Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI S. JAYARAMAN
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER
ITA No. 219/Bang/2014 Assessment Year: 2007-08 Shri Mallanagouda S. Sankagoudashani, No.222, 2nd Floor, The Deputy Commissioner of Bhavani Arcade, Income Tax, Vs. Near Basav Vana, N.C.M., Circle 1(1), Hubli – 580 029. Hubli.
PAN: AEUPS 7783Q APPELLANT RESPONDENT
ITA No. 291/Bang/2014 Assessment Year: 2007-08 Shri Mallanagouda S. Sankagoudashani, The Assistant Commissioner of No.222, 2nd Floor, Income Tax, Bhavani Arcade, Vs. Circle 1(1), Near Basav Vana, N.C.M., Hubli. Hubli – 580 029. PAN: AEUPS 7783Q APPELLANT RESPONDENT
Appellant by : Shri Ashok Kulkarni, Advocate Respondent by : Shri G. Kamaladhar, Standing Counsel
Date of hearing : 22.02.2017 Date of Pronouncement : 28.04.2017
ITA Nos. 219 & 291/Bang/2014 Page 2 of 38
O R D E R Per Bench
These cross appeals are directed against the order dated 29.11.2013 of
CIT(A) for the assessment year 2007-08. First we take up the appeal filed by
the assessee wherein the assessee has raised the following grounds.
ITA Nos. 219 & 291/Bang/2014 Page 3 of 38
ITA Nos. 219 & 291/Bang/2014 Page 4 of 38
ITA Nos. 219 & 291/Bang/2014 Page 5 of 38
Ground no. 1 is general in nature and does not require any specific adjudication.
Ground nos. 2 and 3 are regarding validity of reopening. There was a survey u/s. 133A of the Act in the case of the assessee on 01.03.2011. During the course of survey certain incriminating documents, diaries were found and impounded. On verification of entries made in the impounded diaries it was observed that the receipts relating to contract business was under stated in the return of income. Hence the AO proposed to reopen the assessment by issuing a notice u/s. 148 on 20.10.2011. In response to notice u/s. 148 the assessee filed a letter dated 21.11.2011 stating that the return of income filed on 30.09.2009
ITA Nos. 219 & 291/Bang/2014 Page 6 of 38 may be treated as return filed in response to the notice u/s. 148. The AO completed the assessment u/s. 143(3) r.w.s. 147 on 19.03.2013 thereby making various additions on account of receipts recorded in the diary as well as unexplained receipts. The assessee challenged the action of the AO before the CIT(A) including the validity of reopening. The CIT(A) rejected the objection of the assessee and upheld the reopening of assessment u/s. 147.
Before us the ld. AR of the assessee has submitted that the alleged item of income for escapement of which the assessment was reopened were not brought to tax by the Assessing Officer in the impugned assessment order. Therefore it is submitted that the very exercise of reopening of the assessment is rendered infructuous and unsustainable in law. He has further contended that when the Assessing Officer has not made any addition on the issue for which the assessment was reopened to brought to tax then no addition can be made in the reassessment proceedings. In support of his contention he has relied upon the decision of Hon’ble Bombay High Court in case of CIT Vs Jet Airways (I) Ltd. (331 ITR 236) and submitted that when the AO has formed a reason to believe that income has escaped assessment and has issued a notice u/s. 148 on certain specific issues however, if after issuing notice u/s. 148 he accepted the contention of the assessee and holds that the income which
ITA Nos. 219 & 291/Bang/2014 Page 7 of 38 he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment it was not open to him to assess or reassess any other income which may have escaped assessment but which did not form the subject matter of notice u/s. 148. Thus, the ld. AR has contended when the AO has not assessed any income on the issue which was subject matter of notice u/s. 148 then it is not permissible to assess or reassess any other income not subject matter of notice u/s. 148. He has also relied upon the decision of 15/04/2015 of coordinate bench of this Tribunal in case of M/s. A.M. Constructions Vs DCIT in ITA No. 177/Bang/2014 and submitted that the coordinate bench has decided an identical issue in favour of the assessee by following the decision of Hon’ble Bombay High Court in case of CIT Vs Jet Airways (I) Ltd. (supra).
On the other hand, the ld. DR has relied upon the decision of Hon’ble jurisdictional High Court in case of N. Govindaraju Vs ITO (377 ITR 243) and submitted that the Hon’ble High Court has held that if the notice issued u/s. 148 was found to be valid then the foundation remains and the proceedings on the basis of such notice can go on. It becomes the duty of the AO to bring to tax the entire income including any other income which may have escaped assessment and come to his notice
ITA Nos. 219 & 291/Bang/2014 Page 8 of 38 during the course of proceedings initiated u/s. 147 of the Act. Thus, the
ld. DR has submitted that in view of the decision of Hon’ble
jurisdictional High Court the reassessment cannot be challenged on this
ground.
