TaxTMI 
TaxTMI 
2019 (2) TMI 103
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....1961, determining the total income at Rs. 14,19,97,500, by making addition towards estimated net profit of 8% on total sales turnover by rejecting books of account u/s 145 of the I.T. Act, 1961 for Rs. 9,18,70,062, addition towards waiver of secured loans by banks and financial institutions on account of one time settlement u/s 41(1) of the Income-tax Act, 1961 for Rs. 5,01,27,439 and addition towards waiver of interest credited to P&L Account by disallowing various expenditure including depreciation, bad debts written off, write off of obsolete inventories and other expenses against such interest income. The assessing officer also recomputed book profit by taking into account net profit estimated on sales turnover and then by adding addition made u/s 41(1) of the Act in respect of remission / cessation of liability towards waiver of loan by banks and financial institutions. 3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged rejection of books of account and estimation of net profit at 8% of total turnover on the ground that in absence of any incorrectness in books of account, the AO was erred in reject....
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....ect that waiver of loan given by the banks on account of working capital loan taken by the assessee against hypothecation of stocks and receivables; therefore, when benefit derived by way of remission or cessation of liability on account of working capital loan borrowed for the purpose of business of the assessee, such waiver of loan by the lenders amounts to business profits taxable under the head 'Income from business or profession'. However, the Ld.CIT(A) has allowed partial relief of Rs. 17,99,653 out of total addition made by the AO of Rs. 5,01,27,439 on the ground that an amount of Rs. 17,99,653 represents waiver of term loan given by the banks for acquiring capital assets. Insofar as addition towards disallowance of expenses, the Ld.CIT(A) has allowed partial relief in respect of bad debts written off amounting to Rs. 1,41,96,836 and also allowed further relief in respect of amount debited to P&L Account towards direct expenses, interest on loan by holding that when interest on loan has been paid for loans taken to repay earlier loans, the said interest could not be disallowed. Similarly, out of other expenses amounting to Rs. 1,42,66,261, the Ld.CIT(A) has allowed adhoc ded....
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....brought to the notice of the assessee, the assessee has filed certain details and financial statements of Saraswati Trade Centre Pvt Ltd. Since, the assessee has failed to file complete details of purchases and sales recorded in the books of account and also the parties failed to appear before the AO in response to summons issued u/s 131, the AO came to the conclusion that the assessee has not carried out any business activity, but has taken accommodation entries. Accordingly, he came to the conclusion that the transactions recorded by the assessee including purchases and sales were sham transactions. The AO further observed that when the assessee was not carrying out any business activity since last seven years, showing purchase / sales transactions of materials which is different from the products dealt in by the assessee could not be considered as genuine, hence opined that the assessee has obtained accommodation entries in the nature of purchase and sales using a colourable device. Accordingly, rejected books of account u/s 145 of the Act and estimated 8% net profit on total sales turnover. 7. The Ld.DR submitted that the Ld.CIT(A) was erred in not considering the facts brough....
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....n of books of account the AO has to point out descrepancies which render the books of account not capable of deducing the true and correct profit of the business, but without recording any reasons as to incorrectness in books of account merely for non receipt of information from the parties, books of account cannot be rejected and profit cannot be estimated. 9. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. We have also considered the case laws relied upon by the parties. It is an admitted fact that the assessee is a sick company not carrying out any business activities since last seven years. It is also an admitted fact that the assessee is showing trading results of purchase and sales in textiles. The assessee claims to have purchased goods from a single party and also claimed to have sold the goods to a single party. Except purchase and sales, neither opening stock nor closing stock was shown in the books of account. No receivables and payables are also shown in the books of account. It is also an admitted fact that the assessee has not claimed any expenses like transportation and other expenses which ....
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....oks of account u/s 145 of the I.T. Act, 1961, when the assessee has failed to file complete details of evidences in support of purchase and sales transactions recorded in the books of account. 11. Having said so, let us examine the rate of net profit applied by the AO to determine the profit from the business. The AO has adopted 8% profit on total sales turnover. But, the Ld.CIT(A) has deleted estimation of net profit by following the decision of ITAT, Mumbai Bench in the case of Gold Star Fin Vest Ltd vs ITO (supra) by holding that the AO has not brought on record any evidence to prove that assessee has earned 8% profit or that the assessee had earned profit more than what was reflected in the books of account. We have gone through the case laws relied upon by the Ld.CIT(A) in the light of facts and find that the facts of the case considered by the Ld.CIT(A) are entirely different from the facts of the present case. In the case before the ITAT, the issue was estimation of profit in respect of a share broker involved in dealing in shares and securities. Under these facts, the ITAT came to the conclusion that the stock brokers are dealing in shares and securities on behalf of their....
