2014 (4) TMI 309 - AT - Income Tax

Rejection of books of accounts u/s 145(2) of the Act - Addition made on account of non-tallying off bills and vouchers Undervaluation of sales of flats and shops Validity of additional evidences Compliance of Rule 46A of the Rules not made Held that - The assessee is a builder and developer - the flat sold by the assessee during the year constituted its stock-in-trade, there is no justification for making any addition by taking the value adopted by Sub Registrar for Stamp Duty purchased as per provisions of Section 50C - the flat so sold constituted stock-in-trade, there is no justification for upholding the addition on the basis of notional value determined by Stamp Duty authorities as against actual sale price received by the assessee, insofar as there is no evidence on record to hold that assessee was in respect of consideration in excess of what was stated in the sale-deed - the flats sold are not its capital assets but stock-in-trade - there is no justification on the part of the CIT(A) for making/sustaining addition on this count for the assessment year under consideration i.e. 2007-08 - the income declared by the assessee on sale proceeds gives rise to the profit rate of 3.30%, which is very low in case of a builder and contractor. Even though the mistakes pointed out by the AO is not so fatal and sufficient to reject the entire book results of the assessee, but the observation made by the AO to the effect that vouchers do not tally with the amount mentioned in the profit and loss account, some of the expenses are not routed through P&L account, means payments were made outside the profits and loss account, expenses debited in the P&L account was not supported by proper vouchers, cannot be brushed aside out rightly, in view of very low profit declared by the assessee as a builder and developer thus, the order is modified and the AO is directed to take profit @ 5% of the sale proceeds Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Deletion of addition due to non-tallying of bills and vouchers with the profit and loss account.
2. Partial upholding of addition due to under-valuation of sales in flats and shops.
3. Admission of additional evidence without following Rule 46A of the Income-tax Rules, 1962.

Detailed Analysis:

1. Deletion of Addition Due to Non-Tallying of Bills and Vouchers with Profit and Loss Account:
The Assessing Officer (AO) rejected the books of accounts under Section 145(2) of the Income-tax Act, estimating the income at 15% of sale proceeds and work-in-progress, leading to an addition of Rs. 1,40,59,278/-. The AO found discrepancies in the total purchase account and the cost of construction, concluding that some expenses were unaccounted for. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the rejection of books was unjustified, noting that the AO had made errors in interpreting the expenditure and that the reconciliation provided by the assessee was correct. The CIT(A) found that the AO's observations were based on miscalculations and misappreciation of facts, leading to the deletion of the major part of the addition, except for Rs. 8,34,648/- related to the under-valuation of sales.

2. Partial Upholding of Addition Due to Under-Valuation of Sales in Flats and Shops:
The AO observed that some flats and shops were sold at prices lower than the market value determined by the Stamp Duty authorities, leading to a variation in selling prices. The CIT(A) acknowledged this discrepancy but rejected the AO's estimation of net profit at 15% of the total sale value and work-in-progress. Instead, the CIT(A) upheld an addition of Rs. 8,34,648/-, considering the specific circumstances and explanations provided by the assessee for the variations in selling prices. However, the Income Tax Appellate Tribunal (ITAT) found that the profit rate of 3.30% declared by the assessee was very low for a builder and developer. The ITAT modified the CIT(A)'s order and directed the AO to take a profit rate of 5% of the sale proceeds, resulting in a net profit of Rs. 43.43 lakhs. Consequently, the ITAT upheld an addition of Rs. 14.78 lakhs instead of Rs. 8.34 lakhs.

3. Admission of Additional Evidence Without Following Rule 46A of the Income-tax Rules, 1962:
The Revenue contended that the CIT(A) admitted additional evidence regarding the reconciliation of discrepancies in expenses without following the procedure laid down in Rule 46A. The CIT(A) considered the reconciliation statement submitted by the assessee and found it correct, leading to the deletion of the major part of the addition made by the AO. The ITAT, after reviewing the entire material and the nature of the assessee's business, concluded that the AO's observations about the non-tallying of vouchers and unaccounted expenses were not sufficient to reject the entire book results. However, the ITAT acknowledged the defects pointed out by the AO and upheld a modified addition of Rs. 14.78 lakhs.

Conclusion:
The ITAT partially allowed the appeal filed by the Revenue and the cross-objection filed by the assessee. The ITAT sustained an addition of Rs. 14.78 lakhs, modifying the CIT(A)'s order, which had upheld an addition of Rs. 8.34 lakhs. The ITAT concluded that while the AO's rejection of books was not entirely justified, the low profit declared by the assessee warranted a higher addition than what was sustained by the CIT(A). The order was pronounced in the open court on April 4, 2014.