ISSUES RELATING TO PROFITS & GAINS OF BUSINESS OF PROFESSION [SECTION 28]

ISSUES RELATING TO PROFITS & GAINS OF BUSINESS OF PROFESSION [SECTION 28] 1. Introduction: by Ashvin C. Shah, C.A. Issues Relating to Profits & Gains of Business of Profession [Section 28] is a very wide topic and it is difficult to deal with all the issues. The attempt is made to deal with some of the important and burning issues in day-to-day practice. 2. Section 14A: 2.1 Expenditure incurred in relation to income not forming part of total income is not allowable. It therefore follows that expenditure which has a proximate cause with the income such expenditure is not allowable [CIT V/s. Walfort Share and Stock Brokers P. Ltd. 326 ITR 1 (SC)]. 2.2 Where income forms part of total income and the dividend income is incidental, Section 14A is not applicable. If the assessee is a dealer or trading in shares, the profit earned there from forms part of total income. The dividend is incidental. The question of disallowance under Section 14A does not arise [Yatish Trading Co. (P) Ltd. V/s. ACIT 129 ITD 237 (Bom)]. 2.3 The disallowance of expenditure is to be made in accordance with Rule 8D which is not retrospective but prospective in operation [Godrej & Boyce Mfg. Co. Ltd. V/s. DCIT 328 ITR 81 (Mum)]. If the AO is not satisfied having regard to the accounts about the correctness of the claim of expenditure or if the assessee claims that no expenditure is incurred than the disallowance is to be made in accordance with Rule

8D(2). The burden is on the AO to prove that the assessee has not made the correct claim of expenditure incurred. 2.4 If the assessee is able to establish that the investment made is out of interest free funds than the question of disallowance of interest does not arise. Nearly because the assessee had incurred interest expenditure on funds borrowed for other purpose it would not ipso facto invite the disallowance under Section 14A, unless there was evidence to show that such interest bearing funds are utilized in investment yielding exempt income [CIT V/s. Hero Cycles Ltd. 323 ITR 518 (P&H)]. 2.5 If there is no exempt income in one particular year but the interest is paid for the purpose of earning the exempt income, the interest is disallowable under Section 14A. Further, the receipt of interest is not to be considered. The actual interest paid on the borrowing utilized for the purpose of making investment, such interest is disallowable under Section 14A [Cheminvest Ltd. V/s. ITO 121 ITD 318 (Del) SB]. 3. Section 36(1)(iii): 3.1 The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession is allowable as deduction. Whether the borrowing is for the purpose of business or not is a matter of controversy and it depends upon the facts of each case. The principle which emerges on the basis of decided cases for allowing the amount of interest paid in respect of capital borrowed is that the following three conditions should be fulfilled: (i) (ii) The capital must have been borrowed or taken for the purpose of the business or profession; The interest should have been payable; and

(iii) If the borrowing is not for the business purpose and is for private purpose or is not connected with the business, interest paid on such borrowings cannot be allowed as a deduction under Section 36(1)(iii) of the Act. The burden to prove that the borrowing is for the purpose of business is on the assessee [Munjal Sales Corporation V/s. CIT 298 ITR 298 SC]. 3.2 If the capital is borrowed for the purpose of business for acquiring the asset than the interest paid is allowable as deduction even if such asset is not used during the year [DCIT V/s. Core Health Care Ltd. 298 ITR 194 (SC)]. This decision holds good only upto Assessment Year 2003-2004 since proviso to Section 36(1)(iii) is inserted from A.Y. 2004-2005. The proviso provides that no interest shall be allowed as deduction on borrowings utilized for the acquisition of capital assets which is not used during the year. 3.3 If the interest is paid on borrowings utilized not for the purposes of business than it is not allowable as deduction. If the assessee has given interest free loan out of interest bearing funds, the interest is obviously not allowable as deduction. However, if the interest free loan is given for commercial expediency than it is for the purpose of business and the interest paid is allowable as deduction. One has to inquire whether the loan was given by the assessee as measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business [S.A. Builders Ltd. V/s. CIT 288 ITR 1 (SC)].

