2017 (10) TMI 632 - AT - Income Tax

Special auditor appointment u/s 142(2A) - Held that - It would be incorrect to hold that the ld CIT(A) has failed to adjudicate on the grounds relating to the appointment of the special auditor and the audit report so submitted by the special auditor. We have gone through the findings of the ld CIT(A) and don t see any infirmity or perversity in the said findings. The ld CIT(A) has taken into the consideration the fact relating to volume and complexity of transactions and the fact that the assessee himself failed to reconcile the documents found during the course of survey with the books of accounts and basis that, he has confirmed the action of the AO to recommending the appointment of the special auditor after taking appropriate permissions from the ld CIT after providing reasonable opportunity to the assessee. Further, it is noted that based on documents impounded during the course of survey and the fact that the assessee failed to reconcile the same with the books of accounts, the special auditor has come to specific findings which are contained in his special audit report. In the result, ground no. 1 of the assessee s appeal is dismissed. Estimation of net profit rate pursuant to rejection of books of accounts - Held that - The special auditor has pointed out various discrepancies in terms of 62 entries relating to various vouchers/bills/challans etc which could not be verified from the books of accounts. The special auditor also pointed out 251 entries of cash payments exceeding ₹ 20,000 in violation of section 40A(3) of the Act. In our view, these are serious discrepancies as pointed by the AO based on review of assessee s books of accounts, special audit report and other details on record, and we accordingly don t see any justifiable basis to deviate from the view taken by the AO in rejection of the books of accounts of the assessee and invoking the provisions of section 145(3) of the Act. Regarding estimation of profits pursuant to the rejection of the books of accounts, the AO has segregated the turnover relating to work directly executed by the assessee and the work executed through the sub-contractor. In respect of directly executed work, the AO has applied the net profit rate of 12.5% subject to interest and depreciation following the ratio laid down by the Hon ble Rajasthan High Court in case of Jain Constructions 2014 (8) TMI 167 - RAJASTHAN HIGH COURT and in respect of work executed through the sub-contractor, the AO has accepted the net profit of 3% as submitted by the AO during the course of assessment proceedings. Nothing has been brought on record to suggest the case of Jain Construction, which is apparently in the same line of business, is not a comparable case with that of the assessee. We accordingly find that there is a reasonable basis for the AO to estimate the net profit and the same is hereby confirmed Inpendent financial transactions relating to infusion of capital - Held that - It is in relation to independent financial transactions relating to infusion of capital and in absence of satisfactory explanation relating to source of such infusion, the same has been brought to tax. The said addition is independent of determination of net profit which has been estimated by the AO which is in replacement of business income computed under section 29 of the Act and is thus not vitiated by estimation of net profit. A detailed discussion in this regard is contained in subsequent paragraphs in relation to addition u/s 40A(3) and 69C of the Act and the same should be read alongwith the present findings. Hence, we confirm the order of the ld CIT(A) and the ground no. 3 of assessee s appeal is dismissed. Disallowance of capital expenditure u/s 37 - Held that - In our view, the said disallowance of capital expenditure u/s 37 should have been factored in by the AO while estimating the net profit @ 12.5% and replacing the net profit u/s 29 determined by the assessee and hence, separate addition on this account is not warranted. Hence, the said findings of the ld CIT(A) is set-aside and the ground no. 4 of assessee s appeal is allowed. Unverified bank deposits and DD payments - Held that - Since there is no direct linkage of these payments found with the Bank accounts, the AO s argument cannot be totally discounted. Hence, except for the amount of ₹ 14,72,000/- mentioned above, the remaining amount is to be considered as unexplained deposits for whatever purposes used. Since the explanation in respect of the other amounts was not found to be satisfactory, the addition to the extent of balance amount of ₹ 8,32,667/- is accordingly confirmed. Undisclosed income not accounted for in the books of account - Held that - During the course of assessment proceedings, the assessee has surrendered ₹ 89,000 relating to rental income not disclosed in the return of income and an amount of ₹ 27,950 towards sale of scrap which has been adjusted against the site advance account instead of crediting the profit/loss account. Further, an amount of ₹ 3,25,563 has been considered by the AO as unexplained and illegal income from pool based on documents impounded during the course of survey for which the assessee has failed to offer any explanation to the satisfaction of the AO or even during the appellate proceedings. Hence, the abovesaid findings of the ld CIT(A) are confirmed and the ground of assessee s appeal is dismissed. Addition u/s 40A(3) - Held that - In the instant case, the AO has rejected the books of accounts and estimated the net profit. The Hon ble Andhra Pradesh High Court in case of Indwell Constructions vs CIT (1998 (3) TMI 121 - ANDHRA PRADESH High Court) has held that where the books of accounts are rejected, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate of income and where such an estimate is made, it is in substitution of the income that is to be computed under section 29. All the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. In the instant case, this will also mean that the embargo placed in section 40A(3) is also taken into account and there cannot be a separate disallowance under 40A(3) of the Act. Addition on account of unexplained expenditure - Held that - the provisions of section 69C, as we have seen above, are crystal clear and there is no iota of doubt in our mind that where the AO has noticed that certain expenditure has been incurred by the assessee, the primary onus to discharge is clearly on the assessee to provide an explanation relating to source of such expenditure to the satisfaction of the AO. It is the assessee who has incurred the expenditure at first place and it is he who has to demonstrate that the expenditure has been incurred from known sources of his income. Where he fails to demonstrate, the consequences of section 69C will follow. Even going by the assessee s contentions, we find that the ld CIT(A) has himself confirmed the addition on account of undisclosed income of ₹ 4,51,513 and to that extent, the findings of the ld CIT(A) are self-contradictory. In light of above discussions, in respect of transactions reported at item no. 85, 86, 87 and 88 of Annexure 4 of the special audit report, the addition made by the AO u/s 69C amounting to ₹ 14 lacs is hereby confirmed. Now coming to transactions reported at item no. 68, 69,70,71,72, 73 and 74 on perusal of the order of the ld CIT(A), we however donot see a specific finding of the ld CIT(A) which has addressed the matter in light of documents marked as Annexure A-24 impounded during the course of survey and the contentions so advanced by the assessee. In the interest of justice and fair play, we hereby set-aside the matter for the limited purposes of examining Annexure A-24 impounded during the course of survey and the items reflected at Item no. 68, 69,70,71,72, 73 and 74 based on Annexure A-24 and as reported as part of Annexure 4 of the special audit report, and taking into consideration the findings of the special auditor, to decide as per law as to whether the provisions of section 69C are attracted in the instant case or not. Needless to say, both the revenue and the assessee would be provided reasonable opportunity to represent their case before the ld CIT(A).

