Bhavani Cotton Ginning & Pressing Factory, Ahmedabad V. ITO, Ward-3(2)(5), Ahmedabad

ITA 1131/AHD/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1866 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 03-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ABHIMANYU SINGH YADAV
• Keywords: Rejection of books of accounts; Business income; Depreciation; Business expenditure; Principle of natural justice; Corroborative evidences
• Section: 37; 40(b); 14A; 250; 13; 145(3); 119

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ B’’ BENCH, AHMEDABAD BEFORE MS SUCHITRA KAMBLE, JUDICIAL MEMBER And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos. 1130-1131/AHD/2018 िनधाᭅरण वषᭅ/Asstt. Years: (2013-2014 & 2014-15) Bhavani Cotton Ginning & Pressing Factory, Plot No.100/15, GIDC, Ranpur Road, Dhandhuka, Ahmedabad. PAN: ABIFS7878P Vs. I.T.O., Ward-3(2)(5), Ahmedabad. (Applicant) (Respondent) Assessee by : Shri S.N. Divitia, A.R Revenue by : Shri Abhimanyusingh Yadav, Sr. D.R सुनवाई कᳱ तारीख/Date of Hearing : 24/05/2022 घोषणा कᳱ तारीख /Date of Pronouncement: 29/07/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned two appeals have been filed at the instance of the Assessee against the separate orders of the Learned Commissioner of Income Tax (Appeals)- 7, Ahmedabad, of even dated 28/02/2018 arising in the matter of assessment order passed under s. 143 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years 2013-2014 & 2014-15. ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 2 First, we take up ITA No. 1130/Ahd/2018, an appeal by the assessee for the A.Y 2013-14. 2. The assessee has raised the following grounds of appeal: 1.1 The order passed u/s.250 on 28.02.2018 for A.Y. 2013-14 by CIT(A)-7, Ahmedabad upholding the rejection of book result and addition of Rs.38,01,728/- by AO is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned addition. 1.3 The Ld. CIT(A) has grievously erred in law and on facts in confirming the rejection of the books of accounts of the appellant and upholding the consequential addition of Rs.38,01,728/- being Net Profit estimated at 1.5% of the turnover. 1.4 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have confirmed rejection of the books of accounts of the appellant and upholding the consequential addition of Rs. 38,01,728/- being NP estimated at 1.5% of the turnover. It is, therefore, prayed that the addition of Rs.38,01,728/- upheld by the CIT(A) may kindly be deleted. 3. The only effective issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 38,01,728/- made by the AO after rejecting the books of account under section 145(3) of the Act. 4. The facts in briefs are that the assessee is a partnership firm and engaged in the business of purchase and processing of raw cotton, trading of cotton bales and seeds. The assessee during the year under consideration has shown the turnover of Rs. 25,34,48,526/- on which declared gross profit of Rs. 84,46,956/- and net profit of Rs. NIL. The assessee was asked to furnish the details of purchase and sale registers along with copy of invoices, unit wise yield of production and details of closing stock along with method of valuation. But assessee failed to submit copy of invoices, unit wise yield of production etc. despite several reminders. Therefore, the AO vide notice dated 11-03-2016 purposed to reject the books of accounts and estimate the Net Profit at 1.5% only. ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 3 4.1 In response, the assessee vide letter dated 15-03-2016 submitted that it has maintained all the quantitative details and books of account which are duly audited and certified by the qualified auditor. The assessee in support of his contention has also furnished copies of VAT return. It was further submitted that the NIL net profit was shown after deducting depreciation and remuneration to partners and both these deductions are not real expenditure. Hence there is net profit if these legal deduction are not considered. 5. However, the AO was dissatisfied with the explanation of the assessee and again vide order sheet dated 16-03-2016 asked the assessee to furnish the detailed as called for earlier. However, the assessee expressed its inability to furnish the details as asked for. Thus, the AO rejected the books of accounts and estimated the net profit at 38,01,728/- being @ 1.5% of turnover after making comparison with other assessee engaged in similar business. 6. Aggrieved assessee preferred an appeal before the learned CIT(A). The assessee besides reiterating its submission made during the assessment proceeding claimed that all the details were duly discussed and verified by the predecessor AO. However, due to transfer of the AO, the fresh notice was issued at the fag end and without pointing out specific defect in the audited account books. Thus the rejection of the books of accounts was not justified. 7. However, the learned CIT (A) after considering facts in totality confirmed the action of the AO by observing as under: 5.3 have carefully considered the assessment order, facts of the case and the submissions made by the appellant. It is seen from the assessment order that the AO had several times during the assessment proceedings called for purchase and sales registers, unit-wise yield of production, copies of electricity bills, copies of sales bills, details of closing stock, etc. from the appellant. However these were not furnished during the assessment proceedings. The AO therefore rejected the books of accounts u/s. 145(3) of the Act and estimated the net profit at 1.5% of the total turnover of Rs.25,34,48,526/- which worked out to Rs.38,01,728/- which was added to the total income of tin-appellant. During the appellate proceedings, the appellant has stated that the rejection of books of accounts was not justified since no defect was noted in the ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 4 audited accounts of the appellant. This submission of the appellant, however, does not hold merit. 