Once the trading results and books of accounts have been rejected and income is being estimated by applying net profit rate on the declared gross contract receipt, then no other addition is required to be made on account of any other trading items including the trade creditors or any other direct expenses as well as trading liabilities shown in the accounts. The reason being that, when the books of accounts are rejected and income is assessed on the principle of cbest judgment assessment’, then entries of the amounts shown in the books of accounts cannot be held to be reliable. Once business income of the assessee from the contract receipt business has been assessed at 8%, then it take cares of all other additions made on account of trading account and any liability including outstanding amount of trade creditors. Thus, we agree with the contention of the Ld. Counsel that if the income has been assessed after rejecting the books of accounts and net profit rate has been applied, then no separate addition on account of trade creditors should be made.
FULL TEXT OF THE ITAT JUDGMENT
The aforesaid cross appeals have been filed by the assessee as well as by the revenue against the impugned order dated 8.9.20 14, passed by Ld. CIT (Appeals) XI New Delhi for the quantum of assessment passed u/s 143(3) for A.Y. 2010-11. In assessee’s appeal, following grounds have been raised:
“Ground No. 1
On the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in disallowing Rs. 1,34,22,499/- with respect to 19 Sundry Creditors who are Petty Contractors and Suppliers of material and aggregate and placed in remote destinations and sites under tough working conditions and nature of business and the Assessee purchased the material from such person in unorganized sectors.
Ground No. 2
The Ld. CIT (A) ignored the fact that the Appellant had satisfactorily explained the Creditors by way of Affidavits and Confirmation of balances.”
Whereas in the revenue’s appeal, the department has raised the following grounds:-
1. “The Ld. CIT(A) has erred in law and on facts in restricting the addition made by the AO on account of bogus creditors to Rs. 1,34,22,499/- as against Rs. 1,71,03,987/- made by the AO.
2. The Ld. CIT (A) has erred in law in deleting the addition of Rs. 81 lacs made by the AO on account of unsecured loan.”
2. The facts in brief are that assessee is a civil contractor and engaged in the executing of road projects like Government Road Construction Department No. 1, RS\TY Project Division CPWD Rural Engineering Services Deoria, U.P. Road Division Chaibasa, NHPC Ltd. Motihari, Bihar, PACL LTD. The entire contract receipts were duly reconciled from “Form 26AS” also which reflects gross receipts at Rs. 47,68,80,785/-. The Ld. AO from the perusal of the balance sheet noted that assessee has shown ‘trade creditors’ at Rs. 3,88,68,131/- as on 31.3.2010 and requested the assessee to furnish the confirmation and other relevant details of major creditors having outstanding amount of more than Rs. one lac. In response, assessee could not file the confirmation in respect of 23 persons with outstanding amount aggregating to Rs. 1,71,03,9897/-. In absence of any confirmation from the parties, he added the said amount to the income of the assessee. Further, AO has made addition on account of unsecured loans of Rs. 81 lacs shown in the name of Shri Brijesh Kumar Jaiswal on the ground that assessee could not furnish relevant confirmation, details and documents except for photocopy of TDS certificate and Form 16A in respect of interest paid to the said person. Since, assessee could not establish the ingredients of section 68; he therefore, added the said amount of Rs. 81 lacs. Lastly, on perusal of various heads of expenses debited in the profit and loss account, AO had observed that assessee could not produce books of accounts alongwith relevant bills and vouchers for verification and for checking the genuineness of the said expenses. Accordingly, he rejected the books of accounts and audit report alongwith the trading result by invoking the provision of section 145(3) and thereby estimating the net profit rate of 8% of the gross contract receipt from operations. The net profit rate of 8% was determined at Rs. 3,71,48,550/-. Post application of net profit rate, he has not given any deduction of depreciation or salary. Accordingly, the net income from the business was taken of Rs. 3,71,48,550/- instead of return income of Rs. 2,09,54,808/- and also further added the amount of Rs. 1,71,03,987/- on account of sundry creditors and Rs. 81 lacs on account of unexplained loan.
