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Issues Involved:
1. Addition on account of gross profit. 2. Disallowance of gratuity and retrenchment compensation. Issue-wise Detailed Analysis: 1. Addition on Account of Gross Profit: The primary issue is the addition of Rs. 2,50,000 to the gross profit of the assessee by the Commissioner of Income Tax (Appeals) [CIT(A)], out of an initial addition of Rs. 14,95,462 made by the Assessing Officer (AO). The AO enhanced the turnover of the assessee by Rs. 15 lakhs and applied a higher gross profit (GP) rate of 45% due to the assessee's admission during a search on 15-4-1988 of making sales outside the books. The CIT(A) found the GP rate of 40.36% acceptable but presumed unaccounted sales post-search, reducing the AO's estimate by 50% and sustaining an addition of Rs. 2,50,000. The assessee argued that there was no material evidence post-search to justify the presumption of continued unaccounted sales. The Tribunal found merit in the assessee's argument, noting the absence of evidence indicating sales outside the books post-search and the acceptable GP rate. The Tribunal referenced the case of Samrat Beer Bar v. ACIT, emphasizing that any addition should be based on material evidence found during the search. Consequently, the Tribunal directed the deletion of the Rs. 2,50,000 addition. 2. Disallowance of Gratuity and Retrenchment Compensation: The second issue concerns the disallowance of Rs. 96,242 each for gratuity and retrenchment compensation paid to employees. The business of the appellant firm was closed and taken over by a partner as a proprietary concern. The AO viewed the payments as a tax avoidance device, disallowing them based on the Supreme Court decision in McDowell & Co. Ltd. v. CTO. The CIT(A) upheld the disallowance, referencing the case of CIT v. Gemini Cashew Sales Corporation, which held that such payments arising from business closure are not allowable. The assessee differentiated between gratuity and retrenchment compensation, citing the Supreme Court decision in W.T. Suren and Co. Ltd. v. CIT, which recognized gratuity as distinct. The Tribunal agreed, reversing the disallowance of gratuity based on this precedent and the Kerala High Court decision in CIT v. Union Saw Mills. Regarding retrenchment compensation, the Tribunal found the facts aligned with CIT v. Gemini Cashew Sales Corporation, where liability arising from business transfer, not during its operation, is not allowable. The retrenchment compensation paid before the business transfer was deemed non-deductible as it was not incurred for carrying on the business. Thus, the Tribunal upheld the disallowance of retrenchment compensation but allowed the appeal concerning gratuity. Conclusion: The Tribunal allowed the appeal on the first issue, directing the deletion of the Rs. 2,50,000 addition. On the second issue, the Tribunal partly allowed the appeal by reversing the disallowance of gratuity but upheld the disallowance of retrenchment compensation.
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