THE DCIT, CIRCLE-9,, AHMEDABAD vs. M/S. BHAILALBHAI A.PATEL, AHMEDABAD

PER MAHAVIR PRASAD, JM:

Both captioned appeals and cross objection have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals)-XV, Ahmedabad (‘CIT(A)’ in short) vide Appeal Nos. CIT(A)-XV/DCIT/Cir-9/275/10-11 & CIT(A)-XV/DCIT/Cir-9/449/11-12, dated 02.11.2012 & 18.08.2011 arising out of assessment order dated 27.12.2011 & 30.12.2010; respectively, passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2008-09 & 2009-10.

ITA No. 2610/Ahd/2011 – A.Y. 2008-09

“1) The Ld. Commissioner of Income-tax (Appeals)-XV, Ahmedabad has erred in law and on facts in re-estimating Net Profit @6% being Rs.41,78,516 (difference of Rs.2,89,62,723 NP estimated minus(-) Rs.2,47,84,207/- NP shown by the assessee) on total receipts of Rs.43,19,32,759/- (+) Rs.5,07,79,287/- (disclosed income on account of Survey) AND in directing to add the NP to the total income declared by the assessee as against NP estimation @5% made by the Assessing Officer AND the Ld. CIT(Appeals)-XV, Ahmedabad erred in law in directing to get telescoped the separate disallowance of expenses of Rs.2,08,000/-, Vehicle expenses of Rs.1,17,840/- and telephone expenses of Rs.18,180/- made by the Assessing Officer.

2) The Ld. Commissioner of Income-tax (Appeals)-XV, Ahmedabad has erred in law and on facts in re-estimating the Net Profit on the amount of total receipts plus (+) disclosed income on account of Survey instead of re-estimating the net profit on total receipts of Rs.43,19,32,759/- only and not assessing the disclosed income as such as shown by the

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assessee, as deemed as per the provisions of Section 69 and 69C of the IT. Act as has been done by the Assessing Officer in his order.

3) The Ld. Commissioner of Income-tax (Appeals)-XV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.59,300/- made by the Assessing Officer on account of late payment of PF.

4) On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad ought to have upheld the order of the Assessing Officer.

5) It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad may be set-aside and that of the Assessing Officer be restored.”

3.1 The brief facts are that the assessee is a partnership firm and engaged in the business of Government approved engineers and contractors. There was a survey operation under section 133A of the Act dated 27-08-2008, carried out at the premises of the assessee where one of the partner Shri Hitendra B Patel has admitted an unaccounted income to the tune of Rs. 2,84,05,846/- and Rs. 7,63,37,283/- aggregating to 10,47,43,129/- for the A.Y. 2008-09 and 2009-10 respectively.

3.2 However, the assessee in the return of income for the year under consideration has shown Rs. 5,07,79,287/- as undisclosed income comprising of Rs. 3,50,27,817/- on account of cessation of liability/non-existent of creditors and Rs. 1,57,51,470/- on account of cash expenses which was classified in the profit & loss account as other income under the head other business and profession. The assessee has declared the net profit at Rs. 2,47,84,207/-

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against the gross receipts of Rs. 43,19,32,759/- and other income of Rs. 5,52,57,699/- which includes undisclosed income of Rs. 5,07,79,287/- only.

3.3 The AO, however, was of the view that the undisclosed income shown by the assessee in its profit and loss account was deemed income as per the provision of section 69 and 69C of the Act and not the income derived from business. Further, on exclusion of such income from the business income, there is the trading/business loss if undisclosed income is not credited in profit and loss account of the assessee. As such the assessee has adjusted the income offered during the survey operation against the business income. According to the AO, the income offered during survey, cannot be adjusted with such business income. The AO, thus, has made addition separately on account of undisclosed income amounting to Rs. 5,07,79,287/- to the total income of the assessee.

