2012 (11) TMI 758 - AT - Income Tax

Determination of Gross Profit ratio in restaurant business - AO rejected Books of account due to inflating of expenses and suppression of sales made and in absence of bills and vouchers Held that - AO is directed to estimate Gross Profit at the rate of 35% on total turnover instead of 40% as determined by him and as against @ 31.15 on the admitted sales by assessee - the appeal of the Revenue is allowed in part. Disallowance of expenditure towards advertising charges u/s 40(a)(ia) Held that - As the payment was made and not payable on the date of balance-sheet, TDS payment and provisions of sec.40(a) are not attracted, expenditure claimed cannot be disallowed - ground raised by the assessee in its Cross Objection is allowed.

Summary

Issues Involved:
1. Estimation of gross profit at 40% by AO and subsequent appeal by Revenue.
2. Disallowance of expenditure under section 40(a)(ia) and Cross Objection by assessee.

Issue 1: Estimation of Gross Profit at 40%
The appeal involved a dispute between the Revenue and the assessee regarding the estimation of gross profit at 40% by the Assessing Officer (AO) for the assessment year 2007-08. The AO rejected the books of accounts under section 145(3) due to lack of proper bills and vouchers supporting the transactions. The AO calculated the gross profit at 40% on the sales admitted by the assessee, resulting in an addition of Rs.21,84,024 to the total income. The assessee contended that a similar issue for the preceding year was resolved in their favor by the CIT (A), who accepted a lower profit rate of 31%. The ITAT, following a previous order, directed the AO to estimate the profit at 35% instead of 40%, ultimately allowing the Revenue's appeal in part.

Issue 2: Disallowance of Expenditure under Section 40(a)(ia)
In the Cross Objection, the assessee challenged the disallowance of expenditure of Rs.1,05,722 paid towards advertising charges under section 40(a)(ia) by the AO. The AO disallowed the claim as tax was not deducted at source. However, it was noted that the amount was paid and not payable on the balance sheet date. Citing a precedent from the ITAT Special Bench, the Cross Objection was allowed, and the expenditure claimed was held not to be disallowable under section 40(a)(ia). Consequently, the appeal filed by the Revenue was allowed in part, and the Cross Objection by the assessee was allowed.

This detailed analysis of the judgment highlights the key issues of estimation of gross profit and disallowance of expenditure under the Income Tax Act, showcasing the legal proceedings and outcomes in a comprehensive manner.