Tribunal Partially Allows Appeal, Sets Aside Rejection of Accounts, Confirms Expenses Disallowance. Remits Salary Disallowance for Verification.

The Tribunal partially allowed the appeal by setting aside the rejection of books of accounts and deleting the trading addition. It confirmed the 10% disallowance of various expenses but remitted the disallowance of salary expenses back to the AO for verification. The judgment was pronounced on 23/07/2020.

---

---

Issues Involved:
1. Application of Section 145(3) of the Income Tax Act.
2. Confirmation of addition by applying Gross Profit (GP) rate.
3. Disallowance of various expenses.
4. Disallowance of salary expenses.

Detailed Analysis:

1. Application of Section 145(3) of the Income Tax Act:
The assessee contended that the provisions of Section 145(3) were wrongly applied by the Assessing Officer (AO) as no specific mistakes or discrepancies were pointed out. The AO rejected the books of accounts due to the low GP rate and erratic month-wise loss of quantities due to evaporation. The assessee argued that the books had never been rejected in the past, and the GP rate of 1.5% was comparable to the 1.56% accepted in the previous year. The Tribunal found that the AO’s basis for rejecting the books was not substantiated, as the overall yearly shortage percentages were consistent with past years. Thus, the rejection of books of account was set aside, and the consequent trading addition was deleted.

2. Confirmation of Addition by Applying GP Rate:
The CIT(A) confirmed an addition of Rs. 10,52,356 by applying a GP rate of 1.92% instead of the 1.5% declared by the assessee. The assessee argued that all sales and purchases were fully vouched and verifiable, and the slight variation in evaporation loss was natural and insignificant. The Tribunal noted that the assessee's declared net profit rate was higher than in previous years and found the AO’s and CIT(A)’s reasoning for the addition to be unsubstantiated. Consequently, the Tribunal deleted the trading addition.

3. Disallowance of Various Expenses:
The AO disallowed certain Profit & Loss (P&L) expenses on the grounds that they were not properly vouched and verifiable. The CIT(A) restricted these disallowances to 10%, which was consistent with past years. The assessee argued that all expenses were fully vouched and incurred exclusively for business purposes. The Tribunal confirmed the CIT(A)’s decision to restrict the disallowance to 10%, as it was consistent with past assessments and had been accepted by the assessee.

4. Disallowance of Salary Expenses:
The AO disallowed Rs. 1,55,880 out of salary expenses, questioning the verifiability of these payments. The assessee contended that these expenses were fully verifiable through ESI, PF records, and labor records. The CIT(A) upheld the disallowance, citing lack of signatures in the salary sheets and doubts about the vouchers produced. The Tribunal remitted this issue back to the AO for verification, directing that if the expenses are found to be in order, necessary relief should be granted to the assessee.

Conclusion:
The Tribunal allowed the appeal in part, setting aside the rejection of books of accounts and deleting the trading addition. It confirmed the 10% disallowance of various expenses but remitted the disallowance of salary expenses back to the AO for verification. The judgment was pronounced in open court on 23/07/2020.

---