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ACIT, Circle 20 (1) , New Delhi Versus Advert Communication

2015 (11) TMI 416 - ITAT DELHI

Bogus purchases - addition made u/s 69C - addition u/s 41(1) - rejection of books results - estimation of income - Held that:- AO has accepted returned income and impliedly rejected book results by making two additions. The AO grossly committed error on fact and also against the well settled principles of the accounting while he disbelieved purchases to be genuine without making and consequent adjustment to sale and that too the AO again made additions regarding three trade creditors alleging th .....

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s. Banwarilal Bansidhar [1997 (5) TMI 37 - ALLAHABAD High Court] and Amitabh Construction (P) Ltd. (2011 (5) TMI 821 - Jharkhand High Court).

In making an assessment after rejecting books of accounts and results therefore, the Assessing Officer has to make an honest estimate and having done so he must take into account the past assessment records of the assessee but the Assessing Officer of the present case miserably failed in discharging his functions while framing assessments. On th .....

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nor adopted a view against the interest of revenue rather she adopted higher percentage for estimation of net profit, in the eventuality of rejection of book results and accounts, as against lower percentage of net profit shown by the assessee and accepted by the revenue. The CIT(A) was fair enough when she upheld the implied rejection of book results, despite noticing some contradictions in the view taken by the Assessing Officer, because of the facts and circumstances surrounding the purchases .....

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right and justified in inferring rejection of book results and consequently directing the Assessing Officer to estimate net profit @5% of turnover which is certainly higher than the book results of past/preceding two years, The CIT(A) was correct in allowing relief to the assessee and thus we are unable to see any ambiguity, perversity or any other valid reason to interfere with the same and hence we uphold the conclusion of the CIT(A). - Decided against revenue. - I.T.A.No.3723/Del/2012 - Dated .....

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of the case the Ld. CIT(A) has erred in law and on facts by allowing the bogus purchases, as they were not found genuine, and the onus to prove these purchases wholly lies on the assessee. 2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in law and on facts by deleting the addition u/s 41 (1) of the IT Act of the disputed creditors, the PANs of Creditors differs in different year, which apparently showed that these parties are bogus. 3. Whether on the facts and circ .....

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y making certain disallowances. The aggrieved assessee preferred an appeal before the CIT(A) which was partly allowed on certain grounds. Now the revenue is before this Tribunal in the second appeal mainly alleging three issues viz. deletion of addition made by the Assessing Officer in regard to bogus purchases, deletion of addition u/s 41(1) of the Act regarding alleged bogus creditors and disputing the benefit of net profit estimation granted by the first appellate€ authority to the asses .....

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ipes, angle and sheets from several parties. Ld. DR further pointed out that the Assessing Officer examined the claim of display charges and found some discrepancies in respect of payments claimed to have been made to some of them. Ld. DR also pointed out that these discrepancies were mainly that in some cases, PAN number did not match the record of the income tax department and there were some more discrepancies in the confirmation letters, no service or lack of responsibility of the notice iss .....

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huvan Singh has given statement that no amount on any account has been due on the assessee and the assessee had shown fake liability on Shiva Enterprises. Hence, the ld. DR submitted that these liabilities were false and ceased to exist, thus the Assessing Officer rightly made additions in this regard. The ld. DR vehemently contended that the ld. CIT(A) granted relief to the assessee on these two issues without any basis or justified reason, therefore, the impugned order may be set aside by rest .....

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on on the statement of accounts and financial statements can be made and in this situation, when net profit is estimated on higher side than earlier/preceding two years, then no other addition is warranted except addition, if any, on the basis of estimated net profit as rightly held by the first appellate authority. 5. On careful consideration of rival submissions, we are of the view that the CIT(A) granted relief to the assessee deleting the first addition made u/s 69C of the Act by recording f .....

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ear which were not questioned by the Assessing Officer iv) there was no discrepancy in the PAN number, because the number belonged to the seller in her name and she was the proprietor of the business which was run under a different name and style;\ v) the assessment was completed after a scrutiny under section 143(3) for the assessment year 2009-10 and no disallowance was made on this count. The CIT(A) further noted that the only reason for making the disallowance/addition under Section 69C was .....

