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2015 (8) TMI 326 - AT - Income TaxEstimation of rental income - AO arrived at a conclusion that the prevailing rent in the area is ₹ 1,20,000 per month for both the Galas and held that the fair rent value ought to be adopted ₹ 14,40,000 per annum as rental for both the Galas - CIT(A) in restricting the ALV of the property to ₹ 3,12,960/- - Held that - In this case the peculiar factors have been lucidly brought out by the AO. Moreover, a perusal of the impugned orders reveal that though assessee relied upon Municipal Ratable Value on the same does not appear to have been furnished. Even before us the figure of the Municipal Ratable Value has not been brought out. Under these circumstances the action of CIT(A) in basing ALV for the property for the purpose of section 23(1) of the Act is quite justified which based on the prevailing rentals in the same building. Thus we hold that income from rent should be charged to tax at ₹ 16 per square feet per month being fair rent rate for comparable properties as submitted by society itself where the assessee flat is situated and hence total rental income to be brought to tax shall be ₹ 312960 as held by FAA. We uphold the findings of FAA. We order accordingly. Bogus purchases and sales - FAA held that both bogus purchase to the tune of ₹ 915564 and also bogus sales of ₹ 1605440 are to be added to the income of the assessee - FAA held that the sales are being credited in the books of accounts of the assessee and is treated as un-explained credit u/s 68 of the Act as income of the assessee - Held that - The assessee is engaged in the business of trading of fabric under name and style of proerietory concern Surya Enterprises. The assessee has made purchase and sale with the parties as mentioned above and hence primary onus is on the assessee to establish that these purchase/sale are genuine. The assessee has merely produced invoices and ledger account. The ledger account of M/s Samundra Polycoats and Supreme Agencies(only these two ledger accounts are submitted before us) reveal that there was an opening balance existing as credit to these parties as on 1-4-2005 which has been mainly squared with the sale of fabric transaction in the month of March 2006, ie at the fag end of financial year(even there is no mention of invoice details). The assessee has made no attempt to substantiate by evidences and cogent material such as delivery challan and proof of movement of goods, IT particulars of these parties, VAT returns filed with respect to these transactions, bank statements, financial statements, etc. In view of the above discussion, we hold that FAA has rightly treated these purchases of ₹ 915564 and sales of ₹ 1605440 as bogus and added the same as income of the assessee chargeable to tax. Since we have already held that sales to the tune of ₹ 1605440 is income of the assessee chargeable to tax , it will be fair that the said income of ₹ 1605440 is reduced from sales declared and disclosed by the assessee in the return of income filed with the Revenue otherwise it will be leading to taxing the same amount twice Unexplained credit u/s 68 - Held that - It is not clear from the records that the addition of ₹ 9,88,000 is the same addition as held to be bogus sale as referred to in ground no 3 of ground of appeal with respect to sales made to Josh Advertising of ₹ 688000 and M/s G L Investment of ₹ 3,00,000 aggregating to ₹ 9,88,000 .We set aside the addition and restore the matter to the file of Assessing Officer to verify that the addition of ₹ 9,88,000 is same as is held to be bogus sale to Josh Advertising of ₹ 688000 and M/s G L Investment of ₹ 3,00,000 aggregating to ₹ 9,88,000 as per ground no3 of ground of appeal. If it be so , then the addition would stand deleted, as otherwise it will lead to adding the same amount twice Allowance of Interest u/s 24(b) - Held that - The assessee has borrowed funds for purchase of 2 Galas bearing number unit 302 admeasuring 710 sq feet and unit 303 having area of 920 sq feet at Navyug Industrial Estate, Sewri , Mumbai. The assessee is liable to pay interest on such borrowings , however, no interest is paid during the impugned assessment year and the loan is stated to have become NPA, but as per therecord liability of interest is accruing on the loan borrowed. As per Section 24(b), the deduction of interest is allowed on the interest payable on borrowing for purchase, construction , repair etc of house property . However, from the records,it is not clear about the quantum of interest payable and also about the property on which the assessee is intending to claim deduction u/s 24(b) of the Act vide additional ground raised before us. We restore this issue to the file of assessing officer to verify the claim of the assessee as to the quantum of interest payable and also the property with respect to which such interest is claimed to have been payable before allowing the claim of the assessee for deduction u/s 24(b) of the Act . Rejecting the financial results shown in the books of accounts u/s 143(3) and estimating gross profit at 5% of the total turnover - Held that - The CIT(A) has categorically noted that Assessing Officer has made specific enquiries and treated the relevant purchases and sales as bogus. At the same time the AO also rejected the books of accounts maintained and estimated gross profit. As per the CIT(A) making of specific additions on one hand and estimating gross profits after rejecting the books of account cannot be done simultaneously. We find no error in the said approach of the CIT(A), which we hereby affirm. Thus, on this aspect Revenue fails.
