PRITAM KHANNA RUGS PVT. LTD. V. COMMISSIONER OF INCOME TAX

IAPL/502/2008

AI Insights

Pritam Khanna Rugs Pvt. Ltd., a manufacturer and exporter of carpets, faced scrutiny during the assessment year 2004-05 when the Assessing Officer noted a significant drop in gross profit margins and lack of proper documentation for purchases. The AO invoked Section 145(3) of the Income Tax Act due to the non-verifiability of the accounts, leading to an estimated tax on extra profits. The Commissioner (Appeals) and subsequently the Tribunal upheld these findings, rejecting the assessee's claims that the interest income from FDRs should be treated as business income. The Tribunal's decision was based on the lack of direct connection of FDR interest to the export business, aligning with precedents set by the Supreme Court.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 695869 (HC-INDIA)
• Appeal Type: Others
• Pronouncement Date: 01-08-2018
• Assessment Year: misc
• Other Referred Cases: Dr. V.P. Gopinathan 245 ITR 499, ACG Associated Capsules Pvt. Ltd. Versus Commissioner of Income Tax : (2012) 343 ITR 89 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: S S C I T; ASHISH AGARWAL
• Assessee Lawyers: S K GARG; ASHISH BANSAL
• Keywords: Assessment Year 2004-05; Books of account; FDR; Gross Profit; Income tax appeal; Interest income
• Section: 144; 145(3); 260-A; 80 HHC

