2018 (1) TMI 1682 - AT - Income Tax

Addition u/s 68 - Addition based on rough papers - HELD THAT - These are rough papers kept by employees for their personal reference. Therefore, there cannot be addition u/s.68 of the Income Tax Act. Assessee has explained the nature of transaction in these papers. The gross value of transactions in these papers were more than Rs.5.00 crores, Rs.17.00 crores and Rs.90 lakhs in Asstt.Years 2003-04, 2004-05 and 2005-06 respectively. The discrepancy in terms of percentage of gross value is 0.31%, 2.16% and 0.68% in Asstt.Years 2003-04, 2004-05 and 2005- 06. Thus, in two years discrepancy comes out after reconciliation was less than 1% of gross value. This was the result of time gap between the recording of entries and explanation sought. Some of the employees who have noted these entries must have left the job also. Thus, we find that the ld.CIT(A) has rightly appreciated controversy and rightly deleted the additions. We do not find any merit in the grounds of appeal raised by the Revenue. Un-reconciled entries - HELD THAT - Only element of profit involved in them is to be taxed. In Asstt.Year 2004-05, theld.CIT(A) has confirmed the addition of 42 lacs on an estimation basis. But even for estimation there should be some logic for working out the quantum. The ld.CIT(A) has taken the un-reconciled entries of Rs.38,77,759/- for estimation of profit. But this is the gross value of some transaction. Corresponding expenses were also there in those entries. Therefore, gross entries cannot be taken as income of the assessee. Therefore, we modify the direction of the ld.CIT(A). The ld.AO shall calculate the profit at the rate assessee has shown on the basis of regular books in these years and accepted by AO. In other words only element of profit is to be included in the taxable income out of the un-reconciled entries worked out by the ld.CIT(A) and not the gross receipt. Addition under the heading Disclosure made before the DDIT(Investigation)-2, Rajkot. - CIT(A) has deleted addition in Asstt.Year 2005-06 which is discernible from details filed by the assessee in para-5 of this order. The assessee has impugned only retention of addition of Rs.3.00 lakhs by the ld.CIT(A) in this assessment year. She has pointed out that this Rs.3.00 lakhs is a gross income and only profit element of Rs.3.00 lakhs be added in her income. Revenue in the Asstt.Year 2005-06 has impugned deletion of Rs.51,33,219/- meaning thereby an amount of Rs.36,50,978/- retained by the ld.CIT(A) has not been challenged by the assessee in the Asstt.Year 2005-06. Thus, this amount has been added twice by the AO. It is also stand of the assessee that this amount was included in the peak balance for the Asstt.Year 2005-06. It cannot be assessed in the Asstt.Year 2003-04 also. The ld.CIT(A) has rightly deleted from the Asstt.Year 2003-04 and we do not find any merit in this ground of appeal. It is rejected. Disallowance of proportionate interest expenditure for the respective assessment years - HELD THAT - We do not find any error in the order of the ld.CIT(A) because interest expenditure could be disallowed if interest bearing funds were used by the assessee for the purpose of granting loan without charging interest. The assessee has demonstrated that she has more interest free funds during the year than the interest free advance, and therefore there could not be any attribution of interest expenditure on such interest free loans. These grounds of appeal are rejected in all these assessment years. Estimated disallowance of expenses of out of vehicle expenses, telephone and travelling expenses at 20% by the AO which were restricted by the ld.CIT(A) at 10% of total expenses - HELD THAT - We find that the AO has estimated impugned expenditures for disallowance at 20% for want of necessary supporting materials. However, the ld.CIT(A) after considering the size of business and quantum of transactions carried out by the assessee restricted disallowance to 10% of the total expenses, which we find to be reasonable and justifiable. Therefore, we are not inclined to disturb the order of the ld.CIT(A) on this issue. It is confirmed. The ground taken by both the sides in appeals/cross-objection are rejected. Disallowance of bad debts - AO has disallowed the claim of the assessee on the ground that the assessee failed to demonstrate the efforts made by her for recovery of the outstanding amount - HELD THAT - CIT(A) has deleted the disallowance by following judgment of the Hon ble Supreme Court in the case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT According to the ld.CIT(A) after 1.4.1989 the assessee was not supposed to bring demonstrative evidence on record to show that debts have actually become bad. It is sufficient if these amounts have been written off in its accounts. After considering the finding of the ld.CIT(A) we do not find any merit in this ground of appeal. It is rejected. Addition of low household withdrawal - HELD THAT - It is quite difficult to determine household expenditure of any individual. It is a very subjective area. The AO must have considered his local knowledge about the assessee and their status of living in the society. The assessee has been carrying out voluminous business in ticket booking. She has earned commission of crores of rupees. Looking into their background, it appears that they must have living a good life and the AO must have considered that aspect while estimating the household expenses. Two Revenue authorities have exercised their discretion in estimating household expenditure. Therefore, without there being anything on record that such opinion was formed by the Revenue authorities for extraneous reasons, we do not wish to replace those opinions by a third-one, which is also based on estimation. We do not find any merit in these grounds of appeal. Disallowance in respect of discount u/s.40(a)(ia) - tickets which were to be booked in the name of the assessee were to be sold to the agents at discounted price. The alleged travel agents made payment of concessional price and assumed role of customer of the assessee. The AO treated such travel agents as agents of the assessee and observed that the discounted rate on which tickets were sold to the customers is to be construed as commission paid - HELD THAT - There is no agency between the assessee and the alleged travel agents. Agency has been assumed by the AO with the help of section 194H of the Income Tax Act, 1961. The AO was of the opinion that since the assessee