2023 (5) TMI 1213 - AT - Income Tax

Addition toward estimated gross profit by rejecting books of accounts - Unexplained cash credits - HELD THAT - Where AO rejected books of account u/s 145(3) and made estimated addition on turnover then such books of accounts should not be relied to make addition on account of sundry creditors/ trade creditors. Thus respectfully following the judgment of BAHUBALI NEMINATH MUTTIN 2017 (1) TMI 1375 - KARNATAKA HIGH COURT the addition made by the Assessing Officer in case of assessee under consideration on account of creditor/ temporary loan taken for trading purpose should be deleted. Addition u/s 68 - creditors/person who gave the temporary loan did not turn up before him as discussed in the assessment order - We note that assessee has produced sufficient documents and evidences before the assessing officer and the solitary reason of not serving of summons on few creditors cannot be relied only by ignoring the other relevant material produced by the assessee. The judicial pronouncement in the case of D. H Enterprises 2016 (8) TMI 510 - GUJARAT HIGH COURT in which it was held that the solitary reason of not serving of summons cannot be relied only by ignoring the other relevant material produced by the assessee. As noticed that in the case of the assessee the confirmation with the name address copy of ledger account copy of bank statement and PAN number in respect of the parties were filed before the Assessing Officer therefore addition should not be made in the hands of assessee. Assessee has proved the source of money and the assessee need not to prove source of the source as held in the case of Prayag Tendu Leaves Processing Co 2017 (12) TMI 932 - JHARKHAND HIGH COURT - assessee s case is covered by the judgment of Gopal Heritage (P.) Ltd 2021 (10) TMI 422 - GUJARAT HIGH COURT wherein the Court held that where assessee had taken unsecured loans from some persons and Assessing Officer made addition under section 68 on ground that assessee had not been able to prove immediate source of cash-in-hands of party since all ingredients contemplated under section 68 had been duly satisfied in aspect of identity of creditors genuineness of transactions and their creditworthiness said addition was to be deleted As evident that the assessee had produced all relevant details and documents in its possession namely names and addresses PAN numbers confirmations bank statements and copy of ledger accounts. The amounts in question had been received by way of account payee cheques. As permanent account numbers and the income tax returns of all the creditors had been furnished by the assessee, AO could have easily verified the same hence there is no failure on the part of the assessee to furnish relevant documents and evidences before the AO. Onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case AO is dissatisfied about the source of the amount deposited in the bank accounts of the creditors the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). Therefore AO was not justified in treating it as unexplained cash credit. The assessee has satisfactory explained the source. Ground of assessee s appeal is allowed.

Summary

Issues Involved:
1. Rejection of Books of Accounts and Gross Profit Estimation
2. Addition of Unexplained Cash Credits
3. Ad-hoc Disallowance of Various Expenses

Summary:

1. Rejection of Books of Accounts and Gross Profit Estimation:
The assessee, a proprietor engaged in trading electronic appliances, declared a gross profit of Rs. 23,27,044/- at 4.89% on a turnover of Rs. 4,75,51,369/-. The Assessing Officer (AO) noted a decline in gross profit compared to the previous year and issued a notice under section 142(1) of the Income Tax Act, 1961, requesting the production of books of accounts and other documents. The assessee provided partial details but failed to submit complete records. Consequently, the AO rejected the books of accounts under section 145(3) and estimated the gross profit at Rs. 14,26,541/- (3% of the turnover), adding this amount to the total income. The Tribunal held that the gross profit declared by the assessee should be set off against the estimated gross profit, and other line-by-line additions should not be made after rejecting the books of accounts.

2. Addition of Unexplained Cash Credits:
The AO made an addition of Rs. 1,25,13,000/- as unexplained cash credits under section 68, stating that the details provided by the assessee were insufficient to prove the genuineness and creditworthiness of the creditors. The Tribunal noted that the assessee had furnished confirmations, PAN numbers, bank statements, and ledger accounts of the creditors. It held that the AO should have conducted further inquiries under sections 133(6) or 131 if there were doubts about the creditors' genuineness. The Tribunal relied on various judicial precedents, including the Hon'ble High Court of Karnataka and Hon'ble Gujarat High Court, to conclude that once books of accounts are rejected, the same cannot be relied upon for making additions on account of trade creditors. The addition of Rs. 1,25,13,000/- was thus deleted.

3. Ad-hoc Disallowance of Various Expenses:
The AO made an ad-hoc disallowance of Rs. 2,50,000/- on various expenses claimed in the profit and loss account due to the absence of supporting bills and vouchers. The CIT(A) deleted this addition, holding that once the books of accounts are rejected and profit is estimated, no separate ad-hoc disallowance should be made. The Tribunal upheld this view, stating that other line-by-line additions should not be made after the rejection of books of accounts.

Conclusion:
Both appeals filed by the assessee for the assessment years 2011-12 and 2012-13 were allowed by the Tribunal. The Tribunal emphasized that after rejecting the books of accounts and estimating the gross profit, no further line-by-line additions should be made, and the AO should ensure a fair and honest estimate of the proper figure of assessment.