2017 (5) TMI 1522 - AT - Income Tax

N.P. determination - rejection of books of accounts - enhancement by CIT-A - Held that - Enhancement made by the ld. CIT(A) which in terms of NP rate comes to 11.58% is also unjustified. It is also noted that the AO has not provided any basis of applying 11.50%. He neither referred past history nor any comparable case. Considering the totality of facts 12, 15, 176/- and also the enhancement of 1, 84, 824/- made by the ld. CIT(A) totaling to 14 Lacs was not fully justified. Since we have sustained the rejection of books of account and to plug the leakage of Revenue we sustain addition of 2.00 lacs only. Thus ground of appeal no. 2 of the assessee is partly allowed. Depreciation on vehicles and depreciation on mobiles - Held that - We hold that once the books of account are rejected and income is estimated then there is no further scope for any addition out of various expenses debit in profit and loss account. Therefore we find no merit in the order of the ld. CIT(A) which is not justified in confirming the disallowance

Summary

Issues Involved:
1. Jurisdiction and legality of additions and disallowances made under Section 143(3).
2. Application and confirmation of Section 145(3) of the Income Tax Act.
3. Trading additions and enhancement of income by the CIT(A).
4. Disallowance of expenses and depreciation.
5. Charging of interest under Sections 234B and 234D and withdrawal of interest under Section 244A.

Detailed Analysis:

1. Jurisdiction and Legality of Additions and Disallowances:
The assessee challenged the jurisdiction and legality of the additions and disallowances made under Section 143(3) for the assessment years 2006-07, 2007-08, and 2008-09. The ground was not pressed during the hearing and was thus dismissed.

2. Application and Confirmation of Section 145(3):
The assessee contested the application of Section 145(3) of the Income Tax Act, which allows for the rejection of books of account if they are not deemed accurate or complete. The CIT(A) upheld the application of Section 145(3) and issued a Show Cause Notice for enhancement. The assessee’s books were rejected due to various deficiencies and discrepancies. The Tribunal found that after rejecting the books under Section 145(3), the CIT(A) should not have relied on the same books to work out alleged shortfalls in stock. The Tribunal noted that the CIT(A) and AO did not find any suppression of receipts or inflation of expenses through a survey or search.

3. Trading Additions and Enhancement of Income:
The AO applied a Net Profit (NP) rate of 11.50% (subject to interest and depreciation) for the assessment year 2006-07, leading to an addition of ?12,15,176. The CIT(A) enhanced this addition by ?1,84,824, making a total addition of ?14,00,000. The Tribunal found that the method adopted by the CIT(A) for enhancement was not justified. The Tribunal sustained the rejection of books but reduced the addition to ?2,00,000 for the assessment year 2006-07. For the assessment years 2007-08 and 2008-09, the Tribunal followed a similar approach, rejecting the CIT(A)'s method and reducing the additions to ?3,00,000 and ?4,00,000, respectively.

4. Disallowance of Expenses and Depreciation:
The AO disallowed expenses amounting to ?1,24,830 on account of depreciation on vehicles and mobiles. The CIT(A) confirmed this disallowance. The Tribunal held that once the books of account are rejected and income is estimated, there is no further scope for any addition out of various expenses debited in the profit and loss account. Thus, the disallowance of ?1,24,830 was deleted.

5. Charging of Interest under Sections 234B and 234D and Withdrawal of Interest under Section 244A:
The assessee contested the charging of interest under Sections 234B and 234D and the withdrawal of interest under Section 244A. The Tribunal held that these are consequential and mandatory, thus dismissing the assessee’s appeal on these grounds.

Revenue’s Appeals:
For the assessment years 2009-10 and 2010-11, the Revenue appealed against the CIT(A)’s decision to restrict the trading additions. The Tribunal upheld the CIT(A)’s decision, noting that the NP rates declared by the assessee were better than in previous years and that the CIT(A) had provided detailed reasoning for the reductions. The Tribunal confirmed the additions of ?10,00,000 and ?15,00,000 for the assessment years 2009-10 and 2010-11, respectively.

Conclusion:
The Tribunal partly allowed the assessee's appeals and dismissed the Revenue's appeals. The Tribunal emphasized the importance of fair estimation and consistency with past history while rejecting arbitrary and capricious estimations. The Tribunal also reiterated that once books are rejected under Section 145(3), separate additions based on the same books are not permissible.