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Shri. Iqbal Ahmed Khalil Ahmed Subedar Versus ITO 22 (1) (2) , Mumbai

2017 (10) TMI 480 - ITAT MUMBAI

Additions u/s. 40A(3) and 40A(3A) - best judgment assessment - rejection of books of accounts - Held that:- From the perusal of Section 144 we donot also find any restriction on the powers of the AO to only estimate income based on profitability after rejecting books of accounts. There is no equity under taxing statute and if the provision of the statute are clear and unambiguous, full effect is to be given to them to compute income of the assessee. There is no scope of adding or deleting any wo .....

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vision of the 1961 Act relating to the computation of income under the head ‘Profit and gains of business or profession’ . Section 28 deals with computation of income from profits and gains of business or profession which is to be computed in accordance with the provisions contained in Section 30 to 43D which included Section 40A(3)/40A(3). Section 40A(1) has a non obstante clause ‘notwithstanding anything to the contrary contained in any other provision of the 1961 Act relating to the computati .....

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nt for AY 2009-10 which was upheld by learned CIT(A) which we are not inclined to interfered and hence we uphold/sustain the appellate order of learned CIT(A) and the additions are confirmed. The assessee fails in this appeal. - So far as appeal of the assessee for AY 2008-09 AO shall work out disallowance in the similar manner as for AY 2008-09 as was done for AY 2009-10 by invoking applicable provisions of Section 40A(3)(a) and (b). We also have noticed that assessment for AY 2008-09 was f .....

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twice, once when entire purchases were disallowed for AY 2008-09 u/s 69C and secondly when payments against those purchases were made against preceding year outstanding’s in AY 2009-10 which has led to double jeopardy . However, this figure of double jeopardy needs to be worked out by the AO and in any case since now we have directed the AO to compute disallowance with reference to Section 40A(3)(a) and (b) - I.T.A. No. 2135/Mum/2013 And I.T.A. No.4896/Mum/2015 - Dated:- 4-10-2017 - SHRI C.N PR .....

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Appeals)-33, Mumbai (hereinafter called the CIT(A) ) and learned CIT(A)-25, Mumbai respectively, for assessment years 2009-10 & 2008-09 respectively, appellate proceedings had arisen before learned CIT(A) from two separate assessment orders firstly dated 30-12-2011 passed by learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called the Act ) for assessment year 2009-10 and secondly dated 26-03-2013 passed by AO u/s 143(3) r.w.s.147 of t .....

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osses and shock due to this huge demand raised against the assessee. It was submitted that huge demands raised against the assessee wherein additions of more than ₹ 30 crores have been made in the case of the assessee for AY 2008-09 and 2009-10 are in itself evidence that the assessee is facing huge financial difficulties. Reliance was placed on the decision of the Hon‟ble Supreme Court dated 09-06-2010 in the case of Investment Trust v. Ujagar Singh in Civil Appeal No. 2395 of 2008 .....

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ial difficulties as there is no financial statement/balance sheet on record to prove that the assessee is in financial difficulties and it was prayed that the delay should not be condoned and appeal be dismissed. We have observed that high pitched assessments have been framed by Revenue vis-a-vis returned income in the case of the assessee for AY 2008-09 and 2009-10, wherein additions of more than ₹ 30 crores has been made by Revenue. The learned CIT(A) has also dismissed the appeal of the .....

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eal for AY 2008-09 on 25-02-2015 while learned CIT(A) adjudicated appeal for AY 2009-10 on 22.01.2013. Thus, appeal for AY 2008-09 with tribunal ought to have been filed later in point of time than appeal for AY 2009-10. The appeal for AY 2009-10 with tribunal was filed in time. Pain and agony of the assessee is understandable more-so for AY 2009-10 the income of ₹ 17.99 crores is assessed under deeming fiction created for computing income by Section 40A(3) and 40A(3A). Relying on decision .....

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eft remediless in the midst of huge additions to the income to the tune of ₹ 13.67 crores made for AY 2008-09 against returned income of only ₹ 7.72 lacs. Hence, we order condonation of delay of 123 days in filing this appeal late by the assessee beyond the time stipulated u/s 253(3). We admit this appeal in ITA no. 4896/Mum/2015 for AY 2008-09 which was filed late by the assesee by 123 days than the time prescribed u/s 253(3). We order accordingly. Appeal No. ITA no. 2135/Mum/2013-A .....

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om various parties and sold to various parties and as such, it cannot be stated that the purchases are not genuine. 1.1 Your appellant submits that your appellant has given the details as well as various judgments of High Courts which the learned CIT(A) ought to have considered. 1.2 Your appellant submits that while passing the order the learned A.O. has accepted the sales made by your appellant without considering the fact that the sales cannot be effected in the absence of purchases. 1.3 Your .....

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appeal 3 above, on the facts and in the circumstances of the case of the appellant and in law Ld. CIT-A has erred in not deleting the disallowance u/s. 40A(3) of the Act as made in the assessment order. 5. The learned counsel for the assessee submitted that the books of accounts of the assessee were rejected u/s 145(3) for AY 2009-10 and submitted that there is no dispute as to the rejection of books of accounts by the authorities below . The assessee took recourse to Rule 11 of Income-tax Appel .....

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ejected u/s 145(3), the AO cannot invoke provisions of Section 40A(3). It is accepted that quantum of addition is not challenged by the assessee but a challenge is made on legal ground that the entire addition is bad in law because the AO rejected books of accounts u/s 145(3) and hence AO has to necessarily estimate profits after rejection of book results but the AO cannot have recourse to the rejected books of accounts by invoking Section 40A(3)/40A(3A) to make additions. The assessee made pray .....

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gation of fresh facts and can be adjudicated based on material on record . Hence we are hereby directing these additional grounds to be admitted in the interest of substantial justice and thereafter to be adjudicated on merits keeping in view ratio of decision of Hon‟ble Supreme Court in the case of National Thermal Power Corp. Ltd. v. CIT (1998) 229 ITR 383(SC). We order accordingly. 6. The Brief facts of the case are that the assessee is in the business of fabric and garments export in t .....

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:- S.No Notices u/s. Date Hearing date Compliance Status i. 143(2) & 142(1) 29/09/10 11/10/10 Non compliance ii. 142(1) 18/01/11 17/02/2011 -do- iii. 142(1) 29/07/11 08/08/11 -do- iv. 142(1) 28/08/11 06/09/11 -do- v. Show cause for initiation of penalty and exparte assessment 12/09/11 22/09/11 -do- vi. Order Sheet on appearance of accountant 18/10/11 24/10/11 Partial compliance in tapal vii. 142(1) 31/11/11 09/11/11 Non compliance viii. Accountant appeared 21/11/11 24/11/11 Attended but with .....

