2022 (1) TMI 1452 - AT - Income Tax

Addition u/s. 69A - reliance on documents impounded during the course of survey proceedings - HELD THAT - AO has himself stated in his assessment order that assessee is engaged in the business of trading of cloths , therefore, assessee does not have any income other than business activity, hence, undisclosed income of declared during the survey proceedings is business income. Considering these facts, and respectfully following the judgment of jurisdictional Hon'ble, Gujarat High Court in the case of Mahskar General Hospital 2011 (8) TMI 1144 - GUJARAT HIGH COURT we do not find any infirmity in the order of ld. CIT(A). That being so, we decline to interfere with the order of Ld. CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Addition of certain expenses - Revenue has challenged the disallowance @ 1/10th of various business expenses such as depreciation on motor car, interest on car loan, motor car expenses, motor car repairing, mobile phone expenses, telephone expenses and travelling expenses - AO had not pointed out any single entry of personal expenses during the scrutiny therefore, ld. CIT(A) deleted the ad hoc addition made by AO - HELD THAT - We note that AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s. 145(3) and thereafter by best judgment assessment u/s. 144 of the Act. Here in this case, the AO has not passed any order u/s. 144 - AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the AO; and item-wise the AO could have disallowed the expenditure rather than going for ad-hoc disallowance of percentage basis of the expenses claimed by the assessee which action of the AO is arbitrary in nature and cannot be sustained. Considering these facts, we do not find any infirmity in the order of ld. CIT(A), therefore, order of the CIT(A) is hereby approved and confirmed. Addition on account of unrecorded purchases - deletion of addition as same is already included in the physical stock taken by the department during the survey - HELD THAT - We have heard both the parties and note that even though this purchase was not recorded in the books, however, the physical stock taken during survey and excess stock declared included the said purchase. CIT(A) observed that no finding of the AO as to why this amount could not be considered, as included in the disclosure of excess stock, during the survey. Based on this finding, the ld. CIT(A) deleted the addition - Hence, we are not inclined to accept the contention of the AO in any manner and hence the addition so made, has been rightly deleted by ld. CIT(A). Hence, we dismiss the ground raised by the Revenue. We have heard both the parties and note that eventhough this purchase was not recorded in the books, however, the physical stock taken during survey and excess stock declared included the said purchase. The ld. CIT(A) observed that no finding of the AO as to why this amount could not be considered, as included in the disclosure of excess stock, during the survey. Based on this finding, the ld. CIT(A) deleted the addition. Hence, we are not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made, has been rightly deleted by ld. CIT(A). Hence, we dismiss the ground raised by the Revenue. Disallowance u/s 14A - HELD THAT - As the investment was made out of interest free fund, had no direct nexus between the interest borrowed funds. Respectfully following the binding precedent of Suzlon Energy Ltd. 2013 (7) TMI 697 - GUJARAT HIGH COURT we delete the addition. Addition being incurred u/s 36(1)(va) r.w.s. 2(24)(x) - delayed Employees Contribution towards Provident Fund (PF) and ESI - HELD THAT - Issue decided against the assessee by the judgment of Gujarat State Road Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT wherein as held tribunal has erred in deleting respective disallowances being employees' contribution to PF Account/ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees' account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act.

Summary

Issues Involved:
1. Addition under Section 69A based on survey proceedings.
2. Disallowance of expenses under Section 40(b)(v).
3. Disallowance of certain business expenses.
4. Addition of unrecorded purchases.
5. Disallowance under Section 14A.
6. Addition under Section 36(1)(va) r.w.s. 2(24)(x).

Issue-wise Detailed Analysis:

1. Addition under Section 69A Based on Survey Proceedings:
The main issue was whether the undisclosed income of Rs. 3,37,03,023/- declared during the survey should be taxed under Section 69A or as business income under Section 28. The assessee argued that the excess stock found during the survey was part of its business stock and should be taxed as business income. The Assessing Officer (AO) treated this amount as income under Section 69A and disallowed related expenses. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that the differential stock had no separate identity from the business stock. The Tribunal upheld the CIT(A)'s decision, noting that the assessee was engaged solely in the business of trading cloths and had no other source of income. The Tribunal relied on the Gujarat High Court's decision in CIT vs. Mahaskar General Hospital, which supported the treatment of such income as business income.

2. Disallowance of Expenses under Section 40(b)(v):
The AO disallowed the deduction of Rs. 1,54,98,675/- under Section 40(b)(v) related to partner remuneration and interest. The Tribunal upheld the CIT(A)'s decision to allow these expenses, stating that the income was business income and thus eligible for such deductions. The Tribunal noted that both the partnership firm and its partners were taxed at the maximum marginal rate, resulting in no loss to the revenue.

3. Disallowance of Certain Business Expenses:
The AO disallowed Rs. 1,58,061/- of various business expenses on an ad-hoc basis, suspecting personal and non-business use. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, stating that the AO could not make such estimations without rejecting the books of accounts under Section 145(3). The Tribunal emphasized that any disallowance should be based on specific deficiencies in vouchers or unsupported expenses, not on arbitrary estimations.

4. Addition of Unrecorded Purchases:
The AO added Rs. 36,060/- for unrecorded purchases from Zenisha Creation Pvt. Ltd. The CIT(A) deleted this addition, noting that the amount was already included in the physical stock taken during the survey. The Tribunal upheld this decision, agreeing that the purchase was part of the disclosed excess stock.

5. Disallowance under Section 14A:
The AO disallowed Rs. 57,867/- under Section 14A, assuming some expenses were incurred to earn dividend income. The Tribunal deleted this disallowance, noting that no direct expenses were incurred for earning the dividend income from Reliance Liquid Mutual Fund. The Tribunal relied on the Gujarat High Court's decision in CIT vs. Suzlon Energy Ltd., which supported the exclusion of such disallowance when investments were made from interest-free funds.

6. Addition under Section 36(1)(va) r.w.s. 2(24)(x):
The AO added Rs. 27,467/- for late payment of employees' contributions towards PF and ESI. The Tribunal upheld this addition, following the Gujarat High Court's decision in Gujarat State Road Transport Corporation, which mandated that such contributions must be credited to the employees' accounts by the due date to be deductible.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decisions on treating the excess stock as business income, allowing related expenses, and deleting arbitrary disallowances. However, it confirmed the addition for late payment of employees' contributions towards PF and ESI.