ITO, New Delhi V. Sh. Sunil Nayyar, Delhi

ITA 6168/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3702 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2012-2013
• Appeal Filed On: 02-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SARAS KUMAR
• Assessee Lawyers: JAGDISH AJMANI
• Keywords: Rejection of books of accounts; Principle of natural justice; Set aside
• Section: 40A(3); 143(3); 201; 43; 48; 73; 72; 13; 145(3); 22; 68; 145; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE SH. KULDIP SINGH, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 6168/DEL/2016 : ASSTT. YEAR : 2012-13 INCOME TAX OFFICER, WARD-49(3), NEW DELHI VS SH. SUNIL NAYYAR, R/O 81-A, VIKRANT ENCLAVE, MAYAPURI, NEW DELHI-110064 (APPELLANT) (RESPONDENT) PAN NO. ABVPN3963B CO NO. 09/DEL/2017 : ASSTT. YEAR : 2012-13 SH. SUNIL NAYYAR, R/O 81-A, VIKRANT ENCLAVE, MAYAPURI, NEW DELHI-110064 VS INCOME TAX OFFICER, WARD-49(3), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. ABVPN3963B ASSESSEE BY : SH. JAGDISH AJMANI, CA REVENUE BY : SH. SARAS KUMAR, SR. DR DATE OF HEAR ING: 20 . 01 .20 20 DATE OF PRONOUNCEMENT: 24 .02 .20 20 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL FILED BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF LD. CIT (A)-17, NEW DELHI DATED 05.09.2016. 2. FOLLOWING THE GROUNDS HAVE BEEN RAISED BY THE RE VENUE: 1. THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS O F THE CASE IN DELETING THE ADDITION OF RS. 2,79,61,917/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROFIT ON UNEXPLAIN ED DEPOSITS IN BANK, BY APPLYING PROFIT OF 5% TO TOTAL TURNOVER , ON THE PLEA THAT NO DEFECT IN BOOKS OF ACCOUNTS WAS POINTE D OUT BY THE ASSESSING OFFICER AND WHEREAS THE ASSESSING OFF ICER HAD ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 2 POINTED OUT VARIOUS DEFECTS IN BOOKS OF ACCOUNTS AS MENTIONED IN THE IMPUGNED ASSESSMENT ORDER DATED 30/03/2015. 2. THE LD. CIT (A) HAS ERRED IN UPHOLDING GENUINENE SS OF ALLEGED BUSINESS DONE BY THE ASSESSEE IN THE LIGHT OF ENQUIRIES AND FINDINGS DONE BY THE AO. 3. THE LD. CIT (A) HAS ERRED IN UPHOLDING THE GENUI NENESS OF THE BUSINESS OF THE ASSESSEE BY HOLDING THAT NO SPE CIFIC DEFECTS WERE POINTED OUT BY THE AO WHEN AO MENTIONE D VARIOUS DEFECTS IN HIS BOOKS. THE LD. CIT (A) HAS E RRED IN UPHOLDING THE GENUINENESS OF BOOKS OF ASSESSEE WHEN AO HAS SPECIALLY MENTIONED THAT NO STOCK REGISTER WAS MAIN TAINED AND NEITHER ANY CASH BOOK NOR OTHER DETAILS WAS MAI NTAINED AND PRODUCED. 4. THE CIT (A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS. 1,39,38,110/- (THAT IS RS. 51,00,000/- MADE BY THE ASSESSING OFFICER ON ACCOUN T OF UNEXPLAINED CASH DEPOSIT AND RS. 88,38,110/- MADE B Y THE ASSESSING OFFICER ON ACCOUNT OF UNSECURED LOANS U/S 68 OF THE IT ACT 1961). AS THE ASSESSEE FAILED TO PROVE THE I DENTITY, GENUINENESS & CREDITWORTHINESS OF THE PARTIES, WHO GAVE THE UNSECURED LOAN AND PAID CASH TO THE ASSESSEE AND TH E ASSESSEE HAS FAILED TO DISCHARGE PRIMARY ONUS AS IN COMPLETE ADDRESS WAS PROVIDED WITHOUT OTHER DETAILS. IN VIEW OF THIS, LD. CIT (A) ERRED IN FACT AND ON THE LAW WHILE DELE TING THE ADDITION MADE BY THE AO. 3. GROUND NO. 1 RELATES TO CONTENTION OF THE ASSESS EE AGAINST REJECTION OF BOOKS OF ACCOUNT, ESTIMATION OF PROFIT AND MAKIN G ADDITION OF RS.2,79,61,917/-. 4. THE FACTS, JUSTIFICATION, SUBMISSIONS OF THE AR HAVE BEEN TAKEN FROM WELL COMPILED ORDER OF THE LD. CIT (A). 5. THE FACT OF THE CASE IS THAT THE AO FOUND THAT T HE ASSESSEE WAS ENGAGED IN THE BUSINESS OF WHOLE SALE TRADING OF MI LK IN THE NAME OF PROPRIETARY CONCERN, M/S KUMARS BROTHERS. TOTAL SAL E OF RS.86,65,83,744/- ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 3 WAS SHOWN ON WHICH NET PROFIT @0.04% WAS DECLARED. GP WAS SHOWN @0.22%. 6. THE REASONS GIVEN BY THE AO WHILE ESTIMATING THE PROFIT @5% ON THE GROSS TURNOVER IS AS UNDER: 1. 'SOFT COPY OF BOOKS WAS NOT FILED, ALTHOUGH SPEC IFICALLY ASKED FOR. 2. ON PERUSAL OF PURCHASE BILLS, IT IS SEEN THAT TH EY WERE IDENTICAL, GENERATED THROUGH IN THE SAME STYLE AS IS PREPARED BY A SINGLE HAND. 3. TANKER NUMBERS WERE NOT WRITTEN ON THE PURCHASE BILLS. 4. THESE BILLS WERE LIKE NEW PRINTOUTS AS IF IT HAS NOT PASSED ON TO MANY HANDS. 5. ALL THE PURCHASE BILLS WERE SEQUENTIALLY NUMBERE D ALTHOUGH BELONG TO DIFFERENT PERSONS EXCEPT TIE BILLS OF KWALITY DAIRY (INDIA) LTD. 6. LIKE, PURCHASE BILLS, SALE BILLS WERE ALSO COMPU TER GENERATED IN THE SAME STYLE AND NEW LIKE PAPER (WITHOUT ANY FOLD), A S IF IT HAS NOT PASSED THROUGH MANY HANDS. 7. ALL SALE AND PURCHASE BILLS BEAR THE SIMILAR STY LE OF SIGNATURES AS IF PREPARED BY THE SAME GROUP OF PERSONS. 8. NONE OF THE SALE BILL OR THE PURCHASE BILLS CONT AINED SIGNATURES OF THE RECIPIENT OF GOODS. 9. NO VOUCHER IN RESPECT OF TANKER HIRE CHARGES WAS PRODUCED. 10. STOCK REGISTER NOT MAINTAINED. 11. CASH BOOK NOT PRODUCED FOR VERIFICATION. 12. THE AR WAS SPECIFICALLY ASKED TO SHOW BANK PAY- IN-SLIPS AND WITHDRAWAL VOUCHERS AND CHEQUE BOOK COUNTERFOILS, B UT IT IS SUBMITTED THAT ALL TRANSACTIONS WERE THROUGH RTGS. NO VOUCHER IN THIS REGARD WAS PRODUCED. 13. TRANSPORT CHARGES ARE CLAIMED AT RS. 32,78,560 /- BUT NO VOUCHER IN THIS REGARD WAS PRODUCED. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 4 14. ALL THE FOLDERS CONTAINING BOOKS OF ACCOUNTS HA D NEW PRINTOUTS OF COMPUTER GENERATED A-4 PAPER PRINTOUTS AND IT CLEAR LY APPEARED THAT THERE WAS NO ACTUAL USE OF THESE VOUCHERS IN DAILY WAV OF BUSINESS.' 7. IT WAS ALSO OBSERVED AS PER FORM NO.3CD ATTACHED TO FORM NO.3CB (TAX AUDIT REPORT), THE NATURE OF THE BUSINESS WAS MENTIONED AS 'TRADING/WHOLESALER'. THERE WAS NO MENTION OF GOODS IN WHICH THE ASSESSEE WAS DEALING WITH. THE OPENING AS WELL AS C LOSING STOCK WAS SHOWN AT NIL. OUT OF TOTAL SALE AND PURCHASES, TRAD ING OF RS.29 CRORES WAS SHOWN UPTO THE MONTH OF AUGUST, 2011. AS PER BANK S TATEMENT, IT WAS SEEN THAT ALL THE MAJOR WITHDRAWALS WERE IN THE NAM E OF M/S KWALITY DAIRY INDIA LTD. WHILE ALL THE MAJOR DEPOSITS OTHER THAN CASH WERE IN THE NAMES OF OTHER FIVE PERSONS. 8. IN VIEW OF ABOVE, THE AO ESTIMATED PROFIT @5% ON THE GTO. 9. BEFORE THE LD. CIT (A), THE ASSESSEE SUBMITTED T HE EXPLANATION REBUTTING EACH AND EVERY POINT FLAGGED BY THE AO WHILE MAKING ADDITION @5% OF GTO. 1. 'THE ASSESSEE IS DEALING IN WHOLESALE TRADING OF MILK. THE BUSINESS MODULE OF ASSESSEE IS THAT HE COLLECTS MILK DIRECTL Y FROM MILK PLANTS BY WAY OF CONTAINER/TANKER AND FURTHER SELLS THE SAME CONTAINER/TANKER TO THE VARIOUS WHOLESALE MILK SUPPLIERS OF DIFFERENT A REAS OPERATING FROM UTTAR PRADESH, RAJASTHAN AND HARYANA AS PER THE BUS INESS REQUIREMENTS. THE ROLE OF THE ASSESSEE IS TO ASSIST THE MILK PLAN T IN DISTRIBUTION OF SURPLUS MILK TO VARIOUS WHOLESALE SUPPLIERS AND TO COLLECT THE PAYMENT. THE MILK PLANTS HAVE TO TAKE THE ASSISTANCE OF SUCH DISTRIBUTORS SO AS TO MINIMIZE THE WASTAGE AND TO ENSURE THE DISTRIBUTION OF SURPLUS MILK WHICH IS LEFT OUT AFTER PREPARATION OF VARIOUS MILK PRODUCTS & OTHER ITEMS. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 5 2. AS THE ROLE OF THE ASSESSEE IS LIMITED SO THE CO RRESPONDING PROFIT ARE ALSO VERY LIMITED. THE PROFIT RATE IS ALSO MARGINAL BECAUSE THE RISK INVOLVED IS NEGLIGIBLE BECAUSE MOST OF THE TIME PUR CHASE IS MADE ONLY AFTER NEGOTIATING THE CORRESPONDING SALE. HOWEVER T HE PROFIT RATE COMMENSURATE WITH THE OTHER DISTRIBUTOR OF THE SAME TRADE IN WHOSE CASE PROFIT RATE STAND ACCEPTED BY THE DEPARTMENT U NDER SECTION 143(3) OF THE ACT, PARTICULARLY IN THE SAME CHARGE. 3. THOUGH THE ASSESSEE IS TRADING IN AN UNORGANIZE D SECTOR OF MILK TRADING BUT EVEN THEN MOST OF ITS PURCHASE AND SALE IS THROUGH BANKING CHANNEL AND IS SUPPORTED BY REGULAR BILLS. 4. THE ASSESSEE IS REGULARLY MAINTAINING BOOKS OF ACCOUNTS, IN ACCORDANCE WITH SECTION 44AA OF THE INCOME TAX ACT. 1961, WHICH STAND DULY AUDITED UNDER SECTION 44AB. THE BOOKS OF ACCOU NTS WERE PRODUCED BEFORE THE A.O. MANY A TIMES AND THE A.O. HAS ALSO AFFIRMED THESE FACTS ON PAGE 4 OF THE ORDER WHEREIN IT IS MENTIONED 'ON 25.03.2015, THE A.R APPEARED AND PRODUCED BOOKS OF ACCOUNTS'. 5. ON THE BASIS OF BOOKS OF ACCOUNTS MAINTAINED IN THE REGULAR COURSE OF BUSINESS, THE ASSESSEE FILLED RETURN OF INCOME D ECLARING NET TAXABLE INCOME OF RS. 3,48,243 ON 10/10,2013. THE A.O. HAS MADE FOLLOWING ADDITION: I. ADDITION OF RS 2,79,61,917, BY APPLYING NET PRES UMPTIVE PROFIT RATE OF 5% II. ADDITION OF RS. 51,00,000, BY REJECTING TRADE D EBTORS. III. ADDITION OF RS. 88,38,110, BY HOLDING BALANCES OF SUNDRY CREDITORS AS IN GENUINE. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 6 THE ADDITIONS MADE ARE DISCUSSED SEQUENTIAL IN THE SUBSEQUENT PARAGRAPHS: 10. ADDITION OF RS. 2,79,61,917 BY APPLYING PRESUMP TIVE PROFIT RATE OF 5%. THE AO HAS MADE ADDITION OF RS.2,79,61,917/- BY APPLYING PROFIT RATE OF 5% TO THE TOTAL TURNOVER, WITHOUT REJECTING BOOK S OF ACCOUNTS IN TERMS OF SECTION 145(3) & WITHOUT POINTING OUT ANY 'DEFEC TS' IN THE BOOKS OF ACCOUNTS AND WITHOUT BRINGING ANY COGENT OR CREDIBL E MATERIAL ON RECORD WHICH HAS ANY NEXUS TO THE ESTIMATION OF INCOME. AO HAS MENTION THE FOLLOWING OBJECTIONS IN THE ASSESSMENT ORDER: 1. SOFT COPY OF BOOKS WAS NOT FILLED: REBUTTAL: FIRST OBJECTION OF A.O. IS THAT THE ASSE SSEE HAS GIVEN HARD COPIES OF BOOKS OF ACCOUNTS BUT HE HAS NOT PRODUCED SOFT COPY OF BOOKS OF ACCOUNTS. IN THIS REGARD IT IS SUBMITTED THAT TH E ASSESSEE IS MAINTAINING HIS ACCOUNTS ON A SPECIALIZED COMPUTER SOFTWARE CALLED 'TALLY' AND COPY OF THESE ACCOUNTS CAN BE TRANSFERR ED ONLY WHEN THE CORRESPONDING COMPUTER OF THE RECIPIENT IS ALSO EQU IPPED WITH THE SAME VERSION OF THE 'TALLY' SOFTWARE. SINCE THE AO DID N OT HAVE FACILITY OF 'TALLY SOFTWARE' SO THE SOFT COPY COULD NOT BE HANDED OVER TO HIM. HOWEVER, HARD COPIES OF BOOKS OF ACCOUNTS WAS PRODUCED AND A CKNOWLEDGED BY THE AO. 2. PURCHASE/SALE BILLS ARE COMPUTER GENERATED AND A PPEARED TO BE NEW: REBUTTAL: THE OBJECTION OF THE A.O. IS THAT PURCHAS E AND SALE BILL ARE COMPUTER GENERATED AND APPEARS TO BE VERY NEAT AND DEAN AS IF THESE HAVE NOT PASSED MANY HANDS. IN THIS REGARD IT IS SU BMITTED THAT ORIGINAL SALES BILL ARE HANDED OVER TO THE BUYER AND THE REC EIPT IS INVARIABLY TAKEN ON THE TRADING INVOICE WHICH IS ALSO USED BY THE TR UCK DRIVER FOR ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 7 TRANSPORTATION PURPOSE. BUT TO FURNISH EVIDENCE DUR ING ASSESSMENT PROCEEDINGS THAT FRESH COPY OF SALES BILLS WERE TAK EN OUT FROM COMPUTER AND PRODUCED BEFORE AO FOR VERIFICATION. SIMILARLY PURCHASE BILLS ARE ONLY FROM FEW WHOLESALE SUPPLIERS AND THESE BEING VERY S MALL IN NUMBER THE ASSESSEE HAS MAINTAINED THEM IN A VERY NEAT AND CLE AN MANNER. IN ANY CASE CLARITY OF BILLS AND ITS DUE PRESERVANCE CANNO T BE TERMED AS 'DEFECTS' WITHIN THE MEANING OF SECTION 145(3) OF T HE ACT. 3. TANKER NUMBERS NOT WRITTEN ON SOME OF THE SALE B ILLS: REBUTTAL: THE A.O. HAS A CONCERN THAT THE TANKER NO . IS NOT MENTIONED IN SOME OF THE PURCHASE/SALES BILLS. IN THIS REGARD