2022 (7) TMI 165 - AT - Income Tax

Addition on gross profit - Reduction in gross profit - Rejection of books of accounts - CIT- deleted the addition - HELD THAT - With regard to allegation of the AO that the assessee was repeatedly asked to produce the bill and the internal audit report, but assessee failed to produce Internal Audit Report and proof of payment for internal audit,we find that same has been replied Vide letter dated 29.12.2016, details of provision made for internal audit fees were submitted to the AO. The entire details of complimentary expenses have been mentioned in the order of the ld. CIT(A) giving the complete details of the particulars, designation, cost price of the complimentary and also the various divisions. With regard to service charges, the entire details and the method of accounting charges, and the amount of the services charges paid of Rs.1.23 Cr. have been duly mentioned at para 31 32 of the order of the ld. CIT(A). With regard to the internal audit fees, the details have been filed by letter dated 29.05.2016. Copy of the ledger has been submitted before the AO as verified by the ld. CIT(A). The reasons for declining the gross profit along with rooms available, rooms occupied, percentage of room rate, room revenue and F B revenue page 25 26 of the order of the ld. CIT(A) has been duly furnished substantiating the decline in receipts, incurring expenses of direct receipts such as electricity, water, staff, music and entertainment which have been and to be provided irrespective of the percentage of occupancy. Thus, having gone through the entire facts, we hereby decline to interfere with the reasoned order of the ld. CIT(A). Addition on account of Deemed Dividend - CIT- deleted the addition - HELD THAT - The provisions of section 2(22)(e) of the Act are not applicable in the present case as the assessee is not a shareholder in the companies from which advance has been received during the year. As evident from the aforesaid table showing shareholding pattern, the assessee is not a shareholder in M/s AIPL M/s GSL. In case of GSL, viz., GSHPL do not hold shares in assessee company, clearly bringing it outside the scope of Section 2(22) (e) of the Act. - both the advances could not have been added in the hands of assessee company, being not the registered shareholder of AIPL or GSL.- Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of gross profit.
2. Deletion of addition on account of deemed dividend.
3. Rejection of books of account under section 145(3) of the Income Tax Act.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Gross Profit
Facts and Observations:
- The Assessing Officer (AO) observed a significant drop in the gross profit ratio of the assessee for the assessment year in question compared to the previous year.
- The AO attributed the decline to various factors, including renovation activities and complementary expenses not shown in the Profit & Loss (P&L) account.
- The AO compared the gross profit ratios with other hotels and concluded that the gross profit of 15.24% was low, estimating it at 28% and adding Rs. 6.24 crore to the income.

Assessee's Arguments:
- The decrease in gross profit was due to the renovation of rooms and facilities, leading to reduced room revenue.
- Complementary expenses were necessary for business and were adjusted against closing stock.
- Service charges collected were passed on to employees and not routed through the P&L account.

Tribunal's Findings:
- The Tribunal found that the reduction in gross profit was justified due to renovation and lower occupancy.
- Service charges were properly accounted for and did not affect the net profit.
- Complementary expenses were necessary and appropriately adjusted against closing stock.
- The books of accounts were produced digitally and explained to the AO.

Conclusion:
- The Tribunal upheld the deletion of the addition by the CIT(A), finding the AO's rejection of the books of accounts under section 145(3) unjustified.

Issue 2: Deletion of Addition on Account of Deemed Dividend
Facts and Observations:
- The assessee received advances from M/s Asian Infracon Pvt. Ltd. (AIPL) and Godavari Shilpakala Ltd. (GSL) for the purchase of shares, which were later refunded as the transaction did not materialize.
- The AO treated these advances as deemed dividends under section 2(22)(e) of the Income Tax Act and made protective additions in the hands of the assessee.

Assessee's Arguments:
- The advances were for the purchase of shares and were refunded without interest.
- The assessee was not a registered shareholder in AIPL or GSL, and thus, the provisions of section 2(22)(e) were not applicable.

Tribunal's Findings:
- The Tribunal noted that the assessee was not a shareholder in AIPL or GSL.
- Citing judicial precedents, the Tribunal held that deemed dividend provisions apply only to registered shareholders.

Conclusion:
- The Tribunal affirmed the CIT(A)'s order deleting the addition, as the assessee was not a registered shareholder of the companies from which the advances were received.

Issue 3: Rejection of Books of Account under Section 145(3)
Facts and Observations:
- The AO rejected the books of accounts citing several reasons, including non-routing of complementary expenses through the P&L account, non-verification of service charges, and non-submission of internal audit reports.

Assessee's Arguments:
- Detailed explanations and records were provided for complementary expenses, service charges, and internal audit fees.
- The books of accounts were produced digitally and explained to the AO.

Tribunal's Findings:
- The Tribunal found that the complementary expenses, service charges, and internal audit fees were adequately explained and accounted for.
- The rejection of books of accounts by the AO was not based on substantial grounds.

Conclusion:
- The Tribunal upheld the CIT(A)'s decision, finding the rejection of books of accounts under section 145(3) unjustified.

Final Judgment:
- The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order on all counts. The additions made by the AO on account of gross profit and deemed dividend were deleted, and the rejection of books of accounts under section 145(3) was found to be unjustified.