1985 (12) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 22,270 due to low gross profit shown by the assessee.
2. Addition of Rs. 5,24,356 for cash payments allegedly in contravention of Section 40A(3) of the IT Act, 1961.

Detailed Analysis:

1. Addition of Rs. 5,24,356 for Cash Payments in Alleged Contravention of Section 40A(3):

The ITO made an addition of Rs. 5,24,356, citing that the assessee made cash payments exceeding Rs. 2,500 to M/s. Shikhar Trading Company and M/s. Porwal Trading Company, which was in violation of Section 40A(3). The assessee contended that these firms acted as adhatias (commission agents) and made payments to the sellers by cheque, thus complying with Section 40A(3). The CIT(A) upheld the ITO's decision, but the Tribunal found that the two firms were indeed acting as agents for the assessee. The Tribunal concluded that since the payments were made by the agents via cheque, there was no contravention of Section 40A(3). Additionally, the Tribunal noted that the assessee had no bank account in Indore, thus qualifying for an exemption under Rule 6DD(j) of the IT Rules. The Tribunal held that the sum of Rs. 5,24,356 was wrongly disallowed and ordered it to be deleted.

2. Addition of Rs. 22,270 Due to Low Gross Profit:

The ITO observed that the assessee, a wholesale dealer in cloth, showed a gross profit of Rs. 68,730 on total sales of Rs. 11,45,526, giving a rate of 6%. The ITO applied a gross profit rate of 7.5% for wholesale and 12.5% for retail sales, resulting in an addition of Rs. 22,270. The CIT(A) upheld this addition. However, the Tribunal noted that the assessee's gross profit of 6% on sales of Rs. 11,28,185 was accepted in the succeeding year with a minor addition of Rs. 4,892. Considering the lack of proper stock register and inventory details, the Tribunal found the addition of Rs. 22,270 to be excessive and reduced it to Rs. 7,500.

Conclusion:

The Tribunal allowed the appeal partly, deleting the addition of Rs. 5,24,356 for cash payments and reducing the addition for low gross profit from Rs. 22,270 to Rs. 7,500. The ITO was directed to recompute the assessee's income accordingly.