2010 (7) TMI 490 - AT - Income Tax

Estimation of profit - Application of section 145(3) - Held that - the returning of a lower profit which is itself a relative term cannot by itself form a reason for the rejection of account - However Rejection (non acceptation) of books of account on the ground of booking of a substantial portion of the expenses through self-vouchers sustained. Estimation of income of the business would arise only where the finding of the books of account not yielding correct income due to their being not correct or complete is upheld - When the quantum or estimate itself is in dispute making claims sons any basis is of no moment; the law in fect only requiring the assessing authority to be not arbitrary and make the estimated an objective reasonable manner; in short fairly - Decided in the favour of the assessee by way remand to CIT(A) for passing a speaking order in the matter and after allowing proper opportunity of hearing to both the parties Income from other sources or capital gain - Trees rooted to the land by definition are a part of land (refer Transfer of Property Act) even as clarified by the apex court per inter alia the cited decisions - Thus though an erstwhile constituent thereof and not mainland itself it would nevertheless where severed from the land and realized as such stand to be categorized as a capital asset in specie - The gains on the sale of trees decidedly a capital asset u/s 2(14) would therefore stand to be assessed as capital gains u/s. 45 of the Act Regarding cost of acquisition - Plants and trees arise out of the womb of the land without any organised effort or activity which is what essentially the term spontaneous growth signifies - The assessee however in the computation of its income under the said head would be entitled to a reduction toward the decline in the value of the land on account of removal of such trees and which would be independent and irrespective of whether the roots stood sold to the same purchaser or stood not sold by the assessee being unrealisable or otherwise; it being not the Revenue s case that the roots stood sold to somebody else - Decided in the favour of the assessee by way of remand - In the result the assessee s appeal is partly allowed and partly allowed for statistical purposes

Summary

Issues Involved:
1. Estimation of income and application of Section 145(3) of the Income Tax Act.
2. Taxability of receipts from the sale of rubber and coconut trees.
3. Taxability of receipts from the sale of soil.

Detailed Analysis:

1. Estimation of Income and Application of Section 145(3):
The primary issue concerns the assessment of the assessee's trading profit. The Assessing Officer (AO) found that the correct income from the contract business could not be deduced from the assessee's books of account and estimated the net profit at 8% of the gross receipts. The Commissioner of Income-tax (Appeals) [CIT(A)] reduced this estimation to 6.5%. The Tribunal noted several defects in the assessee's accounts, such as substantial expenses booked through self-made vouchers, unverified site and conveyance expenses, and the valuation of work-in-progress (WIP). The Tribunal upheld the non-acceptance of the account by the AO on the first ground but found that the primary onus to prove its return and establish its claims was not discharged by the assessee. It was noted that the AO did not make a proper investigation into the assessee's submissions. The Tribunal restored the matter back to the CIT(A) for a detailed examination and a speaking order, allowing the assessee's objections partly.

2. Taxability of Receipts from the Sale of Rubber and Coconut Trees:
The second issue pertains to the receipt of Rs. 17 lakhs from the sale of rubber and coconut trees, which the AO taxed as income from other sources, considering them a spontaneous growth. The assessee argued that the trees were sold along with the roots, making the proceeds a capital receipt. The CIT(A) confirmed the AO's addition based on the inspector's report, which indicated that the trees were sold for timber, not with roots. The Tribunal observed that the trees were a spontaneous growth and part of the land. It concluded that the sale of trees, uprooted from the land, represented a capital receipt exigible to capital gains tax. The Tribunal remitted the matter back to the AO to allow the assessee an opportunity to claim the cost of acquisition and adjudicate accordingly.

3. Taxability of Receipts from the Sale of Soil:
The last issue concerns the receipt of Rs. 6.5 lakhs from the sale of soil, which the AO assessed as income from other sources. The Tribunal found this issue to be similar to the sale of trees, as the sale of soil represented the realization of the capital asset by dismembering the land. It held the receipt to be taxable under Section 2(24)(vi) read with Section 45 of the Income Tax Act, but entitled to a reduction toward the cost of acquisition. The Tribunal restored the matter back to the AO with similar directions as in the case of the sale of trees.

Conclusion:
The Tribunal partly allowed the assessee's appeal and remitted the matters back to the lower authorities for further examination and adjudication, ensuring a fair opportunity for the assessee to substantiate its claims.