2025 (9) TMI 1581 - AT - Income Tax

Assessee's 4% gross profit and unsecured loan disallowed for lack of evidence; vendor rebate, rent and adhoc additions deleted

ITAT affirmed additions disallowing the reported 4% gross profit rate and an unsecured loan, finding the assessee failed to substantiate trading figures ... Addition of calculating GP @4% - purchases had been inadvertently shown at a lower value against the purchases reflected in Form 26AS - HELD THAT:- Gross profit rate of 4% as mentioned in the impugned order cannot be applied in the instant case. Ld. CIT(A) sought remand report from the AO, wherein the AO submitted that the issue had already been discussed during the assessment proceedings by the AO and the assessee himself admitted that balance purchases had been missed from being reflected int eh trading account and has not been considered in closing stock as well as for the year under consideration. Hence, the veracity of results, reflected in trading account furnished by the appellant is not reliable. Assessee has not furnished any documentary evidence to justify his claim that the trading results shown by him are correct. The gross profit (GP) rate reported by the assessee is significantly lower than what is typically observed in this particular industry. This discrepancy raises concerns about he accuracy and reliability of he financial statements presented. Thus, CIT(A) rightly sustained the addition which does not need in any interference on my part, hence, affirm the same and reject the ground no. 1 raised by the assessee. Addition on account of unsecured loan received - It is well settled law that on the instant the onus lies on the assessee to prove the identity of the lender, creditworthiness of the lender and genuineness of the transaction. Assessee has neither submitted any copy of his bank statement when the loan was received by him nor has he submitted the bank copy of bank statement of the lender and only submitting the PAN card of lender and his own bank pass book coy does not prove the creditworthiness of the lender and genuineness of the transaction. Hence, the assessee is not justified in discharging the onus lies upon him, thus, the CIT(A) rightly sustained the addition which does not need in any interference on my part, hence, affirm the same and reject the ground no. 2 raised by the assessee. Addition on account of administrative / operational expenses on account of rebate of sale and rent - Assessee has got rebate of Rs. 26 lacs from the vendors and shown them as income in the profit and loss account during the relevant period and rent of L-13 of Rs. 1,66,340/- is rent paid for the outlet which was taken on rent, which is the essential requirement to run the business of sales and purchase of any items, copy of rent receipts establishes the genuineness of the same. Delete both the aforesaid the additions in dispute and decided the issue in hand in favour of the assessee by allowing the ground no. 3. Adhoc addition - As noted that Ld. CIT(A) considering the nature of business, restricted the addition to 5% of Rs, 9,17,631/- which works out Rs. 45,882/- and gave a relief of Rs. 1,04,118/-. However, the expenses are for business purposes only and does not include any expenditure of personal nature, thus, in my considered opinion the adhoc addition should also be allowed. Hold and direct accordingly. Thus, the ground is allowed in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition based on a presumed gross profit rate (GP @ 4%) can be sustained where the assessee's trading account shows a markedly lower GP and the assessee admits omission of certain purchases from the trading account and closing stock. 2. Whether an addition treating an alleged unsecured loan of Rs. 10,00,000 as unexplained income is sustainable where the assessee produced the lender's PAN, bank passbook entries showing receipts/payments through banking channels, but did not produce the lender's bank statements or other proof of creditworthiness. 3. Whether rebates on sales and rent paid for a business outlet (specific amounts) are deductible/allowable where the assessee explains rebates as marketing/promotion and produces rent receipts for the outlet. 4. Whether an adhoc disallowance of business expenses (5% of specified amount ? Rs. 45,882) is justified where the impugned expenses are claimed to be wholly for business purposes and not personal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Addition based on presumed gross profit rate (GP @ 4%) Legal framework: The assessing authority may make adjustments to trading results where the returned trading account is found unreliable, and may apply a reasonable GP rate when purchases/closing stock are misstated or omitted. The assessee bears the onus to substantiate purchases, sales and stock figures where questioned. Precedent treatment: The Tribunal notes the well-established principle that onus lies on the assessee to substantiate trading figures; where veracity is undermined and no satisfactory documentary proof is furnished, addition based on a reasonable GP rate is permissible. (Followed) Interpretation and reasoning: The assessee admitted omission of a material portion of purchases from the trading account and closing stock. The AO and