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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Sh. Kuldip SinghDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member: The present appeal filed by the revenue and Cross Objection by the assessee are directed against the order of ld. CIT (A)-17, New Delhi dated 05.09.2016.
Following the grounds have been raised by the revenue:
“1. The Ld. CIT (A) has erred in law and on facts of the case in deleting the addition of Rs. 2,79,61,917/- made by the assessing officer on account of profit on unexplained deposits in bank, by applying profit of 5% to total turnover, on the plea that no defect in books of accounts was pointed out by the assessing officer and whereas the assessing officer had
ITA No. 6168/Del/2016 & 2 CO No. 9/Del/2017 Sunil Nayyar pointed out various defects in books of accounts as mentioned in the impugned assessment order dated 30/03/2015.
The Ld. CIT (A) has erred in upholding genuineness of alleged business done by the assessee in the light of enquiries and findings done by the AO.
The Ld. CIT (A) has erred in upholding the genuineness of the business of the assessee by holding that no specific defects were pointed out by the AO when AO mentioned various defects in his books. The Ld. CIT (A) has erred in upholding the genuineness of books of assessee when AO has specially mentioned that no stock register was maintained and neither any cash book nor other details was maintained and produced.
The CIT (A) has erred in law and on facts of the case in deleting the addition of Rs. 1,39,38,110/- (that is Rs. 51,00,000/- made by the assessing officer on account of unexplained cash deposit and Rs. 88,38,110/- made by the assessing officer on account of unsecured loans u/s 68 of the IT Act 1961). As the assessee failed to prove the identity, genuineness & creditworthiness of the parties, who gave the unsecured loan and paid cash to the assessee and the assessee has failed to discharge primary onus as incomplete address was provided without other details. In view of this, Ld. CIT (A) erred in fact and on the law while deleting the addition made by the AO.” 3. Ground no. 1 relates to contention of the assessee against rejection of books of account, estimation of profit and making addition of Rs.2,79,61,917/-.
The facts, justification, submissions of the AR have been taken from well compiled order of the ld. CIT (A).
The fact of the case is that the AO found that the assessee was engaged in the business of whole sale trading of milk in the name of proprietary concern, M/s Kumars Brothers. Total sale of Rs.86,65,83,744/-
ITA No. 6168/Del/2016 & 3 CO No. 9/Del/2017 Sunil Nayyar was shown on which net profit @0.04% was declared. GP was shown @0.22%.
The reasons given by the AO while estimating the profit @5% on the gross turnover is as under: 1. "Soft Copy of books was not filed, although specifically asked for. 2. On perusal of Purchase Bills, it is seen that they were identical, generated through in the same style as is prepared by a single hand. 3. Tanker Numbers were not written on the Purchase Bills. 4. These Bills were like new printouts as if it has not passed on to many hands. 5. All the purchase bills were sequentially numbered although belong to different persons except tie bills of Kwality Dairy (India) Ltd. 6. Like, Purchase Bills, Sale Bills were also computer generated in the same style and new like paper (without any fold), as if it has not passed through many hands. 7. All sale and Purchase Bills bear the similar style of signatures as if prepared by the same group of persons. 8. None of the sale bill or the purchase bills contained signatures of the recipient of goods. 9. No voucher in respect of Tanker Hire Charges was produced. 10. Stock register not maintained. 11. Cash Book not produced for verification. 12. The AR was specifically asked to show bank pay-in-slips and withdrawal vouchers and cheque book counterfoils, but it is submitted that all transactions were through RTGS. No voucher in this regard was produced. 13. Transport charges are claimed at Rs. 32,78,560/- but no voucher in this regard was produced.
ITA No. 6168/Del/2016 & 4 CO No. 9/Del/2017 Sunil Nayyar 14. All the folders containing books of accounts had new printouts of computer generated A-4 Paper printouts and it clearly appeared that there was no actual use of these vouchers in daily wav of business."
It was also observed as per Form no.3CD attached to Form no.3CB (Tax audit report), the nature of the business was mentioned as "trading/wholesaler". There was no mention of goods in which the assessee was dealing with. The opening as well as closing stock was shown at nil. Out of total sale and purchases, trading of Rs.29 crores was shown upto the month of August, 2011. As per bank statement, it was seen that all the major withdrawals were in the name of M/s Kwality Dairy India Ltd. while all the major deposits other than cash were in the names of other five persons.
In view of above, the AO estimated profit @5% on the GTO.
Before the ld. CIT (A), the assessee submitted the explanation rebutting each and every point flagged by the AO while making addition @5% of GTO. 1. "The assessee is dealing in wholesale trading of milk. The business module of assessee is that he collects milk directly from milk plants by way of container/tanker and further sells the same container/tanker to the various wholesale milk suppliers of different areas operating from Uttar Pradesh, Rajasthan and Haryana as per the business requirements. The role of the assessee is to assist the milk plant in distribution of surplus milk to various wholesale suppliers and to collect the payment. The milk plants have to take the assistance of such distributors so as to minimize the wastage and to ensure the distribution of surplus milk which is left out after preparation of various milk products & other items.
ITA No. 6168/Del/2016 & 5 CO No. 9/Del/2017 Sunil Nayyar 2. As the role of the assessee is limited so the corresponding profit are also very limited. The profit rate is also marginal because the risk involved is negligible because most of the time purchase is made only after negotiating the corresponding sale. However the profit rate commensurate with the other distributor of the same trade in whose case profit rate stand accepted by the department under section 143(3) of the Act, particularly in the same charge.
Though the assessee is trading in an unorganized sector of milk trading but even then most of its purchase and sale is through banking channel and is supported by regular bills.
The assessee is regularly maintaining books of accounts, in accordance with section 44AA of the Income Tax Act. 1961, which stand duly audited under section 44AB. The books of accounts were produced before the A.O. many a times and the A.O. has also affirmed these facts on page 4 of the order wherein it is mentioned "on 25.03.2015, the A.R appeared and produced books of accounts".
On the basis of books of accounts maintained in the regular course of business, the assessee filled return of income declaring net taxable income of Rs. 3,48,243 on 10/10,2013. The A.O. has made following addition:
i. Addition of Rs 2,79,61,917, by applying net presumptive profit rate of 5% ii. Addition of Rs. 51,00,000, by rejecting trade debtors. iii. Addition of Rs. 88,38,110, by holding balances of sundry creditors as in genuine.
ITA No. 6168/Del/2016 & 6 CO No. 9/Del/2017 Sunil Nayyar The additions made are discussed sequential in the subsequent paragraphs:
Addition of Rs. 2,79,61,917 by applying presumptive profit rate of 5%. The AO has made addition of Rs.2,79,61,917/- by applying profit rate of 5% to the total turnover, without rejecting books of accounts in terms of section 145(3) & without pointing out any "defects" in the books of accounts and without bringing any cogent or credible material on record which has any nexus to the estimation of Income. AO has mention the following objections in the assessment order:
Soft copy of Books was not filled: Rebuttal: First objection of A.O. is that the assessee has given hard copies of books of accounts but he has not produced soft copy of books of accounts. In this regard it is submitted that the assessee is maintaining his accounts on a specialized computer software called 'Tally" and copy of these accounts can be transferred only when the corresponding computer of the recipient is also equipped with the same version of the "Tally" software. Since the AO did not have facility of 'tally software' so the soft copy could not be handed over to him. However, hard copies of books of accounts was produced and acknowledged by the AO.
Purchase/sale bills are computer generated and appeared to be new: Rebuttal: The objection of the A.O. is that purchase and sale bill are computer generated and appears to be very neat and dean as if these have not passed many hands. In this regard it is submitted that original sales bill are handed over to the buyer and the receipt is invariably taken on the trading invoice which is also used by the truck driver for
ITA No. 6168/Del/2016 & 7 CO No. 9/Del/2017 Sunil Nayyar transportation purpose. But to furnish evidence during assessment proceedings that fresh copy of sales bills were taken out from computer and produced before AO for verification. Similarly purchase bills are only from few wholesale suppliers and these being very small in number the assessee has maintained them in a very neat and clean manner. In any case clarity of bills and its due preservance cannot be termed as "defects" within the meaning of section 145(3) of the Act.
Tanker Numbers not written on some of the Sale Bills: Rebuttal: The A.O. has a concern that the tanker no. is not mentioned in some of the Purchase/Sales bills. In this regard it is submitted that the assessee has duly mentioned vehicle number on each purchase bill/sale bill. There may be some omission in one or the two bills but as a matter of routine all the purchase and sale bills bear tanker number. More so each Purchase/Sale bills is also supported by delivery challan, where in tanker number is also mentioned. Goods cannot be transported unless the container is accompanied with sale bill or delivery challan wherein tanker number is duly mentioned. Copy of purchase/sale bill and delivery challan of each month is submitted here with.
Purchase/Sale Bills are Serial Numbered: Rebuttal: The next objection of A.O. is that some of the Purchase bills are serial numbered, though these purchases are made from different persons. In this regard it is submitted that the bulk purchase is made by the assessee from few whole sale dealers, who issue regular bills which obviously have different serial number. But small quantity of milk is also purchased from villagers who do not have facility for issuing proper bills. In order to systematically account for these purchases assessee has printed his own purchase voucher which he calls as "retail purchase bills". All these purchase bills are serial numbered and are progressing in
ITA No. 6168/Del/2016 & 8 CO No. 9/Del/2017 Sunil Nayyar accordance with the day. Whenever the assessee purchases milk from retail milk sellers he records the purchases on this serial numbered voucher for accounting purpose and also obtains the signature of retail milk vendor. This is a correct accounting system which all the traders are adopting uniformly to record the retail purchase. There being no infirmities in the accounting treatments so the objection of the AO is without any basis.
