Income Tax Appellate Tribunal - Jaipur
Dcit, Jaipur vs Jadau Jewellers & Mfg (P) Ltd., Jaipur on 28 February, 2017
vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj
IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES , JAIPUR
Jh HkkxpUn] ys[kk lnL; ,o Jh dqy Hkkjr] U;kf;d lnL; ds le{k
BEFORE: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM
vk;dj vihy la-@ITA No. 446/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2010-11
M/s. Jadau Jewellers & Manufacturers (P) Ltd. cuke The DCIT
B-1, Trimurti Circle, Govind Marg Vs. Central Circle-2
Jaipur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCJ 6114 C
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 502/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2010-11
The DCIT cuke M/s. Jadau Jewellers & Manufacturers (P)
Central Circle-2 Vs. Ltd.
Jaipur B-1, Trimurti Circle, Govind Marg
Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCJ 6114 C
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 447/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2011-12
M/s. Jadau Jewellers & Manufacturers (P) Ltd. cuke The DCIT
B-1, Trimurti Circle, Govind Marg Vs. Central Circle-2
Jaipur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCJ 6114 C
vihykFkhZ@Appellant izR;FkhZ@Respondent
2 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
vk;dj vihy la-@ITA No. 503/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2011-12
The DCIT cuke M/s. Jadau Jewellers & Manufacturers (P)
Central Circle-2 Vs. Ltd.
Jaipur B-1, Trimurti Circle, Govind Marg
Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCJ 6114 C
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@Assessee by: Shri Vijay Goyal and
Shri Gulshan Agarwal, CA
jktLo dh vksj ls@ Revenue by :Shri R.A. Verma, Addl.CIT - DR
lquokbZ dh rkjh[k@ Date of Hearing : 20/02/2017
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 28 /02/2017
vkns'k@ ORDER
PER BHAGCHAND, AM
The above appeals are the cross appeals filed against separate orders of the ld. CIT(A)-4, Jaipur dated 23-02-2016 and 26-02-2016 for the assessment years 2010-11 and 2011-12 respectively.
2.1 The grounds raised by the assessee and Revenue in respective appeals for the assessment year 2010-11 are as under:-
ITA No.446/JP/2016 - Assessee''1. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the reference for special audit under S.142(2A) of Income Tax Act is bad in law and invalid and aimed at getting extended period of limitation and thus, the ld CIT(A) erred in not declaring the assessment order dated 14.11.2013 3 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur passed U/s 144 read with Section 153A of Income Tax Act, 1961 as time barred, without jurisdiction, void ab-initio and bad in law.
2. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the reference to special audit report under Section 142(2A) of Income Tax Act is purely based on the recommendation in appraisal report. The AO has not applied his mind with regard to the nature and complexity of the accounts of the assessee. It is contended that the AO's opinion cannot be substituted by another officer's opinion. Thus, the ld CIT(A) erred in not declaring the reference to special audit report under Section 142(2A) of Income Tax Act is bad in law and invalid and assessment order dated 14.11.2013 passed U/s 144 read with Section 153A of Income Tax Act, 1961 as bad in law and void ab-inito.
3. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the assessment order passed U/s 144 r.w.s. 153A of the Income Tax Act, 1961 is void ab-initio and bad in law and deserves to be annulled as the special auditors have computed the income of the assessee on the basis of certain presumption and assumption, possibilities and probabilities dehors of material and the AO has borrowed the same in the assessment, meaning thereby the AO has delegated the task of framing an assessment to the auditor.
4. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the special auditors have conducted the audit beyond the scope of the provisions of Section 142(2A) by recasting the books of account and by applying presumption and assumption and such audit report cannot be considered for the Assessment of the assessee. Therefore and thus, the ld CIT (A) erred in not declaring the entire assessment as bad in law.
5. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the learned A.O. passed the Assessment Order based on no evidence or on irrelevant evidence and on surmises and conjectures and the facts of the case stated in assessment order are contrary to the records and is against the doctrine of äudi alterm partem", a principle of natural justice. Therefore and thus the ld CIT(A) erred in not declaring the assessment Order passed U/s 144 read with Section 153A, as bad in law and void ab-initio.
6. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in not declaring the entire assessment as perverse and vitiated in law more so when the department did not find and seize 4 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur undisclosed assets after rummage of all corners of house and business premises of the assessee group.
7. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in confirming the trading addition of Rs.2,59,56,858/- by estimating GP rate @ 24% on the estimated sales of Rs.26.00 crores out of the trading addition of Rs.5,30,97,994/- made by AO.
8. On the facts and in the circumstances of the case and in law the lower authorities erred in not allowing the benefit of telescoping, recycling and rotation of funds.'' ITA No.502/JP/2016 - Revenue
1. Whether on the facts and the circumstances of the case ld CIT(A) was right in restricting the trading addition of Rs.5,30,97,994/- (i.e. 5,09,67,486/- minus Rs.21,30,508/-) to Rs.2,59,56,858/- made by the AO without appreciating the facts given in special audit report which has also been held valid.
2. Whether on the facts and the circumstances of the case the ld CIT(A) was right in restricting the disallowance from Rs.6,83,29,329/- to Rs.3,35,092/- made U/s 40A(3) of the Act without appreciating the fact that this violation of the provision of the Section 40A(3) of the Act has been mentioned in the special audit report.
3. Whether on the facts and the circumstances of the case the ld CIT(A) was right in restricting the disallowance from Rs.6,99,228/- to Rs.4,81,614/- made U/s 40(a)(ia) of the Act without appreciating the fact that this violation of the provision of the Section 40(a)(ia) of the Act has been clearly mentioned in the special audit report.
4. "Whether on the facts and the circumstances of the case the ld CIT(A) was right in deleting the addition of Rs.70,00,000/- made on account of bogus share capital introduced without appreciating the fact that during the course of assessment proceedings despite various opportunities of being heard granted to the assessee, the assessee has failed to prove the genuineness of the transaction and identity and creditworthiness of the related parties.
5. Whether on the facts and the circumstances of the case the ld CIT(A) was right in deleting the addition of Rs.5,516/- being bill premium expenses without appreciating the fact that same can't be considered to be admissible expenses since the same has been incurred to procure bogus purchase bill.
5 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
6. Whether on the facts and the circumstances of the case the ld CIT(A) was right in deleting the addition of Rs.1,66,336/- made by disallowing 15% of the total expenses found recorded in the books of accounts named "Jadavji"maintained by the assessee.
7. Whether on the facts and the circumstances of the case the ld CIT(A) was right in allowing the appeal of the assessee without appreciating the fact that amount lying in the PD account has to be adjusted against the existing liability of the assessee and as per explanation-2 of the Section 132B of the I.T. Act, 1961. It has been clarified that the existing liability' doesn't include advance tax payable in accordance with the provisions of part-C of Chapter XVII.
3.1 Brief facts of the case are that the assessee is a private limited company and engaged in the business of manufacturing and trading of studded jewellery. The department carried out search & seizure operations on assessee on 06-05-2010 (Copy of Panchnana and inventory placed at PB Page 1-22). The case of assessee was centralized at Central Circle-2, Jaipur. Notice u/s 153A was issued on 16.09.2011, which was served on assessee on 23.03.2012 (Copy at PB Page 75). In pursuant to notice u/s 153A of Income Tax Act, the assessee filed its return on 31.03.2012 declaring the total income of Rs. 2,31,17,670/- (Copy at PB Page 76-122). Since the due date of filing of return u/s 139(1) of Income Tax Act, 1961 for AY 2010-11 was 30.09.2010 which was not expired as on the date of search, therefore no return u/s 139(1) of Income Tax Act was filed for AY 2010-11. The assessment proceedings were commenced by issue of notice u/s 143(2) of Income Tax Act, 1961 on 11.06.2012 and 6 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur later on vide various notices/query letters (Copy at PB Page 183, 189- 190, 215-230, 255-256, 287-288, 297-301 and 314-318) certain information were required from assessee. The assessee complied the notices/query letters by submitting its reply on various dates copy at ( copy at PB pg 184-185, 191-214, 231-254, 257-263, 264-269, 270-275, 276-284, 285-286 289-296, 302-313, 319-324, 325-328, 329-331, 332- 334, 335, 336-338, and 339-343). During the course of search certain documents were found and seized relating to the assessee including a CPU containing the books of accounts named as "Jadavji" being duplicate/parallel books of accounts of the assessee company maintained in the form of memoirs, containing the entries of recorded and unrecorded transactions of the assessee company. However the books of accounts named as "Jadavji" were neither complete nor correct. During the course of assessment proceedings it was opined by AO that the entries in the books of accounts named as "Jadavji" were extremely complex in nature therefore the AO moved a proposal to ld CIT, Central, Jaipur vide letter dated 13.03.2013 for approval of special audit of accounts of the assessee u/s 142(2A) of Income Tax Act, 1961. In response to the proposal of AO, the ld CIT (Central), Jaipur issued a show cause notice dated 15.03.2013 (Copy at PB Page 176-177) to the assessee for approval of special audit 7 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur and in response to the show cause notice, the assessee objected the reference of special audit u/s 142(2A) of Income Tax Act, 1961 vide its letter dated 18.03.2013 (Copy at PB Page 178-179) but the proposal for special audit was approved by the ld CIT, Central, Jaipur and the AO vide his letter dated 22.03.2013 (Copy at PB Page 180-181) directed to assessee to get its accounts audited u/s 142(2A) of Income Tax Act, 1961 as per the terms of reference which has been reproduced by AO at Page 7 of assessment order. The special auditors gave the report vide their report dated 14.09.2013 which was received to assessee on 17.09.2013 and the same was filed to AO on the same date (Copy of letter is at PB Page 182) wherein the net profit of the assessee company was computed Rs.
7,45,84,379/- as against Rs. 2,36,16,893/- shown by the assessee. The copy of special audit report is separately filed by the assessee as Paper Book Vol-4. The AO rejected the books of accounts of assessee and estimated the profits by applying the provisions of section 145(3) of Income Tax Act, 1961 and assessment order vide his order dated 14.11.2013 u/s 144 r.w.s.153A of Income Tax Act, 1961 assessing the total income of assessee Rs. 15,28,93,350/- as against returned income of Rs.
2,31,17,670/- by making the following additions/disallowances: -
S. Particulars Amount
No. (Rs.)
8 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
1. Trading addition on unaccounted sales and by 5,30,97,994 estimation of GP @26.21% on sales of Rs.
26,96,46,926/- (as worked out by special auditor) Rs. 5,09,67,486/-+21,30,508
2. Disallowance on a/c of alleged personal element in (a) 53,218 electricity expenses Rs. 1,322/- (b) Travelling expenses Rs. 51,896/-.
3. Disallowance u/s 40A(3) of Income Tax Act, 1961. 6,83,29,399
4. Disallowance u/s 40 (a) (ia) of Income Tax Act, 1961 6,99,228
5. Addition u/s 68 of Income Tax Act, 1961 on account of 70,00,000 alleged bogus share capital introduced through Kolkata based companies
6. Disallowance of expenses naming bill premium 5,516
7. Disallowance 15% of total expenses of Rs. 11,08,906/- 1,66,336 (After reducing Rs. 54,57,098/- already disallowed u/s 40(A)(3), 40(a)(ia) etc.) found recorded in the books of accounts named as "Jadavji"
Total Addition 12,93,51,691 3.2 Aggrieved by the aforesaid additions, the assessee filed appeal before ld CIT(A). It is noted that during the course of hearing of the appeal, the assessee filed paper book and written submission. The ld CIT(A) called remand report from the AO. The AO submitted his remand report. The assessee filed rejoinder on the remand report of the AO. The ld CIT(A) partly allowed the appeal by deleting/sustaining the additions as under:-
S. No. Particulars Additions Deleted by Sustained by Made by AO CIT(A) CIT(A) in dispute Amount Amount before (Rs.) (Rs.) CIT(A) Amount (Rs.) 9 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
1. Trading addition 53097994 27141136 25956858
2. Disallowance u/s 40A(3) of 68329399 67994307 335092 Income Tax Act, 1961.
3. Disallowance u/s 40 (a) (ia) 699228 217614 481614 of Income Tax Act, 1961 4. Addition u/s 68 of Income 7000000 7000000 0 Tax Act, 1961 on account of alleged bogus share capital introduced through Kolkata based companies 5. Disallowance of expenses 5516 5516 0 naming bill premium 6. Disallowance 15% of total 166336 166336 0 expenses of Rs. 11,08,906/-
(After reducing Rs.
54,57,098/- already
disallowed u/s 40(A)(3),
40(a)(ia) etc.) found recorded
in the books of accounts
named as "Jadavji"
Total Addition 129351691 102524909 26773564
Further, ld CIT(A) directed that the seized cash lying in PD account be adjusted against self assessment tax liability and interest u/s 234B be computed accordingly.
4.1 Now we take up the grounds of appeal of the assessee and the Revenue for adjudication of the respective grounds.
5.1 Ground No. 1 and 2 of the assessee are regarding challenging the validity of assessment reference made for special audit and validity of assessment order. The facts as emerges from the order of the ld. CIT(A) is as under:-
''3.1.3 I have duly considered assessee's submission, remand report and rejoinder filed by the 10 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur assessee. I have also taken a note of judicial pronouncement relied upon by the appellant as well as the factual matrix of the case. On plain reading of sub-section (2A) of Section 142 of the Act, it seen that the AO should form on opinion before issuing on order under the said sub-section. The said opinion is to be formed having regard to the nature and complexity of the accounts maintained by the assessee and in the interest of the Revenue. Such a satisfaction is a condition precedent to passing an order u/s 142 (2A) of the Act. On perusal of assessee's submission, it is seen that the assessee itself has admitted that the Department as a result of search found a CPU marked as exhibit-4 wherein duplicate and parallel books are maintained. The assessee has also admitted that the books of account maintained in computed are not in complete from and also entries therein are not made correctly. All these defects pointed out by AO and also admitted by the assessee; suggest complexities of accounts maintained by the assessee. The Ld. CIT (Central), Jaipur has given an opportunity to assessee to file any objection to the said proposal for special audit of accounts u/s 142 (2A) of Act, in compliance of which the assessee has submitted its objections. The Ld.CIT(Central),Jaipur has duly considered the objections of the assessee and then approved the proposal of AO for special audit of the case. The appellant assessee has not brought any positive material to show that the approval given by ld. CIT (Central, Jaipur is without application of mind. Further the opinion of the AO that the accounts are complex is based on objective consideration. Therefore, the contentions of the appellant assessee are rejected and ground No 1 and 2 are dismissed. '' 5.2 During the course of hearing, the ld. AR of the assessee objected the action of the ld. CIT(A) on the issues in question. The ld. AR of the assessee filed the written submission which has been taken into consideration.11 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 5.3 On the other hand, the ld. DR relied on the order of the lower authorities.
5.4 We have heard the rival contentions and perused the materials available on record. It is noted from the order of the ld. CIT(A) that assessee has not brought any positive material to show that the approval given by ld. CIT (Central, Jaipur is without application of mind and the ld. CIT(A) also noted that the opinion of the AO that the accounts of the assessee are complex and based on objective consideration. Therefore, the ld. CIT(A) rejected the contentions of the assessee are rejected and dismissed both the ground Nos 1 and 2 of the assessee. Looking into the present facts and circumstances of the case, we concur with the order of the ld. CIT(A) on this issue. Thus Ground No. 1 and 2 of the assessee are dismissed.
6.1 The Ground No. 3 to 7 of the assessee's appeal are in respect of confirming the addition of Rs. 2,59,56,858/- by estimating the profit rate @ 24% on estimated sales of Rs. 26. crores by the ld. CIT(A).
6.2 The Ground No. 1 of the departmental appeal is in respect of restricting the trading addition of Rs. 5,30,97,994/- to Rs. 2,59,56,858/-.
12 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 6.3 In these grounds, It is observed that the ld. CIT(A) has upheld the addition to the extent of Rs. 2,59,56,858/- by estimating the profit rate @ 24% on estimated sales of Rs. 26. crores by observing as under:-
''After considering the past history of the assessee and gross profit of 15.30% in comparable cases cited by the A.R. of the assessee, I found that the gross profit rate of 26.21% seems to be on higher side in the business of the assessee. The consolidated sales worked out by the assessee after the correction comes to Rs. 25,06,61,673/- but the fact remains the accounts of Jadavji are incomplete and there may remain some more unaccounted sales. Therefore, I estimate the consolidates sales of the assessee at Rs. 26.00 crores. So far as the addition of gross profit is concerned, the Special Auditor has computed the gross profit rate of 26.21% on the basis of sample size selected by him. The A.R. of the assessee has cited some more cases wherein the gross profit rate is (-) 5.67%. If the examples cited by the A.R. of the assessee are added to the sample selected by special auditors, the weighted average gross profit comes to 24.08%.
Considering this fact and assessed gross profit in past and next years, I estimate the gross profit rate of 24% as against 26.21% adopted by the AO and 16.95% shown by the assessee. Thus the gross profit comes to Rs.
6,24,00,000/-. The assessee has shown gross profit of Rs. 1,18,43,142/- in the return filed u/s 153A of the Act. Thus the short fall in gross profit is determined at Rs. 5,05,56,858/-. The assessee has declared Rs.2,46,00,000/- in the return filed u/s 153A of the Act on account of undisclosed income from unaccounted sales/ purchases. In profit and loss account, the assessee disclosed this income by mentioning that ''income taken into account on the basis of statement recorded in search/ documents found during the search being income earned from unaccounted sales represented by undisclosed assets (PB pager 103). Further in search statement, Shri Prateek Kothari, director of assessee company admitted this as income earned from unaccounted 13 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur purchases and sales in the company (PB page 34 43). Further the company being an artificial judicial person, cannot act like a living person. Therefore, whatever earning is there in the company, it comes form activities in the company. The assessee company has no another activity except the jewellery business.
Therefore, considering the facts and circumstances of the case as discussed, I hold that the assessee has declared this income of Rs. 2,46,00,000/- on account of profit from unaccounted purchase and sales which was utilized in unaccounted asset. After considering the above facts and circumstances , the addition of Rs. 5,05,56,858/- - Rs. 2,46,00,000 = Rs. 2,59,56,858/- is sustained as against trading addition of Rs. 5,09,67,486+Rs. 21,30,508/- totaling to Rs. 5,30,97,994/- made by the AO. Thus the assessee gets relief of Rs. 2,71,41,136/-.'' 6.4 During the course of hearing, the ld. AR of the assessee prayed that the ld. CIT(A) erred in confirming the trading addition of Rs.2,59,56,858/- by estimating GP rate @ 24% on the estimated sales of Rs.26.00 crores out of the trading addition of Rs.5,30,97,994/- made by AO. The ld. AR of the assessee filed the following written submission which has been taken into consideration.
