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Income Tax Appellate Tribunal, ‘’D’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeals) (in short “Ld.CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2017-18. 2. The assessee has raised the following grounds of appeal: “1. The order passed by the Ld. CIT(A) is against law, equity & justice.
2. The Ld. CIT(A) has erred in law and on facts in summarily upholding rejection of books of accounts U/S 145 of the Act made by the Ld. A.O.
Asstt. Year- 2017-18 2 3. The Ld. CIT(A) has erred in upholding the addition U/S 68 of the Act of Rs. 3,28,75,000/- of sales made in cash as unexplained cash credit. 4. The Ld. CIT(A0 has erred in law and on facts in invoking section 115BBE of the Act when transactions are occurred prior to insertion of provision on statute. 5. The appellant Craves liberty to add, amend, alter or modify all or any grounds of appeal before final appeal.”
3. The interconnected issue raised by the assessee is that the learned CIT-A erred in upholding the rejection of the books of accounts and further confirming addition of the sales made in cash of ₹ 3,28,75,000 on account of unexplained cash credit under section 68 of the Act.
The facts in brief are that the assessee in the present case is an individual and carrying on his business under the name and style of 2 proprietary concerns M/s. Mahalaxmi Ornaments and M/s Veer Fabrics which are engaged in the business of gold jewellery and wholesale business of fabrics respectively.
The AO during the assessment proceedings found that the assessee during the demonetisation period has deposited substantial cash of ₹ 3,28,75,000 which was claimed against the cash sales. However, the AO found that the cash sale shown by the assessee in immediately preceding the demonetisation period was NIL and likewise in the financial year 2015-16, the total cash sale was of ₹ 3,08,775 only. Accordingly, the AO had a doubt on the genuineness of cash deposited during the demonetisation period.
5.1 The AO also noted that the suppliers of the jewellery to the assessee has not been paid since longtime against the purchases shown by the assessee. According to the AO, such outstanding sundry creditors for a long time in the business of gold jewellery is not possible. As per the AO, no stock register was furnished by the assessee showing inward and outward material so as to justify the availability of stock against the alleged sales.
Asstt. Year- 2017-18 3 5.2 The AO also found that the investigation wing vide latter number DDIT(Inv)/U-1(1)/Info./Cash dep./18-19 dated 30 March 2019 has referred the transaction as suspicious which were carried out by the suppliers of the jewellery to the assessee. In view of the above, the AO sought an explanation from the assessee. The assessee made a detailed reply contending that the impugned amount of cash deposits in the bank represents the sales. It was also submitted that the cash sales in the earlier year or the period cannot be a yardstick to have a doubt on the sales shown by the assessee during the demonetisation period. The assessee also submitted that if the books of accounts are rejected then the only option available is to estimate the gross profit/ net profit. Therefore, no addition under section 68 of the Act can be made. But the assessee contended that before rejecting the books of accounts, the fair opportunity of being heard should be given to him.
5.3 But the AO was not satisfied with the explanation furnished by the assessee on the reasoning detailed below: “In view of the above discussion, it can be logically concluded that, the assessee had been instrumental in depositing SBN notes by fabricating the books of account by recording bogus and inflated purchase and corresponding bogus cash sales. As the assessee could not prove the genuineness of the retail sale shown, which as per assessee is the basis of mounting cash in hand, and also the efforts made by this office by issuing notices u/s.133(6) of the IT Act were failed due to non-confirmation from the parties with whom sales/purchases were shown, the entire cash deposit of Rs.3,28,75,000/- is treated as unexplained cash credits and added to the total income as per the provisions of section 68 of the Income Tax Act, and taxed accordingly. Penalty proceedings under section 271AAC(1) are initiated separately. (Addition : Rs.3,28,75,000/-) 11. A question which possibly arises is whether this amount to double taxation. The undersigned is of view that it does not amount to double taxation of same income as cash deposits during demonetization period is not generated from business activity and it is from undisclosed sources and to be taxed as income from other sources. Further, in the case of Kale Khan Mohammad Hanif v. CIT [1963] 50 1TR 1 (SC). Hon'ble Supreme Court held that "the income is treated as one from an undisclosed source which the question postulates, it is not treated as income of the disclosed source which has previously been assessed to tax and, therefore, there is in such a case no double taxation."
12. One more issue pertinent to discuss here is that if books of account have been rejected and tax is levied on estimated income, whether A.O. can make an addition for cash credit u/s. 68 of the Act or not. There is nothing in law which prevents the Assessing Officer in an appropriate case in taxing the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the Asstt. Year- 2017-18 4 books of account of the assessee as unreliable. In the case of Kale Khan Mohammad Hanif v. CIT[1963] 50 ITR 1 (SC). Hon'ble Supreme Court held that “it cannot be said that the taxing authorities were preclude from treating the amounts of the credit entries as income from undisclosed sources simply because the I entries appear in the books of a business whose income they had previously computed on a percentage basis".”
Aggrieved assessee preferred an appeal to the learned CIT-A who confirmed the order of the AO.
Being aggrieved by the order of ld. CIT-A, the assessee is in appeal before us.
The learned AR before us filed a paper running from pages 1 to 206 and synopsis of events running from pages 1 to 6supported by various case laws. The ld. AR before us submitted that he has been instructed not to press the ground relating to the rejection of the books of accounts under section 145(3) of the Act. As such, the ld. AR before us did challenge the order of the authorities below regarding the rejection of the books of accounts. However. it was submitted that once, the books of accounts are rejected, the only option available with the revenue is to estimate the income of the assessee in scientific manner. As per the ld. AR the income declared by the assessee in the earlier years should be adopted as the yardstick to determine the income after rejecting the books of accounts. To this effect, the ld. AR submitted the necessary details and further contended that the amount of net profits shown by the assessee in the year in dispute is much better than the earlier and later year, therefore no adjustment/ addition is warranted.
