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Facts
The assessee, engaged in fabric trading under M/s Garima Trading Company, also operated 7 other proprietorship concerns where large cash deposits were made. The Assessing Officer (AO) discovered these deposits through AIR information, treated them as undisclosed sales due to lack of justification, rejected the assessee's books, estimated net profit at 3% of total turnover, and made additions for unsecured loans and peak credit under Section 68 of the Income Tax Act. The CIT(A) upheld the AO's order, leading to the present appeal before the ITAT.
Held
The Tribunal determined that the 7 other concerns were merely dummy entities for circular transactions to boost the turnover of Garima Trading Company, lacking real business. It held that when income is estimated on a net profit basis after rejecting books, a separate addition for peak credit and unsecured loans under Section 68 is not permissible. The Tribunal directed the AO to estimate income at a net profit rate of 0.40% on the disputed sales, considering the assessee's declared 0.39% net profit in Garima Trading Co., after allowing for verified intra-entity transfers and dishonored cheques, and to delete the additions made under Section 68 for peak credit and unsecured loans.
Key Issues
1. Whether additional income can be assessed for cash deposits in undisclosed bank accounts of other proprietorship concerns by estimating net profit. 2. Whether separate additions for peak credit and unsecured loans under Section 68 are justified when income is estimated on a net profit basis after rejecting books of accounts. 3. What would be the appropriate net profit rate for estimating income from such transactions.
Sections Cited
143(1), 143(2), 142(1), 136, 44AB, 68, 30, 37, 145(3), 40A(3), 69
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘F’: NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘F’: NEW DELHI BEFORE, SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER AND SHRI VIMAL KUMAR, JUDICIAL MEMBER ITA No.789/Del/2018, A.Y. 2013-14 ITA No.788/Del/2018, A.Y. 2014-15
Pawan Kumar Gupta ITO, A-116, Ashok Vihar, Ward 34(4) Phase-III, Vs. New Delhi New Delhi PAN: AANPG2625E (Appellant) (Respondent) Assessee by Sh. Suresh Gupta, CA Respondent by Ms. Mayuri, Sr. DR Date of Hearing 22/04/2024 Date of Pronouncement 03/05/2024 ORDER PER S.RIFAUR RAHMAN, AM: This appeal has been filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals)-12, New Delhi [“Ld. CIT(A”, for short], dated 26/10/2017 & 31/10/207 for Assessment Year 2013-14 & 2014-15 respectively. Since, the issues involved in both the appeals are common and similar, they were heard together and being adjudicated by this common order. We are considering ITA No. 789/Del/2018 as lead case for disposal of these cases.
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Brief facts of the case are, assessee filed his return of income declaring Rs. 13,07,596/- on 12.11.2014, the same was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘Act’). The case was selected for scrutiny under CASS, notices u/s 143(2) and 142(1) along with questionnaire were issued and served the assessee. In response, Ld. AR of the assessee attended the proceedings from time to time and filed the relevant information as called for. The assessee is engaged in the business of trading of Fabrics under name & style of M/s. Garima Trading Company.
The Assessing Officer observed from the information about large cash deposits in the bank account operated by the assessee and the assessee is also proprietor of 7 other proprietorship concerns. In respect of above said proprietorship concerns, the assessee has not submitted any details. In order to verify the same, information u/s 136 of the Act is called from Jammu & Kashmir Bank and DCB Bank Ltd. The Assessing officer asked the J & K Bank to furnish the bank statements concerning the following proprietor concerns :-
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“Name of proprietary Account Nos. 1. M/s J.K. Fabric 88,36,804 2. M/s Sarthak Fabric 1,40,25,678 3. M/s Ganpati Enterprises 1,27,50,000 4. M/s G. M. Enterprises 1,48,42,762 5. M/s Gupta Trading Company 92,83,160 6. M/s Samridh Trading company 1,50,35,374 7. M/s. Shri Krishna Enterprises 1,09,82,000”
In response, J & K Bank submitted the bank statements and from the details submitted by the J & K bank vide letter dated 18.11.2016, the deposits made by the assessee are summarized as under :-
“S. No. Name of the Firm Total Deposit 1 M/s. J.K.Fabric 6,64,69,983 2 M/s. Sarthak Fabric 2,10,03,953 3 M/s. Ganpati Enterprises 2,26,06,432 4 M/s. G.M.Enterprises 3,99,42,890 5 M/s. Gupta Trading Company 5,43,01,151 6 M/s. Samridh Trading Company 5,11,48,658 7 M/s. Shri Krishna Enterprises 2,50,24,484 Total 28,04,97,551
Further, the assessee vide letter dated 28.03.2016 has provided list of entries of transfer from bank account of one concern to another concern, which totals to Rs. 54,10,000. The net deposit of Rs. 27,50,87,551 (Rs. 28,04,97,551-Rs. 54,10,000) in the bank account of
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the said seven firms. The AO observed that in the absence of proper details and justification, the above said deposits are considered as undisclosed sales of the assessee.
