2015 (8) TMI 326 - AT - Income Tax

Tribunal decision: Assessee's appeal partly allowed, Revenue's cross-appeal dismissed.

The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's cross-appeal. The Tribunal upheld the First Appellate Authority's decisions ... Annual Letting Value - related-party rent scrutiny - adoption of comparable market rent - bogus purchases and bogus sales - unexplained cash credit under section 68 - deduction of interest under section 24(b) - rejection of books and estimation of income by applying deemed gross profit rateAnnual Letting Value - related-party rent scrutiny - adoption of comparable market rent - ALV of two industrial galas for computing income from house property. - HELD THAT: - The Assessing Officer had adopted a much higher figure based on his enquiries, while the CIT(A) accepted information supplied by the society showing prevailing rents in the same building and fixed the ALV at Rs. 16 per sq. ft. per month. The Tribunal found that the CIT(A) relied on cogent material (rent agreements and society information) and correctly applied the principle that where a property is let to a related concern the AO may probe the true rent but must base any estimate on reliable comparables; municipal rateable value was not established on record and therefore could not be given primacy. Accordingly the ALV adopted by CIT(A) was upheld. [Paras 5]Income from rent of the two galas is to be charged at Rs. 16 per sq. ft. per month, total rental income Rs. 312960, and the findings of the CIT(A) are upheld.Bogus purchases and bogus sales - Genuineness of purchases from M/s Keshav Enterprises and M/s Narayani Textiles and sales to M/s Supreme Agencies, Samudra Polycoats, G L Investments & Joshi Advertising. - HELD THAT: - The assessee, a trader, bore the primary onus to establish genuineness of transactions. Only ledger entries and invoices were furnished; no delivery challans, proof of movement of goods, counterpart tax returns, bank statements or other corroborative material were produced. Ledger particulars indicated large year end transactions without adequate supporting evidence. The Tribunal agreed with the Authorities below that the assessee failed to discharge the onus and that the purchases (Rs. 915,564) and sales (Rs. 1,605,440) were rightly treated as bogus and added to income. The Tribunal directed that the amount treated as income from bogus sales be adjusted against sales in the return to avoid double taxation. [Paras 8]Purchases of Rs. 915,564 and sales of Rs. 1,605,440 are to be treated as bogus and added to the assessee's income; the bogus sales amount is to be reduced from declared sales to avoid double taxation.Unexplained cash credit under section 68 - Whether an addition of Rs. 988,000 as unexplained cash credit under section 68 is distinct from and may be sustained separately to the bogus sales addition. - HELD THAT: - It was not clear on the record whether the impugned addition under section 68 corresponds to the same amounts already treated as bogus sales to certain parties. The Tribunal observed that if the section 68 addition duplicates the treatment of the same receipts as bogus sales, double addition would result. Accordingly the matter was set aside to the file of the Assessing Officer to verify whether the section 68 addition is the same as the bogus sales addition; if so, the addition should be deleted. [Paras 11]Addition of Rs. 988,000 under section 68 is set aside and the matter remanded to the Assessing Officer for verification; if it is the same amount already treated as bogus sales, the addition shall be deleted.Deduction of interest under section 24(b) - Allowability of interest claimed as deduction under section 24(b) where the loan has been classified as NPA and interest has not been actually paid. - HELD THAT: - Although interest liability had accrued on borrowings for purchase of the galas, the records before the Tribunal did not clarify the quantum of interest payable nor the specific property in respect of which deduction was claimed. The Tribunal noted that section 24(b) permits deduction for interest payable on borrowing for a house property, but factual verification is necessary where the loan is NPA and interest has not been paid. Consequently the issue was restored to the Assessing Officer to verify the quantum of interest payable and the property to which the claim relates before allowing any deduction. [Paras 15]Claim for deduction of interest under section 24(b) is remitted to the Assessing Officer for verification of quantum and the property concerned before admission of the deduction.Rejection of books and estimation of income by applying deemed gross profit rate - Validity of the Assessing Officer's rejection of books and estimation