After rejection of books of accounts AO cannot make Addition U/s. 40A (3) & 68

Deepak Mittal Vs. ACIT (ITAT Delhi)

When books of account of the assessee are not reliable and rejected by the authorities below under section 145(3) of the I.T. Act and there is no challenge to these findings of the authorities below, there is no reason for the authorities below to rely upon the same books of account for the purpose of making addition under section 40A(3) of the I.T. Act as well as to make addition of peak under section 68 of the I.T. Act. The A.O. noted in his findings that M/s. Hanuman Traders did not exist in purchase and sale ledger and existence of the same have not been proved. The Inspector also gave report to the same effect that M/s. Hanuman Traders do not exist at the given address. These facts clearly show that whatever entries are relied upon by the authorities below from the books of account, are contrary to the findings of the authorities below because non-existent party would not come to pay any amount to the assessee. Therefore, there is no question of considering the unrecorded amount recorded in the books of account of the assessee, so as to make the addition under section 68 of the I.T. Act. The A.O. did not make addition under section 68 of the I.T. Act separately because the addition is already made under section 40A(3) of the I.T. Act. The Ld. CIT(A) did not give any specific notice to assessee for enhancement of income under section 68 of the I.T. Act because he has merely recorded entry of 8t^h June, 2017 without confronting the facts for making addition of peak credit. The Ld. CIT(A) forgot to consider that if he wanted to make addition on account of peak credit on account of M/s. Hanuman Traders, whether theory of peak credit would apply in the case of the assessee ? For considering the issue of peak credit, the authorities below have to laid-out the foundation that it was unaccounted money of the assessee having both debit and credit which assessee did not agree. It could not be taken into consideration for making such addition under section 68 of the I.T. Act in the hands of the assessee for making any alleged transaction with M/s. Hanuman Traders, which, according to the authorities below, did not exist and that no such entries appear in the books of account of the assessee. Even if, some entries appeared in the books of account of the assessee regarding M/s. Hanuman Traders, according to the findings of the authorities below, such books of account of the assessee are not reliable. Therefore, the authorities below cannot rely upon  the same entries in books of account for the purpose of making the addition of the nature of peak against the assessee. Thus, there is no justification for the authorities below to make addition of Rs. 6,92,25,000/- under section 40A(3) of the I.T. Act and addition of Rs. 7,12,15,150/- under section 68 of the I.T. Act. In view of the above discussion, we set aside the orders of the authorities below and delete both these additions.

FULL TEXT OF THE ITAT JUDGMENT

This appeal by assessee has been directed against the order of the Ld. CIT(A)-19, New Delhi, Dated 26^th June, 2017, for the A.Y. 2013-2014.

2. The facts of the case are that the assessee filed return of income declaring income at Rs. 22,52,471/-. The assessee is an individual and engaged in the business of trading/ Distribution of ITC Products under the name and style of M/s. DK Enterprises. On verification of the P & L A/c, audited report and books of account of the assessee, it was noticed that assessee had made huge payments to M/s. Hanuman Traders in cash. The assessee was requested to produce ledger account of the party. The A.O. noted that assessee has made cash payments to this party and required to assessee to explain why the same should not be disallowed under section 40A(3) of the I.T. Act, 1961. The assessee, in his reply, submitted that copy of the audited accounts are filed to show sundry creditors in a sum of Rs. 1.79 crore in the balance sheet in respect of one M/s. Hanuman Traders who will is the dealer of the assessee and having the transaction with the party as a normal accounting practice and deals in ITC Products and wheat floor (Aatta) and same was sold/purchased in cash to wholesale dealers to approach the assessee and having the credit amount of Rs.  1.58 crores as on 31st March, 2013 and one M/s. Garg Cloths House shown a sum of Rs. 14 lakhs and remaining balance as creditors  of M/s. ITC Limited. The assessee did not produce the copy of the ledger account. Therefore, assessee was asked to produce the party M/s. Hanuman Traders and also produce purchase register, sale register and copy of the ledger of ITC Limited. The assessee explained that assessee is not in contact with M/s. Hanuman Traders and that they have left the business. The Inspector was deputed to make enquiries at the address of M/s. Hanuman Traders. The inquiry report of the Inspector stated that “firm was not existing/available at the given address”. The assessee was confronted with these facts. Summons were issued under section 131 to the assessee to appear personally. The assessee appeared and produced purchase and sale ledger. It was noticed that name of M/s. Hanuman Traders did not exist in purchase and sale ledger. The statement of assessee were recorded under section 131 on 28^th March, 2016. The relevant portion of the statement are reproduced in the assessment order in which assessee was confronted that payments in cash have been made to M/s. Hanuman Traders of Rs. 6,92,25,000/-The assessee explained that it is not recorded in the books of account as purchase and stated that it is undisclosed part of his trading activities. It was also stated that sale from purchases are not recorded in the books of account. The assessee further explained that some purchases of unbranded Aatta were made which were sold in next year and assessee offered the same for taxation. The A.O, therefore, noted that assessee has confessed in his statement that he has neither shown the purchases of unbranded Aatta purchased from M/s. Hanuman Traders in his books of account nor has shown the corresponding sales in his books of account. The profit earned out of these transactions have not been accounted by the assessee in his books of account. The assessee in his statement further submitted that purchases and sales made of the product so shown in the name of M/s. Hanuman Traders, are not accounted in the books of account and same may be taxed. The assessee offered the same amount for taxation and submitted that he has also incurred expenses relating to purchase and sales made, therefore, requested that gross profit on the sale may be taxed @ 8%. The A.O, therefore, noted that since purchases and sales of unbranded Aatta was not disclosed in the books of account, therefore, books of account of the assessee are not reliable and the same were accordingly, rejected under section 145(3) of the I.T. Act. The A.O. reproduced the letter of the assessee in which it is confirmed that additional turnover was made of Rs. 7,55,15,150/- without claiming expenses, on which, profit rate of 8% was surrendered for taxation in a sum of Rs. 60,41,212/-. The A.O. rejected the explanation of assessee that he was acting as an agent of M/s. Hanuman Traders because no such documentary evidence was produced. The A.O. noted that assessee has paid Rs. 6,92,25,000/- in cash and received Rs. 7,55,15,150/- in cash, which, a Commission Agent will not receive it. The A.O. re-casted Trading, P & L A/c and made the addition on account of net profit of Rs. 4,14,44,156/-

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