M/S. K.N. DIAMOND,,BILIMORA vs. THE ASSTT. COMMISSIONER OF INCOME TAX, NAVSARI CIRCLE,, NAVSARI

आयकर अपील�य अ�धकरण, सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, Hon'ble JUDICIAL MEMBER AND Dr. ARJUN LAL SAINI, Hon'ble ACCOUNTANT MEMBER (Virtual Hearing) आ.अ.सं./I.T.A No.1788/AHD/2016 �नधा�रण वष�/Assessment Year: 2012-13 M/s K.N.Diamond, Vs. The Assistant Commissioner Soniwad, Bilimora, of Income Tax, Navsari Navsari – 396 321. Circle, Navsari. [PAN: AADFK 3167 H] अपीलाथ� / Appellant ��यथ�/Respondent �नधा�रतीक�ओर से /Assessee by Shri Parimalsinh Parmar – Advocate राज�वक�ओर से /Revenue by Smt. Anupama Singla – Sr.DR

सुनवाई की तारीख/ Date of hearing: 20.01.2021 उ�घोषणा क� तार�ख/Pronouncement on: 04.02.2021 आदेश /O R D E R PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal filed by the Assessee is directed against the order of Learned Commissioner of Income Tax (Appeals)-Valsad, Valsad dated 04.05.2016 for the A.Y. 2012-13. The Assessee raised the following grounds of appeal: “1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in upholding action of the Assessing Officer (herein after referred as "AO") of assessing income of appellant firm at Rs.33,67,563/-, as against returned income of Rs.25,73,040/-. 2. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in upholding action of the AO making disallowance of Rs.3,50,030/- out of interest expenses by invoking provisions of section 40A(2)(b) without appreciating the submission made by the appellant. 3. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in upholding action of the AO in making disallowance of expenses out of Exhibition

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 Expenses of Rs. 1,44,493/- u/s.40(a)(ia) without appreciating the facts and details submitted by the appellant. 4. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in upholding action of the AO in making partial disallowance/addition of Rs.1,00,000/- out of expenses of Rs.5,53,517/- incurred/claimed under the head Foreign Tour Expenses. 5. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in upholding action of AO making partial disallowance/addition of Rs.2,00,000/- out of expenses of Rs.33,83,143/- incurred/claimed under the head Job Work Expenses. 6. For various reasons and on different grounds, the aggregate addition of Rs.7,94,523/- made by the AO and upheld by the Learned CIT(A), deserves to be deleted. 7. The above Grounds of Appeal are without prejudice to and are independent of each other. 8. Your Appellant craves, leave to amend, alter, delete and/or add to or withdraw the foregoing Grounds of Appeal any time before the appeal is decided.” 2. Brief facts of the case are that the assessee is a company engaged in the business of diamonds, filed its Return of Income for assessment year (AY) 2012-13 on 17.08.2012 declaring taxable income of Rs.25,73,040/-. The case was selected for scrutiny. The Assessing Officer after issuing show cause notice and considering the reply of the assessee made various disallowance including disallowance under section 40A(2)(b) of the Act of Rs.3,50,030/-. The Assessing Officer while making disallowance noted that assessee has paid interest @18% per annum to its family members, HUF, however, on other unsecured loan the assessee has paid interest @12% per annum to other than family members. The Assessing Officer allowed interest @15% to the family member and disallowed interest in excess of 15%, and worked out disallowance of Rs.3,50,030/-. The Assessing Officer further noted that

