2020 (1) TMI 1104 - AT - Income Tax

Rejection of books of accounts -Trading addition by adopting GP rate at 12% - GP rate of 11.06% declared by the assessee - HELD THAT - There is no dispute that after rejecting the books of account under section 145(3) of the Act, the income of the assessee is required to be estimated on some reasonable and proper basis. The past history of GP declared by the assessee is a proper guidance for estimation of income in pursuant to the rejection of books of account. For the assessment year 2008-09 the assessee declared GP at 11.99%, for the assessment year 09-10 the assessee declared GP at 10.79%. However, there was an addition made by the AO and after the addition sustained by the ld. CIT (A), the GP for the assessment year 2009-10 comes to 11.02%. Therefore, even if taking the average of preceding two years which comes to 11.05%, the GP declared by the assessee at 11.06% cannot be said to be at the lower side or any significant decline in GP. Accordingly in the facts and circumstances of the case, when the assessee has declared the GP in line with the past history of the assessee which has attained the finality, the adoption of GP rate by the AO without any basis cannot be accepted. Hence the trading addition made by the AO is deleted. Adhoc disallowance made by the AO on account of various expenses for want of proper supporting vouchers - Travelling Expenses disallowed - HELD THAT - AO selected 9 (nine) visits of the partner of the assessee undertaken almost monthly basis to Jammu, Delhi, Kolkata and Mumbai. The AO has also referred that some bills were related to family tours to Mata Vaisno Devi Darshan. The assessee has not specifically disputed those facts as detected by the AO from the bills. Accordingly, in the absence of the claims duly substantiated by the assessee to prove that the expenditure was incurred wholly and exclusively for the purpose of business of the assessee, the assessee has not discharged its primary onus. Accordingly, we do not find any error or illegality in the orders of the authorities below qua the disallowance of travelling expenses. Advertisement expenses - HELD THAT - AO has taken three entries of expenditure total amounting to ₹ 9,200/- which are not supported by any bill or voucher nor incidental to business. Although the assessee has objected to the disallowance made by the AO, however, the assessee has not furnished any supporting documentary evidence in respect of this expenditure of ₹ 9,200/-. Thus in the absence of supporting documentary evidence, the expenditure incurred on account of Advertisement cannot be allowed. Insurance Expenses - HELD THAT - AO has made the disallowance on the ground for want of supporting receipt. The insurance premium cannot be claimed without supporting receipt as it is bound to be paid against the receipt. Even otherwise, the assessee has not furnished any other supporting evidence to show that the payment was made for taking the insurance and for the purpose of business of the assessee. Accordingly, in the absence of any supporting evidence regarding the said expenditure on insurance, we do not find any error or illegality in the orders of the authorities below. Depreciation on building - HELD THAT - The facts pointed out by the AO that the Chowkidar quarter is in the factory premises itself on which the assessee has claimed depreciation which was allowed. Therefore, a separate depreciation on the part of the factory building cannot be allowed. In the absence of any contrary facts brought before us, we do not find any error or illegality in the orders of the authorities below. Jeep Hire charges - HELD THAT - In the absence of any supporting evidence or other material even to prove that the Jeep was actually hired by the assessee for the purpose of business of the assessee, we do not find any error or illegality in the orders of the authorities below. Sales Tax Penalty - HELD THAT - It is clear from the assessment order that this amount is part of the total sales tax demand arising from the sales-tax assessment order, therefore, this is not an amount of penalty separately levied by the Sales Tax Authority but it is only a charge or levy for irregularities in filing the return or late payment of tax. Therefore, this would be part of the Sales-tax demand and is an allowable claim. EMD forfeited written off - HELD THAT - The said amount was written off by the assessee in the books and claimed as business expenditure. The AO has disallowed the claim for want of documents. However, if the amount deposited