3.4 It is presumed that interest free funds so long as they are available are utilized for interest free loans or investments unless the AO has established the nexus, the interest is on such funds is allowable as deduction [CIT V/s. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom)]. 3.5 If the borrowing is made in the past and there is no disallowance on interest free advances in the past, no disallowance can be made in the current year on the ground that the approach has to be consistent [CIT V/s. Sridev Enterprise 192 ITR 165 (Kar)]. 4. Section 36(1)(vii) Bad Debts: 4.1 After the amendment of Section 36(1)(vii) of the I.T. Act, 1961 with effect from 1 st April, 1989 in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable: it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee [T.R.F. Ltd. V/s. CIT 323 ITR 397 (SC)]. 4.2 The write off means there should be a debit to Profit & Loss Account and the corresponding amount should be reduced from the amount of sundry debtors disclosed in the balance sheet. There is no need to credit the debtor account and to close such account. If the amount provided is reduced from sundry debtors in the balance sheet it is sufficient compliance and the deduction is available. This is applicable to banking company as well as non-banking company [Vijaya Bank V/s. CIT 323 ITR 166 (SC)]. 4.3 There may be a case of loss arising out of trading. This loss is a trading loss. The loss may be allowed as deduction either as bad debts or trading loss depending upon the facts of each case.

5. Cessation or Remission of Liability Section 41(1) & 28(iv): 5.1 It is easy to explain the principles regarding cessation or remission of liability by way of illustration. A Ltd. received a loan of Rs. 10,00,000 from Mr. X before say six years. A Ltd. has written off Rs. 10,00,000 to capital reserve account on the ground that the whereabouts of Mr. X is not known. The AO held that the said amount of Rs. 10,00,000 is taxable under Section 41(1). The AO also held that the said amount is taxable under Section 28(iv) since it amounts to benefit or perquisites arising out of the business and that the assessee has become richer to that extent. 5.2 When any liability ceases or is remitted the amount of which was allowed as deduction in the past, Section 41(1) is applicable. Whether the act of cessation or remission of liability is unilateral or bilateral, it makes no difference. The above referred principles are also approved by the Supreme Court in the case of Polyflex (India) Pvt. Ltd. 257 ITR 343-346. The observations of the SC are as under: Section 41(1) applies if the following conditions and circumstances are satisfied: In the assessment for the relevant year an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by the assessee. This is the first step. Coming to the next step the assessee must have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof. In case either of these events happens, the deeming provision enacted in the closing part of sub-section (1) comes into play.

On the facts of A Ltd. there was no allowance or deduction in the past, therefore Section 41(1) is not applicable even if there is unilateral act on the part of A Ltd. 5.3 If the assessee has received the deposit from customer and the assessee writes off such amount to P & L A/c. since it is time barred. It is in the nature of trading receipt and taxable. If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee s own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee [CIT V/s. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 SC]. It was held as under: Held, that if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profit and loss account. The amounts were assessable in the hands of the assessee. 5.4 The Delhi ITAT in the case of DCIT V/s. Logitronics (P) Ltd. 127 ITD 16 has followed the SC decision in the case of CIT V/s. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 and held that the waiver of a loan if

it is utilized for the purpose of trading then when it is incurred. However, if it is utilized for acquisition of capital assets then it is not income. The AO did not make any inquiry about the use of the loan. The matter was restored to AO. On appeal, the Delhi High Court in the case of Logitronics (P) Ltd. V/s. CIT 197 Taxman 394 held that the Tribunal was justified in holding so. As regards illustration, it is not known whether A Ltd. has borrowed Rs. 10,00,000 for what purpose and therefore the above referred principle will hold good in case of A Ltd. also. The Bombay ITAT in the case of Mindteck (India) Ltd. V/s. ITO 122 ITD 486 distinguished the SC decision in the case of CIT V/s. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 (SC) and held that the loan amount received from promoter group company to meet the day to day requirements of the company i.e. payment of salary and other incidental in running the company apart from meet the conditions of handing over fairly a clean balance sheet is not a trading liability and therefore not taxable. 5.5 The AO held that the amount of Rs. 10,00,000 written off to capital reserve account represents the value of benefits or perquisites within the meaning of Section 28(iv) and that the assessee has become richer to that extent. The addition is not proper. (a) The liability though written off in the books of account still stands. The remedy is time barred but the right is not destroyed. The debtor can claim the amount at any time. The assessee has not become richer as held by the AO in as much as the liability to repay the loan still stands. In other words, the liability does not cease to exist. The SC in case of CIT V/s. Sugauli Sugar Works (P) Ltd. 236 ITR 518 while dealing with Section 41(1) held as under:

