2019 (3) TMI 1456 - AT - Income Tax

Trading addition - books of accounts rejected by invoking of provisions of section 145(3) - AO estimated the G.P rate of 16.47% on the declared turnover of the assessee and which has been upheld by the ld CIT(A) - HELD THAT - It is a settled legal proposition that mere rejection of books of accounts are not sufficient to hold that the trading additions have to be necessarily made in the hands of the assessee company. Where the assessee company has declared a better trading results as compared to previous years, such results provide a reasonable basis to hold that there should not be any addition in the hands of the assessee company. The trading addition so made by the AO and so confirmed by the ld CIT(A) are hereby directed to be deleted and the trading results so declared by the assessee are directed to be accepted. The issue regarding rejection of books of accounts so raised by the assessee thus becomes academic and we donot deem it appropriate to adjudicate the same on merits. Addition of 10% of telephone, conveyance & car maintenance expenses - CIT(A) confirmed the addition so made (except the addition on account of depreciation) holding that the assessee has failed to file any evidence which established that the observation made by AO are not correct - HELD THAT - These are purely adhoc addition made by the Assessing Officer which cannot be sustained in eyes of law. It is not the case of the Revenue that these are bogus expenditure or the expenditure has not been incurred for the purposes of business. A mere suspicion that given the nature of expenses, it is likely that incurrence of such expenditure is for non-business purposes, in our view, cannot be a basis for making the addition in the hands of the assessee. Accordingly, the adhoc addition so made is hereby directed to be deleted. Disallowance of 10% of the labour and staff welfare expenses - expenses are not fully supported by the proper bills/evidences and payments in some cases were made in cash on self made vouchers due to which these expenses could not be verified completely and 10% of such expenses were disallowed which was sustained by the ld CIT(A) - HELD THAT - The addition is again adhoc in nature and the same cannot be sustained in the eyes of law and is hereby directed to be deleted - Appeal of assessee allowed.

Summary

Issues:
1. Rejection of books of account and trading addition of ?2,00,000.
2. Disallowance of 10% of telephone, conveyance, and car maintenance expenses.
3. Disallowance of 10% of labour, staff welfare, and office expenses.

Analysis:

Issue 1: Rejection of books of account and trading addition of ?2,00,000:
The appellant, engaged in garment manufacturing and export, appealed against the rejection of books of accounts and a trading addition of ?2,00,000. The Assessing Officer rejected the books due to discrepancies, leading to a lump sum addition. The CIT(A) upheld this decision. The appellant argued for the deletion of the addition, citing an increase in turnover and gross profit rate over the years. They maintained proper accounting standards and inventory valuation. The tribunal noted that rejection of books requires income assessment based on best judgment. The AO made an ad hoc addition without considering past history, which was deemed unreasonable. The tribunal directed the deletion of the trading addition, as the appellant's better trading results compared to previous years provided a reasonable basis for not making the addition.

Issue 2: Disallowance of 10% of telephone, conveyance, and car maintenance expenses:
The appellant challenged the disallowance of 10% of these expenses, arguing that they were used for business purposes. The AO and CIT(A) upheld the disallowance based on lack of evidence. The tribunal deemed these additions ad hoc and lacking legal basis, directing their deletion. Mere suspicion of non-business use is insufficient for such disallowances.

Issue 3: Disallowance of 10% of labour, staff welfare, and office expenses:
The appellant contested the disallowance of 10% of these expenses, which the AO attributed to lack of proper bills and cash payments. The tribunal found these disallowances ad hoc and lacking legal basis. The disallowance was directed to be deleted, as unsupported expenses cannot be a sole reason for such deductions.

In conclusion, the tribunal allowed the appeal, directing the deletion of all challenged additions. The judgment emphasized the need for reasoned and evidence-based assessments, rejecting arbitrary ad hoc additions unsupported by concrete evidence.