SHRI FAROOQ AHMAD AHANGAR,SRINAGAR vs. INCOME TAX OFFICER,WARD-3(1), SRINAGAR

Per Dr. M. L. Meena, AM:

Both the appeals have been filed by the assessee against the order dated 10.10.2018 passed by the Ld. Commissioner of Income Tax

2 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO (Appeals)-1, Amritsar (Camp at Jammu), in respect of the Assessment

Years 2009-10 & 2010-11.

606/Asr/2018:

“1. The ld. CIT(A) erred in both facts and laws by confirming application of net profit rate of 8% on gross turnover without any logical basis, when the assessee has furnished duly audited accounts and produced complete books of account and vouchers, as such erred in both facts and laws.

“1. The ld. CIT(A) erred in both facts and laws by confirming addition of Rs.5,72,590.00 u/s 68 of the Income Tax Act, 1961.

3 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO ITA No. 606/Asr/2018 (Assessment Year 2009-10):

assessee is individual and filed its ITR declaring income of Rs.

6,50,372.00/- against Gross Sales of Rs. 1,18,24,952.00/- and thus,

declared Net profit rate of 5.5%. During scrutiny proceedings, the appellate

produced books of account and provided details required by the AO.

However, the Ld AO by rejecting book results, applied net profit rate of 10%

relying on the judgment delivered by Hon’ble Punjab & Haryana High Court

in case of M/s Shivam Costruction Co. Vs CIT Patilia ITR No

166/167/183/184 of 2007.

against 10 % applied by the AO, relying on ITAT Bench Amritsar wherein it

has upheld Net profit rate of 7% in the case of Civil and road construction

contractors.

record stating therein that the assessee is engaged in the business of

electrical, mechanical and mining works contractor and applying net profit

rate of 10% by purely relying on the judgment passed by Hon’ble Punjab &

Haryana High Court in case of M/s Shivam Construction Co. Vs CIT Patiala

4 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO ITR No 166/167/183/184 of 2007 without considering assessee past history

of the assessee or net profit shown by other assesses in the same line of

business in the state of J & K, net profit rate of 10%applied by the AO

cannot justified and that the Ld. CIT (A) restricted net profit rate of 8%

without appreciating the facts of the case. It is submitted that assessee is a

regular tax payer filing its ITR regularly duly supported with audited

accounts. The Ld. AO didn’t point out any material defect in the books of

accounts for applying such abnormal Net profit rate. The relevant part of

the written submissions reads as under:

Ground 1 & 2:-

The assessee is individual by status filed its ITR voluntary and declared income of Rs 650372.00 against Gross sales of Rs 11824952.00 , which works out to be Net profit rate of 5.50%, which is highly reasonable in this kind of trade . The assessee is a regular tax payer and during the year was engaged in the business of electrical, mechanical, mining & operation of plant contractor. The Ld CIT (Appeals) has upheld the Net Profit Rate of 8% on the basis , that Hon'ble ITAT Bench Amritsar has upheld Net profit rate of 7% in the case of Civil and road construction contractors and the assessee is engaged in the business of electrical, mechanical and mining works contractor and applying net profit rate of 10% purely by relying on the judgment passed by Hon’ble Punjab & Haryana High Court in case of M/s Shivam Costruction Co. Vs CIT Patialia ITR No 166/167/183/184 of 2007, without considering assessee past history or net profit shown by other assesses in the same line of business in the state of J & K, net profit rate of 10% cannot be upheld and the Ld. CIT (A) applied net profit rate of 8% without any logical basis. It is submitted, that Ld. CIT (A) has also committed the same mistake by not considering the past history of assessee or any comparable case rather in an arbitrary manner applied Net profit of 8% without any logical basis. It is submitted, that the past performace of the assesee is reproduced as:

5 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO Assessment 2005-06 2006-07 2007-08 2008-09 2009-10 Year Sales/Turnover 7354444 9748994 13186677 18741190 11824952 Net Profit Rate 108562 222346 675590 946175 650372.00 Net Profit Rate 1.48% 2.28% 5.12% 5.05% 5.50%

Therefore, the average Net profit rate of assessee is 3.89% and the assessee during the year has declared Net profit rate of 5.50% and the profit declared during current year are encouraging than previous results, therefore Net profit rate of assessee declared may please be accepted. Further for the same assessee, the Net Profit Rate of 5% stands upheld by this Hon’ble Bench for the assessment year 2005-06 (ITA NO 126 (ASR ) /2010 )

The AO may resort to estimation of net profits, when the assessees book results or books of accounts are unreliable. Before proceeding for making estimation, the AO must examine book results, detect material defects, afford a reasonable opportunity to the assessee and in case, the assessee is unable to provide justified explanation, the AO may resort to estimation of income after rejecting the Book results. However, Assessing Officers must exercise this power prudently and not act arbitrarily, which has not been adopted m this case In the instant case, the AO ignored book results and assessees past results and proceeded for estimation of income, which is not only unjustified but also illegal.

