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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
O R D E R Per Inturi Rama Rao, Accountant Member
This appeal filed by the assessee is directed against the order of CIT(Appeals), Mysore dated 29.8.2013 for the assessment year 2008-09.
The assessee has raised the following grounds of appeal:-
“1. The Hon’ble CIT(A) erred in upholding the additions made u/s.40A(3) on the ground that all the turnover were recorded in the books of accounts and the payments exceeding Rs.20,000/- were confirmed directly by the parties involved.
2. The Hon’ble CIT(A) erred in not appreciating that the assessee was given no opportunity to defend the payments made in the books of accounts to the parties involved.
3. The Hon’ble CIT(A) failed to appreciate that once the books of accounts were rejected on the ground that they were incorrect the only option left for the assessee to estimate the total income u/s.144. 4. The Hon’ble CIT(A) failed to appreciate that once the books were rejected and income was to be estimated there is no place for disallowance u/s.40A(3).”
Briefly the facts of the case are that the appellant is an individual. He is engaged in the business of dealing in fertilizers and paddy. Return of income for the AY 2008-09 was filed on 31.7.2008 declaring income of Rs.3,17,340. Against such return of income, after issue of notice u/s. 143(2), assessment was completed u/s. 144 of the Income-tax Act, 1961 [“the Act”] vide order dated 24.9.2010 by the ITO, Ward 1(3), Mysore at a total income of Rs.6,94,540. The disparity between the returned income and assessed income is on account of addition made under the provisions of section 40A(3) of Rs.3,48,157 and on account of cash deficit as per books of account of Rs.29,042.
It is observed by the Assessing Officer that the books of account were not reliable and therefore he rejected the book results and assessment is stated to have been completed under the provisions of section 144 invoking the provisions of section 145(3) of the Act.
Being aggrieved by the assessment order, an appeal was filed before the CIT(Appeals). It was inter alia contended that when the books of account were rejected by the AO, the only course open to the AO is to estimate the profit by adopting the comparable profit in the similar trade of business and having rejected the books of account, the AO cannot make disallowances under the provisions of the Act such as sec. 40A(3) and sec. 69 of the Act.
The contention of the appellant was rejected by the ld. CIT(Appeals) vide impugned order by holding as under:-
“9. I have considered the rival contentions carefully. In the case law cited by the appellant there was a search wherein unaccounted business transactions were found. It is observed that since the transaction was outside the books, it is impossible to make payment by cheque. However, the facts in the case of the appellant are totally different. In the case of the appellant, as analysed by the AO in the order, the provisions of sec 40A(3) are clearly attracted. Further the addition u/s 69 is clearly identified by the AO. The rejection of books is for different reasons. Hence, considering the facts and circumstances, I find that the additions made are on sound reasoning and accordingly, the additions are confirmed and the appeal is dismissed.”
Being aggrieved, the assessee is in appeal before us. The ld. counsel for the assessee contended that the CIT(Appeals) had failed to appreciate that additions were made without affording reasonable opportunity to explain the case of assessee and it was further contended that having rejected books of account, the only course open to the AO was to estimate the profit by adopting comparable profit in the similar line of business. Therefore, he prayed that the additions may be deleted.
On the other hand, the ld. Sr. DR supported the orders of lower authorities.
We have heard the rival submissions and perused the material on record. In this case, the AO had specifically stated that the assessee had complied with all the notices issued by him. Despite this, he had chosen to reject the books of account as he found that the entries recorded in the books of account are not corroborated by the entries made in the books of the firm, from whom the assessee purchased the fertilizers. In our considered opinion, this alone would not enable the AO to reject the books of account and make additions under other provisions of the Act such as sec. 69 and sec. 40A(3). Having rejected the books of account, the only course open to the AO is to estimate the profit by adopting profit in the comparables engaged in similar line of business. The same books of account cannot be relied upon by the AO to make disallowances under any other provisions of the Act as held by the Hon’ble Andhra Pradesh High Court in Indwell Constructions Pvt. Ltd. v. CIT, 232 ITR 276; CIT v. Inter Continental Constructions, 372 ITR 141 and CIT v. Y. Ramachandra Reddy, 372 ITR 77. In light of this legal principle, we are unable to sustain the additions made.
In the result, the appeal filed by the assessee is allowed.
Pronounced in the open court on this 5th day of February, 2016.