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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ,
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER,
ITA No.904/Bang/2015 Assessment year : 2006-07
Sri Mallanagouda S. Vs. The Deputy Commissioner of Sankagoudshani, Income Tax, No.222, 2nd Floor, Circle 1(1), Bhavani Arcade, Hubli. Near Basav Vana, N.C.M., Hubli – 580 029. PAN: AEUPS 7783Q APPELLANT RESPONDENT
Appellant by : Shri Ashok Kulkarni, Advocate Respondent by : Dr. P.K. Srihari, Addl. CIT(DR)
Date of hearing : 28.10.2015 Date of Pronouncement : 30.11.2015
O R D E R Per Asha Vijayaraghavan, Judicial Member
This appeal by the assessee is directed against the order dated 27.02.2015 of the CIT(Appeals), Hubli for the assessment year 2006-07.
The brief facts of the case are that the assessee is a contractor. During the course of survey u/s. 133A conducted on 01.03.2011, certain incriminating documents, diaries were found and impounded as per the
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Inventory of Books of Account/Documents drawn during the survey on 01/03/2011. On verification of the entries made in the impounded diaries, the Assessing Officer observed that receipts and payments as recorded in the impounded diary for the months of January 2006, February 2006 and March 2006 aggregates to Rs. 1,40,62,868/- and Rs. 1,16,17,157/-. Whereas in the return of income for the whole year, the receipts are shown at Rs. 2,00,94,368/- and payments at Rs.1,75,08,014/- (after excluding depreciation). Subsequently, a notice u/s. 148 dated 1.3.2013 was served on the assessee and the AO assumed jurisdiction u/.s 147 of the Act. The AO has made certain additions/disallowance under the heads mentioned below :-
Addition of Rs.37,84,597/- as receipts is improper and unjustified. 2. Addition of a sum of Rs.14,420/- as unexplained cash receipts. 3. Addition of a sum of Rs. 10,006/- as unexplained receipt. 4. Addition under section 40A(3) bringing to tax a sum of Rs.6,16,351/- as per Rectification Order u/s 154 dated 21.02.2014. 5. Disallowance of Rs.2,227/- being contribution to benevolent fund.
Aggrieved by the additions/disallowances made by the AO, the assessee preferred an appeal before the CIT(Appeals).
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Before the CIT(Appeals), with respect to assumption of jurisdiction u/.s 147 and issue of notice u/s. 148 of the Act, the assessee in its written
submissions submitted that it was not in accordance with law for the reason that the impounded diary was a personal diary to aid his memory and
reiterated the submissions made for the A.Y. 2007-08. It was submitted
that the assessment order is invalid in view of the first proviso to section 147 r/w. Explanation 3 as detailed in the submissions for A.Y. 2007-08.
The CIT(Appeals) observed that the return was processed u/s 143(1) and it was converted into scrutiny assessment by issuing notice u/s
143(2). In the meanwhile survey u/s 133A of the IT Act was conducted on
01.03.2011. During the survey AO found diary which contained the transactions of the assessee's business and some of the transactions were
not recorded and reflected in the regular books of accounts. Hence the AO had the reason to believe that income has escaped and on this belief and
by recording the reasons, notice was issued u/s 148 of the IT Act.
The CIT(Appeals) further observed that reopening of the assessment was to bring to the tax net escaped income based on the diary
entries which was found at the time of survey u/s. 133A of the Act. He was of the view that but for the survey, the escaped income or the transactions
which were not written in the books of accounts would not have surfaced.
Relying on the decision of the Hon’ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO, 236 ITR 4 (SC), he upheld the action of
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the AO in reopening the assessment u/s. 147 of the Act. Aggrieved, the assessee is in appeal before us.
We have heard both the parties. During the survey, the AO has found that the diary which contained transactions of assessee’s business and some of the transactions were not recorded and reflected in the regular books of account. We are therefore of the opinion that confirmation of the AO’s order with respect to reopening of the assessment is valid.
The next ground of appeal is relating to addition of Rs.37,84,597 as income from undisclosed sources. The AO observed that the receipts recorded in the diary are not reflected in the regular books of accounts. The assessee was called for to explain the nature and source of the such receipts and complete addresses of the persons from whom the receipts were received. The assessee vide letter dated 24/01/2014, stated as follows:-
“Regarding receipts as per the Annexure-A, which are recorded in the diary relates to the amount received against sale of materials of Rs.37,84,597/-, receipts from sale of agriculture produces of Rs.14,420, encashment of NSC of Rs.9,506/- and cash drawn from ATM of Rs.500/- respectively. A detailed statement is separately enclosed.”
