2020 (3) TMI 546 - AT - Income Tax

Rejection of books of accounts - additions on account of alleged low GP - HELD THAT - Even when the books of accounts have been rejected by the Assessing Officer, estimation of profit should be as per the material available on record. It would not be out of place to mention here that in all the earlier Assessment Years, assessments have been framed u/s 143(3) of the Act. The g.p of the assessee ranges from 2.97% to 3.08%. We do not find any reason for adoption of g.p. rate of 10.50%. Considering the facts of the case in hand as discussed hereinabove, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground No. 1 is, accordingly, dismissed. Disallowance on account of payment of commission to shareholders employees u/s 36(1)(ii) - HELD THAT - The undisputed fact is that there is no allegation that these persons are not working for the company. In our considered opinion, it is the prerogative of the assessee to decide the remuneration etc to be paid to the persons who work for his company. As per the agreement, six directors, who were also share holders, were paid additional salary termed as commission and there are four employees who are also share holders who also have been paid salary with additional salary termed as commission . The total commission comes to 0.5% of the total turnover. In our humble opinion, considering the nature of the business of the assessee vis-a-vis the turnover, such payment of commission cannot be doubted. We, therefore, do not find any reason to interfere with the findings of the ld. CIT(A). Thus, Ground No. 2 also stands dismissed.

Issues Involved:
1. Deletion of addition on account of suppression of Gross Profit (GP).
2. Deletion of disallowance on account of payment of commission to shareholder employees.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Suppression of Gross Profit (GP):

The Revenue's grievance was that the CIT(A) erred in deleting an addition of ?10,52,65,260/- made by the Assessing Officer (AO) for suppression of GP after invoking section 145(3) of the Income Tax Act. The AO had rejected the books of account due to various discrepancies, including unverifiable purchases, differences in closing balances with certain parties, and excessive sales discounts. The AO estimated the GP at 10.5%, significantly higher than the 3.39% declared by the assessee.

The assessee argued before the CIT(A) that there were no discrepancies or bogus purchases, maintaining a complete day-to-day stock register. The CIT(A) noted that the GP rate of 3.08% was accepted in earlier years and found no cogent reason for the AO's estimation of a 10.5% GP rate. Consequently, the CIT(A) deleted the addition.

The Tribunal reviewed the facts and submissions, noting that the AO's discrepancies included unverifiable purchases, differences in balances with parties, and excessive sales discounts. However, the Tribunal found that the AO included opening balances and cash payments as purchases, which were accepted in earlier assessments. The Tribunal also noted that payments for purchases were made through banking channels and that the total turnover was ?147.98 crores, with questioned purchases constituting only 1.51% of the turnover. The Tribunal found no reason for the assessee to track suppliers' whereabouts and concluded that the differences in balances were due to pending reconciliations. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

2. Deletion of Disallowance on Account of Payment of Commission to Shareholder Employees:

The Revenue's second grievance was against the deletion of a disallowance of ?73,18,516/- on account of commission payments to directors and relatives who were also shareholders. The AO disallowed the commission, arguing it was a means to avoid Dividend Distribution Tax, as the commission would otherwise be payable as dividends.

The assessee contended that the commission was part of the remuneration fixed by a shareholders' resolution and had been allowed in earlier years. The CIT(A) noted that similar disallowances in earlier years were deleted, and the commission payments were consistent with past practice. The CIT(A) found no reason to disallow the commission payments, given the facts and judicial precedents.

The Tribunal reviewed the facts and submissions, noting that there was no allegation that the directors and shareholders were not working for the company. The Tribunal emphasized that it was the assessee's prerogative to decide remuneration. The commission, constituting 0.5% of the turnover, was deemed reasonable given the business nature and turnover. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal and the assessee's cross objections, upholding the CIT(A)'s decisions on both issues. The Tribunal found no errors or infirmities in the CIT(A)'s findings, affirming the deletion of the addition for suppression of GP and the disallowance of commission payments to shareholder employees.

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