1 find that the AO had very specifically asked for various details like purchases and sales register, unit-wise yield of production, copies of electricity bills, copies of sales bills, details of closing stock, etc. which were not produced by the appellant. During the appellate proceedings as well, none of these documents/registers, etc. have been produced and no reason has been given for the same. If the books of accounts of the appellant are audited and all the necessary registers, bills, etc. are available with it, then the appellant should have no problem in producing the same before the AO. During remand proceedings as well, it is evident that these have not been furnished to the AO. The appellant has also not made any mention in this regard in its rejoinder to the remand report. /In view of these facts, I am of the opinion that the AO was justified in rejecting the books of accounts of the appellant and accordingly i the estimation of net profit of Rs.38,01,728/-is confirmed. Ground of appeal No.l is dismissed. 8. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 9. The learned AR for the assessee before us filed a paper book running from pages 1 to 53 and contended that the books of accounts were duly audited and no adverse inference was drawn against the assessee therefrom. Accordingly, the books of accounts should be accepted along with the profit declared therein. 10. On the other hand, the learned DR vehemently supported the order of the authorities below. 11. We have heard the rival contentions of both the parties and perused the materials available on record. There is no dispute to the fact that the assessee has shown huge turnover in its financial statements amounting to Rs. 25,34,48,526/- against which the assessee has shown gross profit at Rs. 84,46,956/- and net profit at Rs. Nil. It was the contention of the assessee that net profit is not actually nil if it is seen before the remuneration/interest to the partners and the depreciation which stands at ₹73,272/, Rs. 6,00,936/- and Rs. 11,24,454/- respectively. Admittedly, in the hands of the assessee being the partnership firm the interest/remuneration to the partners are the eligible expenses. Same is the case with the depreciation claimed by the assessee. It is also an admitted fact that the ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 5 remuneration/interest to the partners though eligible for deduction from the income of the partnership firm but the same is taxable in the hands of the partners in their individual capacity. But, we have to see profit of the assessee which is the partnership firm before us. It is the onus upon the assessee to justify based on the documentary evidence that the profit declared by it, is correct and supported by the books of accounts and the corroborative evidences. But the assessee has not filed the books of accounts along with the supporting corroborative materials to justify that the profit declared in the income tax return is correct within the provisions of law. Thus, we hold that the assessee failed to discharge his primary onus cast upon it under the provisions of law. 11.1 Accordingly, in the absence of necessary books of accounts and supporting materials, the income of the assessee cannot be deduced. Thus, the only option available to the AO is to determine the profit of the assessee in the scientific manner. For this purpose, we note that the AO has taken other assessee engaged in similar business for comparable and reached to the conclusion that the net profit of the assessee should have been declared at least 1.5% of the turnover. The industrial comparable rate selected by the AO while determining the profit has not been disputed by the assessee. 11.2 Even before us, the learned AR has not brought anything on record contrary to the finding of the authorities below. It was just contended by the learned AR that books of accounts were duly audited and therefore the same cannot be rejected without assigning any reason. However, we are not convinced with the argument of the learned AR that getting the books of accounts audited debar the assessee to provide the necessary supporting documents along with the books of accounts as appearing in the audited financial statements. 11.3 Before parting, we note that the Hon’ble High Court in numerous cases has held that once the books of accounts have been rejected, then the only option is to ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 6 estimate the income of an assessee by applying a net profit or gross profit to the gross receipts/turnover of the assessee in scientific manner. In such cases, following questions always arise: (1) Whether the remuneration and interest to the partners are the allowable deduction against the income estimated by the AO. (2) Whether an assessee can claim depreciation for use of assets during the course of business from estimation made by the Assessing Officer? 