The principle that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt has been well settled. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section. (b) Explanation-1 to Section 41(1) was inserted by Finance (No.2) Act, 1996 with effect from 01-04-1997 so as to treat unilateral transaction as benefit. However, there is no such corresponding explanation under Section 28(iv). Therefore, unilateral transaction does not confer any benefit to the assessee. (c) Section 28(iv) is reproduced below for ready reference : (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. From the plain language of the section that the value of benefit or perquisite arising out of business is always in kind and not in cash. If anything is received in cash then it is not a benefit or perquisite taxable under Section 28(iv). This view is held in following cases: CIT V/s. Alchemic Pvt. Ltd. 130 ITR 168 (Guj) CIT V/s. Saurashtra Packaging P. Ltd. 259 ITR 520 (Guj) Ravinder Singh & Other V/s. CIT 205 ITR 353 (Del) Mahindra & Mahindra Ltd. V/s. CIT 261 ITR 501-509 (Bom) Solid Containers Ltd. V/s. DCIT & Ano. 308 ITR 417 (Bom)

(d) Section 28(iv) taxes the income and not the capital receipt. The loan amount received by A Ltd. is capital receipt and therefore not taxable under Section 28(iv). (e) The benefit or perquisite should arise out of the business. In case of A Ltd. it is not arising out of the business and therefore it is not taxable [Chetan Chemicals P. Ltd. 267 ITR 770 (Guj)]. 6. Section 40(a)(ia): 6.1 If there is a failure to deduct tax at source or failure to make payment of the tax deducted than the expenditure in respect of which the tax is required to be deducted is not allowable as deduction. This is a harsh provision but the relief is given by the amendment made by Finance Act, 2010 w.e.f. 01-04-2010 which provides that if the tax deducted is paid before due date of filing of the return than it is sufficient compliance though the amendment is with effect from 01-04-2010 it is held to be retrospective in following cases: (a) (b) Bansal Parivahan India (P) Ltd. V/s. ITO 43 SOT 619 (Mum) Kanubhai Ramjibhai V/s. ITO 135 TTJ 364 (Ahd) 6.2 Section 194C is substituted by Finance Act, 2009 with effect from 01-10-2009. Before its substitution, the transport operator makes payment to the sub-contractors, the tax is not required to be deducted at source, if the sub-contractor has submitted Form No. 15-I and has also furnished the information in Form No. 15-J to the CIT within prescribed time limit. The AO takes a view that the conditions are cumulative and that if Form No. 15-J is not submitted within prescribed time limit than failure to deduct tax at source invites disallowance even if the contractor has received Form No. 15-I from sub-contractors. It is held by

Ahmedabad Bench of ITAT in the case of Valibhai Khanbhai Mankad V/s. DCIT, ITA No. 2228/Ahd/2009 dated 29-04-2011 that failure to deduct tax at source and failure to furnish Form No. 15-J with the CIT are different things. Since Form No. 15-I are received by the contractor, there is no failure to deduct tax at source and that furnishing of Form No. 15-J is of procedural nature and not mandatory. 7. Same Business: 7.1 It is easy to explain the concept of same business by illustration. A Ltd. has made expansion by starting another manufacturing Division at different location. The new division has yet not commenced the production at the end of the year. However, has incurred the revenue expenditure by way of salary, postage, telephone, stationary etc. and also interest on borrowings utilized for the acquisition of capital asset. The AO did not allowed the set-off of revenue expenditure and interest against the profit of main division of A Ltd. As regards interest is concerned, if the assessment year is prior to A.Y. 2004-2005, it is allowable as deduction [DCIT V/s. Core Health Care Ltd. 298 ITR 194 (SC)]. As regards A.Y. 2004-2005 onwards, the interest is not allowable as deduction by virtue of proviso of Section 36(1)(iii) inserted by Finance Act, 2003 w.e.f. 01-04-2004. The proviso provides that the interest paid on borrowing utilized for acquisition of capital asset for extension of business is not allowable as deduction. 7.2 As regards revenue expenditure, the same is allowable since the expansion or extension is a part of same business. The test for the same business is unity of control, interlacing, common management, common administration and common funds which can be proved as under:

