Case Law Details
Chirag Nareshbhai Soni Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that rejection of books of accounts merely for not providing stock details in desired format and without bringing any corroborative material on record suggesting specific defect in the books of accounts is unjustified.
Facts- The assessee is an individual and engaged in the business of trading of gold and gold ornament through his proprietary concern. The assessee during the demonetization period i.e. 9th November 2016 to 31st December made cash deposit of Rs. 59.95 Lakh only in the bank account. The assessee during the assessment proceedings explained that the cash has been deposited out of sale proceeds which were duly recorded in the books of accounts which were duly audited by the independent auditor, supported by the bills and voucher, purchases and stock register, cash book, bank book etc.
However, AO after rejecting the books of account treated the cash deposit made during the demonetization period as unexplained cash credit u/s. 68 of the Act. The AO further estimated the GP after reducing the amount of cash deposit from turnover to Rs. 15,91,131/- as against the GP of Rs. 15,14756/- declared by the assessee. Thus, the AO made addition of Rs. 59,95,000/- u/s. 68 of the Act and Rs. 75,375/- on account estimation of GP to the total income of the assessee.
CIT(A) upheld the action of AO. Being aggrieved, the present appeal is filed.
Conclusion- AO cannot use this power as a tool to reject the books of accounts merely due to non-maintenance of the stock register, variation in gross profit and non-furnishing of certain vouchers or its explanation or non-confirmation of sundry creditors. Mere minor mistakes/typological errors/absence of stock registers/ lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. In the given case, AO has rejected the book results because the assessee has not provided the details of quality wise quantity of the stock asked for during assessment and on account cash deposits in the bank. In this connection, we find that the assessee has maintained proper books of account and furnished details as required by the A.O. except the details of the stock in the desired format. The details submitted by the assessee include audited financial statement, details of the purchases, gold stock summery and other information about the sales, GP of different years which are available in the paper book filed before us. In these documentary evidence no defect was pointed out by the AO except non-maintenance of stock register in the desired format. Therefore, without bringing any corroborative material on record suggesting specific defect in the books of account the book result cannot be rejected merely for not providing certain detail which the AO requires to verify.
Once the books of accounts have been rejected, the AO has to estimate the profit and he has no right to make any individual addition or deletion to the total income of the assessee. However, in the case on hand, the AO has not done so.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi, in the proceeding u/s 250 of the Act vide dated 20/12/2021 passed for the assessment year 2017-18.
2. The assessee has raised following grounds of appeal:-
“1) The Learned CIT(appeals) NFAC has erred in law and on facts in dismissing the appeal of the assessee against estimated gross profit addition of Rs.75,375/-and addition u/s. 68 of Rs.59,95,000/- by appeal order dated 20/12/2021 without properly appreciating and considering the facts of the assessee.
2) The Ld. CIT(A) has erred in law and on facts in confirming the estimated addition of gross profit of Rs.75,375/- made by A.O. without any basis to support it.
3) He has erred in law and on facts in upholding the cash deposit out of cash sales at Rs.59,95,000/- u/s.68 in as much as that the Provision of Section 68 are not applicable to the facts of the assessee.
4) He has erred in law and on facts in upholding the rejection of books of accounts of the assessee to justify addition of gross profit and addition of cash deposits out of cash sales u/s.68 of the Act.
5) He has erred in law and on facts in upholding the application by A.O. of principle of preponderance of probability by relying upon various decisions mentioned in the order inasmuch as that the ratio of these decisions are not applicable to the facts of the assessee.
6) He has erred in law and on facts in confirming the treatment of the cash sales as cash credits u/s.68 of the Act inasmuch as that there being no other source of income, other than business income, the Provision of section 68 has been wrongly applied.
7) He has erred in law and on facts in confirming the application of the Provision of Section 115BBE to the business income of the assessee arising out of sales including cash sales.
8) He has erred in law and on facts in confirming the cash sales as inflated sales inasmuch as that the same is duly proved from the purchases made by the assessee and accepted by the A.O.
9) He has erred in law and on facts in not appreciating the facts that for cash sale below Rs.2 lakh, there is no requirement for Address and PAN as per the Income-Tax Act itself.
10) On the facts of the assessee, there was no justification for the A.O. to estimate Gross Profit and to tax as sales/cash deposit in the bank as cash credits u/s.68 of the I.T. Act, 1961 and the returned income ought to have been accepted.