''At the outset, we submit that ld CIT(A) has held the reference of special audit as valid. Ld CIT(A) has categorically mentioned that there exist defects in recasting of the books of account by special auditors. The findings of ld CIT(A) in this regard are at pg 71-82 of his order. The assessee has pointed out several factual defects in the recasting of books of account by special auditors such as double /over recording of sales, under recording of purchases and expenses, holding some of purchases as bogus whereas the seized records shows the purchases of goods from these parties etc, which the ld CIT(A) has reproduced in his order at pg 26-61 of his order. The assessee has 14 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur pointed out these defects to AO in assessment proceedings also, which was rejected by AO on technical reasons such as the audit was carried out by special auditors wherein the assessee had active involvement, the assessee has not pointed out these defects to the special auditors when copy of final trail balance was given to the assessee. The Ld AO rejected the defects pointed out by the assessee in recasted books by saying that there is no need to have any correction in the purchase/sales/expenditure/fixed assets in the figure taken in special audit report. Ld CIT(A) sent the submission of the assessee to ld AO for comments in remand report. The ld AO has also not controverted the defects pointed out by the assessee in remand report. The ld CIT(A) has reproduced the remand report of the AO at page 3-12 of his order. Ld CIT(A) after considering the defects pointed out by the assessee in recasted books by special auditors, remand report and rejoinder of assessee on remand report, has categorically held as under (pg 72-73 of CIT(A)'s order):-
"All the above notes/observation and limitations show that the books of accounts naming "Jadavji" has been written in such as manner that correct statement of affairs and profit of the assessee company cannot be derived and only some estimation/guess work has be done with recasting of the accounts. When the estimation/guess is made in recasting of the account, the trading results may differ person to person who makes estimation or guess. The Special Auditors themselves have admitted at page 33 of their report that any change in estimation or assumption may lead to change in financial statements. I agree with the contention of ld AR that in point no II of terms of reference for special audit, it has been clearly mentioned by the AO to recast the trading and P & L A/c on accounting principles and on the basis of seized material. The AO has not assigned the task to Special Auditors to compute the income or recast the Trading and P & L A/c by applying the presumption and assumption or on estimation. There was no scope of application of presumption, assumption, estimation, personal judgment etc in recasting of accounts. Further the auditor is not a quasi judicial authority and estimation and presumption is beyond the scope of audit. Further, the auditor reported the bogus purchases merely on assumption more so when the full particulars of purchases along with quantity is recorded in the seized documents. In no 1 book, there may be bogus purchase but no 2 books are always presumed to be true and correct and bogus purchases 15 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur cannot be entered in no 2 books particularly when the quantitative details and description of purchase is recorded in seized books. The amount mentioned against head "Bill Premium" is not sufficient to believe that the purchases are bogus particularly when the assessee explains that the bill premium is against the extra amount charges by the supplier against the issue of bill against the purchases. Whether the particular purchase is bogus or not is to be determined by AO after conducting proper inquires. Further, the assessee has pointed out the cases where the purchases were understated and sales were over stated by the Special Auditor. The AO has not made independent findings and rejected the assessee's contentions on technicalities. The justice always prevails over the technicalities. The AO should independently apply his own mind over the objections raised by the assessee on the figures arrived by Special Auditors in recasted books of account. The copy of submission of ld AR was sent to AO for comments on the issue raised by ld AR on the recasting of books of account made by Special Auditors. In remand report the AO is silent on these issues. I have examined the contention of the ld A/R of assessee that purchases were understated and sales were over stated in the recasted account and found force in the contention of AR."
Therefore, ld CIT(A) upheld the defects in recasting of books of account by special auditors. The above findings of ld CIT(A) is not under challenge by the department. The ld AO made the high pitched assessment assessing the total income of assessee at Rs. 15,28,93,350/- on the total sales computed by Special Auditors at Rs. 26,96,46,926/- and Ld CIT(A) confirmed the trading addition of Rs. 2,59,56,858/- on sales estimated by him at Rs. 26.00 crore in complete disregard to concept of real income. The ld AO has rejected the books of account of the assessee. After rejecting the books of accounts and by applying the provisions of section 145(3) the ld AO assessed the income of assessee u/s 144 of Income Tax Act. As per provisions of section 144 of the Income Tax Act, 1961 the total income should be computed after taking into consideration all relevant material gathered as a result of search and on the basis of best judgment. The Income Tax department carried out intensive search over the assessee group and during the course of search the department has not found any evidence to show/visualize that this much additional undisclosed income was utilized by the assessee in making any investment or expenditure. It is relevant to mention here that in the case of the assessee the ld AO has 16 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur assessed huge income in the hands of assessee but there is no evidence to show where this income was utilized because as a result of search no undisclosed investment/expenses was found by department. We have made detailed submission showing that the recasted accounts are incomplete, incorrect, arbitrary, based on presumption and assumption and also not prepared on the basis of accounting principles and without considering the seized documents properly. Further the assessee has made detailed submission before the lower authorities showing that the figures of purchases, expenses and sales have been determined by the special auditors in recasted accounts are at wrong figure. They made certain wrong adjustment or certain adjustments left to be made. The addition of Rs. 5,09,67,486/- made by the ld AO was based on the defective recasted accounts. Furthermore, the auditors have pointed out in common remarks that true and correct profit cannot be computed due to inherent shortcoming in the seized records/ method of recording entries in Jadavji. The common remarks of the special auditors are as under:-
i. In para 3.3 at Page 2 of common notes annexed with special audit report (Copy at Page 27-28_of SAR PB Vol 4) it has been mentioned that ".........it emerges that by applying the standard auditing procedure, neither the statement of affairs nor profit or loss as desired can be determined".
This proves that the way by which the books of accounts naming "Jadavji" has been written, correct statement of affairs and profit of the assessee company cannot be derived and only some estimation/guess work can be done with these.
ii. In para 3.3.3 at Page 3 of common notes annexed with special audit report (Copy at Page 28 of SAR PB Vol -
4) it has been mentioned that ".........there may be transactions which are not entered in "Jadav Ji". In absence of specific details of such transactions, standard auditing procedure and methods of determination of income cannot be apply.".17 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur iii. In para 3.3.6 at Page 4 of common notes annexed with special audit report (Copy at Page 29 of SAR PB Vol
4) it has been mentioned that "in the books of accounts titled as "Jadavji" most of the purchases, sales, transfers, returns have been entered in pieces whereas in regular books of accounts, these have been entered in gms/cts. Therefore, in absence of common unit of measurement for those transactions which are not entered in regular books or vice versa, the correct quantitative stock cannot be determined by applying the standard auditing procedure".
Thus in this para the special auditors themselves expressed their inability to compute the stock on the basis of books of accounts named as "Jadav Ji" while as per terms of reference of audit they were required to compute the closing stock as on the date of search on the basis of these books of accounts. Further this was one of the ground for which the books of accounts were referred for special audit. Therefore the recasted accounts cannot be considered as compete and correct and correct profit there from cannot be deduced.
iv. In para 4 at Page 5 of common notes annexed with special audit report (Copy at Page 30 of SAR PB Vol
4) it has been mentioned that "Under the facts and circumstances narrated hereinbefore and applying our professional judgement, we are of the opinion that audit procedure and methods of determination of income or loss, believed to be desirable, cannot be applied in the given circumstances. Hence, we have attempted to carryout reasonable alternative procedure and methods to obtain sufficient or appropriate conclusion. However there may be lack of corroborative evidence to support certain entries in the financial statements drawn or there may be also exist certain other limitations imposed by the circumstances."
18 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Thus in this para the special auditors admitting the true and correct profit from the books of accounts named as "Jadav Ji" cannot be deduced.
Furthermore, the ld AO himself has estimated the profit by applying GP rate of 26.21% on consolidated sales determined by the special auditors in recasted accounts. The ld AO determined the consolidated sales at Rs. 26,96,46,926/- and applied the GP rate of 26.21% to estimate the profit. In this way, he estimated the overall profit of the assessee at Rs. 7,06,74,459/-. Since the profit computed by the Special Auditors was Rs. 6,85,43,951/- so he made further addition of Rs. 21,30,508/-. This action of the AO shows that he himself does not believe that recasted accounts by the auditors are true and correct. The AO himself held indirectly that the true profit cannot be deduced from the recasted account otherwise there was no need to estimate the profit by applying GP rate on the consolidated sales determined by the special auditors in recasted accounts. First of all we submit that when the estimation is made, the best method of estimation should be applied. The assessment order of the assessee was framed u/s 144 i.e. best judgment assessment. It means that the AO should consider all the circumstances of the case and income should be measured by applying best suitable method in the facts and circumstances of the case. In this case, the ld AO applied GP rate on consolidated sales determined by special auditors at Rs. 26,96,46,926/- The assessee has pointed out several mistakes showing double accounting of sales. The detailed submission in this regard has been submitted in Ground No 3 to 5 above. Besides that the sales in the account of Buntiji CA was determined on presumption and assumption. The copy of ledger account of Buntiji CA in the books named as "Jadavji" is at PB pg 349 and recasted ledger of this account is at PB pg 349A . No any description or narration or quantitative detail etc is mentioned to treat the figure of Rs. 1,12,20,000/- in this account as of sales. Further, the GP rate of 26.21% is also not justifiable. The assessee has submitted detailed explanation to the AO in this regard objecting the estimation of profit on GP rate of 26.21%. (Paper book page 342-343). The assessee has objected the estimation of income by applying GP rate of 26.21% on the following grounds:-
a) The estimation of GP of 26.21% is based on the instances of sales given in Appendix-9 of the special 19 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur auditor report. The instances are based only on the sales of Rs. 75,93,362/- while the total sales of the assessee for the year under consideration was Rs.
26,96,46,926/-, therefore the sample size in not comparable.
b) In the instances given the most of the entries of sales is of trading items while the assessee is having its own manufacturing too, therefore the same is not comparable.
c) In the regular books of accounts the assessee declared GP of 16.95% and except to some minor mistakes pointed out by the auditor, impact of which will not be so much on the GP declared by the assessee, there is no error in the regular books of accounts of the assessee, therefore the GP of the assessee cannot be estimated only on the basis of some very few and small instances of the sales.
d) As regard to the declaring the GP of 26.17% in AY 2009-10 this is to submit that in AY 2009-10 the sales of the assessee was only Rs. 1,28,24,830/- which is also not comparable. Further in previous assessment years i.e in AY 2006-07 to 2008-09 and in AY 2011-12 the GP of the assessee was below to 15% and the year AY 2009-10 was only year in which the assessee earned higher GP. There is substantial change in the circumstances in AY 2010-11 from AY 2009-10. In AY 2010-11 the sales of the assessee has substantially increased which could be possible only by lowering down the GP rate. Furthermore, in market, there are many other dealers/parties which are doing same business and the GP of the assessee can be compared with the other comparable cases.
e) As regard to GP of AY 2010-11 worked out on the basis of trading account re-casted by special auditor this is to submit that in view of our previous submission the trading account is prepared on the basis of incomplete 20 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur books of accounts in which the proper impact of all the purchases and common sales was not given, therefore this trading a/c do not show the real picture of trading affairs of the assessee.
On the first instance after resuming the assessment proceedings after completion of special audit and submitting the special audit report to ld. AO the ld. AO issued a show cause notice to the assessee vide notice dated 03.10.2013 (Copy at PB Page 300 ) wherein estimation of gross profit by applying the GP rate of 15% was suggested by the AO. Thereafter the ld. AO suddenly changed his mind and applied the GP rate of 26.21% on entire turnover without assigning any reason of changing the opinion. The Ld CIT(A) estimated the sales of the assessee at Rs. 26.00 crore. The sales could be worked out on the basis of seized material. The Ld CIT(A) has accepted that after correction in the sale figure worked out by special auditors, it comes out to the figure of Rs. 25,06,61,673/- (Pg 80-81 of order of d CIT(A). Therefore it is highly unjustifiable to estimate the sales of the assessee at Rs. 26.00 crore. Ld CIT(A) has estimated the profit of the assessee by applying GP rate of 24% on the estimated sales of Rs. 26.00 crore which was worked out at Rs. 6,24,00,000/-. The assessee has declared Gross Profit of Rs. 1,18,43,142/- in Trading Account filed with the return. The assessee has further declared Rs. 2,46,00,000/- in the return filed u/s 153A of the Act on account of undisclosed income from unaccounted sales/purchases. The ld CIT(A) sustained the trading addition of Rs. 2,59,56,858/- {Rs. 6,24,00,000 minus (1,18,43,142+2,46,00,000)}, for which no corroborative undisclosed assets/expenditure was found after rummage of all corners of premises of the assessee and its directors.
Estimation of Profit by applying GP rate of 24%
(i) It is relevant to mention here that in the trade of the assessee the sales are not made on the fixed profit margin and the sales price vary day to day on the basis of market rate of bullion, therefore the few instances of the few days cannot be compared with the sale of whole year and the comparison can only be made for the sample collected for whole year and also for all items. From the perusal of chart of instance (PB page SAR 198-200 PB Vol 4) your honor would find that this chart contains the instance of 21 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur various GP percentage which is varying from 9.71% to 57% which shows the GP in the trade of the assessee is highly varying from item to item and day to day change in rates of gold basis. In the sample, all the products sold were diamonds or diamond studded Jewellery which was purchased from market. In diamond jewelry margin of profit remains always more than gold jewelry. Further there is huge difference in the GP of each transaction, therefore the average GP computed by Special Auditors is not indicative to real GP earned by the assessee for entire sales. Further the instances are only for few days. It is further relevant to mention here that the assessee citing some more instances showing much lesser GP, which the special auditors have not considered.: -
S. Product code Purchases Date of Sold to Sales GP
No. amount sales value
1 Market Item 2pscs 72,935 20.02.10 Namrata 80,100 7,165
K20788/Krng00098/ Rajpurphit
(R0000094) &
K20783/Ktop00008
(R0000098) &
Nosepin 1pc
K1165/Jnp112
2 Market Item 1pc 1,58,056 13.10.09 Radha 1,75,000 16,944
R000036/Klkt00023 Akar
3 Market Item 2pcs 2,10,977 02.02.10 Vijay 1,50,000 (-) 60,977
K20791/Kbng00080 Singh Ji
And
K20800/Klkt00004
4 R00000123/KMNG00 50,586 11.01.10 Smita 50,000 (-) 586
015 Sharma
5 K20751/Kmng00022 72,892 03.02.10 K.C. 80,000 7,108
Ring 1pc K1607/Jr818 Swami
Earring K2330/Je887
Total 5,65,446 5,35,100 (-) 30,346
On above transaction the GP of the assessee comes (-) 5.67%. This proves that merely on the basis of some instances of some particular products and for some particular days the overall GP of the assessee cannot be estimate.
22 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
ii) In the given sample all the transactions are of trading goods of diamonds while the assessee has also sales of Kundan Meena jewelry for substantial amount i.e. almost 50% of total sales. Therefore this sample which represents sales of diamond jewelry cannot be applied for sales of Kundan Meena jewelry.
iii) If we compare the trading results of the assessee for the previous history of the assessee the GP chart of the assessee is as under: -
S. No. A.Y Turnover G.P G.P.
Ratio
1 2006-07 3531618.00 512723.00 14.52%
2 2007-08 18562148.00 2509297.00 13.52%
3 2008-09 20591252.00 3047886.00 14.80%
4 2009-10 12824830.00 3356643.00 26.17%
Weighted 55509848.00 9426549 16.98%
Average GP
The assessments of the assessee for AY 2006-07 to AY 2009- 10 were completed u/s 153A of Income Tax Act, 1961 and the GP declared by the assessee was accepted therein. From the perusal of above chart your honor would find that the GP rate of the assessee of all the assessment years except AY 2009-10 ranging between 13.52% of 16.95%. In the AY 2009-10 the sales of the assessee were substantially reduced in comparison to previous years, therefore the GP of this year is not comparable. However the reason of high GP in AY 2009-10 in comparison to AY 2010-11 was as follow: -
i. In AY 2009-10 the entire sales of the assessee were of Diamond studded gold Jeweler while during the year the sales of the assessee consists the sales of Kundan Meena Jeweler as well as diamond studded Jewellery.
ii. Further in AY 2009-10 the entire sales were of traded jeweler while in AY 2010-11 the sales was of traded jewellery as well as own manufactured jewelry.23 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur iii. When we compare the sales rate and purchases/production rate the position comes as under: -
Description AY 09-10 AY 10-11
Average Sales rate per 3593.60 2304.04
gms
Average cost of sales 2653.05 1913.04
per gms
Profit margin (In Rs.) 940.55 391.00
Profit margin (in%) 26.17% 16.95%
From the perusal of above chart your honor will find that in AY 2009-10 the average gross profit earned by the assessee was Rs. 940.55 per gms while in the AY 2010-11 the same was Rs. 391 per gms, therefore the same effected the gross profit of the assessee.
There was the reason for sharp increase in GP rate of AY 2009- 10 that the sales rate of the assessee was higher which resulted to substantial decrease in sales of the assessee in AY 2009-10.
When the assessee lower down the sales rate in AY 2010-11 the sales of the assessee substantially increased.
iv) While applying the GP rate of 26.21% ld. AO/24% by ld CIT(A), lower authorities have not cited any comparable case of the trader of same trade. In this regard we have submitted comparable case of M/s Rambhajo's (PAN: - AAJFR4553Q) who was assessed at Central Cirlce-1, Jaipur. This concern is also engaged in the same trade and dealing in the same products in which the assessee is dealing. The case of this firm for the AY 2010-11 was assessed by ITO Ward 1(1), Jaipur wherein the GP of this firm 15.30% on declared turnover of Rs. 11,77,70,683/- was accepted. The copy of assessment order of this firm is PB Page 489-490.
In view of the above submission, the estimation of income by estimating the GP of 24% on estimated sales of Rs. 26.00 crore is highly unjustifiable and weighted average GP rate of last four years which comes to 16.98% on turnover of Rs. 25,06,61,673/- should be applied which gives GP of Rs. 4,25,62,352/-. The assessee has declared 24 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Gross Profit of Rs. 1,18,43,142/- in Trading Account filed with the return and the assessee has further declared Rs. 2,46,00,000/- in the return filed u/s 153A of the Act on account of undisclosed income from unaccounted sales/purchases. Therefore, the trading addition of Rs. 61,19,210/- {Rs. 4,25,62,352 minus (1,18,43,142+2,46,00,000)} can be sustained if the weighted average GP rate on the basis of past history approached is followed. Reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of CIT Vs Bhawan Va Path Nirman (Bohra) & Co (No. 1) 258 ITR 431 wherein it has been held that the past history of the assessee is best guiding factor. Further, if assets and expenditure theory is applied than no trading addition deserves to be sustained as the department has not found any undisclosed assets/expenses as the result of the search. The humble assessee prays your honor kindly to dismiss the ground raised by the department and allow the grounds raised by the assessee in this regard.
