2017 (5) TMI 902 - AT - Income Tax

G.P. determination - rejection of books of account - Held that - The valuation of opening stock, closing stock is done on estimate by the assessee, which cannot be subjected to verification. In absence of production register, input output ratio can also not be worked out. The Assessing Officer has also noted that the assessee has not produced job work like printing, dyeing, washing, embroidery etc. The details of wastage were also not shown and was also not maintained and in view of these defects, the ld. CIT(A) had sustained the rejection of books of account. Therefore, agree with the findings of CIT(A) in respect of rejection of books of account. As far as estimation of the gross profit rate is concerned, the ld. CIT(A) has reduced it from 14% to 12% and the gross turnover of the assessee was accepted. It is pertinent to note that the comparative G.P. for the year under consideration was better than the earlier year. However, to cover the leakage of revenue on account of various defects noted in the books of account, hold that estimating lump sum addition of ₹ 80,000/- shall be reasonable and sufficient. Addition u/s 41(1) - cessation of liability in form of sundry creditors - Held that - The assessee has not written of the amount in its books of account. The assessee has also not denied the payment of these amounts to these creditors. The genuineness of these creditors were not in doubt. Notices issued U/s 133(6) of the Act were not served on some creditors and some of them did not respond. Only four person responded negatively. The assessee requested the Assessing Officer to issue the summons U/s 131 of the Act, which he has not done. Heavy onus is on the revenue to establish that the liability shown in the books of account has been extinguished. The sickness of the assessee as well as dispute regarding the quality variation is also not in doubt. Therefore, direct to delete the balance of the amount as the revenue has failed to establish the liability in respect of these creditors. Disallowance of interest - Held that - Assessee is having sufficient capital balance of ₹ 57,63,821.14/- to give loan of ₹ 3,06,000/-. The assessee s own non-interest bearing funds were far in excess of the interest free advances given. Deduction claimed U/s 36(1)(iii) in respect of interest on its borrowings could not be declined. The Hon ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT) has held that the presumption would arise that investment would be at of the interest free funds generated or available with assessee. Thus direct the Assessing Officer to delete the addition. This ground of the assessee s appeal is allowed. Confirming the restricted disallowance @ 10% on depreciation - Held that - Once the books of account have been rejected then no such ad hoc disallowance is called for. Further the Assessing Officer had not given any finding of personal use of conveyance, therefore, the personal use is not established. In view thereof, the ad hoc addition @ 10% sustain by the ld. CIT(A) is hereby deleted and this ground of appeal is allowed.

Issues Involved:
1. Sustaining the addition of ?36,76,180 under Section 41(1) of the Income Tax Act, 1961.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
3. Application of Gross Profit (G.P.) rate at 12% instead of 10.39%.
4. Disallowance of interest amounting to ?36,720.
5. Disallowance of 10% on depreciation amounting to ?98,480.

Detailed Analysis:

1. Sustaining the Addition of ?36,76,180 under Section 41(1) of the Income Tax Act, 1961:
The issue pertains to the addition of ?36,76,180 by invoking Section 41(1) on the grounds of cessation of liability in the form of sundry creditors. The assessee argued that the amount payable to creditors was due to quality variations and severe illness, and no benefit was obtained from these creditors. The assessee did not write off the dues in its books nor refused to make payments. The revenue failed to establish that the assessee obtained any benefit from these credits. The tribunal concluded that the onus was on the revenue to prove cessation of liability, which was not established. Consequently, the tribunal directed to sustain the addition only for four specific creditors amounting to ?5,55,350 and deleted the balance amount.

2. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act, 1961:
The books of accounts were rejected due to various discrepancies such as the absence of stock registers, job work registers, attendance registers, and supporting bills for expenses. The tribunal upheld the rejection of books due to these defects. However, it was noted that the gross profit declared by the assessee was better than previous years, and a lump sum addition of ?80,000 was deemed reasonable to cover revenue leakage. Thus, the rejection of books was upheld, but the estimation of gross profit was partially allowed.

3. Application of Gross Profit (G.P.) Rate at 12% Instead of 10.39%:
The tribunal addressed the issue of applying a G.P. rate of 12% instead of the declared 10.39%. The CIT(A) found a 12% G.P. rate reasonable based on the turnover declared by the assessee. The tribunal noted that the comparative G.P. for the year under consideration was better than earlier years and reduced the lump sum addition to ?80,000. Hence, the tribunal partially allowed the ground related to the G.P. rate.

4. Disallowance of Interest Amounting to ?36,720:
The issue involved the disallowance of interest on the grounds that the assessee had forwarded interest-free loans while paying interest on borrowed funds. The CIT(A) restricted the disallowance to ?36,720 from ?1,50,216. The tribunal observed that the assessee had sufficient non-interest-bearing funds to cover the interest-free advances given. Citing the Bombay High Court's decision in CIT Vs. Reliance Utilities & Power Ltd., the tribunal directed the deletion of the disallowance, allowing this ground of appeal.

5. Disallowance of 10% on Depreciation Amounting to ?98,480:
The Assessing Officer disallowed 20% of the expenses on conveyance and depreciation, which the CIT(A) restricted to 10%. The tribunal held that once the books of accounts were rejected, no such ad hoc disallowance was warranted. Additionally, there was no finding of personal use of conveyance. Consequently, the tribunal deleted the ad hoc addition of 10%, allowing this ground of appeal.

Conclusion:
The appeal was partly allowed, with the tribunal providing detailed reasoning for each issue. The tribunal upheld the rejection of books of accounts but provided relief on the estimation of gross profit, disallowance of interest, and depreciation. The addition under Section 41(1) was significantly reduced, demonstrating a balanced approach in addressing the discrepancies and the assessee's arguments.

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