1998 (2) TMI 168 - AT - Income Tax

Method Of Accounting, Benami Transaction, Clubbing Of Income, Business Expenditure, Salary, Gross Profit Rate

Issues Involved
1. Sustenance of addition in trading account.
2. Clubbing of income from M/s. Mahesh Bhandar.
3. Disallowance of salary expenses.

Detailed Analysis

1. Sustenance of Addition in Trading Account
Facts:
- The AO made trading additions of Rs. 47,760 and Rs. 28,245 for A.Y. 1987-88 and 1988-89, respectively, by applying a g.p. rate of 7% against the declared g.p. rates of 5.38% and 6.02%.
- The AO based his additions on findings from a survey under sec. 133A, which revealed discrepancies such as unrecorded daily sales, dual bill books, and non-disclosure of certain receipts and profits.
- The CIT(A) reduced these additions to Rs. 15,000 and Rs. 10,000, considering the increased sales volumes and the competitive market conditions faced by the assessee.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had given a reasonable finding by reducing the additions and that the order did not suffer from any infirmity.

2. Clubbing of Income from M/s. Mahesh Bhandar
Facts:
- The AO clubbed the income of M/s. Mahesh Bhandar with the assessee's income, estimating it at Rs. 30,000 each for A.Y. 1987-88 and 1988-89, based on a survey indicating that the business was run by the assessee's younger brother, Shankar Lal, but was actually a branch of the assessee's business.
- The CIT(A) reduced the income estimation to Rs. 12,000 and Rs. 15,000 for the respective years but upheld the view that it was a branch office of the assessee.

Judgment:
- The Tribunal disagreed with the AO and CIT(A), noting that there was insufficient evidence to prove the business was benami. The Tribunal emphasized the importance of independent verification and found the department's reliance on third-party statements without summoning Shankar Lal or conducting further inquiries inadequate.
- Consequently, the Tribunal deleted the additions related to M/s. Mahesh Bhandar for both years.

3. Disallowance of Salary Expenses
Facts:
- The AO disallowed part of the salary expenses claimed by the assessee, amounting to Rs. 20,000 for A.Y. 1987-88 and Rs. 24,900 for A.Y. 1988-89, based on discrepancies found during the survey.
- The CIT(A) accepted the assessee's explanation for most of the salary expenses but upheld a disallowance of Rs. 3,600 for A.Y. 1987-88 due to lack of supporting evidence for payments to one employee.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, finding that the CIT(A) had reasonably considered all facts and materials on record.

Subsequent Years (A.Y. 1989-90 and 1990-91)
Facts:
- For A.Y. 1989-90, the AO made an addition of Rs. 77,140 by applying a g.p. rate of 7% on estimated sales, which the CIT(A) reduced to Rs. 41,140.
- For A.Y. 1990-91, the AO applied a 7% g.p. rate on estimated sales, but the CIT(A) reduced the addition to Rs. 10,000.

Judgment:
- The Tribunal further reduced the addition for A.Y. 1989-90 to Rs. 20,000, considering the substantial increase in sales and marginal decline in g.p. rate.
- For A.Y. 1990-91, the Tribunal deleted the trading addition entirely, noting that the assessee had declared a higher g.p. rate of 6.49% compared to previous years.

Additional Salary Disallowance for A.Y. 1990-91
Facts:
- The CIT(A) sustained a disallowance of Rs. 5,000 out of the total salary expenses claimed, based on a comparison with a previous year's disallowance.

Judgment:
- The Tribunal found no valid reason for the disallowance and deleted the addition, noting that the assessee had provided complete salary details.

Conclusion
The appeals of the assessee were partly allowed, and the appeals of the department were dismissed. The Tribunal provided a detailed analysis, emphasizing the need for substantial evidence and proper verification in cases involving benami transactions and disallowances.

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