On the other hand, the ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the AO rejected the books of accounts after invoking the provisions of section 145(3) of the Act. Before us, the assessee has not challenged the action of the authorities
Asstt. Year- 2017-18 5 below with respect to the rejection of the books of accounts made by them under the provisions of section 145(3) of the Act. In simple words the decision of the authorities below for rejecting the books of accounts has reached to the finality and no interference to this effect is required to be made. It is the trite law that once the books of accounts have been rejected, the only resort available to the revenue is to determine the income of the assessee in the manner provided under section 144 of the Act to the best of the judgment. The Hon'ble Supreme Court in Kachwala Gems v. Jt. CIT [2007] 288 ITR 10/158 Taxman 71 held that rejection of books of account under section 145 justified and best judgment assessment under section 144 of the Act needed.
10.1 The Hon'ble Bombay High Court in Bastiram Narayandas v. CIT [1994] 210 ITR 438/74 Taxman 454 held that rejection of books of account justified under section 145 and best judgment assessment under section 144 needed.
10.2 The Hon'ble Gujarat High Court in the case of CIT Vs. Dhiraj R. Rungta reported in 40 taxmann.com 284 held that once rejection of books of account is justified under section 145 of the Act, no other addition can be made referring the same set of books to the income of the assessee.
10.3 The next controversy arises how to make the best judgement in the manner provided under section 144 of the Act after rejecting the accounts under the provisions of section 145(3) of the Act. When the books are rejected, a lump sum addition is made to the original return of income. Such addition may be based on estimate of turnover and profit rate or disallowance of claims, expenditure, etc. as held by the Hon’ble Supreme court in case of CIT v. Pilliah& Sons [1967] 63 ITR 411(SC).
10.4 Further in the case of Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, the Supreme Court had this to say :
Asstt. Year- 2017-18 6 " . . .the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case……."(p. 530)
From the above discussion, it can be opined that best judgment assessments cannot be based on wild guess, rather it should be based on some materials available on hand relating to the assessee which should be taken into account and that too after providing the opportunity of being heard to the assessee as well as considering the provisions of the Act and Rules of Income Tax Rules. After rejecting book results, the Assessing Officer has to determine the income in reasonable and scientific manner after considering the results/ performance of the earlier years or some comparable cases. In holding so, we referred the judgment of co-ordinate bench of Jodhpur Tribunal in case of Sriram Jhanwarlal v. ITO [2005] 98 TTJ (Jodh.) 639. The relevant observation is extracted as under:
After rejecting the book results, the AO does not get unfettered powers to make assessment at any income. He is supposed to be guided either by the previous results of the assessee or some comparable cases. In the instant case, the AO has allowed deduction of direct expenses at 75 per cent of the gross receipts without any cogent material. His ad hoc estimate of expenses divorced from the relevant facts cannot be upheld.
Now coming to the facts of the present case, the AO has assumed the amount of cash deposit during the demonetisation period of ₹ 3,28,75000/- as unexplained cash credit under section 68 of the Act. As such, what we find is this that the AO after rejecting the books of accounts has not estimated the income but has treated the amount of cash sales deposited during the demonetization period in the bank as unexplained cash credit which is against the spirit of the law as discussed above. First of all, the provisions of section 68 of the Act cannot be applied to the amount shown as sales in the books of accounts otherwise it is going to lead to the double addition which is undesirable. In holding so, we draw support and guidance from the judgement of CIT vs. Vishal exports overseas Ltd in tax appeal No. 2471 of 2009vide order dated 3-07-2012 wherein the order of Asstt. Year- 2017-18 7 the ITAT was upheld that the sales cannot be treated as unexplained cash credit under section 68 of the Act.
At this juncture it is necessary to deal with the case law cited by the revenue authorities in the case ofShri Kale Khan Mohamed Hanif Vs. CIT reported in 50 ITR 1for making the addition under section 68 of the Act. In our humble understanding, in this case the issue was involved for the addition under section 68 of the Act whereas in the case on hand, the sales have been assumed as unexplained cash credit under section 68 of the Act. Thus, we are of the view that the facts of the case are distinguishable and accordingly, the sales cannot be treated as unexplained cash credit under section 68 of the Act in the given facts and circumstances.
Besides the above, we also note that the assessee has shown total sales in the books of accounts more than Rs. 15 crores. The AO out of such sales has treated the sum of ₹ 3,28,75000 representing the cash deposited during the demonetisation period out of the cash sales as unexplained cash credit under section 68 of the Act. But the AO has not reduced such amount of alleged unexplained cash credit from the amount of sales. This action of the AO contrary. It is for the reason that the AO in the present case is treating the amount of cash deposits during the demonetisation period as sales and unexplained cash credit under section 68 of the Act which is contrary to the spirit of the provisions of law. As such the AO should have reduced the alleged amount of unexplained cash credit from the total sales and the balance sales should have been made subject to tax on some estimation basis. But the AO has not done so. Therefore, we are of the view that such addition made by the AO and confirmed by the learned CIT-A in the given facts and circumstances is not sustainable for the reasons elaborated above. At this juncture, it is equally important to note that the assessee has shown better net profit ratio in comparison to the immediately preceding assessment year and succeeding assessment year. Therefore, event on merit of the case no addition is warranted in the given facts and circumstances. In view of Asstt. Year- 2017-18 8 the above and after considering the facts in totality, we uphold the rejection of the books of accounts made by the authorities below but with the direction not to treat the amount of cash sales as unexplained cash credit under section 68 of the Act. Hence, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 03/04/2024 at Ahmedabad