IT IS SUBMITTED THAT THE ASSESSEE HAS DULY MENTIONED VEHICLE NUMBER ON EACH PURCHASE BILL/SALE BILL. THERE MAY BE SOME OMISSION IN ONE OR THE TWO BILLS BUT AS A MATTER OF ROUTINE ALL THE PURCHASE AND SALE BILLS BEAR TAN KER NUMBER. MORE SO EACH PURCHASE/SALE BILLS IS ALSO SUPPORTED BY DELIV ERY CHALLAN, WHERE IN TANKER NUMBER IS ALSO MENTIONED. GOODS CANNOT BE TR ANSPORTED UNLESS THE CONTAINER IS ACCOMPANIED WITH SALE BILL OR DELI VERY CHALLAN WHEREIN TANKER NUMBER IS DULY MENTIONED. COPY OF PURCHASE/S ALE BILL AND DELIVERY CHALLAN OF EACH MONTH IS SUBMITTED HERE WITH. 4. PURCHASE/SALE BILLS ARE SERIAL NUMBERED: REBUTTAL: THE NEXT OBJECTION OF A.O. IS THAT SOME O F THE PURCHASE BILLS ARE SERIAL NUMBERED, THOUGH THESE PURCHASES ARE MAD E FROM DIFFERENT PERSONS. IN THIS REGARD IT IS SUBMITTED THAT THE BU LK PURCHASE IS MADE BY THE ASSESSEE FROM FEW WHOLE SALE DEALERS, WHO ISSUE REGULAR BILLS WHICH OBVIOUSLY HAVE DIFFERENT SERIAL NUMBER. BUT SMALL Q UANTITY OF MILK IS ALSO PURCHASED FROM VILLAGERS WHO DO NOT HAVE FACILITY F OR ISSUING PROPER BILLS. IN ORDER TO SYSTEMATICALLY ACCOUNT FOR THESE PURCHA SES ASSESSEE HAS PRINTED HIS OWN PURCHASE VOUCHER WHICH HE CALLS AS 'RETAIL PURCHASE BILLS'. ALL THESE PURCHASE BILLS ARE SERIAL NUMBERE D AND ARE PROGRESSING IN ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 8 ACCORDANCE WITH THE DAY. WHENEVER THE ASSESSEE PURC HASES MILK FROM RETAIL MILK SELLERS HE RECORDS THE PURCHASES ON THI S SERIAL NUMBERED VOUCHER FOR ACCOUNTING PURPOSE AND ALSO OBTAINS THE SIGNATURE OF RETAIL MILK VENDOR. THIS IS A CORRECT ACCOUNTING SYSTEM WH ICH ALL THE TRADERS ARE ADOPTING UNIFORMLY TO RECORD THE RETAIL PURCHASE. T HERE BEING NO INFIRMITIES IN THE ACCOUNTING TREATMENTS SO THE OBJ ECTION OF THE AO IS WITHOUT ANY BASIS. 5. PURCHASE/SALES BILLS DO NOT CONTAINED SIGNATURE OF THE RECIPIENT: REBUTTAL: THE OBJECTION OF THE A.O. IS THAT SALES B ILLS DO NOT CONTAINED SIGNATURE OF THE RECIPIENT. IN THIS REGARD IT IS SU BMITTED THAT WHEN GOODS ARE TRANSPORTED THESE ARE INVARIABLY ACCOMPANIED WI TH 'DELIVERY CHALLAN'. FOR THE PURPOSE OF SMOOTH ACCOUNTING THE ASSESSEE H AS ADOPTED A UNIFORM POLICY TO GET THE SIGNATURE ON THESE DELIVE RY CHALLAN RATHER THAN SALES BILLS. COPY OF TWO DELIVERY CHALLAN OF SALES BILLS OF EACH MONTH ARE SUBMITTED HERE WITH. 6. NON MAINTENANCE OF VOUCHER IN RESPECT OF TRANSPO RT BILLS: REBUTTAL: THE A.O. HAS EXPRESSED CONCERN ABOUT NON MAINTENANCE OF VOUCHER IN RESPECT OF TRANSPORT BILLS OF RS. 32,78, 560. IT IS SUBMITTED THAT THE OBSERVATION OF THE A.O. IS ERRONEOUS BECAUSE VO UCHERS IN RESPECT OF ALL THE TRANSPORTATION EXPENSES HAVE DULY BEEN MAIN TAINED BY THE ASSESSEE AND WERE PRODUCED BEFORE THE AO, BUT REGUL AR TRANSPORT BILTIES COULD NOT BE PRODUCED. IN THIS REGARD IT IS SUBMITT ED THAT THE PRECISE BUSINESS OF THE ASSESSEE IS TO PURCHASE A CONTAINER LOAD OF MILK FROM MILK PLANT AND TO SUPPLY THE SAME TO THE WHOLE SALE DISTRIBUTOR OF MILK OF VARIOUS PLACES. IN ORDER TO MINIMIZE THE WASTAGE OF STOCK AND TO ENSURE THE SUPPLY IN THE MINIMUM POSSIBLE TIME THE TANKER, WHICH START FROM THE PLACE OF WHOLE SALE DISTRIBUTER IS DIRECTLY DIVERTE D TO THE PLACE OF ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 9 PROSPECTIVE BUYER OF MILK. IN THE PROCESS TRANSPORT CHARGES ARE SHARED BY THE ASSESSEE AND BY THE PROSPECTIVE BUYER, BUT T HE CONTAINER IS NOT CHANGED TO AVOID WASTAGE AND SPOILAGE OF STOCK. HOW EVER, FOR THE PROPORTIONATE EXPENSES REGULAR VOUCHERS ARE MAINTAI NED. IN EACH VOUCHER TANKER NUMBER, DATE OF DELIVERY, PLACE OF D ELIVERY AND NAME OF THE BUYER IS DULY RECORDED. MORE SO, THESE TANKERS ARE HIRED FROM TANKER OWNERS, WHO ARE SPECIALIZED IN THE SMOOTH DELIVERY OF MILK. COPY OF THESE TRANSPORT VOUCHERS AND MONTH WISE DETAILS OF TRANSPORT EXPENSES IS SUBMITTED HERE WITH. 7. SEPARATE STOCK REGISTER IS NOT MAINTAINED: REBUTTAL: THE A.O. HAS EXPRESSED A CONCERN THAT SEP ARATE STOCK REGISTER IS NOT MAINTAINED. IN THIS REGARD IT IS SUBMITTED T HAT THE ASSESSEE IS MAINTAINING ITS ACCOUNT ON SPECIALIZED ACCOUNTING S OFTWARE CALLED 'TALLY' WHERE DAY TO DAY QUANTITATIVE DETAIL IS SELF-GENERA TED AND EMBEDDED WITH THE RESPECTIVE LEDGER ACCOUNTS OF PURCHASE AND SALES. IN THIS SOFTWARE SEPARATED STOCK REGISTER/STOCK INVENTORY I S SELF-GENERATED. BESIDES, THE QUANTITATIVE DETAIL IS ALSO MENTIONED IN EACH PURCHASE/SALE BILLS. MORE SO THE NATURE OF BUSINESS OF THE ASSESS EE IS SUCH THAT STOCK AT THE END OF EVERYDAY IS REDUCED TO NIL AND THE DAY T O DAY STOCK SUMMARY CAN BE SUMMED UP IN A PAGE OR TWO. COPIES OF STOCK INVENTORY AS GENERATED FROM TALLY SOFTWARE AND STOCK SUMMARY IS SUBMITTED HERE WITH. 8. CASH BOOK IS NOT PRODUCED: REBUTTAL: THE AO HAS MENTIONED THAT THE CASH BOOK I S NOT PRODUCED. THIS FINDING OF AO IS AGAINST THE FACTUAL POSITION. THE ASSESSEE IS PREPARING ITS ACCOUNT ON COMPUTERIZED SOFTWARE CALL ED 'TALLY IN WHICH CASH BOOK, LEDGER AND OTHER ASSOCIATED ACCOUNTS ARE GENERATED AUTOMATICALLY AND THESE CANNOT BE SEPARATED FROM ON E ANOTHER. IN A ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 10 SIMPLE ACCOUNTING SYSTEM MAINTAINED ON THE COMPUTER , CASH BOOK IS SIMULTANEOUSLY GENERATED ALONG WITH THE LEDGER. MOR E SO THE A.O, HAS EVEN POINTED OUT DEFECTS IN THE CASH BOOK AND HAS A LSO MADE ADDITION OF RS.51,00,000/- ON ACCOUNT OF CASH SALE WHICH HE HAS FOUND FROM CASH BOOK. IN THESE CIRCUMSTANCES IT CANNOT BE SAID THAT CASH BOOK HAS NOT PRODUCED. THE CASH BOOK IS PRODUCED BEFORE THE LD. CIT (A). 9. PAYMENT RECEIVED THROUGH RTGS: REBUTTAL: THE NEXT INFIRMITY POINTED OUT BY THE A.O . IS THAT THE ASSESSEE HAS RECEIVED/MADE PAYMENTS IN THE BANK NOT THROUGH CHEQUES BUT THROUGH RTGS. IN THIS REGARD, IT IS SUBMITTED THAT RTGS IS A METHOD OF TRANSFER MONEY THROUGH BANKING CHANNEL WHICH IS EQU IVALENT TO TRANSFER BY CHEQUES RATHER IT IS SUPPORTED BY A CHEQUES. IT IS A REGULAR METHOD EMPLOYED BY ALL THE BUSINESSMAN AND ALL THE BANKING CHANNEL THROUGHOUT THE COUNTRY AND BY ANY STRETCH OF IMAGINATION IT CA NNOT BE EQUATED WITH THE 'DEFECT' WITHIN THE MEANING OF SECTION 145(3). 10. BOOKS OF ACCOUNTS APPEARS TO BE NEW: REBUTTAL: THE OBJECTION OF THE A.O. IS THAT PRINTS OF BOOKS OF ACCOUNTS IS NEW AND ARE ON A4 PAPER SHEET. THE ASSESSEE HAD VER Y MANY TIMES SUBMITTED TO THE A.O. THAT ACCOUNTS ARE MAINTAINED ON COMPUTER IN SOFTWARE CALLED TALLY AND NO HARDCOPY IS PRESERVED FOR DAY TO DAY USE. IT IS ONLY WHEN THE A.O. HAS ASKED FOR HARD COPIES OF BOOKS OF ACCOUNTS THAT FRESH PRINT OUT WERE TAKEN OUT. THESE FRESH PRINT O UT SIMPLY GOES ON TO ADD ON THE CLARITY OF THE FINANCIAL TRANSACTIONS AN D DO NOT IN ANY WAY INHIBITS THE AO FROM DEDUCING THE TRUE AND CORRECT PROFIT. 11. IN FORM 3CD NATURE OF BUSINESS IS WRITTEN 'WHOL ESALE TRADER': ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 11 REBUTTAL: OBJECTION OF A.O. IS THAT THE TAX AUDITOR HAS MENTIONED THE NATURE OF BUSINESS AS 'TRADING/WHOLE SELLER' AND HE HAS NOT SPECIFIED THE GOODS TO BE TRADED. IN THIS REGARD IT IS SUBMITTED THAT AS PER RULE 6G(2) THE TAX AUDITOR IS REQUIRED TO FILE A REPORT IN THE FORM NO. 3CD PRESCRIBED IN THE INCOME TAX RULES. THE FORM NOWHER E MAKES IT MANDATORY FOR THE CHARTERED ACCOUNTANT TO MENTION T HE EXACT NATURE OF THE COMMODITY. COPY OF THE RELEVANT FORM WAS SUBMIT TED BEFORE THE LD. CIT (A). IRRESPECTIVE OF THE CONTROVERSY NATURE OF TRADE WAS DULY EXPLAINED TO THE A.O. AND HE HAS HIMSELF INCORPORAT ED THE SAME IN THE BODY OF THE ORDER. 12. IN THE AUDIT REPORT OPENING AS WELL AS CLOSING STOCK IS NIL: REBUTTAL: OBJECTION OF LD. A.O. IS THAT, IN THE TAX AUDIT REPORT OPENING AS WELL AS CLOSING STOCK IS MENTIONED AS NIL. IN THIS REGARD IT IS SUBMITTED THAT THE ASSESSEE IS DEALING IN PERISHABLE GOODS (M ILK), SO OPENING AS WELL AS CLOSING STOCK IS BOUND TO BE NIL ALMOST E VERY DAY. WHEN THE OPENING AS WELL AS CLOSING STOCK IS NIL, NATURALLY THE TAX AUDITOR HAS TO CONFIRM THE FACTUAL POSITION SO HE HAS RIGHTLY WRIT TEN AS NIL. THERE BEING NO ABNORMALITY IN THE OBSERVATIONS SO THE SAME CANN OT BE CONSTRUED AS 'DEFECTS' WITHIN THE MEANING OF SECTION 145(3). 13. THERE ARE CREDIT PURCHASE AND SALE UPTO 09.09.2 011: REBUTTAL: NEXT OBJECTION OF LD. A.O. IS THAT THE BA NK ACCOUNT WAS OPENED ON 09.09.11 BUT BEFORE THAT ASSESSEE HAS MADE CREDI T PURCHASE AND CREDIT SALE OF RS. 29.00 CRORE. IN THIS REGARD IT I S SUBMITTED THAT THIS WAS THE FIRST YEAR OF THE ASSESSEE, SO AT THE INITIAL L EVEL ALL THE PURCHASES/AND SALES WERE MADE ON CREDIT BASIS EXCEPTING A FRACTIO N OF AMOUNT. HOWEVER THESE CREDIT PURCHASE AND SALES WERE REALIZED/PAID IN THE SUBSEQUENT MONTHS THROUGH BANKING CHANNEL AND THESE ALSO FORM PART OF THE TOTAL PURCHASE AND SALE RECORDED IN THE BOOKS OF ACCOUNTS . COPY OF ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 12 PURCHASE/SALE LEDGER FOR THE RELEVANT PERIOD REFLEC TING THE CREDIT PURCHASE AND CREDIT SALE AND ITS SUBSEQUENT REALIZA TION THROUGH BANKING CHANNEL WERE SUBMITTED. COPY OF RELEVANT BANK ACCOU NT CLEARLY SHOWING THE REALIZATION ARID PAYMENT OF THESE CREDIT SALE/P URCHASE IS ALSO SUBMITTED. ALL THE PURCHASES HAVE BEEN MADE FROM TH E MILK PLANT WHICH IS A LISTED COMPANY SIMILARLY ALL THE SALES WERE MA DE TO THE ESTABLISHED DEALERS. CONFIRMATIONS IN RESPECT ALL THESE CREDIT PURCHASE AND SALES UPTO AUGUST 2011 WERE DULY FURNISHED TO THE AO. COPY IS SUBMITTED AGAIN BEFORE THE LD. CIT (A). AS THE CREDIT PURCHASE/SALE MADE UP TO AUGUST 2011 STANDS PAID THROUGH BANKING CHANNEL IN THE SUBSEQUENT MONTHS AND ARE PA RT OF THE REGULAR BOOKS OF ACCOUNTS SUBMITTED BEFORE AO, SO NON OPENI NG OF BANK ACCOUNT AND MAKING CREDIT PURCHASE AND SALE UPTO AUGUST 201 1 CANNOT BE CONSTRUED AS 'DEFECT' WITHIN THE MEANING OF SECTION 145(3) OF IT ACT 1961. 14. WITHDRAWAL AND DEPOSIT IN THE BANK ACCOUNT THRO UGH CHEQUES: REBUTTAL: NEXT OBJECTION OF A.O. IS THAT MAJOR WITH DRAWALS ARE IN THE NAME OF M/S KWALITY DAIRY INDIA LTD AND THE MAJOR D EPOSITS ARE IN THE NAME OF SOME CUSTOMERS IN THE BANK, ACCOUNT, BUT PU RPOSE OF SUCH PAYMENTS IS NOT KNOWN. IN THIS REGARD IT IS SUBMITT ED THAT IN ANY BUSINESS SYSTEM PAYMENTS ARE RECEIVED AGAINST THE S ALE PROCEEDS FROM THE CUSTOMERS, WHICH THE AO HAS TERMED AS DEPOSITS. SIMILARLY EVERY BUSINESS MAN MAKES PAYMENTS AGAINST THE SALES TO TH E SUPPLIER WHICH THE AO HAS TERMED AS 'WITHDRAWAL'. HOWEVER, THE NAM E AND FULL PARTICULAR OF THE PERSON FROM WHOM PAYMENTS HAVE BE EN RECEIVED OR MADE IN LIEU OF PURCHASE AND SALES IS DULY MENTIONE D IN THE BANK ACCOUNT ITSELF ALREADY SUBMITTED TO THE AO. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 13 15. NO BUSINESS HAS BEEN CARRIED OUT: REBUTTAL: ON THE BASIS OF ABOVE OBJECTIONS, WHICH A RE BASICALLY COSMETIC IN NATURE AO HAS DRAWN A CONCLUSION 'THAT NO BUSINE SS HAS BEEN CARRIED OUT'. WHAT AO IS CONCLUDING IS THAT ALL THE PURCHAS E AND SALE THROUGH BANKING TRANSACTION AND SUBSEQUENT VERIFICATION FRO M THE RESPECTIVE PARTIES ARE NOT GENUINE AND IN FACT NO BUSINESS HAS BEEN CARRIED OUT. IN THIS REGARD FOLLOWING SUBMISSION IS MADE. (A) BUSINESS INVOLVES COMPREHENSIVE ACTIVITIES WHI CH INTER ALIA INCLUDES PURCHASE OF GOODS, SALE OF GOODS, PAYMENT THROUGH B ANKING TRANSACTION, CREDIT PURCHASE AND CREDIT SALE. FURTHER THIS ACTIV ITY AS PER THE REQUIREMENT OF LAW HAS TO BE RECORDED IN THE BOOKS OF ACCOUNTS STRICTLY IN ACCORDANCE WITH THE PROVISION OF SECTION 44AA AND S HALL BE AUDITED BY THE TAX AUDITOR UNDER SECTION 44AB. THE ASSESSE HAS COMPLIED WITH ALL THESE PROVISIONS OF THE LAW AND THE AO HAS NOT FOUN D ANY 'DEFECT' OR INFIRMITY OR IRREGULARITY IN THESE DOCUMENTS. BUT E VEN IN THE PRESENCE OF THESE DOCUMENTS MAINTAINED IN THE REGULAR COURSE OF BUSINESS, THE AO HAS NEGATED THE ENTIRE BUSINESS PROCESS. (B) THE BUSINESS ACTIVITY RESULTED INTO PROFIT AND THE ASSESSEE HAS PAID DUE TAXES ON THE INCOME DECLARED IN THE RETURN FOR THE YEAR. IT IS ALSO SUBMITTED THAT IN THE BUSINESS ACTIVITIES THERE IS NEITHER ANY UNSECURED LOAN NOR ANY ACCUMULATION/TRANSFER OF MONEY BY WAY OF ANY OTHER MODE. THE CREDITORS/DEBTORS OF THE YEAR STAND SETTLED DUR ING THE YEAR ITSELF OR AT THE BEST IN THE VERY NEXT ASSESSMENT YEAR AT THE EA RLIEST POSSIBLE. (C) THE AO HAS BEEN VERY SELECTIVE IN NEGATING THE BUSINESS ACTIVITIES. THUS HE HAS ACCEPTED THE SUNDRY CREDITORS WORTH RS. 24,17,14,924/- AND SUNDRY DEBTORS WORTH RS.24,50,13,470/-. SUNDRY DEBT ORS AND SUNDRY CREDITORS ARE ONE OF THE BUSINESS CONSTITUENTS RATH ER A VERY IMPORTANT ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 14 PART OF THE BUSINESS. WHEN THE MAJOR CONSTITUENT OF THE BUSINESS ACTIVITY STANDS ACCEPTED HOW THE AO CAN NEGATE REST OF THE B USINESS. (D) THE ASSESSEE HAS MADE TOTAL SALE OF RS.86,65,83 ,719/-. THE AO HAS ACCEPTED THE SALE PROCEEDS REALIZED THROUGH BANKING CHANNEL, BUT HAS MADE ADDITION FOR THE REALIZATION OF SALE PROCEED B Y WAY OF CASH WHICH WERE DEPOSITED IN THE BANK ACCOUNT. THUS THE SALES REALIZED THROUGH BANKING CHANNEL STANDS ACCEPTED. (E) IF FOR ARGUMENT SAKE IT IS TAKEN THAT NO BUSINE SS ACTIVITY HAS BEEN CARRIED OUT, THE OBVIOUS QUESTION ARISES WHAT FOR T HE PROFIT RATE HAS BEEN APPLIED. PROFIT INVARIABLY FOLLOWS THE COMMERCIAL A CTIVITY. WHEN THERE IS NO BUSINESS OR COMMERCIAL ACTIVITY, IN THAT EVENT T HERE CANNOT BE ANY PROFIT. THE ASSESSEE HAS DULY CARRIED OUT BUSINESS ACTIVITY; SHOWN PROFIT THERE ON AND HAS PAID TAXES ON SUCH BUSINESS PROFIT . (F) MORE SO THE ACT MAKES IT INCUMBENT UPON THE AO TO EXAMINE THE BUSINESS ACTIVITIES WITH REFERENCE TO BOOKS OF ACCO UNTS. BOOKS OF ACCOUNTS ARE EVIDENCE UNDER THE INDIAN EVIDENCE ACT AND THESE CANNOT BE CONVENIENTLY IGNORED. THE AO IS ENTITLED TO FIND FACTS IN THE BOOKS OF ACCOUNTS REJECT THEM UNDER SECTION 145(3) AND CAN P ROCEED TO ESTIMATE THE INCOME AS PER PROCEDURE LAID DOWN IN THE ACT. B UT THE STATUTE DO NOT EMPOWER THE AO TO SIMPLY IGNORE THE BOOKS OF ACCOUN TS AND THE ENTIRE BUSINESS PROCESS WITHOUT POINTING OUT ANY MAJOR 'AC COUNTING DEFECT' WHICH INHIBITS HIM IN DEDUCING THE TRUE AND CORRECT PROFIT. OBVIOUSLY THE ACTION OF THE AO IN IGNORING THE BOOKS OF ACCOUNTS AND THE TOTAL BUSINESS PROCESS AND THERE AFTER MAKING ESTIMATIONS OF PROFI T WITHOUT ANY BASIS IS HIGHLY IRRATIONAL, ILLEGAL AND BAD IN LAW. 11. THE ASSESSEE FURTHER RELIED ON THE VARIOUS LEGA L ASPECTS OF THE ADDITION MADE UNDER SECTION 145(3) WHICH ARE AS UND ER: ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 15 WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WH ERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1), HAS NOT BEE N REGULARLY FOLLOWED BY THE ASSESSEE, OR INCOME HAS NOT BEEN COMPUTED IN ACCORDANCE WITH THE STANDARDS NOTIFIED UNDER SUB-SECTION (2), THE A SSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTIO N 144'. THE SECTION 145(3) THUS ALLOWS A REASONABLE RIGHT T O THE AO TO ESTIMATE THE INCOME, BUT AT THE SAME TIME SECTION CAST SEVER AL OBLIGATIONS ON THE AO. THESE OBLIGATIONS WHICH ARE MANDATORY IN NATURE ARE DISCUSSED IN THE FOLLOWING PARAGRAPHS: I. REJECTION OF BOOKS OF ACCOUNTS IS MANDATORY BEFO RE ESTIMATION. AT THE OUTSET SECTION CAST AN OBLIGATION ON THE AO THAT BEFORE RESORTING TO ESTIMATION UNDER SECTION 145(3) IT IS INCUMBENT UPON HIM TO REJECT THE BOOKS OF ACCOUNTS. IT IS AN ESTABLISHED JUDICIAL PR EPOSITION THAT ESTIMATION OF INCOME UNDER SECTION 145(3) CANNOT BE MADE UNLES S THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE REJECTED IN CLEAR TERM S AND THE ASSESSMENT IS FRAMED IN THE MANNER PROVIDED UNDER SECTION 144. ITO VS ANIL KUMAR & CO., ITA NO. 20001/2014, KARNATAKA. WITHOUT REJEC TING THE BOOKS OF ACCOUNTS OR POINTING OUT INCOMPLETION OR INACCURACY IN THE ACCOUNTS, AO CANNOT INVOKE SECTION 145(3). M/S PARAS DYING AND P RINTING MIL! 4 ITR 24 KHT. IN THE GIVEN CASE, THE ASSESSEE HAS MAINTAINED REGU LAR BOOKS OF ACCOUNTS WHICH WERE DULY AUDITED BY TAX AUDITOR AND THESE BOOKS OF ACCOUNTS WERE ALSO PRODUCED BEFORE AO. THE AO HAS N OT REJECTED THESE BOOKS OF ACCOUNTS RATHER IGNORED THESE BOOKS OF ACC OUNTS AND PROCEEDED ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 16 TO MAKE ESTIMATIONS. THE ACTION OF AO IS OBVIOUSLY ARBITRARY, ILLEGAL AND BAD IN LAW, SO ADDITION MADE NEEDS TO BE DELETED. II. TO POINT OUT CLEAR DEFECTS IN THE BOOKS OF ACCO UNTS IN ORDER TO REJECT THE BOOKS OF ACCOUNTS IN SECTION 145(3) MAKES IT OBLIGATORY AND INCUMBENT UPON THE AO TO POINT OUT A ND ELABORATE THE 'DEFECTS' IN THE BOOKS OF ACCOUNTS. THE SECTION FUR THER LIMITS THE SCOPE OF WORD 'DEFECT' USED IN THE SECTION AND DEFINES THAT THE 'DEFECTS' SHALL BE OF SUCH NATURE, WHICH PREVENTS THE AO FROM CALCULAT ING THE TRUE AND CORRECT PROFIT OF THE ASSESSEE. THE DEFINITION IS E MBEDDED IN THE PHRASE 'INCOME CANNOT BE PROPERLY DEDUCED FROM THE ACCOUNT S MAINTAINED BY THE ASSESSE'. THE AO HAS NOT POINTED OUT ANY SUCH A CCOUNTING DEFECTS IN THE BOOKS OF ACCOUNTS WHICH HAVE ANY FINANCIAL IMPL ICATION OR IMPEDIMENT IN THE CALCULATION THE TRUE AND CORRECT PROFIT. THE OBJECTION OF THE AO, REGARDING CLARITY OF PURCHASE VOUCHER MAKIN G PAYMENT THROUGH RTGS AND OTHER OBJECTIONS DO NOT FALL UNDER THE SCO PE AND AMBIT OF SPECIFIED DEFINITION OF THE WORD 'DEFECT' AS ENVISA GED UNDER SECTION 145(3). THESE ARE VAGUE AND GENERAL OBSERVATIONS WH ICH HAVE HARDLY ANY FINANCIAL IMPLICATION ON THE TRADING RESULTS, T RADING PROFIT OR OVERALL RETURNED PROFIT OF THE ASSESSEE. III. TO GIVE A CLEAR FINDING IN THE ASSESSMENT ORDE R THE SECTION CAST ANOTHER OBLIGATION ON THE AO. THE MANDATE OF THE SECTION NOT ONLY MAKES IT INCUMBENT ON THE AO THAT BEFORE ESTIMATION OF INCOME, HE SHOULD REJECT THE BOOKS OF ACCOUNTS I N CLEAR TERMS, BUT THE SECTION ALSO MAKE IT OBLIGATORY ON THE PART OF THE AO TO RECORD A CLEAR SATISFACTION IN THE BODY OF ASSESSMENT ORDER IN A C LEAR LANGUAGE THAT 'HE IS NOT SATISFIED THAT ACCOUNTS ARE CORRECT OR COMPL ETE AND TRUE PROFIT CANNOT BE DEDUCED FROM SUCH ACCOUNT', 'IF THERE IS NO FINDING THAT THERE WAS MATERIAL BEFORE THE AO TO LEAD HIM TO THE CONCL USION THAT A PROPER ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 17 STATEMENT OF INCOME, COULD NOT BE DEDUCED, IN THAT EVENT AO IS NOT ENTITLED TO ESTIMATE THE PROFIT'. CHHABILDAS SHAH V S. CIT 59 ITR 733 (SC). A. IN THE CASE OF PANDIT BROTHERS VS. CIT 26 ITR 15 9 (PUN) HON'BLE SUPREME COURT HAS AS EXPLAINED THE BASIC PRINCIPLES FOR INVOKING SECTION 145(3) AND HAS CLARIFIED IN CLEAR TERMS THAT UNLESS A CLEAR SATISFACTION WITH REGARD TO INACCURACY OF BOOKS OF ACCOUNTS IS R ECORDED IN ABSOLUTE TERMS IN THE BODY OF ASSESSMENT ORDER, THE ASSESSME NT FRAMED IS BAD IN LAW. WHILE EXPLAINING THE PRINCIPLE APEX COURT HAS OBSERVED 'IF THERE IS NO DEFINITE FINDING IN THE ORDER THAT IN HIS OPINIO N THE INCOME, PROFITS AND GAINS COULD NOT PROPERLY BE DEDUCED THERE FROM, IN THAT EVENT ASSESSMENT FRAMED IS BAD IN LAW. B. THE AO HAS NEITHER REJECTED BOOKS OF ACCOUNTS NO R POINTED OUT ANY ACCOUNTING DEFECTS AND HAS ALSO NOT RECORDED ANY SA TISFACTION IN THE BODY OF ASSESSMENT ORDER WITH REGARD TO INACCURACY OF AC COUNTS AS SUCH ASSESSMENT FRAMED IS BAD IN LAW. IV. BASIS OF ESTIMATION OF PROFIT ONCE BOOK RESULTS WERE REJECTED IN TERMS OF PROVISI ONS OF SEC. 145(3) OF THE ACT, IT IS NOT THE IPSE DIXIT OF THE AO TO COMPUTE THE INCOME EITHER U/S 144(1) OR SEC. 145(3) THE COMPUTATION AND DETER MINATION OF INCOME CANNOT BE AT THE WHIMS AND FANCIES OF A.O. THERE MU ST BE IN EXISTENCE RELEVANT MATERIAL OR EVIDENCE, FOR MAKING ESTIMATIO N OF INCOME. CIT VS DAULAT RAM RAWATMUL 87 ITR 349 (S.C). HOWEVER, THE A.O. HAS NOT PLACED ON RECORDS ANY MATERIAL OR EVIDENCE OR THE B ASIS OF HIS ESTIMATION. IN FACT, A.O. HAS NOT GIVEN EVEN A SINGLE REASON FO R ESTIMATING THE INCOME AND FOR MAKING SUCH A HUGE ADDITION. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 18 V. CONFRONTING THE BASIS OF ESTIMATION TO THE ASSES SEE THE SECTION CAST ANOTHER OBLIGATION ON THE AO THAT BEFORE MAKING ANY ESTIMATION OF INCOME, HE SHOULD CONFRONT THE ASSESS EE WITH THE MATERIAL OR EVIDENCE OR BASIS OF ESTIMATION OF INCOME. THE O BLIGATION IS EMBEDDED IN THE PHRASE 'MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144'. THE PHRASE OBVIOUSLY MEANS IF THE AO HAS CHOSEN TO MAKE ESTIMATION UNDER SECTION 145(3) THEN HE HAS TO OBSE RVE ALL THE CONDITIONS WHICH ARE STIPULATED IN SECTION 144, WHICH INTER-ALIA INCLUDES CONFRONTING THE MATERIAL OR THE BASIS OF ESTIMATION TO THE ASSE SSEE. THE AO HAS NOT CONFRONTED ANY SUCH MATERIAL OR EVIDENCE TO THE ASS ESSEE. RATHER HE HAS CHOSEN TO IGNORE THE MATERIAL OR EVIDENCE WHICH INC LUDES COMPARABLE CASES AND OTHER FACTORS. THUS THE ADDITION MADE IS AGAINST THE PROVISIONS OF THE LAW. THE EXPLICIT PROVISION OF THE LAW VIS--VIS FACTS O F THE CASE ARE DISCUSSED IN THE ORDER OF THE LD. CIT (A) WITH REFERENCE TO G ROUNDS OF APPEAL IN THE FOLLOWING PARAGRAPHS: AT THE OUTSET, THE SECTION PROVIDES THAT THE ACCOUN TS WHICH ARE REGULARLY MAINTAINED IN THE COURSE OF BUSINESS AND ARE DULY A UDITED, FREE FROM ANY QUALIFICATION BY THE AUDITORS, SHOULD NORMALLY BE T AKEN AS CORRECT UNLESS THERE ARE ADEQUATE REASONS TO INDICATE THAT THEY AR E INCORRECT OR UNRELIABLE. IF THERE WAS NO CHALLENGE TO THE TRANSA CTIONS REPRESENTED IN THE BOOKS, THEN IT IS NOT OPEN TO THE DEPARTMENT TO CONTEND THAT WHAT WAS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF A FFAIRS. CIT V. VIKRARN PLASTICS [1999] 239 ITR 161(GUJ). THUS SECTION 45(1 ) CAST AN OBLIGATION ON THE AO TO COMPUTE INCOME IN ACCORDANCE WITH BOOK S OF ACCOUNTS MAINTAINED DURING THE COURSE OF BUSINESS. CIT V A. KRISHNA SWAMY 53 ITR 122 (SC), CIT V MCMELAN & CO. 33 ITR 182. SUSPI CION, HOWEVER STRONG IT MAY BE, IS NO GROUND FOR THE AO FOR INVOK ING THE PROVISIONS OF ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 19 SECTION 145(3) OF THE ACT', THUS THE AO IN ANY CIRC UMSTANCES CANNOT IGNORE THE BOOKS OF ACCOUNTS, THOUGH HE CAN REJECT THE SAME. WHAT THE AO HAS DONE THAT HE HAS CONVENIENTLY IGNORED THE BO OKS OF ACCOUNTS AS IF THESE DO NOT EXIST AND HAS RESORTED TO ESTIMATIONS WITHOUT REJECTING THE BOOKS. MORE SO, WHILE IGNORING THE BOOKS OF ACCOUNTS AO HA S BEEN SELECTIVE. THUS HE HAS EXAMINED SUNDRY CREDITORS/DEBTORS AND H AS DISALLOWED SUBSTANTIAL AMOUNT OUT OF THESE WHILE PLACING RELIA NCE IN THE BOOKS OF ACCOUNTS. BUT WHEN IT COMES TO CALCULATION OF PROFI T HE HAS SIMPLY IGNORED THE BOOKS OF ACCOUNTS, WHICH IS APPARENTLY NOT PERMISSIBLE UNDER THE LAW. SIMILARLY, THE AO HAS ACCEPTED THE SALES I N RESPECT OF WHICH PROCEEDS HAVE BEEN REALIZED THROUGH BANKING CHANNEL , BUT HE HAS ADDED BACK THE AMOUNT OF SALES IN RESPECT OF WHICH PROCEE DS WERE REALIZED BY WAY OF CASH. THUS THE AO HAS BEEN SELECTIVE IN ACCE PTING AND REJECTING THE BOOKS OF ACCOUNTS AND THE BUSINESS PROCESS AS A WHOLE WHICH IS IN FACT NOT PERMISSIBLE UNDER THE LAW. ACTION OF AO IS HIGHLY ARBITRARY, AGAINST THE SPIRIT OF LAW AND THE ASSESSMENT FRAMED IS BAD IN LAW. II. ESTIMATION WITHOUT REJECTING BOOKS. THE ASSESSEE HAD BEEN MAINTAINING REGULAR BOOKS OF ACCOUNT, WHICH WERE DULY AUDITED BY AN INDEPENDENT CHARTERED ACCOUNTANT . THE FINANCIAL RESULTS WERE FULLY SUPPORTED WITH VOUCHERS AND THE BOOKS OF ACCOUNT WHICH WERE COMPLETE AND CORRECT IN AIR RESPECTS. TH ESE BOOKS OF ACCOUNTS AND THE SUPPORTING MATERIALS WERE DULY PRO DUCED BEFORE THE AO. HOWEVER THE AO HAS NEITHER POINTED OUT ANY MATE RIAL DEFECTS IN THE BOOKS OF ACCOUNTS, NOR REJECTED THE SAME BUT HAS PR OCEEDED TO MAKE ADDITION UNDER SECTION 145(3). ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 20 'WITHOUT ENLISTING THE DEFECTS, INCOMPLETION AND IN ACCURACIES IN THE ACCOUNTS OF THE ASSESSEE, AO CANNOT EXPRESSIVELY OR OTHERWISE, INVOKE THE PROVISIONS OF SECTION 145(3) OF THE ACT. WHEN N O SPECIFIC DISCREPANCIES OR DEFECTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE HAS BEEN POINTED OUT NOR WAS ANY MATERIAL BROUGHT TO ES TABLISH THAT PURCHASES WERE INFLATED OR RECEIPTS SUPPRESSED, THE RE IS NO JUSTIFICATION IN INVOKING THE PROVISIONS OF SECTION 145 OF THE AC T, M/S PARAS DYEING AND PRINTING MILLS P LTD 004 ITR (TRIB) 0029 (AHD). 'IT IS WELL SETTLED THAT WITHOUT REJECTING THE BOOK S OF ACCOUNTS MAINTAINED BY THE ASSESSEE BY POINTING OUT SPECIFIC MATERIAL D EFECTS THEREIN, THE RESULTS DECLARED BY THE ASSESSEE ON THE BASIS OF SU CH BOOKS CANNOT BE DISTURBED. GAJANAN TRADERS RUBBER CO. PVT. LTD. VS. ACIT ITA NO. 4980/DEL/2004. ACTION OF THE ASSESSING OFFICER CLEARLY DEMONSTRATE S THAT HE COULD NOT GATHER ANY DETAILS OR FIND ANY IRREGULARITY IN MAIN TENANCE OF THE BOOKS. IT WAS ALSO ESTABLISHED BEYOND DOUBT THAT ASSESSING OF FICER COULD NOT QUANTIFY ANY SPECIFY AMOUNT OF EXPENDITURE FOR DISA LLOWANCE. A MINOR IRREGULARITY CANNOT BE BLOWN OUT OF PROPORTION TO R ESORT A CONVENIENT APPROACH OF THE REJECTION OF THE BOOK RESULTS'. DHA KESWARI COTTON MILLS LTD. VS CIT (1954) 26 ITR. 'INSIGNIFICANT MISTAKE CANNOT AFFORD A GROUND FOR R ESORTING TO SECTION 145(3) OR ESTIMATION OF INCOME. SO LONG AS IT IS NO T IMPOSSIBLE TO DEDUCE THE TRUE INCOME FROM THE ACCOUNTS MAINTAINED BY THE ASSESSEE, ITS COMPUTATION CANNOT BE MADE IN ANY OTHER WAY'. CIT V PADAMCHAND RAMGOPAL (1970) 76 ITR 719 (SC). 'IN ORDER TO REJECT THE ACCOUNT THE AO HAS TO ESTAB LISH THAT INCOME CANNOT BE PROPERLY DEDUCED FROM THE ACCOUNTS MAINTA INED BY THE ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 21 ASSESSEE. IN ORDER TO ARRIVE AT SUCH A CONCLUSION, IT MUST BE SHOWN THAT THE ASSESSING' OFFICER HAS TAKEN INTO CONSIDERATION THE VARIOUS FACTORS AND HAS NOT OMITTED TO CONSIDER THE MATERIALS BEFOR E HIM. IT IS FOR THE AO TO ESTABLISH THE INCOMPLETENESS OR INCORRECTNESS OF THE ACCOUNTS. UNLESS THE AO PERFORM HIS DUTY THE BOOKS OF ACCOUNTS CANNO T BE REJECTED'. ASHOK REFRACTORIES PVT. LTD. (279 ITR 457) (CAL.) WHEN THE BOOKS OF ACCOUNTS OF THE ASSESSEE HAD NOT BEEN REJECTED AND ASSESSMENT HAVING NOT BEEN FRAMED UNDER SECTION 144 OF THE INCOME TAX ACT THE SAID AUTHORITIES WERE IN ERROR IN RESOR TING TO AN ESTIMATION OF INCOME AND SUCH EXERCISE UNDERTAKEN BY THEM WAS NOT SUSTAINABLE. ITO VS M/S ANIL KUMAR & CO I.T.A. NO.200001/2014, KARNA TAKA THE AO CANNOT BASE ITS FINDINGS ON SUSPICIONS, CON JECTURES OR SURMISES, NOR CAN IT ACT ON IMPROPER REJECTION OF MATERIALS P ARTLY ON EVIDENCE AND PARTLY SUSPICIONS, CONJECTURES OR SURMISES AND IF I T SO DOES, THE FINDING IS REQUIRED TO BE SET ASIDE'. IN OMAR SALAY MOHARNED S AIT V. CIT [1959] 37 ITR 151 (SC). IN THE INSTANT CASE THE ASSESSING OFFICER HAS NOT R EJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE. TO PUT IT DIFFERENTLY THE ASSESSING OFFICER HAS NOT MADE OUT A CASE THAT CONDITIONS SAID DOWN IN SE CTION 145(3) OF THE ACT ARE SATISFIED FOR REJECTION OF THE BOOKS OF ACC OUNTS. THUS, THE ACTION OF AO IN RESORTING TO ESTIMATION WITHOUT REJECTING BOOKS IS ARBITRARY AND AGAINST THE EXPLICIT PROVISIONS OF THE ACT. III. TO POINT OUT SPECIFIC DEFECTS IN THE BOOKS. A. IT IS THE SETTLED LAW THAT UNLESS THE A.O. POIN TS OUT SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS, TO THE EXTENT WHICH MAKE IT IMPOSSIBLE OR DIFFICULT FOR THE AO TO DEDUCE THE CORRECT PROFIT, BOOKS OF ACCOUNTS CANNOT ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 22 BE REJECTED. FURTHER THE SCOPE AND LIMITATION OF TH E WORD 'DEFECT' HAS BEEN DEFINE IN THE SECTION ITSELF. THUS THE SECTION DEFINES 'THAT THE DEFECTS IN THE BOOKS OF ACCOUNTS' SHALL BE SUCH WHI CH ESTABLISHES THAT 'INCOME CANNOT BE PROPERLY DEDUCED FORM THE ACCOUNT S'. THE AO HAS NOT POINTED OUT ANY SUCH ACCOUNTING DEFECTS IN THE BOOK S OF ACCOUNTS. THE GENERAL OBJECTIONS OF THE AO REGARDING CLEANLINESS OF THE BILLS, PAYMENT THROUGH RTGS AND NON-PRODUCTION OF SOFT COPY OF BOO KS OF ACCOUNTS DO NOT FALL UNDER THE AMBIT OF DEFINITION OF WORD 'DEF ECT', AS ENVISAGED UNDER SECTION 145(3). THESE OBJECTIONS DO NOT INHIB ITS OR COME IN THE WAY OF DETERMINING OR CALCULATING THE CORRECT PROFI T. B. 'WITHOUT ENLISTING THE DEFECTS, INCOMPLETION AN D INACCURACIES IN THE ACCOUNTS OF THE ASSESSEE, AO CANNOT EXPRESSIVELY OR OTHERWISE, INVOKE THE PROVISIONS OF SECTION 145(3) OF THE ACT. MR. K. N. RAMCHANDRA NAIDU VS. CIT ITA NO. 47 /PNJ/2013. WITHOUT POINTING OUT ANY SUCH DEFECT IN THE ACCOUNT BOOKS OR BRINGING ON RECORD INSTANCES O F UNRECORDED PRODUCTION OR UNRECORDED SALES, OR ANY OTHER INFIRM ITY OR DEFINITE DEFECT WHICH HAS SPECIFIC BEARING ON CALCULATION OF PROFIT FROM THE BOOKS OF ACCOUNTS, OF ACCOUNTS CANNOT BE REJECTED BY APPLYIN G PROVISIONS OF SECTION 145(3)'. DCIT VS. ASSOCIATED STONE INDUSTRI ES LIMITED 22 TW 155 (JAIPUR). C. WHERE THE DEFECTS POINTED OUT IN THE BOOKS OF A CCOUNTS WERE OF GENERAL OR TECHNICAL NATURE AND NO SUPPRESSION OF S ALE OR PURCHASE WAS POINTED OUT BOOK RESULTS OR BOOKS OF ACCOUNTS CANNO T BE REJECTED'. VADAYATTU JEWELLERY VS. STATE OF KERALA (1997) 104 STC 121, (KER.). THE DEPARTMENT HAS TO PROVE SATISFACTORILY THAT THE ACC OUNTS BOOKS ARE UNRELIABLE, INCORRECT OR INCOMPLETE BEFORE IT CAN R EJECT THE ACCOUNTS. REJECTION SHOULD NOT BE DONE LIGHTLY'. ST. TERRSAOI L MILLS VS. STATE OF KERALA (1970) 76 UR 365 (KER.). ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 23 D. 'IN THE CASE OF ACIT VS. HITECH GRAIN PROCESSIN G PVT. LTD. IN ITA NO. 2885/DEL/2011, HON'BIE DELHI HIGH COURT HAS HELD TH AT SINCE THE AO HAD NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNT AND THE ACCOUNTS WERE ALSO NOT REJECTED BY THE AO, THEREFORE, NO ADD ITION COULD HAVE BEEN MADE BY THE AO. THE SAME VIEW POINT HAS BEEN ENDORS ED BY KERALA HIGH COURT IN THE CASE OF [ADDL. ITO VS PONKUNNAM TRADER S (1976) 102 ITR 366 (KER)]. E. 'WHEN NO SPECIFIC DISCREPANCIES OR DEFECTS IN T HE BOOKS OF ACCOUNT OF THE ASSESSEE HAS BEEN POINTED OUT NOR WAS ANY MA TERIAL BROUGHT TO ESTABLISH THAT PURCHASES WERE INFLATED OR RECEIPTS SUPPRESSED, THERE IS NO JUSTIFICATION IN INVOKING THE PROVISIONS OF SECTION 145 OF THE ACT, M/S PARAS DYEING AND PRINTING MILLS P LTD 004 ITR (TRIB ) 0029 (AHD). F. 'THUS, THE SCOPE OF THE PROVISIONS OF SECTION 14 5 CONCLUSIVE ESTABLISHING THE FACT THAT, WHAT IS IMPORTANT FOR R EJECTION OF BOOKS IS THE AO BEING NOT SATISFIED ABOUT THE CORRECTNESS OR COM PLETENESS OF THE ACCOUNTS AND IT IS FOR THE AO TO ESTABLISH THE INCO MPLETENESS OR INCORRECTNESS OF THE ACCOUNTS OF THE ASSESSE', ASHO K REFRACTORIES PVT. LTD (279 ITR 457) CALCUTTA HIGH COURT. G. 'THE POWER TO REJECT THE BOOKS OF ACCOUNTS UNDER SECTION 145(3) ARISES ONLY IF THE AO IS SATISFY THAT THERE IS A MA JOR DEFECT IN THE BOOKS OF ACCOUNTS WHICH COMES IN THE WAY OF DETERMINING THE ACTUAL PROFIT'. DCIT V. ASSOCIATED PETROLEUM CORPORATION [2011] 44 SOT 4 5 (AHD.), ITA NO. 47 /PNJ/2013. H. IN CIT V. AMITBHAI GUNVANTBHAI [1981] 129 ITR 5 73 (GUT.), THE HON'BLE JURISDICTIONAL HIGH COURT HAS HELD THAT THE BASIC PRINCIPLE IS THE SAME IN LAW RELATING TO INCOME-TAX AS WELL AS IN CI VIL LAW, NAMELY, IF THERE IS NO CHALLENGE TO THE TRANSACTION REPRESENTED BY T HE ENTRIES, THEN IT IS ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 24 NOT OPEN TO THE REVENUE OR OTHER SIDE TO CONTEND TH AT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF AFFAIRS. 12. THE AO HAS NOT POINTED OUT ANY ACCOUNTING DEFEC TS IN THE BOOKS OF ACCOUNTS. RATHER HE IS SUMMARILY IGNORED THE BOOKS OF ACCOUNTS BUT HAS PROCEEDED TO INVOKE THE RIGOUR OF SECTION 145(3) WH ICH IS BAD IN LAW. IV. RECORDING A CLEAR SATISFACTION IN THE ASSTT. OR DER A. THE SETTLED LEGAL PREPOSITION IS THAT BEFORE AS SUMING JURISDICTION UNDER SECTION 145(3) OR RESORTING TO 'ESTIMATION' A .O. HAS TO RECORD A DEAR AND DEFINITE SATISFACTION IN THE BODY OF ASSES SMENT ORDER, THAT 'HE IS SATISFIED THAT THE ACCOUNTS ARE NOT CORRECT OR C OMPLETE AND TRUE PROFIT CANNOT BE DEDUCED FROM SUCH ACCOUNTS. IF, THERE IS NO FINDING THAT THERE WAS MATERIAL BEFORE THE AO TO LEAD HIM TO THE CONCL USION THAT A PROPER STATEMENT OF INCOME, PROFITS AND GAINS COULD NOT BE DEDUCED FROM THE MATERIAL PLACED BEFORE HIM, IN THAT EVENT HE IS NOT ENTITLED TO ESTIMATE THE PROFIT. PANDIT BROS. VS CIT 26 ITR 159 (P&H) B. THE ABOVE PRINCIPLE WAS ALSO AFFIRMED BY THE SU PREME COURT IN THE CASE OF CHHABILDAS TRIBHUVANDAS SHAH V. CIT [1966] 59 ITR 733 (SC) WHEREIN IT WAS HELD 'WHAT WE HAVE TO SEE IS WHETHER THERE IS ANY FINDING THAT THE INCOME, PROFITS AND GAINS CANNOT PROPERLY BE DEDUCED. 'WE ARE NOT CONCERNED WITH THE CORRECTNESS OF THE CONCLUSIO N AND WE ARE ONLY CONCERNED WITH THE QUESTION WHETHER THERE IS ANY MA TERIAL IN SUPPORT OF THE FINDING OR NOT'. C. HOWEVER THE AO HAS NOT RECORDED ANY SUCH SATISF ACTION IN THE BODY OF ASSESSMENT ORDER BEFORE MAKING HUGE ADDITION OF RS. 2.79 CRORE. AS NO COGENT REASON HAS BEEN ADVANCED BY THE A.O. FOR REJECTING THE ACCOUNTS, THE REJECTION AND SUBSEQUENT ESTIMATION O F INCOME IS BAD IN LAW. CIT V. S.R. FRAGNACES LTD., 270 ITR 560.'IN TH E ABSENCE OF ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 25 SPECIFIC FINDING ON THE PART OF A.O, THAT THE TRUE PROFIT CANNOT BE ASCERTAINED FROM THE ACCOUNTS OF THE ASSESSEE BOOK RESULTS CANNOT BE DISTURBED' CIT VS JAYALAXMI TRADING COMPANY 2014 IT R 660 MAT. D. SECTION 145 REQUIRES THE ASSESSING OFFICER TO GI VE A FINDING AS TO WHETHER METHOD OF ACCOUNTING ADOPTED BY THE ASSESSE E IS SUCH THAT IT WILL NOT ENABLE THE ASSESSING OFFICER TO COMPUTE TH E INCOME OF THE ASSESSEE CORRECTLY OR THAT THERE ARE SERIOUS DEFECT S IN THE MAINTENANCE OF ACCOUNTS WHICH WILL NOT ENABLE THE ASSESSING OFFICE R TO WORK OUT THE INCOME OF THE ASSESSEE. WITHOUT THESE FINDINGS BOOK RESULT CANNOT BE DISTURBED. K.N. RAMCHANDRA NAIDU VS. CIT ITA NO. 47 /PNJ/ E. 