2014 (8) TMI 1075 - HC - Income Tax

Non application of provisions of Section 40(a)(ia) - whether tribunal was justified in law to direct that once profit rate is estimated further disallowance on the same books of accounts cannot be made in the Light of the provisions under Section 40(a)(ia)? - Held that - Whether the AO can disallow the expenses which are directly related to gross receipt of the assessee on which the AO has estimated net profit by applying the rate of 8%. It is a fact that the assessee has not produced books of account, it means that the AO has not relied on books of account for estimation of profits. This fact is accepted by assessee as well as by revenue. We are of the view that once the net profit rate is estimated the AO cannot base his disallowance on the same books of account for the purpose of disallowance by invoking the provisions of section 40(a)(ia) of the Act or general disallowance u/s 37 of the Act. The estimation made by AO of net profit will take care of every addition related to business income or business receipts and no further disallowance can be made. We see force in the argument of the assessee that when the income of the assessee was computed applying gross profit rate and no deduction was allowed in regard to the expenses claimed by the assessee, there was no need to look into the provisions of section 40(a)(ia) of the Act or section 37 of the Act. Accordingly, no disallowance could have been made in view of the above facts that once the profit is estimated by applying net profit rate. Accordingly, we direct the AO to delete the other disallowances and restrict the addition by applying Net Profit rate @8% of gross receipts. We find valid reasons given by the Tribunal in support of this order

Summary

Issues:
1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 regarding disallowances for non-deduction of tax at source.
2. Whether further disallowances can be made once profit rate is estimated under Section 44AD.
3. Allegations of violation of provisions by the assessee regarding non-maintenance of books of accounts and evasion of taxes.

Analysis:
1. The appeal was filed against the order of the Income Tax Appellate Tribunal regarding the application of Section 40(a)(ia) of the Income Tax Act, 1961. The appellant argued that additional additions should have been made to the presumptive profits under Section 44AD. The Tribunal noted that the assessee did not produce books of account, and the net profit rate was accepted at 8% on gross receipts. Disputes arose regarding disallowances on various charges. The Tribunal held that once the net profit rate is estimated, the Assessing Officer (AO) cannot base disallowances on the same books of account. The Tribunal directed the AO to delete other disallowances and restrict the addition by applying the net profit rate at 8% of gross receipts.

2. The Tribunal's decision was based on the premise that the AO's estimation of net profit should encompass all additions related to business income or receipts. Since the income was computed using the gross profit rate without allowing deductions for claimed expenses, the Tribunal found no need to invoke Section 40(a)(ia) or Section 37 of the Act. Therefore, the Tribunal concluded that no further disallowances could be made once the profit was estimated by applying the net profit rate. The Tribunal emphasized that the AO cannot rely on the same books of account for disallowances after estimating the net profit rate.

3. The Tribunal dismissed the appeal, stating that no substantial question of law arose from the valid reasons provided in support of the order. The decision highlighted that the Tribunal's reasoning was sound, and therefore, the application and appeal were both dismissed. The order concluded by mentioning the provision of an urgent certified copy of the judgment to the parties upon request.