2020 (10) TMI 282 - AT - Income Tax

Estimation of income - NP determination - assessee has declared the Net Profit on presumptive basis u/s 44AD of the IT Act @ 8% - HELD THAT - We find that since the assessee has already explained the source of amount of turnover declared by the assessee, salary income and loans from the relatives, then the action of the AO by taking the entire bank amount as turnover of the assessee is contrary to the facts. When the assessee has discharged his onus of explaining the source of deposit in the bank account and the AO has failed to conduct any further enquiry or bring any contrary material on record to disprove the explanation and evidence produced by the assessee, the addition made by the AO is not sustainable. Accordingly, the said addition made by the AO on account of turnover of the assessee is deleted. Net profit rate applied by the AO at 8%, since the main issue of enhancing the turnover of the assessee is decided in favour of the assessee, therefore, this issue becomes infructuous. We may clarify that the AO has not enhanced the NP rate but applied the same NP rate which was declared by the assessee in the return of income. Therefore, the assessee has no merit on this issue. Appeal of the assessee is allowed.

Summary

Issues:
- Whether the LD. CIT (A) erred in confirming the action of the learned AO in invoking the provisions of section 145(3) of the Income Tax Act, 1961?
- Whether the AO's application of NP rate @ 8% on enhanced turnover of ?79,74,414/- for making an addition of ?5,50,329/- was justified?

Analysis:
1. The appeal was against the order of the LD. CIT (A) for the assessment year 2015-16. The assessee, an Individual and proprietor of a business, declared a total income of ?5,00,400/- under section 44AD @ 8% on a turnover of ?10,95,300/-. The AO, during assessment, noted total credits in the bank account of ?79,74,414/-, including cash deposits. The AO treated the entire credit in the bank account as turnover and applied NP rate of 8%, resulting in total income of ?10,50,729/-. The LD. CIT (A) upheld this addition based on the total turnover adopted by the AO, which was significantly higher than the turnover declared by the assessee.

2. The assessee contended that all entries in the bank account matched with the cash book and ledger, explaining that deposits were from loans taken from family members, salary income, and transfers between bank accounts. The AO, however, did not consider these explanations and made the addition based on total credits in the bank account. The assessee argued that the AO's treatment was arbitrary and unreasonable, as the source of deposits was adequately explained with supporting documents.

3. The Tribunal found that the AO only questioned the cash deposits in the bank account, not the entire credits. The assessee provided detailed explanations and evidence for all deposits, including loans from family members and inter-account transfers. The Tribunal noted that the AO failed to conduct further inquiries or disprove the explanations provided by the assessee. Consequently, the addition made by the AO on account of turnover was deemed unsustainable, and the Tribunal ruled in favor of the assessee, deleting the addition.

4. Since the main issue of enhancing turnover was decided in favor of the assessee, the Tribunal considered the AO's application of NP rate at 8% as infructuous. The Tribunal clarified that the AO had not enhanced the NP rate but applied the same rate declared by the assessee. Therefore, the Tribunal found no merit in the assessee's challenge on this issue.

5. In conclusion, the Tribunal allowed the appeal of the assessee, stating that the addition made by the AO on account of turnover was unjustified. The order was pronounced on 11/08/2020.