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Income Tax Appellate Tribunal, DELHI BENCH ‘G’ NEW DELHI
Before: SHRI C.M. GARG & SHRI L.P. SAHU
ORDER
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the Revenue against the order of the CIT(A)- XXIV, New Delhi dated 13.03.2012 on the following grounds : “1. On the facts and circumstances of the case, the CIT(A) erred in law as well as on facts by not upholding the action of the AO in rejecting the books of accounts u/s 145(3) of the I.T. Act, 1961. ii). On the facts and circumstances of the case, the CIT(A) erred in law as well as on facts by directing the AO to allow partner’s salary and partner’s interest u/s. 40(b) of the I.T. Act. iii). On the facts and circumstances of the case, the CIT(A) erred in law as well as on facts in directing the AO to treat interest income on FDRs as business income.
Brief facts of the case are that the return of income was filed on 30.10.2006 declaring total income of Rs.40,86,300/-. The assessee is a partnership firm and claimed interest on capital amounting to Rs.12,94,710/- and salary u/s. 40(b)(v) amounting to Rs.3,30,000/-. He also received FDR interest of Rs.6,03,081/- and interest on Income Tax Refund of Rs.57,267/-. The above interest of Rs.6,60,348/- (6,03,081 + 57,267) was treated as business income by the assessee. The case was selected for scrutiny. Notices were issued and served. The Assessing Officer pointed out four samples of the bills where complete addresses were not give and stated that proper bills were not there for many expenses, but she has failed to identify any such specific defect in the books of accounts. She also stated that the payments were made in cash to the parties where complete address was not given in the bills. Therefore, the ld. Assessing Officer out rightly rejected the books of account and applied 5% of the total turnover of Rs.13,54,58,515/- and calculated net profit rate of Rs.67,72,925/-. She also did not allow interest and salary paid to the partners and interest received was treated as income from other sources. Accordingly, she completed the assessment and enhanced the income. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). The ld. CIT(A) accepted the claims made by the assessee and deleted the additions made by the AO. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. DR submitted that the Assessing Officer has made reasoned order and it does not require any interference. She has rightly rejected the books of accounts because she made verification and bills were not in proper form. Some payments were made in cash. The ld. DR submitted that rejection of accounts is based on justified reasons u/s. 145(3) which reads as under : (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.
The learned AR relied on the order of the ld. CIT(A) and submitted that the CIT(A) has made reasoned order which does not require any interference. He has submitted comparable cases of contractors of relevant assessment year, in which the respective AOs have accepted the cases below @ 5% net profit rate, which are as under : Name of the assessee NP Rate NP Rate Declared Assessed M/s. S.K. Singhal Contractor 3.60% 4.17% M/s. Thomas and Company P. Ltd. 2.74% 3.00% The assessee firm has shown NP rate @ 4.17%. Reliance is also placed on following cases for wrong invocation of section 145(3) of the Act. (i). M/s. Madnani Construction Company (P) Ltd. vs. CIT 296 ITR 45 (Gau.) (ii). M/s. Ashok Kumar & Co. vs. ITO (2004) 2 SOT 518 (Asr.)(SMC) (iii). M/s. CM Francis & Co. (P) Ltd vs. CIT (1970) 11 449 Kerela High Court (iv). Sh. Imran Ahmed vs. CIT (1982) Tax LR (NOC) III Alld. H.C. (v). M/s. Valtamp Transporter (P) Ltd. vs. CIT (1981) 129 ITR 105, 113, Guj. HC (vi). CIT vs. Dalmia Contract (Bharat) Ltd. (2002) 254 ITR 377 Del. HC (vii). Hemraj Nebhomal & Sons vs. CIT(2005) 146 Taxman 345 MP HC (viii). S. Gurlal Singh Tuli vs. ACIT (2000) 73 ITD 365 (ITAT Nagpur) (ix). ACIT vs. LMP Tractor(P) Ltd. (2005) 148 Taxman 52(Mag.) Ahd. ITAT (x). M/s. Vishal Infrastructure Ltd. vs. ACIT, 104 ITD 537 (Hyd. ITAT) He submitted that some creditors are old and transaction is continuously going in previous and subsequent assessment years. The assessments in previous and subsequent years were made under scrutiny, but no addition on account of creditors was made and the interest income was also treated as business income. The rejection of books of account by the AO was wrong. Therefore, the question of estimation of profit itself does not rise. The books of account were duly audited by the Chartered Accountant and no any other adverse report has been given.
We have considered the rival submissions and have also gone through the entire material available before us as well as cases cited and we find that the ld. CIT(A) has decided the issues in para 4.1 to 4.6 of the appellate order.
