2014 (4) TMI 959 - AT - Income Tax

Disallowance of various expenses Held that - When the assessee had been maintaining mercantile system of accounting, then provisions based on actuarial calculations are allowable and deductible u/s 37 of the Act - when the assessee made purchases during the previous financial year and shown that amount as receivables in its final account, the amount was carried forward to the financial year and during the same period i.e. AY 2007- 08, additional excise duty was paid to the excise department being excise duty as determined by the Settlement Commission of the Central Excise Department - When the liability was actually crystallized during the relevant financial year in question, then the claim of the assessee is allowable and no disallowance can be made in this regard. The AO has made a lump sum trading addition by estimating ad hoc income of assessee at Rs.10 lakh after rejection of books of accounts u/s 145(3) of the Act - it is not open to the AO to uphold other disallowances and addition on other counts and on the basis of results of rejected books of accounts - except lump sum ad hoc trading addition of Rs. 10 lakh, other disallowances and addition made thereunder are not sustainable. Lump sum ad hoc trading addition Held that - Since the AO found anomalies and discrepancies in the books of accounts of the assessee and on this basis, the AO rejected books of accounts of the assessee u/s 145(3) of the Act, the AO is empowered to make a trading addition on the basis of best judgment assessment and it should be either based on the previous year or subsequent year results of the assessee or some suitable comparables - the AO has not made any exercise to consider previous or subsequent results of the assessee or any other suitable comparables - estimation of lump sum trading addition was not based on cogent and justified basis the order of the AO pertaining to estimated trading addition is set aside and the matter is remitted back to the AO for adjudication Decided in favour of Assessee.

Summary

Issues:
1. Assessment based on audited book results and ad hoc estimation.
2. Best judgment addition upheld by CIT(A).
3. Disallowances and additions based on rejected books u/s 145(3).

Issue 1: Assessment based on audited book results and ad hoc estimation

The appeal was against the order of the Commissioner of Income Tax(A) regarding the assessment year 2007-08. The assessee, engaged in manufacturing electrical accessories and acting as a commission agent for scientific instruments, declared a loss. The Assessing Officer made disallowances and rejected the books of accounts under section 145(3) of the Income Tax Act, adding Rs. 10 lakh to the income. The CIT(A) partly allowed the appeal but upheld certain disallowances. The Tribunal found that the Assessing Officer's rejection of books and the ad hoc trading addition of Rs. 10 lakh were not justified. The Tribunal held that the claim of the assessee related to excise duty was allowable as it was crystallized during the relevant financial year. The Tribunal set aside other disallowances and additions, directing the Assessing Officer to delete them.

Issue 2: Best judgment addition upheld by CIT(A)

The CIT(A) upheld the best judgment addition made by the Assessing Officer of Rs. 10 lakh to the assessee's income. The Tribunal found that the Assessing Officer did not consider subsequent year results or comparables while making this addition. The Tribunal held that the estimation of the trading addition was not based on cogent and justified grounds. Therefore, the Tribunal set aside the order related to the estimated trading addition and directed the Assessing Officer to reconsider it based on previous or subsequent year results or comparables. The Tribunal upheld the rejection of books under section 145(3) but set aside the trading addition of Rs. 10 lakh.

Issue 3: Disallowances and additions based on rejected books u/s 145(3)

The Assessing Officer made various disallowances and additions based on the rejected books of accounts under section 145(3). The CIT(A) upheld part of these disallowances. The Tribunal found that the Assessing Officer's lump sum ad hoc trading addition of Rs. 10 lakh was not justified as it was not based on proper assessment criteria. The Tribunal set aside all disallowances and additions except the trading addition of Rs. 10 lakh, directing the Assessing Officer to delete them. As the main grievance was resolved by deleting all disallowances and trading addition, the Tribunal dismissed the remaining grounds as academic.

In summary, the Tribunal partially allowed the appeal, setting aside disallowances and additions made based on rejected books and directing the Assessing Officer to reconsider the trading addition based on appropriate assessment criteria. The Tribunal emphasized the importance of considering previous or subsequent year results or comparables while making such estimations.