'IF THERE IS NO FINDING THAT BOOKS OF ACCOUNTS A RE INCOMPLETE OR INCORRECT, ACCOUNTS CANNOT BE REJECTED. 'CIT V. RAJ NI KANT DAVE [2006] 281 ITR 6 (ALI), IF THERE IS NO FINDING THAT INCOM E COULD NOT BE DEDUCED FROM THE ACCOUNTS MAINTAINED BY THE ASSESSEE, THEN REJECTION OF ACCOUNTS WOULD BE INVALID, 'JUGGILAI KAMLAPAT UDYOG LTD. V. CIT [2005] 278 ITR 522 (CAL,)'. UNLESS THERE IS A FINDING AGAI NST THE ASSESSEE THAT HIS INCOME, PROFITS AND GAINS COULD NOT PROPERLY BE DEDUCED FROM HIS METHOD OF ACCOUNTING WHICH HE HAS BEEN REGULARLY EM PLOYING, THE ACCOUNTS CANNOT BE DISTURBED. 'P. VENKANNA V. CIT [ 1969] 72 ITR 328'. F. HONBLE JURISDICTIONAL HIGH COURT, IN THE CASE O F BASTIRAM NARAYANDAS MAHESWARI (210 ITR 438), HELD THAT IT IS THE SETTLE D LAW THAT THE BOOKS CANNOT BE REJECTED U/S 145 OF THE ACT AND RESORT TO BEST JUDGMENT ASSESSMENT, UNLESS THE AO RECORD ANY FINDING THAT T HE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE ARE INCORRECT RENDERING IT IMPOSSIBLE TO DEDUCE THE PROFITS, AO NEEDS TO INDICATE THAT HE NO TICED ANY INCONSISTENCY OR INFIRMITY IN THE AUDIT REPORT. MAD NANI CONSTRUCTION CORPORATION P LTD VS CIT (296 ITR 0045) (GAUHATI). ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 26 13. THE ASSESSING OFFICER HAS NEITHER GIVEN ANY FIN DING ABOUT REJECTION OF BOOKS NOR IS IT DISCERNIBLE FROM HIS ORDER, THE WORKING OF HIS MIND FOR REJECTION OF THE BOOKS. HOWEVER WITHOUT REJECTING H E HAS PROCEEDED IN ESTIMATING THE PROFIT. THE CONDUCT OF THE AO IS OBV IOUSLY ARBITRARY AND AGAINST THE EXPLICIT PROVISIONS OF THE ACT'. V. APPLYING PROFIT RATE WITHOUT EVIDENCE A. THE AO HAS ESTIMATED THE PROFIT BY APPLYING PRO FIT RATE OF 5% WITHOUT BRINGING AN, COGENT MATERIAL OR EVIDENCE ON RECORD. IT IS A SETTLED LEGAL PREPOSITION THAT ONCE THE BOOKS OF ACCOUNTS A RE REJECTED, THEN, PROFIT HAS TO BE ESTIMATED ON THE BASIS OF PROPER M ATERIAL OR EVIDENCE. AO IS NOT ENTITLED TO MAKE A PURE GUESS AND MAKE AS SESSMENT WITHOUT REFERENCE TO EVIDENCE OR ANY MATERIAL AT ALL. THERE MUST BE SOMETHING MORE THAN MERE SUSPICION TO SUPPORT THE ADDITION. S HETH GURMUKH SINGH VS. CIT (1944) 12 ITR 393. B. THE RULE OF LAW ON THIS SUBJECT HAS BEEN WELL S ETTLED THAT ESTIMATE FRAMED WITHOUT GIVING THE BASIS FOR THEIR FIXATION IS BAD IN LAW. DHAKESWARI COTTON MILLS LTD. VS. CIT (1954) 26 ITR 775. IN THE CASE OF BRIJBHUSNAN LAL PRADUMA KUMAR V CIT [1978] 115 ITR 524 THE APEX COURT HELD AN ESTIMATE, MUST NOT BE CAPRICIOUS BUT SHOULD HAVE A REASONABLE NEXUS TO THE AVAILABLE MATERIAL AND THE CIRCUMSTANCES OF THE CASE. SAME VIEW HAS BEEN TAKEN IN THE CASE OF STATE OF KERALA VS. C. VELUKUTTY [1996] 60 ITR 239 (SC). C. THE PRINCIPAL HAS ALSO BEEN ELUCIDATED BY THE A PEX COURT IN THE CASE OF STATE OF KERALA VS. C. VELUKUTTY [1966] 60 ITR 2 39 (SC) WHEREIN THE FOLLOWING OBSERVATIONS HAVE BEEN MADE. 'THE LIMITS OF THE POWER ARE IMPLICIT IN THE EXPRESSION 'BEST OF HIS JUDGMENT. JUDGMENT IS A FACULTY TO DECIDE MATTERS WITH WISDOM, TRULY AND LEGALLY. JUDG MENT DOES NOT ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 27 DEPEND UPON THE ARBITRARY CAPRICE OF A JUDGE, BUT O N SETTLED AND INVARIABLE PRINCIPLES OF JUSTICE. THOUGH THERE IS A N ELEMENT OF GUESS-WORK IN A BEST JUDGMENT ASSESSMENT, IT SHALL NOT BE A WILD ONE, BUT SHALL HAVE A REASONABLE NEXUS TO THE AVAILABLE MATERIAL AND TH E CIRCUMSTANCES OF EACH CASE.' D. THE ABOVE PRINCIPAL HAS BEEN CONFIRMED BY THE HO NORABLE SUPREME COURT IN NUMBER OF JUDGMENT. THUS, IN THE CASE OF K ACHWALA GEMS VS JCIT, 288 ITR 10 (2007)(SC). THE APEX COURT HAS HEL D 'AFTER REJECTION OF BOOK RESULTS, AO SHOULD TRY TO MAKE AN HONEST AND F AIR ESTIMATE OF THE INCOME EVEN IN A BEST JUDGMENT ASSESSMENT AND SHOUL D NOT ACT TOTALLY ARBITRARILY, THE AO SHOULD ADOPT A METHOD WHICH MUS T REFLECT THE PROFITS TRULY AND JUSTLY [GEMINI PICTURES LTD. VS CIT (1958 ) 33 ITR 547 (MAD).] FOR ESTIMATING THE PROFIT, THE AO CAN ALWAYS HAVE A LOOK AT THE MARGIN RETURNED IN COMPARABLE CASES OR EVEN IN ASSESSEE'S OWN CASE IN THE PRECEDING YEARS. E. THE HON'BLE RAJASTHAN HIGH COURT IN CIT VS. GOTA N LIME KHANIJ UDHYOG (2001) 256 ITR 243 (RAJ) HELD THAT THE BOOKS OF ACCOUNT TOGETHER WITH PAST HISTORY OF THE CASE AS ALSO MATE RIAL COLLECTED SHOULD BE CONSIDERED FOR ESTIMATION OF INCOME. THE PAST HI STORY IS THE BEST GUIDE WHERE PROVISIONS OF S. 145(3) OF THE ACT ARE INVOKED AS HELD IN AJAY GOYAL VS. ITO (2006) 99 TTJ (JD) 164, MADAN LA L VS. ITO (2006) 99 110 (JD) 538, CIT VS. POPULAR ELECTRIC CO, (P) LTD. (1993) 203 ITR 630(CAL) AND M.A RAUF VS. CIT (1958) 33 ITR 843 (PA T)., I.E., LAW IN RESPECT OF ASSESSMENTS MADE ON THE BASIS OF BEST JU DGMENT OR ESTIMATE IS WELL-SETTLED. HON'BLE SUPREME COURT IN THE CASE OF, LAYS DOWN THAT WHILE MAKING THE BEST JUDGMENT ASSESSMENT, NO DOU BT, SHOULD ARRIVE AT ITS CONCLUSION WITHOUT ANY BIAS AND ON RATIONAL BAS IS. THAT AUTHORITY SHOULD NOT BE VINDICTIVE OR CAPRICIOUS. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 28 F. ONCE BOOK RESULTS WERE REJECTED IN TERMS OF PROV ISIONS OF SEC. 145(3) OF THE ACT, IT IS NOT THE IPSE DIXIT OF THE AO TO C OMPUTE THE INCOME EITHER U/S 144(1) OR SEC. 145(3) OF THE ACT, OR THE COMPUT ATION AND DETERMINATION OF INCOME CAN BE AT THE WHIMS AND FAN CIES OF THE AO, COMMISSIONER OF SALES TAX V. H. M. ESUFALI H. M. AB DULALI [1973] 90 ITR 271 (SC). G. IN S. M. HASAN, STO V. NEW GRAMOPHONE HOUSE, AIR 1977 SC 1788, A DIVISION BENCH OF THE HON'BLE SUPREME COURT HELD TH AT, 'IF THE CONDITIONS FOR THE BEST JUDGMENT ASSESSMENT ARE PRESENT, THE A SSESSING OFFICER WILL MAKE IT NOT ON SPECULATIVE OR FANCIFUL GROUNDS, BUT ON REASONABLE GUESS SINCE THE BEST JUDGMENT ASSESSMENT DOES NOT NEGATE THE EXERCISE OF JUDGMENT ON THE PART OF THE OFFICER, A FAX OFFICER WHO MAKES A BEST JUDGMENT ASSESSMENT SHOULD MAKE AN INTELLIGENT WELL -GROUNDED ESTIMATE RATHER THAN LAUNCH UPON PURE SURMISES'. H. IN THE CASE OF KACHWALA GEMS VS JCIT, 288 ITR 10 (2007)(SC). THE APEX COURT HAS HELD ''AFTER REJECTION OF BOOK RESUL TS, AO SHOULD TRY TO MAKE AN HONEST AND FAIR ESTIMATE OF THE INCOME EVEN IN A BEST JUDGMENT ASSESSMENT AND SHOULD NOT ACT TOTALLY ARBITRARILY, THE AO SHOULD ADOPT A METHOD WHICH MUST REFLECT THE PROFITS TRULY AND JUS TLY [ GEMINI PICTURES LTD. VS CIT (1958) 33 ITR 547 (MAD).] I. IN THE INSTANT CASE THE AO HAS NOT GIVEN EVEN A SINGLE REASON OR EVEN A SINGLE BASIS FOR MAKING SUCH A HUGE ADDITION OF R S.2.5 CRORE. IN FACT, THE AO HAS FRAMED THE ASSESSMENT ON THE BASIS CONJU NCTURE, SURMISES AND SUPPOSITION. THE AO HAS APPARENTLY IGNORED THE BASIC PRINCIPAL LAID DOWN IN AFORESAID DECISION FOR ESTIMATING PROFIT AN D HAS SIMPLY RESORTED TO GUESS WORK. THE ADDITION MADE ACCORDINGLY IS BAD IN LAW. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 29 VI. ESTIMATING WITHOUT CONFRONTING MATERIAL TO ASSE SSEE A. A BARE PERUSAL OF THE PROVISION OF SECTION 145 R EAD WITH SECTION 144 OF THE ACT, CLEARLY REFLECT THE LEGISLATIVE INTENT THAT AO CANNOT MAKE ASSESSMENT, WITHOUT PROVIDING PROPER AND REASONABLE OPPORTUNITY TO THE ASSESSEE. THE INTENT AND THE PURPOSE OF THE LEGISLA TURE IS IMBEDDED IN THE PHRASE 'MAY MAKE ASSESSMENT IN THE MANNER PROVI DED UNDER SECTION 144'. THE PHRASEOLOGY USED IN THE SECTION MEANS THA T IN CASE RIGOR OF SECTION 145(3) HAS BEEN INVOKED IN THAT CASE AO HAS TO FOLLOW ALL THE RULES WHICH ARE APPLICABLE IN FRAMING THE ASSESSMEN T UNDER SECTION 144. THESE RULES INTER- ALIA INCLUDES CONFRONTING THE AS SESSEE THE BASIS FOR REJECTION OF BOOKS OF ACCOUNTS AND THEREAFTER CONFR ONTING THE ASSESSEE MATERIAL AND EVIDENCE ON THE BASIS OF WHICH AO IS I NTENDING TO MAKE ADDITION. UNLESS THIS BASIC REQUIREMENT OF SECTION 144 IS NOT FULFILLED AND THE AO HAS NOT GIVEN AN OPPORTUNITY TO THE ASSESSEE TO CONTRADICT THE MATERIALS UPON WHICH THE ASSESSING OFFICER WANTS TO BASE HIS ESTIMATE. ASSESSMENT FRAMED IS BAD IN LAW. ADDL. ITO VS PONKU NNAM TRADERS (1976) 102 ITR 366 (KER). B. THE DEFINITION OF WORD MATERIAL AND EVIDENCE HAS FURTHER BEEN ELABORATED BY HON'BLE SUPREME COURT AND IT HAS BEEN HELD THAT THOUGH THE SCOPE OF THE PHRASE CAN BE WIDER BUT IT CAN BE PAST HISTORY OF THE CASE, SUBSEQUENT HISTORY OF THE CASE, FACTS OF THE CASE OR THE PROFIT RATE OF OTHER COMPARABLE CASES. C. THE RULE OF LAW ON THIS SUBJECT HAS BEEN WELL S ETTLED THAT ESTIMATES FRAMED WITHOUT GIVING THE BASIS FOR THEIR FIXATION OR WITHOUT FURNISHING TO THE ASSESSEE THE MATERIAL ON WHICH BASIS BOOKS OF A CCOUNTS ARE BEING REJECTED OR WITHOUT GIVING AN OPPORTUNITY TO THE AS SESSEE TO REBUT IT ARE BAD. NEEDLESS TO SAY THAT STATUTORY FUNCTION OF AO, BEING QUASI-JUDICIAL AUTHORITY, IN FRAMING THE ASSESSMENT, IS GUARDED AN D GUIDED BY JUDICIAL ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 30 CONSIDERATIONS AND ACCORDINGLY, MUST CONFORM TO THE RULES OF NATURAL JUSTICE, AS HELD IN A NUMBER OF CASES. THE AO MUST ACT IN ACCORDANCE WITH THE PRINCIPLE OF JUSTICE, EQUITY AND GOOD CONS CIENCE. DHAKESHWARI COTTON MILLS LTD. VS CIT 26 ITR 775 (SC). D. THUS THE POSITION IN LAW IS SETTLED. THE AO CAN NOT RESORT TO ESTIMATION WITHOUT CONFRONTING TO THE ASSESSEE THE 'DEFECTS' IN THE BOOKS OF ACCOUNTS AND 'MATERIAL OR EVIDENCE OR THE BASIS OF ESTIMATIONS'. THE AO HAS NOT DISCHARGED HIS PRIMARY ONUS AS SUCH THE ASSESSMENT MADE IS BAD IN LAW. VII. REDUCING PROFIT RATE OF 5% TO 1%. A. THE AO HAS ESTIMATED THE PROFIT RATE AT 5% SIMP LY BY CONJUNCTURE, SURMISES AND GUESS WORK AND WITHOUT ANY LOGIC ANY R ELEVANT MATERIAL ON RECORD. THE CONDUCT OF THE AO IS OBVIOUS FROM THE F ACT THAT IN THE NEXT VERY ASSESSMENT YEAR, THE AO REDUCED HIS ON ESTIMAT ION OF 5% TO 1%, ONCE AGAIN WITHOUT ASSIGNING ANY REASON OR PUTTING ANY CREDIBLE MATERIAL ON RECORD. THE ARBITRARY ACTION OF THE AO GOES TO P ROVE THAT THE WHOLE EXERCISE OF MAKING SUCH A LARGE ADDITION IS NOTHING BUT WILD GUESS WORKS, WHICH VARY FROM YEAR TO YEAR AND WHICH HAS NO RELEV ANCE WITH COMPARABLE CASES OR WITH ANY OTHER MATERIAL OR REAS ON FOR DOING SO. IN VIEW OF THE SETTLED LEGAL PREPOSITION ADDITION MADE ON THE BASIS OF GUESS WORK MAY BE DELETED. COPY OF ASSESSMENT ORDER FOR A Y 2013-14 IS ON RECORD. B. IT IS THE SETTLED LAW THAT UNLESS THE A.O, POIN TS OUT SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS, TO THE EXTENT WHICH MAKE IT IMPOSSIBLE OR DIFFICULT FOR THE AO TO DEDUCE THE CORRECT PROFIT, BOOKS OF ACCOUNTS CANNOT BE REJECTED. FURTHER THE SCOPE AND LIMITATION OF TH E WORD 'DEFECT' HAS BEEN DEFINE IN THE SECTION ITSELF. THUS THE SECTION DEFINES 'THAT THE ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 31 DEFECTS