6.5 The ld. DR relied on the order of the lower authorities 6.6 We have heard the rival contentions and perused the materials available on record. It is noted from the records that the AO made the addition of Rs.5,30,97,994/-(i.e.Rs.5,09,67,486+Rs.21,30,508 )estimating the gross profit @ 26.21% on sales of Rs. 26,96,46,926/- (sales as worked out by Special auditor. It is noted that in the given samples all the transactions were of trading goods of diamond jewellery while the assessee has sales of Kundan Meena Jewellery for substantial amount i.e. almost 50% of total sales. We would like to state that the samples which represented sales of diamond jewellery cannot be applied for sales of Kundan Meena jewellery. Margins in both these items varies and canot be applied to each other. To reach at a comparable and reasonable 25 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur estimated, the average of past years could be the justified method. It is also notable to compare the trading results of the assessee for the previous years which are as under:-
S. No. A.Y Turnover G.P G.P.
Ratio
1 2006-07 3531618.00 512723.00 14.52%
2 2007-08 18562148.00 2509297.00 13.52%
3 2008-09 20591252.00 3047886.00 14.80%
4 2009-10 12824830.00 3356643.00 26.17%
Weighted 55509848.00 9426549 16.98%
Average GP
It is further noted that the ld. CIT(A) has estimated the higher gross profit @ 24% on estimated sales of Rs. 26 crores. The assessee had computed the gross turnover of Rs. 25,06,61,673/- on the basis of seized documents and books of account and has pointed out several mistakes and instances of double counting of sales computed by the Special Auditor in the estimates of gross turnover. The ld. CIT(A) as well as AO have not pointed out any defect in the calculation of gross turnover by the assessee on the basis of seized records. Therefore, It will be in the interest of equity and justice that weighted average gross profit rate of last four years i.e. 16.98% should be taken into consideration on turnover of Rs.
25,06,61,673/- which gives gross profit of Rs. 4,25,62,352/-. It is also noted that the assessee had declared the gross profit of Rs. 1,18,43,142/-
26 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur in the trading account filed with the return and further the assessee had declared Rs. 2,46,00,000/- in the return filed u/s 153A of the Act on account of undisclosed income from unaccounted sales/purchase.
Therefore, the trading addition of Rs. 61,19,120/- (Rs. 4,25,62,352/-
minus (1,18,43,142+2,46,00,000) is sustained on the basis of weighted average gross profit rate on the basis of past history of the assessee. Thus the Ground No. 3 to 7 of assessee's appeal of the are partly allowed and Ground No. 1 of the Revenue is dismissed.
7.1 As regards ground no. 2 of the Revenue's appeal against restricting the disallowance u/s 40A(3) of the Act from Rs. 6,83,23,399/-
to Rs. 3,35,092/-. The facts as emerges from the order of the ld. CIT(A) is as under :-
"3.3.3 I have duly considered assessee's submission and also taken a note of judicial pronouncements relied upon by the appellant as well as the factual matrix of the case. It is seen that the AO made disallowance by holding that the assessee is indulged in illegal activities by not recoding the correct purchases, sales, Revenue & capital transaction in its regular books of accounts and payments against the purchases and expenditure were made in cash and no relaxation can be given for the illegal activities. He further held that he has not rejected the parallel and duplicate books of accounts maintained by the assessee and judicial decisions relied upon by the assessee are not applicable to the case of the assessee. On the other hand the ld AR submitted that the assessee was not engaged in any illegal business or a business prohibited by law. It made only sale and purchases not recorded in its regular books of account. The unaccounted sales and purchases were recorded in parallel and duplicate books of named maintained in Tally under the name "Jadauji". I inclined to agree with this contention of ld AR that the assessee was not engaged in any unlawful business. The fact remains that the assessee was indulged in unaccounted sale and purchase business of jewellery and the provisions of section 40A(3) 27 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur cannot be used as penal action, the law prescribes separate penal action u/s 271(1)(c)/271AAA for the unaccounted income. Further, these books were incomplete and not maintained in proper way therefore definite and correct profit cannot be derived from these books of account. The ld AO referred these books of account for special audit. The Special Auditors recasted these books of account but in recasting of these books, he pointed out certain limitation & remarks and expressed that the recasting of the books were made by applying certain estimation and assumptions. He also expressed his view under common remarks that the true and correct profit cannot be determined due to inherent limitation of records and method of accounting. The relevant remarks of the Special Auditors have been reproduced while disposing the ground no 3 to 10 of assessee in para 3.2.3. Further the assessee has pointed several adjustments which affect the trading results shown by the recasted accounts by the Special Auditors. The AO mentioned that he has not rejected the parallel and duplicate books of account maintained in name "Jadavji" but the fact remains that the assessment was framed u/s 144 of the Act by applying the provisions of section 145(3) of the Act and the AO himself has estimated the profit by applying GP rate of 26.21% on consolidated sales determined by the Special Auditors in recasted accounts. The ld AO determined the consolidated sales at Rs. 26,96,46,926/- and applied the GP rate of 26.21% to estimate the profit. In this way, he estimated the overall profit of the assessee at Rs. 7,06,74,459/-. Since the profit computed by the Special Auditors was Rs. 6,85,43,951/- so he made further addition of Rs. 21,30,508/-. This action of the AO shows that he himself does not believe that recasted accounts by the auditors are true and correct. The AO himself held indirectly that the true profit cannot be deduced from the recasted account otherwise there was no need to estimate the profit by applying GP rate on the consolidated sales determined by the Special Auditors in recasted accounts. The assessment u/s 144 of I.T Act by applying the provisions of section 145(3) of I.T Act and further estimation of profit by applying GP rate on consolidated sales over and above to the profit recasted from books of "Jadavji" clearly show that for all practicable purposes, the AO has rejected the parallel and duplicate books of account maintained in the name "Jadavji". Further, while disposing the ground No 3 to 10 of the assessee, I have also sustained the trading addition by applying the GP rate. Various Benches on Hon'ble ITAT including the jurisdictional Jaipur bench of Hon'ble ITAT and various High Court including the jurisdictional Hon'ble Rajasthan High Court has held that where the estimation of income is made by applying GP rate, further disallowance cannot be made by applying the provisions of section 40A(3) of Income-tax Act,. It would be worthwhile to reproduce the relevant para of decision of Hon'ble ITAT Jaipur Bench, Jaipur ITAT in the case of Shri Shankar Khandelwal v/s ACIT, Central Circle-1, Jaipur in ITA No. 392/JP/2011 AY 2008-09 Order dated 12/08/2011 as under:-28 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur "5.9 We have heard both the parties. The ld. AR during the course of proceedings before us has argued that no disallowance u/s 40A(3) can be made in case the books of accounts are rejected. Our attention was drawn towards the fact that the AO has rejected the books of accounts and has made the addition on account of construction and work in progress expenses and has also made disallowance of taxi running expenses. The addition made under both the heads is substantial. The Hon'ble Jurisdictional High Court in the case of CIT Vs. G.K. Contractors, 19 DTR 305 held that if the profit is estimated by applying higher net profit rate after rejecting the books of accounts by invoking the provisions of Section 145(3)of the Act then no separate addition can be made on account of cash credit u/s 68 of the Act. The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Smt.Santosh Jain, 296 ITR 324 held that Section 40A(3) cannot be invoked when the income is estimated by applying the gross profit rate. The Hon'ble Punjab & Haryana High Court followed the decision of The Hon'ble Allahabad High Court in the case of CIT Vs. Banwari Lal Bansi Dhar, 229 ITR 229. The Jaipur Tribunal in the case of Singhal Builders Contractor Vs. Addl. CIT, 133 TTJ 102 has also held that once an income of the assessee is estimated by applying the gross profit rate or net profit rate then no disallowance can be made u/s 40A (3) or any other provisions. The proviso to Section 40A(3) makes an exception that cash payment is not to be disallowed if it is an account of business expediency. After considering the submissions of the assessee, we feel that no separate addition is required to be made u/s 40A(3) because the books of accounts has been rejected and there has been. The addition of Rs. 3.21 lacs made u/s 40A(3) is deleted."
Therefore, in view of various judicial pronouncements, the addition on account of disallowance made u/s 40A(3) cannot be sustained where the profit was estimated by rejecting the books of account and by applying the provisions of section 145(3) of I.T. Act. Further, the fact remains that the assessee itself has disallowed Rs. 3,07,550/- u/s 40A(3) in the return filed u/s 153A (refer copy of computation is at PB page 77) and it has also agreed for further disallowance of Rs. 27,542/- on account of cash payment recorded in regular books of account. Thus, the disallowance to the extent of Rs. 3,35,092/- is on agreed basis.
Therefore in view of the above facts and circumstances and respectfully following the judicial pronouncements of Hon'ble ITAT Jaipur Bench and Hon'ble Rajasthan High Court the addition of the remaining amount Rs. 6,83,29,399 minus Rs. 3,35,092/- = Rs. 6,79,94,307/- cannot be sustained. The AO is directed to delete the addition of Rs. 6,79,94,307/- made by disallowing the cash payment u/s 40A(3) of I.T. Act and the addition for the remaining amount Rs. 3,35,092/- is sustained as the same is on agreed basis. Assessee's appeal is partly allowed to that extent."
29 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 7.2 During the course of hearing, the ld. AR of the assessee supported the order of the ld. CIT(A). The ld. AR of the assessee submitted the following written submission which has been taken into consideration.
''B Further, we brought to your kind notice following facts:-
(i) That the assessment order has been passed u/s 144 of Income Tax Act, which is best judgment assessment. In the case of the assessee order u/s 144 can be passed only after applying the provisions of section 145(3).
(ii) The assessee has pointed out several serious mistakes/errors in the books maintained in name "Jadavji" and recasted accounts prepared by the special auditors. The assessee has submitted detailed submission in this regard, which has been reproduced by ld CIT(A) in his order at pg 26-69 of his order.
(iii) The special auditors themselves have mentioned under common remarks that the true and correct profit cannot be determined due to inherent limitation of records and method of accounting. For ready reference, the common remarks of the special auditors in this regard are reproduced as under:-
(a) In para 3.3 at Page 2 of common notes annexed with special audit report (Copy at Page 27-28 of SAR) it has been mentioned that ".........it emerges that by applying the standard auditing procedure, neither the statement of affairs nor profit or loss as desired can be determined".
This proves that the way by which the books of accounts naming "Jadavji" has been written, correct statement of affairs and profit of the assessee company cannot be derived and only some estimation/guess work can be done with these.
(b) In para 3.3.3 at Page 3 of common notes annexed with special audit report (Copy at Page 28 of SAR) it has been mentioned that ".........there may be transactions which are not entered in "Jadav Ji". In absence of specific details of such transactions, standard auditing procedure and methods of determination of income cannot be apply.".
(c) In para 3.3.6 at Page 4 of common notes annexed with special audit report (Copy at Page 29 of SAR) it has been 30 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur mentioned that "in the books of accounts titled as "Jadavji" most of the purchases, sales, transfers, returns have been entered in pieces whereas in regular books of accounts, these have been entered in gms/cts. Therefore, in absence of common unit of measurement for those transactions which are not entered in regular books or vice versa, the correct quantitative stock cannot be determined by applying the standard auditing procedure".
Thus, in this para the special auditors themselves expressed their inability to compute the stock on the basis of books of accounts named as "Jadav Ji" while as per terms of reference of audit they were required to compute the closing stock as on the date of search on the basis of these books of accounts. Further this was one of the ground for which the books of accounts were referred for special audit. Therefore the recasted accounts cannot be considered as compete and correct and correct profit there from cannot be deduced.
(d) In para 4 at Page 5 of common notes annexed with special audit report (Copy at Page 30 of SAR) it has been mentioned that "Under the facts and circumstances narrated hereinbefore and applying our professional judgement, we are of the opinion that audit procedure and methods of determination of income or loss, believed to be desirable, cannot be applied in the given circumstances. Hence, we have attempted to carryout reasonable alternative procedure and methods to obtain sufficient or appropriate conclusion. However there may be lack of corroborative evidence to support certain entries in the financial statements drawn or there may be also exist certain other limitations imposed by the circumstances."
Thus in this para the special auditors admitting the true and correct profit from the books of accounts named as "Jadav Ji" cannot be deduced.
(iv) The ld AO himself has estimated the profit by applying GP rate of 26.21% on consolidated sales determined by the special auditors in recasted accounts. The ld AO determined the consolidated sales at Rs. 26,96,46,926/- and applied the GP rate of 26.21% to estimate the profit. In this way, he estimated the overall profit of the assessee at Rs. 7,06,74,459/-. Since the profit computed by the Special Auditors was Rs. 6,85,43,951/- so he made further addition of Rs. 21,30,508/-. This action of the AO shows that he himself does not believe that recasted accounts by the auditors are true and correct. The AO himself held 31 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur indirectly that the true profit cannot be deduced from the recasted account otherwise there was no need to estimate the profit by applying GP rate on the consolidated sales determined by the special auditors in recasted accounts.
C) In addition to above submission the most important crux of the case of the assessee is to determine whether the books of accounts recasted by the special auditors can be considered as complete and correct?. Whether true and correct profit can be deduced from these recasted books of account? In the instant case looking to the all circumstances, evidence and arguments there can be only one answer that is "No". It is an admitted fact that the recasted consolidated books of accounts and well as original books of account named as "Jadavji" are not complete and not correct. These books of accounts are not written in a systematic and scientific manner. Further the in absence of supporting or source documents on the basis of which these books of accounts has been prepared and also in absence of complete information no one can completely correct to these books of accounts. The special auditors have clearly admitted that true profit cannot be derived from these books of account. Further, stock quantity is not available. As per terms of reference, the special auditors was required to compute the closing stock as per books as on the date of search. In this regard they clearly mentioned that quantitative details of stock cannot be worked out in absence of vital information. Thus, for the purpose of income tax proceedings the books of accounts named as "Jadavji" cannot be considered as books of accounts and the same can only be treated as gist of unaccounted transactions of the assessee where from no true profit/income can be determined and only some logical estimation of income can be made.
D) In this regard it is further relevant to mention here that the books of accounts named as "Jadavji" were incomplete and incorrect thus the correct profit could not be compute from these books of accounts, therefore the case of the assessee was referred for special audit. However the special auditor made some adjustments in such books of accounts at their own even on certain presumption and assumptions but still the special auditors could not recast consolidated account showing the true and correct profit. This is the reason why the ld AO resorted to estimation by applying GP rate on the consolidated sales.
E) It is relevant to mention here the finding of ld. AO given on last para of this issue at page 33 of the assessment order wherein he mentioned that:-
32 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur "It is very important to point out at this juncture that each of the default found to have been made u/s 40A (3) of the Act and disallowed as above are only in respect of the transactions contained in the duplicate/parallel books of accounts named Jadavji and not in the regular and audited books of accounts. It is only the regular and audited books of accounts which have been found to be incorrect and incomplete and hence rejected u/s 145(3) of the Act. Therefore, any argument that disallowance u/s 40A(3) of the Act, cannot be made in respect of transactions contained in such books of accounts which have been rejected, shall not be correct on facts of this case".
In this regard we submit as under:-
(i) The ld AO was biased and acted vindictively, capriciously and perversely mentioned the above findings. Section 145(3) can be applied where the true profit cannot be deduced from the books of account. The ld AO has treated the regular books separate books.
When we talk the rejection of regular books, we have to see whether the true profit can be deduced from books of account. Further, the ld AO himself has estimated profit by applying GP rate on consolidated sales recasted by special auditors and made addition for the shortfall in profits determined by the special auditors by recasting the accounts.
ii) Therefore, true profit cannot be deduced from the books of account maintained in the name "Jadvaji" as well as from the recasted accounts by the special auditors more so when the special auditors themselves have admitted in common remarks that the true profit cannot be determined by recasting of account and the recasting of the accounts have been made by applying certain assumption, presumption, estimation and judgments and any change therein will also change the results shown by the recasted accounts. Therefore, the Ld AO made a perverse findings that true profit can be deduced from the books of account maintained in name "Jadavji or from recasted accounts prepared by the special auditors. In fact for all practical purpose he has rejected both set of books of account as he has estimated profit on consolidated turnover and assessment order was passed u/s 144 after applying the provisions of section 145(3) of Income Tax Act. It is settled law that the AO is quasi-judicial authority and should be governed in his function by judicial consideration and must conform to the rules of natural justice and must proceed without bias as held by Hon'ble Supreme Court in the case of Tin Box Co. Vs CIT 249 ITR 216 (SC). It is also settled law that the AO must act honestly on the material before him and not vindictively, capriciously, or arbitrarily as held by Hon'ble Supreme Court in the case of Gurumukh Singh Vs CIT 12 ITR 393, 427 (FB), Dakeshwari Cotton Mills Ltd Vs CIT 26 ITR 775. The taxing authority should not act in a manner as might 33 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur indicate that scales are weighted against the assessee CIT Vs Simon Carves Ltd (1976) 105 ITR 212,218 (SC). But in our case, the ld AO has brushed aside all the principles of law and made the perverse findings as stated above.
F) We further submit that the disallowance u/s 40A(3) is @100% of expenses/purchases, so by using this method the ld AO assessed the gross sales as net income of the assessee as he disallowed the unaccounted purchases and expenses by applying section 40A(3). It is established practice in the search cases where unaccounted sales is found, estimation of income is made by estimating the GP. Only real income from the unaccounted transactions is estimated. Further, Hon'ble Gujarat High Court in the case of CIT vs. President Industries, (2002) 258 ITR 654 (Guj.), held that the entire sales could not be added as income of the assessee but addition could be made only to the extent of estimated profits embedded in sales. Hon'ble ITAT Ahmedabad Bench in the case of M/s Rameshwar Textile Mills Ltd vs JCIT, Range 4, Surat has 2015 (1) TMI 508 has taken similar view and followed the above decision of Hon'ble Gujarat High Court. But in the case of the assessee the LD AO bent upon to assess high pitched income so he assessed the gross value of the sales as income.
