2015 (11) TMI 789

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....Expenses Rs. 21,952/- Wages Expenses Rs. 1,57,952/- Shop Expenses Rs. 15,877/- Mobile & Telephone expenses Rs. 19,660/- Transportation expenses Rs. 28,919/- House hold expenses Rs. 1,06,815/- Penalty expenses Rs. 1,78,540/- Cash Creditors Rs. 39,400/- Commission expenses Rs. 22,000/-   2.1 The ld. CIT(A) has further erred on facts and in law in not allowing the set off of trading addition of Rs. 9,76,312/- confirmed by him against the disallowance / addition in respect of transportation expenses, house hold expenses and cash creditor made by him resulting into double addition. 2.1 First of all, we take up ground 1 and 1.1 of the assessee wherein brief facts of the case are that the assessee is engaged in the trading of iron scrap in the name and style of M/s. Bajaj Scrap Traders and the AO has observed therein as under:- In nutshell, the AO rejected the books of account of the assessee by applying the provisions of Section 145(3) of the Act. Thereafter, the AO made trading addition of Rs. 9,76,312/- by applying the gross profit rate of 2.34% i.e. taking the mean of last two preceding years as against gross profit r....

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....e any consent for applying the gross profit rate as claimed by the assessee. In view of the above discussion, the rejection of books of account u 145(3) is upheld and addition of Rs. 7,97,312/- by applying of gross profit rate of 2.234% based on the earlier years results is confirmed.'' 2.3 During the course of hearing, the ld. AR of the assessee has filed the written submission praying therein to this issue in question which is reproduced as under:- ''1. The various discrepancies pointed out by the AO is explained as under:- (i) The assessee maintains day to day books of accounts, which is subject to audit. These books are duly supported with bills and vouchers. The lower authorities have not pointed out any sales or purchase which is out of the books or not vouched. The month-wise quantitative details of stock is at page 3 of the paper book. In these facts, the observation of AO regarding non maintenance of day to day stock register has no relevance & thus this can't be a reason for rejecting the books and applying provisions of section 145(3). (ii) The shortage shown is justified in as much as assessee purchases scrap from various parties and during....

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....s not necessary that there should be a trading addition. After rejection of books of accounts, assessment is to be made in the manner provided u/s 144. This would require to take into consideration all the circumstantial facts & the past history. It is to be noted that overall gross profit has been increased from Rs. 18,26,910/- to Rs. 41,78,691/- as compared to last year. The slight decline in the G.P. Rate of 0.39% is on account of increase in the turnover, which has increased by three times as compared to the last year. The assessee is interested in the volume of profit & not in the rate of profit. Thus, when the amount of profit declared by the assessee is better as compared to the results declared in earlier years, application of G.P. rate of 2.34% i.e. average of last two preceding years as against G.P. rate of 1.90% declared by the assessee is unwarranted. 5. The another reason for applying the average G.P. rate of the last two years is that assessee has agreed to the same as per order sheet entry dated 28.12.2010. From the order sheet entry dated 28.12.2010, it can be noted that the assessee agreed for the assessment by applying average G.P. rate to avoid litigatio....

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....d vouchers. Further monthwise quantitative details are also maintained. It is, therefore, important that the AO should examine both quantitative as well as qualitative details as maintained by the assessee in order to determine the reasons for fall in gross profit rate as compared to past years. Thirdly, the assessee has mentioned that the gross profit has increased in absolute terms from Rs. 18,26,910/- (A.Y. 2007-08) to Rs. 41,78,691/- (A.Y. 2008-09) but there is only marginal decline in gross profit rate i.e. 0.39% on account of increase in turnover. The assessee has further stated that he was interested in volume of the profit and not in rate of profit. To our mind, this justification on stand alone basis cannot stand the test of judiciary without any corroborative evidence. What is really required to be demonstrated by the assessee as a prudent businessman is that what are the key business circumstances in context of the prevailing market conditions which led to the fall in gross profit rate. In the light of above discussions and especially the fact that the assessee has been denied a reasonable opportunity of being heard, the mater is set aside to the file of the AO to determ....

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....912/- is a part of trading account. Therefore, once income is estimated by application of the g.p rate, separate disallowance of wages payable cannot be made. Hence, disallowance made by AO and confirmed by CIT(A) without considering these factual aspects be deleted. Disallowance out of mobile and telephone expenses 20% of the expenses has been disallowed for personal use which is excessive considering the volume of the business and the same be restricted to 10%. Disallowance out of transportation expenses 20% of the expenses is disallowed for the reason that the expenses are incurred on self- made vouchers. From the details of expenses, it can be noted that all expenses are supported by the GR/ receipts/ receipt issued by western railway. Further, these expenses are part of trading account. Therefore, once income is estimated by application of the g.p rate, separate disallowance of transportation expenses cannot be made. Hence, disallowance made by AO and confirmed by CIT(A) without considering these factual aspects be deleted. Addition on account of household expenses The AO observed that assessee submitted the details of hous....

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....g dates time and again they did not appear and assessee shown his inability to produce them. He therefore, made the addition. It is submitted that in respect of the above two creditors assessee vide letter dated 24.09.2010 filed the confirmation . Thereafter, the copy of the income tax return was filed . Both the creditors are assessed to tax. The AO has accepted the amount received by them from cheque but has added the amount received in cash. Further, when these persons have confirmed giving loan to the assessee, are assessed to income tax and summons have been served on them, assessee has discharged his burden of proof and therefore, the addition made by AO and confirmed by CIT(A) is unjustified. This apart when trading addition is made, addition u/s 68 should not have been made as per the ratio laid down in the following cases:- CIT Vs. Tyaryamal Bal Chand 165 ITR 453 (Raj.) (HC) CIT Vs. G.K Contractor 19 DTR 305 (Raj.) CIT Vs. KSM Guruswamy Nadar & Sons 149 ITR 127 (Mad.) Anantharam Veerasinghaiah & Co. Vs. CIT 123 ITR 457(SC) Disallowance out of commission expenses. AO disallowed the commission payment u/s 40(a)(i....

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....me as well as in the name of his wife. The AO is directed to verify the same and allow the same after due verification. 3.5.4 Regarding disallowance of penalty expenses, the assessee has submitted that the restoration charges of Rs. 1,17,540/- have been debited to the account of the assessee and has not been claimed as expenditure in the profit and loss account. The AO is thus directed to verify the same and if the claim of the assessee is supported by the treatment done in the financial statement as claimed by the assessee, the same should be allowed. 3.5.5 Regarding addition of Rs. 39,400/- u/s 68 of the Act, it is noted that the assessee has submitted the confirmation from Shri Ratan Chand and Smt. Rashmi Jain during the course of assessment proceedings. Further the Income Tax Returns were also filed and both the creditors are assessed to tax. Both these persons have confirmed the loan transactions made with the assessee and the transactions are duly verifiable and the creditors have been duly identified. Thus in view of these facts, the addition made u/s 68 is deleted. Hence, the order of the ld. CIT(A) is not sustainable on this point and addition sustained by the ld. CI....

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