2010 (11) TMI 1071 - AT - Income Tax

Issues Involved:
1. Non-consideration of submissions by CIT(A).
2. Confirmation of penalty under section 271(1)(c) of the Income-tax Act, 1961.
3. Addition on account of low Gross Profit (GP).
4. Addition on account of unexplained investment in stock.
5. Disallowance of various expenses.

Detailed Analysis:

1. Non-consideration of submissions by CIT(A):
The assessee contended that the CIT(A) erred in law and on facts by not considering the submissions and decisions cited during the appellate proceedings. This issue was raised as a ground of appeal but was not separately adjudicated upon in the judgment.

2. Confirmation of penalty under section 271(1)(c) of the Income-tax Act, 1961:
The penalty under section 271(1)(c) was imposed due to the assessee's failure to provide accurate particulars of income. The AO imposed a penalty of Rs. 7,46,568 at 200% of the tax sought to be evaded. The CIT(A) reduced the penalty to 100% of the tax sought to be evaded. The ITAT upheld the penalty, noting that the assessee failed to substantiate its explanation for the low GP and unexplained investment in stock, thus attracting the provisions of Explanation 1 to section 271(1)(c).

3. Addition on account of low Gross Profit (GP):
The AO observed a sharp decline in the GP rate from 26.20% before the survey to 11.63% after the survey. The assessee's explanation for the decline, including factors like selling rejected and out-of-fashion goods at lower prices, was not accepted due to lack of documentary evidence. The AO, therefore, added Rs. 1,49,888 to the income. The CIT(A) and ITAT upheld this addition, noting that the assessee's explanation was inconsistent and not substantiated.

4. Addition on account of unexplained investment in stock:
During the survey, excess stock of Rs. 11,17,752 was found, of which Rs. 7,75,050 was attributed to the assessee. The AO noticed discrepancies between the stock declared to the bank and the stock as per books. The AO added Rs. 13,26,614 as unexplained investment under section 69. The CIT(A) deleted this addition, but the ITAT reversed the CIT(A)'s decision, sustaining the addition to the extent of Rs. 26,21,865, subject to reduction for stock of sister concerns.

5. Disallowance of various expenses:
The AO disallowed certain expenses due to lack of supporting evidence:
- Electricity expenses: Rs. 13,901
- Advertising expenses: Rs. 2,336
- Staff welfare expenses: Rs. 9,500
- Traveling expenses: Rs. 12,250

The CIT(A) upheld the disallowance of staff welfare and traveling expenses. The ITAT reversed the disallowance of traveling and staff welfare expenses, noting that the explanation provided by the assessee was plausible under the circumstances. However, the disallowance of advertising expenses was upheld as the assessee had accepted it.

Conclusion:
The ITAT upheld the penalty under section 271(1)(c) for the additions on account of low GP and unexplained investment in stock, as the assessee failed to discharge the onus of proving the bonafide of its explanations. The penalty on the disallowed advertising expenses was not justified and was excluded from the penalty computation. The appeal was partly allowed, with the penalty on the disallowed advertising expenses being excluded.

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