2016 (6) TMI 46 - AT - Income Tax

Rejection of Books of accounts and estimation of G P - Held that - The assessee has failed to place on record material evidence to controvert the findings of the learned CIT(A) on the issue of rejection of books and estimation of G.P. In this view of the matter, we are of the considered opinion that there is no cause for us to interfere with or deviate from the decision of the learned CIT(A) and therefore uphold his findings on rejection of the assessee s books of account and the estimation of G.P. @0.5% consequently leading to the addition of ₹ 29,67,013/- - Decided against assessee. Disallowance of Expenditure on salary - Held that - The assessee has failed to place on record any material evidence to controvert the findings of the learned CIT(A) on the issue of disallowance of expenditure of ₹ 3,00,000/- claimed as paid as salary to two employees by the assessee. In this view of the matter, we are of the considered opinion that there is no cause for us to interfere with or deviate from the decision of the learned CIT(A) on this issue and therefore conform and uphold the same. - Decided against assessee.

Issues Involved:
1. Rejection of Books of Accounts and Estimation of Gross Profit (G.P.)
2. Disallowance of Salary Expenses under Section 40A(3) of the Income Tax Act

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Gross Profit (G.P.):
The assessee, engaged in the retail trade of diamonds, filed a return declaring an income of ?8,42,531/-. The Assessing Officer (AO) completed the assessment under section 143(3) of the Income Tax Act, 1961, determining the income at ?41,95,542/- due to various additions and disallowances, including an addition of ?29,67,013/- on account of low G.P. The AO observed that the assessee showed a G.P. ratio of 0.26%, which was achieved only due to an exchange gain difference of ?1,57,59,827/- and without which the assessee would have suffered a significant loss. The AO also noted that the stock register was maintained quantity-wise and not quality-wise, leading to the rejection of the books of accounts and estimation of G.P. at 0.5%.

The CIT(A) upheld the AO's decision, noting that the assessee failed to provide satisfactory explanations for the sharp decrease in profits and the method of keeping proper stock records. The CIT(A) found the estimation of G.P. at 0.5% reasonable and confirmed the addition of ?29,67,013/-. The Tribunal agreed with the CIT(A)'s findings, emphasizing that the assessee did not bring any material evidence to controvert the findings. Therefore, the Tribunal upheld the rejection of the books of accounts and the estimation of G.P. at 0.5%, leading to the addition of ?29,67,013/-.

2. Disallowance of Salary Expenses under Section 40A(3) of the Income Tax Act:
The AO disallowed salary expenses of ?3,00,000/- paid to two employees, Mahesh Verma and Milind Dighe, under section 40A(3), noting discrepancies in the payment process and the higher rate of salary compared to other employees. The AO observed that the payments were initially made as advances and later transferred to the salary account through journal entries. The CIT(A) upheld the disallowance, finding that the assessee failed to provide documentary evidence to justify the higher salaries and the advance payments.

The Tribunal agreed with the CIT(A)'s findings, noting that the assessee did not submit sufficient evidence to prove the genuineness of the salary expenses. The Tribunal emphasized that the disallowance was justified as the assessee could not provide any material evidence to counter the findings. Therefore, the Tribunal upheld the disallowance of ?3,00,000/- under section 40A(3).

Conclusion:
The Tribunal dismissed the assessee's appeal for A.Y. 2011-12, upholding the rejection of the books of accounts and the estimation of G.P. at 0.5%, as well as the disallowance of salary expenses under section 40A(3). The Tribunal found no cause to interfere with the CIT(A)'s decisions on these issues.

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