2012 (7) TMI 681 - AT - Income Tax

Addition upon rejection of the assessee s books of accounts u/s. 145 - Held that - In the present case no basis for the estimate as made by the two authorities below the CIT(A) merely reducing the addition as made by the AO by half. The assessee has disclosed a much higher gross profit than that for the earlier two years. No other comparable case has been again cited by the Revenue. The addition of income is not a concomitant of the rejection of books of accounts, as explained by the hon ble high court in the case of CIT vs. Gotan Lime Khanij Udyog (2001 (7) TMI 19 - RAJASTHAN HIGH COURT ) and, as such, in our view no addition in the instant case is called for and thus decided accordingly. Addition u/s. 68 - Held that - The assessee has stated per his written submissions of having rendered the affidavits complete before the ld. CIT(A), who, though, has ignored the same - the fact remains that the incompleteness of the affidavits are stated by the assessee to have been removed and as such, the same constitutes a valid material on record, i.e., something more than a bald assertion - restore the matter back to the file of the ld. CIT(A) for carrying out the required verification - The addition is consequently deleted. Disallowance u/s. 40A(3) - Held that - AO only from its reporting per the auditor s report in Form 3CD disallowed the claim whereas assessee though has rendered an explanation that the payment was made by depositing cash in the bank account of the supplier to secure the supply of goods pleading for business expediency as a reason for making the payment in cash - do not think that any disallowance u/s. 40A(3) in the instant case is sustainable in law as this is as the purchase under reference is on trading account, the result of which stands estimated by the Revenue after invoking the provision of sec. 145(3)- appeal of assessee allowed.

Summary

Issues:
1. Addition for Rs. 30,000 under section 145 of the Income Tax Act, 1961
2. Addition of Rs. 2.45 lacs under section 68 of the Act
3. Disallowance of Rs. 9,980 under section 40A(3) of the Act

Issue 1: Addition for Rs. 30,000 under section 145 of the Income Tax Act, 1961

The case involved the rejection of the assessee's books of accounts due to the absence of a stock register and discrepancies in purchase vouchers. The Assessing Officer (AO) made a trading addition of Rs. 30,000, which was partially sustained by the Commissioner of Income-tax (Appeals) at Rs. 15,000. The Appellate Tribunal held that the assessee failed to support its declared gross profit rate with evidence, making the trading results unverifiable. While acknowledging the AO's authority under section 145(3) to estimate income, the Tribunal emphasized that any additions must be reasonable and not arbitrary. It noted the higher gross profit rate disclosed by the assessee compared to previous years and found no basis for the addition. Citing legal precedents, the Tribunal ruled in favor of the assessee, stating that the rejection of books does not automatically warrant income addition.

Issue 2: Addition of Rs. 2.45 lacs under section 68 of the Act

The addition under section 68 pertained to unexplained credits from various individuals. The assessee submitted affidavits from creditors, but crucial details like addresses, payment mode, and loan execution dates were missing. The AO considered these credits as accommodation entries, leading to the unexplained credit addition. The Tribunal emphasized that section 68 requires proof of credit nature and source based on materials, not just affidavits. It highlighted the absence of supporting documents and the creditors' non-appearance for cross-examination. Despite the incomplete affidavits, the Tribunal noted the efforts to rectify them and, considering the nominal amount involved, decided to delete the addition.

Issue 3: Disallowance of Rs. 9,980 under section 40A(3) of the Act

The third ground concerned a disallowance under section 40A(3) for a cash payment of Rs. 49,900 to a supplier. The assessee argued business expediency for the cash payment, but the Revenue found it in violation of the prescribed payment mode. The Tribunal noted that section 40A(3) applies to allowable business expenses paid in a specific manner. While acknowledging the breach of payment rules, the Tribunal found the disallowance unsustainable as the purchase was on the trading account, and the book results were accepted due to lack of a better estimate. Citing relevant case law, the Tribunal allowed the assessee's appeal on this issue.

In conclusion, the Appellate Tribunal ITAT, Jaipur ruled in favor of the assessee on all three issues, overturning the additions and disallowance made by the lower authorities under different sections of the Income Tax Act, 1961.