2014 (7) TMI 376 - AT - Income Tax

Tribunal dismisses Revenue's appeal, upholds assessee's position on additions & estimations

ACIT, Circle 1, Noida Versus M/s Cross Roads

The Tribunal dismissed the Revenue's appeal, upholding the decisions of the First Appellate Authority on the addition of purchases made outside the books, ... Purchases made outside the books – Held that:- AO has estimated the negative stock, by first assuming a particular percentage as gross profit - The calculation adopted by the AO is to first add purchases to the opening stock and thereafter estimate a particular percentage of the sales/turnover as gross profit - The balance figure is taken as closing stock - closing stock cannot be estimated by assuming a particular Gross Profit Percentage when the books of accounts are not rejected – Relying upon Income Tax Officer Versus Shri Anand Prakash Gupta, Prop. of M/s Anand Prakash Ankit [2013 (5) TMI 578 - ITAT DELHI] - assessee had maintained proper books of accounts, no defect had been pointed out in books of accounts, quantitative details of stock were duly certified by auditors – thus, the order of the FAA is upheld – Decided against Revenue. Ad-hoc disallowance – Held that:- FAA was of the view that the assessee has explained in detail that the employees are villagers doing hand jobs who come from far flung areas and then go back to their villages or some other business concerns - Salary register has been maintained and primary details are available regarding the employees to whom salary was paid - there are also certain flaws in the assessee’s explanation which cannot be brushed aside - on salary register, signatures of the employees have not been taken - some amount of disallowance is justified – revenue was not able to contradict the findings of the CIT(Appeals) – Decided against Revenue. Issues Involved:1. Addition of purchases made outside the books2. Estimation of closing stock based on gross profit rate3. Adhoc disallowance of expensesAnalysis:1. Addition of purchases made outside the books:The appeal by the Revenue challenged the deletion of an addition of Rs. 42,50,158 made by the Assessing Officer due to purchases made outside the books. The Revenue contended that the purchases were not supported by evidence and were made from undisclosed sources. The Ld.D.R. argued that the Assessing Officer estimated negative stock due to discrepancies in the assessee's claims. However, the Ld.Counsel for the assessee supported the First Appellate Authority's decision, emphasizing that additions cannot be made without rejecting the books of accounts. The Tribunal held that the Assessing Officer's method of estimating negative stock based on a gross profit percentage was erroneous when the books of accounts were not rejected. Citing a similar case, the Tribunal upheld the findings of the First Appellate Authority, dismissing the Revenue's appeal.2. Estimation of closing stock based on gross profit rate:The Assessing Officer calculated the negative stock by assuming a gross profit percentage without rejecting the books of accounts. The Tribunal found this method erroneous and held that the closing stock cannot be estimated based on a particular gross profit percentage when the books of accounts are not rejected. Referring to a previous case, the Tribunal upheld the First Appellate Authority's decision, dismissing the Revenue's appeal on this issue.3. Adhoc disallowance of expenses:Regarding the adhoc disallowance of expenses, the First Appellate Authority found that while some disallowance was justified, the amount disallowed by the Assessing Officer was excessive. The Authority considered the explanations provided by the assessee regarding employee salaries and turnover increase. The Tribunal upheld the findings of the First Appellate Authority, noting that the Assessing Officer had accepted the claim in the subsequent assessment year under section 143(3). As the Ld.D.R. could not refute the factual findings of the Ld.CIT(Appeals), the Tribunal dismissed the Revenue's appeal on this ground.In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions of the First Appellate Authority on all the issues raised.