K J KARTHIK ,CHIKKABALLAPUR vs. THE INCOME TAX OFFICER WARD-1 , CHIKKABALLAPUR

The assessee is an individual. He filed return of income for AY 2014-15 declaring total income of Rs.2,32,500. According to assessee, he was carrying on the business of supplying building materials. The assessee did not maintain any books of account. The assessee’s turnover was Rs.41,07,080. The assessee declared the presumptive income of 8% of this turnover as laid down in section 44AD of the Income-Tax Act, 1961 [“the Act”].

It appears that there were cash deposits in the SB account maintained in the name of assessee of Rs.77,80,000. In this scenario, assessment was completed by the AO determining the total income of assessee at a sum of Rs.18,79,500 by making an addition of Rs.16,47,000 for the following reasons:- “ The assessee claims that he does finance business, mainly financing his friends, relatives and small traders in and around his own village. He states that he earns interest income of around 12% to 15% from these finances. The sources for this finance business is obtained through loans from other parties. The assessee stated that he had a turnover of Rs.91,50,000/- which included the cash deposits found in his Savings Bank A/c of Rs.77,80,000/-. After discussion and perusal of the bank statements, the assessment is concluded by estimating the income at 18% on the total turnover of Rs.91,50,000/- which works out to Rs.16,47,000/-.”

Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the CIT(Appeals) and contended that the assessee was not involved in finance business as wrongly observed in the order of assessment and that he was engaged in the business of supply of building materials. The assessee also submitted that building materials are purchased by the assessee from small time contractors and assessee arranges for material through his contacts and supplies the same. The assessee collects cash from the purchasers and deposits to the account of suppliers immediately. The very nature of business therefore involves cash and the deposits in the bank account were therefore attributable to cash received from purchasers which were paid over to suppliers. The assessee submitted that he was not obliged to maintain books of accounts and entitled to declare income u/s. 44AD of the Act. The assessee also pointed out that there was no basis for the AO to arrive at a turnover of Rs.91,50,000. The assessee further submitted that estimation of income at 18% of turnover by the AO is contrary to provisions of section 44AD of the Act.

None of the submissions were considered by the CIT(Appeals). He proceeded to confirm the order of the AO for the following reasons:- “10. The issue to be adjudicated is whether the AO was right in making an addition of Rs.16,47,000/- to the income of the appellant on an estimated basis. The assessment order is passed u/s 143(3) of the Act and the AO has noted in the order that the appellant is involved in finance business. The AO made the addition at the rate of 18% of the total turnover of the appellant, holding the same to be income from finance business. The appellant disputes the same and has filed revised statement of facts and disputed the same and claims that he is not in finance business and only deals in building materials with some accommodation made to known persons. The appellant apart from making these statements has not filed any evidence in support of the same. In the statement of facts filed along with F- 35, the appellant admits to finance business, but states that it is of a small scale. Be it as it may, the appellant does not maintain books of accounts. He is admittedly in business of building materials and finance business. He relies upon the provisions contained in section 44AD of the Act in estimating income based on turnover, but the same does not apply to the facts of his case. There is no clear submission as to how much of his turnover relate to building material business and how much relate to finance business. The appellant has not produced any evidence to make out a proper case for himself. In absence of any concrete evidence to support his case, the addition made by the AO is sustained.”

Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal.

I have heard the rival submissions. The ld. Counsel for the assessee reiterated the submissions made before the CIT(A), whereas the ld. DR relied on the order of CIT(A).

After considering the rival submissions, I am of the view that the addition made by the AO cannot be sustained. The order of the AO is silent as to how he arrived at the turnover of assessee at Rs.91,50,000. It is clear that the AO has completely misunderstood the nature of business of assessee. In this regard, I also find from the statement of total income filed by the assessee for the relevant assessment year that the nature of business is clearly mentioned as income from building material supply. In these circumstances the basis for the AO to say that the assessee was in finance business is incorrect. Besides the above, there is no discussion of cash deposits in SB account by the AO, which means the AO was satisfied about the source of funds for the deposits in the SB account. The turnover declared by the assessee is Rs.41,07,080 and the assessee is entitled to take advantage of the provisions of section 44AD of the Act without maintaining any books of account. The income declared by the assessee is in accordance with the provisions of section 44AD of the Act. There is no reason why the same should not be accepted. The CIT(Appeals) has not given any reason as to why the provisions of section 44AD are not applicable to the assessee. In the circumstances, I am of the view that the addition made by the AO and sustained by CIT(Appeals) deserves to be deleted. Accordingly, I direct that the addition in question be deleted. I allow the appeal of the assessee.

In the result, the appeal of assessee is allowed. Pronounced in the open court on this 3rd day of October, 2018.