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2021 (9) TMI 881 - AT - Income TaxComputation of assessee income - GP estimation - Addition u/s 68 - deposits made in the undisclosed bank account - reopening of assessment - assessee's income computation by treating the entire deposits in the Bank as business receipts and applying the G P rate over that - HELD THAT - When the assessee had received the deposits through the banking channels, than names and bank accounts of the persons from whom amounts were received and paid by the assessee, could be retrieved by the assessing officer by using his powers under section 133(6) of the Income Tax Act however, the notices were only issued 7 persons to verify the transactions, whose details were provided by the assessee, out of 7 persons, only one person had responded and acknowledged that it was in a business relationship with the assessee - nothing was brought on record concerning the remaining 6 persons. No efforts were made by AO , to find out the real nature of transactions by issuing the summons to the Banks officials of these five Bank accounts. Revenue has unbridled power to summon, examine, and collect the evidence to prove its case and enforce the attendance of six people to whom the lower authorities issued the notices under section 133. In our opinion once the assessing officer had reopened and examined the case of the assessee by treating the receipt deposited in the bank accounts as the business receipts, then the assessing officer has two options either to reconcile the bank entries by drawing the trading account based on bank entries and compute profit of the assessee or treat the entire bank deposits as turnover of the assessee and apply gross profit over that. Once the assessment is made based on the undisclosed bank accounts, the debit and the credit in the bank accounts were required to be considered for making the addition u/s 68 - The income that has accrued to the assessee is taxable as per law. What income has really occurred to be decided based on material available with the AO, not by reference to physical receipt of income(credit entry in Bank ), but by also giving the benefit/ adjustment of debit entry ( in the bank account ), the difference would solely represent the income of the assessee, in the present case. Being the amount paid were on account of business connections, required to be verified by the lower authorities either from the bank account or from the bank authorities or from the beneficiaries - assessee had failed to produce various persons with whom he had the financial transactions for the purchases/sale of goods. Nothing had been brought on record to substantiate that invoices produced by the assessee were not genuine or that the assessee had not made business transactions from the above noted seven entities. GP estimation - We have only left the second recourse, whereby the assessee's income was required to be computed by treating the entire deposits in the Bank as business receipts and applying the G P rate over that - the assessee was not maintaining any books of account in respect of the business carried out by the assessee nor was the assessee able to show that he was registered with the VAT department. In other words the books of account as required under section 2(12A) were not maintained by the assessee, in our view it is this requirement of invoking section 68 of the act that the assessee should have maintained the books of account and the entries have not been shown in the books of account. Section 68 is a deeming provision, which provides that if any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation then the sum so credited may be charged to income tax as the income of the assessee. For applying section 44 AF, it is clear that the total turnover of the assessee must be less than 40 lakhs of rupees. In the present case as mentioned hereinabove turnover the assessee, as per the case of the assessee as well as of the assessing officer was more than 40 lakhs, therefore the rate of 5% cannot be applied as claimed by the assessee - AO has not brought on record that the assessee is having any other source of income other than doing the business, as mentioned by the assessing officer in the reasons to reopen the assessment. Therefore, only the GP addition can be made on the bank deposits, treating it as a business turnover. Best rate which can be applied in the given set of facts would be 8% GP on the turnover in all the assessment years. This will be tune with the 44AD of the IT Act.The profit forall three years, after applying GP rate of 8% would come to ₹ 76,90,622.88/-, however, if we compute the profit based on trading accounts for all three years , it will come to ₹ 38,99,852/- Undoubtedly the assessing officer in the assessment order, had accepted the return of income, declaring business income, filed by the assessee after receipt of the notice under section 148 and had given the credit while computing the income of the assessee based on the bank deposits.Income of the assessee shall be as under for all three assessment years after giving the benefit of the amounts declared by the assessee during all these assessment years and after applying 8% for all these assessment years.
Issues Involved:
1. Reopening of assessment under Section 148 of the Income Tax Act. 2. Treatment of undisclosed bank deposits as business income. 3. Application of Section 68 of the Income Tax Act. 4. Determination of the Gross Profit (GP) rate to be applied on business turnover. 5. Verification of transactions through Section 133(6) notices. Issue-Wise Detailed Analysis: 1. Reopening of Assessment under Section 148: The assessee's case was reopened under Section 148 for the assessment years 2009-10, 2010-11, and 2011-12 due to large credit transactions in undisclosed bank accounts. The Assessing Officer (AO) believed that the assessee was carrying out business activities that were not disclosed in the returns, thus leading to the reopening of the case. 2. Treatment of Undisclosed Bank Deposits as Business Income: The AO treated the entire deposits in the undisclosed bank accounts as unexplained cash deposits, resulting in significant additions to the assessee's income for the respective years. The assessee contended that these deposits represented business receipts from trading in rubber chemicals and declared income on an estimated basis in response to the notice under Section 148. 3. Application of Section 68 of the Income Tax Act: The AO invoked Section 68, treating the entire bank deposits as unexplained cash credits. The assessee argued that Section 68 could not be applied as it requires the maintenance of books of accounts, which the assessee did not have. The Tribunal noted that bank accounts are not considered books of accounts under Section 68, thus questioning the validity of the AO's application of this section. 4. Determination of the Gross Profit (GP) Rate: The Tribunal considered the assessee's argument that only the profit from the business should be taxed, not the entire deposits. The Tribunal referred to past judgments and decided that an 8% GP rate on the turnover was appropriate, aligning with Section 44AD of the Income Tax Act. This rate was applied to the total deposits to determine the taxable income. 5. Verification of Transactions through Section 133(6) Notices: The AO issued notices under Section 133(6) to various parties to verify the transactions. Only one party responded, confirming business dealings with the assessee. The Tribunal noted that the AO did not make sufficient efforts to verify the remaining transactions, which could have clarified the nature of the deposits. Findings: - The Tribunal found that the AO should have considered both credit and debit entries in the bank accounts to determine the actual income. - The Tribunal rejected the application of Section 68 due to the lack of books of accounts. - The Tribunal applied an 8% GP rate on the total deposits for all assessment years, resulting in a lower taxable income than initially determined by the AO. - The Tribunal allowed the assessee's appeal partly, providing relief by recalculating the taxable income based on the GP rate. Conclusion: The Tribunal concluded that the AO's approach of treating the entire bank deposits as income was incorrect. Instead, only the profit from the business activities should be taxed, applying an 8% GP rate on the turnover. The appeals were partly allowed, providing relief to the assessee.
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