2016 (9) TMI 1404 - AT - Income Tax

Rejection of books of accounts - N.P. estimation - disallowance by invoking provisions of section 40(a)(ia) - rectification of mistake - Held that - From the perusal of the assessment order, it is noted that there have been discussions between the AO and the assessee in terms of estimating the net profit rate once the books of account have been rejected. As part of that discussion, it is noted that in response to AO s show-cause as to why 8.5% net profit rate should not be allowed, AR has submitted that if the net profit at the rate of 8.5% is applied, then the deduction on account of payment of hiring charges for machinery taken on rent amounting to ₹ 22,41,600/- and ₹ 21,60,000/- are also to be allowed. AO finally decided to apply net profit of 5.05% which has been agreed upon by the assessee. It is therefore seen that issue of allowance of payments of machinery hire charges has been duly taken into consideration by the AO while estimating the n.p. rate of 5.05%. As noted that the decision of Hon ble Kolkatta High Court in the case of Arjun Bhowmick (2014 (8) TMI 1075 - CALCUTTA HIGH COURT) wherein it has held that once the n.p. rate is estimated, the AO cannot based this disallowance on the same books of accounts for the purpose of disallowance by invoking provisions of section 40(a)(ia) of the Act or general disallowance u/s 37 of the Act. The estimation made by the AO of net profit will take care of every addition related to business income or business receipts and no further disallowance can be made. In light of above, we see no reason for AO to invoke provisions of section 154 of the Act. - Decided in favour of assessee

Summary

Issues:
1. Initiation of proceedings u/s 154 based on AG Objection after passing assessment order u/s 143(3).
2. Disallowance u/s 40(a)(ia) on outstanding hire charges of machinery.

Issue 1:
The appeal was filed against the order of Ld. CIT(A)-III, Jaipur for assessment year 2007-08. The ld. AR requested an adjournment, which was denied due to previous adjournments. The AO initiated proceedings u/s 154 post passing assessment order u/s 143(3). The assessee contended that after a conscious assessment order, there should be no basis for further proceedings u/s 154. The Tribunal upheld the AO's decision, citing the overriding nature of section 40(a)(ia) and the mistake apparent from the records. Various case laws were considered, and the addition made by the AO was confirmed.

Issue 2:
The assessee, a partnership firm engaged in civil construction work, declared a net income with a net profit rate of 2.39%. The AO rejected the books of accounts u/s 145(3) and estimated the net profit rate at 5.05% on an agreed basis. The AO disallowed outstanding hire charges of machinery u/s 40(a)(ia). The ld. CIT(A) upheld the AO's decision. The ld. AR argued against the rectification order u/s 154 and the disallowance u/s 40(a)(ia) based on the agreed net profit rate. The Tribunal noted discussions between the AO and the assessee regarding the net profit rate. Citing relevant case laws, including decisions of the Kolkatta High Court and Jaipur ITAT, the Tribunal quashed the order u/s 154 and upheld the original assessment order u/s 143(3).

In conclusion, the Tribunal allowed the appeal filed by the assessee, ruling in favor of the assessee on both issues.