2021 (10) TMI 502 - AT - Income Tax

Estimation of income - Bogus purchases - sole basis of addition was surrender made by the assessee - adoption of profit rate of 0.5% of the turnover by AO HELD THAT - It is an admitted fact that this is the first year of operation of the assessee-company. The assessee has produced books of account before A.O. and the sales declared by the assessee has not been doubted - A.O. in the subsequent years has accepted the book results i.e., 0.045% in A.Y. 2016-17 under section 143(1) of the I.T. Act, 1961 and 0.029% in the order passed under section 143(3) I.T. Act, 1961 for the A.Y. 2017-18. Therefore, for the impugned assessment year, when the sales has not been doubted and the assessee has produced the books of account including details of purchases, sales, sundry debtors, creditors, stock statement, quantitative of details etc., therefore, adoption of net profit @ 0.5% appears to be on higher side. Adoption of net profit rate of 0.075% under the facts and circumstances of the present case will meet the ends of justice. I hold and directly accordingly. It is also made clear that this profit rate is only for the impugned year for the assessee and cannot be considered as a precedent for other years or for any other assessee. The ground raised by the assessee on this issue is accordingly partly allowed. Addition u/s 68 in respect of share capital - It is an admitted fact that the share capital was invested by the Directors and this is the first year of the incorporation. Therefore, in the year of incorporation the assessee-company in our opinion cannot have income from undisclosed source towards introduction of share capital and addition, if any, could have been made in the hands of the Directors - therefore, set aside the order of the Ld. CIT(A) on this issue and direct the A.O. to delete the addition.

Summary

Issues Involved:

1. Addition of ?18,39,223/- under Section 68 of the I.T. Act.
2. Addition of ?1,00,000/- under Section 68 of the I.T. Act on account of share capital.
3. Rejection of books of account under Section 145(3) of the I.T. Act.

Detailed Analysis:

1. Addition of ?18,39,223/- under Section 68 of the I.T. Act:

The Assessee, a company engaged in trading clothes, declared a total income of ?2,25,633/- for the A.Y. 2015-2016. During assessment, the A.O. noted purchases of ?41,29,01,230/- from 12 parties. Notices issued under Section 133(6) to verify these purchases were returned undelivered, and the Ward Inspector could not locate these firms. The Assessee failed to produce the proprietors of these firms, leading the A.O. to reject the books of account under Section 145(3) on the grounds that the firms were bogus. The Assessee offered to declare 0.5% of the turnover as net profit, leading to an addition of ?18,39,223/- under Section 68. The Ld. CIT(A) upheld this addition, noting that the Assessee admitted the purchases were bogus and agreed to the addition during assessment proceedings.

The Tribunal found merit in the Assessee's argument that this was the first year of operation, and the books of account were duly audited. The Tribunal noted that the A.O. accepted lower net profit rates in subsequent years (0.045% in A.Y. 2016-17 and 0.029% in A.Y. 2017-18). Given the facts, the Tribunal deemed a net profit rate of 0.5% excessive and reduced it to 0.075%, partially allowing the Assessee's appeal on this issue.

2. Addition of ?1,00,000/- under Section 68 of the I.T. Act on account of share capital:

The A.O. made an addition of ?1,00,000/- under Section 68, treating the share capital as income from undisclosed sources. The Ld. CIT(A) upheld this addition, citing the Assessee's failure to provide details or evidence regarding the share capital.

The Tribunal found that the share capital was invested by the Directors and that this was the first year of incorporation. Therefore, the addition should have been made in the hands of the Directors, not the Assessee-company. The Tribunal set aside the Ld. CIT(A)'s order on this issue and directed the A.O. to delete the addition, fully allowing the Assessee's appeal on this point.

3. Rejection of books of account under Section 145(3) of the I.T. Act:

The A.O. rejected the Assessee's books of account under Section 145(3) due to the inability to verify purchases from the 12 parties. The Ld. CIT(A) upheld this rejection, noting the Assessee's non-compliance and the bogus nature of the firms.

The Tribunal acknowledged the Assessee's submission that the books of account were duly audited and that the sales were not doubted. Given the Assessee's production of books, purchase and sales details, stock register, and other relevant documents, the Tribunal found the A.O.'s rejection of the books to be excessive. The Tribunal's adjustment of the net profit rate to 0.075% implicitly addressed this issue, thereby partially allowing the Assessee's appeal.

Conclusion:

The Tribunal partly allowed the Assessee's appeal by reducing the net profit rate to 0.075% and deleting the addition of ?1,00,000/- under Section 68 on account of share capital. The order was pronounced in the open Court on 30.09.2021.