2012 (12) TMI 250 - AT - Income Tax

Tribunal upholds trading addition, disallowance, rejects commercial expediency argument. Discount expenses deletion justified.

The Tribunal partially allowed the Assessee's appeal, upholding the trading addition under section 145(3) and the disallowance under section 36(1)(iii) ... Reduction in GP Rate - rejection of books of accounts u/s 145(3) - held that:- The stock record is a vital component of the assessee's books of account; in the absence of which it is not possible to deduce the correct profits there-from. How would assessee then place reliance on its books of account for determining its profits? There is no law that the books of account cannot be rejected in the absence of a stock register. True, there is equally no law that the book results are to be necessarily rejected in its absence; the finding of whether the books as maintained could be relied upon for deducing true profits being essentially a matter of fact - even the feasibility of maintenance of the stock record/s is again a question of fact, and which we have found as so in the instant case.- We, therefore, uphold the invocation of the provision of sec. 145(3) of the Act by the Revenue in the instant case, and concomitantly proceeding to estimate the assessee’s trading results. - Decided against the assessee. Disallowance u/s. 36(1)(iii) of the Act - disallowance is on account of a loan given by the assessee to M/s. M.P. Food Products on interest-free basis – Held that:- M/s. M.P. Food Products, is not the assessee’s sister concern; the same being a proprietary concern of Shri Devendra Agarwal, the assessee's grand-son, and in a completely different line of business - there is no question of any business expediency for advancing the same to the said concern - disallowance upheld Disallowance out of discount expenses – Held that:- Expenditure has been explained by the assessee as arising on account of short receipt from the customers - no basis in the said disallowance by the AO; the assessee explaining the claim with reference to its accounts. The same stands restricted by the ld. CIT(A) on adhoc basis, without furnishing any reason for its confirmation or restriction – disallowance deleted Issues involved:1. Trading addition under section 145(3) of the Income Tax Act, 1961.2. Disallowance under section 36(1)(iii) of the Act.3. Disallowance of discount expenses.Issue 1: Trading addition under section 145(3) of the Income Tax Act, 1961:The case involved an appeal by the Assessee against the CIT (A)'s order partially allowing the appeal against assessment under section 143(3) for the AY 2008-09. The primary issue was regarding the trading addition based on the gross profit (G.P.) rate. The AO rejected the assessee's books of account under section 145(3) due to lack of stock register and applied a G.P. rate of 4.75%, resulting in an addition. The Tribunal upheld the invocation of section 145(3) by the Revenue, emphasizing the importance of maintaining stock records for determining accurate profits. The Tribunal also analyzed the quantification aspect, finding no substance in the assessee's challenge to the adopted trading results.Issue 2: Disallowance under section 36(1)(iii) of the Act:The second issue revolved around the disallowance under section 36(1)(iii) concerning a loan given interest-free to another entity. The AO disallowed an amount, which was later restricted by the CIT(A). The Tribunal analyzed whether the borrowed funds were used for non-business purposes. It was noted that the loan recipient was not a sister concern and the loan was given to the assessee's grandson, raising questions about the business expediency. The Tribunal rejected the argument of commercial expediency and upheld the disallowance, emphasizing the lack of evidence to support the diversion of business funds for non-business purposes.Issue 3: Disallowance of discount expenses:The third ground of appeal related to the confirmation of disallowance of discount expenses by the CIT(A). The Tribunal found no basis for the disallowance by the AO and noted that the CIT(A) restricted the disallowance without providing reasons. Consequently, the Tribunal directed for the deletion of the disallowance, ruling in favor of the assessee on this ground.In conclusion, the Tribunal partially allowed the assessee's appeal, upholding the trading addition under section 145(3) and the disallowance under section 36(1)(iii) while directing the deletion of the disallowance of discount expenses. The judgment provided detailed analysis and reasoning for each issue, emphasizing the legal principles and factual considerations in reaching its decisions.