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2021 (12) TMI 436 - AT - Income TaxLow GP on estimation basis - assessee has submitted the complete quantitative tally of two wheelers which is available on record. comparative chart placed on record shows that the assessee s gross profit is progressive - HELD THAT - CIT(A) in his findings has observed that AO has not made any enquiry to ascertain the margin on sale of vehicles - estimation of GP rate on the basis of margin on sale of spares and accessories cannot be the yard stick for applying profit rate on total sale. Since, the authorities below have not conducted any enquiry to ascertain the margin on sale of vehicles, the addition made on estimation basis is not sustainable in law - authorities below have not assigned any cogent reason for making addition in in this AY, whereas no such addition was made in the AY 2011-12 in which the assessee had shown GP rate of 2.02%. As in the case of Pr. CIT vs. Bhiwani Silicate Industries 2015 (8) TMI 1098 - RAJASTHAN HIGH COURT as held that once stock register had been found to be properly maintained no trading addition could have been made. In the present case, since the authorities below have not rejected the books of account of the assessee, the action of sustaining trading addition is contrary to the ratio laid down by the Hon'ble High Court in the case discussed above. Hence, we allow this ground of appeal and direct the AO to delete the addition Disallowance of interest on the opening debit balance - counsel submitted that the closing balance of capital as on 31.03.2011 is the opening balance of assessment year 2012-13, therefore, no addition is warranted on the said amount - HELD THAT - CIT(A) has deleted the identical addition in assessee s appeal against the assessment order for the assessment year 2011-12 following the decision of the Amritsar Bench of the Tribunal in the case of ITO vs. Euro Infrastructure Power Ltd. 2015 (6) TMI 766 - ITAT AMRITSAR The department has not challenged the findings of the Ld. CIT(A). Since, the authorities below have not assigned any cogent reason for making addition in the assessment year under consideration, we find merit in the contention of the Ld. counsel for the assessee. Hence, we allow this ground of appeal. Addition of interest disallowance on advances made to M/s Orchid Resorts - assessee submitted that CIT(A) has made addition of the said amount without appreciating the fact that advances have been made to the sister concern M/s Orchid Resorts, in which the assessee was a partner and that the advances have been made out of commercial expediency - HELD THAT - Since the capital account was debited out of the commercial expediency, the Ld. CIT(A) has wrongly confirmed the interest expenditure disallowance made by the AO. The authorities below have not pointed out any material on record to rebut the contention of the assessee. Further, as pointed out by the Ld. counsel, AO did not make any addition in assessee s case having the identical set of facts in the assessment year 2017-18. The Ld. DR did not point out any valid reasons for making interest disallowance @ 12% of the total advance made during the year relevant to the assessment year under consideration. Hence, we do not find any reason to sustain the addition on account of interest disallowance. We accordingly, allow this ground of appeal and set aside the findings of the Ld. CIT(A). Disallowance of miscellaneous expenses claimed - disallowance/ sustained the addition in question for the reason that the assessee has failed to produce evidence to substantiate its claim - contention of the Ld. counsel is that since these expenses were incurred in connection with the business of the assessee, the Ld. CIT(A) has wrongly sustained the disallowance - HELD THAT - CIT(A) has not denied the contention of the assessee that the expenses were incurred for the purposes of business, however, sustained the addition to the extent of 10% of the total amount of expenses claimed holding that the disallowance made by AO is on higher side. So, in our considered view, the action of the Ld. CIT(A) in sustaining 10% disallowance without any cogent reason is arbitrary, therefore bad in law. Hence, we allow this ground of appeal of the assessee and set aside the findings of the Ld. CIT(A). Accordingly, we direct the AO to delete the addition.
Issues Involved
1. Sustaining addition on account of low Gross Profit (GP) rate. 2. Sustaining addition on account of disallowance of interest on the opening debit balance of the proprietor's capital account. 3. Sustaining addition on account of disallowance of interest on interest-free advances to a sister concern. 4. Sustaining disallowance of miscellaneous expenses. Detailed Analysis Issue 1: Sustaining Addition on Account of Low Gross Profit (GP) Rate The assessee challenged the addition of ?1,50,000/- out of a total addition of ?3,30,305/- made by the AO on account of low GP on an estimation basis. The assessee argued that complete quantitative records and audited results were provided, and the addition was made without pointing out any defects in the books of accounts. The Tribunal noted that in the previous assessment year, a lower GP rate was accepted without any trading addition. The authorities did not conduct any inquiry to ascertain the margin on the sale of vehicles, and the addition was made on an estimation basis, which is not sustainable in law. The Tribunal allowed this ground of appeal and directed the AO to delete the addition. Issue 2: Sustaining Addition on Account of Disallowance of Interest on the Opening Debit Balance of the Proprietor's Capital Account The assessee contested the addition of ?2,36,452/- made by the AO on account of disallowance of interest on the opening debit balance. The assessee argued that the closing balance of capital as on 31.03.2011 is the opening balance for the assessment year 2012-13, and no addition is warranted. The Tribunal found merit in the assessee's contention, noting that the CIT(A) had deleted a similar addition in the previous assessment year, and the department did not challenge this finding. The Tribunal allowed this ground of appeal and set aside the findings of the CIT(A). Issue 3: Sustaining Addition on Account of Disallowance of Interest on Interest-Free Advances to a Sister Concern The assessee challenged the addition of ?2,46,150/- on account of interest disallowance on advances made to M/s Orchid Resorts, a sister concern. The assessee argued that the advances were made out of commercial expediency and internal accruals, and no withdrawal was made from the capital account for non-business purposes. The Tribunal noted that the authorities did not provide any material to rebut the assessee's contention and did not make any addition in the assessment year 2017-18 under similar circumstances. The Tribunal allowed this ground of appeal and directed the AO to delete the addition. Issue 4: Sustaining Disallowance of Miscellaneous Expenses The assessee contested the disallowance of 10% amounting to ?72,253/- out of the total addition of ?1,44,507/- made by the AO on account of disallowance of miscellaneous expenses. The Tribunal observed that the CIT(A) sustained the addition on an estimation basis without pointing out any material defect in the books of accounts. The Tribunal found the action of the CIT(A) in sustaining 10% disallowance without any cogent reason to be arbitrary and bad in law. The Tribunal allowed this ground of appeal and directed the AO to delete the addition. Conclusion In conclusion, the Tribunal allowed both appeals of the assessee, directing the AO to delete the additions made on account of low GP rate, disallowance of interest on the opening debit balance of the proprietor's capital account, disallowance of interest on interest-free advances to a sister concern, and disallowance of miscellaneous expenses.
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