2018 (3) TMI 892 - AT - Income Tax

Addition on account of bogus creditors - case of the revenue before us is that, the outstanding trade creditors is a part of balance sheet item, therefore, separate addition can be made over and above the business income assessed by applying the net profit rate after rejecting the books of accounts - Held that - When the books of accounts are rejected and income is assessed on the principle of best judgment assessment , then entries of the amounts shown in the books of accounts cannot be held to be reliable. Once business income of the assessee from the contract receipt business has been assessed at 8%, then it take cares of all other additions made on account of trading account and any liability including outstanding amount of trade creditors. Thus, we agree with the contention of assessee that if the income has been assessed after rejecting the books of accounts and net profit rate has been applied, then no separate addition on account of trade creditors should be made. Accordingly, we direct the AO to make addition of ₹ 35,25,490/- as has been worked out by the Ld. CIT(A). The additions on account of sundry creditors raised in both the appeals are dismissed. Decided in favour of assessee Addition on account of unexplained loan - Held that - CIT (A) has noted that the party was old lender and assessee has filed his PAN details which has been verified by the AO; copy of return of income for the current year of the said creditors which reflects his creditworthiness from the quantum of income shown by him; and the genuineness of the transaction is also proved as the transaction is through banking channel. Not only that, he has already directed the Assessing Officers of the said creditors to initiate that the scrutiny proceedings in their cases. The observation and the finding of the Ld. CIT(A) as incorporated above does not call for any interference which is based on correct appreciation of law and facts and consequently, the ground raised by the revenue is dismissed

Summary

Issues Involved:
1. Disallowance of ?1,34,22,499/- with respect to 19 sundry creditors.
2. Deletion of addition of ?81 lacs made by the AO on account of unsecured loan.
3. Rejection of books of accounts and estimation of net profit rate at 8%.

Issue-wise Detailed Analysis:

1. Disallowance of ?1,34,22,499/- with respect to 19 Sundry Creditors:
The assessee, a civil contractor, showed trade creditors at ?3,88,68,131/- as on 31.3.2010. The AO added ?1,71,03,987/- to the income due to the lack of confirmation from 23 creditors. The CIT(A) accepted the outstanding amount for four creditors but upheld the disallowance for 19 creditors, reducing the addition to ?1,34,22,499/-. The assessee argued that these creditors were small suppliers from unorganized sectors, making it difficult to obtain confirmations. The Tribunal found that once the books of accounts are rejected and income is estimated by applying a net profit rate, no separate addition should be made for trade creditors. Thus, the addition on account of sundry creditors was dismissed.

2. Deletion of Addition of ?81 lacs on Account of Unsecured Loan:
The AO added ?81 lacs to the income, citing the assessee's failure to furnish relevant details for a loan from Shri Brijesh Kumar Jaiswal. The CIT(A) deleted this addition, noting that the assessee provided PAN details, a copy of the return of income, and TDS certificates for the lender, establishing the genuineness and creditworthiness of the transaction. The Tribunal upheld this deletion, agreeing with the CIT(A) that the transaction was through banking channels and properly documented.

3. Rejection of Books of Accounts and Estimation of Net Profit Rate at 8%:
The AO rejected the assessee's books of accounts under section 145(3), estimating the net profit rate at 8% of the gross contract receipt, resulting in an enhanced business income of ?3,71,48,550/-. The CIT(A) upheld the rejection of books but allowed depreciation, resulting in a net addition of ?35,25,490/-. The Tribunal agreed with the CIT(A) that once the books are rejected and a net profit rate is applied, no further addition should be made for trade creditors or other trading liabilities. The Tribunal directed the AO to sustain the addition of ?35,25,490/- as worked out by the CIT(A).

Conclusion:
The Tribunal dismissed the addition on account of sundry creditors and upheld the deletion of the ?81 lacs unsecured loan addition. The rejection of books and application of a net profit rate of 8% was upheld, with the addition limited to ?35,25,490/-. The assessee's appeal was partly allowed, and the revenue's appeal was dismissed.