The AO observed that Assessee vide letter dated 28.03.2016 has offered income for taxation in respect of cash deposit only in the said bank accounts of Rs. 12,10,41,500/- @ 2.5% but has not provided any justification for the same.
Based on the above information, the assessee was asked to file complete set of audit report, audited Balance Sheet and Profit and Loss account along with the annexure other than the information of Garima Trading Company. In response, the assessee has submitted the relevant information relating to Garima Trading Company only. 8. Further, assessing officer directed the assessee to file relevant information as called for and also assessee was asked to explain the source of cash deposits in DCB Bank in the name of Garima Trading Company to the extent of Rs. 36.30 lakhs. In response, the assessee submitted his response vide letter dated 22.12.2016, for the sake of clarity it reproduced below :-
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“1. With respect to your show cause notice dated 06.12.2016 is explained as under I am carrying out the business of trading in fabrics during the year and in earlier years, I have filed my return of income with my proprietorship concern naming Garima Trading Co. That I was also carrying out the same business activity from different proprietorship firms whose bank account has not been declared in the return of Income filed. I have made cash sales in those accounts and has deposit cash in those bank accounts during the year. The cash deposited in Garima Trading Co has been duly declared in the Balance Sheet and declared audited report. The total cash deposit of Rs. 15,09,38,387/- (as referred in the SCN) out of which Rs. 13,35,44,387/- (Rs. 15,09,38,387/-Less Rs. 173,94,000/- pertaining to M/s. Garima Trading Co.) was made during the year in other 7 firms. These are basically the cash out of cash sales and cash withdrawals made during the year from these other firms. I am maintaining proper books of accounts of M/s. Garima Trading Co. which has declared a Gross Profit @ 3.25% and Net Profit @ 0.39% during the year. Therefore, I have earned business income at the aforesaid rate during the year. Further, I have done same line of activity during the year in its other concerns as it is declared in M/s. Garima Trading co, Le. trading of fabrics. I have utilized funds for carrying out the activity from its main concern so as to carry out business in the other concerns. Therefore, the other transactions in bank accounts include internal transfers made within Garima Trading and other 7 firms for meeting the requirements of funds for carrying my business activity. Therefore, the working capital required to meet the needs of other concerns has been provided from my main concern. I have no other source/business
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except from the business activity which has been declared and accepted in earlier years as well. Therefore, the working capital for carrying out business in other firms is out of the main firm declared by me. 2. With respect to your note sheet entry dated 13.12.2016 regarding cash deposit of Rs. 36.30 Lakhs in the DCB bank account, it is submitted that the cash has been deposited out of cash in hand available in M/s. Garima Trading Co on different dates. The source of cash deposited is out of cash receipts from the debtors, cash sales and out of excess leftover cash withdrawal from bank accounts. The copy of ledger account of bank along with relevant cash book are enclosed for your verification. The cash deposited is therefore out of books of accounts duly audited and shown in the return of income.