Purchase/Sales bills do not contained signature of the recipient: Rebuttal: The objection of the A.O. is that Sales bills do not contained signature of the recipient. In this regard it is submitted that when goods are transported these are invariably accompanied with "delivery challan". For the purpose of smooth accounting the assessee has adopted a uniform policy to get the signature on these delivery challan rather than Sales bills. Copy of two delivery challan of sales bills of each month are submitted here with.
Non maintenance of voucher in respect of transport bills: Rebuttal: The A.O. has expressed concern about non maintenance of voucher in respect of transport bills of Rs. 32,78,560. It is submitted that the observation of the A.O. is erroneous because vouchers in respect of all the transportation expenses have duly been maintained by the assessee and were produced before the AO, but regular transport Bilties could not be produced. In this regard it is submitted that the precise business of the assessee is to purchase a container load of milk from milk plant and to supply the same to the whole sale distributor of milk of various places. In order to minimize the wastage of stock and to ensure the supply in the minimum possible time the tanker, which start from the place of whole sale distributer is directly diverted to the place of
ITA No. 6168/Del/2016 & 9 CO No. 9/Del/2017 Sunil Nayyar prospective buyer of milk. In the process transport charges are shared by the assessee and by the prospective buyer, but the container is not changed to avoid wastage and spoilage of stock. However, for the proportionate expenses regular vouchers are maintained. In each voucher Tanker number, date of delivery, place of delivery and name of the buyer is duly recorded. More so, these tankers are hired from tanker owners, who are specialized in the smooth delivery of milk. Copy of these transport vouchers and month wise details of transport expenses is submitted here with.
Separate stock register is not maintained: Rebuttal: The A.O. has expressed a concern that separate stock register is not maintained. In this regard it is submitted that the assessee is maintaining its account on specialized accounting software called "Tally" where day to day quantitative detail is self-generated and embedded with the respective ledger accounts of purchase and sales. In this software separated stock register/Stock inventory is self-generated. Besides, the quantitative detail is also mentioned in each purchase/sale bills. More so the nature of business of the assessee is such that stock at the end of everyday is reduced to Nil and the day to day stock summary can be summed up in a page or two. Copies of stock inventory as generated from Tally software and stock summary is submitted here with.
Cash Book is not produced: Rebuttal: The AO has mentioned that the cash book is not produced. This finding of AO is against the factual position. The assessee is preparing its account on computerized software called "Tally” in which cash book, ledger and other associated accounts are generated automatically and these cannot be separated from one another. In a
ITA No. 6168/Del/2016 & 10 CO No. 9/Del/2017 Sunil Nayyar simple accounting system maintained on the computer, cash book is simultaneously generated along with the ledger. More so the A.O, has even pointed out defects in the cash book and has also made addition of Rs.51,00,000/- on account of cash sale which he has found from cash book. In these circumstances it cannot be said that cash book has not produced. The cash book is produced before the ld. CIT (A).
Payment received through RTGS: Rebuttal: The next infirmity pointed out by the A.O. is that the assessee has received/made payments in the bank not through cheques but through RTGS. In this regard, it is submitted that RTGS is a method of transfer money through banking channel which is equivalent to transfer by cheques rather it is supported by a cheques. It is a regular method employed by all the businessman and all the banking channel throughout the country and by any stretch of imagination it cannot be equated with the "defect" within the meaning of section 145(3).
Books of accounts appears to be new: Rebuttal: The objection of the A.O. is that prints of books of accounts is new and are on A4 paper sheet. The assessee had very many times submitted to the A.O. that accounts are maintained on computer in software called tally and no hardcopy is preserved for day to day use. It is only when the A.O. has asked for hard copies of books of accounts that fresh print out were taken out. These fresh print out simply goes on to add on the clarity of the financial transactions and do not in any way inhibits the AO from deducing the true and correct profit.
IN Form 3CD nature of business is written "Wholesale Trader":
ITA No. 6168/Del/2016 & 11 CO No. 9/Del/2017 Sunil Nayyar Rebuttal: Objection of A.O. is that the tax auditor has mentioned the nature of business as "trading/whole seller" and he has not specified the goods to be traded. In this regard it is submitted that as per Rule 6G(2) the Tax Auditor is required to file a report in the Form No. 3CD prescribed in the Income Tax Rules. The form nowhere makes it mandatory for the Chartered Accountant to mention the exact nature of the commodity. Copy of the relevant form was submitted before the ld. CIT (A). Irrespective of the controversy nature of trade was duly explained to the A.O. and he has himself incorporated the same in the body of the order.
In the Audit report Opening as well as Closing stock is Nil: Rebuttal: Objection of Ld. A.O. is that, in the tax audit report opening as well as closing stock is mentioned as Nil. In this regard it is submitted that the assessee is dealing in perishable goods (milk), so opening as well as closing stock is bound to be ‘Nil’ almost every day. When the opening as well as closing stock is nil, naturally the tax auditor has to confirm the factual position so he has rightly written as Nil. There being no abnormality in the observations so the same cannot be construed as "defects" within the meaning of section 145(3).
There are Credit Purchase and Sale upto 09.09.2011: Rebuttal: Next objection of Ld. A.O. is that the bank account was opened on 09.09.11 but before that assessee has made credit purchase and credit sale of Rs. 29.00 Crore. In this regard it is submitted that this was the first year of the assessee, so at the initial level all the purchases/and sales were made on credit basis excepting a fraction of amount. However these credit purchase and sales were realized/paid in the subsequent months through banking channel and these also form part of the total purchase and sale recorded in the books of accounts. Copy of
ITA No. 6168/Del/2016 & 12 CO No. 9/Del/2017 Sunil Nayyar purchase/sale ledger for the relevant period reflecting the credit purchase and credit sale and its subsequent realization through banking channel were submitted. Copy of relevant bank account clearly showing the realization arid payment of these credit sale/purchase is also submitted. All the purchases have been made from the milk plant which is a listed company similarly all the sales were made to the established dealers. Confirmations in respect all these credit purchase and sales upto August 2011 were duly furnished to the AO. Copy is submitted again before the ld. CIT (A).
As the credit purchase/sale made up to August 2011 stands paid through banking channel In the subsequent months and are part of the regular books of accounts submitted before AO, so non opening of bank account and making credit purchase and sale upto August 2011 cannot be construed as "Defect" within the meaning of section 145(3) of IT ACT 1961.
Withdrawal and Deposit in the Bank account through Cheques: Rebuttal: Next objection of A.O. is that major withdrawals are in the name of M/s Kwality Dairy India Ltd and the major deposits are in the name of some customers in the bank, account, but purpose of such payments is not known. In this regard it is submitted that in any business system payments are received against the sale proceeds from the customers, which the AO has termed as deposits. Similarly every business man makes payments against the sales to the supplier which the AO has termed as "withdrawal". However, the name and full particular of the person from whom payments have been received or made in lieu of purchase and sales is duly mentioned in the bank account itself already submitted to the AO.
ITA No. 6168/Del/2016 & 13 CO No. 9/Del/2017 Sunil Nayyar 15. No Business has been carried out: Rebuttal: On the basis of above objections, which are basically cosmetic in nature AO has drawn a conclusion "that no business has been carried out". What AO is concluding is that all the purchase and sale through banking transaction and subsequent verification from the respective parties are not genuine and in fact no business has been carried out. In this regard following submission is made.
(a) Business Involves comprehensive activities which inter alia includes purchase of goods, sale of goods, payment through banking transaction, credit purchase and credit sale. Further this activity as per the requirement of law has to be recorded in the books of accounts strictly in accordance with the provision of section 44AA and shall be audited by the tax auditor under section 44AB. The assesse has complied with all these provisions of the law and the AO has not found any "defect" or infirmity or irregularity in these documents. But even in the presence of these documents maintained in the regular course of business, the AO has negated the entire business process.
(b) The business activity resulted into profit and the assessee has paid due taxes on the income declared in the return for the year. It is also submitted that in the business activities there is neither any unsecured loan nor any accumulation/transfer of money by way of any other mode. The creditors/debtors of the year stand settled during the year itself or at the best in the very next assessment year at the earliest possible.
(c) The AO has been very selective in negating the business activities. Thus he has accepted the sundry creditors worth Rs.24,17,14,924/- and sundry debtors worth Rs.24,50,13,470/-. Sundry debtors and sundry creditors are one of the business constituents rather a very important
ITA No. 6168/Del/2016 & 14 CO No. 9/Del/2017 Sunil Nayyar part of the business. When the major constituent of the business activity stands accepted how the AO can negate rest of the business.
