2016 (8) TMI 692 - AT - Income Tax

Rejection of books of accounts - estimation of gross profit consequent to the same - Held that - The are of the view that there is merit in the contentions of the assessee that the rejection of books of accounts was not justified. Accordingly, we set aside the order of Ld CIT(A) on this issue. Since we have set aside the orders of tax authorities passed in respect of rejection of books, the consequent estimate of gross profit and addition thereof are also liable to be deleted. Further, the AO has modified only Gross profit and he has accepted the expenses claimed by the assessee, meaning thereby he did not find any defects in the books. Accordingly we direct the AO accept book results. Addition made u/s 69C - Held that - We notice that the assessing officer has fully relied upon the show cause notice issued by the Customs officials to make this addition. The admitted fact is that the assessing officer did not make any independent enquiry to confirm the allegation of under invoicing of invoices. The question of addition u/s 69C of the Act shall arise only if it is shown that the assessee has incurred any expenditure outside the books of account. In the instant case, we notice that the assessing officer has not brought any material on record to show that the assessee has made any payment through illegal sources to cover up the amount of under invoicing. Thus the assessing officer has entertained belief that the assessee has made the payments through illegal channels, only on the basis of presumptions. In our view the presumptions so entertained would not satisfy the condition prescribed in sec. 69C, viz., the assessee incurred any expenditure, source of which was not explained.In view of the foregoing discussions, we are of the view that the Ld CIT(A) was not justified in confirming the addition made u/s 69C of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Deduction claimed u/s 80IB - A.R contended that the interest income should be netted off against the interest expenditure and accordingly the deduciton u/s 80IB should be worked out - Held that - The netting off sought by the assessee could be given, if it is shown that there is nexus between the borrowed funds and loans given/deposits made. Since this factual aspect requires verification, we set aside this issue to the file of the AO for examining the same. Accordingly, the order passed by Ld CIT(A) stands modified.

Issues Involved:
1. Non-service of notice u/s 143(2) of the Act.
2. Rejection of books of accounts and estimation of gross profit.
3. Addition made u/s 69C of the Act.
4. Deduction u/s 80IB of the Act.
5. Deduction of Customs duty paid.
6. Interest u/s 234C of the Act.
7. Interest u/s 234D of the Act.

Detailed Analysis:

1. Non-service of notice u/s 143(2) of the Act:
The assessee did not press the grounds relating to the non-receipt of notice u/s 143(2) during the hearing. Consequently, these grounds were dismissed as not pressed.

2. Rejection of books of accounts and estimation of gross profit:
The AO rejected the books of accounts based on information from Central Excise and Customs officials alleging under-invoicing of imports and payment through illegal channels. The AO noted inconsistencies in Gross Profit (GP) and Net Profit (NP) ratios and a high percentage of expenses incurred in cash. The AO estimated the GP for the current year at 7.07%, leading to an addition of ?1.92 crores, which was upheld by the CIT(A).

The assessee contended that the show cause notice from Customs was a mere allegation and the partner's confession was made under coercion. The actual cash expense ratio was 1.27%, not 12.7% as calculated by the AO. The GP ratio depends on market conditions, and the books were audited and accepted by the Excise department. The Tribunal found merit in the assessee’s arguments, noting that the AO did not conduct an independent enquiry and relied solely on the show cause notice. The Tribunal concluded that the rejection of books and the estimation of GP were not justified and directed the AO to accept the book results.

3. Addition made u/s 69C of the Act:
The AO added ?59.26 lakhs as unexplained expenditure u/s 69C based on the show cause notice, which was reduced to ?45.55 lakhs by the CIT(A). The assessee argued that the AO did not conduct an independent enquiry and relied on documents not pertaining to the relevant year. The Tribunal agreed, noting that the AO’s addition was based on presumptions without material evidence. The Tribunal directed the AO to delete the addition.

4. Deduction u/s 80IB of the Act:
The AO assessed interest income of ?25.14 lakhs as business income but rejected the deduction u/s 80IB. The CIT(A) allowed deduction on interest from customers but not on the remaining ?23.06 lakhs. The assessee argued for netting off interest income against interest expenditure due to an overdraft facility. The Tribunal set aside the issue to the AO for verification of the nexus between borrowed funds and loans/deposits.

5. Deduction of Customs duty paid:
The assessee claimed a deduction of ?65 lakhs paid as Customs duty during assessment, which was rejected by the AO and CIT(A) for not being claimed through a revised return. The Tribunal admitted the additional ground for deduction and restored the issue to the AO for examination.

6. Interest u/s 234C of the Act:
The CIT(A) remanded the issue of interest u/s 234C to the AO. The Tribunal found no infirmity in this decision, as it involves computation of interest.

7. Interest u/s 234D of the Act:
Similar to the previous issue, the CIT(A) remanded the issue of interest u/s 234D to the AO. The Tribunal upheld this decision.

Additional Grounds:
The assessee raised additional grounds but did not advance any arguments during the hearing. Consequently, these grounds were rejected.

Conclusion:
The appeal of the assessee was treated as allowed for statistical purposes, with the Tribunal setting aside certain issues for further examination by the AO. The order was pronounced in the Open Court on 10.6.2016.

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