(a) (b) (c) (d) (e) (f) There is a common management in as much as the Board of Directors of A Ltd. managed both the division; There is common fund from which the necessary capital and working funds are supplied to both the business activity; The ultimate gain or loss of the business are also worked out by consolidated P & L A/c. and Balance Sheet; There is a common staff for carrying on both the business activity; There is complete unity of control in the management and administration of both the business activities; There is common place of business. This is so held in following cases: (i) (ii) (iii) (iv) (v) (vi) CIT V/s. Prithvi Insurance Co. Ltd. 63 ITR 632 SC Produce Exchange Corp. Ltd. V/s. CIT 77 ITR 739 SC CIT V/s. Alembic Glass Industries Ltd. 103 ITR 715 [Guj] Veecumsees V/s. CIT 220 ITR 185 (SC) CIT V/s. DCM Ltd. 320 ITR 307 (Del) CIT V/s. Monnet Indus. Ltd. 332 ITR 627 (Del) 8. Set-up of Business and Commencement of Business: 8.1 There is distinction between set-up of Business and Commencement of Business. In case of commencement of business, there is commencement of commercial production. In case of set-up of business one of the activities of the business is started without commencing commercial production. In case of set-up of business, the revenue expenditure is allowable as deduction when the business is set-up.

8.2 The assessee has carried on following activities: (a) Acquired the building; (b) Started renovation of the building; (c) Giving on lease to the tenant. It was contended by the Revenue that the business is said to have commenced when the property was given on lease. It was held by the Gujarat High Court in the case of Sarabhai Management Corporation V/s. CIT 102 ITR 25 that the starting of renovation of a property is one of the activities carried on the assessee and therefore from the date of starting renovation the business is said to have set-up. This decision is affirmed by SC in the case of CIT V/s. Sarabhai Management Corporation 192 ITR 151. The Gujarat High Court in case of Sarabhai Management Corporation has followed the principle laid down by Saurashtra Cement & Chemical Industries Ltd. 91 ITR 170. The above referred principles are followed by the Delhi High Court in case of CIT V/s. Hughes Escorts Communication Ltd. 311 ITR 253. 9. Principle of res-judicata consistency: 9.1 Under the normal circumstances, the principle of res judicata or estoppels is not applicable in taxing statutes. However, if the revenue has taken a view after making the inquiry than the same view cannot be changed in the subsequent years unless there are change in facts. The SC in the case of Radhasoami Satsang V/s. CIT 193 ITR 321 (SC) held as under: Strictly speaking, res judicata does not apply to income tax proceedings. Though, each assessment year being a unit, what was

decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 9.2 The above referred principles of res judicata or consistency have been followed in so many cases. For example, the assessee gave interest free loan to a sister concern in the past. No disallowance was made in the past on the presumption that the interest free loan was given out of interest free funds and not out of interest bearing funds. The interest on the opening balance as on 1 st April cannot be disallowed since the approach has to be definite and consistent [CIT V/s. Sridev Enterprise 192 ITR 165 (Kar)]. The Kerala High Court in the case of CIT V/s. N.P. Methews 280 ITR 44. It is held that Income tax proceedings difference should not be made between assessee in similar situation and between different assessment years of same assessee. The Delhi High Court in the case of DIT(E) V/s. Escorts Cardiac Diseases Hospital Society 300 ITR 75 (Del) held as under: Held, dismissing the appeal, that since there was no change in the facts and circumstances from the A.Y. 1988-1989 till the A.Y. 1997-1998, the Revenue had to follow a consistent pattern and when it had granted the benefit of exemption under Section 10(22A) and 11 of the Act. It could not be permitted to change its opinion without any noticeable change in circumstances.

