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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI ARUN KHODPIA
आदेश / ORDER
PER RAVISH SOOD, JM:
The present appeal filed by the assessee firm is directed against the order passed by the CIT(Appeals)-II, Raipur, dated 07.02.2018, which in turn arises from the order passed by the A.O under Sec. 144 r.w.s. 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 31.12.2016 for assessment year 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us: “1. Ld. CIT(A) erred in confirming addition of Rs.90,72,799/- made by the AO on account of PRW (piece rate work) (Labour and Machine) expenses being the difference between the expenses claimed in the profit and loss account (Rs.7,24,00,859/-) and expenses in the records found during survey (Rs.6,33,28,060/-). The addition made by AO and confirmed by CIT(A) is arbitrary, baseless and not justified.
2. Ld. CIT(A) erred in confirming disallowance of Rs.2,71,38,940/- made by the AO invoking provisions of sec. 40A(3). The disallowance made by AO and confirmed by CIT(A) is not justified.
3. Ld. CIT(A) erred in confirming disallowance of Rs.19,95,450/- made by the AO on account of provision for bonus to staff. The disallowance is not justified.
4. Ld. CIT(A) erred in confirming disallowance of Rs.14,28,899/- made by AO on account of amount written off by assessee as bad debt.
5. Ld. CIT(A) erred in confirming disallowance of Rs.4,04,56,014/- made by AO out of material purchase account. The disallowance made by AO alleging inflation of purchases and confirmed by CIT(A) is arbitrary and not justified.
3 Five Star Construction Company Vs. DCIT-1(1), Bhilai
6. Ld. CIT(A) erred in confirming addition of Rs.4,82,840/- made by the AO invoking sec. 68, on account of cash credit The addition is arbitrary and not justified.
7. Ld. CIT(A) erred in confirming addition of Rs.10,00,000/- made by AO on account of explained credit invoking sec. 68. 8. Ld. CIT(A) erred in confirming addition of Rs.27,88,260/- made by the AO on account of alleged unrecorded contract receipts. The addition made by the AO and confirmed by CIT(A) is not justified. 9. Ld. CIT(A) erred in confirming addition of Rs.8,10,000/- made by AO on account of alleged credits found in the records, on account of car sale. The addition is arbitrary and not justified. 10. Ld. CIT(A) erred in confirming addition of Rs.1,60,000/- made by the A.O on account of unexplained expenditure u/s.69C. 11. Ld. CIT(A) was not justified in confirming addition of Rs.1,59,000/- made by the AO on account of alleged unrecorded interest receipts. 12. Ld. CIT(A) was not justified in confirming the addition of Rs.6,56,248/- made by AO on account of unexplained cash credit invoking sec. 68. 13. Without prejudice to above grounds, the disallowance of Rs.90,72,799/- on account of PRW (Labour & Machine) expense account, addition/disallowance of Rs.19,95,450/- on account of bonus & of Rs.14,28,899/- on account of bad debts is not justified and is arbitrary inasmuch as the AO rejected the books of assessee and thereafter made specific disallowances/additions based on the entries in rejected books. The stand adopted by AO is illegal. 14. The appellant reserves the right to add, amend or alter any ground/s of appeal.”
Succinctly stated, the assessee firm which is a civil contractor had filed its return of income for A.Y. 2014-15 on 08.11.2014, declaring an income of Rs. 1,78,89,680/-. Case of the assessee firm
