2016 (9) TMI 1429 - AT - Income Tax

Tribunal Adjusts Profit Rate, Disallows Depreciation, Deletes Unexplained Liabilities

The Tribunal partially allowed both the assessee's and the revenue's appeals. It revised the net profit rate to 17%, upheld the disallowance of ... Rejecting the books of accounts - CIT-A confirming the net profit rate of 15% against the declared rate of 10.12% and net profit rate 29.52% estimated the ld. A.O. - Held that:- In the year 2005- 06, the turnover of gross contract receipts was ₹ 12102939/- and whereas gross receipts in the year was ₹ 34012026/-. Whereas the gross receipt in the A.Y. 2006-07 was ₹ 46441234/- . ₹ 46114965 is the gross contract receipts for the year 2004-05 and 2005-06, in our view, in fact the gross receipt of 2006-07 was ₹ 46441234/-. Thus, the gross receipts of 2006-07 is matching the gross receipts for the earlier two years. Therefore, to apply the NP rate for the year 2005-06 @ 29.52%, in our view, was not correct and therefore, a rational view is required to be taken estimating the profit of the assessee. The ends of justice would be served if the estimate of profit of the assessee is estimated at 17% subject to depreciation, interest and remuneration to the partners. Thus, the appeal of the assessee is dismissed and appeal of the revenue is partly allowed on this ground. Disallowing on account of depreciation - use of machinery in the assessment year under consideration - Held that:- AR has failed to point out the bill showing that it was purchased prior to 30/03/2006 and was put to use by the assessee in the year under consideration. Since the assessee has failed to produce any document showing the uses of machine in the assessment year under consideration, therefore, depreciation on the machine is disallowed. Accordingly, this ground of assessee appeal is dismissed. Addition of outstanding liabilities - Held that:- AO was not required to travel and examine the outstanding liabilities of wages which was specifically disallowed by the Assessing Officer in the earlier years and the order of the Assessing Officer was set aside after upholding the rejection of books and specific directions were issued to estimate the profit on the basis of the past history. Since the profit of the assessee has been estimated @ 17% of the turnover by the Tribunal hereinabove, that will take care of all the disallowances earlier made by the Assessing Officer in its assessment year and therefore, no specific addition should have been made by the Assessing Officer under the outstanding liability (wages payable), as the said adjudication by the Assessing Officer is beyond the scope of the remand proceedings - no hesitation to delete the addition made towards unexplained liability shown in the balance sheet. Moreover, the Assessing Officer has made the disallowances U/s 68 of the Act, in view of the judgment of the Hon’ble Jurisdictional High court in the case of CIT Vs. G.K. Contractor [ 2009 (1) TMI 840 - RAJASTHAN HIGH COURT], once the books are rejected and the income of the assessee is estimated, no separate addition can be made U/s 68 of the Act. - Decided in favour of assessee. Issues Involved:1. Rejection of books of accounts and estimation of net profit rate.2. Disallowance of depreciation.3. Addition of unexplained liabilities.Detailed Analysis:1. Rejection of Books of Accounts and Estimation of Net Profit Rate:The first issue pertains to the rejection of the books of accounts and the estimation of the net profit rate. The Assessing Officer (AO) observed discrepancies in the expenses and maintained consolidated expense accounts without proper bifurcation. Consequently, the AO estimated the net profit rate at 29.52%, based on the previous year's figures. The CIT(A) reduced this rate to 15%, considering the Tribunal's order for the assessment year (A.Y.) 2007-08, where a net profit rate of 11.5% was upheld. The Tribunal directed the AO to estimate the profit based on past results, which included a net profit rate of 9.89% for A.Y. 2004-05 and 29.52% for A.Y. 2005-06. The Tribunal concluded that the application of a 29.52% rate was incorrect and instead estimated the profit at 17%, subject to depreciation, interest, and remuneration to partners.2. Disallowance of Depreciation:The second issue involves the disallowance of depreciation amounting to Rs. 6,63,750/-. The AO found discrepancies in the purchase date of machinery and noted that the machine was put to use after 31/03/2006, as per the auditor's note. The CIT(A) upheld this disallowance. The assessee argued that the machinery was purchased on 30/03/2006 and was ready for use within the relevant previous year, citing legal precedents that allow depreciation for machinery ready for use. However, the Tribunal found that the assessee failed to produce documents showing the use of the machine within the assessment year and upheld the disallowance.3. Addition of Unexplained Liabilities:The third issue concerns the addition of unexplained liabilities amounting to Rs. 16,40,214/-. The AO disallowed this amount, citing discrepancies and lack of explanation from the assessee. The CIT(A) confirmed this addition, relying on various case laws that allow such additions even when books are rejected. The Tribunal found that the AO exceeded the remand jurisdiction set by the earlier Tribunal order, which directed the AO to estimate the profit based on past results. The Tribunal held that once the books are rejected and income is estimated, no separate addition can be made under Section 68 of the Act. Consequently, the Tribunal deleted the addition of Rs. 16,40,214/- towards unexplained liabilities.Conclusion:The Tribunal partly allowed both the assessee's and the revenue's appeals. It revised the net profit rate to 17%, upheld the disallowance of depreciation, and deleted the addition of unexplained liabilities, thus providing a balanced resolution to the issues at hand.