Commissioner of Income Tax vs G.S. Tiwari and Co.

Satish Chandra, J.—The present appeal has been filed by the Department u/s 260A of the income tax Act, 1961, against the judgment and order dated July 27, 2007, passed by the income tax Appellate Tribunal, Lucknow, in I.T.A. No. 323/Luc/2007 for the assessment year mentioned above. On January 15, 2008, a co-ordinate Bench of this hon''ble court has admitted the appeal on the following substantial questions of law, reads as under:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in deleting the disallowance of unsubstantiated sundry creditors on the ground that where the estimate profit rate is applied any other addition can be made for cash credits from the undisclosed sources of the assessee and not for non-verification of the same, while failing to appreciate the fact that the Assessing Officer in his assessment order had exactly held the same and fulfilled the requirement under the law?

Whether or not both the Commissioner of income tax (Appeals) and the income tax Appellate Tribunal erred in disregarding the fact of assessments having been made u/s 144 of the income tax Act, 1961, due to non-co-operation of the assessee and the asses-see having failed in discharging the onus of proving that even if the said cash credit represented income, it is income from a source which has already been taxed?

The brief facts of the case are that during the assessment year under consideration, the assessee carried on the business as contractor for civil work of Public Works Department, Nagar Palika, and other Government Departments. The Assessing Officer (AO) had provided several opportunities to the assessee, but the assessee did not attend the proceedings, so the Assessing Office, after issuing the notice, has passed the assessment order u/s 144, where he has made the addition pertaining to the sundry creditors to the tune of Rs. 23,14,417 by mentioning that the same were not verifiable on account of non-submission of details but the first appellate authority has deleted the addition by observing that since 8 percent net profit rate was estimated u/s 44AD, no separate addition could be made. The first appellate authority also reversed the findings of the Assessing Officer in taking the status of assessee as "AOP" instead of "RF". Being aggrieved, the Department has filed the appeal before the Tribunal, who, vide its impugned order dated July 27, 2007, has upheld the finding of the first appellate authority regarding the application of net profit rate at 8 percent; and deletion of disallowance of sundry creditors. Still not being satisfied, the Department has filed the present appeal.

With this background, Sri D.D. Chopra, learned standing counsel for the income tax Department, justified the order passed by the Assessing Officer. He further submits that the Tribunal has wrongly observed that the Assessing Officer has not made the addition from undisclosed sources but has not accepted the sundry creditors on account of non-verification. The sundry creditors actually represented the business income on the assessee which was not disclosed. This aspect was ignored by the appellate authority.

Learned counsel for the appellant, on the strength of written note, submits that the ratio laid down in the case of KALE KHAN MOHAMMAD HANIF Vs. COMMISSIONER OF Income Tax, MADHYA PRADESH AND BHOPAL., is fully applicable in the facts of the instant case but the Tribunal has overlooked the said case law. He further submits that the Tribunal has failed to appreciate that where there is no co-operation by the assessee and even regular statutory information regarding cash credit, sundry creditors has not been furnished by the assessee, then the Assessing Officer has no other alternative but has rightly made an addition for the reason of non-verification alone. He submits that the impugned order is perverse as the addition pertaining to the sundry creditors represented undisclosed business income of the assessee. The Assessing Officer has merely mentioned that the addition is a bogus liability credit in the garb of sundry creditors whose name and balance are not known to the assessee. Lastly, he made a request that the appeal may be allowed.

On the other hand, Sri K.R. Rasthogi holding brief of Sri Rakesh Garg, learned counsel for the assessee, justified the impugned order. He submits that the assessment order was passed u/s 144 of the Act. The net profit rate was estimated at 8 percent as per the provisions of section 44AD. The sundry creditors were appearing in the balance-sheet of the assessee, but the addition has been made only because they were not verifiable. The Assessing Officer has not made the addition from undisclosed sources but has not accepted the genuineness of the sundry creditors. This implies that the Assessing Officer has not disputed the sundry creditors, therefore, the assessee was entitled for telescoping of the net profit determined on estimated basis against sundry creditors and in support of his submissions, he relied on the ratio laid down in the following cases:

(a) CIT v. Raghavendra Pratap Singh 14 MTC 415 (All), where ex parte assessment u/s 144 of the income tax Act was made. In such a situation, the Assessing Officer cannot make addition u/s 68 which has to be necessarily on the basis of entries in the books which not are rejected. It was further observed that when the books are not maintained, then 8 percent net profit can be computed on the gross receipts in the case of civil contractor.