11) On the facts of the assessee interest u/s. 234B of Rs.15,43,707/- and u/s. 234C of Rs.1575/-, totaling Rs.15,45,282/- ought not to have been levied.
12) The appellant craves leave to add, to alter and/or to modify any grounds of appeal.”
3. The interconnected issue raised by the assessee is that the learned CIT(A) erred in confirming the order of the AO by rejecting the book of accounts and making addition of Rs. 59.95 Lakh under section 68 of the Act representing cash deposit in the bank account and further addition of Rs. 75,375/- on account of GP estimation.
4. The facts in brief are that the assessee is an individual and engaged in the business of trading of gold and gold ornament through his proprietary concern. The assessee during the demonetization period i.e. 9th November 2016 to 31st December made cash deposit of Rs. 59.95 Lakh only in the bank account. The assessee during the assessment proceedings explained that the cash has been deposited out of sale proceeds which were duly recorded in the books of accounts which were duly audited by the independent auditor, supported by the bills and voucher, purchases and stock register, cash book, bank book etc. However, the AO on analysis of details submitted by the assessee along with immediate previous year data found certain shortcomings which are detailed as under:
(i) During the period starting from 1st April 20016 to 8th November 2016, the assessee made a cash deposit of Rs. 2,47,400/- only whereas during the demonetization period i.e. between 9th November to 31st December 2016, the cash deposit abnormally increased to the tune of Rs. 59.95 Lakh.
(ii) In the immediate previous assessment year, the total cash deposits were Rs. 15,56,550/- only and in the corresponding period of November-December 2015, the cash deposit was for Rs. 2.6 Lakh only. Thus, the trend shows that there was abnormal increase in cash deposits in the demonetization period.
(iii) In the immediate previous assessment year, the assessee shown total cash sale for Rs. 8,05,174/- only whereas in the year under consideration claimed cash sales of Rs. 56,81,842/- only. Thus, cash sale during the year increased by 606.66%
(iv) Out of total cash sale of Rs. 56,81,842/- in the year under consideration majority of the cash sale was claimed in the month of September & October 2016 only to the tune of Rs. 3,05,254/- and Rs. 52,58,725/- (total Rs. 55,63,979). Before that there was only cash sale for Rs. 78,790/- in the month of May 2016. Again, there is an abnormal trend in cash sale just before the demonetization period.
(v) The bills issued by the assessee against the cash sales in the month of October 2016 were written by the same person, the invoice does not contain complete details of the buyer. The invoice amount ranged between Rs. 1 Lakh to 2 Lakh to avoid the applicability of section 206C(ID) of the Act. It is also very abnormal that 30 odd customers came in the month of October 2016 and all purchased gold jewelry in cash for the amount ranging between Rs. 1 Lakh to 2 Lakh.
(vi) The assessee was specifically asked to furnish day to day stock register in the form of quality wise quantitative details of gold whereas the assessee simply furnished quantity wise stock details. The quality wise quantitative detail of gold/gold ornament is of very importance because the purchase or sale price and value of opening and closing stock of gold depend or varies upon the basis of quality.
The AO, based on the above finding concluded that the cash sales shown by the assessee were camouflaged to show cash balance in the books before depositing in the demonetization period. The bills, vouchers etc. are made up documents only. The AO also found that the assessment proceedings under the Act are civil proceedings and therefore the degree of proof can be determined based on principle of preponderance of probability. Accordingly, the test of probabilities, consideration of entire sequence of events and circumstances are to be considered before arriving conclusion. Hence, the explanation furnished by the assessee that cash deposits were made from cash sale is not acceptable based on the preponderance of probabilities and surrounding circumstances as there was sudden spike in the cash sale and balance of cash in hand just before the demonetization which is against the common yard stick. The AO accordingly held that the sales shown by the assessee in the books account of account is manipulated and to show manipulated sales in the books, the stock movement also must have been manipulated by the assessee. The assessee also failed to furnish the quality wise quantitative details of stock. Thus, the AO rejected the book of account of the assessee as unreliable.
5. The AO after rejecting the books of account treated the cash deposit made during the demonetization period as unexplained cash credit under section 68 of the Act. The AO further estimated the GP after reducing the amount of cash deposit from turnover to Rs. 15,91,131/- as against the GP of Rs. 15,14756/- declared by the assessee. Thus, the AO made addition of Rs. 59,95,000/- under section 68 of the Act and Rs. 75,375/- on account estimation of GP to the total income of the assessee.
