JANARDHAN CHOKHANI,KOLKATA vs. DCIT, CC-VI, KOLKATA, KOLKATA

First we take up the cross appeals for A.Y. 2009-10 being and 272/KOL/2015, which are directed against the order of the ld. Commissioner of Income Tax (Appeals)-20, Kolkata dated 27.01.2015. The appeal of the Revenue being ITA No. 214/KOL/2015 involves a solitary issue relating to the deletion by the ld. CIT(Appeals) of the trading addition of Rs.42,85,878/- made by the Assessing Officer by applying the higher gross profit rate.

The assessee in the present case is an individual, who is engaged in the business of trading of hosiery and cotton fabrics as well as manufacturing of ladies garments. The return of income for the year under consideration was filed by him on 21.12.2009 declaring total income of Rs.3,33,429/-. During the course of survey carried out in the business premises of the assessee under section 133A of the Act, no books of account for the year under consideration were found to be maintained. The assessee, therefore, was called upon by the Assessing Officer to produce the books of account and other details required for the purpose of his assessment. The assessee, however, failed to comply with this requirement inspite of sufficient opportunity afforded by the Assessing Officer. The Assessing Officer, therefore, was left with no option but to complete the assessment under section 144 to the best of 3 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 his judgment. In this regard, he found that the gross profit declared by the assessee for the year under consideration at 1.59% was substantially lower than the gross profit rate of 7.32% declared by the assessee in the immediately preceding year. In the absence of production of books of account and other details by the assessee, the Assessing Officer estimated the income of the assessee by applying the gross profit rate of 7.32%, which resulted in the trading addition of Rs.42,85,878/-.

The trading addition made by the Assessing Officer by applying higher gross profit rate of immediately preceding year was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submissions made by the assessee, the ld. CIT(Appeals) deleted the said addition for the following reasons given in paragraph no. 7 of his impugned order:- “7. I have perused the impugned order and also considered the submissions of the Ld AR. It appears that the books of account were admittedly not produced before the AO at the assessment stage. The AO however has brought no positive material to substantiate his estimation of the gross profit. The AO does not appear to be confident about his own action when he noted in the impugned order that he had no alternative but to estimate the gross profit of the assessee. The decline in the gross profit rate can be no justification for estimating the gross profit. I find from the impugl1ed order that the tax audit report was produced at the assessment stage but the AO has found no specific defect in the audited accounts of the assessee. I also find that the AO has not rejected the books of account of the assessee. The jurisdictional ITAT has in the case of M/s SRK Tea Processing Industries Ltd vs ACIT (ITA No. 1685/Kol/2009) held that the first proviso to section 145( 1) or 145(2) can be invoked only when the elements attracting either of those provisions are found to exist. The AO has to give a categorical finding in that regard and also the material which constituted the basis of such finding. The AO is therefore not competent to make an assessment under first proviso to section 145(1) or 145(2) without rejecting the books of account. I find that there is no finding of the AO in the assessment order in respect to the fact that the method of accounting adopted by the 4 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 assessee is not regularly employed or that his income, profits or gains could not be deduced or accounts are incomplete or incorrect in the present case. In absence of such finding and without the rejection of the books of account, it cannot be held that the AO has rightly estimated the gross profit of the assessee. Accordingly, I am of the considered view that the AO has erred in applying gross profit rate on the basis of earlier year without rejecting books of account. It also appears that the estimation of profit is based more on suspicion than on factual ground. The AO has brought no material on record to show that the assessee made more profit than what was declared in his books of account maintained in the normal course of the business. There was admittedly non-compliance on the part of the assessee but that did not authorize the AO to make a wild assessment and estimate the gross profit at an arbitrary figure without there being any supportive material to justify such estimation. The AO was expected to bring some material on record to support his estimation of profit. In view of the above, I am of the opinion that the estimation of profit as made by the AO in the impugned order is neither sustainable in law nor on the facts of the case. The addition of Rs.42,85,878/- is deleted. Ground no 4 is allowed. In consequence, ground no 5 fails. Ground no 6 relates to the charging of interest u/s 234A, 234B and 234C which is consequential. Ground no 7 is directed against the initiation of penalty proceedings u/ s 271(1)(b) and 271(1)(c) which is premature for adjudication at this stage. Ground no 8 is general in nature”.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly contended by the ld. D.R., the relief given by the ld. CIT(Appeals) by deleting the trading addition made by the Assessing Officer on the ground that there was no rejection of books of account by the Assessing Officer is not well founded. When the assessee had failed to produce the books of account and other relevant details as required by the Assessing Officer during the course of assessment proceedings despite sufficient opportunity afforded in this regard, there was no question of any requirement on the part of the Assessing Officer to reject the books of 5 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 account. In our opinion, the Assessing Officer was left with no option but to complete the assessment to the best of his judgment under section 144 as a result of the failure of the assessee to produce the books of account and the ld. CIT(Appeals) was not justified in putting the entire onus on the Assessing Officer to bring any adverse material on record to justify the estimation of income by applying a higher gross profit rate. When the assessee fails to produce the books of account in support of the book results declared by him, the Assessing Officer is entitled or rather is duty bound to complete the assessment under section 144 to the best of his judgment on the basis of material available on record and there is no requirement in such case to reject the books of account which the assessee has not even produced before him for verification. Even the ld. counsel for the assessee has not been able to raise any material contention to dispute this position. He, however, has contended that the gross profit rate of 7.32% as applied by the Assessing Officer on the basis of gross profit rate declared in the immediately preceding year is highly excessive and unreasonable. In this regard, he has invited our attention to the specific submissions made by the Assessing Officer before the ld. CIT(Appeals), wherein the fall in gross profit rate in the year under consideration was explained by the assessee by pointing out that the turnover of the assessee for the year under consideration was increased five-folds as compared to the immediately preceding year. It was also explained that the assessee’s business had two components, i.e. trading and manufacturing of hosiery goods and there was a substantial increase in the trading sales as compared to manufacturing sales in the year under consideration. The relevant details of turnover of the assessee for the year under consideration as well as for the immediately preceding three years were also furnished by the assessee before the ld. CIT(Appeals) to show that there was a variation in the components of total sales, i.e. trading sale and manufacturing sale. Keeping in view all these submissions made by the assessee specifically before the ld. CIT(Appeals), which are relevant to justify the variation in the gross 6 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 profit rate as declared by the assessee, we are of the view that the gross profit rate of 7.32% of the last year as applied by the Assessing Officer is excessive and unreasonable and it would be fair and reasonable in the facts and circumstances of the case to apply the average gross profit rate of the relevant five years as worked out by the assessee at 4.42% in the submissions made before the ld. CIT(Appeals). We accordingly modify the impugned order of the ld. CIT(Appeals) on this issue and direct the Assessing Officer to re-compute the trading addition to be made to the total income of the assessee by applying the gross profit rate of 4.42% instead of 7.32%. The appeal of the Revenue for A.Y. 2009-10 is thus partly allowed.

