2022 (8) TMI 444 - AT - Income Tax

Rejection of book result u/s 145(3) - estimation of income - HELD THAT - As in the hands of the assessee being the partnership firm the interest/remuneration to the partners are the eligible expenses. Same is the case with the depreciation claimed by the assessee. It is also an admitted fact that the remuneration/interest to the partners though eligible for deduction from the income of the partnership firm but the same is taxable in the hands of the partners in their individual capacity. But we have to see profit of the assessee which is the partnership firm before us. It is the onus upon the assessee to justify based on the documentary evidence that the profit declared by it is correct and supported by the books of accounts and the corroborative evidences. But the assessee has not filed the books of accounts along with the supporting corroborative materials to justify that the profit declared in the income tax return is correct within the provisions of law. Thus we hold that the assessee failed to discharge his primary onus cast upon it under the provisions of law. In the absence of necessary books of accounts and supporting materials the income of the assessee cannot be deduced. Thus the only option available to the AO is to determine the profit of the assessee in the scientific manner. For this purpose we note that the AO has taken other assessee engaged in similar business for comparable and reached to the conclusion that the net profit of the assessee should have been declared at least 1.5% of the turnover. The industrial comparable rate selected by the AO while determining the profit has not been disputed by the assessee. Deduction of depreciation from the estimated income - Estimate the income of an assessee by applying a net profit or gross profit to the gross receipts/turnover of the assessee - As provided by presumptive taxes under sections 44AD 44AE and 44AF all deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under those sections would be allowable. No such provision has been mentioned in any other case of presumptive income or estimation by the Assessing Officer and hence depreciation should be allowable being statutory allowance where Assessing Officer has rejected the books of account and estimated the income of the assessee. However the profit declared by the assessee in the return of income cannot be further reduced on account of partner s remuneration interest on partner s capital and the depreciation. Thus we uphold the rejection of the books of accounts made by the authorities below as well as the rate of profit estimated by the authorities below but subject to the direction that against the estimated profit the amount of depreciation partners remuneration and interest to the partners on their capital should be allowed as deduction while calculating the taxable income in the hands of the assessee. Thus the ground of appeal of the assessee is partly allowed.

Issues Involved:
1. Legality of rejection of books of accounts.
2. Justification of net profit estimation at 1.5% of turnover.
3. Allowability of remuneration and interest to partners as deductions.
4. Allowability of depreciation as a deduction.

Detailed Analysis:

Issue 1: Legality of Rejection of Books of Accounts
The primary issue raised by the assessee was the rejection of its books of accounts by the AO under section 145(3) of the Income Tax Act, 1961. The assessee contended that its books were duly audited and no specific defects were pointed out by the AO. However, the AO noted that the assessee failed to furnish critical documents such as purchase and sales registers, unit-wise yield of production, and copies of invoices despite multiple reminders. Consequently, the AO rejected the books and estimated the net profit at 1.5% of the turnover. The CIT(A) upheld this rejection, emphasizing that the assessee did not produce the required documents even during appellate proceedings. The Tribunal concurred with the CIT(A), stating that the onus was on the assessee to justify its declared profit with documentary evidence, which it failed to do.

Issue 2: Justification of Net Profit Estimation at 1.5% of Turnover
The AO estimated the net profit at 1.5% of the turnover by comparing it with other assessees engaged in similar businesses. The assessee argued that its net profit was not actually nil if remuneration and interest to partners and depreciation were considered. However, the Tribunal noted that these deductions were statutory and should not influence the net profit estimation. The Tribunal upheld the AO's estimation, stating that the assessee did not dispute the industrial comparable rate used by the AO.

Issue 3: Allowability of Remuneration and Interest to Partners as Deductions
The Tribunal examined whether remuneration and interest to partners could be deducted from the estimated income. Citing the ITAT Pune Bench's decision in Quality Industries vs. JCIT, the Tribunal noted that interest and remuneration to partners are not expenses but appropriations of profit. Therefore, these should not be deducted from the estimated profit. The Tribunal concluded that the assessee is entitled to these deductions only against the estimated profit after rejecting the books of accounts.

Issue 4: Allowability of Depreciation as a Deduction
The Tribunal addressed whether depreciation could be claimed as a deduction from the estimated income. Citing various High Court rulings and CBDT circulars, the Tribunal affirmed that depreciation is a statutory allowance and should be allowed even when income is estimated. The Tribunal stated that the net profit estimation should be subject to the deduction of depreciation, partners' remuneration, and interest on partners' capital.

Conclusion:
The Tribunal upheld the rejection of the books of accounts and the net profit estimation at 1.5% of turnover but allowed the deductions for depreciation, partners' remuneration, and interest on partners' capital from the estimated profit. Both appeals for the assessment years 2013-14 and 2014-15 were partly allowed, applying the same findings to both years. The order was pronounced on 29/07/2022 at Ahmedabad.

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