned about payment. How can we take dream that the assessee has made the pool amount during the year. • There are no any work order and execution of work from RIICO ltd. During the year of that amount. • In respect of DD of Rs. 14,72,000/- It was part of amount to take tender and entered during the year in E.M & S.D. Account but that amount has been refund back in next year –WE are enclosing copy of Bank statement and vouchers for your’ kind reference. Once your’ good self estimating on certain grounds but special auditor has not taken any grounds to mentioned in audit report. In this way a simple person can mention on each and every paper without keeping proper attention on the records and validity of transaction. • On this grounds we have produced the evidence of refund of that amount so how can we estimate that this pool amount is related to assessee and he has paid that amount. We have mentioned the execution of the work during the year amount is refund back how can we say that …..untenable. Please consider the facts and justification of the documents. Estimation/dream is not justified. • In respect of any expenditure not entered any where …..Once you are demanding further evidences of expenditures debited in profit and loss account on the other side you are saying not entered in books. Your good self also mentioned in clause (iv) for other entries of annexure…. The reply was not backed by any bills or vouchers to ……If any entry is related to business why should not be entered – if related to assessee. There may be reducing

48 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

of profit and loss account only. How it is justified to say and entered. In this chart we have mentioned in the explanations of so many entry that it is entered. How can a special auditor may pointed out without keeping proper attention on any books of accounts of each entries in enclosed sheet. In spite to appreciate the Assessee that he has not debited the expenditure which are not related to him/business. The special auditor is directing to keep addition in the income of the Assessee. 85 A-22 14.01.2011 RIICO 600,000.00 Illegal Payment RamganjMandi debited to Other ACE Debtors a/c 86 A-22 14.01.2011 RIICO DGM 500,000.00 Illegal Payment debited to Other Debtors a/c 87 A-22 14.01.2011 RIICO RM 100,000.00 Illegal Payment debited to Other Debtors a/c 88 A-22 15.01.2011 RIICO Sr. RM 200,000.00 Illegal Payment debited to Other Debtors a/c

• A-22 is part of Assessee-cash Book diary – as we have mentioned above that all the entry whether you have considered legal or illegal are in the hand of the diary of the Assessee, if not entered it is not related to assessee. There are marking of payment to person as mentioned in that column….the Assessee entered in Books of accounts also as mentioned in Other Debtors account/site advances account. As per records these amount is recoverable and not debited in Profit & Loss account ….. How can

49 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

we say illegal payment. Is any where mentioned illegal …. In case illegal and not debited in profit and loss account but amount in debtors account, How can it may be added in the total income of the Assessee. • A-22: The assessee has mentioned aggregate amount, however as per actual records – Copy of account enclosed It has been entered on various dates:- 78 A-22 13.05. LDO 240,000.00 Paid Amount debited to 2010 to Balaji Sales detail: Rs. Vijay 15000 on 13.5, Rs. Bhai 16000 on 14.05, Rs 17000 on 15.05, Rs. 18000 on 16.05, Rs. 19000 on 17.05 Rs. 14000 on 18.05, Rs. 15000 on 19.05, Rs. 18000 on 20.05, Rs. 19000 on 21.05, Rs. 17000 on 22.05, Rs. 18000 on 23.05, Rs. 19000 on 24.05, Rs. 18000 25.05 & Rs. Rs. 17000 on 26.05. (We are enclosing copy of account) A- 21 & Pool 2,935,000.00 Pool A-24 1. There is no any date 24 22 Paym payment for on paper. ent obtaining 2. No where is from RIICO mentioned Pool as Rs. 7.35 Cr. mentioned in above

50 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

Paid @ 4% mentioned paper. to 22 3. How can the persons of auditor has mentioned Rs. POOL PAYMENT. 29,35,000/- 4. May be part of @ Rs. discussion to give the 1,33,409/- work on sub contract per person or estimation or Also discussion. No where showing recorded in seized name of the documents—(as person to recorded in s.no. 84-88 whom and consider illegal payment expe.) It is unjustified were made. to mention Pool payment. Or to consider illegal expenses. A- 40 & Pool 1,000,000.00 A-24 Please keep attention 24 41 Expen on that paper – No any ses date …..Vijay-Galav, Khatri and pareta 25 A- 40 & Paid 1,461,000.00 A-24 lac each lene…than 24 41 to officer after 2615000 dene..On the basis of that facts s It looks like an estimation of expenditure. No where has mentioned paid. It’s preparation of plan/cost to take

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Contract …..where the name of assessee has mentioned means this paper is not related to assessee.

