2015 (9) TMI 1431 - AT - Income Tax

Addition towards difference in cost of construction based on Department Valuer s Report - Held that - In the instant case the Obiter of Karnataka High Court would not become a binding precedent for Kolkata Tribunal. Hence we are not inclined to accede to the view of the Learned AR that the difference in cost of construction is only less than 15% and hence no addition needs to be made. If this proposition of the Learned AR is to be accepted then the provisions of section 142A of the Act would become redundant. Under the provisions of section 142A(2) of the Act the Learned AO is empowered to make a reference to DVO whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. In the instant case we have already held hereinabove that the action of the Learned AO in rejecting the books of accounts is upheld as the same is done with cogent reasons by the learned AO and not objected by the learned AR for resorting to estimate the net profit of assessee for determining business income. The Hon ble Apex Court in the case of Sargam Cinema vs CIT reported in (2009 (10) TMI 569 - Supreme Court of India ) had held that reference to DVO could be made only after rejection of the books of accounts by the Learned AO. We are not inclined to interfere with the decision of the Learned CITA on this ground except directing the Learned AO to adopt the state PWD rates for the purpose of valuing the factory shed of the assessee and bring to tax the difference if any as against the reported construction cost by the assesssee. - Decided partly in favour of assessee. Addition made towards insurance claim received subsidy PF deducted and interest on FD - Held that - It is seen that the Learned AO having resorted to make estimate of business income computed @ 2% of total turnover at Rs. 4, 01, 930/- ought not to have made any separate addition towards insurance claim of Rs. 51, 487/- ; interest subsidy of Rs. 3, 53, 707/- ; PF deducted of Rs. 11, 094/- as they are part and parcel of business receipts. We hold that once the business income is determined on estimated basis any further addition towards business income would only get telescoped with the net profit already determined on estimated basis.The assessment of income under presumptive basis u/s 44AD is similar to the income determined on an estimated basis by the AO after rejecting the books of account of the assessee. Once the books are rejected the doors of the AO are closed for looking after other provisions of the Act which are relevant for determining the business income of the assessee unless or otherwise specifically provided in the provisions of section 44AD of the Act itself such as allowance of interest and remuneration to partners in the case of a partnership firm. As far as the interest on FD of Rs. 72, 355/- is concerned we hold that the same is to be assessed as income from other sources. Reliance in this regard is placed on the decision of the Hon ble Apex Court in the case of Liberty India vs CIT reported in (2009 (8) TMI 63 - SUPREME COURT ) Addition towards cash credits - Held that - If the Learned AO wants to reject the books of accounts he should do it in toto and not reject the entire books of accounts except the cash book filed by the assessee. In view of the aforesaid facts we hold that the Learned AO is not right in making an addition towards cash credit u/s 68 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:

1. Addition towards difference in cost of construction based on Department Valuer's Report.
2. Separate addition of insurance claim received, subsidy, PF deducted, and interest on FD when business income is estimated.
3. Addition towards cash credits.

Detailed Analysis:

1. Addition towards difference in cost of construction based on Department Valuer's Report:

The first issue revolves around whether the addition of Rs. 2,06,249 towards the difference in the cost of construction, based on the Department Valuer's Report, was justified. The assessee had shown an investment of Rs. 19,45,680 in the factory shed, while the DVO estimated it at Rs. 21,51,929, leading to the addition under section 69B of the Act. The assessee argued that the difference was only 10.6% and should be disregarded, citing the Karnataka High Court decision in CIT vs Vasudev Construction. However, the Tribunal upheld the rejection of the books of accounts by the AO under section 145(3) due to unverified purchases and found no specific defects in the DVO's report. The Tribunal directed the AO to adopt the state PWD rates instead of CPWD rates for valuation, referencing multiple judicial precedents supporting the use of state PWD rates over CPWD rates. The Tribunal concluded that the addition should be recalculated using state PWD rates.

2. Separate addition of insurance claim received, subsidy, PF deducted, and interest on FD when business income is estimated:

The second issue concerned the separate addition of insurance claim (Rs. 51,487), interest subsidy (Rs. 3,53,707), PF deducted (Rs. 11,094), and interest on FD (Rs. 72,355) despite the business income being estimated. The Tribunal held that once the business income is estimated at 2% of turnover, separate additions for business receipts should not be made as they are deemed included in the estimated net profit. This principle aligns with the decision in Indwell Constructions vs CIT, where all deductions under section 29 are considered in the estimated income. However, the interest on FD was to be assessed as income from other sources, as per the Supreme Court rulings in Liberty India vs CIT and Pandian Chemicals.

3. Addition towards cash credits:

The third issue was the addition of Rs. 80,40,000 as cash credits under section 68 of the Act. The assessee provided a list of 453 persons from whom the amount was received but could not substantiate the genuineness of some transactions. The Tribunal noted that once the books of accounts are rejected, the AO cannot selectively use the cash book to make separate additions. The Tribunal emphasized that the AO must reject the books in totality and cannot make piecemeal rejections. The Tribunal referenced the Pune Tribunal decision in Chander Mohan Mehta vs ACIT, which held that the AO should either accept or reject the books entirely. Consequently, the Tribunal ruled that the AO's addition of cash credits was not justified.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to adopt state PWD rates for the cost of construction and disallowing separate additions for business receipts once the income is estimated. The addition of cash credits was also disallowed due to the improper rejection of books by the AO.