2015 (12) TMI 1564 - AT - Income Tax

Rejection of books of accounts - trading addition - Held that - During the course of survey, the diary as Annexure A-8 was found and impounded by the ld Assessing Officer where number of transactions were found unrecorded. The stock register has not been maintained by the assessee. Therefore, correct income of the business cannot be deduced in absence of rejection of books of account. Accordingly, the Assessing Officer was right in applying Section 145(3) of the Act. After rejecting the books of account, the ld Assessing Officer estimated the sale at ₹ 5.5 crores against ₹ 4,99,54,718/- and applied the same G.P. rate, which has been disclosed by the assessee, which is reasonable and estimated on the basis of discrepancies found during the course of survey. The assessee s alternative argument is also not acceptable as the assessee has not correlated with the disclosure of excess stock with the entries made in the Annexure-A-8. The excess stock was in form of furniture. However, this was the discrepancy on unaccounted sale made by the assessee. There was no disclosure on account of excess cash during the course of survey. Accordingly we confirm the order of the ld CIT(A) on both the grounds. Disallowance U/s 40 (a)(ia) - Held that - The interest of ₹ 3,21,952/- was not payable as on 31/3/2009, therefore, the case laws referred by the assessee is squarely applicable. However, remaining interest amount of ₹ 27,81,388 was paid to M/s India Bulls Bank ltd. against the purchase of machinery. The ld CIT(A) had rightly capitalized the interest payment with the cost of plant and machinery and accordingly, was allowed depreciation on it. The assessee s argument that there was no extension of existing business during the year is not substantiated with any evidence when interest cost is 27.81 lacs, then addition of assets is in crores, therefore, it is extension of business. Accordingly, we uphold the order of the ld CIT(A).

Summary

Issues Involved:
1. Rejection of books of account under Section 145(3).
2. Trading addition of Rs. 12,14,417 by estimating turnover.
3. Disallowance of Rs. 3,21,952 under Section 40(a)(ia) for non-deduction of TDS on interest expenses.
4. Disallowance of Rs. 27,81,388 out of interest expenses by treating it as capital expenditure.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The assessee's books of account were rejected by the Assessing Officer (A.O.) under Section 145(3) of the Income Tax Act, 1961, due to discrepancies found during a survey conducted under Section 133A. A diary (Annexure A-8) impounded during the survey contained unrecorded transactions, leading the A.O. to conclude that the assessee was engaged in sales outside the books of account. The absence of a stock register further supported the A.O.'s decision to reject the books. The CIT(A) confirmed this rejection, noting that the diary's entries could not be dismissed as unexecuted orders without evidence to the contrary. The Tribunal upheld the rejection, agreeing that the correct income could not be deduced without reliable books of account.

2. Trading Addition of Rs. 12,14,417 by Estimating Turnover:
The A.O. estimated the total turnover at Rs. 5.5 crores against the declared Rs. 4,99,54,718, applying a Gross Profit (G.P.) rate of 24.12%, resulting in a trading addition of Rs. 12,14,417. The CIT(A) upheld this estimation, stating it was reasonable given the unrecorded transactions found in the diary. The Tribunal also confirmed this addition, rejecting the assessee's argument that the addition resulted in double taxation due to the surrendered excess stock during the survey. The Tribunal found no correlation between the excess stock and the diary entries.

3. Disallowance of Rs. 3,21,952 under Section 40(a)(ia) for Non-Deduction of TDS on Interest Expenses:
The A.O. disallowed Rs. 3,21,952 under Section 40(a)(ia) for non-deduction of TDS on interest expenses paid to various financial institutions. The CIT(A) confirmed this disallowance, referencing the suspension of the Visakhapatnam Special Bench decision in the case of M/s Merilyn Shipping & Transport by the Andhra Pradesh High Court. The Tribunal upheld the CIT(A)'s decision, noting that the interest was not payable as of 31st March 2009, and thus the case laws cited by the assessee were applicable.

4. Disallowance of Rs. 27,81,388 out of Interest Expenses by Treating it as Capital Expenditure:
The A.O. disallowed Rs. 27,81,388 paid to India Bulls Bank Ltd., treating it as capital expenditure for the purchase of machinery. The CIT(A) upheld this disallowance, allowing depreciation on the capitalized amount. The Tribunal confirmed this decision, stating that the assessee did not provide evidence to substantiate that there was no extension of the existing business. The Tribunal found that the significant interest cost indicated an extension of business, justifying the capitalization of the interest expense.

Conclusion:
The Tribunal upheld the rejection of the books of account and the trading addition, confirming the A.O.'s and CIT(A)'s decisions. The disallowance under Section 40(a)(ia) was partly upheld, with the interest paid to India Bulls Bank Ltd. treated as capital expenditure. The assessee's appeal was partly allowed, but the major contentions were dismissed, affirming the lower authorities' findings.