It is hoped that above would be found in order. In case your goodself requires any further Information/document/clarification, we are pleased to submit the same. Thanking you, Yours faithfully Sd/- (Pawan Kumar Gupta) Assessee
After considering the above submissions, the assessing officer rejected the same and observed as not convincing and further observed that assessee has merely filed the return reply without producing any other records including Balance Sheet and P & L account of the above
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said concerns. Assessing Officer also observed that the transactions in the above said concerns are more than 1 crore and assessee need to get the audited report u/s 44AB of the Act. The Assessing Officer after considering the overall submission of the assessee observed that it is only after thought for manipulation to avoid explaination of the deposit of both cash and credit into the bank accounts of 7 concerns, which were not disclosed by the assessee. Therefore, the Assessing officer treated the entire deposit in the bank account of the above said concerns as their undisclosed sales.
The assessee has submitted that cash deposit of Rs. 173,94,000/- in the account of Garima Trading Company and 36,30,000/- deposited in DCB bank account is duly accounted in the books of accounts maintained by the assessee. The AO observed that no books of accounts along with bills and vouchers were produced before him for verification. The assessee has failed to produce books of accounts of Garima Trading Company wherein turnover/sales of Rs. 36,99,39,186/- is declared and however the assessee has not submitted any books of accounts even though after providing several
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opportunities. Therefore, assessing officer rejected the declared result submitted by the assessee.
After rejecting the books results submitted by the assessee, the assessing officer added the cash/credit deposited by the assessee in the 7 concerns and the sales declared in Garima Trading Company together and estimated net profit of the assessee of Rs. 1,99,05,564/- determined from total turnover of Rs. 66,35,18,788/- (388,431,237+275,087,551) @ 3%.
Further, the assessing officer observed that assessee has taken unsecured loan from Sh. Subhash and Sh. Viresh Chopra an amount of Rs. 9 lakhs since no details were filed by the assessee. The same was added as income of the assessee under section 68 of the Act.
Further the AO observed that the assessee has not disclosed the 7 bank accounts, these were reported through AIR information only. The assessing officer observed that the assessee was not able to explain the deposit of cash/ cheque amount in the various books of
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accounts in the name of all the proprietor concerns, therefore, AO added the peak credit during the year in these bank accounts individually. For the sake of clarity it is reproduced below :- S. No. Name of the Firm Date Total Deposit 1 M/s. J.K. Fabric 13.07.2012 20,29,408/- 2 M/s. Sarthak Fabric 27.02.2013 17,79,650/- 3 M/s. Ganpati Enterprises 12.03.2013 11,05,832/- 4 M/s. G.M.Enterprises 19.03.2013 9,99,770/- 5 M/s. Gupta Trading 31.12.2012 12,59,673/- Company 6 M/s. Samridh Trading 30.03.2013 20,11,357/- Company 7 M/s. Shri Krishna 23.11.2012 21,75,305/- Enterprises Total 1,13,60,995/-
Now, aggrieved with the above order, assessee preferred an appeal before CIT(A)-12, New Delhi. After considering the grounds of appeal submitted by the assessee, Ld. CIT(A) observed in its order at para 4 that assessee has not responded to the notices of hearing issued by him. Therefore, Ld CIT(A) has considered the submissions of the assessee before the assessing officer for adjudicating the present appeal and based on the information available on record. Ld. CIT(A)
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decided the issue against the assessee and dismissed the grounds raised by the assessee.
Further, with regard to other additions of Rs. 9 lakhs towards unsecured loans and peak credit, Ld. CIT(A) dismissed the relevant grounds raised by the assessee.
Aggrieved with the above order, assessee is in appeal before us arising following grounds of appeal :-
“1. On the facts and circumstances of the case and in law, the assessment order passed by A.O. is bad in law and without jurisdiction and Commissioner of Income Tax (Appeals) erred in not holding so. 2. On the facts and circumstances of the case and in law, the assessing officer erred in confirming the action of the assessing officer of completing the assessment at income of Rs.3,25,43,787/- instead of Rs. 12,73,271/- as returned by the appellant.
On the facts and circumstances of the case and in law, the assessment order passed by the assessing officer is arbitrary and against the principle of natural justice and Commissioner of Income Tax (Appeals) erred in not holding so.
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On the facts and circumstances of case and in law, the CIT(A) erred in not adjudicating the various grounds of appeal on merit.
On the facts and circumstances of case and in law, the order passed by the Commissioner of Income Tax (Appeal) is bad-in-law, arbitrary and against the principles of natural justice. 6. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred in not providing proper and reasonable opportunity of hearing to the appellant.