11.4 With respect to question No. 1, we note that the ITAT Pune Benches in the case of Quality Industries vs. JCIT Reported in 161 ITD 217 has held that interest on partner’s capital and remuneration to the partners is not an expenses as the same is an appropriation of profit only. The relevant observation of the tribunal reads as under: 10. We have carefully considered the rival submissions. The pre-dominant question that arises for our consideration is whether payment of interest to the partners by the partnership firm toward use of partner's capital is in the nature of 'expenditure' or not for the purposes of section 14A of the Act and consequently, whether interest on partners capital is amenable to section 14A or not in the hands of partnership firm. 11. In order to adjudicate this legal issue, we need to appreciate the nuances of the scheme of the taxation. We note that prior to amendment of taxation laws from AY 1993-94, the interest charged on partners capital was not allowed in the hands of partnership firm while it was simultaneously taxable in the hands of respective partners. An amendment was inter alia brought in by the Finance Act 1992 in section 40(b) to enable the firm to claim deduction of interest outgo payable to partners on their respective capital subject to some upper limits. Hence, as per the present scheme of taxation, the interest payment on partners capital in essence is not treated as allowable business expenditure except for the deduction available under S. 40(b) of the Act. 11.1 Ostensibly, with effect from assessment year 1993-94, partnership firms complying with the statutory requirements and assessed as such are allowed deduction in respect of interest to partners subject to the limits and conditions specified in section 40(b) of the Act. In turn, these items will be taxed in the hands of the partners as business income under s. 28(v). Share of partners in the income of the firm is exempt from tax under section 10(2A). Thus, the share of income from firm is on a different footing than the interest income which is taxable under the business income. 11.2 Similarly, we note that interest and salary received by the partners are treated on a different footing by the Act and not in its ordinary sense of term. The Section 28(v) treats the passive income accrued by way of interest as also salary received by a partner of the firm as a 'business receipt' unlike different treatments given to similar receipts in the hands of entities other than partners. In this context, we also note that under proviso ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 7 to section 28(v), the disallowance of such interest is only in reference to section 40(b) and not section 36 or S. 37. This also gives a clue that deduction towards interest is regulated only under section 40(b) and the deduction of such interest to partners is out of the purview of s. 36 or 37 of the Act. Notably, there has been no amendment in the general law provided under Partnership Act 1932. The amendment to section 40(b) as referred hereinabove has only altered the mode of taxation. Needless to say, the Partnership firm is not a separate legal entity under the Partnership Act. It is not within the purview of the Income-tax Act to change or alter the basic law governing partnership. Interest or salary paid to partners remains distribution of business income. 11.3 Relevant here to refer to decision of Hon'ble Supreme Court in the case of R.M. Chimbaram Pillai (supra) relied upon by the Assessee. Supreme Court has held in the case of R.M. Chidambaram Pillai, etc. (supra) held that: "A firm is not a legal person, even though it has some attributes of personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm. Held accordingly, the salary paid to a partner by a firm which grows and sells tea, is exempt from tax, under rule 24 of the Indian Income-tax Rules, 1922, to the extent of 60 per cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent." Supreme Court has also held in the case of CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC) that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is partner. Thus, the 'partnership firm' and partners have been collectively seen and the distinction between the two was blurred in the judicial precedents even for taxation purposes. 11.4 Section 4 of the Indian Partnership Act 1932 defines the terms partnership, partner, firm and firm name as under : "Partnership" is the relation between persons, who have agreed to share the profits of a business, carried on by all or any of the partners acting for all. Persons who have entered into partnership with one another are called individually 'Partners' and collectively a 'firm' and the name under which their business is carried on is called the 'firm name." Thus, it is clear from the above that firm and partners of the firm are not separate person under Partnership Act although separate unit of assessment for tax purposes. There cannot therefore be a relationship inferred between partner and firm as that of lender of funds (capital) and borrowal of capital from the partners, hence section 36(1)(iii) is not applicable at all. Section 40(b) is the only section governing deduction towards interest to partners. In the light of what is already noted above that firm and partners not being two separate persons, the question of borrowing capital by the firm from its partners does not arise at all and, therefore, section 36(1)(iii) is not at all applicable for the purposes of computation of interest to partners under section 40(b) ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 8 of the Act. To put it differently, in view of section 40(b) of the Act, the Assessing Officer purportedly has no jurisdiction to apply the test laid down under section 36 of the Act to find out whether the capital was borrowed for the purposes of business or not. Thus, the question of allowability or otherwise of deduction does not arise except for S. 40(b) of the Act. 11.5 The above order of the ITAT reveals that interest on the partners’ capital and remuneration to the partners by the assessee is not an expense rather it represents the appropriation of profit. Thus, in such circumstances we can hold that the assessee is entitled for deduction against the profit estimated by the AO after rejecting the books of accounts of such expenses being interest on partners’ capital account and remuneration to the partners. 