The solitary issue involved in the appeal of the assessee for A.Y. 2009-10 relates to the addition of Rs.14,25,000/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of cash deposits found to be made in the undisclosed Bank account of the assessee with ING Vysya Bank.

In the undisclosed Bank account of the assessee maintained with ING Vysya Bank, cash deposits of Rs.14,25,000/- were found to be made during the year under consideration. In this regard, it was explained by the assessee that the said undisclosed Bank account was used by him for providing accommodation entries on commission basis. He, therefore, contended that the addition only to the extent of such commission earned by him for providing the accommodation entries could be made. This stand of the assessee was not found acceptable by the Assessing Officer in the absence of any details furnished by the assessee giving names and addresses of the persons to whom the accommodation entries were provided as well as the nature of entries so provided. He accordingly added the entire amount of Rs.14,25,000/- found to be deposited in the undisclosed Bank account of the assessee.

7 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 8. The addition of Rs.14.25 lakhs made by the Assessing Officer on account of cash deposits made in his undisclosed Bank account was disputed by the assessee in the appeal filed before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), it was contended by the assessee that there was a search conducted in his case on 02.07.2013 and as found during the course of search on the basis of material seized, he was engaged in providing accommodation entries. Even the commission income earned for providing such accommodation entries as declared by the assessee during the relevant assessment years including the assessment year under consideration was also accepted by the Assessing Officer. It was contended by the assesese before the ld. CIT(Appeals) that the findings of search, which supported the plea of the assessee that the cash deposits found to be made in his undisclosed Bank account with ING Vysya Bank were part of his business activity of providing accommodation entries, should be taken into consideration while deciding this issue. An alternative contention was also raised by the assessee that only the peak credit as appearing in his undisclosed Bank account with ING Vysya Bank should be added and not the total amount of all deposits.

