2020 (8) TMI 807 - AT - Income Tax

Peak credit addition - addition by way of applying higher net profit rate - undisclosed bank account held with ICICI Bank - HELD THAT - Physical stock and cash in hand in the regular books have been utilised for making un accounted sales. It is noteworthy that the assessee is carrying out of books sales transactions in the past also and till the date of peak bank balance on 28.2.2014 the profits earned on unrecorded sales have been offered to tax and they form part of the peak bank balance. As against peak balance found in the bank account not disclosed in the regular books in the instant case three things have to be considered, firstly stock in hand available with the assessee, secondly cash in hand available in regular books and thirdly the undisclosed profit earned on the unaccounted sales till the date of peak balance which have been offered to tax. In the instant case the peak balance in the undisclosed ICICI bank account is much less than the total of stock in hand, cash in hand and unaccounted profits offered to tax. Considering judicial precedence find no inconsistency in the finding of Ld. CIT(A) deleting the peak credit addition. Rejection of books of accounts - Addition made by enhancing net profit - AO applying net profit @2.5% as against the net profit disclosed by the assessee @0.73% - CIT-A deleted the addition - HELD THAT - Action of the A.O rejecting the book results thereby invoking provisions of section 145(3) was not justified and so was also not justified in estimating the net profit on the regular turnover in the books of accounts @2.5% as against 0.73% offered by the assessee. Application of 2.5% on undisclosed turnover cannot be equated to be applied on the regular turnover disclosed by the assessee. In the immediately preceding assessment year 2013-14 assessee has offered 0.91% as net profit rate which has been accepted by the revenue. No reason to interfere in the finding of Ld. CIT(A) deleting the addition of ₹ 67,76,734/- and we also find no justification in the action of the Ld. A.O rejecting the books of accounts u/s 145(3) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of peak credit addition of ?1,25,53,136/-.
2. Deletion of addition of ?67,76,734/- made on account of Gross Profit (G.P) after rejecting the books of accounts under Section 145(3) of the Income Tax Act.

Issue 1: Deletion of Peak Credit Addition of ?1,25,53,136/-

The Revenue challenged the deletion of the peak credit addition of ?1,25,53,136/- made by the Assessing Officer (A.O) based on deposits in an undisclosed ICICI Bank account. The A.O found a peak balance of ?1,25,53,136/- on 01.03.2014 and added this to the total income of the assessee. The assessee contended that sufficient cash and stock were available in the regular books of account, which should be set off against the peak balance. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted this contention and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient stock and cash in hand, which were more than the peak balance in the undisclosed bank account. The Tribunal cited several judicial precedents, including decisions by the ITAT Jodhpur Bench, Allahabad High Court, and Gujarat High Court, which supported the principle of telescoping, i.e., allowing set-off of cash and stock against peak credit. The Tribunal concluded that the A.O was not justified in making the peak credit addition, as the assessee's stock and cash in hand were sufficient to cover the peak balance. Therefore, the Tribunal dismissed the Revenue's ground of appeal on this issue.

Issue 2: Deletion of Addition of ?67,76,734/- on Account of Gross Profit

The Revenue also challenged the deletion of an addition of ?67,76,734/- made by the A.O by applying a higher net profit rate on the total turnover after rejecting the books of accounts under Section 145(3) of the Income Tax Act. The A.O applied a net profit rate of 2.5% on the total turnover of ?37,47,40,488/- disclosed in the books of account, resulting in a net profit of ?93,68,512/-. After allowing credit for the net profit of ?25,91,778/- disclosed by the assessee, the A.O added the difference of ?67,76,734/- to the total income.

The CIT(A) deleted this addition, noting that the assessee had already offered a higher net profit rate of 2.5% on the unrecorded sales, considering that interest and bank charges had already been claimed in the regular books. The CIT(A) found that the net profit rate disclosed by the assessee was consistent with past years and comparable to other similar businesses.

The Tribunal upheld the CIT(A)'s decision, noting that the A.O had not pointed out any specific irregularities in the regular books of accounts other than the undisclosed bank account. The Tribunal observed that the assessee had offered a higher net profit rate on the unrecorded sales to account for the interest and bank charges already claimed in the regular books. The Tribunal concluded that the A.O was not justified in rejecting the books of accounts and applying a higher net profit rate. Therefore, the Tribunal dismissed the Revenue's ground of appeal on this issue as well.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the peak credit addition of ?1,25,53,136/- and the addition of ?67,76,734/- made on account of Gross Profit after rejecting the books of accounts under Section 145(3) of the Income Tax Act. The Tribunal found that the assessee had sufficient stock and cash to cover the peak balance in the undisclosed bank account and that the net profit rate disclosed by the assessee was consistent with past years and comparable to other similar businesses.