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our of the assessee:- 3.2 I have gone through the discussion in the assessment order as well as the submissions of the AR of the appellant. In all the cases where the AO has made the addition u/s 69 C, purchases arc submitted to have been made by the appellant, in support of which the appellant furnished copies of the bills. Payments to all these parties have been made by account payee cheques. In the case of two such parties i.e. M/s. Adplast Sales Corporation and M/s. Rupsy Enterprises, discre .....

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s is not required as per law or commercial practice. In case of M/s. Rupsy Enterprises, the balance has been carried forward from earlier years, besides purchases having been made during the year under appeal, meaning thereby that the appellant made purchases from this party in the earlier year as well. It is observed that no adverse inference has been drawn by the Assessing Officer in respect of the purchases made from M/s. Rupsy Enterprises in the earlier assessment year. In the case of anothe .....

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e are concerned, it has been submitted that, the appellant continued to have transactions with the party in the succeeding year also and in fact in the succeeding years, tax has been deducted at source from these payments. Not only this no such disallowance/addition to income has been made by the AO in the succeeding years i.e. A.Y. 2009-10 while completing the case u/s 143 (3). The only reason for the AO to disallow the purchase made from this party was that notice u/s 133 (6) issued to the par .....

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nt by account payee cheque was furnished by the appellant but the AO made the addition for the reason that notice issued to the party came back unserved. As regards the purchases from Sh. Tribhuvan Singh, the AO has relied upon the statement of the person. On going through the statement recorded by the Assessing Officer of Sh. Tribhuvan Singh, it is seen that Sh. Singh has stated that for the year ending 31s1 March 2008, he had done work for the appellant to the tune of ₹ 10-12 lacs and ab .....

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onclusion:- As far as additions to income made by the AO u/s 41 (1) are concerned, since the appellant has not written off the amounts outstanding to these parties in its books of account and neither have those parties acknowledged the cessation of liabilities in their books, the AO could not have drawn the conclusion that the liabilities no longer existed, especially when the appellant produced copies of the bills as well as details of payments made to the parties, being payments through accoun .....

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f the parties had indeed transacted with the appellant either in the year preceding the subject year or in the year succeeding the subject year, then the persistent non-compliance of such parties to the notices u/s 133 (61 of the Act and also their obdurate refusal to confirm the transactions cannot be easily countenanced or understood. While it is true that without the purchase appellant could not have made the sales, yet it also equally true that me quantum of purchases can be appreciated and .....

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the Act and to confirm the transactions by the vendors does put the transactions under a cloud, constraining the AO to verify the veracity of transactions through other means as are known in commercial practice and law. In the circumstances, therefore, the AO was correct in not accepting the book results after failing in his attempts to verify them through other means as deployed by him. As per the table drawn above, in the preceding years for turnover as mentioned against them, the net profit r .....

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is found to have been incurred and the source of the same is not satisfactorily explained by the assessee. For the year, on a turnover of ₹ 4,17,07, 303/- the net profit shown is ₹ 15,70.930/-, which works out to 3.76%. I direct that net profit rate at 5% be taken in terms of the turnover for the year. In that way there would be no scope for further addition for purchases based on the book version or for liabilities ceasing to exist in the view of the AO. The A.O. may take necessary .....

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hance or annul the assessment. While laying dicta about the powers of the CIT(A), the Hon'ble Supreme Court in CIT vs McMillan & Co. Reported as 33 ITR 182(S.C.) approving the proposition laid by Hon ble Bombay High Court in the case of Narrondas Manordass vs CIT 31 ITR 909 (Bombay), it was held that the powers of CIT(A) are much wider than the powers of the appellate under Civil Procedure Code (CPC) and he has jurisdiction over entire assessment without being confined to the issues or s .....

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te authority under the Act, no analogy can be drawn between CIT(A) and first appellate authority empowered under CPC because it is only the assessee who has been given right to appeal against assessment order and if there is no appeal by the assessee, the assessment order attains finality, however, subject to rectification u/s 154, revision u/s 263 or reassessment u/s 147/148 or 153A/153C of the Act which can only be exercised after satisfaction and fulfilment of stringent statutory conditions. .....

