2020 (7) TMI 685 - AT - Income Tax

Rejection of books of accounts - Trading addition - GP Estimation - HELD THAT - Assessee has claimed shortage of 0.55% in Petrol during the year as against 0.60% in the past two years and similarly, the assessee has claimed 0.18% in Diesel during the year which is comparable to A.Y 2011-12 and better than 0.20% claimed in A.Y 2010-11. The same provides a more realistic and rationale basis as compared to monthly comparison and will factor-in the climatic and other factors prevailing throughout the year resulting in such shortages. Even where the Assessing officer intends carrying out monthly comparison, then the shortages claimed in the month of June 2011 should have been compared with shortages in the month of June 2010 and likewise, for other month which however, has not been done in the instant case. Comparative shortages for two months is not reflective of any inconsistent claim of such shortages for the whole year and it is even not the case of the Revenue that similar discrepancies are found in remaining months. Shortages so claimed by the assessee are lower than what has been claimed and allowed by the Revenue in past two years for which the requisite data is available on record and therefore, the same being found comparable cannot be form a rational basis for rejection of books of accounts so maintained by the assessee. Rejection of books of account is hereby set-aside and the consequent trading addition is hereby deleted. Disallowance of various expenses - CIT(A) has restricted such disallowances to 10% which is consistent with the disallowances made in the past years and which has been accepted by the assessee. In the result, we are not inclined to interfere with the findings of the ld CIT(A) and the same is hereby confirmed. Disallowance of salary expenses - claim of the assessee is that the same is fully verifiable for ESI, PF records and has been duly offered to tax, where applicable in their personal tax returns. The matter is accordingly remitted to the file of the Assessing officer to verify the same and where the same is found to be in order, allow the necessary relief to the assessee.

Summary

Issues Involved:
1. Application of Section 145(3) of the Income Tax Act.
2. Confirmation of addition by applying Gross Profit (GP) rate.
3. Disallowance of various expenses.
4. Disallowance of salary expenses.

Detailed Analysis:

1. Application of Section 145(3) of the Income Tax Act:
The assessee contended that the provisions of Section 145(3) were wrongly applied by the Assessing Officer (AO) as no specific mistakes or discrepancies were pointed out. The AO rejected the books of accounts due to the low GP rate and erratic month-wise loss of quantities due to evaporation. The assessee argued that the books had never been rejected in the past, and the GP rate of 1.5% was comparable to the 1.56% accepted in the previous year. The Tribunal found that the AO’s basis for rejecting the books was not substantiated, as the overall yearly shortage percentages were consistent with past years. Thus, the rejection of books of account was set aside, and the consequent trading addition was deleted.

2. Confirmation of Addition by Applying GP Rate:
The CIT(A) confirmed an addition of ?10,52,356 by applying a GP rate of 1.92% instead of the 1.5% declared by the assessee. The assessee argued that all sales and purchases were fully vouched and verifiable, and the slight variation in evaporation loss was natural and insignificant. The Tribunal noted that the assessee's declared net profit rate was higher than in previous years and found the AO’s and CIT(A)’s reasoning for the addition to be unsubstantiated. Consequently, the Tribunal deleted the trading addition.

3. Disallowance of Various Expenses:
The AO disallowed certain Profit & Loss (P&L) expenses on the grounds that they were not properly vouched and verifiable. The CIT(A) restricted these disallowances to 10%, which was consistent with past years. The assessee argued that all expenses were fully vouched and incurred exclusively for business purposes. The Tribunal confirmed the CIT(A)’s decision to restrict the disallowance to 10%, as it was consistent with past assessments and had been accepted by the assessee.

4. Disallowance of Salary Expenses:
The AO disallowed ?1,55,880 out of salary expenses, questioning the verifiability of these payments. The assessee contended that these expenses were fully verifiable through ESI, PF records, and labor records. The CIT(A) upheld the disallowance, citing lack of signatures in the salary sheets and doubts about the vouchers produced. The Tribunal remitted this issue back to the AO for verification, directing that if the expenses are found to be in order, necessary relief should be granted to the assessee.

Conclusion:
The Tribunal allowed the appeal in part, setting aside the rejection of books of accounts and deleting the trading addition. It confirmed the 10% disallowance of various expenses but remitted the disallowance of salary expenses back to the AO for verification. The judgment was pronounced in open court on 23/07/2020.