TaxTMI 
TaxTMI 
2015 (10) TMI 2017
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....ppeal in respect of following issues: a) Estimation of profit; b) Allowing deduction of remuneration and interest payable to partners. 5. The facts relating to the case are stated in brief. The assessee is a partnership firm consisting of two partners, namely, Shri P. Babu Rao and his wife Smt. PSVS Eswari, holding equal share in the profit. The assessee is engaged in the business of C&F agency, stevedoring, transportation, etc. The revenue carried out search & seizure operation under section 132 of the Act in the hands of the assessee on 25.11.2009. Simultaneously, the branch offices of the assessee firm located at Kakinada and Bangalore were surveyed under section 133A of the Act. Consequent to the search operation, the Assessing Officer completed the assessments u/s.153A of the Act for the assessment years 2004-05 to 2009-2010. The assessment for assessment year 2010-2011, being the year of search, was completed under section 143(3) of the Income tax Act, 1961. During the course of assessment proceedings, the Assessing Officer noticed various discrepancies in the books as well as the business carried on by the assessee in the form of defective vouchers, unaccounted receipts, ....
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....(A) did not allow telescoping of additional income surrendered by the assessee against the income estimated by him. Accordingly, he directed the AO to assess income surrendered by the assessee for assessment years 2008-09 and 2010- 2011 separately in addition to the income estimated by him. b) The ld CIT(A) allowed the claim of the assessee for deduction of remuneration and interest payable to the partners. 8. Aggrieved by the order of the ld CIT(A), both the parties are in appeals before us. 9. The Learned Counsel appearing for the assessee Shri G.V.N. Hari raised a legal contention, viz., for the assessment years 2004-05 to 2008-09, no proceeding was pending on the date of initiation of search and hence those assessments can be disturbed or any addition could be made only on the basis of incriminating materials found during the course of search. He submitted that the search proceedings did not reveal any incriminating materials pertaining to these years, so far as the business operations of the assessee is concerned, and hence the tax authorities are not justified in rejecting the book results and estimating the profit. He submitted that the admission made by the partner of th....
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....has also stated that they cannot be avoided in his business, since they are dealing with unorganized labourers. Further he has also confirmed about the payment of speed money and also the payments made as formality payments to various Government officials. He has further admitted that this was the practice followed in this trade, which fact makes amply clear that such kind of deficiencies existed and also identical payments have made in all the years under consideration. Further, the unaccounted receipts also prove that the books of accounts are not reliable. Similarly, the undisclosed investments admitted by the partner also show that the partners have generated money outside the books of the assessee firm. Accordingly the Learned D.R submitted that the various documents seized during the course of search and also admission made by the partner show that the deficiencies and discrepancies noticed in the year of search also existed in the earlier years also and they form sufficient incriminating materials to disturb the income returned by the assessee. Accordingly he submitted that the Learned CIT(A) was justified in upholding the action of the Assessing Officer in rejecting the boo....
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....n of books of account. For the sake of convenience, we extract the same below:- "8. I have gone through the facts of the case and the submissions of the appellant. As regards the issue of rejection of books of account, it is seen that the AO rejected the book results of the appellant by invoking the provisions of se.145(3) of the I.T. Act, 1961 after pointing out the following defects in the books of account maintained by the appellant: i) that majority of the vouchers maintained to support huge C&F charges, labour payments, transport charges, handling charges etc, were 'self made', and as such, 'not entirely amenable to verification". He found that some of them were even "unsigned" and even "undated" and did not contain the necessary particulars regarding nature of expenses. ii) that the appellant had incurred certain expenses as "Speed Money", mostly booked under the head "C&F Charges" on a regular basis, which included "extra incentives paid to labourers" and certain payments to Government Departments as "formalities", which were in the nature of unauthorized payments, prohibited by law. The Managing Partner had himself stated that such payments are "routine affair", irresp....