G) It is quite interesting to note that the ld. AO was assessing the total income of single assessee named as "Jadau Jewellers & Manufacturers Pvt Ltd" which was maintaining the books of accounts of regular transactions as well as unaccounted transactions. For computing the income on the one hand the ld. AO rejecting the regular books of accounts but on the other hands relying on the books of accounts named as "Jadavji" which itself consisting several defects. Thus, by this act the ld. AO holding that the assessee is partly correct and party incorrect for the same state of transactions. For the single act either a person can be correct or not correct. For the same affairs dual opinion cannot be framed for the same person. It is further relevant to mention here that the ld. AO assessing the total income of the assessee on the basis of consolidated affairs of assessee which consist the accounted and un-accounted business activities of the assessee and for this purpose he took the figure from consolidated trading and profit & loss a/c prepared by the special auditors. The consolidated accounts have entries for both type of transaction i.e. recorded in regular books and unrecorded in regular books. Therefore, if rejection of part of the transactions of consolidated account is made, it automatically makes the rejection of other part. Further, there are no two separate assessments one for regular transaction and other for unrecorded transaction. For both the transactions, single assessment order was passed that too u/s 144 of Income Tax Act by applying the provisions 34 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur of section 145(3). Therefore in the eye of the law the action of the ld. AO serve no mean that he has rejected only regular books of accounts and rely on books of accounts named as "Jadavji" because for computing the total income the consolidated affairs were taken into consideration. If a part of the consolidated account is rejected, it means the whole is rejected.
H) Though technically the ld. AO not rejected the books of accounts named as "Jadavji" but when we see the assessment order in entirety, your honor would find that he disbelieved to such books of accounts and indeed and for all practicable purpose the results of such books of accounts were rejected by ld. AO because he estimated the consolidated profit by applying GP rate on consolidated sales. The assessment order was passed u/s 144 of Income Tax Act by applying provisions of section 145(3). Thus for all practical purposes, he has rejected the books of accounts named as "Jadavji" also though not admitted by words in the assessment order because he wanted to make huge addition by disallowance u/s 40A(3) of Income Tax Act, 1961 @ 100% of purchases and expenses.
I) It is further relevant to mention that the assessment of the assessee was completed u/s 144 of Income Tax Act, 1961 and the assessment u/s 144 is called 'Best Judgment assessment" which can only be made where the income cannot be computed from books of accounts of the assessee and books of account rejected by applying section 145(3) of Income Tax Act. Thus in the instate case the ld. AO passing the order u/s 144 of I. Tax Act, 1961 proves that the books of accounts of the assessee were rejected by the ld AO for all practical purpose.
J) Thus from the above submissions and the submission in the forgoing paras this is to submit that the ld. AO has rejected the book of account of the assessee for all practical purpose. In the case of the assessee, the profit has been estimated therefore, further addition u/s 40A(3) cannot be made. Reliance is placed on following decisions:-
ITAT Jaipur Cases:-
i) The Jaipur ITAT in the case of Singhal Builders Contractor V/s. Addl. CIT, 133 TTJ 102 has held that once an income of the assessee is estimated by applying the gross profit rate or net profit rate then no disallowance can be made u/s 40A(3) or any other provisions.
ii) The same view was taken by the Jaipur ITAT in the case of Shri Shankar Khandelwal v/s ACIT, Central 35 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Circle-1, Jaipur in ITA No. 154/JP/2011 AY 2005-
2006; 391/JP/2011 AY 2007-08; 392/JP/2011 AY 2008- 09 Order dated 12/08/2011 wherein it has been held that where the profit has been estimated no further disallowance u/s 40A(3) can be made.
iii) P.C. Mundra vs. Assistant Commissioner of Income tax ITAT, JAIPUR BENCH ITA Nos. 229 & 230/JP/1999 & 1343 & 1344/Jp/1997 27th December, 2002 (2003) 80 TTJ (Jp) 945 Held that where trading addition has been made by estimating gross profit rate, provision of s. 40A(3) cannot be invoked.
iv) Income Tax Officer vs. Sadhwani Brothers ITAT, Jaipur 'B' bench (2011) 142 TTJ (JP)(UO) 26 : (2011) 58 DTR 368 Asst. Year 2002-03 Held that AO having rejected the books of account and applied the net profit rate for the purpose of computing income, no disallowance could be made under s. 40A(3). In this case decision of Hon'ble Allahabad High Court in the case of CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All), decision of Hon'ble Himachal Pradesh in the case of Amrit Singh & Co. vs. ITO 2010-TIOL-832-HC-HP and decision of Hon'ble Rajasthan High Court in the case of CIT vs. G.K. Contractor (2009) 19 DTR (Raj) 305 were followed Rajasthan High Court Cases:-
v) Commissioner of Income Tax Vs. Motilal Khatri (2008) 218 CTR (Raj) 602 : (2008) 7 DTR 139 Hon'ble Rajasthan High Court held that Disallowance under s. 40A(3)--No claim for deduction--Sec. 40A(3) only prohibits deduction of expenditure--Expenditure obviously means expenditure admissible as deduction which may include the expenditure on purchase and the like--In the instant case, assessee has not claimed deduction of expenditure on purchases of gold biscuits which were not recorded in his books of account--
Therefore, no part of such expenditure can be disallowed under s. 40A(3)
vi) The Hon'ble Jurisdictional High Court in the case of CIT Vs. G.K. Contractors, 19 DTR 305 held that if the profit is estimated by applying higher net profit rate after rejecting the books of accounts by invoking the 36 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur provisions of Section 145(3) of the Act then no separate addition can be made on account of cash credit u/s 68 of the Act.
ITAT Third Member cases:-
vii) India Seed House Vs. Assistant Commissioner of Income Tax ITAT, DELHI 'B' THIRD MEMBER BENCH V. Dongzathang, Senior Vice President ; U.B.S. Bedi & Phool Singh, J.Ms. (2000) 69 TTJ (Del) (TM) 241 Business expenditure--Disallowance under s. 40A(3)--
Assessment after applying gross profit rate--No disallowance under s. 40A(3) could be made when income is estimated after applying gross profit rate-- CIT vs. Banwarilal Bansi Dhar (1998) 148 CTR (All) 533 : (1998) 229 ITR 229 (All) followed Other High Court Cases:-
viii) CIT v/s Banwari Lal Banshidhar (1998) 148 CTR (All) 533 wherein it was held that Where income is assessed at G.P. rate by rejecting the books of the assessee, no disallowance can be made separately u/s 40 A (3).
ix) CIT v/s Smt. Santosh Jain (2008) 296 ITR (P&H) 324 wherein it was held that when income of the assessee is computed by applying GP rate, there is no need to invoke the provisions of section 40A(3), as applying the GP rate takes care of expenditure paid otherwise by way of crossed cheque also.
x) CIT vs. Purshottamlal Tamrakar Uchehra (2003) 184 CTR (MP) 349/270 ITR 314 (MP) Business expenditure--Disallowance under s. 40A(3)--
Application of net profit rate--Sec. 40A(3) is not applicable when income is determined by the AO by applying net profit rate Other ITAT Cases
x) Chhattisgarh Steel Casting (P) Ltd. Vs. Assistant Commissioner of Income Tax* ITAT, Bilaspur Bench ITA No. 290/Nag/2007; Asst. Yr. 2004-05 15th February, 2008 (2008) 8 DTR (Bilaspur)(Trib) 14 Business expenditure--Disallowance under s. 40A(3)-- Estimation of income--Disallowance under s. 40A(3) 37 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur made by AO out of unrecorded purchases from the record seized by Excise Department was uncalled for where income was estimated and payment itself was not proved
xi) Kirti Foods Ltd. Vs. Assistant Commissioner Of Income Tax ITAT, PUNE 'B' BENCH ITA. No. 208/PN/2007; (2011) 60 DTR (Pune)(Trib) 96 Disallowance under s. 40A(3)--Provisions of s. 40A(3) cannot be invoked with respect to the purchases found as per the seized material and unrecorded in the regular books of account--Therefore, it was impermissible for the AO to have made the disallowance under s. 40A(3) while computing undisclosed income in a block assessment especially in the circumstances wherein profit from the impugned unrecorded transactions has been estimated and declared --Dhanvarsha Builders & Developers (P) Ltd. vs. Dy. CIT (2006) 105 TTJ (Pune) 376 : (2006) 102 ITD 375 (Pune) and DM Construction (ITA No. 1791/Pn/2005, dt. 26th Oct., 2007) followed;
K) Without prejudice to above we further submit:-
a) As regard disallowances on the basis of entries recorded in books of accounts named as "Jadvaji" this is to submit that the assessee has not claimed these expenditure as deduction in computing the profits in the return filed by the assessee u/s 153A of Income Tax Act. The assessee has surrendered the undisclosed income in the return on the basis of documents found in search showing amount in fictitious names and it claimed that this represents to assessee's undisclosed income earned from unaccounted business activities.
b) The assessee was maintaining the account of unaccounted business in the name of Jadavji in the form of memoirs. The special auditors recasted the consolidated accounts. In the account maintained in name "Jadavji" payments were found against the expenses which were not recorded in regular books of accounts i.e. undisclosed expenses, which the assessee incurred against undisclosed income. The payment of undisclosed expenses cannot be made through a/c payee cheque/bank drafts and the same can only be made by cash.
Since it is admitted facts the entries in books of accounts of "Jadvaji" which are not recorded in regular books of accounts of the assessee represent to undisclosed business activities of the 38 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur assessee, therefore no disallowance can be made on a/c of undisclosed payments made in cash.
c) Further, the parties from whom the assessee purchased the goods were not accepting the payments through the cheques or bank draft. The Proviso to section 40A(3) emphasizes 'having regard to the nature and extend of banking facilities available, consideration of business expediency and other relevant factors. The Proviso to section 40A(3) is as under:-
"Provided that no disallowance shall be made and no payment shall be deemed to be the profit and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such case 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 words "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors" were added to "under such circumstances as may be prescribed" have some specific meanings. If the legislature intended to restrict the exemption only to the circumstances prescribed under rule 6DD than there was no need to add these words. The intention of the law is to give proper weightage to availability of banking facilities, business expediency and other relevant factors. The reliance is placed on the following decisions:-
i) Jurisdictional High Court in the case of Kanti Lal Purshottam & Co. Vs. Commissioner Of Income Tax 155 ITR 519 (RAJ) held that Income-tax is a tax on the real income. Proviso to s. 40A(3) shows that the Legislature intended not to make the provision of s.
40A(3) very strict and absolutely mandatory. The rigor of the whole restriction was loosened by the proviso and by making r. 6DD
ii) The appellant further seeks to place reliance on the judgment of the Hon'ble Calcutta High Court in the case of Girdhari Lal Goenka Vs Commissioner of 39 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Income Tax, reported in 179 ITR 122, wherein their Lordships held as under :
"The Income -Tax Officer has to take a pragmatic view of the matter. The Income- Tax Officer should take a practical approach to problem and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim where the amount was paid in cash or received in cash. The Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction, the circular of the Board is not exhaustive; it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee. There be an oral agreement between the assessee and the seller for payment in cash seller may not be willing to accept cheques : cash payment may be made at the request of the payee who is also an assessee and a certificate to that effect filed ; absence of banking facilities in places where cash payments are made. All such cases would come within the purview of exceptional or unavoidable circumstances".
iii) Gujarat High Court decision in the case of CIT v. P. Pravin And Co. 274 ITR 534 : held that the requirement under rule 6DD of the Income-tax Rules 1962, regarding practicability of payment otherwise than in cash and consideration of business expediency has to be judged from the point of view of the businessman and not of the revenue authorities.
iv) Hon'ble ITAT Jaipur Bench in its decision in the case of PACL India Ltd. V/s ACIT Circle-3, Jaipur in ITA No. 944/JP/07 vide order dated 12.03.2010 has deleted the addition made by the AO by applying the provisions of section 40A(3) by considering the Second Proviso to section 40A(3) of Income Tax Act.
d) It is an admitted fact that the payments so made in cash in the books of accounts named as "Jadavji" are in relation to 40 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur undisclosed business activities carried out by the assessee and no one will accept the undisclosed payments through a/c payee cheque or bank draft. This was a practical difficulty with the assessee, therefore the benefit of exemption allowed in provision of section 40A(3) wherein it held that "------ having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors" should be allowed to the assessee. It is relevant to mention here that while claiming the exemption provided for applicability of provisions of section 40A(3) the assessee has to established that there are exceptional or unavoidable circumstances for not paying crossed cheques or draft as required by the rule. When it was intended by both the parties of the transactions that it should be an unaccounted transactions than this itself constitute an exceptional circumstance, where it is not practicable to make payments by crossed cheque having regard to the nature of transitions, so the benefit of exemptions provided under section 40A(3) should be allowed to the assessee. So far as proving the genuineness of expenses which has been recorded in books of accounted named as "Jadavji" this is to submit that all the expenses has been allowed by the ld. AO and the payments of such expenses was made out of corresponding undisclosed income, therefore the genuineness of such expenses cannot be doubt. Further these payments were recorded in seized documents. Therefore, in view of the provisions of section 132(4A) of Income Tax Act, the entries recorded in seized documents are presumed to be true and correct.
The rule 6DD has to be read in the context of the second proviso to sub-s. (3) of Section 40A where under a disallowance is not permissible if on consideration of business expediency an assessee is able to satisfy the AO that he was required to make payment in cash due to exceptional or unavoidable circumstances, or because payment by a crossed cheque or bank draft was not practicable, and/or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof. In the instant case once it has been established that the business in relation to which the payments are made was undisclosed business of the assessee, payment by crossed cheque or draft would not have been practicable considering the nature of the transaction and the assessee is not required to prove further more impracticability of not making the payments by a/c payee cheques or bank drafts. Further all the expenses were found recorded in unaccounted books of 41 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur accounts and accepted by ld. AO as genuine, therefore it is not required to prove the genuineness of these transactions further more. In this regard the kind attention is drawn on the decision of Honorable Rajasthan High Court in the case of Smt. Harshila Chordia v/s ITO (2007) 208 CTR (RAJ) 208 wherein it was opined: - "Business Expenditure- Disallowance u/s 40A(3)- Exceptional or unavoidable circumstances- circumstances in which the conditions laid down in Rule 6DD(j) could be applicable cannot be spelt out and the circumstances provided in CBDT circular are not exhaustive but illustrative- As per circular No. 220 dated 31.05-77 clearly states that Rule 6DD(j) has to be liberally construed, and ordinarily where the genuineness of the transaction, the requirement of Rule 6DD(j) must be deemed to has been satisfied- Genuineness of the transactions and the identity of the payee is not disputed"
Thus from the above submission this is to clear that the total income of the assessee was estimated by applying the GP rate, therefore no disallowance u/s 40A(3) can be made in the case of the assessee.
In view of the above submissions and cases cited before your honor, the humble assessee prays your honor kind to confirm the findings of ld CIT(A) and reject the ground raised by revenue.
7.3 During the course of hearing, the ld. DR relied on the order of the AO.
74 We have heard the rival contentions and perused the materials available on record. It is noted that the ld. CIT(A) has restricted the disallowance u/s 40A(3) of the Act from Rs. 6,83,23,399/- to Rs.
3,35,092/- by observing as under:-
''Therefore, in view of various judicial pronouncements, the addition on account of disallowance made u/s 40A(3) cannot be sustained where the profit was estimated by rejecting the books of account and by applying the provisions of section 145(3) of I.T. Act. Further, the fact remains that the assessee itself has disallowed Rs. 3,07,550/- u/s 40A(3) in the return filed u/s 42 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 153A (refer copy of computation is at PB page 77) and it has also agreed for further disallowance of Rs. 27,542/- on account of cash payment recorded in regular books of account. Thus, the disallowance to the extent of Rs. 3,35,092/- is on agreed basis.
Therefore in view of the above facts and circumstances and respectfully following the judicial pronouncements of Hon'ble ITAT Jaipur Bench and Hon'ble Rajasthan High Court the addition of the remaining amount Rs. 6,83,29,399 minus Rs. 3,35,092/- = Rs. 6,79,94,307/- cannot be sustained. The AO is directed to delete the addition of Rs. 6,79,94,307/- made by disallowing the cash payment u/s 40A(3) of I.T. Act and the addition for the remaining amount Rs. 3,35,092/- is sustained as the same is on agreed basis. Assessee's appeal is partly allowed to that extent."
Looking the observation of the ld. CIT(A) on the issue an the case laws relied on by the ld. AR of the assessee, we do not find any reason to interfere with the his order. Thus Ground No. 2 of the Revenue is dismissed.
8.1 As regards ground no. 3 of the Revenue's appeal against restricting the addition of Rs. 6,99,228/- by making disallowance u/s 40(a)(ia) of the Act to Rs. 4,81,614/- the facts as emerges from the order of the ld. CIT(A) is as under:-
"3.4.3 I have duly considered assessee's submission and also taken a note of judicial pronouncements relied upon by the appellant as well as the factual matrix of the case. I have decided identical issue in respect to addition made on a/c of disallowance u/s 40A(3) in the ground no 11 and 12 above and covered by my findings made in ground no 11 & 12 above. Therefore in view of various judicial pronouncements, the addition on account of disallowance made u/s 40(a)(ia) cannot be sustained where the profit was estimated by rejecting the books of account and by applying the provisions of section 145(3) of I.T. Act. Further, the fact remains that the assessee itself has disallowed Rs. 4,81,614/- u/s 40(a)(ia) in the return filed u/s 153A (copy of computation is at PB page 77). Thus, the disallowance to the extent of Rs. 4,81,614/- cannot be deleted. Therefore in view of the above facts and circumstances and respectfully following the judicial 43 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur pronouncements of various benches of Hon'ble ITAT the addition of the remaining amount Rs. 6,99,228/- minus Rs. 4,81,614/- = Rs. 217614/- cannot be sustained. The AO is directed to delete the addition of Rs. 2,17,614/- made by disallowing u/s 40(a)(ia) of I.T. Act and the addition for the remaining amount Rs. 4,81,614/- is sustained as the same has been added by the assessee in the return filed u/s 153A of the Act. Assessee's appeal is partly allowed."
8.2 During the course of hearing, the ld. DR relied on the order of the AO.
8.3 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A). However, the ld. AR of the assessee submitted following written submission.
''We have submitted that the assessee's books of account have been rejected by the AO for all practical purpose and the profit has been estimated by applying GP rate. Therefore, no further addition can be made on the basis of entries in the books of account. Reliance is placed on the following decisions:-
(i) ITAT Cuttack Bench in the case of ITO v/s Sahadev Pradhan (2012) 18 ITR 0180.