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 the assessee debited exhibition expenses Rs.1,44,493/- paid to Focus Trade Fairs Pvt. Ltd. The assessee has not deducted tax at source while making payment as required under section 194J of the Act, thus, the assessing officer took his view that the assessee made default under section 194J of the Act. Accordingly, the Assessing Officer disallowed the entire payment of Rs.1,44,493/-. The Assessing Officer further noted that assessee claimed foreign tour expenses of Rs.5,53,517/-. On showcase notice to explain the purpose and nature of expenses. The assessee explained that partner of the firm made foreign tour for promotion of export sales in foreign countries. The Assessing Officer noted that no details of the expenses and nature of expenses and purpose of visit, is verified in absence of evidence, thus, the Assessing Officer made ad hoc disallowance of Rs.1.00 lakh. The Assessing Officer further noted that assessee has shown job work expenses of Rs.33,83,143/-. On some of the bills, nature of labour charges is also not mentioned. The assessee had purchase readymade diamonds jewellery on which no labour charges was required to pay. The assessing officer noted that out of total purchase of Rs.8.40 crore, the assessee made purchase of diamond studded gold jewellery to the tune of Rs.1.93 crores from Kiah Life Style Pvt. Ltd. The assessee was asked to produce skilled worker karigar register to quantify the job work. No such register was produced. The Assessing Officer made ad hoc disallowances of Rs.2.00 lakhs out of total expenses of Rs.33.83 lakhs. On appeal before the ld.CIT(A) all the additions/ disallowance were upheld. Further aggrieved, the assessee has filed present appeal before this Tribunal.

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 3. We have heard the submissions of learned Authorised Representative (AR) of the assessee and the learned departmental representative (DR) for revenue and perused the order of lower authorities. Ground No. 1 is general and needs no adjudication. Ground No. 2 relates to additions under section 40A(2) of Rs. 3,50,030/-. The learned AR for the assessee submits that during the assessment, the assessing officer noted that assessee has paid interest to certain related parties @18% per annum. The assessing officer treated the interest rate @15% as reasonable based on rate of interest on other loans i.e. to non related parties and, accordingly worked out disallowance of Rs.3.50 lakhs under section 40A(2) of the Act. The ld. CIT(A) confirmed the disallowance. The AR for the assessee submits that no disallowance can be made under section 40A(2) of the Act, unless the Assessing Officer brings on record Fair Market Value(FMV) on similar services. The Assessing Officer and Ld. CIT(A) failed to bring on record any reasonable cases as to FMV on similar services. In support of his submissions, the Authorised Representative relied upon the following decisions,  CIT vs. Sarjan Realities – [2014] 50 taxmann.com 52 (Guj),  Kashi Exports Pvt. Ltd., vs. DCIT – Tax Appeal No.15 of 2003 (Guj. HC) and  Anilkumar P. Soni – ITA 2511/Ahd/2013. 4. The Ld. AR for the assessee submits that the assessing officer and ld. CIT(A) to appreciate that interest @18% to “related parties” is absolutely “reasonable” on account of Funds obtained from related parties are without any security; such funds are not to be repaid in the near future and since the loans are without any security and are not to be repaid short, the same falls within the high risk category. The ld.AR 4

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 for the further submits that on account of the submitted factors, loans obtained from “related parties” deserve some premium as compared to loans obtained from outsiders which are usually against security, need to be repaid in the specified time and do not fall within the high risk category. The ld. AR for the assessee further submitted that in the light of above, interest @ 18% to related parties is reasonable. Reliance is further placed on Anilkumar P. Soni in ITA No.2511/Ahd/2013 wherein the interest @ 24% per annum was held to be reasonable. It was and also submitted that in any case, the assessing officer is not supposed to decide the “reasonableness” or any expenditure. It is submitted that the prerogative of a businessman to determine the amount of expenditure. The Assessing Officer cannot step into the shoes of a businessman to determine quantum of such expenditure and under such circumstances, impugned disallowance is unwarranted. 5. On the other hand, ld. Departmental Representative (DR) relied on the orders of Lower Authorities. The ld. DR for the revenue submits that the assessing officer made disallowance on reasonable basis. 6. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities carefully. The assessing officer disallowed the interest expenses paid the related parties in excess of interest @15% per annum and worked out the disallowance of Rs. 3.50 lakhs. Before us, the Ld. AR for the assessee vehemently argued that that interest @18% per annum to related parties is reasonable as funds obtained from related parties are without any security; such funds are not to be repaid in the near future and since the loans are without any security and are not to be repaid short, the same falls within the high 5