The ld. CIT(Appeals) did not find merit in the submissions by the assessee on this issue and proceeded to confirm the addition of Rs.14.25 lakhs made by the Assessing Officer for the following reasons given in paragraph no. 5 of his impugned order:- “5. I have perused the impugned order and considered the submissions of the assessee. The Ld AR has argued that search u/s 132 was conducted on 02-07 -2013 in the case of the assessee and the material found therein should be considered while deciding the present appeal. I do not find merit in the contentions of the Ld. AR. The second proviso to section 153A(I) clearly states that only those assessment proceedings that were pending on the date of initiation of the search shall abate. The impugned assessment was made on 30-12-2011 when the search had not taken place. Under the circumstances, the material found in the search cannot be lawfully considered while deciding the present appeal. On the merits of the case, the Ld AR has argued 8 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 that the peak credit of Rs.5 lakhs which appears on 31-12-2008 should be assessed as the investment in the undisclosed bank account. The Ld AR has also placed reliance on certain judicial decisions in support of his contention. I have considered the submissions and perusedthe material on record. The peak credit is assessable where the bank account contains mixed transactions involving frequent deposits as well as withdrawals of cash or cheque. I however find from the bank statement that the undisclosed bank account of the assessee does not reflect such state of affairs. On the contrary, each cash deposit in the bank account is followed by issue of cheque thereby ruling out the possibility of such money judicial decisions in support of his contention. I have considered the submissions and perused the material on record. The peak credit is assessable where the bank account contains mixed transactions involving frequest deposits as well as withdrawals of cash or cheque. I however find from the bank statement that the undisclosed bank account of the assessee does not reflect such state of affairs. On the contrary, each cash deposit in the bank account is followed by issue of cheque thereby ruling out the possibility of such money returning to the bank account. I am of the considered view that in such factual background, peak theory is not applicable. The AO was therefore justified in adding the cash deposits totaling to Rs.14.25 lakhs. Ground no. 3 is dismissed”.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly submitted by the ld. counsel for the assessee, when the assessee was found to have indulged in giving accommodation entries during the relevant years including the year under consideration as a result of search conducted in his case subsequently on 02.07.2013, the said finding was required to be taken into consideration while deciding the issue relating to the addition made on the basis of entries found reflected in his undisclosed Bank account with ING Vysya Bank, which the assessee had categorically explained during the course of assessment proceedings itself as pertaining to his activity of providing accommodation entries. The ld. counsel for the assessee has also contended that various Bank accounts were to found to be maintained in the name of the assessee as well as his family members during the course of search and the claim of the assessee that the said Bank accounts were utilized for providing 9 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 accommodation entries was accepted by the Assessing Officer. He has also contended that the commission income earned by the assessee for providing accommodation entries as reflected in all the relevant Bank accounts including the Bank account maintained with ING Vysya Bank was declared by the assessee in the returns of income filed in response to the notices issued by the Assessing Officer under section 153A for all the relevant years including the year under consideration and, therefore, the impugned addition made in regular assessment on the basis of the same entries has resulted in double addition. The ld. D.R., on the other hand, has contended that this claim made by the assessee for the first time before the ld. CIT(Appeals) has not been verified by the ld. CIT(Appeals) on merit as he did not accept the contention of the assessee that the material found during the course of search should be considered while deciding the issue involved in regular assessment. He has contended that if at all the said material is required to be considered, an opportunity may be given to the Assessing Officer to verify the claim of the assessee. We find merit in this contention of the ld. D.R. Accordingly the impugned order of the ld. CIT(Appeals) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh after verifying the claim of the assessee on the basis of material found during the course of search. The appeal of the assessee for A.Y. 2009-10 is accordingly treated as allowed.

As regards the appeal of the assessee for A.Y. 2010-11 being it is observed that the solitary issue involved therein relating to the addition made to the total income of the assessee on the basis of cash deposits found to be made in his undisclosed Bank account with ING Vysya Bank is similar to the one involved in assessee’s appeal for A.Y. 2009-10, which has already been decided by us. Following our conclusion drawn in A.Y. 2009-10, we set aside the impugned order of the ld. CIT(Appeals) confirming the addition made by the Assessing Officer on this issue and restore the matter to the file of the Assessing Officer for 10 ITA No. 214/KOL/2015 Assessment Year: 2009-2010 & ITA Nos. 272 & 273/KOL/2015 Assessment years : 2009-2010 2010-2011 deciding the same afresh after verifying the claim of the assessee on the basis of material found during the course of search. The appeal of the assessee for A.Y. 2010-11 is accordingly treated as allowed for statistical purposes.

In the result, the appeal of the Revenue for A.Y. 2009-10 is partly allowed, while the appeals of the assessee for A.Y. 2009-10 and 2010-11 are treated as allowed for statistical purposes. Order pronounced in the open Court on 22nd day of December, 2017.