2017 (3) TMI 689 - AT - Income Tax

Addition on undisclosed purchases and profit thereon - Held that - On examination of the details submitted by the assessee we find that the goods were purchased on credit basis. As there is outstanding credit balance in the books of the assessee in the name of MUS. Thus it can be presumed that the goods were purchased on the basis of credit. However the lower authorities have not brought anything on record about the sales made by the assessee of such undisclosed purchases In the absence of any information about the sales of undisclosed purchases the entire amount of purchase cannot be treated as undisclosed profit of the assessee. Therefore we are of the view that only profit element of Rs. 21, 548/- can be brought to tax. We also find that there is no allegation from the order of the lower authorities that the undisclosed purchases were made on cash basis. Besides MUS has shown sales in its books of accounts on credit basis. Therefore the question of making addition of investment in such undisclosed purchases does not arise. In view of the above we restrict the disallowance to Rs. 21, 548/-. Accordingly AO is directed. Hence this ground of appeal of the assessee is partly allowed. Disallowance of expenses on estimated basis - Held that - AO should have verified the expenses at the time assessment rather disallowing the same on the basis of estimation. The AO should have pointed out defects in respect to the specific vouchers before making the disallowance. In our considered view the AO should not disallow the expenses based on some suspicion doubt and should not draw unreasonable inferences based on some unreasonable apprehensions. The AO has not brought on record any cogent reasons as to why this expenditure was to be disallowed. It is not the case that the expense was considered to be bogus or short comings in the vouchers in this regard as observed by the Revenue. No material has been placed before us by the Revenue to controvert the arguments of the ld. AR. In that view of the matter we find ourselves in no agreement with the reasoning and conclusion contained in the order of ld. CIT(A). With the result we reverse the finding of ld. CIT(A) with regard to delivery expenses. Disallowance for Installation and teas & tiffin charges we find that the assessee has failed to provide the supporting evidence in respect to the aforesaid expenses. Therefore the AO had to resort for the purpose of disallowance on the basis of estimation. In our considered view it was the duty of the assessee to provide the necessary details as desired by the AO as the onus lies on the assessee. Even before us the learned AR has not produced any supporting evidence in support of his claim therefore the inclined not to interfere in the order of lower authorities. Hence this ground of appeal of the assessee is partly allowed.

Summary

Issues involved:
1. Addition of undisclosed purchases and profit thereon
2. Disallowance of expenses on estimated basis
3. Disallowance under section 40A(3) of the Act

Issue 1: Addition of undisclosed purchases and profit thereon:
The appeal concerned the addition of Rs. 15,07,636/- on account of undisclosed purchases and profit. The AO found a variance in the purchases declared by the assessee and the sales reported by the supplier, MUS. The AO treated the undisclosed purchases as income and added Rs. 15,07,636/- to the total income. The CIT(A) upheld the AO's decision, stating that the sales were genuine and the assessee failed to provide fresh evidence. However, the ITAT observed that the purchases were made on credit, indicating no undisclosed funds were used. As the sales of undisclosed purchases were not recorded, the entire amount couldn't be added to income. Hence, only the profit element of Rs. 21,548/- was deemed taxable. The ITAT partially allowed the appeal, restricting the disallowance to Rs. 21,548/-.

Issue 2: Disallowance of expenses on estimated basis:
The AO disallowed certain expenses based on estimation, including delivery charges, installation charges, and tea & tiffin expenses. The CIT(A) confirmed the disallowance, citing lack of supporting evidence. The ITAT noted lapses in the AO's approach, as the nature of expenses wasn't clarified, and no defects in the details were pointed out. The ITAT emphasized that expenses shouldn't be disallowed based on suspicion or estimation without verifying the genuineness. While the delivery charges disallowance was reversed due to lack of cogent reasons, the disallowance for installation and tea & tiffin charges was upheld since supporting evidence was not provided by the assessee.

Issue 3: Disallowance under section 40A(3) of the Act:
The appeal challenged the disallowance of Rs. 34,000/- under section 40A(3) of the Act. However, as the AR did not present arguments on this issue, the ITAT dismissed the ground of appeal. Consequently, the assessee's appeal was partly allowed by the ITAT.

This detailed analysis of the judgment covers the key issues involved and the respective outcomes for each issue, providing a comprehensive understanding of the legal proceedings and decisions made by the authorities.