2012 (2) TMI 536 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decision on Additions & Disallowances, Emphasizes Specific Evidence

Deputy Commissioner of Income-tax, Central Circle-2, Hyderabad Versus M/s. Hyderabad House Pvt. Ltd. and vice-versa

Deputy Commissioner of Income-tax, Central Circle-2, Hyderabad Versus M/s. Hyderabad House Pvt. Ltd. and vice-versa - TMI Issues Involved:1. Legality of estimating suppressed turnover and income.2. Disallowance of expenditures debited to Profit and Loss account.3. Determination of undisclosed income on suppressed turnover for specified assessment years.4. Calculation of net profit on suppressed turnover.5. Disallowance of cash expenditures.Detailed Analysis:1. Legality of Estimating Suppressed Turnover and Income:The assessee objected to the Assessing Officer's (AO) estimation of suppressed turnover for assessment years 2002-03 to 2005-06 based on evidence from 2006-07 and 2008-09. The CIT(A) agreed with the assessee, noting that no incriminating material was found for the earlier years. The CIT(A) referenced ITAT Ahmedabad's decision in DCIT Vs. Royal Marawar Tobacco Products, which held that additions based on assumptions without specific evidence are unjustified. Consequently, the CIT(A) deleted the additions made by the AO for these years.2. Disallowance of Expenditures Debited to Profit and Loss Account:The AO disallowed certain expenditures on the grounds of potential inflation. The assessee argued that most payments were made through banking channels and supported by statutory payments. The CIT(A) deleted these disallowances, citing ITAT Kolkata's decision in LMJ International Ltd Vs. DCIT, which held that only items found during the search should be assessed. The CIT(A) emphasized that disallowances without specific seized material are not legally sustainable.3. Determination of Undisclosed Income on Suppressed Turnover for Specified Assessment Years:For assessment years 2006-07 to 2008-09, the AO estimated net profit on suppressed turnover and made disallowances of various expenditures. The CIT(A) directed the AO to adopt a net profit figure of 15% on the suppressed turnover, based on the Managing Director's statement and the nature of the business. The CIT(A) also instructed the AO to verify and adjust the income based on any undisclosed income already admitted by the assessee.4. Calculation of Net Profit on Suppressed Turnover:The assessee disputed the AO's high net profit rates, arguing that the actual net profit rate should be lower based on past records and industry standards. The Tribunal agreed that the AO's method was erroneous and directed the AO to estimate the income at 8% of the suppressed turnover, considering the nature of the business and prevailing market conditions.5. Disallowance of Cash Expenditures:The AO disallowed a flat percentage of production, employee benefits, and administrative expenditures, suspecting inflation. The assessee provided evidence of payments through banking channels and statutory remittances. The Tribunal found the AO's flat disallowance unwarranted and reduced it to 5% of cash expenses, excluding statutory payments and amounts subjected to TDS, citing the Tribunal's decision in M/s GSP Infratech Development Ltd.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the additions for the earlier years due to lack of specific evidence. For the later years, it adjusted the net profit rate to 8% and reduced the disallowance of cash expenditures to 5%, ensuring a fair and reasonable assessment based on the nature of the business and available evidence. The Tribunal's decision emphasizes the importance of specific evidence in making additions and disallowances in search assessments.