2022 (10) TMI 1038 - AT - Income Tax

Rejection of books of accounts - GP estimation - HELD THAT - We find substance in the observations of the A.O that had prompted him to reject the trading results of the assessee, but are accept the manner in which he had determined the gross profit addition on the basis of an unsubstantiated; or in fact an ad-hoc application of gross profit rate of 1.98% of cigarette and tobacco products and 3.96% of other FMCG products. As stated by AR and, rightly so, there was no justification on the part of the A.O to have adopted the aforesaid basis which as the same was not supported by any concrete basis. On the contrary, in our considered view the estimation of the assessee s income for the year under consideration could have been safely done by taking cognizance of its disclosed gross profit rates for the immediately three preceding years out of which two years had been subjected to scrutiny assessment u/s. 143(3) of the Act , as well as that of the immediately succeeding year which too have been subjected to a scrutiny assessment u/s.143(3). Gross profit rate of the assessee could have safely been taken by the A.O at 1.54% i.e. average gross profit rate of the last three years i.e. A.Y. 2010-11 to 2012-13. Accordingly, in terms of our aforesaid observations the A.O is herein directed to restrict the addition by adopting the overall gross profit rate of the assessee @1.54% of its total sales - Thus, the ground of appeal No.1 is partly allowed in terms of our aforesaid observations. Allowability of a claim of expenditure u/s. 37(1) - deduction of commission expenses - HELD THAT - A.O for considering the allowability of the expenditure incurred by the present assessee before us, could not have been guided by the test of necessity, but by the fact that as to whether or not the expenditure had been laid out or expended wholly and exclusively for the purpose of the business of the assessee; and that the same is not in the nature of an expense which are specifically excluded as per the mandate of Sec. 37 of the Act. It is not the case of the A.O that the assessee had not incurred the aforesaid expenses wholly and exclusively for the purpose of his business, but for the reason that as per him there was no need for the assessee to have paid commission to the aforesaid parties. We are afraid that the aforesaid reasoning for dislodging the assessee s claim for deduction of the commission expenses by the A.O cannot be accepted on our part. A.O had failed to give any justifiable reason as regards declining of the assessee s claim for deduction of commission expenses that were paid to the aforementioned parties. Apart from that, we are of the considered view that considering the fact that payment of commission by the assessee to the aforesaid parties within the same parameters had not only been allowed by the department in his for the last three preceding years (for two years scrutiny assessment was framed), but also while framing assessment in his case for the immediately succeeding year i.e. AY 2014-15 vide order passed u/s.143(3), dated 15.11.2016, therefore, there was no justification on the part of the A.O in declining the assessee s claim for deduction of the commission expenses during the year under consideration - Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of Rs.48,22,955/- on account of 'low GP'.
2. Sustaining the addition of Rs.18,83,719/- on account of commission paid to sister concerns.

Issue-Wise Detailed Analysis:

1. Sustaining the addition of Rs.48,22,955/- on account of 'low GP':
The assessee, engaged in the business of wholesale dealing/distribution of ITC products, filed a return declaring an income of Rs.16,59,700/-. During the scrutiny assessment, the A.O observed discrepancies in the gross profit rates shown in the purchase entry bills and the actual gross profit declared by the assessee. The A.O noted that the gross profit rates for tobacco products ranged from 1.60% to 2.50% and for FMCG products from 2.50% to 6%, while the assessee declared a gross profit of only 1.53%. The A.O reworked the gross profit and made an addition of Rs.48,22,955/-.

The Tribunal found substance in the A.O's observations but disagreed with the ad-hoc application of gross profit rates without concrete basis. It was held that the estimation of the assessee's income should consider the gross profit rates of the immediately preceding three years and the immediately succeeding year, which were subjected to scrutiny assessments. The Tribunal directed the A.O to restrict the addition by adopting an overall gross profit rate of 1.54% of the total sales, thereby partly allowing the appeal on this ground.

2. Sustaining the addition of Rs.18,83,719/- on account of commission paid to sister concerns:
The A.O disallowed the commission expenses of Rs.18,83,719/- paid to related parties, reasoning that there was no justification for paying commission for facilitating sales of high-demand ITC products. The Tribunal, however, noted that the litmus test for allowability of expenditure under Sec. 37(1) of the Act is whether the expenditure is laid out wholly and exclusively for business purposes and not prohibited by law. The Tribunal found that the A.O's reasoning based on the necessity of the expenditure was not justified.

Additionally, it was observed that similar commission expenses were allowed in previous and succeeding years' scrutiny assessments. Hence, the Tribunal vacated the disallowance of Rs.18,83,719/- and allowed the appeal on this ground.

3. General Grounds:
The third ground being general in nature was dismissed as not pressed.

Conclusion:
The Tribunal partly allowed the appeal, directing the A.O to adopt an overall gross profit rate of 1.54% for the total sales and vacating the disallowance of commission expenses of Rs.18,83,719/-.