1999 (9) TMI 127 - AT - Income Tax

Summary

Issues Involved:
1. Application of Section 145(2) of the Income Tax Act.
2. Estimation of sales by the Assessing Officer (AO).
3. Gross Profit (GP) rate applied by the AO.
4. Disallowances of various expenses.
5. Additions on account of marriage expenses of relatives of partners.
6. Opportunity to explain the justification of expenses.

Detailed Analysis:

1. Application of Section 145(2) of the Income Tax Act:
The AO invoked the provisions of Section 145(2) due to several defects in the assessee's books of accounts, such as the absence of a cash book, incomplete ledger entries, and lack of vouchers for various expenses. The Tribunal upheld the AO's decision to apply Section 145(2), noting that the defects were significant enough to question the correctness of the accounts.

2. Estimation of Sales by the AO:
The AO estimated the sales based on the assumption that the assessee, being a big retailer, had underreported sales. The AO used a daily sales figure of Rs. 4,500 for peak months and Rs. 2,500 for lean months. The Tribunal, however, found no justification for this estimation as the AO did not provide concrete evidence of unaccounted sales or purchases. The Tribunal concluded that the estimation of sales was unjustified and directed the AO to accept the sales as declared by the assessee.

3. Gross Profit (GP) Rate Applied by the AO:
The AO applied a GP rate of 25% on the estimated sales, which was higher than the GP rate shown by the assessee (ranging between 21.60% to 24.58%). The Tribunal confirmed the GP rate applied by the AO, stating that the books of accounts were not properly maintained, and thus, the GP rate applied was reasonable.

4. Disallowances of Various Expenses:
The AO made several disallowances on account of shop expenses, advertisement expenses, interest, travelling expenses, scooter expenses, telephone expenses, and sales-tax demand. The Tribunal upheld these disallowances, noting that the assessee failed to provide proper justification or mutual agreements for expenses incurred on behalf of its sister concern, M/s Fine Art Wears.

5. Additions on Account of Marriage Expenses of Relatives of Partners:
The AO made additions for marriage expenses of the daughter and sister of one of the partners. The Tribunal deleted these additions, stating that under Section 69C, such expenses should be added to the income of the person who actually incurred them, i.e., the partners, and not the firm.

6. Opportunity to Explain the Justification of Expenses:
The assessee claimed that no opportunity was given to explain the justification of expenses. The Tribunal found that the AO had indeed given the assessee a chance to explain, and the additions were made after considering the explanations provided. Thus, the Tribunal confirmed the AO's decision on this matter.

Conclusion:
The appeals were allowed in part. The Tribunal upheld the application of Section 145(2) and the GP rate applied by the AO but canceled the estimation of sales. The disallowances of various expenses were confirmed, while the additions on account of marriage expenses were deleted. The Tribunal also clarified that the assessee was given an opportunity to explain the expenses.