For the sake of convenience, the relevant paras of the impugned order are reproduced as under : “4.1 The first issue pertains to the rejection of books of accounts by the AO by invoking provisions of Section 145(3) of the Act. In para no. 3 of the assessment order, the AO has dealt with the issue by stating that test check of bills and vouchers revealed that most of the payments had been made in cash and that several parties from whom purchases were made during the year did not have complete address and that proper bills were not there for many expenses. The AO has given some illustrations of sample bills in para nos. 3.1 and 3.2 of the assessment order. On the basis of this finding, the AO invoked the provisions of Section 145(3) of the Act and decided that it was a fit case for rejection of books of accounts. I have carefully considered the assessment order and the logic of the AO. The fact remains that the books of accounts, bills and vouchers of the appellant firm have been audited by a Chartered Accountant. All books of accounts, bills and vouchers were produced before the AO who carried out a test check. She has pointed out four samples of the bills where complete address has not been given. She has stated that proper bills were not there for many expenses, but she has failed to identify any such specific defect in the books of accounts. She has not challenged the payments made to parties in cash, where complete addresses have not been given. In my opinion, without pointing out specific defects in bills, vouchers or books of accounts, it was not proper on the part of the AO to reject the books of accounts. 4.2 In para no. 4 of the assessment order, the AO has estimated the Net Profit of the appellant firm at 5% of gross receipts. She has further submitted that she had carried out enquiries by issue of notices u/s. 133(6) to 21 parties via Notice Server of the Ward, who gave a report that the notices could not be served because the addressee were incomplete. As against this, the appellant has submitted that this fact was never brought to the notice of the appellant that notices were sent to the purchase parties through Notice Server. The appellant submitted that when he attended the assessment proceedings on 23.12.2008. The AO mentioned on the order sheet that the appellant was “to show-cause why purchases from amount paid to the following parties should not be disallowed since the addresses are not given or are incomplete." Therefore, it was submitted by the appellant that he was never confronted with the fact that notices issued u/s. 133(6) through Notice Server could not be served on the parties. Further, the appellant submitted that many of these parties from whom materials were purchased also continued as creditors in the succeeding years i.e. A.Y. 2007-08 and A.Y. 2008-09 and in these years the Income Tax Department treated these creditors as good. Some of these creditors from whom the appellant continued to make the purchases in succeeding years were : (a) M/s. Ahmed Transport Service (b) M/s. Krishna Suppliers (c) M/s. Naresh Kumar Jain (d) M/s. Raj Trading Co. (e) M/s. Satvir Singh (f) M/s. Sudha Traders The appellant submitted a complete chart giving details of purchases made from them and amounts outstanding at the end of the year which were paid during subsequent years. 4.3 Directions u/s. 250(4) of the Act were issued to the AO vide letter dt. 03.12.2009 directing him to verify the parties from whom purchases have been made. The Remand Report in this connection was received from the AO vide letter dt. 23.02.2012 in which he mentioned that notices u/s. 133(6) were sent to 14 parties and in all cases the notices were returned back saving that the addresses were incomplete. The appellant in response gave a rejoinder dt. 05.03.2012 in which he gave a chart of these 14 parties giving opening balances, purchase amount, payment made by cheques, payment by cash, closing balances and confirmations. It is seen that outstanding balances were there at the end of the year in the case of 11 parties from whom purchases were carried out and payments were made in the succeeding assessment years and the same have been accepted by the Department. It is also seen that in the case of six parties, payments have been made by cheques, which could have been easily verified by the AO through the banking channels. Thus, in my opinion, the AO was not justified in outright rejection of the books of accounts of the appellant merely on the grounds that some of the addresses given in the bills and vouchers were not complete. She should have seen that purchases had been made consistently from these parties even in earlier years, which were accepted by the Department. In fact, the purchases from and payments to these parties have been accepted by the Department in the succeeding years also. 4.4 The next issue pertains to the estimation of net profit at 5% of gross receipts by the AO, as a consequence of the rejection of books of accounts u/s. 145(3) of the Act. Since it has been held in the preceding paragraph that no justifiable grounds existed for the rejection of books of accounts u/s. 145(3) of the Act as no specific defects have been pointed out by the AO in the hills, vouchers or books of accounts of the appellant, and that the rejection of books of accounts by the AO was wrong, therefore, the question of estimation of profit itself does not arise. The AO is therefore directed to accept the Net Profit as declared by the appellant as per its audited books of accounts. 4.5 The next issue pertains to allowing Partners Salary and Partners Interest u/s. 40(b) of the Act. This issue becomes redundant once directions are issued to the AO to accept the Net Profit as per the audited books of accounts of the appellant. 4.6 The last issue pertains to the treatment of interest on FDRs and interest on Income Tax Refund totalling upto Rs.6,60,348/- under the head "Income from Other Sources" by the AO. The appellant has submitted that these are part and parcel of his business income and has stated that the judgment of Hon'ble Delhi High Court in the case of CIT Vs. Shree Ram Honda Power Equipments 289 ITR 475 (Del) is not applicable in the case of the appellant as in that case the interest income had been excluded from the business income for the purpose of calculating deduction u/s. 80HIIC of the Act, whereas this was not the case here. The appellant submitted that FDR interest of Rs.8,35,34,958 in A.Y. 2007-08 and FDR interest of Rs.10,12,23,376 in A.Y. 2008-09 were not considered separately in the assessment orders for those years. The appellant relied on the case of: (a) CIT Vs. Favre Luvea & Co. Ltd. 179 Taxman 419 (Bom) (b) ITO Vs. Paramount Premises Pvt. Ltd. 91 ITD 267. ITAT Bombay. "C" Bench (c) R.B. Jodhamal Kuthiala Vs CIT 83 ITC 464 (P&H) I have carefully considered the submissions made by the appellant and the case laws cited by the Id. AR. I have also considered the fact that in subsequent years the Department has treated FDR interest as business income. Under these circumstances, I am of the opinion that the interest income should be treated under the head Business and Profession only. The appellant has also submitted that these FDRs were made by the appellant firm as a guarantee against contracts. Thus, this issue is decided in favour of the appellant.”
In view of the above discussion, we do not find any justification to interfere with the well reasoned order of the ld. CIT(A). The ld. DR could not contradict the findings given in the impugned order. Therefore, the appeal of the Revenue is liable to be dismissed, being devoid of merit.