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 risk category thus on account of the above factors, loans obtained from related parties deserve some premium as compared to loans obtained from outsiders which are usually against any security, need to be repaid in the specified time and do not fall within the high risk category. We find convincing force in the above submissions of the Ld. AR for the assessee. The Hon'ble Gujarat High Court in CIT Vs Sarjan Realites Ltd. (supra) held that unless payment of interest was in excess of market rate, merely because the assessee has paid interest at the different rate to different companies , payments of interest could not be held to be excessive or unreasonable. In view of the above factual and legal discussions, ground No. 2 of the appeal is allowed. 7. Ground No.3 relates to confirming the disallowance of exhibition expenses of Rs.1,44,493/- under section 40(a)(ia) of the Act. The ld. AR for the assessee submits that assessing officer made disallowance of Rs.1,44,493/- under section 40(a)(ia) by taking view that no tax was deducted at sources while making payment made to Focus Trade Fairs Pvt. Ltd. and that the assessee was liable to deduct tax at source under section 194J. The Ld. CIT(A) upheld the disallowance. The ld. AR for the assessee submits that it is not a case of “non-deduction” of tax at source, rather it is a case of “short deduction” of tax at source. The ld. AR for the assessee further submitted that the assessing officer is factually incorrect in stating TDS has not been effected in respect of the underlying payment. The assessee has effected TDS of Rs.2,890/- under section 194C in respect of payment to Focus Trade Fairs P. Ltd. as evident in ledger account of the said party and TDS certificate (Form 16A). Therefore, at the most it can be treated as a case of “shortfall in 6

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 TDS” and not a case of “non-deduction of tax at source at all”. It was submitted by ld AR for the assessee that it is a settled law that if there is shortfall due to any difference of opinion as to taxability of any item or nature of payments, then the assessee can, at the most, be declared to be an assessee in default under section 201, but that cannot be a ground for disallowance under section 40(a)(ia) of the Act. In support of his submission, the Authorised Representative relied upon the following decisions;  CIT Vs S.K.Tekriwal – 361 ITR 432 (Cal);  Kandwala Integrated Financial Services Pvt. Ltd., Vs JCIT (ITA No.634 & 532/Ahd/2011) and  CIT vs. Prayas Engineering Ltd. (Tax Appeal No.1237 of 2014) (Gujarat High Court). 8. In alternative submissions the learned AR for assessee submits that insertion of second proviso to Section 40(a)(ia) is declarative and curative in nature and has retrospective effect from 01.04.2005 and hence, if recipients have already paid tax on such sum no disallowance under section 40(a)(ia) is called for in prayer’s hands. Reliance is placed in case laws in Janak Bhupatrai Parekh – HUF vs. ITO in ITA No.2891/Ahd/2011 wherein Hon'ble ITAT has followed CIT vs. Ansal Land Mark Township Pvt. Ltd., 377 ITR 635 (Del) wherein Hon'ble Delhi High Court has affirmed the view taken in “Rajiv Kumar Agarwal vs. ACIT 45 taxmann.com 555 (Agra Tribunal). 9. On the other hand, ld. Departmental Representative relied on the orders of Lower Authorities. The Ld. DR for the revenue further submits that the assessee has to established that the services rendered by Focus Trade Fair Ltd was neither professional nor technical in nature. 7

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 10. We have considered the rival submissions of the parties and perused the order of lower authorities. There is no dispute that the assessee made payment to Focus Trade Fair Ltd. of Rs. 1,44,493/-. Before us the Ld. AR for the assessee claimed that assessee deducted tax at source of Rs. 2890/- under section 194C for the impugned payment and furnished the ledger account of the said party along with the copy of TDS certificate under Form-16A. It was argued before us, that at the most it can be a short deduction of tax, and any difference of opinion as to taxability of any item or nature of payments, then the assessee can, at the most, be declared to be an assessee in default under section 201 but that cannot be a ground for disallowance under section 40(a)(ia) of the Act. The Hon'ble Calcutta High Court in CIT Vs SK Tekriwal (supra) and Hon'ble Jurisdictional High Court in CIT Vs Prayas Engineering Ltd (supra) held that there is nothing in this section to treat the assessee as a defaulter where there is a shortfall of the deduction. It was also held that section 40(a)(ia) of the Act refer only to the duty to deduct tax and pay to Government account. If there is any shortfall due to any difference of opinion as to taxability of any item or the nature of payments falling under the TDS provisions, the assessee can be declared in default under section 201 of the Act no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. In view of the aforesaid factual and respectfully following the decisions of Hon'ble Calcutta High Court in CIT Vs SK Tekriwal (supra) and Hon'ble Jurisdictional High Court in CIT Vs Prayas Engineering Ltd (supra), the ground No. 3 of the appeal is allowed.