remand report considered this admission and the absence of documentary evidence to support the returned trading results. The returned GP (0.89%) was significantly lower than typical industry levels, creating a reliability concern. Given missing purchases and lack of supporting documents, the Tribunal found the GP reported by the assessee unreliable and that application of a higher GP for estimating undisclosed income was appropriate. Ratio vs. Obiter: Ratio - where an assessee admits omission of purchases and fails to produce corroborative evidence, an assessing authority (and appellate authorities) may compute income by applying a reasonable GP rate to assess underreporting. Conclusion: The addition of Rs. 8,08,245 based on variation in gross profit ratio is affirmed; ground seeking its quashal is rejected. Issue 2 - Addition treating unsecured loan of Rs. 10,00,000 as unexplained income Legal framework: Receipts characterized as loans are not treated as taxable income if the assessee establishes identity and creditworthiness of the lender and genuineness of the transaction, typically by producing cogent banking evidence and corroborative documents. The onus to prove these elements rests on the assessee. Precedent treatment: The Tribunal applies the settled legal principle that the assessee must prove identity, creditworthiness and genuineness of transactions to exclude receipt from tax as a genuine loan. (Followed) Interpretation and reasoning: The assessee produced the lender's PAN and copies of bank passbook entries reflecting receipts/payments through banking channels. However, the assessee did not produce his own bank statement for the receipt nor the lender's bank statement demonstrating the lender's financial capacity or movement of funds from the lender's account at the time of lending. The AO's remand report was silent, but the appellate record demonstrated an evidentiary gap as to the lender's creditworthiness and the source of funds. Mere PAN and selective passbook extracts were insufficient to discharge the onus. Ratio vs. Obiter: Ratio - where the assessee fails to produce adequate banking records or other evidence establishing the lender's identity/creditworthiness and genuineness of the transaction, the receipt may be treated as unexplained and added to income. Conclusion: The addition of Rs. 10,00,000 on account of the unsecured loan is sustained; the ground challenging it is rejected. Issue 3 - Allowability of rebate on sales (Rs. 1,64,219) and rent of outlet L-13 (Rs. 1,66,340) Legal framework: Rebate/discounts that are incurred wholly and exclusively for business purposes and rent paid for premises used in the business are deductible/allowable if genuine and supported by evidence. Precedent treatment: The Tribunal treats marketing rebates and rent paid for business premises as legitimate business expenditures when evidenced and explained as integral to commercial operations. (Followed) Interpretation and reasoning: The assessee explained rebates as marketing policy to promote sales and clear stock; rebates totaling larger amounts were reflected in profit & loss. Rent for outlet L-13 was shown as necessary for carrying on the retail business, with rent receipts produced to establish genuineness. On the basis of explanations and rent receipts, and considering the commercial rationale for rebates and outlet rent, the Tribunal found the additions arbitrary and unsupported by a basis for disallowance. Ratio vs. Obiter: Ratio - rebates and rent properly evidenced and shown to be for business purposes cannot be disallowed arbitrarily; proof of genuineness (e.g., receipts) suffices to admit such expenses unless contrary material is shown. Conclusion: Both additions (rebate on sale and rent of outlet) are deleted; the related grounds in favour of the assessee are allowed. Issue 4 - Adhoc disallowance of expenses (Rs. 45,882) Legal framework: Adhoc disallowances are permissible only where there is a rational basis and material to support them; expenses shown as wholly and exclusively for business, and supported by records, should not be disallowed without reasoned justification. Precedent treatment: The Tribunal constrained adhoc disallowances where expenses are claimed to be business-related and no evidence of personal expenditure is shown. (Followed) Interpretation and reasoning: The assessing officer had made an adhoc disallowance; the CIT(A) limited the disallowance to 5% and provided relief, but retained Rs. 45,882. Upon review, the Tribunal observed that the impugned expenses are for business purposes only and do not include personal expenditure. No material was shown to justify even the reduced adhoc disallowance. Accordingly, the Tribunal allowed the remaining disallowance claimed by the assessee. Ratio vs. Obiter: Ratio - adhoc disallowances must be supported by reasoning or material; in the absence of any evidence of personal expenditure, such adhoc disallowance is to be disallowed. Conclusion: The adhoc disallowance of Rs. 45,882 is deleted and the ground is allowed in favour of the assessee. Overall Disposition The appeal is partly allowed: additions based on GP variation and the unsecured loan are affirmed; additions for rebates and rent and the adhoc expense disallowance are deleted.