2010 (4) TMI 1062 - AT - Income Tax

Undisclosed income detected at the time of survey - d iscrepancies in the books of account found and impounded at the time of the survey - AO rejected the books of account of the assessee and made the addition to the trading result declared by the assessee in the books - Whether the AO was justified in rejecting the books of account of the assessee? - HELD THAT - The assessee failed to point out that amount of 20, 000 received on 12th Sept. 2004 was accounted for in the books of account. we find that the assessee has merely given a fanciful and blunt explanation without the same being supported by any iota of evidence that dinner to be arranged by the assessee on 15th Dec. 2004 was ultimately cancelled. We therefore have no hesitation in holding that the receipt against the said catering services rendered by the assessee to Mr. Kushaal has not been recorded in the books of account and has been kept outside the books and thus the receipts have been suppressed by the assessee. It is well-settled that when there is suppression of sales or receipts the books of the assessee can be rejected and income can be estimated. It is of great importance that the details of all the sales and receipts should be verifiable and correctly recorded. The books can be rejected even if the some of the sales are found to be verifiable and the rest are not verifiable. Therefore we hold that the AO was justified in rejecting the books of the assessee and in estimating the income my making addition to the trading results declared by the assessee. Quantum of reasonable addition - addition made to trading results - As assessee himself admitted in its letter that assessee was grateful to all the officers of the Department for extending their full support and co-operation to the assessee during and after the survey proceedings. The assessee has also stated in the aforesaid letter that the assessee shall be able to achieve the object of buying peace with the Department and ensure smooth sailing for it not only at the investigation stage but also at the assessment stage. From the aforesaid averment made by the assessee in its letter it is fully established and proved that it is not the case where disclosure has been made either under coercion or pressure or because of any misunderstanding and/or mistaken reading of the document. It was never the case of the assessee that the assessee has misunderstood the contents of the various documents and papers found at the time of the survey and has wrongly declared the amount which was submitted after about two months from the date of the survey in the light of various documents and papers found at the time of the survey. The assessee s conduct in not including the aforesaid sum in the light of the various documents and papers found at the time of the survey on which tax was also paid in advance is not justified but is an unwarranted attempt to reduce its due and just tax liability. It is also well-settled that once the books of account of the assessee are rightly rejected u/s. 145(3) of the Act the AO has to proceed to determine the assessee s income on the basis of material available on record and to the best of his judgment. The fact that assessee has been indulging in suppressing sales of its business has been detected as a result of a survey conducted by the Department during the course of which various documents and papers were found and impounded indicating that all the transactions of receipts and payments were not recorded in the books of account submitted by the assessee to the Department. we therefore uphold the order of the CIT(A) in confirming the addition made to the trading results declared by the assessee. This ground raised by the assessee is thus rejected. Business promotion expenses - CIT(A) confirmed the disallowance by observing that the assessee has filed only copy of accounts of business promotion expenses and from the copy of accounts it is noted that the some of the expenses are in the form of hotel and restaurant bills and have been incurred from credit card and while some expenses incurred in cash also and therefore the assessee has not been able to justify that entire expenses - HELD THAT - We are of the considered view that the authorities below are unjustified in disallowing part of the total expenses incurred on account of business promotion expenses. The AO should have pointed out some of the instances in respect of which he was of the view that expenses were not incurred for the purpose of business but the AO has not done so and has disallowed the amount purely on estimate. In this view of the matter we therefore do not find any justification in sustaining the disallowance of 1, 00, 000 out of the business promotion expenses We therefore delete the disallowance. Disallowance out of vehicle running and maintenance and depreciation - Addition made as expenses incurred for personal use - HELD THAT - The present case is a case of private limited company where the vehicles belonging to the company were also used by the directors. Even if the directors were using the vehicle for their personal use insofar as company is concerned the expenses are to be treated as being incurred for the purpose of business. If any personal benefit is accruing to the directors by use of vehicle for their personal purposes the perquisite value could have been added as income in the hands of the directors. It is also to be noted that providing a car to the director by the company cannot be said to be on non-business account. Moreover the books of account of the assessee have been rejected and the addition has been made by the AO in the trading result and therefore there would be no justification to make further disallowance out of the expenses claimed in the P L a/c when the addition has already been made by the AO. We therefore delete this addition sustained by the learned CIT(A). In the result the appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Sustaining the addition of Rs. 25,00,000 as undisclosed income.
2. Disallowance of Rs. 1,00,000 out of business promotion expenses.
3. Disallowance of Rs. 75,000 out of vehicle running, maintenance, and depreciation expenses.

Issue-wise Detailed Analysis:

1. Sustaining the Addition of Rs. 25,00,000 as Undisclosed Income:

The assessee appealed against the order of the CIT(A) which sustained the addition of Rs. 25,00,000 made by the AO on account of undisclosed income detected during a survey conducted under section 133A of the IT Act, 1961. The survey revealed various discrepancies in the books of account and impounded documents indicating unrecorded receipts. The AO noted that the assessee had voluntarily surrendered Rs. 25,00,000 as additional income but did not include this amount in the return of income. The assessee contended that the surrender was made without clarity about the undisclosed income and was an ad hoc payment of tax. The AO rejected this explanation due to the discrepancies found in the books of account and impounded documents, leading to the rejection of the books under section 145 of the Act and an addition of Rs. 25,00,000 to the trading results.

The CIT(A) upheld the AO's order, noting that the surrender was voluntary and not under coercion, and the retraction in the return of income lacked valid reason or basis. The assessee's explanations regarding specific discrepancies, such as the catering services to Gannon Dunkerley & Co. and the cancellation of a function for Mr. Kushaal, were found unsatisfactory and unsupported by evidence. The Tribunal also upheld the CIT(A)'s decision, emphasizing that the assessee's conduct in not including the surrendered amount in the return was unjustified. The Tribunal concluded that the addition was based on material evidence and the assessee's own admission, thus rejecting the ground raised by the assessee.

2. Disallowance of Rs. 1,00,000 Out of Business Promotion Expenses:

The AO disallowed Rs. 1,00,000 out of Rs. 7,08,293 claimed as business promotion expenses, citing the personal element in expenses incurred in cash or through credit card for lunch, gifts, etc. The CIT(A) confirmed the disallowance, noting that some expenses were incurred in cash and the assessee failed to justify that the entire expenses were for business purposes. However, the Tribunal found that the authorities below did not point out specific items unrelated to business and made the disallowance purely on estimate. The Tribunal held that the disallowance was unjustified without specific instances and deleted the disallowance of Rs. 1,00,000.

3. Disallowance of Rs. 75,000 Out of Vehicle Running, Maintenance, and Depreciation Expenses:

The AO disallowed Rs. 1,00,000 out of vehicle running, maintenance, and depreciation expenses, treating them as incurred for personal use. The CIT(A) reduced the disallowance to Rs. 75,000. The Tribunal noted that in the case of a private limited company, vehicle expenses should be treated as business expenses even if used by directors for personal purposes, with any personal benefit being added as perquisite income in the hands of the directors. The Tribunal also considered that the books of account were rejected, and an addition of Rs. 25,00,000 was made to the trading results, making further disallowance unjustified. The Tribunal deleted the disallowance of Rs. 75,000.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal upheld the addition of Rs. 25,00,000 as undisclosed income but deleted the disallowances of Rs. 1,00,000 out of business promotion expenses and Rs. 75,000 out of vehicle running, maintenance, and depreciation expenses.