2012 (6) TMI 682 - AT - Income Tax

Addition in Gross Profit - invoking the provisions of section 145(3) - assessee has declared GP ratio @ 12.67% as compared to gross profit rate ratio at 15.07% - Held that - As the assessee did not maintain stock register of raw material, work in progress, consumable and finished products the necessary verification of the trading results cannot be made - the AO has correctly applied the provisions of section 145(3)as the GP ratio declared by the assessee for the year under consideration was on lower side as compared to GP rate of immediate preceding year failing to give any plausible explanation regarding the fall in GP ratio at 2.40% particularly when the turn over has remained almost consistent as per past year - as the GP rate at 14% estimated by the AO and confirmed by the CIT(A) is on higher side therefore, in the interest of justice same is to be reduced to 13% - partly in favour of assessee. Addition under the head Disallowance u/s 40A(2)(b) - AO noted that the assessee has paid excess salary to his son as compared to other employees - Held that - The disallowance u/s 40A(2)(b) can be made only to the extent the payment for the services is excessive or unreasonable vis-a-vis the market price of such services but what is essentially required is that the market price of these services is established and then amount paid in excess of such market price is to be disallowed - estimate of salary made by AO @ Rs. 5,000/- per month is without any basis and against the express provisions of Section 40A(2)(b) - disallowance of Rs. 60,000/- in this case will meet the ends of justice and thus, the assessee gets a relief of Rs. 1,25,000/- on this count - partly in favour of assessee. Addition under the head Disallowance u/s 43B - payment of bonus and leave with wages after filing of return - Held that - Payment of liability covered u/s 43B are liable to be paid before the due date of filing of the return as prescribed u/s 139(1) and there is no relevance with regard to the date of filing of the income tax return - as the assessee paid the amount in question on 8.11.2007 i.e. before the due date of filing of return i.e. 15.11.2007, which was extended time for filing the return u/s 139(1) the addition are to be deleted - in favour of assessee. Addition under the head Provision for Foreign exchange - Held that - As a detailed reply dated 30.11.2009 was filed before the AO in support of the contention claiming the provision for foreign exchange as Revenue expenditure in the profit and loss account for the year under consideration which the authorities have ignored while deciding the issue in hand - remand this issue back to the file of the AO to consider it afresh. Addition under the head Disallowance of Telephone expenses - AO disallowed 1/5th of the expenses which comes to Rs. 31,799/- observing that the element of personal use of telephone - Held that - Considering the assessee submission that in the computation of income, the assessee himself has disallowed 1/10th out of telephone expenses which comes to Rs. 15,900 the addition of Rs. (31,799/- minus (-) Rs. 15,900/-) Rs. 15,899/- may of sustained - partly in favour of assessee. Addition under the head Disallowance of Vehicle Expenses - Held that - Considering the Copies of acknowledgment of return and computation of income assessee has already added back Rs. 32,775/- being 1/5th out of car expenses of Rs. 1,63,873/- plus Rs. 68,911/- being 1/5th out of car depreciation of Rs. 3,44,553/- aggregating to Rs. 1,01,686/- in the computation of income chart under the head Car expenses and Car depreciation - in favour of assessee.

Summary

Issues Involved:
1. Addition in Gross Profit under section 145(3)
2. Disallowance under section 40A(2)(b)
3. Disallowance under section 43B
4. Provision for Foreign Exchange
5. Disallowance of Telephone Expenses
6. Disallowance of Vehicle Expenses

Issue-wise Detailed Analysis:

1. Addition in Gross Profit under section 145(3):
The assessee declared a Gross Profit (GP) ratio of 12.67% for the assessment year 2007-08, lower than the previous year's 15.07%. The assessee attributed the decline to increased wages and fabrication charges, and a significant reduction in fabrication charges receipts. The Assessing Officer (AO) rejected this explanation due to a lack of supporting details and invoked section 145(3) of the Income Tax Act, estimating a GP rate of 14%. The CIT(A) upheld this decision, citing the absence of stock registers and documentary evidence. The Tribunal, however, found the 14% GP rate excessive and reduced it to 13%, directing the AO to re-compute the income accordingly.

2. Disallowance under section 40A(2)(b):
The AO disallowed Rs. 1,85,000/- under section 40A(2)(b), noting that the assessee paid an excessive salary to his son, Mr. Karan Malhotra, compared to other employees. The AO estimated a reasonable salary at Rs. 5,000/- per month. The CIT(A) confirmed this addition. The Tribunal observed that the disallowance should be based on the market price of services, which was not established by the AO or CIT(A). It concluded that a disallowance of Rs. 60,000/- would be just, granting the assessee relief of Rs. 1,25,000/-.

3. Disallowance under section 43B:
The assessee paid bonus and leave wages amounting to Rs. 3,09,114/- after filing the return but before the due date. The AO disallowed this amount, as it was paid after the return filing date. The CIT(A) upheld this decision. The Tribunal noted that under section 43B, liabilities must be paid before the due date of filing the return as prescribed under section 139(1). Since the payment was made before the extended due date, the Tribunal deleted the addition.

4. Provision for Foreign Exchange:
The AO disallowed Rs. 1,73,823/- for foreign exchange provision, considering it an unascertained liability. The assessee claimed to have submitted a detailed reply, which the AO ignored. The CIT(A) upheld the disallowance, doubting the authenticity of the assessee's submission. The Tribunal found that the assessee did submit a detailed reply and remanded the issue back to the AO for a fresh decision, ensuring a fair hearing.

5. Disallowance of Telephone Expenses:
The AO disallowed 1/5th of telephone expenses (Rs. 31,799/-) due to potential personal use by the assessee and family. The CIT(A) upheld this disallowance. The Tribunal noted that the assessee had already disallowed 1/10th of the expenses in the computation of income. It reduced the disallowance to Rs. 15,899/-, granting partial relief.

6. Disallowance of Vehicle Expenses:
The AO disallowed 1/5th of car repair and maintenance expenses and depreciation (Rs. 1,01,685/-) due to potential personal use. The CIT(A) confirmed this disallowance. The Tribunal observed that the assessee had already added back 1/5th of these expenses in the income computation. Hence, it found no justification for the additional disallowance and allowed the appeal.

Conclusion:
The appeal was allowed partly and partly for statistical purposes, with specific reliefs and remands directed by the Tribunal on various grounds.