2023 (6) TMI 36 - AT - Income Tax

Rejection of books of accounts - Assessment of income u/s 144 - HELD THAT - AO having rejected the books of accounts of the assessee firm under sub-section (3) of Sec. 145 thereafter, could not have relied upon the said books of accounts, and the proper recourse available with him was to judicially determine its business profits in the manner provided in Sec. 144 of the Act. Our view that once the books of account of an assessee are rejected as unreliable then it is open to the A.O to estimate the assessee s profits considering the profit which was earned in similar business by other similarly placed merchants is supported by the judgment of CIT Vs. K.Y Pilliah Sons 1966 (10) TMI 35 - SUPREME COURT AO after rejecting the books of accounts of the assessee could not have based his assessment on the said books of accounts and should have judicially determined the business profits in the manner provided in Sec. 144 of the Act. Thus though approve the rejection of the books of accounts of the assessee firm u/s 145(3) by the A.O, but direct him to determine its business profits in the alike manner as was adopted by him while framing the respective assessments u/ss. 143(3)/147 in the case of the assessee firm for the preceding years, i.e A.Y 2010-11 to A.Y 2013-14, i.e @ 8% of its for the year under consideration. Addition u/s 68 and 69C - The maintainability of the additions made by the A.O u/s 68 and u/s 69C would not be telescoped in the business profits of the assessee firm and are required to be considered separately. Addition u/s 68 - As the ld. A.R had neither come forth with any explanation to rebut the observations of the lower authorities nor led any material which would prove otherwise, therefore, we are constrained to sustain the addition made by the A.O u/s 68 of the Act. Addition u/s 69C - debit entry against the name of Partner which was apparently spent towards purchase of a gold biscuit, but the same was not found recorded in the regular books of accounts of the assessee - claim of the assessee that the same pertained to the Vishwakarma expenses that were incurred by its partners. The A.O observing that the aforesaid expenditure was not record in the books of account of the assessee firm thus made an addition of the same u/s 69C - CIT(Appeals) being of the view that the pooja expenses were not allowable as a deduction u/s 37 disallowed the same - HELD THAT - Ostensibly, the aforesaid expenditure of Rs. 1.60 lac is not recorded in the regular books of accounts of the assessee firm. Considering the aforesaid facts, we are of the considered view that the A.O had rightly made an addition u/s 69C of the Act. Once the A.O had made an addition of the aforesaid expenditure of Rs. 1.60 lac as an unexplained expenditure u/s 69C of the Act, then there was no occasion for the CIT(Appeals) to have looked into its allowability as a deduction u/s 37 of the Act. We, thus, finding no infirmity in the addition of Rs. 1.60 lac made by the A.O u/s 69C of the Act, uphold the same.

Issues Involved:
1. Addition of PRW (Labour and Machine) expenses.
2. Disallowance under Section 40A(3).
3. Disallowance of provision for bonus to staff.
4. Disallowance of bad debts.
5. Disallowance of material purchase account.
6. Addition under Section 68 on account of cash credit.
7. Addition under Section 68 on account of explained credit.
8. Addition on account of alleged unrecorded contract receipts.
9. Addition on account of alleged credits from car sale.
10. Addition on account of unexplained expenditure under Section 69C.
11. Addition on account of alleged unrecorded interest receipts.
12. Addition on account of unexplained cash credit under Section 68.
13. Legality of specific disallowances/additions after rejecting books of accounts.

Summary:

1. Addition of PRW (Labour and Machine) Expenses:
The assessee challenged the addition of Rs. 90,72,799/- made by the AO, arguing that the difference between the expenses claimed in the profit and loss account and those found during the survey was arbitrary and baseless. The Tribunal found that the AO had rightly rejected the books of accounts under Section 145(3) due to serious discrepancies and assessed the income under Section 144. However, it was noted that the AO's reliance on the rejected books for assessing income was contradictory and legally flawed.

2. Disallowance under Section 40A(3):
The AO disallowed Rs. 2,71,38,940/- invoking Section 40A(3) for payments exceeding Rs. 20,000/- made in cash. The Tribunal upheld the rejection of books but directed the AO to estimate business profits based on a flat rate of profit, similar to previous assessments.

3. Disallowance of Provision for Bonus to Staff:
The AO disallowed Rs. 19,95,450/- claimed as a provision for bonus. The Tribunal maintained the disallowance, emphasizing that the AO should not rely on rejected books for specific disallowances.

4. Disallowance of Bad Debts:
The AO disallowed Rs. 14,28,899/- claimed as bad debts. The Tribunal upheld the disallowance, reiterating the need for a consistent approach in rejecting books and estimating income.

5. Disallowance of Material Purchase Account:
The AO disallowed Rs. 4,04,56,014/- alleging inflated purchases. The Tribunal directed the AO to estimate the business profits based on previous assessments rather than relying on rejected books.

6. Addition under Section 68 on Account of Cash Credit:
The AO added Rs. 4,82,840/- under Section 68, considering it an unexplained cash credit. The Tribunal found the addition unjustified, noting that the amount was a repayment of an outstanding liability.

7. Addition under Section 68 on Account of Explained Credit:
The AO added Rs. 10,00,000/- under Section 68 for unexplained cash credits. The Tribunal upheld the addition due to the lack of any plausible explanation from the assessee.

8. Addition on Account of Alleged Unrecorded Contract Receipts:
The AO added Rs. 27,88,260/- for unrecorded contract receipts. The Tribunal directed the AO to estimate the business profits based on a flat rate of profit.

9. Addition on Account of Alleged Credits from Car Sale:
The AO added Rs. 8,10,000/- for unrecorded car sale proceeds. The Tribunal directed the AO to estimate the business profits based on a flat rate of profit.

10. Addition on Account of Unexplained Expenditure under Section 69C:
The AO added Rs. 1,60,000/- for unexplained expenditure on a gold biscuit. The Tribunal upheld the addition, noting that the expenditure was not recorded in the regular books.

11. Addition on Account of Alleged Unrecorded Interest Receipts:
The AO added Rs. 1,59,000/- for unrecorded interest receipts. The Tribunal directed the AO to estimate the business profits based on a flat rate of profit.

12. Addition on Account of Unexplained Cash Credit under Section 68:
The AO added Rs. 6,56,248/- under Section 68 for unexplained cash credits. The Tribunal directed the AO to estimate the business profits based on a flat rate of profit.

13. Legality of Specific Disallowances/Additions after Rejecting Books of Accounts:
The Tribunal emphasized that once the books of accounts are rejected, the AO should not rely on them for specific disallowances or additions. Instead, the AO should estimate the business profits based on a flat rate of profit, considering previous assessments.

Conclusion:
The Tribunal partly allowed the appeal, upholding the rejection of books under Section 145(3) but directing the AO to estimate business profits based on a flat rate of profit, similar to previous assessments, and separately considering additions under Sections 68 and 69C.

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