2013 (11) TMI 426 - AT - Income Tax

Disallowance u/s 40A(3) of the Income tax act - Sweeping statements have been made that most of these payments are exceeding Rs. 20,000/- - Held that - Authorities below have not identified the payments which were exceeding Rs. 20,000/- which have been said to be incurred in contravention of section 40A(3) - As regards, the other expenditure on electric items & air conditioners, considerable cogency in the assessee s counsel submission that these related to capital purchase and hence, cannot be treated as payments in violation of section 40A(3) - There is no case of addition of section 40A(3) with regard to purchases that were made on account of capital items. However, for making any addition in this regard it was incumbent upon the lower authorities to make out the detailed list of expenditure which was found to be in violation of section 40A(3) Issue remanded to the file of AO for fresh examination whether the cash payments were made out of the books of accounts. Rejection of books of accounts u/s 145(3) of the Income Tax Act Addition of Rs.1.5 Crores Held that - Assessee has given detailed explanation regarding the books of accounts and stocks records maintained. Assessee has asserted that AO never asked about the books of accounts. These submissions were before the LD. CIT(A) but were not verified by the LD. CIT(A). Without considering these submissions, LD. CIT(A) has accepted the AO s finding that books of accounts were not properly maintained - Tribunal in the order for A.Y. 2008-09 has also noted that assessee has maintained proper books of accounts and the system of accounting was under the ERP system - Assertions by the AO that books of accounts and stocks were not properly maintained is not sustainable and hence, this reason for rejection of books of accounts is accordingly not sustainable. AO has rejected the books of accounts u/s. 145(3) of the I.T. Act which is without any basis or justification or even without examination of the books of accounts. While making the lumpsum addition of Rs. 1.5 crore, the AO has not given the basis or justification of the same - No valid basis for addition of Rs. 1.5 crore has been pointed out. It is a pure guess work without any calculation. AO has observed that addition of Rs. 1.5 crore was made to cover up all possible leakages and hence, lumpsum addition of Rs. 1.5 crore was made. Thus, no basis or justification to arrive at the amount of addition Decided in favor of Assessee.

Summary

Issues Involved:
1. Justification of the lump sum trading addition of Rs. 1,50,00,000/-.
2. Invocation of provisions of Section 145(3) of the Income Tax Act.
3. Addition of Rs. 23,43,565/- under Section 40A(3) of the Income Tax Act.
4. Addition of Rs. 1,75,273/- under Section 40A(3) of the Income Tax Act for cash payments towards capital expenses.
5. Validity of the order framed against the facts of the case.

Detailed Analysis:

1. Justification of the Lump Sum Trading Addition of Rs. 1,50,00,000/-:
The Assessee contended that the Authorities made an unjustified lump sum trading addition of Rs. 1,50,00,000/- based on assumptions and presumptions. The Assessee maintained detailed submissions justifying the gross profit results and proper stock records, and all purchases and sales were duly vouched. The Authorities ignored these submissions and made the addition purely on surmises and conjectures. The Tribunal noted that the Assessee maintained proper books of accounts under the ERP system and provided reconciliation of opening and closing stock. The Tribunal found no substantial basis for the lump sum addition and concluded it was made without any valid justification or calculation.

2. Invocation of Provisions of Section 145(3) of the Income Tax Act:
The Assessing Officer (AO) invoked Section 145(3) due to discrepancies noted during a survey, including cash discrepancies, differences in trial balance, a drop in gross profit, and a lack of quantitative details of purchase, sales, and stock. The Assessee argued that the books of accounts were maintained correctly, and the discrepancies were due to pending entries and reconciliation with banks. The Tribunal found that the Assessee provided plausible explanations for the discrepancies, and the Authorities did not properly consider these explanations. The Tribunal held that the reasons for invoking Section 145(3) were not cogent and sustainable.

3. Addition of Rs. 23,43,565/- under Section 40A(3) of the Income Tax Act:
The AO made an addition of Rs. 23,43,565/- for cash payments exceeding Rs. 20,000/- in contravention of Section 40A(3). The Assessee contended that the cash deficit pertained to the financial year 2008-09, not the assessment year 2008-09. The Tribunal noted that the cash deficit was explained and reconciled, and the AO did not dispute the correctness of the reconciliation. The Tribunal remitted the issue to the AO to examine whether these expenditures were accounted for in the financial year 2007-08 and to identify payments exceeding Rs. 20,000/-.

4. Addition of Rs. 1,75,273/- under Section 40A(3) of the Income Tax Act for Cash Payments Towards Capital Expenses:
The AO disallowed cash payments of Rs. 63,771/-, Rs. 84,702/-, and Rs. 27,250/- for capital expenses, arguing they were in contravention of Section 40A(3). The Assessee argued that these were capital purchases and not business expenses. The Tribunal found cogency in the Assessee's submission that these related to capital purchases and hence could not be treated as payments in violation of Section 40A(3). The Tribunal remitted the issue to the AO to examine the nature of these expenditures.

5. Validity of the Order Framed Against the Facts of the Case:
The Assessee argued that the order framed was against the facts of the case and bad in law. The Tribunal found that the Assessee provided detailed explanations for the discrepancies noted by the AO, which were not properly considered by the Authorities. The Tribunal concluded that the rejection of books of accounts and the resultant lump sum addition were not justified, and the order was set aside.

Conclusion:
The Tribunal allowed the Assessee's appeal, finding that the reasons for the rejection of books of accounts and the lump sum addition were not cogent. The Tribunal remitted certain issues to the AO for further examination and provided detailed reasoning for setting aside the Authorities' orders.