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issues agitated by the assessee but also on the issues which have been considered by the Assessing Officer and adjudicated while framing the assessment order. Thus, the powers of the CIT(A) are wide enough to protect the interests of the revenue as can be observed by the powers of enhancement in the proposition of Hon'ble High Court in the judgment in the case of CIT vs Kanpur Col Syndicate 53 ITR 225 (S.C.) wherein speaking for the apex court, their lordships held that while an appeal by th .....

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profit and loss account and the result shown in the books of accounts have been thrown aside by him. The CIT(A) noted contradiction in the manner of computation of income having not accepted the book results. We are of the opinion that if the Assessing Officer dismissed and discarded book results on the ground that purchases are not proved and on the other hand, he accepted the sales amount shown in the P&L account as correct then the financial account results gets completely skewed. This co .....

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er observe that the CIT(A) has opined that the grounds on which the Assessing Officer disallowed and added back the purchases by erroneously invoking sections 69C and 41(1) of the Act are flimsy or irrelevant but she was quite cautious about the final conclusion as she has taken the position that though the rejection of book results be otherwise justified on the facts of the case but the computation of income consequent thereto is not correct. Accordingly, she set right the error committed by th .....

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nds support from the dicta laid down by the Privy Council in the case of CIT vs Laxmandas Badridas 05 ITR 180 (PC) wherein it was held that in making an assessment, after rejecting book of accounts and results therefrom, the Assessing Officer has to make an honest estimate and in doing so, he must take into account the past assessment record of the assessee . 10. In the case in hand, there were two aspects viz. first, rejection of book results and second, computation of income thereafter. The fi .....

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/s 69C and 41(1) of the Act are not strong or legally and factually justified. Consequently, the CIT(A), keeping in mind propositions and principles laid down on the issue, correctly held that the proper way of making the computation of income is to apply the net profit rate on the basis of average rate of net profit rate adopted in the immediately preceding assessment of the assessee. The CIT(A) was quite balance when she took 5% of turnover as against 4% or 4.25% disclosed by the assessee in t .....

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g regard to the facts of the present case in hand. 11. Ld. DR contended that the Assessing Officer has not rejected book results and books of accounts of the assessee and all that the Assessing Officer has done is to disallow purchases and add back unclaimed liability (ceased liability of trade creditors) without rejecting the book results. But on vigilant perusal of the assessment order we note that, however, the Assessing Officer has not rejected book results in so many words in the assessment .....

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utation from the net profit figure shown in the P&L account but when he verified the purchases, he disallowed substantive part thereof without disturbing the sales figure the logical inference would be that the Assessing Officer has not accepted or has not reposed confidence in the books of accounts. It is not open or allowed to the CIT(A) to reject the book results partially and accept them partially. In the eventuality when the Assessing Officer disbelieved purchases and major part of purc .....

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d contended that the CIT(A) adopted a very low rate of percentage while estimating net profit. Learned counsel of the assessee supporting the view taken by the first appellate authority submitted that the CIT(A) has adopted 5% of total turnover for estimating net profit for assessment year 2008-09 against 4.00% for assessment year 2006-07 and 4.25% for assessment year 2007-08 which is much higher in comparison to immediately two preceding assessment years to the assessment year under considerati .....

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udgment of Hon ble Jharkhand High Court in the case of Amitabh Construction (P) Ltd. vs. ACIT (2011) 335 ITR 523 (Jharkhand) that in the best judgment assessments when the AO has passed contradictory order by holding the books of accounts are not reliable while deciding the issue of the creditors but relied upon the return for accepting the profit shown to be correct which is supported by books of accounts then the AO commits an error of law by adding the amount u/s 68 of the Act merely because .....

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s as bogus u/s 41(1) of the Act. These additions made on contradictory observations and baseless action of the AO have been deleted by the CIT(A) and she proceeded to estimate net profit by taking higher percentage of NP in comparison to earlier two years inferring that the AO rightly rejected the book results. This conclusion of the CIT(A) is a sustainable and in accordance with the provisions of the Act which require no interference at our end in view of dicta of Hon ble Allahabad High Court i .....

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ssessment records of the assessee but the Assessing Officer of the present case miserably failed in discharging his functions while framing assessments. On the other hand, the CIT(A), enjoying coterminous powers with the Assessing Officer estimated the net profit in the proper manner as contemplated by the Act and on the basis of sound and well accepted principles. We may further point out that for subsequent assessment year 2009-10 the returned income of the assessee has been accepted in the or .....

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