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2022 (10) TMI 1251 - AT - Income TaxRejection of books of accounts - estimation of net profit from the business of the assessee - Addition made by the AO in regard to defects found during survey for not recording the transactions and entry made in loose sheets - HELD THAT - The increase in the sales made by the AO from 4.65 crores to 6 crores was without any basis, therefore, the actual sales reported in the audited financial statement is accepted. AO has also not made out the case as per Chapter VI of the Act., AO noted that the some of the purchases and expenditures were not recorded, therefore, the AO had sufficient reasons for rejection of books of accounts as per section 145(3) of the I.T. Act., in view of this, AO had rightly applied the provision of section 145(3) for rejection of books of account for estimation of net profit from the business of the assessee, however, during the course of hearing, the AR fairly accepted the 5% net profit may be considered on the turnover disclosed in the audited financial statements. Therefore, considering the profitability for the previous and subsequent assessment years, we accept the plea of the assessee for applying 5% net profit on the turnover of Rs. 4,64,79,756/- which comes to Rs. 23,23,988/-. The assessee has himself disclosed the net profit of Rs. 18,49,242/-, therefore, we confirm the addition of Rs. 4,74,746/-and the assessee gets relief of Rs. 34,36012/-. We make it clear that from the estimated profit adopted @5% on the turnover, no further deduction shall be allowed under the head income from business and profession. Once the books of accounts have been rejected and profit has been estimated by applying sec.145(3) no further disallowance can be made under the head income from business and profession for tax computation of taxable income of the assessee - HELD THAT - The pattern of assessment under the Act is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the AO may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed u/s 29. All the deductions which are referred to under section 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account. The other additions made by the AO towards disallowance of certain expenses cannot be made. Therefore, the ground no.5 and 6 is allowed. Unexplained cash credit - HELD THAT - The name and address were provided to the AO by the assessee and she had also requested to the AO for exercising his power u/s 131. The specimen copy of application for Deposit has been placed by the assessee in the Fixed Deposit certificates with ID No. is enclosed, the name and address is also mentioned therein. But the AO did not issue any notice to the Fixed Depositors. AO had to enquire only those fixed depositors from whom the assessee has received Rs. 1.00/- lakh or more for fixed deposits during the year in respect of whom the confirmations have not been received. On perusal of chart produced in most of the cases the assessee submitted confirmations but the AO did not issue any summons to the rest of the fixed depositors whose balance is more than Rs.1.00/- lakh or more. Addition made by the AO towards unexplained cash credit is not justified. Accordingly, we delete the addition.
Issues Involved:
1. Rejection of books of accounts and estimation of profit under Section 145(3). 2. Disallowance of interest expenditure. 3. Disallowance of business promotion, consultancy, bad debts, holiday, and staff welfare expenses. 4. Addition on account of unexplained cash credits under Section 68. Issue-wise Detailed Analysis: 1. Rejection of Books of Accounts and Estimation of Profit under Section 145(3): The AO rejected the books of accounts under Section 145(3) due to discrepancies found during a survey conducted on 21/04/2005, which revealed unrecorded sales and stock discrepancies. The AO estimated the turnover at Rs. 6.00 crore and applied a net profit rate of 9.6%, resulting in an addition of Rs. 39,10,758/-. The ITAT, however, observed that the AO had not substantiated the increase in turnover and agreed with the assessee's plea for a 5% net profit rate on the actual turnover of Rs. 4,64,79,756/-, leading to a confirmed addition of Rs. 4,74,746/- and relief of Rs. 34,36,012/-. The ITAT emphasized that once profit is estimated, no further deductions under the head "income from business and profession" should be allowed. 2. Disallowance of Interest Expenditure: The AO disallowed Rs. 15,75,158/- of interest expenditure, arguing that the assessee provided interest-free loans to relatives and sister concerns. The ITAT agreed with the assessee's contention that once books of accounts are rejected and profit is estimated, no further disallowances can be made under the head "income from business and profession." 3. Disallowance of Business Promotion, Consultancy, Bad Debts, Holiday, and Staff Welfare Expenses: The AO disallowed various business expenses, including Rs. 1,04,252/- for business promotion, Rs. 2,75,000/- for consultancy, Rs. 29,437/- for bad debts, and Rs. 39,215/- for holiday and staff welfare expenses. The ITAT held that once books of accounts are rejected and profit is estimated, no further disallowances can be made under the head "income from business and profession," thus allowing the assessee's appeal on these grounds. 4. Addition on Account of Unexplained Cash Credits under Section 68: The AO added Rs. 2,03,26,280/- as unexplained cash credits, arguing that the assessee failed to provide confirmations for fixed deposits. The ITAT rejected the assessee's argument that no further additions can be made under Section 68 once books of accounts are rejected. However, the ITAT noted that the AO did not issue summons to verify the fixed deposits despite the assessee providing names and addresses. Citing precedents, the ITAT deleted the addition, emphasizing that the AO should have verified the deposits through summons. Conclusion: The ITAT partly allowed the appeal, confirming a reduced addition for estimated profit while deleting other disallowances and additions. The judgment underscores the principle that once books of accounts are rejected and profit is estimated, further disallowances under the same head are not justified, but additions under Section 68 can still be made if properly substantiated.
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