1980 (7) TMI 144 - AT - Income Tax

Summary

Issues:
1. Disallowance of telephone expenses.
2. Disallowance of expenses for essential items on work site.
3. Disallowance of cash payment to the owner of Saw Mill.
4. Addition to gross profit.

Analysis:

1. The first issue pertains to the disallowance of Rs. 750 from telephone expenses claimed by the assessee. The disallowance was made by the ITO as it included expenses related to the telephone connection at the partners' residence. The CIT(A) upheld the disallowance, stating that the telephone was used for non-business purposes. The Tribunal agreed with the CIT(A) and upheld the disallowance.

2. The next issue concerns the retention of Rs. 4,000 out of Rs. 6,073 for expenses of essential items on the work site. The ITO disallowed this amount after finding entertainment and miscellaneous expenses in the accounts. The CIT(A) upheld the disallowance of Rs. 4,000, which the Tribunal deemed fair and declined to interfere with.

3. The third issue involves the disallowance of Rs. 3,600 paid in cash to the owner of a Saw Mill. The ITO disallowed the payment under section 40A(3) of the IT Act due to lack of explanation for the cash payment. The CIT(A) upheld the disallowance citing unestablished identity of the payee. However, the Tribunal disagreed, stating that the payee's identity was established, and vacated the disallowance.

4. The final issue relates to the addition of Rs. 50,000 to the gross profit by the ITO. The ITO based this addition on a decrease in profit margin and included the cost of material provided by the Government. The CIT(A) upheld the addition, considering it fair. However, the Tribunal found the addition unwarranted as the assessee's explanations were valid and not rejected by the authorities. Therefore, the additions of Rs. 50,000 and Rs. 10,000 were deleted from the assessment.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the assessee on the issues of telephone expenses, essential items expenses, cash payment disallowance, and addition to gross profit.