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ary details xiii. Adjournment 27/12/11 28/12/11 Non compliance As per A.O several notices were issued to the assessee during course of assessment proceedings as detailed above wherein proper opportunity of being heard was provided to the assessee but the assessee did not either attended the hearing nor necessary documents were filed by the assessee. The A.O observed that assessee has deliberately delayed the proceedings and took it to the fag end till the time barring date i.e. 31st December 201 .....

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the AO to submit details of purchase parties, the assessee submitted following details:- S.No Name Address Closing amount 1 Advance Finstock Plot no 122, Sector no 10. Juhu Gaon Panvel Dist. Raigad - 410206 42,48,075/- 2 Ajay Impex 98/100, Proqressive Bldg, Near Voltas House Byculla (E) 2,00,000/- 3 B K Enterprises Plot no 150, Nehru Road, 4882000/- Near Vishal Hall, Borivali(E) Mumbai-400092 -. 58,33,524/- 4 Classic Trading 26/1, Daji colony, Vijay Nagar Road, Narangpura, Ahmedabad- 3800013 5 .....

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li , Surat -394540 25,66,500 11 Kalapna Textiles Shop no 7, Laxmi College, Dr 13,31,139/- . Ambedkar Road, Parel Mumbai 12 Karnimata Emporium Laxmi Bhawan Bldg Gokhale Road, Dadar(W), Mumbai - 28 44,80,627/- 13 Keshav Enterprises 325, Ground Floor, Kalbadevi Road, Kalbadevi,Mumbai-400002 22,67,000/- 14. KV Impex 98, Mangal Sadan Junction, Opp 7th Road, SV Road, Khar, Mumbai 15,28,110/- 15. Maruti Enterprices S-07, City Arcade, Near DSP Bunglow, Jamnagar-361008 18,95,551/- 16. Mateshwari Enterpri .....

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ro, PuNiwasmp, Dr Ambedkar l Road , Parel Mumba. i 14,40,000/- 22 Ratan Enterprises 47,Astavinayak, Sai Marg, Old Hanuman Lane, Malad E 56,03,500/- 23 R Dhanlaxmi Traders Progressiv Apartment, A Winge , off no 12, Jogeshwari West 9,24,000/- 24 Real Trading Suryakant Apartment SeAAppartmecond fl Off no 11, Off Cafe Paradise, CChembur 975000/- 25 Sampat Traders 48/82, Janta Chambers, Shantaramm Road, Near Sagar Hotel, Panvel 8,40,000/- 26 Sona Traders 53/23, Jeevan jyot Apartments, Near Vashi Rly .....

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all purchases above ₹ 2 lacs with sample purchase bill copy. But the assessee did not submitted the desired details despite repeated reminders by the A.O. . The A.O issued notices under 133(6) on 25th Oct, 2011 to following ten parties wherein following details were called from these purchase parties:- I Your return of income, computation, Balance sheet and Profit & Loss account for A.Y 2009-10 II Confirmed ledger account copy of the above named assessee relevant for A.Y 2008-09, 2009 .....

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name Remark 1 B K Enterprises Not known 2 Vijay Laxmi Traders Not known . 3 Advance Finstock Try vashi Post office 4 Soni Brothers Not Known 5 Shubh Trading Co Not Known 6 Karnimata Emporium Not known 7 Ratan Enterprises Not Known 8 Keshav Enterprises Not known 9 Sona Traders No remark 10 Pawansheth traders No remark Thereafter, A.O issued notices to the remaining 20 purchasing parties u/s. 133(6) which envelops containing notices u/s 133(6) also returned unnerved by the postal department with .....

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No remarks 17. Jayesh Corportation No remarks 18. JMDE Pack Real Ltd. No remarks 19. Mateshwari Enterprises Remark not understandable However, with respect to one party M/s. Devam Impex, Surat neither envelops nor acknowledgment were received by the A.O. Thus, the A.O observed that despite enquires being made with all the 30 parties not even single party were served notice. Thereafter, AO deputed Ward Inspector to conduct filed enquiries with respect to these purchase parties and to report on n .....

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Enterprises 325 Ground floor, Mumbai 02 No such concern at Kalbadevi Road 4 Ajay Impex Address not located 5 J K Textiles Address not located 6 Kalpana Textile Incomplete address 7 Om Textiles Address not located 8 Raju Traders Address not located 9 Real Trading Incomplete address 10 Shubh Trading Co Address not located 11 Vora Associates Address not located 12 Vijay laxmi Trader Address not located 13 B K Enterprises Address not located Thus, it was observed by the A.O that not even a single p .....

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ment 379 200000 The A.O made enquiries with the bank North Canara GGB Co. Op. Bank Ltd. and it was observed that these payments are only cash withdrawal from bank account. Similarly, it was observed that 10 cheques which were issued for an amounts of ₹ 81, 98, 483/- were not account payee cheques and have been deposited in some other bank accounts in the name of M/s. Shubh Impex which is a non genuine business entity. The A.O obtain copies of cheques issued by the assessee from his bankers .....

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Laxmi Traders . On enquiry with the bankers RNS Bank it was found that these cheques were deposited in the other bank account maintained by Shubh Impex proprietor Mr. Suhel Parvez Ansari Current Account no. 1054 which is a third party account for the assessee. It was observed by the A.O that cheques has been deposited in the third party bank accounts because the same were not marked as account payee cheques. The A.O called for the bank account opening form and bank statement of M/s. Shubh Impex .....

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pex but the said summons returned unserved by postal authorities with remarks left‟. The inspector was deputed to verify the address and he reported that Mr. Suhel Parvez Ansari was not staying in the address . The occupant of the address submitted to the inspector that Mr. Suhel Parvez Ansari was their relative and now left the place. Thus, A.O concluded that Shubh Impex was a fly by night operator and no genuine business was conducted . It was observed that the assessee has given these c .....

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before the A.O that cheques issued were not account payee cheques and complete purchase bills and supporting vouchers are not available . It was submitted by assessee during the course of hearing before the A.O as under: Shri Iqbal Subedar assessee attended without any paper or details or/explanation. He submitted that he does not have complete purchase bills and other supporting vouchers as all the bills were managed by one Mr Pramod who is now not traceable. He submitted that as all purchases .....

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n genuine iii section 40A(3) should not be made applicable in view of non account payee cheques- cheques favouring of B K Enterprises, Vijay Laxmi Traders and K C Fab shown to him. Hearing is fixed on 12/12/2011 at 11 AM. The assessee categorically submitted that he did not have purchase bills and supporting . The assessee also submitted that he did not issued account payee cheques. Statement was recorded on 15.12.2011 wherein the assessee admitted that some time bearer cheques were issued and n .....

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ow cause notices were issued by the A.O to the assessee with respect to the proposed addition of ₹ 53, 82, 379/- u/s. 69C for peak unaccounted expenditure and addition of ₹ 17, 99, 90, 677/- u/s. 40A(3) of the Act .The content of the notice is as under:- No.ITO 22( I )-2/scrutiny/shocause/20 I 1-12/64 Dated: 22/12/2011 PAN: AGPPS 6788L Mr Iqbal Ahmed Khalil Ahmed Subedar Shop no I, Jamnabai Chawl, Opp Naval Depot, Chirag Nagar, Ghatkopar W, Mumbai 86 Sub: Final showcause notice for p .....

