2011 (7) TMI 536 - AT - Income Tax

Low gross profit - Rejection of books of accounts - G.P. rate of 15.08% applied by the Assessing Officer as against 14.28% returned by the assessee - CIT(A) deleted the addition - Held that - The assessee had given an explanation in regard to increase in the price of Cooking Gas which has not yet been rebutted by the AO - The other main reason assigned by AO for rejection of books of account that assessee had failed to produce relevant vouchers/bills, invoices in support of cash purchases of milk, AO has rightly observed that onus is on the assessee to prove its claim of expenditure - As held in CIT vs. Calcutta Agency Limited 1950 (12) TMI 4 - SUPREME Court that onus lies on the assessee to establish its claim - Under such circumstances, it would meet the ends of justice if G.P. rate is estimated at 14.5% as against 15.08% determined by AO - Ground of the Department is partly allowed. Non-business expenditure - foreign travel of the Director - Held that - The assessee had shown export turn over of Rs.1.00 crores to UK therefore, assessee s claim regarding visit of Director to UK for business purposes can not be doubted - The assessee had produced all the relevant correspondence in this regard which has been taken note of by CIT(A) and not rebutted by Department - In favour of assessee. Commission disallowed u/s. 40A(2)(a) - Held that - The commission had been paid to mother of Director of assessee-company who has been associated with this business for considerable long time as explained by assessee. He has pointed out that commission has been paid for the last 25 years and the lady still manages the outlet. Merely her age being 70 years, cannot be a basis for making disallowance - Her presence itself in the outlet was more than sufficient for making the payment of commission to her as she could manage the affairs effectively merely by sitting at the outlet - Though the Assessing Officer has made disallowance by referring to Section 40A(2)(a), but he has not made disallowance on the ground of the same of being excessive and unreasonable - He has made disallowance observing that it was an accommodation of expenses paid to a person satisfied u/s. 40A(2)(a) - AsO has wrongly referred to Section 40A(2)(a) because u/s. 40A(2)(a), disallowance can be made if the expenditure is considered to be excessive and unreasonable having regard to the fair market value of the services rendered by the person - In favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of low gross profit.
2. Deletion of addition on account of foreign travel expenses.
3. Deletion of disallowance of commission under Section 40A(2)(a) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Low Gross Profit:
The Department contested the deletion of an addition of Rs. 30,78,972/- made due to a low gross profit rate. The Assessing Officer (AO) had noticed a fall in the Gross Profit (G.P.) rate from 15.87% in the previous year to 14.28% in the assessment year 2006-07. The assessee attributed this decline to a 74.21% increase in the price of Cooking Gas. The AO rejected the assessee's books under Section 145(3) due to lack of stock registers, production records, and supporting vouchers for cash purchases. The AO estimated sales at Rs. 31 crores and applied an average G.P. rate of 15.08%, leading to an addition of Rs. 30,78,972/-.

The CIT(A) confirmed the rejection of the books but deleted the addition, noting that:
- The AO did not provide evidence of sales outside the books.
- The explanation for the fall in G.P. rate was not rebutted by the AO.

The Tribunal agreed with the CIT(A) that the sales could not be disturbed without evidence of unrecorded sales. However, it found that the G.P. rate should be estimated at 14.5% instead of 15.08%, partly allowing the Department's appeal.

2. Deletion of Addition on Account of Foreign Travel Expenses:
The Department challenged the deletion of an addition of Rs. 13,08,979/- related to foreign travel expenses of the Director. The AO disallowed this amount, suspecting non-business purposes, as the assessee failed to substantiate the business connection of the foreign trips.

The CIT(A) allowed the appeal, noting that:
- The Director's visit to the UK was a continuation of a previous business trip in 2003.
- The assessee had provided sufficient evidence, including correspondence with the Indian High Commission and RBI applications.
- The expenses were covered by Fringe Benefit Tax (FBT), already paid by the assessee.

The Tribunal upheld the CIT(A)'s decision, confirming that the Director's visit was for business purposes and the Department did not rebut the provided evidence.

3. Deletion of Disallowance of Commission under Section 40A(2)(a):
The Department disputed the deletion of a disallowance of Rs. 3,93,363/- paid as commission to Smt. Kamala Devi Agarwal. The AO questioned the services rendered by her, given her age and family status.

The CIT(A) allowed the appeal, noting that:
- The commission was taxed in Smt. Kamala Devi Agarwal's assessment.
- She was responsible for the growth and profitability of a specific retail outlet.
- The AO did not argue that the commission was excessive or unreasonable.

The Tribunal confirmed the CIT(A)'s decision, stating that the mere age of the recipient could not justify disallowance. The AO's reference to Section 40A(2)(a) was incorrect as the disallowance should be based on the reasonableness of the expenditure, not the relationship.

Conclusion:
The Tribunal partly allowed the Department's appeals, adjusting the G.P. rate to 14.5% but upheld the CIT(A)'s decisions on the foreign travel expenses and commission disallowance. The judgments were delivered in a consolidated manner for assessment years 2006-07 and 2007-08.