The judgment of the court was delivered by
Dr. Satish Chandra, J-The present appeal has been filed by the Department under Section 260A of the Income Tax Act, 1961 against the judgment and order dated 27.07.2007, passed by the Income-Tax Appellate Tribunal, Lucknow in ITA No. 323/Luc/2007 for the assessment year mentioned above.
On 15.01.2008, a coordinate Bench of this Hon'ble Court has admitted the appeal on the following substantial questions of law, reads as under:-
"1. Whether on the fact and in the circumstances of the case the Income Tax Appellate Tribunal was justified in deleting 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.
2. Whether or not both the CIT (Appeals) and the Income Tax Appellate Tribunal erred in disregarding the fact of assessments having been made u/s 144 of the I.T. Act, 1961 due to non-cooperation of the assessee and the assessee 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 AO after issuing the notice, has passed the assessment order under Section 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% net profit rate was estimated under Section 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 27.07.2007 has upheld the finding of the first appellate authority regarding the application of net profit rate @ 8%; 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 AO. He further submits that the Tribunal has wrongly observed that the AO 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, at the strength of written note, submits that the ratio laid down in the case of Kale Khan Hanif Mohd vs. CIT, 50 ITR 1 SC 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 cooperation by the assessee and even regular statutory information regarding cash credit, sundry creditors has not been furnished by the assessee, then AO has no other alternative but has right 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 AO 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 under Section 144 of the Act. The net profit rate was estimated @ 8% 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 AO has not made the addition from undisclosed sources but has not accepted the genuineness of the sundry creditors. This implies that the AO 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) Commissioner of Income Tax vs. Raghvendra Pratap Singh; 14 MTC 415 (All), where ex-parte assessment under Section 144 of the Income Tax Act was made. In such situation, the AO cannot make addition under Section 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% net profit can be computed on the gross receipts in the case of civil contractor.
(b) CIT vs. Aggarwal Engineering Co.; 302 ITR 246 (P&H), 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) CIT vs. Purshottam Lal Tamrakar; 270 ITR 314;
(d) CIT vs. Banwari Lal Banshidhar; 229 ITR 229 (All); and
(e) Amitabh Construction Pvt. Ltd. vs. Additional Commissioner of Income Tax; 335 ITR 523 (Jharkhand).
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 perusal of the record, it appears that there was no cooperation by the assessee before the AO. On 01.12.2005, the balance sheet and profit & loss account were filed. The balance sheet filed with the return shows sundry creditors to the turn of Rs. 23,14,417/-. These creditors are not verifiable in absence of their full names and complete addresses. As per 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 preschedule 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 name & balances are not known to assessee. Had there been the alleged creditors existed, the schedule might have 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 assessed.
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 lacs then the provisions of Section 44AD is not applicable. However, in the instant case, AO, has inspired from Section 44AD and applied the 8% net profit rate and made the addition on estimate basis on gross contract receipt. 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 CIT vs. Maduri Rajaiahgari Kistaiah; 120 ITR 294 (AP), 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 AO 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 AO is not precluded from treating the unexplained sundry creditors as income from other sources such as salaries securities or any other income from a 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 AO 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 at any point of time the assessee take 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 AO, therefore, was held valid.
Further, the Hon'ble Apex Court in the case of CIT vs. Devi Prasad Vishwanath Prasad; 72 ITR 194 observed that where there is an unexplained credit, it is open to the AO to hold that it is income of the assessee, and no further burden lies on the AO 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 AO in an appropriate case in taxing both the sundry credit, the source and nature of which is not satisfactorily explained, and the business income estimate 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.