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Notice u/s 142(1) with detailed questionnaire was again issued on 18/01/2011 and served on 04/02/2011. But you did not comply on hearing date on 17/02/2011. You did not file any adjournment letter ALSO. Third notice u/s 142(1) was issued on 29/7/20 11 with hearing date on 8/82011 but you did not comply in any manner again. Fourth notice u/s 142(1) was issued on 24/8/2011 with hearing date on 6/9/2011 but you did not comply or file any adjournment. On 12/09/2011, you were issued a showcause noti .....

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s and sample purchase and sales bills copies with some other details. Hearing was fixed on 24/10/2011. On this date some details were filed in tapal but purchases sales bills copies were not submitted except two sales bill copies. On 27/10/2011, information u/s 133(6) were called for from ten purchase parties. But all of these notices returned back by the postal department unserved with mostly" not known" remarks. On 31/10/2011, fifth notice u/s 142(1) with questionnaire was issued in .....

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itiated. III Notices u/s 133(6) for purchase verification issued the following parties but returned unserved by the postal department: M/s B K Enterprises; M/s Vijay Laxmi Traders; M/s Soni Brothers; M/s Shubh Trading Co; M/s Karnimata Emporium; M/s Ratan Enterprises; M/s Keshav Enterprises; M/s Sana Tradings and M/s Pawan Sheth Traders. Please explain as to why there purchase parties should not be treated as the parties who did not supply any material to assessee and the transactions are non ge .....

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r. Please explain as to why total purchase amount of ₹ 1, 00, 98, 483/- should not be added to assessee s income as per section 40A(3). V. Please submit details as per letter dated 31.10.2011. Hearing was fixed on 24.11.2011 to file reply to this showcause. On 24.11.2011, you attended without any submission or explanation any yourself was asked to go through showcause issued vide order sheet dated 21.11.2011 and submit your contentions by 25.11.2011. But you did not file any contention. On .....

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hases were prepared and handed over to Mr Pramod. He made to purchase parties payments through cheques but not account payee cheques. He further submitted that Mr Pramod is not traceable. He is again asked to go through order sheet showcause dated 21/11/2011 and comply. He is asked to produce I books of accounts, purchases sale bills transportation documents up to port for A Y 2008-09 and 2009-10 ii purchase parties should not be treated non genuine iii section 40A(3) should not be made applicab .....

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; 13.40 Crores, Rs.7.80 Crores and ₹ 1.5 crores (appro) for A Y 2008-09, 2009-10 and 20 I 0-11. Qno 18 Please give details of the persons who were helped to you in this business Ans I was having three four person on salary basis. Q no 19 What were name and addresses of these employees Ans Farooq, Yaseen and Vazir, I am not having addresses of these persons now. Q no 20 To whom you were exporting! Ans I was exporting to different parties in Dubai, Saudi Arab, Lagos (SA) etc Qno 21 How was y .....

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received for ladies items which require fabric with embroidery or stitching. There was one person Mr Pramod in the local Garment market at Kalbadevi. Mr Pramod were used to make arrangement for fabric purchases on credit basis. After getting fabric, embroidery and stitching work was arranged by me at Govandi on the basis of sample. The sample was packed at there and exported through CFA M/s Merchant & Sons. In case, readymade items were available as per sample, Mr Pramod make arrangement for .....

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as no challans or receipts are issued by these tempowalas. Q no 27 To whom did you engage (or stitching and for embroidery work? Ans, In Govandi area, the work o( stitching and embroidery is done in residential units and there are no organized units. People work from their houses on independent basis. I and my employees were used to visit Govandi area in order to supervise the job. Qno 28 For the first purchase of fabric how did you made arrangement of funds? Ans With a few lacs from my personal .....

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ued by you? Ans Yes, but as my all business was dependent on credit system provided by Mr Pramod. I did never verified genuineness of the bills with cheques. Furthermore, this is the market practice. Trader is issues cheque in the name of purchase party. Q no 31 To whom you were made payments out of your sale proceeds or receipts and what was mode of payment? Ans In order to make payment against purchases credits, cheques were filled up and handed over to Mr Pramod according to his requirements .....

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Govandi labour parties? Ans In order to be cost effective, the stitching or embroidery jobs were completed through Govandi household parties and these person works from their home and they did not issue any bill. Q no 35 How did you make payment to these parties? Ans Payments to all the stitching or embroidery workers from Govandi area were made in cash only. Q no 36 How did you make arrangement (or the cash as your bank statement does not show cash withdrawal? Ans Mainly, the required cash was .....

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osed and I have no income and therefore no accounts maintained. Qno 39 Please give name of the auditor? Ans My auditor is Shri R H Mehta, C/62, Sector 5, Shanti Nagar, Mira Road E. Mumbai. Qno 40 Please go through your audit report and submit your auditors remark for relevant coloumn (or section 40(A)(3)? Ans The auditor submitted that "It is not possible for us to verify whether any payment in excess o( ₹ 20, OOOf- have been made through bank otherwise than by crossed cheque or bank .....

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parties list through postal department, but twenty two notices has been returned back by the postal department with mostly marked as "not Known". Remaining eight were also not served as no acknowledgement received from the postal department. Not a single party submitted any response. Inspector conducted inquiries on sixteen parties party addresses but he submitted that either the addresses are incorrect or the parties are not known at these addresses. ii. On bank inquiries, from Rajko .....

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19/21, Ist floor, R No 13/A, 210, M A Road, Madanpura, Mumbai 400 008 through speed post. Postal department returned with the remark "left". Inspector inquiries revealed that Mr Suhil Ansari is not staying at the address. On perusal of the bank account of M/s Shubh Impex (Prop Mr Ansari), it is found that the account was opened on 17/7/2008 and closed on 06/03/2009. Nature of entries in the bank account shows that the account was used to give accommodation entries and the account was .....

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g but only accommodation entry provider. iii Similar inquiries were conducted in another party M/s B K Enterprises from which you shown purchases of ₹ 48, 82, 000/-. You issued five cheques ( not account payee) in the name of M/s B K Enterprises. On inquiries from AX S Crawford Market branch and your banker Union Bank of India, Kalbadevi branch, it is found that these cheques were credited in account of M/s B K Enterprises account no 255610200012032 maintained with Prince Anwar Shah Road, .....

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was used for providing accommodation entries to the assessee. iv. In your ledger account maintained for M/s K C Fab, you shown cheque payment of ₹ 3, 30, 580/- (cheque no 713820), Rs.3, 22, 980/-(cheque no 713821), Rs.3, 33, 470/-(cheque no 713819), Rs.2, 67, 104/- (cheque no 713823) and ₹ 3, 28, 820/-(cheque no 713822) to M/s KC Fab on 28/03/2009. But these cheques were presented in clearing by Rajkot Nagrik Sahakari Bank Kalbadevi. When the banker was asked in which account these c .....