4 Five Star Construction Company Vs. DCIT-1(1), Bhilai was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act.
Survey proceedings under Sec. 133A of the Act were conducted at the business premises of the assessee firm on 11.03.2016. During the course of the survey proceedings several serious deficiencies had surfaced in the records of the assessee. It was found by the survey team that the assessee firm for recording on day-to-day basis its actual business transactions was by way of a consistent practice maintaining manual cash books for the preceding several years. It was observed by the A.O that the assessee had maintained 4 (four) volumes of manual cash book for the period relevant to the year under consideration, i.e. A.Y. 2014-15. The A.O on a perusal of the photocopies of the impounded records, observed, that the transactions for the year under consideration were spread over 1st page (i.e Page No.42 of impounded Article No.4) and last page (Page No.56 of impounded Article No.8). Referring to the contents of the manual cash books, it was observed by the A.O that the same were being regularly and meticulously maintained, wherein daily cash balances were drawn; entries were verified by responsible partners with their initials at some places; some of the entries were corrected after applying whitener; and postings
5 Five Star Construction Company Vs. DCIT-1(1), Bhilai were made giving ledger folio number against each entry. It was also observed by the A.O that the site-wise details giving names of the site- in-charge, persons through whom payments were made etc. were also recorded in the manual cash book. It was further observed by the A.O, that though the manual cash books made a reference to ledger folio numbers against each entry but no such corresponding ledgers were physically found available during the course of the survey proceedings. Also, it was observed by the A.O that the cash book on the basis of which the final accounts were prepared and got audited were not found available at the business premises of the assessee firm during the course of survey proceedings. On the basis of the aforesaid facts, the A.O holding a conviction that the impounded manual cash books were the actual cash books and the entries therein made were true and correct, thus called upon the assessee to correlate the same with its audited final accounts. In reply, it was the claim of the assessee that the manual cash books found during the course of the survey were rough log books which were maintained by the staff for their own use and memory. It was the claim of the assessee that its business transactions were duly recorded in its regular books of accounts. It was further the claim of the assessee that the manual cash books
6 Five Star Construction Company Vs. DCIT-1(1), Bhilai impounded by the department were not the actual cash books but the log books that were maintained by the office staff for the various firms, viz. M/s Five Star Construction Co. (assessee firm); M/s Five Star Construction Co. Pvt. Ltd; M/s Star Engineering Associates and M/s Star Engineering Associates Pvt. Ltd. It was further stated that the aforesaid log books were maintained by one of their old supervisor who had no knowledge of accounts and was though earlier engaged in field work, but thereafter having come across a medical problem was rendering his services in office. Elaborating on the nature of the entries in the log books, it was stated by the assessee that the same were prepared by the aforementioned person as regards the various transactions of purchase/sale of material, receipts, payments, bank transactions along with individual transactions of the partners of all the aforementioned four concerns. In its attempt to distance its actual business transactions from the contents of the log books, it was, inter alia, the claim of the assessee that the same were notings made by the supervisor who had maintained the same, for the purpose that he may be in a position to give an explanation w.r.t. any query that would be raised any senior officer or partners of the aforementioned firms. It was, thus, the claim of the assessee that the manual cash book that 7 Five Star Construction Company Vs. DCIT-1(1), Bhilai was found in the course of the survey proceedings may not be considered as the actual cash book of the assessee firm.
The A.O in order to verify the veracity of the aforesaid claim of the assessee, directed it to produce the ledgers corresponding to the manual cash books that were found in the course of the survey proceedings. In reply, it was submitted by the assessee that no separate ledger was available. However, the A.O did not find favor with the claim of the assessee that the entries mentioned in the manual cash books did not reveal its day-to-day business transactions. The reasons that had weighed in the mind of the A.O for rejecting the aforesaid explanation of the assessee, and concluding that the contents of the manual cash books revealed the actual business affairs of the assessee are culled out as under :- “The assessee’s explanation is grossly incorrect and misleading. As pointed out above it is a cash book and maintained meticulously on day-to-day basis drawing daily cash balances and posting corresponding ledger folios. It is also contains verification marks and even at some places initials of the controlling partners. The contention that it was maintained by some old supervisor, whose name purposefully concealed as there may be none, who was not having knowledge of accounts is absurd because the cash book was maintained strictly as per requirements of accountancy, in cool and compose manner with all sincerity and diligence. Several entries are interlacing and interlocking with the tally backup of final accounts prepared for the purposes of tax authorities. Some features and reasons for maintaining this cash book are noted below :-
8 Five Star Construction Company Vs. DCIT-1(1), Bhilai a) This cash book mainly contains all types of labour expenses incurred on actual basis. b) It contains machinery expenses of own machines and hired machines incurred on actual basis. c) It contains record of receipt (i) Cash received from different partners, or their relatives for meeting day to day expenses, (ii) Cash withdrawn from banks, (iii) Cash received from parties to whom cheques are issued of inflated amounts against material purchase or sub- contract payment for machines or labour and amounts representing inflated part are received back in cash, (iv) Cash received on sale of scarp, material, other items which are not recorded in audited books of accounts, (v) Cash received from parties over and above the amount received through cheque in respect of works executed. (vi) Cash recollected by payment of bogus unsecured loans made through cheque in audited books of account. Therefore, the assessee’s contention that it is log book maintained by some ex-employee having no knowledge of accountancy in clearly false and unbelievable. Therefore, I am not satisfied about the correctness or completeness of the accounts of the assessee, hence the books on the basis of which final accounts and audit report are prepared are rejected u/s 145(3) of the Act and the income is assessed in the manner provided in sec.144 of the Act after taking into account all relevant material. However, the entries made through bank, which were found to be correct are not disturbed and adopted as recorded in the Audit Report. For the purpose of clear understanding the entries contained in manual cash book have been entered into Tally software and details thereof are discussed subsequently.”