Summary

Issues Involved:
1. Appointment of Special Auditor and validity of Special Audit Report.
2. Estimation of Net Profit Rate and rejection of books of accounts.
3. Addition on account of fresh capital introduced by the proprietor.
4. Addition for capital expenditure claimed as revenue expenditure.
5. Addition for unexplained investment under Section 69.
6. Addition for unaccounted income and unverified bank deposits/DD payments.
7. Addition for undisclosed income.
8. Deletion of addition under Section 69 for unexplained cash credit.
9. Deletion of addition under Section 40A(3) for cash payments above ?20,000.
10. Deletion of addition under Section 69C for unexplained expenditure.

Detailed Analysis:

1. Appointment of Special Auditor and Validity of Special Audit Report:
The Tribunal upheld the appointment of a special auditor under Section 142(2A) due to the complexity of the accounts and the lack of cooperation from the assessee. The Tribunal found no fault with the Assessing Officer's (AO) action, as the AO followed the legal provisions and provided the assessee with reasonable opportunities to represent its case. The special audit report, based on available materials, was deemed lawful.

2. Estimation of Net Profit Rate and Rejection of Books of Accounts:
The Tribunal confirmed the rejection of the books of accounts due to significant discrepancies, including unverifiable expenses and lack of supporting documentation. The AO applied a Net Profit (N.P.) rate of 12.5% based on comparable cases and legal precedents, which the Tribunal upheld. The Tribunal found the estimation reasonable and dismissed the assessee’s appeal on this ground.

3. Addition on Account of Fresh Capital Introduced by the Proprietor:
The AO added ?6,97,919 as undisclosed capital introduced by the proprietor. The Tribunal upheld this addition, noting that the assessee failed to provide satisfactory explanations and evidence linking the capital introduction to earlier withdrawals.

4. Addition for Capital Expenditure Claimed as Revenue Expenditure:
The AO added ?16,225 for capital expenses claimed as revenue expenditure. The Tribunal found that such expenses should have been capitalized and upheld the addition. However, it noted that this disallowance should have been factored in while estimating the net profit, and thus, separate addition was not warranted. The Tribunal allowed the assessee’s appeal on this ground.

5. Addition for Unexplained Investment under Section 69:
The AO added ?12,94,873 for unexplained investments. The Tribunal upheld the addition of ?59,873 but deleted the addition of ?12,35,000, finding that the AO failed to verify the assessee’s explanation regarding NSCs being part of earlier years' balance sheets.

6. Addition for Unaccounted Income and Unverified Bank Deposits/DD Payments:
The AO added ?23,04,667 for unaccounted income and unverified bank deposits/DD payments. The Tribunal upheld the addition of ?8,32,667 but deleted ?14,72,000, finding that the AO incorrectly added the same amount at two places and failed to link other deposits satisfactorily.

7. Addition for Undisclosed Income:
The AO added ?4,51,513 for undisclosed income based on specific entries and lack of satisfactory explanations from the assessee. The Tribunal upheld this addition, noting that the assessee failed to provide credible evidence to justify its version.

8. Deletion of Addition under Section 69 for Unexplained Cash Credit:
The Revenue appealed against the deletion of ?12,35,000 for unexplained cash credit. The Tribunal found that the AO failed to verify the assessee’s explanation and upheld the deletion by the CIT(A).

9. Deletion of Addition under Section 40A(3) for Cash Payments Above ?20,000:
The Revenue appealed against the deletion of ?1,41,34,476 for cash payments above ?20,000. The Tribunal upheld the deletion, citing legal precedents that no separate disallowance under Section 40A(3) could be made once the net profit rate was applied after rejecting the books of accounts.

10. Deletion of Addition under Section 69C for Unexplained Expenditure:
The Revenue appealed against the deletion of ?1,18,34,723 for unexplained expenditure. The Tribunal upheld the deletion for most entries, finding that these were already considered in the net profit estimation. However, it confirmed the addition of ?14,00,000 for specific transactions not debited to the profit/loss account and remanded the matter for limited re-examination of certain entries based on impounded documents.

Conclusion:
The Tribunal dismissed the appeals of both the assessee and the Revenue on various grounds, providing detailed reasons for upholding or deleting the respective additions. The Tribunal emphasized the importance of proper documentation and verification in tax assessments and reaffirmed the principles of best judgment assessment and the limitations on making separate disallowances once the books of accounts are rejected.