2015 (10) TMI 2017 - AT - Income Tax

Tribunal adjusts total income based on issues, assessee's appeals partly allowed, revenue's appeals dismissed.

The Tribunal directed the Assessing Officer to compute the total income for all years based on its decisions on various issues. If the computed income is ... Rejection of books of account - Estimation of profit & assessment of income surrendered by the assessee separately - unauthorized payment - Held that:- In the instant case, we are of the view that the trade practice prevailing in this trade and also the manner of maintenance of vouchers regarding payments made towards various expenses would constitute sufficient material to disturb the earlier year’s assessments also, which were not pending on the date of initiation of search. Accordingly, we do not find merit in the contentions of the assessee and accordingly, reject the same. In view of the admission of the partner of the firm that he has been following same practice in the earlier years also, one has to presume that the defects noticed in the maintenance of books in AY 2008-09 to 2010-11 were also prevailing in the earlier years also. Accordingly, we are of the view that there is no infirmity in the order of Ld CIT(A) in confirming rejection of books of account for all the years under consideration. The net profit rate of 5% and 7% estimated by the Ld CIT(A) for the years under consideration also appears to be high, when we consider the rate of net profit declared by the assessee. At the time of hearing, the Ld Counsel submitted that the deficiencies, if any, is automatically made good by the assessee by offering additional income in AY 2008-09 to 2010-11. Accordingly he submitted that the net profit rate declared by the assessee should have been accepted for the earlier years. However, the said contentions cannot be accepted, since we have upheld the rejection of book results and hence the net profit is required to be estimated. However, in view of the foregoing discussions, we are of the view that the rate of net profit should be determined by considering the net profit rate declared by the assessee for the earlier years, which shall be modified to take care of or to cover up the deficiencies. From the chart furnished by the assessee, we notice that the rate of net profit declared by the assessee before partners’ remuneration and interest work out to 1.46%, 3%, 3.46% and 6.83% respectively for AY 2004-05, 2005-06, 2006-07 and 2007-08. Accordingly, in our view, the rate of net profit may be adopted @ 2.5%, 3.5%, 4% and 7% respectively for AY 2004-05, 2005-06, 2006-07 and 2007-08. Rejection of claim for deduction of depreciation - Held that:- The capital expenditure incurred is not allowed as deduction, but the deterioration in their value is allowed as deduction with the name “depreciation”. Hence, it is called non-cash expenditure and also called statutory deduction. While estimating the income, the trading results only are estimated on the basis of sales/gross receipts, meaning thereby, what is estimated is only the net profit before allowing any non-cash expenditure/statutory deductions. Further, the quantum of depreciation would also depend upon the value of assets. Even if the level of operations and other things are equal between the two, the depreciation amount will be different due to the difference in the value of assets. Hence the total income shall also result in different figures between the two business men. The above said illustration would support the contentions of the assessee that the depreciation should be allowed separately. Accordingly, we direct the AO to allow the depreciation admissible to the assessee against the income estimated by us in the preceding paragraphs. Next contention of the assessee that it was using its vehicles for transport purposes and hence the vehicles are entitled for higher rate of depreciation. Since the contentions urged by the assessee require factual verification, we set aside this issue to the file of the AO, who shall examine the claim of the assessee afresh and shall take appropriate decision in accordance with the law. Deduction for remuneration and interest payable to the partners - Held that:- As from the Statement of facts filed by the assessee before the Ld CIT(A), we notice that the assessing officer has assessed the remuneration and interest in the hands of the partners, even though it was not allowed as deduction in the hands of the assessee firm. Under these set of facts, we do not find any infirmity in the decision of Ld CIT(A) in directing the AO to allow the deduction for remuneration and interest payable to the partners. Issues Involved:1. Rejection of books of account.2. Estimation of profit.3. Assessment of income surrendered by the assessee separately.4. Rejection of claim for deduction of depreciation.5. Claim for higher rate of depreciation on vehicles.6. Allowing deduction of remuneration and interest payable to partners.Issue-wise Detailed Analysis:1. Rejection of Books of Account:The Assessing Officer (AO) rejected the books of account maintained by the assessee under section 145(3) of the Income Tax Act, 1961, due to various discrepancies, including defective vouchers, unaccounted receipts, and unverifiable payments. The CIT(A) upheld the rejection, noting that the books were not reliable enough to give a true and correct picture of the business. The Tribunal agreed, stating that the deficiencies and discrepancies in the books of account were significant and that the partner's admission of following the same practices in earlier years justified the rejection.2. Estimation of Profit:The AO estimated the net profit from the business operations at varying percentages for different assessment years. The CIT(A) scaled down these percentages, taking into account the nature of the assessee's business and judicial precedents. The Tribunal further modified these percentages, considering the net profit rate declared by the assessee in earlier years and the fact that a significant portion of the gross receipts were reimbursements with a lower profit margin. The Tribunal adopted net profit rates of 2.5%, 3.5%, 4%, and 7% for the assessment years 2004-05 to 2007-08, respectively.3. Assessment of Income Surrendered by the Assessee Separately:The CIT(A) directed the AO to assess the additional income surrendered by the assessee separately from the estimated net profit. The Tribunal disagreed, stating that both the additional income and the estimated profit aimed to arrive at the correct amount of profits. Hence, the Tribunal held that the additional income should be telescoped against the net profit estimated, preventing double assessment of the same income.4. Rejection of Claim for Deduction of Depreciation:Both the AO and CIT(A) rejected the assessee's claim for depreciation. The Tribunal, however, found merit in the assessee's contention that depreciation is a statutory deduction and should be allowed separately. The Tribunal directed the AO to allow the admissible depreciation against the estimated income.5. Claim for Higher Rate of Depreciation on Vehicles:The assessee claimed a higher rate of depreciation on vehicles used for transport purposes. The Tribunal remanded this issue to the AO for factual verification and appropriate decision in accordance with the law.6. Allowing Deduction of Remuneration and Interest Payable to Partners:The CIT(A) allowed the deduction for remuneration and interest payable to partners, following judicial precedents that considered such deductions allowable against estimated income. The Tribunal upheld this decision, noting that the AO had assessed the remuneration and interest in the hands of the partners, even though it was not allowed as a deduction in the hands of the assessee firm.Conclusion:The Tribunal directed the AO to compute the total income for all the years under consideration based on the Tribunal's decisions on various issues. If the computed income for any year is less than the returned or already assessed income, the total income should be determined at the level of the returned or already assessed income. The appeals filed by the assessee were partly allowed, and the appeals of the revenue were dismissed.