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Facts
The assessee, a partnership firm engaged in liquor trading, did not maintain proper books of accounts or file a return of income. The Assessing Officer (AO) completed an assessment under Section 144, estimating gross profits at 10% and making substantial additions under Section 68 for unsecured loans and partners' capital based on figures from a 'draft return'. The CIT(A) reduced the net profit rate to 5% but sustained the additions made under Section 68.
Held
The Tribunal condoned a delay of 253 days in filing the appeal. It held that once the books of accounts are rejected and profits are estimated, no separate additions under Section 68 for unsecured loans and partners' capital can be sustained. The Tribunal directed the AO to estimate the business profits at a net profit rate of 2.5% of gross sales and consequently deleted the additions made under Section 68.
Key Issues
Whether separate additions under Section 68 for unsecured loans and partners' capital are permissible when books of accounts are rejected and business profits are estimated; and the appropriate net profit rate for estimating income from a liquor trading business.
Sections Cited
250, 144, 68, 115BBE, 206C(1), 139(1), 142(1), 44AB, 145(3)
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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR
Before: SH. MANOJ KUMAR AGGARWAL & SH. UDAYAN DASGUPTA
This appeal is filed by the assessee against the order of the ld. CIT (A) NFAC, Delhi dated 15.01.2024 passed u/s 250 of the Income Tax Act, 1961 which has emanated from the order of the AO, Ward, Nawanshahr passed u/s 144 of the Act, 1961 dated 01.11.2019. belatedly. The order of the Ld. CIT(A) has been passed on 15/01/2024, and the due date for filing an appeal before the Tribunal was 14/03/2024, but the said appeal has been e filed on 23/11/2024, which is belated by 253 (two hundred fifty three) days. The assessee has filed an affidavit explaining the delay on account of the appeal order being dispatched to the email of the previous counsel cajagdipsingh@gmail.com , who did not inform the assessee regarding the outcome of the appellate order. It is further stated that the partnership firm existed for only one year FY 2016-17 ( relevant to the AY 2017-18 ), and thereafter the firm has been practically dissolved and the email id of the assessee firm was rk.3061974@gmail.com , was not operated by any partners , since suspension of business, from the year 2017 onwards, and the third email id on record grv.singh33@gmail.com does not belong to the assessee firm . Thereafter, in the month of November, 2024, after settlement of disputes in between the CA and the partners, the counsel started cooperating in the matter and necessary steps were taken by the assess firm in filing this appeal before the tribunal , in the month of November, 2024, and since the delay was not intentional on the part of the assessee firm, the Ld AR prayed for condonation of the delay and admission of the appeal to be heard on merits.
The Ld. DR did not object to the said application for condonation.
Considering the facts narrated in the affidavit we condone the delay of 253 days, in filing the appeal and admit the same for hearing on merits.
The grounds of appeal taken by the assessee in form 36 are as follows:
“1. That the order passed by the Hon'ble CIT(A) dated 15.01.2024 is against the law and facts of the case.
That having regard to the facts and circumstances of the case, Hon'ble CITTA) has erred in law and on facts in confirming the action of Ld. Alin framing the impugned assessment order u's 144 of the Act and without complying with the mandatory conditions u's 144 as envisaged under the Income Tax Act, 1961
3. That having regard to the facts and circumstances of the case, Hon'ble CTT(A) has erred in law and on facts in confirming the action of Ld. AO in passing order without giving adequate opportunity of hearing.
4. That having regard to the facts and circumstances of the case. Hon'ble CIT(A) has erred in law and on facts in confirming the action of Ld. AΟ in making an addition of Rs. 74,20,833, u/s 68 of the Act and taxing the same w's 115BBE, without considering the facts of the case and without observing the principles of natural justice.
5. That having regard to the facts and circumstances of the case, Hon'ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an addition of Rs. 43,50,000/-, u/s 68 of the Act, on account of unsecured loan treated as income from undisclosed sources and taxing the same u/s 1158BE, without considering the facts of the case and submission of the assessee and without observing the principles of natural justice
6. That having regard to the facts and circumstances of the case. Hon'ble CITIA) has erred in law and on facts in confirming the action of Ld. AO in making an addition of Rs. 5.89,874/-, u/s 68 of the Act, on account of addition in capital account treated as Assessment Year: 2017-18 income from undisclosed sources and taxing the same u/s 115BBE, without considering the facts of the case and without observing the principles of natural justice
7. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
Brief facts emerging from records are that the assessee is a partnership firm (consisting of nine partners) as evident from the partnership deed executed on 1st April 2016, under the trade name of “Rajkumar & Co”, (PAN: AAUFR1863Q), with the main object of trading in beer and wines (alcoholic liquor for human consumption).