5. The A.O not being satisfied about the correctness and completeness of the accounts of the assessee on the basis of which its final accounts and audit report were prepared, thus rejected the same under Section 145(3) of the Act. The A.O after rejecting the books of 9 Five Star Construction Company Vs. DCIT-1(1), Bhilai accounts of the assessee proceeded with to assess its income in the manner provided in Sec. 144 of the Act and made the following additions/disallowances:- S. No. Particulars Amount (In Rs.) 1. Disallowance of the excess PRW (Labour & Machine) 90,72,799/- Expenses of Rs.7,24,00,859/- (as debited in the audited profit and loss account) as against the corresponding expenses found in the manual cash book of Rs.6,33,28,060/-.
2. Disallowance under Sec.40A(3) of the Act out of the 1,04,52,789/- expenditure of Rs.6,33,28,060/- (supra).
3. Disallowance under Sec.40A(3) of the payments 1,66,86,151/- which as per the manual cash book were made by the assessee to a person on a single day in cash exceeding Rs.20,000/- .
4. Disallowance of the assesses claim for deduction of 19,95,450/- provision for payment of bonus to staff.
Disallowance of the assesses claim for deduction of 14,28,899/- bad debts.
Disallowance of the assesses claim for deduction of 4,04,56,014/- inflated purchase expenses.
Addition towards bogus cash credit under Sec.68 of 4,82,840/- the Act.
8. Addition towards unexplained cash credit under 10,00,000/- Sec.68 of the Act.
9. Addition of undisclosed contract/hiring receipts. 27,88,260/- 10. Addition of the unrecorded sale proceeds of a motor 8,10,000/- car.
11. Addition under Sec. 69C of the Act towards 1,60,000/- unexplained expenditure incurred for purchase of gold biscuit.
12. Addition of undisclosed interest income. 1,59,000/- 13. Addition as regards the unexplained credit in the 6,56,248/- capital account of Sh. D.K Jain (partner).
14. Addition of long term capital gain (LTCG) on sale of 18,98,410/- land by the assessee firm which was claimed as exempt.
10 Five Star Construction Company Vs. DCIT-1(1), Bhilai Accordingly, the A.O after making the aforesaid additions /disallowances vide his order passed under Sec.144 r.w.s. 143(3), dated 31.12.2016 assessed the income of the assessee firm at Rs. 10,59,36,510/- (including LTCG of Rs.18,98,410/-)
6. Aggrieved, the assessee carried the matter in appeal before the CIT(Appeals) but without any success. The CIT(A) not only approved the rejection by the A.O of the assessee’s books of accounts under Sec. 145(3) of the Act and framing of the assessment under Sec.144 r.w.s. 143(3) of the Act, but also upheld all the additions/disallowances that were made by him.
7. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us.
We have heard the ld. authorized representatives for both the parties and perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.
11 Five Star Construction Company Vs. DCIT-1(1), Bhilai
As is discernible from the orders of the lower authorities, it transpires that during the course of the survey proceedings conducted at the business premises of the assessee firm on 11.03.2016, certain manual cash books recording on a day-to-day basis the transactions of the assessee firm over the years were found and impounded. On a perusal of the orders of the lower authorities, we find that 4 (four) volumes of cash books containing transactions commencing from 01.04.2013, i.e. 1st page (Page No.42 of impounded Article No.4) and last page i.e. 31.03.2014 (Page No.56 of impounded Article No.8) were found and impounded by the survey officials. It is a matter of fact borne from record, that the assessee on being called upon by the A.O to furnish the ledgers corresponding to the manual cash books, and also to reconcile its book results as were disclosed on the basis of its audited accounts with the said manual cash books, had failed to do the needful. We are of a strong conviction that no infirmity emerges from the view taken by the A.O, who on the basis of his exhaustive deliberations, had in the backdrop of the entries in the manual cash books that were impounded during the course of the survey proceedings, raised serious doubts as regards the correctness and completeness of the accounts of the assessee firm on the basis of 12 Five Star Construction Company Vs. DCIT-1(1), Bhilai which its final accounts and audit report were prepared. In our considered view the A.O had rightly triggered the provision of Sec. 145(3) of the Act, and after rejecting the accounts of the assessee, which did not inspire any confidence at all proceeded with to assess its income in the manner provided under Sec.144 of the Act. We, thus, approve the rejection of the accounts of the assessee firm under Sec.145(3) of the Act by the A.O.
