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2015 (10) TMI 2017 - ITAT VISAKHAPATNAM

2015 (10) TMI 2017 - ITAT VISAKHAPATNAM - TMI - Rejection of books of account - Estimation of profit & assessment of income surrendered by the assessee separately - unauthorized payment - Held that:- In the instant case, we are of the view that the trade practice prevailing in this trade and also the manner of maintenance of vouchers regarding payments made towards various expenses would constitute sufficient material to disturb the earlier year’s assessments also, which were not pending on the .....

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firming rejection of books of account for all the years under consideration.

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 rat .....

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. 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 1.46%, 3%, 3.46% and 6.83% respectively for AY 2004-05, 2005-06, 2006-07 and 2007-08. Accordingly, in our view, the rate of net profit may be adopted @ 2.5%, 3.5%, 4% and 7% respectively for AY 2004-05, 2005-06, 2006-07 and 2007-08.

Rejection of claim for deduction of depreciation - Held that:- The capital expenditure incurre .....

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assets. Even if the level of operations and other things are equal between the two, the depreciation amount will be different due to the difference in the value of assets. Hence the total income shall also result in different figures between the two business men. The above said illustration would support the contentions of the assessee that the depreciation should be allowed separately. Accordingly, we direct the AO to allow the depreciation admissible to the assessee against the income estimate .....

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rs - Held that:- As from the Statement of facts filed by the assessee before the Ld CIT(A), we notice that the assessing officer has assessed the remuneration and interest in the hands of the partners, even though it was not allowed as deduction in the hands of the assessee firm. Under these set of facts, we do not find any infirmity in the decision of Ld CIT(A) in directing the AO to allow the deduction for remuneration and interest payable to the partners. - I.T.A. Nos.79 to 85/Viz/2013, I .....

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issues are involved in all these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience. 3. The assessee is in appeal in respect of following issues: a) Rejection of books of account; b) Estimation of profit & assessment of income surrendered by the assessee separately. c) Rejection of claim for deduction of depreciation. d) Claim for higher rate of depreciation on Vehicles. 4. The department is in appeal in respect of following issues: .....

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he 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 As .....

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ating to unaccounted receipts and unaccounted investments made in the name of partners. Accordingly, the Assessing Officer took the view that the books of account maintained by the assessee are not reliable and accordingly he rejected the book results for all the assessment years under consideration. 6. Accordingly, the Assessing Officer estimated the net profit from the business operation as under: Assessment years % of net profit on gross receipts 2004-05 to 2006-07 8% 2007-08 8.5% 2008-09 9% .....

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neries, etc. (b) did not allow deduction towards remuneration and interest payable to partners. Further the assessing officer assessed other income like commission, interest on deposits, chit dividend, interest on income tax refund, etc. separately. 7. Aggrieved by the orders passed by the Assessing Officer, the assessee carried the matters by filing appeal for all the assessment years before the first appellate authority. The ld CIT(A) upheld the rejection of books of account. However, the ld C .....

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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 .....

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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 the assessee with regard to defective vouchers, payment of speed money/formality payments etc. was related to the specific vouchers found during the course of search and the assessee has already surrendered income relating to the same. Similarly the income relating to unaccounted receipts and undisclosed inv .....

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ing the book results and resorting to estimate of the net profit as a percentage of gross receipts declared by the assessee. He further submitted that the revenue may take the support of the decision rendered by the Hon ble jurisdictional A.P High Court in the case of Rajnik & Co. (251 ITR 561) to support the action of the AO in estimating the income in all the years. He submitted that the Hon ble Hyderabad bench of Tribunal had an occasion to consider the decision of Rajnik & Co. in the .....

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he did not state anything about the prior years. The statement given with regard to Trade practice also pertained to AY 2008-09 to 2010-11 only. Accordingly, the Ld A.R contended that the tax authorities are not justified in rejecting the book results of AY 2004-05 to 2007-08 without there being any incriminating material warranting the same. 10. The Learned Standing Counsel Shri Narasimha Sharma and Ld D.R, on the contrary, submitted that the partner of the assessee firm Shri Babu rao has conf .....