(d) The assessee has made total sale of Rs.86,65,83,719/-. The AO has accepted the sale proceeds realized through banking channel, but has made addition for the realization of sale proceed by way of cash which were deposited in the bank account. Thus the sales realized through banking channel stands accepted. (e) If for argument sake it is taken that no business activity has been carried out, the obvious question arises what for the profit rate has been applied. Profit invariably follows the commercial activity. When there is no business or commercial activity, in that event there cannot be any profit. The assessee has duly carried out business activity; shown profit there on and has paid taxes on such business profit.
(f) More so the Act makes it incumbent upon the AO to examine the business activities with reference to books of accounts. Books of accounts are evidence under the Indian Evidence Act and these cannot be conveniently ignored. The AO is entitled to find facts in the books of accounts reject them under section 145(3) and can proceed to estimate the income as per procedure laid down in the Act. But the statute do not empower the AO to simply ignore the books of accounts and the entire business process without pointing out any major "accounting defect" which inhibits him in deducing the true and correct profit. Obviously the action of the AO in ignoring the books of accounts and the total business process and there after making estimations of profit without any basis is highly irrational, illegal and bad in law.
The assessee further relied on the various legal aspects of the addition made under section 145(3) which are as under:
ITA No. 6168/Del/2016 & 15 CO No. 9/Del/2017 Sunil Nayyar
Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1), has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144". The section 145(3) thus allows a reasonable right to the AO to estimate the income, but at the same time section cast several obligations on the AO. These obligations which are mandatory in nature are discussed in the following paragraphs:
i. REJECTION OF BOOKS OF ACCOUNTS IS MANDATORY BEFORE ESTIMATION. At the outset section cast an obligation on the AO that before resorting to estimation under section 145(3) it is incumbent upon him to reject the books of accounts. It is an established judicial preposition that estimation of income under section 145(3) cannot be made unless the books of accounts of the assessee are rejected in clear terms and the assessment is framed in the manner provided under section 144. ITO vs Anil Kumar & Co., ITA No. 20001/2014, Karnataka. Without rejecting the books of accounts or pointing out incompletion or inaccuracy in the accounts, AO cannot invoke section 145(3). M/s Paras Dying and printing Mil! 4 ITR 24 KHT.
In the given case, the assessee has maintained regular books of accounts which were duly audited by tax auditor and these books of accounts were also produced before AO. The AO has not rejected these books of accounts rather ignored these books of accounts and proceeded
ITA No. 6168/Del/2016 & 16 CO No. 9/Del/2017 Sunil Nayyar to make estimations. The action of AO is obviously arbitrary, illegal and bad in law, so addition made needs to be deleted.
ii. TO POINT OUT CLEAR DEFECTS IN THE BOOKS OF ACCOUNTS In order to reject the books of accounts in section 145(3) makes it obligatory and incumbent upon the AO to point out and elaborate the "defects" in the books of accounts. The section further limits the scope of word "defect" used in the section and defines that the "defects" shall be of such nature, which prevents the AO from calculating the true and correct profit of the assessee. The definition is embedded in the phrase "Income cannot be properly deduced from the accounts maintained by the assesse". The AO has not pointed out any such accounting defects in the books of accounts which have any financial implication or impediment in the calculation the true and correct profit. The objection of the AO, regarding clarity of purchase voucher making payment through RTGS and other objections do not fall under the scope and ambit of specified definition of the word "defect" as envisaged under section 145(3). These are vague and general observations which have hardly any financial implication on the trading results, trading profit or overall returned profit of the assessee.
iii. TO GIVE A CLEAR FINDING IN THE ASSESSMENT ORDER The section cast another obligation on the AO. The mandate of the section not only makes it incumbent on the AO that before estimation of income, he should reject the books of accounts in clear terms, but the section also make it obligatory on the part of the AO to record a clear satisfaction in the body of assessment order in a clear language that "he is not satisfied that accounts are correct or complete and true profit cannot be deduced from such account", "if there is no finding that there was material before the AO to lead him to the conclusion that a proper
ITA No. 6168/Del/2016 & 17 CO No. 9/Del/2017 Sunil Nayyar statement of income, could not be deduced, in that event AO is not entitled to estimate the profit". Chhabildas Shah vs. CIT 59 ITR 733 (SC).
a. In the case of Pandit Brothers vs. CIT 26 ITR 159 (Pun) Hon'ble supreme court has as explained the basic principles for invoking section 145(3) and has clarified in clear terms that unless a clear satisfaction with regard to inaccuracy of books of accounts is recorded in absolute terms in the body of assessment order, the assessment framed is bad in law. While explaining the principle Apex Court has observed "If there is no definite finding in the order that in his opinion the income, profits and gains could not properly be deduced there from, in that event assessment framed is bad in law.
b. The AO has neither rejected books of accounts nor pointed out any accounting defects and has also not recorded any satisfaction in the body of assessment order with regard to inaccuracy of accounts as such assessment framed is bad in law.
iv. BASIS OF ESTIMATION OF PROFIT Once book results were rejected in terms of provisions of sec. 145(3) of the Act, it is not the ipse dixit of the AO to compute the income either u/s 144(1) or sec. 145(3) the computation and determination of income cannot be at the whims and fancies of A.O. There must be in existence relevant material or evidence, for making estimation of income. CIT Vs Daulat Ram Rawatmul 87 ITR 349 (S.C). However, the A.O. has not placed on records any material or evidence or the basis of his estimation. In fact, A.O. has not given even a single reason for estimating the income and for making such a huge addition.
ITA No. 6168/Del/2016 & 18 CO No. 9/Del/2017 Sunil Nayyar V. CONFRONTING THE BASIS OF ESTIMATION TO THE ASSESSEE The section cast another obligation on the AO that before making any estimation of income, he should confront the assessee with the material or evidence or basis of estimation of income. The obligation is embedded in the phrase "May make an assessment in the manner provided in section 144". The phrase obviously means if the AO has chosen to make estimation under section 145(3) then he has to observe all the conditions which are stipulated in section 144, which inter-alia includes confronting the material or the basis of estimation to the assessee. The AO has not confronted any such material or evidence to the assessee. Rather he has chosen to ignore the material or evidence which includes comparable cases and other factors. Thus the addition made is against the provisions of the law.
The Explicit provision of the law vis-à-vis facts of the case are discussed in the order of the ld. CIT (A) with reference to grounds of appeal in the following paragraphs:
At the outset, the section provides that the accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. If there was no challenge to the transactions represented in the books, then it is not open to the Department to contend that what was shown by the entries is not the real state of affairs. CIT v. Vikrarn Plastics [1999] 239 ITR 161(Guj). Thus section 45(1) cast an obligation on the AO to compute income in accordance with books of accounts maintained during the course of business. CIT v A. Krishna Swamy 53 ITR 122 (SC), CIT v Mcmelan & Co. 33 ITR 182. Suspicion, however strong it may be, is no ground for the AO for invoking the provisions of
ITA No. 6168/Del/2016 & 19 CO No. 9/Del/2017 Sunil Nayyar section 145(3) of the Act", Thus the AO in any circumstances cannot ignore the books of accounts, though he can reject the same. What the AO has done that he has conveniently ignored the books of accounts as if these do not exist and has resorted to estimations without rejecting the books.
More so, while ignoring the books of accounts AO has been selective. Thus he has examined sundry creditors/debtors and has disallowed substantial amount out of these while placing reliance in the books of accounts. But when it comes to calculation of profit he has simply ignored the books of accounts, which is apparently not permissible under the law. Similarly, the AO has accepted the sales in respect of which proceeds have been realized through banking channel, but he has added back the amount of sales in respect of which proceeds were realized by way of cash. Thus the AO has been selective in accepting and rejecting the books of accounts and the business process as a whole which is in fact not permissible under the law. Action of AO is highly arbitrary, against the spirit of law and the assessment framed is bad in law.
ii. ESTIMATION WITHOUT REJECTING BOOKS. The assessee had been maintaining regular books of account, which were duly audited by an independent chartered accountant. The financial results were fully supported with vouchers and the books of account which were complete and correct in air respects. These books of accounts and the supporting materials were duly produced before the AO. However the AO has neither pointed out any material defects in the books of accounts, nor rejected the same but has proceeded to make addition under section 145(3).
ITA No. 6168/Del/2016 & 20 CO No. 9/Del/2017 Sunil Nayyar "Without enlisting the defects, incompletion and inaccuracies in the accounts of the assessee, AO cannot expressively or otherwise, invoke the provisions of section 145(3) of the Act. When no specific discrepancies or defects in the books of account of the assessee has been pointed out nor was any material brought to establish that purchases were inflated or receipts suppressed, there is no justification in invoking the provisions of section 145 of the Act, M/s Paras Dyeing and Printing Mills P Ltd 004 ITR (Trib) 0029 (Ahd).
"It is well settled that without rejecting the books of accounts maintained by the assessee by pointing out specific material defects therein, the results declared by the assessee on the basis of such books cannot be disturbed. Gajanan Traders Rubber Co. Pvt. Ltd. vs. ACIT ITA No. 4980/Del/2004.
Action of the Assessing Officer clearly demonstrates that he could not gather any details or find any irregularity in maintenance of the books. It was also established beyond doubt that Assessing Officer could not quantify any specify amount of expenditure for disallowance. A minor irregularity cannot be blown out of proportion to resort a convenient approach of the rejection of the book results". Dhakeswari Cotton Mills Ltd. Vs CIT (1954) 26 ITR.
