Shri Hitesh Kumar Gupta Vs ITO (ITAT Jaipur)
The issue under consideration is whether the addition made by AO u/s 68 of Income tax Act, 1961 is justified in law?
In the present case, the Assessing Officer made the addition of capital employed in the business U/s 68, on the ground that the assessee must be requiring the funds to run the business as he makes credit sales.
ITAT states that the Assessing Officer made the addition U/s 68 on the ground that sales are made on credit basis and funds would be required/tied up in sundry debtors. In our view, such an addition cannot be sustained by invoking the provisions of section 68 which talks about any sum found during the books of accounts and in respect of which the assessee offers no explanation or the explanation so offered is not found satisfactory. In the instant case, there is no sum which is found credited in the books of accounts of the assessee and hence, on this ground itself, the assessee deserve the relief and the addition so made is hereby deleted. Hence, the appeal filed by the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
These are two appeals filed by the assessee against the respective orders of the ld CIT(A) for AY 2004-05 and AY 2005-06 respectively. As the same were heard together and involving common grounds of appeal, the same are being disposed off by this consolidated order.
2. In ITA No. 859/JP/2013, the assessee has filed the appeal against the order of ld. CIT(A), Alwar dated 05.09.2013 for the Assessment Year 2004-05 wherein the assessee has taken the following grounds of appeal:
” 1. In the facts and circumstances ofthe case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in reopening of assessment under section 147 ofthe IT Act, 1961. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the re-opening proceedings.
2. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in confirming the trading addition of Rs. 43,341/- (1,25,000-81,659) after adopting the N.P. rate of 5% on an estimated sales of Rs. 25,00,000/-. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition amounting to Rs. 43,341/-.
3. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action ofthe ld. AO regarding addition of a sum of Rs. 3,00,000/- u/s 68 of the IT Act, 1961. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 3,00,000/-~
3. During the course of hearing, the ld. AR did not press ground no. Hence, the same is dismissed as not pressed.
4. In ground No. 2, the assessee has challenged the action of the Assessing officer in confirming the trading addition of Rs. 43,341/- after adopting the N.P. rate of 5% on an estimated sales of Rs. 25,00,000/-.
5. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing Officer, on the basis of the diary found during the course of survey which admittedly belongs to the assessee, considered the amount of Rs. 13,20,574/- to be undisclosed balance with debtors as on 31stMarch, 2004. He further observed that there must have been some cash sales also, and on adhoc basis, estimated the turnover at Rs. 30,00,000/- for the year, and applied 5% presumptive profit rate on the same resulting into a trading addition of 68,341/-.
6. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). It was contended before the Id. CIT(A) that the law gives relaxation to the assessee from maintenance of books of The diary was maintained by the assessee on memorandum basis and was not at all regularly and systematically maintained. It was further submitted that once provisions of section 44AF has been applied, there is no scope of making estimation of the sales. Scheme of 44AF requires acceptance, by Revenue, of the declared turnover. It was accordingly contended that the estimation of turnover is possible only by applying the provisions of section 145(3), where the books of accounts must be rejected. It was further submitted that by applying past history, the approximate average growth rate is 13%, applying the same to the turnover of AY 2003-04, the turnover of A.Y. 2004-05 comes out to Rs. 18,40,408/-. The Assessing Officer’s estimation of Rs. 30,00,000/- is a wild guess-work and has no comparison with past history.
7. The ld. CIT(A) rejected assessee’s claim for the reason that the assessee did not deny the fact that the opening balance of the debtors is Rs. 13,20,574/- as per the diary. Further, the past history does not hold good for the estimation of turnover of the current year because the assessee has not maintained regular books of accounts, past data is too less to apply the statistical technique of extrapolation, ITR filed for the past years has no record/ estimate of sale within the return and the assessee is a retailer and probability of cash sales cannot be denied. The ld. CIT(A) confirmed the addition to the extent of Rs. 43,341/- with the sales estimate of Rs. 25,00,000/- against the estimate of Rs. 30,00,000/- of ld. AO. Thus, relief of Rs. 25,000/- was granted to the assessee and in respect of addition of Rs 43,341, the assessee is in appeal before us.
8. During the course of hearing, the ld. AR submitted that the provisions of section 44AF are special provisions for computing profits & gains of retail business. This section is a code in itself. If net profit of 5% or more is declared, the assessee is absolved from maintaining Books of Accounts. If less than 5% NP is declared, Books of Accounts are to be maintained u/s 44AA and the same are also to be got audited u/s 44AB. The sub section (1) mandates for acceptance of turnover “as declared by the assessee”. Sub section (1) is reproduced below for ready reference:
“44AF Special provisions for computing profits and gains of retail business
(1)”Notwithstanding anything to the contrary contained in section 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five percent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession”
9. In view of the above legal provision, it was submitted that the. AO is not given any authority to estimate the turnover. Since, Books of Accounts are not to be maintained, declared turnover cannot be rejected and replaced by the ld. AO’s estimation. Needless to mention that even provisions of section 145(3) are not applicable, as no Books of Accounts are required to be maintained. Thus, lower authorities have erred in resorting to estimation of turnover. It was submitted that the CIT(A) for estimating the turnover has upheld the invoking of the provisions of section 145(3) which is not correct.
10. Without prejudice, it was further submitted that against the declared turnover of Rs. 13,82,346/-, ld. AO had estimated the turnover at Rs. 30,00,000/- which was reduced by ld. CIT(A) at Rs. 25,00,000/-. It was submitted that the ld. CIT(A) has erred in estimating the turnover at Rs. 25,00,000/-. He has not given any basis for the same. Appellant’s contention before him in respect of extrapolated turnover of 18,40,408/- is rejected by him without giving any cogent reason. The basis of extrapolation was duly explained to him, which is reproduced below for ready reference:
