2017 (8) TMI 1063 - AT - Income Tax

Addition on account of low gross profit - CIT(A) deleted the additions - Held that - Since, It is on record that the assessee filed part details as sought by the AO only at the fag end when the assessment was getting time barred thereby preventing any meaningful enquiry and examination by the AO and the AO made adhoc estimation of the addition to the total income of the assessee on account of low GP, this is an open remand so far as this issue is concerned and the AO shall be entitled to make additions, if so warranted after considering the evidences and explanations filed by the assessee uninhibited by the earlier adhoc addition on account of low GP made in original assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act. - Matter remanded back.

Issues Involved:
1. Addition on account of low gross profit.
2. Disallowance of brokerage/commission expenses.

Issue-wise Detailed Analysis:

1. Addition on Account of Low Gross Profit:

The Revenue challenged the deletion of an addition of ?2,50,000/- made by the AO due to low gross profit (GP). The AO observed a decline in the GP rate from 10.62% in the preceding year to 8.88% in the assessment year 2009-10. The assessee attributed the fall in GP to increased sales, which doubled, thus slightly reducing the profit margin. However, the AO rejected this explanation, noting discrepancies in the monthly purchase and sales details provided at the end of the assessment period, which prevented thorough verification. The AO invoked Section 145(3) of the Income-tax Act, 1961, and made an addition of ?2,50,000/- on an estimated basis due to unreliable book results.

The CIT(A) deleted the addition, explaining that the differences in purchase and sales figures were due to VAT accounting, which the AO misunderstood. The CIT(A) held that the rejection of books under Section 145(3) was unwarranted. However, the Tribunal observed that the assessee presented a different explanation before the CIT(A) and introduced additional evidence without the AO's verification, violating Rule 46A of the Income-tax Rules, 1962. Consequently, the Tribunal set aside the issue to the AO for de novo determination, allowing the AO to make appropriate additions after considering all evidence and explanations provided by the assessee.

2. Disallowance of Brokerage/Commission Expenses:

The AO disallowed ?34,00,000/- in brokerage/commission expenses paid to various parties, primarily based in New Delhi. The AO questioned the genuineness of these expenses, noting that the brokers were not produced for verification and that there was insufficient evidence of the services rendered. The AO also pointed out that the brokers were located far from the assessee's business premises in Mumbai, and some had the same address, raising doubts about the legitimacy of the transactions.

The CIT(A) deleted the disallowance, emphasizing that the AO did not issue notices under Section 133(6) or summons under Section 131 to verify the brokers' claims. The CIT(A) found that the assessee had provided confirmations and TDS details, and the brokerage payments were consistent with the business needs.

The Tribunal noted that the CIT(A) should have conducted further inquiries, given the power to do so, especially since the assessee provided part details only at the end of the assessment period, hampering the AO's investigation. The Tribunal set aside this issue to the AO for fresh examination, directing the AO to conduct necessary inquiries and verifications. The assessee was allowed to submit evidence and explanations, which the AO would evaluate on merits.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes, remanding both issues to the AO for de novo determination, ensuring proper verification and adherence to procedural requirements. The AO was instructed to provide the assessee with adequate opportunities to present evidence and explanations, ensuring compliance with principles of natural justice.

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