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2019 (2) TMI 103 - AT - Income TaxRejection of books of accounts - Estimation of net profit of 8% on total turnover - Held that - AO was right in rejection of books of account u/s 145 of the I.T. Act, 1961, when the assessee has failed to file complete details of evidences in support of purchase and sales transactions recorded in the books of account. When books of account are rejected, the books results of the assessee could not be relied upon to determine the true and correct profits from the business. The AO has to bring on record some comparable cases of similar nature or estimate a reasonable net profit which is in line with the profit in similar line of business. In this case, the AO has adopted 8% profit, but the said estimation is not supported by any comparable case of similar nature. The AO has adopted 8% profit, which is applicable for specified assessee as per section 44AD. In case of retail traders, the statute provides for 5% profit on total sales. Therefore, we are of the considered view that net profit of 5% would meet ends of justice. Therefore, we reverse the findings of the Ld.CIT(A) and uphold estimation of net profit of 5% on total sales turnover. Waiver of loans by banks as remission or cessation of liability u/s 41(1) - whether waiver of loan by banks is a capital receipt which could not be treated as remission / cessation of liability u/s 41(1) of the Act, as the assessee never derived any benefit or never claimed deduction towards said loan in the past? - Held that - When a loan is borrowed for the purpose of business of the assessee, the principal amount of loan including any interest waived would constitute income chargeable to tax under the Act. Since the assessee has failed to controvert the finding of facts recorded by the lower authorities that the said loan has been taken for the purpose of acquiring capital asset, we find no reason to interfere with the findings of the lower authorities that the benefit derived by the assessee by way of waiver of loan constitute business profit which is taxable under the head Income from business or profession . This legal proposition is supported by the decision of Solid Containers Ltd vs DCIT 2008 (8) TMI 156 - BOMBAY HIGH COURT wherein it was held that if an amount is received in course of a trading transaction even though it is not taxable in the year of receipt is being of capital character, that the amount changes its character when the amount becomes assessee s own money because of limitation or by way of other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. In this case, on perusal of facts, we find noticed that the assessee has borrowed working capital loan from banks by way of hypothecation of stocks and receivables. When a working capital loan is waived by banks, the same constitute business receipts chargeable to tax. The Ld.CIT(A), after considering relevant facts, has rightly allowed partial relief of ₹ 17,99,653 which is on account of waiver of term loan and confirmed balance amount being waiver of working capital loan. We do not find any error in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee. Disallowance of expenses - assessee has credited interest waiver by the banks to P&L Account and has claimed various expenses including depreciation on plant and machinery, bad debt written off, write off of obsolete inventories, debit balances written off, write off of obsolete stores & spares and also claimed direct and administrative expenses including interest paid on loan - Held that - As during the year under consideration, except for a trading activity of a different product, the assessee did not carry out any business activity including manufacture of its own product. Therefore, the question of use of plant & machinery in its business is ruled out. We further notice that in order to claim depreciation as per provisions of section 32, the assessee has to prove that the said plant & machinery owned by the assessee has been used for the purpose of business or profession in the year under consideration. In this case, since the assessee has failed to prove use of its plant & machinery for its business, the lower authorities were right in rejecting depreciation claimed by the assessee. As regards interest paid, the Ld. CIT(A) has allowed the claim by holding that the assessee has proved payment of interest on borrowing loan for the purpose of business. In regard to the other expenses, the Ld.CIT(A) has observed that the assessee has failed to file any evidence including bills and vouchers to prove that said expenditure incurred wholly and exclusively for business purpose. The Ld.CIT(A) further observed that even though the assessee has failed to prove the necessity of incurring said expenditure, keeping in view the fact that the assessee has regained control over plant & machinery, it has to incur certain expenditure on repairs and maintenance and security and also to incur certain administrative expenditure in order to maintain its corporate status, has allowed an amount of ₹ 25 lakhs towards expenses and balance amount of ₹ 1,17,66,261 has been confirmed. Facts remain unchanged. The assessee failed to bring on record any evidence to counter the facts of finding recorded by the Ld.CIT(A). Disallowing set off of brought forward losses of earlier years - Held that - We find that the Ld.CIT(A) did not adjudicate the ground taken by the assessee in respect of carry forward and set off of losses . The assessee claims that loss claimed is allowable as it has fulfilled the conditions prescribed u/s 72 of the Income-tax Act, 1961. Therefore, we set aside the issue to the file of the AO and direct the AO to verify the details filed by the assessee to ascertain whether carry forward and set off of losses is allowable or not. In case, the AO found that the assessee has fulfilled all the conditions prescribed under the Act, to allow the benefit of carry forward and set off of losses, then, the AO is directed to allow losses claimed by the assessee. MAT computation - re-computation of book profit u/s 115JB - Held that - The assessee has not prepared its account in accordance with Parts II & III of Schedule VI to the Companies Act and such accounts are not in accordance with the provisions of section 211(c) of Companies Act, 1956. In such cases, the AO has every right to make adjustment towards book profit computed u/s 115JB of the Act. In this case, since the assessee has not routed the benefit got out of onetime settlement of loan from the banks through P&L Account, the AO has rightly made addition to book profit computed u/s 115JB in respect of addition made u/s 41(1) of the Act. Therefore, we are of the considered view that there is no error in the adjustment made by the AO and accordingly, we uphold the AOs finding and reject ground taken by the assessee.