On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in confirming the action of the assessing officer in assessing the business income at Rs. 1,99,05,564/- (by computing Net Profit @ 3% on turnover) instead of Rs. 8,96,043/-as declared by the appellant.
On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in confirming action of the assessing officer in increasing the income under the head Business & profession by Rs. 1,90,09,521/-. 9. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in confirming addition of Rs. 9,00,000/- made by the Assessing Officer on account of alleged deemed income u/s 68 of the Income Tax Act, 1961. 10. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in confirming addition of Rs. 1,13,60,995/- made by the assessing officer
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on account of alleged income from undisclosed sources u/s 68 of the Income Tax Act, 1961. 11. On the facts and circumstances of the case and in law, the various alleged reasons given by the Commissioner of Income Tax (Appeals) and assessing officer for making various additions are erroneous, and therefore, the additions made by the assessing officer and confirmed by the Commissioner of Income Tax (Appeals) are liable to be deleted.
The appellant craves leave to add one or more ground of appeal or to alter/modify the existing ground before or at the time of hearing of appeal. The aforesaid grounds of appeal are without prejudice to each other.”
At the time of hearing, Ld. AR of the assessee explained the facts in this case and submitted the following synopsis for adjudications :- “Additions contested in the present appeal: 1. Business Income estimated at the rate of 3% of the declared turnover increased by the credits appearing in various bank accounts of the business concerns of the appellant assessee. 2. The turnover of Garima Trading Co.: Rs.38.84 Crore Credits in the various bank accounts: Rs.27.50 Crore Total Amount: Rs.66.35 Crore. Profit estimated at the rate of 3% is Rs. 1,99,05,564/-(Para 7 page 4 of AO order) 3. The appellant has one trading entity i.e. M/s Garima Trading Co. and other entities as per the AO are not found by the Ld AO as genuine sales (page 3 para 3 of the AO). The appellant had not disclosed the profit/ loss of these entities in the return of income and the credits in the bank accounts of these entities is also considered the sales of the appellant.
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The appellant was not able to produce books of account of all the entities before the Ld AO although the same were offered to be produced as per the letter dated 24.02.2016 the fact noted by the Ld AO in para 23 page 2. The reason being miscommunication of the appellant with the counsel then appearing on his behalf. 5. The Ld. AO also made an addition of Rs 1,13,60,995/- of the peak credit in the current accounts of the entities treating each entity on standalone basis. 6. The Ld. AO rejected the books of account and the trading results. The appellant vide letter dated 28.03.2016 offered the income for taxation @ 2.5% of the cash deposits in the bank accounts, but the Ld. AO for his convenience found this offer as acceptance by the assessee appellant for taxation of all the credit entries in the bank accounts @ 2.5%. 7. Coming to the objection on quantification of the credits in the bank accounts, it is submitted that the Ld. AO has given benefit of intra entities transfers for Rs 54,100/- only (para4 page3) but the quantum of actual intra entity transfers comes to Rs. 6,79,25,800/- which can be verified from the detailed working separately provided. Besides above, there had been Instances of reversal of the credit entries on account of bouncing back/ dishonor of cheques which amount of Rs 69,74,321/-. The total of such amounts Rs. 7,49,00,121/- needed be reduced from the aggregate credits of Rs. 66,89,28,788/- instead of Rs 54,10,000/- reduced by the Ld AO. The aggregate credits thus should have been Rs. 59,40,28,667/- in place of Rs 66,35,18,788/-taken by the Ld. AO. 8. On the basis of estimation of the net profit adopted by the Ld. AO, it is submitted that the Ld. AO had no basis to estimate the net profit in the given facts and circumstances @ 3% of the total credits in the bank accounts. The Ld. AO ignored the fact that even in best judgment assessment the deduction of the expenses which are not in dispute be allowed from the gross income estimated. The margin of profit estimated cannot be income of the assessee without allowing deduction of the expenditure u/s 30 to section 37 of the Act. From the evidences furnished the expenses the major expenses are Bank Interest Rs. 64, debited to the P& L Account aggregates to