We shall now deal with the manner in which the A.O had assessed the income of the assessee firm vide his order passed under Sec.144 r.w.s. 143(3) of the Act, dated 31.12.2016. Before proceeding any further, we may herein cull out Sub-section (3) of Section 145 of the Act, which during the year under consideration read as under :- “(3). Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” (emphasis supplied by us) On a perusal of sub-section (3) of Section 145, it transpires that in a case where the A.O is not satisfied about the correctness or completeness of the accounts of the assessee; or where the method of accounting providing in sub-section (1); or accounting standard as 13 Five Star Construction Company Vs. DCIT-1(1), Bhilai notified under sub-section (2) of Sec. 145 of the Act, have not been regularly followed by the assessee, then, the A.O may make an assessment in the manner provided in Sec.144. In so far the framing of a best judgment assessment is concerned, the manner for framing of such assessment can be traced in Sec.144 of the Act, which reads as under: “144(1) If any person _ (a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section; or. (b) fails to comply with all terms of a notice issued under sub- section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section; or (c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment. Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of 14 Five Star Construction Company Vs. DCIT-1(1), Bhilai
section 142 has been issued prior to the making of an assessment under this section.” (emphasis supplied by us) On a careful conjoint reading of Sec.145(3) and Sec.144 of the Act, we find that in a case where the books of accounts of an assessee are rejected by the A.O, then, in light of the term “….the Assessing Officer may make an assessment in the manner provided in section 144” used in sub-section (3) of Sec. 145, the latter after taking into account all relevant material which he had gathered, after giving the assessee an opportunity of being heard, may make the assessment of its total income to the best of his judgment. In sum and substance, the A.O after rejecting the books of accounts of the assessee is vested with a discretion to frame the assessment in a manner provided in Sec.144 of the Act.
11. Although, we concur with the rejection of the books of account of the assessee under sub-section (3) of Section 145 by the A.O, but at the same time are unable to persuade ourselves to subscribe to the manner in which he had thereafter assessed the income vide his order passed under Sec.144 r.w.s. 143(3), dated 31.12.2016. We, say so, for the reason that though the A.O had in clear and unequivocal terms rejected the books of accounts of the assessee under Sec.145(3) of the 15 Five Star Construction Company Vs. DCIT-1(1), Bhilai Act but had thereafter based his assessment on the profit that was disclosed by the said rejected books of accounts. The aforesaid factual position can safely be gathered from Page 14- Para 23 of the assessment order, wherein the A.O had worked out the assessed income of the assessee firm, as under :-
“23. Subject to above discussion total income of the assessee is computed as under:- TOTAL INCOME AS PER RETURN 1,78,89,680/- Add: PRW (Labour, Machine, etc.) 7,24,00,859/- as claimed in audit for separate consideration para7-9 Total 9,02,90,539/- LESS: PRW (Labour, Machine, etc.) 6,33,28,060/- as per manual cash book allowed para7-9 ADD: Total 2,69,62,479/- Disallowance u/s 40A(3)-para-10 & 2,71,38,940/- 11 Disallowance of bonus bogus 19,95,450/- claimed-para-12 Disallowance claim of bad debts- 14,28,899/- para-13 Bogus claim of material purchase- 4,04,56,014/- para-14 Bogus cash credit u/s.68-para-15 4,82,814/- Unexplained cash credit-para-16 10,00,000/- Unrecorded work receipts-para-17 27,88,260/- Unrecorded income from car sale- 8,10,000/- para-18 Unexplained Expenditure u/s.69C- 1,60,000/- para-19 Unrecorded interest receipt-para- 1,59,000/- 20 Unexplained cash credit u/s.68- 6,56,248/- para-21
16 Five Star Construction Company Vs. DCIT-1(1), Bhilai
7,70,75,625/- TOTAL BUSINESS INCOME 10,40,38,104/-
LONG TERM CAPITAL GAIN : assessed separately on 18,98,410/- sale of land @ 20% tax : para-22 TOTAL ASSESSED INCOME 10,59,36,510/-
Total income assessed and rounded at Rs.10,59,36,510/-.” (emphasis supplied by us) We are unable to fathom that now when the A.O had rejected the books of accounts of the assessee, then as to how he could thereafter fall back on the profit disclosed by the said rejected books of accounts for assessing the income of the assessee firm. The self-contradictory approach adopted by the A.O is incomprehensible. On the one hand, the A.O not being satisfied about the correctness and completeness of the accounts of the assessee, had rejected the books of accounts on the basis of which the final accounts and audit report of the assessee firm were prepared; but had thereafter on the other hand, while assessing its income relied on the profit disclosed by the said rejected books of accounts. Our aforesaid view that where the A.O had rejected the books of accounts of an assessee under Sec.145(3) of the Act, then he is precluded from relying upon the said books of accounts (rejected) while assessing the income is supported by the judgment of the 17 Five Star Construction Company Vs. DCIT-1(1), Bhilai Hon’ble High Court of Jharkhand in the case of Amitabh Construction Pvt. Ltd. Vs. ACIT, Tax appeal No.16 of 2010, dated 10.05.2011. In its aforesaid order the Hon’ble High Court had observed, that once the A.O had rejected the books of accounts, then, he could not have held the profit which is supported by the books of accounts to be correct. For the sake clarity the observations of the Hon’ble High Court are culled out as under:-
