2021 (4) TMI 629 - AT - Income Tax

Unexplained cash credits addition u/s.68 - unexplained commission u/s.69C - as per assessee when books of accounts were rejected u/s.145(3) of the Act and profit is estimated, then same books of accounts cannot be considered for invoking provisions of section 68 to make addition - assessee has also challenged addition on merits by filling necessary evidences including confirmation letters from the creditors and argued that the assessee had discharged his burden to prove the identity, genuineness of the transactions and credit worthiness of the parties - HELD THAT - It is an admitted fact that the AO has rejected books of account u/s.145(3) of the Act and estimated profit from the business by adopting 12.5% net profit on gross receipts - once books of account are rejected u/s.145(3) of the Act, no further additions can be made by relying upon same books of account either in respect of cash credits u/s.68 of the Act or unexplained commission expenses u/s.69C of the Act, because in order to invoke provisions of section 68 of the Act, it is essential that credit should be from the books of account of the assessee maintained for that year. Once, the books of account maintained by the assessee is treated as no longer in existence by rejecting those books u/s.145(3) of the Act, then for all purposes including for the purpose of section 68 of the Act, said books of account ceased to exist and hence, those books cannot be relied upon to make addition towards unexplained credit u/s.68 of the Act - See G.K. CONTRACTOR 2009 (1) TMI 840 - RAJASTHAN HIGH COURT where it was clearly held that AO having estimated the profit by applying a higher net profit rate to total contract receipts after rejecting assessee s books of account by invoking the provisions of section 14(3), no separate addition can be made on account of cash credit u/s.68, even though the assessee has failed to discharge its onus of proof in explaining the amount shown in the books of account . Thus to make additions u/s.68 or 69 essential condition is books of account should be maintained by the assessee for the relevant financial year. If books of account of the assessee are rejected and income is estimated by applying certain profit rate, it would take care of all expenses necessarily to be incurred for earning profit and hence, when profit is estimated no separate addition can be made towards unexplained commission u/s.69 - CIT(A) after considering relevant facts has rightly held that the AO is erred in making addition towards cash credit u/s.68 of the Act and unexplained commission u/s.69C of the Act, when the books of account were rejected u/s.145(3) of the Act. Once loans taken by the assessee are genuine which are supported by necessary evidences and further said loans were repaid in subsequent financial year by cheques then said loans cannot be considered as unexplained cash credit u/s.68 of the Act. Therefore, we are of the considered view that the AO was erred in making additions towards cash credit u/s.68 of the Act and unexplained commission u/s.69C - Decided against revenue.

Summary

Issues:
- Addition made on account of unexplained cash credit u/s68 of the IT Act
- Addition on account of unexplained commission expenses u/s69C
- Reliance on decision of ITAT, Lucknow
- Failure to call for remand report from the AO
- Challenge of additions made by the AO
- Rejection of books of accounts by the AO
- Deletion of additions by the CIT(A)
- Appeal by the Revenue against CIT(A) order

Analysis:

1. Unexplained Cash Credit u/s68 of the IT Act:
The Revenue challenged the deletion of addition made on account of unexplained cash credit u/s68. The CIT(A) held that once books of accounts are rejected, they cannot be relied upon for making additions u/s68. The Revenue argued that even if books are rejected, additions can still be made if there is no relationship between credits and business activity. However, the AR supported the CIT(A) by stating that necessary evidences were provided to prove the genuineness of transactions and repayment of loans through banking channels in subsequent years. The Tribunal upheld the CIT(A)'s decision, emphasizing that once books are rejected, no further additions can be made based on those books.

2. Unexplained Commission Expenses u/s69C:
Similar to the cash credit issue, the CIT(A) also deleted the addition on account of unexplained commission expenses u/s69C. The Revenue contended that the CIT(A) erred in deleting the addition, as the assessee failed to substantiate the expenses with relevant documents and TDS deductions. However, the AR argued that necessary evidences were provided to prove the repayment of loans and the genuine nature of transactions. The Tribunal agreed with the CIT(A) and held that once loans are proven to be genuine and repaid through banking channels, they cannot be considered unexplained cash credit u/s68.

3. Reliance on ITAT Decision and Failure to Call for Remand Report:
The Revenue criticized the CIT(A) for relying on a decision of ITAT, Lucknow, arguing that it was factually distinguishable. Additionally, the Revenue raised concerns about the failure to call for a remand report from the AO to complete the enquiries. However, the Tribunal did not find these arguments persuasive and upheld the CIT(A)'s decision based on the facts and evidences presented.

4. Rejection of Books of Accounts and Deletion of Additions:
The AO had rejected the books of accounts and estimated profits, leading to additions being made towards unsecured loans and commission expenses. The CIT(A) deleted these additions, emphasizing that once books are rejected, no further additions can be made based on those books. The Tribunal supported this reasoning, citing judicial precedents and holding that the AO erred in making additions when books of accounts were rejected.

5. Appeal by the Revenue:
The Revenue's appeal against the CIT(A)'s order was dismissed by the Tribunal. The Tribunal found no error or infirmity in the CIT(A)'s findings and upheld the deletion of additions made by the AO. The Tribunal concluded that the necessary evidences provided by the assessee proved the genuineness of transactions and repayment of loans, justifying the deletion of additions.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, emphasizing the importance of proving the genuineness of transactions and the repayment of loans to avoid being classified as unexplained cash credit or commission expenses under the IT Act.