2018 (11) TMI 1541 - AT - Income Tax

N.P. determination - assessee is a Partnership Firm, engaged in the business of civil construction - assessee is a Partnership Firm, engaged in the business of civil construction - Held that - neither the authorities below has specified circumstances under which it could have been presumed that the reported rate of profit is low nor has cited any comparable case, in support, for application of high profit rate on gross total receipt - neither the authorities below has specified circumstances under which it could have been presumed that the reported rate of profit is low nor has cited any comparable case, in support, for application of high profit rate on gross total receipt. There is a consistency in judicial opinion that after rejection of books of accounts, income is to be computed after due consideration of the past history of the assessee. We find that the authorities below were in gross ignorance determining NP rate without consideration of the past history of the appellant and without any instance of some comparable case on identical facts in applying profit rate of 8%, in the case of the assessee - it would be just, fair and reasonable to estimate the income of the assessee at the Net Profit rate of 5.75% of the gross total receipts of ₹ 15,26,42,919/- as adopted by CIT(A) for the year under appeal. Thus, the assessee gets relief of 2.25% in estimation of profit rate on the gross total receipts, as against the 8% net profit rate estimated by the Authorities below. - Decided partly in favour of assessee Addition u/s 41 - outstanding liability in the accounts of trade creditors appearing as payable in the Balance Sheet - Held that - CIT(A) had not brought anything on record to prove that any amount or benefit had been obtained by the appellant during the year under consideration against liabilities which is allegedly ceased to exist moreso when no such specific allowance in respect of material purchased was allowed in present assessment where income was initially and finally upto this stage is arrived after application of flat rate of profit. It is also an established proposition of law that onus is on the revenue to establish that any benefit has accrued to the appellant against alleged liabilities during the year under consideration. In the light of the provisions of section 41(1) of the Act and the Judgment of Hon ble Apex Court in the case of Kesaria Tea Company 2002 (3) TMI 1 - SUPREME COURT and CIT Vs Sugauli Sugar 1999 (2) TMI 5 - SUPREME COURT , we hold that the action of the Ld CIT(A) in making addition is unsustainable on facts and in law. Therefore, addition of ₹ is deleted. - Decided in favour of assessee Disallowing statutory claim of Depreciation - Held that - Claim of Depreciation has already been taken care while applying N.P rate of 6% and therefore, no further allowance is called for. Thus Ground is rejected. Separate addition against Income Tax refund - Held that - During the course of hearing the Counsel of the assessee fairly conceded that this represents Interest on Income Tax Refund, which is liable for addition. We therefore, confirm the addition. Separate addition towards amounts received as Trade Tax Refund - Held that - We find that VAT has been deducted by various Departments on contract payment and the assessee has claimed debit of ₹ 46,08,996/- against VAT paid. Correspondingly assessee has received Refund of Trade Tax amounting to ₹ 13,88,945/-. Since, no specific deduction has been allowed in respect of VAT paid and being deducted by various Department on the same analogy, Trade Tax Refund cannot be separately added. - Decided in favour of assessee Penalty u/s 271(1)(c) - Held that - Since, the basis for imposition of penalty was the addition of ₹ 90,33,414/- being the alleged unverifiable sundry creditors, which is stood deleted in quantum appeal as above,therefore, the consequential penalty levied u/s 271(1)(c) by the CIT(A) would not survive and as such deleted.

Issues Involved:
1. Application of net profit rate without considering past history.
2. Enhancement and addition under section 41(1) for cessation of liability.
3. Disallowance of statutory depreciation claim.
4. Addition of Income Tax refund.
5. Addition of Trade Tax refund.
6. Imposition of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Application of Net Profit Rate:
The assessee argued that the CIT(A) erred in applying an 8% net profit rate without considering the past history. The Tribunal noted that the books of accounts were rejected under Section 145(3) and upheld this rejection. However, the authorities did not provide a basis for the 8% rate and ignored past profit rates, which were consistently around 5.65%. The Tribunal found that applying an 8% rate was unreasonable and reduced it to 5.75%, considering the past history and judicial precedents.

2. Enhancement and Addition under Section 41(1) for Cessation of Liability:
The CIT(A) enhanced the income by ?90,33,414/- under Section 41(1), assuming cessation of liability since only 6 out of 33 creditors confirmed their balances. The Tribunal held that mere non-response from creditors does not prove cessation of liability. The assessee showed that part of the liability was paid in subsequent years, and no benefit was derived during the assessment year. The Tribunal relied on precedents like 'CIT v. Sugauli Sugar Works (P) Ltd.' and 'CCIT v. Kesaria Tea Co. Ltd.' to conclude that the conditions for applying Section 41(1) were not met, and the addition was deleted.

3. Disallowance of Statutory Depreciation Claim:
The CIT(A) withdrew the depreciation claim of ?33,89,415/-. The Tribunal noted that the net profit rate applied already accounted for depreciation, and thus, no further allowance was needed. This ground was rejected.

4. Addition of Income Tax Refund:
The assessee conceded that the amount of ?1,98,983/- represented interest on an Income Tax refund, which is taxable. The Tribunal confirmed this addition.

5. Addition of Trade Tax Refund:
The CIT(A) added ?13,88,945/- received as Trade Tax refund. The Tribunal found that since VAT was deducted and no specific deduction was allowed for VAT paid, the refund should not be added separately. This ground was allowed.

6. Imposition of Penalty under Section 271(1)(c):
The CIT(A) imposed a penalty of ?27,91,325/- based on the addition of ?90,33,414/-. Since the Tribunal deleted this addition, the basis for the penalty no longer existed. Consequently, the penalty was deleted.

Conclusion:
The Tribunal partly allowed the appeal regarding the net profit rate and Trade Tax refund, deleted the addition under Section 41(1), and confirmed the addition of the Income Tax refund. The penalty appeal was allowed, resulting in the deletion of the imposed penalty.

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