2017 (6) TMI 541 - AT - Income Tax

Addition on account of low gross profit - Held that - The books of account in this case have not been rejected. The orders of the authorities below do not cogently speak as to what they were considering the low gross profit. One of the reasons attributed by the AO himself is excessive claim of expenditure. The AO has, himself, made separate additions. Furthermore, as find that fall in gross profit can be a reason for further examination, but it cannot be a sole reason for making adhoc addition. In these circumstances, this addition made is based upon surmises without rejection of books of account and hence, not sustainable. - Decided in favour of assessee Disallowance under the head interest account - Held that - It is none of the business of the revenue to decide as to how the assessee shall conduct his business. Whether the assessee should take loan or utilize internal resources is the sole prerogative of the assessee. It is not the case that the assessee has not paid the interest. As held in CIT vs Walchand & Co (P) Ltd (1967 (3) TMI 2 - SUPREME Court) hold that in applying the test of commercial expediency for determining whether the expense was wholly and exclusively laid out for purpose, reasonablenesss of the expense has to be judged from the point of view of businessman and not revenue. Hence, this disallowance is directed to be deleted.- Decided in favour of assessee Addition on account of excessive stock found - Held that - The excess stock has been said to have been arrived at partly on the basis by applying the gross profit rate, which in the earlier part of this order, have been deleted. Moreover, it is the contention of the assessee that the stock found on survey was taken at the MRP which has also resulted in increase in the value of the stock. Upon careful consideration, remit this issue to the file of the AO. The AO shall consider this issue afresh. Addition on account of loss on fire - Held that - It is not clear as to how this loss has arisen, whether it is a case of stock loss or a claim of bad debt. This aspect needs factual verification at the level of AO. Hence, remit the issue to the file of the AO to examine as to how the loss has been arrived at. Disallowance out of telephone expenses, can expense, mobile expense and motor car expense - AO made adhoc disallowance of 25% restricted to 10% by CIT-A - Held that - CIT(A) has reasonably restricted the disallowance. Admittedly, all the vouchers under dispute have not been claimed to be backed by proper external vouchers. In such situation, a small disallowance sustained by the Ld.CIT(A) is reasonable. Hence, there is no need of any interference in the order of Ld.CIT(A).

Summary

Issues:
1. Addition on account of low gross profit
2. Disallowance under the head interest account
3. Addition on account of excessive stock found
4. Addition on account of loss on fire
5. 10% disallowance out of telephone, mobile, motor car, and motor cycle expenses

Analysis:

1. Addition on account of low gross profit:
The Assessing Officer (AO) made an addition due to low gross profit, attributing it to excessive expenditure claimed by the assessee. The AO compared gross profit found during a survey with an earlier period and added a specific amount. The Commissioner of Income Tax (Appeals) partially accepted the assessee's submissions but confirmed an addition. The ITAT found the addition unsustainable as it was based on surmises without rejecting the books of account. The ITAT directed the deletion of this addition.

2. Disallowance under the head interest account:
The AO disallowed interest expenditure of ?3 lakhs, stating that the assessee had substantial cash in hand and did not need to take a loan. The ITAT held that it is the assessee's prerogative to decide how to conduct business. The disallowance was deleted, citing the principle that reasonableness of expenses should be judged from a businessman's viewpoint, not revenue's.

3. Addition on account of excessive stock found:
The AO made an addition for excess stock found during a survey, partly based on the confirmed addition of gross profit rate. The ITAT remitted this issue to the AO for fresh consideration, noting discrepancies in the valuation of stock. The assessee was to be given a fair opportunity to present their case.

4. Addition on account of loss on fire:
The AO disallowed a claimed loss on fire, which the CIT(A) upheld due to lack of supporting material. The ITAT found the nature of the loss unclear and remitted the issue to the AO for factual verification. The AO was directed to examine how the loss occurred before making a decision.

5. 10% disallowance out of telephone, mobile, motor car, and motor cycle expenses:
The AO made adhoc disallowances on these expenses, which the CIT(A) reduced to 10%. The ITAT upheld the CIT(A)'s decision, considering the lack of proper external vouchers for some expenses. The 10% disallowance was deemed reasonable, and no interference was required. The appeal by the assessee was partly allowed in this regard.