2014 (1) TMI 394 - AT - Income Tax

Disallowance of telephone and travelling expenses - Held that - The Assessing Officer while making the disallowance @ 20% of the expenses claimed had not given any specific instance where the expenses were incurred for personal purposes - The ld. CIT(A) while restricting the disallowance @ 10% had also not given any cogent reason - In such type of cases, the personal use on account of telephone and vehicle, cannot be ruled out - It is justified in the eyes of court that to cover the leakage if any and to meet the ends of justice, the disallowance to Rs. 5,000/- is restricted - Partly allowed in favour of assessee. Addition on account of household expenses - Held that - The assessee explained that a sum of Rs. 1,12,000/- was withdrawn for house hold expenses, however, the Assessing Officer considered only Rs. 87,000/- for the purposes of house hold expenses and excluded the expenses of Rs. 25,000./-, which were incurred by the assessee for the education of the children - The Assessing Officer while estimating monthly expenses @ Rs. 12,000/- has not given any basis - The withdrawal of Rs. 1,12,000/- shown by the assessee for the purposes of house hold expenses, appears to be reasonable considering the size of the family - The Assessing Officer was not justified in making the addition on account of house hold expenses and the ld. CIT(A) was not justified in confirming the action of the Assessing Officer - Decided in favour of assessee. Low G.P. rate declared - Held that - Ld. CIT(A) directed the Assessing Officer to apply the G.P. rate on the basis of the G.P. rate of immediately two assessment years and the maximum G.P. rate i.e. 7.19% declared by the assessee and accepted by the department in the assessment year 2007-08 was directed to be applied - The view taken by the Ld. CIT(A) was justified - Decided against Revenue. Unexplained cash credit - Held that - The assessee not only filed the confirmation from the cash creditors, whose accounts were squared up but also produced them before the Assessing Officer who recorded their statement - The Assessing Officer could not bring any material on record to substantiate that the credits were from undisclosed income of the assessee - Following Kanhaiyalal Jangid Vs. ACIT 2007 (1) TMI 496 - HIGH COURT OF RAJASTHAN - Assessee having filed confirmation from the creditor and having produced the creditor before the A.O. where the creditor affirmed advancement of loan to assessee, no addition u/s 68 could be made in the hands of assessee on the ground that the creditor could not satisfactorily explain the source of loan. Credit balance in account of trade creditors - Held that - The purchases made from those parties were accepted and even the payments made through banking channel were not doubted, therefore, it cannot be said that the trade creditors were not traceable because the payments were made through banking channel to those parties, which had been accepted - The Assessing Officer had no where established that those were the bogus parties or the amount shown in their names, were bogus. The Ld. CIT(A) was of the view that the provisions of Section 68 of the Act were not attracted to the amounts representing purchases made on credit - In respect of difference in balances of parties the Ld. CIT(A) was of the view that the assessee by showing the higher credit balances had also inflated the purchases which resulted in the reduction of profit - The disallowance has been restricted to this amount - Decided against Revenue.

Issues Involved:
1. Acceptance of return of income.
2. Rejection of books of accounts under Section 145.
3. Acceptance of balance differences declared by the assessee.
4. Disallowance of expenses amounting to Rs. 19,353.
5. Addition to household expenses.
6. Deletion of addition made by the Income Tax Officer.

Issue-wise Detailed Analysis:

1. Acceptance of Return of Income:
The assessee contended that the Commissioner of Income Tax should have accepted the return of income considering the facts and circumstances of the case. However, this specific ground was not argued further by either party during the proceedings.

2. Rejection of Books of Accounts under Section 145:
The Assessing Officer (AO) rejected the books of accounts citing reasons such as lack of inventory records for opening and closing stocks, differences in balances with suppliers, and discrepancies in the quality of goods in purchase and sales bills. The CIT(A) upheld the rejection but reduced the gross profit (G.P.) rate applied by the AO from 17.22% to 7.19%, based on the past history of the assessee. The tribunal agreed with the CIT(A) that the past history of the assessee was a more relevant factor for determining the G.P. rate.

3. Acceptance of Balance Differences Declared by the Assessee:
The AO noted differences in the balances declared by the assessee and proposed additions. The CIT(A) found that the differences were due to different methods of accounting for discounts and restricted the addition to specific discrepancies. The tribunal upheld the CIT(A)'s decision, agreeing that the AO had not established that the balances were bogus.

4. Disallowance of Expenses Amounting to Rs. 19,353:
The AO disallowed 20% of the expenses claimed by the assessee due to lack of vouchers and potential personal use. The CIT(A) reduced this disallowance to 10%. The tribunal further reduced the disallowance to Rs. 5,000, noting that no specific instances of personal use were identified and that the disallowance was on the higher side.

5. Addition to Household Expenses:
The AO added Rs. 57,000 to the household expenses, estimating them at Rs. 12,000 per month. The CIT(A) confirmed this addition. However, the tribunal found that the assessee's declared household expenses of Rs. 1,12,000 were reasonable considering the family size and living standards, and thus, deleted the addition.

6. Deletion of Addition Made by the Income Tax Officer:
The department appealed against the deletion of several additions by the CIT(A):
- G.P. Rate Addition: The CIT(A) applied a G.P. rate of 7.19% based on past history, which the tribunal upheld.
- Addition under Section 68 (Rs. 1,31,000): The CIT(A) deleted the addition, noting that the assessee had provided confirmations and the AO did not bring any contrary material. The tribunal agreed with this decision.
- Addition under Section 68 (Rs. 24,14,889): The CIT(A) deleted the addition except for minor discrepancies, noting that the purchases were accepted and payments were made through banking channels. The tribunal upheld this decision.
- Miscellaneous Expenses (Rs. 19,353): This was addressed in the cross-objection, with the tribunal reducing the disallowance to Rs. 5,000, thus dismissing the department's appeal on this ground.

Conclusion:
The tribunal dismissed the department's appeal and partly allowed the cross-objection of the assessee, providing relief on several grounds while maintaining a balanced approach to the disallowance of expenses. The judgment emphasized the importance of past history and reasonable estimation in tax assessments.

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