We have considered the rival submissions as well as relevant material
on record. The only objection raised by the assessee against the validity
of reassessment is that when the AO has not made an addition in respect
of the item of income on which the assessment was reopened than the
other addition in the reassessment is not sustainable. At the outset, we
note that though the assessee has relied upon the decision of Hon’ble
Bombay High court in case of CIT Vs Jet Airways (I) Ltd. (supra)
however the Hon’ble jurisdictional High Court in case of N.
Govindaraju Vs ITO (supra) while dealing with an identical issue has
held in para 41 to 44 as under.
“41. Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 is for the benefit of the Revenue and not the assessee and is aimed at garnering the escaped income of the assessee [viz. Sun Engg. (supra )] and also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to 'such income' and the other to 'any other income') are to be read independently. The phrase 'such income' used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase 'any other income' used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has come to the notice of the Assessing Officer subsequently during the course of the proceedings, which can be assessed independent of
ITA Nos. 219 & 291/Bang/2014 Page 9 of 38 the first part, even when no addition can be made with regard to 'such income', but the notice on the basis of which proceedings have commenced, is found to be valid. 42. In the end it was vehemently argued by the learned counsel for the appellant that the reason to be given under sub-section (2) of section 148 would be the very foundation of the issuance of notice and if it is false or baseless, then everything goes and the structure erected on such foundation would crumble. 43. It is true that if the foundation goes, then the structure cannot remain. Meaning thereby, if notice has no sufficient reason or is invalid, no proceedings can be initiated. But the same can be checked at the initial stage by challenging the notice. If the notice is challenged and found to be valid, or where the notice, is not at all challenged, then in either case it cannot be said that notice is invalid. As such, if the notice is valid, then the foundation remains and the proceedings on the basis of such notice can go on. We may only reiterate here that once the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income (including 'any other income') which may have escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act. 44. In view of the aforesaid, we answer the first two substantial questions of law in favour of the Revenue and against the assessee.”
Since this issue is now covered by the decision of Hon’ble jurisdictional
High Court (supra) which is a binding precedent for us therefore we
decide this issue against the assessee. Consequently the ground nos. 2
and 3 of the assessee’s appeal are dismissed.
Ground nos. 4 to 6 are regarding the addition made on account of
receipts from the bank account of M/s. P.R. Nayak Associates. The AO
in the assessment order has stated that in the impounded diaries the
assessee recorded receipts from M/s. P.R. Nayak Associates. On query
the assessee vide letter dated 06.02.2013 explained that he was looking
ITA Nos. 219 & 291/Bang/2014 Page 10 of 38 after the minor bridge work allotted to M/s. P.R. Nayak Associates and he has carried out work to the extent of Rs. 85,83,438/- on which the
assessee offered to declare net profit at 1% on the total work executed by him. The AO issued a letter to M/s. P.R. Nayak Associates to confirm the contract work given to the assessee and also the payments
made to the assessee against such work. M/s. P.R. Nayak Associates vide letter dated 16.02.2013 stated that they have not entrusted any work to assessee during the said Financial Year. The assessee again
vide letter dated 28.02.2013 reiterated its stand that he has carried out the work of M/s. P.R. Nayak Associates and payment against such work were made by utilizing the money drawn through self cheques of
M/s. P.R. Nayak Associates. The assessee also stated that the amount withdrawn from the bank account of M/s. P.R. Nayak Associates in aggregate is Rs. 94,77,000/- which was used for the purpose of contract of M/s. P.R. Nayak Associates. The AO did not accept the contention
and explanation of the assessee on the ground that when M/s. P.R. Nayak Associates has refused to pay any amount to the assessee as well as entrusted any work to the assessee then the assessee has failed to
explain the source of receipt of that amount of Rs. 94,77,000/-. The AO accordingly made an addition of said amount of Rs. 94,77,000/-. The assessee challenged the action of the AO before the CIT(A) and
ITA Nos. 219 & 291/Bang/2014 Page 11 of 38 reiterated its contention that the amount recorded in the diary is also matching with the bank entries of M/s. P.R. Nayak Associates. It was further explained that M/s. P.R. Nayak Associates had undertaken the work of National Highway 218 Bijapur, Hubli and the assessee in turn was doing the work for National Highway 218 Bijapur, Hubli at Kilometer 172-400. This work was allotted to M/s. P.R. Nayak by the National Highway Authority. The CIT(A) did not accept the explanation of the assessee on the ground that Shri P.R. Nayak the partner of M/s. P.R. Nayak Associates was examined by the AO in the presence of the assessee who has denied the fact that he has given a contract work to the assessee or issued any cheque to the assessee.
Before us the ld. AR of the assessee has referred to the break-up of the amounts received and diary entries as reproduced by the CIT(A) at page 12 and 13 of the impugned order. He has also referred to the details of the diary entries as well as the entries of the bank account of Mr. P.R. Nayak maintained with Syndicate Bank, Vidyanagar Branch, Hubli and submitted that there is total identity in the diary entry and entries in the Syndicate Bank account of Shri P.R. Nayak as well as in the book of M/s. P.R. Nayak Associates with dates and amounts. The entries in the diary aggregating to Rs. 85,83,428/- along with the narrations that “Ch.
