2006 (6) TMI 146 - AT - Income Tax

Marginal Fall In GP Rate - trading addition - unexplained public deposit accepted u/s 68 - failed to file corroborative evidence - non-business related expenditure - disallowance of foreign travelling expenses - Entertainment expenditure - Order of the CIT(A) is non-speaking - HELD THAT - In the instant case the assessee is a company under the Companies Act 1956 whose accounts are statutorily audited and there are no adverse observations in this regard. In fact the reasons explained for the marginal decline are also reasonable and can be accepted. The AO has reproduced the reply of the assessee made before him wherein the reasons for the decline have been explained. Ostensibly the assessee explained that the average selling price of one of its products namely connecting rods declined in this year. Further the purchase price of raw material remained the same. None of these explanations has been commented adversely by the AO and yet the addition has been made. Thus we are inclined to affirm the conclusions drawn by the CIT(A) that the impugned addition was unwarranted. Accordingly on the first ground the Revenue fails. We notice that in a large number of cases the repayment cheques issued by the assessee have been furnished before the IT authorities. These cheques which are placed at the paper book contain an endorsement of the bankers of the depositors which clearly evidence the repayment. The aforesaid piece of evidence clearly demonstrates the identity of the deposit holders. Now insofar as the quantum of individual deposit is concerned we find that the same ranges from Rs. 5, 000 to Rs. 15, 000 in an overwhelming majority of cases. Considered in the face of the fact that the deposits have been received in response to the public advertisement through normal banking channels repayments are evidenced by bank and most importantly the absence of any adverse material with the Revenue we see no reason to treat the deposits as unexplained. Therefore considering the overall gamut of facts and circumstances of the issue we are inclined to affirm the conclusion of the CIT(A) in deleting the addition made by the AO. Merely because the order of the CIT(A) is brief cannot be a reason to interpret it as a non-speaking order . In contrast a non-speaking order is to be understood as one which shows a lack of application of mind on the part of the authority writing the order. Having noted the manner in which the CIT(A) has proceeded to examine the rival claims it cannot be said that there is an absence of application of mind on his part. Therefore the grievance of the Revenue on this count is misplaced. Accordingly the Revenue fails on this ground. Foreign travelling - We find that no specific instance of any non-business related expenditure has been pointed out by the AO on this count. The order of the CIT(A) even if we agree with the learned Departmental Representative that the same is brief yet it brings out the reasons adopted by him for deleting the addition. In any case having regard to our observations above we are inclined to affirm the conclusion drawn by the CIT(A) albeit on a different ground. Thus the Revenue fails in this ground. Entertainment expenditure - There is no instance noticed by the AO which showed that the expenditure was incurred for personal purpose. Moreover the accounts of the assessee as noted by us earlier are statutorily required to be audited and have been so done. There is also no adverse observation by the auditors in this regard. The disallowance therefore was made by the AO on mere surmises and conjectures. Therefore the CIT(A) appropriately deleted the addition. We hereby affirm the order of the CIT(A) and therefore the Revenue fails on this ground. In the result the appeal of the Revenue is dismissed.

Issues Involved:
1. Deletion of addition made to the trading account.
2. Deletion of addition made on account of unexplained public deposits under Section 68 of the Companies Act.
3. Deletion of disallowance of foreign traveling expenses.
4. Deletion of disallowance of entertainment expenses.

Detailed Analysis:

1. Deletion of Addition Made to the Trading Account:
The Revenue challenged the deletion of an addition of Rs. 7,37,750 made by the Assessing Officer (AO) to the trading account due to a nominal decline of 0.13% in the Gross Profit (GP) ratio. The AO justified the addition based on past results, suspecting revenue leakage. However, the CIT(A) deleted the addition after considering the assessee's explanation and a remand report from the AO. The Tribunal affirmed the CIT(A)'s decision, noting that the decline in GP ratio was marginal and reasonable explanations were provided, such as a decrease in the average selling price of connecting rods while raw material costs remained unchanged. The Tribunal found no specific defects in the assessee's accounts, which were statutorily audited, and concluded that the addition was unwarranted.

2. Deletion of Addition Made on Account of Unexplained Public Deposits Under Section 68:
The AO added Rs. 2,09,37,000 to the assessee's income, treating it as unexplained public deposits under Section 68 of the Companies Act, as the assessee failed to prove the identity, creditworthiness, and genuineness of the depositors. The CIT(A) deleted the addition, noting that the deposits were raised through a scheme approved by the Registrar of Companies (RoC) and were repaid through account payee cheques. The Tribunal upheld the CIT(A)'s decision, emphasizing that the deposits were received through normal banking channels and were supported by substantial evidence, including application forms, public advertisements, and bank advices. The Tribunal noted that the AO did not conduct further inquiries despite the assessee's willingness to bear the expenses for such an exercise. The Tribunal concluded that the deposits were genuine and the addition was unjustified.

3. Deletion of Disallowance of Foreign Traveling Expenses:
The AO disallowed 50% of the foreign traveling expenses (Rs. 10,52,231) incurred by the assessee, suspecting non-business purposes. The CIT(A) deleted the disallowance, noting that such additions were not sustained in the past. The Tribunal affirmed the CIT(A)'s decision, criticizing the AO's approach of expecting tangible results from the foreign visits. The Tribunal referenced CBDT Circular No. 4, which advises against evaluating foreign travel expenses solely based on immediate profit generation. The Tribunal found no specific instances of non-business-related expenses and concluded that the disallowance was arbitrary and unsupported by evidence.

4. Deletion of Disallowance of Entertainment Expenses:
The AO disallowed Rs. 5,64,500 out of the total entertainment expenses claimed by the assessee, suspecting non-business purposes. The CIT(A) deleted the disallowance, finding it arbitrary and without basis. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not identify any specific vouchers or expenditures unrelated to the business. The Tribunal emphasized that the assessee's accounts were statutorily audited without any adverse observations from the auditors. The Tribunal concluded that the disallowance was based on mere conjectures and was rightly deleted by the CIT(A).

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletions of the additions and disallowances made by the AO. The Tribunal found that the AO's actions were largely arbitrary and unsupported by concrete evidence, while the CIT(A)'s decisions were based on thorough consideration of the facts and statutory requirements.

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