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Sec. 68 additions can be made even in case AO computed income on estimate basis after rejecting books of a/c: ITAT
Whether addition under section can be made even in case AO computed income on estimate basis after rejecting books of a/c is an issue of controversial opinion and views. Here is one case wherein it has been held that Sec. 68 additions can be made even in case AO computed income on estimate basis after rejecting books of a/c
The case details is as under:
Smt. Lizy George
 144, 52 (Bangalore – Trib.)
ITAT observed as under:
- Where AO rejects assessee’s books of account u/s 145(3) on estimated net profit rate basis, he should apply the net profit to actual turnover as per audited accounts and not to estimated turnover. AO cannot reject audited figures of turnover and adopt increased estimated turnover without sufficient basis. The Net profit rate applied should be reasonable having regard to rates reported in earlier and subsequent years.
- In this case, during the course of hearing, the ld.AR fairly accepted the 5% net profit may be considered on the turnover disclosed in the audited financial statements. Therefore, considering the profitability for the previous and subsequent assessment years, we accept the plea of the assessee for applying 5% net profit on the turnover of Rs.4,64,79,756/- which comes to Rs.23,23,988/-. The assessee has himself disclosed the net profit of Rs.18,49,242/-, therefore, the addition of Rs.4,74,746/- is confirmed and the assessee gets relief of Rs.34,36,012/-..
- From the estimated profit so computed, no further deductions under the head Profits and Gains from Business or Profession are to be allowed and no disallowances are to be made in respect of estimated profit so computed.
- Once the books of accounts have been rejected by the AO for determination of net profit from the business of the assessee u/s 145(3) no further disallowance can be made for the expenditure for computation of business income.
- The pattern of assessment under the Act is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections.
- The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Assessing Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under section 29. In other words, all the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account. Therefore, the other additions made by the AO towards disallowance of certain expenses cannot be made and are deleted.
- If the books of accounts are rejected and estimated net profit rate is applied sec.145(3) for determining net profit from the business carried on by the assessee, the AO is free to make additions u/s 68 towards unexplained cash credit.
- Where AO asks assessee to obtain confirmations for fixed deposits of Rs.1 lakh and above, he can’t make additions u/s 68 in respect of fixed deposits below that amount on the ground that the assessee failed to produce confirmations of fixed deposits of Rs.1 lakh and above without summoning the depositors when assessee had requested that depositors not giving confirmations be served with summons u/s 131.
AO can make additions for unexplained cash credit u/s 68 even where he rejects assessee’s books & computes income on estimated NP rate basis
If the books of accounts are rejected and estimated net profit rate is applied sec.145(3) for determining net profit from the business carried on by the assessee, AO cannot make additions to net profit in respect of disallowances u/s 40. However, the AO is free to make additions u/s 68 towards unexplained cash credit.