2014 (2) TMI 1024 - AT - Income Tax

Application of Net profit rate - Assessment framed u/s 144 of the Act - Deduction by way of any payment of interest, salary to be allowed or not u/s 185(5) of the Act Estimation of income in the absence of evidences - Held that - Even in the remand proceedings before the AO and the CIT(A), the claim has not been substantiated by the assessee - As regards the increase in the cost of building material and fall in net profit, no cogent explanation or supporting evidence has been brought on record before any of the authorities and even in the remand proceedings before the AO and the CIT(A) Thus, the CIT(A) has rightly has rightly confirmed the provisions of section 145(3) of the Act though that have not been challenged by the assessee either in the cross appeal or in the cross objection There is great possibility of leakage and therefore, the past history cannot be the guide for application of net profit rate. The facts and circumstances of the concerned year have to be taken into consideration for estimation of income - The assessee has not produced copies of the bills of the assets purchased by him and has not brought on record whether assets have been put to use for the purpose of business during the year the AO who has rightly applied net profit rate of 7% on the gross receipts by the assessee - no separate allowance or depreciation is made and the application of net profit rate is inclusive of depreciation and interest and salary to the partners - Once the said estimation has been held to be correctly made and assessment having been made u/s 144 of the Act and with clear provisions of section 184(5), the ld. CIT(A) is not justified in allowing interest and salary to the partners. Allowability of Depreciation u/s 32 of the Act Held that - The assessee has not brought on record that the assets purchased by him have been put to use during the year the CIT(A) is not justified in allowing depreciation the order of the CIT(A) set aside and order of the AO is restored Decided in favour of Revenue.

Summary

Issues Involved:
1. Application of net profit rate by CIT(A).
2. Deduction of salary and interest to partners under Section 185(5) of the Income Tax Act, 1961.
3. Allowance of depreciation by CIT(A).
4. Independence of each assessment year and the peculiar facts of the assessment year in question.

Detailed Analysis:

1. Application of Net Profit Rate by CIT(A):
The Revenue contested the CIT(A)'s decision to apply a net profit rate of 4% on gross receipts, arguing that the AO had correctly applied a 7% rate due to the assessee's failure to produce most vouchers for purchases and expenses. The AO had rejected the books of account under Section 145(3) and made an assessment under Section 144 by estimating the income. The AO noted discrepancies in the assessee's records, such as unverified cash payments and lack of confirmations from creditors. The CIT(A) observed that the AO accepted the contract receipts and the assessee's explanation for the increase in material costs but found no adverse material to justify a 7% net profit rate. The CIT(A) thus applied a 4% rate, which was higher than the average net profit rate for the last three years.

2. Deduction of Salary and Interest to Partners Under Section 185(5):
The AO disallowed interest and salary to partners since the assessment was made under Section 144. The CIT(A), however, allowed these deductions. The Revenue argued that Section 184(5) clearly disallows interest and salary when an assessment is made under Section 144. The Tribunal agreed with the Revenue, noting that the clear provisions of Section 184(5) should be applied, and the CIT(A) was not justified in allowing these deductions.

3. Allowance of Depreciation by CIT(A):
The AO did not allow depreciation as claimed by the assessee, noting that the assessee did not produce copies of bills for assets purchased or evidence that the assets were put to use for business purposes. The CIT(A) allowed the depreciation, but the Revenue argued that this was incorrect. The Tribunal found that the assessee did not substantiate the claim of expenses or provide supporting evidence for the assets' use. Therefore, the CIT(A) was not justified in allowing depreciation, and the AO's decision was restored.

4. Independence of Each Assessment Year:
The Revenue argued that each assessment year is independent, and the peculiar facts and circumstances of the assessment year in question justified a 7% net profit rate. The Tribunal agreed, noting that past results cannot guide the application of the net profit rate due to the possibility of revenue leakage. The Tribunal emphasized that the profitability of each year depends on its specific facts and circumstances.

Conclusion:
The Tribunal restored the AO's order, applying a net profit rate of 7% inclusive of depreciation and interest and salary to partners. The CIT(A)'s order was reversed, and all grounds of the Revenue's appeal were allowed. The Tribunal concluded that the AO had correctly made the assessment under Section 144 and applied the appropriate net profit rate based on the facts and circumstances of the case. The order was pronounced in the open court on 14th February 2014.