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 11. Ground No.4 relates disallowance of Rs.1,00,000/- in respect of foreign tour expenses. The ld AR for the assessee submits that the Assessing Officer made lump sum disallowance of Rs.1,00,000/- out of total foreign tour expenses of Rs.5,53,517/-. The ld CIT(A) has upheld the ad hoc disallowance. The learned Authorised Representative submits that expenses in question were incurred on foreign visits for business purposes. The foreign visits helped in increasing export of the assessee’s business. The Ld. AR for the assessee furnished a chart showing that export turnover of the assessee was increased. With regards CIT(A)’s observation that a part of foreign tour expenses has been incurred on foreign trip of Urvashiben Soni, who is employee of assessee and handles counter sales. The Ld. AR for the assessee explained that she had built very good repo with many Non Resident Indian lady customers who used to visit assessee’s showroom for purchase of jewellery. Owing to her skills, she was helping in augmenting business and hence, expenditure in question is justified. With regards to Kishorebhai Soni, the ld AR for the assessee explained that he is partner of assessee firm. His foreign trips were also for business purpose and hence, the impugned disallowance is absolutely unjustified. 12. The ld AR for the assessee further submits that the books of accounts are duly audited under section 44AB. And the expenses in question are supported by documentary evidences. The fact that such expenses have been incurred for the business purpose has not been doubted by assessing officer. However, assessing officer made lump sum disallowance. No specific defect has been pointed out by assessing officer. No specific expenses have been found to be personal in nature by 9

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 assessing officer. Alternatively, it was argued that some token disallowance may be confirmed. 13. On the other hand, ld.Departmental Representative relied on the orders of Lower Authorities. The ld.Departmental Representative submits that no details of foreign travel is provided, no purpose of such foreign travel is explained. One of the persons, who visited was not the partner in the assessee firm. The Assessing Officer disallowed the very meagre and reasonable amount and that the assessee is not entitled for further relief. 14. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. The assessing officer disallowed part of the expenses on ad hock basis by taking view that no details of the expenses and nature of expenses and purpose of visit, is verified in absence of evidence. The Ld. CIT(A) upheld the action of assessing officer for the want of evidence. It was also held that part of the expenses does not belongs to the assessment year under consideration. Before us the assessee has filed certain documentary evidences with regards to foreign travel expenses, consisting of ledger of foreign expenses, receipt of travel agencies, insurance receipts and foreign exchange receipts only. No documents with regard to purpose and place of visits or meetings details in overseas countries if place on record to substantiate the expenses. We have further noted that the assessing officer has already allowed substantial part of the foreign tour expenses and disallowed only Rs. 1.00 lakhs. In absence of sufficient evidence, we do not find any merit in the ground of appeal raised by the assessee. In the result this ground of appeal is dismissed. 10

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 15. Ground No.5 relates to disallowance of addition of Rs.2,00,000/- in respect of job-work expenses. The Ld. AR of the assessee submits that the assessing officer made lump sum disallowance of Rs.2,00,000/- out of total job-work expenses Rs.33,83,143/. The Ld. CIT(A) confirmed the same. The Ld. AR for the assessee further submits that the assessee is engaged in the business of manufacturing and trading of diamonds jewellery. The nature of assessee’s business is such wherein significant labor work is required to prepare jewellery, ornaments, articles of precious metals like gold, diamonds, etc. Such job work require intense skills which requires physical abilities such as close-range vision for detail work, manual dexterity, arm/hand steadiness, control and precision for machine work, attention to details and discriminatory ability with color and category details. Thus, the job work is highly skill oriented and hence, assessee needs to incur such job work expenses to get such work done. 16. The AR for assessee submitted that documentary evidences relating to the expenses in question i.e., Tax Audit Report, Annual Accounts, Ledger of Job work, Bills issued by the concerned parties, Ledgers of the concerned parties and TDS certificates (Form 16A) were furnished, copies of which are also filed. The assessing officer made the disallowance broadly on the three counts; (i) in certain details were missing in some of the bills, (ii) Karigar register was not produced and (iii) hefty expenses were incurred by assessee. The Ld. AR for the assessee explained that job-work bills were generated by third parties and assessee does not have control over such parties and so also contents of bills issued by them. In any case, basic details of job-work 11