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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 discrepancie .....

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se of Sunrise sales corporation (supra) and the same has been rendered in the context of block assessment proceedings under Chapter XIV-B of the Act. Accordingly he submitted that the assessee cannot take support of the same. With regard to the decision rendered by the Hyderabad bench in the case of DADA Prints (supra), the Ld D.R submitted that the same was a case where there was no admission by the assessee therein. However, in the instant case, the assessee has accepted the factum of payment .....

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t and the same was also accepted by the partner in his statement. Further, he has also stated that the payment of speed money and formality payments are prevalent trade practice and hence there is a possibility to infer that the said trade practice should have existed in the earlier years also. As submitted that the decision rendered in the case of Sunrise Sales Corporation (supra) cannot be taken support of, since the same has been rendered in the context of Chapter XIV-B of the Act, the scope .....

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e assessee relates to the validity of rejection of books of account. We heard the parties on this issue. We notice that the Ld CIT(A) has made detailed analysis of the facts relating to the rejection 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 pr .....

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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", irrespective of any period or yea .....

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xplaining that by omission the same was not reflected in the books of account, (v) that the Managing Partner of the appellant firm, Shri P.Babu Rao in his various statements had repeatedly admitted that the vouchers were "self made" and "defective" and had therefore, declared substantial income as additional income for the Assessment Years 2008-09, 2009-10 and 2010-11. (vi) that the appellant had revised its return of income for the Assessment Year 2009-10 after the search an .....

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clear cut finding that vouchers for certain expenditure were not amenable to verification. (viii) that the appellant had claimed the depreciation on trailers @ 40%/30%, despite transportation not being its principal business. (ix) that the appellant had shown cash loans of ₹ 45,90,000/- from 6 persons in the Assessment Year 2010-11, which were admitted as bogus and the appellant even declared ₹ 35 lakhs on this account for the Assessment Year 2010-11. (x) that the partners of the fi .....

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t 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 ₹ 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 an .....

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Partner and in view of such defects, he even came forward with disclosure of substantial additional income in the Assessment Years 2008-09, 2009-10 and 2010-11. The incurrence of substantial expenditure in cash, in contravention of the provisions of sec.40A(3) of the Act, is also an admitted fact. As regards the payment of "speed money", though the appellant in subsequent proceedings tried to explain that the same was paid to the dock workers, in the earlier statements, there was a cat .....

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tion to this, it can be seen that the appellant was found having made unexplained investments way back in the Financial Year 2004-05 also, besides the findings of unexplained investments in the Assessment Years 2008-09 and 2010-11. Obviously, the partners of the appellant firm could not reckon any other source for such investments, implying that the source of such investments was indeed the unrecorded and undisclosed income from the firm itself. On a conspectus of the above facts, therefore, it .....

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of the Act, therefore,, the grounds raised in this regard are decided against the appellant . 13. Even though the Ld A.R contended that the search team did not unearth any material relating to AY 2004-05 to 2007-08 and hence the rejection of books was not correct, yet in view of the admission of the partner of the firm that he has been following same practice in the earlier years also, one has to presume that the defects noticed in the maintenance of books in AY 2008-09 to 2010-11 were also prev .....

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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 a .....

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to back basis or at the best with a tiny margin to cover its overhead expenses. This passing on is done by means of an invoice raised on the end customer detailing various heads of services and each such charge is separately recorded in the books of account. In the yearend financial statements, all the said heads are broadly grouped into two major groups viz., C&F Charges and Transport Charges. The fact, however, remains that major part of the gross receipts shown in the Profit and Loss A/c .....

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n the net receipts i.e. gross receipts less those which are in the nature of reimbursable ones. It was submitted that for the Assessment Years 2004-05, 2005-06, 2006-07, 2007-08, 2008-09, 2009-10 and 2010- 11, about 72.23%, 69.73%, 62.98%, 58.81%, 72.59%, 66.60% and 63.04% respectively, of the gross receipts were in the nature of or meant for reimbursement and therefore including the same in the gross receipts for estimation is not correct. He therefore pleaded that the gross receipts should be .....

