2016 (5) TMI 276 - AT - Income Tax

Disallowance of purchases - Held that - The assessee filed confirmations from both the concerns with their PAN and changed address. The assessee produced certificate from bank that the assessee made payments to those parties through account payee cheque, however could not produce the parties as the assessee was not having any business dealings during the assessment period, but the assessee requested the AO to enforce their attendance through section 133(6)/131 of the Act. The assessee also produced bills bearing the inward stamp of the proprietary concern, goods received note, fabric inspection reports in respect of purchases from those two parties. Thus, in our opinion, the assessee has demonstrated sufficient proof of genuineness of the purchases, and therefore the findings of the learned Commissioner of Income-tax( Appeals) on the issue in dispute are well reasoned and no interference on our part is required. - Decided against revenue Disallowance of expenditure incurred on foreign travel by the employees of the assessee concern - Held that - From the observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding of the learned Commissioner of Income-tax (Appeals) are well reasoned. Accordingly, we uphold his finding on the issue in dispute, hence the ground of the appeal is dismissed.- Decided against revenue Disallowance of the salary/incentives under section 40A(2)(b) - Held that - We find that the assessee submitted the qualification, experience and the services rendered by both the relatives of the assessee and demonstrated that the salary and incentive paid was not excessive or unreasonable having regard to the market value of the services and no finding were given by the Assessing Officer whether the payment was excessive or unreasonable having regard to the fair market value. We don t find any infirmity in the finding of the learned Commissioner of Income-tax(Appeals), on the issue is dispute, and thus, we uphold his finding on the issue in dispute - Decided against revenue Disallowance on electricity and water expenses - Held that - The fact of the tripartite agreement among the parties was not disputed by the ld DR and the Ledger account of the M/s Ess Aar essence confirmed that the party acted as contractor for fabrication of goods and washing and finishing of goods of the assessee and the assessee also deducted tax at source on the payments made to the party. In our view, the findings of the learned Commissioner of Income-tax( Appeals) on the issue in dispute are well reasoned and no interference on our part is required.- Decided against revenue Addition on account of estimation of gross profit by the AO after rejecting books of accounts of the assessee - Held that - The assessee has demonstrated the reasons for fall in gross profit rate and explained that there was no inconsistency in the inventory and also explained for non-maintenance of consumption of raw material as the assessee was engaged in production of garments for foreign buyers involving number of raw materials and multiple stages of production. The defects in respect of disallowance of unverifiable purchases, disallowances of electricity and water charges etc have already been rejected by us, and therefore in our considered opinion the rejection of books of accounts by the AO was not justified. The findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute are well reasoned and no interference on our part is required. - Decided against revenue

Issues Involved:

1. Deletion of disallowance of purchases amounting to ?1,08,66,524.
2. Deletion of disallowance of ?18,90,349 out of foreign travel expenses.
3. Deletion of disallowance of ?6,44,589 out of salary and incentive under Section 40A(2)(b).
4. Deletion of disallowance of electricity and water expenses of ?6,18,048.
5. Deletion of addition of ?1,90,43,902 on account of estimation of gross profit after rejecting books of accounts.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Purchases Amounting to ?1,08,66,524:

The Revenue challenged the deletion of disallowance of purchases from M/s Ma Durga Traders and M/s Vikas Udyog. The AO disallowed these purchases based on the inspector's report that the firms were not found at the given address and the occupant denied knowledge of these firms. The assessee provided affidavits, confirmations, PAN details, and proof of payments through cheques, but could not produce the parties for examination. The CIT(A) accepted the assessee's evidence, including purchase bills, goods receipt notes, and fabric inspection reports, and found the purchases genuine. The Tribunal upheld the CIT(A)'s findings, noting the sufficient proof of genuineness provided by the assessee.

2. Deletion of Disallowance of ?18,90,349 out of Foreign Travel Expenses:

The Revenue contested the deletion of the disallowance related to foreign travel expenses incurred by the assessee's employees, including her son and daughter-in-law. The AO disallowed a portion of these expenses, suspecting they were related to other family businesses. The CIT(A) confirmed part of the disallowance for travel to Doha but allowed the rest, noting that the other companies were not operational during the relevant period. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were justified and related to the assessee's business.

3. Deletion of Disallowance of ?6,44,589 out of Salary and Incentive under Section 40A(2)(b):

The Revenue challenged the deletion of disallowance under Section 40A(2)(b) for salary and incentives paid to the assessee's son and daughter-in-law. The AO disallowed 25% of these payments, suspecting they were excessive. The CIT(A) found no evidence that the payments were unreasonable or excessive and noted the qualifications and responsibilities of the employees. The Tribunal upheld the CIT(A)'s findings, agreeing that the payments were justified and not excessive.

4. Deletion of Disallowance of Electricity and Water Expenses of ?6,18,048:

The Revenue contested the deletion of disallowance for electricity and water expenses paid to a related concern. The AO disallowed these expenses based on a lease agreement stating a monthly rent inclusive of electricity charges. The assessee provided a tripartite agreement showing shared electricity expenses with a contractor. The CIT(A) accepted this evidence and deleted the disallowance. The Tribunal upheld the CIT(A)'s decision, noting the validity of the tripartite agreement and the justification for the expenses.

5. Deletion of Addition of ?1,90,43,902 on Account of Estimation of Gross Profit:

The Revenue challenged the deletion of the addition made by the AO after rejecting the assessee's books of accounts and estimating gross profit. The AO observed a fall in gross profit rate and other discrepancies, leading to the rejection of books and estimation of gross profit. The CIT(A) found the reasons for the fall in gross profit rate justified, noted the global recession's impact, and found no inherent defects in the books of accounts. The Tribunal upheld the CIT(A)'s findings, agreeing that the rejection of books and the gross profit estimation were not justified.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s findings on all issues. The decision was pronounced in the open court on 30th March 2016.

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