This nature of business is generally carried out under license granted by the State Excise authorities (Excise and Taxation Department, Punjab ), and in the instant case the excise license under category of L-14A / L-2 is granted in the name of an individual partner Mr. Raj Kumar ( PAN : AXFPK8915L) holding 25% share in profits and losses of the partnership firm.
The purchases of goods ( PML and IMFL ) Punjab Medium Liquor and Indian Made Foreign Liquor, are made from excise bonded warehouse under control of State excise authorities and goods are sold on wholesale to other retailers and also on retail basis to general customers (over the counter) as off shop sales. (A certificate issued by the Excise officer, SBS Nagar, is made a part of this order). bonded ware houses) against the PAN of the individual partner and TCS u/s 206C(1) of the Act 61, has also been deducted @ ONE percentage , by the respective sellers on such sales duly reflected in form 26AS against the said individual PAN.
In the instant case neither any return of income has been filed by the assessee in normal course u/s 139(1) for the year under appeal nor any return filed in response to notice u/s 142(1) of the Act, even though the assessee had made a total cash deposit of Rs. 71.12 lakhs in its bank account at HDFC A/c No xxxxxxx65655, (which included an amount of Rs. 18.07 lakhs , during the demonetization period).
In absence of any books of accounts being maintained and in absence of any tax audit report being uploaded u/s 44AB of the Act 61, and in absence of any supporting purchase invoices , bills and vouchers , and other documentary evidences , the assessment was completed on the basis of a so called “ draft return ” filed by the assessee before the AO in course of assessment proceedings, containing figures of gross SALES at Rs.9.92 crores ( page -12 of assessment order ) and other incidental figures of direct and indirect expenses , all without any supporting documentary evidences.
The AO determined the gross profits (from liquor business) @ 10% of gross Sales of Rs.9.92 crores (as disclosed in draft return by the assessee ) and sou moto Rs. 74.20 lakhs (effective NP rate of 7.48% ). Apart from above, the AO has made addition of Rs. 43.50 lakhs on account of unsecured loans as reflected in the said draft return and a further addition of Rs. 5.89 lakhs being the amount reflected under the head “Partners Capital” both u/s 68 of the Act, and the total income has been determined at Rs. 1.23 crores.
The matter carried in appeal, has been partly allowed by the Ld CIT (A), by reducing the net profit rate to 5% (five percentage) of gross sales on estimate ( after all expenses) and the NP from liquor business was determined at Rs.49.60 lakhs .
However, the remaining addition of Rs. 43.50 lakhs plus Rs. 5.89 lakhs , both u/s 68 has been sustained, by observing as follows:
“6.5 Ground no. 7: It relates to the plea that the AO erred in making addition of Rs. 43,50,000/- being the credits without telescoping the addition made in the trading account and rejecting the evidence filed by the appellant.
6.5.1 It is seen here that in preceding para of this order, the estimated income has been held to be out of the business of the appellant. The AO had made a separate addition u/s 68 of the Act as unsecured loans of Rs. 43,50,000/- were credited to the balance sheet sources of which were not explained. Creditworthiness of lenders and genuineness of transactions was also not proved. Thus, the AO was correct in adding these back as unexplained credits u/s 68 of the Act.
Even during appeal proceedings, the appellant failed to file any evidences for such credits but merely claimed that it should be allowed telescoping out of the additions made on account of trading profits.
It is also seen that the AO had also allowed credit for expenses from the gross profits so estimated and in this appeal order part relief on the estimated profits has been allowed.
In so far as separation addition on unexplained credits in the form of loans is concerned, in case of G.S. Tiwari & Co. [2014] 41 taxmann.com 17 (Allahabad) & [2013] 38 taxmann.com 259 (Allahabad), assessee carried on business of contractor for civil work of PWD. In course of assessment, Assessing Officer noted that assessee had not maintained proper books of account. He thus rejected book results and estimated net profit rate of 8 per cent under section 44AD. AO also made certain addition under section 68 in respect of unexplained cash credit. Hon'ble High Court had held that there is nothing in law which prevents Assessing Officer in an appropriate case in taxing both sundry credit, source and nature of which is not satisfactorily explained, and business income estimated by him after rejecting books of account of assessee as unreliable.
The case of present appellant is also similar on facts. The unexplained credits were in the form of loans and no telescoping can be allowed out of trading profits for the same.
Considering the above, the ground no. 7 of appeal is dismissed.
6.6 Ground no, 8: It relates to the claim that the AO erred to making addition of Rs. 5,89,874/- without appreciating that the capital of the partners was deposited in the year ended on 31- 03-2016 and the capital was required to be considered in the cases of the partners for the assessment year 2016-17.
6.6.1 It is noted the appellant has not filed any return of income for previous AY 2016-17. It has not filed any books of accounts and evidences in the form of bank statements, return of income of partners etc. to show that the capital was introduced in FY 2015-16.
