2025 (10) TMI 526 - AT - Income Tax

Tribunal rejects section 68 characterization, upholds 8% gross profit estimate, allows partners' remuneration under s.40(b) with recomputation directions

ITAT, DELHI-AT rejected the Revenue's characterization of the twin additions as unexplained cash credit under s.68, holding there was no discussion ... Twin additions of GP estimation @ 8% on gross receipts - addition u/s 68 after rejecting books of account - HELD THAT:- We conclude that there is no such discussion treating the sum total of the twin addition as unexplained cash credit. We accordingly see no reason to accept the same which is hereby rejected. Estimating 8% gross profit in civil contractor business after rejecting it’s books - We note that the assessee has not been able to explain it’s alleged audited book result all along either in the course of assessment or in the lower appellate proceedings. We thus see no reason to disturb the learned lower authorities findings estimating the impugned GP in assessee’s case @8% after rejecting it’s books. Rejected accordingly. Partners remuneration adopted in the P&L account - All what the Revenue has argued in light of the assessment discussion is that the assessee has been treated as an AOP. We are of the considered view that given the fact that the assessee all along is getting assessed as a partnership firm even in the assessment order, there is no basis for the learned revenue authorities to deny the statutory benefits of partners interest remuneration u/s 40(b) of the Act. We thus find merit in the assessee’s instant last substantive ground which is hereby allowed. Necessary computation shall follow as per law. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessment framed under section 144 of the Income Tax Act by estimating gross profit at 8% on gross receipts after rejecting books of account is sustainable. 2. Whether an addition under section 68 for unexplained cash credit was made or sustainble on the record. 3. Whether partners' interest and remuneration debited in profit & loss account are allowable deductions under section 40(b) despite assessment having been completed under section 144 and books being rejected. 4. Whether delay in filing the appeal should be condoned (administrative/procedural issue considered by the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of section 144 assessment estimating gross profit at 8% after rejection of books Legal framework: Assessment under section 144 permits the Assessing Officer to make best judgment assessment where the assessee fails to attend or produce evidence; rejecting books of account for lack of proof permits the AO to estimate income. Precedent treatment: No specific precedents were cited or considered by the Tribunal in the text; the Tribunal proceeded on established statutory principles governing best judgment assessments and rejection of books. Interpretation and reasoning: The Tribunal noted that the assessee failed to explain or substantiate the audited book results either before the AO or during appellate proceedings. Given the assessee's non-appearance and failure to produce books or evidence, the AO's exercise of estimating gross profit at 8% on gross receipts was an exercise of the statutory power under section 144 and was founded on the rejection of books. The Tribunal found no material on record to disturb the AO's estimation. Ratio vs. Obiter: Ratio - Where an assessee does not produce or explain books of account and fails to attend proceedings, an AO's best judgment estimate of gross profit (here 8%) on gross receipts after rejecting books is sustainable if supported by absence of explanation/evidence. (Obiter - absent.) Conclusion: The Tribunal upheld the section 144 assessment estimating gross profit at 8% and rejected the challenge to that estimation. Issue 2: Alleged addition under section 68 (unexplained cash credit) Legal framework: Section 68 deals with unexplained cash credits; addition under that provision requires that a sum appearing as a credit in books be unexplained on the basis of evidence presented. Precedent treatment: No precedents were invoked or distinguished; the Tribunal examined the assessments and orders for presence of such addition. Interpretation and reasoning: On review of the assessment order and the impugned additions, the Tribunal observed that the AO's two primary additions were for estimated gross profit (8%) and disallowance of partners' remuneration; there was no discussion or treatment equating those twin additions to an addition under section 68. The Tribunal therefore concluded that no section 68 addition was made and that the assessee's ground challenging a section 68 addition had no antecedent in the record. Ratio vs. Obiter: Ratio - A ground challenging an addition under section 68 must be entertained only where the assessment order actually records an addition under section 68; absent such recording, the ground is misconceived. (Obiter - none.) Conclusion: The Tribunal rejected the contention that an addition under section 68 was made; the plea was not accepted. Issue 3: Allowability of partners' interest and remuneration under section 40(b) despite rejection of books and section 144 assessment Legal framework: Section 40(b) governs allowance of partners' remuneration and interest to the extent allowable under the partnership deed and the provisions of law; in assessments where the assessee is a partnership firm, such payments may be allowable if properly claimed and supported. Precedent treatment: The Tribunal did not cite or rely upon specific case law; it applied statutory principles concerning treatment of partnership firms and section 40(b) allowances. Interpretation and reasoning: The AO disallowed partners' remuneration (and interest) after treating the assessee as an AOP in the assessment discussion. The Tribunal observed that throughout proceedings the assessee had been assessed as a partnership firm (including in the assessment order itself) and that the partnership deed provided for interest and remuneration (with terms described in the deed). Given that status, there was no basis for denying statutory benefits under section 40(b). The Tribunal distinguished the AO's approach of treating the entity as an AOP and rejected it as a basis for disallowance of remuneration and interest where the firm status and partnership deed supported such payments. The Tribunal directed recalculation as per law, allowing the partners' remuneration/interest in accordance with section 40(b). Ratio vs. Obiter: Ratio - When an assessee is assessed as a partnership firm and the partnership deed provides for partners' interest and remuneration, statutory allowances under section 40(b) cannot be denied merely because books were rejected or an AO adopts an AOP characterization without basis; such payments are allowable subject to the statutory tests. (Obiter - comments on procedural fairness and natural justice in ex parte proceedings.) Conclusion: The Tribunal allowed the partners' remuneration and interest claimed in the profit & loss account and directed recomputation in accordance with law. Issue 4: Condonation of delay in filing appeal Legal framework: Delay in filing appeals can be condoned by the Tribunal upon satisfaction of sufficient cause under the relevant appellate provisions. Precedent treatment: No precedents were discussed; the Tribunal applied the discretionary power to condone delay on the facts. Interpretation and reasoning: The Tribunal accepted the assessee's explanation attributing the 172-day delay to circumstances beyond control and condoned the delay accordingly. Ratio vs. Obiter: Ratio - Delay may be condoned where the assessee furnishes a plausible explanation showing circumstances beyond its control; exercise of discretion is factual. (Obiter - none.) Conclusion: The Tribunal condoned the delay of 172 days in filing the appeal. Overall Disposition The appeal was partly allowed: the Tribunal upheld the section 144 estimation of gross profit at 8% and rejected any section 68 contention, but allowed partners' remuneration and interest under section 40(b) with directions for recomputation; delay in filing the appeal was condoned.