2016 (11) TMI 1526 - AT - Income Tax

Rejection of books of accounts u/s 145 - G.P. determination - Held that - In the instant case, in absence of production of ledgers and bills, there is no finding that the purchase and sales are fully vouched and similarly, there is no finding that the closing stock has been examined by the AO after taking into consideration the opening stock, purchases and sales. In light of that, we confirm the rejection of books of accounts u/s 145(3) of the Act. Estimation of profits after rejection of the books in the instant year, the assessee has reported a turnover of ₹ 7.5 Cr which is almost 38% of peak turnover achieved in the past years and we were to work out the comparative G.P, keeping all other things constant, it will result in G.P of 3.64%. In absence of any other creditable data on record in terms of fall in G.P rate submitted by the assessee and based on the past assessment history of the assessee, we accordingly confirm the G.P rate of 3.64% to be applied on the turnover of ₹ 7.51 Cr. The ground of appeal is thus partly allowed. Addition u/s 41(1) holding that the creditors shown in the books of account have cease to exist - Held that - In the instant case, it is therefore imperative on the part of the AO to carry out necessary enquiries with the trade creditors independently in order to determine whether there is remission of liability or not. We, accordingly, set-aside the matter to the file of the AO to carry out the necessary examination/enquiry from the trade creditors and examine the matter a fresh as per law and after providing reasonable opportunity to the assessee. Needless to say, the assessee shall cooperate and provide all relevant information and latest contact details of the creditors so that the matter may be decided expeditiously. The ground is therefore allowed for statistical purposes. TDS u/s 194J - non deduction of tds on professional fee - Held that - The recipient of income M/s Kalani & Co has included the income of ₹ 50,000/- in its return of income and a copy of CA certificate was filed before the AO, we delete the disallowance in question. - Decided in favour of assessee.

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the IT Act.
2. Trading addition by applying a higher Gross Profit (G.P.) rate.
3. Addition under section 41(1) of the IT Act due to cessation of liability.
4. Disallowance under section 40(a)(ia) for non-deduction of tax at source on legal and professional fees.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee, engaged in trading and export of precious and semi-precious stones, declared a G.P. rate of 2.27% on a turnover of ?7.51 crores. The Assessing Officer (AO) rejected the books of accounts under section 145(3) due to the non-production of purchase bills, sale bills, stock register, ledger, cash book, and other books of accounts. The AO applied a G.P. rate of 5% resulting in a trading addition. The CIT(A) upheld the rejection but reduced the G.P. rate to 4%, considering the drastic reduction in turnover and the previous year's G.P. rate of 2.48%.

The Tribunal confirmed the rejection of books of accounts, noting that the assessee failed to produce the necessary books for verification. The Tribunal emphasized that merely submitting broad quantitative details does not suffice to verify the trading results. The Tribunal partially allowed the appeal by applying a G.P. rate of 3.64%, based on past assessment history and the reduction in turnover.

2. Trading Addition by Applying a Higher G.P. Rate:
The AO applied a G.P. rate of 5%, which was reduced to 4% by the CIT(A). The Tribunal, after reviewing the past assessment history, confirmed a G.P. rate of 3.64% on the turnover of ?7.51 crores. The Tribunal considered the significant reduction in turnover and the historical G.P. rates, determining that 3.64% was a reasonable estimate.

3. Addition under Section 41(1) Due to Cessation of Liability:
The AO observed that creditors totaling ?63,50,246/- were outstanding for more than 3 to 5 years and added this amount under section 41(1), holding that the liability had ceased to exist. The CIT(A) confirmed the addition, noting that the assessee could not provide any evidence or explanation for the non-payment.

The Tribunal set aside this addition, stating that the mere fact that liabilities were outstanding for several years does not imply cessation of liability. The AO was instructed to carry out necessary inquiries with the trade creditors to determine if there was any remission of liability. The Tribunal emphasized that there must be a positive act of remission by the creditor or a write-off by the assessee for section 41(1) to apply.

4. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source:
The AO disallowed ?50,000/- paid to M/s Kalani & Co. under section 40(a)(ia) due to non-deduction of tax at source. The CIT(A) upheld the disallowance, citing that the second proviso to section 40(a)(ia) is prospective and not applicable retrospectively.

The Tribunal, referencing the decision of the Coordinate Bench in the case of Kanhaiyalal Kalyanmal, held that the second proviso to section 40(a)(ia) is retrospective. Since M/s Kalani & Co. had included the income in its return, the Tribunal deleted the disallowance, directing the AO to verify the Form No. 26A to confirm the inclusion of income by the recipient.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal upheld the rejection of books of accounts but adjusted the G.P. rate to 3.64%. The addition under section 41(1) was set aside for further inquiry, and the disallowance under section 40(a)(ia) was deleted based on the retrospective application of the second proviso.

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