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transport industry, it is 5.83%. Accordingly, it was claimed that the rate of 8% adopted by the Assessing Officer is exorbitant. 7.6 The Authorised Representative of the appellant 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 Tr .....

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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, resulting in increase in turnover and the capital employed. It was averred that the increase in asset base and investment in work .....

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the admission in the course of search had been made by the appellant to come to the finality of issues and to avoid protracted litigation only. 16. We notice from the assessment order that the assessing officer has not brought on record any comparable case to support the estimate made him. In fact, the AO placed his reliance on the statement given by the partner, wherein he had stated that the profit margin would be in the range of 6-7% and further the rate of profit declared in AY 2009-10 work .....

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the Profit and Loss account. The details furnished by the assessee before Ld CIT(A) would show that about 60% of the Gross receipts consists of reimbursed items. Even though the assessee contends that there is no profit element on such reimbursements, yet it was not substantiated through evidences. However, there is some merit in such contentions. The profit element on such kind of reimbursable expenses is usually less and hence we agree with the contentions of the assessee that the profit rate .....

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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 .....

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2009-10, where as it was only about 6.64 crores in AY 2004-05. Further, it is known fact that the business men usually charge less in a competitive market in the initial years in order to attract customers, while the scope to reduce expenses will be minimal. Hence both the factors shall cumulatively lead to lesser rate of profits in the initial years. In the instant case, the assessee has specifically submitted that he has infused capital and also increased the asset base in the subsequent year .....

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h we have upheld the rejection of books for all the years, yet the fact remains that the search officials have stumbled with incriminating materials relating to the AY 2008-09 to 2010-11 only and no specific material relating to the earlier years were found during the course of search or brought on record subsequently. The rejection of the books of earlier years is entirely based upon the statement given by the partner to the effect that such practice is generally followed in the trade. We have .....

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y, apparently to protect the interests of its client and most importantly to protect its own business interests. Further, we have noticed that the assessment for AY 2004-05 was earlier completed u/s 143(3) of the Act by making addition of less than ₹ 3.00 lakhs. Considering all these factors, in our view, the admission of additional income made in AY 2008-09 to 2010-11 should not lead to an inference that the assessee has been making higher profits all through. 20. In view of the above, in .....

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owever, 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 pr .....

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he book results have been rejected, the AO estimated the net profit for these three years @ 9%, 9.5% and 9.5% respectively and made the addition of excess amount, i.e., the income so estimated less the income returned by the assessee in 153A return. The assessee had included the income admitted by it in the return filed by it u/s 153A of the Act. However, the Ld CIT(A), while scaling down the net profit rate for these years to 7%, held that the additional income offered by the assessee should be .....

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o assess the additional income separately over and above the net profit estimated by him and the same defeats the very purpose of estimation. Though the Ld D.R strongly supported the order of Ld CIT(A), yet he could not contradict the reasoning given by the Ld A.R. 22. We find merit in the contentions of Ld A.R. Since the objective of offering additional income and estimation of profit by rejecting the book results is the same, they constitute two different methods of arriving at the total incom .....

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fit 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, howev .....

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nd 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 only the net profit before allowing any non-cash expenditure/statutory deductions. Further, the quantum of depreciation would also depend upon the value of assets. For example, a business man having lower version of Car or Air conditioner would be entitled to claim lower amount of depreciation, since the cost of the lo .....

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lustration would support the contentions of the assessee that the depreciation should be allowed separately. Accordingly, we direct the AO to allow the depreciation admissible to the assessee against the income estimated by us in the preceding paragraphs. 25. The next contention of the assessee is that it was using its vehicles for transport purposes and hence the vehicles are entitled for higher rate of depreciation. Since the contentions urged by the assessee require factual verification, we s .....

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