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2012 (6) TMI 447 - AT - Income TaxSearch action u/s. 132 Assessment completed u/s. 143(3) r.w.s. 158BC AO rejected books of account of the assessee AO estimated the income at 10% citing two comparable cases AO estimated the undisclosed income from construction activity for the block period and addition to this being interest accrued on amount advanced on the basis of calculations shown in the loose sheets Held that - No specific reason has been given for applying the flat rate of 10% except stating that considering the nature of contract works executed by the assessee-company and the percentage of income admitted for other A.Ys. and also for the percentage of income admitted by other two comparable cases - considering two comparable cases relied to estimate the income carry on business in one line viz. construction of irrigation works such as dams canals etc. which is not strictly comparable with the business of the appellant. As to the percentage of net profit amongst the two concerns there is a variation of 4.15% approximately - therefore the estimation of the rate of net profit @ 10% by the AO is arbitrary not proper not correct and illusory as the comparison relied upon by the assessing officer is without any basis and not in any way nearer to the facts of the appellant s case. No material was found during the search which could show suppression of income no estimation of undisclosed income of block period by resorting to Section 145 could be made - a lower rate of gross profit declared by the assessee as compared to the previous year would not by itself be sufficient to justify any addition - there is a reasonable cause for declining in net profit rate explained by assessee and it is found to be genuine. The low profit rate itself cannot be the reason for rejecting the books of accounts more so in the block assessment. The addition is not based on seized material to estimate the turnover and thereby estimate the income. Similarly expenditure claimed in the regular returns cannot be disallowed in the block assessment consequent to the search action as the disallowance and at the best it could be the subject matter in regular assessment not in the block assessment. Estimation of income on contracts which are disclosed in the regular books of accounts cannot be disturbed in the block period and at best it could be the subject matter of regular assessment only - inclined to hold that the CIT(A) is not justified in giving the direction to assessing officer for the Assessment Year 2001-02 and for part period from 01.04.2001 to 20.12.2001 to determine the undisclosed income at 6.5% before depreciation as against 4.49% for the assessment year 2001-02 and 5.59% for part period from 01.04.2001 to 20.12.2001 declared by the assessee. Accordingly the ground raised by the assessee is allowed. Department allegation that seized material reflected money advanced by the assessee and interest accrued thereon Held that - Revenue not able to unearth any background with regard to accrual of real income - There is no evidence as to whether he paid the interest. The department cannot draw inference on the basis of suspicion conjuncture and surmise. The assessing officer without examining concerned party who has received advance from the assessee cannot come to the conclusion that the assessee has received interest on the basis for addition is only note book/loose slips. which are unsigned documents thus revenue unable to established nexus between the note book/loose slips with actual accrual/ receipt of interest in favour of assessee.
Issues Involved:
1. Invoking provisions of Section 145 of the Income Tax Act in Block Assessment. 2. Estimation of income by applying a profit rate of 10%. 3. Addition of interest receivable on funds advanced to a third party. Detailed Analysis: 1. Invoking Provisions of Section 145 of the Income Tax Act in Block Assessment: The Assessing Officer (AO) invoked Section 145 of the Income Tax Act to reject the books of account and estimate the income for certain assessment years within the block period. The CIT(A) confirmed this action for some years but disagreed for others. The Tribunal highlighted that Section 158BC(b) allows invoking Section 145 for determining undisclosed income in block assessments, but this should be based on material found during the search. The Tribunal cited various judgments, including Rajnik & Co. vs. ACIT and Vedprakash vs. CIT, to support that estimation is permissible when suppression is established. However, the Tribunal emphasized that low profit alone does not justify rejecting books of account, especially in block assessments, as held in Aluminium Industries P Ltd. vs. CIT. 2. Estimation of Income by Applying a Profit Rate of 10%: The AO estimated the income at a flat rate of 10% for certain years, citing comparable cases. The CIT(A) partially disagreed, finding the declared income percentages for some years reasonable. The Tribunal reviewed the reasons for low profits, including diversification into new sectors, competitive tender pricing, and losses in specific projects. The Tribunal noted that low profit rates were due to genuine business reasons and not indicative of undisclosed income. It was held that the AO's estimation was arbitrary and not supported by sufficient evidence. The Tribunal emphasized that block assessments should be based on evidence found during the search, not on estimations without concrete proof. 3. Addition of Interest Receivable on Funds Advanced to a Third Party: The AO added Rs. 6,15,03,415 as notional interest on advances made to a third party, based on loose sheets found during the search. The CIT(A) deleted this addition, citing Supreme Court judgments that income tax can only be levied on real income, not hypothetical or notional income. The Tribunal upheld this view, stating that the loose sheets were not sufficient evidence of accrued interest. The Tribunal emphasized that block assessments should be based on real, not notional, income and that the evidence must be concrete and corroborated. Conclusion: The Tribunal concluded that: - The AO's invocation of Section 145 was partially justified but not for all years. - The estimation of income at a flat rate of 10% was arbitrary and not supported by sufficient evidence. - The addition of notional interest was not justified as it was based on insufficient evidence. The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, emphasizing the need for concrete evidence in block assessments and rejecting arbitrary estimations.
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