2014 (3) TMI 1062 - AT - Income Tax

Rejection of books on accounts - application of N.P. rate - disallowance on account of hire charges, transportation charges and slurry removable charges by invoking the provisions of section 40(a)(ia) - 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% - Held that - 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 disallowances 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. - Decided in favour of assessee.

Summary

Issues:
1. Dismissal of appeal by CIT(A) summarily.
2. Failure to consider each ground of appeal and decide on merit.
3. Estimation of income and disallowance of expenses by AO.

Issue 1: Dismissal of appeal by CIT(A) summarily
The appellant raised concerns regarding the CIT(A) summarily dismissing the appeal, contravening Section 250(6) of the Income Tax Act, 1961. The appellant argued that each ground of the appeal should have been considered and decided on merit. The appellant further contended that the CIT(A) erred in not considering the submissions made before passing the appellate order. However, the Tribunal did not find merit in these contentions and proceeded to analyze the substantive issue of estimation of income and disallowance of expenses.

Issue 2: Failure to consider each ground of appeal and decide on merit
The appellant contended that the CIT(A) failed to consider each ground of the appeal and decide on merit, especially after written submissions were filed. The Tribunal noted this contention but focused on the primary issue of the estimation of income and disallowance of expenses by the Assessing Officer (AO). The failure to consider each ground of appeal did not impact the final decision of the Tribunal.

Issue 3: Estimation of income and disallowance of expenses by AO
The core issue revolved around the AO's estimation of the appellant's income from civil construction business at 8% of gross receipts and subsequent disallowance of various expenses. The AO based the estimation on the lack of maintained books of account and evidence. The Tribunal acknowledged the absence of books of account and the appellant's acceptance of the 8% net profit rate on gross receipts. The Tribunal held that once the net profit rate is estimated, the AO cannot rely on the same books of account for further disallowances. The Tribunal directed the AO to delete the disallowances and restrict the addition by applying the net profit rate. Consequently, the appeal of the assessee was allowed, emphasizing the significance of the net profit rate in determining income and disallowances.

In conclusion, the Tribunal's judgment primarily addressed the issue of the AO's estimation of income and disallowance of expenses, emphasizing the relevance of the net profit rate in such assessments. The dismissal of the appeal by CIT(A) summarily and the failure to consider each ground of appeal were secondary issues that did not impact the final decision.