2011 (4) TMI 892 - AT - Income Tax

Rejection of the books of accounts - Estimation of net profit - Held that - AO noted that the amount of total freight receipts i.e. freight reflected in the TDS certificate furnished along with the return of income and freight actually shown in the Profit & Loss Account were different. As the assessee failed to produce the necessary record to be maintained in the course of carrying on transportation business and in the absence of the same results shown by the assessee cannot be accepted & rejection of books of account is upheld Estimation of income in the hands of the assessee - Section 44AE lays down special provisions for computing Profit & Gains of business of plying/hiring or leasing of goods carriage by an assessee - Held that - The option is given to the assessee to claim lower Profit & Gains where he keeps and maintains books of account as prescribed and gets its account audited under the provisions of the Income-tax Act - in the present set of circumstances where the books of account of the assessee have been rejected there is an occasion to estimate the income earned by the assessee from such trucks. The income earned by the assessee on account of trucks owned by others is to be computed at the rate of 3.5 per cent of the gross receipts being Rs. 7.05 crores. The income relating to the year under appeal needs to be worked out by applying the guidelines laid down by section 44AE at the rate of Rs. 3500 per month per truck. The assessee is not entitled to any claim of depreciation on the said trucks which is deemed to be allowed while computing the income in view of the provisions of section 44AE - in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Rejection of books of account under section 145(3) of the Income-tax Act, 1961.
2. Application of a net profit rate of 5% on gross freight receipts.
3. Estimation of gross freight receipts at Rs. 11,47,98,419.
4. Application of net profit rate not based on past history or comparable cases.
5. Non-allowance of depreciation after applying a flat net profit rate.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):
The assessee, engaged in the transportation business, filed a return showing an income of Rs. 7,28,670. During scrutiny, discrepancies were noted in the books of account, leading to a show-cause notice for invoking section 145(3). The discrepancies included differences between freight receipts shown in TDS certificates and those in the Profit & Loss Account. The assessee failed to produce complete evidence, including a booking register and logbooks for journeys. Consequently, the Assessing Officer (AO) rejected the books of account under section 145(3) due to the lack of proper documentation and unverifiable expenses.

2. Application of a Net Profit Rate of 5% on Gross Freight Receipts:
The AO applied a 5% net profit rate on gross freight receipts, considering past discrepancies and unverifiable expenses. The assessee argued for applying section 44AE, which was rejected as the assessee owned more than 10 trucks. The AO noted that in the assessment year 2004-05, a 3.5% net profit rate was applied, but due to increased gross freight and unverifiable expenses, a 5% rate was deemed appropriate.

3. Estimation of Gross Freight Receipts at Rs. 11,47,98,419:
The AO estimated gross freight receipts at Rs. 11,47,98,419 based on discrepancies between TDS certificates and the Profit & Loss Account. The assessee explained that the difference was due to freight received on behalf of other truck owners, for which commission was earned. However, the AO found the explanation and supporting documents insufficient, leading to the estimation of gross receipts.

4. Application of Net Profit Rate Not Based on Past History or Comparable Cases:
The assessee contended that the 5% net profit rate was not based on past history or comparable cases. The AO justified the rate by referencing the significant increase in gross freight receipts and unverifiable expenses. The CIT(A) upheld the AO's decision, stating that the provisions of section 44AE were not applicable and relying on the Supreme Court decision in Baroda Distributors Pvt. Ltd. to avoid perpetuating a mistake.

5. Non-allowance of Depreciation After Applying a Flat Net Profit Rate:
The assessee argued for the allowance of depreciation after applying the net profit rate. The AO rejected this claim, stating that under section 44AE, depreciation is deemed to be allowed. The CIT(A) concurred, emphasizing the non-applicability of section 44AE due to the number of trucks owned.

Conclusion:
The Tribunal upheld the rejection of books of account under section 145(3) due to significant discrepancies and lack of proper documentation. However, it directed the AO to compute the income by applying section 44AE guidelines for trucks owned by the assessee and a 3.5% rate for income from other trucks. The AO was instructed to verify the number of trucks owned during the year and allow deductions for interest and salary to partners, but not for depreciation, which is deemed allowed under section 44AE. The appeal was allowed for statistical purposes.