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 are duly mentioned. With regards karigar register, it was explained that the assessee gets job-work done from outsiders and not from in-house labourers. Hence, there is no requirement to maintain any such karigar register. On the objection of hefty expenses, it was submitted that the assessing officer cannot step into the shoes of a businessman and decide as to how much expenses can be paid to be reasonable. There is no concept of “reasonableness” under the Act. It is the sole prerogative of a businessman to decide the quantum of any expense. So long as such expense is wholly and exclusively for business, the same needs to be allowed. All necessary details of recipients of job-work charges (viz., name, address, PAN, etc) were made available to Assessing Officer. TDS provisions have been compiled with in accordance with the Act. In case Assessing Officer had any doubt, he could have very well cross verified such aspects by calling for details from the concerned parties u/s.133(6) of the Act. However, Assessing Officer chose not to do anything of such sort. The books of accounts are duly audited under section 44AB of the Act. Expenses in question are supported by documentary evidences. The fact that such expenses have been incurred for the business purpose has not been doubted by Assessing Officer. However, assessing officer made lump sum disallowance. The impugned expenditure of Rs.33,83,143/- is insignificant compared to the “total turnover” of Rs.8,88,68,050/-. Hence, even in view of “Materiality concept”, the impugned addition is unwarranted. The Ld. AR for the assessee prayed for deleting the entire disallowances. In alternative submissions the Ld. AR for the assessee prayed for token disallowance.

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 17. On the other hand, the ld. DR for the revenue relied upon the orders of Lower Authorities. The Ld. DR for the revenue further submits that the assessee has taken altogether new plea now, before Ld. CIT(A), the assessee submitted that all records were produced before assessing officer. The assessing officer made very reasonable disallowances of Rs. 2.00 lakhs only out of the total Job work expenses of Rs. 34 lakhs (Aprox). The assessee failed to maintain the karigar register and other basic details, thus, the assessee failed to substantiate the job-work expenses. The Ld. DR for the revenue prayed for dismissal of the ground raised by the assessee. 18. We have considered the rival submission of the parties and have gone through the orders of the authorities below. The assessing officer made ad hock disallowance of job work expenses of Rs. 2.00 lakhs, out of total expenses of Rs. 34 lakhs (approx.) for the want of verification of bills and vouchers and non-maintenance of karigar register containing the details of job work and charges thereof. The Ld. CIT(A) also affirmed the disallowance with the similar observation. The Ld. CIT(A) also held that in absence of karigar register, the attendance, details and genuineness of expenses cannot be verified. Before Ld. CIT(A) the assessee admitted that that no karigar registrar was maintained. Before us the Ld. AR for the assessee vehemently argued that job-work done from outsiders and not from in-house labourers. Hence, there is no requirement to maintain any such karigar register. No such plea was raised before the lower authorities. Now the assessee has come with new pleas, which was not raised before lower authorities. The new explanation given by the assessee does not inspire confidence. Further, we have noted that the 13

M/.s.K.N.Diamond Vs. ACIT, Navsari Circle, Navsari./ ITA No.1788/AHD/2016 for A.Y.2012-13 assessing officer have made ad hock disallowance of Rs. 2.00 lakhs only, out of the total job work expenses of Rs. 34 Lakhs claimed by the assessee. Considering the above discussions, we do not find any merit in the ground of appeal raised by the assessee. In the result this ground of appeal is dismissed. 19. Ground No.6 relates to the total addition of Rs.7,94,523/-. In this ground of appeal the assessee has assailed the aggregate of additions, which we have already adjudicated above, thus, this ground of appeal need no specific adjudication. 20. Ground No.7 and 8 are general in nature, needs no specific adjudication and is dismissed as such. 21. In the result the appeal of the assessee is partly allowed. Order pronounced on 04-02-2021 by placing result on notice board. Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) (लेखा सद�य/ACCOUNTANT MEMBER (�याियक सद�य/JUDICIAL MEMBER) सुरत/ Surat, िदनांक Dated: 4th February, 2021 /#SGR Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat