2008 (7) TMI 612 - AT - Income Tax

Issues Involved:
1. Validity of the assessment order dated 27-2-1998.
2. Rejection of books of account.
3. Estimation of gross profit (GP) and turnover.
4. Addition under section 68 for cash credits.
5. Addition of Rs. 45,000 under the 'Suspense account'.
6. Disallowance of commission paid to Shri M.M. Khatri and M/s. R.D.K. Financiers.
7. Quantification of deductions under section 80HH and 80-I.
8. Charging of interest under section 234B and 234C.
9. Raising of demand from Rs. 40,25,799 to Rs. 71,63,085.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contested the validity of the assessment order dated 27-2-1998. The Tribunal upheld the assessment as it was conducted under section 144 read with section 147 and section 250 of the Income-tax Act, following proper procedures despite the appellant's non-compliance.

2. Rejection of Books of Account:
The Assessing Officer (AO) rejected the books of account due to:
- Transactions with sister concerns recorded through journal entries on the last day of the accounting year.
- Non-maintenance of day-to-day production records or stock registers.
- Negative closing stock at the Ghaziabad branch.
- Lack of bifurcation of inventory at different locations.
The Tribunal upheld the rejection, emphasizing the statutory requirement to maintain day-to-day registers for production and stock, which the appellant failed to do. The Tribunal cited various judgments supporting the AO's decision.

3. Estimation of Gross Profit and Turnover:
The AO estimated the GP at 15% on an enhanced turnover of Rs. 7 crores. The CIT(A) reduced the GP rate to 12.5% based on past assessments. The Tribunal found the estimation arbitrary and directed the AO to adopt an average GP rate of 10.83% based on the preceding three years' data, resulting in a more reasonable estimation.

4. Addition under Section 68 for Cash Credits:
The AO added Rs. 2.5 lakhs under section 68 for lack of confirmations. The CIT(A) reduced this to Rs. 35,000 for Durgh Agencies and Hindustan Agencies due to insufficient confirmations. The Tribunal upheld this decision, noting the appellant's failure to provide adequate evidence for these credits.

5. Addition of Rs. 45,000 under 'Suspense Account':
The AO added Rs. 45,000 from the 'Suspense account' due to lack of satisfactory explanation. The CIT(A) upheld this addition, and the Tribunal agreed, noting the reassessment was validly conducted under section 147 read with section 250.

6. Disallowance of Commission:
The AO disallowed Rs. 48,500 in commissions due to lack of confirmatory letters and evidence of services rendered. The CIT(A) upheld this for R.D.K. Financiers but allowed the commission for Shri M.M. Khatri. The Tribunal agreed with the CIT(A) regarding Shri M.M. Khatri but upheld the disallowance for R.D.K. Financiers due to insufficient evidence.

7. Quantification of Deductions under Section 80HH and 80-I:
The AO calculated deductions under sections 80HH and 80-I on a proportionate basis, which the CIT(A) upheld. The Tribunal directed the AO to recalculate these deductions based on the revised GP rate of 10.83%, ensuring a more accurate reflection of profits.

8. Charging of Interest under Section 234B and 234C:
The Tribunal did not separately adjudicate this issue as it was consequential to the other findings.

9. Raising of Demand:
The Tribunal noted that the increase in demand from Rs. 40,25,799 to Rs. 71,63,085 was a consequence of the reassessment and upheld the revised demand based on the recalculated profits and deductions.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to revise the GP estimation and recalculate the deductions under sections 80HH and 80-I, while upholding the rejections of books of account, additions under section 68, and other disallowances.

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