2010 (1) TMI 937 - AT - Income Tax

Validity of rejection of books of accounts - addition made by assessing profits at 10% of the total turnover - Held that - Books of Account cannot be rejected and the profits cannot be estimated de-hors the book results. However, we are also of the view that looking to various attendant circumstances, namely, (i) non-verifiability of bills of 10 vendors, (ii) withdrawal of money in cash by vendors, (iii) non-verifiability of transportation of goods from the premises of the vendors to the factory of the assessee on account of wrong vehicle numbers, and (iv) acceptance of the assessee that 10 vendors did not discharge their statutory liability thereby paying the duties on their behalf, some adjustment will have to be made to the total income of the assessee in respect of purchases from these parties. Therefore, what can be said is that the assessee dealt with maximum of five vendors from which no verification of actual purchases could be made on account of their non existence or denial. On contention of Revenue that all the purchases were not made on revenue account and some of the expenditure was capitalized it is held that AO is directed to segregate the purchases from the aforesaid five parties made in this year in terms of capital expenditure and revenue expenditure 10% of the revenue expenditure will be disallowed on account of non-verifiability of The purchase price and similarly 10% of the expenditure on capital account shall be reduced from the cost of purchase of plant and machinery for the purpose of computation of depreciation - Decided partly in favor of assessee. Further, in view of admitted position that the assessee is unable to bring any independent evidence on record regarding purchases from 10 vendors, it cannot be said that lower authorities erred in taking into account the enquiries conducted by the central excise authorities. Dis-allowance of amount on account of late deposit of employees contribution towards the provident fund and ESI - Held that - Issue stands covered in favor of assessee in case of CIT vs. P.M. Electronics Ltd. Dis-allowance u/s 40(a)(ia) - Held that - In view of amendment in Section 40 by Finance (No2) Act, 2004, w.e.f. 01.04.2005, AO is directed to allow the expenditure in the year of payment. However in so far as payment of rent is concerned, amendment in this behalf came into force w.e.f. 01.04.2006. Therefore, the assessee was entitled to deduct the rental expenditure in computing the income of this year.

Issues Involved:
1. Rejection of Books of Accounts
2. Validity of Assessment Order
3. Estimation of Net Profit
4. Addition of Bogus Purchases
5. Disallowance on Account of Late Deposit of PF and ESI
6. Disallowance under Section 40(ia)
7. Allowance of Depreciation

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts:
The appellant contended that the CIT(A) erred in sustaining the rejection of books of accounts and the estimation of net profit at 10% of the total turnover. The books were rejected based on findings from the Excise Department's search and post-search investigations, which indicated fraudulent CENVAT credit claims based on non-existent vendors. The AO also made independent inquiries and found that many vendors were non-existent or had no production facilities. Despite the appellant's submission of ledger accounts and some evidence, the AO rejected the books due to material deficiencies, including the non-production of original books seized by the Excise Department.

2. Validity of Assessment Order:
The appellant argued that the assessment order was void ab-initio due to non-service of statutory notice under Section 143(2) within the prescribed time. However, the Tribunal did not find merit in this argument as the notice was issued and served within the stipulated period, and the assessment proceedings were conducted extensively.

3. Estimation of Net Profit:
The AO estimated the net profit at 10% of the total turnover, considering the bogus purchases and other deficiencies in the books of accounts. The CIT(A) upheld this estimation, noting that the AO did not separately add the bogus purchases but included them in the profit estimation. The Tribunal found that while the rejection of books was justified, the estimation of net profit at 10% was excessive. It directed a disallowance of 10% of the purchase price from non-verifiable vendors instead.

4. Addition of Bogus Purchases:
The AO identified bogus purchases amounting to Rs. 9,93,40,483/- from non-existent vendors. The Tribunal noted that while the stock tally indicated actual receipt and use of goods, the purchase price from 10 vendors could not be verified. Therefore, it directed a disallowance of 10% of the purchase price from these vendors, considering the absence of direct evidence and the nature of the transactions.

5. Disallowance on Account of Late Deposit of PF and ESI:
The AO disallowed Rs. 18,747/- and Rs. 3,066/- for late deposit of employees' contributions towards PF and ESI. The CIT(A) reduced these disallowances, and the Tribunal further allowed the ground based on the jurisdictional High Court's decision in CIT vs. P.M. Electronics Ltd., which held that such contributions are allowable if paid before the due date of filing the return.

6. Disallowance under Section 40(ia):
The AO disallowed Rs. 18,34,490/- under Section 40(ia) for non-deduction of tax at source on certain payments. The CIT(A) directed the AO to allow the expenditure in the year of payment. The Tribunal upheld this decision, noting that the relevant payments were made after the due date and should be allowed in the subsequent year.

7. Allowance of Depreciation:
The appellant's ground regarding the non-allowance of depreciation was not pressed during the hearing. The Tribunal dismissed this ground as not pressed.

Conclusion:
The Tribunal partly allowed the appeal, directing a specific disallowance related to unverifiable purchases and allowing the ground on late deposit of PF and ESI contributions. Other grounds, including the estimation of net profit and disallowance under Section 40(ia), were upheld with modifications. The appellant's grounds on the validity of the assessment order and allowance of depreciation were dismissed.

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