Regarding sale of materials, the assessee also submitted vide letter dated 24.1.2014 as follows:-
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“Regarding sale of materials it is further submitted that I used to sell the surplus materials which is purchased on bulk quantity at a concessional rate directly from the factory to the friends and relatives who are constructing the residential buildings and also to the fellow petty contractors. Normally I am getting the bulk materials like steel, cement, jelly etc., at a concessional rate without dealers margin directly from the manufacturers / whole sale dealers. During the course of this sale of materials to various parties, I used to get a nominal profit margin.”
The facts of the case are that when the AO called the assessee to furnish the details and evidence in support of the assessee’s claim, the assessee reiterated the submissions made vide its letter dated 24.01.2014. It was further submitted that the CIT(Appeals) for the A.Ys. 2007-08 to 2011-12 consider a profit of 9% on the sale of materials instead of whole amount and requested that the same has to be considered though it is on much higher side. The AO found from the audit report the nature of business of the assessee is indicated as “Civil Engg. & PWD/Govt. Contractor”. In the absence of details and evidence for purchase of materials as well as VAT return in support of the assessee’s claim, the AO assessed the receipts of Rs.37,84,597 to tax.
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:-
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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).
Aggrieved, the assessee is in appeal before us.
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).
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The next ground of appeal is regarding addition of Rs.14,420 as unexplained cash receipts. The assessee vide his letter dated 24.1.2014 claimed that the diary entries represent agricultural receipts being cash received by banana sale. The AO was of the opinion that no evidence was furnished to indicate that such receipts represent agricultural receipts. The AO observed that from the returns filed for the year under consideration and subsequent years, the assessee has not declared any agricultural income. He was of the view that merely because the assessee is holding agricultural lands, it could not be presumed that the assessee has derived income from agricultural activity. The AO therefore assessed the unexplained receipts of Rs.14,420 as income of the assessee from undisclosed sources.
Before the CIT(Appeals), the assessee stated that he had substantial agricultural land holdings and concerned copies of the property extracts were furnished to the AO, thus the source is from agricultural income. The CIT(Appeals) held as follows:-
“As per the diary that was found at the time of survey, it was mentioned that the assessee has received Rs. 14,420/- on agricultural income but has not filed any details such as agricultural income, expenditure, and the details such as use of manure, fertilizers and pesticides etc. Mere position of the agricultural land cannot be acceptable without corresponding agricultural expenditure and agricultural receipts details. Though the reasonable opportunity has given to the assessee, to substantiate his claim of agricultural income, assessee has not filed the details in support of his claim for agricultural income. Hence, in the absence of details, I don’t have any option other
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than upholding the addition made by the AO. So, the addition made by the AO is upheld ……. ”.
We have heard both the parties. We are of the opinion that one more opportunity is to be afforded to the assessee to produce details of agricultural land holding to establish that he had agricultural income which is net of agricultural expenditure. We therefore restore this issue to the file of the Assessing Officer to examine the Government records as to which crops are grown and the price it would fetch in the market so as to arrive at the agricultural income as claimed by the assessee.
The next ground of appeal is relating to addition of Rs.10,006 as unexplained receipt. The AO noticed from the statement enclosed to the assessee’s letter dated 24/01/2014, it was claimed that the following diary entries represent NSC encashment and cash drawn from bank:-
In response to details and evidence called for by the AO, the assessee stated that for the purpose of tender the NSC of Rs.9,506 was purchased and later the same was encashed as the same was no more required for the Tender works. Rs.500/- is drawn from the ATM of ICICI
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Bank. It was argued that there was already sufficient withdrawal in the assessee’s capital account, therefore, the source is duly explained.
The AO was of the view that the assessee has not furnished the
details of NSC and how the said investment is reflected in the books, also the said encashment of NSC has not been reflected as receipts in the
regular books of account. As regards withdrawal of cash from ATM, the AO observed that the assessee has not explained how the said cash is
reflected in the books. According to the AO, the assessee’s explanation that there are sufficient withdrawals was not convincing. Hence the AO
assessed the said receipts of Rs. 10,006 as income from unexplained
receipts.
Before the CIT(Appeals), the assessee reiterated the submissions
made before the AO.
The CIT(Appeals) held that the assessee has not filed any details in support of his claim of NSC and depended only on ATM drawings and
hence in the absence of details, he upheld the addition made by the AO.
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
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this issue to the file of the Assessing Officer for fresh examination after giving an opportunity of being heard to the assessee.
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).
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.
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
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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.
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 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).”
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.
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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).
Levy of interest u/s. 234B is consequential in nature and the AO is directed to give consequential effect.
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 30th day of November, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) (ASHA VIJAYARAGHAVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 30th November, 2015.
/D S/
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Copy to:
Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.