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Rs 1,05,82,330. The major expenses are interest of Rs. 64,03,878/- Salary Rs 12,11,425/- Depreciation on car Rs 1,49,793/-. These major expenses should at least have been considered for deduction from the gross income estimated in case of Garima Trading Co. The other entities have similar expenses debited to P& L Account as per the details below : Name Other Bank Total Ref. Expenses Charges & Interest Shri Krishna - 61,183/- 61,183/- PB-16 Enterprises Ganpati 2,64,523/- 61,421/- 3,25,944/- PB-19 Enterprises Saarthak Fabrics 2,18,022/- 26,386/- 2,44,408/- PB-21 GM Enterprises 2,67,871/- 69,111/- 3,36,982/- PB-23 J K Fabrics 1,65,456/- 87,824/- 2,53,280/- PB-25 Gupta Trading Co 1,12,678/- 55,858/- 1,68,536/- PB- Samridh Trading 2,95,467/- 62,548/- 3,58,015/- PB- Co. Total 13,24,017/- 4,24,331/- 17,48,348/- 9. This estimation of such a high rate that too without providing for deduction for the expenses is not in accordance or rather contrary to the decisions of the various courts where much lower estimation was accepted on similar facts. To cite few of these : i. Pr CIT Vs Alag Securities P Ltd ITA No 1512 of 2017 at 12.06.2020 In para 17 of the the Hon'ble Bombay High Court considering the fact of accommodation entries provided by the assessee considered various cases for estimating the commission income in such cases ranging from 0.15 to 0.25% of the aggregate credits as the reasonable profit attributable to such activities of the assessee. ii. Vishnu Goel ITA NO 3929-3932/Del/2015 dated 15.10.2018
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In the identical facts and circumstances the coordinate Bench estimated 0.25% as profit on the aggregate credits and against this the deduction of 0.05% was further allowed. The net profit thus was estimated at 0.20% of the aggregate credits whereas the AO initially estimated income at 2% which was reduced by the Ld CITIA) to 1% in first appeal. iii. JKD Brokers P. Ltd Vs CIT ΠΑ No 134/2014 CM App 5666/2014 dt 04.03.2015 (Delhi High Court) The estimated profit was estimated at 1% of the aggregate credits. iv. Sorus Power P Ltd Vs ACIT ITA No 2773/Del/2017dt 06.11.2018 The Hon'ble ITAT estimated profit 0.30% against the estimation at 0.60 made by lower authorities. v. Manoj Aggarwal Vs DCIT 1134 itd 377(Del) SB The net profit was estimated 0.355% after giving deduction of this expenses 0.15% against the estimated gross profit of 0.50%. vi. Freak Buildcon P Lid Vs ACIT ITA 5010/Del/2018 dt. 22.10.2019 Relying on Sorus Power case (supra) the Hon'ble Bench estimated profit margin at 0.30% against the rate of 0.60 adopted by the AO. vii. Realstone Exports Ltd Vs ITO ITA 3580/Mum/2019 dt. 04.10.2019. The profit margin upheld at 0.15% as made by the Ld CIT(A). viii. City Base Multitrade P. Ltd. ITA 3374/Mum/2016 (rate accepted by the bench was 0.10%. 10. The Ld AO has committed a grave error in not aggregating the transactions of the appellant assessee by putting them in the basket for working out the peak credit of Rs 1,13,60,995/ The appellant has worked out the peak credit by taking the transactions of all the entities together. The peak credit comes to Rs 45,30,765/- to be reduced by balance of Rs 29,881/-net peak credit Rs 45,00,885/-. The Ld. was not correct in not considering the profit estimated as the source of credits in the bank account. If the profit estimated is less than the peak credit then the peak credit could be
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the basis of estimation of profit, The Ld AO is not correct in making addition both on the estimated profit margin and simultaneously making addition of the peak credit. 11. Addition of Rs 9,00,000/- u/s 68 of the IT Act The Ld AO has rejected the books of account has estimated the trading results on best judgment basis. The Ld AO was not lawfully correct in taking the information from the books of account which have been rejected by him. The Ld AO however could consider this credit for estimating the business profit as any other credit. This legal position is supported by the decision of Hon'ble High Court of Rajasthan in the case of CIT vs. G.K. Contractor, (2009) 19 DTR 0305, where it was clearly held that "AO having estimated the profit by applying a higher net profit rate to total contract receipts after rejecting assessee's books of account by invoking the provisions of section 145/3), no separate addition can be made on account of cash credit u/s 68, even though the assessee has failed to discharge its onus of proof in explaining the amount shown in the books of account”. The Hon'ble High Court of Punjab and Haryana, in the case of CIT vs. Aggarwal Engg. Co., (2008) 302 ITR 0246 had considered an identical issue and held that "no separate addition on account of cash credit and on account of unexplained payments for purchases made outside the books can be made once the net profit rate is applied on contract receipts of an assessee for estimating his income from contract work”. The Hon'ble High Court of Allahabad in the case of CIT vs. Banwarilal Banshidhar, (1998) 229 ITR 0229 had taken a similar view and held that "where income is assessed at G.P. rate by rejecting the books of assessee u/s 145(3), no disallowance can be made separately u/s 40A(3) of the Act.”
