2015 (7) TMI 653 - AT - Income Tax

Net profit rate of 7.5% on the gross receipts - CIT(A) allowing the relief of ₹ 32,59,715/- out of the additions made on account of disallowance of lorry hire charges, salary to drivers, administrative expenses and lorry fuel Running and maintenance expenses - assessee submission that action of the learned CIT (A) in adopting profit rate of 7.5% of gross receipts is excessive - Held that - CIT(A) has referred to various Tribunal decisions wherein the Tribunal has approved the adoption of net profit rate of 7% of total turnover in one case, 7.5% in another case and 9.6% in some other case. It has been accepted that facts of each case are different and therefore, direction of CIT(A) to adopt 7.5% in the present case is reasonable in the facts of the present case and also in the light of these Tribunal decisions referred to by learned CIT(A). In this regard, it is also very relevant to notice that it is noted by the learned CIT(A) in Para 8.1 of his order that if the disallowance made by the A.O. is taken into account, the net profit rate of the assessee will go up to 44.77% which is unrealistically higher in the case of a transport contractor. He has also referred to the provisions of section 44AD, which are applicable in case of a transport contractor whose turnover is less than ₹ 40 lac and in those cases, net profit rate of 8% is prescribed. In the present case, the turnover of the assessee exceeds ₹ 2 crore and therefore, adoption of net profit rate of 7.5% in the facts of the present case is reasonable in view of the fact that the assessee is showing a very high amount of outstanding unpaid lorry hire charges, which are paid by way of cash payment in the next year in the month of April and May 2010 and this amount is ₹ 44.14 lac. Thus no infirmity in the order of learned CIT(A). - Decided against revenue and assessee. Addition on unexplained expenses - CIT(A) deleted the addition - Held that - We fail to understand that how the provision for income tax and audit fees payable can be added by invoking the provisions of section 68 of the Act. In this regard, it is observed by learned CIT(A) in Para 10.2 of his order that the recklessness of the Assessing Officer can be seen that even he has not verified the break-up of sundry creditors which included auditor s liability and provision for income tax and he has concluded that this shows that no application of mind has been made by the Assessing Officer and addition has been made without any substance. We are of the considered opinion that it is very rightly observed by learned CIT(A) in the facts of the present case that the action of the Assessing Officer is reckless and he has not applied his mind before making this addition. In our considered opinion, when CIT(A) has directed the Assessing Officer to adopt net profit rate of 7.5% and we have approved the same, separate addition made by the Assessing Officer on account of unpaid liability of lorry hire charges is not called for. The remaining two additions u/s 68 of ₹ 13,788/- on account of audit fees payable and ₹ 2,18,787/- on account of provision for income tax is without any basis and therefore, on this entire issue, we do not find any reason to interfere in the order of learned CIT(A).- Decided against revenue. Addition on account of difference between the expenses of salary claimed and actual payment made - CIT(A) deleted the addition - Held that - This disallowance was made by the Assessing Officer by making ad hoc 20% disallowance out of salary to staff of ₹ 3,81,400/-. The same was deleted by learned CIT(A) on the basis that as he has directed the Assessing Officer to estimate the profit of the assessee by applying 7.5% net profit rate of gross receipts, and hence, separate addition of this nature is not called for. We find no infirmity in the order of CIT(A) on this issue and therefore, this ground is also rejected.- Decided against revenue. Addition in contravention of provisions contained in section 40A(3) - cash payment above ₹ 20.000/- which was in contravention of provisions - CIT(A) deleted the addition - Held that - CIT(A) has referred to a judgment of CIT vs. Banwari Lal Banshidhar 1997 (5) TMI 37 - ALLAHABAD High Court wherein it was held that if the income of the assessee is estimated by applying net profit rate, no disallowance can be made with regard to lorry hire charges u/s 40A(3) of the Act. Thus we decline to interfere in the order of CIT(A) on this issue - Decided against revenue.

Summary

Issues Involved:
1. Application of net profit rate on gross receipts.
2. Deletion of addition on account of unexplained expenses.
3. Deletion of addition on account of difference between claimed and actual salary payments.
4. Deletion of addition on account of cash payments above Rs. 20,000 contravening section 40A(3).

Issue-wise Detailed Analysis:

1. Application of Net Profit Rate on Gross Receipts:
The Revenue contended that the Commissioner of Income-tax (Appeal) [CIT(A)] erred by applying a net profit rate of 7.5% on gross receipts, thereby allowing relief of Rs. 32,59,715/- out of additions made for disallowance of lorry hire charges, salary to drivers, administrative expenses, and lorry fuel running and maintenance expenses. The assessee argued that the 7.5% rate was excessive. The tribunal considered the rival submissions and upheld the CIT(A)'s decision, noting that the Assessing Officer (AO) had not conducted any inquiries and that the disallowance would result in an unrealistically high net profit rate of 44.77%. The tribunal found the 7.5% rate reasonable given the facts and previous tribunal decisions, rejecting both the Revenue's and assessee's grounds.

2. Deletion of Addition on Account of Unexplained Expenses:
The Revenue challenged the deletion of Rs. 46,47,454/- added for unexplained expenses. The tribunal noted that the major part of this amount was related to unpaid lorry hire charges, which the CIT(A) had already addressed by directing the AO to adopt a net profit rate of 7.5%. The tribunal also highlighted that the addition included provisions for income tax and audit fees, which should not have been added under section 68. The tribunal agreed with the CIT(A) that the AO's action was reckless and lacked application of mind, thus upholding the CIT(A)'s deletion of the addition.

3. Deletion of Addition on Account of Difference Between Claimed and Actual Salary Payments:
The Revenue contended the deletion of Rs. 85,700/- added due to a difference between claimed and actual salary payments. The tribunal found that this disallowance was made by the AO on an ad hoc basis and was rightly deleted by the CIT(A) since the net profit was already estimated at 7.5% of gross receipts. The tribunal found no infirmity in the CIT(A)'s order and rejected this ground.

4. Deletion of Addition on Account of Cash Payments Above Rs. 20,000 Contravening Section 40A(3):
The Revenue argued against the deletion of Rs. 4,49,913/- added due to cash payments above Rs. 20,000, which contravened section 40A(3). The tribunal referred to the judgment of the Hon'ble Allahabad High Court in CIT vs. Banwari Lal Banshidhar, which held that no disallowance under section 40A(3) can be made if income is estimated by applying a net profit rate. Respecting this judgment, the tribunal upheld the CIT(A)'s deletion of the addition.

Conclusion:
The tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, finding no reason to interfere with the CIT(A)'s order. The tribunal's decision was pronounced in the open court.