3. Before the Ld. CIT (A) the assessee submitted that trade creditors are not bogus but most of them were very small suppliers were given temporary work for supply of construction material due to their proximity with the construction site. The assessee had further submitted confirmation from eight major parties before the AO; however assessee was unable to give confirmation from other parties at that time. AO had also not issued any notices u/s 133(6) before coming to the conclusion that creditors are not genuine. A petition for additional evidence was filed before CIT (A) enclosing a list of sundry creditors with the amount outstanding alongwith their addresses and other details, list of which has been given at page 6 of the appellate order. Similarly with regard to unsecured loans, copy of ITR of the said person alongwith the PAN details was given which was submitted that the same may be treated as additional evidence. Assessee’s detailed submissions and evidences were forwarded to the AO to submit a remand report, the content of which has been incorporated in the appellate order on pages 9 and 10. Ld. CIT (A) after considering the entire facts and material on record and the remand report, accepted the outstanding amount in respect of four sundry creditors only and for other 19 sundry creditors who were small suppliers of sand, bazri, soil, etc., for which assessee could not file confirmation, he did not accept the amount outstanding against them aggregating to Rs. 1,34,22,499/- The details of such persons have been incorporated at page 12 and 13 of the appellate order. Thus, the only part relief was given out of total addition of Rs. 1,71,03,987/- and balance amount of Rs. 1,34,22,499/- was upheld.
4. Regarding addition on account of unexplained amount of Rs. 81 lacs received from Shri Brijesh Kumar Jaiswal, Ld. CIT (A) appreciated that assessee has filed the copy of PAN; copy of acknowledgements of return for the same assessment year; and that the party was old lender since early years and income tax has been deducted at source on interest paid to him. Ld. CIT (A) had deleted the said addition after observing and holding as under:-
“8.2 I have considered the entire facts of the case and the arguments forwarded by the appellant in this regard. The appellant had already taken substantial loans from the person in earlier years which have been accepted by the department and no adverse view was ever taken regarding the same. Perusal of TDS certificate (Form No. 1 6A) by which the appellant deducted tax on interest paid to Shri Brijesh Kumar Jaiswal, from whom unsecured loans were obtained by the appellant, it is observed that the certificate clearly shows the PAN of the party. The AO has not at all bothered to verify the authenticity of PAN and the fact regarding the filing of the return, by the party. During the appellate proceedings, the AO has now verified that PAN quoted by the party is genuine. Moreover, since the money has travelled to the appellant through banking channel, the genuineness of transaction cannot be doubted. Regarding the creditworthiness of Shri Brijesh Kumar Jaiswal, the copy of return filed by him shows his gross total income to the tune of -25,80,033/-. This return has been filed by Shri Brijesh Kumar Jaiswal on 13.10.2011 with DCIT, Circle 2, Gorakhpur which is much prior to the initiation of scrutiny assessment in appellant’s case. The facts being so, these evidences being part of the departmental records are admitted under Rule 46A of the Income Tax Rules, 1962 in the interest of natural justice. As all the parameters viz. identity, creditworthiness and genuineness of transaction have been established in respect of unsecured loan received by the appellant, the AO’s action in making the addition of Rs.81 lacs on account of unsecured loan is not justified. The same is directed to be deleted. Ground No. 2 of the appeal is allowed.”
5. Lastly on the issue of rejection of books of accounts and estimation of net profit rate 8% whereby the AO has enhanced the business income by making addition of Rs. 1,61,93,740/-, Ld. CIT(A) upheld the action of the AO in rejecting the books of accounts and also the application of net profit rate of 8%, but the accepted claim of depreciation after applying the said rate after discussing various judgments on allowability of depreciation post applying net profit rate. However he held that, since already addition on account of inflated sundry creditors to the tune of Rs. 1,34,22,499/- has already been upheld by him, therefore, separate addition by applying the net profit is not justified.
