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I-T - Whether when complaint filed by assessee against accountant has been duly filed with police, in that case assessee's inability to produce books needs to be believed & he could not be considered as defaulter for not discharging onus of providing books before AO - YES: ITAT

By TIOL News Service

KOLKATA, OCT 21, 2016: THE issue is - Whether when the complaint filed by assessee against its accountant has been duly filed with the police, in that case assessee's inability to produce the books of accounts needs to be believed & he could not be considered as a defaulter for not discharging his onus of providing the books before AO. YES is the answer.

Facts of the case

The assessee is a firm engaged in the business of watches, clocks, time pieces, imitation jewellery, readymade garments, crockery items, perfumes, cosmetics, leather items and sun glasses having its show rooms at Behala, Camac Street and B.B.D.Bag. A survey u/s 133A was conducted at the business premises of the assessee, incriminating documents & evidences were found and impounded by the survey team. A search and seizure operation was carried out by the Central Excise authorities and it was found by them that the assessee was engaged in manufacturing and selling of watches in large scale without obtaining proper license and without disclosing and paying duties thereon. Assessee filed the return of income for AY 2003-04 on 27.11.2003 declaring loss of Rs 1,89,627/-. The books of accounts were called for by AO for which the assessee replied that their books of accounts were washed out and they need some time to rebuild the accounts. It was contended in the letter filed before AO that the accountant of the assessee left on 31.1.2004 after destroying the accounts of the assessee. AO observed that during the course of survey the assessee was engaged in the practice of making unaccounted purchases and sales outside the books of accounts. It was also found that purchase register was updated upto 19.1.2003 but some purchases made in the months of April, May, August, Sept , Oct , Nov and Dec 2002 amounting to Rs. 23,59,261/- were not entered in the purchase register. Sales of over Rs 13 lacs approximately were also not entered in the sales register.

The AO observed that during the course of assessment proceedings, the assessee was directed to produce the books of accounts with supporting bills and vouchers which were not produced by the assessee. He observed that the submission of the assessee, that the books of accounts were washed out due to the action of the accountant who left on 31.1.2004 after destroying the accounts, could not be believed as it was found that the sales tax return for the year ending 31.3.2004 was filed on 28.5.2004 and the income tax return for AY 2004- 05 was filed within due date after getting the same audited. He accordingly concluded that the accounts were either not destroyed as claimed by the assessee or was rebuilt within the said time and the assessee did not produce the books of accounts despite passage of more than two years from the alleged date of destruction of accounts. Thus, AO made addition of Rs. 23,59,261/- on account of undisclosed investment in the undisclosed purchase on the ground that there was unaccounted purchases found during the course of survey and the source of fund utilized for making such undisclosed purchase was not accounted for. He also made addition of Rs. 5,12,471/- on account of profit on the undisclosed purchase of Rs. 23,59,261/- since the purchases were outside the books of accounts and so the sales were also outside the books of accounts. Therefore, profit of Rs. 5,12,471/- was added by applying the disclosed gross profit rate.

The CIT(A) after obtaining remand report from AO, granted relief to the extent of Rs 3,37,104/- stating that the balance shown by the sundry credit parties tallied with the balance shown by the assessee in its balance sheet against their names and hence the unrecorded purchases were subsequently accounted in the books after the survey needs to be accepted as stated by the assessee. In respect of purchases to the tune of Rs. 12,46,221/-, the CIT(A) found that the assessee had duly paid the dues to the concerned sundry creditors before the end of the previous year itself and there was no balance outstanding as on 31.3.2003 in their names and hence the explanation that the unrecorded purchases on the date of survey have been subsequently accounted by the assessee in its books needs to be accepted and the same is also cross verified from the concerned parties.

