Iapl/502/2008 Of Pritam Khanna Rugs Pvt. Ltd v. Commissioner Of Income Tax

Court No. - 35 Case :- INCOME TAX APPEAL No. - 502 of 2008Appellant :- Pritam Khanna Rugs Pvt. Ltd.Respondent :- Commissioner Of Income TaxCounsel for Appellant :- S.K. Garg,Ashish BansalCounsel 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 IncomeTax Act, 1961 (hereinafter referred to as 'the Act') by the assesseearising out of an order of Income Tax Appellate Tribunal (hereinafterreferred to as 'the Tribunal') dated 27.06.2008 for the assessment year2004-05. 2. The appeal was admitted on 04.07.2013 on two followingquestions of law formulated in the memo of appeal:- "iii)Whether, there existed any material on the basis of which provision ofsub section (3) of section 145 can be invoked, so as to uphold the rejectionof books of account thereunder and addition of Rs.3,00,000/- on accountof extra profit? vii) Whether, the Tribunal was legally correct in upholding theenhancement os had been made by the first Appellate Authority byexcluding interest income and disallowing the loss in joint venture, fromthe computation of business income?" 3. The assessee was a manufacturer and exporter of carpets anddurries etc. During the course of assessment proceedings, theAssessing Officer (hereinafter referred to as 'the AO') observed that thegross profit had come down substantially from 32.57 % in AssessmentYear 2001-02 and 32.04 % in Assessment Year 2002-03 to 19.72 %only during the Assessment Year 2004-05. The AO found that theassessee had not maintained bills and vouchers for purchases fromkarigars (artisans) and information requested in respect of thequantitative tally of stock was not furnished. Therefore, the AO askedthe assessee to explain the reasons for fall in gross profit and theapplicability of provisions of Section 145(3) of the Act. 4. The assessee replied that the karigars( artisans) did not give billsand hence, vouchers were not obtained from them. 5. The AO found the reply filed by the assessee to be vague andunconvincing. Since, the actual purchase price of each carpet could notbe ascertained in absence of proper vouchers, the entire system ofaccounting of the assessee was not proper. The books of the accountmaintained by the assess could not be said to be verifiable. The AOtherefore, invoked the provisions of Section 145(3) of the Act. The AOwhile rejecting the books of accounts observed that no manufacturingregister could be produced and hence, verification of manufacturingand finishing expenses was not possible. The original books ofaccount were not produced and only computer generated books wereproduced. Audit report mentioned that no raw material was consumedduirng the process of manufacturing and, therefore, the AO observedthat the expenses relating to various processes in manufacturing ofcarpets and darries could not be cross checked. 6. The AO did not agree with the explanation of the assesseeregarding fall in the gross profit that the local sales resulted in loss,fluctuation in foregin exchange brought down the profit by 6% and thecompetition in the market increased. The AO, therefore, rejected thebooks and estimated gross profit at 26% by giving the benefit ofreduction of 6% towards fluctuation in foreign exchange from thegross profit rate of 32.04% of the earlier year. By applying gross profitat the rate of 26% on the admitted turn over, the AO brought anamount of Rs.64,65,114/- to tax as extra profit. 7. The assessee filed an appeal against the assessment order dated27.12.2006 before the Commissioner (Appeals). The Commissioner(Appeals) upheld the order of the AO for invoking the provisions ofSection 145(3) of the Act. 8. During the course of appellate proceedings, it was noticed thatthe assessee had interest income of Rs.17,93,484/-. The said interestwas earned on FDR. The contention of assessee that the interest on 7. The assessee filed an appeal against the assessment order dated27.12.2006 before the Commissioner (Appeals). The Commissioner(Appeals) upheld the order of the AO for invoking the provisions ofSection 145(3) of the Act. 8. During the course of appellate proceedings, it was noticed thatthe assessee had interest income of Rs.17,93,484/-. The said interestwas earned on FDR. The contention of assessee that the interest on FDR be treated as business income was not accepted by theCommissioner (Appeals). The Commissioner (Appeals) held that FDRhad no direct bearing on the business of the assessee. If the surplusfunds ha been deposited in the FDR to earn interest an the assesseehad incidentally borrowed certain money against the society of FDR(which in this case was just on one occasion that too for a period oftwo months or so), the interest on money borrowed was allowable asexpenditure in connection with business (and the same had beenclaimed and got allowed as deduction). However, the interest on FDRas such could not be treated as business income. 