2013 (9) TMI 330 - AT - Income Tax

Addition on Account of Low GP - Whether the Ld. CIT (A) erred in restricting the addition on account of G.P. @ 5% to 2% on the ground that the turnover for the year has been reduced compared to preceding year and in not appreciating the fact that the G.P. for the immediately preceding year was 10.84% and that the substantially increased figures show by the assessee in manufacturing expenses like power fuel addition other expenses has resulted the G.P. in negative figure and addition on facts in partly confirming the addition on account of gross profit - The confirmation of such addition being unjust and unlawful be deleted - Held that - The books of accounts have not been rejected by A.O. nor has any defect been pointed out in the books of accounts - CIT (A) though has granted partial relief to the assessee has held that in the context of reduced turnover in the current year increased expenditure partly explains the negative G.P. during the year - the A.O. was not right in making addition. Following CIT vs. Amitbhai Gunwatbhai 1980 (6) TMI 10 - GUJARAT High Court - if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is show by the entries is not the real state of affairs - Secondly even if for some reason the books are rejected it is not open to the A.O. to make any addition on estimate basis or on pure guess work - No specific discrepancies or defects in the books of account of the assessee have been pointed out before us nor was any material brought to our notice to establish that purchases were inflated or receipts suppressed - CIT vs. Vikram Plastic 1998 (8) TMI 43 - GUJARAT High Court - there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained addition also on the finding that there was no material brought on record to establish that purchases or expenses were inflated or sales suppressed and also in view of the finding that it was not the case that there was no method of regular accounting employed the Tribunal was fully justified in coming to the conclusion that the provisions of Sec. 145(2) of the Income Tax Act, 1961 could not be invoked - This conclusion was based on a finding of fact and raised no question of law - this ground of the assessee is allowed and that of Revenue is dismissed. Disallowance of Deduction u/s. 40(a)(ia) - Whether the expenditure on which TDS is deducted and paid after the due date as prescribed u/s. 200 calls for disallowance in view of the provisions of Sec. 40(a)(ia) - Held that - Following M/s. Alpha Projects Versus DCIT Ci rcle-1(1) 2012 (4) TMI 466 - ITAT Ahmedabad - No disallowance is called for in the present case since the TDS has been deposited before filing of return - it is also a fact that the A.O. has not examined the issue of disallowance u/s. 40(a)(ia) in light of the aforesaid decision of coordinate Bench - We therefore feel that in the interest of justice the issue be remanded to the file of A.O. for verification - We accordingly direct the A.O. to examine as to whether the assessee had paid the TDS to the account of Government before filing of Return of income - If the assessee has deposited the TDS before filing of Return of Income the deduction be allowed following the aforesaid decision of Co-ordinate Bench - By this order we also direct the assessee to furnish all the information required by the A.O. to decide the issue. The A.O. shall also grant an opportunity of being heard to the assessee. Thus this ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition on account of Gross Profit (GP).
2. Disallowance under Section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Addition on Account of Gross Profit (GP):

The Revenue's contention was that the CIT (A) erred in reducing the addition on account of GP from 5% to 2%, despite a significant decrease in turnover and an increase in manufacturing expenses, resulting in a negative GP. The assessee argued that the CIT (A) partially confirmed the addition of Rs. 24.50 lakhs, which was unjust and should be deleted.

The assessee, a company manufacturing chemicals, declared a total loss of Rs. 38,08,629/- for the assessment year 2005-06. The A.O. observed a fall in sales and an increase in manufacturing expenses compared to the previous year, leading to a negative GP. The assessee attributed this to financial difficulties and a shift to less profitable job work. The A.O. rejected this explanation and made an addition by applying a GP rate of 5%.

The CIT (A) partially agreed with the A.O., noting that the reduced turnover partly explained the negative GP but not entirely. The CIT (A) adopted a GP rate of 2% on total sales, restricting the addition to Rs. 24.5 lakhs.

The Tribunal considered the assessee's argument that the A.O. did not point out any defects in the books of accounts nor invoked Sec. 145(3) to reject the book results. The Tribunal referenced multiple decisions, including those of the Hon'ble Gujarat High Court and Co-ordinate Bench of the Tribunal, which held that without rejecting the books of accounts, no estimate of profits could be made. The Tribunal concluded that the A.O. was not justified in making the addition and allowed the assessee's ground while dismissing the Revenue's ground.

2. Disallowance under Section 40(a)(ia) of the Income Tax Act:

The A.O. disallowed Rs. 60,47,992/- paid to contractors, as the TDS was deducted but not paid within the due date prescribed under Sec. 200. The CIT (A) confirmed the disallowance, noting that the TDS was paid late, and thus the expenditure was not admissible as a deduction.

The assessee argued that the TDS was deposited before filing the return of income and cited the decision of the Ahmedabad Tribunal in the case of Alpha Projects Society Ltd. The Tribunal referenced the decision of the Hon'ble Calcutta High Court in the case of Virgin Creators, which held that if TDS is deposited before filing the return, no disallowance under Sec. 40(a)(ia) is warranted.

The Tribunal remanded the issue to the A.O. for verification, directing the A.O. to examine if the TDS was deposited before filing the return of income. If confirmed, the deduction should be allowed. The Tribunal allowed this ground of the assessee for statistical purposes.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing a detailed analysis of the issues related to GP addition and disallowance under Sec. 40(a)(ia). The Tribunal emphasized the need for proper verification and adherence to legal precedents in determining the justifiability of additions and disallowances.