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2019 (10) TMI 773 - AT - Income TaxRejection of books of account and estimation of gross profit - HELD THAT - In the present case, basis of rejection of rejection of accounts by the Assessing Officer was totally erroneous and uncalled for. The Assessing Officer has not given any reason which would fall within the four corners of the ingredients as stipulated u/s. 145 (3) of the Act. Basis of making the addition on the basis of G.P. is also unsustainable, as making the GP addition on the basis of earlier year or future year is not called for when the rejection of books of account was found to be unsustainable. As in the present case, we do not agree with the finding of the lower authorities with respect to the rejection of books of account and in consequence thereof, we have no hesitation to hold that the GP rate of 16% is also erroneous and liable to be set aside. We may further mention that in the similar circumstances, the remand report was submitted by the Assessing Officer for the assessment year 2012-13 and the ld. CIT(A) had deleted the addition of ₹ 82.68 crores based on the remand report of the Assessing Officer. Books of Accounts maintained in regular course of business cannot be rejected unless there are strong and sufficient reasons to indicate that they are unreliable. In the present case, basis of rejection of rejection of accounts by the Assessing Officer was totally erroneous and uncalled for. The Assessing Officer has not given any reason which would fall within the four corners of the ingredients as stipulated u/s. 145 (3) of the Act. Basis of making the addition on the basis of G.P. is also unsustainable, as making the GP addition on the basis of earlier year or future year is not called for when the rejection of books of account was found to be unsustainable. As in the present case, we do not agree with the finding of the lower authorities with respect to the rejection of books of account and in consequence thereof, we have no hesitation to hold that the GP rate of 16% is also erroneous and liable to be set aside. We may further mention that in the similar circumstances, the remand report was submitted by the Assessing Officer for the assessment year 2012-13 and the ld. CIT(A) had deleted the addition of ₹ 82.68 crores based on the remand report of the Assessing Officer. Books of Accounts maintained in regular course of business cannot be rejected unless there are strong and sufficient reasons to indicate that they are unreliable. - Decided in favour of assessee. Disallowance of prior period expenses - HELD THAT - Income and expenditure are required to be taxed in the year in which it was accrued and if the income is considered to be accrued in the year under consideration, may be relating to the prior period, then any expenditure laid out or expanded wholly and exclusively for the purpose of business is also required to be allowed in this year. In the present case, if we look into the computation of income, then it is clear that the assessee has not taken into account the prior period expenses in computation of income. As the assessee has not taken into account the prior period expenses for the purpose of computation of income, then there was no reason for the Assessing Officer to make disallowance of ₹ 13,52,866/-. In view of the above, the ground raised by the assessee is allowed, as there is no occasion for the Assessing Officer to disallow the same being not arising and forming part of the profit loss account of the assessee. Notional rental income - rent was payable by GIL on account of machines let out by the assessee and the said machines were given to GIL after taking consent from the Financial Institution to whom the machines were hypothecated - HELD THAT - When we look into the record, it is clear that the assessee has let out the machines on lease to GIL and the GIL was under legal obligation to pay yearly rent of ₹ 29.11 lacs. In our considered opinion, there is an obligation of GIL to pay rent to the assessee in terms of lease agreement and further it was under obligation to return back the assets leased to it by the assessee. Further the GIL while entering into amicable settlement had paid an amount of ₹ 2.60 crores towards the value of machines as well as for pending rent which clearly shows that the rental income of the assessee was not a hypothetical or imaginary income, but had accrued on account of use of industrial plant by GIL . Therefore, there was no error in the orders of the authorities below. Disallowance of claim of deferred revenue expenses in respect of payment made to financial institution on restructuring of loans - AO considered the disallowance on the ground that deferred revenue expenses are only allowable in terms of provisions of section 35D and the payment made to financial institution is covered u/s 43B - HELD THAT - It is an undisputed fact that the identical claim of assessee, in the similar facts and circumstances of the case, has been accepted by the Revenue authorities since 2002- 03 onwards. There is no rebuttal of the fact stated by the assessee that the impugned deferred revenue expenses are relatable to expenses actually incurred and apportioned over the period of loan. In view of the above and following the rule of consistency, we are of the opinion that the ld. authorities below were not justified in disallowing the claim of the assessee. Accordingly, the disallowance made on this count is liable to be deleted.
