2014 (5) TMI 82 - AT - Income Tax

Tribunal decision: Appeal partly allowed, directing 5% profit rate. Disallowances reduced. Upheld disallowance under section 40(a)(ia).

FRANKLIN A DAVID Versus JOINT COMMISSIONER OF INCOME TAX

The Tribunal partly allowed the appeal, directing the Assessing Officer to apply a 5% gross profit rate on sales without further disallowances on direct ... Partial confirmation of addition u/s 250 of the Act – Confirmation of estimated gross profit – Held that:- There was no reason to uphold the additions on account of direct costs once the books of account has been rejected and the gross profit rate has been applied - there is no further requirement of disallowing the cost or purchases – the CIT(A) ought to have restricted the addition to the extent of estimate of gross profit when she has found that books of account are to be rejected and the trading results as a whole shown by the assessee are not reliable – Relying upon This proposition is duly supported by the decision of Gujarat High Court in CIT v/s Dheeraj R. Rungta [2014 (4) TMI 711 - GUJARAT HIGH COURT] thus, the AO is directed to apply the gross profit rate of 5% as applied by the CIT(A) on sales - The balance additions under various heads of purchases or cost against commission and AMC income cannot be interfered – Decided partly in favour of Assessee. Disallowance of expenses under various heads – Held that:- The disallowance of 1/5th portion of expenses under the heads “motorcar expenses”, “interest on car loan” and “depreciation” , it should be restricted at 1/10th, as the element of personal nature of expenses has not been rebutted - With regard to the amount disallowed under the professional charges after invoking the provisions of section 40(a)(ia), WC tax and professional tax are concerned, the order of the CIT(A) is upheld – Decided partly in favour of Assessee. Disallowance of Expenses - General expenses, travelling and conveyance expenses and advertising conference and sales promotion expenses – Held that:- The disallowance has been made on the ground that some of the expenses relates to gifts and obligations for the doctors for which there is no quantification of such expenses from the bills which were produced - the reasons for disallowance by the AO as well as the CIT(A) are justified - the major expenses which relates to advertisement, travelling and sales promotion, conveyance, wherein no such quantification has been done either by the assessee – thus, the disallowance of 10% under the heads would sustained – Decided partly in favour of Assessee. Issues Involved:1. Confirmation of partial addition made by the Assessing Officer.2. Confirmation of addition on account of estimated gross profit.3. Confirmation of disallowance of certain expenditures.4. Confirmation of addition on account of unexplained agricultural income.5. Confirmation of disallowances under various heads of expenses.6. Confirmation of disallowance under section 40(a)(ia) of the Income Tax Act.Detailed Analysis:1. Confirmation of Partial Addition by Assessing Officer:The assessee challenged the impugned order dated 28th February 2011, wherein the Commissioner (Appeals) partially confirmed the addition made by the Assessing Officer. The Commissioner (Appeals) rejected the assessee's books of account and trading results, applied a gross profit rate of 5%, and estimated the income at Rs. 2,83,659 on the trading account. Additionally, various expenditures were disallowed, aggregating to Rs. 10,16,550, and further disallowance of Rs. 4,45,854 on account of clearing charges on custom duty was made.2. Addition on Account of Estimated Gross Profit:The Assessing Officer adopted the previous year's gross profit rate of 17.18% and ignored the loss, making an addition of Rs. 9,74,654 on account of gross profit rate and further disallowance of Rs. 37,55,321 on account of loss, aggregating to Rs. 42,29,975. The Commissioner (Appeals) applied a gross profit rate of 5% on sales and disallowed certain purchases and custom duty charges. The Tribunal held that once the books of account are rejected and a gross profit rate is applied, no further disallowance should be made on direct expenses.3. Disallowance of Certain Expenditures:The Commissioner (Appeals) confirmed the disallowance of Rs. 1,25,054 out of the total disallowance of Rs. 4,75,918 made by the Assessing Officer. The Tribunal restricted the disallowance of 1/5th portion of expenses under the heads 'motorcar expenses,' 'interest on car loan,' and 'depreciation' to 1/10th, as the personal nature of expenses was not rebutted. The disallowance under professional charges, WC tax, and professional tax was confirmed.4. Addition on Account of Unexplained Agricultural Income:The Commissioner (Appeals) confirmed the addition of Rs. 28,000 on account of unexplained agricultural income as the assessee could not produce evidence regarding the agricultural produce. The Tribunal dismissed this ground as 'not pressed' by the assessee.5. Disallowances Under Various Heads of Expenses:The Commissioner (Appeals) confirmed the disallowance of Rs. 1,533 out of general expenses, Rs. 3,63,293 out of traveling and conveyance, and Rs. 2,49,736 out of advertisement, conference, and sales promotion expenses at 20%. The Tribunal held that a disallowance of 10% under these heads would meet the ends of justice, considering the nature of expenses and lack of quantification of non-admissible expenses.6. Disallowance Under Section 40(a)(ia):The Commissioner (Appeals) confirmed the disallowance of Rs. 26,665 under section 40(a)(ia) of the Income Tax Act. The Tribunal upheld this disallowance as the assessee could not justify the claim before the Tribunal.Conclusion:The Tribunal partly allowed the assessee's appeal, directing the Assessing Officer to apply a gross profit rate of 5% on sales and not to make further disallowances on direct costs once the books of account are rejected. The disallowance of certain expenditures was restricted, and the addition on account of unexplained agricultural income was dismissed as not pressed. The disallowances under various heads of expenses were reduced to 10%.