2019 (3) TMI 1535 - AT - Income Tax

Disallowance on account of M.O. Commission paid and Cessation of liability u/s 41 - partially rejection of books - estimation of profit being 2% of total sales - trading Addition - HELD THAT - It is nowhere mentioned that the AO can reject the books of accounts partially. It is also an undisputed fact there was a single set of books of accounts maintained by the assessee. The income shown by the assessee in the instant case can be bifurcated without much effort i.e. trading business and the commission business. But when the issue comes to bifurcate the expenses which have been incurred combinedly for both the sources of income, we find that it is not easy rather impractical to bifurcate the expenses. Assessee did not earn commission income just by making any reference or it was not just the brokerage income earned by arranging a deal between two parties. The assessee to earn commission income has to put continuous efforts by employing a lot of resources of workforce, infrastructure facilities etc. Therefore, it can be inferred that the gross commission income does not represent its full income or major income. AO has treated all the expenses claimed by the assessee against the commission income. Thus the overall position shows that the assessee has to incur expenses against the commission income. We are of the view that the books of accounts of the assessee cannot be rejected partially. It is because the assessee incurred the expenses for it s both the activities and there were no separate books maintained by the assessee separately for it s both sources of income. Thus we are of the view that the books of accounts of the assessee cannot be rejected partially in the given facts & circumstances. However, if the books of the accounts are rejected then the income from both the sources needs to be estimated. As there is no dispute that both the sources of income of the assessee, as discussed in the preceding paragraph, cannot fetch the same rate of profit in the event of the rejection of the books of accounts. It is because the nature of both the sources of income is different and distinct from each other. Thus the question arises what should be the rate of profit in the case of commission business. For this purpose we deem it fit to restore this issue to the file of AO for fresh adjudication in the light of the above discussion and as per the provisions of law. Also find pertinent to direct the AO to estimate the income in respect of commission business at the gross commission income declared in the form 26AS as discussed above. The AO will not make any separate addition for the commission income directly paid by Binani Ltd to Shiv & Associates. Also direct that there will not be any separate addition under the provisions of section 41(1) of the Act as made by the AO in the assessment proceedings. It is because the assessee has not written off its liabilities in its books of accounts. Once the books got rejected, then there will not be any separate addition under section 41(1) of the Act. Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of M.O. Commission.
2. Rejection of books of account and estimation of income.
3. Addition on account of cessation of liability under Section 41(1) of the Income Tax Act.
4. Separate addition despite rejection of books of account.
5. Charging of interest under Section 234B of the Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Disallowance of M.O. Commission:
The first issue pertains to the disallowance of ?9,87,500/- as M.O. Commission. The assessee received commission from M/s. Binani Cement Co. Ltd. amounting to ?45,86,195/- but reported only ?35,98,695/- in its P&L account. The difference was explained as commission paid to M/s Shiv & Associates, which was adjusted against the commission income. The Assessing Officer (AO) disallowed this commission expense due to the failure of the assessee to provide sufficient details and evidence of business procured through Shiv & Associates, and due to the related party transaction not being disclosed under Section 40A(2)(b) of the Act.

2. Rejection of Books of Account and Estimation of Income:
The AO rejected the books of account of the assessee under Section 145(3) of the Act due to discrepancies and lack of quantitative details. The AO estimated the profit from the trading business at 2% of the turnover, resulting in an addition of ?5,39,692/- to the income. The assessee argued that the rejection was unjustified as all necessary details were provided, but the CIT(A) upheld the AO's decision.

3. Addition on Account of Cessation of Liability under Section 41(1):
The AO added ?12,72,990/- to the income of the assessee under Section 41(1) of the Act, treating it as cessation of liability. This was based on the confirmation from M/s Hans Ispat Ltd. showing NIL closing balance against the sundry creditors reported by the assessee. The CIT(A) confirmed this addition.

4. Separate Addition Despite Rejection of Books of Account:
The fourth issue raised by the assessee was that no separate additions should be made for commission expenses and cessation of liability once the books of account are rejected. The Tribunal agreed with the assessee, stating that once the books are rejected, the income should be estimated on a reasonable basis, and no separate additions should be made for these items.

5. Charging of Interest under Section 234B:
The CIT(A) confirmed the action of the AO in charging interest under Section 234B of the Act. However, this issue was not separately adjudicated by the Tribunal in detail as it was consequential to the main issues discussed.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The CIT(A) also confirmed the initiation of penalty proceedings under Section 271(1)(c) of the Act. Similar to the interest issue, this was not separately adjudicated by the Tribunal as it was consequential to the main issues.

Tribunal's Decision:
The Tribunal concluded that the books of account cannot be partially rejected. Since the assessee maintained a single set of books for both trading and commission income, the rejection of books should apply to both sources of income. The Tribunal directed the AO to estimate the income from both sources on a reasonable basis, considering the gross commission income declared in Form 26AS. The Tribunal also directed that no separate additions should be made under Section 41(1) of the Act or for commission expenses once the books are rejected. The appeal was partly allowed for statistical purposes, and the case was remanded to the AO for fresh adjudication in light of these directions.