The findings of Hon'ble ITAT are as under:-
"7. Having heard the rival parties and going through the impugned orders of the authorities below and also the decisions cited at Bar, we are inclined to find the contention of the learned Counsel of the assessee appropriate to the extent the learned CIT(A) has taken into cognizance the facts leading to the disallowance of the expenditure u/s.40(a)(ia) by the Assessing Officer when he sought to consider the rejection of books of account taking recourse to Section 145(3) of the I.T.Act as the Assessing Officer was to pass the order u/s.144. Having estimated the income from book publishing by enhancing the Net profit as otherwise returned by the assessee on the basis of financial statements submitted along with the return with Form 3CD, the Assessing Officer tried to indicate that the relevant expenditures were to be burdened with tax deduction at source which had not been done. The observation of the Assessing Officer therefore only led to the finding that the non-deduction 44 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur of tax at source was to be considered under the provisions of Chapter XVIIB which the learned DR pointed out was to be considered u/s.201 of the I.T.Act. The various decisions cited at the Bar and noted by the learned CIT(A) therefore indicate that the assessee would have never tried to deduct tax at source on these payments for claiming these expenditures for the purpose of its business insofar as the AO having allowed these expenditures on estimation of the income at a percentage indicated allowance of expenditure of the remaining receipts as expenditure. Those receipts were spent by the assessee therefore could not have been further considered for disallowance as noted by the Assessing Officer the provisions of Section 40(a)(ia) as penal in nature. The learned Counsel for the assessee submitted that having discussed the issue for non- deduction of tax at source on these payments, the Assessing Officer himself was of the considered view that they do not require deduction of tax u/s.194C. The learned CIT(A) therefore having dealt with the facts in accordance with the Assessing Officer's discussions could only reason out that there was no binding for incurring the expenditure by the assessee subjected to deduction of tax at source. He rightly held that Section 40(a)(ia) provides for certain disallowances in certain cases notwithstanding that those amounts are generally allowed under the general section. The computation u/s.29 has to be made u/s.145 on the basis of books of account regularly maintained by the assessee which the Assessing Officer did by estimating the profit at 5% of the sales. The learned Counsel for the assessee has relied on the decision of ITAT, Hyderabad in the case of Teja Constructions v. ACIT, which is squarely applicable to the facts of the assessee's case when the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions v. CIT (1998() 232 ITR 776 was taken note of when having rejected the book result it was not the case of the Assessing Officer to go back to those very books of account which indicated non- deduction of tax at source on certain expenditures that had ripened to be disallowed u/s.40(a)(ia). Confining ourselves to the issue on hand we are inclined to follow the decision of the ITAT, Cuttack Bench in the case of Sanjay Kumar Pradhan v. ACIT in ITA No.450/CTK/2011 dt.16.12.2011 (copy placed on record) indicating that it cannot be said that a change of stand can be taken up later when the finding of facts remains the same as were available to the Assessing Officer in view of the fact that part deduction of tax on certain payments do not lead to the finding that all the expenditures incurred were susceptible to be disallowed u/s.40(a)()ia) for want of deduction of tax at source. For the reasons discussed above, we do not find any infirmity in 45 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur the impugned order of the learned CIT(A), which we uphold by dismissing the appeal of the Revenue."
(ii) ITAT Hyderabad in the case of M/s Teja Constructions v/s ACIT (2010) 36 DTR 0220 Held that when books of account of the assessee was not relied and it was rejected by the AO. Now based on the reliance on the same books disallowance u/s 40(a)(ia) is not proper. The estimation of income takes care of the irregularities committed by the assessee.
In view of the above submission the ld CIT(A) has rightly deleted the addition. The humble assessee prays your honor kindly to confirm the findings of ld CIT(A) and dismiss the ground raised by revenue. '' 8.4 We have heard the rival contentions and perused the materials available on record. It is noted that the ld. CIT(A) has restricted the of Rs.
6,99,228/- by making disallowance u/s 40(a)(ia) of the Act to Rs.
4,81,614/- by observing as under:-
''...Therefore in view of the above facts and circumstances and respectfully following the judicial pronouncements of various benches of Hon'ble ITAT the addition of the remaining amount Rs. 6,99,228/- minus Rs. 4,81,614/- = Rs. 217614/- cannot be sustained. The AO is directed to delete the addition of Rs. 2,17,614/- made by disallowing u/s 40(a)(ia) of I.T. Act and the addition for the remaining amount Rs. 4,81,614/- is sustained as the same has been added by the assessee in the return filed u/s 153A of the Act. Assessee's appeal is partly allowed."
Looking the observation of the ld. CIT(A) on the issue an the case laws relied on by the ld. AR of the assessee, we do not find any reason to interfere with the his order. Thus Ground No. 3 of the Revenue is dismissed.46 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
9.1 As regards Ground No. 4 of the Revenue wherein the Revenue is aggrieved that the ld. CIT(A) has erred in deleting the addition of Rs.
70,00,000/- made by the AO treating the share capital received as non-
genuine. The facts as emerges from the order of the ld. CIT(A) is as under-
"3.5.3 I have duly considered assessee's submission and also taken a note of judicial pronouncements relied upon by the appellant as well as the factual matrix of the case. The facts of case are similar to AY 2008-2009 wherein Hon'ble ITAT has deleted the addition made on a/c of bogus share application , relevant extracts of which are reproduced here as under:
".6.1 On facts also, the assessee has produced before the Assessing Officer copy of share application, confirmation of the cash creditors, copy of PAN, copy of Board resolution, copy of Director's report, auditor's report, copy of balance sheet, copy of P&L account, copy of bank account in all the cases to prove the identity, genuineness and creditworthiness of the cash creditors. The ld Assessing Officer made addition on the basis of investigation conducted by the ITO, Investigation Wing, Kolkata but the ld Assessing Officer of the assessee has not clarified what inquiry had been conducted and what evidences collected which goes against the assessee. The notice U/s 131 issued by the ITO, Investigation Wing, Kolkata were served in case of Vidya Agencies Pvt. Ltd. and Shivarpan Mercantiles Pvt. Ltd., but compliance could not be made on the given date because concerned officer was on leave. In case of Middleton Goods Pvt. Ltd. And Lactrodryer Marketing Pvt. Ltd., notices were served on the assessee and in compliance to the notice, the party submitted all the documents in the IT office. The case law referred by the ld CIT(A) i.e. decision of Hon'ble Delhi High Court in the case of Nipun Builders and Developers Pvt. Ltd. Vs. CIT and Vijay Power Generator Ltd. Vs CIT (supra) are not squarely applicable on the facts of the case as there was short time available with the Assessing Officer as well as Investigation Wing of Kolkata. The copy of inquiry has not been provided by the Assessing Officer to the assessee. As per findings of the Hon'ble Delhi High Court in the case Nipun Builders and Developers Pvt. Ltd. Vs. CIT (supra), the Investigation Officer at Kolkata had not deputed Inspector to 47 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur enquire the whereabouts of the company. The case laws referred by the assessee are squarely applicable on the facts and circumstances of the appellant's case, therefore, we reverse the order of the ld CIT(A) on technical ground as well as on merit also...."
Respectfully following the decision of Hon'ble ITAT Jaipur Bench, Jaipur in the case of assessee itself, I direct the AO to delete the addition of Rs. 70,00,000/- made by him on account of share capital. Assessee's appeal stands allowed.
9.2 During the course of the ld. DR relied on the order of the AO.
9.3 On the other hand, the ld. AR supported the order of the ld.
CIT(A). The ld. AR of the assessee filed the written submission alongwith case laws which has been taken into consideration.
9.4 We have heard the rival contentions and perused the materials available on record. It is noted from the records that the assessee had received following share application in A.Y. 2006-07, A.Y. 2006-08 and A.Y. 2010-11.
(i) AY 2006-07
Name of the Party No of Amount Amount Total
shares against against
allotted shares share
Premium
Hariom Vanijya Pvt. Ltd 1,00,000 10,00,000 0.00 10,00,000
Brothers Trading Pvt. Ltd 90,000 9,00,000 0.00 9,00,000
Nupur Finvest Private 60,000 6,00,000 0.00 6,00,000
Limited (Old Name Nupur
Computers Pvt Ltd)
(ii) AY 2008-09
Name of the Party No of Amount Amount Total
shares against against
allotted shares share
Premium
48 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Vindya Agencies Pvt Ltd 25,000 2,50,000 7,50,000 10,00,000 Shivarpan Mercantiles Pvt 25,000 2,50,000 7,50,000 10,00,000 Ltd.
Middleton Goods Pvt Ltd 75,000 7,50,000 22,50,000 30,00,000
Lactrodryer Marketing Pvt 25,000 2,50,000 7,50,000 10,00,000
Ltd
(iii) AY 2010-11
Name of the Party No of Amount Amount Total
shares against against
allotted shares share
Premium
Bawa Hire Purchases Pvt 12,500 1,25,000 23,75,000 25,00,000
Ltd.
Omega Suppliers Pvt Ltd 10,000 1,00,000 19,00,000 20,00,000
Sabhyata Suppliers Pvt 12,500 1,25,000 23,75,000 25,00,000
Ltd.
It is observed from the records that the AO made similar addition on same facts and ground in AY 2006-07 & 2008-09. The appeal of the assessee for AY 2006-07 had been decided by ld CIT(A) in favour of the assessee and addition was deleted. The department has not filed appeal in Tribunal against the appeal order for AY 2006-07. The addition in appeal for AY 2008-09 was confirmed by ld CIT (Appeal), Central Jaipur. The assessee filed appeal before Hon'ble ITAT, Jaipur Bench, Jaipur. The appeal of the assessee was decided by Hon'ble ITAT in ITA No. 686/JP/2014 vide order dated 27.11.2015 wherein the addition confirmed by ld CIT(A) was deleted Copy PB pg 1051-1065/ Vol -3. The relevant Para of findings of Hon'ble ITAT in the case of assessee is as under:-
49 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 6.1 On facts also, the assessee has produced before the Assessing Officer copy of share application, confirmation of the cash creditors, copy of PAN, copy of Board resolution, copy of Director's report, auditor's report, copy of balance sheet, copy of P&L account, copy of bank account in all the cases to prove the identity, genuineness and creditworthiness of the cash creditors. The ld Assessing Officer made addition on the basis of investigation conducted by the ITO, Investigation Wing, Kolkata but the ld Assessing Officer of the assessee has not clarified what inquiry had been conducted and what evidences collected which goes against the assessee. The notice U/s 131 issued by the ITO, Investigation Wing, Kolkata were served in case of Vidya Agencies Pvt. Ltd. and Shivarpan Mercantiles Pvt. Ltd., but compliance could not be made on the given date because concerned officer was on leave. In case of Middleton Goods Pvt. Ltd. And Lactrodryer Marketing Pvt. Ltd., notices were served on the assessee and in compliance to the notice, the party submitted all the documents in the IT office. The case law referred by the ld CIT(A) i.e. decision of Hon'ble Delhi High Court in the case of Nipun Builders and Developers Pvt. Ltd. Vs. CIT and Vijay Power Generator Ltd. Vs CIT (supra) are not squarely applicable on the facts of the case as there was short time available with the Assessing Officer as well as Investigation Wing of Kolkata. The copy of inquiry has not been provided by the Assessing Officer to the assessee. As per findings of the Hon'ble Delhi High Court in the case Nipun Builders and Developers Pvt. Ltd. Vs. CIT (supra), the Investigation Officer at Kolkata had not deputed Inspector to enquire the whereabouts of the company. The case laws referred by the assessee are squarely applicable on the facts and circumstances of the appellant's case, therefore, we reverse the order of the ld CIT(A) on technical ground as well as on merit also.
The facts of this year are similar to AY 2008-09. Therefore, in view of the decision of Hon'ble ITAT the addition which was made on the same facts and circumstances deserves to be deleted and ld CIT(A) has rightly followed the decision of Hon'ble ITAT. There is no material change in the facts and circumstances in the year under consideration, therefore, the decision of Hon'ble ITAT is bindings. In view of the present facts and 50 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur circumstances of the case, we find no reason to interfere with the order of the ld. CIT(A). Thus Ground No. 4 of the Revenue is dismissed.
10.1 As regards Ground No. 5 of the Revenue wherein the Revenue is aggrieved that the ld. CIT(A) has erred in deleting the addition of Rs.
5,516/- made by the AO by making disallowance form expenses named as Bill premium debited in books of accounts ''Jadavji''. The facts as emerges from the order of the ld. CIT(A) is as under:-
"3.6.3 I have considered assessee's submission and the factual matrix of the case. I have decided the issue of trading addition in ground no 3 to 10 above by holding that the true profit cannot be determined on the basis of recasted books of account prepared by Special Auditors due to certain limitation pointed out by Special Auditors in their report and the AO himself assessed the trading results of the assessee by estimating the GP rate of 26.21% on consolidated sales. Therefore, the separate addition on account of bill premium cannot be sustained. Further the AO made a finding that the assessee has not challenged the reduction of corresponding purchases relatable to the bill premium expenses. This finding of AO is against the facts. The AO has reproduced a chart at page 46-47 of his order wherein the assessee claimed the purchases should be increased by Rs. 3,37,50,507/-. In this chart Purchases from M/s Baheti Gems and Mr Girdhari are included. Further the assessee has given plausible explanation for the genuine purchase from these parties and justification of bill premium mentioned in the seized records. The AO has not cotroverted this explanation in his remand report. Therefore, in view of facts and circumstances as discussed above, addition of Rs. 5,516/- made by AO on account of bill premium cannot be sustained and AO is directed to delete this addition. Assessee's appeal in Gr No 16 stands allowed."
10.2 During the course of hearing, the ld. DR relied on the order of the AO.
51 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 10.3 On the other hand, the ld. AR of the assessee relied on the findings of the ld. CIT(A) and also filed the following written submission which has been taken into consideration.
''Further, we submit that there is no evidence with ld. AO that the bill premium expenses are incurred in relation to procuring the bogus bills.The copy of ledger a/c of bill premium is at PB Page 586. From examining the books of accounts your honour would find that there are only two entries in the a/c one of Rs. 2000/- of Baheti Gems and second of Rs. 3,516/- of Mr. Girdhari. The explanation as regard the nature of the transaction is as under:-
(i) Baheti Gems & Jewels Purchases of Rs. 2,04,000/- Bill Premium. Rs. 2000/-
During the year under consideration the assessee company made purchases of Rs. 2,04,000/- from this party which is entered in regular books as well as in books of accounts named as "Jadavji". The copy of ledger a/c of this party in books of accounts of "Jadavji" is at PB Page 344. The special auditors treated this purchase as bogus merely because of the reason that along with the entry of purchases the amount payable against bill premium was also credited in a/c of the party. In this regard we would like to draw your kind attention towards the narration mentioned in the entry passed against this purchase. In the narration its has been mentioned that the assessee has purchased 4 Km (Kundan Meena) set from this party and the design numbers of the sets is also mentioned in the narration which can only be mentioned in the case of genuine purchases. Further most importantly these sets were sold on 02.02.2010 to some Singhania Ji (Delhi) for Rs. 2,30,000/- (Copy of ledger a/c at PB Page 345). Therefore without purchasing the goods cannot be sold. Further no any entry showing the return of cash against the cheque given was found anywhere in the seized document. The seized No 2 books ("Jadavji") as well as regular books both shows the issue of cheque against the purchases. Had this entry was against the bogus bill, than there would be entry of receipt of cash as against issue of cheque in no.2 books of account. The special auditors treated this purchase as bogus only on the basis of presumption and assumption without making further inquires. The supplier party charged extra Rs. 2000/- on account of billing charges. It was practice of this party to charge some extra if bill is taken against the goods supplied. If the goods is taken without bill than no charges of 52 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur the bill. Therefore bill premium is part and partial amount of goods purchased. Further the bills premium was only credited in a/c of the party and amount against purchases was paid by cheque. Later on this entry was w. Off by transferring the same in discount a/c meaning which the payment of bill premium was not made to this party. Further, no show cause notice was given by the AO before accepting the audit report which says this purchase as bogus.
(ii) Mr. Girdhari purchases of Rs. 5,05,992/- Bill premium Rs. 3516/-
During the year under consideration the assessee company made purchases of Rs. 5,05,992/- from this party on 27.03.2010 which is entered in books of accounts named as "Jadavji". The copy of ledger a/c of this party in books of accounts of "Jadavji" is at PB Page 346. The special auditors treated this purchase as bogus merely because of the reason that the bill premium was paid to this party. In this regard this is to submit that this party charged some extra amount if bill is taken alongwith the goods. So the assessee credited the original value of the goods and charges against the bill separately in the account of the party. The bill premium does not represent to bogus bill but extra amount payable for billing. This extra amount is part and partial amount of value of the goods. The assessee made separate entry against the billing charges in order to pursue the party to reduce it on final payment. Had it was bogus bill, there could not be any entry of credit bills in No 2 account. Rather full descriptions as regard design no etc are given. Further no any entry showing the return of cash against the cheque given was found anywhere in the seized document. The seized No 2 books ("Jadavji") as well as regular books both shows the issue of cheque against the purchases. Had this entry was against the bogus bill, than there would be entry of receipt of cash as against issue of cheque in no.2 books of account. The special auditors treated this purchase as bogus only on the basis of presumption and assumption which was beyond the scope of terms of reference of audit. The audit could have been completed on the basis of accounting principles and seized documents. There was no document to visualise the purchase was bogus.
In view of above, the ld CIT(A) has rightly deleted the addition, and therefore, the humble assessee prays your honour kindly to sustain the findings of ld CIT(A) and dismiss the ground raised by the revenue. '' 53 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 10.4 We have heard the rival contentions and perused the materials available on record. We find from the record that the ld. CIT(A) had deleted this addition by observing as under:-
''In this chart Purchases from M/s Baheti Gems and Mr Girdhari are included. Further the assessee has given plausible explanation for the genuine purchase from these parties and justification of bill premium mentioned in the seized records. The AO has not cotroverted this explanation in his remand report. Therefore, in view of facts and circumstances as discussed above, addition of Rs. 5,516/- made by AO on account of bill premium cannot be sustained and AO is directed to delete this addition. Assessee's appeal in Gr No 16 stands allowed."
Taking into consideration the present facts and circumstances of the case, we find no infirmity in the order of the ld. CIT(A) which is sustained.
Thus Ground No. 5 of the Revenue is dismissed.
11.1 As regards Ground No. 6 of the Revenue wherein the Revenue is aggrieved that the ld. CIT(A) has erred in deleting the addition of Rs.
