2019 (4) TMI 47 - AT - Income Tax

GP Estimation - G.P. rate determination - AO rejected the books of account on the plea that the stock records are not maintained and in respect of some of the suppliers notices issued u/s 133(6) was returned unserved - HELD THAT - Mere rejection of books of account will not entitle the AO to make the trading addition unless the trading results offered by the assessee during the year under consideration are not comparative as compared to the earlier years. Even after rejection of books of account, addition can be made only on the basis of material on record. In the instant case, we found that during the year under consideration, the assessee had shown G.P. rate of 5.35% on a turnover of ₹ 51.86 crores for the year under consideration as against the G.P. of 5.26% on turnover of ₹ 45.65 crores in the A.Y. 2013-14 and 3.18% on a turnover of ₹ 33.16 crores in the A.Y. 2012-13. A trading result even after substantial increase in sale is much better than the G.P. rate of earlier two years. Accordingly, no justification for the trading addition so made by the AO. Ad hoc disallowances in respect of telephone, travelling and vehicle expenses etc. - HELD THAT - Ad hoc basis by observing that a personal element cannot be ruled out. In this regard we observe that the assessee being a corporate entity, no disallowance can be made on the ground of personal use in view in the case of Sayaji Iron & Engg. Co. vs. Commissioner of Income-tax 2001 (7) TMI 70 - GUJARAT HIGH COURT . Accordingly, we direct the Assessing Officer to delete the ad hoc disallowance of expenses of ₹ 45,088/-.

Summary

Issues:
1. Jurisdiction of lower authorities in making assessment.
2. Invocation of Section 145(2) and trading addition.
3. Disallowance of expenses based on personal element.
4. Justification for trading addition by Assessing Officer.
5. Disallowance of expenses of &8377; 45,088.

Jurisdiction of Lower Authorities:
The appeal was filed against the order of the ld.CIT(A) for the A.Y. 2014-15 under Section 143(3) of the Income Tax Act, 1961. The appellant contended that the lower authorities lacked jurisdiction in making the assessment. The Assessing Officer had rejected the books of account under Section 145(3) of the Act and made a trading addition of &8377; 7,76,198. The ld. CIT(A) confirmed this action, leading to the further appeal.

Invocation of Section 145(2) and Trading Addition:
The Assessing Officer invoked Section 145(3) due to unsatisfactory replies from suppliers regarding brokerage, rebate, discount, and processing expenses. The rejection of books of account was based on the lack of proper stock register maintenance and returned unserved notices to suppliers. However, the Tribunal found that the trading results offered by the assessee were comparative to earlier years, with a higher Gross Profit (G.P.) rate of 5.35% in the year under consideration. Consequently, the Tribunal held that the trading addition made by the Assessing Officer was unjustified.

Disallowance of Expenses Based on Personal Element:
The Assessing Officer had disallowed expenses of &8377; 45,088, including telephone, traveling, and vehicle expenses, on an ad hoc basis, citing a personal element. The Tribunal referred to a decision by the Hon’ble Gujarat High Court, stating that no disallowance can be made for personal use by a corporate entity. Thus, the Tribunal directed the Assessing Officer to delete the ad hoc disallowance of expenses.

Justification for Trading Addition by Assessing Officer:
The Assessing Officer's rejection of books of account was primarily due to improper stock record maintenance and unserved notices to suppliers. The ld. DR argued in favor of the Assessing Officer's actions. However, the Tribunal found that the rejection of books of account alone does not warrant a trading addition unless the trading results offered by the assessee are not comparative to previous years. Given that the G.P. rate for the year under consideration was better than the earlier years, the Tribunal concluded that the trading addition was unwarranted.

Disallowance of Expenses of &8377; 45,088:
The Tribunal observed that the ad hoc disallowances made by the Assessing Officer for expenses like telephone, traveling, and vehicle expenses were not justified. Citing a decision of the Hon’ble Gujarat High Court, the Tribunal directed the Assessing Officer to delete the ad hoc disallowance of expenses amounting to &8377; 45,088.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the lack of justification for the trading addition and the improper disallowance of expenses based on personal elements.