Issues Involved:
1. Ex-parte appellate order by CIT(A) 2. Rejection of books of account and estimation of gross profit 3. Addition of notional gain on foreign currency 4. Disallowance of prior period expenses and taxing prior period income 5. Addition of notional income on account of rent of machines 6. Disallowance of deferred revenue expenses 7. Loss on merger of companies 8. Incorrect credit of TDS 9. Arbitrary observations and conclusions by AO and CIT(A) 10. Levy of interest under section 234B & 234C 11. Order contrary to facts, law, and principles of natural justice Detailed Analysis: 1. Ex-parte Appellate Order by CIT(A) The assessee contended that the CIT(A) erred in passing an ex-parte order without due consideration of material facts available on record. The tribunal found that the CIT(A) had provided opportunities to the appellant to present their case, but no substantial evidence or documents were submitted to counter the AO's findings. Thus, the tribunal upheld the CIT(A)'s decision. 2. Rejection of Books of Account and Estimation of Gross Profit The AO rejected the books of account under section 145(3) and estimated the gross profit at 16% against the disclosed 13.96%. The tribunal observed that the AO did not point out specific defects in the books of account or show that the accounting standards were not followed. The tribunal noted that the AO's reasons, such as increased raw material prices and decreased sale prices, were not supported by independent evidence. The tribunal concluded that the rejection of books was an excessive use of power and set aside the AO's estimation of gross profit. 3. Addition of Notional Gain on Foreign Currency This ground was not pressed by the appellant and hence, no detailed analysis was provided. 4. Disallowance of Prior Period Expenses and Taxing Prior Period Income The AO disallowed prior period expenses amounting to ?13,52,866/-. The tribunal noted that the assessee did not claim these expenses in the computation of income. The CIT(A) had directed the AO to verify if any prior period income was taxed in the current year and exclude it if found. The tribunal agreed with the CIT(A) that income and expenses should be accounted for in the year they accrue. Since the assessee did not include prior period expenses in their computation, the tribunal allowed this ground in favor of the assessee. 5. Addition of Notional Income on Account of Rent of Machines The AO added ?29,11,000/- as notional rent, which the assessee claimed was not realizable due to a dispute with the lessee, GIL, and ongoing litigation. The tribunal noted that the assessee followed the mercantile system of accounting, which requires income to be recognized on accrual basis. The tribunal found that the settlement with GIL included rent charges, indicating that the rental income was not hypothetical. Therefore, the tribunal upheld the AO's addition of notional rent. 6. Disallowance of Deferred Revenue Expenses The AO disallowed ?19,67,582/- claimed as deferred revenue expenses. The tribunal observed that the assessee had been consistently allowed such claims in previous years. The tribunal found no change in facts or circumstances to justify the disallowance and emphasized the principle of consistency. Thus, the tribunal deleted the disallowance. 7. Loss on Merger of Companies The tribunal did not provide a detailed analysis for this ground, indicating it was either not pressed or not relevant to the decision. 8. Incorrect Credit of TDS The tribunal did not provide a detailed analysis for this ground, indicating it was either not pressed or not relevant to the decision. 9. Arbitrary Observations and Conclusions by AO and CIT(A) The tribunal found that the AO and CIT(A) made various observations and conclusions without substantial evidence. The tribunal emphasized that the AO must provide specific reasons and evidence for rejecting books of account and making additions. The tribunal found the AO's actions arbitrary and unsustainable. 10. Levy of Interest Under Section 234B & 234C The tribunal did not provide a detailed analysis for this ground, indicating it was either not pressed or not relevant to the decision. 11. Order Contrary to Facts, Law, and Principles of Natural Justice The tribunal found that the AO's and CIT(A)'s orders were contrary to facts and law, particularly in the rejection of books of account and estimation of gross profit. The tribunal emphasized the need for adherence to accounting standards and principles of natural justice. Conclusion: The tribunal allowed the appeal partly, setting aside the rejection of books of account and the estimation of gross profit, disallowance of prior period expenses, and disallowance of deferred revenue expenses, while upholding the addition of notional rent.
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