2012 (11) TMI 657 - AT - Income Tax

Tribunal rules in favor of assessee on income estimation, GP addition. Excessive diamond powder use upheld, expenses remanded.

The Tribunal allowed the assessee's grounds regarding the estimation of income and Gross Profit (G.P.) addition, dismissing the Revenue's corresponding ... Addition on account of low G.P. - alleged that during the year under consideration the gross profit was 7.37 % as against the gross profit at 7.79% in the last year – Held that:- the Revenue authorities must have come across the case of other assessee’s whereby securing similar or more turnover the assessee suffers a loss in the business or secured lesser profit than the assessee. - In the instant case, as no specific defect in the various expenses claimed by the assessee in the P&L A/c. could be pointed out by the Revenue, the Ld. CIT(A) was not justified in arbitrarily applying the rate of net profit of 3%. As the additions are found to be not based on cogent and relevant material and are based merely on the surmises and conjectures, the same are found unsustainable on the facts of the instant case. We, therefore, delete the addition Addition on account of unaccounted sale of diamond powder expenses - As per AO, no proof was given by the assessee for excessive consumption of the diamond powder for the year under consideration – Held that:- Consumption of diamond powder was excessive and appeared to be unreasonable considering the overall circumstances of the case. The assessee has also failed to establish the reasons for abrupt enhancement in consumption of diamond powder – addition upheld – against assessee Disallowance on account of foreign travel expenses – alleged that no bill was available in respect of foreign exchange purchase – Held that:- Foreign exchange was purchased in the names of relatives. Assessee’s argument was that those persons had gone for market survey. As per AO, no report about the work carried out by those persons was furnished. It was also pointed out by the AO that those relatives had no professional qualification or any experience of the business – matter remanded to AO Issues Involved:1. Estimation of income and Gross Profit (G.P.) addition.2. Unaccounted sale of diamond powder.3. Disallowance of foreign travel expenses.4. Disallowance of telephone expenses.Issue-wise Detailed Analysis:1. Estimation of Income and Gross Profit (G.P.) Addition:The appeals from both the assessee and the Revenue pertain to the estimation of income and the addition on account of low G.P. The AO noted a discrepancy in the gross profit percentage, comparing 7.37% for the current year against a mistakenly cited 7.79% for the previous year, while the correct figure was 7.09%. The AO demanded qualitative details of polished diamonds, which the assessee failed to provide, leading to the rejection of the books of accounts under section 145(3) of the I.T. Act and an addition of Rs.1,45,25,670/-.The CIT(A) noted similar issues from the previous year and rationalized the estimation by adopting comparable net profit rates, ultimately restricting the addition to Rs.44,57,266/-. The Tribunal referenced past decisions, emphasizing that additions must be based on material evidence rather than estimates. It was concluded that the rejection of books solely on the absence of qualitative details was insufficient for the addition, leading to the deletion of the addition and the allowance of the assessee's ground while dismissing the Revenue's ground.2. Unaccounted Sale of Diamond Powder:The AO added Rs.33,31,725/- for unaccounted sale of diamond powder, noting an excessive consumption compared to previous years. The CIT(A) upheld 25% of this addition (Rs.7,93,268/-) but allowed for telescoping against net profit addition. The Tribunal found the consumption excessive and unsupported by the assessee, confirming the CIT(A)'s view but reversing the telescoping due to the deletion of the profit addition, thus dismissing the assessee's ground.3. Disallowance of Foreign Travel Expenses:The AO disallowed Rs.29,29,609/- out of Rs.66,02,120/- claimed for foreign travel expenses, citing lack of evidence for foreign exchange purchases and the business purpose of relatives' travel. The CIT(A) did not address this issue in detail. The Tribunal restored the issue to the first appellate authority to examine the details and purpose of the foreign travel, directing adjudication according to law.4. Disallowance of Telephone Expenses:The AO disallowed 10% of Rs.8,31,786/- claimed for telephone expenses, attributing it to personal use. The CIT(A) did not express a view on this matter. The Tribunal restored this issue to the first appellate authority for a decision as per law, treating both the Revenue's and the assessee's grounds as allowed for statistical purposes.Conclusion:In summary, the Tribunal allowed the assessee's grounds regarding the estimation of income and G.P. addition while dismissing the Revenue's corresponding grounds. The excessive consumption of diamond powder was upheld, reversing the telescoping of the addition. The issues of foreign travel and telephone expenses were restored to the first appellate authority for further examination and decision according to law. Both appeals were partly allowed for statistical purposes.