The assessing officer had not specifically identified any specific defects in the book results nor the assessing officer held that the expenses so claimed by the assessee in his books of accounts were not incurred by the assessee for the purpose of its business. The assessee provided all possible cooperation and the AO without pointing out any material mistake and error in the book results estimated income @ 10% is legally incorrect, which stands reduced to 8% by CIT (A)s. Further the AO is a quasi judicial authority & in case the books results of the assessee are to be rejected, the income of assessee is to be estimated on some reasonable basis for which comparable case and history of assessee could be taken as a guide.”

raised by the Ld. A.R, and supported the Impugned order.

6 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO 8. We have heard the Addl. CIT D.R., perused the material on records,

written submission filed by the assessee and the judgments relied upon. It

is undisputed fact that books of account are rejected by invoking provisions

of Section 145(3) of the Act. After rejection of books of account, keeping in

mind the judicial guideline available on issue the income of the assessee is

to be estimated and for the purpose of such an exercise history of the

assessee and any comparable case is the best guide subject to parity in

facts and circumstances. However, it is equally settled position in law that

merely because provisions of section 145(3) are invoked and best

judgement assessment is made the Assessing officer in all such cases

acquires jurisdiction to reach a different figure of profit against what is

disclosed by the assessee. This view was propounded by the Hon’ble

Rajasthan High Court in the case of Gotan Lime Khanij Udhyogh 256 ITR

243 (Raj.) and stood duly approved by the Hon’ble Allahabad High Court in

the case of CIT Vs Mahadev Fleet (P) Limited in ITA No. 232 of 2013 order

dated 10.09.2013.

Ltd. 105 ITR 212 (S.C.) guided the administration of justice by observing

that the taxing authorities exercise quasi-judicial powers. In doing so they

must act in a fair and not a partial manner. Although it is a part of their duty

7 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO to ensure that no tax legitimately due form an appellant should remain un-

recovered, they must also at the same time not act in a manner as might

indicate that scales are weighed high against the appellant. The assessing

authority has to look to the substance of the situation and decide the matter

in such a manner that neither the Revenue is put to unreasonable loss nor

is the assessee subjected to unreasonable hardship as held by the Hon’ble

Calcutta High Court in the case of CIT Vs Hazaribagh Coal Syndicate Pr.

Ltd. 177 ITR 135 (Cal.).

bring ourselves to the assessment order passed by the AO who has

chosen to apply N.P rate of 10% ignoring past history of the assessee

without bringing on record any comparable case where such an exorbitant

rate of N.P was either shown by the assessee or assessed by the AO

which has to become final. The AO while framing assessment has totally

lost sight of the fact that during the year under consideration the Audited

Accounts for year under consideration as well as for past assessment

years were undisputedly available with the Department. It is not the case of

the AO by drawing comparison with the past years Audited Accounts in the

year under consideration assessee had either shown certain expenses in

abnormal terms or that certain expenses were debited for an abnormal

8 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO amount. Hon’ble Delhi High Court in the case of Additional CIT Vs Jai

Engineering Works 113 ITR 389 (Del.) had the occasion to consider a

question that whether the report of the Auditor could be said to be ‘material’

on which reliance could be placed by the Income Tax Authorities. The

Hon’ble High Court while approving the order passed by the Tribunal ruled

that in case where books are not made available for AO’s verification the

AO should rely on the Audit Report because the said evidence is

admissible under Indian Evidence Act, 1872.

upon above facts what would be the reasonable rate of Net Profit. Since,

the turnover has gone down but higher than the earlier years. Therefore,

relying the past years trading results, in the present case, it may be an

appropriate guide to go by past history. We are of the view, that it would be

just fair, therefore, to apply N.P rate of 6% on gross receipts of Rs.

1,18,24,952/-. We also make it clear that assessee shall not be entitled for

any other deduction such as depreciation and interest paid. Thus, ground

no. 1 is partly allowed.

adjudication.

9 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO ITA No. 607/Asr/2018 (Assessment Year 2010-11)

on account of wages payable, that assessee could not establish the

complete identity of the parties and genuineness of the transactions being

not satisfied with the appellate information filed in respect of wages

claiming that its genuineness stands itself accepted, when trading results of

the assessee are accepted.

