2016 (10) TMI 1246 - AT - Income Tax

Rejection of books of account - NP determination - application of net profit rate of 8% - non-deduction of TDS u/s 40(a)(ia) - Held that - The rate of net profit rate declared at 5.51% should have been accepted but to create a deterrent to maintain books of accounts the ld. CIT(A) has rightly applied a higher Net Profit ratio. CIT(A) has applied 8% rate of net profit which is quite high when compared to the actual rate of net profit earned by the assessee in the earlier years. The books of accounts of the assessee has been audited u/s 44AB and it cannot be assumed that the books of accounts were not supported by vouchers. The assessee in this case has produced photocopies of purchase bills and therefore CIT(A) has rightly distinguished the case laws relied on by the Assessing Officer. Therefore we deem it appropriate that a 1% higher rate of net profit would have served the ends of justice. In view of the above we direct the AO to calculate the profits of the assessee by applying net profit rate of 6.51% on the gross receipts. As regards the grievance of the Revenue that the depreciation should not have been allowed we find that the department vide Circular No. 29D dated 31.08.1965 (placed at APB 34) has directed that where the books of the account are rejected and profits are estimated depreciation allowance should be given Hon ble Punjab & Haryana High Court in the case of Lali Construction Co.(2014 (9) TMI 500 - PUNJAB & HARYANA HIGH COURT) has held that where the assessee gives information required under section 32 of the Act regarding claim of depreciation the AO is bound to allow the claim of depreciation. In view of the above the ld. CIT(A) has rightly allowed the claim of depreciation out of net profit worked out by applying net profit rate. As regards the grievance of the Revenue regarding late filing of appeal by the assessee before the ld. CIT(A) and admission by him we find that the ld. CIT(A) has given cogent reasons for accepting the appeal of the assessee which he has narrated at page 3 of the impugned order which reasons we find are reasonable for admission of the appeal and therefore this grievance of the Revenue is rejected. As regards the grievance of the Revenue that the AO has taken cogent reason for rejecting the books of account the CIT(A) should not have taken different view. The ld. CIT(A) has not taken a different view rather he has upheld the action of the A.O. in rejecting books of account and before us nothing has been argued regarding rejection of books therefore we uphold the action of the ld. CIT(A) in rejecting books of accounts. Appeal of the Revenue is dismissed. As regards the appeal of the assessee we have already allowed part relief to the assessee by holding that net profit rate of 6.51% should be applied instead of 8% sustained by the ld. CIT(A). As regards the disallowance under section 40(a)(ia) of the Act We find that since the income of the assessee has been worked out on estimation therefore no further disallowance was warranted - Decided in favour of assessee.

Summary

Issues Involved:
1. Admission of late appeal by the assessee.
2. Reduction of net profit rate from 10% to 8% by CIT(A).
3. Sustenance of the application of net profit rate of 8%.
4. Sustenance of addition of ?1,18,342/- under section 40(a)(ia) for non-deduction of TDS.
5. Allowance of depreciation out of net profits.
6. Rejection of books of account by AO.

Issue-wise Detailed Analysis:

1. Admission of Late Appeal by the Assessee:
The Revenue contended that the CIT(A) should not have admitted the appeal filed late by more than six months. The CIT(A) justified the delay by stating that the father of the assessee was ill and required treatment at various hospitals, which was a reasonable cause for the delay. The Tribunal upheld the CIT(A)’s decision, finding the reasons for the delay reasonable.

2. Reduction of Net Profit Rate from 10% to 8% by CIT(A):
The AO applied a net profit rate of 10% after rejecting the books of account due to incomplete vouchers and bills. The CIT(A) reduced this rate to 8%, considering the past history where the assessee had declared net profit rates of 5.21% to 5.34% in previous years, which were accepted by the department. The Tribunal found that the CIT(A) rightly distinguished the case laws relied on by the AO and applied a balanced view, ultimately directing the AO to apply a net profit rate of 6.51%.

3. Sustenance of the Application of Net Profit Rate of 8%:
The assessee argued that the net profit rate of 8% applied by the CIT(A) was excessive and arbitrary. The Tribunal noted that while the assessee had declared a progressive net profit rate of 5.51% for the year under consideration, a higher rate was justified due to the incomplete submission of vouchers and bills. The Tribunal decided that a 1% higher rate than the declared rate, i.e., 6.51%, would serve justice, balancing the need for proper bookkeeping deterrence and the assessee’s past history.

4. Sustenance of Addition of ?1,18,342/- under Section 40(a)(ia) for Non-Deduction of TDS:
The assessee contended that no further disallowance was warranted once the profits were estimated. The Tribunal agreed, citing various judgments that support the view that no additional disallowance should be made when income is estimated. Therefore, the Tribunal allowed this ground of appeal, deleting the disallowance under section 40(a)(ia).

5. Allowance of Depreciation Out of Net Profits:
The Revenue argued that depreciation should not have been allowed. However, the Tribunal upheld the CIT(A)’s decision to allow depreciation, referencing Circular No. 29D, dated 31.08.1965, which states that depreciation should be allowed even when profits are estimated. The Tribunal also cited the Punjab & Haryana High Court’s decision in Lali Construction Co., which supports the allowance of depreciation when the required information is provided by the assessee.

6. Rejection of Books of Account by AO:
The AO rejected the books of account due to the assessee’s failure to produce complete vouchers and bills. The CIT(A) upheld this rejection. The Tribunal agreed with the rejection of the books, noting that the assessee did not produce complete vouchers and bills, justifying the AO’s action.

Conclusion:
The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal by directing the AO to apply a net profit rate of 6.51% instead of 8% and deleting the disallowance under section 40(a)(ia). The Cross Objections filed by the assessee were dismissed as they merely supported the CIT(A)’s order, which had already been addressed. The order was pronounced in the open court on 19/10/2016.