IN THE BOOKS OF ACCOUNTS' SHALL BE SUCH WHI CH ESTABLISHES THAT 'INCOME CANNOT BE PROPERLY DEDUCED FORM THE ACCOUNT S'. THE AO HAS NOT POINTED OUT ANY SUCH ACCOUNTING DEFECTS IN THE BOOK S OF ACCOUNTS. THE GENERAL OBJECTIONS OF THE AO REGARDING CLEANLINESS OF THE BILLS, PAYMENT THROUGH RTGS AND NON-PRODUCTION OF SOFT COPY OF BOO KS OF ACCOUNTS DO NOT FALL UNDER THE AMBIT OF DEFINITION OF WORD 'DEF ECT', AS ENVISAGED UNDER SECTION 145(3). THESE OBJECTIONS DO NOT INHIB ITS OR COME IN THE WAY OF DETERMINING OR CALCULATING THE CORRECT PROFI T. C. WITHOUT ENLISTING THE DEFECTS, AND INACCURACIES IN THE ACCOUNTS OF THE ASSESSEE, AO CANNOT EXPRESSIVELY OR OTHERWISE, INVOKE THE PROVISIONS OF SECTION 145(3) OF THE ACT. MR. K.N. RAMCHANDRA N AIDU VS. CIT, ITA NO. 47/PNJ/2013. WITHOUT POINTING OUT ANY SUCH DEFECT I N THE ACCOUNT BOOKS OR BRINGING ON RECORD INSTANCES OF UNRECORDED PRODU CTION OR UNRECORDED SALES, OR ANY OTHER INFIRMITY OR DEFINITE DEFECT WH ICH HAS SPECIFIC BEARING ON CALCULATION OF PROFIT FROM THE BOOKS OF ACCOUNTS , OF ACCOUNTS CANNOT BE REJECTED BY APPLYING PROVISIONS OF SECTION 145(3). DCIT VS ASSOCIATED STONE INDUSTRIES LIMITED 22 TW 155 (JAIPUR). D. WHERE THE DEFECTS POINTED OUT IN THE BOOKS OF A CCOUNTS WERE OF GENERAL OR TECHNICAL NATURE AND NO SUPPRESSION OF S ALE OR PURCHASE WAS POINTED OUT BOOK RESULTS OR BOOKS OF ACCOUNTS CANNO T BE REJECTED'. VADAYATTU JEWELLERY VS. STATE OF KERALA (1997) 104 SIC 121, (KER.).THE DEPARTMENT HAS TO PROVE SATISFACTORILY THAT THE ACC OUNTS BOOKS ARE UNRELIABLE, INCORRECT OR INCOMPLETE BEFORE IT CAN R EJECT THE ACCOUNTS. REJECTION SHOULD NOT BE DONE LIGHTLY'. ST. TERRSAOI L MILLS VS. STATE OF KERALA (1970) 76 ITR 365 (KER.). E. 'IN THE CASE OF ACIT VS. HITECH GRAIN PROCESSIN G PVT. LTD., ITA NO. 2885/DEL/2011, THE HON'BLE DELHI HIGH COURT HAS HEL D THAT SINCE THE AO ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 32 HAD NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACC OUNT AND THE ACCOUNTS WERE ALSO NOT REJECTED BY THE AO, THEREFORE, NO ADD ITION COULD HAVE BEEN MADE BY THE AO. THE SAME VIEW POINT HAS BEEN ENDOR SED BY KERALA HIGH COURT IN THE CASE OF [ITO VS. PONKUNNAM TRADER S (1976) 102 ITR 366 (KER)]. F. 'WHEN NO SPECIFIC DISCREPANCIES OR DEFECTS IN T HE BOOKS OF ACCOUNT OF THE ASSESSEE HAS BEEN POINTED OUT NOR WAS ANY MA TERIAL BROUGHT TO ESTABLISH THAT PURCHASES WERE INFLATED OR RECEIPTS SUPPRESSED, THERE IS NO JUSTIFICATION IN INVOKING THE PROVISIONS OF SECTION 145 OF THE ACT, M/S PARAS DYEING AND PRINTING MILLS P LTD 004 ITR (TRIB ) 0029 (AHD). G. 'THUS, THE SCOPE OF THE PROVISIONS OF SECTION 1 45 CONCLUSIVE ESTABLISHING THE FACT THAT, WHAT IS IMPORTANT FOR R EJECTION OF BOOKS IS THE AO BEING NOT SATISFIED ABOUT THE CORRECTNESS OR COM PLETENESS OF THE ACCOUNTS AND IT IS FOR THE AO TO ESTABLISH THE INCO MPLETENESS OR INCORRECTNESS OF THE ACCOUNTS OF THE ASSESSEE. ASH OK REFRACTORIES PVT. LTD (279 ITR 457) CALCUTTA HIGH COURT. H. 'THE POWER TO REJECT THE BOOKS OF ACCOUNTS UNDE R SECTION 145(3) ARISES ONLY IF THE AO IS SATISFY THAT THERE IS A MA JOR DEFECT IN THE BOOKS OF ACCOUNTS WHICH COMES IN THE WAY OF DETERMINING THE ACTUAL PROFIT', DCIT V. ASSOCIATED PETROLEUM CORPORATION [2011] 44 SOT 4 5 (AHD), ITA NO. 47/PNJ/2013. I. IN CIT VS. AMITBHAI GUNVANTBHAI, [1981] 129 ITR 573 (GUT), THE HON'BLE JURISDICTIONAL HIGH COURT HAS HELD THAT THE BASIC PRINCIPLE IS THE SAME IN LAW RELATING TO INCOME-TAX AS WELL AS IN CI VIL LAW, NAMELY, IF THERE IS NO CHALLENGE TO THE TRANSACTION REPRESENTED BY T HE ENTRIES, THEN IT IS NOT OPEN TO THE REVENUE OR OTHER SIDE TO CONTEND TH AT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF AFFAIRS. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 33 13. IN THE INSTANT CASE, THE AO HAS NOT POINTED OUT ANY ACCOUNTING DEFECTS IN THE BOOKS OF ACCOUNTS. RATHER HE IS SUMM ARILY IGNORED THE BOOKS OF ACCOUNTS BUT HAS PROCEEDED TO INVOKE SECTI ON 145(3) WHICH IS BAD IN LAW.' 14. THE LD. CIT (A) HELD THAT THERE IS NO DOUBT ABO UT THE FACT THAT THE ASSESSEE WAS DEALING IN MILK ON WHOLE SALE BASIS. A LL THE TRADE CREDITORS WERE SHOWN OUTSTANDING AS ON 31.03.2012 BUT PAID IN THE BEGINNING OF THE SUBSEQUENT YEAR. THERE WAS NO ACCUMULATION OF F UND EITHER IN THE SHAPE OF UNSECURED LOAN OR SUNDRY CREDITORS. THE EN TIRE SALES AND PURCHASES WAS MADE THROUGH BANKING CHANNELS ONLY EX CEPT MARGINAL SALE OF RS.48,89,100/. THERE WAS NO PURCHASE MADE IN CAS H. ALL THE RELEVANT BILLS/VOUCHERS WERE PRODUCED BEFORE THE AO FOR VERI FICATION. THE TRADING ACTIVITY WAS SUPPORTED BY QUANTITATIVE DETAILS AS S EPARATE STOCK REGISTER WAS MAINTAINED. REGULAR BOOKS OF ACCOUNT WERE MAINT AINED BY THE ASSESSEE, WHICH WERE DULY AUDITED BY THE TAX AUDITO R. THERE WAS RUNNING ACCOUNT OF TRADE CREDITORS AND DEBTORS MAINTAINED B Y THE ASSESSEE, WHICH CAN BE VERIFIED FROM THE DETAILS GIVEN BY THE ASSESSEE IN THIS REGARD. THE AO HAS NOT CONSIDERED ALL THESE FACTS W HILE ESTIMATING THE PROFIT AND REJECTING THE BOOKS OF ACCOUNT. ON THE C ONTRARY, THE AO HAS HELD THAT NO SUCH BUSINESS WAS CARRIED OUT BY THE A SSESSEE. IT IS NOT UNDERSTOOD AS TO WHEN THERE WAS NO BUSINESS CARRIED OUT BY THE ASSESSEE, THEN HOW THE PROFIT OF THE SAME BUSINESS CAN BE ESTIMATED. I DO NOT FIND ANY REASON FOR REJECTION OF BOOKS OF AC COUNT, WHEREAS, ALL THE RELEVANT DETAILS INCLUDING BOOKS OF ACCOUNT WERE FI LED BY THE ASSESSEE BEFORE THE AO FOR VERIFICATION. THERE WAS NO SPECIF IC DEFECT POINTED OUT BY THE AO IN THE BOOKS OF ACCOUNT THE ASSESSEE HAS ALSO GIVEN COMPARATIVE CHART OF BALANCE SHEET/TRADING ACCOUNT FOR THE ASSESSMENT YEARS 2012-13 TO 2015-16, WHICH IS AS UNDER: ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 34 COMPARATIVE CHART OF BALANCE SHEET OF SUNIL NAYYAR PROP. KUMAR BROTHERS PARTICULARS AY 2012-13 AY 2013-14 AY 2014-15 AY 2015-16 ! PROP. CAPITAL 248,020 419,540 486,863 593,236 UNSECURED LOANS NIL NIL NIL NIL OTHER LOANS NIL NIL NIL NIL TRADE CREDITORS 250,553,034 315,359,100 278,829,586 141,463,880 TOTAL 250,801,054 315,778,640 279,316,449 142,057,116 LOAN ADVANCED NIL NIL NIL NIL TRADE DEBTORS 250,113,470 314,997,500 276,313,867 136,010,470 FIXED ASSETS 168,890 243,213 214,451 194,197 CASH IN HAND 406,476 440,566 483,553 451,120 BANK BALANCE 112,218 97,361 2,304,578 5,401,328 TOTAL 250,801,054 315,778,640 279,316,449 142,057,115 COMPARATIVE CHART OF TRADING ACCOUNT OF SUNIL NAYYA R PROP. KUMAR BROTHERS PARTICULARS AY 2012 - 13 AY 2013 - 14 AY 2014 - 15 AY 2015 - 16 ! OPENING STOCK NIL NIL NIL NIL CASH PURCHASE NIL NIL NIL NIL CREDIT PURCHASE 861,366,340 1,103,754,138 1,195,793,275 1,021,076,444 DIRECT EXPENSES 3,278,560 4,582,800 4,186,460 4,080,510 GROSS PROFIT 1,938,819 2,212,500 2,538,062 2,617,504 TOTAL 866,583,719 1,110,549,438 1,202 ,517,797 1,027,774,457 CASH SALES 4,889,100 NIL NIL NIL CREDIT SALES 861,694,619 1,110,549,438 1,202,517,797 1,027,774,457 CLOSING STOCK NIL NIL NIL NIL TOTAL 866,583,719 1,110,549,438 1,202,517,797 1,027,774,457 NET PROFIT 348,214 504,330 529,643 537,977 ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 35 15. THUS, AFTER GOING THROUGH THE ENTIRE GAMUT OF T HE FACTS, THE LD. CIT (A) HELD THAT THE AO WAS NOT JUSTIFIED TO REJECT BO OKS OF ACCOUNT AND ESTIMATE PROFIT. 16. GROUND NO. 4 RELATES TO DELETION OF RS. 1,39,38 ,110/- MADE BY THE LD. CIT (A) ON ACCOUNT OF SUNDRY CREDITORS OF RS.88 ,38,110/- AND RS.51,00,000/- AS UNEXPLAINED CASH DEPOSITS. 17. THE FACT OF THE CASE IS THAT THE AO FOUND THAT THERE WERE CASH DEPOSITS IN THE BANK ACCOUNT OF THE ASSESSEE ON VAR IOUS DATES TOTALING TO RS.51,00,000/-. THE AO HELD THAT THOUGH NAMES/ADDRE SSES WERE GIVEN BUT NO PAN WAS GIVEN OF THE SUNDRY CREDITORS. TOTAL CRE DITORS OF RS.25,05,53,034/- WAS SHOWN, WHICH INCLUDES SUNDRY CREDITORS IN THE NAME OF KWALITY DAIRY INDIA LTD. OF RS.24,17,14,924 /-, THE AO, TREATED THE OTHER CREDITORS TO BE NON-GENUINE EXCEPT KWAIIT Y DAIRY INDIA LTD., AND THEREBY, MADE AN ADDITION OF RS.88,38,110/-. FURTHE R, CASH DEPOSITS OF RS.51,00,000/- WAS ALSO TREATED TO BE UNEXPLAINED, THEREBY, AN ADDITION OF RS.1,39,38,110/- WAS MADE U/S.68 OF THE ACT. 18. BEFORE THE LD. CIT (A), IT WAS SUBMITTED THAT, THE ASSESSEE IS DEALING IN PURCHASE AND SALE OF MI LK, AND THE TRADE IS BASICALLY A RELATED TO THE FARMERS OR ILLITERATE DA IRY OWNERS. TRADING IN SUCH COMMODITY AND SUCH SECTION OF SOCIETY INVARIABLY DE MANDS CASH TRANSACTIONS. HOWEVER, THE ASSESSEE HAS TRIED TO MI NIMIZE THE CASH TRANSACTIONS. THUS THE ENTIRE PURCHASE IS THROUGH B ANKING CHANNEL AND ONLY A MARGINAL SALE HAS BEEN CARRIED OUT BY WAY OF CASH. THE CASH SALE IS NECESSITATED BECAUSE OF THE NATURE OF GOODS TRADED WHICH ARE HIGHLY PERISHABLE. CASH SALE IS MADE RARELY, ON CERTAIN OC CASION BECAUSE OF BUSINESS COMPULSION SUCH AS LACK OF DEMAND OR EXCES SIVE SUPPLY AND THE PERISHABLE NATURE OF THE STOCK. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 36 19. IT WAS ALSO SUBMITTED THAT THE ENTIRE SALE INCL UDING THE SALE POINTED OUT BY AO IS SUPPORTED BY CORRESPONDING PURCHASE WH OSE PAYMENT HAS BEEN MADE THROUGH BANKING CHANNEL. THE AO HAS ALSO NOT DISPUTED THE PURCHASE BECAUSE COMPLETE LEDGER OF PURCHASE AS WEL L AS SALE ACCOUNT WAS FURNISHED TO THE AO AT THE TIME OF ASSESSMENT ITSEL F. TO SUBSTANTIATE THE CONTENTION, THE ASSESSEE SUBMITTED COPY OF PURCHASE LEDGER FOR THE RELEVANT DAYS WHICH CLEARLY SHOWS THAT THE CASH SAL E MADE TO THE RETAIL TRADERS IS DULY SUPPORTED BY THE CORRESPONDING PURC HASE. THE ABOVE LEDGER ACCOUNT OF PURCHASE AND SALE IS AL SO SUMMARIZED HEREUNDER IN THE TABULATED FORM: DATE OF PURCHASE NAME OF THE PARTY QUANTITY PURCHAS ED IN KG PURCHASE VALUE QUANTITY SOLD IN KG CASH SALES CREDIT SALES TOTAL SALE VALUE 01.11.11 KWALITY DAIRY 79,285 24,97,479 79,285 4,59,800 20,50,443 25,10,243 02.11.11 KWALITY DAIRY 73,610 23,18,715 73,610 8,64,100 14,66,313 23,30,413 03.11.11 KWALITY DAIRY 80,085 25,22,678 80,085 17,72,600 7,62,938 25,35,538 05.03.12 KWALITY DAIRY 84,445 24,91,129 84,445 8,90,200 16,13,454 25,03,654 06.03.12 KWALITY DAIRY 43,030 12,75,837 43,030 9,02,400 3,73,549 12,75,949 TOTAL 3,60,455 1,11,02,838 3,60,455 48,89,100 62,66,697 1,11,55,797 20. THE ABOVE TABULATED ANALYSIS CLEARLY SHOWS THAT CASH SALE IS SUPPORTED BY THE CORRESPONDING PURCHASE AND THE FAC TS ARE ALSO COLLABORATED WITH THE SALE LEDGER ATTACHED HEREWITH . 21. THE CASH GENERATED FROM THE SALE SHOWN IN THE A BOVE TABLE WAS DEPOSITED IN THE BANK ON 03.11.11 & 06.03.12 ALONG WITH THE OPENING BALANCE SHOWN IN THE CASH BOOK WHICH COMES TO MORE THAN RS. 51,00,000/-. COPY OF CASH BOOK FOR THE RELEVANT DAT ES AND THE CORRESPONDING PURCHASE AND SALE LEDGER ARE SUBMITTE D HERE WITH. 22. IT IS THE BUSINESS COMPULSION IN THE TRADE OF T HE ASSESSEE AS WELL AS IN MANY OTHER RETAIL TRADES THAT PART OF THE SALES HAS TO BE MADE IN CASH. