2020 (2) TMI 1043 - AT - Income Tax

Rejection of books of accounts - NP rate determination - only reason assigned by AO for making this addition was that the assessee was non-cooperative in the assessment and recovery proceedings in the A.Yr. 2008-09 - AO applied NP of 11.03% on the gross deposits as reduced to 3.66% by CIT- A - HELD THAT - 'Bank' is not a trading or manufacturing concern so it was not required to maintain any 'Stock Register' as opined by the ld. CIT (A). The Receipts and Advances as made during the banking operations are duly accounted for and are vouched and verifiable. In the circumstances, the observations of ld. CIT(A) regarding non-maintenance of 'Stock', Register is irrelevant in the present case. Authorities Below had failed to spell out as to how the General. and Common' observations regarding procedural lapses made in the Statutory Audit warranted rejection of the books of banking company and make addition by estimating NP rate which is generally in the case of concerned who engaged in trading and manufacturing activities. Detailed chart of 'Receipts' 'Expenses' as placed at PB page No.34 35, no specific discrepancy what-so-ever could be pointed out in respect of such receipts and expenses. Set aside both the orders of the lower authorities and the matter is restored back to the A.O. to examine afresh in the light of the fact that the observation of internal and statutory auditor was removed by the assessee subsequently as stated by the ld AR. A.O. should also keep in the mind that the assessee being banking company and not a trading or manufacturing concerned so as to estimate the GP or NP on its sales. The A.O. is to decide the issue afresh after giving due and effective opportunity of hearing to the assessee.

Issues Involved:

1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Application of Net Profit (NP) rate by the Assessing Officer (AO).
3. Reduction of NP rate by the Commissioner of Income Tax (Appeals) [CIT(A)].
4. Procedural lapses and defects pointed out in the audit reports.
5. Comparability of the assessee's case with other entities.
6. Reassessment of the case by the AO.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):

The AO noticed various discrepancies in the assessee's books of accounts, including reliance on an external audit report, inconsistent accounting methods, lack of information on employee contributions to provident funds, and failure to provide details on indirect taxes and prior period income/expenditure. The AO issued a show cause notice and, upon finding the explanations unsatisfactory, rejected the books of accounts under section 145(3) of the Income Tax Act.

2. Application of Net Profit (NP) Rate by the AO:

The AO applied an NP rate of 11.03% to the assessee's gross interest receipts, based on a comparison with a cooperative society. The AO justified this by stating that the books did not reflect the true profit/loss and cited a comparable case showing a higher NP rate.

3. Reduction of NP Rate by the CIT(A):

The CIT(A) reduced the NP rate from 11.03% to 3.66%, noting that the appellant bank had shown better NP rates in previous years despite a lower turnover. The CIT(A) found the AO's applied NP rate to be on the higher side and considered the appellant's arguments regarding the increase in NP ratio.

4. Procedural Lapses and Defects Pointed Out in the Audit Reports:

The audit reports highlighted several procedural lapses, such as non-reconciliation of accounts, non-compliance with RBI and NABARD guidelines, irregularities in day book and vouchers, lack of NPA register, and no physical verification of furniture and fixtures since 1994-95. The AO used these observations to justify the rejection of the books of accounts.

5. Comparability of the Assessee's Case with Other Entities:

The AO compared the assessee's NP rate with that of a cooperative society, which was not engaged in banking operations. The assessee argued that this comparison was incorrect as the cooperative society did not undertake similar banking activities. The CIT(A) and ITAT noted that the AO's comparison was flawed and not appropriate for a banking institution.

6. Reassessment of the Case by the AO:

The ITAT set aside the orders of the lower authorities and restored the matter to the AO for fresh examination. The ITAT directed the AO to consider the removal of audit objections by the assessee and to recognize that the assessee is a banking company, not a trading or manufacturing concern. The AO was instructed to reassess the case after providing a fair opportunity of hearing to the assessee.

Conclusion:

The ITAT concluded that the procedural lapses noted in the audit reports did not justify the rejection of the books of accounts for a banking institution. The comparison with a non-banking cooperative society was deemed inappropriate. The matter was remanded to the AO for a fresh assessment, taking into account the nature of the assessee's business and the rectification of audit objections. Both the appeals of the assessee and the revenue were allowed for statistical purposes.

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