ITA Nos. 219 & 291/Bang/2014 Page 12 of 38 To Synd Bank of PRN Associates” clearly show that these amounts were nothing but representing the withdrawal aggregating to Rs.
94,77,000/- tally strictly with bank account of M/s. P.R. Nayak Associates on both respect amounts and datewise. He has further submitted that cheque leaves some of them signed and few blank and
undated of M/s. P.R.N. Associates relating to the Syndicate Bank were found in the assessee’s premises during survey. The ld. AR has further submitted that the current account no. 12013070000337 with Syndicate
Bank, Vidyanagar Branch, Hubli belongs to M/s. P.R. Nayak Associates and this fact is admitted by Shri P.R. Nayak in his statement. The ld. AR has further pointed out that M/s. P.R. Nayak Associates
have entered into an agreement dated 16.12.2005 with the assessee for the purpose of execution of the said contract work. A copy of the said agreement has been placed at page 79 to 81 of the paper book. The assessee and Shri P.R. Nayak have studied together and also enjoyed
long standing friendship and relationship. Therefore the assessee did not choose to cross examine Shri P.R. Nayak. Thus, the ld. AR has submitted the assessee has proved from the record that this amount as
recorded in the diary was received from M/s. P.R. Nayak Associates from their current account in Syndicate Bank on account of executing the Highway work awarded to Shri P.R. Nayak by the National
ITA Nos. 219 & 291/Bang/2014 Page 13 of 38 Highway Authority. Therefore it is pleaded that the addition made by the AO of Rs. 94,77,000/- be deleted.
On the other hand, the ld. DR has referred to the finding of the CIT(A) and submitted that despite the opportunity given by the AO, the assessee did not choose to cross examine Shri P.R. Nayak who has stated in his statement recorded in the presence of the assessee that he has not given any contract work to the assessee. Thus Shri P.R. Nayak has categorically denied the fact of giving any contract work or issue any cheque to the assessee. The ld. DR has further contended that the assessee’s explanation was found to be not correct and therefore the assessee failed to explain the source of the said amount of Rs. 94,77,000/-. He has relied upon the orders of the authorities below.
We have considered the rival submissions as well as relevant material on record. During the course of survey u/s. 133A conducted on 01.03.2011 a diary was impounded from the place of the assessee wherein various receipts relating to contract business in the name of M/s. P.R. Nayak Associates were found. The AO has made an addition on this account of Rs. 94,77,000/-. The assessee explained before the authorities below that these receipts are related to the contract work carried out by the assessee on behalf of M/s. P.R. Nayak Associates
ITA Nos. 219 & 291/Bang/2014 Page 14 of 38 relating to National Highway Bijapur,Hubli. The assessee has further explained that only a small commission of 1% was paid to the assessee.
To verify the explanation of the assessee the AO summoned Shri P.R. Nayak and recorded his statement. In the said statement Shri P.R. Nayak has denied having sub contracted the work to the
assessee or issued any cheque to the assessee in respect of the said amount of Rs. 94,77,000/-. Since the assessee did not cross examine Shri P.R. Nayak therefore the AO rejected the explanation of the
assessee and made the said addition. It is pertinent to note that the assessee has clearly brought out on record the material to show that all the entries as recorded in the diary found during the survey are
matching with the entries in the bank account of M/s. P.R. Nayak Associates and submitted that the datewise entries in the diary are matching with the entries in the bank account of M/s. P.R. Nayak Associates. Thus the assessee claimed that the evidence furnished by
the assessee goes to prove that the cash receipts were received from M/s. P.R. Nayak Associates in respect of the contract work of National Highway Bijapur, Hubli. We further note that the AO has not disputed
this fact that M/s. P.R. Nayak Associates were awarded the contract work in respect of the National Highway Bijapur, Hubli at Kilometer 172-400 of National Highway 218 Bijapur, Hubli road by the National
ITA Nos. 219 & 291/Bang/2014 Page 15 of 38 Highway Authorities. Further, during the course of survey some
cheques were also found signed by M/s. P.R. Nayak Associates which
were not encashed by the assessee and this fact supports the explanation
of the assessee that the assessee received the payment in question from
Shri P.R. Nayak. The assessee filed the bank statement of M/s. P.R.
Nayak Associates. We find that the CIT(A) has reproduced the details
of the diary entry at page 12 and 13 as under.
