No separate addition can be made when net profit is estimated by rejecting book results

Brief of the case:

In the case of Brahamanand Agarwal, Thekhedar Vs. DCIT Jaipur Bench of ITAT have held that when net profit is estimated by AO by rejecting the book result U/s 145(3) of the Act, no separate addition can be made on account of cash creditor. ITAT relied upon the decision of Rajasthan High Court in the case of CIT Vs. G.K. Contractor 19 DTR 305 (Raj) wherein the Hon’ble Jurisdictional High Court held that when net profit is estimated by the Assessing Officer by rejecting the book result U/s 145(3) of the Act, no separate addition can be made on account of cash creditor.

Facts of the case:

• Assessee is a civil contractor and having work for government department like PHED and Marketing Board and has declared a net profit rate of 5.66% on the gross receipt of Rs. 1,65,29,950 totaling to Rs. 9,35,595/-.
• During the assessment proceedings assessee was asked to file books of account regarding claim of net profit ratio.
• The assessee was requested to produce the books of account and details of site wise, stock register, vouchers for labour charges and diesel and fuel vouchers for verification.
• Assessee failed to produce complete books, and filed partly on various occasions, and filed affidavit that he had dispute with his accountant.
• AO made assessment in absence of complete books of account, non-cooperation of the assessee in producing the bills/vouchers and he decided the case.
• AO applied 12.5% N.P. on total receipt of Rs. 1,65,29,950/-, which was worked out at Rs.20,66,244/-.
• During the year consideration AO found that assessee’s account in PNB was partly credited of amount Rs. 34, 64,896/- through cash deposit and partly from clearings.
• AO found difficulty in verification of said credits as assessee had not produced complete books of account, purchase and sales and other expenses vouchers for verification.
• AO observed that the amount received through clearings in this bank account were from out of contract receipt but cash deposited in the bank account is undisclosed income of the assessee.
• AO enquired from the bank about these deposits made but the bank had also not supplied the details of these deposits.
• AO finally concluded that these undisclosed cash deposits is also from the contract business, therefore, he applied 12% N.P. rate on Rs. 32,64,896/- and made addition of Rs. 4,08,112/- in the income of the assessee.
• AO further observed that on verification of bank account, the assessee has deposited cash on different dates to the tune of Rs. 7,98,000/-, which includes DD cancellation of Rs. 90,000/-.
• The assessee has not explained source of these cash deposits, therefore, AO made addition of Rs. 7,98,000/- in the total income of the assessee.
  

Contention of the assessee:

• The books of account are subject to audit U/s 44AB and the necessary report of the tax audit was also submitted before the AO.
• During the course of assessment proceedings, all the possible details available with assessee were submitted as asked for by the ld Assessing Officer in the shape of copy of bank statements, copy of FD account, details regarding household withdrawals and list of liabilities for the year under appeal and also the details regarding purchase of raw materials.
• Certain details such as books of account, stock register could not be produced by the assessee for the reason of an ongoing dispute with the accountant of assessee who is in the possession of assessee’s books of account.
• Assessee has maintained proper books of account, which was duly audited and auditor had not pointed out any single defects/short comings in the books of account maintained by the assessee. Audit report was not considered by AO.
• AO estimated the net profit @ 12.5% without allowing the deduction on account of interest and depreciation resulting into the application of NP rate, which is more than double of the NP rate declared by the assessee.
• Rate of 9% confirmed by the CIT(A) is very higher side and same is deserved to be reduced to a reasonable profit rate subject to statutory allowing of depreciation and interest.
• AO, without giving opportunity, treated the total credit side of the bank account as undisclosed contract receipts of the assessee and applied net profit @ 12.5% on it and addition of Rs. 4,08,112/- was made.
• The credit entries in the PNB account were almost all of the clearing into the PNB account from another bank.

Contention of the revenue:

• As per audit report, the assessee was maintaining books of account on computer, which cannot be taken by the munim/accountant.
• The assessee might have generated the hard copy of the books of account from the computer. Therefore, the assessee’s reply is beyond truth.
• As per audit report, the assessee valued closing stock on estimate basis.
• In preceding year, GP rate was 18.81%, which has been gone down to 11% during the year under consideration. Similarly, the net profit in preceding year was 9.1%, which has also gone down to 5.66%, the assessee has not explained any reason.
• Assessee has not submitted any reply in response to credit entry made in the bank account maintained with PNB.

Held by CIT (A):

•  CIT (A) partly allowed appeal and reduced net profit to 9% from 12.50%.
• Most of the entries were transfer entries from assessee’s other bank account. Few entries related to contractual receipts, two entries of Rs. 3.00 lacs and Rs. 2.00 lac related to cheques, which were not cleared. Out of remaining entry of Rs. 9026/- related to FDR interest and entry of Rs. 1,80,000/- related to cash deposited. The interest of FDR amounting to Rs. 9026 is liable to be taxed under the head income from other sources.
• CIT (A) confirmed the addition of Rs. 9,026/-.
• Assessee had disclosed net profit of Rs.9,35,596/- @ 5.66% N.P. as against this he confirmed the addition at Rs. 14,87,697, which resulted in net addition of Rs. 5,61,126/-.
• There was cash withdrawal from the bank account of the assessee and net addition upheld by CIT(A) is also available at Rs. 5,61,126/- for cash deposit made by the assessee.

 Held by ITAT:

•  The assessee only filed an affidavit before the A.O. that the assessment proceedings initiated by the Assessing Officer by issuing first notice in the month of September, 2009 and was completed on 28/12/2010.
• Assessee filed an affidavit before the Assessing Officer on 06/12/2010 and agreed to assess the net profit @ 8% on total receipts. It is also undisputed fact that the assessee’s G.P. as well as N.P. had gone down during the year.
• On verification of asset disclosed by the assessee, he has only Jeep. It appears that this computer owned by the somebody else, therefore, the claim of assessee that accountant had taken books of account appears to be false.
• Accordingly, ITAT confirm the net profit @ 9% subject to third party interest and depreciation.
• On the issue of credit entries in bank account ITAT relied upon Rajasthan High Court in the case of CIT Vs. G.K. Contractor 19 DTR 305 (Raj) wherein the Hon’ble Jurisdictional High Court held that when net profit is estimated by the Assessing Officer by rejecting the book result U/s 145(3) of the Act, no separate addition can be made on account of cash creditor.
• Addition on account of cash credit can’t be made net profit already decided at 9%.