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713815) on 28/03/2009. But these cheques were deposited in above mentioned account of M/s Shivom Trading Co through clearing by Rajkot Nagrik Sahakari Bank Kalbadevi Branch. On perusal of bank account statement of M/s Shivom Trading Co, it is seen the account was opened on 16/02/2009 and closed on 10/09/2009 and the transaction are similar to accommodation entry provider. The account is operated by fly by night operators not by a genuine business man. vi. It is pertinent to brought on record th .....

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e showcaused vide order sheet dated 21/11/2011 and 24/11/2011, you changed your stand in planned manner and vide order sheet dated 09/12/2011, you submitted that these purchases were arranged through Mr Pramod. Furthermore, in order to lead the inquiries to dead end, you strategically submitted that Mr Pramod left the business and you do not know anything about him. 4. With these facts, it is found that you purchased the material on cash basis and used accommodation entry operators to encash the .....

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nclosed working, maximum of negative cash balance arrives at ₹ 53, 82, 379/- on 19/05/2008. Therefore, an addition of ₹ 53, 82, 379/- is proposed for A Y 2009-10 for peak unexplained cash credit. 5. On sample basis test checking of cheques issued by you, it is found that you issued all cheques without marking "Account payee" in your Union Bank of India Bank account with Kalbadevi Branch which is violation of provision of section 40A(3) of the Income tax Act, 1961. Please ex .....

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. This may be treated last and final opportunity. Encl. Peak statement 4 pages (ADEESHWAR MEENA) ITO WD 22(1)(2), MUMBAI Despite several opportunities granted by the AO pursuant to issue of above show cause notice, there was no compliance to above said SCN by the assessee. The A.O observed that the assessee have made actual purchases in cash above of ₹ 20, 000/- without bills which are not accounted for in its books of accounts and in order to generate required cash, the assessee handed ov .....

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ucing cash balance and similarly all cleared cheques in the bank account of the assessee i.e. Union Bank of India, Kalbadevi branch were considered as sources of cash. The A.O did not accepted purchases on credit basis as there were no genuine parties from whom purchases were made and there is no confirmations from these parties who could confirm that they sold goods to the assessee. The A.O worked out peak statements of the assessee for A.Y 2009-10 which was worked out to negative cash balance .....

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was below ₹ 13, 67, 62, 973/-, no addition for A.Y 2009-10 was made by the AO u/s. 69C of the Act. The A.O held that appropriate action for peak balance of ₹ 13, 67, 62, 973/- for A.Y 2009-10 will be taken separately. Additions u/s. 40A(3) and 40A(3A) - AY 2009-10- it was observed by the A.O that assessee has issued cheques without writing name of the party and without marking it 'account payee cheque' which were issued from Union Bank of India account with Kalbadevi branch . .....

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fferent hand writings. During the year, the AO observed that the assessee has issued cheques of ₹ 17, 99, 90, 677/- of which details were given by the A.O vide annexure attached to the A.O assessment order without marking account payee by the assessee. The A.O observed that there is no business expediency or any other factor for issuing cheques other than account payee cheques. The AO also observed that the assessee works in Mumbai and banking facilities are excellent. The A.O observed tha .....

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counts which are audited and copy of balance sheet, profit and loss account, capital accounts were submitted before learned CIT(A). It was submitted that although A.O failed to verify the purchases as notices u/s133(6) returned unserved and purchase parties could not be traced but sales were accepted by the A.O and there cannot be sales unless the purchases have been made by the assessee. The assessee relied upon the various case laws which are listed in learned CIT(A) appellate order on page no .....

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ved that A.O has made detailed enquires after giving several opportunities to the assessee and assessee did not comply or made partial compliance to such opportunities granted by the AO. The learned CIT(A) observed that the A.O has made detailed enquiries after giving number of opportunities to the assessee and the assessee has on majority of dates did not appeared before the AO or made partial compliances. The learned CIT(A) observed that field enquiries in the case of 30 parties were conducted .....

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ank accounts or that the cheques issued to various parties were not account payee which were deposited in some other their party bank accounts of the parties which are not business entities and were engaged in providing accommodation entries. The learned CIT(A) observed that the assessee admitted before the AO that the assessee has not issued account payee cheques to these purchasing parties. The learned CIT(A) observed that books of accounts were rejected by the AO u/s. 145(3) as the same did n .....

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008-09 wherein appropriate action were proposed by the AO to be taken for A.Y 2008-09 for making additions u/s 69C and no additions were made on this ground for AY 2009-10, which decision of learned AO was held to be correct by learned CIT(A), vide appellate order dated 22-01-2013. The learned CIT(A) based on factual matrix of the case confirmed additions to the tune of ₹ 17, 99, 90, 677/- u/s 40A(3)/40A(3A) for AY 2009-10 as the cheques were issued in favour of third parties without marki .....

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parties in cash, vide assessment order dated 26-03-2013 passed by the AO u/s 143(3) r.w.s. 147. The assessee carried the matter in appeal before learned CIT(A) who confirmed the additions for AY 2008-09, vide appellate order dated 25.02.2015 which was later on rectified by learned CIT(A) u/s. 154 vide orders dated 16.02.2017. The learned CIT(A) rectified the appellate order by holding that disallowance in the impugned assessment year is to be made u/s. 69C and not u/s 40A(3) and 40A(3A) as were .....

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smissed The learned CIT(A) made the following amendments by holding as under vide rectification order dated 16-02-2017 passed u/s 154 by learned CIT(A) for AY 2008-09:- Since the facts of the case and issues in the year under consideration remaining the same, respectfully, following the order of my predecessor, the disallowance made by the A.O is hereby confirmed by invoking section 69C of the I.T. Act, 1961, Grounds raised by he appellant are accordingly dismissed. 9. Aggrieved by appellate ord .....

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hallenge the rejection of books of accounts which as per learned counsel for the assessee had been validly done by the authorities below . It was also submitted by learned counsel for the assessee that even quantum of disallowance made of ₹ 17, 99, 90, 677/- for AY 2009-10 by invoking Section 40A(3) and 40A(3A) is also not challenged by the assessee. It was submitted that legal contention which is raised by the assessee is that when the books of accounts were rejected by the AO u/s. 145(3) .....

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jection of books of accounts. It was submitted that after rejection of books of accounts only trading additions can be made by estimating profits and Section 40A(3)/40A(3A) cannot be invoked as the AO cannot have recourse to same rejected books of accounts for making additions u/s 40A(3)/40A(3A) which he himself has rejected. Our attention was drawn to assessment order and also our attention was drawn to the annexure to assessment order where the AO has given working details of the disallowance .....

