2021 (7) TMI 797 - AT - Income Tax

Appeal partly allowed: Gross Profit, freight expenditure deletion; adhoc expense disallowance reduced.

Dilip Kumar Khetan Proprietor Dilip Yarn Traders Versus Income Tax Officer, Ambedkarnagar

Dilip Kumar Khetan Proprietor Dilip Yarn Traders Versus Income Tax Officer, Ambedkarnagar - TMI Issues Involved:1. Addition on account of low Gross Profit (G.P.) declared by the assessee.2. Adhoc disallowance of expenses by the Assessing Officer (AO).3. Disallowance of freight expenditure under Section 40A(3) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Addition on Account of Low Gross Profit Declared by the Assessee:The assessee, a proprietor of Dilip Yarn Traders, filed a return of income declaring a total income of Rs. 5,22,510/- for the assessment year 2013-14. The Assessing Officer (AO) noted a Gross Profit (G.P.) of Rs. 11,10,369/- which translated to 0.65% on total sales of Rs. 17.07 crores. Comparing this to the preceding years' G.P. rates of 0.68% and 0.69%, the AO applied a G.P. rate of 0.69% resulting in an addition of Rs. 67,840/-. The assessee contested this, arguing that the AO did not reject the books of account under Section 145(3) and that the books were audited and verified without any defects found. The Tribunal held that without detecting defects in the books, the AO could not justify the addition based on a lower G.P. rate. Citing the Delhi Bench Tribunal decision in ACIT Vs. M/s. Ess EII Cables Co., the Tribunal concluded that a fall in G.P. alone is insufficient for additions without pointing out defects in the books. Thus, the addition made by the AO was deleted.2. Adhoc Disallowance of Expenses by the AO:The AO made an adhoc disallowance of 25% of shop expenses, travelling expenses, and vehicle running and maintenance expenses, amounting to Rs. 41,785/-, citing unverifiable expenses. The CIT(A) reduced this disallowance to 12.5%. The assessee argued that adhoc disallowance is not justified without finding defects in the books. The Tribunal referred to decisions in Sanjeev Seth Vs. ACIT and M/s. Premier Car Sales Ltd. Vs. ACIT, supporting the assessee's contention. However, the Tribunal also considered the jurisdictional High Court decision in Pr. CIT Vs. Rimjhim Ispat Ltd., which justified disallowance for unverifiable expenses. The Tribunal found the disallowance of 5% reasonable and thus restricted the disallowance to 5% of the total expenses.3. Disallowance of Freight Expenditure Under Section 40A(3):The AO disallowed Rs. 3,31,500/- of freight expenses, citing cash payments exceeding Rs. 20,000/- in a day to a single party, invoking Section 40A(3). The assessee argued that the threshold limit for cash payments to transport operators was Rs. 35,000/- as per the third proviso to Section 40A(3) and 40A(3A). The Tribunal examined the provisions and the explanatory note issued by CBDT Circular No.5/2010, which confirmed the higher limit of Rs. 35,000/- for transport operators. The AO's details showed none of the payments exceeded Rs. 35,000/-. Hence, the Tribunal held that the disallowance was not sustainable and deleted the addition.Conclusion:The appeal filed by the assessee was partly allowed. The addition on account of low G.P. and the disallowance of freight expenditure were deleted. The adhoc disallowance of expenses was restricted to 5% instead of the 12.5% confirmed by CIT(A). The judgment emphasized the necessity of detecting defects in books of account before making additions based on low G.P. and underscored the importance of proper documentation for claimed expenses.