2019 (9) TMI 1336 - AT - Income Tax

Undisclosed sales - Addition on the basis of the papers found in search conducted by the Central Excise Department - HELD THAT - The whole case of the Revenue regarding undisclosed sales rest on the orders of the Central Excise authorities which has since been set-aside by the CESTAT vide its order dated 7.02.19. In view of the same the additions so made by the Assessing officer towards gross profit on unrecorded sales and unaccounted purchases is directed to be deleted. At the same time the Revenue would be at liberty to take action as per law where the matter so decided by the CESTAT is appealed against by the Revenue and is decided in its favour. Disallowance u/s 40(a)(ia) - AR submitted that an amendment has been made by the Finance Act 2014 w.e.f. 01.04.2015 in Section 40(a)(ia) whereby it is provided that 30% of any sum payable to a resident shall be disallowed if tax is not deducted at source under Ch. XVIIB as against the 100% disallowance presently made - HELD THAT - In the instant case there is no dispute that the assessee is liable to deduct TDS on interest payment to Shri Ramesh Chand and non-deduction of the TDS will entail disallowance u/s 40(a)(ia) of the Act. However in view of the consistent position taken by the Coordinate Benches of the Tribunal wherein the amendment in section 40(a)(ia) has been held retrospective in nature the disallowance is restricted to 30% of the total amount. In the result the crossobjection is partly allowed. Addition towards telephone expenses and the personal/other than business use of telephone could not be ruled out and therefore made disallowance being 10% of the expenses - HELD THAT - CIT(A) held that the personal use of telephone by Director cannot be ruled out and no evidence is brought to consider the same as perquisite. Thus the disallowance made by AO is reasonable and accordingly confirmed the addition. It was submitted by the ld AR that the telephone expenses are incurred in respect of telephone installed at factory and mobile of directors and employee. The telephones are used for the purpose of the business. Hence the adhoc disallowance of 10% of the expenses cannot be made. Even otherwise in case of a company no disallowance can be made on account of personal use. We donot see any infirmity in the order of the ld CIT(A) and the same is hereby confirmed. In the result the cross-objection is dismissed.

Summary

Issues Involved:
1. Adoption of unrecorded sales amount.
2. Application of gross profit (G.P.) rate on unrecorded sales.
3. Estimation of investment in unaccounted purchases.
4. Disallowance under Section 40(a)(ia) for non-deduction of tax at source.
5. Disallowance of telephone expenses.

Detailed Analysis:

1. Adoption of Unrecorded Sales Amount:
The assessee contested the amount of unrecorded sales adopted by the CIT(A) based on papers found during a search by the Central Excise Department. The CIT(A) adopted an amount of Rs. 1,42,40,278/- for AY 2010-11 and Rs. 1,54,22,078/- for AY 2011-12, whereas the assessee claimed the unaccounted sales were Rs. 92,89,856/- and Rs. 32,65,518/- respectively. The Tribunal noted that the basis for the charge of unaccounted sales, which was the order of the Central Excise Authorities, had been set aside by the CESTAT. Consequently, the Tribunal directed the deletion of the additions made by the Assessing Officer (AO) towards gross profit on unrecorded sales and unaccounted purchases.

2. Application of Gross Profit (G.P.) Rate on Unrecorded Sales:
The CIT(A) applied a G.P. rate of 3.61% on the alleged unrecorded sales instead of the G.P. rate declared by the assessee (3.43% for AY 2010-11 and 2.25% for AY 2011-12). The Tribunal, considering the CESTAT's order, directed that the additions based on these G.P. rates be deleted.

3. Estimation of Investment in Unaccounted Purchases:
The CIT(A) estimated the investment in unaccounted purchases at Rs. 11,86,494/- for AY 2010-11 and Rs. 12,85,369/- for AY 2011-12, based on an average unaccounted sales cycle. The Tribunal found no basis for such assumptions and directed the deletion of these additions in light of the CESTAT's order.

4. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source:
The AO disallowed Rs. 9,400/- under Section 40(a)(ia) for non-deduction of tax on interest paid to an individual. The CIT(A) confirmed this disallowance. The Tribunal, referencing amendments made by the Finance Act, 2014, which reduced the disallowance to 30% of the amount for non-deduction of TDS, held that this amendment should be given retrospective effect. Thus, the disallowance was restricted to 30% of the amount.

5. Disallowance of Telephone Expenses:
The AO disallowed 10% of the telephone expenses, amounting to Rs. 16,745/- for AY 2010-11 and Rs. 5,768/- for AY 2011-12, citing personal use. The CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that personal use by the director could not be ruled out.

Conclusion:
The Tribunal partly allowed the cross-objections filed by the assessee, directing the deletion of additions related to unrecorded sales and unaccounted purchases based on the CESTAT's order. The disallowance under Section 40(a)(ia) was restricted to 30% of the amount, and the disallowance of telephone expenses was upheld.