"Insignificant mistake cannot afford a ground for resorting to section 145(3) or estimation of income. So long as it is not impossible to deduce the true income from the accounts maintained by the assessee, its computation cannot be made in any other way". CIT v Padamchand Ramgopal (1970) 76 ITR 719 (SC).
"In order to reject the account the AO has to establish that income cannot be properly deduced from the accounts maintained by the
ITA No. 6168/Del/2016 & 21 CO No. 9/Del/2017 Sunil Nayyar assessee. In order to arrive at such a conclusion, it must be shown that the Assessing' Officer has taken into consideration the various factors and has not omitted to consider the materials before him. It is for the AO to establish the incompleteness or incorrectness of the accounts. Unless the AO perform his duty the books of accounts cannot be rejected". Ashok Refractories Pvt. Ltd. (279 ITR 457) (Cal.)
When the books of accounts of the assessee had not been rejected and assessment having not been framed under section 144 of the Income Tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. ITO vs M/S Anil Kumar & Co I.T.A. No.200001/2014, Karnataka
“The AO cannot base its findings on suspicions, conjectures or surmises, nor can it act on improper rejection of materials partly on evidence and partly suspicions, conjectures or surmises and if it so does, the finding is required to be set aside". In Omar Salay Moharned Sait v. CIT [1959] 37 ITR 151 (SC).
In the instant case the Assessing Officer has not rejected the books of accounts of the assessee. To put it differently the Assessing Officer has not made out a case that conditions Said down in Section 145(3) of the Act are satisfied for rejection of the books of accounts. Thus, the action of AO in resorting to estimation without rejecting books is arbitrary and against the explicit provisions of the Act.
III. TO POINT OUT SPECIFIC DEFECTS IN THE BOOKS. a. It is the settled law that unless the A.O. points out specific defects in the Books of accounts, to the extent which make it impossible or difficult for the AO to deduce the correct profit, books of accounts cannot
ITA No. 6168/Del/2016 & 22 CO No. 9/Del/2017 Sunil Nayyar be rejected. Further the scope and limitation of the word "defect" has been define in the section itself. Thus the section defines "that the defects in the books of accounts" shall be such which establishes that "income cannot be properly deduced form the accounts". The AO has not pointed out any such accounting defects in the books of accounts. The general objections of the AO regarding cleanliness of the bills, payment through RTGS and non-production of soft copy of books of accounts do not fall under the ambit of definition of word "defect", as envisaged under section 145(3). These objections do not inhibits or come in the way of determining or calculating the correct profit.
b. "Without enlisting the defects, incompletion and inaccuracies in the accounts of the assessee, AO cannot expressively or otherwise, invoke the provisions of section 145(3) of the Act. Mr. K.N. Ramchandra Naidu vs. CIT ITA No. 47 /PNJ/2013. Without pointing out any such defect in the account books or bringing on record instances of unrecorded production or unrecorded sales, or any other infirmity or definite defect which has specific bearing on calculation of profit from the books of accounts, of accounts cannot be rejected by applying provisions of section 145(3)". DCIT Vs. Associated Stone Industries Limited 22 TW 155 (Jaipur).
c. Where the defects pointed out in the books of accounts were of general or technical nature and no suppression of sale or purchase was pointed out book results or books of accounts cannot be rejected". Vadayattu Jewellery Vs. State of Kerala (1997) 104 STC 121, (Ker.). The department has to prove satisfactorily that the accounts books are unreliable, incorrect or incomplete before it can reject the accounts. Rejection should not be done lightly". St. TerrsaOil Mills vs. State of Kerala (1970) 76 UR 365 (KER.).
ITA No. 6168/Del/2016 & 23 CO No. 9/Del/2017 Sunil Nayyar d. "In the case of ACIT Vs. Hitech Grain Processing Pvt. Ltd. in ITA No. 2885/Del/2011, Hon'bie Delhi High Court has held that since the AO had not pointed out any defects in the books of account and the accounts were also not rejected by the AO, therefore, no addition could have been made by the AO. The same view point has been endorsed by Kerala High Court in the case of [Addl. ITO Vs Ponkunnam Traders (1976) 102 ITR 366 (Ker)].” e. "When no specific discrepancies or defects in the books of account of the assessee has been pointed out nor was any material brought to establish that purchases were inflated or receipts suppressed, there Is no justification in invoking the provisions of section 145 of the Act, M/s Paras Dyeing and Printing Mills P Ltd 004 ITR (Trib) 0029 (Ahd).
f. "Thus, the scope of the provisions of section 145 conclusive establishing the fact that, what is important for rejection of books is the AO being not satisfied about the correctness or completeness of the accounts and it is for the AO to establish the incompleteness or incorrectness of the accounts of the assesse", Ashok Refractories Pvt. Ltd (279 ITR 457) Calcutta High Court.
g. "The power to reject the books of accounts under section 145(3) arises only if the AO is satisfy that there is a major defect in the books of accounts which comes in the way of determining the actual profit". DCIT v. Associated Petroleum Corporation [2011] 44 SOT 45 (Ahd.), ITA No. 47 /PNJ/2013.
h. In CIT v. Amitbhai Gunvantbhai [1981] 129 ITR 573 (Gut.), the Hon'ble jurisdictional High Court has held that the basic principle is the same in law relating to income-tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries, then it is
ITA No. 6168/Del/2016 & 24 CO No. 9/Del/2017 Sunil Nayyar not open to the revenue or other side to contend that what is shown by the entries is not the real state of affairs.
The AO has not pointed out any accounting defects in the books of accounts. Rather he is summarily ignored the books of accounts but has proceeded to invoke the rigour of section 145(3) which is bad in law.
IV. RECORDING A CLEAR SATISFACTION IN THE ASSTT. ORDER a. The settled legal preposition is that before assuming jurisdiction under section 145(3) or resorting to "Estimation" A.O. has to record a dear and definite satisfaction in the body of assessment order, that "He is satisfied that the accounts are not correct or complete and true profit cannot be deduced from such accounts. If, there is no finding that there was material before the AO to lead him to the conclusion that a proper statement of income, profits and gains could not be deduced from the material placed before him, in that event he is not entitled to estimate the profit. Pandit Bros. vs CIT 26 ITR 159 (P&H)
b. The above principle was also affirmed by the supreme court in the case of Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733 (SC) wherein it was held "What we have to see is whether there is any finding that the income, profits and gains cannot properly be deduced. "We are not concerned with the correctness of the conclusion and we are only concerned with the question whether there is any material in support of the finding or not".
c. However the AO has not recorded any such satisfaction in the body of assessment order before making huge addition of Rs. 2.79 crore. As no cogent reason has been advanced by the A.O. for rejecting the accounts, the rejection and subsequent estimation of income is bad in law. CIT V. S.R. FRAGNACES LTD., 270 ITR 560."In the absence of
ITA No. 6168/Del/2016 & 25 CO No. 9/Del/2017 Sunil Nayyar specific finding on the part of A.O, that the true profit cannot be ascertained from the accounts of the assessee book results cannot be disturbed" CIT VS JAYALAXMI TRADING COMPANY 2014 ITR 660 MAT.
d. Section 145 requires the Assessing Officer to give a finding as to whether method of accounting adopted by the assessee is such that it will not enable the Assessing Officer to compute the income of the assessee correctly or that there are serious defects in the maintenance of accounts which will not enable the Assessing Officer to work out the income of the assessee. Without these findings book result cannot be disturbed. K.N. Ramchandra Naidu vs. CIT ITA No. 47 /PNJ/
e. "If there is no finding that books of accounts are incomplete or incorrect, accounts cannot be rejected. "CIT v. Rajni Kant Dave [2006] 281 ITR 6 (Ali)”, if there is no finding that income could not be deduced from the accounts maintained by the assessee, then rejection of accounts would be invalid, "Juggilai Kamlapat Udyog Ltd. v. CIT [2005] 278 ITR 522 (Cal,)". Unless there is a finding against the assessee that his income, profits and gains could not properly be deduced from his method of accounting which he has been regularly employing, the accounts cannot be disturbed. "P. Venkanna v. CIT [1969] 72 ITR 328".
f. Hon’ble jurisdictional High Court, in the case of Bastiram Narayandas Maheswari (210 ITR 438), held that it is the settled law that the books cannot be rejected u/s 145 of the act and resort to best judgment assessment, unless the AO record any finding that the books of accounts maintained by the assessee are incorrect rendering it impossible to deduce the profits, AO needs to indicate that he noticed any inconsistency or infirmity in the Audit report. Madnani Construction corporation P Ltd vs CIT (296 ITR 0045) (Gauhati).
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The Assessing Officer has neither given any finding about rejection of books nor is it discernible from his order, the working of his mind for rejection of the books. However without rejecting he has proceeded in estimating the profit. The conduct of the AO is obviously arbitrary and against the explicit provisions of the act".