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ques. It was submitted that A.O has alleged that there are purchases from undisclosed sources in cash and hence addition has been made of the peak negative cash balance and it was found by the AO that peak negative cash balance was of ₹ 13, 67, 62, 973/- as on 26-01-2008 which was added in AY 2008-09 u/s 69C while no additions were made in AY 2009-10 towards peak negative cash balance . It was submitted that assessee has started his business on 02.07.2007. It was submitted that books of ac .....

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ourt in the case of Ranka Jewellers v. ACIT (2011) 238 CTR 153 (Bom). He also relied upon the decision of Hon‟ble Punjab & Haryana High court in the case of CIT v. Santosh Jain (2008) 296 ITR 324(P&H), the decision of Hon‟ble Allahabad High Court in the case of CIT v. Banwarilal Banshidar (1998) 0229 ITR 229(All.) and decision of Hon‟ble Rajasthan High Court in the case of CIT v. G.K. Contractor (2009)19 DTR 0305(Raj. HC) . It was submitted that once Section Section 145 .....

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0A(3A). Without prejudice and without conceding, it was submitted that the disallowance as made by the A.O u/s.40A(3)/40A(3A) is absurd. It was submitted that the total turnover of the assessee is ₹ 7.5 crore for previous year relevant to the assessment year 2009-10 while disallowance is made u/s. 40A(3)/40A(3A) of ₹ 17.99 crores. It was submitted that there is basic flaw in the working of the A.O wherein the AO has applied 40A(3)/40A(3A) even if the payments are not for expenses. He .....

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he case of CIT v. Smt. P.K. Noorjahan (1999) 237 ITR 570(SC) and also decision of the Hon‟ble Supreme Court in the case of Godhra Electricity Company Ltd. v. CIT (1997) 225 ITR 746(SC). Assessment Year 2008-09 It was submitted by learned counsel for the assessee that additions has been made u/s 69C as purchases could not be explained by the assessee and addition were made u/s. 69C towards peak negative cash balance which was worked out at ₹ 13.67 crores as on 26-01-2008 as it was hel .....

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.O power to make assessment in the manner done by the A.O. as after rejecting books of accounts, the AO has to estimate profits and he cannot have recourse to Section 69C. The Ld. Counsel for the assessee submitted that parties could not be produced before the authorities below as assessee does not have control over purchasing parties . It was submitted that books of accounts could not be produced before the authorities below. It was submitted only ledger accounts were produced and even purchase .....

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u/s. 133(6) were issued by AO to all the 30 purchasing parties from whom purchases has been made but none of the party responded and notices returned unserved. It was submitted that even inspector was deputed to verify the purchasing parties and it was found these parties are non-existing parties . It was submitted that these are non existing parties. It was submitted it is shown by the AO that purchases have been shown to have been made from X‟ party while payments have been made to Y .....

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hat documents were furnished before AO . It was submitted by learned DR that assessee has claimed that it has filed documents before learned CIT(A) and A.O, which is wrong contentions made by the learned counsel for the assessee and a wrong certificate is given by the assessee before tribunal . It was submitted that Section 40A(1) has a non-obstante clause and it is clearly stated in Section 40A(1) that it will be operative notwithstanding anything to contrary contained in any other provisions i .....

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sing parties and has wrongly invoked protection under rule 6DD(g) and (j) which has no application as no evidences has been produced before the A.O. that the bank were closed due to holidays or the bank were situated in remote areas/villages . It was submitted that Section 40A(3) and 40A(3A) being deeming provision which creates fiction and income is to be deemed under certain situation and as real income cannot be brought to tax then deeming provision will come into picture and income will be b .....

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It was submitted that for A.Y 2008-09 books of accounts were not rejected. It was submitted the entire addition u/s. 69C for A.Y 2008-09 be upheld and he relied upon the decision of ITAT-Ahmedabad in the case of Vijay Proteins Ltd. v. ACIT reported in (1996) 58 ITD 428(Ahd.) . The learned DR also relied upon decision of Hon‟ble Karnataka High Court in the case of P.M Abdula v ITO reported in (2015) 60 taxmann.Com 52(Kar.) and also decision of Hon‟ble Supreme Court in the case of N.K .....

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as invoked Section 40A(3)/40A(3A) wherein disallowance of ₹ 17.99 crores were made on the ground that payments made during the year were made otherwise than by account payee cheques which payments during AY 2009-10 included opening creditors of ₹ 10.82 crores as on 01-04-2008 which can be verified by the AO and it was submitted that it led to double jeopardy which is not permitted as the same amount of purchase suffered taxation twice. 18. We have considered rival contention and peru .....

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tices u/s 143(2) /142(1) were issued by the A.O to the assessee during the course of assessment proceedings under 143(3) r.w.s. 143(2) for AY 2009-10. The notices issued u/s 143(2) and 142(1) are tabulated below:- S.No Notices u/s. Date Hearing date Compliance Status i. 143(2) & 142(1) 29/09/10 11/10/10 Non compliance ii. 142(1) 18/01/11 17/02/2011 -do- iii. 142(1) 29/07/11 08/08/11 -do- iv. 142(1) 28/08/11 06/09/11 -do- v. Show cause for initiation of penalty and exparte assessment 12/09/11 .....

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ompliance xii. Showcause for addition of ₹ 53,82,379/- for 22/12/11 27/12/11 Attended without any reply to peak unexplained purchases and ₹ 17,99,90,677/- u/s. 40A(3) showcause submitted certain primary details xiii. Adjournment 27/12/11 28/12/11 Non compliance The assessee did not either attended during the dates fixed for hearing or did not submitted details in compliance of the said notices or submitted partial replies . The assessee did not produced purchase bills nor produced bo .....

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erved that the assessee has made purchases from following 30 parties :- Sno Name Address Closing amount 1 Advance Finstock Plot no 122, Sector no 10. Juhu Gaon Panvel Dist. Raigad - 410206 42,48,075/- 2 Ajay Impex 98/100, Proqressive Bldg, Near Voltas House Byculla (E) 2,00,000/- 3 B K Enterprises Plot no 150, Nehru Road, 4882000/- Near Vishal Hall, Borivali(E) Mumbai-400092 -. 58,33,524/- 4 Classic Trading 26/1, Daji colony, Vijay Nagar Road, Narangpura, Ahmedabad- 3800013 5 Devam Impex Off no .....

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25,66,500 11 I Kalapna Textiles Shop no 7, Laxmi College, Dr 13,31,139/- . Ambedkar Road, Parel Mumbai 12 Karnimata Emporium Laxmi Bhawan Bldg Gokhale Road, Dadar(W), Mumbai - 28 44,80,627/- 13 Keshav Enterprises 325, Ground Floor, Kalbadevi Road, Kalbadevi,Mumbai-400002 22,67,000/- 14. KV Impex 98, Mangal Sadan Junction, Opp 7th Road, SV Road, Khar, Mumbai 15,28,110/- 15. Maruti Enterprices S-07, City Arcade, Near DSP Bunglow, Jamnagar-361008 18,95,551/- 16. Mateshwari Enterprices Raj complex G .....