Considering the above, ground no. 8 of appeal is hereby dismissed.” the memo of appeal. The Ld. AR of the assessee submitted that the business of the assessee firm was effective only for one financial year ie from 1st April 2016 to 31st March 2017, and the same was carried on by all the nine partners amongst themselves, by pooling in their individual resources , on the strength of the excise license granted to the individual partner Mr. Raj Kumar , and no proper books of accounts has been regularly maintained and no tax audit was possible in absence of any regular books and after the termination of the business in March, 2017, the firm has no physical existence, except on paper and all the partners has left for good and the business of partnership for all practical purpose has come to an end .
He further submitted that the gross sales of the business during the year was approximately Rs. 9.92 crores against purchases of Rs. 4.31 crores (as reflected in form 26 AS ) and the total payment to Punjab State excise authorities for the year (deposited in State Government treasury) as certified by the excise authorities was Rs. 4.89 crores and rest of the expenses as claimed in the draft return are estimated figures without any supporting documentary evidences. He further referred to the draft return to submit that the figure of Rs.43.50 lakhs appearing as unsecured loans and the figure of partners capital Rs. 5.89 lakhs , in the balance sheet are both imaginary figures and so are the figures of cash in hand Rs.39.39 lakhs and the fixed assets Rs. 6.41 lakhs , all appearing cash with the assessee and neither is there any outstanding loans payable to anyone.
Thereafter, he referred to the decision of the coordinate Bench of ITAT/ 2022, in the case of Satwinder kaur Balachor , Asst year 2017-18 , where in an identical nature of trading business in IMFL , the net profit from business has been estimated @ 2% on Gross sales of Rs. 16.37 crores, and the Ld AR prayed for estimation of the business profits in the instant case at a fair rate, taking the above case as a comparative one, being the same nature of trade carried out in the same State, under similar circumstances.
He further submitted that in absence of any books of accounts and in absence of any return of income and audited balance sheet being actually filed , the figures contained in the so called draft return , both liabilities and assets are all hypothetical and imaginary and this case is a case of no books and in absence of any such books of accounts it is the net profit that is to be estimated on gross sales ( at a fair rate ) and no further additions on any other heads are legally possible and he prayed for deleting the additions made u/s 68 on account of unsecured loans and partners capital .
In support of his argument he relied on the jurisdictional high court in the case of 1999 [2014] 223 taxman 24 ( P & H ) where the cannot rely upon any entry in the books of accounts for making any addition .
He further relied upon the decision of the Hon’ble Rajasthan High court in the case of CIT vs G K Contractor [2009] 19 DTR ( Rajasthan ) 305 order dated of 2009 , where the Hon’ble court has observed that no separate addition can be made u/s 68 of the Act 61 , on account of unexplained cash credit after rejection of books of accounts invoking provisions of section 145(3).
Before concluding the Ld. AR referred to the bank statement of HDFC bank and submitted that in the instant case the total cash deposited in bank during the FY is only Rs. 71.12 lakhs , ( including the meagre amount of Rs.18.07 lakhs during demo period ) , which are adequately covered by the voluminous sale proceeds of Rs.9.92 crores disclosed by the assessee, for the year under appeal, and the entries of withdrawal in the said bank statement reflects payments being made for purchase of goods from various sellers and as such the source of deposit in bank is explained to have come out of business sale proceeds of liquor trading.
The Ld. DR relied on the order of the Ld. first appellate authority, and submitted that on the facts of the case the net profit percentage determined by the Ld. CIT ( A )
@ 5% (FIVE percentage) on gross sales are justified and the same needs to be upheld , in absence of any documentary evidences and books of accounts maintained by the appropriate cases in taxing both the cash credit ( the source and nature of which is not satisfactorily explained) and the business income estimated after rejecting books of the assessee , and in support of his argument the Ld DR relied on the decision of the Hon’ble Supreme court in the case of Kale Khan Md Hanif v CIT [1963] 50 ITR – 1 ( SC ), and he prayed for sustaining the appellate order .
We have heard the rival submissions and considered the materials on record and we find that the entire assessment is based on figures supplied by the assessee in the form of a draft return , in course of assessment proceedings and the only authentic figures available are that of the purchase made by the assessee from various bonded warehouse dealing in IMFL and beer ( alcoholic liquor for human consumption ) , which is evident from the income tax portal in form 26AS against which TCS are collected by the sellers u/s 206C (1) of the Act 61, purchase figure totalling to Rs. 4.31 crores and the figure of state excise duty paid in Government treasury as certified by excise authorities at Rs. 4.89 crores ( both totalling Rs. 9.20 crores) against which sales are disclosed by the assessee at Rs.9.92 crores .