by the assessee in respect of the tender and the earnest money was finally forfeited by the Railway authorities, then the forfeiture would be an allowable business expenditure as this is the regular business activity of the assessee and the expenditure was incurred for the purpose of business of the assessee. Once the payment of the said amount is not in dispute and the forfeiture of the Earnest money by the authorities is also independently verifiable, then the claim of the assessee is an allowable business expenditure. Arbitration Fee Railways - HELD THAT - AO has noticed that the payment was made in cash by the assessee to one Shri K.B. Mody, but since the assessee has not produced the bill, the AO has disallowed the said expenditure as non business expenditure. Once the assessee has claimed that this expenditure is towards arbitration fee and the dispute was between the assessee and railways regarding the business work of the assessee then the said expenditure is an allowable claim. Accordingly the disallowance made by the AO is deleted. Telephone expenses - HELD THAT - AO has pointed out specific facts regarding certain telephones which were installed at the residence of the partners and some others were not related to the assessee firm. These facts have not been disputed by the assessee. Further, the assessee has also claimed purchase of Mobile set as revenue expenditure which was disallowed by the AO treating the same as capital expenditure and depreciation on the said claim was allowed. Hence in view of these facts, we do not find any error or illegality in the orders of the authorities below. Disallowance of Sales Tax Penalty - HELD THAT - If the said amount is part of the demand arising from Sales tax assessment, then it will partake the character of Sales-tax and not the penalty. However, if the said amount is on account of penalty separately levied by the Sales Tax Authorities, then it cannot partake the character of simple Sales-tax payment. Accordingly, the AO is directed to verify the fact from the record whether the said amount of ₹ 2,52,066/- is arising from separate penalty order passed by the Sales Tax Authorities or it is only a demand under the Sales Tax assessment order. Accordingly, in view of our finding on this issue for the assessment year 2010-11, this issue is set aside to the record of the AO. Disallowance of Conveyance expenses - HELD THAT - AO has made the adhoc disallowance @ 10% of the expenses on the ground that the reliability and genuineness of the expenses is doubted. He has also doubted the personal use of the two cars of the partnership firm by the partners. Thus it is clear that the AO has made the disallowance only on the basis of suspicion and doubt without pointing out a specific claim of expenditure is not genuine. Adhoc disallowance made by the AO is not justified, the same is deleted. Adhoc disallowance of vehicle hiring expenses - HELD THAT - AO though doubted the correctness of the claim, however, he has not undertaken the enquiry to determine whether the payment made by the assessee is excessive in comparison to the fair market price. Therefore, in the absence of such a finding by the AO that the payment made by the assessee to the related parties is excessive in comparison to the fair market price of the services provided by the related parties, the adhoc disallowance is not justified. If the AO has tangible reasons to doubt the claim of the assessee, then either the claim should have been disallowed as bogus or to be disallowed under section 40A(2) of the Act. In the absence of any such finding on the part of the AO, the adhoc disallowance is not justified. The same is deleted. Disallowance on account of Workmen and staff welfare expenses - HELD THAT - AO has made an adhoc disallowance of 10% of Workmen and Staff welfare expenses on the ground of self made vouchers. Since the AO has made adhoc disallowance based on suspicion of correctness and genuineness of the claim without pointing out a specific incident of bogus claim, accordingly in view of our finding in Ground No. 2 regarding disallowance of Conveyance expenses, adhoc disallowance made by the AO is not sustainable. The same is deleted. Disallowances on account of general expenses, welcome expenses and Worship expenses - HELD THAT - AO has made an adhoc disallowance without pointing out a specific expense either found bogus or not incurred for the purpose of business of the assessee. Therefore, such an approach of the AO making disallowances without giving specific finding cannot be accepted.