The Ld. CIT (A) has confirmed the addition of Rs 5,72,590.00 u/s 68 14.

of the Act of wages payable on the basis of not establishing identity of the

parties and genuineness of the transactions.

unjustified and against the law. Further the entire addition of Rs 572590.00

u/s 68 of the Act, is based on presumptions by ignoring the facts and

circumstances of the case. The Ld. AO made an addition of Rs 572590.00

on account of wages payable u/s 68 of the Act on the basis, that assessee

could not establish the complete identity of the parties involved and

genuineness of the transactions. The appellate produced all possible

information in respect of wages and its genuineness stands itself accepted,

when trading results of the assessee are accepted. Therefore, question of

10 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO not establishing genuineness of these transactions does not arise. Further

regarding the identity, in this connection, it is submitted, that assessee has

mentioned complete name and address in the book of accounts, which is

sufficient identity of labour. He has made a reference to section 68 of the

act in its reply which reads as under:

Kind attention of the Hon'ble Bench is invited towards section 68 of the Act.

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature & source thereof or the explanation offered by him is not in the opinion of the assessing officer satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. Section 68 is a deeming provision and applies on fulfillment of three conditions:

a. The existence of books of accounts maintained by assessee b. A credit entry in the books of accounts c. Absence of a satisfactory explanation by the assessee about the nature & source of the sum credited.

The source of credit of these entries is clear from debit to wages account and the same stands accepted by AO/CIT(A), when books results of the assessee are accepted and the wages debited to PL account are accepted and not doubted. Therefore, this addition stands made without application of mind.

It is further submitted, that section 68 of the Act is not applicable to credit representing a liability payable by the assessee rather to credit representing monies received from another person.

In support of this contention, kind attention is invited towards following judgments.

11 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO ITO Vs Ashok Transport Co. (ITAT Jodhpur)

There is a difference between credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction a liability which arises as a consequence of any purchase resulting in a corresponding credit to the account of the supplier cannot be added u/s. 68 of the Act, more so, when the purchase has been accepted as genuine. In other cases involving actual receipt of money, the provisions of sec. 68 are applicable and then the onus is on the assessee to prove satisfactorily the nature and source of the monies. In the present case we note that the transaction between the assessee and the truck owners is a liability which assessee had to pay arising from the trade transaction of Rs.78,22,863/- which is reflected under the head ‘other payable’ has arisen as a consequence of the aforesaid trade transaction and the sum of Rs.78,22,863/- represented the liability to pay the truck owners by the assessee once he receives from the principal. We note the entire turnover on transportation of Rs. 11,70,63,030/- has beat accepted by the AO as genuine, so question of addition of the sum of Rs.78,22,863/- which represented the liability to pay the truck owners by assessee cannot be added u/s. 68 of the Act. Therefore, we do not find any infirmity in the order of the CIT(A) and we agree that section 68 of the Act was wrongly invoked in the present case in respect of the outstanding liability payable by the assessee to the truck owners.

Sanjav Sharma Vs. ACIT (ITAT Delhi)

The Assessing Officer has accepted not only the sales figures but has also accepted that total purchases. Under accounting principles, a liability can only be brought into account by a credit entry in the books of account in favour of the person to whom the money is payable’ Thus, there is marked difference between a credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction, a liability for purchase which has been credited in the account of the supplier cannot be added under section 68 of the Act, more so when the purchase has been accepted as genuine and a deduction therefore has been allowed. Therefore, it is prayed, that additions confirmed by CIT(A) may please be deleted.”

written submission filed by the assessee and the judgments relied upon. It

12 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO is undisputed fact that books of account are rejected by invoking provisions

of Section 145(3) of the Act.

applying section 145(3) of the Act, the AO has estimated the income of te

assessee as above. It is settled law that once books are rejected and

income assessed by the AO on estimate basis, the provisions of section 68

of the Act cannot be invoked.

expenses and the said liability was accounted for as credit entry in its

books of account. Thus, for the purpose of discharging burden to prove

veracity of said expenses and he had duly recorded said expenses in its

books of account, Assessing Officer was not justified in disallowing said

expenditure by treating same as unexplained expenditure or bogus liability

under section 68 of the Act.

on the facts of the case and thus, section 68 of the Act was wrongly

invoked in the present case in respect of the wage liability. Accordingly, the

addition of Rs 572590.00 is deleted.

13 ITA Nos. 606 & 607/Asr/2018 Farooq Ahmad Ahangar v. ITO 20. In the result, both the appeals are allowed.

Order pronounced in the open court on 26.09.2022

Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member *GP/Sr/PS* Copy of the order forwarded to: (1) The Appellant: (2) The Respondent: (3) The CIT(Appeals) (4) The CIT concerned (5) The Sr. DR, I.T.A.T