1977 (9) TMI 43 - AT - Income Tax

Summary

Issues:
1. Assessment of gross profit based on accounting method.
2. Disallowance of bad debts claimed by the assessee.
3. Enhancement of assessment without giving reasonable opportunity to the appellant.
4. Adhoc disallowance of bad debts by the ITO.

Analysis:
1. The first issue in this appeal pertains to the assessment of gross profit for the assessment year 1973-74 by the Income Tax Officer (ITO). The assessee's business involved purchasing grey cloth, processing it, and selling the processed material. The ITO raised concerns about the lack of a stock account for purchases, potential sales of grey cloth without processing, and an increase in various expenditures. The ITO added Rs. 5,000 to the gross profit, which was upheld by the Appellate Assistant Commissioner (AAC). However, the ITAT Bombay-B found no justification for invoking Section 145(1) or making the addition based on estimates. The tribunal noted that the assessee had maintained accounts similarly in previous years, and there was no evidence of grey cloth being sold outside the accounts. The addition was deemed unjustified and was deleted by the tribunal.

2. The second issue revolves around the disallowance of bad debts claimed by the assessee in the amount of Rs. 7,462 for the assessment year. The ITO disallowed Rs. 3,000 out of the claim, citing lack of precautionary measures for debt recovery. The AAC went further to disallow the entire claim, questioning the conclusiveness of the assessee's decision on bad debts. The ITAT Bombay-B highlighted that the AAC's decision to disallow the entire claim, exceeding the ITO's order, violated Section 251(2) by not providing a reasonable opportunity for the appellant to contest the enhancement. The tribunal emphasized the need for the assessee to establish bad debts with evidence during the accounting period, and as such, upheld the ITO's decision on this issue.

3. The third issue pertains to the enhancement of assessment without affording a reasonable opportunity to the appellant. The ITAT Bombay-B noted that the AAC's decision to enhance the assessment without notifying the assessee of the intended enhancement violated the provisions of Section 251(2). As a result, the tribunal deemed the AAC's order, which exceeded the ITO's assessment, as failing due to the lack of a reasonable opportunity provided to the assessee.

4. The final issue involves the adhoc disallowance of Rs. 30,000 for bad debts by the ITO. The ITAT Bombay-B upheld the ITO's decision, emphasizing the lack of documentary evidence or proof provided by the assessee to establish that the debts had become bad and irrecoverable during the accounting period. The tribunal highlighted the assessee's failure to substantiate the claim of bad debts, leading to the confirmation of the ITO's decision and the setting aside of the AAC's order on this matter.

In conclusion, the ITAT Bombay-B partially allowed the appeal, ruling in favor of the assessee on the assessment of gross profit and the enhancement of assessment issues, while upholding the ITO's decision on the adhoc disallowance of bad debts.