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r Ambedkar l Road , Parel Mumba. i 14,40,000/- 22 Ratan Enterprises 47,Astavinayak, Sai Marg, Old Hanuman Lane, Malad E 56,03,500/- 23 R Dhanlaxmi Traders Progressiv Apartment, A Winge , off no 12, Jogeshwari West 9,24,000/- 24 Real Trading Suryakant Apartment SeAAppartmecond fl Off no 11, Off Cafe Paradise, CChembur 975000/- 25 Sampat Traders 48/82, Janta Chambers, Shantaramm Road, Near Sagar Hotel, Panvel 8,40,000/- 26 Sona Traders 53/23, Jeevan jyot Apartments, Near Vashi Rly Station, Navi Mu .....

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u/s 133(6) were issued by the AO to these purchasing parties asking for details but the said notices u/s 133(6) could not be served on these parties and most of the notices returned unserved as the said parties were not existing at those addresses . Enquiries were also made through ward inspector who also reported that these purchasing parties are not existing at the given addresses. The A.O, then proceeded to verify various payments stated to be made to these purchasing parties . Ledger accoun .....

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made enquiries with the bank North Canara GGB Co. Op. Bank Ltd. and it was observed that these payments are only cash withdrawal from bank account. Similarly, it was observed by the AO that 10 cheques which were issued for an amounts of ₹ 81, 98, 483/- were not account payee cheques and have been deposited in some other bank accounts in the name of M/s. Shubh Impex which is a non genuine business entity. The A.O obtain copies of cheques issued by the assessee from his bankers Union Bank of .....

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. On enquiry with the bankers RNS Bank it was found by the AO that these cheques were deposited in the other bank account maintained by Shubh Impex proprietor Mr. Suhel Parvez Ansari Current Account no. 1054 which is a third party account for the assessee. It was observed by the A.O that cheques has been deposited in the third party bank accounts because the same were not marked as an account payee cheques. The A.O called for the bank account opening form and bank statement of M/s. Shubh Impex .....

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31 to Shubh Impex but the said summons returned unserved by postal authorities with remarks left‟. The inspector was deputed to verify the address and he reported that Mr. Suhel Parvez Ansari Prop Shubh Impex was not staying at the address . The occupant of the address submitted to the inspector that Mr. Suhel Parvez Ansari was their relative and now left the place. Thus, A.O concluded that Shubh Impex was a fly by night operator and no genuine business was conducted . It was observed by t .....

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night operators. The assessee admitted before the A.O that cheques issued were not account payee cheques and complete purchase bills and supporting vouchers are not available . It was submitted by assessee during the course of hearing before the A.O as under: Shri Iqbal Subedar assessee attended without any paper or details or/explanation. He submitted that he does not have complete purchase bills and other supporting vouchers as all the bills were managed by one Mr Pramod who is now not tracea .....

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rchase parties should not be treated non genuine iii section 40A(3) should not be made applicable in view of non account payee cheques- cheques favouring of B K Enterprises, Vijay Laxmi Traders and K C Fab shown to him. Hearing is fixed on 12/12/2011 at 11 AM. The assessee categorically submitted that he did not have purchase bills and supporting . The assessee also submitted that he did not issued account payee cheques. Statement was recorded on 15.12.2011 wherein the assessee admitted that som .....

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or which name the cheque is issued . Show cause notice was issued by the AO to the assessee but the assessee did not submit any reply before the A.O to the SCN issued by the AO despite several opportunities being granted by the AO to the assessee .The A.O observed that the assessee have made actual purchases in cash above of ₹ 20, 000/- without bills which are not accounted for in its books of accounts and in order to generate required cash, the assessee handed over cheques which were not .....

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ilarly all cleared cheques in the bank account of the assessee i.e. Union Bank of India, Kalbadevi branch were considered as sources of cash. The A.O did not accepted purchases on credit basis as there were no genuine parties from whom purchases were made and there is no confirmations from these parties who could confirm that they sold goods to the assessee. The A.O worked out peak statements of the assessee for A.Y 2009-10 which was worked out to negative cash balance of ₹ 53, 82, 379/- o .....

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7, 62, 973/-, no addition for A.Y 2009-10 was made by the AO u/s. 69C of the Act. The A.O held that appropriate action for peak balance of ₹ 13, 67, 62, 973/- for A.Y 2009-10 will be taken separately. Additions u/s. 40A(3) and 40A(3A) - AY 2009-10- it was observed by the A.O that assessee has issued cheques without writing name of the purchasing party and without marking it 'account payee cheque' which were issued from Union Bank of India account with Kalbadevi branch . Sometime ch .....

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writings. During the year, the AO observed that the assessee has issued cheques of ₹ 17, 99, 90, 677/- of which details were given by the A.O vide annexure attached to the A.O assessment order, which cheques were issued without marking account payee by the assessee. The A.O observed that there is no business expediency or any other factor for issuing cheques other than account payee cheques. The AO also observed that the assessee works in Mumbai and banking facilities are excellent. The A .....

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ee is not disputing the action of Revenue in rejection of the books of account u/s.145(3) of the Act and the assessee is submitting before the Bench that books of accounts were rightly rejected by the AO and it was submitted that there is no dispute as far as rejection of books of accounts by Revenue for AY 2009-10 is concerned. The assessee is also not disputing that he issued cheques to the so called purchasing parties which were not account payee cheques and rather bearer cheques or crossed c .....

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see‟s main line of argument and defense is that once books of accounts are rejected by the AO u/s. 145(3), then no resort can be made to the said rejected books of accounts and additions cannot be made u/s. 40A(3)/40A(3A) of the Act, and the only recourse available with the A.O is to estimate profits of the assessee‟s business to compute income under the Act. This is the main line of argument /defense of the assessee before the tribunal. Before adjudicating this ground, it is importa .....

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ofession . **** **** [ (3)(a) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure; (b) where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter refer .....

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profession under this sub-section where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.] The following sub-sections (3) and (3A) shall be substituted for sub-section (3) of section 40A by the Fina .....

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ly during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees: Provided that no disallowance .....

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ncy and other relevant factors. Best judgment assessment. 144. [(1)] If any person- (a) fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 [or fails to comply with a direction issued under sub-section (2A) of that section], or (c) having made a return, fails to comply with al .....

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a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment : Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.] [(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment .....

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sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of a .....

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hearing: a) First decision relied upon by the assessee is a decision of Hon‟ble Bombay High Court in the case of Ranka Jewellers (supra) wherein issue before Hon‟ble Court was with respect to invocation of Section 263 w.r.t. Block assessment framed u/s 158BC pursuant to a search u/s 132. Thus, it was not a case of regular assessment but a case of Block assessment wherein the objective is to compute undisclosed income as stipulated under Chapter XIV-B. The undisclosed transactions fr .....

