2014 (12) TMI 470 - AT - Income Tax

Rejection of books of account and estimation of profit Held that - FAA rightly held that the assessee, under the provisions of Income Tax Law, can maintain its books of accounts either on Cash Basis or Mercantile basis - the AO has not properly analyzed the veracity of books of account nor has he properly appreciated various facts - the various other reasons given by the AO in support of his decision to reject the books of account are trivial in nature, which does not warrant such a decision - CIT(A) has come to the conclusion that the rejection of books of account of the assessee and consequently estimation of net profit is not justified - CIT(A) has properly analyzed the facts prevailing in the instance case and has taken conscious decision on this matter - AO has not found any defect in the books of account revenue could not file any material to controvert the findings of the CIT(A) the order of the CIT(A) is upheld Decided against revenue. Assessment of security deposit Held that - CIT(A) was rightly of the view that the assessee has received the security deposit from the prospective patients under the promotional scheme floated by the assessee - the assessee has given copies of all deposits, details of patients, amount received, copies of dental record to the AO - the AO has proceeded to assess the amount under the impression that the assessee is not liable to repay the security deposit received by it - assessee has refunded the security deposit to the patients - CIT(A) was justified in holding that there is no cessation of liability in respect of the security deposits - Since the assessee is liable to repay the security deposit, the question of assessing the same u/s 28(iv) also does not arise the order of the CIT(A) is upheld Decided against revenue. Unexplained investment u/s 69 Held that - CIT(A) rightly held that the assessee has accounted for the deposit of ₹ 3.70 crores paid to M/s Royal Dental Clinic Pvt. Ltd. in its books of account but the same was netted of against the security deposit while preparing the balance sheet - CIT(A) has given clear finding that the assessee has accounted for the investment made in M/s Royal Dental clinic Pvt Ltd in books of account, and since the assessee has followed a particular method for grouping the accounts and presented only the net balance in the balance sheet, it cannot be held that the assessee has not accounted for the investment of ₹ 3.70 crores made with M/s Royal Dental Clinic Pvt. Ltd. the order of the CIT(A) is upheld Decided against revenue. Unexplained credits u/s 68 Held that - Dr. Arun Chamaria is also assessed by the same officer and upon examination of his assessment record only, the AO has come to know of the fact that the assessee has received the share application money ₹ 20 lakhs from Dr.Arun Chamaria - The reasons for not disclosing the same in the balance sheet has been duly explained by the assessee before CIT(A) and the same has been found to be correct by the FAA also thus, the genuineness of receipt of ₹ 20 lakhs cannot be suspected Decided against revenue.

Issues Involved:
1. Rejection of books of accounts and estimation of net profit.
2. Assessment of security deposit at Rs. 2,06,31,700.
3. Assessment of investment under Section 69 of the Income Tax Act, 1961 amounting to Rs. 3,70,50,000.
4. Assessment of Rs. 20,00,000 under Section 68 of the Act.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Net Profit:
The Revenue challenged the rejection of the books of accounts and the estimation of net profit by the Assessing Officer (AO). The AO rejected the books of accounts maintained by the assessee, a private limited company running a dental clinic, on the grounds that it followed a cash system of accounting instead of the mercantile system as mandated by the Companies Act. The AO estimated the net profit at 15% of the turnover. The CIT(A) overturned this decision, noting that the assessee consistently followed the cash system of accounting and that the AO did not find any defects in the books of accounts. The CIT(A) found the AO's grounds for rejection to be baseless and held that the rejection and subsequent estimation of net profit were unjustified. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO did not properly analyze the veracity of the books and that the rejection of the books was not warranted.

2. Assessment of Security Deposit at Rs. 2,06,31,700:
The AO assessed the security deposits received by the assessee under a promotional health scheme as income, citing cessation of liability under Section 41(1) or as perquisites under Section 28(iv) of the Act. The CIT(A) disagreed, noting that the deposits were refundable and that there was no cessation of liability. The CIT(A) referenced previous ITAT decisions in the assessee's favor and observed that the assessee had provided detailed records of the deposits and refunded some during the year. The Tribunal concurred with the CIT(A), finding that the security deposits were repayable and thus could not be assessed as income under Section 41(1) or Section 28(iv).

3. Assessment of Investment under Section 69 of the Act Amounting to Rs. 3,70,50,000:
The AO noticed a payment of Rs. 3,70,50,000 to M/s Royal Dental Clinic Pvt Ltd in the balance sheet of the sister concern but not in the assessee's balance sheet, leading to an assessment of unexplained investment under Section 69. The CIT(A) found that the assessee had netted off the security deposit account and the payment to the sister concern in the balance sheet, thus the amount was accounted for. The Tribunal supported the CIT(A)'s finding, noting that the method of grouping accounts and presenting net balances was acceptable and that the investment was indeed accounted for.

4. Assessment of Rs. 20,00,000 under Section 68 of the Act:
The AO assessed Rs. 20,00,000 received as share application money from Dr. Arun Chamaria as income under Section 68, as it was not reflected in the assessee's balance sheet. The CIT(A) found that the share application money was adjusted against a debit balance and thus not shown in the balance sheet. The CIT(A) noted that Dr. Chamaria had confirmed the transaction and provided supporting evidence. The Tribunal agreed with the CIT(A), stating that the assessee had proved the identity, capacity, and genuineness of the transaction, and there was no reason to doubt the creditworthiness of Dr. Chamaria.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on all issues. The judgment was pronounced in the open court on 10th December 2014.

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