• If it is related to assessee whether legal or illegal it may be debited in profit and loss account and you may disallow only. What will be the position – Nil effect on the Profit as disclosed by the Assessee. It is part of appreciation to the Assessee that he has disclosed the actual net profit as per norms of the business in the position where he know that there are seized documents in possession of the Department. • I am of the opinion that no where any attention in the aggregate amount as noted in special audit report if any person who know something about business. He will further keep attention before to write --- as mentioned above in payment of expenditure exceeding Rs. 20000/- and this amount of Rs. 11835,956/-. I have previously mentioned above that Audit Report is only like a person who has mentioned in each and every document where to write in audit report without any reason or evidences to write and effect and value of that expenditure”.

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section 133A of I.T. Act, 1961 has himself stated that a contract of Rs. 7,35,00,000/- has been awarded to him by RIICO. The relevant paragraphs of the statement are being reproduced here:- “iz’u&2 vki D;k dk;Z djrs g S? mŸkj& eSa Civil Contractor gwWA eSa lM+d cukus dk dk;Z djrk gwWA eSa eq[;r% ;g dk;Z PWD ¼lkoZtfud fuekZ.k foHkkx½ ds lkFk djrk gwWA blds vykok UIT ,oa RIICO ls izkIr dk;Z Hkh djrk gwWA ;g dk;Z eSa eSllZ ikjsrk ,lksfl,V~l ds uke ls djrk gwWA iz’u&9 d`i;k crk,a fd orZeku esa vkidk Bsdsnkjh dk;Z dgkW&dgkW py jgk gS? dk;Z dh D;k Progress gS? foLrkj ls crk,aA mŸkj ¼1½ RICCO ls izkIr dk;Z& mijksDr dk;Z yxHkx 8-10 fnu iwoZ gh feyk gSA ;g dk;Z jkexate.Mh lM+d fuekZ.k ls lEcafU/kr gS tks fd yxHkx 8&10 ekg esa iw.kZ djuk gSa bl dk;Z dk Work order yxHkx : 7]35]00]000@& gSA bl dk;Z ds isVs vHkh eq>s dksbZ Advance ugha feyk gSA ¼2½ RES ¼;kfU=d foHkkx½ e/; izns’k ls izkIr dk;Z& mijksDr dk;Z eq>s yxHkx 3 ekg iwoZ gh izkIr gqvk gS tks fd vkyksV MP½ esa lM+d fuekZ.k ls lEcfU/kr gS bldk Work order yxHkx : 2 djksM+ gSA bldk;Z dks ges 8&9 ekg esa lEiUu djuk gSA blds fy, eq>s dksbZ Advance ugha feyk gSA ¼3½ PMGSY ¼ iz/kkuea=h xzkeh.k lM+d ;kstuk½ vUrxZr izkIr lM+d ejEer dk dk;Z& mijksDr dk;Z yxHkx 6 ekg iwoZ gh izkIr gqvk gS ftlds 3 Work order gS& ¼1½ yxHkx 190 yk[k ¼2½ yxHkx 195 yk[k ¼3½ yxHkx 38 yk[k mijksDr rhuks Work Order dk eq>s 5o’kksZ dk Bsdk feyk gS rFkk vHkh rd yxHkx : 1 djksM+ :- fofHkUu rkjh[kksa ls izkIr gks pqds gSA : 2 djksM+ gSA bl dk;Z dks ges 8&9 ekg esa lEiUu djuk gSA blds fy, eq>s dksbZ Advance ugha feyk gSA”

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Therefore, the claim of the assessee that the illegal pool payments were just discussion points/estimation to take any work order and no work order from RIICO was awarded to the assessee is completely unacceptable. Further, it may be noted the special auditor has observed illegal payments based on documents impounded during the survey. Moreover, the 26AS of assessee shows the contract receipts on which TDS has been deducted by RIICO. Contrary to assessee’s claim, this in fact shows that the assessee was awarded work contract by the RIICO. Therefore, assessee cannot claim that no work from RIICO was awarded to the assessee and the pool payments made are just estimations and not actual payments.

ii) The assessee’s explanation regarding DD of Rs. 14,72,000/- is incorrect because as per submission made by the assessee the RIICO has adjusted the said amount while making work contract payments to the assessee.

iii) The A/R, of the assessee has given no documentary evidence to prove that any particular entry was debited in books of account or not, despite giving enough opportunity to provide the required evidence to support assessee’s claim.

iv) Further, the special auditor made observations regarding illegal payment as well as unexplained expenditure are on the basis of documents impounded during the survey. On the other hand, the A/R of the assessee had no other explanation to offer other than

54 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

“there was no such entry and no any expenditure debited in profit and loss account.”

The unexplained expenditure including illegal payment of Rs. 1,18,34,723/- as pointed out in Annexure-4 of the audit report (except for entries no. 27 and 4 which do not pertain to relevant assessment year) made by the assessee is added to the total income of the assessee under section 69C of Income Tax Act, 1961.