(b) Commissioner of Income Tax Vs. Aggarwal Engg. Co. (Jal.), , where it was observed that once the net profit rate was applied, no further addition was called for in respect of purchase and introduction of cash.

(c) Commissioner of Income Tax Vs. Purshottamlal Tamrakar Uchehra, ;

(d) Commissioner of Income Tax Vs. Banwari Lal Banshidhar, and

(e) Amitabh Construction Private Ltd. Vs. The Additional Commissioner of Income Tax, Range-I, .

Lastly, he made a request that the impugned orders may be confirmed and the appeal of the Revenue be dismissed.

After hearing both the parties and on a perusal of the record, it appears that there was no co-operation by the assessee before the Assessing Officer. On December 1, 2005, the balance-sheet and the profit and loss account were filed. The balance-sheet filed with the return shows sundry creditors to the tune of Rs. 23,14,417. These creditors are not verifiable in the absence of their full names and complete addresses. As per the balance-sheet the details of creditors appears available "as per schedule C", but no such schedule attached therewith. The perusal of record shows that right from start of firm business the assessee though mentioning (in balance-sheet) about availability of details of creditors as per schedule but no such schedule has ever been enclosed with the audit report/return. This clearly shows that there are no creditors. Bogus liability has been created in the garb of sundry creditors whose names and balances are not known to the assessee. Had there been the alleged creditors existed, the schedule might have been enclosed. This also indicates that no regular books of account have been maintained by the assessee, as not a single detail from the books of account has been furnished in the past fifteen months. The creditors are, therefore, not verifiable and so the amount of Rs. 23,14,417 is being added to the total income of the assessee.

In the instant case, the assessee has total contract receipts, as per Form 16AA, Rs. 3,03,04,527. When the turnover is more than 40 lakhs then the provisions of section 44AD is not applicable. However, in the instant case, Assessing Officer, was inspired from section 44AD and applied the 8 percent net profit rate and made the addition on estimate basis on gross contract receipts. The assessee has shown the sundry creditors to the tune of Rs. 23,14,417. No information, as required by law, was furnished by the assessee pertaining to the sundry creditors. When it is so then further examination of the material is required. This aspect was ignored by the appellate authority.

It may be mentioned that in the case of Commissioner of Income Tax Vs. Maduri Rajaiahgari Kistaiah, , it was observed that where a particular business income of the assessee has been estimated and determined and in such a case certain sundry creditors are found, the Assessing Officer may be precluded from adding the said unexplained sundry creditors as undisclosed income from the business, the income of which was determined on estimate basis. But where the unexplained sundry creditors are not referable to the business income of the assessee which was estimated, the Assessing Officer is not precluded from treating the unexplained sundry creditors as income from other sources such as salaries securities or any other income from business, the source of which was not disclosed by the assessee. Where certain unexplained sundry creditors are found in the account books of the assessee, whose business income is determined on estimate basis and not on the basis of his returned income, the Assessing Officer is not prevented from treating the unexplained sundry creditors standing in the books of account as income from undisclosed sources.

In the instant case, the consistent plea of the assessee was that the sundry creditors are genuine but no point of time the assessee took the stand that the sundry creditors are referable to the income of the business which has been determined on estimate basis. Hence, the assessee must be held to have failed to establish that the unexplained sundry creditors were referable to the business income. The addition of the unexplained sundry creditors as income from other sources by the Assessing Officer, therefore, was held valid.

Further, the hon''ble apex court in the case of Commissioner of Income Tax, Uttar Pradesh Vs. Devi Prasad Vishwanath Prasad, observed that where there is an unexplained credit, it is open to the Assessing Officer to hold that it is income of the assessee, and no further burden lies on the Assessing Officer to show that the income is from any particular source. It is for the assessee to prove that, even if the sundry creditors represents income, it is income from a source which has already been taxed. There is nothing in law which prevents the Assessing Officer in an appropriate case in taxing both the sundry credits, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account of the assessee as unreliable.

In the view of above discussion and by considering the totality of the facts and circumstances of the case, we set side the impugned order passed by the Tribunal and remit the matter back with a direction to examine the identity, creditworthiness and genuineness of the transactions of the sundry creditors. The Tribunal is further directed to dispose of the matter within a period of three months, as per law.

In the circumstances, the answer to the substantial question is declined and the same will be answered in another appropriate case. In the result, the appeal filed by the Department is allowed for statistical purpose.