3.4 The AO further noted that the amount of expenses of Rs. 7,48,470/- admitted by one of the partner Shri Hitendra B Patel during survey proceedings was different from the amount of expenses of Rs. 9,56,470/- recorded in the annexure of impounded documents during survey proceedings. The AO also noted that the assessee had deducted the sum of Rs. 2,08,000/- for site expenses out of the expenses of Rs. 9,56,470/- recorded in the annexure of impounded documents. The AO, however, was of the view that the entire expenses Rs. 9,56,470/- were recorded out of the books. Therefore, the addition of Rs. 2,08,000/- should have been further made. The AO thus has made addition of Rs. 2,08,000/- on account of unexplained expenditure and added to the total income of the assessee.

3.5 The AO also noted that the Gross Profit of Rs. 2,77,50,019/- being 6.42% of gross receipts Rs. 43,19,32,759/- was drastically reduced as compared to preceding year gross profit ratio 10.78% declared by the assessee. Regarding this the assessee has made the submission but the AO rejected the books of account as per the provision of section 145(3) of the Act

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by observing that the replies/submission made by the assessee was not substantiated with any corresponding evidence. The AO thereafter estimated the net profit @ 5% of gross receipts of Rs. 43,19,32,759/- which comes to Rs. 2,15,96,637/- only.

3.6 The AO thus after allowing the remuneration to the tune of Rs. 86,91,154/- computed in accordance to the provision of section 40(b) of the Act made the balance addition of Rs. 1,29,05,483/- ( Rs. 2,15,96,637 minus 86,91,154 ) to the total income of the assessee.

3.7 The AO in addition also noted that the other businesses of the assessee’s sister concern also were carried out from the same premises. Therefore, the ad- hoc disallowance of telephone expenses of Rs. 18,180/- and vehicle running and maintenance expenses of Rs. 1,17,840/- as well as late payment of employees PF of Rs. 59,300.00 were made and accordingly added to the total income of the assessee. The AO in totality has computed total income as detailed under:

Other income on account of Rs.5,07,79,287/- declaration /disclosure

Add: Expenses as per Annexure-A as Rs. 2,08, 000/- Rs.5,09,87,287/- discussed

Income from business Rs. 1,29,05,483/- Net profit of contract business estimated at 5% as computed in para- 8

Addition /Disallowance

(i) Out of vehicle expenses Rs. 1,17,840/-

(ii) Out of telephone expenses Rs. 18,180/-

(iii) Late payment of P.P. Rs. 59,300/- Rs. 1,31,00,803/- Total Income Rs.6,40,88,090/-

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“10. Thus in view of the reasons summarized in para 9 above invoking of section 145(3) by the AO is upheld and in my view it would be reasonable to estimate the profit. The AO has estimated profit at 5% of Turnover contract receipts of Rs 43,19,32,759 shown in the P&L account excluding the Income disclosed credited in the P&L account. In my view it would be reasonable to estimate profit at 6% taking the Income credited in the P&L account both of Contract Receipts shown in the P&L account at Rs.43,19,32,759 plus the Disclosed Income of Rs 5,07,79,287 which totals to Rs.48,27,12,046 . The NP then comes to Rs 2,89,62,723 as against Rs. 2,47,84,207 shown by the appellant. Thus the Net profit addition is upheld of Rs.41,78,516 (Rs. 2,89,62,723 minus Rs. 2,47,84,207) to the returned income of Rs. 2,49,79,082 in place of the computation of total income made by the AO on page 25 of the assessment order/The disallowance of expenses of Rs. 2,08,000 and adhoc disallowances out of vehicle and telephone expenses of Rs. 1,17,840 and Rs.18,180 get telescoped in the NP addition of Rs.41,78,516 sustained under section 145(3).

11 It is seen that the AO has made disallowance of Rs. 59,300 under section 2(24)(x) read with section 36(1)(va) , because the appellant has not deposited Employees Contribution to PF account within the due date prescribed under the PF Act, but the AO is directed to delete the addition in view of Hon'ble ITAT 'D' Bench decision dated 22.7.2011 in the case of Agew Steel Manufacturers Pvt. Ltd. in ITA No. 488/Ahd/2011 in AY 2005-06 wherein the disallowance was deleted because the payments to PF fund was made by the appellant before the due date of filing the return u/s 139(1) . In the present case the PF contribution of February and March 08 have been deposited on 22.03.2008 and 23.04.2008 respectively much before the 'due' date of filing of return.”

