2015 (1) TMI 1393 - AT - Income Tax

Estimation of Gross Profit (GP Rate) - rejection of books of accounts - bogus sale and purchase transactions with the sister concerns - Held that - We agree with the finding of the Ld. CIT(A) that the way the transactions are entered, i.e. sale and purchase of the bullion and ornaments within the group concerns are only paper transactions without involving any real transfer of bullion/ornaments. The assessee has entered into fictitious transactions within the group to inflate the purchases and sales of all the group concerns - the books of account of the assessee, in our opinion, do not give the correct picture and therefore are liable to be rejected. Additions u/s 40A(2)(b) - even if the books of account are rejected by the AO but ultimately the assessment is framed u/s. 143(3) of the Act by making addition u/s. 40A(2)(b) and the addition towards siphoning of the alleged profit. Both the authorities below have not correctly understood the trading in the gold. According to him gold is a commodity having high liquidity and there are fluctuations of prices in the open market. In our opinion, the above submission cannot be simply discarded. AO has adopted the short cut method without understanding the trading in the bullion and fluctuations in the market in the prices and worked out the average rate by comparing the same transaction on same dates and accordingly worked out the alleged difference. In our opinion, the approach of the AO is totally erroneous as he has totally discarded the trading in the bullion that takes place. He has also not considered the statement of the assessee that there are variations and fluctuations in the bullion market and even in the intra day transactions rate can be changed and sometimes rates may be stable and rates may swing like a wind. When the average price method is adopted, then where ever there is a lesser price paid that is also to be considered and not the excess price only. In our opinion, the average price method adopted by both the authorities is totally erroneous considering the market conditions of the bullion. Approach of both the authorities below is not correct for making high pitch additions in the hands of the assessee by invoking provisions of section 40A(2)(b) and for alleged selling of the ornaments to the related entities at a lower price. As per the financial accounts of the assessee, the GP worked out at 1.13%. After reducing the GP declared by the assessee at ₹ 10,79,15,449/-, the balance GP is to be added to the total income of the assessee. This covers the grounds on the addition made by invoking provisions of section 40A(2)(b), i.e. purchase of bullion from the sister concerns/related entities by paying higher price as well as sale of the ornaments at lower price. - Decided partly in favor of assessee. Additions u/s 38(2) - addition made on account of Driver s Salary - Use of vehicle partly for personal purpose - Held that - salary to driver being fixed such expenditure remains same whether the vehicle is used for personal purpose or not. - CIT(A) is correct in deleting the additions - Decided in favor of assessee.

Issues Involved:

1. Rejection of books of account and estimation of Gross Profit (GP).
2. Disallowance under Section 14A and Section 36(1)(iii) of the Income Tax Act.
3. Addition on account of melting gain.
4. Disallowance of generator maintenance expenses.
5. Disallowance of interest on loan to R.K. Oswal Graphics Pvt. Ltd.
6. Disallowance of interest on funds invested in the guest house.
7. Disallowance of interest to partners.
8. Denial of depreciation on windmill.
9. Addition on account of property income.
10. Addition on account of difference in trade creditors.
11. Addition on account of driver's salary.
12. Addition on account of depreciation on vehicles.
13. Addition on account of disallowance of interest under Gold Deposit Scheme (GDS).
14. Addition on account of verification under GDS.
15. Addition on account of bogus liability.

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Gross Profit (GP):

The Assessing Officer (AO) rejected the books of account of the assessee due to various defects, including non-submission of stock statements to the bank, non-furnishing of details of sales, and non-maintenance of proper records. The AO made high-pitch additions based on alleged purchases of bullion and ornaments at higher prices and sales at lower prices to sister concerns. The CIT(A) confirmed the rejection of books but reduced the GP addition by estimating a GP rate of 5.71% on an estimated turnover. The Tribunal, however, found the approach of both authorities erroneous and directed the AO to adopt a GP rate of 1.20% on the total sales as per audited accounts.

2. Disallowance under Section 14A and Section 36(1)(iii) of the Income Tax Act:

The AO disallowed Rs. 4,53,72,146/- under Section 14A for investments made in group companies, which was upheld by the CIT(A). The CIT(A) further enhanced the disallowance to Rs. 4,82,82,028/- under Section 36(1)(iii), considering the borrowed funds used for non-business purposes. The Tribunal restored the issue to the AO for fresh adjudication, allowing the assessee to claim the interest as a deduction under "income from other sources" and set off against business income under Section 71.

3. Addition on Account of Melting Gain:

The AO estimated melting gain at 10% and made an addition of Rs. 84,89,937/-. The CIT(A) confirmed the addition but did not make a separate addition, considering it covered under the GP addition. The Tribunal deleted the addition, accepting the assessee's method of accounting for melting gain.

4. Disallowance of Generator Maintenance Expenses:

The AO disallowed 50% of generator maintenance expenses, which the CIT(A) reduced to 15%. The Tribunal upheld the CIT(A)'s decision, finding the disallowance reasonable.

5. Disallowance of Interest on Loan to R.K. Oswal Graphics Pvt. Ltd.:

The AO disallowed Rs. 3 lakhs for non-charging of interest on a loan given to R.K. Oswal Graphics Pvt. Ltd., which was upheld by the CIT(A). The Tribunal deleted the addition, accepting the assessee's explanation that it was a trade advance.

6. Disallowance of Interest on Funds Invested in the Guest House:

The AO disallowed Rs. 15,02,342/- under Section 14A, which the CIT(A) reduced to Rs. 7,51,171/- under Section 36(1)(iii). The Tribunal upheld the CIT(A)'s decision but allowed the assessee to claim depreciation on the guest house once construction is completed.

7. Disallowance of Interest to Partners:

The AO disallowed Rs. 18,92,421/- paid as interest to partners, considering it a colorable device. The CIT(A) upheld the disallowance. The Tribunal deleted the addition, stating that the interest paid was within the permissible limit under Section 40(b).

8. Denial of Depreciation on Windmill:

The AO disallowed Rs. 31,133/- out of depreciation on windmill, following the CIT(A)'s order for the previous year. The Tribunal restored the issue to the AO to recompute depreciation in light of the Tribunal's direction for the previous year.

9. Addition on Account of Property Income:

The AO made an addition of Rs. 15,76,669/- for underreported property income. The CIT(A) reduced the addition to Rs. 3,15,102/-. The Tribunal upheld the CIT(A)'s decision.

10. Addition on Account of Difference in Trade Creditors:

The AO made an addition of Rs. 1,10,537/- for differences in trade creditors' balances. The CIT(A) deleted Rs. 42,847/- and upheld Rs. 67,690/-. The Tribunal upheld the CIT(A)'s decision.

11. Addition on Account of Driver's Salary:

The AO disallowed Rs. 32,086/- out of driver's salary, which the CIT(A) deleted. The Tribunal upheld the CIT(A)'s decision.

12. Addition on Account of Depreciation on Vehicles:

The AO made an addition of Rs. 8,14,855/- for the difference in WDV of vehicles. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision.

13. Addition on Account of Disallowance of Interest under GDS:

The AO added Rs. 1,44,856/- under Section 41(1) for outstanding cheques under GDS. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision.

14. Addition on Account of Verification under GDS:

The AO added Rs. 1,61,06,612/- for unverified gold deposits. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision.

15. Addition on Account of Bogus Liability:

The AO added Rs. 1,32,772/- for a bogus liability. The CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision.

Conclusion:

The Tribunal provided significant relief to the assessee by reducing the GP addition and deleting several disallowances and additions made by the AO. It also restored certain issues to the AO for fresh adjudication, ensuring a fair and just assessment.

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