2014 (7) TMI 126 - AT - Income Tax

Low gross profit, un-vouched expenses, unexplained expenses and valuation of stock Held that - The AO has not specifically rejected the books of accounts or made any adverse comments - there is a finding by the AO that the vouchers produced by the assessee in support of the expenditure claimed are mostly self-made vouchers - The CIT (A) has restricted the disallowance to 10 lakh by observing that the AO has rejected the books of accounts and the expenditure claimed by the assessee are not supported by bills and vouchers - considering the claim of the assessee that all the expenditures are supported by genuine bills and vouchers and books of accounts have been correctly maintained which can be proved by the assessee, the matter is required to be remitted back to the AO for verification Decided in favour of Assessee. Addition u/s 40A(3) of the Act Held that - The AO has clubbed together payments made on 8th Aril, 2008 and 9th April, 2008 to treat it as single payment of ₹ 20,500 so as to bring it within the purview of section 40A(3) - When other instances of clubbing of payments made on successive days are also filed from the ledger extracts - the AO cannot club together payments made on two different dates as one payment so as to bring within the purview of section 40A(3) of the Act - the claim of the assessee is required to be verified which has not been properly done either by the AO or by the CIT (A) thus, the matter is to be remitted back to the AO for examination Decided in favour of Assessee. Restriction of deduction u/s 80G of the Act Held that - The receipt is in the name of two persons i.e., the assessee and one Sri Kedia - the contention of the assessee is that the cheque for ₹ 1 lakh was entirely paid by the assessee from his bank account - reference to the order passed u/s 80G, a copy of which reveals that the institution to which donation was paid has been registered u/s 80G of the Act - if the assessee as claimed by him, has issued a cheque from his bank account for ₹ 1 lakh, only because the receipt is in the name of the assessee and another person, the claim of deduction u/s 80G cannot be restricted to 50,000/- in place of ₹ 1 lakh thus, the matter is liable to be remitted back to the AO for verification Decided in favour of Assessee.

Summary

Issues Involved:
1. Addition of Rs. 10 lakh on account of low gross profit, un-vouched expenses, unexplained expenses, and valuation of stock.
2. Addition of Rs. 4,35,220 under Section 40A(3) of the Income Tax Act.
3. Restriction of deduction claimed under Section 80G of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10 lakh on account of low gross profit, un-vouched expenses, unexplained expenses, and valuation of stock:
The assessee, engaged in the manufacture and sale of castor oil and cotton oil, declared a gross profit of Rs. 34,90,041 on a turnover of Rs. 33,06,60,497, equating to 1.06%. The Assessing Officer (AO) found this low compared to previous years, estimating a gross profit of Rs. 41,99,381 at a rate of 1.28%, resulting in an addition of Rs. 7,09,346. Further additions included un-vouched expenditure, payments under Section 40A(3), donations, excess purchase payments, quality differences, interest payments, and closing stock valuation. The CIT (A) restricted the total disallowance to Rs. 10 lakh. The assessee contended that all expenditures were supported by genuine vouchers and bills, and the AO did not reject the books of accounts or find discrepancies. The Tribunal found that the AO did not specifically reject the books but noted that many vouchers were self-made. The CIT (A) incorrectly stated that the books were rejected. The Tribunal remitted the matter to the AO for verification, allowing the assessee to substantiate the entries with proper evidence.

2. Addition of Rs. 4,35,220 under Section 40A(3) of the Income Tax Act:
The AO disallowed Rs. 4,35,220 under Section 40A(3) for cash payments exceeding Rs. 20,000, made for fuel expenses. The assessee argued that the payments were for firewood from unregistered dealers who insisted on cash payments, often made after banking hours. The Tribunal noted that the AO clubbed payments made on successive days to exceed Rs. 20,000, which was incorrect. The Tribunal remitted the issue back to the AO to verify the nature of the payments and whether they were for firewood, ensuring proper examination and providing the assessee an opportunity to explain.

3. Restriction of deduction claimed under Section 80G of the Income Tax Act:
The AO restricted the deduction under Section 80G to Rs. 25,000, as the donation receipt for Rs. 1 lakh was in the names of the assessee and another person. The assessee claimed to have paid the entire amount. The CIT (A) directed the AO to verify the receipt and the trust's registration under Section 80G. The Tribunal noted that the donation receipt was in the names of two persons, but the assessee claimed to have issued the cheque from his bank account. The Tribunal remitted the issue back to the AO to verify the bank account and allow the deduction if the payment was made by the assessee.

Conclusion:
The appeal was allowed for statistical purposes, with all three issues remitted back to the AO for further verification and proper examination, ensuring the assessee is given adequate opportunity to present evidence.