6. The aggrieved assessee preferred an appeal before the learned CIT(A). The assessee before the learned CIT(A) submitted that the books of account have been duly audited by an independent auditor. The results shown in books of account are duly supported by purchase registers, stock registers, bills/voucher, GP/NP working, VAT return. All these details were furnished before the AO but the AO without pointing out any defects in supporting document rejected the books merely by raising doubts over cash deposits during the demonetization. The learned CIT(A) after considering the facts in totality confirm the order the AO by observing as under: –
“6.0 I have considered the grounds of appeal and statement of facts of assessment order. I have carefully analysed the submission filled by the appellant and contents of the assessment order.
6.1 So far the main issue of addition of Rs 59,95,000/- u/s 68 is concerned, the AO found that the assessee had deposited cash amount of Rs 59,95,000 during demonetization period [19.11.2016 to 30.12 .2016] in his bank account A/c No.03280200002419 held in Bank of Baroda. The appellant explained that the aforesaid cash deposits is out of cash sales of goods The AO compared cash deposits, cash sales, month wise sales in the whole FY 2016-17 with FY 2015-16 as well as utpo 8th November and thereafter and found that there was sharp increase of 989% in cash sales booked in the period from 1st Apr to 8th November. On comparing the cash deposit of the relevant FY2016-17 with previous years it was found that the assessee bas deposited total cash of Rs. 15,56,550/- in FY 2015-16 where the cash deposited in the FY 2016-17 was Rs.62,42,400/-. Thus there was a huge increase in cash deposit it was also found that the assessee deposited cash of Rs 2,47,400/- in the period from 01.04.2016 to 08.11.2016 whereas a disproportionately big amount of Rs.59,95,000/- was deposited during the period of demonetization from 09.11.2016 to 31 12 2016. The assessee could not submit any proper explanation regarding this huge increase of the cash deposited in the relevant year from the previous year. The cash sale bills submitted by the assessee in support to prove the cash sales was not found genuine and verifiable by the AO as all these bills was written without complete address of the purchasers and all the sales were kept intentionally below Rs. 2,00,000/- to avoid writing particulars of customers and any further verification in this regard. It is difficult to accept as to why the assessee will have huge cash balance of Rs. 60,54,216/- as on 8.11.2016 which was merely Rs. 2,93,980/- as on 8. 11.2015. The assessee could not give any proper explanation regarding this huge crease of the closing cash balance as on 8.11.2016. I agree with the findings and the view of the AO that the assessee has failed to justify abnormal increase in cash sales just before 8.11.2016 which was found manifold increased when compared to earlier years. The main issue here is verification of cash sales which has been stated as source of cash deposits if the cash sales are not verifiable, the AO has correctly invoked provisions of section 68 and treated the cash deposits of Rs. 59,95,000 as undisclosed income u/s 68 which was deposited in old currencies and the possibility of achieving the abnormal high sales are not proved by any evidence Therefore, I do not have any material to interfere with the order passed by the AO and the grounds of appeal related to addition. of Rs. 59,95,000/- filled by the appellant are hereby dismissed.
6.3 The AO has estimated the gross profit ratio for the AY 2017-18 @13.34%. The AO rejected books of account of the assessee because the assessee has manipulated the turnover to explain the source of cash deposit and there was defect in the books of account. The cash deposited amount was not generated from the business activities. So the AO deducted the cash deposited amount from the turn over. The AO estimated the GP on the basis of previous year GP. As the GP for AY 2015-16 was 13.80% and for AY 2016-17 it was 13.34%. So, the GP ratio for the AY 2017-18 was taken at 13.34% . After deducting the amount of cash deposit during the demonetization period, the resultant turn over comes Rs.1,19,27,5204 (1,79,22,520-59,05,000) and after applying average gross profit estimated @13.34% on such turnover, net profit comes at Rs 15,91,131/-. The assessee already declared the net profit of Rs. 15, 14,756. Therefore, the AO added the difference amount of net profit of Rs 75,375 (Rs. 15,91,131- Rs.15,14,756) to the total income of the assessee on account of estimation of gross profit. The approach of the AO is found to be proper an logical and hence the rejection of the books of accounts and estimation of G.P is also confirmed. To conclude, all the grounds of appeal are hereby dismissed.”
7. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
8. The learned AR before us has filed a paper book running from pages 1 to 90 and the compilation of the case laws. It was submitted by the learned AR that all the requisite details were furnished by the assessee during the assessment proceedings and therefore the book results shown by the assessee should have been accepted in toto. However, the AO merely on account of non-furnishing the stock statement in the desired format rejected the books of accounts and treated the cash sales made during the period as unexplained cash credit under section 68 of the Act. As per the learned AR, the cash sale in the book is possible only against the purchases which have been duly accepted by the revenue during the assessment proceedings. All the necessary details regarding the purchase parties were duly furnished and no doubt whatsoever was raised by the AO. Hence, it was contended by the learned AR that the book results shown by the assessee should be accepted. On the other hand, the learned DR before us vehemently supported the order of the authorities below.
9. We have heard the rival contentions and gone through the facts and circumstances of the case, including the materials available on record. As per the provisions of section 145(3) of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting. However, the AO cannot use this power as a tool to reject the books of accounts merely due to non-maintenance of the stock register, variation in gross profit and non-furnishing of certain vouchers or its explanation or non-confirmation of sundry creditors. Anyway, before rejecting the books of accounts, the AO must record the specific reasons for rejecting the books of accounts. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/ lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings. In the given case, AO has rejected the book results because the assessee has not provided the details of quality wise quantity of the stock asked for during assessment and on account cash deposits in the bank. In this connection, we find that the assessee has maintained proper books of account and furnished details as required by the A.O. except the details of the stock in the desired format. The details submitted by the assessee include audited financial statement, details of the purchases, gold stock summery and other information about the sales, GP of different years which are available in the paper book filed before us. In these documentary evidence no defect was pointed out by the AO except non-maintenance of stock register in the desired format. Therefore, without bringing any corroborative material on record suggesting specific defect in the books of account the book result cannot be rejected merely for not providing certain detail which the AO requires to verify. In holding so we draw support and guidance from the judgment of Hon’ble Allahabad High Court in case of Awadhesh Pratap Singh Adbul Rehman & Bros v/s. CIT 201 ITR 404(All) which reads as under:
“It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145(3) and to make the assessment in the manner contemplated in these provisions.”
9.1 Without prejudice to the above, we also note that the AO after rejecting the books accounts has proceeded to treat the cash sales as unexplained cash credit under section 68 of the Act on various grounds. In other words, the AO has relied upon the same set of data/figures as shown by the assessee for treating the cash deposit as unexplained cash credit under section 68 of the Act. As such, there was no iota of doubt on the genuineness of the other income and the expenses was brought on record by the assessee. To our mind, once the books of accounts have been rejected, the AO has to estimate the profit and he has no right to make any individual addition or deletion to the total income of the assessee. However, in the case on hand, the AO has not done so. In holding so, we draw support and guidance from the judgment of this tribunal in case of Hynope Food and Oil Industries Pvt. Ltd reported in 48 ITD 202 where it was held as under:
Section 145 deals with two situations : (a) where the method of accounting is faulty, and (b) where the accounts are not correct or complete. In the case of the former, the Assessing Officer is empowered to compute the income upon such basis and in such manner as he may determine. So far as the latter is concerned, the Assessing Officer is empowered to make a best judgment assessment as provided in section 144, that is, after taking into account all relevant materials which he has gathered. Further, section 145(1) is an enabling provision. It is intended to enable the Assessing Officer to make the correct assessment which is the paramount object. It is not intended to confer any right or benefit upon an erring assessee. Thus, this section is intended to make the correct assessment in compliance with the law and not to by-pass the statutory provisions.
It is a fair proposition that if an overall estimate of income has been made, there would not be any scope for making any disallowances and applying section 40A(3). This is not because the statutory provisions can be ignored or excluded but because they must be deemed to have been applied in making the estimate so that there is no scope for any further deductions. Thus, if an estimate is made on the basis of gross profit by using comparative instances, there would be no scope for further deductions applying section 40A(3). Therefore, all depended upon the manner of making the estimate. If it had been made in a way which covered the entire position regarding income and expenditure, naturally there would not be any scope for further deductions.
9.2. In view of the above and after considering the facts in totality, we are of the opinion that the books of accounts of the assessee were not liable to be rejected in the given facts and circumstances. Therefore, we hold that the book result shown by the assessee in the given facts and circumstances has to be accepted. Accordingly, we set aside the finding of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 11-10-2023
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