2015 (4) TMI 538

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....y the A.O. to produce the VAT returns of its Hyderabad branch as well as Chennai branch. Although, the assessee produced the relevant details pertaining to Hyderabad branch, it could not produce either the VAT returns or the purchase invoices pertaining to Chennai branch. On verification of the relevant ledger extract pertaining to Chennai branch, it was also observed by the A.O. that the same did not contain the details of purchases made. He, therefore, held that the claim of the assessee for purchases of Chennai branch was not fully verifiable and disallowance of Rs. 1,86,09,868 was made by him on account of unverifiable purchases being 8% of the total purchases of Chennai branch. It was also noted by the A.O. that expenditure of Rs. 27,21,566 claimed by the assessee on account of salaries, wages and bonus was apparently on the higher side when compared to the turnover of the last year vis-à-vis turnover of the year under consideration which was drastically lower at about 50% of the earlier year. Since the assessee could not offer any explanation to the satisfaction of the A.O. for such higher claim on account of salaries, wages and bonus, adhoc disallowance of Rs. 4,80,00....

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....ary etc., the books of account of the assessee were liable to be rejected. Accordingly, he directed that the books of account of the assessee be rejected and the net profit be estimated at 0.7% of sales being the net profit rate applied in the case of sister concern of the assessee engaged in the same line of business. This method adopted by the Ld. CIT(A) resulted in enhancement of income of the assessee as computed by the Assessing Officer. The Ld. CIT(A) also confirmed the disallowance of Rs. 10,83,239 made by the A.O. on account of finance charges by invoking the provisions of section 40a(ia). 7. Aggrieved by the order of the Ld. CIT(A), assessee and revenue both are in appeal before the Tribunal on the following grounds : ITA.No.404/Hyd/2014 : A.Y. 2009-2010 (Assessee's Appeal) : "1. The Ld. CIT(A)-III, Hyderabad erred both in law and on facts in upholding order of the A.O. partly. 2. The Ld. CIT(A), Hyderabad erred in confirming the addition towards disallowance of financial charges u/s.40(a)(ia) of Rs. 10,83,239/-. 3. The Ld. CIT(A), Hyderabad erred in not considering the fact that the provisions of section 40(a)(ia) are applicable only to expenditure whic....

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....have heard the arguments of both the sides and also perused the relevant material on record. Ground Nos.1 and 10 raised in the appeal of the assessee and ground No.5 raised in the appeal of the revenue are general in nature requiring no specific adjudication. 9. The common issue raised in ground Nos. 2 and 3 of the assessee's appeal relates to the disallowance of Rs. 10,83,239 made by the A.O. and confirmed by the Ld. CIT(A) on account of finance charges under section 40a(ia) for its failure to deduct tax at source. 10. At the time of hearing before us, both sides have agreed that this issue is squarely covered in favour of the assessee by the decision of Coordinate Bench of this Tribunal in the case of S.S. Net Works vs. ITO rendered vide order dated 28.01.2015 passed in ITA.No.478/Hyd/2013 wherein it was held, following the decision of Hon'ble A.P. High Court in the case of CIT vs. Janapriya Engineers Syndicate (ITA.No.352 of 2014 dated 24.06.2014) as well as the decision of Special Bench of the Tribunal at Visakhapatnam in the case of Merylin Shipping and Transport vs. Addl. CIT (ITA.No.477/Vizag/2008 dated 29.03.2012), that if the relevant expenditure is found to ....

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....Accordingly, he rejected the books of account and estimated the net profit of the assessee company from the business of trading in steel products by applying the net profit rate of 0.7% which resulted in enhancement of income. Although, we agree with the contention of the Ld. Counsel for the assessee that the action of the Ld. CIT(A) rejecting the books of account and estimating the income of the assessee by applying net profit rate of 0.7%, which resulted into the enhancement, is not justified in the facts and circumstances of the case especially when no notice of enhancement was given by the Ld. CIT(A) to the assessee, we find it difficult to accept his contention that the addition made by the A.O. by way of disallowance of 8% made out of purchases of Chennai branch is not sustainable in the absence of rejection of books of account made by him. In our opinion, it is not the case where the income of the assessee was estimated by the A.O. but it is the case where disallowance was made by the A.O. for unverifiable purchases due to the failure of the assessee to produce the relevant invoices and furnish the relevant details to support and substantiate its claim of purchase made by Ch....

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.... of unverifiable element involved in the expenditure claimed by the assessee, in our opinion, is not well founded. We, therefore, direct the A.O. to delete the same. Ground Nos. 4, 5, 6, 7 and 9 of the assessee's appeal are accordingly allowed, Ground No.8 of the assessee's appeal is treated as allowed for statistical purposes and Ground No. 3 and 4 of the Revenue's appeal are treated as partly allowed for statistical purposes. 15. In ground No. 1 and 2 of its appeal, the Revenue has challenged the action of the Ld. CIT(A) in remitting the issue relating to the addition made on account of non- disclosure of opening stock to the A.O. with a direction to verify the claim of the assessee that the value of opening stock was duly grouped with purchases. 16. After considering the rival contentions and perusing the relevant material on record, it is observed that the addition made by the A.O. on account of non-disclosure of opening stock was assailed by the assessee before the Ld. CIT(A) by making the following submissions in writing : 1. "As seen from the P & L account drawn in the annual report 2008-09 there appears the following position. Because of grouping up of ....