Summary

Issues Involved:

1. Trading Addition by Estimating GP Rate
2. Disallowance of Travelling Expenses
3. Disallowance of Advertising Expenses
4. Disallowance of Insurance Expenses
5. Disallowance of Depreciation on Factory Building
6. Disallowance of Jeep Hire Charges
7. Disallowance of Sales Tax Penalty
8. Disallowance of EMD Forfeited/Written Off
9. Disallowance of Arbitration Fees Railways
10. Disallowance of Telephone Expenses
11. Double Addition of FDR Interest, Other Income, and Office Rent
12. Disallowance of TDS Claim
13. Validity of Rejection of Books of Account under Section 145(3)

Issue-wise Detailed Analysis:

1. Trading Addition by Estimating GP Rate:
The assessee contested the addition made by the AO by adopting a GP rate of 12% instead of 11.06% shown in audited books. The Tribunal noted that the assessee declared a GP rate of 11.06%, which is better than the previous year's 10.79%. It was concluded that the GP rate declared by the assessee was in line with the past history and thus, the trading addition made by the AO was deleted.

2. Disallowance of Travelling Expenses:
The AO disallowed ?169,408/- out of ?596,402/- claimed as travelling expenses, citing personal journeys of a partner. The Tribunal upheld the disallowance, emphasizing that the assessee failed to substantiate the claim with evidence proving the expenses were for business purposes.

3. Disallowance of Advertising Expenses:
The AO disallowed ?9,200/- out of ?35,365/- claimed as advertising expenses due to lack of supporting bills and vouchers. The Tribunal upheld the disallowance, noting the absence of documentary evidence to support the claim.

4. Disallowance of Insurance Expenses:
The AO disallowed ?2,758/- out of ?63,821/- claimed as insurance expenses due to lack of supporting receipts. The Tribunal upheld the disallowance, emphasizing the necessity of receipts to substantiate the claim.

5. Disallowance of Depreciation on Factory Building:
The AO disallowed ?3,716/- claimed as depreciation on a residential building, stating it was not allowable. The Tribunal upheld the disallowance, noting that the Chowkidar's quarter was part of the factory premises for which depreciation was already claimed.

6. Disallowance of Jeep Hire Charges:
The AO disallowed ?3,200/- claimed as jeep hire charges due to lack of supporting bills and vouchers. The Tribunal upheld the disallowance, noting the absence of evidence to substantiate the claim.

7. Disallowance of Sales Tax Penalty:
The AO disallowed ?9,560/- claimed as sales tax penalty, stating it was not allowable under section 37(1). The Tribunal noted that the amount was part of the sales tax demand and allowed the claim, emphasizing it was not a penalty for infraction of law.

8. Disallowance of EMD Forfeited/Written Off:
The AO disallowed ?18,750/- claimed as EMD forfeited, citing lack of documents. The Tribunal allowed the claim, noting that the forfeiture was an allowable business expenditure as it was incurred in the regular course of business.

9. Disallowance of Arbitration Fees Railways:
The AO disallowed ?18,118/- claimed as arbitration fees due to lack of supporting bills. The Tribunal allowed the claim, noting that the expenditure was for business purposes and independently verifiable.

10. Disallowance of Telephone Expenses:
The AO disallowed ?15,615/- out of ?172,234/- claimed as telephone expenses, citing personal use. The Tribunal upheld the disallowance, noting the specific facts regarding certain telephones installed at the residence of partners.

11. Double Addition of FDR Interest, Other Income, and Office Rent:
This issue was not pressed by the assessee and thus dismissed.

12. Disallowance of TDS Claim:
This issue was not pressed by the assessee and thus dismissed.

13. Validity of Rejection of Books of Account under Section 145(3):
The Tribunal upheld the rejection of books of account under section 145(3), noting various defects such as non-availability of vouchers, self-made vouchers, and lack of a site-wise consumption register. The Tribunal emphasized that the books of account were not maintained in a manner that could deduce true and correct profit.

Conclusion:
The Tribunal partly allowed the appeals, deleting certain disallowances while upholding others. The trading addition by adopting a higher GP rate was deleted, while disallowances on account of lack of supporting evidence were upheld. The Tribunal emphasized the importance of maintaining proper documentation to substantiate claims and the necessity of adhering to legal provisions for deductions and allowances.