6.1 The learned DR before us vehemently supported the stand of the AO by reiterating the findings contained in the assessment order which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity.

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6.2 On the contrary, the ld. AR before us has filed a paper book running from pages 1 to 535 and contended that the income offered to tax during the survey operation represents the business income and therefore the same should be given the same treatment in the event when the books are rejected. As such the income should be worked out on estimated basis.

6.3 Both the ld. DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

7.1 It is the trite law that once the books of accounts have been rejected, the only resort available to the revenue is to determine the income of the assessee in the manner provided under section 144 the Act to the best of the judgment. The Hon'ble Supreme Court in Kachwala Gems v. Jt. CIT [2007] 288 ITR 10/158 Taxman 71 held that rejection of books of account under section 145 justified and best judgment assessment under section 144 of the Act needed.

7.2 The Hon'ble Bombay High Court in Bastiram Narayandas v. CIT [1994] 210 ITR 438/74 Taxman 454 held that rejection of books of account

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justified under section 145 and best judgment assessment under section 144 needed.

The 1st controversy arises for our adjudication whether expenses 7.3 disallowed on ad-hoc basis i.e. telephone expenses of Rs. 18,180/- and vehicle running and maintenance expenses of Rs. 1,17,840/-, expenses of Rs. 2,08,000/- as well as late payment of employees PF of Rs. 59,300.00, are sustainable in the given facts and circumstances. Once the books of accounts have been rejected and profit has been estimated, there cannot be made any disallowance of the expenses claimed by the assessee. It is for the reason that once the books of accounts have been rejected then the AO is precluded from referring the same set of documents for making the disallowance under the different provisions of the Act. In holding so, we draw support and guidance from the judgment of Hon’ble Rajasthan High Court in case of Malpani House of Stone vs. CIT reported in 395 ITR 385 wherein it was held as under:

7.4 We also draw support and guidance from the judgment of Hon’ble Andhra Pardesh High Court in the case of Indwell Constructions v. Commissioner of Income-tax reported in 232 ITR 776 wherein it was held as under :

The pattern of assessment under the Income-tax Act is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under section 29. In other words, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account. No doubt there is a big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the Income-tax Officer while making an estimate. If the Commissioner

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had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the Income-tax Officer, there may not have been any difficulty in upholding that order. But, when he proposes to add back an exact item in the profit and loss account, he was relying on the rejectedbooks which he could not do as held by the Bench of this court in Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369. There is also a further difficulty if section 40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in section 40, can it be said that after making an estimate, the wealth-tax charged in the profit and loss account should again be added back to the profit. This example illustrates how the contention of the Revenue, that section 40(b) makes a difference in the situation, is untenable. In our considered opinion, the answer to the question has to be in the negative and in favour of the assessee.

In view of the above, we hold that there cannot be any disallowance of the expenses made by the AO as discussed above.

7.5 The next controversy arises for our adjudication whether the income admitted in the course of survey operation should be made subject to the addition on gross basis or same can also be considered as the part of the turnover for estimating the profit. Admittedly, the AO in the given case has estimated the profit at the rate of 5% on the gross turnover declared by it and over and above a separate addition was also sustained by the AO which was admitted and disclosed by the assessee during the survey operation. The element of income admitted during survey operation was representing the business transactions which are elaborated on page 3 of the order of the AO. The assessee has credited profit and loss account by showing such income admitted in the profit and loss account. But the AO treated the same as deemed income under the provisions of section 69 and 69C of the Act. Admittedly the provisions of section 69 and 69C are the deeming provisions which provides certain transactions to be deemed as income though in reality such transactions do not represent the income of the assessee. In the given facts of the case, there is no dispute to the fact that all the transactions which were made subject to disclosure as income during the course of survey operation. Thus, we are of the view that such income cannot be treated as income under the deeming provisions. As such provisions of section 69 deals with the investment which are not recorded in the books of accounts and the

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assessee fails to explain the source of the same. Likewise under the provisions of section 69C of the Act, it can be applied in a situation where assessee incurs the expenses but fails to explain the source of the same. However, it is not the case before us for the reason that the assessee in the present case is able to explain the source of income admitted in the course of survey operation i.e. out of the business activities. The Revenue has also not brought anything on record suggesting that the income offered during survey operation was not arising from the business activities.