“Although I have held above that once N.P is estimated, other additions made on the basis of books of accounts in the P&L account should not have been made, however, certain issues need to be pointed out in this Ground as well.

In respect of the D.D. of Rs. 14,72,000/- the assessee has in his reply dt. 15.10.2014 submitted before the AO the details of Bank account from where DD was made for application to RIICO on 10.11.2010 and mentioned that it was refunded next year.

Even if the payment made was adjusted against any allotted work as the AO has reasoned in his order, the source of the D.D is clearly from the disclosed Bank account at Bank of Baroda and this type of arbitrary

55 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

addition should not have been made by the AO in respect of this amount.

As regards the other entries forming the basis of the additions, on his part the AO has not brought out that certain entries were not debited in the books of accounts and he has not even considered the books to be correct. Since he rejected the books of accounts, what he needed to do was make a best judgment assessment based on net profit. For any other additions, he needs to prove that there were receipts outside the books of accounts which facilitated carrying out the illegal expenses payments to that extent.

At the same time, he also mentioned at the time of rejection of books that details of expenses were not properly mentioned. Even if it is agreed for the sake of discussion on the AO’s contention that illegal payments were made to obtain contracts, except for the piece of paper, there is no corroborative evidence. He has neither confronted the so called beneficiaries or the other persons involved in the said “pool” of contractors to establish his finding.

So if there was a case of any illegal expenses being there, they would be either camouflaged as other expenses, which the AO himself considered while estimating the net profit or such expenses would be backed by additional undisclosed receipt or Income which could take care of these expenses, which the AO failed to being on record through any evidences.

56 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

His only focus was on expenses claimed and lack of supporting evidences, which he had already covered by estimating a best judgment net profit rate. All the other things in between the P & L a/c get accommodated in the end result estimated by the AO.

The HIGH COURT OF PUNJAB AND HARYANA in Commissioner of Income-tax Patiala v. Dulla Ram, Labour Contractor, Kothapura reported in 42 taxmann.com 349 (Punjab & Haryana) has held clearly that-

“An Assessing Officer may, while considering a return of income, inspect the account books and, if satisfied, that account books do not reflect the true income of an assessee, reject the same. Account books once rejected, are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue. Thus, when account books are rejected, it would follow, as a necessary corollary, those entries in the account books whether suspicious or not cannot be relied by the revenue or the assessee. To hold otherwise, would, in essence, render account books valid for certain purposes and invalid for others, a course impermissible in law.

The Assessing Officer rejected the account books in their entirety and thereafter proceeded to assess income by applying a flat rate of profit of 10%. After applying a flat rate of profit of 10% the Assessing Officer added Rs. 1,98,298/- to the income of the assessee on the basis of certain ‘entries’ deemed to be suspicious. The Commissioner of Income

57 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

Tax (Appeals) as well as the Tribunal have rightly held that as books of account were rejected in their entirety, the Assessing Officer could not rely upon any entry in the books of account for making an addition of Rs. 1,98,298/-.”

Income Tax Appellate Tribunal – Lucknow in the case of M/s M.A Builders Pvt. Ltd., vs. Department of Income Tax in ITA No. 564/LKW/2011 Assessment Year : 2008-09 Date of pronouncement: 28/05/2013, had on this very issue on similar rejection of Books and estimation of Net profits held that-

“Once the books of account are rejected and the assessee is not co- operating, the only option left with the Assessing Officer is to estimate reasonable income after taking into account the total receipts of that year. We, therefore, find no infirmity in the estimation of income by the ld. CIT(A) and we accordingly approve the same.

58 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

In the light of the facts as emerged from the discussion made above and the legal precedents available in this regard, I am of the opinion that the AO was not justified in making the addition towards the expenses u/s 69C once he had estimated the Net Profit after rejection of the regular books of accounts. He has already formed an opinion on the net profit and if he still had doubts on these expenses, no one stopped him from adopting a higher than normally acceptable net profit rate based on the discrepancies pointed out in the other grounds of appeal. He cannot have an addition on account of estimation of profit separately & then make other additions to the expenses which would disturb the Net Profit to give absurd business results as happened in this case. As a result I am unable to sustain the addition made u/s 69C. The addition of Rs. 1, 18, 34,723/- is accordingly directed to be deleted. This ground of appeal is treated as allowed.

“69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount

59 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year :

Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”

60 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

undertaken by the assessee during the year are under consideration of the AO and the AO not being satisfied with such determination of net profit, has replaced and estimated net profit based on his understanding and material available on record. But where there are transactions which are not connected to the determination of net profit and are not reflected in the profit/loss account and are basically stand alone balance sheet transactions or transactions which have not been recorded in the books of accounts at all but later on acknowledged, can it be said that even those transactions cannot be examined by the AO. In the instant case, based on report of the special auditor and as reported in Annexure 4 of the audit report and examination during the course of assessment proceedings, the Additional CIT has held that there are specific transactions which have not been debited in the books of accounts and further, these transactions are determined based on documents impounded during the course of survey. In our view, the said action of the Additional CIT is not vitiated merely on the ground that the books of accounts have been rejected and net profit has been estimated by the AO provided it can be proved that these are independent transactions not connected with the transactions in respect of which the net profit has been estimated by the AO. In support, useful reference can be drawn to the legal proposition laid down by the Hon’ble Supreme Court decision in case of Kale Khan Mohammad Hanif vs CIT reported in 50 ITR 1 and which has been followed by the Hon’ble Supreme Court in its subsequent decision in case of CIT vs Devi Prasad Vishwanath reported in 72 ITR 194 wherein it was held as under:

61 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

“ there is nothing in law which prevents the ITO in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained and the business income estimated by him under section 13 after rejecting the books of accounts of the assessee as unreliable. Whether in a given case, the ITO may tax the cash credit entered in the books of account of the business and at the same time, estimate the profit must however depend upon the facts of each case.”

62 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account.”

63 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

profit/loss account has been rejected by the AO, the said transactions cannot again be disallowed as the AO has already estimated the net profit rate. Hence, the additions on account of these transactions are hereby deleted.

64 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

considered while working out the net profit rate by the AO. Hence, the additions on account of these transactions are hereby deleted.

“A-22 is part of Assessee-cash Book diary – as we have mentioned above that all the entry whether you have considered legal or illegal are in the hand of the diary of the Assessee, if not entered it is not related to assessee. There are marking of payment to person as mentioned in that column….the Assessee entered in Books of accounts also as mentioned in Other Debtors account/site advances account. As per records these amount is recoverable and not debited in Profit & Loss account ….. How can we say illegal payment. Is any where mentioned illegal …. In case illegal and not debited in profit and loss account but amount in debtors account, How can it may be added in the total income of the Assessee.”

65 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

amounts are mentioned in the debtors accounts, these are recoverable amount and hence, not debited in the profit/loss account. In light of above explanation, it is clear that the subject payments have been made during the financial year and are not debited to the profit/loss account. Where the amount is not debited in the profit/loss account so prepared by the assessee, there is no basis to hold that since the AO has rejected the results as declared in the profit/loss account, the AO would be precluded in examining these transactions and bringing it to tax under section 69C of the Act.

66 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

replaced by the AO by his own estimation, it cannot be said that such transactions are also subsumed in the overall transactions, the results of which are substituted by the AO. These are independent transactions what are brought to tax under section 69C by the AO and to escape the rigour of section 69C, the assessee has to come forward and offer an explanation justifying the source of such expenditure. In the instant case, we however donot any explanation about the source of such expenditure which has been submitted by the assessee to the satisfaction of the AO.

67 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

expenditure has been incurred from known sources of his income. Where he fails to demonstrate, the consequences of section 69C will follow. Even going by the assessee’s contentions, we find that the ld CIT(A) has himself confirmed the addition on account of undisclosed income of Rs 4,51,513 and to that extent, the findings of the ld CIT(A) are self-contradictory.

68 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

the auditor has mentioned as pool payment. It may be part of discussion to give the work on sub contract or estimation or discussion. No where recorded in seized cash book as is the case in respect of items recorded in s.no. 84-88 and consider illegal expense and it was unjustified to mention pool payment or to consider illegal expenses. On perusal of the order of the ld CIT(A), we however donot see a specific finding of the ld CIT(A) which has addressed the matter in light of documents marked as Annexure A-24 impounded during the course of survey and the contentions so advanced by the assessee. In the interest of justice and fair play, we hereby set-aside the matter for the limited purposes of examining Annexure A-24 impounded during the course of survey and the items reflected at Item no. 68, 69,70,71,72, 73 and 74 based on Annexure A-24 and as reported as part of Annexure 4 of the special audit report, and taking into consideration the findings of the special auditor, to decide as per law as to whether the provisions of section 69C are attracted in the instant case or not. Needless to say, both the revenue and the assessee would be provided reasonable opportunity to represent their case before the ld CIT(A).

In the result, the appeal of the assessee and the revenue are disposed off with above directions.

Order pronounced in the open court on 09/10/2017

Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

69 ITA No. 434 & 617/JP/2016 Sh. Subhash Pareta, Kota vs. ACIT, Kota

Tk;iqj@Jaipur fnukad@Dated:- 09/10/2017. *Ganesh Kr. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- Subhash Pareta, Kota 2. izR;FkhZ@ The Respondent- ACIT, Circle-1, Kota 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File {ITA No. 434 & 617/JP/2016} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत