2004 (2) TMI 324 - AT - Income Tax

Summary

Issues Involved:
1. Adoption of 5% net profit of turnover for arriving at income.
2. Deletion of addition of unexplained cash credit under Section 68.
3. Deletion of addition on account of foreign trip expenses under Section 28(iv).

Issue-Wise Detailed Analysis:

1. Adoption of 5% Net Profit of Turnover:

The primary issue in the appeals of the assessee was the adoption of a 5% net profit rate of the turnover for determining the income for the relevant assessment years. The appellant-assessee, a sole proprietor dealing in electronic appliances, had her books of accounts impounded during a survey under Section 133A. The Assessing Officer (AO) rejected the books of accounts due to their unreliability and applied a gross profit (GP) rate of 19%, significantly higher than the admitted GP rate of 3-5%.

The learned CIT(A) upheld the rejection of the books but adjusted the net profit rate to 5%, considering various factors like long supplier credits and non-payment of showroom rent. The Tribunal, after reviewing the submissions and evidence, including sales-tax orders and comparative cases, decided that a net profit rate of 4% was more reasonable. Consequently, the Tribunal directed the AO to recalculate the profits based on a 4% net profit rate for all three years, partly allowing the assessee's appeals.

2. Deletion of Addition of Unexplained Cash Credit Under Section 68:

The Department's appeal contested the deletion of an addition of Rs. 1.8 lakhs as unexplained cash credit under Section 68. The AO had observed a credit entry in the assessee's bank account that was not posted in the books of accounts and added it as unexplained cash credit. The assessee explained that the amount was part of the sale consideration received via cheque, providing details of the payer and the bank.

The learned CIT(A) accepted the explanation, noting that the AO could have verified the details with the bank. The Tribunal agreed with the CIT(A) that the addition could be telescoped against the increased estimated net profit and upheld the deletion, dismissing the Department's appeal.

3. Deletion of Addition on Account of Foreign Trip Expenses Under Section 28(iv):

The Department's second appeal challenged the deletion of an addition of Rs. 5 lakhs related to foreign trips undertaken by the assessee and her family, which were sponsored by companies like MRC Electronics (Onida) and Godrej India Ltd. The AO added this amount as deemed profit under Section 28(iv), considering it a benefit arising from business.

The learned CIT(A) held that such trips were gifts and did not fall under Section 28(iv). However, the Tribunal disagreed, stating that the value of any benefit or perquisite arising from business is chargeable to tax under Section 28(iv). The Tribunal found that the trips were directly related to the assessee's business and thus taxable. Consequently, the Tribunal set aside the CIT(A)'s order and restored the AO's addition, allowing the Department's appeal.

Summary:

The Tribunal partly allowed the assessee's appeals by adjusting the net profit rate to 4% and upheld the deletion of the unexplained cash credit addition. However, it allowed the Department's appeal regarding the foreign trip expenses, reinstating the addition under Section 28(iv).