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....er section 44AD. In case of retail traders, the statute provides for 5% profit on total sales. Therefore, we are of the considered view that net profit of 5% would meet ends of justice. Therefore , we reverse the findings of the Ld.CIT(A) and uphold estimation of net profit of 5% on total sales turnover. 13. The next issue that came up for our consideration from assessee's appeal is addition towards waiver of loans of banks under one time settlement scheme. The assessee has treated waiver of loans by the banks as capital receipt and credited to reserves and surplus account. The AO has added loan waiver u/s 41(1) of the Act as remission / cessation of liability for the reason that the assessee has got benefit of waiver of loan borrowed for the purpose of business. According to the AO, all working capital loan borrowed for the purpose of business shall be treated as business receipts in case any benefit derived by the assessee on account of loan waiver scheme. It is the contention of the assessee that the assessee does not get any benefit on account of waiver of loan and the same cannot be treated as remission of liability u/s 41(1) as the same has not been considered as deduction i....
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....iver by the creditor would constitute income chargeable to tax under the Act. It was further observed that if the loan was utilised for the purpose of acquiring any capital asset, the same on its waiver, would not constitute income chargeable to tax either u/s 41(1) or u/s 28(iv) of the Income-tax Act, 1961. In this case, on perusal of facts, we find noticed that the assessee has borrowed working capital loan from banks by way of hypothecation of stocks and receivables. When a working capital loan is waived by banks, the same constitute business receipts chargeable to tax. The Ld.CIT(A), after considering relevant facts, has rightly allowed partial relief of Rs. 17,99,653 which is on account of waiver of term loan and confirmed balance amount being waiver of working capital loan. We do not find any error in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of the Ld.CIT(A) and reject ground taken by the assessee. 15. The next issue that came up for our consideration is disallowance of expenses amounting to Rs. 5,66,26,527. The factual matrix of the impugned dispute are that the assessee has credited interest waiver by the banks to P&L Account. Again....
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....tores and spares, the Ld.AR submitted that the assessee has filed complete details before the AO; however, the AO has rejected the evidence filed by the assessee only for the reason that there was no business activity in the year and also there was no opening and closing stock. As regards administrative expenses, interest paid and other direct expense, the Ld.AR has submitted that the assessee has paid interest on loan borrowed to repay the existing loan which were borrowed for the purpose of business of the assessee and hence, whatever interest paid on loan has necessarily to be allowed as deduction. Insofar as expenses, whether the assessee is carrying out its business or not, to maintain the corporate status of the assessee, it needs to incur various expenses. Therefore, there was no reason for the AO to disallow expenditure. 17. The Ld.DR, on the other hand, strongly supported the order of the Ld.CIT(A). The Ld.DR further submitted that the Ld.CIT(A) has apprised the facts in the light of evidences produced by the assessee to come to the conclusion that there is no reason to allow depreciation as the assessee neither carried out any business activity nor proved the existence ....
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....istrative expenses totalling to Rs. 1,90,20,078. As regards interest paid, the Ld. CIT(A) has allowed the claim by holding that the assessee has proved payment of interest on borrowing loan for the purpose of business. In regard to the other expenses, the Ld.CIT(A) has observed that the assessee has failed to file any evidence including bills and vouchers to prove that said expenditure incurred wholly and exclusively for business purpose. The Ld.CIT(A) further observed that even though the assessee has failed to prove the necessity of incurring said expenditure, keeping in view the fact that the assessee has regained control over plant & machinery, it has to incur certain expenditure on repairs and maintenance and security and also to incur certain administrative expenditure in order to maintain its corporate status, has allowed an amount of Rs. 25 lakhs towards expenses and balance amount of Rs. 1,17,66,261 has been confirmed. Facts remain unchanged. The assessee failed to bring on record any evidence to counter the facts of finding recorded by the Ld.CIT(A). Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the assessee. 20. The next issue th....