ITA Nos. 219 & 291/Bang/2014 Page 16 of 38
The dates and amounts as recorded in the diary are identical to the entries in the bank account of M/s. P.R. Nayak Associates and therefore it leaves no iota of doubt about the fact that the entries in the diary are identical and completely matching with the entries in the bank account of M/s. P.R. Nayak Associates in respect of dates and amounts. Further, it is also not in dispute that some of the cheque leaves signed and blank relating to M/s. P.R. Nayak Associates from its bank account with Syndicate Bank were also found during the survey. The copies of these cheque leaves are placed by the assessee at page nos. 74 to 78 of Paper Book. Therefore the presence of these cheques in the office of the assessee shows that Shri P.R. Nayak was having business dealing with the assessee and this fact is supported by the agreement between the assessee and M/s. P.R. Nayak Associates for the purpose of execution of the contract work of National Highway. The copy of the agreement has been placed at page nos. 79 to 81 of the paper book. Though Shri P.R. Nayak denied in his statement having given any contract to the assessee as well as cheques in question however the evidence produced by the assessee proves contrary and also falsify the statement of Shri P.R. Nayak. It appears that Shri P.R. Nayak denied the awarding of execution of contract to the assessee due to the fact that
ITA Nos. 219 & 291/Bang/2014 Page 17 of 38 it may be in violation of the terms and conditions of the contract awarded by the National Highway Authority to M/s. P.R. Nayak
Associates. The evidence on record establishes the fact of relationship between the assessee and M/s. P.R. Nayak Associates and further the matching of the entries in the diary with the entries in the bank account
of M/s. P.R. Nayak Associates establish the said relationship of execution of the work by the assessee on behalf of M/s. P.R. Nayak Associates. We further note that in the diary, found and impounded
during the survey, the receipts in question were recorded along with the description as “Cash by PRN Associates Syndicate Bank” and therefore all these entries were recorded in the diary with narration received from
Syndicate Bank account of M/s. PRN Associates. When the AO has made an addition on the basis of these entries then the entire entry in the diary has to be taken into account. If we see the complete details of the entries in the diary it explains the source of receipts recorded in the
diary and therefore the explanation recorded in the diary itself cannot be denied when the amount recorded in the diary as receipt is accepted by the AO. When a document is found during the survey and impounded
then the document is either completely accepted in toto or is denied in toto. In the case in hand, the explanation as recorded in the diary is also supported by the entries in the bank account of M/s. P.R. Nayak
ITA Nos. 219 & 291/Bang/2014 Page 18 of 38 Associates. Therefore in view of the facts and circumstances of the case, when the diary entries itself are self-explanatory to the source of receipts and further it is supported by the matching entries in the bank account of M/s. P.R. Nayak Associates then accepting the amount from the diary entries and rejecting the explanation by the AO is not justified. Accordingly, we decide this issue in favour of the assessee and delete the addition made by the AO on this account.
Ground no. 7 is regarding the adoption of 9% Gross Profit in respect of sale of material. The AO made an addition of Rs. 51,08,557/- as receipts recorded in the impounded diaries which are not reflected in the regular books of account. The assessee explained before the AO that the amount was received towards sale of materials. Since the assessee did not furnish the details and supporting documents to prove that the said receipts was received towards sale of material the AO has made an addition of the entire amount of Rs. 51,08,557/-. The assessee challenged the action of the AO before the CIT(A) and contended that the receipts shown in the diary were towards sale of material for civil contract work made outside books which was also explained by the assessee that the corresponding payments made towards purchase of similar material was also recorded in the diary and therefore the entries
ITA Nos. 219 & 291/Bang/2014 Page 19 of 38 aggregating to Rs. 1,42,08,990/- are representing both in the diary and in the regular books with identity in names, dates and value total amounting to Rs. 63,03,554/-. Thus the assessee contended that this item of Rs. 63,03,554/- appears in the regular books of account which was left out by the AO while making the addition. The CIT(A) after considering the relevant record as well as submissions of the assessee has directed the AO to take average gross profit at 9% on total sale of material including Jelly and therefore the income has to be computed accordingly. Thus, the CIT(A) has granted substantial relief by restricting the addition only to the gross profit on the sale of material instead of the entire amount added by the AO.
Before us the ld. AR of the assessee has submitted that the CIT(A) after taking into consideration the GP ratio on various materials suppliers has directed the AO to take the average GP at 9%. However even if the instances as taken by the CIT(A) are considered the average GP of the comparable parties comes to less than 6% whereas the CIT(A) has arbitrarily adopted the GP at 9%. The ld. AR has further submitted that an identical issue has been considered by this Tribunal in assessee’s own case for the assessment year 2006-07 vide order dated 30.11.2015 in ITA No. 904/Bang/2015. Thus the ld. AR has submitted that the
ITA Nos. 219 & 291/Bang/2014 Page 20 of 38 average GP should have been taken at 5.5% instead of 9% taken by the CIT(A).
On the other hand, the ld. DR has relied upon the order of the AO and submitted that when the assessee has failed to explain the details and particulars of the parties to whom the alleged material were sold then the AO is justified in making the addition of the entire amount.
