2021 (7) TMI 797 - AT - Income Tax

Addition on account of low G.P. declared by assessee - HELD THAT - AO cannot question the rate of profit declared by assessee until and unless he detects some defects in the books of account. Once the books of account are found to be the representing true and correct affairs of business the Assessing Officer cannot tinker with the actual profit declared by the assessee. In the case in hand, AO has duly recorded in the assessment order that books of account along with bills and vouchers were produced for examination and the AO has examined the same as test check. Once the books of account and other supporting evidence were examined by AO and no defect was found by him then low profit outcome of the business activity cannot be a reason for addition. AO can very well conduct an enquiry to find out the reasons for low G.P. declared by assessee in comparison to the preceding year but low G.P declared by assessee cannot be a basis or ground for making the addition. Once the AO did not detect any mistake in the books of account the adoption of higher G.P. rate by Assessing Officer for the making addition is unjustified and not sustainable. Decided in favour of assessee. Adhoc disallowance of expenses by AO@ 25% - addition of expenses under the head of Shop Expenses, Travelling Expenses and Vehicle Running and Maintenance Expenses for want of voucher and verification - Addition restricted by CIT(A) of 12.5% - HELD THAT - The reason for disallowance is cited by Assessing Officer as not fully vouched which remain unverifiable. The assessee has not produced any contrary material or record to contract this finding of the Assessing Officer that expenses are not fully vouched. However as in the case of Pr. CIT Vs. Rimjhim Ispat Ltd. 2016 (1) TMI 374 - ALLAHABAD HIGH COURT the disallowance of 5% of the expenses for want of supporting vouchers was considered as reasonable, therefore, the disallowance confirmed by CIT(A) 12.5% is restricted to 5%. Disallowance of freight expenditure u/s 40A(3) - AO noted that the assessee has made payment in cash exceeding ₹ 20,000/- in a day on certain dates to a single party or person which is not allowable - HELD THAT - Section 40A(3) contemplates certain expenditure incurred in cash are not deductible. Though, sub-section 3 of Section 40A as existed at the relevant point of time prescribes the limit not exceeding of ₹ 20,000/- meaning thereby if expenditure incurred in cash is less than ₹ 20,000/-or not exceeding ₹ 20,000/- then the provisions of Section 40A(3) are not applicable. However, in the case of the payment made by assessee to transport operators in respect of hiring or leasing goods carriages the same would fall in third proviso to Section 40A(3) and 40A(3A) of the I. T. Act. This proviso provides a higher limit of ₹ 35,000/- for payment in cash to the transport operators. As enhanced limit of ₹ 35,000/- is applicable for the payment to the transport operators and in other cases the limit of payment remains at ₹ 20,000/-. Therefore, there is no ambiguity in the provision of Section 40A(3) and third proviso as well as the explanatory note issue by CBDT. Accordingly, in view of the third proviso to Section 40A(3), the payment made in cash to the transport operators which is less than ₹ 35,000/- would not attract this proviso of section 40A(3) of the I. T. Act, 1961 and consequently no disallowance is called for. In the present case none of these payments are exceeding ₹ 35,000/-, therefore, the disallowance made by Assessing Officer is not sustainable and the same is deleted.

Summary

Issues Involved:
1. Addition on account of low Gross Profit (G.P.) declared by the assessee.
2. Adhoc disallowance of expenses by the Assessing Officer (AO).
3. Disallowance of freight expenditure under Section 40A(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition on Account of Low Gross Profit Declared by the Assessee:

The assessee, a proprietor of Dilip Yarn Traders, filed a return of income declaring a total income of ?5,22,510/- for the assessment year 2013-14. The Assessing Officer (AO) noted a Gross Profit (G.P.) of ?11,10,369/- which translated to 0.65% on total sales of ?17.07 crores. Comparing this to the preceding years' G.P. rates of 0.68% and 0.69%, the AO applied a G.P. rate of 0.69% resulting in an addition of ?67,840/-. The assessee contested this, arguing that the AO did not reject the books of account under Section 145(3) and that the books were audited and verified without any defects found. The Tribunal held that without detecting defects in the books, the AO could not justify the addition based on a lower G.P. rate. Citing the Delhi Bench Tribunal decision in ACIT Vs. M/s. Ess EII Cables Co., the Tribunal concluded that a fall in G.P. alone is insufficient for additions without pointing out defects in the books. Thus, the addition made by the AO was deleted.

2. Adhoc Disallowance of Expenses by the AO:

The AO made an adhoc disallowance of 25% of shop expenses, travelling expenses, and vehicle running and maintenance expenses, amounting to ?41,785/-, citing unverifiable expenses. The CIT(A) reduced this disallowance to 12.5%. The assessee argued that adhoc disallowance is not justified without finding defects in the books. The Tribunal referred to decisions in Sanjeev Seth Vs. ACIT and M/s. Premier Car Sales Ltd. Vs. ACIT, supporting the assessee's contention. However, the Tribunal also considered the jurisdictional High Court decision in Pr. CIT Vs. Rimjhim Ispat Ltd., which justified disallowance for unverifiable expenses. The Tribunal found the disallowance of 5% reasonable and thus restricted the disallowance to 5% of the total expenses.

3. Disallowance of Freight Expenditure Under Section 40A(3):

The AO disallowed ?3,31,500/- of freight expenses, citing cash payments exceeding ?20,000/- in a day to a single party, invoking Section 40A(3). The assessee argued that the threshold limit for cash payments to transport operators was ?35,000/- as per the third proviso to Section 40A(3) and 40A(3A). The Tribunal examined the provisions and the explanatory note issued by CBDT Circular No.5/2010, which confirmed the higher limit of ?35,000/- for transport operators. The AO's details showed none of the payments exceeded ?35,000/-. Hence, the Tribunal held that the disallowance was not sustainable and deleted the addition.

Conclusion:

The appeal filed by the assessee was partly allowed. The addition on account of low G.P. and the disallowance of freight expenditure were deleted. The adhoc disallowance of expenses was restricted to 5% instead of the 12.5% confirmed by CIT(A). The judgment emphasized the necessity of detecting defects in books of account before making additions based on low G.P. and underscored the importance of proper documentation for claimed expenses.