of gross profit at 5% despite making specific additions. - HELD THAT: - The CIT(A) observed that where the AO has made specific additions on account of discrepancies, simultaneously rejecting books and making an adhoc computation by applying a flat gross profit rate is not justified. The Tribunal found no error in the CIT(A)'s approach of not sustaining the AO's adhoc 5% estimation once specific adjustments had been made, and accordingly affirmed the CIT(A)'s conclusion. [Paras 16]The CIT(A)'s disallowance of the AO's adhoc 5% gross profit estimation is affirmed and the Revenue's cross-objection on this point fails.Final Conclusion: The assessee's appeal is partly allowed: the ALV is sustained at Rs. 312,960 and the CIT(A)'s disallowance of the AO's adhoc 5% GP estimation is upheld; additions treating specified purchases and sales as bogus are upheld subject to adjustment of the bogus sales figure against declared sales. The addition under section 68 (Rs. 988,000) and the claim for interest deduction under section 24(b) are remanded to the Assessing Officer for verification. Issues Involved:1. Estimation of rental income.2. Treatment of purchases as bogus.3. Treatment of sales as bogus.4. Treatment of unexplained cash credit under Section 68.5. Deduction of interest under Section 24(b).6. Rejection of financial results and estimation of gross profit.Issue-wise Detailed Analysis:1. Estimation of Rental Income:The assessee rented out two industrial units to a related party, M/s Ashpura Garments Private Limited, at Rs. 9,500 per month. The Assessing Officer (AO) determined the fair rental value to be Rs. 1,20,000 per month based on prevailing rates in the area, leading to an annual value of Rs. 14,40,000. The First Appellate Authority (FAA) adjusted this to Rs. 3,12,960 using a rate of Rs. 16 per square foot per month, derived from comparable rents in the same building. The Tribunal upheld the FAA's decision, noting the AO's lack of evidence to support a higher rental value and the FAA's reliance on cogent material from the society where the units were located. The Tribunal cited the case of CIT vs. Tip Top Typography, emphasizing the need for cogent material to disregard municipal rateable values.2. Treatment of Purchases as Bogus:The AO treated purchases worth Rs. 9,15,564 from M/s Keshav Enterprises and M/s Narayani Textiles as bogus due to the lack of supporting documents such as delivery challans and bank statements. The FAA upheld this, adding the amount to the assessee's income. The Tribunal agreed, noting the assessee's failure to provide substantial evidence to validate the purchases, thus affirming the FAA's decision.3. Treatment of Sales as Bogus:Similar to the purchases, sales amounting to Rs. 16,05,440 to M/s Supreme Agencies, Samudra Polycoats, G L Investments, and Joshi Advertising were deemed bogus by the AO. The FAA upheld this, treating the sales as unexplained credits under Section 68. The Tribunal concurred, highlighting the lack of evidence such as delivery challans and VAT returns to substantiate the sales. It was ordered that the bogus sales amount should be reduced from the total sales to avoid double taxation.4. Treatment of Unexplained Cash Credit under Section 68:The FAA treated Rs. 9,88,000 as unexplained cash credit, which the assessee claimed was part of the bogus sales already added to income. The Tribunal remanded this issue to the AO to verify if the amount was indeed the same as the bogus sales. If confirmed, the addition would be deleted to prevent double taxation.5. Deduction of Interest under Section 24(b):The assessee claimed a deduction of Rs. 1,99,302 as interest on a loan from Abhudaya Co-operative Bank Limited for purchasing the rented units. The AO disallowed this, stating the loan had become a Non-Performing Asset (NPA) and no interest was paid. The Tribunal admitted this additional ground and remanded the issue to the AO to verify the interest payable and the property related to the claim before allowing the deduction under Section 24(b).6. Rejection of Financial Results and Estimation of Gross Profit:The AO rejected the assessee's books of accounts and estimated a gross profit rate of 5% of the total turnover. The FAA found this unjustified as specific additions for discrepancies were already made. The Tribunal upheld the FAA's view, stating that specific additions and gross profit estimation cannot be done simultaneously.Conclusion:The appeal of the assessee was partly allowed, and the cross-appeal of the Revenue was dismissed. The Tribunal upheld the FAA's decisions on rental income, bogus purchases, bogus sales, and the rejection of financial results while remanding the issues of unexplained cash credit and interest deduction for further verification by the AO.