2015 (3) TMI 7 - AT - Income Tax

Addition on account of income from business - low gross-profit - rejection of books of accounts - Held that - Conclusion of the AO, to reject the books of accounts merely on the ground of non-furnishing of list of parties to whom sales have been made in cash cannot be a solitary basis to reject the books of account. The assessee has placed on record, the audited books of accounts, in which no discrepancy has been pointed out by the AO. Moreover, the assessee has explained that the low gross-profit is on account of incentive passed onto the retailers, and demonstrated that submission by inviting our attention to the expenditure incurred by the assessee this year and the preceding year to show the fall in expenses on account of rebate and rent. It was pointed out that the expenses of rebate were of ₹ 1,53,000/- in the preceding year, apart from cartage and distribution expenses of ₹ 57,000/- on a turnover of ₹ 1.33 crores. However, we take note that no expenses were incurred by the assessee in the relevant Assessment Year, as the assessee opted to avoid complete distribution cost and pass on the margin and incentive to the customers. No doubt, that approach has resulted into reduction of expenses including rent from ₹ 36,000/- for 5 months to ₹ 12,000/- for the entire year. However, we feel that the said explanation too, cannot be a sole basis to accept the declared result. In such circumstances, we deem it appropriate to remit the matter back to the file of AO, for re-consideration, of the trading results declared by the assessee, in the light of the explanation tendered before us. - Decided in favour of assessee for statistical purposes. Addition in respect of incentive received and not declared by the assessee - Held that - We are remitting back the matter to the file of the AO, we set-aside the order of the AO on this issue and direct that he may ascertain the veracity of the claim of the assessee that the impugned incentive pertains to the earlier Assessment Year and not relevant to the Assessment Year under consideration. If the said claim of the assessee is found correct, then the impugned addition may be deleted otherwise it may be upheld.Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Rejection of declared income and addition by Assessing Officer.
2. Addition of income from business and professional activities.
3. Addition of incentive received and not declared.

Issue 1: Rejection of Declared Income and Addition by Assessing Officer:
The appellant, a wholesale distributor of milk, challenged the Assessing Officer's addition of Rs. 6,26,631 to the declared income for the Assessment Year (AY) 2008-09. The AO contended that the appellant should have earned higher gross profit based on the sales volume. The AO invoked Section 145(3) of the Act, rejected the books of accounts, and made the addition due to the appellant's inability to provide party-wise details of sales. The CIT(A) upheld the addition, emphasizing the lack of evidence on passing on margins to buyers. However, the ITAT found the AO's rejection of the books solely based on missing party-wise details unjustified. The ITAT remitted the matter to the AO for reconsideration, considering the appellant's explanations and directing a fair opportunity for evidence submission.

Issue 2: Addition of Income from Business and Professional Activities:
The AO added Rs. 6,26,631 to the appellant's income, alleging underreporting of gross profit from milk distribution. The AO applied a higher GP rate due to the absence of party-wise sales details, leading to the addition. The CIT(A) confirmed this addition, citing discrepancies in the appellant's explanations and unreliable confirmations submitted. However, the ITAT found the rejection of books solely based on missing party-wise details inadequate. The ITAT noted the appellant's explanations on cost-cutting and margin passing to customers, leading to reduced expenses. Consequently, the ITAT set aside the CIT(A)'s order, directing the AO to re-examine the matter considering the appellant's contentions and allowing additional evidence submission.

Issue 3: Addition of Incentive Received and Not Declared:
The AO added Rs. 1,80,112 to the appellant's income for unreported incentives based on ledger entries. The CIT(A) upheld this addition, noting the lack of evidence supporting the appellant's claim of passing on incentives to customers. The ITAT, while remitting the matter to the AO for reconsideration, directed verification of the appellant's assertion that the incentive pertained to a previous year. The ITAT allowed for deletion of the addition if the claim was substantiated, emphasizing a thorough examination of the incentive's relevance to the relevant assessment year.

In summary, the ITAT's judgment addressed the issues of income addition, rejection of declared income, and unreported incentives. The ITAT emphasized the need for fair consideration of the appellant's explanations, directing the AO to re-evaluate the matters with proper opportunity for evidence submission.