has parted with her volume of commission amongst travel agents, then it should be construed that those agents were acting on behalf of the assessee while booking international air-tickets. In the light of the above interpretation of section 194H if the facts of the present case are looked into then it would reveal that the assessee has just given a trade discount out of commission earned by her from the airlines. She has not appointed any travel agents for acting on her behalf. Thus, there was no relationship of principal and agent. We further find that almost in an identical condition, ITAT Mumbai Bench 2010 (9) TMI 536 - ITAT, MUMBAI has considered this issue and observed that intermediaries were booking tickets from the assessee and intermediaries were not working as agents of the assessee for doing the assessee's business rather the intermediaries were bringing the business to the assessee as recorded by AO and the assessee was passing out some handling charges. Thus, the assessee was, in fact, giving some discount to the intermediaries for getting business. It was not a transaction between the principal and agent but it was as transaction between the principal and principal. Respectfully following judgment of the Hon ble Gujarat High Court 2002 (6) TMI 32 - GUJARAT HIGH COURT and order of the ITAT, Mumbai Bench we are of the view that disallowance made by the AO and confirmed by the ld.CIT(A) with help of section 40(a)(ia) of the Act on account of non-deduction of TDS deserves to be deleted. We accordingly delete the disallowance. This ground of appeal is allowed. Disallowance of proportionate interest expenditure - HELD THAT - We have already held that the assessee was able to demonstrate that if she has more interest free funds than the advance then on notional basis interest cannot be computed for disallowance. We do not find any error in the order of the ld.CIT(A). This ground is rejected. Addition u/s 69C - HELD THAT - We are of the view that entries in the books of third person could not be given weightage over and above entries in the books of the assessee. The AO ought to have collected more evidence for establishing that the alleged payment was made. He has not recorded statement of the creditors showing that they have received such payment. Therefore, the ld.CIT(A) has rightly deleted the addition, and this ground is also rejected. TDS credit - HELD THAT - CIT(A) has recorded a finding of fact that the assessee has duly credited commission receipts on which TDS deducted by the payer and she has claimed the credit of the TDS. Considering the finding of the ld.CIT(A), we do not find any merit in this ground. It is rejected Penalty u/s 271(1)(c) - HELD THAT - The income of the assessee has been determined on an estimate basis. By way of present order, we have changed that estimation. We have held that un-reconciled entries be considered only for working out element of profit involved in it. Gross receipt cannot be added. Similarly, we have observed that profit is to be estimated in these assessment years according to the rate of profit disclosed by the assessee on the basis of regular books of accounts. Thus, there cannot be any element of concealment of income. The assessee has explained papers found during the course of survey. As observed in the quantum appeals, discrepancy in explaining these papers was ultimately determined at 2.6% of the gross value of the transaction considered by the AO on the basis of entries in these papers. In other words, the gross value of the transaction was Rs.17.92 crores worked out by the AO in the Asstt.Year 2004-05 and unreconciled entries were of only Rs.38,77,759/-. It was explained by the assessee that some of the employees must have left job and it was quite difficult to keep track of all entries noted by the employees. In this situation, the ld.CIT(A) has rightly deleted penalty. We do not find any error in both the orders of the ld.CIT(A). They are upheld and both appeals of the Revenue are dismissed. Unexplained advances and probable interest thereon - HELD THAT - CIT(A) has rightly appreciated facts and circumstances leading to addition made by the AO. The ld.CIT(A) has observed that Smt. Mansihaben Mashru, during the assessment proceedings has admitted and owned up the amount found in the papers impounded during the survey. She accordingly offered the same for taxation on the basis of peak value. Even otherwise also, there is no material with the Revenue to prove that the money was in fact belonging to the assessee and to suggest that any unrecorded advance was made to Smt.Mansihaben Mashru by the assessee. Therefore, we do not find any error in finding of the ld.CIT(A) on this issue, this ground is accordingly dismissed. Unexplained investment in shares - HELD THAT - CIT(A) has considered material facts on record and observed that impugned investment was recorded in the books of accounts and that sufficient funds is available with the assessee for making the investment. Though the assessee had submitted books of accounts during the assessment proceedings, the same was not considered at the end of the AO. Therefore, there is no merit in this ground of appeal of the Revenue. It is dismissed. Low household withdraw - HELD THAT - On considering orders of the Revenue authorities, we do not find any justification to take a different view than the one taken by the Revenue authorities on this issue. Looking to the quantum and size of the business carried out by the assessee and life their style both the authorities estimated low household withdrawals. There is nothing on record to show that estimation based on some opinion made by both the authorities below is unjustified, and therefore, we do not wish to replace the estimation of the Revenue authorities with a third estimation. We do not find any merit in this ground. Disallowance of fictitious liability - HELD THAT - CIT(A) who deleted the addition on the ground that rough papers found from the premises of wife of the assessee were mere notebooks and diaries and not books of accounts of the assessee. Besides, he observed that wife of the assessee has owned up the noting in the rough diary and taxed accordingly. The ld.CIT(A) has also observed that there is no documents or material evidence with the Revenue to link flow of unrecorded transactions with the assessee. Since there is no contrary material brought before us by the Revenue to convince us to take a different view, we do not find any merit in this ground of appeal. It is dismissed.

