2012 (11) TMI 792 - AT - Income Tax

Disallowance made from the expense claimed under the head Salary and Bonus Held that - Payments in cash were made to only casual and temporary workers. Hence on a conspectus of the matter, the Ld CIT (A) restricted the impugned addition to a lump sum figure of Rs.5.00 lakhs for the reason that there is a probability that a part of claim cannot be substantiated by the assessee - AO has doubted the genuineness of this expense for another reason, i.e., the assessee could produce 5 employees out of 10 persons called for by him - disallowance upheld Determination of GP Rate - held that - There cannot be any dispute that the assessee cannot realize any profit when a particular item is replaced at free of cost during the warranty period. If such warranty claims are borne by the assessee, then it will certainly have impact on the rate of GP. - the non-maintenance of stock leads to certain other problems, like theft and pilferage and such incidents would also have impact on the rate of GP. - The AO has not factored in such kind of possibilities while working out the average rate of GP. Further the samples taken by the AO cannot be taken as representative samples, as he has not taken samples randomly over the entire year. - Thus, in our view, the rate of GP worked out by the AO also cannot be considered to be a perfect one. - the average rate of GP on sale of spare parts may be fixed at 9% and in our view the same would meet the ends of justice. Disallowance made from the expense claimed under the head Telephone expenses assessee had disallowed 1/20th of the expenses claimed under this head towards personal use. The AO however enhanced the disallowance to 1/4th of the total claim Held that - Assessee himself had disallowed a part of telephone expenses towards personal use on ad-hoc basis. The said action of the assessee establishes the fact that the telephones were put to personal use also - 1/5th of the expenses claimed disallowed Disallowance made from the expense claimed under the head Vehicle expenses and also from depreciation claimed on Motor car towards personal use Held that - Assessee himself had disallowed a part of telephone expenses towards personal use on ad-hoc basis. The said action of the assessee establishes the fact that the telephones were put to personal use also - 1/5th of the expenses claimed disallowed Disallowance made from Discount and Rebate claim alleged that the assessee has inflated the claim made under the head Discount and Rebate and accordingly disallowed 20% there of Held that - AO has failed to adduce the opportunity of cross examining the persons who have given contradictory statements - no merit in the impugned disallowance and accordingly deleted Disallowance made from the Labour charges claim - AO issued letters u/s 133(6) of the Act to four persons to whom an aggregate amount of Rs.10,66,468/- had been paid as labour charges. Since the said letters were returned back un-served, the AO disallowed the said claim Held that - Assessee is required to engage out side persons also, to carry out the repair works of vehicles - assessee had deducted tax at source u/s 194C of the Act on the above said payments - assessee had made majority portion of the impugned amount by way of Account Payee cheques. It was also noticed that out of four persons, one had expired, one of them had gone abroad and other two persons were not immediately traceable - AO was not justified in making the addition addition deleted Disallowance of Employees share of PF Held that - Assessee submitted that a grace period of five more days are available under the PF Regulations and the impugned payments have been made within the grace period. It was also submitted that the payments made within the grace period are also considered as payments made within the due date - amounts paid beyond the grace period disallowed

Issues Involved:
1. Disallowance made from Salary and Bonus.
2. Disallowance made from Telephone expenses.
3. Disallowance made from Motor Car expenses and Depreciation on Motor car.
4. Addition made towards Suppression of Gross Profit.
5. Disallowance made from Discounts and Rebates claim.
6. Disallowance made from Labour charges claim.
7. Disallowance of PF contribution u/s 43B of the Act.

Detailed Analysis:

1. Disallowance made from Salary and Bonus:
The assessee claimed Rs.1,27,37,469/- under Salary and Bonus, out of which Rs.68,19,704/- was paid in cash without deducting PF. The AO doubted the genuineness of these payments and disallowed 25% of the cash payments. The Ld CIT (A) reduced the disallowance to Rs.5 lakhs, noting that non-deduction of PF alone is not a sufficient ground for disallowance and that payments were made to casual and temporary workers. The Tribunal upheld the Ld CIT (A)'s decision, agreeing that the non-deduction of PF cannot solely justify disallowance and that the assessee provided explanations for not producing all employees.

2. Disallowance made from Telephone expenses:
The assessee disallowed 1/20th of the telephone expenses for personal use, but the AO increased it to 1/4th. The Ld CIT (A) reduced it to 1/5th. Both parties challenged this, but the Tribunal found no reason to interfere with Ld CIT (A)'s decision, noting that the assessee's own disallowance indicated personal use.

3. Disallowance made from Motor Car expenses and Depreciation on Motor car:
Similar to the telephone expenses, the assessee disallowed 1/20th for personal use, the AO increased it to 1/4th, and the Ld CIT (A) reduced it to 1/5th. The Tribunal upheld Ld CIT (A)'s decision, applying the same reasoning as for the telephone expenses.

4. Addition made towards Suppression of Gross Profit:
The AO found discrepancies in the assessee's GP rate calculation for spare parts, using a "Retailer method" which the AO questioned. The AO recalculated the GP rate based on selected invoices, finding it higher than the assessee's declared rate. The Ld CIT (A) deleted the addition, noting the overall GP rate increased and the sample size used by the AO was not representative. The Tribunal partially agreed with the AO, noting the lack of day-to-day stock records and physical inventory, and fixed the average GP rate at 9%, directing the AO to rework the GP addition accordingly.

5. Disallowance made from Discounts and Rebates claim:
The AO disallowed 20% of the discounts and rebates claim, doubting the reliability of credit notes. The Ld CIT (A) deleted the disallowance, noting that a significant portion was paid by crossed cheques and recognizing practical issues with customer signatures on credit notes. The Tribunal upheld Ld CIT (A)'s decision, agreeing with the various points considered.

6. Disallowance made from Labour charges claim:
The AO disallowed labour charges as letters sent to recipients were returned unserved. The Ld CIT (A) deleted the disallowance, noting the necessity of outside labour for repairs, TDS deductions, and payments by account payee cheques. The Tribunal upheld this decision, agreeing with the Ld CIT (A)'s reasoning.

7. Disallowance of PF contribution u/s 43B of the Act:
The AO added Rs.85,254/- for late PF payments. The Ld CIT (A) sustained Rs.20,016/- for payments beyond the grace period, accepting the assessee's submission that payments within the grace period are on time. The Tribunal found no reason to interfere with Ld CIT (A)'s decision.

Conclusion:
The Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal, modifying the GP rate issue and upholding Ld CIT (A)'s decisions on other issues.

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