2015 (4) TMI 470 - AT - Income Tax

Rejection of books of accounts - Estimation of income - Held that - Assessee did not produce proper books of account and other relevant details in support of the expenses, etc., claimed. The same position continued even before the learned first appellate authority inasmuch as the assessee admitted that it was not possible to do so because of the closure of its business and the case being before BIFR - rejection of books of account by the authorities below is upheld. Determination of the gross profit rate to be applied after rejecting the books of account - AO applied GP rate of preceding year. However, it can be seen from the impugned order that the assessee was in BIFR being a sick company declared so vide order dated 21.12.2006, being the period relevant to the assessment year under consideration. The fact that the assessee was declared as a sick company in this year alone strengthens the view point of the ld. CIT(A) for justifying the departure from the preceding year s gross profit rate. If there had not been this salient feature in this year, we would have gone by the earlier year s gross profit rate. But this is a relevant factor justifying the reduction in profit. In our considered opinion, the ld. CIT(A) was justified in ordering the application of 4% GP rate in contrast to 7.18% applied by the AO Auditor of the assessee pointed out the referred irregularities in the payment of statutory liabilities, which called for disallowance, if any, under section 43B or the other relevant provisions of Chapter XVII-B of the Act. Merely because the AO mentioned a wrong section in making the disallowance cannot be a ground to delete the addition, if the facts otherwise justify the sustenance of addition under some other appropriate section. As the ld. CIT(A) has failed to consider the merits of addition made by the AO for a sum of ₹ 14.56 lac, we cannot sustain his point of view. - Matter remanded back - Decided partly in favour of Revenue.

Summary

Issues:
1. Deletion of addition of Rs. 93,01,676
2. Determination of gross profit rate after rejecting books of account
3. Deletion of addition of Rs. 14,56,585 made by AO citing wrong section

Deletion of addition of Rs. 93,01,676:
The appeal was against the CIT(A)'s order related to the assessment year 2007-08. The AO observed discrepancies in the assessee's accounts, including non-cooperation in producing relevant documents. The AO rejected the books of account due to lack of proper documentation and discrepancies in receipts and expenses. The CIT(A) upheld the rejection of books and directed the application of a 4% gross profit rate instead of the 7.18% applied by the AO. The tribunal upheld the rejection of books due to non-cooperation and closure of the business. The tribunal agreed with the CIT(A)'s decision to apply a lower GP rate, considering the assessee's status as a sick company declared under BIFR.

Determination of gross profit rate after rejecting books of account:
The tribunal discussed the GP rate application after rejecting the books of account. It noted that ordinarily, the GP rate of the preceding year is a good guide for the current year. However, in this case, the assessee was a sick company under BIFR, justifying a departure from the preceding year's GP rate. The tribunal agreed with the CIT(A)'s decision to apply a 4% GP rate instead of the 7.18% applied by the AO, considering the company's status. The tribunal emphasized the relevance of the company's situation in justifying the lower profit rate.

Deletion of addition of Rs. 14,56,585 made by AO citing wrong section:
The AO made an addition of Rs. 14.56 lakh under the wrong section based on irregularities in statutory liabilities payments. The CIT(A) deleted this addition, stating that the disallowance was not covered under section 41 of the Act. The tribunal found that the irregularities pointed out by the auditor called for disallowance under other relevant provisions. As the CIT(A) did not consider the merits of the addition, the tribunal set aside the decision and restored the matter to the AO for reevaluation. The tribunal directed the AO to pass a speaking order specifying the appropriate section for disallowances, if necessary, after providing a reasonable opportunity for the assessee to be heard.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, setting aside the decision on the addition of Rs. 14.56 lakh and restoring it to the AO for reconsideration.