2017 (7) TMI 1380 - AT - Income Tax

Rejection of books of accounts u/s 145 - Estimation of Gross profit - AO after rejection of books of accounts has estimated G.P. @17.20% as against G.P. @13.19% declared by the assessee - HELD THAT - In view of the specific observations of the auditors in terms of inconsistency in maintaining the books of account and not following the well accepted accounting principles and the Coordinate Bench decision in assessee s own case for A.Y. 2008-09 2014 (11) TMI 1015 - ITAT JAIPUR wherein on similar basis the books of accounts were rejected we see no reason to interfere with the order of the lower authority in terms of rejection of the books of accounts. Regarding estimation of G.P. rate wherein the books of accounts are rejected a fair estimate is required to be made by the Assessing Officer. The principle of average taking into consideration last 5 years past history is clearly a robust and fair basis of estimation to determine the gross profits for the year under consideration. The average G.P rate of last 5 years as finally affirmed comes to 13.58%. The AO is accordingly directed to apply the G.P. rate of 13.58% as against G.P rate of 13.19% declared by the assessee. Addition u/s 40(a)(ia) on account of non-deduction of TDS on payment made to Export Promotion Council for handicraft working under Ministry of Commerce and Industry for export trade fair - HELD THAT - We find that no information was submitted before the Assessing Officer on the nature of payment - CIT(A) upheld disallowance stating that the assessee has not filed any receipt/document which suggested that the payment is towards registration cum membership charges. Before this Bench the assessee has submitted that the payment has been made to Export Promotion Council of which assessee is a member for booking of stall area at New Delhi and the payment is not liable for TDS in terms of section 196 of the Act. Alternatively it was submitted that the payment is liable for TDS u/s 194(I) and since the payment is less than the threshold of Rs. 1.8 lace. There is no liability towards TDS and accordingly the addition made by the Assessing Officer may be deleted. Firstly regarding the applicability of section 196 of the Act there is nothing on record to suggest that Export Promotion Council is exempt from payment of income tax. Hence in absence of the same we are unable to accede to the contention of the ld. AR that no TDS is liable on the subject payment. Regarding the alternative contention of the ld. AR regarding applicability of section 194(I) assessee is taking varying contention regarding exact nature of payment. No evidence is available on record to determine the exact nature of payment whether its towards membership fees or towards participation in trade fair and stall booking or both. Accordingly we are setting aside the matter to the file of the AO to examine the exact nature of payment and decide the matter a fresh as per law. Hence the ground no. 2 of the assessee s appeal is allowed for statistical purposes. Addition u/s 69A in respect of cash deposit in personal saving bank account maintained by the assessee - HELD THAT - We are setting aside this matter to the file of the AO to examine the above books of accounts to determine the source of cash deposit in the personal bank account of the assessee. We are not getting into the merit of the matter and the contentions raised by the assessee explaining the source of deposits as the same has not been examined by the AO. The appellant is at liberty to raise its said contentions before the AO and the AO will examine the same and give his findings as per law. In the result the ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
3. Addition under Section 69A for unexplained cash deposits.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):

The Assessing Officer (AO) rejected the books of accounts of the assessee based on several observations by the auditors:
- Valuation of Inventory: The inventory was valued at cost, not in accordance with Accounting Standard (AS-2).
- Stock and Consumption Records: These were not maintained.
- Foreign Currency Transactions: Not accounted for as per Accounting Standard (AS-11).
- Income and Expenses: Certain income and expenses were accounted for on a yearly basis, not in accordance with accepted accounting principles.

The AO cited the Supreme Court cases of CIT Vs. McMillian & Company and CIT Vs. British Paints India Ltd., emphasizing that the AO is not bound to accept the declared profits if the books do not disclose the true state of accounts. The AO also noted that the books of accounts were rejected in A.Y. 2008-09 on similar grounds, a decision upheld by the Tribunal.

The CIT(A) confirmed the rejection of the books of accounts. The Tribunal also upheld the rejection, referencing the specific observations of the auditors and the past decision in A.Y. 2008-09.

2. Estimation of Gross Profit (G.P.) Rate:

After rejecting the books of accounts, the AO estimated a G.P. rate of 17.20% against the declared 13.19%, based on the Tribunal's decision for A.Y. 2008-09. The CIT(A) reduced the G.P. rate to 15%, considering the past history and increased costs of raw materials.

The Tribunal directed the AO to apply a G.P. rate of 13.58%, derived from the average G.P. rate of the last five years, as it was a fair basis for estimation.

3. Disallowance under Section 40(a)(ia):

The AO disallowed Rs. 1,31,036/- under Section 40(a)(ia) for non-deduction of TDS on payments made to the Export Promotion Council for Handicrafts. The assessee contended that the payment was not liable for TDS under Section 196, as it was made to a government body. However, no evidence was provided to support this claim.

The CIT(A) upheld the disallowance, noting the lack of supporting evidence. The Tribunal set aside the matter to the AO to examine the exact nature of the payment and decide as per law, as the assessee provided varying contentions regarding the payment's nature.

4. Addition under Section 69A for Unexplained Cash Deposits:

The AO added Rs. 37,34,500/- under Section 69A for unexplained cash deposits in the assessee's personal savings account. The assessee failed to provide a satisfactory explanation during the assessment proceedings.

The CIT(A) confirmed the addition, stating that the personal cash book and balance sheet were not filed during the assessment proceedings, and no application for additional evidence under Rule 46A was made.

The Tribunal set aside the matter to the AO to examine the personal books of accounts and determine the source of the cash deposits, allowing the assessee to provide evidence and explanations.

Conclusion:

The Tribunal upheld the rejection of the books of accounts and directed the AO to apply a G.P. rate of 13.58%. The disallowance under Section 40(a)(ia) and the addition under Section 69A were remanded to the AO for further examination. The appeals were disposed of with these directions.