“11. However, so far as assessment of the income of the assessee is concerned, for that purpose few facts are very relevant and which are that the total gross receipt of the assessee was Rs.4,51,01,011/- the disclosure of his income is Rs.14,13,624/- and interestingly this income was accepted by the assessing officer itself which is apparent from the assessment order. Then the assessing officer added the amount shown in the accounts of Sundry Creditors to the tune of Rs.1,59,90,274/- and assessed the total income as Rs.1,74,03,900/- meaning thereby by this order of assessment the assessing officer accepted the books of accounts for the purpose of finding out the profit shown by the assessee to be correct as disclosed in the return and thereafter added the amount of the credit shown in the account of Sundry Creditors. In view of the above it appears that the assessing officer has passed the contradictory order by holding that the books of accounts are not reliable while deciding the issue of Sundry Creditors but relied upon the return for accepting profit shown to be correct which is supported by the books of accounts. The other fact relevant is that for gross receipt of Rs.4,51,01,011/- the assessing officer has not declared that gross receipt is the correct figure and yet added the income of Rs.1,59,90,274/- merely on account of cash entries.
In the facts of the case, the assessing officer has committed an error of law by adding that amount u/s 68 of the Act of 1961 straightway merely because of the reason that the genuineness of the transaction shown in the heading of the Sundry Creditors was not found genuine.
18 Five Star Construction Company Vs. DCIT-1(1), Bhilai
13. In view of the above reasons, following Section 145(3) the assessing officer should have proceeded u/s 144 and should have followed the procedure of assessment of the tax.
In view of the above reasons the question is answered that the Tribunal and the Assessing Officer though recorded finding of fact correctly that the transaction of the Sundry Creditors were not genuine but so far as assessment order is concerned that deserved to be set aside and the assessing officer should assess the income afresh u/s 144 (3). 15. The appeal is accordingly allowed and the order of the Income Tax Appellate Tribunal, Circuit Bench, Ranchi and the Assessing Officer are set aside. The matter is remanded back to the assessing officer for passing a fresh assessment order and the parties are directed to appear before the concerned authority on 13th June, 2011.” Also, a similar view had been taken by a coordinate bench of the ITAT, “B” Bench, Pune in the case of ACIT, Central Circle-2(1), Pune Vs. M/s ISMT Limited, & 2752/Pun/2016; dated 06.12.2021. It was observed by the Tribunal by drawing support from a host of judicial pronouncements, that once the books of accounts of an assessee are rejected by the A.O under Sec. 145(3) of the Act, then he cannot rely upon on the same books of account for the purpose of making any addition, and the only course of action available with him is to determine the income by application of a flat rate of profit by taking into consideration the business conditions of the assessee as in comparison to profits disclosed by other assessee’s
19 Five Star Construction Company Vs. DCIT-1(1), Bhilai in the similar line of business. The Tribunal while concluding as hereinabove had held as under: 12. We have carefully gone through the orders of the lower authorities as well as the written submissions filed before us. We consider it not necessary to dwell into the rival submissions made by both the parties as we find the approach of both the authorities is totally flawed for the reason that when the books of accounts stood rejected by both the authorities and when the assessee not challenged the action of the lower authorities rejecting the books of accounts then the only course of action available to the Assessing Officer is to determine the profits by application of flat rate of profits by taking into consideration the business conditions of the assessee and compare it from the profits disclosed by the assessee in the similar line of businesses. In this connection, reference can be made to the following decisions:- (i) CIT vs. K.Y. Pilliah & Sons, 63 ITR 411 (SC); (ii) Dabros Industrial Co. (P.) Ltd. vs. CIT, 108 ITR 424 (Cal.); (iii) Badrinath Agarwal vs. CIT, 65 ITR 242 (All.); and, (iv) Shri Venkteshwar Sugar Mills vs. CIT, 341 ITR 588 (All.).
13. It is also settled position of law that the Assessing Officer cannot rely on the same books of accounts which are rejected for the purpose of making any other additions as held by the Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions vs. CIT, 232 ITR 776 (Andhra Pradesh), Hon’ble Rajasthan High Court in the case of Malpani House of Stones vs. CIT, 395 ITR 385 (Rajasthan) and Hon’ble Punjab & Haryana High Court in the case of CIT vs. Gian Chand Labour Contractors, 316 ITR 127 (P&H).
