2022 (10) TMI 116 - AT - Income Tax

Estimation of income - Addition u/s 68 - bogus and false entries or undisclosed income of the assessee which was induced in the books under the garb of cash sales and advance from customer and receipt from debtors - addition considering the same as part of turnover and applying same rate of G.P. @ 2.59 % of cash sales which was added by AO u/s. 68 of the disbelieving the cash sales recorded by the assessee on the day of demonetization - CIT-A deleted the addition - HELD THAT - As revenue not prove the sale made by the assessee which is executed after giving the goods to the customer, duly reflected in the invoice issued, assessee having sufficient stock in the books, sales is duly reflected in the books of accounts supported by payment of VAT. Therefore, the contention of the revenue based on the facts and circumstance of the case is not accepted and we see no reason to find any fault in the detailed reasoned finding in the order of the ld. CIT(A). Thus, we sustain the order of the ld. CIT(A) and based on these observations the appeal of the revenue stands dismissed. Rejection of books of account on the basis of insignificant defects - estimation of income by applying NP rate - Whether Rejection of books of account u/s 145(3) was not given by the AO and the assessment completed in the manner provided u/s 144 - HELD THAT - It is apparent from records that all the amounts realized from debtors and received as advance from customers during the period 03-11-2016 to 8-112016 was genuine and verifiable from the accounts then there is no cogent reason by the lower authorities to treat the same as nongenuine. Hence, looking into the entirety of the facts, circumstances of the case and the case laws cited by the AR of the assessee (supra), we allow the appeal of the assessee by holding that the rejection of books of account on the basis of insignificant defects in all respect, is not justified and books of account deserves to be accepted. Before invoking the provisions of Section 145(3) of the Act, the AO has to bring on record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assessee or the method of accounting employed by it. In the instant case, it was not the case that the assessee had not followed either cash or mercantile system of accounting. It was also not the case that the Central Government had notified any particular accounting standard not followed by assessee. Further the assessee maintains proper books of account audited by Chartered Accountant and the profit may be derived from the audited books of account therefore there is no justification in estimation of income by applying NP rate and accordingly the lower authorities are directed to delete the addition sustained by ld CIT(A). Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Deletion of addition of Rs. 12,17,48,500/- made u/s 68 of the IT Act, 1961.
2. Rejection of books of accounts and estimation of net profit rate.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 12,17,48,500/- made u/s 68 of the IT Act, 1961:

The Revenue argued that the cash deposited during the demonetization period was bogus and represented undisclosed income. The Assessing Officer (AO) highlighted various discrepancies, including abnormal cash sales on a single day, revision of VAT returns, and unverifiable purchases from certain entities. The AO also questioned the genuineness of cash receipts from debtors and advances from customers.

The CIT(A) found that the assessee had substantiated its claim with documentary evidence and past trends. The CIT(A) noted that treating the cash sales as unexplained cash credit u/s 68 would result in double taxation, which is impermissible. The CIT(A) held that the AO's action was not based on a correct appreciation of facts and directed the deletion of the addition.

The Tribunal upheld the CIT(A)'s findings, noting that the assessee had provided detailed explanations and supporting documents, including sales bills, stock registers, and VAT returns. The Tribunal emphasized that the AO had not pointed out any specific defects in the books of accounts and that the sales were consistent with past trends. The Tribunal also noted that the cash deposits were supported by the sales recorded in the books and that the AO's rejection of the assessee's explanations was based on mere suspicion.

2. Rejection of Books of Accounts and Estimation of Net Profit Rate:

The AO rejected the books of accounts u/s 145(3) and estimated the net profit rate at 2.59%, based on the average net profit of the last three years. The AO applied this rate to the reduced turnover, excluding the cash deposits during the demonetization period.

The CIT(A) upheld the rejection of the books of accounts but directed the application of the net profit rate to the total turnover, including the cash deposits. The CIT(A) sustained an addition of Rs. 47,72,297/- based on the estimated net profit.

The Tribunal found that the AO had not issued a show cause notice for the rejection of the books of accounts and had not framed the assessment u/s 144, as required by section 145(3). The Tribunal noted that the purchases from certain entities were held genuine by the CIT(A) and that the books of accounts were complete and correctly maintained. The Tribunal also found that the amounts realized from debtors and advances from customers were genuine and verifiable.

The Tribunal held that the rejection of the books of accounts was not justified and that the estimation of income by applying the net profit rate was incorrect. The Tribunal directed the deletion of the addition sustained by the CIT(A).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, holding that the addition of Rs. 12,17,48,500/- u/s 68 was not justified and that the rejection of the books of accounts and estimation of net profit rate were incorrect. The Tribunal emphasized the importance of specific defects and credible evidence in rejecting books of accounts and making additions.