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....at the partners have no other sources except the business of the firm, implying that those were made out of the unexplained income of the firm itself. (xi) that the partners had invested in cash for purchasing agricultural lands in the Financial Year 2004-05 also and offered the difference of Rs. 8.65 lakhs between the agreements found in the course of search, as additional income. He concluded that the firm was generating unexplained income which was enabling the partners to make unexplained investments in properties. 8.1 Keeping in view the above referred deficiencies and discrepancies, I am of the considered opinion that the facts and evidence gathered in the course of search and seizure operation were indeed sufficient and substantial to lead to the conclusion that the books of account maintained by the appellant firm were not reliable enough to give a true and correct picture of the prospects of the business. It is clear that the "defective" and unverifiable nature of the vouchers maintained by the appellant was repeatedly admitted by the Managing Partner and in view of such defects, he even came forward with disclosure of substantial additional income in the Assessment Yea....
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....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. 14. Next issue contested by both the parties relate to estimation of net profit for all the years under consideration. We have earlier noticed that the rate of net profit estimated by the AO for all the years was scaled down by the Ld CIT(A). The assessee is in appeal seeking further reduction and the revenue is in appeal objecting the reduction. 15. We have heard the parties on this issue. The Ld. A.R reiterated the contentions urged before the Ld CIT(A) and hence we feel is convenient to extract the observations made by the Ld CIT(A) below:- "7.4 The Authorised Representative submitted that even it is assumed for a while that the Assessing Officer was right in resorting to estimation, the estimation so made is not tenable. He submitted that appellant's gross receipts predominantly account for receipts in the nature of reimbursement of various charges incurred on behalf of customers and that the main business is akin to a service provider. It was submitted that the income of the appellant is fee based rather than composite charge for r....
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....ellant also submitted a copy of the decision of the Hon'ble Income-tax Appellate Tribunal, Visakhapatnam Bench dated 15- 5-2009 in the case of Priya Export Agencies Vs. ACIT (ITA No.200/Vizag/2006) to contend that in the said decision, which is squarely comparable to the appellant, the Hon'ble Income-tax Appellate Tribunal have prescribed the rate of 2.5% for C&F business. 7.7 By way of written submissions the Authorised Representative of the appellant added that the appellant's business has increased by size and capital over the years, resulting in increasing of margins due to acquisition of assets and increase in capital funding. He however claimed that higher margins in the subsequent years cannot be the basis for adoption of higher profit rate in the preceding years also. It was argued that the business is also influenced by various external factors like import and export trade, currency fluctuations, price of HSD in the transport business, industrial output etc, which may affect the business and result in lower profits even in the subsequent years. The Authorised Representative furnished details showing increase in investment in fixed assets over the years, result....
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....ion in the case of civil construction contracts, but as contended by Ld A.R, they cannot be applied to the business carried on by the assessee. 17. We notice that the Ld CIT(A) has also observed that the AO has not cited any comparable instances. The Ld CIT(A) has also noted down that the majority of gross receipts constitutes C & F Charges, i.e., reimbursements. He has also noted that the Visakhapatnam bench of ITAT has determined the net profit at 2.5% in a case named M/s Priya Export Agencies. Further, the Ld CIT(A) has referred two other decisions rendered by the Tribunal (Maa Mangala Transport by Cuttack bench and Shri Subodh Prakash by Chandigarh bench) in the context of assessees carrying on transport business, where in the net profit was determined around 4%. Based on the above judicial precedents, the admission made by the partner, financial performance, the Ld CIT(A) scaled down the net profit rate as stated earlier. 18. However, we notice that the Ld CIT(A) has failed to consider the important point that the rate of net profit on reimbursements received by the assessee shall be lower. He has also failed to consider another important factor that the Gross receipt was ab....
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.... lead to an inference that the assessee has been making higher profits all through. 20. In view of the above, in our view, 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.....
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....inst the net profit estimated by the assessee, meaning thereby the addition should be restricted over and above the amount of income returned and surrendered by the assessee. 23. The next issue urged by the assessee relates to the claim for deduction of depreciation. Both the tax authorities have rejected the same. The contention of the assessee is that the depreciation allowance is a statutory deduction provided under the Act and as per the CBDT circular also, it should be allowed separately. The Ld D.R, however, contended that the estimate of net profit made should be considered as having been made net of all deductions including depreciation and hence there is no requirement of allowing depreciation separately. 24. On consideration of rival contentions, we find merit in the submissions made by the assessee. 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 o....