2017 (10) TMI 924 - AT - Income Tax

Addition made u/s 40A(2)(a) - assessee has purchased spare parts from its associated concern M/s JJA at a price higher than the prevailing market rate - Held that - AO has determined the rate of profit earned by JJA on the sales made to outside parties without giving effect to the opening and closing stock of the goods held by JJA. In such situation, we are of the considered view that the rate of profit determined by the Assessing Officer is not based on actual figures. After giving effect to the opening and closing stock, we find that profit earned by JJA on the sale of outside party is coming @ 9.42% only whereas the profit margin earned by JJA on the sales made to the assessee is coming @ 10%. As such, there is no significant difference in the amount of profit earned by JJA on the sales made to the assessee as well as the outside party. In view of above, we hold that the addition has been made by Authorities Below on wrong figures of the goods sold by JJA. It was also observed that the ld. DR has not brought anything on record contrary to the argument of ld. AR. Thus, we reverse the order of Ld. CIT(A) in this regard and direct the AO to delete the addition - Decided in favour of assessee Addition of entertainment expense - Held that - Assessee before us failed to bring any evidence suggesting that the impugned expenses were incurred in connection of assessee s business. The ld. AR simply produced the credit card statement and copies of ledger to justify the expense incurred by it. However, no business connection was established by Ld. AR. In this view of the matter, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. We order accordingly. This ground of assessee is dismissed. Disallowance on account of inflated purchase - Held that - AO has not pointed out any difference in the opening and closing balance of the party. Thus, the submission of Ld. AR that the difference has arisen on account of opening and closing balance do not hold good. As per the books of the assessee it has shown purchases during the year worth of ₹ 49,45,610/- whereas Pugalia Automobile has shown sales in its books during the year to the assessee worth of ₹ 47,92,625/-. Thus, it is clear that the difference was observed by the AO on account of difference in the amount of purchase shown by the assessee in its books as well as the amount of sale shown by Pugalia Automobile. Thus, the argument of Ld. AR that the difference pertains to the opening and closing balance of the party is not maintainable. In the background of the above discussions we do not find any infirmity in the order of Ld. CIT(A) and accordingly we uphold the same. Hence, this ground of assessee is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 40A(2)(a) of the Income Tax Act, 1961.
2. Disallowance of entertainment expenses.
3. Disallowance on account of alleged inflated purchases.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2)(a) of the Income Tax Act, 1961:
The first issue pertains to the disallowance of ?19,32,213/- under Section 40A(2)(a) of the Income Tax Act. The assessee, a partnership firm engaged in running a service center for Hyundai Motor India Ltd., had transactions with M/s J.J. Automotive Ltd. (JJA), a group company. The Assessing Officer (AO) noted that JJA sold spare parts to the assessee at a 10% margin over the cost, whereas the margin for other parties was 5.22%. Consequently, the AO deemed the purchases from JJA excessive and unreasonable, disallowing 4% of the purchases amounting to ?19,32,213/-.

The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the AO did not consider the opening and closing stock while determining the profit margin. The CIT(A) upheld the AO’s decision, stating that the assessee failed to provide supporting documents for their claims and the case laws relied upon by the assessee were not applicable.

Upon appeal, the Tribunal found that the AO's calculation did not account for the opening and closing stock, which, when considered, showed a profit margin of 9.42% for JJA's sales to other parties, compared to 10% for sales to the assessee. This minimal difference led the Tribunal to conclude that the disallowance was based on incorrect figures. The Tribunal reversed the CIT(A)’s decision and directed the AO to delete the addition.

2. Disallowance of Entertainment Expenses:
The second issue involves the disallowance of ?2,10,364/- out of the total entertainment expenses of ?4,11,536/-. The AO noted that these expenses, incurred through credit cards, included air tickets, hotel bookings, and purchases unrelated to the business. The assessee argued that these expenses were for training and business purposes, but the CIT(A) upheld the AO’s decision, citing a lack of evidence connecting the expenses to business activities.

The Tribunal observed that the assessee failed to provide evidence linking the expenses to business activities, merely presenting credit card statements and ledger copies. Consequently, the Tribunal upheld the CIT(A)’s decision, dismissing the assessee’s appeal on this ground.

3. Disallowance on Account of Alleged Inflated Purchases:
The third issue concerns the disallowance of ?1,52,985/- for alleged inflated purchases. The AO found a discrepancy between the purchase amount shown by the assessee and the confirmation received from M/s Pugalia Automobile (PA). The assessee attributed this difference to opening and closing balances, but the AO and CIT(A) rejected this explanation, noting the difference was in the purchase figures.

The Tribunal reviewed the reconciliation statement and ledger entries, confirming that the difference was not due to opening and closing balances but the purchase figures. Thus, the Tribunal upheld the CIT(A)’s decision, dismissing the assessee’s appeal on this ground.

Conclusion:
The Tribunal allowed the appeal partially, reversing the disallowance under Section 40A(2)(a) while upholding the disallowances for entertainment expenses and alleged inflated purchases. The final order was pronounced on 20/09/2017.