Issues Involved:
1. Estimation of rental income. 2. Treatment of purchases as bogus. 3. Treatment of sales as bogus. 4. Treatment of unexplained cash credit under Section 68. 5. Deduction of interest under Section 24(b). 6. Rejection of financial results and estimation of gross profit. Issue-wise Detailed Analysis: 1. Estimation of Rental Income: The assessee rented out two industrial units to a related party, M/s Ashpura Garments Private Limited, at Rs. 9,500 per month. The Assessing Officer (AO) determined the fair rental value to be Rs. 1,20,000 per month based on prevailing rates in the area, leading to an annual value of Rs. 14,40,000. The First Appellate Authority (FAA) adjusted this to Rs. 3,12,960 using a rate of Rs. 16 per square foot per month, derived from comparable rents in the same building. The Tribunal upheld the FAA's decision, noting the AO's lack of evidence to support a higher rental value and the FAA's reliance on cogent material from the society where the units were located. The Tribunal cited the case of CIT vs. Tip Top Typography, emphasizing the need for cogent material to disregard municipal rateable values. 2. Treatment of Purchases as Bogus: The AO treated purchases worth Rs. 9,15,564 from M/s Keshav Enterprises and M/s Narayani Textiles as bogus due to the lack of supporting documents such as delivery challans and bank statements. The FAA upheld this, adding the amount to the assessee's income. The Tribunal agreed, noting the assessee's failure to provide substantial evidence to validate the purchases, thus affirming the FAA's decision. 3. Treatment of Sales as Bogus: Similar to the purchases, sales amounting to Rs. 16,05,440 to M/s Supreme Agencies, Samudra Polycoats, G L Investments, and Joshi Advertising were deemed bogus by the AO. The FAA upheld this, treating the sales as unexplained credits under Section 68. The Tribunal concurred, highlighting the lack of evidence such as delivery challans and VAT returns to substantiate the sales. It was ordered that the bogus sales amount should be reduced from the total sales to avoid double taxation. 4. Treatment of Unexplained Cash Credit under Section 68: The FAA treated Rs. 9,88,000 as unexplained cash credit, which the assessee claimed was part of the bogus sales already added to income. The Tribunal remanded this issue to the AO to verify if the amount was indeed the same as the bogus sales. If confirmed, the addition would be deleted to prevent double taxation. 5. Deduction of Interest under Section 24(b): The assessee claimed a deduction of Rs. 1,99,302 as interest on a loan from Abhudaya Co-operative Bank Limited for purchasing the rented units. The AO disallowed this, stating the loan had become a Non-Performing Asset (NPA) and no interest was paid. The Tribunal admitted this additional ground and remanded the issue to the AO to verify the interest payable and the property related to the claim before allowing the deduction under Section 24(b). 6. Rejection of Financial Results and Estimation of Gross Profit: The AO rejected the assessee's books of accounts and estimated a gross profit rate of 5% of the total turnover. The FAA found this unjustified as specific additions for discrepancies were already made. The Tribunal upheld the FAA's view, stating that specific additions and gross profit estimation cannot be done simultaneously. Conclusion: The appeal of the assessee was partly allowed, and the cross-appeal of the Revenue was dismissed. The Tribunal upheld the FAA's decisions on rental income, bogus purchases, bogus sales, and the rejection of financial results while remanding the issues of unexplained cash credit and interest deduction for further verification by the AO.
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