TMI Blog2017 (10) TMI 632X X X X Extracts X X X X X X X X Extracts X X X X ..... which are contained in his special audit report. In the result, ground no. 1 of the assessee’s appeal is dismissed. Estimation of net profit rate pursuant to rejection of books of accounts - Held that:- The special auditor has pointed out various discrepancies in terms of 62 entries relating to various vouchers/bills/challans etc which could not be verified from the books of accounts. The special auditor also pointed out 251 entries of cash payments exceeding ₹ 20,000 in violation of section 40A(3) of the Act. In our view, these are serious discrepancies as pointed by the AO based on review of assessee’s books of accounts, special audit report and other details on record, and we accordingly don’t see any justifiable basis to deviate from the view taken by the AO in rejection of the books of accounts of the assessee and invoking the provisions of section 145(3) of the Act. Regarding estimation of profits pursuant to the rejection of the books of accounts, the AO has segregated the turnover relating to work directly executed by the assessee and the work executed through the sub-contractor. In respect of directly executed work, the AO has applied the net profit rate of 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - is accordingly confirmed. Undisclosed income not accounted for in the books of account - Held that:- During the course of assessment proceedings, the assessee has surrendered ₹ 89,000 relating to rental income not disclosed in the return of income and an amount of ₹ 27,950 towards sale of scrap which has been adjusted against the site advance account instead of crediting the profit/loss account. Further, an amount of ₹ 3,25,563 has been considered by the AO as unexplained and illegal income from pool based on documents impounded during the course of survey for which the assessee has failed to offer any explanation to the satisfaction of the AO or even during the appellate proceedings. Hence, the abovesaid findings of the ld CIT(A) are confirmed and the ground of assessee’s appeal is dismissed. Addition u/s 40A(3) - Held that:- In the instant case, the AO has rejected the books of accounts and estimated the net profit. The Hon’ble Andhra Pradesh High Court in case of Indwell Constructions vs CIT (1998 (3) TMI 121 - ANDHRA PRADESH High Court) has held that where the books of accounts are rejected, all the deductions which are referred to under section 29 are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 69C are attracted in the instant case or not. Needless to say, both the revenue and the assessee would be provided reasonable opportunity to represent their case before the ld CIT(A). - ITA No. 434/JP/2016, ITA No. 617/JP/2016 - - - Dated:- 9-10-2017 - SHRI KUL BHARAT, JM AND SHRI VIKRAM SINGH YADAV, AM For The Revenue : Shri S.L.Chandel (Addl. CIT) For The Assessee : None ORDER PER: VIKRAM SINGH YADAV, A.M. These are two cross appeals filed by the assessee and the Revenue against the order of Ld. CIT (A), Kota dated 11.03.2016 for A.Y. 2011-12. None appeared on behalf of the assessee. The assessee s appeal was filed on 28.04.2016 and first listed for hearing on 8.09.2016, and the revenue s appeal was filed on 03.06.2016 and first listed for hearing on 14.09.2016. Since then, both these appeals had come up for hearing on numerous occasions but no hearing has taken place, it was decided at the time of scheduled hearing on 10.08.2017 in the open Court that no useful purpose would be served in adjourning the matter any further. Accordingly, based on material available on record and taken into consideration the contentions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed income and the Ld. CIT(A) also erred in sustaining the same. ITA No. 617/JP/16 (Grounds of Revenue s appeal):- On the facts and in the circumstances of the case, the ld. CIT(A) has erred in:- ( i) deleting the addition of ₹ 12,35,000/- made u/s 69 of the Act on account of unexplained cash credit; ( ii) deleting addition of ₹ 1,41,34,476/- made u/s 40A(3) of the Act; ( iii) deleting addition of ₹ 1,18,34,723/- made u/s 69C of the Act on account of unexplained expenditure; ( iv) deleting addition of ₹ 14,72,000/- made on account of unaccounted income; 2. Briefly stated facts of the case are that the assessee filed his return of income declaring income of ₹ 37,53,350/-. Given the complexity in the books of account of the assessee, the matter was referred to the special auditor and after taking into consideration the report of the special auditor and other details and data available on record, the assessment was completed u/s 143(3) computing total income of the assessee at ₹ 3,47,64,800. