2017 (5) TMI 1806 - AT - Income Tax

Rejection of books of account u/s 145(3) - estimation of net profit - AO applied the GP rate of 4.1 per cent being average GP rate of assessee's three office's GP to the total freight receipts (excluding own trucks) - HELD THAT - AO has pointed out some defects mainly that the assessee has not submitted the name and addressed of the owner of the trucks and their PAN which in fact could have been submitted and are part of the record. Assessee has submitted the truck number and their registration number as well. All the details of the expenses have been submitted is a matter of record. Books of account are maintained in which no defect as such has been pointed out except as above. The details of the driver salary, Bhatta expenses though were on the self made vouchers, but all the details were submitted before both the parties below and the amount paid to the recipient was also submitted. In the circumstances and facts of the case, the AO was not justified in invoking the provision of s. 145(3) of the Act and accordingly the order of the learned CIT(A) is reversed. Estimation of income - Once books of account are not found to be rejected, no estimation of the net profit can be made. However, during the impugned year the assessee has declared a net profit @ 0.58 per cent as compared to the preceding year @ 0.34 per cent and @ 0.29 per cent in the year before the preceding year. It is the assessee had declared the better results and it is a settled law that even the books of account are rejected no addition can be made on such account - no additions can be made to the income of the assessee and additions so sustained is directed to be deleted. Accordingly, grounds of the assessee on the issues are allowed. Treatment of the income u/s 44AE of the Act of the trucks owned by assessee - Assessee has maintained the separate books of account and therefore the provisions of s. 44AE cannot be made applicable, therefore, the addition so made is directed to be deleted. Hence, all the grounds of the assessee are allowed.

Summary

Issues:
1. Rejection of books of account under s. 145(3) of the IT Act.
2. Estimation of net profit.
3. Treatment of income under s. 44AE of the Act for trucks owned by assessee.

Rejection of Books of Account under s. 145(3) of the IT Act:
The appellant's appeal arose from the order of the CIT(A) for the assessment year 2012-13. The appellant contested the rejection of books of account under s. 145(3) by the Assessing Officer (AO). The AO found discrepancies in the maintenance of accounts, particularly regarding the details of freight expenses and payments made to truck owners. The AO considered the lack of verifiable details as a basis for rejecting the books of account. The AO highlighted various crucial aspects left unverified due to incomplete records, such as payment details, TDS provisions, and genuineness of sundry creditors. Consequently, the AO concluded that the books did not reflect the true business picture, leading to potential revenue leakages. Subsequently, the AO invoked s. 145(3) to reject the books of account.

Estimation of Net Profit:
Following the rejection of books of account, the AO delved into the trading results of the appellant's business. Significant variations in Gross Profit (GP) and Net Profit (NP) rates among the appellant's branch offices were noted without plausible explanations from the appellant. The AO particularly scrutinized the profit of the head office, expecting it to be on par with or better than branch offices. Additionally, concerning the appellant's own trucks, the AO observed a distorted presentation of net loss due to interest and depreciation claims in a consolidated manner. Subsequently, the AO applied an average GP rate to the total freight receipts, resulting in a calculated net profit. The AO also computed the income from the appellant's own trucks under s. 44AE due to the limited number of trucks owned.

Treatment of Income under s. 44AE of the Act:
Regarding the treatment of income under s. 44AE for the appellant's owned trucks, the AO calculated the total income at a specific amount based on the reasons outlined in the order. However, the appellate tribunal found that since the appellant maintained separate books of account, the provisions of s. 44AE could not be applied. Consequently, the tribunal directed the deletion of the addition made under s. 44AE. Ultimately, the tribunal allowed all grounds of the appellant's appeal, reversing the rejection of books of account, disallowing the estimation of net profit, and directing the deletion of additions made under s. 44AE.

In conclusion, the appellate tribunal's judgment favored the appellant on all issues raised, emphasizing the importance of maintaining accurate records and adhering to applicable provisions for income calculation and assessment.