We have considered the rival submissions as well as relevant material on record. We find from the entries in the diary that the receipts as well as payments were recorded simultaneously at the same page of the diary and therefore it is clear that these receipts and payments are representing the purchases and sale of the material. The AO has taken only the receipt part of the diary entries and ignored the payment part. The CIT(A) after considering the relevant record found that these receipts are representing the sale of material for construction work like steel, cement etc and therefore the CIT(A) has asked the assessee to furnish the GP details from the local market which were furnished by the assessee as reproduced by the CIT(A) at page 27 of the impugned order as under.
ITA Nos. 219 & 291/Bang/2014 Page 21 of 38
Though the CIT(A) has considered the GP details furnished by the
assessee however instead of taking the average of the these GP details
the CIT(A) has adopted the GP at 9%. We find that the said adoption
of 9% of GP is without any basis and rather contrary to the material on
record / evidence. We further note that the coordinate bench of this
Tribunal in assessee’s own case for the assessment year 2006-07 vide
order dated 30.11.2015 while dealing an identical issue has held in para
11 to 14 as under.
“11. Before the CIT(Appeals), the assessee relied on the order of the CIT(Appeals) for the A.Ys. 2007-08 to 2011-12 and contended that a suitable rate of profit towards sale of material has to be considered and not whole of the receipts. The assessee furnished GP details from the local market which is as follows:-
ITA Nos. 219 & 291/Bang/2014 Page 22 of 38
Average Gross Profit for Steel was given at (6.08 to 7.56%), for Cement the Average Gross Profit was given at (3.33 to 5.09%) and for Jelly no average Gross Profit was given. The CIT(A) directed the AO to take average Gross Profit at 9% on total sale of materials including Jelly and compute income accordingly. Thus, this issue was partly allowed by the CIT(A). 13. Aggrieved, the assessee is in appeal before us. 14. We have heard both the parties. We find from the GP details from the local market furnished before the CIT(Appeals) that average GP is 5.5% approximately and hence we are of the opinion that the CIT(A) was not justified in adopting GP at 9% on total sale of materials including jelly. Hence, the AO is directed to work out the GP rate at 5.5% on sale of materials instead of 9% directed by the CIT(A).”
In view of the above facts and circumstances of the case as well as the
decision of the coordinate bench of this Tribunal in assessee’s own case
we direct the AO to work out the GP rate at 5.5% on sale of material
instead of 9% directed by the CIT(A).
ITA Nos. 219 & 291/Bang/2014 Page 23 of 38 18. Ground no. 8 is regarding addition on account of receipts and deposits
relating to ICICI Bank. We have heard the ld. AR as well as ld. DR and
considered the relevant material on record. At the outset, we note that
an identical issue was considered by the coordinate bench of this
Tribunal in assessee’s own case for the assessment year 2006-07 vide
order dated 30.11.2015 in para 23 as under. “ 23. We have heard both the parties. We are of the opinion that one more opportunity is to be afforded to the assessee to explain his case before the AO as it is stated that the assessee has sufficient withdrawals from his capital account and the source is explained. We therefore restore this issue to the file of the Assessing Officer for fresh examination after giving an opportunity of being heard to the assessee.”
In view of the earlier order of this Tribunal we set aside this issue to the
record of the AO for fresh examination and adjudication after giving an
opportunity of hearing to the assessee.
Ground no. 9 is regarding cash withdrawn / deposited in bank of Rs.
2,80,000/-. The AO has made an addition of cash deposits in the State
Bank of Mysore of Rs. 2,80,000/-. The assessee challenged the action
of the AO before the CIT(A) and submitted that when all the receipts
recorded in the diary has been brought to tax or separately considered
by the AO then the deposit in bank has no element of income. Further
the assessee explained that there is corresponding withdrawal from
ITA Nos. 219 & 291/Bang/2014 Page 24 of 38 bank and therefore only the deposit side of the bank cannot be considered as income of the assessee by ignoring the corresponding withdrawal from the bank. The CIT(A) did not accept the contention of the assessee and confirmed the addition made by the AO.
Before us the ld. AR of the assessee has pointed out the details of transfer from Cash Credit account to his own Savings Bank Account of Rs. 1,50,000/- which is also reflected in the diary entry with a narration that SBM Cash credit to Savings Bank Account. The ld. AR has submitted that the actual transfer took place on 26.06.2006 but in a slightly larger sum of Rs. 1,75,000/- which is also recorded in the regular books of account and also in the respective bank accounts. Similarly, in respect of Rs. 1,00,000/- dated 23.10.2006 the assessee instructed the accountant at site to deposit the said amount in the bank account. However the accountant carried out the instruction only on 31.10.2006. Therefore there is a difference in the entry in the diary and the amount deposited in the bank. Hence the ld. AR has submitted that this amount of Rs. 2,50,000/- cannot be considered as unexplained income of the assessee as the assessee has explained the approximate dates of deposit in the bank. The ld. AR has further submitted that other two entries of Rs. 15,000/- each on 18.12.2006 and 23.11.2006 represents the same entries drawn from the ATM with reference to bank
ITA Nos. 219 & 291/Bang/2014 Page 25 of 38 account disclosed in the books or the undisclosed bank account with the ICICI. Hence the entire sum Rs. 2,80,000/- cannot be treated as unexplained income of the assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the assessee has not shown these deposits in the regular books of accounts and also not filed any evidence in support of his claim. Therefore the addition made by the AO is justified.