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) who allowed partial relief to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses income as well as other details. Given the volume of impounded books of accounts and complexity therein, the case was recommended for special audit by another chartered accounted under section 142(2A) of the I.T. Act, 1961. The final opportunity was given to the assessee on 24.03.2014 to submit the reply. However, A/R, submitted that he has nothing more to explain on this issue, I do not find fault with the action of the A.O to refer the matter for Special Audit looking to the provisions of Section 142(2A) of the Act. The HIGH COURT OF GUJARAT in Neesa Leisure Ltd. V. Deputy Commissioner of Income-tax, Central Circle 2(2) 1 reported in 35 taxmann.com 216 (Gujarat) has held that- Section 142 of the Act pertains to inquiry before assessment. Sub-section (2A) thereof provides that if, at any stage of proceedings the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, may with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in Explanation below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fully reconciled and explain the books of accounts related entries as found in the loose papers with the Special Auditor, the details of which are a part of the record. In the absence of the same the Auditor appointed by the Department had no basis but to reach conclusions based on the available impounded documents. The CD of the books presented by him to the Special Auditor was given only 15 days before the report was finalized. Therefore, I am of the opinion that since the Auditor had to submit the report within the limitation period prescribed in the statute, he may not have fully considered the late submissions of the assessee but he had initially provided adequate opportunity to the assessee to represent his case with documentary evidences regarding the loose papers impounded during the survey proceedings. Thus the report being based on the available materials with the Special Auditor cannot be considered as being not as per law mentioned in this ground of appeal. I accordingly am unable to agree with the assessee s contention on this Ground and the same is accordingly dismissed. As regards Ground No. 4, the contention raised will be dealt with while dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wise stock register of fuel consumed has not been mentioned. Therefore, exact consumption of raw material fuel cannot be verified. - The Assessee did not produce any documentary evidence like stock register/inventory in support of closing stock and work-in-progress. - The Annexure-9 10 of Audit report of Special Auditor which points to voucher/bills which are not verifiable from the books of accounts submitted by the A/R. In view of this, the genuineness of expenses cannot be ascertained and profits of the assessee cannot be deduced in accurate and fair manner. After rejecting the books of account, the issue to be decided is estimation Thus, the admitted facts of the case are that the assessee is a civil contractor who did not maintain proper books of account. The assessee did not furnish relevant bills and vouchers of purchase and expenses before the Special Auditor and later the assessing officer. These are defects worth note and under the circumstances of the case, the decision of the AO to reject the books of accounts cannot be faulted. In the light of the facts, I uphold the order of the Assessing Officer in rejecting the books of account. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assessment : d) The conclusion drawn should be unbiased and rationally made, e) The authority should not be vindictive or capricious, f) Estimate should be bona fide. Good proof is not required while making an estimate provided the accounts are rightly rejected and estimate is fair and reasonable. Now coming to the estimation resorted by the AO in this case, he had the entire material impounded in the course of Survey proceedings in the case of the assessee. He had already taken the benefit of the advise of the Special Auditor and after finding all the discrepancies in the books of accounts, he had rejected the same as being unreliable. Thus while considering the nature of the assessee s business being that of a Contractor, he used the example of the available comparative cases and resorted to his best estimate of Profits in my opinion. He has followed the order of the jurisdictional High Court in the case of M/s Jain Construction Company where the Hon ble Rajasthan High Court has upheld the N.P. rate of 12% in the business of the civil Construction. The AO held that as the case of assessee is comparable with case of Jain Construction Company, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock and work in progress which remain unverifiable. Further, the special auditor has pointed out various discrepancies in terms of 62 entries relating to various vouchers/bills/challans etc which could not be verified from the books of accounts. The special auditor also pointed out 251 entries of cash payments exceeding ₹ 20,000 in violation of section 40A(3) of the Act. In our view, these are serious discrepancies as pointed by the AO based on review of assessee s books of accounts, special audit report and other details on record, and we accordingly don t see any justifiable basis to deviate from the view taken by the AO in rejection of the books of accounts of the assessee and invoking the provisions of section 145(3) of the Act. 9. Regarding estimation of profits pursuant to the rejection of the books of accounts, the AO has segregated the turnover relating to work directly executed by the assessee and the work executed through the sub-contractor. In respect of directly executed work, the AO has applied the net profit rate of 12.5% subject to interest and depreciation following the ratio laid down by the Hon ble Rajasthan High Court in case of Jain Constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, hence the same was added as undisclosed capital of the assessee from undisclosed sources of income. 