2012 (11) TMI 1264 - AT - Income Tax

Summary

Issues Involved:
1. Net Profit Rate Application
2. Disallowance of Interest u/s 40A(2)(a)
3. Adhoc Disallowance of Expenses
4. Addition u/s 68 for Unexplained Cash Credits

Summary:

1. Net Profit Rate Application:
The Revenue's appeal contested the CIT(A)'s direction to apply a net profit rate of 2% instead of 6.5% as determined by the Assessing Officer (AO). The AO had rejected the books of account u/s 145 due to defects and estimated the profit at 6.5%, resulting in an additional profit of Rs. 12,58,049/-. The CIT(A) confirmed the rejection of books but reduced the net profit rate to 2% based on past history and comparable cases, providing relief of Rs. 10,71,399/- out of the total addition.

2. Disallowance of Interest u/s 40A(2)(a):
The AO disallowed Rs. 58,977/- as interest payment under section 40A(2)(a). The CIT(A) agreed in principle but held that no separate addition was warranted since the sustained addition of Rs. 1,86,650/- covered this disallowance.

3. Adhoc Disallowance of Expenses:
The AO made adhoc disallowances totaling Rs. 81,352/- for telephone, vehicle expenses, and depreciation. The CIT(A) reduced this disallowance to 10% of the expenses, amounting to Rs. 40,676/-, but noted that no relief would be provided in the assessed income as these disallowances were covered within the net profit rate addition.

4. Addition u/s 68 for Unexplained Cash Credits:
The AO added Rs. 8,25,000/- u/s 68 due to unverified loans from various depositors, who did not respond to summons and had insufficient bank balances before issuing cheques to the assessee. The CIT(A) deleted the addition, stating that the AO cannot ask for the source of the source and that addition u/s 68 cannot be made after rejecting the books of account. However, the ITAT disagreed, citing Supreme Court and jurisdictional High Court judgments, and restored the AO's addition for Rs. 5,75,000/- while upholding the CIT(A)'s deletion of Rs. 2,50,000/- for other creditors with sufficient funds.

Conclusion:
The ITAT upheld the CIT(A)'s application of a 2% net profit rate but restored the AO's addition of Rs. 5,75,000/- u/s 68 for unexplained cash credits, providing partial relief to the Revenue.