2018 (11) TMI 999 - AT - Income Tax

Rejection of books of accounts - estimation of income - CIT(A) adopted 8% of net profit rate as against 10% adopted by the A.O. - Addition on account of unexplained creditor - Held that - Unsecured loans need not necessary be used only for the purpose of purchase as one cannot deny the possibility that the unsecured loans can be used for purchase of other assets, making investment or loans and advances but if the impugned credit comes into the books of accounts then it needs to be explained about their identity, genuineness and creditworthiness. Similar is the fact of sundry creditors which are for purchase of goods or capital assets or services. The onus to prove their genuineness completely lies on the assessee. In the instant case during the assessment proceedings assessee did not cooperate with the Assessing authority and all the queries of the A.O remain unanswered. CIT(A) did not adjudicate these two issues of unexplained sundry creditors and unexplained unsecured loans by grossly taking a view that the profits are estimated as such no other addition is called for. The issues of identity, genuineness and creditworthiness of the sundry creditors at ₹ 60,42,964/- and unexplained unsecured loan of ₹ 9,48,000/- (Rs. 6,48,000/- from M/s. Amit Construction and ₹ 3,00,000/- from Shri Sheikh Allabaksh) needs to be set aside to the file of CIT(A) for afresh adjudication and if necessary a remand report may be called from the AO for verifying the facts and thereafter CIT(A) should decide as to whether the alleged amount of sundry creditors and unsecured loans are to be treated as unexplained or explained and decide accordingly. - Decided in favour of revenue for statistical purpose.

Summary

Issues Involved:
1. Addition of ?60,42,964/- on account of unexplained sundry creditors.
2. Addition of ?9,48,000/- on account of unexplained unsecured loans.
3. Estimation of net profit at 10% by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Addition of ?60,42,964/- on account of unexplained sundry creditors:
The AO made an addition of ?60,42,964/- for unexplained sundry creditors due to the assessee's failure to submit confirmation and other details. The CIT(A) held that once the book results are rejected and profits are estimated, no further addition should be made. The Tribunal noted that the AO is empowered to make additions for unexplained sundry creditors even after rejecting the book results and estimating profits. The Tribunal emphasized that the identity, genuineness, and creditworthiness of the sundry creditors must be verified. The issue was set aside to the file of CIT(A) for fresh adjudication, with instructions to verify the facts and decide accordingly.

2. Addition of ?9,48,000/- on account of unexplained unsecured loans:
The AO added ?9,48,000/- for unexplained unsecured loans from M/s. Amt Construction and Shri Sheikh Allabakash due to lack of supporting documents. The CIT(A) similarly held that no further addition should be made after estimating profits. The Tribunal, however, clarified that unexplained unsecured loans, which appear in the balance sheet, must be explained regarding their identity, genuineness, and creditworthiness. The issue was remanded to the CIT(A) for fresh adjudication, with instructions to verify the facts and decide on the unexplained unsecured loans accordingly.

3. Estimation of net profit at 10% by the AO:
The AO rejected the book results and estimated the net profit at 10% of the total turnover, leading to an addition of ?39,10,039/-. The CIT(A) reduced the net profit rate to 8%, partly allowing the assessee's appeal. The Tribunal upheld the CIT(A)'s decision to estimate the net profit at 8%, noting that the AO is within his rights to estimate profits under Section 144 of the Income Tax Act when the books of accounts are not produced. However, the Tribunal also clarified that the AO can make separate additions for unexplained items in the balance sheet, such as sundry creditors and unsecured loans, which are not part of the profit and loss account.

Conclusion:
The Tribunal allowed the revenue's appeal for statistical purposes, remanding the issues of unexplained sundry creditors and unsecured loans to the CIT(A) for fresh adjudication. The Tribunal upheld the CIT(A)'s estimation of net profit at 8% but emphasized the need for verification of the identity, genuineness, and creditworthiness of the sundry creditors and unsecured loans. Proper opportunity of being heard should be provided to the assessee during the fresh adjudication process.