1999 (12) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Application of gross profit rate and trading addition.
2. Increase in sales and corresponding gross profit margin.
3. Engagement of an electrician and its impact on the income.
4. Disallowance of interest paid to old creditors.
5. Genuineness and explanation of initial credits in creditors' accounts.

Issue-wise Detailed Analysis:

1. Application of Gross Profit Rate and Trading Addition:
The assessee contested the application of an 11% gross profit (GP) rate and the resulting trading addition of Rs. 64,532. The assessee argued that the lower authorities erred in this application, especially considering the increase in sales from Rs. 15 lakhs to Rs. 19 lakhs, including sales of over Rs. 10 lakhs relating to TV sets with a profit margin of only 5%. The Tribunal noted that the AO did not provide material evidence to rebut the assessee's claim of a 5% GP rate on TV sales. The Tribunal observed that if the GP on TV sales is calculated at 5%, the GP rate on other items would be 10.89%, which is comparable to the previous year's 10.3%. The absence of a day-to-day stock register for a petty dealer handling numerous items did not justify the estimation of profits. Thus, the Tribunal directed the AO to delete the addition of Rs. 64,532.

2. Increase in Sales and Corresponding Gross Profit Margin:
The assessee highlighted the increase in turnover to Rs. 19,38,114 from Rs. 12,80,639 in the previous year and argued that the lower GP rate was due to the high volume of TV sales with a lower profit margin. The Tribunal found that the AO acknowledged the reasonableness of the 5% GP rate on TV sales but questioned the GP rate on other items due to the absence of quantitative details. The Tribunal concluded that the overall GP rate, excluding TV sales, was better than the previous year, and no specific discrepancies were found in the books of accounts. Therefore, the Tribunal ruled in favor of the assessee on this issue.

3. Engagement of an Electrician and Its Impact on the Income:
The AO drew an adverse inference from the engagement of an electrician, suggesting that the assessee should have shown income from repair charges. The assessee contended that no such income was earned, and thus, there was no basis for showing repair income. The Tribunal found no evidence to support the AO's presumption and ruled that the addition based on this inference was unjustified.

4. Disallowance of Interest Paid to Old Creditors:
The assessee challenged the disallowance of Rs. 26,616 out of interest paid to seven old creditors, arguing that these loans had been carried forward for 8-10 years and interest had been allowed in previous years. The Tribunal noted that the AO based the disallowance primarily on the statement of one creditor, Shri Harish Chandra, recorded behind the assessee's back without providing an opportunity for cross-examination. The Tribunal emphasized the need for proper verification of loan repayments by cheques and directed the AO to re-examine the issue, considering whether repayments were made by account payee cheques and allowing the assessee to cross-examine the creditors if necessary.

5. Genuineness and Explanation of Initial Credits in Creditors' Accounts:
The assessee argued that the initial credits in the accounts of the creditors were genuine and had been explained. The Tribunal directed the AO to verify the genuineness of the credits by examining the repayment of loans through cheques and recording statements of the creditors in the presence of the assessee. The Tribunal instructed the AO to supply copies of the statements to the assessee and provide an opportunity for cross-examination, ensuring a fair and thorough investigation.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to delete the trading addition of Rs. 64,532 and re-examine the disallowance of interest paid to old creditors after conducting further inquiries and providing adequate opportunities to the assessee.