2016 (4) TMI 659 - AT - Income Tax

Appeal success due to NP rate adjustment and book rejection in tax assessment

The appeal challenged the assessment order under section 143(3) due to lack of jurisdiction. The AO invoked section 145(3), rejecting books of account and ... Rejection of books of account under section 145(3) - computation of deemed net profit rate based on past history - application of net profit rate on estimation where books are rejected - treatment of interest on fixed deposits as income from other sources versus business receiptsRejection of books of account under section 145(3) - Rejection of the assessee's books of account under section 145(3) was upheld. - HELD THAT: - The Tribunal found that the assessee failed to produce the stock register and other documents despite opportunities, rendering qualitative verification of the books impossible. In those circumstances the Assessing Officer's invocation of section 145(3) and rejection of the books was sustained by the appellate authorities and is agreed with by the Tribunal. The authorities relied upon by the assessee were held not to apply to the facts of the present case.Books of account rejected under section 145(3) are upheld.Computation of deemed net profit rate based on past history - application of net profit rate on estimation where books are rejected - The net profit rate to be applied for estimation was fixed at 6% (subject to deduction of depreciation and interest paid to third parties). - HELD THAT: - The Assessing Officer applied an 8.5% net profit rate based on an earlier assessment year; the CIT(A) had confirmed that rate. Having regard to the decision of the Jurisdictional High Court that where section 145(3) is invoked the AO must bring concrete material to justify the net profit rate adopted, and in the absence of a sufficient basis to sustain 8.5% instead of the assessee's declared 5.92%, the Tribunal exercised its discretion to moderate the estimate. The Tribunal noted the books were rightly rejected but, on the available material and relevant authority, restricted the net profit rate to 6% subject to the allowed deductions of depreciation and interest paid to third parties.Net profit rate adopted for assessment reduced to 6% subject to depreciation and third party interest deductions.Treatment of interest on fixed deposits as income from other sources versus business receipts - Interest earned on fixed deposits (FDRs) was correctly treated as income from other sources by the AO and CIT(A). - HELD THAT: - The Tribunal agreed with the reasoning of the lower authorities that the interest on FDRs was shown separately in the assessee's profit and loss account and net of expenditure already claimed; even if FDRs were obtained for business purposes, such interest does not form part of contract receipts and is properly taxable as income from other sources. Accordingly the separate addition of the FDR interest was maintained.Treatment of FDR interest as income from other sources is upheld.Final Conclusion: The appeal is partly allowed: the rejection of books under section 145(3) and the treatment of FDR interest as income from other sources are upheld, but the deemed net profit rate imposed for estimation is restricted to 6% subject to depreciation and interest to third parties. Issues:1. Jurisdiction of assessment order under section 143(3)2. Application of section 145(3) for trading addition3. Treatment of interest income from FDRs as business receipts4. Charging of interest under sections 234B, 234C, and 234DJurisdiction of assessment order under section 143(3):The appeal challenged the assessment order dated 05.12.2011, claiming it to be bad in law and jurisdiction. The appellant argued for its quashing due to lack of jurisdiction and other reasons. The appellant, a contractor in civil construction work, revised the income declaration for A.Y. 2009-10 to Rs. 1,25,99,660/-. The AO invoked section 145(3) due to low net profit rate after excluding interest income and rental income. The AO rejected the books of account, applying an 8.5% NP rate, leading to an addition of Rs. 10,72,520. The CIT (A) upheld the AO's decision, citing past history and rejecting the appeal.Application of section 145(3) for trading addition:The AO's application of an 8.5% NP rate, post rejection of books of account, was based on past history and upheld by the CIT (A). The appellant argued for deletion of the addition, citing a lower NP rate declared for a subsequent year. The Tribunal considered the absence of stock register and verified books, leading to the rejection of books of account and estimation of NP rate at 8.5%. However, the Tribunal restricted the NP rate to 6% due to lack of concrete evidence to support the higher rate.Treatment of interest income from FDRs as business receipts:The AO treated interest income from FDRs as income from other sources, separate from contract receipts, leading to a separate tax assessment. The CIT (A) supported this treatment, considering the expenses already claimed in the P&L account. The Tribunal upheld this decision, emphasizing the separate nature of FDR income from business receipts, leading to the confirmed addition.Charging of interest under sections 234B, 234C, and 234D:The appellant denied liability for interest charged under sections 234B, 234C, and 234D, arguing against its consequential nature. However, the Tribunal did not address this issue explicitly in the judgment, focusing mainly on the application of section 145(3) and the NP rate calculation. The appeal was partly allowed based on the NP rate adjustment and rejection of books of account.