Issues Involved:
1. Addition towards estimation of net profit of 8% on total turnover. 2. Addition towards waiver of loans by banks under one-time settlement scheme. 3. Disallowance of various expenses including depreciation, bad debts written off, obsolete inventories, and other expenses. 4. Not allowing set-off of brought forward losses of earlier years. 5. Re-computation of book profit under section 115JB of the Income-tax Act. Detailed Analysis: 1. Addition towards Estimation of Net Profit of 8% on Total Turnover: The case involved the assessee company engaged in the manufacture and sale of duplex board and trading activities. The AO rejected the books of account under section 145 of the I.T. Act, 1961, and estimated an 8% net profit on total sales turnover due to the absence of supporting evidence for purchases and sales. The CIT(A) deleted the addition, holding that the AO did not provide evidence of earning an 8% net profit and that the books of account could not be rejected merely for the absence of lorry receipts. The Tribunal found that the AO was correct in rejecting the books of account due to the lack of evidence supporting the transactions and non-cooperation from the parties involved. However, it held that a 5% net profit estimation, as per section 44AF applicable to retail traders, was more appropriate than 8%. 2. Addition towards Waiver of Loans by Banks under One-Time Settlement Scheme: The AO treated the waiver of loans by banks as a taxable business receipt under section 41(1) of the Act, arguing that the waiver constituted a benefit derived from business-related loans. The assessee contended that the waiver was a capital receipt and not taxable. The Tribunal upheld the AO's decision, agreeing that the waiver of working capital loans borrowed for business purposes constituted business profits taxable under 'Income from business or profession.' The Tribunal relied on the Bombay High Court's decision in Solid Containers Ltd vs DCIT and the ITAT Delhi Bench's decision in DCIT vs Logistronics Pvt Ltd to support this view. 3. Disallowance of Various Expenses: The AO disallowed expenses claimed against interest income credited to the P&L Account, including depreciation, bad debts written off, and other expenses, arguing that the assessee did not use the plant and machinery for business activities. The CIT(A) allowed partial relief for bad debts and some expenses but confirmed the disallowance of depreciation and other expenses due to the lack of evidence. The Tribunal upheld the disallowance of depreciation, citing the requirement of actual use of assets for business purposes, as supported by the jurisdictional High Court's decision in Dineshkumar Gulabchand Agarwal vs CIT. It also upheld the disallowance of other expenses, noting the assessee's failure to provide supporting evidence. 4. Not Allowing Set-Off of Brought Forward Losses of Earlier Years: The assessee claimed that the CIT(A) did not address the issue of carry forward and set-off of losses aggregating to ?2,18,78,078. The Tribunal set aside this issue to the AO for verification, directing the AO to allow the set-off if the assessee fulfilled the conditions prescribed under section 72 of the Income-tax Act, 1961. 5. Re-computation of Book Profit under Section 115JB: The AO added the waiver of working capital loans to the book profit computed under section 115JB, arguing that the assessee did not route the waiver through the P&L Account. The CIT(A) dismissed the ground as infructuous, noting that the assessee did not press it. The Tribunal upheld the AO's adjustment, stating that the AO had the right to make adjustments to the book profit when the accounts were not prepared in accordance with Parts II & III of Schedule VI to the Companies' Act. The Tribunal rejected the assessee's reliance on the Supreme Court's decision in Apollo Tyres Ltd vs CIT, noting that the assessee's accounts were not in accordance with section 211(c) of the Companies Act, 1956. Conclusion: The Tribunal partly allowed both the revenue's and the assessee's appeals, making adjustments to the estimation of net profit and directing further verification of the set-off of brought forward losses. The Tribunal upheld the AO's decisions on the waiver of loans and disallowance of expenses, as well as the re-computation of book profit under section 115JB.
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