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 37 BUT THERE IN THE YEAR UNDER REFERENCE THE STATUTE D O NOT IN ANY WAY PROHIBS THE CASH SALES AND THE SAME TIME THERE IS N O PROVISIONS IN THE ACT WHERE THE CASH SALE CAN BE EQUATED WITH THE CREDIT WHICH GOES TO ENHANCE THE BALANCE IN THE BOOKS OF THE ASSESSEE. THE ONLY CRITERIA IN THIS REGARD ARE THAT SALES SHOULD BE SUPPORTED BY THE CORRESPON DING PURCHASES. 23. RELIANCE IS PLACED ON THE DECISION OF HON'BLE R AJASTHAN HIGH COURT IN THE CASE OF SMT. HARSHIIA CHORDIAVS ITO (2008) 298 ITR 349 IN WHICH IT WAS HELD THAT 'ADDITION U/S 68 COULD NOT BE MADE IN RESPECT OF THE AMOUNT WHICH WAS FOUND TO BE CASH RECEIPTS FROM THE CUSTOM ERS AGAINST WHICH DELIVERY OF GOODS WAS MADE TO THEM'. ALSO ON THE DE CISION OF HONBLE ITAT, NAGPUR BENCH IN THE CASE OF M/S HEERA STEEL L IMITED VS ITO (2005) 4 ITJ 437 IN WHICH IT WAS HELD THAT CASH SALES CANN OT BE EQUATED WITH CASH CREDIT UNDER SECTION 68. 24. THE AO HAS MADE ADDITION BY INVOKING THE PROVIS ION OF SECTION 68. THE PRECONDITION FOR INVOKING SECTION 68 IS THAT TH ERE HAS TO BE CREDIT OF AMOUNT IN THE BOOKS MAINTAINED BY THE ASSESSEE. [CI T VS P. MOHANAKALA (2007) 291 ITR 278 (SC)]. THE SECTION IS APPLICABLE ONLY WHEN A SUM IS FOUND CREDITED IN THE BOOKS OF THE ASSESSEE [RAKESH KALIA V. CIT, (2006) 286 ITR 357 (DEI.)]. IN THE CASE OF ASSESSEE NEITHE R ANY SUM HAS BEEN CREDITED IN THE BOOKS OF ACCOUNTS OR IN THE BANK AC COUNT EVEN FOR A SINGLE DAY THROUGHOUT THE YEAR WHICH IS EVIDENT FROM THE P EAK ANALYSIS OF BANK ACCOUNT IS SUBMITTED HERE WITH. AS EVIDENT FROM THE BANK ACCOUNT, SALE PROCEEDS REALIZED WAS DEPOSITED IN THE BANK ARE UTI LIZED IN THE SAME DAY FOR MAKING PAYMENTS OF PURCHASES. THE SALE PROCEEDS REALIZED WAS NOT LYING AS CREDIT IN THE BOOKS OF ACCOUNTS OF THE ASS ESSEE EVEN FOR A SINGLE DAY. HENCE BY ANY STRETCH OF IMAGINATION, PAYMENTS RECEIVED FROM THE TRADE DEBTORS CANNOT BE COVERED WITHIN THE MEANING OF CREDITS UNDER SECTION 68. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 38 25. IN THE CASE OF 'DEWAS SOYA LTD. VS ITO ITA NO.3 36/IND/2012' HAT HON'BLE ITAT HAS ALSO HELD JUST BECAUSE THE AMOUNTS WERE RECEIVED FROM THE BUYERS IN CASH, THE ASSESSEE CANNOT BE PENALIZE D BECAUSE THE RESTRICTION PLACED FOR PAYMENT U/S 40A(3) OF THE AC T APPLIES TO BUYER AND NOT THE SELLER. THERE BEING NO RESTRICTION UNDER TH E ACT TO ACCEPT CASH AGAINST SALES, THE ASSESSEE COMPANY CANNOT BE PENAL IZED. 26. HON'BLE SUPREME COURT IN THE CASE OF CIT V. P. MOHAN KALA 291 ITR 278 (SC) HAS CLEARLY EXPLAIN THAT THE PRIMARY CONDI TION FOR INVOCATION OF SECTION 68 IS THAT THERE HAS TO CREDIT OF AMOUNT IN THE BOOKS OF THE ASSESSEE AND SUCH CREDIT SHALL BE SUM OF MONEY EMPH ASIS IS PLACED ON THE PHYSIOLOGY USED IN THE SECTION WHEREIN THE PHRASE A NY SUM IS FOUND CREDITED HAS BEEN USED AND THE LEGISLATION HAS NOT USED THE WORD DEPOSITED. IN OTHER WORD THE BALANCING EFFECT OF TH E TRANSACTION HAS TO BE CREDIT ACCOUNT IN THE BOOKS OF ACCOUNTS WHICH IS NO T THE CASE WITH THE ASSESSEE. 27. THE ASSESSEE IS DEALING IN PURCHASE AND SALE OF MILK WHICH IS AN UNORGANIZED SECTOR AND WHEREIN THE CASH PURCHASE IS COMMONLY PREVALENT AND ACCEPTED BUSINESS PRACTICE. EVEN THAN THE ASSES SEE HAS TRIED TO MAKE MAXIMUM PURCHASES AND SALES THROUGH BANKING CHANNEL . THUS, THE TOTAL PURCHASES OF RS.86,13,66,340/- OUT OF WHICH PURCHAS ES OF RS.83,49,30,250/- HAVE BEEN MADE THROUGH BANKING CH ANNEL. HOWEVER, BECAUSE OF THE APPARENT BUSINESS COMPULSION THE ASS ESSEE HAS TO MAKE THE PURCHASES FROM VILLAGERS WHO EVIDENTLY DO NOT A CCEPT THE PAYMENT THROUGH BANKING CHANNEL. 28. DURING THE YEAR THE ASSESSEE HAS MADE PURCHASES FROM THESE VILLAGERS AND HAS ALSO MADE PAYMENT TO THEM OTHERWI SE THEN BANKING CHANNEL AND AT THE END OF YEAR THERE ARE SOME CREDI T BALANCES IN RESPECT ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 39 OF THESE MILK SUPPLIERS. THE PARTICULARS IN RESPECT OF THESE SUNDRY CREDITORS AND THE MODALITY OF PAYMENT IS TABULATED HEREUNDER: - S. NO. NAME & ADDRESS OF SUNDRY CREDITOR TOTAL AMOUNT OF PURCHASE AMOUNT PAID DURING THE YEAR OUTSTANDING BALANCE AS ON 31.03.2012 PAYMENT MADE DURING THE NEXT YEAR 1. SATISH BHANDARI VILLAGE PINJOKHERA, TEHSIL TOSHAM, DISTT. BHIWANJ 12,92,285 8,80,000 4,12,285 4,12,285 2. CHANDER SINGH VILLAGE THOTHWAL, TEHSIL REWARI, DISTT. REWARI 13,38,947 8,80,000 4,58,947 4,58,947 3. DEV KUMAR MORYA VILLAGE SIRSAKHER, TEHSIL 3ULANA, DISTT, JIND 13,33,808 9,00,000 4,33,808 4,33,808 4. DHARAM SINGH DAGAR VILLAGE CHILEWAL, TEHSIL TOHANAY, DISTT. FATEHABAD 13,07,570 8,71,000 4,36,570 4,36,570 5. GOPAL RAI VILLAGE NIDANA, TEHSIL MAHAM, DISTT. ROHTAK 13,56,049 8,95,000 4,61,049 4,61,049 6. JAGAT RAM VILLAGE RANIKA, TEHSIL NAGINA, DISTT. MEWAT 13,16,844 8,70,000 4,46,844 4,46,844 7. J AGDISH CHANGAL VILLAGE NILANWALI, TEHSIL DABWALI, DISTT. SIRSA 12,65,433 8,75,000 3,90,433 3,90,433 8. JAGGU MOURWAL VILLAGE BADEO, TEHSIL FEROZEPUR JHIRKA, DISTT. MEWAT 13,13,001 9,00,000 4,13,001 4,13,001 9. KALLU RANA VLLLAGE BAINSI, TEHSIL LAKHAN MAJRA, DISTT. ROHTAK 12,93,124 8,78,000 4,15,124 4,15,124 10. KAMAL THAKUR VILLAGE MARORA, TEHSIL NUH, DISTT. MEWAT 13,42,399 8,94,700 4,47,699 4,47,699 11. MAHADEV PRASAD VILLAGE SUPURA, KHURO TEHSIL, BENAL, DISTT. BHIWANI 13,17,970 8,70,000 4,47,970 4,47,970 12. NIRMAL SINGH VILLAGE DAMKORA, TEHSIL TOHANA, DISTT. FATEHABAD 13,41,110 9,00,000 4,41,110 4,41,110 13. RAGHU SHEORAN VILLAGE UGAHERI, TEHSII LAKHAN MAJRA, DISTT. ROHTAK 13,81,945 8,80,000 5,01,945 5,01,945 14. RAMDASS SINGH VIIIAGE THEDI, BABA SAWAN SINGH, TEHSIL SIRSA, DISTT. SIRSA 13,29,253 8,70,000 4,59,253 4,59,253 ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 40 15. RAMESH SHARMA VILIAGE JHIMARAVAT, TEHSII NAGINA, DISTT. MEWAT TEHSII 12,82,811 8,70,780 4,12,031 4,12,031 16. SHAM LAL RAJAURA VIILAGE TILPAT, TEHSIL FARIDABAD, DISTT. FARIDABD 13,42,090 8,90,000 4,52,090 4,52,090 17. JAI SHANKAR VILLAGE ROSHAKHERA, TEHSIL HISAR-II, DISTT. HISAR 13,34,562 8,80,000 4,54,562 4,54,562 18. SUMESH THOLIYA VILLAGE HUSANPUR, TEHSII REWARI, DISTT, REWARI 13,71,396 8,80,000 4,91,396 4,91,396 19. SURESH RAPARIA VILLAGE KHERA ALAMPUR, TEHSIL J ATUSANA, DISTT. REWARI 12,86,166 8,58,500 4,27,666 4,27,666 20. AJAY YADAV VILLAGE ASSAN, TEHSIL ROHTAK, DISTT. ROHTAK 12,89,327 8,80,000 4,09,327 4,09,327 TOTAL 2,64,36,090 1,76,22,980 88,13,110 88,13,110 29. THE ABOVE TABULATED ANALYSIS CLEARLY SHOWS THAT THE PURCHASES HAVE BEEN MADE IN THE REGULAR COURSE OF BUSINESS. IT WAS ALSO SUBMITTED THAT THE AMOUNT OF CREDIT REPRESENTS THE PURCHASES MADE BY THE ASSESSEE WHICH FORM PART OF THE TOTAL PURCHASES SHOWN IN THE RETURN AND THE TOTAL QUANTITY SHOWN IN THE RETURN. STILL MORE THE MILK P URCHASE ON CREDIT BASIS FROM THESE PERSONS HAVE BEEN SOLD ON THE SAME DATE AND THE SALE AMOUNT ALSO FORM PART OF THE TOTAL SALES. COPY OF ACCOUNTS OF THESE CREDITORS SUBMITTED HERE WITH. IT IS ALSO EVIDENT THAT THE EN TIRE PURCHASES HAVE BEEN MADE BY WAY OF CREDIT AND THE REPAYMENT HAS BEEN MA DE. THUS THE TABULATED ANALYSIS SHOWS THAT AGAINST THE CREDIT RE CEIPT FROM THESE PERSONS BY WAY OF SUPPLY OF MILK PART PAYMENT HAVE BEEN MADE DURING THE YEAR ITSELF AND THE BALANCE HAVE BEEN PAID IN T HE IMMEDIATE SUBSEQUENT YEAR. BUT IN ANY CASE THE CREDIT AMOUNT INTRODUCED IN THE BOOKS OF ACCOUNTS BY WAY OF PURCHASE OF MILK WAS FO R THE TOTAL PURCHASES OF MILK FROM THESE SMALL VILLAGERS. THE ASSESSEE HA S PRODUCED AIL THE DOCUMENTS TO PROVE THE IDENTITY, CREDITWORTHINESS A ND GENUINENESS OF TRANSACTION WITH RESPECT TO ALL THESE CREDITORS. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 41 30. AFTER GOING THROUGH THE DETAIL OF THESE CREDITO RS, PATTERN OF PAYMENT AND THE DOCUMENT FURNISHED BY THE ASSESSEE, THE AO HAS CONCLUDED THAT THE CREDITORS ARE NOT GENUINE TO THE EXTENT FOR WHI CH THE PAYMENT HAVE BEEN MADE IN THE SUBSEQUENT YEAR. HOWEVER, THE AO H AS NOT DISPUTED THE CREDITORS TO THE EXTENT FOR WHICH THE PAYMENT HAVE BEEN MADE DURING THE YEAR ITSELF. THUS WHAT THE AO IS HOLDING THAT THE C REDITORS ARE PARTLY GENUINE AND PARTLY IN GENUINE. THE CONCLUSIONS DRAW N BY THE AO ARE THUS SELF-CONFLICTING, INCONSISTENCE AND APPARENTLY VARI ABLE WHICH IS NOT TENABLE UNDER THE EXPLICIT PROVISION OF THE ACT. THESE CRED ITORS HAVE ALSO BEEN HELD GENUINE BY THE AO HIMSELF WHILE DECIDING THE CASE F OR THE AY 2013- 14 UNDER SECTION 143(3) WHEREIN NO SEPARATE ADDITION O N ACCOUNT OF THESE CREDITORS HAVE BEEN MADE. 31. DURING ASSESSMENT PROCEEDINGS THE ASSESSEE HAS FURNISHED COMPLETE POSTAL ADDRESSES OF ALL THESE PERSONS WHER EIN THE COMMUNICATION CAN BE MADE EITHER THROUGH THE POSTAL AUTHORITIES O R DIRECTLY BY THE AO, WHICH ESTABLISHES THE IDENTITY OF THESE CREDITORS. SIMILARLY AIL THE PURCHASE BILL WERE ALSO SUPPLIED TO THE AO FULLY ESTABLISHIN G THE CAPACITY OF THESE CREDITORS. THE ASSESSEE ALSO SUPPLY THE SUBSEQUENT COPIES OF ACCOUNT OF THESE CREDITORS WHICH ESTABLISHES THAT THE PAYMENT HAVE BEEN MADE TO THESE CREDITORS IN THE SUBSEQUENT YEAR, THEREBY EST ABLISHING THE GENUINENESS OF THESE TRANSACTIONS. THE ASSESSEE ALS O FURNISHES COPIES OF ACCOUNTS OF AIL THESE PERSONS WHICH ARE SUBMITTED H ERE WITH. THE ASSESSE HAS THUS DISCHARGE HIS COMPLETE ONUS, SO FAR AS SEC TION 68 IS CONCERNED. 32. HOWEVER, THE AO WITHOUT VERIFYING THE CORRECTNE SS OF THE IDENTITY OF THESE SUNDRY CREDITORS OR WITHOUT BRINGING ON RECOR D ANY MATERIAL OR EVIDENT ON RECORD HELD THAT THESE SUNDRY CREDITORS ARE NOT GENUINE AND MADE ADDITION OF RS.88,38,110/-. THE AO HAS THUS ER RED IN NOT ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 42 APPRECIATING THE FACTS THAT WHEN THE ASSESSEE HAS S UPPLIED NAMES AND ADDRESSES OF SUNDRY CREDITORS AND THE NATURE OF TRA NSACTION AND ALSO THE CAPACITY OF THE CREDITORS HIS ONUS STANDS DISCHARGE D. 33. IT IS A SETTLED LEGAL PREPOSITION THAT ADDITION UNDER SECTION 68 CAN BE MADE ONLY IF 'ASSESSEE OFFERS NO EXPLANATION ABOUT THE NATURE ABOUT THE NATURE AND SOURCE OF SUCH CREDITS'. THE ASSESSEE HA S CLEARLY EXPLAIN THE NATURE OF THE CREDIT WHICH IS UNDOUBTEDLY MILK PURC HASE FROM THE VILLAGERS AND ALSO THE CORRESPONDING SOURCE WHICH ARE THE REG ULAR MILK SUPPLIERS TO WHOM PAYMENTS HAVE ALSO MADE, WHICH ALSO STAND ACCE PTED BY THE AO IN THE NEXT YEAR. WHEN THE ASSESSEE DISCHARGED HIS ONU S, SUCH BURDEN, WHICH IS PLACED ON THE ASSESSEE, SHIFTS ON THE AO. THE AO HAS NOT VERIFIED THESE EVIDENCES AND EVEN THE MAJOR FACT THAT THE PA YMENT STAND MADE TO THESE CREDITOR IN THE SUBSEQUENT YEAR. THUS WITHOUT PUTTING ANY MATERIAL OR EVIDENCE ON RECORD THE AO HAS PROCEEDED IN INVOK ING THE PROVISION OF SECTION 68 WHICH IS AGAINST THE INTENT AND PURPOSE OF THE SECTION. 34. IT IS A SETTLED LEGAL PREPOSITION THAT WHEN THE PRIMARY ONUS IS DISCHARGED BY THE ASSESSEE, THE BURDEN SHIFTS ON TH E AO TO EXAMINE THE MATERIAL AND IN CASE HE WANT TO REBUT THE EVIDENCE SUPPLIED BY THE ASSESSEE, HE HAS TO COLLECT THE MATERIAL OR EVIDENC E AND CONFRONT TO THE ASSESSEE BEFORE ARRIVING AT ANY ADVERSE CONCLUSION. ORIENT TRADING CO. LTD V. CIT (1963) 49 ITR 723 (BOM.) IN HOLDING A PARTIC ULAR RECEIPT AS INCOME FROM UNDISCLOSED SOURCE, THE FATE OF THE ASSESSEE C ANNOT BE DECIDED BY THE REVENUE ON THE BASIS OF SURMISES, SUSPICIONS OR PROBABILITIES [NORTHERN BENGAL JUTE TRADING CO. LTD. V. CIT, (1968) 70 ITR 407, 415 (CAL)]. 