11. In this regard, the relevant findings of the ld. CIT(A) are reproduced as under:- As regards the fresh capital of ₹ 6,97,919/- worked out by the Special Auditor as per his report Annexure A-12, and also accepted as such by the A.O, considering the explanation dated 15.10.2014, the assessee s version is not corroborated except for sales of car, which also was neither reflected in the block of assets of business nor reflected in the P L a/c. Even in the course of appellate proceedings the assessee could not give specific linkages of the capital introduction except for general submission. In the absence of satisfactory submission evidences, the capital introduced could not be said to be out of excess withdrawals and the explanation given is not acceptable as these have not been linked with any earlier withdrawals date wise etc. Under the circumstances involved, I am in agreement with the AO and accordingly, the addition of ₹ 6,97,919/- is accordingly confirmed. 12. We have gone through the findings of the ld CIT(A) and don t see any infirmit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,225/- as revenue expenditure. The assessee has, vide order sheet entry no. (ix) dated 09.10.2014, surrendered ₹ 16,225/- as addition in the total income of the assessee. 14. In this regard, the relevant findings of the ld. CIT(A) are reproduced as under:- I have gone through assessee s submission and AO s findings. Although in the assessment order the AO has not mentioned any details of the opportunity given to the assessee to explain with regard to the addition made in this ground, but in the course of appellate proceedings the assessee vide reply dt. 29.04.2015 had mentioned that these are mostly miscellaneous small items below 5000/- in cost (except cost of one cooler) and were part of site expenses. They had no value for capital expenses purpose. Irrespective of the cost involved, since these are expenses an items which have long term benefit, the amounts spent needed to be capitalized, which the AO has rightly done. There is no reason to interfere with the addition of ₹ 16,225/- made in this regard. This ground of appeal is treated as dismissed. 15. We have gone through the findings of the ld CIT(A). In our view, the said disallowance of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment of ₹ 12,35,000/-. The letter is dated 29.10.10 but it is noticed that no such investment is available in audited financial statement of the assessee. After considering the submissions of the assessee, the AO made an addition of ₹ 12,94,873 out of above. 17. The relevant findings of the ld. CIT(A) are reproduced as under:- I have gone through assessee s submission and AO s findings. As regards to entry no. 1 of Annexure-6, there is no evidence that the amount of ₹ 30,000/- pertains to recirculation of investment and to consider it as a technical mistake as per the assessee s explanation is not possible as there is no evidence in favour of the same. Accordingly, this amount of ₹ 30,000/- is held to be unexplained investment as worked out by the AO and is accordingly confirmed. As regards entry no. 3, related to the LIC premium of ₹ 29,873/- mentioned to be paid from drawings, since no evidence of such payment is linkable, the explanation of the assessee is not acceptable and the addition made by the AO is confirmed. However, as regards entry no. 2, pertaining to NSCs amounting to ₹ 12,35,000/- claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed explained while discussing the addition u/s 69C in ground No. 10. The AO should not have added the same amount at two places. In any case since I have discussed that the said entry is linked to the disclosed account, it cannot be said to be unaccounted Income. This amount requires to be excluded from the addition made in this regard and is directed to be deleted. As regards the other entries, the AO has made out a case that these DDs etc were made out of unaccounted receipts and made the addition on the ground that these were not entered in the books of accounts and were to be considered unverified deposits for lack of supporting evidence produced before AO. Since there is no direct linkage of these payments found with the Bank accounts, the AO s argument cannot be totally discounted. Hence, except for the amount of ₹ 14,72,000/- mentioned above, the remaining amount is to be considered as unexplained deposits for whatever purposes used. Since the