2017 (11) TMI 113 - AT - Income Tax

Rejection of books of accounts - estimation of income - Held that - We find that AO while rejecting the books of accounts have listed various reasons which led him to believe that the books of accounts have not been maintained properly. Some of the reasons pointed out by him are no proper explanation for identical opening and closing stock, wrongly considering excess cash and unexplained investment in furniture and material which pertained to deemed income u/s 69A and 69B of the Act in the Profit and Loss account while working of the gross profit / net profit for the year, discrepancies in paper consumption and other expenses. The aforesaid findings of AO have not been controverted by Ld.A.R nor has assessee pointed out any mistake or fallacy in the findings of AO. We uphold the action of AO in rejecting books of accounts. Once the books of accounts are rejected u/s 145(3) of the Act, the next step is to estimate the profits. We find that for the purpose of estimating profits, AO has considered the net profits of the assessee for past three years and to it added the additions made u/s 69A and 69B of the Act and after granting the credit for the amount disclosed by the assessee in the return of income, made addition of the balance amount. Before us, the Ld.A.R. has not pointed out any grave error in the method of estimation considered by AO. In such circumstances, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of the assessee is dismissed. Addition in respect of agricultural income - Held that - Revenue has also not placed any material on record, to show that the assessee does not own the land or has sold the land or the land is not well irrigated. Considering the income shown by the assessee in earlier years which has also not been doubted by the Revenue and considering the fact that the assessee has shown agricultural income of ₹ 6,71,575/- in the year under consideration as compared to the income of ₹ 6,40,000/- shown in immediately preceding year, the income shown by the assessee seems to be reasonable. Considering the totality of these facts, we are of the view that the agricultural income shown by the assessee does not require any interference and the AO was not justified in estimating the agricultural income and treating ₹ 6,71,575/- as income from other sources without any evidence to the contrary. In view of the aforesaid facts, we set aside the order of AO in treating the income of ₹ 3,21,575/- as income from other sources and direct to consider it as income from agriculture. Thus, the ground of the assessee is allowed. Addition on account of excess remuneration - Held that - For invoking provisions of Sec.40A(2)(b) of the Act. AO is required to form an opinion having regard to the fair market value of the services rendered. The AO has to record a finding as to whether the expenditure is excessive or unreasonable in relation to the requirements of Sec.40A(2)(b) of the Act. AO has to prove that the transaction is not bonafide or the value of services paid by the assessee is not in consonance with the fair market value. The opinion of the AO should be formed objectively from the point of view of a prudent businessman and taking into consideration all the relevant circumstances. In the present case, we are of the view that AO has not brought any material on record to demonstrate that the salary of the wife of the assessee is excessive so as to invoke the provisions of Sec.40A(2)(b) of the Act. In such a situation we are of the view that no disallowance of expenses on account of excess salary payment was called for. Thus the ground of the assessee is allowed. Telephone charges and travelling expenses - Held that - We find that AO had disallowed 20% of telephone and travelling expenses considering that the personal element of expenses is not being ruled out. Before us, assessee has stated that no such expenses have been disallowed by Revenue in earlier years. Considering the totality of the aforesaid facts, we are of the view that in the present case the ends of justice shall be met if the disallowance of expenses is restricted to 10% of the expenses. We thus direct accordingly. Thus the ground of assessee is partly allowed.

Summary

Issues Involved:
1. Addition of ?18,70,360 based on assumption/presumption.
2. Addition of ?3,21,575 as income from other sources instead of agricultural income.
3. Addition of ?50,000 on account of excess remuneration.
4. Addition of ?81,739 due to disallowance of various expenses.

Detailed Analysis:

1. Addition of ?18,70,360 based on assumption/presumption:
The assessee, engaged in hotel business and sale of newspapers, was subject to a survey under Section 133A, revealing discrepancies in the books of accounts. The AO found that the assessee had disclosed additional income of ?34,64,894 but had not properly recorded this in the Profit and Loss account. The AO rejected the books of accounts under Section 145(3) due to various discrepancies, including unaccounted sales and incorrect inclusion of deemed income under Sections 69A and 69B. The AO estimated the net profit based on the past three years' profits and added the unaccounted income, resulting in an addition of ?18,70,360. The CIT(A) upheld this decision, noting that the appellant had not disclosed the full income offered during the survey and had made accounting adjustments to negate the additional income. The Tribunal agreed with the AO and CIT(A), finding no reason to interfere with the estimation method used by the AO.

2. Addition of ?3,21,575 as income from other sources instead of agricultural income:
The AO observed that the assessee had shown agricultural income of ?6,71,575 but could only provide evidence for ?1,11,707 from the sale of sugarcane. The remaining amount was claimed to be from sales in the open market without proper documentation. The AO treated ?3,21,575 as income from other sources, which was upheld by the CIT(A) due to the lack of credible evidence. However, the Tribunal found that the assessee had consistently shown agricultural income in previous years and owned well-irrigated land producing crops like sugarcane and coconut. The Tribunal concluded that the agricultural income shown by the assessee was reasonable and directed the AO to consider the entire amount as agricultural income.

3. Addition of ?50,000 on account of excess remuneration:
The AO disallowed ?50,000 out of the ?1,56,000 salary paid to the assessee's wife, considering it excessive compared to salaries paid to other employees. The CIT(A) upheld this disallowance, rejecting the appellant's argument that the wife deserved a higher salary due to additional responsibilities. The Tribunal, however, noted that the services rendered by the wife were not doubted and that the AO had not provided any comparative instances or evidence to show that the salary was excessive. The Tribunal held that the AO had not justified the disallowance under Section 40A(2)(b) and allowed the assessee's claim.

4. Addition of ?81,739 due to disallowance of various expenses:
The AO disallowed 20% of telephone and traveling expenses, amounting to ?81,739, due to the absence of a call register and the potential for personal use. The CIT(A) confirmed this disallowance. The Tribunal, considering that similar expenses were not disallowed in earlier years and the lack of specific evidence of personal use, reduced the disallowance to 10% of the expenses, partly allowing the assessee's claim.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal providing relief on the issues of agricultural income and excess remuneration while modifying the disallowance of various expenses. The addition based on assumption/presumption was upheld.