35. THE HON'BLE SUPREME COURT HAS ALSO EXPLAINED A NUMBER OF CASES THAT ONCE THE ASSESSEE FURNISHES EXPLANATION REGARD ING THE NATURE AND SOURCE OF THE CREDIT MONEY THE AO IS NOT ENTITLED T O REJECT UNREASONABLY ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 43 AND SIMPLY ON THE GROUND THAT THE PARTICULAR PROVID ED ARE 'UNCONVINCING AND DESERVE TO BE REJECTED'. THE AO CAN REJECT THE PARTICULAR PROVIDED BY THE ASSESSEE ONLY AFTER PROPER ENQUIRY OR BRINGING ON RECORD RELEVANT MATERIAL OR EVIDENCES AND AFTER SATISFACTION ON THE BASIS OF SUCH MATERIAL OR EVIDENCES BUT THE AO IS NOT ENTITLED TO DRAW CON CLUSION OR INFERENCES WITHOUT EXAMINATION AND WITHOUT PUTTING ANY MATERIA L ON RECORD AND SIMPLY ON THE BASIS OF CONJECTURE OR SURMISES. [SRE EIEKHA BANERJEE V. CIT, (1963) 49 ITR (SC) 112]. 36. THE SATISFACTION OF THE AO IS THE BASIS OF INVO CATION OF THE POWERS UNDER SECTION 68, BUT THE SATISFACTION MUST BE DERI VED FROM RELEVANT FACTOR AND ON THE BASIS OF PROPER ENQUIRY. [RAJSHREE SYNTH ETICS V. CIT (2002) 256 ITR 331(RAJ.)] FURTHER THE ENQUIRY ENVISAGED UN DER SECTION 68 IS AN ENQUIRY WHICH IS REASONABLE AND JUST. [KHANDELWAL C ONSTRUCTION V. CIT (1997) 227 ITR 900 (GAU.)]. 37. THE OPINION FOUND BY THE AO MUST BE BASED ON MA TERIAL AND IT SHOULD BE PERVERSE. AS A MATTER OF FACT THE WORD SA TISFACTION HAS BEEN USED IN SECTION 68 TO PROTECT THE INTEREST OF THE A SSESSEE. THE LEGISLATURE BY USING THIS WORD MAKE IT INCUMBENT ON THE AO TO C ONSIDER THE MATERIAL PUT BEFORE HIM AND INCASE HE CHOOSE TO DRAW ADVERSE CONCLUSION HE SHOULD COLLECT THE BASIS FOR HIS SATISFACTION AND CONFRONT THE SAME TO THE ASSESSEE. AO HAS NOT DISCHARGED HIS ONUS TO THIS EXTENT SO TH E ADDITION MADE NEEDS TO BE DELETED. 38. THUS, IT HAS BEEN HELD THAT IF THE AO REJECTS A N EXPLANATION GIVEN BY THE ASSESSEE WITHOUT CONSIDERING ITS ACCEPTABILITY IN THE LIGHT OF THE FACT AND CIRCUMSTANCES OF THE CASE, OR REJECTS THE EXPLA NATION WITHOUT VERIFYING IT, THE ADDITION CANNOT BE SUSTAINED. MEHTA PARIKH & CO. V. CIT [(1956) 30 ITR 181 (SC)]; [K.S. KANNANKUNHI V. CIT, (1969) 72 ITR. 757, 765 ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 44 (KER)(SC)]. THE ASSESSEE HAS GIVEN ALL PROBABLE AND POSSIBLE EXPLANATION ABOUT THE IDENTITY, CAPACITY AND THE NATURE OF TRAN SACTIONS. AO HAS NOT PUT ON ANY, MATERIAL OR EVIDENCE ON RECORD TO CONTRAVEN E HIS EXPLANATION AND B. RECORD A SATISFACTION THAT THE EVIDENCES ARE NOT RELIABLE. 39. THE OBJECTION OF AO IS THAT NAME OF TEHSIL, DIS TRICT AND CITY IS GIVEN BUT HOUSE NO. AND STREET NO., IS NOT GIVEN. IT IS A COMMON KNOWLEDGE THAT IN SMALL VILLAGE HOUSE NUMBERS AND STREET NUMBERS A RE NOT GIVEN AND NAME OF THE VILLAGE AND TEHSIL IN ITSELF IS A COMPL ETE POSTAL ADDRESS TO VERIFY THE IDENTITY AND GENUINENESS OF THE CREDITOR . THE AO CANNOT ASK THE ASSESSEE TO DO THE IMPROBABLE OR THE IMPOSSIBLE. TH E ASSESSEE HAS ALSO EXPLAINED THAT HIS NATURE OF BUSINESS IS SUCH THAT ON CERTAIN OCCASIONS HE HAS TO PURCHASE MILK FROM SMALL VILLAGERS, WHO EVEN TUALLY- BECOME HIS SUNDRY CREDITOR BECAUSE THE PURCHASES ARE MADE ON C REDIT. SECONDLY IT WAS ALSO EXPLAINED THAT SINCE THESE MILK SUPPLIERS BELONGS TO SMALL VILLAGES, SO THE MINUTE DETAIL REGARDING HOUSE NUMB ER AND STREET NUMBER IS NEITHER RELEVANT OR REQUIRED, NOR IT CAN BE SUPP LIED. 40. IN THIS REGARD, IT IS PERTINENT TO MENTION THE LEGAL MAXIM-LEX NON COJITADIMPOSSIBILIA- WHICH MEANS 'THE LAW DOES NOT COMPEL A MAN TO DO THAT WHICH HE CANNOT POSSIBLY PERFORM'. IN THIS REG ARD, REFERENCE MAY BE MADE TO COCHIN STATE POWER & LIGHT CORPORATION LTD. V. STATE OF KERALA [AIR 1965 SC 1688, 1691]; VINOD KRISHNA KAUL V. UNI ON OF INDIA [JT 1995 (9) SC 205, 208]; ATTIQ-UR-REHMAN VS. MUNICIPAL COR PORATION OF DELHI [JT 1996 (2) SC 670, 678]; MANOHAR JOSHI V. NITIN BHAUR AO PATIL [(1996)1 SCC 169, 179]; LIFE INSURANCE CORPORATION OF INDIA V, C IT [(1996) 219 ITR 410,418 (SC)]. 41. IT WAS SUBMITTED THAT THE ISSUE INVOLVED IS HOL DING THE CREDITOR AS PARTLY GENUINE AND PARTLY IN GENUINE. THE ASSESSEE HAD MADE PURCHASES OF ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 45 RS.2,64,36,090/- BY WAY OF CREDIT FROM SMALL MILK S UPPLIER OF DIFFERENT VILLAGES. OUT OF THIS CREDIT PURCHASE THE ASSESSEE HAD MADE PAYMENT TO THE EXTENT OF RS.1,76,22,980/- DURING THE YEAR. THE BALANCE PAYMENT OF RS.88,13,110/- TO THESE CREDITORS WAS MADE IN THE I MMEDIATE SUCCEEDING YEAR. THE AO HAS HELD THAT THE CREDITORS ARE NOT GE NUINE TO THE EXTENT OF THE AMOUNT WHICH WAS OUTSTANDING AT THE END OF THE YEAR BUT HE HAS NOT OBJECTED TO THE IDENTITY, CAPACITY AND GENUINENESS OF THE TRANSACTIONS TO THE EXTENT OF RS.1,76,22,980/- WHICH WAS PAID DURIN G THE YEAR, THUS IS AN APPARENTLY PARADOXICAL CONCLUSION WHICH IS OBVIOUSL Y SELF-CONTRADICTORY AND DOES NOT STAND UNDER THE EXPLICIT PROVISIONS OF SEC TION 67. IT IS A SETTLED LEGAL PREPOSITION THAT THE IDENTITY OF THE CREDITOR CAN EITHER BE GENUINE OR IN GENUINE. IT CANNOT BE IN PARTS TO THE CONVENIENC E OF THE AO. THE CONCLUSION BEING SELF-CONTRADICTORY SO ADDITION MAD E NEEDS TO BE DELETED. 42. AFTER GOING THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE, SUBMISSION OF THE ASSESSEE AND PERUSAL OF THE ASSES SMENT ORDER, THE LD. CIT (A) HELD THAT THE DEALING IN SALE/PURCHASES OF MILK WAS ALSO RELATED TO THE FARMERS/ILLITERATE DAIRY OWNERS. THEREFORE, THE RE WERE INSTANCES OF CASH SALE BUT THERE WAS NO PURCHASE IN CASH. SALE I N CASH WAS MADE OF A NOMINAL AMOUNT. ALL THE CREDITORS HAVE BEEN PAID TH E OUTSTANDING AMOUNT IN THE IMMEDIATE SUCCEEDING YEAR. COMPLETE ACCOUNT OF SALE/PURCHASE WAS FURNISHED BEFORE THE AO FOR VERIFICATION. QUANTITAT IVE DETAILS OF THE SALE/PURCHASES WERE GIVEN AS UNDER: (REPETITIVE FRO M PAGE NO. 36) DATE OF PURCHASE NAME OF THE PARTY QUANTITY PURCHASED IN KG PURCHASE VALUE QUANTITY SOLD IN KG CASH SALES CREDIT SALES TOTAL SALE VALUE 01.11.11 KWALITY DAIRY 79,285 24,97,479 79,285 4,59,800 20,50,443 25,10,243 02.11.11 KWALITY DAIRY 73,610 23,18,715 73,610 8,64,100 14,66,313 23,30,413 03.11.11 KWALITY DAIRY 80,085 25,22,678 80,085 17,72,600 7,62,938 25,35,538 05.03.12 KWALITY DAIRY 84,445 24,91,129 84,445 8,90,200 16,13,454 25,03,654 06.03.12 KWALITY DAIRY 43,030 12,75,837 43,030 9,02,400 3,73,549 12,75,949 ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 46 TOTAL 3,60,455 1,11,02,838 3,60,455 48,89,100 62,66,697 1,11,55,797 43. THE LD. CIT (A) HELD THAT THE ABOVE TABULATED A NALYSIS CLEARLY SHOW THAT THE CASH SALE WAS SUPPORTED BY CORRESPONDING P URCHASES AND THIS FACT WAS ALSO CORROBORATED WITH THE SALE LEDGER. THE CAS H SALE AND OPENING BALANCE OF CASH COMES TO MORE THAN TO RS.51,00,000/ - WHICH IS VERIFIABLE FROM THE CASH BOOK AS WELL AS LEDGER OF SALE. ALL T HE RELEVANT DETAILS OF THE SUNDRY CREDITORS TO WHOM PAYMENT WAS MADE IN THE NE XT YEAR WAS FILED, WHICH IS HAS BEEN MENTIONED AT PAGE NOS. 39 & 40 OF THIS ORDER. 44. THE LD. CIT (A) HELD THAT THE AMOUNT OF CREDIT BALANCES REPRESENT THE PURCHASES MADE BY THE ASSESSEE, WHICH FORM PART OF THE TOTAL PURCHASES SHOWN DURING THE YEAR AND THE SAID PURCHASES ARE VE RIFIABLE FROM THE TOTAL QUANTITY OF THE MILK SHOWN TO HAVE BEEN PURCHASED. NAMES AND ADDRESSES OF THE PERSONS CONCERNED WERE FILED. PAYMENTS TO TH OSE PERSONS WERE MADE DURING THE YEAR ALSO AND THE BALANCE PAYMENT W AS MADE IN THE SUBSEQUENT YEAR. SO THERE WAS NO DISPUTE ABOUT THE GENUINENESS OF THE SUPPLIERS VIS--VIS SUNDRY CREDITORS. THERE WAS TOT AL PURCHASES OF RS.2,64,36,090/- MADE BY WAY OF CREDIT FROM SMALL M ILK SUPPLIERS OF DIFFERENT VILLAGES OUT OF WHICH RS.1,76,22,980/- WA S PAID DURING THE YEAR ITSELF AND THE BALANCE AMOUNT OF RS.88,13,110/- WAS PAID IN THE IMMEDIATE SUCCEEDING YEAR. FURTHER, THE SOURCE OF C ASH DEPOSIT OF RS.51,00,000/- WAS EXPLAINED THAT INCLUDES SALE IN CASH OF RS.48,89,110/-. 45. DURING THE HEARING BEFORE US, THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. AR SUPPORTED THE ORDER OF THE LD. CIT (A) AND REITERATED THE ARGUMENTS TAKEN UP BEFORE THE LD . CIT (A). 46. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 47 47. HAVING GONE THROUGH THE RECORD, WE FIND THAT TH E LD. CIT (A) HAS PASSED A WELL REASONED ORDER TAKING INTO CONSIDERAT ION THE POINT WISE REBUTTAL GIVEN BY THE LD. AR WITH REGARD TO THE REJ ECTION OF THE BOOKS OF ACCOUNT AND ESTIMATION OF PROFIT. WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT (A) WHICH HAS BEEN QUOTED ABOV E. HENCE, THE GROUND NO. 1 TAKEN UP BY THE REVENUE IS LIABLE TO BE DISMI SSED. REGARDING THE ADDITION MADE ON ACCOUNT OF SUNDRY CREDITORS, IT HA S BEEN UNDISPUTEDLY PROVED BY THE ASSESSEE THAT THE SUNDRY CREDITORS HA VE BEEN PAID OFF IMMEDIATELY IN THE SUBSEQUENT YEARS AND ALL THE DET AILS HAVE BEEN SUBMITTED WHICH CONSISTS OF AMOUNT OF PURCHASE OF M ILK IN THE YEAR, AMOUNT PAID DURING THE YEAR, OUTSTANDING BALANCE AS ON 31.03.2012 AND THE PAYMENT MADE DURING THE NEXT YEAR FROM 01.04.20 12. THERE WAS NO DISPUTE THAT THE ASSESSEE HAS PURCHASED MILK FROM T HE 20 SUPPLIERS AND SQUARED OFF THE AMOUNTS SUBSEQUENTLY IN THE NEXT FI NANCIAL YEAR. HENCE, THE ADDITION MADE ON ACCOUNT OF SUNDRY CREDITORS IS HEREBY BY DELETED. REGARDING THE CASH DEPOSIT IN THE SAME BANK ACCOUNT THROUGH WHICH THE ENTIRE SALE AND PURCHASE OF MILK HAS TAKEN PLACE. T HE LD. CIT (A) HAS GIVEN A CATEGORICAL FINDING THAT AN AMOUNT OF RS.48,89,11 0/- REPRESENTS THE SALE OF MILK IN CASH. THE LD. CIT (A) HELD THAT THE AMOU NT OF RS.2,10,890/- IS THE OPENING BALANCE. THE ASSESSEE STARTED HIS BUSIN ESS IN THE CURRENT ASSESSMENT YEAR ONLY. IT IS NOT CLEAR FROM THE RECO RDS WHETHER THIS AMOUNT OF RS.2,10,890/- REPRESENTS THE DEPOSIT OF CASH UT ILIZED FOR OPENING THE BANK ACCOUNT OR OTHERWISE. HENCE, THE AO IS HEREBY DIRECTED TO EXAMINE THE ACCOUNT AND GIVE EFFECT TO THIS AMOUNT IF IT RE PRESENTS THE CASH UTILIZED FOR OPENING OF THE BANK ACCOUNT. IN CONCLUSION, ITA NO. 6168/DEL/2016 & CO NO. 9/DEL/2017 SUNIL NAYYAR 48 48. GROUND NO. 1 - DEALING WITH ESTIMATION OF PROFI T IS DISMISSED OWING TO WRONG INVOCATION OF PROVISIONS U/S 145(3) OF THE INCOME TAX ACT, 1961. 49. GROUND NO. 2 IT IS HEREBY HELD THAT ASSESSEE IS IN THE BUSINESS OF MILK SUPPLY. 50. GROUND NO. 3 RELATED TO GROUND NO. 1, NO DEFE CTS IN THE BOOKS OF ACCOUNT HAVE BEEN ESTABLISHED BY THE REVENUE. 51. GROUND NO. 4 (A) ADDITION MADE ON ACCOUNT OF SUNDRY CREDITORS, HAVING ESTABLISHED THE FACT OF PAYMENT, IS DELETED. (B) THE CASH DEPOSITS HAVE BEEN PROVED TO BE THE CASH SALES DULY ACCOUNTE D FOR, HENCE DELETED. 52. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND CROSS OBJECTION OF THE ASSESSEE IS TREATED AS INFRUCTUOUS OWING TO THE ADJUDICATION ON MERITS OF THE CASE. ORDER PRONOUNCED IN THE OPEN COURT ON 24/02/2020. SD/- SD/- (KULDIP SINGH) (D R. B. R. R. KUMAR) JUDICIAL MEMBER ACCO UNTANT MEMBER DATED: 24/02/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR