2015 (11) TMI 1673 - AT - Income Tax

Tribunal rejects AO's disallowance, emphasizes proper documentation and reasonable estimation.

Dy. Commissioner of Income Tax -25 (2), Bandra (East), Mumbai Versus Kantilal P Shah and Vice Versa

The Tribunal upheld the deletion of additions by the AO for disallowance of commission and interest claimed by the assessee. It found the AO's basis for ... Addition of trading result - assessee has not maintained stock register and the entire purchase and sale bills were not produced - Held that:- AO looking to the huge volume of bills and details could have asked for purchase and sale bills on test check basis i.e., on sample basis to tally as per the entries in the books of accounts, which he has not done; secondly, the AO has applied the Gross Profit Rate of 25% without considering the assessee’s past history or any other material or comparability; before the CIT(A) and before us, it has been submitted that the gross profit ratio was 19.99% as compared to 18% in the earlier years and overall net profit has also increased. Thus, there may not be any prima facie inference that assessee’s profit is not in commensurate with the earlier years’ so as to doubt the correctness of the profit shown by the assessee; and lastly, the manner in which the AO has worked out the gross profit on the basis of selected samples is also not a correct approach and if going by the trading result and gross profit of various items, it can be very well held that assessee’s profit and trading results are much better this year, hence, the observation and the finding of the CIT(A) cannot be deviated from and accordingly, the same is affirmed - Decided against revenue Disallowance of commission - Held that:- AO has made an ad-hoc disallowance on this score on the ground that firstly, there is enhancement of rate of commission from 2.5% to the rate of 3.25%; secondly, some of the commission agents are also the relatives of the assessee. Such a basis drawn by the AO for making the disallowance cannot be sustained for the reason that, the Ld. CIT(A) has clarified that overall rate of commission paid is @ 3% on the total turnover and not 3.25% and the commission has been paid uniformly to all the parties including the relatives. Out of 11 party, only 2 are relatives, therefore, it cannot be held that any unreasonable payment have been made to the relatives as compared to the outsiders. Such an ad-hoc disallowance of payment of commission made by the AO cannot be sustained. Disallowance as part of interest claimed - Held that:- The reason given by the CIT(A) for deleting the disallowance of interest is absolutely correct, because the rate of interest paid by the assessee on unsecured loan during the year @ 12% is still quite less as compared to the interest paid to the bank @13.25% which was on hypothecation of stocks. Thus, the reasoning of the CIT(A) on this score is affirmed. Addition u/s 40(a)(ia) - retrospectivity - Held that:- We find that out of disallowance of ₹ 21,95,605/- the same has been reduced to ₹ 9,43,446/- on the ground that in the case, five such party’s the income was above taxable limit. Before us, the Ld. Counsel made a statement that these recipient have included the said amount on interest in the return of income, therefore, such a disallowance cannot be made in view of the newly inserted Proviso to section 40(a)(ia) w.e.f. 1.4.2013. The Hon’ble Delhi High Court in the case of Landmark Townships Pvt Ltd (2015 (9) TMI 79 - DELHI HIGH COURT) has held that such a Proviso has to be given retrospective effect. Thus, respectfully following the decision of Delhi High Court, we hold that in case recipients have included ‘interest income’ in their return of income then ‘no disallowance should be made’. Accordingly, we direct the AO to verify the contention of the assessee and give consequential relief. Accordingly, ground raised by the assessee is treated as partly allowed. Issues Involved:1. Deletion of addition due to disallowance of commission claimed by the assessee.2. Deletion of addition due to disallowance of interest claimed by the assessee.3. Rejection of books of accounts and estimation of gross profit.4. Disallowance of interest under section 40(a)(ia).Issue 1: Deletion of Addition due to Disallowance of Commission Claimed by the AssesseeThe Revenue challenged the deletion of Rs. 19,59,477/- and Rs. 2,97,048/- made by the AO on account of disallowance of commission claimed by the assessee. The AO disallowed part of the commission due to the inability of the assessee to produce all purchase and sale bills and the absence of a stock register. The AO rejected the book results under section 145 and estimated a gross profit of 25% based on selected samples, leading to the addition.The CIT(A) noted that the assessee maintained regular books of accounts, and the Tax Audit Report did not mandate a stock register. The AO's rejection of books was deemed unjustified as the assessee provided sufficient documentation and the gross profit was higher than the previous year. The CIT(A) deleted the addition, and this decision was upheld by the Tribunal, which found the AO's basis for rejection and estimation flawed and unsupported by the assessee's past history or other material.Issue 2: Deletion of Addition due to Disallowance of Interest Claimed by the AssesseeThe Revenue also contested the deletion of Rs. 4,65,063/- made by the AO on account of disallowance of interest claimed by the assessee. The AO disallowed the excess interest rate of 2% paid by the assessee, arguing that the interest rate had increased from 10% to 12%.The CIT(A) accepted the assessee's argument that the interest rate of 12% was reasonable compared to the bank loan rate of 13.25%. The Tribunal affirmed the CIT(A)'s decision, noting that the interest rate paid was justified and reasonable, and the AO's disallowance lacked merit.Issue 3: Rejection of Books of Accounts and Estimation of Gross ProfitFor the assessment year 2008-09, the Revenue raised similar issues, including the rejection of books of accounts and estimation of gross profit at 25% compared to 20.81% declared by the assessee. The AO's reasoning mirrored the previous year, focusing on the absence of a stock register and selective sampling.The CIT(A) rejected the AO's approach, emphasizing that the books were audited, and the gross profit was higher than the previous year. The Tribunal upheld this decision, finding no merit in the AO's rejection and estimation, and dismissed the Revenue's appeal.Issue 4: Disallowance of Interest under Section 40(a)(ia)The assessee's cross-appeal for AY 2008-09 addressed the disallowance of Rs. 9,43,446/- under section 40(a)(ia) for non-deduction of TDS on interest payments. The AO disallowed the interest, arguing that Form 15G/15H submitted by the parties was invalid as they were not filed with the Department.The CIT(A) partially upheld the disallowance for payments to parties with taxable income, totaling Rs. 9,43,446/-. The Tribunal, referencing the Delhi High Court decision in Landmark Townships Pvt Ltd, held that if the recipients included the interest income in their returns, no disallowance should be made. The AO was directed to verify this and provide consequential relief.ConclusionThe Tribunal dismissed the Revenue's appeals for both assessment years and partly allowed the assessee's cross-appeal, directing verification of the inclusion of interest income by the recipients for relief under section 40(a)(ia). The decisions emphasized proper documentation, reasonable estimation, and adherence to legal provisions concerning disallowances and rejections.