V. APPLYING PROFIT RATE WITHOUT EVIDENCE a. The AO has estimated the profit by applying profit rate of 5% without bringing an, cogent material or evidence on record. It is a settled legal preposition that once the books of accounts are rejected, then, profit has to be estimated on the basis of proper material or evidence. AO is not entitled to make a pure guess and make assessment without reference to evidence or any material at all. There must be something more than mere suspicion to support the addition. Sheth Gurmukh Singh vs. CIT (1944) 12 ITR 393.
b. The rule of law on this subject has been well settled that estimate framed without giving the basis for their fixation is bad in law. Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775. In the case of Brijbhusnan Lal Praduma Kumar v CIT [1978] 115 ITR 524 the Apex Court held an estimate, must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. Same view has been taken in the case of State of Kerala vs. C. Velukutty [1996] 60 ITR 239 (SC).
c. The principal has also been elucidated by the Apex court In the case of State of Kerala vs. C. Velukutty [1966] 60 ITR 239 (SC) wherein the following observations have been made. "The limits of the power are implicit in the expression 'best of his judgment’. Judgment is a faculty to decide matters with wisdom, truly and legally. Judgment does not
ITA No. 6168/Del/2016 & 27 CO No. 9/Del/2017 Sunil Nayyar depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a ‘best judgment’ assessment, it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case."
d. The above principal has been confirmed by the honorable Supreme Court in number of judgment. Thus, in the case of Kachwala Gems Vs JCIT, 288 ITR 10 (2007)(SC). The apex court has held "after rejection of book results, AO should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily, the AO should adopt a method which must reflect the profits truly and justly [Gemini Pictures Ltd. vs CIT (1958) 33 ITR 547 (Mad).] For estimating the profit, the AO can always have a look at the margin returned in comparable cases or even in assessee's own case in the preceding years.
e. The Hon'ble Rajasthan High Court in CIT vs. Gotan Lime Khanij Udhyog (2001) 256 ITR 243 (Raj) held that the books of account together with past history of the case as also material collected should be considered for estimation of income. The past history is the best guide where provisions of s. 145(3) of the Act are invoked as held in Ajay Goyal vs. ITO (2006) 99 TTJ (Jd) 164, Madan Lal vs. ITO (2006) 99 110 (Jd) 538, CIT vs. Popular Electric Co, (P) Ltd. (1993) 203 ITR 630(Cal) and M.A Rauf vs. CIT (1958) 33 ITR 843 (Pat)., i.e., law in respect of assessments made on the basis of best judgment or estimate is well-settled. Hon'ble Supreme Court in the case of, lays down that while making the ‘best judgment’ assessment, no doubt, should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious.
ITA No. 6168/Del/2016 & 28 CO No. 9/Del/2017 Sunil Nayyar f. Once book results were rejected in terms of provisions of sec. 145(3) of the Act, it is not the ipse dixit of the AO to compute the income either u/s 144(1) or sec. 145(3) of the Act, or the computation and determination of income can be at the whims and fancies of the AO, Commissioner of Sales Tax v. H. M. Esufali H. M. Abdulali [1973] 90 ITR 271 (SC).
g. In S. M. Hasan, STO v. New Gramophone House, AIR 1977 SC 1788, a Division Bench of the Hon'ble Supreme Court held that, "if the conditions for the best judgment assessment are present, the Assessing Officer will make it not on speculative or fanciful grounds, but on reasonable guess since the best judgment assessment does not negate the exercise of judgment on the part of the officer, a fax officer who makes a best judgment assessment should make an Intelligent well-grounded estimate rather than launch upon pure surmises".
h. In the case of Kachwala Gems Vs JCIT, 288 ITR 10 (2007)(SC). The apex court has held ''after rejection of book results, AO should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily, the AO should adopt a method which must reflect the profits truly and justly [ Gemini Pictures Ltd. vs CIT (1958) 33 ITR 547 (Mad).]
i. In the instant case the AO has not given even a single reason or even a single basis for making such a huge addition of Rs.2.5 Crore. In fact, the AO has framed the assessment on the basis conjuncture, surmises and supposition. The AO has apparently ignored the basic principal laid down in aforesaid decision for estimating profit and has simply resorted to guess work. The addition made accordingly is bad in law.
ITA No. 6168/Del/2016 & 29 CO No. 9/Del/2017 Sunil Nayyar VI. ESTIMATING WITHOUT CONFRONTING MATERIAL TO ASSESSEE a. A bare perusal of the provision of Section 145 read with Section 144 of the Act, clearly reflect the legislative intent that AO cannot make assessment, without providing proper and reasonable opportunity to the assessee. The intent and the purpose of the legislature is imbedded In the phrase "may make assessment in the manner provided under section 144". The Phraseology used in the section means that in case rigor of section 145(3) has been invoked in that case AO has to follow all the rules which are applicable in framing the assessment under section 144. These rules inter- alia includes confronting the assessee the basis for rejection of books of accounts and thereafter confronting the assessee material and evidence on the basis of which AO is intending to make addition. Unless this basic requirement of section 144 is not fulfilled and the AO has not given an opportunity to the assessee to contradict the materials upon which the Assessing Officer wants to base his estimate. Assessment framed is bad in law. Addl. ITO Vs Ponkunnam Traders (1976) 102 ITR 366 (Ker).
b. The Definition of word material and evidence has further been elaborated by Hon'ble Supreme Court and it has been held that though the scope of the phrase can be wider but it can be past history of the case, subsequent history of the case, facts of the case or the profit rate of other comparable cases.
c. The rule of law on this subject has been well settled that estimates framed without giving the basis for their fixation or without furnishing to the assessee the material on which basis books of accounts are being rejected or without giving an opportunity to the assessee to rebut it are bad. Needless to say that statutory function of AO, being quasi-judicial authority, in framing the assessment, is guarded and guided by judicial
ITA No. 6168/Del/2016 & 30 CO No. 9/Del/2017 Sunil Nayyar considerations and accordingly, must conform to the rules of natural justice, as held in a number of cases. The AO must act in accordance with the principle of justice, equity and good conscience. Dhakeshwari Cotton Mills Ltd. Vs CIT 26 ITR 775 (SC).
d. Thus the position in law is settled. The AO cannot resort to estimation without confronting to the assessee the "defects" in the books of accounts and "material or evidence or the basis of estimations". The AO has not discharged his primary onus as such the assessment made is bad in law.
VII. REDUCING PROFIT RATE OF 5% TO 1%. a. The AO has estimated the profit rate at 5% simply by conjuncture, surmises and guess work and without any logic any relevant material on record. The conduct of the AO is obvious from the fact that in the next very assessment year, the AO reduced his on estimation of 5% to 1%, once again without assigning any reason or putting any credible material on record. The arbitrary action of the AO goes to prove that the whole exercise of making such a large addition is nothing but wild guess works, which vary from year to year and which has no relevance with comparable cases or with any other material or reason for doing so. In view of the settled legal preposition addition made on the basis of guess work may be deleted. Copy of assessment order for AY 2013-14 is on record.
b. It is the settled law that unless the A.O, points out specific defects in the Books of accounts, to the extent which make it impossible or difficult for the AO to deduce the correct profit, books of accounts cannot be rejected. Further the scope and limitation of the word "defect" has been define in the section itself. Thus the section defines "that the
ITA No. 6168/Del/2016 & 31 CO No. 9/Del/2017 Sunil Nayyar defects in the books of accounts" shall be such which establishes that "income cannot be properly deduced form the accounts". The AO has not pointed out any such accounting defects in the books of accounts. The general objections of the AO regarding cleanliness of the bills, payment through RTGS and non-production of soft copy of books of accounts do not fall under the ambit of definition of word "defect", as envisaged under section 145(3). These objections do not inhibits or come in the way of determining or calculating the correct profit.
c. Without enlisting the defects, and inaccuracies in the accounts of the assessee, AO cannot expressively or otherwise, invoke the provisions of section 145(3) of the Act. Mr. K.N. Ramchandra Naidu vs. CIT, ITA No. 47/PNJ/2013. Without pointing out any such defect in the account books or bringing on record instances of unrecorded production or unrecorded sales, or any other infirmity or definite defect which has specific bearing on calculation of profit from the books of accounts, of accounts cannot be rejected by applying provisions of section 145(3). DCIT Vs Associated Stone Industries Limited 22 TW 155 (Jaipur).
d. Where the defects pointed out in the books of accounts were of general or technical nature and no suppression of sale or purchase was pointed out book results or books of accounts cannot be rejected". Vadayattu Jewellery Vs. State of Kerala (1997) 104 SIC 121, (Ker.).The department has to prove satisfactorily that the accounts books are unreliable, incorrect or incomplete before it can reject the accounts. Rejection should not be done lightly". St. TerrsaOil Mills vs. State of Kerala (1970) 76 ITR 365 (KER.).
e. "In the case of ACIT Vs. Hitech Grain Processing Pvt. Ltd., ITA No. 2885/Del/2011, the Hon'ble Delhi High Court has held that since the AO
ITA No. 6168/Del/2016 & 32 CO No. 9/Del/2017 Sunil Nayyar had not pointed out any defects in the books of account and the accounts were also not rejected by the AO, therefore, no addition could have been made by the AO”. The same view point has been endorsed by Kerala High Court in the case of [ITO Vs. Ponkunnam Traders (1976) 102 ITR 366 (Ker)]”.
f. "When no specific discrepancies or defects in the books of account of the assessee has been pointed out nor was any material brought to establish that purchases were inflated or receipts suppressed, there is no justification In invoking the provisions of section 145 of the Act, M/s Paras Dyeing and Printing Mills P Ltd 004 ITR (Trib) 0029 (Ahd).
g. "Thus, the scope of the provisions of section 145 conclusive establishing the fact that, what is important for rejection of books is the AO being not satisfied about the correctness or completeness of the accounts and it is for the AO to establish the incompleteness or incorrectness of the accounts of the assessee”. Ashok Refractories Pvt. Ltd (279 ITR 457) Calcutta High Court.
h. "The power to reject the books of accounts under section 145(3) arises only if the AO is satisfy that there is a major defect in the books of accounts which comes in the way of determining the actual profit", DCIT v. Associated Petroleum Corporation [2011] 44 SOT 45 (Ahd), ITA No. 47/PNJ/2013.
i. In CIT vs. Amitbhai Gunvantbhai, [1981] 129 ITR 573 (Gut), the Hon'ble jurisdictional High Court has held that the basic principle is the same in law relating to income-tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries, then it is not open to the revenue or other side to contend that what is shown by the entries is not the real state of affairs.