Disallowance made u/s 40A(2)(b)

AO observed that the assessee firm paid service charges to the tune of Rs. 78,000/- to persons specified in section 40A(2)(b) and disallowed the same in the absence of any details and evidences about nature of work done / services rendered to the assessee. Before CIT(A), assessee submitted that it had paid service charges of Rs. 30,000/- and Rs. 48,000/- to Shri Muddasir Firoz and Shri Imran Firoz respectively for looking after the sales at different showrooms. Both these parties are sons of the partner of the firm. These submissions were subjected to remand proceedings before AO who mentioned that the payments with mode thereon could not be verified for want of books of account. CIT(A) observed that AO had not disputed the submission of assessee that these service charges were paid to those two parties for looking after the sales at different showrooms and also held that the service charges so paid was not excessive or unreasonable so as to warrant the provisions of section 40A(2)(b). Accordingly, CIT(A) deleted the disallowance in that regard.

Addition on account of unexplained investment in fixed assets

AO observed that no details in support of source for additions to fixed assets were produced by the assessee. He also observed that as per tax audit report, there was an investment of Rs. 54,09,953/- and accordingly found that the said discrepancies were not sorted out by the assessee. Accordingly he made an addition towards unexplained investment in the sum of Rs. 54,09,993/-. Before CITA, it was submitted that the investment in fixed assets cannot be treated as unexplained since the same is reflected in the balance sheet of the assessee together with its proper sources and the balance sheet has tallied. It was also submitted that there was no discrepancy in the aggregate value of the assets, though the figures for written down value (WDV) and those for the additions were inter changed in some cases. In case of cash credit limit allowed by Centurion Bank, AO mentioned that it could not be verified for non-production of books of accounts and bills. However, the bills and vouchers in respect of several additions were furnished and the same were verified to the extent of Rs. 11,82,180/-. It was also submitted that the claim of depreciation of Rs. 5,95,877/- of the assessee has been fully allowed by AO in the assessment which admittedly includes depreciation on additions to fixed assets. On appeal, CIT(A) deleted the addition.

Having heard the matter, the Tribunal held that,

++ the assessee had lodged a compliant before the Officer in Charges, Hare Street Police Station regarding the destroying of records and computerized books of accounts including loss of audited print back up by the accountant. This complaint was specifically made against the accountant of the assessee. We find that AO sought to verify the veracity of this claim of the assessee by making verification with the police department in terms of section 133(6) for ascertaining the action taken by the police on the compliant lodged, whether any arrest has been made or imprisonment etc of the accountant or any other person in connivance and inspector of income tax was also deputed to the police station from time to time to know the development in this regard. These facts are stated by AO in his remand report dated 6.8.2007 which is part of our records. In these circumstances, the assessee's inability to produce the books of accounts needs to be believed and accordingly he could not discharge his onus of providing the books before AO. Moreover, the assessee had claimed that the accountant left him on 31.1.2004 and also had destroyed the accounts of the assessee. It is not mentioned in the said compliant for what period, the accounts were destroyed. Just because the assessee had filed the sales tax return and income tax return for the Asst Year 2004-05 in time, his action of lodging a compliant and expression of inability to produce books of accounts due to its destruction cannot be doubted with or faulted with. It is not the case of the revenue that proper back up was not taken by the assessee in respect of the books of accounts for the AY 2004-05 which would have enabled it to file the returns in time. Moreover, AO had not doubted the fact of assessee lodging compliant before the police authorities against the destruction of books by the accountant;

++ we find that the return for AY 2003-04 was filed along with the audited accounts and the list of sundry creditors together with their names and addresses were duly given by the assessee before AO which only made AO to make verification of the sundry creditors in the assessment as well as remand proceedings. We find that CIT(A) had deleted the addition on account of unrecorded purchases based on the remand report of AO wherein the relevant sundry creditors parties balances were cross verified and tallied / settled by account payee cheques in the same year itself and accordingly held that the assessee had duly recorded the purchases after the survey in its books of accounts. We find when the books of accounts were not produced by the assessee, but the list of creditors together with their names and addresses were available with the ld AO, which were also subjected to verification, then, in our considered opinion, there is nothing wrong in CITA trying to understand the veracity of the claim of the assessee towards purchases by cross verifying with the concerned party balances vis a vis the balances shown by the assessee. Admittedly, the creditors confirming their party balances were purely external evidences and were done directly to the department behind the back of the assessee. When such kind of verification results in no suspicion in the minds of CITA, there is nothing wrong in CITA believing the same and granting relief in respect of the said parties. Hence we do not find any infirmity in the order of the CITA in this regard;

++ AR contended that the total purchases as per audited accounts exceed the average purchases (considered on monthly basis). It is not in dispute before us that the purchase register has been updated upto 19.1.2003 which reflected total purchase of Rs. 232.51 lacs which gives a average monthly purchase of Rs. 23.51 lacs. Hence the total purchase during the year based on said monthly average works out to Rs. 282.12 lacs, whereas the audited accounts show aggregate purchases of Rs. 305.35 lacs i.e an increase of Rs. 23.23 lacs, which almost matches with the unrecorded purchases found in the course of survey. We find that the assessee had submitted the audited balance sheet along with the return. The entire purchases reflected thereon were either settled in cash / cheque or reflected as su+ndry creditors. The AR also argued that these sundry creditors were fully settled by the assessee by account payee cheques either in the same year or in the subsequent year, which fact has not been controverted by the revenue before us. CITA had given a categorical finding that AO had not proved the investment made by the assessee for these alleged unrecorded purchases. We find that the DR had merely stated in his written submission that mere settlement of dues to the said parties does not sanctify the purchase transactions as genuine. This goes to prove that there is no case for making any addition towards unrecorded purchases and it could only have to be concluded that the unrecorded purchases found during survey were subsequently recorded in the books of accounts. Consequentially there is no question of making any addition on account of gross profit on the same. But we find that the additions sustained by the CITA towards unrecorded purchases to the tune of Rs. 77,594/- and undisclosed gross profit of Rs. 1,74,508/- has not been contested by the assessee before us. Hence in these circumstances, we feel that no interference need to be made to the order of CITA in this regard. Accordingly, the Grounds 1 & 2 raised by the revenue are dismissed;

Disallowance made u/s 40A(2)(b)

++ we find from the remand report that AO had merely stated that since the books of accounts were not produced by the assessee, the payments made to these two persons could not be verified. From the perusal of the remand report, we find as rightly pointed out by the AR, that the AO had not doubted the genuineness of the expenditure incurred and the services rendered by these two parties to the assessee. We also agree with the contention of the DR that the said amount remained outstanding as on 31.3.2003 and hence there is no question of verification of mode of payment of these amounts in financial year 2002-03 as stated in the remand report of the AO. We also find that CITA had given a finding that the amount of Rs. 2,500/- per month and Rs. 4,000/- per month given to these two persons cannot be termed as excessive or unreasonable to invoke the provisions of section 40(A)(2)(b). This fact has not been controverted by the revenue before us. We also find that the AO had not brought any comparable cases for fair market value to prove that the payment made by the assessee is excessive or unreasonable even in the remand proceedings. Without bringing the same, simply invoking the provisions of section 40A(2)(b) would be highly improper. We also find that the nature of services rendered by these two parties were also not denied or doubted by the ld AO in the remand report. Hence we hold that the ld CITA had rightly granted relief to the assessee in this regard. Accordingly, the Ground No. 3 raised by the revenue is dismissed;

Addition on account of unexplained investment in fixed assets

++ we find that the fixed assets have been duly reflected in the audited balance sheet filed by the assessee which represents assets and liabilities. The liabilities reflected therein clearly reflect the bank loans availed by the assessee such as auto loan from HDFC Bank, loan from Citi Bank against hypothecation of showroom, cash credit limit from Centurion Bank against the hypothecation of stocks of business of the assessee. The liabilities reflected in the liability side in the form of bank loans were treated as explained by AO. Hence, it could be safely concluded that the assets appearing in the balance sheet would be treated as explained once the corresponding entries on the liability side are explained. There is no case made out for framing an addition towards unexplained investment in fixed assets. It is not in dispute that the fixed assets have been duly reflected in the balance sheet. We also find that the depreciation on entire fixed assets including the addition to fixed assets have been allowed by AO. In the facts of the case, we find that the investment in fixed assets have been duly explained from the balance sheet of the assessee which is a tallied balance sheet filed along with the return of income. Hence CITA had rightly granted relief to the assessee in this regard. Accordingly, the Ground No. 4 raised by the revenue is dismissed.

(See 2016-TIOL-1808-ITAT-KOL)


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