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2018 (10) TMI 1166 - AT - Income TaxAddition on low gross profit earned - fall in GP ratio over the last three years - inventory at substantially lower valuation - assessee is in the business of manufacturing & trading of tobacco products and raw tobacco - Held that - The assessee did not presented any cogent evidences to corroborate its contention as to bumper crop of tobacco and its prices crashing owing to bumper crop. None of the authorities below have also verified the claim of the assessee as to bumper crop and crash in prices and there is no evidence on record to justify such contention except quotations all dated 02-04-2010 from three traders/ agents proposing to buy different varieties of tobacco from the assessee at a particular price which is claimed by the assessee to be substantially lower prices due to bumper crop of tobacco. These quotations in the absence of corroborative evidence does not inspire confidence. The bonafide of change in method of valuation of raw material from cost basis to cost or market value whichever is lower has not been explained by the assessee. The method adopted by the assessee for valuing raw material held as closing stock is in variance to what is stated by tax-auditor to be method of valuation of stock. None of the authorities below have made any enquiry or verifications as to contentions/ evidences filed by the assessee and no verification of the claim of the assessee was undertaken. In the immediately preceding year i.e. AY 2009-10, the assessment was framed by Revenue u/s 143(3) r.w.s. 153A vide assessment orders dated 31.12.2010 pursuant to search conducted by Revenue on 29.04.2008 against the assessee u/s 132(1) wherein additions have been made towards discrepancies in the stock wherein at different locations/ premises belonging to the assessee excess physical stock was found to the tune of ₹ 13.01 lacs while at the same time, in some of the locations/premises belonging to the assessee, excess book stock to the tune of ₹ 55.76 lacs was found. The rollover impact of such addition made by the AO in assessment of the AY 2009-10 to the year under consideration as was done by the assessee is not looked into by authorities below nor the authorities below looked into as to how the assessee adjusted said discrepancies in stock in its books of accounts which found itself manifested in AO making additions for said discrepancies in stock while framing assessment u/s 143(3) r.w.s. 153A. Thus we are of the considered view that the issue arising in this matter need to be set aside and restored to the file of the AO for fresh denovo determination of the issue on merits in accordance with law - Decided in favour of revenue for statistical purposes. Payment made to Hanifa School which is being run by a Trust - allowable business expenditure - Held that - On being asked by the Bench about the details of the employees children who were studying in the school during the relevant period and other details concerning the school such as location of the school and other school in the vicinity, total children studying in the school, details of children of employees who were studying in the said school etc. so as to justify and prove direct nexus of these expenses with business of the assessee so as to prove that these expenses were wholly and exclusively incurred for the business and the assessee. Assessee submitted that presently these details are not readily available on record but if an opportunity is granted by setting aside and restoring the matter to the file of the AO for framing denovo fresh assessment, the assessee will produce all the records before the AO which AO can verify - Thus set aside and restore this issue back to file of the AO to enable assessee to prove with cogent evidences that these expenses were incurred wholly and exclusively for the purposes of business of the assessee. Thus is emerging from records with a view to render complete justice to both the rival parties, we are of the considered view that the matter need to be set aside and restored to the file of the AO for framig denovo fresh assessment. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Addition of ?3,35,68,481 on account of low Gross Profit (GP) by the Assessing Officer (AO). 2. Disallowance of ?19,59,268 for Staff Welfare Educational Benefit expenses under Section 40A(9) read with Section 40A(1) of the Income Tax Act. Detailed Analysis: 1. Addition on Account of Low Gross Profit: Facts and Contentions: - The AO observed a significant decrease in the GP ratio for the assessment year 2010-11 compared to previous years. The GP ratio fell from 24.61% in AY 2008-09 and 16.09% in AY 2009-10 to 7.92% in AY 2010-11. - The assessee attributed the fall in GP ratio to a bumper crop of tobacco, leading to excess supply and a crash in prices, resulting in lower valuation of closing stock. - The AO was not satisfied with the explanation and made an addition by estimating the GP ratio at 16%, leading to an addition of ?3,35,68,481. CIT(A) Decision: - The CIT(A) deleted the addition, stating that the AO did not point out any flaws in the valuation of the closing stock or the books of accounts. - It was noted that the AO did not reject the books of accounts before making the addition, which is necessary for such a determination. Tribunal's Findings: - The Tribunal observed that the assessee failed to provide substantial evidence to support the claim of a bumper crop and crash in prices. - The method of valuation of raw material was inconsistent with what was reported in the tax audit report. - The Tribunal noted discrepancies in stock found during a search in the previous year, which were not considered by the authorities. - The Tribunal set aside the issue to the AO for fresh determination, directing the AO to conduct necessary verifications and provide proper opportunity to the assessee to present evidence. 2. Disallowance of Staff Welfare Educational Benefit Expenses: Facts and Contentions: - The assessee claimed ?19,59,268 as expenses for the education of employees' children at Hanifa School, run by a trust, as business expenses under the head "Staff Welfare Educational Benefit." - The AO disallowed the claim, stating that the assessee failed to prove that the school was exclusively for employees' children and that no fees were collected from outsiders. - The AO treated the expenses as donations, which are not allowable under Section 40A(9) read with Section 40A(1). CIT(A) Decision: - The CIT(A) upheld the AO’s decision, stating that the payments were donations to the trust and not business expenses. - The CIT(A) held that such expenses are prohibited by Section 40A(9) of the Income Tax Act. Tribunal's Findings: - The Tribunal noted that the assessee did not provide sufficient details to justify the claim of business nexus and commercial expediency. - The Tribunal set aside the issue to the AO for fresh assessment, directing the assessee to produce relevant records to prove that the expenses were incurred wholly and exclusively for business purposes. - The Tribunal emphasized the need for the AO to provide proper opportunity to the assessee to present evidence and adjudicate the matter on merits. Conclusion: Both the appeals filed by the Revenue and the assessee were allowed for statistical purposes. The Tribunal remanded the issues back to the AO for fresh consideration, directing the AO to conduct necessary verifications and provide adequate opportunity to the assessee to present evidence in support of their claims.
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