2010 (12) TMI 720 - AT - Income Tax

Application of GP rate - consideration of balance sheet for ascertaining loss on sale of rejected items - rejection of books of accounts - renting of factory premises - rental income or business income - Held that - The AO has not provided the opportunity to the assessee to explain the reasons for fall in GP rate after holding that books of account are to be rejected. - assessee explained the reasons for fall in GP rate before the learned CIT(A). - Decided in favor of assessee. Regarding rental income - Held that - When the assessee exploits the property as owner by leasing out the same and had utilized the income by way of rent then such rental income is to be taxed under the head income from house property. - CIT(A) was justified in directing the AO to tax the rental income under the head income from house property.

Summary

Issues Involved:
1. Application of Gross Profit (GP) rate.
2. Rejection of books of account under section 145(3) of the Income Tax Act.
3. Classification of rental income as business income or income from house property.

Detailed Analysis:

1. Application of Gross Profit (GP) Rate:
The Revenue contested the CIT(A)'s decision to apply a GP rate of 12% instead of 18.44%, which the AO had applied based on the past history of the assessee. The assessee argued that the fall in GP rate was due to increased production costs and changes in the composition of sale products. The CIT(A) found that the assessee did not maintain day-to-day material consumption registers, making book results unverifiable. However, the CIT(A) acknowledged specific circumstances justifying the decline in GP rate, such as the sale of rejected goods and changes in product mix, and thus directed the AO to apply a GP rate of 12%.

2. Rejection of Books of Account under Section 145(3):
The AO rejected the books of account under section 145(3) due to the absence of necessary registers and unverifiable valuation of closing stock. The assessee argued that all required details were submitted and that the fall in GP rate was justified by increased production costs and changes in product composition. The CIT(A) upheld the AO's decision to reject the books of account but adjusted the GP rate to 12% after considering the specific circumstances. The Tribunal agreed with the lower authorities that the provisions of section 145(3) were applicable due to the lack of proper documentation and verification.

3. Classification of Rental Income:
The Revenue argued that rental income from factory premises should be treated as business income. The assessee contended that the rental income should be classified as income from house property, citing that only the factory premises were let out without any other facilities. The CIT(A) agreed with the assessee, noting that the rental income was from factory premises alone and was not intended to exploit the property commercially. The Tribunal upheld the CIT(A)'s decision, referencing Supreme Court rulings that distinguished between business income and income from house property based on the nature and intent of letting out the property.

Conclusion:
The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decision to apply a 12% GP rate, justified the rejection of books of account under section 145(3), and classified the rental income under the head income from house property.