6. After hearing both the parties and on perusal on the material placed on record, we find that there is no dispute with regard to the total turnover from the gross contract receipt declared at Rs. 47,68,80,785/-. The said turnover is also verifiable from form No. 26AS which has been placed on the paper book from pages 54 to 57. Ld. AO has firstly, made the addition by disallowing part of the outstanding amount under the head ‘trade creditors’ shown at Rs. 3,88,68,131/- and thereby made addition of Rs. 1,71,03,987/- on the ground that assessee could not furnish the confirmation in respect of 23 parties; secondly, after making the said addition, AO further went to reject the assessee’s books of accounts after invoking provision of section 145(3) on the ground that the same are not reliable including the net profit shown in the audit report and in the trading account. He proceeded the estimate the net profit rate of 8% from the gross receipt and enhanced the business income by an amount of Rs. 1,61,93,740/- after denying the claim of deduction of depreciation from the said net profit rate. Ld. CIT(A) had accepted the outstanding amount against four trade creditors only and reduced the addition from Rs. 1,71,03,987/- to Rs. 1,34,22,499/-. After sustaining this much amount of addition on account of sundry creditors, he further upheld action of the AO in rejecting the trading result in the books of accounts and the application of net profit rate of 8%. However, he has accepted the assessee’s claim for allowing of depreciation on such an amount following the various judgments of Hon ‘ble High Courts as well as the CBDT circular; and accordingly the addition on account of net profit rate was worked out of Rs. 35,25,490/-. Since he had already sustained the addition on account of sundry creditors which was a higher amount, he did not made separate addition in terms of application of net profit of Rs. 35,25,490/-. The case of the revenue before us is that, the outstanding trade creditors is a part of balance sheet item, therefore, separate addition can be made over and above the business income assessed by applying the net profit rate after rejecting the books of accounts, whereas the case of the assessee is that, firstly, looking to the entire gross turnover of the assessee, the trade creditors and disallowance on account of such outstanding trade liability is only 8.2%, which cannot be said to be more in the assessee’s line of business; and secondly, looking to the nature of material supplied to these parties like grit, sand, dust and moram which has to be purchased from unorganised sectors, it is difficult to obtain any confirmation after lapse of substantial period. The assessee had duly provided all the relevant details and requested the AO in the remand proceedings to independently verify the same which has not been done, wherever the assessee could not obtain the confirmation from the parties. He further submitted that if trading results and books of accounts have been rejected, then addition if at all can be made is on account of net profit rate which has been applied by the AO at 8%, which has also been upheld by the Ld. CIT (A) after allowing depreciation. Once that is so, then no further addition should be made to the income of the assessee.
7. So far as rejection of books of accounts are concerned the Ld. Counsel has not placed any objection which inter alia leads to an inference that books of accounts have rightly been rejected by the authorities below alongwith the application of net profit rate of 8%. Once the trading results and books of accounts have been rejected and income is being estimated by applying net profit rate on the declared gross contract receipt, then no other addition is required to be made on account of any other trading items including the trade creditors or any other direct expenses as well as trading liabilities shown in the accounts. The reason being that, when the books of accounts are rejected and income is assessed on the principle of cbest judgment assessment’, then entries of the amounts shown in the books of accounts cannot be held to be reliable. Once business income of the assessee from the contract receipt business has been assessed at 8%, then it take cares of all other additions made on account of trading account and any liability including outstanding amount of trade creditors. Thus, we agree with the contention of the Ld. Counsel that if the income has been assessed after rejecting the books of accounts and net profit rate has been applied, then no separate addition on account of trade creditors should be made. Accordingly, we direct the AO to make addition of Rs. 35,25,490/- as has been worked out by the Ld. CIT(A).
8. In view of this finding, the additions on account of sundry creditors raised in both the appeals are dismissed. The grounds raised by the assessee on account of sundry creditors is treated as allowed only to the extent that addition on account of net profit rate will get sustained; and consequently revenue’s ground No. 1 is treated as dismissed.
9. Lastly, coming to the addition on account of unexplained loan as raised by the revenue in ground No. 2, we find that Ld. CIT (A) has noted that the party was old lender and assessee has filed his PAN details which has been verified by the AO; copy of return of income for the current year of the said creditors which reflects his creditworthiness from the quantum of income shown by him; and the genuineness of the transaction is also proved as the transaction is through banking channel. Not only that, he has already directed the Assessing Officers of the said creditors to initiate that the scrutiny proceedings in their cases. The observation and the finding of the Ld. CIT(A) as incorporated above does not call for any interference which is based on correct appreciation of law and facts and consequently, the ground raised by the revenue is dismissed
9. In the result appeal of the assessee is partly allowed whereas appeal of the revenue is dismissed.
Order pronounced in the open court on 13th March, 2018.