2018 (12) TMI 411 - HC - Income Tax

Addition being 5% of the turnover - assessment completed under Section 143(3) - inflation of expenses - Held that - It cannot be ruled out that the assessee has not inflated the expenses, however, found fault with the Assessing Officer in adopting 5%, pointing out that it is on higher side and directed the Assessing Officer to adopt 2.5%. The order passed by the Assessing Officer as well as the Tribunal are wholly erroneous. A low gross profit rate can at best be a reason for making an enquiry, but it cannot be a sole basis for making an addition. In Symphony Comfort System Ltd. 2013 (10) TMI 258 - GUJARAT HIGH COURT held that the Assessing Officer cannot make addition merely by comparing the expenditure with preceding year s expenditure, which precisely was done by the Assessing Officer in the instant case, while he passed the assessment order dated 20.12.2016. Thus, we are fully convinced that the addition made by the Assessing Officer was rightly deleted by the CIT (Appeals) and the Tribunal fell in error in interfering with the said order and by way of a guess work reducing to 2.5% without any material before it. Thus, for the above reasons, the order passed by the Tribunal calls for interference. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Appeal against ITAT order under Section 260-A of the Income Tax Act, 1961 for AY 2014-15.
2. Substantial Questions of Law raised regarding modification of AO's order, disallowance of expenses, and assessment principles.
3. Justification of Tribunal's reversal of CIT(A)'s deletion of addition based on turnover percentage.

Analysis:
The appeal before the Madras High Court challenged the ITAT order for the Assessment Year 2014-15. The appellant raised substantial questions of law questioning the correctness of ITAT's modifications to the AO's order, specifically regarding the nonspeaking order, arbitrary disallowance of expenses without substantiation, and rejection of settled judicial principles in assessment. The core issue examined was the justification of the Tribunal's reversal of the CIT(A)'s deletion of an addition based on turnover percentage. The AO had added 5% of turnover due to perceived inflated expenses by the assessee. However, the assessee provided supporting documents, which the AO did not consider in the assessment order. The CIT(A) deleted the addition citing lack of basis for the increase, supported by legal precedents against arbitrary additions. The Tribunal, while not ruling out expense inflation, faulted the AO for adopting a 5% turnover increase and directed a reduction to 2.5%.

The High Court found both the AO and Tribunal's orders erroneous, emphasizing that a low gross profit rate should prompt an inquiry but not serve as the sole basis for additions. Citing legal precedents, the Court highlighted that mere comparison with previous year's expenditure, as done by the AO, was insufficient for additions. Ultimately, the Court concluded that the addition made by the AO was rightly deleted by the CIT(A), criticizing the Tribunal's reduction to 2.5% as guesswork without proper basis. Consequently, the Court allowed the appeal, setting aside the ITAT order and restoring the CIT(A)'s decision in favor of the assessee, answering the substantial questions of law in their favor.