AO cannot disallow Sum credit in books under Section 68

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 31^stMarch, 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:

Note: Sales of A.Y. 2004-05 is interpolated as under:

1) Average Growth rate of A.Y. 2003-04:

16,28,680 – 11,66,733  = 1,53,982 *100 = 13% approx.

3 years                                  11,66,733

2) Turnover of A.Y. 2004-05 after applying growth rate computed in point 1:

16,28,680*113% = 18,40,408/-

11. It was submitted that the ld. CIT(A) in consonance with ld. AO, believed that since the assessee is a retailer and probability of cash sales cannot be denied. However, the assesse at the time of assessment proceedings submitted that there were no cash sales and all sales were credit sales. Ld. AO without bringing anything on record to substantiate the same, and without providing a basis made a general statement and estimated the sales on adhoc basis.

12. The ld DR is heard who has vehemently argued the matter and took us through the findings of the lower authorities which we have already noted above.

13. We have heard the rival contentions and perused the material available on record. The limited issue under consideration is what should be the turnover of the assessee for the year under consideration. The assessee has reported a turnover of Rs 13,82,346 and the undisclosed balance with the debtors as on 31 March 2004 comes to Rs 13,20,574 basis the diary found during the course of survey which has been owned up by the assessee. There is nothing on record to show that corresponding sales relating to the undisclosed balance with the debtors as on 31 March 2004 forms part of the reported turnover and thus, the same is clearly the undisclosed turnover of the assessee. Given that the Revenue is not in appeal, we are of the view that the ld CIT(A) is reasonable enough to determine the turnover of the assessee at Rs 25,00,000. In the result, the ground of appeal is dismissed.

14. Regarding Ground No. 3 wherein the assessee has challenged the addition of a sum of Rs. 3,00,000/- U/s 68 of the I.T. Act, 1961. The Assessing Officer made the addition of capital employed in the business at Rs. 5,00,000/- U/s 68, on the ground that the assessee must be requiring the funds to run the business as he makes credit sales.

15. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) wherein it was submitted that the assessee requires no capital of his own for running business. He allows his customer a credit for a period less than the credit period he enjoys. The assessee’s father is involved in the similar business since long and has a shop in the main market of Dausa. The assessment of assessee’s father was also complete by ld. AO and analysis of the audited statements confirms that he was enjoying credit from his suppliers. The Assessing Officer ignored that the assessee is involved in the same business from last so many years and whatever capital is required for the business was accumulated over the period out of earnings and gifts.

16. The ld. CIT(A) confirmed the addition holding that no records of purchase made on credit are available or found during the course of No supporting evidence in form of names and addresses of the creditors, confirmations, etc were filed in support of the contentions made before the Assessing Officer and considering the normal business conduct at this level of business operations, the assessee’s argument appears to lack substance.

17. Now, the assessee is in appeal before us. During the course of hearing, the ld. AR submitted that the AO on his own and contrary to the facts on record held that the assessee started a new business. The facts on record infact proves that the assessee is involved in the same business from last 10 years. Also, the assessee has provided copy of his return of income for A.Y. 1999-00, A.Y 2000-01 and A.Y. 2003-04.

18. It was further submitted that from the audited financial statements of the assessee’s father, who is involved in the same line of business, it is established that a person, in such line of business enjoys the credit limits from the suppliers. Thus, the assessee also enjoys the credit period from his suppliers. Also, there is nothing on record to prove that the assessee purchases goods in cash whereas all evidences and circumstances substantiate that purchases were made in credit. During the assessment proceedings it was submitted that assessee is enjoying the credit from its suppliers and he allows to his customers a period less than the credit he enjoys. Thus, in assessee’s business model, the requirement of capital was very meager. The meager capital required was accumulated over the years and therefore no additional capital is required for running the business.

19. Without prejudice to above, it is submitted that ld. CIT(A) has upheld the rejection of books. Once the books are rejected, no further addition can be made u/s 68. The issue is covered by the Hon’ble Jurisdictional High Court in the case of CIT vs. G.K. Contractor [2009] 19 DTR 305 (Raj) wherein it was held as under:

‘..However, in our considered opinion, even ifthe assessee has failed to discharge his onus of proof in explaining the cash credits shown in the books of account as “market outstanding’ , the AO having estimated the higher profit rate on total contract receipts after rejection of the books of account invoking the provisions of s. 145(3), no separate additions can be made on account of unexplained cash credit under s. 68 ofthe Act of 1961..”

