2020 (5) TMI 116 - AT - Income Tax

Unverifiable purchases - Rejection of books of accounts - GP estimation - Non-SEZ unit - HELD THAT - It is an admitted position of both the parties that the past history of the assessee can be taken as a reliable basis for estimating the gross profit rate. In terms of non-sez unit, CIT(A) has taken note of the fact that as against the average gross profit of past years which comes to 3.72%, the assessee has declared G.P of 3.12% and where the addition so made by the AO is considered, the effective current year G.P will come to 3.60%. He accordingly has sustained the addition made by the AO and effectively upheld the gross profit rate of 3.60% which is closer though lower than average gross profit rate. The Revenue is not in appeal and we see no reason to interfere with the said findings of the ld CIT(A) and the same are hereby sustained. Ground no. 1 of assessee s appeal is dismissed. GP estimation of Unit-II SEZ - Once the past year results are taken as a reliable basis for estimating the gross profit and such results have attained finality and where the assessee has disclosed better gross profit rate than the past years results, gross profit so declared should be accepted and the same cannot be disturbed applying the same basis pursuant to which the books of accounts have been rejected. The addition of ₹ 4,26,419/- so sustained by the ld CIT(A) is hereby set-aside. In the results, the ground no. 2 of assessee s appeal is allowed. Disallowance of indirect expenditure - apportioning the total indirect expenditure between non-SEZ unit and SEZ Unit on the basis of total turnover of the units - HELD THAT - Where common indirect expenditure has been incurred by the assessee and which has either not been incurred by a specific unit or cannot be indentified to a specific unit, applying the turnover basis for apportioning such expenditure is reasonable and we donot see any basis to disturb the said allocation basis in absence of any other basis so highlighted by the assessee. However, as far as claim of expenditure exclusively incurred by the SEZ unit, we agree with the contention of the ld AR. The matter is accordingly set-aside to the file of the AO to verify and exclude expenditure which is claimed by the assessee as specifically incurred by the SEZ unit while apportioning the common indirect expenditure and recompute the disallowance accordingly. The ground is thus allowed for statistical purposes.

Summary

Issues Involved:

1. Sustenance of additions of ?1,92,926/- for unverifiable purchases in Unit-1 (Non-SEZ).
2. Sustenance of additions of ?4,26,419/- by estimating a higher GP rate in Unit-II (SEZ).
3. Disallowance of ?1,00,000/- out of indirect expenditure by apportioning expenses between non-SEZ and SEZ units.

Detailed Analysis:

Issue 1: Sustenance of Additions of ?1,92,926/- for Unverifiable Purchases in Unit-1 (Non-SEZ)

The assessee contended that the alleged unverifiable purchases of ?7,71,704/- from M/s. Rose Impex were a negligible 0.8% of the total purchases of ?9,72,65,328/- for Unit-1, which had an export turnover of ?14,27,85,791/-. The assessee argued that all purchases were supported by sale invoices, recorded in stock registers, and payments were made through proper banking channels, with goods directly exported. The AO did not provide any specific instances of irregularities or fund layering. However, the Tribunal upheld the CIT(A)'s decision, noting that the effective current year G.P would be 3.60%, closer to the average gross profit rate of past years (3.72%). Thus, the ground was dismissed.

Issue 2: Sustenance of Additions of ?4,26,419/- by Estimating a Higher GP Rate in Unit-II (SEZ)

The assessee challenged the addition of ?4,26,419/- sustained by the CIT(A), arguing that the GP rate of 28.85% declared was higher than the average GP rate of past years (28.80%). The CIT(A) had estimated a GP rate of 29.25%, resulting in the addition. The Tribunal found that since the assessee disclosed a better GP rate than past years and the past results were reliable, the declared GP rate should be accepted. Thus, the addition of ?4,26,419/- was set aside, and the ground was allowed.

Issue 3: Disallowance of ?1,00,000/- Out of Indirect Expenditure by Apportioning Expenses Between Non-SEZ and SEZ Units

The assessee contended that all expenses were related to business activities and supported by evidence. The AO had apportioned total indirect expenses between the units based on turnover, suspecting diversion of expenses to avoid tax liabilities. The CIT(A) restricted the disallowance to ?1,00,000/- due to the lack of specific instances of inter-unit expenditure. The Tribunal agreed with the turnover-based apportionment but directed the AO to exclude ?5,71,727/- of expenses exclusively incurred by the SEZ unit from the common indirect expenditure. The ground was allowed for statistical purposes.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on unverifiable purchases in Unit-1, set aside the addition for the higher GP rate in Unit-II, and directed a re-computation of disallowed indirect expenses, leading to a partial allowance of the assessee's appeal.