2020 (2) TMI 1501 - AT - Income Tax

Rejection of books of account - estimation of profit - AO estimating the profit @5% on the gross turnover - HELD THAT - AO has not pointed out any accounting defects in the books of accounts. Rather he is summarily ignored the books of accounts but has proceeded to invoke the rigour of section 145(3) which is bad in law. The position in law is settled. The AO cannot resort to estimation without confronting to the assessee the defects in the books of accounts and material or evidence or the basis of estimations . The AO has not discharged his primary onus as such the assessment made is bad in law. AO has estimated the profit rate at 5% simply by conjuncture, surmises and guess work and without any logic any relevant material on record. The conduct of the AO is obvious from the fact that in the next very assessment year, the AO reduced his on estimation of 5% to 1%, once again without assigning any reason or putting any credible material on record. The arbitrary action of the AO goes to prove that the whole exercise of making such a large addition is nothing but wild guess works, which vary from year to year and which has no relevance with comparable cases or with any other material or reason for doing so. In view of the settled legal preposition addition made on the basis of guess work may be deleted. AO was not justified to reject books of account and estimate profit. Addition on account of sundry creditors and unexplained cash deposits - AO has concluded that the creditors are not genuine to the extent for which the payment have been made in the subsequent year. - HELD THAT - AO has not disputed the creditors to the extent for which the payment have been made during the year itself. Thus what the AO is holding that the creditors are partly genuine and partly in genuine. The conclusions drawn by the AO are thus self-conflicting, inconsistence and apparently variable which is not tenable under the explicit provision of the Act. These creditors have also been held genuine by the AO himself while deciding the case for the AY 2013- 14 under section 143(3) wherein no separate addition on account of these creditors have been made. During Assessment proceedings the assessee has furnished complete postal addresses of all these persons wherein the communication can be made either through the postal authorities or directly by the AO, which establishes the identity of these creditors. Similarly ail the purchase bill were also supplied to the AO fully establishing the capacity of these creditors. The assessee also supply the subsequent copies of account of these creditors which establishes that the payment have been made to these creditors in the subsequent year, thereby establishing the genuineness of these transactions. The assessee also furnishes copies of accounts of ail these persons which are submitted here with. The assessee has thus discharge his complete onus, so far as section 68 is concerned. AO without verifying the correctness of the identity of these sundry creditors or without bringing on record any material or evident on record held that these sundry creditors are not genuine and made addition - AO has thus erred in not appreciating the facts that when the assessee has supplied names and addresses of sundry creditors and the nature of transaction and also the capacity of the creditors his onus stands discharged. The opinion found by the AO must be based on material and it should be perverse. As a matter of fact the word satisfaction has been used in section 68 to protect the interest of the assessee. The Legislature by using this word make it incumbent on the AO to consider the material put before him and incase he choose to draw adverse conclusion he should collect the basis for his satisfaction and confront the same to the assessee. AO has not discharged his onus to this extent so the addition made needs to be deleted.Thus, it has been held that if the AO rejects an explanation given by the assessee without considering its acceptability in the light of the fact and circumstances of the case, or rejects the explanation without verifying it, the addition cannot be sustained. Thus undisputedly proved by the assessee that the sundry creditors have been paid off immediately in the subsequent years and all the details have been submitted which consists of amount of purchase of milk in the year, amount paid during the year, outstanding balance as on 31.03.2012 and the payment made during the next year from 01.04.2012. There was no dispute that the assessee has purchased milk from the 20 suppliers and squared off the amounts subsequently in the next financial year. Hence, the addition made on account of sundry creditors is hereby by deleted. Cash deposit in the same bank account through which the entire sale and purchase of milk has taken place - CIT (A) has given a categorical finding that an amount of ₹ 48,89,110/- represents the sale of milk in cash. The ld. CIT (A) held that the amount of ₹ 2,10,890/- is the opening balance. The assessee started his business in the current assessment year only. It is not clear from the records whether this amount of ₹ 2,10,890/- represents the deposit of cash utilized for opening the bank account or otherwise. Hence, the AO is hereby directed to examine the account and give effect to this amount if it represents the cash utilized for opening of the bank account.

Summary

Issues Involved:
1. Rejection of books of account and estimation of profit.
2. Genuineness of the business and books of the assessee.
3. Addition on account of unexplained cash deposits and unsecured loans.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account and Estimation of Profit:
The AO estimated the profit at 5% on the gross turnover of ?86,65,83,744, resulting in an addition of ?2,79,61,917. The AO cited various defects in the books of accounts, such as the non-submission of a soft copy of books, identical and new purchase/sale bills, lack of tanker numbers on bills, non-maintenance of a stock register, and non-production of a cash book. The assessee rebutted these points by explaining the nature of their business, the use of computer software for accounting, and the maintenance of regular books of accounts audited under section 44AB. The CIT (A) found that the AO did not reject the books of accounts as required under section 145(3) of the Income Tax Act, 1961, and did not point out any specific defects that prevented the calculation of true profit. The CIT (A) emphasized that the AO's action was arbitrary and not supported by any material evidence. The CIT (A) concluded that the AO was not justified in rejecting the books of account and estimating the profit.

2. Genuineness of the Business and Books of the Assessee:
The AO questioned the genuineness of the business, citing the lack of specific details in the tax audit report and the nil opening and closing stock. The assessee explained that they were engaged in wholesale trading of milk, with most transactions conducted through banking channels. The CIT (A) found that the assessee maintained regular books of accounts, which were duly audited, and that there was no accumulation of funds in the form of unsecured loans or sundry creditors. The CIT (A) held that the AO's conclusion that no business was carried out was not supported by any evidence and that the AO's action was arbitrary and against the spirit of the law.

3. Addition on Account of Unexplained Cash Deposits and Unsecured Loans:
The AO made an addition of ?1,39,38,110, including ?51,00,000 for unexplained cash deposits and ?88,38,110 for unsecured loans. The assessee explained that the cash deposits were from cash sales of milk, supported by corresponding purchases. The CIT (A) found that the cash sales were nominal and supported by corresponding purchases, and that the cash deposits were verifiable from the cash book and sale ledger. Regarding the unsecured loans, the assessee provided details of the creditors, including names, addresses, and payment details. The CIT (A) found that the AO did not verify the correctness of the creditors' identities or bring any material evidence on record to disprove the genuineness of the transactions. The CIT (A) held that the AO's addition was not justified and deleted the addition.

Conclusion:
The appeal of the revenue was dismissed, and the cross-objection of the assessee was treated as infructuous. The CIT (A) found that the AO's rejection of the books of account and estimation of profit was not justified, that the business and books of the assessee were genuine, and that the additions on account of unexplained cash deposits and unsecured loans were not supported by any material evidence. The CIT (A) directed the AO to examine the account and give effect to the amount if it represented the cash utilized for opening the bank account.