D.C.I.T., RANGE-3, LUCKNOW vs. SHRI MANOJ GUPTA, LUCKNOW

Appellant craves leave to add as amend any one or more of the ground of appeal

The facts of the case are, that the assessee is an individual in the business of Civil Contracting. He filed his return of income for the relevant year on 30.09.2015, declaring total income of Rs.37,59,850/-. The AO made an addition of Rs.1,70,21,613/- under section 68 of the Act, on account of Sundry Creditors who failed to respond to the notices under section 133(6) of the Act, that were issued by the AO and also in some cases where there were differences in the balances shown by the assessee and as & 444/LKW/2020 Page 3 of 10 confirmed by them. The assessee filed an appeal against this order of the Assessing Officer passed under section 143(3) of the Act on 26.12.2017. In the said appeal, the assessee agitated against the addition on account of unconfirmed Sundry Creditors amounting to Rs.1,66,80,021/- and an addition on account of difference in confirmed amount of credit by Sundry Creditors amounting to Rs.3,41,592/-. The assessee also took some additional grounds where, inter-alia, he pointed out that under the presumptive scheme of taxation, the profit of the Civil Contractor could not be more than 8%, but the additions made by the Assessing Officer translated into an un-realistic profit of 29.94%. The assessee also submitted the additional evidences before the Ld. CIT(A) in the form of purchase orders, VAT assessment order for the F.Y. 2014-15 and VAT assessment order for the F.Y. 2012-13. A remand report was called for from the AO on these additional evidences and thereafter they were admitted.

The assessee had submitted that he was doing Civil Contractor only for PSUs of the Government and that these PSUs were duly audited and no inference could be drawn that works may not have been done for which payment under section 194C of the Act was being received by the assessee. The assessee had filed all the VAT return for the relevant period and furnished copies of orders passed by the VAT Department for the year under consideration as well as previous year. Therefore, the purchase of materials and such expenses in the year under consideration and past year could not be doubted. The decision of the AO to add the creditors without doubting the purchases or rejecting them was bad in law. The assessee relied upon the judgments of the Hon'ble Delhi High Court in CIT Vs. Sri Vardhaman Overseas Ltd, dated 23.12.2011 343 ITR 408 (Del) and the order of the Hon'ble ITAT Ranchi in M/s. Gulf Steel & Minerals Vs. ITO in & 444/LKW/2020 Page 4 of 10 dated 04.05.2018. The assessee submitted that in both these cases, it was held that the addition under section 68 of the Act could not be made in respect of Sundry Creditors relating to purchases, unless the purchase was rejected. It was further submitted that the opening balances of creditors amounting to Rs.98,12,487/- had been added back by the AO under section 68 of the Act and the assessee placed reliance on a number of case laws for the proposition that the opening balances could not be added back under section 68 of the Act. Without prejudice to these arguments, the assessee submitted that the assessee, being a Civil Contractor, was covered by the provisions of Section 44AD of the Act which provided for presumptive rate of taxation of 8% in the case of small contractor and such cases the assessee was not required to maintain regular of books of account. Therefore, the additions can be made to the extent that the assessee’s income comes to 8%. It was submitted that the assessee had already disclosed a profit of 5.5% and Hon'ble ITAT, Lucknow Bench in the assessee’s own case for the A.Y. 2012-13 had accepted a presumptive rate of taxation of 5% in the A.Y. 2012-13. It was argued that since the business of the assessee remains the same, therefore, the profit percentage would also remain the same. Accordingly, it was requested that the additions made by the AO may be deleted.

In response the AO furnished the remand report in which it was submitted that the AO could not furnish confirmation and copies of accounts in respect of miscellaneous Sundry Creditors, to substantiate their genuineness, creditworthiness and identity. Therefore, the AO was justified in adding the amounts that he had. It was submitted that the additional evidences did not help to verify the Sundry Creditors and differences in balance, therefore, the Assessing Officer stand was justified. A copy of the & 444/LKW/2020 Page 5 of 10 said remand report was given to the assessee, in which the assessee reiterated the submissions made by him earlier.

After considering the submissions of both parties, the Ld. CIT(A) admitted the additional evidences as he was satisfied that there were reasonable cause for their non-production before the Assessing Officer. He held, however, that the assessee had failed to produce the books of account during the assessment, appeal and remand proceedings. However, he observed that the AO had not rejected the books of account and still made an addition on account of Sundry Creditors i.e. the AO had accepted the claim of purchases of Rs.3,55,16,913/- made from the same suppliers/creditors, but only disallowed the credit balance as on 31.03.2015. Thus, the stand of the AO was contradictory. He pointed out that it had been held by the Hon'ble Courts in a number of judgments, that no addition could be made under section 68 of the Act, in respect of credit balances at the end of the financial year, if, the purchases from those parties and trading results had been accepted. The cases cited by the Ld. CIT(A) were (i) CIT Vs. Pancham Dass Jain (2006) 205 CTR 440 (Alld) (ii) CIT Vs. Ritu Anurag Agarwal (2010) 2 DTLONLINE 134 (Del) (iii) Hind Globe Links, New Delhi Vs ITO, (Del Tribunal) and (iv) ITO Ward-29(4), New delhi Vs. Zazsons Exports Ltd [Lucknow Bench ‘A’ (Third Member)].