1,66,336/-made by the AO by disallowing 15% of total expenses of Rs.
11,08,906/- found recorded in the books of account named as ''Jadavji''.
The facts as emerges from the order of the ld. CIT(A) is as under:-
3.7.3 I have duly considered assessee's submission and taken a note of the factual matrix of the case. As I have already decided the issue of trading addition in ground no 3 to 10 in above para by holding that the true profit cannot be determined on the basis of re-casted books of account prepared by Special Auditors due to certain limitation pointed out by Special Auditors in their report and the AO himself assessed the trading results of the assessee by estimating the GP rate of 26.21% on consolidated sales.
Therefore, the separate addition by disallowing the expenses cannot be 54 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur sustained. Hon'ble Rajasthan High Court in the case of CIT Vs G.K. Contractor (2009) 19 DTR 0305 has held that:-
"7. Admittedly, the said amount of Rs. 38,28,086 was shown by the assessee in the books of account as "market outstanding". According to the assessee, the payment was outstanding against the labour and goods supplied. It is true that on being asked, the assessee was not able to explain these entries by producing the adequate proof to the satisfaction of the AO. However, in our considered opinion, even if the assessee has failed to discharge his onus of proof in explaining the cash credits shown in the books of account as "market outstanding", the AO having estimated the higher profit rate on total contract receipts after rejection of the books of account invoking the provisions of s. 145(3), no separate additions can be made on account of unexplained cash credit under s. 68 of the Act of 1961. We are in complete agreement with the view taken by the CIT(A), confirmed by the Tribunal. Thus, no substantial question of law arises for consideration of this Court in this appeal."
Therefore, respectfully following the decision of Hon'ble Rajasthan High Court in above case I hold that separate addition cannot be made where the addition was sustained by applying the GP rate and AO is directed to delete this addition of Rs. 1,66,336/- made by him by disallowing the expenses. Assessee's appeal in Gr No 17 stands allowed.
11.2 During the course of hearing, the ld. DR relied on the order of the AO.
11.3 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A).
11.4 We have heard the rival contentions and perused the materials available on record. We feel that the ld. CIT(A) has rightly deleted the addition of Rs. 1,66,336/- in view of the decision of Hon'ble Hon'ble Jurisdictional High Court in the case of CIT vs. G.K. Contractor (2009) 55 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 19 DTR 305. Hence, we find no reason to interfere with the order of the ld. CIT(A) on this issue. Thus Ground No. 6 of the Revenue is dismissed.
12.1 As regards Ground No. 7 of the Revenue wherein the Revenue is aggrieved that the ld. CIT(A) has erred in giving direction to adjust the seized cash lying in PD account against the self assessment tax liability.
The facts as emerges from the order of the ld. CIT(A) is as under:-
"3.10.4 I have considered assessee's submission and the factual matrix of the case. In this case, a search & seizure operations u/s 132(1) of Act was carried. Pursuant to the notice issued u/s 153A of the Act, assessee filed its return of income for AY 2010-11 on 31.03.2012 declaring total income of Rs. 2,31,17,670/- which includes the income of Rs.2,46,00,000/- surrender on account of income earned from unaccounted sales. On perusal of the return filed on 31.03.2012 for AY 2010-11, it is seen that assessee itself computed total tax liability including interest to Rs. 98,17,671/- and out of the total tax liability, assessee has paid Rs. 45,00,000/- on 31/03/2011 and Rs. 817670/- on 30/03/2012 and for the remaining amount of Rs. 45,00,000/- request was made to Ld CIT Central Jaipur for adjustment against amount lying in PD A/c by filing a letter on 31/03/2012 under copy to DCIT Central Circle-2 Jaipur. AO has not allowed any adjustment of cash lying in the PD A/c against self assessment tax liability till 17.12.2013 even though assessee had made request to Ld CIT (Central) Jaipur on 31.03.2012.
It is also submitted that AO charged interest u/s 234B and 234C of Act without allowing and adjustment of cash lying in the PD A/c to be treated as self assessment tax paid on 31.03.2012 of Rs. 45,00,000/-. In the report submitted, AO has strongly objected to assessee's contention and opined that as per explanation-2 of the section 132B of the Act, the "existing liability" does not include self assessment tax liability. Therefore, credit of amount lying in the PD account can't be adjusted against the self assessment tax liability. However, Shri Vijay Goyal AR contends that as per the law as applicable at that time, Section 132 B (1) of the Act provides for adjustment of assets seized against any existing liability and he relying on following judicial pronouncements, has further submitted that the liability to pay self assessment tax is an existing liability and amount lying in PD A/c is adjustable against the existing liability:
• Kesar Kimam Karyalaya (High Court Delhi) • Kanishka Prints Pvt Ltd (ITAT Ahmadabad) • Sudhar M Shetty (ITAT Mumbai) 56 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur • Nikka Mal Babu Ram (SOT Chandigarh) In case of Nikka Mal Babu, Hon'ble ITAT Chandigarh has observed inter alia as under:
"......8. Quite clearly, it prescribes that the assets seized under s. 132 can be adjusted (a) against the amount of any existing liability under this Act; (b) against the amount of liability determined on completion of assessment under s. 153A; (c) against the amount of liability determined on completion of assessment under Chapter XIV-B for the block period; and (d) against any penalty levied or interest payable in connection with such assessment. In other words, s. 132B(1)(i) of the Act empowers the AO to recover the prescribed liabilities out of the assets seized under s. 132 of the Act. As per the CIT(A) and which has been supported by learned Departmental Representative, the liability towards advance tax does not form a part of the expression 'existing liability' appearing in s. 132B(1)(i) of the Act. In our considered opinion, even liability to pay advance tax is per the statutory provisions and we find no plausible reason to ascribe a restricted meaning to the expression 'existing liability' appearing in s. 132B(1)(i) of the Act, as being contended by the Revenue. The argument set up by the Revenue is that the expression 'existing liability' is referred in the context of the IT Act, 1961. The WT Act, 1957, The Expenditure tax Act, 1987, the GT Act, 1958, and the Interest-tax Act, 1974, and since in the other statutes, there is no concept of advance tax, therefore the expression 'existing liability' used in s. 132B(1)(i) cannot be understood to mean advance tax liability under the IT Act, 1961. In our considered opinion, interpretation placed by the Revenue is misplaced and would lead to absurd results.
9. It is well understood that as per s. 4 of the Act, an assessee is chargeable to income-tax in respect of his total income. Sub-s. (2) of s. 4 prescribes that the income-tax so chargeable shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of the Act.
We have observed earlier that advance tax liability is governed by ss. 208 to 210 of the Act. Similarly, s. 140A provides for payment of self-assessment tax on the basis of any return of income required to be filed by the assessee. The relevant provisions also prescribe the dates and the amount of tax required to be paid by an assessee. Therefore, the expression 'existing liability in s. 132B(1)(i) cannot be read to exclude a particular tax liability, if it can be shown to have existed on a particular date. If the liability to pay advance tax had arisen, it would certainly constitute a part of the 'existing liability' used in s. 132B(1)(i) of the Act.
10. In our considered opinion, the doctrine of purposive construction has to prevail in this situation. In the present situation, it is evident that cash was seized from the assessee during search operation and, assessee requested the Department to adjust a part of such cash receipts against the liability of 57 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur advance tax which arose on account of the income surrendered during the search operation. The Department does not deny possession of the cash since the time of search. Thus, we find no justification for the Revenue to interpret the expression 'existing liability' in s. 132B(1)(i) as not referring to liability of advance tax. Under the IT Act, liability towards advance tax is a part of the scheme of recovery of taxes and such liability definitely falls in the expression 'existing liability' used in s. 132B(1)(i) in the facts and circumstances of the case. The reliance pleaded by the CIT(A) on the judgment of the Hon'ble Madhya Pradesh High Court in the case of Ramjilal Jagannath & Ors. vs. Asstt. CIT (1999) 156 CTR (MP) 49 : (2000) 241 ITR 758 (MP) is quite misplaced. As per the Revenue, in terms of the said judgment, the seized cash cannot be adjusted towards advance tax liability. We have carefully perused the said judgment and find that the same does not prohibit adjustment of seized assets towards liability to pay advance tax. In any case, we find that judgment of the Hon'ble Madhya Pradesh High Court is relevant in a situation when s. 132(5) was on the statute, which has since been deleted by the Finance Act, 2002 w.e.f. 1st June, 2002. Sec. 132(5) of the Act required the AO to make an enquiry and thereafter make an order to deal with the seized assets. Sec. 132(5) of the Act authorizes the AO to retain in his custody such assets as in his opinion were sufficient to satisfy the aggregate amounts referred to in cls. (ii), (iia) and (iii) of s. 132(5) and obligated him to release the remaining seized assets. In this background, the Hon'ble High Court, on the facts of the case before it, held that unless an order under s. 132(5) of the Act is passed, the AO could not direct that the assets seized be adjusted towards advance tax liability. The Hon'ble High Court specifically noted that it is only after an order under s. 132(5) is passed that the assessee can make a request that the seized amount which is sought to be released in his favour be adjusted or appropriated towards the liability to pay advance tax. Though, in the context of the present assessment year before us, the provisions of s. 132(5) are not applicable and therefore, strictly speaking, the ratio of the judgment of the Hon'ble Madhya Pradesh High Court does not apply, so however it is pertinent to observe that the Hon'ble High Court has not read any blanket prohibition in the Act against adjusting the seized assets against liability for payment of advance tax. Therefore, there is no justification for the CIT(A) to rely upon the order of the Madhya Pradesh High Court in the case of Ramjilal Jagannath (supra) and deny the claim of the assessee.
In case of ACIT Central Circle-23 New Delhi Vs. Sh Arun Kumar Gupta, Hon'ble ITAT New Delhi in ITA No. 4108/Del/2010 by respectfully following the decision of Nikka Mal Babu (supra) and K K Marketing (Delhi High Court 278 ITR 596) has upheld the decision of CIT(A) and finally directed the AO to re- compute the interest chargeable u/s 234 B & 234C accordingly after giving credit of amount seized against the advance tax liability fallen due on 15th March 2009.
58 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur In case of ACIT Vs Hans Raj Gandhi reported in 37 ITR 418, Hon'ble ITAT Chandigarh has held that assessee was entitled to adjustment of seized cash against advance tax liability and therefore no interest could be charged u/s 234A & 234B in the event of department not responding to assessee's request for adjustment of cash seized against advance tax liability.
Here I would like to refer decision of Hon ITAT Agra Bench in case of ACIT Vs. Sunil C Gupta [ITA No. 290/Agra/2013 Dt of pronouncement 28/02/2014] wherein Hon'ble ITAT Agra has held that cash seized to be adjusted against advance tax liability as Explanation-2 to Section 132B of the Act is enacted with effect from 1st June 2013. In this case, Hon'ble ITAT has upheld the observations of Id CIT(A) which are as under -
"..........I have carefully considered the assessment order as well as the written submission of the appellant, Remand report and the rejoinder on this issue remand report and the rejoinder. In this case Search and Seizure Operation was carried out in the premises of Shri Sunil Chand Gupta on 10.03.2010 wherein cash amounting to Rs.4,31,36,000/- was seized from the residence and locker and was deposited by the department in the PD account on 10.03.2010 and 19.03.2010. During the course of search the assessee's statement was recorded u/s 134 of the I.T. Act wherein the assessee offered to pay tax on an income of Rs.10 crore for the F.Y. 2009-2010. The estimated tax liability on an income of Rs.10 crore worked out to about Rs.3 crore approx. Since the liability to pay tax had arisen and the cash being seized by the department, the appellant requested the department to adjust Rs.3 crore out of the Rs.4,31,36,000/- seized and deposited in the PD account. It is seen that the assessee made a written request on 29.03.2010 to the Chief Commissioner of Income Tax which was duly received and also to the Additional Director of Income Tax Investigation, Agra. It also seen that similar request for adjustment letters were written to the DCIT Circle-1, Agra on 29.03.2010 which was duly received in the office on the same day. Further, another letter was written to the CIT-1 on 21.03.2010. Letter dated 05/07/2010 was also written to the DCIT Central Circle stating that return of income for A.Y. 2010-11 had been filed on 30/6/10 with tax payable of Rs.2,92,25,240/- and therefore requesting the AO once again for adjustment of tax liability with the cash lying in the PD account. In the circumstances, the assessee had done all it could do so as to ensure that cash lying in the PD account would be adjusted towards the advance tax liability. However, it seen that no action was www.taxguru.in ITA No.290 /Agra/2013 A.Y. 2010-11 5 taken on the assessee's petition by any of the authorities before whom the assessee has filed the petition. To my mind, it is an apparent injustice to the appellant to hold on the cash belonging in the assessee in the Government Account and at the same time charge interest for non-payment of advance tax on the due dates. It is clear that the appellant's application for adjustment has been submitted before the various authorities, the seized cash should have been either been adjusted as requested by the assessee to meet the advance tax 59 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur obligations or the Assessee should have been informed the reasons why the request made by the assessee cannot be acceded to. The Hon'ble Bombay High Court in the case of CIT Vs. Shri Jyotindra B. Modi in order dated 21.09.2011 has clearly held that once the assessee officers to tax the undisclosed income including the amount seized during search, than the liability to pay advance tax in respect of that amount arises even before completion of the assessment. The Hon'ble High Court further held that section 132B(1) of the Act, thus not prohibit the utilization of amount seized during the course of search towards the advance tax liability. The Hon'ble High Court of Punjab & Haryana in the case of CIT Vs. Ashok Kumar reported in 334 ITR 355 has also held on similar facts that the assessee was entitled to adjustment of seized cash against advance tax liability and therefore, no interest could be charged u/s 234A & 234B in the event of the department no responding to assessee's request for adjustment of cash seized against advance tax liability. In view of the following judgments, the action of the AO in charging interest under 234A, 234B & 234C is not justified and hence, directed to be deleted."
In view of facts and circumstances of the case as discussed above and respectfully following the decisions of aforementioned judicial pronouncements AO is directed to re-compute the interest chargeable u/s 234 B after giving credit of amount of Rs. 45,00,000/- ( Lying in PD A/c) against the self assessment tax liability fallen due on 31-03-2012. The assessee's appeal on this ground stands allowed.
12.2 During the course of hearing, the ld. DR relied on the order of the AO.
12.3 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A).
12.4 We have heard the rival contentions and perused the materials available on record. The facts as noted to the issue in question from the order of the ld. CIT(A) is as under:-
''Pursuant to the notice issued u/s 153A of the Act, assessee filed its return of income for AY 2010-11 on 31.03.2012 declaring total income of Rs. 2,31,17,670/- which includes the income of Rs.2,46,00,000/- surrender on 60 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur account of income earned from unaccounted sales. On perusal of the return filed on 31.03.2012 for AY 2010-11, it is seen that assessee itself computed total tax liability including interest to Rs. 98,17,671/- and out of the total tax liability, assessee has paid Rs. 45,00,000/- on 31/03/2011 and Rs. 817670/- on 30/03/2012 and for the remaining amount of Rs. 45,00,000/- request was made to Ld CIT Central Jaipur for adjustment against amount lying in PD A/c by filing a letter on 31/03/2012 under copy to DCIT Central Circle-2 Jaipur. AO has not allowed any adjustment of cash lying in the PD A/c against self assessment tax liability till 17.12.2013 even though assessee had made request to Ld CIT (Central) Jaipur on 31.03.2012 It is also noted that the AO had not adjusted the credit of amount lying in the PD account against self tax liability. The ld. CIT(A) has allowed the same giving the direction as under:-
''In view of facts and circumstances of the case as discussed above and respectfully following the decisions of aforementioned judicial pronouncements AO is directed to re-compute the interest chargeable u/s 234 B after giving credit of amount of Rs. 45,00,000/- ( Lying in PD A/c) against the self assessment tax liability fallen due on 31-03-2012. The assessee's appeal on this ground stands allowed'' It is also noted that similar issue has also been decided in favour of the assessee by the ITAT Jaipur Bench in the case of DCIT vs. Late Smt. Sudha Patni (ITA No. 161/JP/2016 vide order dated 18-10-2016 for the assessment year 2012-13). Hence, looking to the facts, circumstances of the case and also the order of Coordinate Bench in the case of DCIT vs. late Smt. Sudha Patni (supra), we concur with the findings of the ld.
CIT(A) on this issue. Thus Ground No. 7 of the Revenue is dismissed.
13.1 The Ground No. 8 of the assessee is regarding not allowing the benefit of telescoping, recycling and rotation of funds.
61 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 13.2 We have heard the rival contentions and perused the materials available on record. The Ground No. 8 of the assessee is infructuous as no addition has been sustained on the basis of unexplained expenditure or assets. Thus Ground No. 8 of the assessee is dismissed.
14.0 In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.
15.1 Now we take up the cross appeals for the assessment year 2010-11.
Respective grounds raised by the assessee and Revenue are as under:-
ITA No.447/JP/2016 -Assessee1. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the reference to special audit report under S.142(2A) of Income Tax Act is purely based on the recommendation in appraisal report and the AO has not applied his mind with regard to the nature and complexity of the accounts of the assessee. It is contended that the AO's opinion cannot be substituted by another officer's opinion. Thus, the ld CIT(A) erred in not declaring the reference to special audit report under S.142(2A) of Income Tax Act as bad in law and invalid and the assessment order dated 14.11.2013 passed u/s 144 read with Section 143(3) of Income Tax Act, 1961 as bad in law and void ab-initio.
2. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the assessment order passed u/s 144 r.w.s. 143(3) of the Income Tax Act, 1961 is void ab-initio and bad in law and deserves to be annulled as the special auditors have computed the income of the assessee on the basis of certain presumption and assumption dehors of material and the AO has borrowed the same, meaning 62 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur thereby the AO has delegated the task of framing an assessment to the auditor.
3. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assessee that the special auditors have conducted the audit beyond the scope of the provisions of Section 142(2A) by recasting the books of account by applying presumption and assumption and such audit report cannot be considered for the Assessment of the assessee.
Therefore and thus, the ld CIT(A) erred in not declaring the entire assessment as bad in law and void ab-initio.
4. On the facts and in the circumstances of the case and in law the ld CIT(A) erred in rejecting contention of the assesee that the learned A.O. passed the Assessment Order based on no evidence or on irrelevant evidence and on surmises and conjectures and the facts of the case stated in the assessment order are contrary to the records and is against the doctrine of äudi alterm partem", a principle of natural justice and therefore and thus the ld CIT(A) erred in no declaring the Assessment Order u/s 144 read with Section 143(3), as bad in law and ab-initio void.
