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TMI Blog2022 (10) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been duly accepted in scrutiny assessments u/s.143(3) in earlier years and succeeding years. 3. The Appellant craves leave to add, urge, alter, modify or withdraw any grounds before or at the time of hearing. 2. Succinctly stated, the assessee who is engaged in the business as a wholesale dealer/distributor of ITC products namely cigarettes tobacco and other Fast Moving Consumption Products (FMCG) had e-filed his return of income for the assessment year 2013-14 on 26.03.2014, declaring an income of Rs.16,59,700/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s.143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that verification of books of account i.e. sales and purchase account of the assessee revealed that the different products were sold at different gross profit rates. The A.O on a perusal of the records observed by the A.O that the gross profit rates shown in the purchase entry bills was approximately 1.60% to 2.50% for tobacco products and 2.50% to 6% for FMCG products. However, it was observed by the A.O that the assessee had shown only gross profit of 1.53%. It was noticed by the A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that if the discount percentage was reduced from the gross profit percentage then the gross profit percentage of the assessee would work out almost @ 1.98% for cigarette and tobacco products and @ 3.96% for other FMCG products. Considering the aforesaid facts the A.O was of the view that the assessee had shown low GP rate. 3.1. The A.O on the basis of his aforesaid observations reworked out the gross profit of the assessee at an amount of Rs.1,44,34,055/- and made a consequential addition of Rs.48,22,955/-, as under:- Tobacco products Rs.52,95,15,914/- GP @ 1.98% Rs.1,04,84,415/- NBFC Products Rs.9,97,38,393/- GP @ 3.96% Rs.39,49,640/- Total sales Rs.62,92,54,306/- Total GP Rs.1,44,34,055/- Gross profit shown by the assessee Rs.96,11,100/- Difference amount Rs.48, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards suppressed gross profit of Rs.48,22,955/-. 8. Although, 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. In our considered view, as stated by the Ld. 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) of the Act, as under:- 31-3-10 AY10-11 31-3-11 AY11-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter concern) : Rs. 12,71,510/-; and (ii) Shri Varun Nathani, Raipur : Rs.6,12,209/-. As the A.O was of the view that now when the products of the company i.e. ITC products were on high demand, therefore, there could have been no justification for the assessee to have paid commission in order to facilitate sales of the said products. Also, it was observed by the A.O that as the principal company was round the year coming up with schemes to boost up the sales of their products, therefore, there was no need for the assessee to have made payments to the aforementioned related parties in the garb of commission for pushing up its sales. Accordingly, the A.O declined the assessee s claim of commission expenses of Rs.18,83,719/-(supra), which thereafter was been upheld by the CIT(Appeals). 10. We have given a thoughtful consideration to the aforesaid issue and are unable to persuade ourselves to subscribe to the same. At the very outset, we may herein observe that the litmus test for allowability of a claim of expenditure u/s. 37(1) of the Act primarily hinges around satisfaction of dual conditions, viz. (i). the expenditure (not being expenditure of the nature described in sections 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,64,57,045 6,43,70,340 8,27,54,937 9,97,38,393 10,88,16,426 -Discount 4,09,223 7,01,740 12,40,700 13,47,913 19,49,102 Total sales 37,83,81,271 38,94,05,225 55,03,78,083 62,79,06,393 69,97,09,751 Commission expenses claimed 15,13,525 12,65,564 17,88,729 18,83,719 17,42,085 % of commission sales 0.40% 0.32% 0.33% 0.30% 0.25% Accepted by revenue in scrutiny assessment u/s.143(3) dt.19-12-12 Accepted by revenue Accepted by revenue in scrutiny assessment u/s.143(3) dt.20-2-15 Under consideration Accepted by revenue in scrutiny assessment u/s.143(3) dt.15-11-16 Also, the Ld. AR had taken us through the bifurcated details of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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