explanation in respect of the other amounts was not found to be satisfactory, the addition to the extent of balance amount of ₹ 8,32,667/- is accordingly confirmed. This ground of appeal is treated as partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no. 2 of the Revenue s appeal, the Revenue has challenged the action of the ld CIT(A) in deleting addition of ₹ 1,41,34,476/- made u/s 40A(3) of the Act. Briefly the facts of the case are that as per Annexure-A of the Audit report of special auditor, 251 entries violated the provisions of section 40A(3) of I.T. Act, 1961 as assessee has made cash payments which are more than ₹ 20,000/- in a day. During the course of assessment proceedings, explanation were sought from the assessee from time to time and a final show cause was issued on 10.10.2014 to furnish evidence in support of his claim. In reply, the assessee vide his reply dated 15.10.2014 submitted as under: 1. Cash payment exceeding ₹ 20000/- u/s 40A(3): As we have mentioned earlier that the Assessee is a contractor and works on so many sites in the state of Rajasthan and Madhya Pradesh, there was responsibility to execute the work within prescribed time period. To running smoothly work on site, there is a practice to give advance and received back the amount whenever requirement at other sites. The site in charge incurred the expenses like labour payment, wages, material, plant machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in others, payments that were made in cheque and certain entries were in the nature of drawings by the assessee. It may be noted that the loan entries have been considered in Annexures-1,2 5 of audit report are being referred for penal proceedings under section 269 SS and 269T to the Additional/Joint CIT separately. Therefore, the 73 entries have been dropped for purpose of addition as they do not violate the provisions of section 40A(3) of the I.T. Act, 1961. The remaining 178 entries were not satisfactorily explained by the assessee and no evidence was provided to substantiate the claim that earlier the payments have been made below ₹ 20,000/- or they have not been debited from the profit and loss account of the assessee. It also may be noted that there are certain violations against which asessee has given explanation that these cash payments above ₹ 20,000/- pertain to earlier years but have been incurred in the relevant assessment year. The explanation of the assessee is unacceptable because under provisions of section 40A(3) of the I.T. Act, 1961, any liability incurred by the assessee for any other year for which expenditure has been made in cash above &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As examples of the shortcomings in the version of the AO he has mentioned that Entry nos 44-76 pertain to AY 09-10 on the basis of diary considered by AO. Entry no. 2 to 8 direct site labour/payment-made to each labour below ₹ 20000/- that in the Assessment proceedings he had already highlighted the fact that amounts were paid on various dates but the same has been ignored by the AO. Certain points which emerge out of the discussion made in the Assessment order as well as the assessee s submissions are- 1) The AO has not made out a case of unaccounted receipts having been found against which additional out of books expenses could have matched. 2) There is no evidence in the Auditor s note or the Assessment order whether any effort to reconcile the cash expenses of sites with any regular bills or expenses vouchers was made so as to reach a logical conclusion that the expenses claimed at site were much higher than the total expenses against works executed so as to then add the difference as unexplained cash payments. 3) There is no evidence in the Auditor s note or the Assessment order as to whether any reconciliation was attempted with bank withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n normally acceptable net profit rate based on the discrepancies pointed out in the other grounds of appeal. He cannot have an addition on account of estimation of profit separately then make other additions to the expenses which would disturb the Net Profit on a basis to the verge of perversity of business results as happened in this case. 7) While passing the assessment order, the AO has given a thorough description of the various discrepancies found in the books of accounts and rejected the books of accounts at pages 4 to 11 of the assessment order and then gone on to apply maximum NP rate @ 12.5% citing various judgments of the courts in support of the view adopted by him. 8) Net profit in a contractor s case is the ultimate figure of profit which has been estimated by the AO as per his best judgment and the legal precedents he has thought relevant to this case. There remains no further items of expenditure to be examined once that exercise is completed. It is a best judgment order. At that time it is open to the AO to estimate logically what rate of Net Profit he thinks fit that covers all the defects found in the books of accounts. This would include expenses ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t time to do so to reinforce the findings he brought out in the order passed by him. It is settled law that where the income of the assessee for a captioned year is estimated by applying net profit rate after rejecting the books of accounts, in view of the provisions of section 145(3) of the Act, no further addition can be made in the hands of the assessee on account of various disallowances by relying on the aforesaid entries in the books of account, which have been rejected. Reliance can be placed on the following decisions: In the case of Brahamanand Agarwal, Thekhedar Vs. DCIT Jaipur Bench of ITAT have held that when net profit is estimated by AO by rejecting the book result U/s 145(3) of the Act, no separate addition can be made on account of cash creditor. ITAT relied upon the decision of Rajasthan High Court in the case of CIT vs. G.K. Contractor 19 DTR 305 (Raj) wherein the Hon ble Jurisdictional High Court held that when net profit is estimated by the Assessing Officer by rejecting the book result u/s 145(3) of the Act, no separate addition can be made on account of cash creditor. In the case of Indwell Constructions vs. CIT 232 ITR ITR 776 (AP) it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no disallowance could be made in view of the provisions of section 40A(3) read with rule 6DD(j) of the Income-tax Rules, 1962, as no deduction was allowed to and claimed by the assessee. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchased made by the assessee. The above decision of Hon ble Allahabad High Court would be squarely applicable to the case of the assessee. When a net profit rate is applied, there remains no scope for further disallowance of any expenditure. In view of the above, we respectfully following the above decision of Hon ble Allahabad High Court hold that the CIT(A) was justified in deleting the disallowance under section 40A(3) made by the Assessing Officer. Accordingly, we uphold the order of the CIT(A) and dismiss the revenue s appeal. In CIT Vs. Smt. Santosh Jain 159 Taxman 392 (P H) also it was confirmed that when the GP rate is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee. In ITO Vs. M/s Banas Sand Tol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto account and there cannot be a separate disallowance under 40A(3) of the Act. 27. Further, we also refer to the Special Bench of Tribunal in case of Income-tax Officer, Ward-I, Murshidabad vs. Kenaram Saha Subhash Saha [2009] 116 ITD 1 (Kolkata) (SB) has held as under: 24. Now coming to departmental appeal in the case of Sri Shyamal Kr. Dey (supra), the Assessing Officer has determined the income by applying a net profit rate of the turnover. The Assessing Officer in addition to the determination of net profit as a percentage of turnover, made further disallowance under section 40A(3). The CIT(A) deleted the disallowance made under section 40A(3). Revenue aggrieved with the order of the CIT(A) is in appeal before us. It is contended by the learned counsel that once a net profit rate is applied, no further addition/disallowance can be made under section 40A(3). In support of this contention he has relied upon the decision of Hon'ble Allahabad High Court in the case of Banwarilal Bansidhar (229 ITR 229) in which their Lordships held as under :- affirming the decision of the Tribunal, that no disallowance could be made in view of the provisions of section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport which pertains to unexplained/not accounted for expenditure including illegal payment and point no. 5 of showcause dated 22.09.2014. In your reply dated 25.09.2014, you have submitted following reply. Once there are seized and cashbook of the assessee, there was no such entry and no any expenditure debited in profit and loss account. No such contact work received and executed by the assessee on that prescribed sites. Further, in explanation enclosed in sheet No. 5 of your reply, it is noted that: i) For entries numbered 1, 2, 3,4,5,6,7,8,9,10,11,12,13,14,23,20,24,28,30,31,33,35,36,45,49,50,60,6 5,66,67,75,76,79,80,81,93, the Assessee has given no reply or explanation. ii) For entries numbered 68,69,70,71,72,73,74,85,86,87,88 which pertain to illegal payments made by the assessee during the relevant assessment year, the assessee has submitted that the pool expenses are only discussion points and estimations. However there was no any work order. Also, assessee submitted that there was no work order from RIICO and therefore, the illegal payments and pull payments are simply for discussion and estimation. No other documentary evidence has been furnished by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of work from RIICO ltd. During the year of that amount. In respect of DD of ₹ 14,72,000/- It was part of amount to take tender and entered during the year in E.M S.D. Account but that amount has been refund back in next year WE are enclosing copy of Bank statement and vouchers for your kind reference. Once your good self estimating on certain grounds but special auditor has not taken