Summary

Issues Involved:

1. Cancellation of penalty under section 271(1)(c) for Assessment Years 2004-05 and 2005-06.
2. Unexplained cash credits under section 68 for Assessment Years 2003-04, 2004-05, and 2005-06.
3. Disallowance of proportionate interest expenditure.
4. Disallowance from administrative and selling expenses.
5. Addition under section 68 for unexplained advances and probable interest.
6. Addition for unexplained investment in shares.
7. Addition for low household withdrawals.
8. Disallowance under section 40(a)(ia) for non-deduction of TDS on discounts.
9. Deletion of penalty under section 271(1)(c) for Assessment Years 2004-05 and 2005-06.

Issue-wise Detailed Analysis:

1. Cancellation of Penalty under Section 271(1)(c):

The Revenue's appeals challenged the cancellation of penalties imposed under section 271(1)(c) for the Assessment Years 2004-05 and 2005-06. The Tribunal upheld the CIT(A)'s decision to delete the penalties, noting that the income was determined on an estimate basis and the discrepancies were minimal. The Tribunal found no element of concealment of income, as the discrepancies were explained to be due to employees' notings and the voluminous nature of the business.

2. Unexplained Cash Credits under Section 68:

For Assessment Years 2003-04, 2004-05, and 2005-06, the AO added unexplained cash credits based on impounded documents. The CIT(A) deleted most of these additions, accepting the assessee's explanations and additional evidence. The Tribunal upheld the CIT(A)'s decision, noting that the rough notings were not books of account and the discrepancies were minimal compared to the gross value of transactions. The Tribunal emphasized that only the profit element in unrecorded transactions should be taxed, not the gross receipts.

3. Disallowance of Proportionate Interest Expenditure:

The AO disallowed interest expenditure on the grounds that the assessee had advanced interest-free loans while incurring interest on borrowed funds. The CIT(A) deleted these disallowances, finding that the assessee had sufficient interest-free funds. The Tribunal upheld the CIT(A)'s decision, agreeing that interest-free funds were available and thus no disallowance was warranted.

4. Disallowance from Administrative and Selling Expenses:

The AO made an estimated disallowance of 20% of administrative and selling expenses for lack of supporting materials. The CIT(A) reduced this to 10%, considering the size of the business. The Tribunal upheld the CIT(A)'s decision, finding the reduced disallowance reasonable and justifiable.

5. Addition under Section 68 for Unexplained Advances and Probable Interest:

The AO added unexplained advances and probable interest based on impounded papers. The CIT(A) deleted these additions, noting that the amounts were already offered for taxation by the assessee and no double taxation should occur. The Tribunal upheld the CIT(A)'s decision, agreeing that the amounts were owned up and taxed by the assessee.

6. Addition for Unexplained Investment in Shares:

The AO added unexplained investments in shares. The CIT(A) deleted the addition, finding that the investments were recorded in the books and sufficient funds were available. The Tribunal upheld the CIT(A)'s decision, agreeing that the investments were properly accounted for and funded.

7. Addition for Low Household Withdrawals:

The AO added amounts for low household withdrawals, estimating that the declared withdrawals were insufficient. The CIT(A) upheld these additions. The Tribunal agreed with the CIT(A), noting that the estimation was reasonable given the assessee's lifestyle and business size.

8. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Discounts:

The AO disallowed discounts given to travel agents, treating them as commission subject to TDS. The CIT(A) upheld the disallowance. The Tribunal reversed this, finding that the discounts were trade discounts, not commissions, and thus not subject to TDS. The Tribunal relied on precedents, including the Gujarat High Court's decision in Ahmedabad Stamp Vendors Association.

9. Deletion of Penalty under Section 271(1)(c):

The AO imposed penalties for concealment of income based on discrepancies found in impounded documents. The CIT(A) deleted these penalties, finding the discrepancies minimal and explained. The Tribunal upheld the CIT(A)'s decision, noting that the income was determined on an estimate basis and no concealment was proven.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on most issues, finding that the AO's additions and disallowances were largely unwarranted and based on erroneous assumptions. The Tribunal emphasized the need for proper evidence and reasonable estimations in tax assessments.