5. On the facts and in the circumstances of the case and in law the ld. CIT(A) erred in confirming trading addition of Rs.58,53,506/- by estimating GP rate @ 20% on the declared sales of Rs.12,28,29,758/- as against GP rate @ 14.01% declared by the assessee.
6. On the facts and in the circumstances of the case and in law the lower authorities erred in not allowing the benefit of telescoping, recycling and rotation of funds.'' ITA No.503/JP/2016 - Revenue
1. Whether on the facts and the circumstances of the case ld CIT(A) was right in restricting the trading addition of Rs.91,37,068/- (i.e. 92,89,007/- minus Rs.1,51,939/-) to Rs.58,70,206/- made by the AO without appreciating the fact that total sale consideration and gross profit rate had been determined by the special auditor which has also been held valid by ld CIT(A).
63 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
2. Whether on the facts and the circumstances of the case the ld CIT(A) was right in restricting the disallowances of Rs.2,71,50,538/- to Rs.1,20,751/- made U/s 40A(3) of the Act without appreciating the fact that this violation of the provision of the Section 40A(3) of the Act has been clearly mentioned in the special audit report.
3. Whether on the facts and the circumstances of the case the ld CIT(A) was right in deleting the addition of Rs.3,87,948/- made on account of non-genuine purchases from M/s Aditya Gems without appreciating the fact that every assessment year is a separate year and submissions of one year can't be considered as proof in another year and further assessee failed to prove the creditworthiness, genuineness and identity of the said party."
16.1 Brief facts of the case are that the assessee is a private limited company and engaged in the business of manufacturing and trading of studded jewellery. The department carried out search & seizure operations on assessee on 06-05-10 (Copy of Panchnana and inventory placed at PB Page 1-22). The case of assessee was centralized at Central Circle-2, Jaipur. The assessee filed its return of total income on 30.09.2011 declaring the total income of Rs. 4,23,150/- (Copy at PB Page 125 to 175). The assessment proceedings were commenced by issue of notice u/s 143(2) of Income Tax Act, 1961 on 27.02.2012 and later on vide various notices (Copy at PB Page 186, 187-188, 189-190, 215-230, 255-256, 287-288, 297-301 and 314-318) and by order sheet entries certain information were required from assessee from time to time. All of 64 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur these were complied by the assessee vide reply on various dates (copy at PB pg 184-185, 187-188, 191-214, 231-254, 257-263, 264-269, 270-275, 276-284, 285-286 289-296, 302-313, 319-324, 325-328, 329-331, 332- 334, 335, 336-338, and 339-343). During the course of search certain documents were found and seized relating to the assessee including a CPU containing the books of accounts named as "Jadavji" being duplicate/parallel books of accounts of the assessee company maintained in the form of memoirs, containing the entries of recorded and unrecorded transactions of the assessee company. However the books of accounts named as "Jadavji" were neither complete nor correct. Further these books of accounts consists the entries pertaining to AY 2010-11 only. No parallel/duplicate books of account of assessee company for AT 2011-12 was found by the search party. . During the course of assessment proceedings it was opined by ld. AO that the entries in the books of accounts named as "Jadavji" were extremely complex in nature therefore the ld. AO moved a proposal to ld CIT, Central, Jaipur vide letter dated 13.03.2013 for approval of special audit of accounts of the assessee u/s 142(2A) of Income Tax Act, 1961. In response to the proposal of ld.
AO the ld CIT (Central), Jaipur issued a show cause notice dated 15.03.2013 (Copy at PB Page 176-177) to the assessee for approval of 65 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur special audit and in response to the show cause notice, the assessee objected the reference of special audit u/s 142(2A) of Income Tax Act, 1961 vide its letter dated 18.03.2013 (Copy at PB Page 178-179) but the proposal for special audit was approved by the ld CIT, Central, Jaipur and the AO vide his letter dated 22.03.2013 (Copy at PB Page 180-181) directed to assessee to get its accounts audited u/s 142(2A) of Income Tax Act, 1961 as per the terms of reference which has been reproduced by AO at Page 7 of assessment order. The special auditors gave the report vide their report dated 14.09.2013 which was received to assessee on 17.09.2013 and the same was filed to AO on the same date (Copy of letter is at PB Page 182) wherein the net profit of the assessee company was computed Rs. 92,89,007/- as against Rs. 1,51,939/- shown by the assessee. The copy of special audit report is separately filed as Paper Book Vol-4. The assessment of the assessee was completed by the AO vide his order dated 14.11.2013 passed u/s 144 r.w.s.143(3) of Income Tax Act, 1961 assessing the total income of assessee Rs. 3,70,98,760/- as against returned income of Rs. 4,23,150/- by making the following additions/disallowances: -
66 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur S. Particulars Amount No (Rs.)
1. Undisclosed income/profit 91,37,068
2. Disallowance u/s 40A(3) of Income Tax Act, 1961 2,71,50,538
3. Disallowing 25% of total purchases of Rs. 15,51,792/- 3,87,948 made from M/s Aditya Gems by treating the purchases as unverifiable and bogus.
Total Addition 3,66,75,554 The ld. AO rejected the books of accounts by applying the provisions of section 145(3) of Income Tax Act, 1961.
16.2 Aggrieved by the aforesaid additions, the assessee filed appeal before ld CIT(A). During the course of hearing of the appeal, the assessee filed paper book and written submission. The ld CIT(A) called remand report from the AO. The AO submitted his remand report. The assessee filed rejoinder on the remand report of the AO. The ld CIT(A) partly allowed the appeal by deleting/sustaining the additions as under:-
S. No. Particulars Additions Deleted by Sustained by Made by AO CIT(A) CIT(A) in dispute Amount Amount before (Rs.) (Rs.) CIT(A) Amount (Rs.)
1. Undisclosed income/profit 91,37,068 32,66,862 58,70,206
3. Disallowance u/s 40A(3) of 2,71,50,538 2,70,29,587 1,20,751 Income Tax Act, 1961
4. Disallowing 25% of total 3,87,948 3,87,948 0 purchases of Rs. 15,51,792/-
made from M/s Aditya Gems by treating the purchases as unverifiable and bogus.
Total Addition 3,66,75,554 30,68,4397 59,90,957 67 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 16.3 Now the assessee as well as Revenue are in appeal before us against the order of the ld. CIT(A).
17.1 The Ground No. 1 of the Revenue's appeal is in respect of restricting the trading addition of Rs. 91,37,068/- to Rs. 58,70,206/-
17.2 The Ground No. 2 to 5 of the assessee's appeal are in respect of confirming the addition of Rs. 58,53,506/- by estimating the gross profit rate @ 20% on declared sales of Rs. 12,28,29,758/- as against 14.01% declared by the assessee.
17.3 From the above grounds raised by the Revenue and assessee, it is observed that the ld. CIT(A) has restricted the addition of Rs. 91,37,068/-
to Rs. 58,70,206/- on the basis of his findings at pages 48 to 52. The ld.
CIT(A) took into consideration the rejection of books of account and he estimated the gross profit of the assessee by applying the gross profit rate of 20% on the declared sales of the assessee. The observation of the ld.
CIT(A) on the issue in question is as under:-
"3.2.3 I have considered assessee's submission and also taken a note of judicial pronouncements relied upon by the appellant as well as the factual matrix of the case.
Here in this case, the special auditor has re-casted the accounts of the assessee and computed the consolidated net profit of Rs. 2,30,22,563.45. ( PB Vol -iii Page 81-82 of special audit report). This profit is after appropriation to P & L; Rs. 1,86,327/-on account of deferred tax assets, Rs. 1,30,753.00 on account of Provision for Income Tax and Rs. (Cr) 1,40,50,636.50 on account of Opening Balance (Profit/loss) A/c. Therefore, the net profit before the appropriation was calculated by the special auditors at Rs. 92,89,007/-. This profit is subject to some common notes/observations/limitations mentioned in the 68 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur special audit report. Therefore, this profit should be seen along-with the following common notes/observations/limitation mentioned by the special auditors.
(i) In para 3.3 of Heading "BREIF FACTS AND BSERVATIONS:- annexed with special audit report (Copy at Page 27-28 of SAR) it has been mentioned that:-
"On perusal of the Seized Material, regular books of accounts, supporting documents and responses to the queries raised and explanation furnished during our audit and before AO for the Relevant Period, it emerges that by applying the standard auditing procedure, neither the statement of affairs nor profit or loss as desired can be determined".
(ii) In para 3.3.3 of Heading "BREIF FACTS AND BSERVATIONS:- annexed with special audit report (Copy at Page 28 of SAR) it has been mentioned that:-
"The books maintained titled as "Jadavji" is only for the Financial Year 2009-10. These books contain large number of accounts which remained outstanding at the end of the year. Therefore, there may be transactions which are not entered in "Jadav Ji". In absence of specific details of such transactions, standard auditing procedure and methods of determination of income cannot be applied."
(iii) In para 3.3.6 of Heading "BREIF FACTS AND BSERVATIONS:- annexed with special audit report (Copy at Page 29 of SAR) it has been mentioned that:-
"In the books of accounts titled as "Jadavji" most of the purchases, sales, transfers, returns have been entered in pieces whereas in regular books of accounts, these have been entered in gms/cts. Therefore, in absence of common unit of measurement for those transactions which are not entered in regular books or vice versa, the correct quantitative stock cannot be determined by applying the standard auditing procedure. Some examples to this effect are listed in enclosed Appendix-3".
(iv) In para 5.1.8 at Page 8 of common notes annexed with special audit report (Copy at PB Page SAR-33) it has been mentioned that " The figures of adjustments have been derived by applying professional judgments and surroundings materials. Significant estimations and assumptions have been made, wherever 69 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur corroborative evidences are not available or considering the limitations imposed by circumstances, if it is warranted to do so. Therefore, any change, in such professional judgement or estimation or assumption, may lead to change in financial statements, as discussed hereinafter while explaining the basis of adjustments. "
(v) In para 4 (Page 30 of Special Audit Report), the special auditor has expressed their limitation as under:-
"Under the facts and circumstances narrated hereinbefore and applying our professional judgement, we are of the opinion that audit procedure and methods of determination of income or loss, believed to be desirable, cannot be applied in the given circumstances. Hence, we have attempted to carryout reasonable alternative procedure and methods to obtain sufficient or appropriate conclusion. However there may be lack of corroborative evidence to support certain entries in the financial statements drawn or there may be also exist certain other limitations imposed by the circumstances."
All the above notes/observation and limitations show that the books of accounts naming "Jadavji" has been written in such as manner that correct statement of affairs and profit of the assessee company cannot be derived and only some estimation/guess work has be done with recasting of the accounts. When the estimation/guess is made in recasting of the account, the trading results may differ person to person who makes estimation or guess. The special auditors themselves have admitted at page 33 of their report that any change in estimation or assumption may lead to change in financial statements. I agree with the contention of ld AR that in point no II of terms of reference for special audit, it has been clearly mentioned by the AO to recast the trading and P & L A/c on accounting principles and on the basis of seized material. The AO has not assigned the task to special auditors to compute the income or recast the Trading and P & L A/c by applying the presumption and assumption or on estimation. There was no scope of application of presumption, assumption, estimation, personal judgment etc in recasting of accounts. Further the auditor is not a quasi judicial authority and estimation and presumption is beyond the scope of audit. The copy of submission of ld AR was sent to AO for comments on the issue raised by ld AR on the recasting of books of account made by special auditors. In remand report the AO has not deliberated these issues.
Further, it is also seen that the assessment order as well as from special audit report that no entries pertaining Financial Year 2010-11 70 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur corresponding to AY 2011-12 was found in the accounts maintained under the name "Jadavji". No any other incriminating seized document pertaining to AY 2010-11 was brought on records showing unaccounted sales or purchases other unaccounted business activity of the assessee company. The sales were accepted at Rs. 12,28,29,758.50 on the same figure which the assessee disclosed in regular books of account. Separate Trading and Profit and loss account of parallel and duplicate books of account in name "Jadavji" was prepared by Special Auditor which shows no transaction expect opening stock of Rs. 7,60,132.17 which was transferred to the stock of regular books. After taking into consideration this brought forwarded stock, no excess stock as on date of search was derived. The copy of such Trading and Profit and Loss Account is placed at Page 131 of SAR (Vol-III of PB). The consolidated Trading and Profit and loss account is placed at page 81 of SAR (Vol - III of PB), which shows no transaction in Jadavji except opening stock of Rs. 7,60,132.17 and certain adjustment entries in the audited books of account. The adjustment entries carried out by special auditors may be summarised as under:-
Net Profit Increased by Rs. 91,37,067.89 S.No. Particulars Amount 1 GP Increased in transaction of regular books 1866349.89 2 Purchases of stock transferred to Indore out of 7204766 unaccounted income 3 Advertisement Expenses disallowed 4000 4 Extra Depreciation Allowed -1548 5 Packing Expenses disallowed 50000 6 Vehicle Expenses disallowed 13500 Total Net profit Increased 91,37,067.89 Closing Stock increased :- 1,00,99,593.06 S.No. Particulars Amount 1 GP Increased in transaction of regular books 1866349.89
2. Opening Stock Transferred from parallel and 760132.17 duplicate books "Jadavji"
3. Purchases of stock transferred to Indore out of 7204766 unaccounted income
4. Purchases of diamond against negative stock in 268345 stock register Stock Increased in regular books as on 1,00,99,593.06 31.03.2011 The ld AR of the assessee submitted that the GP of assessee was increased by 18,66,349.89 against which the corresponding increase was made in the closing stock. The ld AR submitted that the GP has been increased by Rs. 13,60,178.28 on account of valuation of 60.57 ct 71 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur diamond, which was made at Rs. 13,60,178.28 as against cost taken by special auditors at Rs. 2,68,345/- for 63.14 Ct. The special auditor mentioned in note No (i) at pg 40 of SAR (Vol III of PB), that there was negative stock of diamond 60.57+2.57 totalling to 63.14 ct. The assessee explained that there was no negative stock but due to consolidated one entry of consumption in stock register for the month on 01-11-2010, the stock register shows the negative stock of 60.57 on 01-11-2010 pg 179 of SAR (Vol III of PB). However, the special auditor treated it as unaccounted purchases by Rs. 2,68,345/- for 60.57+2.57 totalling to 63.14 ct. On treating it as unaccounted purchase, the same was also added into closing stock as on 31.03.2011. The working is in para 6.6 page 18 of SAR (Vol III of PB). The stock of 60.57 ct diamond (taken against the negative stock) was valued as on 31.03.2011 at Rs.
13,60,178.28 (working of special auditor is at Pg 44 of SAR Vol III of PB) as against the cost estimated by special auditor against this stock at Rs. 2,57,422.50 (268345/63.14 * 60.57). This working alone has affected the excess valuation of closing stock by Rs. 11,02,755.78 and consequentially excess GP. Further, I found that the discrepancy in stock was calculated on the basis of defective accounts which the AO has rejected. As regard the discrepancy in stock on account of entry of transfer of stock at Indore, the assessee has given plausible explanation that it has sufficient brought forwarded undisclosed income from previous year to cover the alleged discrepancy in stock. Further I found that the AO has rejected the books of account and therefore, the profit should not be computed on the basis of same set of rejected books of account. The AO has held that the addition of Rs. 91,37,068/- represents the undisclosed income/profit earned from sales of Rs. 12,28,29,758/-. Therefore, the ld AO has treated the addition as business income of the assessee. The GP declared by the assessee in regular books of account is Rs. 1,72,12,445.56 (pg 81 of SAR Vo; III PB ). To this if Rs. 91,37,068/- is added than the GP comes to Rs. 1,72,12,445.56 +91,37,068= Rs. 2,63,49,513.56 which gives GP of 21.45% on sales of Rs. 12,28,29,758/-. The assessee has cited an example of comparable case of M/s Rambhajo's. (PAN: - AAJFR4553Q) who was assessed at Central Cirlce-1, Jaipur u/s 153A for AY 2010-11 and the GP rate of 15.30% has been accepted.
Here in this case, assessment was made u/s 144 of Income Tax Act after applying the provisions of section 145(3) of the Act and in view of the observations and remarks of the special auditors and discrepancies pointed out by the AR of the assessee the profit of the assessee should be estimated by applying appropriate GP rate. After considering the fact that the AO has made addition of Rs. 91,37,068/- and treated it as income from sales of Rs. 12,28,29,758, which gives the GP rate of 21.45% on sales. Further no any 72 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur other undisclosed business activity of the assessee has brought to the notice. Further the GP rate in most of the years was assessed to less than 15%. Even in the next year AY 2012-13, the GP of Rs 2,43,34,969.12 was accepted on sales of Rs. 14,41,31,286.15 which gives the GP rate of 16.88%. The weighted average GP rate for the AY 2006-07 to AY 2012-13 comes to 16%. I have estimated the profits for AY 2010-11 by applying GP rate of 24% on consolidated sales but the fact remains that in AY 2010-11, the substantial part of sales was unaccounted sales. In unaccounted sales the profit remains always higher as the saving on account of taxes etc which comes to around 4%. Considering this fact and assessed GP in past and next year, I estimate the GP rate of 20% on the declared sales of Rs. 12,28,29,758/-. Thus, the Gross Profit comes to Rs. 2,45,65,951.60/-. The assessee has shown gross profit of Rs. 1,72,12,445.56 in its regular return. Thus, the short fall in GP is determined at Rs. 73,53,506.04. The assessee has declared Rs. 15,00,000/- in the return filed on account of undisclosed income from unaccounted sales/purchases. In Profit and Loss account the assessee disclosed this income by mentioning that "Income taken into account on the basis of statements recorded in search/documents found during Income tax search being income earned from unaccounted sales represented by undisclosed assets (PB page 103). Further, in the sworn statements recoded on oath, Shri Prateek Kothari, director of assessee company, admitted this income as income earned from unaccounted purchase and sales in the company. (PB page 38 and 43). The assessee company has no any other activity except the jewelry business. Therefore, I hold that the assessee has declared this income of Rs. 15,00,000/- on account of profit from jewelry business which was utilized in unaccounted assets. After duly considering these facts and circumstances, the trading addition of Rs. 73,53,506/= minus Rs. 15,00,000/- = Rs.58,53,506/- is sustained.
