2012 (4) TMI 750 - AT - Income Tax

Rejection of Books of Accounts u/s 145(3) - Estimation of Net Profit - Fair Estimation u/s 44AD - AO opined that the books of account of the assessee are not reliable, accordingly, rejected the same and calculated the income of the assessee at 8% of the total receipts. CIT(A) upheld the action of AO on the issue of rejection of books of accounts. Further, on the basis of income assessed in previous assessment year estimated the net profit rate of 5% - HELD THAT - AO has not given any reasonable explanation while applying 8% net profit rate on the assessee s gross receipts for the assessment year. The income assessed in the previous year in assessee s case was apparently 3.6% of its net receipts. But in the present assessment year, the AO has pointed out various defects in the assessment order. The Ld. CIT(A) considering all the defects pointed out by the AO and finally, validly and reasonably determined the net profit rate at 5% after allowing depreciation and interest to the partners on the assessee s turnover. CIT(A)'s order upheld - Revenue Appeal Dismissed. Carry Forward of Losses - Assessee has filed original return on due date but has filed revised return of loss after due date. Thus, loss was not carry forward u/s 139(1) - HELD THAT - Revised return was filed by the assessee after due date, thus he is not entitled for any carried forward losses - Decision against Assessee.

Summary

Issues involved:
1. Discrepancies in applying net profit rate by AO and CIT(A).
2. Rejection of books of account under section 145(3).
3. Disallowance of carried forward losses.
4. Assessment of income based on gross receipts.

Issue 1: Discrepancies in applying net profit rate by AO and CIT(A):
The Revenue appealed against the CIT(A)'s order directing the AO to apply a net profit rate of 5% instead of the 8% applied by the AO for the assessment year 2006-07. The Revenue argued that the AO's 8% rate was in line with the IT Act's provisions for estimating income of contractors without maintaining books of account. The CIT(A) based the 5% rate on the facts of the case and previous agreements by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to provide a reasonable explanation for applying the 8% rate, and the 5% rate was a fair estimate considering the circumstances.

Issue 2: Rejection of books of account under section 145(3):
The AO rejected the assessee's books of account under section 145(3) due to perceived unreliability, leading to the calculation of income at 8% of total receipts without allowing expenses. The CIT(A) upheld this decision. The Tribunal agreed with the Revenue authorities, stating that the rejection of books under section 145(3) was justified as the assessee failed to submit all necessary documents originally. Therefore, the rejection was deemed appropriate.

Issue 3: Disallowance of carried forward losses:
The AO disallowed the carried forward business loss claimed by the assessee for the assessment year 2006-07, as the revised return declaring the loss was filed after the due date. The CIT(A) upheld this disallowance. The Tribunal concurred, ruling that the assessee was not entitled to carry forward losses due to the delayed filing of the revised return, as per the provisions of the Income Tax Act.

Issue 4: Assessment of income based on gross receipts:
The AO assessed the income at 8% of gross receipts, leading to adjustments in the final tax liability. The CIT(A) modified this by applying a 5% net profit rate after allowing depreciation and interest to partners. The Tribunal found the CIT(A)'s decision reasonable, considering the defects highlighted by the AO in the assessment order. Ultimately, the Tribunal upheld the CIT(A)'s order, dismissing both the Revenue's appeal and the assessee's C.O.

In conclusion, the Tribunal affirmed the CIT(A)'s decision on all issues, emphasizing the importance of reasonable explanations for income estimation and compliance with filing deadlines for loss carryforwards.