2012 (11) TMI 219 - AT - Income Tax

Addition on account of expenditure under the head Discount - No Books of account and supporting documents had been produced by the assessee during the assessment proceedings Held that - Discount is an expenditure, which can either be reduced from sales or it can be charged to Profit & Loss Account - Evidence and details filed by the assessee, has not been confronted to the AO, within the meaning of Rule 46A of the Income Tax Rules, 1962 - issue is restored to the file of the AO, to adjudicate the issue afresh, as per law, after affording reasonable opportunity to the assessee - ground of appeal of the revenue is allowed for statistical purposes. Addition made by the AO in trade account - Held that - No books of account and supporting details were produced AO applied 11% GP and made the impugned addition - Held that - end of justice would be served,if GP is taken at 10% - ground of appeal of the revenue is partly allowed. Addition as income from Undisclosed sources Held that - AO has made addition on certain misconception, which needs to be reconciled, at his level. Therefore, the issue is restored back to AO to adjudicate the issue properly, in accordance with provisions of law and in terms of established accounting norms - grounds of appeal of the revenue are allowed for statistical purposes. Assessee s appeal for assessment year 2006-07 Disallowance of Interest Held that - Since these advances are for non-business activity and no supporting evidence has been furnished - interest @ 12% on these advances making addition of Rs.1,26,000 is disallowed - AO should afford reasonable and proper opportunity to the assessee, while adjudicating the issue afresh and the assessee is also directed to render necessary cooperation in the matter - ground of appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:

1. Deletion of addition on account of expenditure under the head 'discount'.
2. Admitting additional evidence without following Rule 46A.
3. Deletion of addition in the trade account due to lack of books of account.
4. Deletion of addition on account of income from undisclosed sources.
5. Disallowance of interest for non-business purposes.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Expenditure under the Head 'Discount':

The revenue contended that the CIT(A) erred in deleting the addition of Rs.1,22,600/- for discount expenses without the assessee maintaining books of account and supporting documents. The CIT(A) allowed the claim based on the details provided by the assessee, despite the AO's assertion that such discounts should be reduced from sales. The Tribunal observed that the AO's stance on reducing discounts from sales was not tenable as per accounting norms. However, the Tribunal noted that the additional evidence provided by the assessee was not confronted to the AO as required under Rule 46A. Consequently, the issue was remanded back to the AO for fresh adjudication, ensuring compliance with Rule 46A and providing the assessee a fair opportunity to present necessary evidence.

2. Admitting Additional Evidence without Following Rule 46A:

The revenue argued that the CIT(A) admitted additional evidence without following the procedure prescribed under Rule 46A of the Income Tax Rules, 1962. The Tribunal agreed that the evidence and details filed by the assessee were not confronted to the AO. Hence, the Tribunal restored the issue to the AO to adjudicate afresh, ensuring adherence to Rule 46A and providing reasonable opportunity to the assessee.

3. Deletion of Addition in the Trade Account Due to Lack of Books of Account:

The revenue contended that the CIT(A) erred in deleting the addition of Rs.4,90,000/- made by the AO in the trade account, as no books of account and supporting details were produced. The AO had rejected the book version under Section 145(3) and applied a Gross Profit (GP) rate of 11%. The CIT(A) found the AO's application of the 11% GP rate arbitrary and without basis, noting that the assessee's turnover had increased significantly, which justified a lower GP rate. The Tribunal partially agreed with the CIT(A) but adjusted the GP rate to 10%, providing partial relief to the assessee.

4. Deletion of Addition on Account of Income from Undisclosed Sources:

The revenue argued that the CIT(A) erred in deleting the addition of Rs.3,10,000/- as income from undisclosed sources and that Rule 46A procedures were not followed. The AO had added this amount based on a misunderstanding of the accounting entries related to an unsecured loan from M/s H.N. Saree. The CIT(A) found that M/s H.N. Saree was correctly shown as a debtor, and the addition was without basis. The Tribunal agreed that the AO's addition was based on a misconception and restored the issue to the AO for proper adjudication in line with established accounting norms and legal provisions.

5. Disallowance of Interest for Non-Business Purposes:

The assessee contended that the CIT(A) erred in upholding the disallowance of interest of Rs.1,26,000/- for non-business advances. The CIT(A) upheld the AO's disallowance, noting that the advances were not for business purposes and that interest-bearing loans were used to fund these advances. The Tribunal upheld the disallowance in principle but remanded the issue to the AO to consider the assessee's contention that interest should not be charged for the full year. The AO was directed to provide a fair opportunity to the assessee and adjudicate the issue afresh.

Conclusion:

The Tribunal allowed the revenue's appeal for statistical purposes, remanding several issues back to the AO for fresh adjudication. The assessee's appeal was also allowed for statistical purposes, with specific directions for reconsideration of the interest disallowance. The Tribunal emphasized adherence to procedural rules and fair opportunity for both parties in the reassessment process.