2015 (11) TMI 1204 - AT - Income Tax

Estimation of rate of net profit from business - CIT(A)estimated @ 4% as against 8% adopted by AO after rejecting the books of accounts - Held that - We find that the assessee had not disclosed one savings bank account with Allahabad Bank Gariahat Branch in his books and hence the Learned AO was justified in rejecting the books of accounts and determining the profits on an estimated basis u/s 145(3) of the Act. We find that the Learned CITA had considered the average net profits declared by the assessee in the earlier years and accordingly had determined the net profit at 4% of gross receipts which in our opinion is reasonable in the facts and circumstances of the case. Hence we are not inclined to interfere with the order of the Learned CITA in this regard. - Decided against revenue Increase the turnover - undisclosed bank account of the assessee - CITA increasing the turnover by the amount credited in the undisclosed bank account and directing the Learned AO to compute net profit @ 6% as business income - Held that - CIT(A) found that the assessee was not able to prove the credits in the said bank account to the extent of ₹ 22,25,000/- and held that the same has to be construed as turnover of the assessee and net profit to be determined at the rate of 6% thereon as he found that profits from undisclosed business would normally be higher than the regular business profits as the assessee need not incur certain expenditure thereon. We also find that the finding given by the Learned CITA that the only source of income of the assessee is his income from contract / sub contract business has not been refuted by the revenue. Hence we are in agreement with the findings given by the Learned CITA in this regard. - Decided against revenue Addition on undisclosed sundry debtor - CIT(A) deleted the addition - Held that - CITA had given a categorical finding of the manner in which the security deposit was created in the earlier years and these findings have not been refuted by the revenue . Moreover, we hold that since the security deposits were made in the earlier years, the same cannot be the subject matter of addition as undisclosed income u/s 69 of the Act in the assessment year under appeal. Hence we are not inclined to interfere with the findings of the Learned CITA in this regard. - Decided against revenue Addition towards interest on fixed deposits - business income OR income from other sources - CIT(A) deleted the addition - Held that - We are not in agreement with the arguments of the Learned AR that the fixed deposits were used as a security for availing overdraft facility by the assessee for the purpose of his business and hence the interest income derived thereon has got direct business nexus and has to be construed only as business income. It is seen that the entire books of accounts of the assessee has been rejected by the Learned AO which is also accepted by the assessee due to certain defects. We find that the Learned CITA had only accepted to the contentions stated by the assessee during first appellate proceedings and proceeded to accept the claim of the assessee. No evidences were produced to support the contentions of the assessee in this regard either before the Learned CIT(A) or before us. In the absence of clear evidences to prove the business nexus of investing the fixed deposits, the resultant interest income had to be taxed only as income from other sources. - Decided in favour revenue

Summary

Issues Involved:
1. Justification of applying a lower estimated rate of net profit from business.
2. Treatment of turnover and peak credit from an undisclosed bank account.
3. Addition towards undisclosed sundry debtor.
4. Classification of interest on fixed deposits as business income or income from other sources.

Issue-Wise Detailed Analysis:

1. Justification of Applying a Lower Estimated Rate of Net Profit from Business:
The primary issue was whether the CIT(A) was justified in applying a lower estimated rate of net profit from business at 4% instead of the 8% adopted by the AO after rejecting the books of accounts. The assessee, a civil contractor, disclosed gross receipts of Rs. 2,64,20,951, while the NSDL TDS records showed Rs. 2,67,77,057. The AO found discrepancies, including an undisclosed savings bank account, leading to the rejection of the books and an estimation of net profit at 8% of gross receipts. The CIT(A) reduced this to 4%, based on the average profit ratio of earlier years. The tribunal upheld the CIT(A)'s decision, finding it reasonable and dismissing the revenue's appeal on this ground.

2. Treatment of Turnover and Peak Credit from an Undisclosed Bank Account:
The second issue was whether the CIT(A) was justified in increasing the turnover by Rs. 22,25,000 credited in the undisclosed bank account and directing the AO to compute net profit at 6% of Rs. 22,25,000 as business income, instead of the peak credit of Rs. 91,96,120 added by the AO. The AO had added the peak credit balance from the undisclosed bank account as taxable income. The CIT(A) treated Rs. 22,25,000 as turnover from undisclosed business and applied a 6% net profit rate, directing the deletion of the peak credit addition. The tribunal agreed with the CIT(A), noting that the AO had accepted the credits as business transactions and dismissed the revenue's appeal on this ground.

3. Addition Towards Undisclosed Sundry Debtor:
The third issue was whether the CIT(A) was justified in deleting the addition of Rs. 9,01,870 towards an undisclosed sundry debtor. The AO added this amount as unexplained investment under Section 69 of the Act, as it was not reflected in the balance sheet. The CIT(A) found that the deposit was made in earlier years and was deducted from sale proceeds receivable from a subcontractor. The tribunal upheld the CIT(A)'s decision, noting that the deposit was explained and made in earlier years, hence not subject to addition under Section 69 in the assessment year under appeal.

4. Classification of Interest on Fixed Deposits:
The final issue was whether the CIT(A) was justified in deleting the addition of Rs. 74,826 towards interest on fixed deposits by treating it as business income instead of income from other sources. The AO classified the interest as income from other sources, while the CIT(A) treated it as business income, as the fixed deposits were used as security for availing overdraft facilities for business purposes. The tribunal disagreed with the CIT(A), ruling that the interest income lacked clear business nexus and should be taxed as income from other sources, citing the Supreme Court decision in Pandian Chemicals Ltd vs. CIT. Thus, the tribunal allowed the revenue's appeal on this ground.

Conclusion:
The tribunal dismissed the revenue's appeals on the first three issues, upholding the CIT(A)'s decisions, but allowed the appeal on the fourth issue, classifying the interest on fixed deposits as income from other sources. The revenue's appeal was partly allowed.