10. Section 145 Rejection of Books: 10.1 Substitution of Section 145 with effect from 01-04-1997: Section 145(1) is substituted whereby the method of accounting should now be either cash or mercantile and not hybrid. Section 145 of the Income-tax Act, 1961, only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax. The provision by itself does not deal with addition or deletion to the income. Therefore, mere rejection of, or some deficiency in, the books of account would not mean that it must necessarily lead to additions to the returned income. The result of changes in either case would depend on the other principles of computing the income. Merely changing the basis or the method of arriving at the end result of working out the computation of taxable income necessarily does not result in devising any profits or gains from business different from that returned by the assessee, where he has returned his income and different from the result reached by the assessee as per the method of accounting employed by him, by the assessing authority adopting a different basis. [CIT V/s. Gotan Lime Khanij Udhyog 256 ITR 243 (Raj)]. Proviso to Section 145(1) is deleted. It therefore follows that the Assessing Officer has no power to compute the income upon such basis and in such manner as AO may determined. However, it is necessary that the income is determined with reference to the relevant material and in accordance with the correct principles. For this purpose, the AO has not only right but he has a duty to consider whether or not the books disclosed the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee. The correctness of which had not been questioned in the past. There is

no estoppel in this matter and the Officer is not bound by the method followed in the earlier year. [CIT V/s. British Paints India Ltd. 188 ITR 44 (SC)]. 10.2 Method of Accounting: Prior to substitution of Sec. 145, the assessee was at liberty to follow hybrid system of accounting meaning by the assessee may follow either cash or mercantile or mixed system of accounting. However, from 01-04-1997 it is mandatory to follow either cash or mercantile system of accounting. Mercantile system of accounting means all receivables whether received or not are accounted for. Similarly all payables whether paid or not are accounted. In other words, the mercantile system is popularly known as accrual system of accounting. The sanctity of the books of account is of paramount importance. The books of account must always reflect the real and proper picture of each and every sale transaction entered into by the assessee on day-to-day basis in the cash book. The system of accounting does not change from assessee to assessee. It is static and has its application uniformly all assessee in any kind of business. [Ladha Traders V/s. CIT 269 ITR 183 (MP)]. The method of accounting has to be followed regularly i.e. consistently. If it is thought fit to make a change then the change should be bonafide and should thereafter be followed consistently. [CIT V/s. National and Grindlays Bank Ltd. 145 ITR 457 (Cal.) and CIT V/s. Corporation Bank 174 ITR 616 (Kar) and CIT V/s. Soma Textiles & Industries Ltd. 253 ITR 137 (Guj) and CIT V/s. H.P. State Civil Supplies Corporation Ltd. 309 ITR 102 (H.P.)].

10.3 Accrual Reasonable Certainty: When any right is enforceable the income is said to have accrued. If there is no such right then there is no certainty. In other words, there has to be a reasonable certainty when income is said to have accrued as per AS-9 Revenue Recognition. This principle has been accepted and the Courts have taken consistent view in this matter depending upon the facts of each case. The principle is explained by giving certain case law as under: The electricity company raised the charges, however, the company could not recovered the charges though there was a legal right. The company passed entries in Books of Accounts but the increase charges could not be realized. The department sought to tax the increase charges on the ground that the company had legal right to recover and that it has accrued. The Supreme Court held that though there was legal right and though the entries were passed in Books of Accounts the additional charges could not be realized and therefore it has not accrued. The income tax is levied on the income whether accrued or on receipt basis. If, there is no income there is no question of either accrual or receipt. [Godhra Electricity Co. 225 ITR 746 (SC)]. The Debit Note raised for charging interest on delayed payment by customers though debited in the books not honoured by the customers. The same is not accrued. The unilateral act of the company does not amount to accrual of income. [CIT V/s. Modi Rubber Ltd. 230 ITR 817 (Delhi) and Devsons (P) Ltd. V/s. CIT 329 ITR 483 (Del)]. The extra claims bill raised by the contractor does not amount to accrual. [CIT V/s. Pioneer Engg. Syndicate 234 ITR 503 (Mad)].