9. The Commissioner (Appeals) relied on the judgment of SupremeCourt in the case of Dr. V.P. Gopinathan 245 ITR 499 and held thatthe interest on FDR had no connection with the main business ofexport and, therefore, it cannot be said to be business income and,therefore, it was to be excluded for the purpose of computation anddeduction under Section 80 HHC of the Act. The interest earned onFDR was to be assessed as income from other sources. TheCommissioner (Appeals) directed the AO to exclude the interestincome from the computation of business income and bring it to tax asincome from other sources and recompute the deduction under Section80 HHC of the Act. 10. Aggrieved by the aforesaid order of Commissioner (Appeals),the assessee filed an appeal before the Tribunal. The Tribunal in itsimpugned order had dealt with the first question in detail and had heldthat the purchases made in cash from karigars (artisans) were notcompletely verifiable. It held that prerequisite conditions for invokingthe provisions of Section 145 (3) of the Act were in existence and,therefore, the AO rightly rejected the books of accounts. It did not findany error in the order passed by the Commissioner (Appeals) andupheld the order passed by the lower authorities. 11. In respect of second issue regarding the interest on FDRaggregating to Rs.17,19, 484/- to be included for the purposes ofcomputation to eligible profit under Section 80 HHC of the Act, the Tribunal has held that said income could not be said to have beenderived from the business of export and, therefore, it was rightlyexcluded from the computation of eligible profit under Section80HHC of the Act. 12. Heard learned counsel for the appellant, Sri Ashish Bansal andlearned counsel for the Revenue, Sri Ashish Agrawal. 13. Section 145(3) of the Act authorises the AO if he is not satisfiedabout the correctness or completeness of accounts of the assessee tomake an assessment in the manner provided under Section 144 of theAct. The AO as well as Commissioner (Appeals) on detailedexamination of the books of account of the assessee had held that theaccounts were not verifiable. The Tribunal has also upheld the findingsof 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 assessmentyear under considering i.e. 2004-05. We do not find any infirmity inthe impugned order of the Tribunal on this issue. We, therefore, upholdthe order passed by the Tribunal. 13. Section 145(3) of the Act authorises the AO if he is not satisfiedabout the correctness or completeness of accounts of the assessee tomake an assessment in the manner provided under Section 144 of theAct. The AO as well as Commissioner (Appeals) on detailedexamination of the books of account of the assessee had held that theaccounts were not verifiable. The Tribunal has also upheld the findingsof 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 assessmentyear under considering i.e. 2004-05. We do not find any infirmity inthe impugned order of the Tribunal on this issue. We, therefore, upholdthe order passed by the Tribunal. 15. From, the record, it is clear that the assessee had earned interest onincome to the tune of Rs.17,14,484/- from FDR on surplus funddeposited in the bank. Interest paid on loan taken from the bankagainst the FDR had already been allowed as deduction. The intereston money borrowed is allowable expenditure in connection with thebusiness and was claimed and deducted. The interest earned on FDRhas no connection with the export business of the assessee and this isnot an income from export business of the assessee. This has to betreated as an income from other sources. 16. Learned counsel for the assessee has placed reliance on thejudgment of Supreme Court in the case of ACG Associated CapsulesPvt. Ltd. Versus Commissioner of Income Tax : (2012) 343 ITR 89(SC) to submit that as per the language of Explanation (baa) to Section80 HHC of the Act, only 90% of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similarnature included in such profit computing under the head "profits andgains of business" of an assessee can be deducted under Clause (1) ofExplanation (baa) and not 90% to any quantam of the afroesaid receiptwhich is allowed as expenses and, therefore, not included in the profitsof business of the assessee. Learned counsel submits that the net ofinterest should have been included and not whole of the interest earnedon FDR. 17. We have already noticed that the interest on loan taken againstthe FDR was already claimed and allowed as deduction from theprofits and gains of business and, therefore, once the assessee hadclaimed the deduction of the interest on loan and which was allowed,the interest earned on the FDR has to be treated as income from othersources as the interest on FDR does not amount to business income. Ithas to be excluded for the purposes of computation of deduction underSection 80 HHC of the Act. The interest income on FDR is to beassessed as income from other sources. 18. We, therefore, do not find any merit in the appeal and the same isdismissed. 19. We answer the questions against the assessee and in favour of thedepartment. Order Date :- 1.8.2018 prateek