2014 (7) TMI 372 - AT - Income Tax

Rejection of books of accounts Rate of NP @ 15% in place of 11.39% - Held that - After pinpointing incompleteness of books and certain defects in the books of accounts and also making observation with regard to the deposit and withdrawal of cash in the account of Director Hardeep Singh Chaddha and also pointing out absence of supporting evidence in respect of cash expenditure incurred by the assessee and factum of cash loan of ₹ 2.00 lacs from Director Ravikaran Singh Chaddha, the AO has rejected the book results and applied the net profit rate of 15% in place of net profit rate of 11.39% shown by assessee. In the earlier five assessment years, the assessee had shown net profit rate of 5.28% to 11.63% - during the year under consideration the assessee had shown net profit rate of 11.39% - there is no justification for applying the net profit rate of 15% - there was no justification in the AO s order for applying net profit rate of 15% on gross receipts - the cash expenditure incurred by the assessee for which the AO observed that assessee did not furnish evidence to substantiate the expenditure is certainly going to effect the net profit disclosed by the assessee in the books of accounts - there is adverse observation made by the AO with regard to the genuineness of job work undertaken from M/s Unique Enterprises - the observation made by the AO vis- -vis the findings recorded by the CIT(A) with regard to the rejection of books of account and sustaining the trading addition to ₹ 17,00,000/- shown by assessee is modified thus, the issue with regard to the incurring of cash expenditure which is not supported by bills and genuineness of job work undertaken from M/s Unique Enterprises and issue of cash loan of ₹ 2.00 lacs from Ravi Karan Singh Chaddha is remitted back to the AO for fresh examination Decided partly in favour of Assessee.

Summary

Issues: Cross appeals by assessee and Revenue against CIT(A) order for assessment year 2006-07 under Section 143(3) of the I.T. Act.

Analysis:
1. The AO rejected the books of account of the assessee due to incompleteness and discrepancies in cash transactions. The AO applied a net profit rate of 15% instead of the 11.39% shown by the assessee, resulting in an addition of &8377; 92,35,050.
2. The CIT(A) upheld the rejection of books but disagreed with the 15% profit rate, limiting the addition to &8377; 17,00,000 based on previous profit rates and unexplained cash transactions.
3. Assessee's representative argued against the rejection of books and the 15% profit rate, emphasizing the absence of defects pointed out by the AO and the availability of necessary information.
4. The Revenue contended that the rejection was justified due to incomplete books, unverifiable cash transactions, and unexplained loans, supporting the AO's decision to apply a 15% profit rate.
5. The ITAT found no justification for the 15% profit rate, citing the absence of higher profit rates in previous years or similar cases. The AO's rejection of books lacked sufficient reasons, and the CIT(A)'s reduction to &8377; 17,00,000 was unsubstantiated.
6. Specific issues regarding unverified cash expenditure, job work genuineness, and a cash loan were highlighted. The ITAT directed a fresh examination by the AO, emphasizing the need for detailed evidence and full opportunity for the assessee.
7. Both appeals were allowed in part for statistical purposes, with the matter remanded to the AO for reevaluation of the specified issues.