The High Court has directed official liquidator of the company to deposit Rs. 25 lacs and not to deal with the said amount and the interest accrued there on with prior permission of the High Court. The interest credited on Rs. 25 lacs is subjected to tax by the department. CIT confirmed. The Tribunal upheld the addition. On a reference, it was held that accrual means right to receive is to be established and that right is to be enforceable. In the present case, since the company has no right to deal with the interest without permission of the High Court, there is no enforceable right and therefore interest has not accrued and the addition is deleted. [Arrah Sasaram Light Railway Co. Ltd. V/s. CIT 215 ITR 870 (Cal)]. Notional interest cannot be charged on loans, which are considered as sticky. If the loans are outstanding for more than three years and if they are doubtful then the interest cannot be charged as per Board Circular dated 9 th October, 1984 as refer to in UCO Bank V/s. CIT 237 ITR 889 (SC). It is also held that where the method of accounting regularly followed is not to charge interest on doubtful debts, the notional interest on such doubtful trade debts cannot be charged. [CIT V/s. Banswara Fabrics Ltd. 267 ITR 398 (Raj)]. Where there is no reasonable certainty of receiving the income it is not said to have accrued. This accounting principle is also in consonance with judicial decisions. The method of not charging interest on NPA accounts followed by the assessee is in consonance with AS-1 issued by CBDT under Sec. 145(2) and also in consonance with the Prudential Norms issued by RBI and therefore the addition made is deleted. [TCI Finance Ltd. V/s. ACIT 91 ITD 573 (Hyd)].

10.4 Audited Accounts: When the accounts are audited the same has to be accepted. Before rejecting the same, the AO is required to point out how the method of accounting followed is defective. In the absence of any finding, the books cannot be rejected. When books of accounts are regularly maintained supported by voucher and accounts are audited, in the absence of any defects or irregularity pointed out by AO the books cannot be rejected. The onus is on the Dept. to point out the defects of irregularity. [Milk Food P. Ltd. V/s. DCIT 111 Taxman 323 (Del) (Mag)]. Scope and effect of tax audit Para 17.2 of Circular No. 387 dated 6 th July, 1984. [152 ITR 12 (Stat)]. The assessee changed the method of valuing stock from average cost to FIFO as objected by the statutory auditors and insisted that the stock should be valued on FIFO basis which only would reflect the real value. In view of the change in system, the value of stock has gone down. The addition was made. It was held that by this method true profit can be deduced and that the change was bonafide, the addition was deleted. [CIT V/s. Pandavpura Sahakara Sakkare Karkhane Ltd. 201 ITR 56 (Kar)]. It shows that the addition was made as a result of the auditor s note but the same was deleted since true profit can be deduced. The AO made addition as a result of qualification by auditor on account of change in method of valuation of stock. The High Court held that the addition cannot be made merely on the basis of auditor s qualification. [Karnataka State Forest Industries Corporation Ltd. V/s. CIT 201 ITR 674 (Kar)].

10.5 Non maintenance of Stock Register: Simply because stock register is not maintained, the books of accounts cannot be rejected. There has to be a finding that true income cannot be deduced in the absence of quantity details. [Ganesh Foundry V/s. ACIT 78 TTJ 736 (Jodhpur) and Pandit Brothers V/s. CIT 26 ITR 159 (P&H)]. The assessee's income is to be assessed by the Officer on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee had undisclosed income is on the Revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee had deliberately suppressed his income. The burden is on the Revenue to prove that the income sought to be taxed is within the taxing provisions and there was in fact income [CIT v. N. Swamy, 241 ITR 363, 365-66 (Mad) and CIT V. Veerdip Rollers (P) Ltd. 323 ITR 341 (Guj.) and CIT v. Acrow India Ltd. 298 ITR 447 (Bom.)]. In the facts of that case, the Tribunal has, after accepting the explanation of the assessee deleted the addition of Rs. 34,070 as undisclosed income representing the difference between the value of the stock as recorded in the books and that found in the declaration to the bank. It has been held that the Tribunal has acted within its jurisdiction and its conclusion was justified.

