2015 (2) TMI 166 - AT - Income Tax

Turnover estimation - Held that - Assessee has not disputed the fact that one more outlet was opened during the year under consideration as well as distributorship was given for Kalol and Gandhinagar during the year under consideration. The assessee could not give any cogent reason as to why its sales were lesser than the sales of the preceding year, when one more outlets was opened and two franchisees were added by the assessee. Further, the CIT(A) has estimated the sales only on the basis of the sales of the preceding year without considering the change of the fact of the year under consideration to the extent of opening of one more outlets and giving two distributorship - one at Kalol and other at Gandhinagar. In the above facts and circumstances of the case, in our considered view, the AO is fully justified in estimating the turnover of the assessee at ₹ 5.00 crores (Rupees Five Crores). We, therefore, set aside the order of the CIT(A) on this issue and restore the order of the AO on this issue. - Decided in favour of revenue. Disallowance u/s.40(a)(ia) - non-deduction of TDS on the payment made for packing material - Held that - The purchases on account of plastic trays, cups, spoons and plastic dishes etc. which did not carry the logo of the assessee and were in the nature of purchases. The purchases were of standardized material available in market. These submissions of the assessee could not be controverted by the Revenue by bringing any material evidence on record. We are, therefore, of the view that the purchases made by the assessee from the aforesaid three parties cannot be considered as being a case of contract which would require deduction of TDS u/s 194C of the Act and, therefore, no disallowance u/s 40(a) (ia) of the Act is called for. -Decided in fvaour of assessee. Late remittance of employees contribution to PF - disallowance confirmed - Held that - ssue now stands covered against the assessee by the decision of the Hon ble Gujarat High Court in the case of Commissioner of Income-tax-II Vs. Gujarat State Road Transport Corporation, (2014 (1) TMI 502 - GUJARAT HIGH COURT) wherein it was held that employees contribution to provident fund and/or state insurance fund not credited by the assessee to the accounts of the employees in relevant funds within the due dates as specified in section 36(1)(va) of the Act, the amounts are not deductible. - Decided against assessee. G.P. Estimation - Held that - No distinguishing facts have been pointed out during the year by the DR, we, respectfully following the order of the Tribunal for Asstt.Year 2006- 07, estimate the GP of the assessee at 29% - Decided against revenue. Addition being prior period sales-tax expenses - CIT(A) deleted the disallowance - Held that - DR could not point out any specific error in the findings of the CIT(A). He also could not controvert the findings of the CIT(A) by bringing any positive material on record to show that the liability for sales tax had not crystallized during the year under consideration. We, therefore, do not find any good reason to interfere with the order of the CIT(A) on this issue - Decided against revenue. Depreciation on motor vehicle - CIT(A) deleted the disallowance - Held that - CIT(A) in allowing depreciation on vehicles purchased in the name of director was confirmed in appeal by the Tribunal in the Asstt.Year 2006-07 - Decided against revenue. Disallowance u/s.40A(3) - CIT(A) deleted the disallowance - Held that - CIT(A) deleted the disallowance by observing that as the book results of the assessee was rejected, and the AO estimated the sales and GP ratio, no separate addition was warranted. The CIT(A) further observed that the assessee has furnished evidence that at the first instance, the payments were made through account payee cheques, which were dishonoured and to avoid disconnection of the electricity, which would have resulted in huge losses in view of nature of business of the assessee, i.e. the business of manufacturing of food items and sweets, which require continuous flow of electricity, as any failure of power supply or disconnection thereof would result in contamination of food and sweets in absence of proper refrigeration, the assessee was compelled to take the payment of the bills immediately in cash to avoid disconnection by the electricity company. Therefore, the assessee had reasonable cause for making the payment of electricity bills in cash. - Decided against revenue.

Summary

Issues Involved:
1. Estimation of Sales
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS on packing material payments
3. Disallowance of employees' contribution to PF for late remittance
4. Adoption of Gross Profit (GP) rate
5. Disallowance of prior period sales-tax expenses
6. Disallowance of depreciation on motor vehicle
7. Disallowance under Section 40A(3) for cash payments

Issue-wise Detailed Analysis:

1. Estimation of Sales:
The assessee contested the CIT(A)'s confirmation of sales estimation at Rs. 3.75 crores against the book sales of Rs. 3,45,32,261/-. The Revenue argued that the CIT(A) erred in estimating sales at Rs. 3.75 crores instead of Rs. 5 crores as estimated by the AO. The AO based the estimation on the lack of stock and sales registers and static turnover despite business expansion. The CIT(A) referred to previous years' estimations, concluding that Rs. 3.75 crores was reasonable. The Tribunal, however, sided with the AO, noting the assessee's failure to justify lower sales despite additional outlets and distributorships, thereby restoring the AO's estimation of Rs. 5 crores.

2. Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Packing Material Payments:
The AO disallowed Rs. 1,24,270/- for non-deduction of TDS on packing material payments. The CIT(A) upheld this based on the previous year's decision. However, the Tribunal noted that in the preceding year, such disallowance was deleted by the Tribunal, as the purchases were standardized and did not require TDS deduction. Following this precedent, the Tribunal deleted the disallowance.

3. Disallowance of Employees' Contribution to PF for Late Remittance:
The AO disallowed Rs. 18,602/- for late remittance of employees' PF contributions. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, referencing the Gujarat High Court decision in the case of Gujarat State Road Transport Corporation, which held that contributions not credited within the due dates specified in section 36(1)(va) are not deductible.

4. Adoption of Gross Profit (GP) Rate:
The AO adopted a GP rate of 32%, resulting in an addition of Rs. 57,61,691/-. The CIT(A) reduced the GP rate to 29.65%, noting that the assessee had shown a better GP compared to the previous year. The Tribunal affirmed the CIT(A)'s decision, citing the Tribunal's previous year's order which estimated the GP at 29%.

5. Disallowance of Prior Period Sales-Tax Expenses:
The AO disallowed Rs. 19,319/- for sales-tax expenses, claiming it pertained to earlier years. The CIT(A) deleted the disallowance, noting that the liability crystallized during the year under consideration. The Tribunal upheld the CIT(A)'s decision, as the DR could not provide evidence to the contrary.

6. Disallowance of Depreciation on Motor Vehicle:
The AO disallowed Rs. 1,35,776/- being depreciation on a motor vehicle purchased in the director's name. The CIT(A) allowed the depreciation, following decisions from previous years. The Tribunal upheld the CIT(A)'s decision, referencing the Tribunal's confirmation in the preceding year.

7. Disallowance under Section 40A(3) for Cash Payments:
The AO disallowed 20% of Rs. 6,07,164/- paid in cash to Torrent Power AEC Ltd., invoking Section 40A(3). The CIT(A) deleted the disallowance, reasoning that the book results were rejected and the GP ratio was estimated. Additionally, the payments were made in cash due to dishonored cheques and the need to avoid power disconnection. The Tribunal upheld the CIT(A)'s decision, finding no error in the reasoning.

Conclusion:
Both the appeals of the assessee and the Revenue were partly allowed. The Tribunal restored the AO's estimation of sales at Rs. 5 crores, deleted the disallowance under Section 40(a)(ia) for packing material payments, upheld the disallowance for late PF remittance, affirmed the CIT(A)'s GP rate of 29.65%, upheld the deletion of prior period sales-tax expenses disallowance, allowed depreciation on the motor vehicle, and confirmed the deletion of disallowance under Section 40A(3) for cash payments.