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2022 (1) TMI 649 - AT - Income TaxBogus purchases - Disallowance in respect of provision of batteries - Assessee made provision for replacement of batteries qua the computers sold by it - CIT-A deleted part addition - HELD THAT - Here, in this case, the assessee has purchased batteries and replaced. Quantity was not in dispute. In the past, whatever provisions remained unutilized was offered as income by the assessee. Therefore, we are of the view that there is nothing with the ld.CIT(A) to estimate the profit at 17% of the alleged bogus purchase. CIT(A) has made reference to the GP percentage shown by the assessee in the different assessment years. But while working out 17%, he has nowhere referred wither it is net profit of ₹ 3.48 crores or GP out of this. GP has been shown by the assessee at 14.35% in this assessment year. But net profit is only 2.38%. The assessee has not disputed if 2.38% is being estimated as undue profit earned by it from purchase of these batteries amounting to ₹ 1.56 crores. Calculation by the ld.CIT(A) are not based on any scientific formula or any evidence. There is no reference that in purchase and sale of computer batteries there could be profit margin is of 17%. Whenever any estimation is required to be made guess-work would always be there. But such guess-work should be in consonance with overall profit shown by the assessee. It has achieved a turnover of more than ₹ 102 crores, and returned income of ₹ 4.13 crores. These factors are also to be kept in mind. Taking into consideration all these facts, we estimate disallowance out of these bogus purchase at 7%. In other words, 7% of the alleged bogus purchase of ₹ 1,56,78,802/- will be disallowed. This ground taken by the Revenue is rejected; whereas the ground of appeal taken by the assessee is partly allowed. Determination of the amounts require to be disallowed out of sale promotion expenses - CIT-A partly confirming the disallowance - HELD THAT - The assessee is a well organized business house, who has achieved turnover of more than ₹ 102 crores; meaning thereby, its affairs must have been managed in professional manner, where complete details might have been maintained. The assessee has given no details to whom such gift items were given. It is case of the assessee that in order to maintain secrecy of its line of business, it is not incumbent upon him to disclose personal details of recipients. It has shown bills and vouchers for the purchases. All the details have been maintained scientifically. An estimation of disallowance could only be made, if there are some lapses in the detailed maintained by the assessee. The reasoning given by the AO is altogether different which did not meet approval of the CIT(A). Thereafter, the ld.CIT(A) ought to have not made adhoc disallowance. The ld.CIT(A) was not justified in partially confirming the disallowance. After perusal of the finding of the ld.CIT(A), we do not find any error in it to the extent the ld.CIT(A) has deleted the disallowance. There is no justification to interfere in his order. We are of the view that there is no reason to disallow expenditure to the extent of ₹ 9.50 lakhs on an adhoc basis. We delete this disallowance also. Thus, we allow the grounds of appeal raised by the assessee, and reject ground of appeal raised by the Revenue. For 2014-15 - Considering nature of the assessee s business, and expenses incurred in earlier years, it, but natural that this must have been recurring expenditure in this year also there may be some irregularities crept in on the source of purchase of gifts items, but that is not sufficient to ignore claim of the assessee. The sales promotion expenses are one of necessary components for doing business smoothly and the returned income in this year has been enhanced. It has shown total income of ₹ 6.15 crores against ₹ 4.13 crores in the Asstt.Year 2012-13. In Asstt.Year 2012-13, we have accepted the sales promotion expenses to the extent of ₹ 1.29 crores, wherein this year it has also incurred ₹ 85 lakhs. Considering nature of business, the consistency in incurring such expenditure which is essential components, we are of the view that there is no justification to disallow the sales promotion expenditure. Addition of donation to political parties under section 80GGC - denial of deduction under Chapter VIA in respect of donation given to political party and charitable institutions - HELD THAT - We are of the view that whole angle of inquiry at the end of the AO is misdirected. It is for the AO to verify whether these charitable institutions have utilized funds for charitable objects or not, in their own cases, and if they failed to utilize funds for their objects, then their charitable status could be cancelled. Registration under section 12AA could be cancelled as per the procedure contemplated in section 12AA(3) of the Act. The funds which were not used for objects of the Trust, that can be brought to tax under section 13(3) of the Act. A perusal of the scheme of Income Tax Act, it would reveal that once the donation has been made, the donee is not under obligation to keep a track of the donation, and nothing left in his hand which can ask for return of these amounts. There is no such provision provided in the Act. If a duly recognized institution, for the purpose of receiving donation, somebody makes donation and then how the donation would be bogus, if the donee failed to use it for the object which has been made eligible to receive the donation. How the donor could dictate terms after donations are made ? No donee will be under influence of the donor for arranging its affairs. Therefore, there is fallacy in the approach of