2018 (11) TMI 1430 - AT - Income Tax

Trading addition - GP estimation - CIT-A applying the g.p. rate of 1.67% as against g.p. rate of 0.93% declared by the assessee - Held that - The average of G.P. declared by the assessee in the past years which is accepted or attend the finality will be a reasonable and proper basis for estimation of income. Hence, we find that the Assessing Officer was very reasonable and just in estimating the income on the basis of the average of the G.P. declared by the assessee for last three years. The ld. CIT(A) has restricted the addition by applying the G.P. for the immediate preceding year and the revenue has not challenged the same, therefore, we do not find any reason to interfere with the impugned order of the CIT(A) qua this issue. The explanation of the assessee for declining of G.P. due to the market condition can be considered only when it is supported by the books of account. Therefore, once the books of account are rejected then this contention of the assessee cannot be accepted. Disallowance of 10% of the expenditure for want of supporting evidence - Held that - We find that the liability of the expenditure of which 10% was disallowed by the Assessing Officer pertains to audit fee, rent, salary expenses, freight and telephone expenses etc., therefore, the audit fee, rent, salary expenses are very much verifiable and can be compared with the earlier years being recurring in nature. These expenditures are also verifiable independently from the recipients. Hence, the expenditure for audit fee, rent, salary and telephone expenses which are verifiable from the record cannot be disallowed in the manner, the Assessing Officer has made an ad hoc disallowance. Hence, to the extent of the expenditure on these accounts being audit fee, rent, salary and telephone expenses is deleted. The rest of the expenditure for which 10% was disallowed for want of supporting evidence is consequently upheld. Accordingly we modify the orders of the authorities below qua this issue. The Assessing Officer is directed to rework the disallowance of 10% on remaining items of expenditure. - Decided partly in favour of assessee.

Summary

Issues:
1. Trading addition based on Gross Profit (G.P.) rate discrepancy
2. Lump sum disallowance of expenses

Issue 1: Trading Addition based on Gross Profit Rate Discrepancy:
The appeal concerns the assessment year 2014-15 where the Assessing Officer rejected the books of account due to non-production by the assessee, leading to an estimation of income using a G.P. rate of 1.94%. The CIT(A) restricted the G.P. at 1.67%, the rate declared by the assessee for the previous year. The assessee contended that the decline in G.P. was due to market conditions and produced computerized records as explanation. The department argued that rejection of books justified estimation based on a three-year average G.P. history. The tribunal held that rejection of books required estimation, and past G.P. history serves as a reasonable basis. As the CIT(A) adopted the previous year's G.P., the tribunal upheld the decision, emphasizing that without accepted books, the assessee's explanation for G.P. decline could not be considered.

Issue 2: Lump Sum Disallowance of Expenses:
The Assessing Officer disallowed 10% of expenses totaling ?2,21,361 for lack of supporting evidence, which the CIT(A) upheld. The assessee argued that specific expenses were verifiable and cited precedents to challenge the ad hoc disallowance. The department defended the disallowance as reasonable due to lack of verifiable evidence. The tribunal noted that while the books were lost, certain expenses like audit fee, rent, salary, and telephone expenses were recurring and verifiable. Consequently, the tribunal deleted the disallowance on these specific expenses but upheld it on the remaining items, directing the Assessing Officer to reassess the 10% disallowance on the remaining expenditure. Ultimately, the tribunal partially allowed the assessee's appeal.

In conclusion, the tribunal's judgment addressed the issues of trading addition based on G.P. rate discrepancy and lump sum disallowance of expenses for the assessment year 2014-15. The decision highlighted the importance of past G.P. history in income estimation after book rejection and the necessity for verifiable evidence to support expense claims.