2014 (7) TMI 162 - AT - Income Tax

Addition u/s 68 of the Act Admission of additional evidence under Rule 46A of the Rules Creditworthiness and genuineness of transactions not considered - Held that - The initial statement of Shri Sudesh Joshi dated 30.12.2009 was in fact handed over to the assessee only during the appellate proceedings before the CIT(A), which was the sole basis of the impugned addition and the said Shri Sudesh Joshi has retracted his statement during remand proceeding - only the basis of a statement of a witness, which has been admittedly retracted and admittedly which has not been allowed to be cross-examined by the assessee, cannot be the sole basis on which the addition can be made - the authorities have not examined the credit-worthiness of Shri Sudesh Joshi in detail - His source of income for the earlier years, need to be brought out in detail and on record as to ascertain his taxable income; and effort should be made by the AO to verify his savings in his account before he lent the amount to the assesse - since this exercise has not been properly done, the order of the CIT(A) is set aside and the Ao is directed to examine the transaction of Shri Joshi with the assessee de novo, and find out the credit worthiness of Shri Joshi and genuineness of the transactions Decided in favour of Assessee. Addition by estimation of profit @10% of sale Held that - The appellant company for the instant year declared an income of ₹ 1,17,784/- on the basis of audited financial statements - CIT(A) has observed in a very casual manner that books of account cannot be relied upon and rejected it - there was no specific reason spelt out by him, from which it can be concluded that books of account cannot be relied upon and for the said reason, it was necessary for estimation of income was necessary - the audited accounts cannot be rejected unless glaring inconsistency or violation of the Act was brought on record the AO has not made any adverse observation about the correctness and completeness of the accounts made by the AO as envisaged by Section 145 and neither AO has observed that the assessee has not been following the accounting standard as notified and there is no finding by the AO that the assessee was not following the accounting method regularly and there are no adverse finding by him as to the income of the assessee as provided u/s 145(3) of the Act. Relying upon Sanjeev Woolen Mills Vs. CIT 2005 (11) TMI 26 - SUPREME Court - the decision of the AO to reject the audited books of account is vitiated without him spelling out the cogent reasons for doing so and has failed to satisfy the requirement of Section 145(3) before doing so and therefore the said decision to reject the books of account cannot be countenanced in the aforesaid facts and circumstances. Ad-hoc disallowance of 10% of the sales Held that - Simply because the assessee has engaged in a monopoly business where there is no competitor, cannot be a ground to make an ad-hoc addition of 10% without any basis - The audited account with details of sales and sale tax assessment shows that the sales purchases and expenses as well the net profit is verified by the auditors and cannot be interfered by the AO on surmises, presumptions or doubts - as the rejection of books of account was held as bad in law, the exercise of best judgment assessment in this case is also vitiated Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Addition of Rs. 5,00,000 under Section 68 of the Income Tax Act, 1961.
3. Sustaining the addition of Rs. 3,50,343 by estimating profits at 10% of the total turnover.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed an application for condonation of a delay of 3 months and 15 days in filing the appeal, attributing the delay to the counsel's failure to file the appeal on time. The assessee supported this claim with an affidavit from the said Advocate. The Tribunal, in the interest of justice, decided that the assessee should not be penalized for the counsel's omission and thus condoned the delay, admitting the appeal for adjudication.

2. Addition of Rs. 5,00,000 under Section 68 of the Income Tax Act, 1961:
The Assessing Officer (AO) made an addition of Rs. 10,40,000 under Section 68 of the Act, which included Rs. 5,00,000 from Shri Sudesh Joshi. The CIT(A) deleted the addition of Rs. 5,40,000 but sustained the Rs. 5,00,000 addition. The assessee argued that the addition was based on a statement by Shri Sudesh Joshi, recorded behind the assessee's back, and without cross-examination. During remand proceedings, Shri Sudesh Joshi retracted his earlier statement and confirmed the transaction through bank channels. The Tribunal found that the statement of a witness, who was not cross-examined, could not be the sole basis for the addition. The Tribunal directed the AO to re-examine the transaction, verify the creditworthiness of Shri Sudesh Joshi, and ascertain the genuineness of the transaction. The AO was instructed to give both parties an opportunity to explain any contradictions, and then arrive at a conclusion based on the preponderance of probability.

3. Sustaining the Addition of Rs. 3,50,343 by Estimating Profits at 10% of the Total Turnover:
The AO rejected the assessee's books of accounts, citing the absence of a stock register, unsupported taxi bills, unsupported commission payments, and unsupported cash receipts. The AO estimated the profit margin at 10% of the total turnover of Rs. 35,03,435, resulting in an addition of Rs. 3,50,343. The CIT(A) upheld this decision.

The assessee contended that the rejection of the books of accounts was based on suspicion and without any substantive reasons. The books were audited, and no specific inconsistencies or violations were pointed out. The Tribunal noted that the AO did not provide cogent reasons for rejecting the books of accounts and did not follow the requirements of Section 145(3). The Tribunal held that the rejection of the audited books was unjustified and that the ad-hoc estimation of profits at 10% was without basis. The Tribunal set aside the rejection of the books of accounts and the resulting best judgment assessment, allowing this ground in favor of the assessee.

Conclusion:
The Tribunal condoned the delay in filing the appeal, directed the AO to re-examine the Rs. 5,00,000 addition under Section 68, and set aside the addition of Rs. 3,50,343 by estimating profits at 10%. The appeal was partly allowed for statistical purposes.