2018 (3) TMI 1094 - AT - Income Tax

Addition of trade creditors u/s 68 - unexplained cash credits - also making additions of gross profit after rejecting the book results u/s 145(3) - Held that - AO admits these cash sales as unexplained in the absence of confirmation by the parties. Admittedly, these are trade creditors and not cash creditors because the assessee has deposited the cash in its trading bank account out of the proceeds of sales, although those are not verified. It means that these have relation with trading entries and these are not independent cash credits. On the other hand, the Assessing Officer is also rejecting the books of account u/s 145(3) and applied profit rate and making addition by enhancing the income of ₹ 6,09,366/- to ₹ 19,57,569/-. We find from the above facts in entirety that the Assessing Officer cannot blow hot and cold at the same time for the reason he has made twin additions out of the trading results i.e., treating the cash sales as cash credit and adding the same u/s 68. AO is very well within the power of rejecting the book results u/s 145(3) and we confirm the action of the Assessing Officer. However, we find that the Assessing Officer has applied profit rate of more than 8% and assessee s nature of business is trading in steel and iron, which does not give this much profit and assessee s regular profit is assessed at the rate of 2.5% to 3% and it varies from year to year in between the same. In view of the above position, we are of the view that a reasonable profit rate at the rate of 5% should be estimated on the above sales and not at the rate of 8% or above 8% Not allowing the claim of deduction of LIC etc. under Chapter VIA of the Act - Held that - We direct the Assessing Officer to take evidences from the assessee and accordingly allow the claim of the assessee as per law.

Summary

Issues:
1. Addition of trade creditors as unexplained cash credits and rejection of book results under sections 68 and 145(3) of the Income-tax Act, 1961.
2. Disallowance of deduction of LIC under Chapter VIA of the Act.

Issue 1: Addition of Trade Creditors and Rejection of Book Results

The appellant contested the order of the Assessing Officer and the CIT(A) regarding the addition of trade creditors as unexplained cash credits and the rejection of book results under sections 68 and 145(3) of the Income-tax Act, 1961. The Assessing Officer found discrepancies in the assessee's books of account, leading to the rejection of book results and the addition of gross profit. Additionally, the cash sales made by the assessee were treated as unexplained cash credits due to lack of evidence and confirmation from parties. The appellant argued against these additions, highlighting clerical mistakes and discrepancies in the assessment. The Tribunal analyzed the reasons provided by the Assessing Officer for rejecting the books of account and treating cash sales as unexplained cash credits. The Tribunal acknowledged the Assessing Officer's power to reject book results under section 145(3) but disagreed with the profit rate applied for the addition. The Tribunal directed the Assessing Officer to use a reasonable profit rate of 5% instead of the higher rate applied earlier. Furthermore, the Tribunal deleted the addition of cash credits, considering them as trade creditors related to trading entries. The Tribunal's decision was supported by legal precedents, and the Assessing Officer was instructed to recompute the income accordingly.

Issue 2: Disallowance of Deduction under Chapter VIA

The appellant raised an issue regarding the disallowance of the claim for deductions under Chapter VIA of the Income-tax Act, 1961. The lower authorities had not allowed the deduction of LIC and other expenses claimed by the assessee. The Tribunal directed the Assessing Officer to gather evidence from the assessee and make a decision on allowing the claim in accordance with the law. The Tribunal partially allowed the appeal of the assessee for statistical purposes, indicating a favorable stance towards the deduction claim under Chapter VIA.

In conclusion, the Appellate Tribunal ITAT Nagpur addressed the issues raised by the appellant concerning the addition of trade creditors as unexplained cash credits, rejection of book results, and the disallowance of deductions under Chapter VIA of the Income-tax Act, 1961. The Tribunal provided detailed analysis and rulings on each issue, ensuring a fair and comprehensive assessment of the appellant's concerns.