2011 (9) TMI 1110 - AT - Income Tax

Summary

Issues involved: Appeal by department and cross objection by assessee against the order of ld. CIT (A) relating to assessment year 2000-01.

Issue 1 - Addition under section 40A(3) and section 37(1) of the IT Act:
The department objected to the deletion of the addition of Rs. 7,76,829/- made under section 40A(3) and the deletion of the addition of Rs. 5,58,120/- made under section 37(1) of the IT Act. The AO observed that certain payments were made in violation of these sections. The assessee's explanation was deemed unsatisfactory, and affidavits were filed but not considered as the parties were not produced for examination. Regarding the payment of Rs. 5,58,120/-, it was argued that the payments were not made to any one person in a day and were made through employees or business associates for onward payments. The AO did not consider affidavits of employees and the provisions of Rule 6DD (f), (g), and (j) of IT Rules. The ld. CIT (A) applied a net profit rate of 9.5% and made an addition of Rs. 2,72,330/- while deleting the remaining addition of Rs. 10,62,619/-.

Issue 2 - Disagreement on Net Profit Rate:
The department objected to the separate addition made by the AO, while the assessee objected to the application of a net profit rate of 9.5% instead of the 7.25% declared by the assessee. The ITAT found no substance in the department's appeal but agreed that the assessee deserved partial success. The ITAT considered a net profit rate of 8.5% to be more appropriate than the 7.25% declared by the assessee. Referring to the decision of the Hon'ble Allahabad High Court, the ITAT directed the AO to recompute the income at 8.5% instead of 9.5% applied by the ld. CIT (A), subject to allowing depreciation, interest, and remuneration to the partners as directed by ld. CIT (A).

In conclusion, the appeal of the department was dismissed, and the cross objection of the assessee was allowed in part.