2016 (10) TMI 712 - AT - Income Tax

Disallowance on low Net Profit percentage over turnover - AO has made the addition on the ground that the assessee has declared less profit in comparison to the AY 2010-11 - CIT granted the relief to the assessee as the AO failed to bring any defect in the booksHeld that - In the instant case the AO has made addition on his surmise. It is well settled proposition of the law that for making any addition to the total income of assessee there has to be cogent evidence. In the absence of the same the addition shall not stand. The submission of ld. AR is that the profit ratio is the same as quoted by the AO i.e. 3.50% if we eliminate the interest and depreciation expenses from the profit. The same fact was communicated in the statement to the AO. There was no iota of defect in the books of the assessee. The case law cited by the DR is not relevant to the facts of the present case as besides the statement the AO has to bring sufficient evidence before making the addition. There is no material to justify the addition made by the IT authorities to the gross profit shown by the assessee in his account books. The additions were made on ad hoc basis and not on the evidence such as the trading conditions in similar trade or on the reconstruction of the account books of the assessee on the basis selected by the ITO which was different from the one adopted by the assessee. In view of above we do not find any reason to interfere in the order of the ld. CIT(A). Accordingly, we uphold the same. This ground of Revenue is dismissed. Addition u/s 40A(2) on expenses paid to the related parties - Held that - AO has made the addition on his surmise and without bringing any defect in the expenditure incurred by the assessee. we also find that the similar expenses were claimed by the assessee in the earlier years and subsequent years and no disallowance was made. The ld. DR has also failed to bring anything contrary to the findings of ld. CIT(A). In view of above we do not find any reason to interfere in the order of the ld. CIT(A). Accordingly, uphold the same. This ground of Revenue s appeal is dismissed.

Summary

Issues:
1. Addition of ?49,29,534 disallowed by AO on low net profit percentage over turnover.
2. Disallowance of ?76,49,136 under section 40A(2) on excess payments made to relatives and associate concerns.

Analysis:

Issue 1:
The Revenue challenged the deletion of the addition of ?49,29,543 to the total income of the assessee by the ld. CIT(A). The AO doubted the declared income as the net profit percentage was lower compared to the previous year. However, the ld. CIT(A) ruled in favor of the assessee, stating that no defects were found in the books of accounts to estimate turnover or income. The AO's estimation lacked a logical basis, and no specific material was found during the survey regarding undisclosed income. The Tribunal upheld the ld. CIT(A)'s decision, emphasizing the need for cogent evidence before making income additions. The Tribunal cited relevant case law to support the decision and dismissed the Revenue's appeal.

Issue 2:
The second issue involved the disallowance of ?76,49,136 under section 40A(2) for expenses paid to related parties. The AO disallowed the expenses, suspecting accommodating entries to family members despite TDS deductions and banking transactions. The ld. CIT(A) overturned the disallowance, noting the absence of evidence for applicability of section 40A(2) and lack of unreasonable payments. The Tribunal found the AO's decision lacking in substantiation and consistency, as similar expenses were not disallowed in previous or subsequent years. Both parties failed to present compelling arguments against the ld. CIT(A)'s findings, leading the Tribunal to uphold the decision and dismiss the Revenue's appeal.

In conclusion, the Tribunal upheld the ld. CIT(A)'s decisions on both issues, emphasizing the necessity of concrete evidence and logical basis for income additions and disallowances. The judgments were pronounced on 26/08/2016.