2021 (5) TMI 532 - AT - Income Tax

Estimation of income - bogus purchases - Rejection of books of accounts - HELD THAT - As abundantly clear that the Assessing Officer, having once rejected the books of accounts, could not have made further additions on account of bogus sundry creditors under section 68 by relying upon the same books of accounts. Therefore, respectfully following the judgment of PCIT Vs. TAYAB YUNUS BARUDGAR 2019 (6) TMI 1226 - GUJARAT HIGH COURT and AMITABH CONSTRUCTION (P) LTD 2011 (5) TMI 821 - JHARKHAND HIGH COURT we deleted the addition on account of bogus sundry creditors. As per assessee has disclosed net profit @1.79% of turnover (which was enhanced by ld CIT(A) to 2%), therefore, after rejection of books of accounts the profit may be estimated @1.79% of turnover instead of @ 2% of turnover - We note that ld Counsel has himself accepted the estimate NP @ 2% of total URD purchases by relying on the above judgment of the Coodicate Bench in the case of Shri Tayab Yunus Barudgar 2016 (5) TMI 1288 - ITAT AHMEDABAD We note that Hon'ble High Court of Gujarat, Ahmedabad in PCIT Vs. TAYAB YUNUS BARUDGAR 2019 (6) TMI 1226 - GUJARAT HIGH COURT has confirmed the estimate NP @ 2% of total URD purchases Thus as relying on cases above held that to estimate net profit @ 2% of total URD purchases is proper and fair, hence we dismiss ground No. 2 raised by the assessee, and we confirm the order of ld. CIT(A) so far ground no.2 is to estimate the net profit @ 2% on the turnover of the assessee. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Treatment of Sundry Creditors as Cash Credit under Section 68 of the Income Tax Act, 1961.
2. Estimation of Taxable Income based on Turnover Percentage.

Issue-wise Detailed Analysis:

1. Treatment of Sundry Creditors as Cash Credit under Section 68 of the Income Tax Act, 1961:

The primary issue in this case was whether the entire amount of sundry creditors amounting to ?56,68,960/- should be treated as cash credit under Section 68 of the Income Tax Act, 1961. The assessee, engaged in the business of scrap trading, had shown sundry creditors in the balance sheet. The Assessing Officer (AO) issued notices under Section 133(6) to verify the genuineness of these creditors, but the notices were returned unserved. The assessee failed to produce the books of accounts for verification, leading the AO to reject the books of accounts under Section 145(3) of the Act and treat the sundry creditors as unexplained cash credits under Section 68.

The Tribunal noted that once the AO rejected the books of accounts, he could not make separate additions based on the same books. The AO should have proceeded to estimate the profit instead. This view was supported by the judgment of the Hon'ble High Court of Gujarat in PCIT Vs. Tayab Yunus Barudgar and the Hon'ble High Court of Jharkhand in Amitabh Construction (P) Ltd. Vs. Additional Commissioner of Income Tax. Both courts held that after rejecting the books of accounts, the AO could not rely on them to make further additions under Section 68. The Tribunal thus deleted the addition of ?56,68,960/- on account of bogus sundry creditors.

2. Estimation of Taxable Income based on Turnover Percentage:

The second issue was the estimation of taxable income. The AO, after rejecting the books of accounts, made an estimated disallowance of 15% of the total purchases, amounting to ?40,02,234/-. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the estimated addition to 2% of the turnover, following the principle of consistency from previous years.

The Tribunal agreed with the CIT(A) and noted that the AO, having rejected the books of accounts, should estimate the profit based on the turnover. The assessee had disclosed a net profit of 1.79%, which the CIT(A) enhanced to 2%. The Tribunal upheld this estimation, citing the judgment of the Hon'ble High Court of Gujarat in Tayab Yunus Barudgar, which confirmed the estimation of net profit at 2% of total unregistered dealer (URD) purchases as proper and fair. The Tribunal dismissed the assessee's appeal to reduce the net profit estimation to 1.79% and confirmed the CIT(A)'s order to estimate the net profit at 2% of the turnover.

Conclusion:

The Tribunal's judgment emphasized that once the books of accounts are rejected, the AO should not make separate additions based on the same books but should estimate the profit. The estimation of net profit at 2% of the turnover was upheld, aligning with the principle of consistency and previous judicial precedents. The addition of ?56,68,960/- on account of bogus sundry creditors was deleted, and the net profit estimation at 2% of the turnover was confirmed.