2022 (2) TMI 607 - AT - Income Tax

Adhoc disallowance @ 15% of conveyance and vehicle expenses and miscellaneous expenses by the AO - HELD THAT - We considering the turnover, nature of business operations and activities are of the opinion that such addition is without identifying the particular transaction and also the assessee could not substantiate the claims with the proper evidence and are not verifiable. We find the addition made by the AO @ 15% is on higher side and restrict the addition to the extent of 5% and this percentage is applicable for this assessment year only. Accordingly,we restrict the addition to the extent of 5% of the expenses discussed and modify the CIT(A) order sustaining the addition @ 5% and partly allow the grounds of appeal of the assessee. Unexplained Sales/investment - AO has treated the book stock and physical stock of the precious metals as out of book sale - with respect to the pearls, the AO has made the addition as excess stock and was confirmed by the CIT(A) by treating the difference between the book stock and physical stock of the pearls as unexplained investment in the course of stock valuation - HELD THAT - AR submitted a chart reconciling the difference between the physical stock and stock as per the books of account for each precious metal with the documentary evidence and the minor difference arise due to weighing difference. Further the A. O. has not considered sales and sales return effected prior to the date of search. We considering the ratio of the decision of M/S. MAHENDRA BROTHERS EXPORTS PVT. LTD. AND (VICE-VERSA) 2021 (12) TMI 302 - ITAT MUMBAI find that there is difference is stock which could not be reconciled completely in respect of the precious metals and supported with material evidence. Accordingly, we direct the Assessing officer to consider only gross profit in respect of said sale transactions difference after adjusting above said sales returns and partly allow the grounds of appeal of the Assessee.

Summary

Issues Involved:
1. Ad-hoc disallowance of 15% on miscellaneous expenses.
2. Ad-hoc disallowance of 15% on conveyance and vehicle expenses.
3. Addition under Section 69A due to the difference between book stock and physical stock of diamonds, gold, platinum, and color stones.
4. Addition under Section 69B due to the difference between book stock and physical stock of pearls.

Detailed Analysis:

Issue 1: Ad-hoc Disallowance of 15% on Miscellaneous Expenses
The assessee contested the disallowance of ?3,29,387/- being 15% of the total miscellaneous expenses. The Assessing Officer (A.O.) found that the miscellaneous expenses were not properly supported and were unverifiable, leading to an estimated disallowance. The Tribunal considered the nature of the business operations and the turnover, concluding that the addition was on the higher side. It modified the disallowance to 5%, finding that the assessee could not substantiate the claims with proper evidence. Thus, the addition was restricted to 5% for this assessment year.

Issue 2: Ad-hoc Disallowance of 15% on Conveyance and Vehicle Expenses
Similarly, the assessee challenged the disallowance of ?2,68,727/- being 15% of the total conveyance and vehicle expenses. The A.O. observed that the complete details and vouchers were not produced, leading to an ad-hoc disallowance. The Tribunal, considering the turnover and nature of operations, found the 15% disallowance excessive and reduced it to 5%, modifying the CIT(A)'s order accordingly.

Issue 3: Addition under Section 69A Due to Stock Discrepancies
The A.O. identified discrepancies between the book stock and physical stock of diamonds, gold, platinum, and color stones during a search operation. The A.O. treated the shortages as out-of-book sales, leading to an addition of ?7,72,53,517/- under Section 69A. The assessee provided detailed explanations, reconciliation statements, and supporting documents, which were not fully accepted by the A.O. The Tribunal found that the A.O. did not properly consider the sales and sales returns prior to the search date. Referring to similar cases, the Tribunal directed the A.O. to consider only the gross profit from the alleged out-of-book sales, adjusting for sales returns, and partly allowed the appeal.

Issue 4: Addition under Section 69B Due to Stock Discrepancies in Pearls
The A.O. made an addition of ?5,90,010/- under Section 69B, treating the excess physical stock of pearls as unexplained investment. The CIT(A) upheld this addition. The Tribunal, referring to the assessee's reconciliation efforts and the minor differences due to weighing discrepancies, directed the A.O. to consider only the gross profit from the alleged excess stock, adjusting for relevant factors. This approach was consistent with precedents in similar cases within the assessee's group.

Conclusion:
The Tribunal partly allowed the appeal, modifying the disallowances on miscellaneous and conveyance expenses to 5%, and directed the A.O. to consider only the gross profit from the stock discrepancies, adjusting for sales returns and other relevant factors. This decision aligns with the Tribunal's findings in similar cases within the assessee's group.