7.6 It was alleged by the AO that the assessee has claimed excessive expenses in the profit and loss account and if the income admitted in the course of the survey operation is excluded from the profit and loss account there will be a trading/ business loss to the assessee. From this finding of the AO, the expenses incurred by the assessee were doubted but nothing specific has been brought on record suggesting that the expenses claimed by the assessee were bogus in nature.

7.7 In this regard, we note that the business transactions cannot be treated as income in the entirety. In our considered view only a percentage of profit embedded in such amount of business transactions can be brought to tax. In this regard, we find support and guidance from the order of the Hon’ble Gujarat High Court in the case of CIT vs. President Industries reported in 258 ITR 654 where it was directed to make the addition only to the extent of gross profit. The relevant extract of the order is reproduced as under:

‘The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that the investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sales proceeds can be treated as income, answers by itself in the negative.”

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7.8 In holding so, we draw support and guidance from the judgment of Hon’ble Gujarat High Court in case of CIT vs. Sathyanarayn P. Rathi reported in [2013] 38 taxamann.com 402, wherein it was held as under:

“5. From the record, we noticed that the Commissioner (Appeals) as well as the Tribunal found that the purchase of raw-material, in which the assessee was trading, were only made, but not from the disclosed sources. In other words, the case against the assessee was that the purchases were made in the grey market through cash payment and some entries were obtained from certain suppliers who had not sold such goods. 6. The present case, thus, being one of only purchase but not from disclosed sources, it would be only profit element embodied in such purchase which could be added in the income of the assessee and thus, rightly so done by the Commissioner (Appeals) and the Tribunal. 7. If this be our conclusion, only question arises whether such profit element should be estimated at the rate of 30% or 12½%. Whenever such a question arises, some reasonable estimation is always permissible. Hardly any question of law on such aspect would arise. Merely, it is pointed out that the assessee was a trader and that the Tribunal retained 12½% of the purchase towards its possible profit, we do not find any reason to entertain the appeal. In the result, Tax Appeal is dismissed”

7.9 We also draw support and guidance from the order of the Hon’ble Calcutta High Court in the case of PCIT vs. Subarna Rice Mill reported in [2018] 96 taxmann.com 286 wherein it was held as under:

“9. According to the Appellate Tribunal the value of the entire quantity of additional stocks that were discovered in course of the survey operation could not be regarded as the additional income of the assessee and amenable to tax. There was a specific ground taken before the Appellate Tribunal, which was a legal question, as to whether the undisclosed purchase could be taken as the additional income without reference to the possible sale of the paddy when converted. 10. The assessee refers to a judgment of the Gujarat High Court Vijay Trading v. ITO [2016] 388 ITR 377/76 taxmann.com 366. The principle enunciated in such judgment is that when undisclosed purchases of such nature are discovered, it is only the profit embedded in the transaction which can be added to the total income. The Gujarat High Court relied on some of its previous judgments to hold that "not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee." 11. In the circumstances and particularly since the factual findings rendered by the Commissioner (Appeals) as to the quantum of additional stocks have now been restored, the order impugned on the methodology for the ascertainment of the income which escaped assessment would pass muster. The Appellate Tribunal merely directed the gross profit that the additional purchase was capable of generating to be regarded as the additional income for tax to be assessed on such basis. Such view of the Appellate Tribunal does not call for any interference”.

In view of the above and after considering the facts in totality, we do not find any reason to interfere in the finding of the learned CIT-A. Thus we uphold the

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same and direct the AO to delete the addition made by him. Hence the ground of appeal of the revenue is by dismissed.

“1). The Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.7,63,37,283/- by treating the same as business income instead of treating it as other income u/s.69 of the

2). The Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.63,75,648/- out of total addition of Rs.74,33,148/- made on account of estimation of net profit @5%. 3). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad ought to have upheld the order of the Assessing Officer. 4). It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XV, Ahmedabad may be set-aside and that of the Assessing Officer be restored.”

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This Order pronounced in Open Court on 17/08/2022

Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 17/08/2022 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।