2017 (6) TMI 184 - AT - Income Tax

Tribunal upholds CIT-A's order on trade fair expenses, rejects AO's lump sum addition. Disallowance under Section 40(a)(ia) upheld.

ACIT CIR 12 (3), Aayakar Bhavan, Mumbai Versus Malik Traders

The tribunal upheld the CIT-A's order, finding no infirmity in the deletion of the Rs. 50,00,000 addition and the allowance of trade fair expenses. The ... Rejection of books of account - G.P. addition - Held that:- CIT-A has given a finding that the gross profit rate for assessment year 2008 - 09 was 17.47% while the gross profit in the assessment year 2009-10 is 17.43%. Hence there is a very negligible fall in the gross profit which doesn't warrant any adverse inference. Furthermore learned CIT-A has given elaborate finding on all the adverse findings of the assessing officer. Finding of the CIT-A are convincing and do not require any interference on our part. Furthermore even after rejecting the books of account the assessing officer has not found it suitable to make any addition of gross profit ratio. He has made an addition of lump sum amount of ₹ 50 lakh. Learned CIT-A is quite correct that when the gross profit ratio compares favourably with the past data no addition for gross profit is warranted, much less an ad hoc addition of ₹ 50 lakh. This addition has been solely based upon conjecture and surmises have rightly been found by the learned CIT- A to be not sustainable. Even thereafter in the above order learned CIT-A has sustained some addition /disallowance being expenditure of ₹ 2,33,214 under section 40 (a)(ia). No infirmity in order of learned CIT-A. - Decided against revenue Issues Involved:1. Justification of the rejection of books of accounts by the Assessing Officer (AO).2. Deletion of the addition of Rs. 47,66,786 out of Rs. 50,00,000 made by the AO due to discrepancies.3. The correctness of the AO's approach to estimating the assessee's income.4. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.5. Inclusion of interest income of Rs. 6,000 in the total income.6. Disallowance of expenditure on trade fairs.Issue-Wise Detailed Analysis:1. Justification of the rejection of books of accounts by the Assessing Officer (AO):The AO rejected the books of accounts on the grounds of various discrepancies, including non-deduction of tax at source on import/export documentation charges, lack of documentary evidence for trade fair expenses, discrepancies in the valuation of closing stock, and non-furnishing of quantitative details of raw materials. The AO applied Section 145 of the Income Tax Act, 1961, citing these defects.2. Deletion of the addition of Rs. 47,66,786 out of Rs. 50,00,000 made by the AO due to discrepancies:The CIT-A found that the gross profit rate for the assessment year 2009-10 (17.43%) was nearly the same as the previous year (17.47%). The minor fall in the G.P. rate did not justify the rejection of books. The CIT-A also noted that the AO did not find major discrepancies in purchases, sales, or expenditures. The CIT-A held that the AO's rejection of the books and the lump sum addition of Rs. 50,00,000 was not justified, as it was based on conjecture and lacked a proper basis.3. The correctness of the AO's approach to estimating the assessee's income:The AO made an ad-hoc addition of Rs. 50,00,000 to the assessee's income to account for the discrepancies. However, the CIT-A found this approach incorrect, as the AO did not provide a basis for such estimation. The CIT-A emphasized that the AO should have considered the negligible fall in the G.P. rate and the explanations provided by the assessee.4. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:The CIT-A upheld the disallowance of Rs. 2,33,214 under Section 40(a)(ia) for non-deduction of tax at source on import/export documentation charges paid to M/s. Venuta Agencies India. The assessee admitted the non-compliance, and hence, the expenditure was disallowed.5. Inclusion of interest income of Rs. 6,000 in the total income:The CIT-A accepted the assessee's explanation that the interest income of Rs. 6,000 was adjusted against the electricity bill from Reliance Energy. The CIT-A verified the electricity bill and found the adjustment to be correct. Therefore, no addition of Rs. 6,000 was made to the total income.6. Disallowance of expenditure on trade fairs:The AO questioned the expenditure of Rs. 43,16,701 on trade fairs, suggesting that Rs. 1,33,319 might be personal expenses. However, the CIT-A found that the AO did not provide a categorical finding or reasons for disallowance. The CIT-A held that expenses on food, customer hospitality, etc., incurred during trade fairs were genuine business expenses and allowed the entire expenditure.Conclusion:The tribunal upheld the CIT-A's order, finding no infirmity in the deletion of the Rs. 50,00,000 addition and the allowance of trade fair expenses. The tribunal agreed with the CIT-A that the AO's rejection of books and lump sum addition were not justified. The disallowance under Section 40(a)(ia) was upheld, and no addition of Rs. 6,000 was made for interest income. The revenue's appeal was dismissed.