any grounds to mentioned in audit report. In this way a simple person can mention on each and every paper without keeping proper attention on the records and validity of transaction. On this grounds we have produced the evidence of refund of that amount so how can we estimate that this pool amount is related to assessee and he has paid that amount. We have mentioned the execution of the work during the year amount is refund back how can we say that ..untenable. Please consider the facts and justification of the documents. Estimation/dream is not justified. In respect of any expenditure not entered any where ..Once you are demanding further evidences of expenditures debited in profit and loss account on the other side you are saying not entered in books. Your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paid to Vijay Bhai Amount debited to Balaji Sales detail: ₹ 15000 on 13.5, ₹ 16000 on 14.05, ₹ 17000 on 15.05, ₹ 18000 on 16.05, ₹ 19000 on 17.05 ₹ 14000 on 18.05, ₹ 15000 on 19.05, ₹ 18000 on 20.05, ₹ 19000 on 21.05, ₹ 17000 on 22.05, ₹ 18000 on 23.05, ₹ 19000 on 24.05, ₹ 18000 25.05 Rs. ₹ 17000 on 26.05. (We are enclosing copy of account) A- 24 21 22 Pool Paym ent 2,935,000.00 Pool payment for obtaining from RIICO ₹ 7.35 Cr. A-24 There is no any date on paper. No where is mentioned Pool as mentioned in above Paid @ 4% to 22 persons of ₹ 29,35,000/- @ ₹ 1,33,409/- per person Also showing name of the person to whom payment were made. mentioned paper. How can the auditor has mentioned POOL PAYMENT. May be part of discussion to give the work on sub contract or estimation or discussion. No where recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced here:- Therefore, the claim of the assessee that the illegal pool payments were just discussion points/estimation to take any work order and no work order from RIICO was awarded to the assessee is completely unacceptable. Further, it may be noted the special auditor has observed illegal payments based on documents impounded during the survey. Moreover, the 26AS of assessee shows the contract receipts on which TDS has been deducted by RIICO. Contrary to assessee s claim, this in fact shows that the assessee was awarded work contract by the RIICO. Therefore, assessee cannot claim that no work from RIICO was awarded to the assessee and the pool payments made are just estimations and not actual payments. ii) The assessee s explanation regarding DD of ₹ 14,72,000/- is incorrect because as per submission made by the assessee the RIICO has adjusted the said amount while making work contract payments to the assessee. iii) The A/R, of the assessee has given no documentary evidence to prove that any particular entry was debited in books of account or not, despite giving enough opportunity to provide the required evidence to support assessee s clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive evidence. He has neither confronted the so called beneficiaries or the other persons involved in the said pool of contractors to establish his finding. So if there was a case of any illegal expenses being there, they would be either camouflaged as other expenses, which the AO himself considered while estimating the net profit or such expenses would be backed by additional undisclosed receipt or Income which could take care of these expenses, which the AO failed to being on record through any evidences. His only focus was on expenses claimed and lack of supporting evidences, which he had already covered by estimating a best judgment net profit rate. All the other things in between the P L a/c get accommodated in the end result estimated by the AO. The HIGH COURT OF PUNJAB AND HARYANA in Commissioner of Income-tax Patiala v. Dulla Ram, Labour Contractor, Kothapura reported in 42 taxmann.com 349 (Punjab Haryana) has held clearly that- An Assessing Officer may, while considering a return of income, inspect the account books and, if satisfied, that account books do not reflect the true income of an assessee, reject the same. Account books once reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard, I am of the opinion that the AO was not justified in making the addition towards the expenses u/s 69C once he had estimated the Net Profit after rejection of the regular books of accounts. He has already formed an opinion on the net profit and if he still had doubts on these expenses, no one stopped him from adopting a higher than normally acceptable net profit rate based on the discrepancies pointed out in the other grounds of appeal. He cannot have an addition on account of estimation of profit separately then make other additions to the expenses which would disturb the Net Profit to give absurd business results as happened in this case. As a result I am unable to sustain the addition made u/s 69C. The addition of ₹ 1, 18, 34,723/- is accordingly directed to be deleted. This ground of appeal is treated as allowed. 