2015 (6) TMI 1258 - AT - Income Tax

Addition on low gross profit - assessee is in wholesale business of purchase and sale of iron steel plates etc - HELD THAT - AO has not brought on record any cogent material in support of the claim that assessee s books of account are liable to be rejected. A very slight decline in gross profit ratio cannot give rise to rejection of books of account in this case. There is no rule that the gross profit ratio should follow a constant ratio with mathematical precision. We further note that there has been a huge and over 100% increase in the turnover as compared to preceding year. Hence the explanation that increase in turnover has affected margin cannot be brushed aside. In these circumstances we uphold the order of the learned CIT(A) and delete the addition on account of low gross profit. Ground no.1 is dismissed. Addition u/s 40A(2)(b) on account of interest paid - Assessee submitted before us that bank interest rate cannot be compared with the rate of interest on unsecured loan and that even bank charges interest @ 24% on credit card - As regards loan from Shri Trilochan Singh Chawla he submitted that it was for a short period of six months - HELD THAT - We agree that the interest paid on unsecured loan cannot be compared with bank interest rates. Furthermore similar rate of interest has been paid by the assessee in other assessment years which has been accepted by the Revenue. The instance of Shri Trilochan Singh Chawla has been suitably distinguished by the learned Counsel. In these circumstances in our considered opinion the rate of interest paid by the assessee to the persons specified under section 40A(2)(b) cannot be considered to be excessive. Accordingly we uphold the order of the learned CIT(A). Ground no.2 is dismissed. Assessee had paid commission to two persons who are the persons specified under section 40A(2) - HELD THAT - We note that there has been substantial increase in the turnover of the assessee hence the claim that it was the efforts of the commission recipients that brought a huge increase in the turnover cannot be rejected. It is a settled law that the Assessing Officer cannot sit into the shoes of the assessee and decide as to what is reasonable. Accordingly we uphold the order of the learned CIT(A). Ground no.3 is dismissed. Addition on low household withdrawals - referring to the capital gains of the assessee AO opined that all the members of the assessee family are bestowed with substantial accumulation of capital. Making an estimate of income and drawings shown by the members of the assessee AO was of the opinion that withdrawal of 3, 480 per month per member was not sufficient - HELD THAT - We agree that the Assessing Officer has made addition on presumption. The Assessing Officer has computed that per member per month withdrawal by the assessee s family was 3, 500. Hence we do not find any reason to interfere with the order of the learned CIT(A). Accordingly ground no.4 is dismissed.

Summary

Issues Involved:
1. Addition of Rs. 4,77,000 on account of low gross profit
2. Addition of Rs. 2,83,897 on account of interest paid
3. Addition of Rs. 5,07,090 on account of commission paid
4. Addition of Rs. 66,000 on account of low household withdrawals

Issue 1 - Addition of Rs. 4,77,000 on account of low gross profit:
The Assessing Officer questioned the decline in gross profit shown by the assessee in the wholesale business of iron, steel, plates, etc. The AO rejected the explanation provided by the assessee regarding the impact of increased turnover on profit margin. Additionally, concerns were raised about the authenticity of bills and lack of day-to-day stock book maintenance. The CIT(A) deleted the addition, stating that no concrete evidence was presented to suggest inaccuracies in the assessee's accounts. The ITAT upheld the CIT(A)'s decision, emphasizing that a slight decline in profit ratio does not warrant account rejection, especially with a significant turnover increase. The ITAT dismissed the Revenue's appeal on this ground.

Issue 2 - Addition of Rs. 2,83,897 on account of interest paid:
The AO disallowed a portion of interest paid by the assessee on unsecured loans, considering it excessive compared to bank loan interest rates. The CIT(A) overturned this decision, highlighting the short-term nature of certain loans and consistent interest rates paid in previous years. The ITAT agreed with the CIT(A), stating that comparing unsecured loan interest rates to bank rates is not appropriate. The ITAT upheld the CIT(A)'s order, dismissing the Revenue's appeal on this ground.

Issue 3 - Addition of Rs. 5,07,090 on account of commission paid:
The AO disallowed the commission paid to specific individuals under section 40A(2) of the Act, alleging lack of evidence to support the increase in sales attributed to these individuals. The CIT(A) accepted the evidence provided by the assessee, including bills, profit & loss accounts, and income tax returns, to justify the commission payments. The ITAT upheld the CIT(A)'s decision, emphasizing the substantial turnover increase and rejecting the AO's presumption of reducing profits. The ITAT dismissed the Revenue's appeal on this ground.

Issue 4 - Addition of Rs. 66,000 on account of low household withdrawals:
The AO estimated additional income based on perceived low household withdrawals by the assessee's family members. The CIT(A) overturned this addition, labeling it as presumptive. The ITAT concurred with the CIT(A), stating that the AO's calculation of monthly withdrawals was unfounded. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

In conclusion, the ITAT upheld the CIT(A)'s decisions on all issues, dismissing the Revenue's appeal in its entirety.