2022 (4) TMI 895 - AT - Income Tax

Rejection of books of account by applying the provisions of Sec. 145(3) - Computation of business income - applying n.p. rate of 8% on total receipts - HELD THAT - We found that cost of raw material as % of turnover has increased by around 3% for the reasons stated above. Finance cost as % of turnover has increased by around 5% which is mainly on account of increase in interest payment on loan taken from bank. Other expenses as % of turnover has increased by around 5% which is on account of the fact that Central Excise Commissionerate, Jaipur vide order dated 30.08.2013 raised demand of ₹ 26,74,240/- which was paid during the year and because of applicability of Works Contract Tax in the state of Haryana, the assessee has to pay WCT of ₹ 40,18,047/- during the year. For all these reasons the assessee suffered loss during the year which is fully verifiable. Hence, addition made by the AO and confirmed by Ld. CIT(A) by applying n.p. rate of 8% subject to depreciation is unjustified. Considering the totality of the facts and circumstances of the case as well as judicial precedents followed in this regard, we found merit in the contention of the assessee and we direct to delete the addition made and confirmed by the lower authorities as well as set aside the action with regard to rejection of books of account u/s 145(3) of the Act.- Decided in favour of assessee. Addition of interest income and miscellaneous receipts under the head income from other sources - HELD THAT - Assessee had shown interest income of ₹ 12,58,998/- on the FDR and miscellaneous receipts of ₹ 2,89,200/-. The AO assessed the same as income from other sources. The Ld. CIT(A) confirmed the action of AO. We found that the interest income earned on FDR is part of business income as FDRs were made for the purpose of business for giving bank guarantees to the awarder of contract. For this purpose assessee has to obtain the FDR from the bank which was pledged to it. From Note No.3.0 of the financial statements we noticed that the FDR of ₹ 1.98 crores has been pledged with the bank for obtaining the bank guarantee. Thus, interest on FDR is part of business income. Also, the FDR were made by utilizing the cash credit limit on which interest is paid to the bank and which forms part of the business expenditure. Thus, the interest income on such FDR which was earned out of the funds placed with the bank by utilizing the bank overdraft limit is to be considered as business income and not as income from other sources. Similarly, the miscellaneous receipts of ₹ 2,89,200/- is from sale of scrap and is part of business income. In earlier years also the same was considered as business income in the assessment made u/s 143(3) which are at page No. 18-25 of the paper book. Hence, the separate addition made by AO and confirmed by Ld. CIT(A) is unjustified. Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of account under Section 145(3) of the Income Tax Act, 1961.
2. Application of net profit rate of 8% on total receipts.
3. Addition of interest income and miscellaneous receipts under the head income from other sources.

Detailed Analysis:

1. Rejection of Books of Account:
The assessee maintained day-to-day books of accounts subject to statutory audit under the Companies Act, 2013, and tax audit under Section 44AB of the Income Tax Act, 1961. These books were supported by bills and vouchers, with no defects noted by the auditor or the Assessing Officer (AO). The AO's primary concern was the non-maintenance of a stock register, which led to the rejection of the books under Section 145(3). The Tribunal found that the nature of the business did not necessitate a stock register since materials were directly offloaded at the site and consumed, with unbilled work accounted for as work-in-progress (WIP). The Tribunal held that the rejection of books solely due to the absence of a stock register was unjustified, referencing several judicial precedents, including Malani Ramjivan Jagannath Vs. ACIT and CIT Vs. Smt. Poonam Rani, which supported the view that non-maintenance of a stock register alone does not justify the rejection of books of accounts.

2. Application of Net Profit Rate of 8%:
The AO applied a net profit (n.p.) rate of 8% on total receipts, resulting in assessed business income after depreciation of ?78,42,006, contrary to the declared net loss of ?68,43,810 by the assessee. The Tribunal noted that the increase in the cost of raw materials, finance costs, and other expenses justified the declared loss. It was observed that the cost of raw materials increased by around 3%, finance costs by 5%, and other expenses by 4%, due to factors like increased material costs and additional taxes. The Tribunal found the application of an 8% n.p. rate unjustified and directed the deletion of the addition made by the AO. Furthermore, the Tribunal emphasized that even if books are rejected and an n.p. rate is applied, depreciation and interest expenses should be allowed, referencing cases like CIT Vs. Jain Construction Company and CIT Vs. Bhawan Path Nirman (Bohra) and Co.

3. Addition of Interest Income and Miscellaneous Receipts:
The AO assessed interest income on FDRs and miscellaneous receipts as income from other sources. The Tribunal found that the FDRs were made for business purposes, specifically for obtaining bank guarantees required for contracts, and thus, the interest income should be considered business income. Similarly, miscellaneous receipts from the sale of scrap were part of business income. The Tribunal referenced judicial precedents, including ACIT vs. Gallium Equipment (P) Ltd., which supported the treatment of interest income from FDRs as business income when the FDRs were made for business purposes. Consequently, the Tribunal directed the deletion of the addition of ?15,48,198 made by the AO.

Conclusion:
The Tribunal allowed the appeal, directing the deletion of the additions made by the AO and setting aside the rejection of books of accounts under Section 145(3). The Tribunal's decision emphasized the importance of considering the nature of the business and the purpose of financial transactions in determining the correctness of books of accounts and the classification of income.