2017 (9) TMI 522 - AT - Income Tax

Rejection of books of the accounts u/s 145(3) - g.p. determination - Held that - While finalizing the annual accounts, the assessee went ahead and accounted for the said undisclosed income of ₹ 22,60,000 in its profit/loss account. So, even this defect was removed and duly accounted for in the financial statements. During the course of assessment proceedings, the AO took this ground of surrender of undisclosed income as the very basis for rejection of books of accounts. But the fact remains that such defect in the books of accounts by way of not disclosing the investment in construction of godown was cured by passing appropriate entries in the books of accounts finalized subsequently and which was duly offered to tax. Further, there is no other specific defect in the trading results or in the overall determination of business results which has been highlighted by the AO during the course of assessment proceedings. As far as setting off of undisclosed income of ₹ 22,60,000 is concerned against the regular business loss is concerned, the ld CIT(A) has given a finding that such undisclosed income have to be taxed under the head of business income and not to be taxed separately, a finding which has been accepted by the Revenue and is not under challenge before us. In light of above, we are of the view that there was no basis with the AO for rejection of books of accounts in the instant case as contemplated under section 145(3) of the Act. Depreciation on the godown building - no evidence of asset being put to use was submitted - Held that - We prima facie found force in the argument of the ld AR that where rental income has started accruing to the assessee, the same demonstrate that the asset was actually put to use. However, there is no finding of the lower authorities in this regard. We are accordingly setting aside the matter to the file of the AO to examine the above said contention of the ld AR and where the same is found to be in order, allow the depreciation as per law. In the result, the ground is allowed for statistical purposes. Addition u/s 69C - low household withdrawals - Held that - AO without bringing on record any demonstrable evidence that the assessee has in fact incurred expenditure more that the money which has been withdrawn by the assessee from his bank account. In terms of Section 69C, the initial onus is on the Assessing Officer to prove that the assessee has incurred the expenditure. Once the Assessing Officer discharges the onus, the onus gets shifted on the assessee to offer an explanation about the source of such expenditure. In the instant case, the Assessing Officer, has not discharged the initial onus placed on him. In light of the same, we are setting aside the order of the AO and delete the subject addition.

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act, 1961.
2. Estimation of net profit.
3. Disallowance of depreciation claim.
4. Addition of commission income.
5. Addition on account of low household withdrawals.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3)
The primary issue is whether the rejection of books of accounts by the Assessing Officer (AO) under section 145(3) was justified. The AO rejected the books based on the finding that the assessee had surrendered undisclosed income during a survey, indicating that the books were not reliable. The CIT(A) upheld this view, stating that the very fact of a survey is sufficient ground to reject the books.

However, the tribunal found that the books were audited and no specific defects were pointed out by the Revenue authorities during the survey, except for the undisclosed income which was subsequently accounted for by the assessee. Thus, the tribunal concluded that there was no basis for rejecting the books under section 145(3).

2. Estimation of Net Profit
The AO estimated the net profit by applying the previous year's net profit rate to the current year's turnover, resulting in an addition. The CIT(A) partially upheld this estimation but reduced the addition, considering the substantial reduction in turnover.

The tribunal noted that the assessee maintained day-to-day books of accounts, which were audited, and no defects were found in the trading account. The tribunal held that mere deviation in the gross profit rate could not justify the rejection of books and subsequent estimation of net profit. Consequently, the tribunal allowed the assessee's appeal on this ground, rendering the issue of profit estimation infructuous.

3. Disallowance of Depreciation Claim
The AO disallowed a portion of the depreciation claimed by the assessee on the grounds that the building was not put to use. The CIT(A) modified this disallowance, allowing partial depreciation based on the opening Written Down Value (WDV) and new investments.

The tribunal found that the construction of the godown was completed, and rental income had started accruing, indicating that the asset was put to use. The tribunal set aside the matter to the AO to verify this claim and allow depreciation accordingly.

4. Addition of Commission Income
The AO added a commission income reflected in Form 26AS, which the assessee claimed did not belong to them. The CIT(A) upheld this addition due to a lack of cogent evidence from the assessee.

The tribunal accepted the assessee's contention that the PAN was incorrectly quoted by the deductor and set aside the matter to the AO for verification. If the claim was found to be correct, the AO was directed to delete the addition.

5. Addition on Account of Low Household Withdrawals
The AO made an addition based on the estimation that the household withdrawals were insufficient. The CIT(A) upheld this addition, considering the assessee's social and economic status.

The tribunal found that the AO did not provide evidence that the assessee incurred more expenditure than what was withdrawn. Citing Section 69C, the tribunal held that the initial onus was on the AO to prove the expenditure. Since the AO failed to discharge this onus, the tribunal deleted the addition.

Conclusion
The tribunal allowed the appeals on the grounds of rejection of books of accounts, estimation of net profit, and addition on account of low household withdrawals. It set aside the issues of depreciation claim and commission income for verification by the AO. The tribunal emphasized the need for specific defects or evidence to justify such additions and rejections.

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