No return of income has been filed neither u/s 139(1) nor u/s 142(1), no regular books of accounts maintained, no tax audit report existing and no further documentary evidences produced / filed, and the concept of a draft return in income tax proceedings of Rs. 43.50 lakhs as appearing as liability is offset by the cash in hand figure of Rs.39.39 lakhs appearing as asset, in the so called draft return , which can only be termed as imaginary, and same is the case of partners capital and fixed assets , because no such assets actually exists and the business carried on for only one financial year has already closed down .
However, we are of the opinion that the profits generated by the partnership firm (un registered) from trading of alcoholic liquor for the financial year 2016-17, carried out under license granted by the State excise authorities, needs to taxed, at a fair percentage of Gross Sales, and the Gross sales as disclosed by the assessee and accepted by the department is Rs. 9.92 crores . Taking into account the comparative case cited by the assessee in the same nature of trading business carried out under similar circumstances within the same State , the nature and activity being identical , ( with almost matching turnover ) we are of the opinion that in the instant case net profit rate of 2.5% ( two point five percentage ) will meet the ends of justice , and we direct the AO to take the business profits from liquor trading @ 2.5 % of gross sales of Rs. 9.92 crores and the assessee will get consequential relief.
At this stage we would also like to refer to some judicial pronouncement , where it has been held that , when books of accounts are already rejected and recourse has been taken to section 145(3) of the Act 61, and gross profit has been estimated at fair percentage on sales, it is not open to the AO to rely upon the same rejected books of accounts, to make additions and or disallowance on other heads of expenditure.
Hon’ble Karnataka High Court in the case of CIT vs. Bahubali Neminath Muttin 388 ITR 608 (Karnataka HC) has observed as follows: relevant portion reproduced:
“Alternatively, and without prejudice to the preliminary objections raised above, he would submit that, on merits it should be noted that admittedly the books of accounts of the respondent have been rejected by the assessing authority. The profit of the respondent is estimated as provided under Section 145 (3) of the I.T. Act. When the gross profit rate is applied, it would cover any infirmity and there was no need for the Assessing Officer to make a scrutiny of the amounts incurred on the purchases by the respondent. In any event, the revenue would not be in a position to rely on the rejected books of account for making the additions on account of trade creditors and also for the purpose of arriving at a closing stock.”
This is the view taken by at least four High Courts in the following reported judgments:
“1. Indwell Constructions v. CIT [1998] 232 ITR 776 (AP) 2. CIT v. Banwari Lal Banshidhar [1998] 229 ITR 229 (All.) 3. CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246/2006] 156 Taxman 40 (Punj. & Har.) 4. CIT v. Amman Steel & Allied Industries [2015] 377 ITR 568 (Mad.)”
We also find that the Hon’ble Punjab and Haryana High Court in the case of CIT vs Dulla Ram (ITA No 122 of 1999) dated 22/10/2013 citations in 2013 (12) TMI 253, has held: (relevant portion)
Assessment Year: 2017-18 “Accounts books once rejected , are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue . Thus when account books are rejected . it would follow , as a necessary corrolary , that entries in the account books whether suspicious or not cannot be relied by the revenue or the assessee. To hold otherwise , would, in essence , render account books valid for certain purposes and invalid for others , a course impermissible in law.”
We also find that same view has been taken by the Hon’ble Gujrat High Court in the case of PCIT vs Kandla Steel Pvt Ltd (2023) 149taxmann.com224(Gujrat HC) dated 03/01/2023 (Relevant portion)
“ Having rejected the books of accounts of the assessee , the very same set of books could not have been relied upon for revealing the true profitability of the assessee , even though in part ie relating to the period exclusion the last month of the year , since admittedly the books were managed to book losses but also on account of booking expenses of loading and unloading through the year which were found not verifiable.
The basis adopted by the CIT(A) on the other hand we find is just and appropriate having considered the assessors profitability in preceding year and succeeding years and the profitability in this line of business.”
Respectfully following the law laid down by such judicial pronouncements , as stated above , we find that in the instant case before us the regular books of accounts itself is not existing and possibility of any credit entries in books does not arise and all deposits in HDFC bank are explained to have come out of sale proceeds of trading business and as such separate additions u/s 68 of the Act , on account of unsecured practical purpose the business profits are estimated at a fair percentage of gross Sales.
As such the additions on account of unsecured loans and partners capital, are hereby deleted.
In the result, the appeal of the assessee is partly allowed as indicated above.
Order pronounced in accordance with Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 as on 16.10.2025 Sd/- Sd/- (Manoj Kumar Aggarwal) (Udayan Dasgupta) Accountant Member Judicial Member *GP/Sr.PS* Copy of the order forwarded to: (1) The Appellant: (2) The Respondent: (3) The CIT concerned (4) The Sr. DR, I.T.A.T