2018 (3) TMI 470 - AT - Income Tax

Tribunal Upholds CIT(A) Deletions, Emphasizes Income Estimation & Statutory Provisions

The Tribunal upheld the deletions made by the CIT (A) for various disallowances and additions, except for specific confirmations related to NBFC interest ... Disallowance of material expenses, labour expenses, vehicle expenses and telephone expenses rejection of books of accounts u/s 145(3) - Held that:- Once the books of accounts are rejected, the AO cannot make a disallowance of expenditure pertaining to the trading account if the estimation of income of assessee is based on GP rate. Even in case of net profit is taken as the basis of estimation, the scope of disallowance of other expenditure is also very limited. Therefore, in these facts and circumstances when the book results are rejected, the income of the assessee is required to be estimated either on the basis of GP or NP rate without allowing further expenditure. The provisions of section 44AD are relevant on this point which provides the estimation of profits from the business of civil contract as of the assessee before us. Thus the provisions of section 44AD can be taken as a guidance for estimation of the income of the assessee from the business of civil contract. Thus income of the assessee shall be computed by taking the NP @ 8% and no further deduction shall be allowed. Addition on account of interest on FDRs - CIT-A directed addition to be deleted and the interest shown by the appellant in the profit and loss account is directed to be treated as Income from other sources - Held that:- CIT (A) has considered the fact that the actual interest accrued during the year on FDRs has already been included in the total income of the assessee. This factual finding of the ld. CIT (A) has not been controverted before us by the department. Hence we do not find any error or illegality in the order of ld. CIT (A) qua this issue. Addition made under section 41(1) - CIT-A deleted the addition - Held that:- It is not disputed that in the books of account the assessee has shown the outstanding amount which is less than amount shown in the settlement letters. Accordingly the remission of liability under section 41(1) has to be considered as per the books of account and not as per the claim of the creditor. Hence we do not find any error or illegality in the order of ld. CIT (A) qua this issue, when the outstanding liability shown in the books of account of the assessee is not in dispute. Disallowance of House Rent Allowance - CIT-A allowed the claim - Held that:- When the nature of expenditure being house rent allowance paid to the employees has not been disputed, then the same is an allowable business expenditure and, therefore, we do not find any error or illegality in the order of ld. CIT (A) qua this issue. Disallowance of PF and ESI - Held that:- The payment was made by the assessee before the due date of filing of return under section 139 of the Act i.e. 31st October, 2010. See CIT vs. State Bank of Bikaner & Jaipur(2014 (5) TMI 222 - RAJASTHAN HIGH COURT) TDS u/s 194A - non deduction of tds on interest to ABN Amro Bank and two other financial institutions - Held that:- As far as the interest to ABN Amro Bank is concerned, there is no dispute that the interest paid is covered under section 194A(3)(iii) of the Act and, therefore, the assessee is not under obligation to deduct TDS against the interest to the bank. TDS u/s 194H - disallowance under section 40(a)(ia) in respect of Bank Guarantee Commission - Held that:- The commission on bank guarantee is not covered by the expression ‘commission or brokerage’ as envisaged in section 194H since the relationship between the assessee and the bank is not of principal- agent. Also, commission on bank guarantee is not covered by the Explanation (i) which gives an inclusive definition of the term ‘commission or brokerage’. Thus it is held that the appellant is not liable to deduct tax at source on commission on bank guarantee as per the provisions of section 194H. See Kotak Securities [2012 (2) TMI 77 - ITAT MUMBAI] Issues Involved:1. Disallowance of material expenses.2. Disallowance of labour expenses.3. Disallowance of vehicle expenses.4. Disallowance of telephone expenses.5. Addition of interest on FDRs.6. Addition under section 41(1).7. Disallowance of house rent.8. Disallowance of employee's contribution to PF & ESI.9. Disallowance under section 194A.10. Disallowance under section 194H.Detailed Analysis:1. Disallowance of Material Expenses:The AO disallowed 10% of material expenses due to defects in the books of accounts, which were rejected under section 145(3). The CIT (A) deleted the disallowance, and it was upheld by the Tribunal, stating that once books are rejected, income should be estimated using GP or NP rates without further disallowance of trading account expenses.2. Disallowance of Labour Expenses:Similar to material expenses, the AO disallowed 10% of labour expenses. The CIT (A) deleted this disallowance, and the Tribunal upheld the deletion, emphasizing that estimation of income should cover these expenses.3. Disallowance of Vehicle Expenses:The AO disallowed 20% of vehicle expenses. The CIT (A) deleted this disallowance, and the Tribunal upheld the deletion, reiterating the principle of estimating income without further disallowances once books are rejected.4. Disallowance of Telephone Expenses:The AO disallowed 10% of telephone expenses. The CIT (A) deleted this disallowance, and the Tribunal upheld the deletion, following the same reasoning as for vehicle expenses.5. Addition of Interest on FDRs:The AO added accrued interest on FDRs of Rs. 25,34,962/- to the total income. The CIT (A) deleted the addition, noting that the interest was already included in the total income. The Tribunal upheld this deletion, confirming that the actual interest accrued during the year was correctly accounted for by the assessee.6. Addition under Section 41(1):The AO added Rs. 4,44,645/- under section 41(1) for remission of liability. The CIT (A) deleted the addition, verifying that the figures in the books were accurate. The Tribunal upheld this deletion, stating that remission should be considered as per the books of account.7. Disallowance of House Rent:The AO disallowed house rent expenses of Rs. 98,400/-. The CIT (A) deleted the disallowance, recognizing it as an allowable business expenditure. The Tribunal upheld this deletion, as the nature of the expenditure was not disputed.8. Disallowance of Employee's Contribution to PF & ESI:The AO disallowed Rs. 38,590/- for delayed payment of PF & ESI. The CIT (A) deleted the disallowance, noting that payments were made before the due date for filing the return. The Tribunal upheld this deletion, citing precedents from the Rajasthan High Court.9. Disallowance under Section 194A:The AO disallowed Rs. 4,74,201/- for non-deduction of TDS on interest payments to NBFCs. The CIT (A) deleted the disallowance for interest paid to ABN Amro Bank but upheld it for NBFCs. The Tribunal upheld the CIT (A)'s decision, confirming that interest to the bank was exempt under section 194A(3)(iii).10. Disallowance under Section 194H:The AO disallowed Rs. 14,12,035/- for non-deduction of TDS on bank guarantee commission. The CIT (A) deleted the disallowance, stating that the bank guarantee commission is not covered under section 194H. The Tribunal upheld this deletion, referencing the Mumbai Tribunal's decision in Kotak Securities.Conclusion:The Tribunal's judgment addressed each issue raised by the revenue, upholding the deletions made by the CIT (A) for various disallowances and additions, except for specific confirmations related to NBFC interest payments. The judgment emphasized the principles of estimating income post-rejection of books and the correct application of statutory provisions for disallowances and deductions.