2017 (11) TMI 314 - AT - Income Tax

Tribunal Ruling on Income Tax Notice Validity, Estimation of Income, Partnership Deed Provisions

The tribunal upheld the validity of the notice issued under section 153C of the Income Tax Act, finding it applicable to the assessee's partnership firm. ... Rejection of books of accounts and estimating the income - Held that:- The loose sheet belongs to the assessee and the contents in the loose sheets are true and correct. It is for the assessee to prove that if any entry recorded in the loose sheet is not correct. In this case, the assessee has not proved with tangible evidences. Though the assessee has stated that certain expenses are not recorded, he did not bring it to our notice the expenses said to be not recorded. Therefore, we hold that profit worked out by the assessee for the month of June 2007 is correct. The assessing officer estimated the yearly profit by multiplying ₹ 1,76,032/- the average monthly profit with 12 months for the assessment year 2008-09. The assessee did not furnish the true and correct financials before the AO with correct amount of sales and the profit. In the circumstances of non cooperation of the assessee the AO has no option except to estimate the profit. However the sales cannot be the same amount through the year. For the month of June 2007 the net profit was ₹ 1,37.602/- on total sales of ₹ 9,92,826/- which works out to 13.85% on total sales. Therefore we direct the AO to estimate the net profit on total sales of the assessee @13.85% for the A.Y-2008-09 or to adopt the profit admitted by the assessee whichever is higher. Accordingly this ground of appeal of the assessee is partly allowed. Depreciation, interest on partners’ capital and remuneration to partners - Held that:- No information is available with regard to the depreciation claimed by the assessee, Interest on partners capital and remuneration to partners from the assessment order. On verification of Form 35, it appears that the assessee has not raised this ground before the CIT (Appeals). However, unless the partnership deed permits the interest and remuneration it is not allowable deduction. The Ld.AR also did not place any evidence regarding the claim of interest and remuneration claimed by the partners in the Return of Income. Therefore, the assessee’s appeal on interest on partners capital and the remuneration is not tenable and dismissed. With regard to the depreciation, it is statutory allowance which required to be allowed by the assessing officer. It is seen from the loose sheets that while working the net profit for the month of June 2007, no depreciation was debited to the profit and loss account. Therefore, we direct the assessing officer to allow the depreciation as per the rules and allow the same from the income estimated as per the discussion made in the earlier paragraphs subject to providing the necessary evidences for the assets . This issue is allowed for statistical purpose. Unexplained cash credit in respect of Pushkara capital - source was not explained by the assessee during the course of survey - Held that:- It is settled issue that the assessee required to explain the source of cash credit made in the books of account with identity, capacity and the correctness of the entry with the tangible evidence. Though the assessee claimed that there was no such partner in the name of Pushkara, the assessee has shown the same as outstanding capital balance and also declared the matching assets. Therefore, the Ld.CIT(Appeals) upheld that the money does not come from mythical sources. Since the matching assets shown in the balance sheet, the money has come into the firm in the name of Pushkara, assessee is duty bound to explain the source with identification, genuineness and credit worthiness of the capital contributor. Since no explanation is forthcoming from the assessee, we hold that CIT (Appeals) has rightly confirmed the addition made by the assessing officer and the order of the CIT(Appeals) is upheld. Issues Involved:1. Validity of notice issued under section 153C of the Income Tax Act.2. Rejection of books of accounts and estimation of income.3. Depreciation, interest on partners' capital, and remuneration to partners.4. Unexplained cash credit in respect of Pushkara capital.Detailed Analysis:1. Validity of Notice Issued Under Section 153C of the Income Tax Act:The primary issue was whether the notice issued under section 153C was valid. A search under section 132 was conducted on the A.T. Rayudu Group, during which documents related to the assessee were found. The assessee argued that the notice was invalid as the documents did not belong to them. The documents were related to 'Supraja Baywatch Bar Restaurant,' not the assessee's firm 'Supraja Sandy Lane Bar & Restaurant.' The tribunal observed that both firms had the same partners with minor variations in profit-sharing ratios. Thus, the tribunal concluded that the seized material was related to the assessee's partnership firm, and the notice under section 153C was valid. However, it was noted that the assessment order did not reference the seized material for any additions, leading to the conclusion that the assessing officer wrongly invoked section 153C. Therefore, the tribunal set aside the orders passed by the lower authorities and allowed the appeal.2. Rejection of Books of Accounts and Estimation of Income:The second issue involved the rejection of the assessee's books of accounts and the estimation of income. During a survey under section 133A, loose sheets indicating higher profits were found. The assessing officer rejected the books of accounts and estimated the income based on these loose sheets. The assessee argued that the loose sheets were not reliable evidence. The tribunal noted that the sales recorded in the loose sheets matched the audited books of accounts for June 2007. The tribunal held that the loose sheets were valid evidence and directed the assessing officer to estimate the net profit based on the sales at 13.85% or adopt the profit admitted by the assessee, whichever was higher.3. Depreciation, Interest on Partners' Capital, and Remuneration to Partners:The assessee claimed depreciation, interest on partners' capital, and remuneration to partners. The tribunal noted that no information regarding these claims was available in the assessment order, and the assessee did not raise these issues before the CIT(A). The tribunal held that unless the partnership deed permits interest and remuneration, these cannot be allowable deductions. The tribunal directed the assessing officer to allow depreciation as per the rules, subject to the assessee providing necessary evidence for the assets.4. Unexplained Cash Credit in Respect of Pushkara Capital:The final issue was related to the unexplained cash credit in the Pushkara capital account. The assessing officer found a significant capital balance in the name of Pushkara, which the assessee failed to explain. The tribunal upheld the addition made by the assessing officer under section 68, agreeing with the CIT(A) that the money shown as a source was not pseudo and required explanation. The tribunal concluded that the assessee was duty-bound to explain the source of the capital contributor with tangible evidence, and in the absence of such explanation, the addition was justified.Conclusion:The tribunal allowed the appeal for the assessment year 2007-08 and partly allowed the appeal for the assessment year 2008-09, directing specific adjustments and confirmations based on the detailed analysis of each issue.