ITO vs Shri Ajay Sharma

PER MANISH AGARWAL, AM :

The present appeal is filed by Revenue against the order dated 20.03.2024 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2019-20/10228974 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 26.09.2022 passed u/s 144 r.w.s. 144B of the Act pertaining to Assessment Year 2020-21.

Brief facts of the case are that assessee is an individual and engaged in the business of manufacturing and trading of garments, shoes and also doing construction activities. The return of income was e-filed by the assessee on 13.02.2021, declaring total income of INR 9,72,790/-. The case was selected for complete scrutiny under CASS. During the course of assessment proceedings, the assessee has filed reply with respect to the notice issued on 04.11.2021 and for the remaining notices, either adjournment was taken or no reply was filed. Thereafter, the AO observed that there were many discrepancies in the details filed by the assessee vis-a-vis income declared. The AO further observed that the auditor has made given qualifications in the Tax Audit Report therefore, the books of accounts of the assessee were rejected by invoking the provisions of section 145(3) of the Act and profit @ 5% is estimated on contract receipts. Besides this, AO observed that interest income was not declared by the assessee thus the same was added. Besides this AO observed that there was substantial increase in the liabilities for which no explanation was tendered therefore, the same was added. Accordingly, total income of the assessee was assessed at INR 60,87,55,935/-.

Against the said order, assessee filed an appeal before Ld. CIT(A) who vide impugned order dated 20.03.2024, partly allowed the appeal of the assessee where income estimated by applying profit rate of 5% on contract receipts and non-contract receipt is sustained and balance addition was deleted by observing that once the income is estimated by invoking the provision of section 145(3), same books of accounts cannot be considered for making further additions.

Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before the Tribunal by taking various grounds of appeal mentioned in the appeal memo.

Ground of appeal Nos. 1 to 3 raised by the Revenue are with respect to the deletion of additions made u/s 68 of the Act on account of unexplained liability of INR 57,64,87,070/- and Ground of appeal No.4 is with respect to the deletion of addition of INR 37,75,836/-made by estimating the income from contract basis.

Before us, Ld. CIT DR for the Revenue vehemently supported the order of AO and submits that during the course of hearing, the assessee has failed to file complete details as called for and before Ld. CIT(A), had filed fresh evidences including confirmations of the creditors which were never confronted by the Ld. CIT(A) to AO nor any remand report was called for. Ld. CIT DR further submits that assessee has deliberately not participated in the assessment proceedings with the motive to avoid the proceedings so that the AO cannot make verification of the facts. When the AO has passed the order and made the additions, the assessee appeared before Ld. CIT(A) and filed all the details in support of his case which are available at pages 105 to 116 of the Paper Book. Ld. CIT DR submits that from the perusal of the same, it could be observed that Ld. CIT(A) has accepted the contentions of the assessee without providing an opportunity to the AO of making verification of the details so filed more particularly when the assessee has deliberately avoided the proceedings before the AO thus, the AO was deprived from the verification of the details so filed. Ld. CIT DR thus, prayed for the restoration of the order of AO. In the alternatively it is requested that the matter be sent back to the file of the AO for fresh verification. Regarding the merits of the additions, ld. CIT DR submits that assessee has filed to file any details of the Sundry creditors which were substantially increased as compared to earlier year. He further submits that the assessee has made the purchases of INR 61.22 crores and increase in the balance of Sundry Creditors was of INR 57.64 crores and it appears that all majority of purchases were on credit. Ld. CIT DR submits that due to one cooperative approach of the assessee, these facts remained to be examined the AO more particularly one of the reason for scrutiny was large Sundry creditors. He prayed accordingly.

On the other hand, Ld. AR for the assessee vehemently supported the order of Ld. CIT(A) and submits that the AO has not provided adequate opportunity and assessee has filed all the details alongwith the submissions before Ld. CIT(A) who after appreciating the same deleted the majority of additions. Ld.AR further submits that assessee has declared sales which matches with sales declared in GST returns, copy of which are placed at pages 117 to 127 of the Paper Book and the re-conciliation of the stock statement is placed at page 128 of the Paper Book. Ld. AR further submits that AO has failed to appreciate these facts. He, therefore, requested for the confirmation of the order of Ld. CIT(A).

Heard the contentions of both parties at length and perused the material available on record. It is observed that while making the additions made u/s 68 of the Act on account of unexplained liability of the creditors, AO observed that during the year under appeal, the creditors were increased from INR 56.14 crores to INR 128.86 crores and no details were submitted by the assessee. It is further observed that in addition to increase in the outstanding balance of Sundry creditors, assessee had received loans of INR 1.50 crores which neither was explained nor any document was filed with respect to the genuineness and creditworthiness of such loan. The turnover of the assessee was INR 48.43 crores and total purchase was at INR 61.22 crores. AO in para 7.1 of the order further observed that, there was difference in the purchase declared by the assessee and the sales declared by the respective parties in their GST returns which totaling to INR 5.62 crores. Besides this, in para 7.2, the AO observed that certain purchases have been made which were claimed as purchases in trading segment as well as made against the contractual obligations. All these facts remained unverified as the assessee has not appeared before the AO. It appears that books of accounts of the assessee were not reliable and thus AO has rightly invoked the provisions of section 145(3) of the Act.

It is observed that Ld. CIT(A) while deleting the additions, has gave a finding that once the books of accounts are rejected and income is estimated, no further additions could be made for the creditors u/s 68 of the Act based on same books of accounts. It is observed that before Ld. CIT(A), assessee has filed certain ledger accounts and confirmations of Sundry creditors which are placed at pages 129 to 140 of the Paper Book. On perusal of the same, it is observed that they all are typed on same paper and even no ledger accounts were submitted by the respective parties and none of these confirmations have been supplied to the AO for comments. The books of accounts have been rejected for the reasons that there were discrepancies in the purchases and therefore, the corresponding amount of creditors remained doubtful. It is observed that as against the purchase of INR 62 crores made during the year under appeal, corresponding increase in the closing balance of creditors was INR 56.14 crores which creates doubted about the genuineness of purchase. It appears that no payments were made against the purchases made during the year. It is further observed that one of the reasons for scrutiny was credit of more than 50% of the purchases made and further substantial purchases are made from the non-filer or declared lower turnover in ITR as compared to turnover in GST return. The assessee by not appearing before the AO, has deliberately avoided the proceedings where the AO has left with no other option but to invoke the provision of section 145(3) of the Act and estimate the income of the assessee. Thereafter, before Ld. CIT(A), assessee appeared and stated that once the books of accounts were rejected and income is estimated, no further addition could be made on account of sundry creditors. This clearly shows that assessee has tried to avoid the proceedings before AO so that no verification could be done at the end of the AO on account of increase in value of creditors of more than INR 60 crores. This type of practice should be avoided.

In view of the overall discussions made herein above and considering the facts and circumstances of the case, we are of the view that AO should be allowed an opportunity to examine all the facts in the instant case. Accordingly, we set aside the order of Ld. CIT(A) sent back to the file of AO for proper verification of the Sundry creditors declared by the assessee. Accordingly, Ground of appeal Nos. 1 to 4 raised by the Revenue are allowed for statistical purposes.

In the result, appeal of the Revenue is allowed for statistical purposes.