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In the instant case, the AO has not pointed out any accounting defects in the books of accounts. Rather he is summarily ignored the books of accounts but has proceeded to invoke section 145(3) which is bad in law."
The ld. CIT (A) held that there is no doubt about the fact that the assessee was dealing in milk on whole sale basis. All the trade creditors were shown outstanding as on 31.03.2012 but paid in the beginning of the subsequent year. There was no accumulation of fund either in the shape of unsecured loan or sundry creditors. The entire sales and purchases was made through banking channels only except marginal sale of Rs.48,89,100/. There was no purchase made in cash. All the relevant bills/vouchers were produced before the AO for verification. The trading activity was supported by quantitative details as separate stock register was maintained. Regular books of account were maintained by the assessee, which were duly audited by the tax auditor. There was running account of trade creditors and debtors maintained by the assessee, which can be verified from the details given by the assessee in this regard. The AO has not considered all these facts while estimating the profit and rejecting the books of account. On the contrary, the AO has held that no such business was carried out by the assessee. It is not understood as to when there was no business carried out by the assessee, then how the profit of the same business can be estimated. I do not find any reason for rejection of books of account, whereas, all the relevant details including books of account were filed by the assessee before the AO for verification. There was no specific defect pointed out by the AO in the books of account The assessee has also given comparative chart of balance sheet/trading account for the assessment years 2012-13 to 2015-16, which is as under:
ITA No. 6168/Del/2016 & 34 CO No. 9/Del/2017 Sunil Nayyar Comparative chart of Balance Sheet of Sunil Nayyar Prop. Kumar Brothers Particulars AY 2012-13 AY 2013-14 AY 2014-15 AY 2015-16 ! Prop. 248,020 419,540 486,863 593,236 Capital Unsecured Nil Nil Nil Nil Loans Other Nil Nil Nil Nil Loans Trade 250,553,034 315,359,100 278,829,586 141,463,880 Creditors Total 250,801,054 315,778,640 279,316,449 142,057,116 Loan Nil Nil Nil Nil Advanced Trade 250,113,470 314,997,500 276,313,867 136,010,470 Debtors Fixed 168,890 243,213 214,451 194,197 Assets Cash in 406,476 440,566 483,553 451,120 Hand Bank 112,218 97,361 2,304,578 5,401,328 Balance Total 250,801,054 315,778,640 279,316,449 142,057,115
Comparative chart of Trading Account of Sunil Nayyar Prop. Kumar Brothers Particulars AY 2012-13 AY 2013-14 AY 2014-15 AY 2015-16 ! Opening Nil Nil Nil Nil Stock Cash Nil Nil Nil Nil Purchase Credit 861,366,340 1,103,754,138 1,195,793,275 1,021,076,444 Purchase Direct 3,278,560 4,582,800 4,186,460 4,080,510 Expenses Gross Profit 1,938,819 2,212,500 2,538,062 2,617,504 Total 866,583,719 1,110,549,438 1,202,517,797 1,027,774,457 Cash Sales 4,889,100 Nil Nil Nil Credit Sales 861,694,619 1,110,549,438 1,202,517,797 1,027,774,457 Closing Nil Nil Nil Nil Stock Total 866,583,719 1,110,549,438 1,202,517,797 1,027,774,457 Net Profit 348,214 504,330 529,643 537,977
ITA No. 6168/Del/2016 & 35 CO No. 9/Del/2017 Sunil Nayyar 15. Thus, after going through the entire gamut of the facts, the ld. CIT (A) held that the AO was not justified to reject books of account and estimate profit.
Ground no. 4 relates to deletion of Rs. 1,39,38,110/- made by the ld. CIT (A) on account of sundry creditors of Rs.88,38,110/- and Rs.51,00,000/- as unexplained cash deposits.
The fact of the case is that the AO found that there were cash deposits in the bank account of the assessee on various dates totaling to Rs.51,00,000/-. The AO held that though names/addresses were given but no PAN was given of the sundry creditors. Total creditors of Rs.25,05,53,034/- was shown, which includes sundry creditors in the name of Kwality Dairy India Ltd. of Rs.24,17,14,924/-, The AO, treated the other creditors to be non-genuine except Kwaiity Dairy India Ltd., and thereby, made an addition of Rs.88,38,110/-. Further, cash deposits of Rs.51,00,000/- was also treated to be unexplained, thereby, an addition of Rs.1,39,38,110/- was made u/s.68 of the Act.
Before the ld. CIT (A), it was submitted that, “The assessee is dealing in purchase and sale of milk, and the trade is basically a related to the farmers or illiterate dairy owners. Trading in such commodity and such section of society invariably demands cash transactions. However, the assessee has tried to minimize the cash transactions. Thus the entire purchase is through banking channel and only a marginal sale has been carried out by way of cash. The cash sale is necessitated because of the nature of goods traded which are highly perishable. Cash sale is made rarely, on certain occasion because of business compulsion such as lack of demand or excessive supply and the perishable nature of the stock.
ITA No. 6168/Del/2016 & 36 CO No. 9/Del/2017 Sunil Nayyar 19. It was also submitted that the entire sale including the sale pointed out by AO is supported by corresponding purchase whose payment has been made through banking channel. The AO has also not disputed the purchase because complete ledger of purchase as well as sale account was furnished to the AO at the time of assessment itself. To substantiate the contention, the assessee submitted copy of purchase ledger for the relevant days which clearly shows that the cash sale made to the retail traders is duly supported by the corresponding purchase. The above ledger account of purchase and sale is also summarized hereunder in the tabulated form: Date Name of the Quantity Purchase Quantity Sold Cash Credit Total of Party Purchased in Value in Kg Sales sales Sale Purchase Kg Value 01.11.11 Kwality 79,285 24,97,479 79,285 4,59,800 20,50,443 25,10,243 Dairy 02.11.11 Kwality 73,610 23,18,715 73,610 8,64,100 14,66,313 23,30,413 Dairy 03.11.11 Kwality 80,085 25,22,678 80,085 17,72,600 7,62,938 25,35,538 Dairy 05.03.12 Kwality 84,445 24,91,129 84,445 8,90,200 16,13,454 25,03,654 Dairy 06.03.12 Kwality 43,030 12,75,837 43,030 9,02,400 3,73,549 12,75,949 Dairy Total 3,60,455 1,11,02,838 3,60,455 48,89,100 62,66,697 1,11,55,797
The above tabulated analysis clearly shows that cash sale is supported by the corresponding purchase and the facts are also collaborated with the sale ledger attached herewith.
The cash generated from the sale shown in the above table was deposited in the bank on 03.11.11 & 06.03.12 along with the opening balance shown in the cash book which comes to more than Rs. 51,00,000/-. Copy of cash book for the relevant dates and the corresponding purchase and sale ledger are submitted here with.
It is the business compulsion in the trade of the assessee as well as in many other retail trades that part of the sales has to be made in cash.
ITA No. 6168/Del/2016 & 37 CO No. 9/Del/2017 Sunil Nayyar But there in the year under reference the statute do not in any way prohibs the cash sales and the same time there is no provisions in the Act where the cash sale can be equated with the credit which goes to enhance the balance in the books of the assessee. The only criteria in this regard are that sales should be supported by the corresponding purchases.
Reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of Smt. Harshiia Chordiavs ITO (2008) 298 ITR 349 in which it was held that "Addition u/s 68 could not be made in respect of the amount which was found to be cash receipts from the customers against which delivery of goods was made to them". Also on the decision of Hon’ble ITAT, Nagpur Bench in the case of M/s Heera Steel Limited vs ITO (2005) 4 ITJ 437 in which it was held that cash sales cannot be equated with cash credit under section 68.
The AO has made addition by invoking the provision of section 68. The precondition for invoking section 68 is that there has to be credit of amount in the books maintained by the assessee. [CIT vs P. Mohanakala (2007) 291 ITR 278 (SC)]. The section is applicable only when a sum is found credited in the books of the assessee [Rakesh Kalia v. CIT, (2006) 286 ITR 357 (Dei.)]. In the case of assessee neither any sum has been credited in the books of accounts or in the bank account even for a single day throughout the year which is evident from the peak analysis of bank account is submitted here with. As evident from the bank account, sale proceeds realized was deposited in the bank are utilized in the same day for making payments of purchases. The sale proceeds realized was not lying as credit in the books of accounts of the assessee even for a single day. Hence by any stretch of imagination, payments received from the trade debtors cannot be covered within the meaning of credits under section 68.
