2014 (11) TMI 398 - AT - Income Tax

Adhoc disallowance of expenditure Held that - Assessee is able to furnish necessary purchases, sales details and books of accounts were not rejected - in the absence of any incriminating material, general disallowance of expenditure at 50% as was done by AO cannot be sustained - no disallowance can be made in those years as assessee has filed regular returns earlier and those were accepted - there was a scrutiny assessment for AY 2004-05 in which assessee s books of accounts were accepted without any disallowance - there is justification in assessee s additional ground and the grounds raised at disallowance of 25% of claim in these assessment years Decided in favour of assessee. Considering assessee s turnover and nature of expenditure involved, the disallowance can be restricted to 10% of the expenditure claimed, being personal in nature as assessee s business is done in a proprietary concern the order of the CIT(A) is modified that from disallowance of 25% on expenditure 10% of the expenditure is allowed Decided partly in favour of assessee. Cash credits Held that - Credit in the case of Mr. K. Panduranga Reddy who is an income tax assessee with PAN AOWPK1766P required re- examination thus, the matter is restored to the file of AO for examination Decided in favour of assessee. Loss on trading Held that - CIT(A) was rightly of the opinion that there was nothing wrong on the part of assessee to enter into forward contract transaction to protect his business interests - assessee has entered into forward contract transactions as assessee is dealing with bullion market where the fluctuations are on a daily basis - Since Ld. CIT(A) examined the transactions and also gave a finding that these are forward contract transactions to care against loss through the price fluctuations, the same is eligible to be treated as business loss and is covered by the proviso to section 43(5) Decided against revenue. Addition of GP Held that - Revenue could not justify why gross profit addition has to be resorted without rejecting books of accounts - In fact, it is a search case and all the books of accounts and data were also impounded/seized by Revenue - In the absence of any incriminating material or in the absence of any other details, there is no justification for resorting to gross profit addition the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Adhoc Disallowance of Expenditure
2. Cash Credits
3. Loss on Trading
4. Addition of Gross Profit
5. Credit for Cash Seized While Calculating Interests

Adhoc Disallowance of Expenditure:

The major disallowance in the impugned years (A.Y. 2002-03 to 2008-09) was 50% of the expenditure claimed in the P&L account by the Assessee. The A.O. disallowed 50% of the claim due to lack of evidence. The Ld. CIT(A) reduced this disallowance to 25%, excluding expenses on chit loss, bank interest, and depreciation. The Assessee argued that routine disallowance cannot be made in search assessments without incriminating material. The Tribunal found merit in this argument, stating that general disallowance of expenditure without incriminating material is not sustainable. Consequently, the Tribunal allowed the Assessee's grounds for A.Ys. 2002-03 to 2005-06 and partly allowed for A.Ys. 2006-07 to 2008-09, reducing disallowance to 10% for these years.

Cash Credits:

The Ld. CIT(A) sustained cash credits of Rs. 2,75,000 in A.Y. 2006-07 and Rs. 8 lakhs in A.Y. 2008-09. The Tribunal noted that the Ld. CIT(A) had accepted the genuineness of most cash credits except for Mr. K. Panduranga Reddy, Mr. Bajranglal Agarwal, and Mr. A. Srinivasarao. The Tribunal directed the A.O. to re-examine the creditworthiness of Mr. K. Panduranga Reddy and confirmed the addition of Rs. 2,75,000 in A.Y. 2006-07 due to lack of confirmations for credits from Mr. Bajranglal Agarwal and Mr. A. Srinivasarao.

Loss on Trading:

The Revenue contested the Ld. CIT(A)'s decision to allow the loss claimed by the Assessee in A.Y. 2007-08 as a business loss instead of a capital loss. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the Assessee's transactions in the hedging business of gold were to guard against loss through future price fluctuations, thus qualifying as business loss under section 43(5) of the I.T. Act. The Tribunal referenced the Bombay High Court judgment in CIT vs. Ramchandra Shivnarain.

Addition of Gross Profit:

The A.O. had made an addition on account of gross profit for A.Y. 2007-08 and 2008-09, citing low gross profit percentages compared to earlier years. The Ld. CIT(A) deleted these additions, noting the substantial increase in turnover in these years and the A.O.'s failure to reject the books of accounts. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that there was no justification for gross profit addition without rejecting the books of accounts.

Credit for Cash Seized While Calculating Interests:

The Assessee raised an additional ground for A.Ys. 2006-07 to 2008-09, arguing that the A.O. should have adjusted seized cash towards tax payments, thus affecting the calculation of interest under section 234A and 234B. The Tribunal admitted the legal claim and restored the issue to the A.O. for examination, directing the A.O. to consider whether the seized cash could be credited towards self-assessment or advance tax for the respective assessment years.

Conclusion:

The Tribunal allowed the Assessee's appeals for A.Y. 2002-03 to 2005-06, partly allowed for A.Y. 2006-07 to 2008-09, and dismissed the Revenue's appeals for A.Ys. 2002-03 to 2008-09.

Order pronounced in the open Court on 05.11.2014.