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the grounds that the AO did not considered the applicability of Section 40A(3), wherein Hon‟ble Bombay High Court held that the revisional jurisdiction cannot be exercised by learned CIT as the AO has taken a possible view based on the decisions of the tribunal. This case has absolutely no relevance to the instant appeal as the fact situation are materially different as we are concerned with regular assessment and not with Block assessment and in the instant appeal before the Bench, the d .....

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by applying GP rate and the Hon‟ble Courts held that the application of GP rate will takes care of the expenditure otherwise than by way of crossed cheques in violation of Section 40A(3) r.w.r. 6DD(j) of Income-tax Rules, 1962 as no deduction was allowed to and claimed by the assesse in respect of the purchases. It was held that when GP rate is applied, that would take care of everything and there is no need to make scrutiny of the amount incurred on the purchases by the assessee. The Hon .....

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assessee has also placed reliance on the decision of Hon‟ble Allahabad High Court in the case of CIT v. Banwarilal Banshidhar(supra) . In this case the AO rejected books of accounts and applied GP ratio. The AO also made additions u/s 40A(3) . The Hon‟ble Court held that when income is computed applying Gross Profit ratio and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into provisions of Section 40A(3) as no deduction was claim .....

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erpretation by Courts and factual matrix of the case. d) The assessee has also placed reliance on decision of Hon‟ble High Court of Rajasthan in the case of CIT v. G.K.Contractor(supra) is a case where AO estimated income by applying a higher net profit after rejection of books of accounts by invoking Section 145(3), it was held that no separate addition can be made on account of cash credit u/s 68 . But in the instant case before us, the AO after rejecting books of accounts u/s 145(3) has .....

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ce of investment as income in each and every case while discretion has been vested with AO in invoking provisions of Section 69 by treating unexplained source of investment as income depending upon facts and circumstances of the case. We will apply this proposition of law as laid down by Hon‟ble Supreme Court to the factual matrix of the instant case before us in succeeding para‟s of this order. f) The assessee has also placed reliance on the decision of Hon‟ble Supreme Court i .....

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d that if payment exceeding ₹ 20000/- was made otherwise than by account payee cheque or draft, Section 40A(3) stood infringed even if payment is made by crossed cheque after amendment to Section 40A(3) w.e.f. 13-07-2006. The learned DR also relied upon decision of Hon‟ble Supreme Court in the case of N K Proteins Limited (Supra) wherein Hon‟ble Supreme Court has upheld additions to the tune of 100% of bogus purchases.The learned DR also relied upon decision of Hon‟ble Hi .....

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eques and have held that it is only account payee cheques issued by the tax-payer shall meet the compliance of Section 40A(3) and 40A(3A) under the amended provisions, wherein Hon‟ble High Court has held as under: 9. Previously the language used in the said provision was "a crossed cheque drawn on a bank or by a crossed bank draft". Such provision was amended with effect from 13.7.2006 to substitute the expression "an account payee cheque drawn on a bank or account payee ban .....

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s not a non-negotiable instrument. This, at times, results in crossed cheques being endorsed making it difficult to trace final payee and thus defeating the provisions of section 40A(3). As per RBI instructions to banks, an account payee cheque or account payee bank draft cannot be credited to any account other than the account of the payee. The Act was accordingly amended to substitute the said expressions. 10. It is true that the terms "an account payee cheque" or "account payee .....

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ng rise to deeming fictions. It is not mandatory that every term used in the statute must carry its definition under the Act itself. Terms which are not defined would be open to interpretation in its ordinary sense of the term. 11. It is indisputable that the term "an account payee cheque" is well understood and signifies cheque which carries a mandate to have the amount mentioned in the cheque to be paid to the drawee of the cheque. In common parlance and as per RBI directives, it wou .....

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account payee cheques drawn in favour of the banks, it had been indicated, vide our circular DBOD.No.BC.23/21.01.001/92 dated September 9, 1992, that banks which credit cheques drawn in their favour by other banks marked 'A/c. Payee' to the accounts of constituents who are not named payees therein, without proper mandate of the drawer do so at their own risk and will be responsible for the unauthorized payment. 2. In view of the recent misuse of Initial Public Officer (IPO) process by c .....

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s resulted in manipulation of the payment system and has facilitated the perpetration of irregularities. This manipulation would not have taken place but for the banks deviating from the procedure for collection of account payee cheques. The deviations can also not be sanctified as a prudent market practice since it has the potential to expose the banks to various risks. 3. Being satisfied that in consonance with the legal requirements and in particular the intent of the Negotiable Instruments A .....

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nks that they should not collect account payee cheques for any person other than the payee constituent. 4. Where the drawer/payee instructs the bank to credit the proceeds of collection to any account other than that of the payee, the instruction being contrary to the intended inherent character of the 'account payee' cheque, bank should ask the drawer/payee to have the cheque or the account payee mandate thereon withdrawn by the drawer. This instruction would also apply with respect to .....

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t is satisfied that in the public interest or in the interest of the banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company or to secure the proper management of any banking company generally. Thus in exercise of statutory powers such directions came to be issued. Such directions clearly mandate that the banks would be prohibited from crediting ac .....

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ons thus in no uncertain terms mandate the banks to credit the amount of an account payee cheque only in the account of the payee and no other person and conversely not to accept any cheque from any source other than the person named in the account payee cheque except after requiring the drawer of the cheque to withdraw the mandate in this respect. 15. Thus, by virtue of the clear understanding of an account payee cheque in commercial parlance further amplified by RBI guidelines noted above, it .....

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) was a crossed cheque or a crossed bank draft. With specific purpose in mind, the same was amended by the legislature to be replaced by the expression " an account payee cheque or account payee bank draft". This was done in the background of the experience that even crossed cheques were being endorsed in favour of a person other than the drawee making it difficult to trace the constituent of the money. To plug this possible loophole the requirement of section 40A(3) was made more stri .....

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1965] 2 ALL ER 98 in which it was observed that addition of the words "A/c Payee" or "A/c. Payee only" referred to the payee named in the cheque and not the holder at the time of the presentation and that would not prevent further negotiability of the cheque. For the same purpose reliance was also placed on the decision of the Calcutta High Court in the case of Tailors Priya v. Gulabchand Danraj AIR 1963 Cal. 36. In the three Judge Bench judgment, Justice D.N. Sinha in separa .....

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ld blindly follow the English law on the point. However, the position seems to have been so uniformly accepted by text book writers, both in England and India, that I am unable to depart from that view on the strength of my own feelings about it. The matter should however be corrected by legislation. I therefore hold that according to the law as it stands at present, a cheque payable to order or bearer and crossed "a/c payee" or "a/c payee only" but without the endorsement, & .....

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clusive opinion. We, however, cannot resist referring to the decision of the Calcutta High Court in the case of Tailors Priya (supra). In such decision also it was observed that a law on the point should be reconsidered and it is generally believed that by crossing a cheque with the words "a/c. Payee only", it is made not negotiable. It is clarified that according to the law as it stands at present a cheque even if it is account payee without the endorsement "not negotiable" .....

