2019 (1) TMI 1406 - AT - Income Tax

Rejection of books of accounts - addition u/s 40(a)(ia) and 40A(3) - Estimation of N.P. rate - Held that - Once books of account are rejected u/s 145(3) of the Act and income is derived at certain %age of gross receipt then there is no further scope for any further disallowance including u/s 40(a)(ia) and 40A(3) of the Act as made in the instant case. Hence, we do not have any hesitation to delete the additions. Being a subcontractor, the assessee firm was supposed to work on terms and conditions where maximum part of the receipts was taken by the main contractor as the conditions of contract work vary from contract to contract as also the profitability changes depending upon such conditions. Moreover, depreciation and interest charges debited in the accounts never been considered by the Assessing Officer. It is undisputed fact that the working in the state of J&K is not congenial and all the time depends upon the natural calamities as well as terrorist activities, hence in the aforesaid circumstances, in our considered opinion the estimation of net profit rate @6% on the gross receipt would be quite reasonable and would meet the ends of the justice. Induction of capital from partners - rectification of mistake - Held that -CIT(A) while deleting the addition of ₹ 3,00,000/- and ₹ 5,00,000/- relied upon the enquiry independently held by the A.O. in which Sh. P.K. Zalpuri has confirmed the transactions and further ld. CIT(A) has observed that the partners have inducted this amount in the books of account of the appellant firm but there was a mistake on the part of the Accountant of the appellant firm who has shown these amounts as loan to the appellant firm from Sh. P.K. Zalpuri instead of showing them as induction of capital from partners. It was further observed by the ld. CIT(A) that it was stated by the appellant that mistake was subsequently rectified in the F.Y.2009-10. Finally, finding the explanation as reasonable and convincing and since the identity, creditworthiness and genuineness of transactions from Sh. P.K. Zalpur has been established, the ld. CIT(A) deleted the said addition correctly - Decided against assessee.

Summary

Issues:
1. Appeal against order dated 09.01.2012 by Ld. CIT(A)-Jammu for Asst. Year: 2009-10.
2. Assessment of gross profit rate, additions under sections 40A(3) and 40(a)(ia), unsecured loan.
3. Appeal by Revenue Department against reduction of gross profit rate and deletion of additions.
4. Estimation of net profit rate @ 5% by ITAT Amritsar Bench in a similar case.
5. Confirmation of additions under sections 40A(3) and 40(a)(ia) by different courts.
6. Rejection of additions by ITAT based on rejected books of account under Section 145(3).
7. Dismissal of grounds in Revenue Department's appeal and Cross Objection.

Detailed Analysis:

1. The Assessee and Revenue Department appealed against the order by Ld. CIT(A)-Jammu for the assessment year 2009-10. The Assessing Officer applied a gross profit rate @ 10%, made additions under sections 40A(3) and 40(a)(ia), and added amounts for unsecured loans. Ld. CIT(A) partially allowed the appeal by reducing the net profit rate to 8% and deleting some additions.

2. The Revenue Department challenged the reduction of gross profit rate and deletion of additions. The ITAT Amritsar Bench in a similar case estimated the net profit rate @ 5% and deleted certain disallowances. The estimation was based on the risk involved and the nature of the work, considering the difficult terrain and economic theory.

3. Different courts confirmed additions under sections 40A(3) and 40(a)(ia). However, the ITAT held that once books of account are rejected under Section 145(3) and income is estimated, no further disallowances can be made under these sections. Thus, the additions were deleted.

4. The Revenue Department's appeal was dismissed as the grounds related to the estimation of net profit rate and deletions of additions were rejected. The Cross Objection supported the order of Ld. CIT(A) and was disposed of accordingly.

5. In conclusion, the appeal by the Assessee was allowed, the appeal by the Revenue Department was dismissed, and the Cross Objection was disposed of. The judgment emphasized the importance of considering the specific circumstances and risks involved in estimating profit rates and making additions under relevant sections of the Income Tax Act.