14. In the present case, having rejected the books of accounts maintained by assessee, Assessing Officer cannot rely upon on the same books of account for the purpose of making addition in respect of sale of scrap etc.
15. Thus, in the light of the above settled legal position, the approach of both the authorities is totally flawed and cannot be sustained in the eyes of law. Thus, the addition made by the Assessing Officer under the normal provisions of the I.T. Act as confirmed by the ld. CIT(A) cannot be sustained under the law. Accordingly, ground of appeal
no.1 raised by the assessee stands allowed.” Also, we find that the Hon’ble High Court of Andhra Pradesh in the case of Indwell Constructions Vs. CIT (1998) 232 ITR
77. (AP), had 20 Five Star Construction Company Vs. DCIT-1(1), Bhilai observed, that where the books of account have been rejected, the revenue cannot rely on the same books for addition of an exact item of expenditure in the profit and loss account. The Hon’ble High Court had observed as under: “Where the books of account have been rejected, the revenue cannot rely on the same books for addition of an exact item (of expenditure) in the profit and loss account.” The aforesaid view of the Hon’ble High Court in the case of Indwell Constructions (supra) had thereafter been followed by the Hon’ble High Court of Punjab & Haryana in the case of CIT vs. Gian Chand Labour Contractors, 316 ITR 127 (P&H).
Considering the facts involved in the case before us in the backdrop of the aforesaid judicial pronouncements, we are of the considered view that the A.O having rejected the books of accounts of the assessee firm under sub-section (3) of Sec. 145 of the Act, thereafter, could not have relied upon the said books of accounts, and the proper recourse available with him was to judicially determine its business profits in the manner provided in Sec. 144 of the Act. Our aforesaid view that once the books of account of an assessee are rejected as unreliable then it is open to the A.O to estimate the assessee’s profits considering the profit which was 21 Five Star Construction Company Vs. DCIT-1(1), Bhilai earned in similar business by other similarly placed merchants is supported by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. K.Y Pilliah & Sons (1967) 63 ITR 411 (SC). Also, we find that the Hon’ble High Court of Calcutta in the case of Dabros Industrial (P) Ltd. Vs. CIT (1977) 108 ITR 424 (Cal), had observed that once the books of account of an assessee are rejected, then profit has to be estimated. The Hon’ble High Court of Allahabad in the case of Shri Venkteshwar Sugar Mills Vs. CIT(Appeals), (2012) 20 taxmann.com 650 (All), had observed, that once the books of accounts are rejected, then there is no option before the Assessing Officer except to estimate the sale and G.P rate which in the case before them was determined by taking comparative figures of the assessee for the previous assessment year. We, thus, on the basis of our aforesaid deliberations and the settled position of law expounded in the aforesaid judicial pronouncements, are of the considered view, that the A.O after rejecting the books of accounts of the assessee could not have based his assessment on the said books of accounts and should have judicially determined the business profits in the manner provided in Sec. 144 of the Act.
22 Five Star Construction Company Vs. DCIT-1(1), Bhilai
12. In so far the determination of the business profits of the assessee is concerned, the same in all fairness could have been done by the A.O by drawing support from the assessments which were framed by him in its case under Section 143(3) r.w.s 147 of the Act for A.Y 2010-11 to A.Y 2013-14, wherein identical facts were involved. It would be relevant to point out that manual cash books/log books for the aforesaid preceding years, i.e A.Y 2010-11 to A.Y 2013-14 were also found and impounded during the course of survey conducted at the assessee’s premises on 11.03.2016, as under :
S.No. Register No. A.Y For the period 1. 1 2014-15 1.6.13 to 10.11.13 2. 2 2013-14 11.09.12 to 24.01.13 3. 3 2012-13 14.12.11 to 31.03.12 2013-14 08.04.12 to 28.04.12 4. 4 2013-14 25.01.13 to 30.03.13 2014-15 01.04.13 to 31.05.13 5. 5 2015-16 01.05.14 to 25.10.14 6. 6 2009-10 21.02.09 to 31.03.09 2010-11 01.04.09 to 30.06.09 7. 7 2014-15 30.04.13 to 31.03.14 2015-16 30.04.14 to 30.09.14 8. 8 2014-15 11.11.13 to 31.03.14 2015-16 01.04.14 to 30.04.14 9. 9 2013-14 30.04.12 to 10.09.12 10. 10 2016-17 26.12.15 to 07.03.16 On a perusal of the records, it transpires that on the basis of the entries recorded in the manual cash books/log books for the 23 Five Star Construction Company Vs. DCIT-1(1), Bhilai aforesaid preceding years, the concluded assessments of the assessee firm for the said respective years i.e A.Y 2010-11 to A.Y 2013-14 were reopened u/s 147 of the Act. As is discernible from the assessment orders for the aforesaid preceding years, Page 1 to 37 of APB, the A.O while framing the respective assessments for the aforesaid preceding years, had observed, that the aforesaid manual cash books/log books for the said years revealed similar discrepancies in the books of accounts of the assessee firm for the said respective years. However, as the assessee during the course of the assessment proceedings in his statement that was recorded under Sec. 131 of the Act, dated 23.10.2017 had agreed to disclose net profit @8% of its turnover and to facilitate the same revise its return of income, which it had done in its respective returns filed in response to notice(s) issued u/s 148 of the Act, therefore, the A.O had accepted its returned income for all the said respective preceding years i.e A.Y 2010-11 to A.Y 2013-14 (subject to separate addition of unexplained cash credit u/s 68 of the Act for A.Y 2011-12).