the ld.AO as well as the ld.CIT(A) for disallowing the donations made by the assessee - CIT(A) has rightly deleted the disallowance. Disallowance of travelling expenditure - HELD THAT - We find that the assessee failed to demonstrate that rest of the expenditure disallowed by the AO was also incurred for the purpose of business. No doubt the total expenditure claimed by the assessee is only 0.85% of the total revenue earned by it. It has demonstrated a turnover of ₹ 91.40 crores, and it has claimed travelling expenses of only ₹ 77.33 lakhs; but still if it is unearthed by the AO that in certain expenditure element of personal nature is involved, then such expenditure cannot be allowed to the assessee. Therefore, this ground of appeal is partly allowed. Addition of understatement of closing stock - method adopted by the AO in determining the value of understated closing stock in respect of computer chair/tables - HELD THAT - if a particular computer table/chair has been valued in the closing stock on net realizable basis, then its value should be disturbed by the AO by pointing out specific defects in determination of such value, and how he will determine the value which could be realized on sale of such table/chairs. This exercise will be meaningless because accounting year involved herein is 2013-14 and the assessment order was examined this aspect in the year 2016. By that time the available of tables/chairs might not be in the stock. This fact has to be appreciated with different angle also that it is a tax neutral. Whatever value AO would add and tax in this year, would become opening stock in the next year and would reduce taxable income in the coming year. The assessee has been consistently offering the income of more than ₹ 4 to 5 crores, hence no effect will be there on this type of assessee by making addition in the value of closing stock. It is pertinent to observe that in this year also the assessee has returned income of more than ₹ 6.15 crores. In the Asstt.Year 2012-13 its income was ₹ 4.13 crores. In such type of situation, small variation on account of closing stock would hardly affect the taxability. Therefore, to our mind the AO should desist from making such addition without conducting a proper exercise. We allow this ground of appeal and delete disallowance.
Issues Involved:
1. Disallowance of provision for replacement of batteries. 2. Disallowance of sales promotion expenses. 3. Disallowance of donations made to political parties and charitable institutions. 4. Disallowance of travelling expenses. 5. Understatement of closing stock. Detailed Analysis: 1. Disallowance of Provision for Replacement of Batteries: The Revenue challenged the deletion of disallowance of ?3,48,64,200/- for provision of batteries, while the assessee contested the confirmation of ?59,16,000/-. The AO deemed the provision as contingent and not genuine, referencing cases like Mysore Lamps Works Ltd. and Indian Molasses Co. P. Ltd. The assessee argued the provision was in line with Accounting Standard 29 and supported by the Supreme Court's decision in Rotork Control India P. Ltd. The CIT(A) partially upheld the AO's disallowance due to non-genuine purchases but allowed the rest. The Tribunal concluded that the provision was a contractual liability and not contingent. However, it adjusted the disallowance to 7% of the alleged bogus purchases, reducing the disallowance. 2. Disallowance of Sales Promotion Expenses: The AO disallowed ?1,17,40,918/- of sales promotion expenses due to lack of recipient details, while the CIT(A) reduced this to ?9,50,000/-. For the year 2014-15, ?85,34,500/- was disallowed. The Tribunal noted that the assessee's turnover justified the expenses and found the AO's reasoning insufficient. The CIT(A) was found to have erred in making an adhoc disallowance. The Tribunal deleted the disallowance entirely, recognizing the necessity of such expenses in the assessee's business. 3. Disallowance of Donations to Political Parties and Charitable Institutions: For the year 2012-13, the AO disallowed ?55 lakhs donated to a registered political party, which the CIT(A) later allowed. In 2014-15, ?5,46,32,892/- out of ?6,79,00,000/- in donations was disallowed. The Tribunal held that the donations were made to registered entities and the AO's focus on the utilization of funds by donees was misplaced. The Tribunal upheld the CIT(A)'s decision for 2012-13 and allowed the assessee's appeal for 2014-15, emphasizing that the donor is not responsible for the donee's use of funds. 4. Disallowance of Travelling Expenses: The AO disallowed ?17,74,045/- for personal trips, which the CIT(A) upheld. The Tribunal partially allowed the appeal, deleting ?1,30,224/- but maintaining the rest due to lack of business purpose evidence. It acknowledged the overall reasonableness of the expenses relative to the turnover but upheld the disallowance where personal elements were evident. 5. Understatement of Closing Stock: The AO added ?27,60,687/- for alleged understatement of closing stock, based on an average value approach for items like computer tables/chairs. The CIT(A) upheld this. The Tribunal found the AO's method flawed, noting the diverse nature and pricing of stock items. It emphasized the tax neutrality of such adjustments and the consistent valuation method followed by the assessee. The Tribunal deleted the addition, highlighting the lack of specific evidence against the assessee's valuation. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeals, providing detailed reasoning for each issue based on the consistency of the assessee's practices, contractual obligations, and the necessity of business expenses.
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