SH. MANISH SETHI,NEW DELHI vs. ITO, NEW DELHI

Per L.P. Sahu, Accountant Member:

“1. That the learned C.I.T (A) has erred in law and on facts in enhancing the income of the appellant without issuing a show cause notice in that regard and enhancement made not in accordance with the requirement of S. 251(2) of the I.T. Act is illegal, bad in law and liable to be set aside.

2. That without prejudice to ground No. 1 above, having held that all the deposits and withdrawals in the saving account with ICICI

Bank which were not accounted for in the books of account, relates to business activities of the appellant, the learned C.I.T. (A) has failed to appreciate that deposit of Rs. 1,30,734/- out of the sale proceeds could not be brought again to tax on the theory of peak credit and the impugned addition is liable to be quashed.

3. That the learned C.I.T. (A) was not justified in estimating the profit @ 20% on unaccounted turnover of Rs. 22,79,190/- (wrongly taken at Rs. 22,24,000/- in the impugned order) as against the accepted G.P, rate of 1.83% in the line of business of the appellant on wholly erroneous grounds. In any case estimate of gross profit determined by the learned C.I.T. (A) is highly excessive and deserves to be reduced considerably.

5. That the order of the authority below is bad in law and liable to be set aside.”

He filed its return of income on 30.09.2008 declaring an income of Rs.1,07,959/-. During the course of assessment proceedings, the AO noticed that the assessee declared total turnover at Rs.1,43,75,806/- and gross profit of Rs.2,63,542/- which gives gross profit rate of 1.83%. On examination of AIR Data of assessee, the AO further noticed that the assessee has deposited cash of Rs.10,39,190/- in ICICI Bank Ltd., New Delhi. The assessee was asked to explain the nature and source of cash deposited in the said bank account. In response, the assessee stated to have maintained the saving bank account No. 033201507917 with ICICI Bank and admitted that the transactions made through this bank account were not accounted for in the books of account during the year 2007-08. It was also explained, as also mentioned in the assessment order, that various deposits & withdrawals are made in cash and such all entries are not trading related. However, the assessee, keeping in view of the declared gross profit rate of 1.83%, offered an income of Rs.20,000/- from unaccounted deposits of Rs.10,39,190/-. The AO did not accept the offer of the assessee and treating the total cash deposits of Rs.10,39,190/- as unexplained cash credit, added the same to the total income of the assessee vide assessment order dated 24.12.2010. The assessee challenged the addition in appeal before the ld. CIT(A), who after considering the submissions of the assessee, decided the issue in the following terms :

“5.2 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that Rs.10,39,190/- was deposited in cash in the bank account of the assessee. The assessee in response to query by the Assessing Officer stated that the bank transactions amounting to Rs.10,39,190/- were not accounted for in the books of account for A.Y. 2007-08, It was claimed that the various deposits and withdrawals made in cash are not all trade related. As a result he voluntarily surrendered Rs.20,000/- and also accepted that G.P. Rate of 1.83% was being shown by him in the books. The Assessing Officer on the basis of assessee's acceptance that the cash deposits were not shown in the books of account and did not relate to trading , made an addition of Rs.10,39,190/-as unexplained cash credits.

In the appellate proceedings, the appellant challenged the addition made by the Assessing Officer and claimed that – • he was engaged in the business of Computer Hardware • Business receipts deposited in the bank account maintained with Vijaya Bank and Centurion Bank of Punjab amounted to Rs.1,43,75,806/-. • Besides the above two bank account on the basis of which the turnover was declared, the appellant had saving account with ICICI Bank which was utilized for business transactions relating to trading in Computer Hardware.

• The total credit and debit entries in the account were Rs.22,79,190/- and Rs.22,73,679/- respectively • Transaction in the bank account with ICICI Bank were not accounted for in the books of account maintained by the assessee. ; • The declared gross profit rate is 1.83%.

• The appellant enclosed duplicate copies of bills of M/s. G V C Peripheral showing purchase of Computer Hardware not accounted for in the books and copy of sale bills showing the unaccounted sales thereof.

• The appellant also enclosed the copy of the bank account.

The claim of the appellant has been considered. The appellant was asked to file evidence of his claim that the transaction in the bank account pertained to business transactions- As a result copy of purchase and sale bills have been produced by the appellant. This shows that the deposits and withdrawals made in the bank account relate to business activities. The appellant has claimed that the profit being reflected in the books is 1.83% and similar rate should be applied to the turn over not reflected in the books i.e. a sum of Rs.22,24,000/-. However, the perusal of the bank account produced by the appellant shows that the initial deposits have not been made out of withdrawals. There is a peak investment of Rs. 1,30,734/- in the account.

