2007 (1) TMI 225 - AT - Income Tax

Summary

Issues:
1. Rejection of books of account and application of section 145 of the Act.
2. Challenge against the addition on merits.
3. Disallowances of various expenses.
4. Double levy of tax on interest income.
5. Levy of interest under sections 234B, 234D, and 244A(3) of the Act.

Issue 1: Rejection of books of account and application of section 145 of the Act:
The appellant, a labour contractor, faced a steep fall in the GP rate for the assessment year 2003-04. The AO rejected the books of account due to various faults and invoked section 145 of the Act, making an addition of Rs. 11,30,975. The CIT(A) confirmed this addition. The Tribunal upheld the rejection of books and application of section 145, considering unvouched and unverifiable nature of expenses and the significant decrease in GP rate compared to the previous year. Citing the decision in CIT vs. British Paints India Ltd., the Tribunal supported the AO's actions.

Issue 2: Challenge against the addition on merits:
The appellant contested the rejection of books, application of section 145, and the addition on merits. The Tribunal analyzed the contentions of both parties regarding the decrease in GP rate, rise in diesel prices, and skilled labor requirements. Relying on a previous Tribunal order for a similar case, the Tribunal adopted a GP rate of 3% considering the unique circumstances of the appellant's business. The issue was partly allowed by the Tribunal.

Issue 3: Disallowances of various expenses:
The appellant challenged the disallowances of site, telephone, traveling, and salary expenses. The Tribunal found the disallowances excessive and restricted them to 1/6th under each head, considering the lack of other reasons provided by the AO. The Tribunal partly allowed this ground of appeal.

Issue 4: Double levy of tax on interest income:
Regarding the double taxation of interest income on income-tax refunds and fixed deposits, the Tribunal observed that the AO's actions would result in double taxation. The Tribunal agreed with the appellant's submissions and deleted the addition of Rs. 40,305. However, in the case of interest on fixed deposits, the Tribunal ruled that the interest should be taxed on an accrual basis but modified the rate adopted by the AO.

Issue 5: Levy of interest under sections 234B, 234D, and 244A(3) of the Act:
The appellant contested the levy of interest under various sections of the Act. The Tribunal acknowledged the mandatory nature of interest charges but directed for consequential relief to be allowed. The Tribunal decided this ground accordingly.

In conclusion, the Tribunal partly allowed the appeal of the assessee, addressing various issues related to the rejection of books, addition on merits, disallowances of expenses, double taxation of interest income, and levy of interest under specific sections of the Act.