35. We have heard the ld DR and pursued the orders of the ld CIT(A) and the AO as well as the assessee s submissions before both the authorities. The AO has invoked the provisions of section 69C of the Act which reads as under: 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acknowledged, can it be said that even those transactions cannot be examined by the AO. In the instant case, based on report of the special auditor and as reported in Annexure 4 of the audit report and examination during the course of assessment proceedings, the Additional CIT has held that there are specific transactions which have not been debited in the books of accounts and further, these transactions are determined based on documents impounded during the course of survey. In our view, the said action of the Additional CIT is not vitiated merely on the ground that the books of accounts have been rejected and net profit has been estimated by the AO provided it can be proved that these are independent transactions not connected with the transactions in respect of which the net profit has been estimated by the AO. In support, useful reference can be drawn to the legal proposition laid down by the Hon ble Supreme Court decision in case of Kale Khan Mohammad Hanif vs CIT reported in 50 ITR 1 and which has been followed by the Hon ble Supreme Court in its subsequent decision in case of CIT vs Devi Prasad Vishwanath reported in 72 ITR 194 wherein it was held as under: there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40. Now coming to the specifics of the transactions under consideration, on perusal of Annexure 4 of the special audit report and the explanation offered by the assessee during the course of assessment proceedings, it is noted that in entries starting from 1 to 67 except for entries at item no. 40, 41, 42 49, there are transactions where the amount has been debited under various expense heads such as tractor rent, JCB payments, grit expenses, post and courier expense, food misc expenses , repair maintenance expenses, telephone expenses, petrol and fuel expenses, tender expenses, hire and rent expenses, misc expenses, wages and labour charges, plant and machinery hire expenses, material expenses, water electricity expenses. Similarly, entry at item no. 77, 89 91 relates to plant and machinery hire charges and debited to plant and machinery hire charges. These expenses have therefore been debited in the various expense heads and thus considered for drawing up the profit/loss account by the assessee. Given that the net results so declared in the profit/loss account has been rejected by the AO, the said transactions cannot again be disallowed as the AO has already estimated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olumn .the Assessee entered in Books of accounts also as mentioned in Other Debtors account/site advances account. As per records these amount is recoverable and not debited in Profit Loss account .. How can we say illegal payment. Is any where mentioned illegal . In case illegal and not debited in profit and loss account but amount in debtors account, How can it may be added in the total income of the Assessee. 46. On perusal of the above explanation of the assessee, it is clear that the assessee has admitted these payments have been entered in his own handwriting in assessee s cash book as impounded during the course of survey. The assessee has also admitted that where the amounts are mentioned in the debtors accounts, these are recoverable amount and hence, not debited in the profit/loss account. In light of above explanation, it is clear that the subject payments have been made during the financial year and are not debited to the profit/loss account. Where the amount is not debited in the profit/loss account so prepared by the assessee, there is no basis to hold that since the AO has rejected the results as declared in the profit/loss account, the AO would be preclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to agree to said contentions of the assessee and therefore, unable to confirm the findings of the ld CIT(A) as well. In our view, the provisions of section 69C, as we have seen above, are crystal clear and there is no iota of doubt in our mind that where the AO has noticed that certain expenditure has been incurred by the assessee, the primary onus to discharge is clearly on the assessee to provide an explanation relating to source of such expenditure to the satisfaction of the AO. It is the assessee who has incurred the expenditure at first place and it is he who has to demonstrate that the expenditure has been incurred from known sources of his income. Where he fails to demonstrate, the consequences of section 69C will follow. Even going by the assessee s contentions, we find that the ld CIT(A) has himself confirmed the addition on account of undisclosed income of ₹ 4,51,513 and to that extent, the findings of the ld CIT(A) are self-contradictory. 48. In light of above discussions, in respect of transactions reported at item no. 85, 86, 87 and 88 of Annexure 4 of the special audit report, the addition made by the AO u/s 69C amounting to ₹ 14 lacs is hereby ..... X X X X Extracts X X X X X X X X Extracts X X X X
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