2017 (1) TMI 1530 - AT - Income Tax

Rejection of books of account - Estimation of gross profit rate @ 12.50% as against 11.59% declared by the assessee - Held that - Neither the Assessing Officer nor the ld. CIT(A) has conducted any independent enquiry regarding the same and just on the basis of guess work has observed that assessee is not bringing out full particulars. Even the judicial pronouncements are clear on the facts that in the nature of trade as like assessee, cash memos for day-to-day sales are not required and that a consolidated entry in the cash book along with relevant documents of purchase of liquor are sufficient to prove the genuineness. In this view of the matter, we hold that the ld. CIT(A) was not justified in confirming the rejection of the books of account and adopting the G.P. rate on the higher side and, therefore, we set aside the order of the ld. CIT(A) on this issue and allow grounds No.1 & 2 of the appeal of the assessee. Ad-hoc disallowance on account of shop rent paid - Held that - Only affidavits and confirmation of receipts of shop rent are enclosed and the Department did not conduct any independent enquiry and physical verification regarding rent paid and both the Assessing Officer and the ld. CIT(A), on ad-hoc and summary basis, have stated that the rent should be @ ₹ 3,000/- per month per shop, however, neither the order of the Assessing Officer nor of the ld. CIT(A) was a speaking order on this issue and the reasons for arriving at the conclusion was not spelt out specifically. We are of the considered view that any ad-hoc disallowance made summarily by a quasi-judicial authority, without any factual basis, cannot be held justified and accordingly we set aside the order of the ld. CIT(A) - Decided in favour of assessee. Ad-hoc disallowance on account of salary paid - Held that - As held in various judicial pronouncements discussed hereinabove, how the business has to be conducted, it is the prerogative of the assessee and not of the Department. The Department is, however, free to conduct enquiry and have a physical verification to put forth the allegation on the assessee, but on guess work and summary basis any addition made is unwarranted. In view of commercial expediency of the expenditure incurred and the evidences placed before us in the paper book and the judicial pronouncements discussed hereinabove, we set aside the order of the ld. CIT(A) on this issue and allow ground of the appeal. Disallowance of processing fee, assessment fee and renewal fee - Held that - The additional evidences go to the root of the matter wherein all these details of renewal, processing and assessment fees paid to the Government are there and such evidences filed by the assessee are accepted. We also find that these payments were paid to the Government agencies and that is certified from the receipt letter of the District Excise Officer. We are of the considered view that under these facts and circumstances of the case, these expenses cannot be held as unjustified expenses and it has direct nexus with the nature of business of the assessee and the payment is also duly debited in the cash book and it has been paid to the Government. - Decided in favour of assessee.

Issues Involved:
1. Rejection of books of account and addition to gross profit.
2. Other disallowances after rejection of books and estimation of gross profit.
3. Ad-hoc disallowance on account of shop rent paid.
4. Ad-hoc disallowance on account of salary paid.
5. Disallowance on account of processing fee, assessment fee, and renewal fee.
6. Lack of proper opportunity provided to the appellant before passing the order.

Detailed Analysis:

1. Rejection of Books of Account and Addition to Gross Profit:
The assessee, engaged in the business of trading liquor, filed a return declaring an income of ?14,02,770. The assessment was completed under section 144 of the Act with a total income of ?62,68,770 after invoking section 145(3) and estimating a gross profit rate of 12.50% against the declared 11.59%. The Assessing Officer (AO) rejected the books of account for reasons including the production of only cash book and ledger, cash-based expenditures, lack of supporting bills/vouchers, and no quantitative details of purchases and sales. The AO suspected suppression of sales and discrepancies in stock records. The assessee argued that purchases were verifiable through TCS certificates and sales were recorded daily. The CIT(A) upheld the AO's decision without providing specific reasons. The Tribunal found that the cash book and ledger were produced, and purchases were supported by TCS certificates. Citing precedents, the Tribunal held that the rejection of books and higher G.P. estimation were unjustified, thus allowing the assessee's grounds.

2. Other Disallowances After Rejection of Books and Estimation of Gross Profit:
These disallowances were inherently linked to the rejection of books and estimation of gross profit. Since the Tribunal found the rejection of books and higher G.P. estimation unjustified, these disallowances were also deemed unjustified.

3. Ad-hoc Disallowance on Account of Shop Rent Paid:
The AO disallowed ?5,88,000 on an ad-hoc basis, questioning the reasonableness of the rent claimed without conducting any independent enquiry. The CIT(A) confirmed this without a specific finding. The assessee provided affidavits confirming rent payments, which were not independently verified by the Department. The Tribunal found the ad-hoc disallowance unjustified due to the lack of factual basis and set aside the CIT(A)'s order, allowing the assessee's ground.

4. Ad-hoc Disallowance on Account of Salary Paid:
The AO disallowed ?16,46,400, questioning the number of employees and the reasonableness of the salary without independent enquiry. The CIT(A) upheld this disallowance. The assessee argued that the expenditure was commercially expedient and supported by affidavits. The Tribunal, citing judicial precedents, held that the reasonableness of expenditure should be viewed from the businessman's perspective and found the ad-hoc disallowance unjustified. The Tribunal set aside the CIT(A)'s order, allowing the assessee's ground.

5. Disallowance on Account of Processing Fee, Assessment Fee, and Renewal Fee:
The AO disallowed ?13,83,300 due to the absence of details. The assessee later provided complete details and receipts from the District Excise Officer as additional evidence. The Tribunal accepted these additional evidences, finding that the expenses were justified and directly related to the business. The Tribunal set aside the CIT(A)'s order, allowing the assessee's grounds.

6. Lack of Proper Opportunity Provided to the Appellant:
This ground was not specifically adjudicated as the Tribunal's findings on the other issues inherently addressed the fairness of the proceedings.

Conclusion:
The Tribunal allowed the appeal, setting aside the orders of the CIT(A) on all contested grounds, and ruled in favor of the assessee. The judgment emphasized the need for factual basis and independent enquiry before making disallowances and upheld the commercial expediency of the expenditures claimed by the assessee.

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