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Therefore, from the above, it is very clear that to make additions u/s.68 or 69 of the Act, the essential condition is books of account should be maintained by the assessee for the relevant financial year. If books of account of the assessee are rejected and income is estimated by applying certain profit rate, it would take care of all expenses necessarily to be incurred for earning profit and hence, when profit is estimated no separate addition can be made u/s 68 of the Act. 12. In any case with out prejudice to above the telescoping of two additions on account of rejection of books of accounts and on account of unexplained cash credit u/s 68 needed by allowed in view of the following decisions: i. KSM Guruswami Nadar & Sons 149 ITR 127 (Mad.) ii. Jagatkumar Satishbhai Patel 45 taxmann.com 441 (Guj.) iii. Kunal Motors 180 CTR 166(Raj.)” 18. On the other hand , Ld. DR objected to the submissions made by the assessee and submitted that the issue of cash deposit was found only through AIR report and based on that report it was found that assessee has made huge cash deposit and further undisclosed purchase and sales unearthed by the department. She submitted that considering the overall facts on records, the assessing officer has fairly and rightly brought to tax at 3% of the turnover and also method adopted by the AO to determine peak credit is also proper. Accordingly she relied on the findings of the lower authorities. 19. Considered the rival submissions and material placed on record, we observed from the record that the main business of the assessee is
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trading in fabrics, are carried through the entity run in the name and style of Garima Trading Company. The other entities consisting of 7 proprietary concerns through which the assessee has merely purchased bills and deposited cash in order to rotate the transactions again through Garima Trading Company. In order to achieve that he discreetly deposited the cash in the various bank accounts opened in the J & K Bank, which was found by the AO through AIR information collected by the department from Banks. On verification, the assessee could not explain the properly the above transactions.
The status of non cooperation or non disclosure of basic information before AO can be noticed from the bank statements received from the banks. In our view, the assessee may not have expected the information will be collected by the revenue. He was complacent in not complying with various formalities mentioned in the various Acts. The assessee has not disclosed the sales / purchases nor maintained any books of account of any of the 7 concerns through which the assessee has merely rotated the funds. From the record we observed that the main business carried on by the assessee is only
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through Garima Trading Company and all other concerns were merely dummy entities to do circular transactions. We observe that there is sales tax record were also not submitted nor the AO collected from the assessee or from the sales tax department. He has merely proceeded to form the opinion on the basis of bank statement and various cash deposits/ credits recorded or found in the bank statement. In our view, even the AO has not carried out proper investigation before making the addition and proceeded to make the addition on the basis of non- cooperation of the assessee.
Considering the overall facts on record and submissions of the assessee in detail. We also observed that the assessee has not made representation before lower authorities. We thought of remitting this issue back to AO but after elapse of considerable time, it will not serve any purpose and in order to resolve the issue of AY 2013-14, we deem it fit to consider the submissions of both the parties and material available on record. Accordingly, we proceeded to resolve the issue under consideration to meet the overall justice.