11.6 The issue with respect to deduction of depreciation is settled by various High Courts in a number of cases. The Rajasthan High Court in the case of CIT v. Jain Construction Co. [2000] 245 ITR 527/110 Taxman 156, wherein circular issued by the CBDT in this regard has been relied upon. Same is reproduced here:– "171. Claim for depreciation - Where required particulars have not been furnished. – (1) Numerous instances have come to the notice of the Board where the assessee’s claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimateprofits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that the mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly ‘allowed’ as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years, the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the written down value of the asset. (2) The Board considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the depreciation allowance should be separately deducted from the gross profit. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom. (3) Even where best judgment is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 9 depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year." 11.7 Following cases support the view that depreciation is a statutory allowance and same is allowable after applying estimated income:– -Girdhari Lal v. CIT [2002] 256 ITR 318/[2001] 119 Taxman 863 (Punj. & Har.). -CIT v. Chopra Bros. India (P.) Ltd. [2001] 252 ITR 412/119 Taxman 866 (Punj. & Har.). -CIT v. Sriram & Co. [2001] 250 ITR 169/[2002] 120 Taxman 238 (Raj.). 11.8 Further as provided by presumptive taxes, under sections 44AD, 44AE and 44AF, all deductions under sections 30 to 38 shall be deemed to have been allowed, and no further deduction under those sections would be allowable. No such provision has been mentioned in any other case of presumptive income or estimation by the Assessing Officer and, hence, depreciation should be allowable being statutory allowance where Assessing Officer has rejected the books of account and estimated the income of the assessee. However, the profit declared by the assessee in the return of income cannot be further reduced on account of partner’s remuneration, interest on partner’s capital and the depreciation. 11.9 In view of the above and after considering the facts in totality, we uphold the rejection of the books of accounts made by the authorities below as well as the rate of profit estimated by the authorities below but subject to the direction that against the estimated profit the amount of depreciation, partners remuneration and interest to the partners on their capital should be allowed as deduction while calculating the taxable income in the hands of the assessee. Thus the ground of appeal of the assessee is partly allowed. In the result, the appeal of the assessee is partly allowed. ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 10 Coming to the ITA No.1131/Ahd/2018 for A.Y. 2014-15. 12. The assessee has raised following grounds of appeal: 1.1 The order passed u/s.250 on 28.02.2018 for A.Y. 2014-15 by CIT(A)-7, Ahmedabad upholding the rejection of book result and addition of Rs.24,99,156/- by AO is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned addition. 1.3 The Ld. CIT(A) has grievously erred in law and on facts in confirming the rejection of the books of accounts of the appellant and upholding the consequential addition of Rs.24,99,156/- being Net Profit estimated at 1.5% of the turnover. 1.4 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have confirmed rejection of the books of accounts of the appellant and upholding the consequential addition of Rs. 24,99,156/- being NP estimated at 1.5% of the turnover. It is, therefore, prayed that the addition of Rs.24,99,156/- upheld by the CIT(A) may kindly be deleted. 13. The only effective issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 24,99,156/- made by the AO after rejecting the books of account under section 145(3) of the Act. 14. At the outset, we note that the issues raised by the Assessee in its grounds of appeal for the AY 2014-15 are identical to the issues raised by the assessee in ITA No. 1130/AHD/2018 for the assessment year 2013-14. Therefore, the findings given in ITA No. 1130/AHD/2018 shall also be applicable for the year under consideration i.e. AY 2014-15. The appeal of the assessee for the assessment 2013- 14 has been decided by us vide paragraph No. 11 of this order partly in favour of the assessee. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2013-14 shall also be applied for the year under ITA nos.1130-1131/AHD/2018 A.Y.s 2013-14 & 2014-15 11 consideration i.e. AY 2014-15. Hence, the ground of appeal filed by the assessee is hereby partly allowed. 14.1 In the result appeal of the assessee is hereby partly allowed. 15. In the combined result, both the appeals of the assessee are hereby partly allowed. Order pronounced in the Court on 29/07/2022 at Ahmedabad. Sd/- Sd/- (SUCHITRA KAMBLE) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 29/07/2022 Manish