Judgement Text

"1 Court No. - 35 Case :- INCOME TAX APPEAL No. - 502 of 2008 Appellant :- Pritam Khanna Rugs Pvt. Ltd. Respondent :- Commissioner Of Income Tax Counsel for Appellant :- S.K. Garg,Ashish Bansal Counsel for Respondent :- S.S.C. I.T.,Ashish Agarwal Hon'ble Bharati Sapru,J. Hon'ble Dinesh Kumar Singh,J. 1. This appeal has been filed under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') by the assessee arising out of an order of Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') dated 27.06.2008 for the assessment year 2004-05. 2. The appeal was admitted on 04.07.2013 on two following questions of law formulated in the memo of appeal:- \"iii)Whether, there existed any material on the basis of which provision of sub section (3) of section 145 can be invoked, so as to uphold the rejection of books of account thereunder and addition of Rs.3,00,000/- on account of extra profit? vii) Whether, the Tribunal was legally correct in upholding the enhancement os had been made by the first Appellate Authority by excluding interest income and disallowing the loss in joint venture, from the computation of business income?\" 3. The assessee was a manufacturer and exporter of carpets and durries etc. During the course of assessment proceedings, the Assessing Officer (hereinafter referred to as 'the AO') observed that the gross profit had come down substantially from 32.57 % in Assessment Year 2001-02 and 32.04 % in Assessment Year 2002-03 to 19.72 % only during the Assessment Year 2004-05. The AO found that the assessee had not maintained bills and vouchers for purchases from karigars (artisans) and information requested in respect of the quantitative tally of stock was not furnished. Therefore, the AO asked the assessee to explain the reasons for fall in gross profit and the applicability of provisions of Section 145(3) of the Act. 2 4. The assessee replied that the karigars( artisans) did not give bills and hence, vouchers were not obtained from them. 5. The AO found the reply filed by the assessee to be vague and unconvincing. Since, the actual purchase price of each carpet could not be ascertained in absence of proper vouchers, the entire system of accounting of the assessee was not proper. The books of the account maintained by the assess could not be said to be verifiable. The AO therefore, invoked the provisions of Section 145(3) of the Act. The AO while rejecting the books of accounts observed that no manufacturing register could be produced and hence, verification of manufacturing and finishing expenses was not possible. The original books of account were not produced and only computer generated books were produced. Audit report mentioned that no raw material was consumed duirng the process of manufacturing and, therefore, the AO observed that the expenses relating to various processes in manufacturing of carpets and darries could not be cross checked. 6. The AO did not agree with the explanation of the assessee regarding fall in the gross profit that the local sales resulted in loss, fluctuation in foregin exchange brought down the profit by 6% and the competition in the market increased. The AO, therefore, rejected the books and estimated gross profit at 26% by giving the benefit of reduction of 6% towards fluctuation in foreign exchange from the gross profit rate of 32.04% of the earlier year. By applying gross profit at the rate of 26% on the admitted turn over, the AO brought an amount of Rs.64,65,114/- to tax as extra profit. 7. The assessee filed an appeal against the assessment order dated 27.12.2006 before the Commissioner (Appeals). The Commissioner (Appeals) upheld the order of the AO for invoking the provisions of Section 145(3) of the Act. 8. During the course of appellate proceedings, it was noticed that the assessee had interest income of Rs.17,93,484/-. The said interest was earned on FDR. The contention of assessee that the interest on 3 FDR be treated as business income was not accepted by the Commissioner (Appeals). The Commissioner (Appeals) held that FDR had no direct bearing on the business of the assessee. If the surplus funds ha been deposited in the FDR to earn interest an the assessee had incidentally borrowed certain money against the society of FDR (which in this case was just on one occasion that too for a period of two months or so), the interest on money borrowed was allowable as expenditure in connection with business (and the same had been claimed and got allowed as deduction). However, the interest on FDR as such could not be treated as business income. 9. The Commissioner (Appeals) relied on the judgment of Supreme Court in the case of Dr. V.P. Gopinathan 245 ITR 499 and held that the interest on FDR had no connection with the main business of export and, therefore, it cannot be said to be business income and, therefore, it was to be excluded for the purpose of computation and deduction under Section 80 HHC of the Act. The interest earned on FDR was to be assessed as income from other sources. The Commissioner (Appeals) directed the AO to exclude the interest income from the computation of business income and bring it to tax as income from other sources and recompute the deduction under Section 80 HHC of the Act. 10. Aggrieved by the aforesaid order of Commissioner (Appeals), the assessee filed an appeal before the Tribunal. The Tribunal in its impugned order had dealt with the first question in detail and had held that the purchases made in cash from karigars (artisans) were not completely verifiable. It held that prerequisite conditions for invoking the provisions of Section 145 (3) of the Act were in existence and, therefore, the AO rightly rejected the books of accounts. It did not find any error in the order passed by the Commissioner (Appeals) and upheld the order passed by the lower authorities. 11. In respect of second issue regarding the interest on FDR aggregating to Rs.17,19, 484/- to be included for the purposes of computation to eligible profit under Section 80 HHC of the Act, the 4 Tribunal has held that said income could not be said to have been derived from the business of export and, therefore, it was rightly excluded from the computation of eligible profit under Section 80HHC of the Act. 12. Heard learned counsel for the appellant, Sri Ashish Bansal and learned counsel for the Revenue, Sri Ashish Agrawal. 13. Section 145(3) of the Act authorises the AO if he is not satisfied about the correctness or completeness of accounts of the assessee to make an assessment in the manner provided under Section 144 of the Act. The AO as well as Commissioner (Appeals) on detailed examination of the books of account of the assessee had held that the accounts were not verifiable. The Tribunal has also upheld the findings of the lower authorities. 14. We, therefore, find that the requisites of invoking Section 145(3) of the Act were present in the case of the assessee for the assessment year under considering i.e. 2004-05. We do not find any infirmity in the impugned order of the Tribunal on this issue. We, therefore, uphold the order passed by the Tribunal. 15. From, the record, it is clear that the assessee had earned interest on income to the tune of Rs.17,14,484/- from FDR on surplus fund deposited in the bank. Interest paid on loan taken from the bank against the FDR had already been allowed as deduction. The interest on money borrowed is allowable expenditure in connection with the business and was claimed and deducted. The interest earned on FDR has no connection with the export business of the assessee and this is not an income from export business of the assessee. This has to be treated as an income from other sources. 16. Learned counsel for the assessee has placed reliance on the judgment of Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. Versus Commissioner of Income Tax : (2012) 343 ITR 89 (SC) to submit that as per the language of Explanation (baa) to Section 80 HHC of the Act, only 90% of receipts by way of brokerage, 5 commission, interest, rent, charges or any other receipt of similar nature included in such profit computing under the head \"profits and gains of business\" of an assessee can be deducted under Clause (1) of Explanation (baa) and not 90% to any quantam of the afroesaid receipt which is allowed as expenses and, therefore, not included in the profits of business of the assessee. Learned counsel submits that the net of interest should have been included and not whole of the interest earned on FDR. 17. We have already noticed that the interest on loan taken against the FDR was already claimed and allowed as deduction from the profits and gains of business and, therefore, once the assessee had claimed the deduction of the interest on loan and which was allowed, the interest earned on the FDR has to be treated as income from other sources as the interest on FDR does not amount to business income. It has to be excluded for the purposes of computation of deduction under Section 80 HHC of the Act. The interest income on FDR is to be assessed as income from other sources. 18. We, therefore, do not find any merit in the appeal and the same is dismissed. 19. We answer the questions against the assessee and in favour of the department. Order Date :- 1.8.2018 prateek "