Further the Special Auditor has pointed out double payment of advertisement expenses by Rs. 4000/- and non maintenance of proper vouchers against packing expenses and vehicle expenses of Rs. 50000/- & Rs. 13500/- . Therefore, I disallow Rs. 4000/- against advertisement expenses, and 20% out of packing and vehicle expenses which comes to Rs. 10000+2700 totaling to Rs. 12700/-. Thus the total addition of Rs.58,53,506/- +Rs. 4000/-+Rs. 12700/- = Rs. 5870206/- is sustained as against addition of Rs. 91,37,068/- made by AO. This addition would cover all the discrepancies in stock calculated by AO on the basis of rejected books of account. Thus, the assessee gets relief of Rs. 32,66,862/-. Assessee's appeal is partly allowed."
73 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 17.4 During the course of hearing, the ld. AR of the assessee prayed that the ld. CIT(A) erred in confirming the trading addition of Rs.58,53,506/-
by estimating GP rate @ 20% on declared sales of Rs. 12,28,29,758/- as against 14.01% declared by the assessee. The ld. AR of the assessee filed the following written submission which has been taken into consideration.
''As regard the assessee's appeal we submit that the ld CIT(A) confirmed the trading addition of Rs. 58,53,506/- by estimating the GP rate of 20% on the declared sales. It is admitted fact the assessee was not indulged in any unaccounted purchase sales or other business activities. When there is no unaccounted business, than there cannot be unaccounted income. Further, the books of account of the assessee has been rejected but it does not give unfettered power to lower authorities to assessee the income of the assessee at their whims and fancies. Assessment framed u/s 144 of Income Tax Act is best judgment it means income should be assessee considering the best available material, past history, nature and practice of trade in such manner which gives a justifiable result. The lower authorities have assessed higher business profit but no asset or stock was found corresponding to enhanced profit. Further, The assessee has cited comparable case of similar nature trade of M/s Rambhajo's. (PAN: - AAJFR4553Q) who was assessed at Central Cirlce-1, Jaipur u/s 153A for AY 2010-11 and the GP rate of 15.30% has been accepted. Further the GP rate in most of the years was assessed to less than 15%. Even in the next year AY 2012-13, the GP of Rs 2,43,34,969.12 was accepted on sales of Rs. 14,41,31,286.15 which gives the GP rate of 16.88%. The weighted average GP rate for the AY 2006-07 to AY 2012-13 comes to 16%.
S. A.Y Turnover G.P G.P.
No. Ratio
1 2006-07 3531618.00 512723.00 14.52%
2 2007-08 18562148.00 2509297.00 13.52%
3 2008-09 20591252.00 3047886.00 14.80%
4 2009-10 12824830.00 3356643.00 26.17%
5 2010-11 69891003.00 11843141.55 16.95%
6 2011-12 122829758.50 17212445.56 14.01%
74 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur
7. 2012-13 144131286.15 24334969.12 16.88% Weighted 392361895.65 62817105.23 16.01% GP Therefore, the trading addition of Rs. 58,53,506/- cannot be sustained if the weighted average GP rate on the basis of past history approached is followed. The weighted average GP comes to 16.01% and the declared GP rate of the assessee is 14.01% which is very close to weighted average GP rate. Reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of CIT Vs Bhawan Va Path Nirman (Bohra) & Co (No. 1) 258 ITR 431 wherein it has been held that the past history of the assessee is best guiding factor.
In view f the above submission, the humble assessee prays your honor kindly to delete the addition of Rs. 58,53,506/- confirmed by ld CIT(A) and dismiss the ground raised by the department and allow the ground of the assessee.'' 17.5 During the course of hearing, the ld. DR relied on the orders of the AO.
17.6 We have heard the rival contentions and perused the materials available on record. It may be mentioned that in the case of the assessee for the assessment year 2010-11, we have adopted the method of weighted average applying the gross profit rate of 16.98%. Hence, there is no change in the facts and circumstances of the case, the gross profit rate of 16.01% should also be adopted in this case also taking into past history of the assessee by considering the gross profit, turnover for the 2006-07 to 2012-13 as under:-
75 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur S. A.Y Turnover G.P G.P. No. Ratio 1 2006-07 3531618.00 512723.00 14.52% 2 2007-08 18562148.00 2509297.00 13.52% 3 2008-09 20591252.00 3047886.00 14.80% 4 2009-10 12824830.00 3356643.00 26.17% 5 2010-11 69891003.00 11843141.55 16.95% 6 2011-12 122829758.50 17212445.56 14.01%
7. 2012-13 144131286.15 24334969.12 16.88% Weighted 392361895.65 62817105.23 16.01% GP Accordingly, the ground no. 2 to 5 of the assessee's are partly allowed and the Ground No. 1 of the Revenue is dismissed.
18.1 The Ground No. 2 of the Revenue is regarding restricting the addition of Rs. 2,71,50,538/- to Rs. 1,20,751/- made by the AO by making disallowance u/s 40A(3) of the Act. The facts as emerges from the order of the ld. CIT(A) is as under:-
"3.3.3 I have considered assessee's submission and also taken a note of judicial pronouncements relied upon by the appellant as well as the factual matrix of the case.
I found that the AO made disallowance by holding that the assessee is indulged in illegal activities by not recoding the correct purchases, sales, Revenue & capital transaction in its regular books of accounts and payments against the purchases and expenditure were made in cash and no relaxation can be given for the illegal activities. He further held that he has not rejected the parallel and duplicate books of accounts maintained by the assessee and judicial decisions relied upon by the assessee are not applicable to the case of the assessee. On the other hand the ld AR submitted that the assessee was not engaged in any illegal business or a business prohibited by law. The sales pertaining to this year has been accepted by the AO. No any parallel or duplicate books of account for the year were found by the search party. It is an admitted fact that no entry was found in the books maintained in name "Jadavji"
for the current year. The books of account and documents seized by the department do not show any entries of alleged cash payment of Rs. 2,38,345/- on 76 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur account of cash purchase of diamond. The AR submitted that the seized paper (pg 2 Exhibit 2) shows the cash payment of Rs. 27,16,000/- in the name of Sameer Bhai. The cash payments in the name of diamond purchases or Sameer Bhai were recorded by the special auditors in the books re-casted by them on presumption, assumption possibilities and probabilities without having any corroborative evidence. This action of the special auditor is beyond the scope of terms of reference. The terms of reference of special audit is to recast the account on the basis of seized documents. Further, the purchases relating to Sameer Bhai belong to AY 2010-11 wherein the profit was estimated by applying GP rate. On the facts and circumstances of the case and after duly considering assessee's submission, I am inclined to agree with the contention of ld AR that the assessee was not engaged in any unlawful business. The fact remains that the assessee was indulged in unaccounted sale and purchase business of jewellery and the provisions of section 40A(3) of the Act cannot be used as penal action, the law prescribes separate penal action u/s 271(1)(c) or 271AAA for the unaccounted income. Further, for this year, no duplicate sets of books of account were found. The AO has rejected the regular books of account and the assessment has been made u/s 144 of I.T. Act by applying the provisions of section 145(3) of the Act. In absence of parallel or duplicate books for the year under consideration, the question of rejection or not rejection of parallel or duplicate books for this year does not arise. The cash payments were recorded by the special auditors in the re-casted books on presumptions without having the corroborative entries seized documents. The seized paper pg 2 exhibit 2 (PB pg 23) shows cash payment of Rs. 27,16,000/- only against which the special auditor has recorded the cash payment of Rs. 2,67,91,442/- in name of Sameer Bhai. Similarly, the special auditor presumed the cash purchases of Rs. 2,38,345/- against the negative stock of diamond calculated by him on the basis of stock register wherein the consumption of diamond was not shown on day to day basis but on monthly basis. The special auditors recasted these books of account but in recasting of these books, he pointed out certain limitation & remarks and expressed that the recasting of the books were made by applying certain estimation and assumptions. He also expressed his view under common remarks that the true and correct profit cannot be determined due to inherent limitation of records and method of accounting. Further, the purchases in respect to seized document page 2 of Exhibit 2 pertain to AY 2010-11 and the fact remains that the profit of the assessee for AY 2010-11 by applying the GP rate of 26.21% was estimated and the assessment was finalized u/s 144 of I.T. Act after applying the provisions of section 145(3) of Act. Various Benches on Hon'ble ITAT including the jurisdictional Jaipur bench of Hon'ble ITAT and various High Court including the jurisdictional Hon'ble Rajasthan High Court has held that where the estimation of income is made by applying GP rate, further disallowance cannot be made by applying the provisions of section 40A(3) of Income Tax Act. It would be worthwhile to reproduce the 77 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur relevant para of decision of Hon'ble ITAT Jaipur Bench, in the case of Shri Shankar Khandelwal v/s ACIT, Central Circle-1, Jaipur (supra) as under:-
"5.9 We have heard both the parties. The ld. AR during the course of proceedings before us has argued that no disallowance u/s 40A(3) can be made in case the books of accounts are rejected. Our attention was drawn towards the fact that the AO has rejected the books of accounts and has made the addition on account of construction and work in progress expenses and has also made disallowance of taxi running expenses. The addition made under both the heads is substantial. The Hon'ble Jurisdictional High Court in the case of CIT Vs. G.K. Contractors, 19 DTR 305 held that if the profit is estimated by applying higher net profit rate after rejecting the books of accounts by invoking the provisions of Section 145(3)of the Act then no separate addition can be made on account of cash credit u/s 68 of the Act. The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Smt. Santosh Jain, 296 ITR 324 held that Section 40A(3) cannot be invoked when the income is estimated by applying the gross profit rate. The Hon'ble Punjab & Haryana High Court followed the decision of The Hon'ble Allahabad High Court in the case of CIT Vs. Banwari Lal Bansi Dhar, 229 ITR 229. The Jaipur Tribunal in the case of Singhal Builders Contractor Vs. Addl. CIT, 133 TTJ 102 has also held that once an income of the assessee is estimated by applying the gross profit rate or net profit rate then no disallowance can be made u/s 40A (3) or any other provisions. The proviso to Section 40A(3) makes an exception that cash payment is not to be disallowed if it is an account of business expediency. After considering the submissions of the assessee, we feel that no separate addition is required to be made u/s 40A(3) because the books of accounts has been rejected and there has been. The addition of Rs. 3.21 lacs made u/s 40A(3) is deleted."
Further Hon'ble ITAT in the case of Bollineni Castings and Steel Limited Versus DCIT, Central Circle 1(3), Hyderabad (supra) has dealt the issue of disallowance of expenditure recorded in the seized material. It is useful to refer here the findings of Hon'ble Tribunal as under:-
"Having regard to the rival contentions and the material on record and the judicial precedents relied by each of the parties, we find that the undisputed facts are that the assessee has accepted that books found and seized during the course of search pertain to the assessee and that the receipts and payments mentioned therein are also relating to the business operations of the assessee. Whatever may be the reason for accepting the receipts mentioned in the books, the lone contention of the assessee before us is that the expenditure relating to the receipts should be allowed. We agree with the contention of the Ld. D.R. that the expenditure which has been incurred wholly and exclusively for the purpose of business alone can be allowed and it is not verifiable from the seized material that this expenditure is incurred wholly and exclusively for the purpose of business of the assessee. We also agree 78 ITA No. 446/JP/2016 M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur with the Ld. D.R. that most of the expenditure being incurred in cash and some of which may be for illegal purposes is also not allowable under sections 40A(3) and 40(a)(ia) of the I.T. Act. Therefore, the contention of the Ld. Counsel for the assessee that the entire payments mentioned in the seized material is to be allowed while treating the receipts as income of the assessee is not tenable. However, we also agree with the Ld. Counsel for the assessee that the entire receipts recorded in the registers cannot be treated as the income of the assessee. The relatable business expenditure has to be allowed from the receipts to compute the undisclosed income of the assessee. Therefore, the only course open to the Revenue would be to reject the books of account maintained by the assessee and to estimate the business income of the assessee. As the facts relating to the computation of gross profit or net profit of the assessee for the earlier or subsequent assessment years or relating to other assessee in similar business are not before us, we are of the opinion that the issue needs re-look/reconsideration by the A.O. for estimation of the assessee's income. It is needless to mention that assessee shall be given a fair opportunity of hearing as regards the estimation of the undisclosed business income and the assessee shall cooperate with the A.O. by producing all the relevant material for such estimation. Since payments mentioned in the seized material are not being considered as the expenditure of the assessee, the applicability or otherwise of the provisions of sections 40A(3) and 40(a)(ia) of the I.T. Act is also not relevant at this stage."
Therefore in view of aforementioned judicial pronouncements, the addition on account of disallowance made u/s 40A(3) cannot be sustained where the profit was estimated by rejecting the books of account and by applying the provisions of section 145(3) of Act. Further, the fact remains that Festival Expenses Rs. 39600/- + 44827/- and Gift Expenses Rs. 36324/- totalling to Rs. 120751/- pertain to profit and loss account and for which the assessee has also agreed before the AO for the disallowance. Thus, the disallowance to the extent of Rs.1,20,751/- is on agreed basis. Therefore in view of the above facts and circumstances and respectfully following the judicial pronouncements of Hon'ble ITAT Jaipur Bench and Hon'ble Rajasthan High Court the addition of the remaining amount Rs. 2,71,50,538/- minus Rs. 1,20,751/- = Rs. 2,70,29,787/- cannot be sustained.
Therefore, AO is directed to delete the addition of Rs. 2,70,29,787/- made by him by disallowing the cash payment u/s 40A(3) of I.T. Act and the addition for the remaining amount Rs. 1,20,751/- is sustained as the same is on agreed basis.
18.2 During the course of hearing, the ld. DR relied on the order of the AO.
79 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 18.3 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A).
18.4 We have heard the rival contentions and perused the materials available on record. It may be noted that in the appeal of the Revenue for the assessment year 2010-11, the issue raised by the Revenue has been dismissed confirming the action of the ld. CIT(A) on the issue in question. Thus Ground No. 2 of the Revenue is also dismissed as indicated in Revenue's appeal (supra).
19.1 The Ground No. 3 of the Revenue is regarding deletion of addition of Rs. 3,87,948/- made by AO by treating the purchases made from M/s.
Aditya Gems as unverifiable/ non-genuine. The facts as emerges from the order of the ld. CIT(A) is as under:-
"3.4.3 I have duly considered assessee's submission and also taken a note of the factual matrix of the case as well as judicial pronouncements relied upon by the appellant. AO has treated the purchases from M/s Aditya Gems as non genuine on the basis of finding that no document was produced by the assessee and the assessee has not produced the party before him for cross examination. It is submitted that vide the letter dated 19.02.2013, the assessee has submitted the following documents in respect of purchases made from Aditya Gems (Prop. Shree Kant Soni) to substantiate its claim of genuineness of the purchases (PB Page 595-619):
i) Copy of ledger a/c of assessee in books of accounts of this concern.
ii) Copy of sales Tax registration of party.
iii) Copy of PAN card of party.
iv) Copy of bank a/c of party showing the entry of payment
received from assessee against goods sold to assessee.
v) Copy of Income Tax return, Computation of total Income, Audit report, audited balance sheet including profit & loss a/c and its annexure of the party of AY 2011-12.80 ITA No. 446/JP/2016
M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur Further, the assessee stated that the assessee has also made purchases from this party in FY 2011-12 and filed documents in support of the genuineness of the purchases and the party attended before the AO and confirmed the sales to the assessee and thereafter the purchases made in AY 2012-13 from this party was treated as genuine. The assessee filed the copy of assessment order for AY 2012-13 along-with documents showing the purchases from this party. I have also called for assessment records of AY 2012-13 for necessary verification of facts and found that this party appeared before the AO and purchases from this party in AY 2012-13 was treated as genuine. This proves that the party is genuine party and the party is existing on the given address, filing Income-tax record and also getting refunds from the Dept. The aforementioned documents are part of case record and even AO has recorded the same in the order sheet dt 25/2/2015 for the scrutiny assessment of AY 2012-13. Therefore in view of the above facts and circumstances the addition of Rs. 3,87,948/- cannot be sustained. The AO is directed to delete the same. Assessee's appeal succeeds.
19.2 During the course of hearing, the ld. DR relied on the order of the AO.
19.3 On the other hand, the ld. AR of the assessee supported the order of the AO.
19.4 We have heard the rival contentions and perused the materials available on record. It may be noted that the ld. CIT(A) has given clear findings hereunder on the issue in question by deleting the addition of Rs.
3,87,948/-
''I have also called for assessment records of AY 2012-13 for necessary verification of facts and found that this party appeared before the AO and purchases from this party in AY 2012-13 was treated as genuine. This proves that the party is genuine party and the party is existing on the given address, filing Income-tax record and also getting refunds from the Dept. The aforementioned documents are part of case record and even AO has recorded the same in the order sheet dt 25/2/2015 for the scrutiny assessment of AY 2012-13. Therefore in view of the above facts and circumstances the addition of Rs. 3,87,948/- cannot be sustained. The AO is directed to delete the same. Assessee's appeal succeeds.
81 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur It is noted that the order of the ld. CIT(A) is well reasoned and we find no reason to interfere with the order of the ld. CIT(A). Thus Ground No. 3 of the Revenue is dismissed.
20.1 Ground No. 1 of the assessee is regarding challenging the validity of assessment reference made for special audit and validity of assessment order.
20.2 We have heard the rival contentions and perused the materials available on record. It may be noted that this issue has been decided against the assessee confirming the action of the ld. CIT(A) in the case of the assessee for the assessment year 2010-11 (supra). Hence, the decision taken in the appeal of the assessee for the assessment year 2010-11 shall apply mutatis mutandis in the assessment year 2011-12 also. Thus Ground No. 1 of the assessee is dismissed.
21.1 The Ground No. 6 of the assessee is regarding not allowing the benefit of telescoping, recycling and rotation of funds.
21.2 We have heard the rival contentions and perused the materials available on record. The Ground No. 6 of the assessee is infructuous as no addition has been sustained on the basis of unexplained expenditure or assets. Thus Ground No. 6 of the assessee is dismissed.
82 ITA No. 446/JP/2016M/s. Jadau Jewellers & Manufacturers (P) Ltd. vs. DCIT, Central Circle- 2, Jaipur 22.0 In the result, the appeals filed by the assessee are partly allowed and that of the Revenue are dismissed.
Order pronounced in the open Court on 28-02-2017.
Sd/- Sd/- ¼dqy Hkkjr½ ¼HkkxpUn½ (KUL BHARAT) (Bhagchand) U;kf;d lnL; /Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 28 /02/ 2017 *Mishra
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s. Jadau Jewellers & Manufacturers (P) Ltd. , Jaipur
2. izR;FkhZ@ The Respondent- The DCIT, Central Circle- 2, Jaipur
3. vk;dj vk;qDr¼vihy½@ CIT(A).
4. vk;dj vk;qDr@ CIT,
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 446/JP/2016) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar