2013 (5) TMI 985 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of Books of Account u/s 145(3)
2. Estimation of Sales and Net Profit Rate
3. Assessment of Interest Income
4. Disallowance of Partners' Remuneration

Summary:

1. Rejection of Books of Account u/s 145(3):
The Assessing Officer (AO) rejected the books of account of the assessee firm, engaged in the retail sale of liquor, on the grounds that cash memos were not maintained, making sales unverifiable. The AO invoked provisions of Section 145(3) and estimated sales at two times the license fee, applying a net profit rate of 3%. The CIT(A) did not address the rejection of books but directed the AO to apply a net profit rate of 1.77% as disclosed by the assessee, following the ITAT's decisions for earlier assessment years. The Tribunal noted that the CIT(A) had not dealt with the issue of rejection of books for the current year and modified the orders, directing the AO to apply a net profit rate of 2%.

2. Estimation of Sales and Net Profit Rate:
The AO estimated the sales at Rs. 44,37,62,734/- and applied a net profit rate of 3%, resulting in an assessed income of Rs. 1,33,12,882/-. The CIT(A) directed the AO to apply a net profit rate of 1.77% on the disclosed turnover, following the ITAT's decisions for earlier years. The Tribunal found that the CIT(A) had reduced the net profit rate to 1.77% without justification and directed the AO to apply a net profit rate of 2% instead of the 1.89% shown by the assessee.

3. Assessment of Interest Income:
The CIT(A) directed the AO to assess the interest income of Rs. 1,76,507/- separately as "income from other sources" u/s 56, rather than as "business income" u/s 28. The Tribunal upheld this direction, stating that interest income earned on bank deposits is assessable as "income from other sources" and not as "business income."

4. Disallowance of Partners' Remuneration:
The assessee claimed a disallowance of partners' remuneration of Rs. 5 lakhs. The Tribunal noted that once the business profit is determined by estimating the net profit rate on sales, no further deduction can be allowed on account of any expenditure, including remuneration to partners.

Conclusion:
The appeal filed by the Revenue is allowed in part, with the Tribunal directing the AO to apply a net profit rate of 2%. The cross objection filed by the assessee is dismissed. The order was pronounced in the open court on 17th May, 2013.