2018 (1) TMI 1039 - AT - Income Tax

Rejecting the Books of Accounts u/s. 145(2) - addition by estimating the Gross Profit - contention of the assessee is that it is maintaining the Books of Accounts mostly in the electronic form - Held that - Simply because the books were not produced in physical Form the same cannot be rejected especially when the books were audited and the assessee is a limited company. Therefore, taking the totality of facts and circumstances into consideration, we are of the considered view that this issue is to be restored to the file of the Assessing Officer and the assessee should be given one more opportunity to produce the Books of Accounts before the Assessing Officer to substantiate its claim for the loss incurred during the current Assessment Year. Thus we set-aside this issue to the file of the Assessing Officer who shall examine afresh in accordance with the law after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purpose. Disallowing finance expenses - Held that - all the charges appears to have been paid towards regular Bank Charges, Interest, Overdue Interest on PEC LC, Bank LC charges etc., and it appears that none of these charges relates to any interest on borrowals. In such circumstances there should not have been any disallowance by the Assessing Officer. Therefore, we are of the view that the Assessing Officer shall examine this issue with reference to the submissions made by the Ld. Counsel for the assessee and therefore we set-aside this issue to the file of the Assessing Officer for adjudicating this issue in accordance with the law after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purpose. Investment made in land as unexplained investment u/s. 69 - Held that - In the case on hand the Assessing Officer without examining the Books of Accounts properly and without giving a finding that the transactions occurred outside the Books of Accounts invoked provisions of section 69C of the Act. We also find that the transaction happened in the Financial Year 2007-2008 relevant to the Assessment Year 2008-09 as the sale agreement entered into is in the Financial Year 2007-08 and in such circumstances, whether the addition can be made in the Assessment Year 2009-10 is also not examined by the Assessing Officer. The contention of the assessee is that, assessee company owes money to Shri G. Eswara Rao who is the Father-in-Law of one of the Directors and Shri G. Eswar Rao sold certain shares to the vendors and this resulted in transferring the lands in the name of the assessee company for discharging the liability of Shri G. Eswara Rao by the company in its Books of Accounts. This aspect has not been examined by the Assessing Officer or by the Ld.CIT(A)- we are of the considered opinion that this issue is to be examined afresh by the Assessing Officer This ground is allowed for statistical purpose.

Summary

Issues Involved:
1. Rejection of Books of Accounts and estimation of Gross Profit.
2. Disallowance of finance expenses.
3. Treatment of investment in land as unexplained investment under Section 69 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Gross Profit:
The assessee engaged in the business of manufacturing and trading of Cotton Gray Fabric filed a return declaring a loss of ?2,22,79,852/-. The Assessing Officer completed the assessment determining the total income at ?6,05,66,170/- by rejecting the Books of Accounts under Section 145(2) and estimating the Gross Profit at ?1,10,11,921/- based on the previous year's Gross Profit ratio of 8.28%. The rejection was due to the inability to produce Books of Accounts. The CIT(A) upheld this decision, citing improper maintenance and unverifiable stock records. The assessee argued that all records were maintained electronically in Tally software and audited, and that the market conditions led to the loss. The Tribunal found that the assessment was completed hastily without sufficient opportunity for the assessee to produce the Books of Accounts and that the Assessing Officer did not specify the required form of the books. The Tribunal restored the issue to the Assessing Officer for reconsideration, allowing the assessee another opportunity to substantiate its claims.

2. Disallowance of Finance Expenses:
The Assessing Officer disallowed finance expenses of ?36,94,584/-, noting that the assessee invested in share application money in related parties while incurring finance expenses for business activities. The CIT(A) upheld this disallowance, stating the assessee failed to prove the investments were made from interest-free funds. The assessee contended that the finance charges consisted of normal bank charges and not interest on borrowals. The Tribunal found that these charges were regular bank charges and not related to borrowals. Consequently, the Tribunal set aside this issue to the Assessing Officer for fresh adjudication, ensuring the assessee is given adequate opportunity to present its case.

3. Treatment of Investment in Land as Unexplained Investment under Section 69:
The Assessing Officer treated the investment in land worth ?5,04,99,110/- as unexplained under Section 69, as the assessee could not satisfactorily explain the sources of funds. The assessee argued that the land purchase was recorded in the Books of Accounts, and the funds were sourced from adjustments involving a director's father-in-law. The Tribunal noted that Section 69 applies to investments not recorded in the Books of Accounts, and in this case, the purchase was recorded. The Tribunal cited the Orissa High Court's decision in Aurobindo Sanitary Stores v. CIT, emphasizing that unexplained investments must be identified as such in the year they are made. The Tribunal found that the Assessing Officer did not properly examine the Books of Accounts or the timing of the transaction. Thus, the Tribunal restored this issue to the Assessing Officer for fresh examination, ensuring compliance with legal standards and providing the assessee an opportunity to explain the sources of investment.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with all issues being remanded to the Assessing Officer for fresh examination and adjudication in accordance with the law, after providing adequate opportunity for the assessee to present its case. The Tribunal emphasized the need for thorough examination and proper procedural adherence in the reassessment process.