2016 (4) TMI 335 - AT - Income Tax

Estimation of N.P. rate - Held that - The assessee has claimed third party interest from the net profit rate estimated but on verification of the past history, it is found that the assessee never claimed third party interest against the net profit rate applied by the Assessing Officer. Therefore, we do not find any merit on ground of the assessee s appeal. Similarly interest on FDR has also been assessed by the Assessing Officer as income from other sources, which has been accepted by the assessee in past. Therefore, we do not find any reason to disturb the consistency of the case. The net profit rate applied @ 11% is higher side even books of account rejected as not produced by the assessee but the business result can be compared from the other cases, which has also not been applied by the lower authority even confirming the addition by the ld CIT(A). Keeping in view of the past history of the case, we apply N.P. rate @ 5.5% subject to interest and remuneration to the partner. The Assessing Officer is directed to calculate the income as per observation made by us.

Summary

Issues:
1. Rejection of books of account under section 145(3)
2. Application of net profit theory for trading addition
3. Treatment of bank interest as income from other sources
4. Charging of interest under sections 234(B), 234(D), and 244(A)

Issue 1: Rejection of books of account under section 145(3):
The appellant contested that the authorities erred in invoking section 145(3) without justification, as the accounts were audited and expenses were verifiable. The Assessing Officer noted discrepancies in the maintenance of stock registers, purchase details, payment registers, and lack of documentary evidence for various expenses. Despite summons and notices, the partners did not comply, leading to assessment under section 144. The CIT(A) upheld the rejection, citing the decrease in net profit from the previous year and lack of complete documentation. The appellant argued for consistency in applying net profit rates and challenged the arbitrary estimation by the Assessing Officer. The Tribunal upheld the rejection of books but reduced the net profit rate applied, considering past history and comparable cases.

Issue 2: Application of net profit theory for trading addition:
The Assessing Officer applied an 11% net profit rate, resulting in a trading addition. The CIT(A) supported this decision based on the decrease in net profit from the previous year. The appellant argued for a lower rate based on past ITAT decisions and maintained books of account. The Tribunal found the 11% rate excessive, considering past history, and directed the Assessing Officer to apply a 5.5% net profit rate for calculation.

Issue 3: Treatment of bank interest as income from other sources:
Bank interest was treated as income from other sources instead of business income. The appellant did not challenge this treatment, leading the Tribunal to maintain consistency in the assessment.

Issue 4: Charging of interest under sections 234(B), 234(D), and 244(A):
The Assessing Officer charged interest under various sections, which the CIT(A) deemed consequential to the findings. The Tribunal upheld these charges, as they were connected to the income estimation and assessment process.

In conclusion, the Tribunal partially allowed the appeal, reducing the net profit rate and directing the Assessing Officer to recalculate the income based on the observations. The rejection of books under section 145(3) was upheld, emphasizing the importance of complete documentation and past history in income estimation.