Assessment based on Mere Suspicion or Probability of Earning Income is not Valid: ITAT Jaipur [Read Order]

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The division bench of the Income Tax Appellate Tribunal (ITAT) Jaipur, in ACIT v. Kishore Singh Gehlot (HUF), held that assessment under the provisions of the Income Tax Act cannot be made merely on the basis of suspicion or probability of earning income. while dismissing the appeal filed by the revenue, the bench also held that disallowance under section 40A(3) of the Income Tax Act cannot be made in respect of expenditure incurred by way of refund to customers; ITAT Jaipur

Coming to the facts of the case, the A.O verified the ledger account of the assessee’s customers and found that some amount have been advanced by the customers for the purchase of tractors, then loan amount is credited to the customer’s account, thereafter, expenses on account of tractor registration, insurance and processing charges for loan are charged and debited to the customers account. The credit balance in the customer accounts are thereafter refunded in cash to the customers after a few months. In respect of 21 cases, refund amount exceeds Rs. 20,000/- totalling to Rs. 5,39,360/-. The assessee didn’t maintains any receipts from the customers regarding the amount refunded to him.The AO disallowed the amount by holding that the refund amount has generated due to discount and revision of price by issuing credit note in favour of the customers and after deducting charges for registration, insurance and loan processing charges. Thus, the nature of refund is expenditure on account of discount allowed to the customers for different reasons. Any refund in cash of amount exceeding Rs. 20,000/- is in violation of provisions of section 40A(3) of the IT Act, 1961.

Further, the AO made an addition in respect of sale of implements amounting to Rs. 31,60,000/-. The assessee maintained that bills for implements are issued to help the customers in getting loan of higher amount. In fact no such sales are made and therefore, a reverse entry to this effect is made in the books of accounts. It was contented that the assessee has not made any purchase of the implements and only sale bills have been issued to enable the customers to get higher amount of loan. AO completed assessment by observing that“a business man would never issue a bill without making any charge from the customers. There is another possibility that such implements could have been sold through some other dealer or implements. In either case, the assessee would get some remuneration for the service rendered by him.

On the first issue, the bench relied upon the findings of the first appellate authority that the amount has actually been refunded and the list of such customers to whom the amount has been refunded is identifiable and the same has been verified by him along with documentary evidence.

Concurring with the findings of the CIT(A), the bench noted that “in terms of quantum and nature of refund, the same depends upon various factors such as initial advance received from the customers, loan approved and credited to the customer account, value of sales recorded, various charges debited to the customer account and off course, the rate difference and discount allowed to the customers. The same will vary from customer to customer and from product to product sold by the assessee. In absence of a specific finding, it is difficult to generalise that in all cases, the refund has arisen only on account of discount offered to the customer as held by the AO. It is only in a particular situation where the cash advance along with loan amount equals the sales and other charges, it can be said that the balancing figure relates to discount offered to the customer.”

Regarding the next issue, the bench said, “the AO has made the subject addition towards earning commission income by the assessee without any material/evidence and is thus on a presumptive basis. Mere suspicion or probability of earning commission income cannot form the basis for bringing the amount to tax in the hands of the assessee. There has to be something positive and tangible to substantiate the said position taken by the Revenue which unfortunately is not apparent in the present case. In light of above, we donot see any infirmity in the order of the ldCIT(A) which is hereby confirmed.”

Read the full text of the order below.