TaxTMI 
TaxTMI 
2026 (5) TMI 615
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....firming the ad-hoc disallowances of business expenses of Rs. 21,39,441/- only. 5. The facts in brief are that the assessee, an individual, is proprietor of M/s Sri Shayam Timbers. The case of the assessee was selected for scrutiny under CASS on low income. During the assessment proceedings, the AO noted that turnover of the assessee for the year under consideration increased by 91.73% i.e. turnover increased from Rs. 1,55,96,439/- to 2,99,03,132/- in the year under consideration. However, the net profit ratio decreased from 3.13% in F.Y. 2020-21 to 1.94% in the year under consideration. The AO also noted that the assessee in the Profit and Loss account has debited expenses such as Freight Inward, Unloading charges and Petrol expense of Rs. 10,30,000/- Rs. 1,09,000/- and Rs. 38,500/- but no such expenses were incurred/ claimed in the previous financial year. Likewise, expenses such as conveyance and freight outward increased from 429% & 657% as compared to previous financial year. 6. The assessee explained that due to competition, she started free delivery services to the customer which resulted in increased freight outward and loading/ unloading expenses and her business also....
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...., repetitive self-generated entries, which were unverifiable. No stock reconciliation or reliable explanation was furnished for the sharp fall in net profit rate. The appellant has not rebutted these factual findings during the appellate proceedings. In view of the defects in books and unverifiable nature of expenses, the enhancement of net profit by 1%, resulting in addition of Rs. 2,99,031/-, is reasonable and does not call for interference. 8. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 9. The learned AR before us submitted that the addition made by the AO and sustained by the learned CIT(A) is unsustainable in law and on facts. It was argued that the assessee maintained regular books of account supported by bills and vouchers, which were duly produced before the AO, and no defects warranting rejection of books were recorded. In absence of rejection of books, estimation of income on an ad-hoc basis is impermissible. The AR explained that the fall in net profit ratio was due to commercial reasons, including increased competition and introduction of free delivery services, leading to higher freight and related expenses. It was furt....
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....t or incomplete so as to warrant the rejection of books of accounts. 11.1 We further note that the primary reason for the addition is the fall in net profit rate from 3.13% in the earlier year to 1.94% in the year under consideration, despite increase in turnover. However, it is a settled position that mere decline in profit rate cannot be a ground for making addition unless it is supported by tangible evidence showing suppression of income or inflation of expenses. The assessee has furnished a plausible explanation that due to increase in competition, she introduced free delivery services and incurred higher expenditure on transportation, loading and unloading, and conveyance. It is also explained that employees were engaged for collection of dues, resulting in higher conveyance expenses. These explanations, in our view, are normal business phenomena and cannot be brushed aside without bringing any contrary materials on record. 11.2 The AO has mainly doubted the expenses on the ground that some vouchers are self-made, certain vouchers do not contain vehicle numbers or acknowledgements, and petrol expenses are recorded in uniform amounts. While these observations may raise so....
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....eal raised by the assessee is hereby allowed. 12. The next issue raised by the assessee through Ground Nos. 3 to 5 is that the learned CIT(A) erred in confirming the addition of Rs. 12 Lakh by treating the amount received from Manoj Kumar Sharma and Manoj Kumar Sharma HUF as undisclosed income. 13. The necessary facts are that the assessee during the year has received unsecured loan of Rs. 4 Lakh from her husband Shri Manoj Kumar Sharma and Rs. 8 Lakh from Manoj Kumar Sharma HUF. The AO treated the same as unexplained credit under section 68 of the Act by holding the bank statement of the lender was not furnished and the creditworthiness of lender was not established who has declared income of Rs. 5,13,510/- and Rs. 3,84,420/-in their respective return of income. The AO also noted that no interest was paid on the impugned borrowing. Hence, the AO made addition of Rs. 12 Lakh to the total income of the assessee. 14. The aggrieved assessee preferred an appeal before the learned CIT(A), however the learned CIT(A) confirmed the finding of the AO by observing as under: 6.2 Regarding the addition of Rs. 12,00,000/- u/s 68 of the Act, it is noted that the appellant recei....
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....e have heard the rival contentions of both the parties and perused the materials available on record. The issue before us is regarding the addition of Rs. 12,00,000/- made u/s 68 of the Act in respect of unsecured loans received from Shri Manoj Kumar Sharma and Manoj Kumar Sharma (HUF). At the outset, we note that the lenders are close family members of the assessee, namely her husband and his HUF. The identity of the creditors is not in dispute, and the transactions have not been found to be fictitious. Thus, the primary requirement of establishing identity stands satisfied. 18.1 Coming to the objection of the AO that the returned income of the lenders is not commensurate with the amount advanced, we find that this reasoning is not sustainable. The AO has compared the loan amount of Rs. 12 Lakh with the income declared by the lenders in a single year, which is around Rs. 9 Lakh in aggregate. In our considered view, such comparison is fundamentally flawed. Creditworthiness cannot be judged only with reference to income of one year. A person may advance loan out of past savings, accumulated capital, withdrawals from bank, or other sources such as sale of assets or family funds. T....