Further, the perusal of the purchase bills also shows that the cost price and the sale price of the items dealt in by the appellant are as under :

S.No. Item Purchase price Sale price 1 1 GB DDR RAM 2750 3000-3800 2 256MB SD RAM 1250 1600-1800 3 512MB DDR RAM 1750 2450 -2500 4 256 MB DDR RAM 850 900 Keeping in view the above margin the profit earned by the appellant is in the range of 20%. The gross profit is to be considered as the indirect expenses being incurred by the assessee are already accounted for in the books of account. This profit rate would be applicable on the additional turnover of Rs.22,24,000/- not accounted for in the books. The Assessing Officer is thus directed to bring to tax the peak investment of Rs. 1,30,734/- and the profit @ 20% on turnover of Rs.22,24,000/-.

Besides it has been accepted by the appellant in the submissions and also vide order sheet entry dated 20.01.2014, that the entire purchases amounting to Rs.22,24,000/- have been made in cash. Provisions of section 40A(3) are therefore applicable to these purchases which have not been accounted and payment for which have been made in cash. The Assessing Officer is directed to apply section 40A(3) to the entire cash purchases. The grounds of appeal are accordingly disposed off.”

The assessee has offered income of Rs.20,000/- from cash transactions of Rs.10,39,190/- considering the declared GP rate of 1.83%, but the AO added the entire amount as unexplained cash credits, which is not justified. It was submitted that the ld. CIT(A) was not justified in deciding the issue in a different manner, as reproduced above, inasmuch as, he directed the AO to bring to tax the peak investment of Rs. 1,30,734/- and the profit @ 20% on turnover of Rs.22,40,000/- (wrongly noted as Rs.22,24,000/-), i.e., the total deposits in the bank account. The ld. CIT(A) has also wrongly held that provisions of section 40A(3) would be applicable, as all the sales are stated to have been made in cash. It was also submitted that before computing the income by way of enhancement, resorting to the new method of computation other than that considered by AO, the ld. CIT(A) has not complied with the provisions of section 251(2) of the IT Act. The CIT(A) has also erred in invoking the provisions of section 40A(3) when the income has been directed to be computed by applying flat gross profit rate, which is against various judicial pronouncements. Reliance has been placed on several decisions. On the other hand, the ld. DR objected to the arguments advanced by ld. AR of the assessee.

4. We have considered the rival submissions and have gone through the entire material on record and we find substance in the contention of the assessee that the ld. CIT(A) while adopting new way of computation of income entailing enhancement, has not issued any show cause notice in that regard which is against the provisions of section 251(2) of the IT Act. We have also gone through the assessment order as well as the order of ld. CIT(A). A perusal of the assessment order categorically shows that that the contention of the assessee before the AO had been that “the various deposits and withdrawals are made in cash, such all entry are not trading related.” However, on perusal of the impugned order shows that the assessee has taken a stand before the CIT(A) that all the transactions entered in the said bank account represent the business transactions of the assessee-firm. This contradiction has also not been addressed by the ld. CIT(A) in the impugned order nor adjudicated upon. Before adopting the different way of computation of income, i.e., by applying GP rate of 20% on the total deposits of Rs.22,40,000/- and peak investment of Rs.1,30,734/-, the ld. CIT(A) was first required to adjudicate whether the deposits and withdrawals in the impugned bank account actually represent the business transactions of the assessee or not. On this aspect, the ld. CIT(A) has accepted the contention of the assessee only observing that the copies of purchase and sale bills produced by assessee before the CIT(A) shows that the said deposits and withdrawals made in the bank account relate to business activities of assessee. He has not recorded any finding whether any of the purchase or sale bills so produced commensurate to or tally with any of the withdrawals or deposits made in the bank account or not. Before adopting the new method of computation, it was at least incumbent upon the CIT(A) to examine whether the total purchase and sales supported by bills/vouchers go to cover the total declared purchases and sales in addition to the transactions of deposits and withdrawals entered in the impugned bank account, which are also alleged to represent the business transactions. The ld. CIT(A) has also failed to record any finding as to which cheque deposited in the impugned bank account pertained to which purchase voucher/bill produced before the ld. CIT(A). In presence of these facts, we observe that the order of the ld. CIT(A) is not a speaking order and has computed the income of the assessee arbitrarily without recording cogent findings on the above aspects of the case. Accordingly, we deem it appropriate to restore the matter to the file of ld. CIT(A) to decide the appeal afresh by way of speaking order in accordance with law and in the light of observations made in the body of this order. Needless to say, both the parties shall be given reasonable opportunity of being heard before deciding the issue afresh. As a result, the appeal of the assessee deserves to be allowed for statistical purposes.

Order pronounced in the open court on 06.01.2017.