We have considered the rival submissions as well as relevant material on record. The AO made the addition on account of the deposits made in the bank account of Rs. 2,80,000/-. We find that the assessee has claimed that the corresponding withdrawal from the bank as well as the entries in the diary representing the same amounts should be considered as the explanation of the said deposits. Though there is no direct correlation between the entries in the diary and deposits in the bank as the dates varies however, we find that the withdrawal from the bank has to be taken into account while making an addition on account of deposit in the bank. Accordingly, we direct the AO to allow the adjustment to the extent of the cash withdrawal from the bank as a source of subsequent deposits.
ITA Nos. 219 & 291/Bang/2014 Page 26 of 38
Ground no. 10 is regarding the addition of Rs. 1,00,000/-. The AO has made an addition of Rs. 1,00,000/- as unexplained receipts on the basis of the diary entry no. 184 dated 28.09.2006. There is no noting in the diary against the said entry of Rs. 1,00,000/- therefore the AO has made an addition of the said amount for want of explanation. The assessee challenged the action of the AO before the CIT(A) however could not succeed.
Before us the ld. AR of the assessee has submitted that this entry dated 28.09.2006 of Rs. 1,00,000/- was also cancelled and therefore it does not represent any income taxable in the hand of the assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the assessee did not furnish any explanation regarding the said entry of Rs. 1,00,000/- in the diary. Even there is no noting in the diary against the said entry. Thus the AO is justified in making the addition.
We have considered the rival submissions as well as relevant material on record. The AO on verification of the diary noticed that certain receipt entries are available in the diary which has been reproduced by the CIT(A) at page 35 as under.
ITA Nos. 219 & 291/Bang/2014 Page 27 of 38
Entry No Date Amount Particulars Cash by Corp. Bank (however 179 22.08.06 900,000 entry scratched) Entry is in diary (but no notings 184 28.09.06 100,000 are made against it) 191 09.11.06 70,000 DD (however entry scratched)
Since the other entries were shown as cancelled in the diary therefore
the AO has not made any addition except the entry dated 28.09.2006 of
Rs. 1,00,000/-. We find that the only explanation furnished by the
assessee before the authorities below is that the transaction did not take
place whereas the entry itself in the diary does not reflect such
cancellation as in the case of other entries cancelled or deleted.
Therefore in the absence of explanation and further the transaction not
recorded in the books of accounts we confirm the addition made by the
AO and CIT(A).
Ground nos. 11 and 12 are regarding the disallowance made u/s.
40A(3).
We have heard the ld. AR as well as ld. DR and considered the relevant
material on record. At the outset, we note that an identical issue has
ITA Nos. 219 & 291/Bang/2014 Page 28 of 38
been considered by the coordinate bench of this Tribunal in the
assessee’s own case for the assessment year 2006-07 vide order dated
30.11.2015 in para 24 to 29 as under.
“24. The next ground of appeal is regarding the addition of a sum of Rs.6,16,351 u/s. 40A(3). The AO observed from the details of expenses and party payment towards materials that assessee made cash payments to various parties exceeding Rs.20,000 in contravention of the provisions of section 40A(3). The aggregate of such payments worked out to Rs.30,81,756. The AO was of the view that the said payments are allowed to be set off against unexplained receipts and hence the same are required to be disallowed u/s. 40A(3). Hence disallowance of Rs.30,81,756 was made by the AO u/s. 40A(3). By the rectification order u/s. 154 dated 21.2.14, disallowance u/s. 40A(3) of Rs.30,81,756 was restricted to Rs.6,16,351 being 20% of the payment made in contravention of provisions of section 40A(3). 25. The CIT(A) upheld the addition made by the AO in the absence of details of cash payments to different parties and the circumstances under which the assessee made the cash payment in support of the assessee’s claim. 26. The ld. counsel for the assessee reiterated the submissions made before the lower authorities that invoking of the provisions of section 40A(3) and the addition of Rs.6,16,351 is unjustified since it has not been shown that any part of the payments as reflected in the diary represents expenditure claimed as a deduction in computing income under the head of “business” or “other sources”. It was submitted that every payment per se is not liable to action u/s. 40A(3) unless it falls within the realm of claimed expenditure with respect to the above two heads. 27. The ld. counsel for the assessee relied on the decision of the Hon’ble Allahabad High Court in the case of CIT v. Banwari Lal Banshidhar, 229 ITR 229 (All) at page 232. He also relied on the decision of the Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions v. CIT, 232 ITR 776 (AP) wherein it was held as under:- ““. . . The question arises whether in such a case any deduction on account of purchases is at all allowed to the assessee, though it may be true that a gross profit rate of
ITA Nos. 219 & 291/Bang/2014 Page 29 of 38 15 per cent was fixed keeping in view all relevant facts including the purchases made by the assessee. Inasmuch as we are of the view that no deduction as such having been allowed to the assessee on account of purchases, we hold that no question of any disallowance on account of purchase can be made in this case under section 40A(3).” 28. The ld. DR objected to the submission of the assessee stating that with respect to both contract and trading, estimate was u/s. 40A(3) and assessee’s claim that sec. 40A(3) would be inapplicable can be restricted only to the trading portion, whose GP was determined at 9%, cannot be accepted. He argued that section 40A(3) would apply to the contract and trading receipts. 29. We have heard both the parties. We agree with the claim of assessee that once there has been an estimate, all the deductions are deemed to have been taken into account while making such estimate and hence no separate addition can be made. However, whether the estimate is only for trading part of the assessee’s business or it is also towards contract part of the business is to be verified by the AO. In these circumstances, we deem it fit to set aside the issue to the file of the Assessing Officer with a direction to redo the assessment following the decision in the case of Indwell Constructions (supra).”