ITA No. 6168/Del/2016 & 38 CO No. 9/Del/2017 Sunil Nayyar 25. In the case of "Dewas Soya Ltd. Vs ITO ITA NO.336/IND/2012" HAT Hon'ble ITAT has also held just because the amounts were received from the buyers in cash, the assessee cannot be penalized because the restriction placed for payment u/s 40A(3) of the Act applies to buyer and not the seller. There being no restriction under the Act to accept cash against sales, the assessee Company cannot be penalized.
Hon'ble supreme court in the case of CIT v. P. Mohan Kala 291 ITR 278 (SC) has clearly explain that the primary condition for invocation of section 68 is that there has to credit of amount in the books of the assessee and such credit shall be sum of money emphasis is placed on the physiology used in the section wherein the phrase any sum is found credited has been used and the legislation has not used the word deposited. In other word the balancing effect of the transaction has to be credit account in the books of accounts which is not the case with the assessee.
The assessee is dealing in purchase and sale of milk which is an unorganized sector and wherein the cash purchase is commonly prevalent and accepted business practice. Even than the assessee has tried to make maximum purchases and sales through banking channel. Thus, the total purchases of Rs.86,13,66,340/- out of which purchases of Rs.83,49,30,250/- have been made through banking channel. However, because of the apparent business compulsion the assessee has to make the purchases from villagers who evidently do not accept the payment through banking channel.
During the year the assessee has made purchases from these villagers and has also made payment to them otherwise then banking channel and at the end of year there are some credit balances in respect
ITA No. 6168/Del/2016 & 39 CO No. 9/Del/2017 Sunil Nayyar of these milk suppliers. The particulars in respect of these sundry creditors and the modality of payment is tabulated hereunder:- S. Name & address of sundry Total amount of Amount paid Outstanding Payment made No. creditor purchase during the year Balance as on during the 31.03.2012 next year 1. Satish Bhandari 12,92,285 8,80,000 4,12,285 4,12,285 Village Pinjokhera, Tehsil Tosham, Distt. BhiwanJ 2. Chander Singh 13,38,947 8,80,000 4,58,947 4,58,947 Village Thothwal, Tehsil Rewari, Distt. Rewari 3. Dev Kumar Morya 13,33,808 9,00,000 4,33,808 4,33,808 Village SirsaKher, Tehsil 3ulana, Distt, Jind 4. Dharam Singh Dagar 13,07,570 8,71,000 4,36,570 4,36,570 Village Chilewal, Tehsil Tohanay, Distt. Fatehabad 5. Gopal Rai 13,56,049 8,95,000 4,61,049 4,61,049 Village Nidana, Tehsil Maham, Distt. Rohtak 6. Jagat Ram 13,16,844 8,70,000 4,46,844 4,46,844 Village Ranika, Tehsil Nagina, Distt. Mewat 7. Jagdish Changal 12,65,433 8,75,000 3,90,433 3,90,433 Village Nilanwali, Tehsil Dabwali, Distt. Sirsa 8. Jaggu Mourwal 13,13,001 9,00,000 4,13,001 4,13,001 Village Badeo, Tehsil Ferozepur Jhirka, Distt. Mewat 9. Kallu Rana 12,93,124 8,78,000 4,15,124 4,15,124 Vlllage Bainsi, Tehsil Lakhan Majra, Distt. Rohtak 10. Kamal Thakur 13,42,399 8,94,700 4,47,699 4,47,699 Village Marora, Tehsil Nuh, Distt. Mewat
Mahadev Prasad 13,17,970 8,70,000 4,47,970 4,47,970 Village Supura, Khuro Tehsil, Benal, Distt. Bhiwani 12. Nirmal Singh 13,41,110 9,00,000 4,41,110 4,41,110 Village Damkora, Tehsil Tohana, Distt. Fatehabad 13. Raghu Sheoran 13,81,945 8,80,000 5,01,945 5,01,945 Village ugaheri, Tehsii Lakhan Majra, Distt. Rohtak 14. Ramdass Singh 13,29,253 8,70,000 4,59,253 4,59,253 Viiiage Thedi, Baba Sawan Singh, Tehsil Sirsa, Distt. Sirsa
ITA No. 6168/Del/2016 & 40 CO No. 9/Del/2017 Sunil Nayyar 15. Ramesh Sharma Viliage 12,82,811 8,70,780 4,12,031 4,12,031 Jhimaravat, Tehsii Nagina, Distt. Mewat Tehsii 16. Sham Lal Rajaura 13,42,090 8,90,000 4,52,090 4,52,090 Viilage Tilpat, Tehsil Faridabad, Distt. Faridabd 17. Jai Shankar 13,34,562 8,80,000 4,54,562 4,54,562 Village Roshakhera, Tehsil Hisar-II, Distt. Hisar 18. Sumesh Tholiya 13,71,396 8,80,000 4,91,396 4,91,396 Village Husanpur, Tehsii Rewari, Distt, Rewari 19. Suresh Raparia 12,86,166 8,58,500 4,27,666 4,27,666 Village Khera Alampur, Tehsil Jatusana, Distt. Rewari 20. Ajay Yadav 12,89,327 8,80,000 4,09,327 4,09,327 Village Assan, Tehsil Rohtak, Distt. Rohtak Total 2,64,36,090 1,76,22,980 88,13,110 88,13,110
The above tabulated analysis clearly shows that the purchases have been made in the regular course of business. It was also submitted that the amount of credit represents the purchases made by the assessee which form part of the total purchases shown in the return and the total quantity shown in the return. Still more the milk purchase on credit basis from these persons have been sold on the same date and the sale amount also form part of the total sales. Copy of accounts of these creditors submitted here with. It is also evident that the entire purchases have been made by way of credit and the repayment has been made. Thus the tabulated analysis shows that against the credit receipt from these persons by way of supply of milk part payment have been made during the year itself and the balance have been paid in the immediate subsequent year. But in any case the credit amount introduced in the books of accounts by way of purchase of milk was for the total purchases of milk from these small villagers. The assessee has produced ail the documents to prove the identity, creditworthiness and genuineness of transaction with respect to all these creditors.
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After going through the detail of these creditors, pattern of payment and the document furnished by the assessee, the AO has concluded that the creditors are not genuine to the extent for which the payment have been made in the subsequent year. However, the AO has not disputed the creditors to the extent for which the payment have been made during the year itself. Thus what the AO is holding that the creditors are partly genuine and partly in genuine. The conclusions drawn by the AO are thus self-conflicting, inconsistence and apparently variable which is not tenable under the explicit provision of the Act. These creditors have also been held genuine by the AO himself while deciding the case for the AY 2013- 14 under section 143(3) wherein no separate addition on account of these creditors have been made.
During Assessment proceedings the assessee has furnished complete postal addresses of all these persons wherein the communication can be made either through the postal authorities or directly by the AO, which establishes the identity of these creditors. Similarly ail the purchase bill were also supplied to the AO fully establishing the capacity of these creditors. The assessee also supply the subsequent copies of account of these creditors which establishes that the payment have been made to these creditors in the subsequent year, thereby establishing the genuineness of these transactions. The assessee also furnishes copies of accounts of ail these persons which are submitted here with. The assesse has thus discharge his complete onus, so far as section 68 is concerned.
However, the AO without verifying the correctness of the identity of these sundry creditors or without bringing on record any material or evident on record held that these sundry creditors are not genuine and made addition of Rs.88,38,110/-. The AO has thus erred in not
ITA No. 6168/Del/2016 & 42 CO No. 9/Del/2017 Sunil Nayyar appreciating the facts that when the assessee has supplied names and addresses of sundry creditors and the nature of transaction and also the capacity of the creditors his onus stands discharged.
It is a settled legal preposition that addition under section 68 can be made only if "assessee offers no explanation about the nature about the nature and source of such credits". The assessee has clearly explain the nature of the credit which Is undoubtedly milk purchase from the villagers and also the corresponding source which are the regular milk suppliers to whom payments have also made, which also stand accepted by the AO in the next year. When the assessee discharged his onus, such burden, which is placed on the assessee, shifts on the AO. The AO has not verified these evidences and even the major fact that the payment stand made to these creditor in the subsequent year. Thus without putting any material or evidence on record the AO has proceeded in invoking the provision of section 68 which is against the intent and purpose of the section.
It is a settled legal preposition that when the primary onus is discharged by the assessee, the burden shifts on the AO to examine the material and in case he want to rebut the evidence supplied by the assessee, he has to collect the material or evidence and confront to the assessee before arriving at any adverse conclusion. Orient Trading Co. Ltd v. CIT (1963) 49 ITR 723 (Bom.) In holding a particular receipt as income from undisclosed source, the fate of the assessee cannot be decided by the revenue on the basis of surmises, suspicions or probabilities [Northern Bengal Jute Trading Co. Ltd. V. CIT, (1968) 70 ITR 407, 415 (Cal)].
