2017 (12) TMI 912 - AT - Income Tax

Rejection of books of accounts - G.P. rate determination - Held that - The validity of the rejection of books of account is not an issue now as the same is not pressed by the Ld. Counsel for the assessee before us. Further, the CIT(A) s decision to estimate the profits applying rate of 15% is also not approved as the same is not supported by any material or any case laws. AO is directed to examine the allowability of statutory deductions u/s.40(b) relating to the remuneration to the partners and u/s.32 relating to the depreciation out of the profits so estimated by the AO in the remand proceedings and pass a speaking order on this issue after considering the decisions relied upon by the Ld. Counsel for the assessee Shri Ram Jhanwar Lal Vs. ITO and Ors (2008 (7) TMI 505 - RAJASTHAN HIGH COURT. Assessee is also directed to discharge the onus from his side by furnishing the relevant comparable cases during the remand proceedings before the AO to help him taking best decision relating to profit percentage. Accordingly, Ground No.2 raised by the assessee is partly allowed for statistical purposes. Addition u/s.69 - we find the CIT(A) is not fair in directing the AO to assess the said amount of ₹ 20 lakhs of capital introduced by the partner of this firm. We find there are similar capital introduction by other partners and AO/CIT(A) did not consider need of taxing the same in the hands of the firm. In our view, considering the principle of consistency, this amount should also be examined for taxation in the hands of the partner involved. As such, there is no nexus established by the Revenue that the said amount of ₹ 20 lakhs has genesis in the firm s profits. Accordingly, Ground No.4 is allowed in favour of the assessee.

Summary

Issues:
1. Rejection of books u/s.145 of the Act and addition of ?21,79,036 not pressed
2. Estimation of net profits at ?2,00,41,924 @15% of total contract receipts
3. Addition of ?20,00,000 u/s.69 on account of unexplained introduction of capital by partner

Analysis:

Issue 1: Rejection of Books u/s.145 and Addition of ?21,79,036
The appellant did not press this issue, leading to its dismissal as 'not pressed.' This decision was made after both parties were heard, and it was confirmed that the grounds related to this issue were not pursued.

Issue 2: Estimation of Net Profits at ?2,00,41,924
The CIT(A) rejected the books of account under section 145 of the Act due to discrepancies in the profit and loss account. Consequently, the CIT(A) estimated the profits at 15% of the total contract receipts, resulting in an addition of ?2,00,41,924. However, the Tribunal found this estimation unfair and unreasonable, citing a comparable case with a net profit rate of 6.25% as fair and reasonable. The Tribunal directed the AO to compute the profit using the 6.25% net profit rate, considering statutory deductions for remuneration and depreciation.

Issue 3: Addition of ?20,00,000 u/s.69
The CIT(A) confirmed the addition of ?20,00,000 under section 69 on account of unexplained capital introduction by the partner. However, the Tribunal deemed this decision unfair, emphasizing the need for consistency in taxing similar capital introductions. As there was no established nexus between the amount and the firm's profits, the Tribunal allowed this ground in favor of the assessee.

In conclusion, the appeal was partly allowed for statistical purposes. The Tribunal directed the AO to examine the allowability of statutory deductions and consider relevant case laws. The issue of estimating profits at 15% was disapproved, and the case was remanded for a reassessment based on fair and reasonable profit rates. The addition under section 69 was also allowed in favor of the assessee due to lack of nexus with the firm's profits.