10.6 Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that account books are unreliable, incorrect or incomplete before it can reject accounts, which may done by showing that important purchases are omitted there from or proper particulars or vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business. Rejection of accounts should not be done light heartedly [St. Teresa s Oil Mills V/s. State of Kerala 76 ITR 365 and Tolaram Daga V/s. CIT 59 ITR 632 (Assam)]. The basis principle is the same in the law relating to income tax as well as in civil law, namely, if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the revenue or other side to contend that what is shown by the entries is not the real state of affairs [CIT V/s. Amitbhai Gunwantbhai 129 ITR 580 (Guj)]. 11. Presumptive Taxation: 11.1 In case of an eligible assessee engaged in eligible business 8% of the turnover or gross receipts or higher income is disclosed shall be deemed to be the income of such assessee. No deduction of any expenses including depreciation shall be allowed. However in case of partnership firm the interest and remuneration to the partners u/s. 40(b) will be allowed. The eligible assessee is subject to presumptive taxation is not required to pay advance tax. 11.2 If the income as per books of accounts is lower than 8% than such income may be accepted if the books of accounts are audited u/s.44ab.

11.3 The eligible assessee means an Individual, HUF or Partnership Firm who is residence but not LLP and who has not claimed deduction under Sections 10A,10AA,10B,10BA or deduction under any provisions of Chapter- VI-A. The eligible business means any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE and whose total turnover or gross receipt in the previous year does not exceed an amount of Rs.60 Lakh. 11.4 From the above, it is clear that any eligible business whose turnover is less than Rs.60 Lakhs is subject to presumptive taxation unless the accounts are audited. 12. Books of Accounts Entries Evidential Values: 12.1 Books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and the correctness thereof [Tolaram Daga V/s. CIT 59 ITR 632-636 (Assam)]. However, the entry in books of account is not conclusive evidence [Pullangode Rubber Produce Co. Ltd. V/s. State of Kerala 91 ITR 18 (SC)]. It is a true character of transaction which is important. If any receipt is disclosed as trading receipts in books but assessee is able to show that the real character of receipt is a capital receipt then it is to be treated as capital receipt and not trading receipt. It is well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the asset was held as a capital asset or stock-in-trade [Fort Properties Pvt. Ltd. V/s. CIT 208 ITR 232 (Bom).

13. Depreciable Asset - Section 50: 13.1 Even if the asset is depreciable, it is long term capital asset. The fiction under Section 50 is restricted to computation of capital gain only and not to exemption provision, therefore the net consideration of a depreciable asset was invested in securities specified in Section 54E, the exemption was allowed. This was so held by the Bombay High Court in the case of CIT V/s. ACE Builders P. Ltd. 281 ITR 210. This case was followed by the Bombay High Court in case of CIT V/s. Delite Tin Industries. SLP filed by Revenue against Delite Tin Industries is dismissed 322 ITR 8 (Stat). 13.2 Section 50 & Section 32(1)(iii): When the assessee receives sale price more than the WDV of block of assets, the excess is chargeable as STCG under Section 50. However, when the assessee gets sale price less than the WDV then the loss arising there from is allowable as terminal loss under Section 32(1)(iii) provided such loss / deficiency is written off to Profit & Loss Account. The scheme of Section 50 and Section 32(1)(iii) deals with different types of situation on transfer of capital assets [Mukand Global Finance Ltd. V/s. DCIT 117 ITD 20 (Mum)]. 13.3 The STCG on depreciable asset is to be calculated with reference to WDV of such assets. WDV means the depreciation actually allowed. If the assessee has not claimed the depreciation for last few years than the WDV of the year from which the depreciation is not claimed is to be considered for the purposes of calculating STCG on depreciable asset [Sadhuram Patel & Sons V/s. ITO 120 ITD 291 (Mum)] and [Shakti Metal Depot 232 CTR 279 (Ker) / 189 Taxman 329].