2020 (4) TMI 786 - AT - Income Tax

Estimation of income - Rejection of books of account u/s 145(3) - GP estimation - lump sum trading addition made by the AO - HELD THAT - It is settled proposition of law that the past history of the assessee is a proper guidance for estimation of the income after rejection of books of account as held by the Hon ble Jurisdictional High Court in a number of judgments including the decisions relied upon by the assessee in cases of CIT vs. Gupta K.N. Construction Co (supra) as well as CIT vs. M/s. Inani Marbles Pvt. Ltd. 2008 (8) TMI 126 - HIGH COURT RAJASTHAN Undisputedly, the GP rate declared by the assessee for the year under consideration is better than the past history and, therefore, after rejection of books of account no trading addition is called for. Hence the trading addition made by the AO which is adhoc and the lump sum addition of ₹ 1,00,000/- as well as disallowance of direct expenses which is part of the trading account are not sustainable in law and liable to be deleted. Hence the lump sum addition of ₹ 1,00,000/- made by the AO as well as direct expenses on account of freight charges disallowed by the AO and confirmed by the ld. CIT (A) are deleted. Disallowance of direct expenses on account of freight charges - Addition restricted by the ld. CIT (A) to 50% - HELD THAT - Except the car maintenance and telephone expenses, no other items of expenses could be attributed to personal use or element. Therefore, these small expenses of ₹ 29,848/- and ₹ 13,542/- are only in respect of telephone and car/scooter/mobile expenses. The rest of the expenses are only in respect of the Office and Administrative expenses as well as selling expenses and hence there cannot be any element of personal use in respect of those expenses. Hence taking the entire claim of expenses which includes salary, wages and other office expenses on rent, printing, insurance, computer as well as selling and marketing expenses, the AO has not applied his mind on the issue and just made an adhoc disallowance. CIT (A) has also not examined the nature of expenses so that the disallowance can be made on account of personal use or element. Accordingly, adhoc disallowance made by the AO and sustained by the ld. CIT (A) is deleted. Addition made on account of Low Household expenses - AO found that having regarding to the joint family of the assessee and status as well as standing of the family of the assessee, the household expenses of ₹ 16,250/- as shown by assessee is very low and accordingly the AO has estimated the reasonable household expenses at ₹ 25,000/- per month - HELD THAT - We find that the estimation of the AO of reasonable household expenses of the family of the assessee at ₹ 25,000/- per month is very reasonable and proper and does not require any interference. Even otherwise, if the status and standing of the assessee and his family is taken into account, the household expense of ₹ 25,000/- per month is even at the lower side. Accordingly, we do not find any error or illegality in the orders of the authorities below qua this issue. - Decided against assessee.

Summary

Issues:
1. Rejection of books of account under section 145(3) and trading addition.
2. Disallowance of direct expenses on freight charges.
3. Disallowance of office administrative expenses.
4. Addition on account of low household expenses.

Issue 1 - Rejection of books of account under section 145(3) and trading addition:
The appellant challenged the AO's lump sum addition of ?1,00,000 to the business income based on claimed shortages without proper explanation and lack of supporting evidence for storing charges. The CIT (A) rejected the books of account under section 145(3) and confirmed the trading addition. The appellant argued that the AO and CIT (A) proceeded on incorrect assumptions, as the audit report supported the valuation method of stocks. The Tribunal noted the better GP declared by the appellant for the year compared to previous years. Despite rejecting the books of account, no automatic addition was warranted. Relying on past history, the Tribunal held the trading addition and disallowance of direct expenses were unsustainable in law and deleted them.

Issue 2 - Disallowance of direct expenses on freight charges:
The AO disallowed direct expenses on freight charges, adding ?1,75,300 to the income. The CIT (A) restricted the disallowance to ?87,650. The appellant argued that the disallowance was arbitrary and unjustified, as all expenses were for business purposes without defects. The Tribunal found the AO's disallowance lacked proper basis and deleted the disallowance confirmed by the CIT (A).

Issue 3 - Disallowance of office administrative expenses:
The AO disallowed ?1,50,000 of office administrative expenses, which the CIT (A) reduced to ?75,000. The appellant contended that the disallowance was arbitrary, including selling expenses without justification. The Tribunal observed that the AO did not consider the nature of expenses properly, leading to an unjustified adhoc disallowance, which was deleted.

Issue 4 - Addition on account of low household expenses:
The AO estimated household expenses at ?25,000 per month, adding ?1,04,500 due to the perceived low amount claimed by the appellant. The Tribunal found the AO's estimation reasonable considering the appellant's family status and standing. No error was found in the authorities' decision on this issue.

In conclusion, the Tribunal partly allowed the appeal, deleting the trading addition, disallowance of direct expenses, and office administrative expenses, while upholding the addition on account of low household expenses.