2007 (1) TMI 300 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of account by invoking the provisions of the proviso to section 145(1) of the Income-tax Act, 1961.
2. Estimate of net profit.
3. Addition of Rs. 4 lakhs on account of excess stock.
4. Reduction of net profit rate from 25% to 15%.
5. Allowance of expenses on a pro rata basis against income by way of interest and lease rent.
6. Enhancement of income for assessment year 1994-95.

Detailed Analysis:

1. Rejection of Books of Account by Invoking Provisions of Proviso to Section 145(1)
The main issue in these appeals relates to the rejection of books of account by invoking the provisions of the proviso to section 145(1) of the Income-tax Act, 1961. The assessee-company, engaged in processing negative films, was following a mercantile system of accounting. The Assessing Officer (AO) noted that the assessee did not bill producers for processing negative films while under production nor valued the work-in-progress, leading to the rejection of the books of account. The AO invoked the first proviso to section 145(1) and estimated the net profit by applying a rate of 15% of the processing charges. The CIT(A) confirmed the rejection but reduced the net profit rate to 15%.

2. Estimate of Net Profit
The AO determined the net profit by applying a rate of 15% for the assessment year 1993-94, resulting in an income of Rs. 16,92,600. For the assessment years 1994-95 and 1995-96, the AO applied a net profit rate of 25%, determining the income at Rs. 53,53,570 and Rs. 84,39,938 respectively. The CIT(A) reduced the net profit rate to 15% but upheld the assessment of the sale of "Hypo" as income separately. The Tribunal held that the system of accounting followed by the assessee could not be rejected in toto but required modification. The processing charges for negative prints should be assessed in the year in which such prints become ready.

3. Addition of Rs. 4 Lakhs on Account of Excess Stock
For the assessment year 1995-96, the AO made an addition of Rs. 4 lakhs on account of excess stock found during a search. The assessee failed to provide confirmations or the names and addresses of the parties to whom the excess stock allegedly belonged. The CIT(A) confirmed this addition, and the Tribunal upheld the CIT(A)'s order in the absence of any evidence from the assessee.

4. Reduction of Net Profit Rate from 25% to 15%
The Revenue challenged the reduction of the net profit rate from 25% to 15% by the CIT(A). The Tribunal, however, held that since the books of account of the assessee should be accepted subject to some modification, this ground did not survive for consideration and was dismissed.

5. Allowance of Expenses on Pro Rata Basis Against Income by Way of Interest and Lease Rent
The CIT(A) allowed the deduction of expenses on a pro rata basis against income by way of interest and lease rent. The Revenue's challenge on this allowance was dismissed by the Tribunal, as it held that the books of account should be accepted with modifications.

6. Enhancement of Income for Assessment Year 1994-95
The Revenue contended that the CIT(A) should have made an enhancement for the assessment year 1994-95 as done for 1993-94. The Tribunal dismissed this ground, reiterating that the books of account should be accepted with modifications.

Conclusion
The Tribunal partly allowed the assessee's appeals, directing the AO to accept the book results with modifications, specifically assessing the processing charges for negative prints in the year they become ready. The Revenue's appeals were dismissed, and the addition of Rs. 4 lakhs on account of excess stock was upheld.