Admittedly, it is a matter of fact borne from record that the assessee firm vide the statement of its partner, viz. Shri. Dilip Kumar Pincha that was recorded u/s 131 of the Act on 23.10.2017, had 24 Five Star Construction Company Vs. DCIT-1(1), Bhilai though agreed to disclose its income @8% for A.Y 2010-11 to A.Y 2013-14 and A.Y 2015-16 but had not made any such offer for the year under consideration i.e A.Y 2014-15. However, considering the fact that the returned income of the assessee firm for the aforesaid preceding years, involving identical facts, had been accepted by the the A.O vide his respective orders passed u/s 143(3) r.w.s 147, therefore, in all fairness the same can safely be adopted as a sound basis for estimating its income for the year under consideration, i.e A.Y 2014-15. We, thus, on the basis of our aforesaid observations, though approve the rejection of the books of accounts of the assessee firm u/s 145(3) of the Act by the A.O, but direct him to determine its business profits in the alike manner as was adopted by him while framing the respective assessments u/ss. 143(3)/147 in the case of the assessee firm for the preceding years, i.e A.Y 2010-11 to A.Y 2013-14, i.e @ 8% of its for the year under consideration.
14. However, the maintainability of the additions made by the A.O u/s 68 and u/s 69C would not be telescoped in the business profits of the assessee firm and are required to be considered separately, as under: (A). Smt. Anita Gajwani : Rs. 4,82,840/-
25 Five Star Construction Company Vs. DCIT-1(1), Bhilai (i). The A.O while framing the assessment observed that as per the audited books of accounts the assessee firm had made a payment of Rs. 4,82,841/- on 02.04.2013 vide cheque drawn on PNB to Ms. Anita Gajwani. It was, however, observed by the A.O that as per the impounded manual cash book the assessee firm had on 03.04.2013 received back cash from Ms. Anita Gajwani. The assessee firm on being confronted with the aforesaid facts, submitted that the said noting was made in the cash book by its supervisor who was maintaining the log book/manual cash book for his memory. It was the claim of the assessee that it had given the cheque to Mr. Biswal for handing over the same to Ms. Anita Gajwani. It was submitted by the assessee that the supervisor who was maintaining the log book had wrongly recorded the transaction as a receipt and payment. However, the A.O did not find favor with the explanation of the assessee and treating the transaction as an accommodation entry made an addition of the aforesaid amount of Rs. 4,82,840/- as an unexplained cash credit u/s 68 of the Act.
26 Five Star Construction Company Vs. DCIT-1(1), Bhilai (ii). On appeal, the assessee filed before the CIT(Appeals) the confirmation a/w income-tax returns of Ms. Anita Gajwani. However, the CIT(Appeals) after referring to the miniscule returned income of Ms. Anita Gajwani (supra) was of the view that she clearly lacked creditworthiness. Accordingly, the CIT(Appeals) upheld the addition of Rs. 4,82,840/- made by the A.O u/s 68 of the Act.
(iii). We have given a thoughtful consideration to the aforesaid issue in the backdrop of the observations of the lower authorities. On a perusal of the facts as can be gathered from the orders of the lower authorities, the assessee firm had paid an amount of Rs. 4,82,841/- on 02.04.2013 vide cheque drawn on PNB to Ms. Anita Gajwani. However, as observed by the A.O, the assessee as per the manual cash book (supra) had on 03.04.2013 received back the aforesaid amount in cash from Ms. Anita Gajwani. The A.O on the basis of the aforesaid facts dubbed the transaction as an accommodation entry and made an addition of Rs. 4,82,840/- u/s 68 of the Act. The aforesaid view arrived at by the lower authorities in our understanding is absolutely fallacious. On a perusal of the confirmation of Ms.
27 Five Star Construction Company Vs. DCIT-1(1), Bhilai
Anita Gajwani, Page 98-99 of APB, it transpires that the payment of Rs. 4,82,841/- was made by the assessee firm vide Cheque no. 184207 on account of the outstanding liability of Rs. 4,82,841/- (Cr.) that was due towards her on 01.04.2013. As stated by Ms. Anita Gajwani (supra) the outstanding liability of Rs. 4,82,841/-(Cr.) on 01.04.2013 was comprised of a loan of Rs. 2.50 lac (Cr.) that was advanced by her on 02.04.2007 to the assessee firm, while for the balance amount was the interest component that had accrued on the same till date. As the assessee had received the loan from Ms. Anita Gajwani in the year relevant to A.Y 2008-09 which a/w the interest element over the preceding years had swelled to an amount of Rs. 4.82 lac (approx.), therefore, there was no justification for the A.O to have held any part of the said amount that was received/generated in the preceding years as an unexplained cash credit u/s 68 of the Act in the hands of the assessee firm. We, thus, finding no justification in treating of the aforesaid amount of Rs. 4.82 lac (supra) as an unexplained cash credit u/s 68 of the Act by the A.O direct him to vacate the same.
(B). Ms. Mamila Giri : Rs.10,00,000/-
28 Five Star Construction Company Vs. DCIT-1(1), Bhilai (i). The A.O while framing the assessment observed that as per the manual cash book the assessee firm was in receipt of an aggregate sum of Rs. 10 lac, i.e Rs. 5 lac each on 16.04.2013 and 01.06.2013 from Smt. Manila Gir. On being queried, it was the claim of the assessee firm that the transaction was not related to it. In the absence of any plausible explanation the A.O made an addition of the aforesaid amount of Rs. 10 lac as an unexplained cash credit u/s 68 of the Act.
(ii). On appeal, the assessee again distanced itself from the transaction in question. The CIT(Appeals) observing that the assessee firm had failed to come forth with any explanation as regards the nature and source of the cash credit as was recorded in its manual cash book that was impounded from its business premises during the course if survey proceedings conducted u/s 133A on 11.03.2016, thus, upheld the addition of Rs. 10 lac made by the A.O u/s 68 of the Act.
(iii). As the ld. A.R had neither come forth with any explanation to rebut the observations of the lower authorities nor led any material which would prove otherwise, therefore, we are 29 Five Star Construction Company Vs. DCIT-1(1), Bhilai constrained to sustain the addition of Rs. 10 lac (supra) made by the A.O u/s 68 of the Act.
We shall now deal with the addition of Rs. 1.60 lac made by the A.O u/s 69C of the Act. As is discernible from the assessment order, the A.O while framing the assessment observed that though the manual cash book of the assessee revealed a debit entry of Rs. 1.60 lac against the name of Shri. Moolchand ji, which was apparently spent towards purchase of a gold biscuit, but the same was not found recorded in the regular books of accounts of the assessee. On being queried, it was the claim of the assessee that the same pertained to the Vishwakarma expenses that were incurred by its partners. The A.O observing that the aforesaid expenditure was not record in the books of account of the assessee firm thus made an addition of the same u/s 69C of the Act.
On appeal, the CIT(Appeals) being of the view that the pooja expenses were not allowable as a deduction u/s 37 of the Act, disallowed the same.
Ostensibly, the aforesaid expenditure of Rs. 1.60 lac is not recorded in the regular books of accounts of the assessee firm.
30 Five Star Construction Company Vs. DCIT-1(1), Bhilai Considering the aforesaid facts, we are of the considered view that the A.O had rightly made an addition of the amount of Rs. 1.60 lac (supra) under Sec. 69C of the Act. Once the A.O had made an addition of the aforesaid expenditure of Rs. 1.60 lac as an unexplained expenditure u/s 69C of the Act, then there was no occasion for the CIT(Appeals) to have looked into its allowability as a deduction u/s 37 of the Act. We, thus, finding no infirmity in the addition of Rs. 1.60 lac made by the A.O u/s 69C of the Act, uphold the same.
Resultantly, the appeal of the assessee is partly allowed in terms of our aforesaid observations.
Order pronounced in open court on 29th day of May, 2023. Sd/- Sd/- ARUN KHODPIA RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायपुर/ RAIPUR ; �दनांक / Dated : 29th May, 2023 ***#SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to :
1. 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent.
3. The CIT(Appeals)-II, Raipur (C.G) 4. The Pr. CIT-II, Raipur (C.G) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण,रायपुर ब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur.
31 Five Star Construction Company Vs. DCIT-1(1), Bhilai