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We observed from the record submitted by the assessee before AO that the assessee has accepted that the assessee has made cash deposits in the said 7 concerns involving Rs. 12,10,41,500/- and accordingly offered to consider the estimation of income @2.5%. The other credits are only circular transaction or accommodation entries. In our view, the assessment was selected mainly to verify the cash transactions in the various bank accounts maintained by the assessee. The assessee has already agreed that the above cash deposits are out of cash sales in Garima Trading Company and other credits are only circular or accommodation entries.
The next issue is, the AO has added all the credits in the books of Garima and bank entries in other 7 entities as sales of the assessee and estimated the income @3% after rejecting the books of account. Before us, the assessee has submitted AO has given benefit of intra entities transfers for Rs. 54,100/- whereas in actual, it is Rs. 6.79.25.800/-. Further it is submitted before us that there are bouncing back or dishonor of cheques to the extent of Rs. 69,74,321/-. In our view, this needs verification at the AO level, therefore, we are
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remitting the relevant submissions of the assessee before AO to verify the same. We direct the AO accordingly.
Therefore, the AO has aggregated the credits to the extent of Rs. 66,89,28,788/-, which may require adjustments as discussed in the above paras i.e., the cash credits of Rs. 12,10,41,500 to be assessed separately @ 2.5%, the inter transfer adjustment to the extent of Rs. 6,79,25,800/- (after verification) and adjustment towards dishonor of cheques to the extent of Rs. 69,74,321/- (after verification) by the AO. The net credit under consideration would be Rs. 47,29,87,167/- (66,89,28,788-12,10,41,500-6,79,25,800-69,74,321). After careful consideration of the submissions made by the parties, we are of the view that the assessee has carried on his main business in Garima Trading Company and the other entities were merely used to increase the turnover of the Garima Trading Company without there being any real transactions. It is only accommodation entries merely to boost the turnover in the Garima Trading Compay, the reason to reach the above view are that the assessee could not bring any record including the sales tax record or any other information before any authority because
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the assessee did transaction in the various banks except making cash deposits and making circular transaction with the Garima Trading Company. We also evaluated the financial results declared by the assessee in the Garima Trading Company, which was rejected by the AO at 0.39%. To meet the ends of justice, as the assessee has merely carried on with the circular or accommodation transactions without there being any real transaction, (even the AO has not brought on record any evidence to show that the assessee has actually carried on the sales in correspondence with the credits found in the bank accounts), therefore, we are inclined to direct AO to estimate the income at the rate of 0.40% of sales under dispute as state above in this paragraph. We direct AO to estimate @0.40% because the real profit declared by the assessee in the Garima Trading Company only at 0.39% as net profit after considering the regular business expenses. For the sake of overall justice, the rate is finalized at 0.40%. Therefore, with the above directions, we are inclined to partly allow the grounds raised by the assessee.
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Coming to the other issue of peak credits and unsecured loans, the AO has made addition by estimating the income on the sales aggregated by him after rejecting the books of account. Further he has proceeded to make further addition of determining the peak credit. In our considered view, the AO has made the addition aggregating the sales from the bank statements of all the concerns and once again AO cannot proceed to make another addition for peak credit u/s 68. The various courts have held that when estimation of income is resorted to after rejecting the books of account, no separate addition u/s 68 is called for even though the assessee failed to discharge its onus of proof in explaining the credit in its books. Therefore, we direct the AO to delete the addition made u/s 68 of the Act relating to peak credit and unsecured loans.
Further we observe that the assessee has filed a separate note on the actual peak credit, since we decided the issue that no separate addition is called for when the income is estimated on the basis of estimations. Accordingly the Ground nos 9 and 10 are allowed.
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In the result, appeal filed by the assessee is partly allowed.
The issue raised in appeal no. 788/Del/2018 are exactly similar to the facts in ITA no. 788/Del/2018, therefore, the decision taken therein is applicable mutatis mutandis. Accordingly, the grounds raised by the assessee are partly allowed.
In the result, both the appeals filed by the assessee are partly allowed. Order pronounced in open Court on 3rd May, 2024.
Sd/- Sd/- (VIMAL KUMAR) (S.RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:3rd/05/2024 Binita, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI