2016 (4) TMI 1094 - AT - Income Tax

Cash payment not supported by voucher - Held that - The books of accounts were incorrectly rejected as it is not a case where it can be held that the books of account was incorrect or incomplete or correct profits could not be deduced. On the contrary we find that completed audited books of accounts were produced before the AO which were duly examined and such book of accounts have not been shown to have been maintained from where correct profits could not be deduced thus vitiating the entire action of the AO and CIT(A) for rejecting the books of account. Further there is no basis for applying rate of profit at 3% which is an ad hoc rate estimated by AO so it falls particularly here we would like to state that the assessee has been incurring losses since start of production and the year in question is the first year where the results have been positive. The assessee falls under preview of various laws of the country such as Excise Sales Tax Provident Fund and Employee State Insurance and regular inspections/scrutiny s by these Government departments is carried out. Accordingly the results declared by the assessee are accepted and addition made including addition on account of exchange fluctuation in excess of the declared profit are deleted. Addition u/s 41(1) - Held that - We notice that there is a fundamental misconception on the facts as appreciated by the AO and CIT(A). It is noticed that during the instant year the assessee had shown in the beginning of the year unsecure loan of Rs. 8, 04, 75, 496/- (Page 55 of the PB) which was reduced to Rs. 7, 35, 30, 351/- on account of exchange fluctuation gain of Rs. 69, 45, 145/- which has been declared as part of exchange gain (Page 104 of PB). Further there was a credit balance of M/s SPM at the beginning of the year of Rs. 59, 20, 969/- which was reduced to Rs. 50, 09, 447/- (Page 57 of PB). It was this balance which was confirmed at US 125, 173.60 thus the balance of US 125, 173.60 had nothing to do with the unsecured loan of Rs. 7, 35, 30, 351/-. There is neither a payment towards the loan nor there was cessation or remission of the liability of the loan. Even the AO has proceeded merely on conjecture to hold that such liability is the income of the assessee. There is no evidence to suggest that liability was squared up or paid. In the absence of any evidence to come to such impugned conclusion the addition is arbitrary and has to go. Therefore we order deletion of the addition

Summary

Issues:
1. Estimation of net profit by rejecting the books of account.
2. Addition of liability under section 41(1) of the Income Tax Act.

Estimation of Net Profit:
The appeal was against the order of the CIT (Appeals) for the assessment year 2008-09, where the AO rejected the books of account of the assessee company. The AO pointed out various discrepancies in cash payments and lack of supporting vouchers. The AO applied a net profit rate of 3% and computed the income at Rs. 1,35,47,020. The CIT (A) upheld this action, stating that the nature of mistakes and discrepancies were serious and justified the rejection of books of accounts under section 145 of the Income Tax Act. The Tribunal disagreed with this approach, emphasizing that the defects in cash payments did not impact the trading results and should not have led to the rejection of the entire books of accounts. The Tribunal found no justification for applying a 3% net profit rate and held that the assessing officer's estimation lacked a proper basis. The Tribunal concluded that the rejection of books of accounts and the addition of income were unjustified, leading to the allowance of the assessee's appeal.

Addition of Liability under Section 41(1):
The AO noted a closing balance of an unsecured loan from M/s S.P.M. Trade Company Korea, equivalent to Rs. 7,35,30,351. The AO raised concerns about the liability being squared up without proper documentation, leading to an addition under section 41(1) of the Act. The CIT (A) supported this approach, citing discrepancies between the confirmation letter and the accounts of the assessee. However, the Tribunal found a fundamental misconception in the AO and CIT (A)'s understanding. The Tribunal clarified that the reduction in the loan balance was due to exchange fluctuation gain and not due to any payment or cessation of liability. The Tribunal deemed the addition arbitrary and lacking evidence, leading to the deletion of the addition. Consequently, the Tribunal allowed the assessee's appeal, emphasizing the incorrectness of the addition under section 41(1) of the Act.

In conclusion, the Tribunal ruled in favor of the assessee, overturning the AO and CIT (A)'s decisions regarding the estimation of net profit and the addition of liability under section 41(1) of the Income Tax Act. The Tribunal highlighted the lack of proper justification for these actions and emphasized the importance of evidence and factual accuracy in tax assessments.