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For the purpose of section 40A(3) of the Act, thus there is really a clear distinction which exists, must be recognised and implemented as required in the plain language used therein. The claim and contentions of the assessee is that once books of accounts are rejected by the AO u/s 145(3), there will be absolute embargo on the AO and he cannot have any recourse to such rejected books of accounts to compute income and the AO will be left with no choice but to compute income by estimating profits .....

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ion while computing income while framing best judgment assessment after rejecting books of accounts rather relied upon judgments by the assessee itself have held that only when AO chooses to estimate profits while framing best judgment assessment, then there is no need to apply provisions of Section 40A(3), 68 and 69 but it is not so otherwise round that when books of accounts are rejected by the AO u/s 145(3) and he did not estimate income by applying profitability, then there is embargo on app .....

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nd assessment based on the accounts submitted by an assessee must be borne in mind. Sometimes there may be innocent or trivial mistakes in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts ; but yet the accounts may be accepted as genuine and substantially correct . In such cases, the assessments are made on the basis of the accounts maintained even though the assessing officer may add back to the accounts price of the items .....

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e may also rely on other information gathered by him as well as the surrounding circumstances of the case. The assessment made on the basis of the assessee s accounts and those made on best judgment basis are totally different types of assessments. …. So long as the estimate made by him is not arbitrary and has nexus with facts discovered, the same cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But, that is no ground for .....

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to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge. Hence, the burden of proving that fact is on him. *** *** The law relating to best judgment assessment is the same both in the case of income-tax assessment as well as in the case of sales tax assessment. Reference is also drawn to decision of Hon‟ble High Court of Lahore in the case of Seth Gurmukh Singh v. CIT re .....

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of method or if the books are unreliable merely in the sense that, though they are a correct record of the assessee's transactions, they have been kept in such a manner that they do not ex facie reveal the true result of the assessee's trading activity during the previous year, and the Income-tax Officer can, in some manner, make them the basis of computation of the assessee's income for the previous year, he must proceed under the proviso to Section 13. If, however, the books are f .....

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y accept the figure of sales and estimate the profits without accepting the trading account as a whole or he may accept the expenditure and on this basis estimate the sales. While proceeding in this manner the Income-tax Officer is not acting under the proviso to Section 13 but on general rules of reasoning and independently of Section 13. I do not, therefore, think that unless, the proviso to Section 13 is applied to such cases there would be a hiatus in the Act and that sub-section (3) of Sect .....

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tructions reported in (2004) 269 ITR 346(Ker.) held as under: 5. We have considered the rival submissions. We have also perused the orders of the Assessing Officer and the two appellate authorities. As we have already stated, the Assessing Officer did not accept the books of account of the assessee which was subjected to a special audit provided under section 45AD of the Act. The main reason for rejecting the books of account was that the Assessing Officer, after considering the statements and d .....

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as income. The first appellate authority had adverted to the contentions of the assessee with reference to the payments made to the sub-contractors. However, the first appellate authority has taken the view that this is at the most a case for rejection of the accounts and that if the accounts are rejected the income has to be estimated. The first appellate authority was of the view that when the income is being estimated there is no question of making separate additions in the light of certain d .....

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ed to the estimation on percentage basis. On an overall view with regard to the profit that can be derived from a contract business, the first appellate authority felt that it is strange to think that out of the total contract receipt of ₹ 1, 15, 47, 373 there may be a profit to the tune of ₹ 87, 51, 092, which will come to more than 75 per cent of the contract receipt. According to us the first appellate authority was not justified on the facts of this case to totally discard the bo .....

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adverted to the findings of the Assessing Officer and the first appellate authority. However, in paragraph 16 of the appellate order, which we have already extracted, the Appellate Tribunal did not consider this aspect of the matter even though the Tribunal found it difficult to accept the case of the assessee regarding payment to the sub-contractors. We notice that the Tribunal has adverted to the award passed by the Arbitrator and found that the amount awarded represents the value of the extr .....

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he matter to the Assessing Officer or at any rate the first appellate authority to consider the matter afresh. However, what we find is that the Tribunal has agreed with the first appellate authority that this is a case which calls for estimation of the profit on percentage basis. We do not find any reason stated by the Tribunal for justifying the estimate made on profit basis. We note that apart from the general observations made by the Tribunal on the merits of the matter, there is no due cons .....

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g it with determination of profit on percentage basis. As we have already noted the first appellate authority, without considering the case of the assessee based on the books of accounts and other records, had straightaway thought that this is a fit case for estimation of profit on percentage basis. We do not think that on the facts of this case the first appellate authority was justified in adopting such a course. The Tribunal has also committed the mistake in approving the estimation of income .....

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ecourse to incriminating material unearthed by the AO during the course of enquiry and/or investigations during assessment proceedings even after rejecting the books of accounts and in our considered view this is the settled position of law and the AO could not be restricted to only estimate income based on profitability and the AO can also not be restricted not to use the incriminating material unearthed during enquiry/investigation to compute income of the assessee but the AO should act honest .....

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eping in view factual matrix of the case. The assessee even did not produced purchase bills and in-fact admitted that there was infringement of Section 40A(3)/40A(3A) which is an admitted position by the assessee. The enquiries made by the AO with these purchasing parties as well with the third parties in whose favour cheques were issued revealed that none of these parties existed as they could not be traced and it was concluded that they were mere accommodation entry operators . Section 40A(3) .....

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not normally interfere with the best judgment of the AO in framing best judgment assessment to compute income of the tax-payer unless perversity is shown to have occurred in the decisions of the AO or it could be shown that AO did not acted honestly in computing income of the assessee after taking recourse to best judgment assessment. The assessee has also raised a feeble plea to seek protection u/r 6DD(g) and (j) of the 1962 Rules but no material is placed on record as to how the assessee is c .....

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e manner provided in section 144. Perusal of Section 144 would clearly reveals that the AO, after taking into account all relevant material which the AO has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and we donot find any limitation on the powers of the AO not to take recourse to the incriminating material gathered during enquiry/investigation during assessment proceedings to compute income .....

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le and unambiguous. We donot find any restricting words in Section 144 restricting the AO to only assess profitability after rejecting books of accounts to compute income of the assessee. Further perusal of Section 40A(1) also clearly reveals that it has a non obstante clause which clearly stipulates that Section 40A(which includes 40A(3)/40A(3A) ) has an overriding effect notwithstanding anything to the contrary contained in any other provision of the 1961 Act relating to the computation of inc .....

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profession as is contained in Section 40A(1) and in our considered view even if accounts are rejected u/s 145(3), the AO can estimate income of the assessee by taking recourse to Section 40A(3) which has an overriding effect over Section 145(3) r.w.s. 144. The assessee in the instant case has admitted that books of accounts were rightly rejected by the AO u/s 145(3) and hence in our considered view, the AO has rightly framed assessment for AY 2009-10 which was upheld by learned CIT(A) which we a .....

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