2017 (1) TMI 323 - AT - Income Tax

Addition to the assessee s profit by rejecting the books of account and estimating 8% profit on the total turnover - CIT(Appeals) has sustained the addition on the ground that the assessee has not been able to reconcile and explain the difference found between the said tentative profit and loss account and the actual profit and loss account - Held that - In our considered opinion the tentative profit and loss account found during the course of survey alone cannot be a basis for making an addition of huge amount of ₹ 3.43 crores. Dehorse any other corroborative evidence of suppressed sale or booking of any bogus expenditure, this addition is not sustainable on the anvil of Hon ble Apex Court decision in the case of S. Khader Khan (2007 (7) TMI 182 - MADRAS HIGH COURT ). If the assessee s books of account are found to be not reliable, the accepted and permissive course of action in this regard is estimate of profit by applying the prevalent rate of profit in the industry and/or past results of the assessee. Hence this addition solely based upon a tentative trading/contract works account for the period 01-04-2011 to 07-02-2012 found at the time of survey alone in absence of any books of account or other documents found is not at all sustainable. Since no evidence whatsoever with regard to finding regarding suppressed sale has been brought on record and the AO has rejected the books of account, we are of the opinion that the addition by the AO by applying 8% gross profit as in earlier years is required to be restored and the addition of R.3,43,24,120/- based upon the tentative trading account found on survey is liable to be deleted.- Decided in favour of assessee Disallowance u/s 40(a)(ia) - it is the assessee s plea that the sums involved have been paid by the end of the year and no amounts are outstanding - Held that - As decided in case of M/s Chadda Transport 2016 (3) TMI 1019 - ITAT NAGPUR Since we have already held that the provisions of section 40(a)(ia) were not attracted inasmuch as no amount was payable as on the close of the year as well as in absence of any contracts, there was no obligation on the part of the assessee to deduct the tax at source - Decided in favour of assessee

Summary

Issues Involved:
1. Endorsement of inquiry and forceful disclosure.
2. Addition based on uncorroborated survey statements.
3. Disallowance under section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Endorsement of Inquiry and Forceful Disclosure:
The appellant contested that the CIT(A) erred in endorsing the inquiry conducted by the survey team and the Assessing Officer (AO), which involved obtaining a forceful disclosure from the appellant and subsequently disregarding the retraction letter. The appellant argued that the CIT(A) did not follow the CBDT instruction F. No. 286/2/2003-IT dated 10/03/2003, which pertains to the treatment of statements obtained during surveys.

2. Addition Based on Uncorroborated Survey Statements:
The appellant challenged the CIT(A)'s confirmation of additions made solely on the basis of statements recorded during the survey, which were not backed by any corroborative evidence. During the survey, two tentative trading accounts were prepared, showing significant discrepancies in gross profit figures. The appellant initially declared additional unaccounted income but later retracted this declaration, citing incomplete books of account and unaccounted creditor bills.

The AO rejected the appellant's books of account under section 145(3) of the Income Tax Act, 1961, and computed the total income at 8% of the total turnover, resulting in an addition of ?15,79,813/-. The AO also added ?3,43,24,120/- based on the retracted declaration during the survey.

The CIT(A) upheld this addition, stating that the appellant failed to explain the significant variance in gross profits between the two trading accounts. The CIT(A) concluded that the appellant inflated expenses to reduce taxable profits, and the retraction was unsupported by corroborative evidence.

3. Disallowance Under Section 40(a)(ia):
The AO disallowed interest payments to Sunderam Finance and Manga Finance amounting to ?23,92,290/- under section 40(a)(ia) of the Income Tax Act, 1961, due to the appellant's failure to deduct tax at source. The CIT(A) affirmed this disallowance, referencing the Hon'ble Calcutta High Court's decision in CIT, Kolkata -XI vs. Crescent Export Syndicate, which held that section 40(a)(ia) applies to expenses payable at any time during the relevant previous year.

Tribunal's Findings:
1. Endorsement of Inquiry and Forceful Disclosure: The Tribunal did not specifically address this issue but focused on the substantive additions made by the AO and confirmed by the CIT(A).

2. Addition Based on Uncorroborated Survey Statements: The Tribunal found that the addition of ?3.43 crores based on a tentative profit and loss account prepared during the survey was not sustainable without corroborative evidence of suppressed sales or bogus expenditure. The Tribunal cited the Hon'ble Apex Court's decision in CIT vs. S. Khader Khan, which held that statements obtained during surveys, without supporting evidence, cannot be the sole basis for additions. The Tribunal restored the AO's original addition by applying an 8% profit rate on the total turnover, deleting the ?3.43 crores addition.

3. Disallowance Under Section 40(a)(ia): The Tribunal noted that the sums involved were paid by the end of the year, with no amounts outstanding. It referenced the Tribunal's decision in M/s Chadda Transport, which followed the Hon'ble Allahabad High Court's ruling in CIT vs. Vector Shipping Services P. Ltd. The Tribunal held that section 40(a)(ia) does not apply to amounts paid by the end of the year, and deleted the disallowance of ?23,92,290/-.

Conclusion:
The Tribunal partly allowed the appeal, deleting the addition of ?3.43 crores based on the tentative trading account and the disallowance under section 40(a)(ia), while restoring the AO's original addition by applying an 8% profit rate on the total turnover.