The Ld. CIT(A) also noted that the adding of Sundry Creditors outstanding as on 31.03.2015, without disputing the purchases was not justified and also the adding back of opening balance of Rs.98,12,487/-, was also not justified. He noted the fact that another quasi-judicial authority i.e. the VAT Authority had accepted the purchases and sales of the assessee as was evident from the VAT assessment order for the F.Y. 2014-15. He & 444/LKW/2020 Page 6 of 10 held that the same could not be brushed aside as it carried substantial evidentiary value. Therefore, after considering all the facts of the case, he held that no case was made out for sustaining of the additions under section 68 of the Act in respect of unverified Sundry Creditors or the difference in balances of creditors as reported by them. However, he observed that it was a fit case for rejection of books of account under section 145(3) of the Act and since the order of the Ld. CIT(A) was co-terminus with that of the AO, he exercises the same to reject the books of accounts under section 145(3) of the Act as in his opinion books of account did not reflect true and correct affairs of the business of the assessee. He noted that the purchases were mostly from PSUs and therefore could not be manipulated. Thereafter, relying upon the decision of the Hon'ble ITAT Lucknow Bench in the case of assessee for the A.Y. 2010-11 in he observed that the Hon'ble ITAT in that case had enhanced the NP rate of 4.43% to 5% and no appeal against the same had been filed against the same, either by the Revenue or by the Assessee. Therefore, he decided to enhance the NP rate of 5.5% disclosed by the assessee in this year to 8% holding the same to be fair and reasonable. Accordingly, the NP was estimated at Rs.56,59,532/.

Both the Department and the assessee are aggrieved against this order of the Ld. CIT(A). The Department is aggrieved at the deletion of the addition of unconfirmed Sundry Creditors amounting to Rs. 1,66,80,021/- and the deletion of Rs.3,41,592/- made due to difference in balances reported by Sundry Creditors. The assessee is aggrieved at the estimation of net profit @ 8% and not following the earlier net profit determined by the ITAT, Lucknow Bench.

Appearing for the Revenue Shri Sanjeev Krishan Sharma, Ld. Sr. DR pointed out that the assessee had not produced the & 444/LKW/2020 Page 7 of 10 books before the Assessing Officer, which has been noted by the Ld. CIT(A) also and that the assessee was not able to provide verification of the sundry creditors that were reflected in his balance-sheet. Therefore, the Assessing Officer was justified in concluding that neither the identity nor the creditworthiness of these sundry creditors had been proved, casting doubt on the genuineness of the transaction. He, therefore, pleaded that there was no justification for the Ld. CIT(A) to delete the addition made on account of section 68 of the Act and instead of adopting an enhanced net profit rate. On the other hand, there was no representation from the assessee at the time of hearing the case.

We have duly considered the facts and circumstances of the case. We observe that the Assessing Officer during the course of his assessment order has not called into question the sales or purchases made by the assessee, to effect those sales. In the circumstances, we do not find any infirmity in the decision of the Ld. CIT(A) to delete the additions made under section 68 of the Act on account of the credit balances standing in the name of certain sundry creditors as on 31.03.2015. These credit balances do not represent loans or advances taken by the assessee where creditworthiness to extent the advances are essential point for examination. Rather these represent sundry creditors for purchases and the purchases have not been called into question. Therefore, merely because some part of the expenditure for the purchases have not been met during the concerned financial year, is not ground to hold that those credits are bogus, unless it can be shown that those purchases were never made at all. As the Ld. AO has not conducted any exercise to determine the bogus nature of the purchases, in view of the decision of Hon'ble Allahabad High Court in the case of CIT Vs. Pancham Dass Jain (supra) and the Hon'ble Delhi High Court in the case of CIT Vs. Ritu Anurag Agarwal (supra), the decision of the Ld. CIT(A) to & 444/LKW/2020 Page 8 of 10 delete the additions made on account of unconfirmed Sundry Creditors is upheld. Accordingly, ground no. 1 of the Department appeal is dismissed.

Ground no. 2 of the Department appeal, relates to disallowance on account of differences in balances of Sundry Creditors as shown by the assessee and as confirmed by the Sundry Creditors on enquiry by the Assessing Officer. As this is a matter of re-conciliation, we restore this matter back to the file of the Assessing Officer so as to give the assessee of the opportunity to re-concile the differences and order that in the event of such re-conciliation being made to satisfaction of the Assessing Officer, addition should not be made on this account. This ground of appeal is allowed for statistical purposes.

Ground no. 2 of the assessee’s appeal relates to not appreciating the previous order of the ITAT in the assessee’s own case. After considering the arguments presented, we observe that res-judicata does not apply to income tax proceedings and each year has to be decided upon the facts of the case in that year. Therefore, Ld. CIT(A) was not bound to follow the rate of profit deemed reasonable by the ITAT in a particular year. However, as we have already held earlier, a rate cannot be estimated without reference to the history of the assessee’s case or comparable cases. Hence to the extent that the Ld. CIT(A) estimated the same without reference to the history of the assessee’s case, ground of appeal is partly allowed.

The third ground agitates the failure of the Ld. CIT(A) to consider the VAT assessment and the fact that the assessee & 444/LKW/2020 Page 10 of 10 supplied only to PSUs, which was the reason for higher estimation of income by him. In deciding ground no. 1, we have already observed that the Ld. CIT(A) has considered the VAT assessment and we observe that he has also recorded the fact of the purchases of the assessee being verifiable as they were from PSUs. However, since the estimation of income by him is at variance with these findings recorded by him in his order, the same is not maintainable. Accordingly, this ground of appeal is allowed.

In the result, both appeals of the department and the assessee are partly allowed.