The Hon'ble Supreme Court has also explained a number of cases that once the assessee furnishes explanation regarding the nature and source of the credit money the AO is not entitled to reject unreasonably
ITA No. 6168/Del/2016 & 43 CO No. 9/Del/2017 Sunil Nayyar and simply on the ground that the particular provided are "unconvincing and deserve to be rejected". The AO can reject the particular provided by the assessee only after proper enquiry or bringing on record relevant material or evidences and after satisfaction on the basis of such material or evidences but the AO is not entitled to draw conclusion or inferences without examination and without putting any material on record and simply on the basis of conjecture or surmises. [Sreeiekha Banerjee v. CIT, (1963) 49 ITR (SC) 112].
The satisfaction of the AO is the basis of invocation of the powers under section 68, but the satisfaction must be derived from relevant factor and on the basis of proper enquiry. [Rajshree Synthetics v. CIT (2002) 256 ITR 331(Raj.)] Further the enquiry envisaged under section 68 is an enquiry which is reasonable and just. [Khandelwal Construction v. CIT (1997) 227 ITR 900 (Gau.)].
The opinion found by the AO must be based on material and it should be perverse. As a matter of fact the word satisfaction has been used in section 68 to protect the interest of the assessee. The Legislature by using this word make it incumbent on the AO to consider the material put before him and incase he choose to draw adverse conclusion he should collect the basis for his satisfaction and confront the same to the assessee. AO has not discharged his onus to this extent so the addition made needs to be deleted.
Thus, it has been held that if the AO rejects an explanation given by the assessee without considering its acceptability in the light of the fact and circumstances of the case, or rejects the explanation without verifying it, the addition cannot be sustained. Mehta Parikh & Co. v. CIT [(1956) 30 ITR 181 (SC)]; [K.S. KannanKunhi v. CIT, (1969) 72 ITR. 757, 765
ITA No. 6168/Del/2016 & 44 CO No. 9/Del/2017 Sunil Nayyar (Ker)(SC)]. The assessee has given all probable and possible explanation about the Identity, capacity and the nature of transactions. AO has not put on any, material or evidence on record to contravene his explanation and b. record a satisfaction that the evidences are not reliable.
The objection of AO is that name of Tehsil, District and city is given but House No. and Street No., is not given. It is a common knowledge that in small village house numbers and street numbers are not given and name of the village and tehsil in itself is a complete postal address to verify the identity and genuineness of the creditor. The AO cannot ask the assessee to do the improbable or the impossible. The assessee has also explained that his nature of business is such that on certain occasions he has to purchase milk from small villagers, who eventually- become his sundry creditor because the purchases are made on credit. Secondly it was also explained that since these milk suppliers belongs to small villages, so the minute detail regarding house number and street number is neither relevant or required, nor it can be supplied.
In this regard, it is pertinent to mention the legal maxim-lex non cojitadimpossibilia- which means 'the law does not compel a man to do that which he cannot possibly perform'. In this regard, reference may be made to Cochin State Power & Light Corporation Ltd. V. State of Kerala [AIR 1965 SC 1688, 1691]; Vinod Krishna Kaul v. Union of India [JT 1995 (9) SC 205, 208]; Attiq-Ur-Rehman vs. Municipal Corporation of Delhi [JT 1996 (2) SC 670, 678]; Manohar Joshi v. Nitin Bhaurao Patil [(1996)1 SCC 169, 179]; Life Insurance Corporation of India v, CIT [(1996) 219 ITR 410,418 (SC)].
It was submitted that the issue involved is holding the creditor as partly genuine and partly in genuine. The assessee had made purchases of
ITA No. 6168/Del/2016 & 45 CO No. 9/Del/2017 Sunil Nayyar Rs.2,64,36,090/- by way of credit from small milk supplier of different villages. Out of this credit purchase the assessee had made payment to the extent of Rs.1,76,22,980/- during the year. The balance payment of Rs.88,13,110/- to these creditors was made in the immediate succeeding year. The AO has held that the creditors are not genuine to the extent of the amount which was outstanding at the end of the year but he has not objected to the identity, capacity and genuineness of the transactions to the extent of Rs.1,76,22,980/- which was paid during the year, thus is an apparently paradoxical conclusion which is obviously self-contradictory and does not stand under the explicit provisions of section 67. It is a settled legal preposition that the identity of the creditor can either be genuine or in genuine. It cannot be in parts to the convenience of the AO. The conclusion being self-contradictory so addition made needs to be deleted.
After going through the facts and circumstances of the case, submission of the assessee and perusal of the assessment order, the ld. CIT (A) held that the dealing in sale/purchases of milk was also related to the farmers/illiterate dairy owners. Therefore, there were instances of cash sale but there was no purchase in cash. Sale in cash was made of a nominal amount. All the creditors have been paid the outstanding amount in the immediate succeeding year. Complete account of sale/purchase was furnished before the AO for verification. Quantitative details of the sale/purchases were given as under: (Repetitive from page no. 36) Date Name of the Quantity Purchase Quantity Sold Cash Credit Total of Party Purchased in Value in Kg Sales sales Sale Purchase Kg Value 01.11.11 Kwality 79,285 24,97,479 79,285 4,59,800 20,50,443 25,10,243 Dairy 02.11.11 Kwality 73,610 23,18,715 73,610 8,64,100 14,66,313 23,30,413 Dairy 03.11.11 Kwality 80,085 25,22,678 80,085 17,72,600 7,62,938 25,35,538 Dairy 05.03.12 Kwality 84,445 24,91,129 84,445 8,90,200 16,13,454 25,03,654 Dairy 06.03.12 Kwality 43,030 12,75,837 43,030 9,02,400 3,73,549 12,75,949 Dairy
ITA No. 6168/Del/2016 & 46 CO No. 9/Del/2017 Sunil Nayyar Total 3,60,455 1,11,02,838 3,60,455 48,89,100 62,66,697 1,11,55,797
The ld. CIT (A) held that the above tabulated analysis clearly show that the cash sale was supported by corresponding purchases and this fact was also corroborated with the sale ledger. The cash sale and opening balance of cash comes to more than to Rs.51,00,000/- which is verifiable from the cash book as well as ledger of sale. All the relevant details of the sundry creditors to whom payment was made in the next year was filed, which is has been mentioned at page nos. 39 & 40 of this order.
The ld. CIT (A) held that the amount of credit balances represent the purchases made by the assessee, which form part of the total purchases shown during the year and the said purchases are verifiable from the total quantity of the milk shown to have been purchased. Names and addresses of the persons concerned were filed. Payments to those persons were made during the year also and the balance payment was made in the subsequent year. So there was no dispute about the genuineness of the suppliers vis-à-vis sundry creditors. There was total purchases of Rs.2,64,36,090/- made by way of credit from small milk suppliers of different villages out of which Rs.1,76,22,980/- was paid during the year itself and the balance amount of Rs.88,13,110/- was paid in the immediate succeeding year. Further, the source of cash deposit of Rs.51,00,000/- was explained that includes sale in cash of Rs.48,89,110/-.
During the hearing before us, the ld. DR relied on the order of the Assessing Officer whereas the ld. AR supported the order of the ld. CIT (A) and reiterated the arguments taken up before the ld. CIT (A).
Heard the arguments of both the parties and perused the material available on record.
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Having gone through the record, we find that the ld. CIT (A) has passed a well reasoned order taking into consideration the point wise rebuttal given by the ld. AR with regard to the rejection of the books of account and estimation of profit. We find no reason to interfere with the order of the ld. CIT (A) which has been quoted above. Hence, the ground no. 1 taken up by the revenue is liable to be dismissed. Regarding the addition made on account of sundry creditors, it has been undisputedly proved by the assessee that the sundry creditors have been paid off immediately in the subsequent years and all the details have been submitted which consists of amount of purchase of milk in the year, amount paid during the year, outstanding balance as on 31.03.2012 and the payment made during the next year from 01.04.2012. There was no dispute that the assessee has purchased milk from the 20 suppliers and squared off the amounts subsequently in the next financial year. Hence, the addition made on account of sundry creditors is hereby by deleted. Regarding the cash deposit in the same bank account through which the entire sale and purchase of milk has taken place. The ld. CIT (A) has given a categorical finding that an amount of Rs.48,89,110/- represents the sale of milk in cash. The ld. CIT (A) held that the amount of Rs.2,10,890/- is the opening balance. The assessee started his business in the current assessment year only. It is not clear from the records whether this amount of Rs.2,10,890/- represents the deposit of cash utilized for opening the bank account or otherwise. Hence, the AO is hereby directed to examine the account and give effect to this amount if it represents the cash utilized for opening of the bank account.
In conclusion,
ITA No. 6168/Del/2016 & 48 CO No. 9/Del/2017 Sunil Nayyar 48. Ground no. 1 - Dealing with estimation of profit is dismissed owing to wrong invocation of provisions u/s 145(3) of the Income Tax Act, 1961.
Ground no. 2 – It is hereby held that assessee is in the business of milk supply.
Ground no. 3 – Related to ground no. 1, no defects in the books of account have been established by the revenue.
Ground no. 4 – (a) Addition made on account of sundry creditors, having established the fact of payment, is deleted. (b) The cash deposits have been proved to be the cash sales duly accounted for, hence deleted.
In the result, the appeal of the revenue is dismissed and Cross Objection of the assessee is treated as infructuous owing to the adjudication on merits of the case. Order Pronounced in the Open Court on 24/02/2020.
Sd/- Sd/- (Kuldip Singh) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 24/02/2020 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR