2017 (5) TMI 2 - AT - Income Tax

Rejection of books of account - G.P. rate determination - Held that - It is noted from the records that the assessee had not maintained the day to day stock register or quantitative details of commodities. It is also noted from the assessment order that the auditor in the audit report had commented that no internal vouchers had been maintained for cash expenses. It is also noted that the assessee had not furnished complete bills and vouchers regarding purchases claimed in trading account. The AO thus invoked the provisions of Section 145(3) of the Act and applied the gross profit rate of 1.14% on total turnover of ₹ 21,59,60,250/- declared by the assessee on which gross profit comes to ₹ 16,06,125/-. However, the assessee had declared the gross profit rate at 0.74% on which gross profit comes to ₹ 16,06,125/-. The AO thus added a difference of ₹ 8,55,822/- (Rs. 24,61,947 minus ₹ 16,06,125-) which in first appeal has been confirmed by the ld. CIT(A). In appeal before the Tribunal, it is observed from the facts available on records that the lower authorities have rightly invoked the provisions Section 145(3) of the Act. As regards the sustenance of addition of ₹ 8,55,822/-, it is noted that the gross profit rate of the assessee for the last three years i.e. 2008-09-, 2009-10 and 2010-11 are at 0.98%, 1.14% and 0.74% respectively. Thus looking to the past history of the assessee and assessee being engaged in the trading of sugar on wholesale basis, the addition is sustained to the extent of ₹ 2.00 lacs only. Thus the assessee will get the partial relief of ₹ 6,55,822/-. Disallowance of expenses - Telephone expenses, depreciation on car and motorcycle, traveling expenses, vehicle expenses and labour expense - Held that - Since the books of account of the assessee has been rejected, therefore, the estimated addition has been made,no separate adhoc disallowance out of the expenses debited in the profit and loss account under the heads telephone expenses, depreciation on car and motorcycle, traveling expenses and vehicle expenses and labour expenseis not justified. See S.A. Builders vs. CIT 2006 (12) TMI 82 - SUPREME COURT - Decided in favour of assessee.

Issues Involved:
1. Rejection of books of account by invoking Section 145(3) of the I.T. Act, 1961.
2. Trading addition of ?8,55,822/- by applying a gross profit rate of 1.14% instead of 0.74%.
3. Ad hoc disallowance of ?67,001/- out of telephone and car expenses.
4. Ad hoc disallowance of ?15,732/- out of labor expenses.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account by Invoking Section 145(3) of the I.T. Act, 1961:
The assessee, engaged in the wholesale trading of sugar, declared a gross profit of ?16,06,125/- on sales of ?21,59,60,250/-, resulting in a gross profit rate of 0.74%. The AO noted defects in the books of account, such as the absence of a day-to-day stock register, incomplete bills and vouchers, and lack of internal vouchers for cash expenses. Consequently, the AO invoked Section 145(3) and applied a gross profit rate of 1.14%, leading to an addition of ?8,55,822/-. The CIT(A) upheld this decision, citing the lack of justification for the fall in the gross profit rate and the absence of supporting documents.

2. Trading Addition of ?8,55,822/- by Applying a Gross Profit Rate of 1.14% Instead of 0.74%:
The assessee argued that the AO wrongly applied Section 145(3) despite submitting a final quantitative tally. The assessee's historical gross profit rates were 0.98% (2008-09), 1.14% (2009-10), and 0.74% (2010-11). The Tribunal observed that the lower authorities rightly invoked Section 145(3) but found the addition excessive. Considering the assessee's past performance, the Tribunal reduced the addition to ?2,00,000/-, providing partial relief of ?6,55,822/-.

3. Ad Hoc Disallowance of ?67,001/- Out of Telephone and Car Expenses:
The AO disallowed 20% of the total expenses (?3,35,003/-) due to incomplete bills and the possibility of personal use, resulting in an addition of ?67,001/-. The CIT(A) confirmed this disallowance, referencing the Hon'ble Rajasthan High Court's approval of ad hoc additions in the absence of proper records. The Tribunal, however, noted that since the books of account were rejected, estimated additions were already made. It found no justification for separate ad hoc disallowances and directed the deletion of the ?67,001/- disallowance.

4. Ad Hoc Disallowance of ?15,732/- Out of Labour Expenses:
The AO disallowed 10% of the labor expenses (?1,57,324/-) due to the lack of supporting vouchers, resulting in an addition of ?15,732/-. The CIT(A) upheld this disallowance, considering it reasonable. The assessee argued that maintaining detailed records for casual labor was impractical and that the expenses were reasonable and necessary for the business. The Tribunal agreed with the assessee, noting that the books of account were already rejected, and thus, no separate ad hoc disallowance was justified. It directed the deletion of the ?15,732/- disallowance.

Conclusion:
The appeal was partly allowed. The Tribunal provided partial relief by reducing the trading addition to ?2,00,000/- and deleted the ad hoc disallowances of ?67,001/- and ?15,732/-. The order was pronounced in the open court on 18/04/2017.

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