It was submitted that the Tribunal in case of Elcon Drugs & Formulation Ltd vs. ITO – ITA No. 995/JP/2013 has also followed the decision of Hon’ble Rajasthan High court in the case of G.K. Contractors (supra). In view of above submissions, addition made by the AO and confirmed by the ld. CIT(A) may please be deleted.

20. The ld. DR is heard who has relied on the lower authorities.

21. We have heard the rival contentions and perused the material available on record. The Assessing Officer made the addition of Rs. 5,00,000/- U/s 68 on the ground that sales are made on credit basis and funds would be required/tied up in sundry debtors and also for purchase of material which has been reduced to Rs 3,00,000 by the ld CIT(A). 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. In view of the same, we have not dealt with other contentions so raised by the ld AR. In the result, the ground of appeal is allowed.

22. In the result, the appeal of the assessee is partly allowed.

23. In ITA No. 860/JP/2013 for AY 2005-06, the assessee has taken 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. 66,513/- (1,75,000- 1,08,487) after adopting the N.P. rate of 5% on an estimated sales of Rs. 35,00,000/-. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts ofthe case. Relief may please be granted by deleting the said addition amounting to Rs. 66,513/-.

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/-.~

24. The ground no. 1 was not pressed during the course of hearing, hence the same is dismissed.

25. In ground no. 2, similar contentions have been raised by the ld AR as we have noted above in context of AY 2004-05. It was submitted that based on past history and average growth rate of 13%, the estimated turnover of the asssessee comes to Rs 20,79,661 as against Rs 35,00,000 estimated by the AO and which has been confirmed by the ld CIT(A).

26. It was further submitted by the ld AR that the ld. CIT(A) has erred in estimating the turnover at Rs. 35,00,000/-, on the observation that the assessee himself has admitted before ld. AO that the total of credit sales as per annexure A-4 comes to Rs. 27,66,751/-. In this regard it is submitted that ld. CIT(A) has not considered the sales return of Rs. 5,62,504/- which is evident from the details placed at PB 98-99. The amount admitted by the assessee is the total amount of the credit sales, excluding the amount of sales return. Hence, the assessee has not inflated the amount of sales in the assessment proceedings. Ld. CIT(A) has not controverted the fact of sales returns submitted before him. The ld. CIT(A) in consonance with ld. AO, believed that since the assessee is a retailer and probability of cash sales cannot be denied. However, the assessee at the time of assessment proceedings submitted that there were no cash sales and all sales were credit sales. Ld. AO without bringing anything on record to substantiate the same, and without providing a basis made a general statement and estimated the sales on adhoc basis. Further it was submitted that the ld. CIT(A) for the A.Y. 2004-05, in the assessee’s own case having identical issue, has himself upheld the estimation of sales to the tune of Rs. 25,00,000/- against the estimation of ld. AO at Rs. 30,00,000/-. In the year under consideration the estimation of sales by ld. CIT(A) is of Rs. 35,00,000/-. Hence, as per CIT(A) there is a growth of 40% in the turnover of the assessee in the current year as compared to last year. Attention is drawn to Para 3.4 of the submission, wherein the past history of the assessee is reproduced. Considering the same and the level of the business at which assessee operates, growth of 40% upheld by ld. CIT(A) is unimaginable and unjustified.

Note 1:

Calculation of Growth %

* 100 adopted by ld. CIT(A) = Estimate of A.Y. 2005-06 – Estimate of A.Y. 2004-05

Estimate of A.Y. 2004-05

(35,00,000 – 25,00,000) * 100 = 40%

25,00,000

27. We have heard the rival contentions and pursued the material available on record. The AO basis the dairy found during the course of survey which has been owned up by the assessee has determined the undisclosed sales for the year amounting to Rs 29,91,458 as against the reported turnover of Rs 21,69,740 in the return of income. The matter relating to sales return are considered but not found established and hence, not acceptable. Therefore, the turnover is determined at Rs 29,91,458 as against the figure of Rs 35,00,000 sustained by the ld CIT(A). The assessee thus get’s the consequent relief on profit determination on the turnover of Rs 29,91,458 and the ground is thus partly allowed.

28. Regarding ground no. 3, both the parties fairly submitted that the facts and circumstances are exactly identical as in ITA No. 859/JP/2013. Therefore, our findings and directions contained in ITA No. 859/JP/2013 shall apply mutatis mutandis to this ground of appeal which is accordingly allowed.

29. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on 26/10/2018.