The ld. AR of the assessee has submitted that though the matter was set
aside by the Tribunal to the record of the AO for reconsideration of the
issue in the light of the decision of Hon’ble Andhra Pradesh High Court
in the case of Indwell Constructions v. CIT, 232 ITR 776 (AP),
however the latest decision of Madras High Court in case of CIT Vs
Amman Steel and Allied Industries (377 ITR 568) is directly on the
point. He has relied upon the said decision of Hon’ble Madras High
ITA Nos. 219 & 291/Bang/2014 Page 30 of 38 Court. In view of the facts and circumstances of the case as well as the decision of the coordinate bench of the Tribunal we set aside this issue to the record of the AO with similar directions as given by the coordinate bench for the assessment year 2006-07. The AO is further directed to reconsider this issue by considering the order of the Tribunal as well as the decision of the Hon’ble Madras High Court in case of CIT Vs Amman Steel and Allied Industries (supra).
Ground no. 13 is regarding the addition on account of gift received of Rs. 10,00,000/-. During the previous year relevant to the assessment year under consideration the assessee received the gift from Shri N.G. Patil of Rs. 5,00,000/- and Shri B.G. Patil of Rs. 5,00,000/-. The assessee explained that Shri N.G. Patil and Shri B.G. Patil are brothers- in-law of the assessee and therefore when the donors have confirmed the transaction of gift then no addition can be made in this respect. The AO did not accept the explanation of the assessee and made the addition of Rs. 10,00,000/-. The assessee challenged the action of the AO before the CIT(A) but could not succeed.
Before us the ld. AR of the assessee has submitted that the assessee filed the confirmation before the authorities below wherein the donors have confirmed the gifts in question. He has further submitted that the
ITA Nos. 219 & 291/Bang/2014 Page 31 of 38 donors are relative of the assessee and the genuineness of the transaction cannot be doubted. These gifts in cash were made to the assessee who is sister’s husband of the donors. The assessee has explained the source, credit worthiness of the donors as agriculture land holdings of the donors. The AO has straightway rejected the explanation of the assessee without examination of the credit worthiness of the donors.
On the other hand, the ld. DR has submitted that the assessee has not submitted any evidence to prove the genuineness of the gifts and the credit worthiness of the donors. Since the gifts are shown as received in cash therefore the genuineness of the transaction is not proved. He has relied upon the orders of the authorities below.
We have considered the rival submissions as well as relevant material on record. The assessee has explained the transaction of gift by filing the confirmation from the donors placed at page 86 and 87 of the paper book. Both the donors are close relative of the assessee being the brothers of the wife of the assessee. We find that once the assessee has produced the confirmation letter from the donors then the further examination and investigation was required to be conducted by the AO. In this case the AO has not examined the donors regarding the
ITA Nos. 219 & 291/Bang/2014 Page 32 of 38 genuineness of the gift and the credit worthiness of the donors. Accordingly, in the facts and circumstances of the case and in the case of justice we set aside this issue to the record of the AO for proper verification and investigation by examination of the donors on this issue. Needless to say the assessee be given appropriate opportunity of hearing.
Ground no. 14 is regarding an addition of Rs. 27,748/- representing the amounts collected for and on behalf of Dharwad District Contractors Association. This amount was found recorded in the diary but not reflected in the books of account therefore the AO has made the addition of said amount of Rs. 27,748/-. The assessee challenged the action of the AO before the CIT(A) and explained that this amount represents the collection for and on behalf of Dharwad District Contractors Association (DDCA) however the CIT(A) was not impressed by the explanation of the assessee and held that the assessee has not filed the details with supporting evidence for incurring such expenditure.
