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Facts
The assessee filed a return declaring income of Rs. 4,92,190/-. The Assessing Officer (AO) made additions totaling Rs. 22,48,000/- on account of various unsecured loans and gifts, citing Section 68 of the Income Tax Act, 1961. The CIT(A) partly allowed the appeal, and the assessee appealed further.
Held
The Tribunal held that additions u/s 68 of the Act cannot be made when the books of account are rejected and profit is estimated at a certain percentage, as this would account for all expenses. The Tribunal also noted that if books of account are rejected, no addition can be made u/s 68 in the absence of books of account.
Key Issues
Whether additions under Section 68 can be made when the assessee's books of account are rejected and income is estimated? Whether additions related to insurance deduction require verification?
Sections Cited
143(3), 68, 145(3), 250, 80C, 69
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Income Tax Appellate Tribunal, DELHI BENCHES : C : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI VIMAL KUMAR
ORDER PER VIMAL KUMAR, JM:
The appeal filed by the assessee is against the order dated 30.03.2015 of the ld. Commissioner of Income-tax (Appeals), Meerut [hereinafter referred to as the Ld. CIT(A)] u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the order dated 11.02.2013 of the ld. AO/ITO, Ward 1(3), Meerut (hereinafter referred to as ‘the ld. AO’) u/s 143(3) of the Act for Assessment Year 2010-11.
Brief facts of the case are that the assessee filed return on 30.09.2020 declaring income of Rs.4,92,190/-. The case was selected for scrutiny under CASS to examine various aspects of contractor’s business. Notice u/s 143(2) dated 13.09.2011 was issued. Notice u/s 142(1) dated 13.01.2012 along with a questionnaire was issued. Shri Harish Chand Mirg, FCA attended the proceedings, filed details and explanations. On completion of proceedings Ld. AO vide order dated 11.02.2013, made additions of Rs.16,00,000/-, Rs.50,000, Rs.18,000/- u/s 68 of the Act; Rs.1,30,000/- as unexplained gift; Rs.54,325/- Hire charges and Rs.5,00,000/- as unexplained deposit in the bank account.
Against the order dated 11.02.2013 of the ld. AO the appellant/assessee filed appeal before Ld. CIT(A) which was partly allowed vide order dated 30.03.2015.
Being aggrieved, the appellant-assessee preferred present appeal with the following grounds of appeal:-
1. That A.O. is in error in taking net profit rate @ 2.5% however, assessee has shown net profit rate @ 2.23% and make addition of Rs. 54,325/- is arbitrary, unjust and without basis and CIT(A) is not justified to confirm the same.
2. That when A.O. has taken net profit rate than other additions are unwarranted and against the case laws quoted by the assessee including Jurisdictional High Court Judgment therefore, order of the CIT(A) sustaining other additions are against the verdict of various High Court including Jurisdictional High Court are bad in law.
3. That without prejudice to ground no. 2, A.O. has not justified in making addition of Rs. 16,68,000 (16,00,000 + 50,000 + 18,000) is against the evidence filed by the assessee. However, addition made by A.O. was without considering the reply filed by the assessee.
4. That without prejudice to ground no. 2, CIT(A) is in error in confirming addition of Rs. (1,30,000 + 50,000) = Rs. 80,000/- without considering the facts and written submission of the assessee. Hence, order passed by A.O. as well as CIT(A) is without merit of the case.
5. That without prejudice to ground no. 2, A.O, has made addition of Rs.5,00,000 duly reflected in cash flow statement and the assessee also furnished copy of account therefore, addition made by the A.O. is without any basis and CIT(A) is in error in confirming the same.
6. That the A.O. has never asked the assessee to furnish the evidence Under Chapter VIA, the investment U/s 6A are duly reflected in the capital account of the assessee and the assessee is having proof of investment U/s 80C of I T. Act therefore, the addition on account of technical grounds is arbitrary, unjust and not according to law.
7. That the assessee has right to add, delete or modify any grounds during the appeal proceeding.”
The ld. Authorised Representative for the appellant-assessee submitted that:
5.1 Under grounds No.1 to 5, the appellant seeks to challenge the action of authorities below justifying the additions u/s 68 of Rs. 16,68,000/-, Rs.80,000/- and Rs.5,00,000/- aggregating Rs.22,48,000/-.
5.2 The addition of Rs. 16,00,000/- out of Rs.16,68,000/- is with regard to loan amount received from oner Sh Jawahar Singh. From the extract of bank account at page 5 of AO’s order, the correct amount received from Sh Jawahar Singh is Rs.15,00,000/- received in three tranches and same amount appears in list of unsecured loan extracted at page 3 of AO’s order. The Ld AO was not 3 justified in making addition of Rs.16,00,000/- whereas the amount received from above person was Rs.15,00,000/-. Copies of ledger account of above person along with ITR are at pages 70-75 and Affidavit and bank statement are at pages 69 & 76- 80 respectively.
5.3 The other amount of Rs.18,000/- from Sh Neel Singh represents brought forward opening balance which fact can be verified from ledger account at page 87 which shows that amount of Rs.18,000/- continue to appear as unsecured loan from financial year 2006-07 till 31.03.2010. The extract of bank account at page 5 of AO’s order will show that there are no such credits received from above person during the year under consideration.
5.4 Regarding the addition of Rs.50,000/-, ledger account (PB 81) along with ITRV (PB 84) was filed of Smt Ashu Thapar (wife of appellant) which shows that the above loan creditor has gross income of Rs.2,64,982/-. There was no reason to dispute the genuineness of transaction and creditworthiness when loan is received from wife having sufficient current year income.
5.5 The original addition was Rs. 1,30,000/- on account of gift received from wife of the appellant Smt Ashu Thapar. In support of claim of gift, ledger account (PB 85), confirmation (PB 82) and copy of ITR (PB 84) was filed as facts stated in page 3 of AO’s order. Still the Ld AO gives contradictory evidence that no evidence was filed in support of creditworthiness. Despite the above documents, undisputedly filed before the AO to prove creditworthiness of the donor, the lower authorities were not justified in giving a finding that no evidences were filed contrary to the above factual situation.
5.6 The above addition is on account of squared loan of Sh Raj Mal Thakur. During assessment proceedings, the above transaction of acceptance of loan and repayment of loan was found from analysis of the bank statement given in page 5 of AO’s order. During the proceedings before lower authorities particularly Ld CIT(A), the confirmation of account along with affidavit of loan creditor with his relevant period bank statement which are placed in paper book at pages 88- 101. Since, the above loan stands repaid during the year and it was duly acknowledged and verifiable from the bank statement of the above loan creditor at pages 93-94. The fact that loan was repaid during the year itself was accepted by Ld AO in its assessment order at page 6 therein. In view of above facts, the lower authorities was not justified in making addition u/s 68 of IT Act when loan was repaid for which reliance is placed in co-ordinate Bench decision in case of ITO vs RMP Holding P Ltd (authored by Hon’ble AM).
5.7 Without prejudice to above, the additions in question are since based on accounting entries found in the books of account of appellant assessee, the Ld AO was not justified in relying on such entries when the books of account from entries were found were rejected u/s 145(3) of IT Act. The AO at best has to compute profit @ 2.5% on all the credits in the bank account which aggregates 5 to Rs.2,18,17,820/-. The above case is covered by co-ordinate Bench decision in the case of Pawan Gupta vs ITO (authored by Hon’ble AM) wherein it was held no separate addition u/s 68 cannot be made when books of accounts are rejected and profit was computed at certain percentage. The Hon'ble High Court of Allahabad in the case of CIT vs. Banwarilal Banshidhar, 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".
5.8 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".
5.9 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". 6 5.10 Therefore, 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.
5.11 In any case without 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.)
5.12 It is also a case where additions were made u/s 68 when books of account are rejected meaning thereby that there are no books of account and therefore no addition can be made u/s 68 in absence of books of account.
5.13 Regarding ground No.6, the evidences of payment of insurance in support of claim of deduction under chapter-VIA for Rs.l,06,326/- are placed in paper book at pages 37-68 and the Ld AO may be directed to verify the same and allow the above deduction after verification.
The ld. Departmental representative relied on the orders passed by the Departmental authorities.
From examination of the record, in the light of the aforesaid rival contentions, it is crystal clear that the ld. AO made addition of Rs.16,68,000/-, Rs.80,000/- and Rs.5 lakh aggretating to Rs.22,48,000/- with regard to loan amount received from Shri Jawahar Singh, Shri Neel Singh, Smt. Ashu Thapar and Shri Raj Mal Thapar. The assessee had submitted copies of ledger account along with ITR. Ld. AO relied on entries found in the books of account of the appellant. A coordinate Bench in Pawan Gupta vs. ITO (supra) held that no separate addition u/s 68 of the Act can be made when books of account are not rejected and the profit was computed at certain percentage. Therefore, the additions made by the ld. AO u/s 68 of the Act rejecting books of account and making addition on the basis of the entries in the books of account being illegal are set aside. The grounds of appeal No.1 to 5 are allowed.
8. Regarding the addition of Rs.1,06,336/- on account of payment of insurance, in view of pages No.37 to 68 of the paper book, the same requires to be verified. Therefore, the matter is restored to the file of the ld. AO for passing a fresh order after affording fair opportunity of hearing to the assessee. Accordingly, ground No.6 is allowed for statistical purposes.