Before us the ld. AR of the assessee has submitted that the entries in the diary clearly mention the cheques / cash are collected on behalf of the Association. He has referred to the diary entries and submitted that
ITA Nos. 219 & 291/Bang/2014 Page 33 of 38 there is noting against each receipt that cheque by DDCA or cheques issued by other members for DDCA. Thus the ld. AR has submitted that this amount represents only the collection for and on behalf of the DDCA. The assessee being the president of the DDCA has collected this fund contributed by members of the Association therefore this amount cannot be treated as income of the assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that when the assessee has not produced any evidence then it was rightly added to the income of the assessee.
We have considered the rival submissions as well as relevant material on record. The AO has made the addition of this amount of Rs. 27,748/- on the basis of the diary entries. We find that the entries recorded in the diary also contains the narrations and explanation of nature of transaction. It is manifest from the noting against each entry that these are the receipts collected by the assessee on behalf of DDCA. The AO has not disputed these narrations in the diary. We also find that the entries in the diaries are self-explanatory and therefore the nature of these entries cannot be disputed when the addition itself is based on the diary entries. The AO is not permitted to take only the amount of the diary entries by ignoring the other details. Therefore if
ITA Nos. 219 & 291/Bang/2014 Page 34 of 38 the diary entry is the basis of addition then the entire details of the diary entry is to be taken into account. Accordingly in view of the fact that these diary entries are self-explanatory as collection for and on behalf of DDCA and the assessee being the president of DDCA has collected this amount on behalf of the Association the addition is not justified. Accordingly, the said addition is deleted.
The revenue has raised the following grounds.
ITA Nos. 219 & 291/Bang/2014 Page 35 of 38 37. Ground no. 1 is general in nature and does not require any specific adjudication.
Ground nos. 2 and 3 are regarding the addition restricted by the CIT(A) to GP at the rate of 9%. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The issue raised in these grounds is common as raised by the assessee in ground no. 7 of the assessee’s appeal. In view of the finding on this issue in the assessee’s appeal these ground nos. 2 and 3 of the revenue’s appeal stands dismissed.
Ground nos. 4 and 5 are regarding the set off unexplained receipts of hand loan against the unexplained repayment of hand loan. The AO had made an addition of Rs. 4,12,435/- on account of unexplained hand loans. The assessee challenged the action of the AO before the CIT(A) and explained that the contract work of the assessee was undertaken at work sites which are in the interior and not easily accessible. Therefore to facilitate the engineers and staff at work site the requisite fund for incurring certain expenditure for the purpose of business, the head office remits the money. However since the engineers and staff at site cannot wait for the receipt of money from the head office they used to take local temporary hand loan from the known people by noting down
ITA Nos. 219 & 291/Bang/2014 Page 36 of 38 their names and amounts to be repaid once the funds from the head office are received. The assessee explained before the CIT(A) that the names have been submitted to the AO from whom the hand loans were taken and subsequently repaid. These hand loans were used towards the business expenses incurred by the local staff and therefore this cannot be treated as income of assessee. The CIT(A) accepted the contention of the assessee and directed the AO to take the differential amount of Rs. 87,565/- instead of the total amount. Thus the CIT(A) has allowed the set off the receipt and payment. Aggrieved by the order of the CIT(A) the revenue has filed this appeal.
Before us the ld. DR has contented that when the assessee has failed to produce any evidence that these hand loans are representing the unexplained expenditure and therefore it justify the adjustment against the repayment then the addition of the entire sum is warranted. He has relied upon the order of the AO. On the other hand, the ld. AR has submitted that the AO has ignored the fact that these hand loans are taken only for the purpose of business expenditure and therefore the repayment amount of hand loan has to be taken into consideration. He has further pointed out that for the assessment year 2006-07 the CIT(A)
ITA Nos. 219 & 291/Bang/2014 Page 37 of 38 has decided this issue in favour of the assessee and the revenue has not challenged the order for the assessment year 2006-07.
Having considered the rival submissions as well as relevant material on record we find that the CIT(A) has dealt with this issue at page 34 of the impugned order as under.
It is clear from the impugned order of the CIT(A) that the transaction of hand loan and repayment of hand loan was found recorded in the diary. Therefore once the facts recorded in the diary are not in dispute then the set off given by the CIT(A) is justified. We further find that for the assessment year 2006-07 this issue was decided in favour of the
ITA Nos. 219 & 291/Bang/2014 Page 38 of 38 assessee and the revenue has not challenged the said order. Accordingly, in view of the above facts and circumstances of the case we do not find any error or illegality in the impugned order of the CIT(A) qua this issue.
In the result the appeal of the assessee is partly allowed and the revenue’s appeal is dismissed.
Pronounced in the open court on this 28th day of April, 2017
Sd/- Sd/- (S. JAYARAMAN) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dated, the 28th April, 2017. / MS/ Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore.