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Income Tax Appellate Tribunal, ALLAHABAD BENCH ‘SMC’ ALLAHABAD
Before: SHRI.VIJAY PAL RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH ‘SMC’ ALLAHABAD [THROUGH VIRTUAL COURT] BEFORE SHRI.VIJAY PAL RAO, JUDICIAL MEMBER ITA No.18/ALLD/2020 Assessment Year: 2013-14 Dilip Kumar Khetan v. Income Tax Officer Proprietor Dilip Yarn Traders Ambedkarnagar-224149. Jalalpur, Ambedkarnagar-224149. TAN/PAN: AASPK9710B (Appellant) (Respondent) Appellant by: Shri Shailendra Kumar Mishra Respondent by: Shri A.K. Singh, CIT ( Sr. DR) Date of hearing: 13.07.2021 Date of pronouncement: 15.07.2021 O R D E R PER SHRI VIJAY PAL RAO, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order dated 17.10.2019 of Ld. CIT(A)-1, Lucknow for the A.Y. 2013-14. 2. The assessee has raised the following grounds.:- “1. That the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in confirming the arbitrary extra profit addition of Rs. 67,840/- which was made by the A.O. , without considering the audit report. 2. That the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in confirming the disallowance of expenses of Rs.20,892 @ 12.5% out of shop expenses, travelling expenses and Vehicle running and maintenance expenses as against addition of Rs.41,785 made by the A.O. @ 25% of Gross expenses claimed at Rs.167,141, without considering the audit report. 3. That the learned Commissioner of Income-tax (Appeals ) has erred in law and on facts in failing to appreciate that second proviso to section 40A(3) and 40A(3A)
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is applicable in the case of the appellant and in confirming the arbitrary addition of Rs.3,31,500 .without considering the audit report. 4. That the appellant craves permission for amending the aforesaid grounds of appeal and / or for raising fresh grounds of appeal.” 3. Ground no. 1 is regarding an addition on account of low G.P. declared by assessee. The assessee is an individual and proprietor of Dilip Yarn Traders. The assessee deals in purchase & sale of cotton yarn on wholesale basis. The assessee filed his return of income for the year under consideration on 25.09.2013 declaring total income of Rs.5,22,510/-. During the scrutiny assessment, the Assessing Officer noted that the assessee has disclosed gross profit at Rs.11,10,369/- which comes to 0.65% on total sale of 17.07 crores and net profit @ 0.36%. The Assessing Officer also considered the G.P. declared by assessee for the preceding two years i.e. A.Ys. 2011-12 & 2012-13 @ 0.68% and 0.69% respectively. Accordingly, the Assessing Officer made an addition by applying the G.P. rate @ 0.69% on the total turnover which resulted an addition of Rs.67,840/-. The assessee challenged the action of Assessing Officer before the CIT(A) but could not succeed. 4. Before the Tribunal the Ld. AR of the assessee has submitted that the Assessing Officer has not doubted the correctness of the books of account of assessee duly audited. He has referred to the assessment order and submitted that the assessee attended the proceedings and furnished the requisite details and supporting the evidence along with books of account including ledger account etc which were examined by Assessing Officer and also discussed with the assessee. Thus, the Ld. AR has contended that when the Assessing Officer has not rejected the books of account of the assessee u/s 145(3) the estimation of the income by Assessing Officer at higher G.P. of 0.69% as against 0.65% declared by assessee is not justified. He has relied upon the decision of Delhi Bench of the Tribunal dated 11.06.2015 in the case of ACIT Vs. M/s. Ess EII Cables Co. in I.T.A. No.2792/Del/2013 has submitted that identical issue has been considered and decided in favour of the assessee and against the revenue.
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On the other hand, the Ld. DR has submitted that the Assessing Officer has considered the past history of the G.P. declared by assessee and consequently applied the G.P. declared by assessee in the immediate preceding year. He has relied upon the orders authority below. 5. I have considered the rival submissions as well as the material available on record. The Assessing Officer cannot question the rate of profit declared by assessee until and unless he detects some defects in the books of account. Once the books of account are found to be the representing true and correct affairs of business the Assessing Officer cannot tinker with the actual profit declared by the assessee. In the case in hand, the Assessing Officer has duly recorded in the assessment order that books of account along with bills and vouchers were produced for examination and the Assessing Officer has examined the same as test check. Once the books of account and other supporting evidence were examined by Assessing Officer and no defect was found by him then low profit outcome of the business activity cannot be a reason for addition. The Assessing Officer can very well conduct an enquiry to find out the reasons for low G.P. declared by assessee in comparison to the preceding year but low G.P declared by assessee cannot be a basis or ground for making the addition. Once the Assessing Officer did not detect any mistake in the books of account the adoption of higher G.P. rate by Assessing Officer for the making addition is unjustified and not sustainable. The Delhi Benches Tribunal in the case of ACIT Vs. M/s. Ess EII Cables Co. (supra) has concluded finding in para no. 7.4 as under.:- “7.4 The counsel for the assessee has submitted that the gross loss is also on account of the opening stock of 88,692 kgs. of copper valued at Rs. 445 per kg. The purchase quantity of 1552.210 MT is less than the sale quantity of 1640.90 MT which could only have come out of the opening stock. Hence the finding of the Assessing Officer that the monthly rates of sale and purchase shows a surplus of Rs. 5,25,35,185/- at the end of the year inspite of the fall in the rate of copper, ignores the value of opening stock of Rs. 3,94,67,940/- (88,692 x 445). We find that this contention is correct, as a working of gross profit must necessarily take into account the opening and closing stock, and direct expenses, and not only be based
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on comparison of purchase prices of raw material and sale prices of finished products. That the Assessing Officer has based the addition of Rs. 4,31.41,035/- entirely on the fall in gross profit rate, without bringing any other material on record, and without disputing the results. It is established law that fall in gross profit alone, without pointing out defects in the books of account, is not an adequate basis for making additions. “Additions to the profits of the assessee made solely on the ground that it was low without giving a specific finding that the accounts of the assessee were not correct and complete, or that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. We find considerable cogency in the finding of the Ld. CIT(A) in the impugned order that the mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not by itself be sufficient to justify the addition." In this regard, Ld. CIT(A) has referred the decision in the case of Aluminium Industries (P) Ltd. Vs. CIT (1995) 80 Taxmann 184 (Gauhati). After considering the evidences filed before Ld. CIT(A) regarding the continuous fall in the prices of copper, and after verifying the quantitative tally of consumption of raw material and manufacture of finished goods, the addition made on account of estimation of gross profit, has rightly been deleted by the Ld. CIT(A). In the background of the aforesaid detailed discussions, we find that Ld. CIT(A) has rightly deleted the addition of Rs. 4,31,41,035/- entirely on the fall in gross profit rate. Therefore, we do not see any reason to interfere with the well reasoned order of the Ld. CIT(A), accordingly, we uphold the same by dismissing the appeal filed by the Revenue.” 6. In view of the above facts and circumstances of the case, the addition made by Assessing Officer on account of low G.P. rate declared by assessee is not justified and the same is deleted. 7. Ground no.2 is regarding adhoc disallowance of expenses by AO@ 25% which was restricted by CIT(A) of 12.5%. The Ld. AR of the assessee has submitted that the adhoc disallowance of expenses is not permitted when the Assessing Officer has not found any defect in the books of account as well as not held that the claim of the assessee is excessive. In support of his contention, he has relied upon the decision of Co-ordinate
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Bench of this Tribunal dated 19.12.2018 in the case of Sanjeev Seth Vs. ACIT in I.T.A. No.184/Alld/2018 as well as decision dated 26.04.2019 in the case of M/s.Premier Car Sales Ltd. Vs. ACIT in I.T. A. No. 449 & 450/Lkw/2018. Hence, the Ld. AR has submitted that the adhoc disallowance made by Assessing Officer and confirmed by CIT(A) to the extent of 12.5% of the total expenses is not justified in the same has been deleted. 8. On the other hand, the Ld. DR has submitted that the Assessing Officer has given the reason for disallowance of expenses in para no.4 of the impugned order and noted that the certain expenses under the head of Shop Expenses, Travelling Expenses and Vehicle Running and Maintenance Expenses are not vouched and remained unverifiable. Therefore, the Assessing Officer is justified in making disallowance of 25% of those expenses amounting to Rs.41,785/- which were reduced to 12.5% by the CIT(A). The Ld. DR has relied upon the decision of jurisdiction High Court in the case of Pr. CIT Vs. Rimjhim Ispat Ltd. (2016) 382 ITR 152 (Alld.). 9. I have considered the rival submissions as well as relevant material on record. The Assessing Officer has made the adhoc disallowance of 25% of certain expenses under the head of Shop Expenses, Travelling Expenses and Vehicle Running and Maintenance Expenses for want of voucher and verification. The said disallowance made by Assessing Officer was restricted by CIT(A) to 12.5% of the total expenditure claimed under these three heads. There is no quarrel on the point that if expenditure claimed by assessee are not supported by proper bills and vouchers the same would not full-fill the conditions as required u/s 37 of the I. T. Act, 1961 that expenses are incurred wholly and exclusively for the business purpose. The Hon'ble Jurisdiction High Court in the case of Pr. CIT Vs. Rimjhim Ispat Ltd. (supra) has considered this issue in para no. 7 to 10 as under.:- “7. Having heard the learned counsel for the parties, we find that there is an express finding given by the Assessing Authority as well as by the Ist Appellate Authority with regard to non-production of bills and vouchers and for not maintaining the stock register. In the absence of non-production of bills and 5
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vouchers, the Assessing Officer was justified in disallowing certain expenditure by 10%, which was reduced by the Ist Appellate Authority to 5%. This aspect had not at all been considered by the Tribunal and the same had only been allowed on the ground that the turnover has increased by 5% and the expenditure has reduced. The Tribunal has lost sight of the fact that the expenditure claimed under the head manufacturing expenses, which forms part of the "profit and loss account", showing expenses made by the assessee are required to be proved by production of bills and vouchers. In the absence of production of bills and vouchers, an inference can be drawn by the Assessing Authority that such expenses shown under this head were inflated or were not supported by any bills, vouchers or any other documentary evidence, which would justify the Assessing Officer in disallowing certain portion of such expenses. 8. In the light of the aforesaid, we are of the opinion that the Tribunal committed an error in allowing the appeal of the assessee and by totally deleting the disallowance of 5%. We, accordingly, allow the Ist question of law as stated aforesaid, in favour of the appellant, i.e., the Department and against the assessee and set aside that part of the order of the Tribunal on this aspect and restore the order of the Ist Appellate Authority. In our opinion, the disallowance of 5% in the facts of the case is justified. 9. Insofar as the second question is concerned, nothing has been brought on record by the Department to indicate as to what was the direction given by the authority for the assessment year 2001-02. We are of the view that the expenses made by the assessee on telephone and conveyance running expenses, etc have to be dealt with in the same fashion as have been dealt in the earlier assessment years. The Tribunal has relied upon a decision of the Gujarat High Court holding that the remuneration given to the Directors which includes any expenditure incurred in providing benefit free of charge under the Companies Act cannot be disallowed. As such disallowance for maintenance of vehicle or conveyance and telephone is not justifiable. The said decision is squarely applicable in the present case. 10. The appeal is partly allowed. Question no. A is answered in favour of the Department and question no.B is answered in favour of the assessee.”
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In the case of hand, the Assessing Officer has made the disallowance of 25% of the expenditure claimed under the head of Shop Expenses, Travelling Expenses and Vehicle Running and Maintenance Expenses amounting to Rs.41,785/-. The reason for disallowance is cited by Assessing Officer as not fully vouched which remain unverifiable. The assessee has not produced any contrary material or record to contract this finding of the Assessing Officer that expenses are not fully vouched. However as in the case of Pr. CIT Vs. Rimjhim Ispat Ltd. (supra), the disallowance of 5% of the expenses for want of supporting vouchers was considered as reasonable, therefore, the disallowance confirmed by CIT(A) 12.5% is restricted to 5%. 11. Ground no.3 is regarding disallowance of freight expenditure u/s 40A(3) of the I. T. Act, 1961. The Assessing Officer noted that the assessee has made payment in cash exceeding Rs.20,000/- in a day on certain dates to a single party or person which is not allowable as per the provision of section 40A(3) of the I. T. Act, 1961. Accordingly, the Assessing Officer has extracted the details of the payments made by assessee towards freight expenses which were more than Rs.20,000/- on a single day and then disallowed the total amount of Rs.3,31,500/- by invoking the provisions of Section 40A(3) of the I. T. Act, 1961. The assessee challenged the action of the Assessing Officer before the CIT(A) but could not succeed. 12. Before the Tribunal the Ld. AR of the assessee has submitted that the Assessing Officer has made the disallowance without considering the correct provision of Section 40A(3) and 40A(3A) of the I. T. Act, 1961. He has referred the third proviso to Section 40A(3) and 40A(3A) and submitted that as per the amended provisions the threshold limit for payment in cash to the transport operators is increased from Rs. 20,000/- to Rs.35,000/. The Ld. AR has submitted that the payment made by assessee are below the limit provided under the third proviso to Section 40A(3) and 40A(3A) of the I. T. Act, 1961. Thus, the Ld. AR has contended that the disallowance made by Assessing Officer and confirmed by CIT(A) is contrary to the provisions of Section 40A(3) and liable to be deleted.
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On the other hand, the Ld. DR has submitted that the third proviso to Section 40A(3) and 40A(3A) of the I. T. Act is not applicable in the case of assessee but the said limit is applicable only in the case of transport operators. He has also referred and relied upon the explanatory not issued by CBDT vide Circular No.5/2010 dated 03.06.2010. The Ld. DR has referred to para no. 19.2 of the said circular and submitted that the limit of Rs.20,000 is applicable in the case of the assessee as provided in second para 19.3 of the said circular. 14. I have considered the rival submissions as well as relevant material on record. Section 40A(3) contemplates certain expenditure incurred in cash are not deductible. Though, sub-section 3 of Section 40A as existed at the relevant point of time prescribes the limit not exceeding of Rs.20,000/- meaning thereby if expenditure incurred in cash is less than Rs.20,000/-or not exceeding Rs.20,000/- then the provisions of Section 40A(3) are not applicable. However, in the case of the payment made by assessee to transport operators in respect of hiring or leasing goods carriages the same would fall in third proviso to Section 40A(3) and 40A(3A) of the I. T. Act. This proviso provides a higher limit of Rs.35,000/- for payment in cash to the transport operators. For the ready reference third proviso to Section 40A(3) and 40A(3A) is reproduced as under.:- “(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration”) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorized by, or is not in accordance with, the terms of partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnership deed, so, however, that the prior of authorization for such payment by any earlier 8
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partnership deed does not cover any period prior to the date of such earlier partnership deed; or iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated a; the rate of J4[twelve] per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which Is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :— [(a) on the first Rs. 3,00,000 Rs. 1,50,000 or at the rate of of the book-profit or in 90 per cent of the book-profit, case of a loss whichever is more; (b) on the balance of the book-pro fit at the rate of 60 per cent:] Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.” 15. As regards the explanatory not issued CBDT vide Circular No.5/2010 it is noted that the para no. 19.2 and 19.3 are relevant for this section which read as under.:- “Enhancement of limit for disallowance of expenditure made in the case of transporters 19.1 Under the existing provisions of the Income-tax Act, where an assessee incurs any expenditure, in respect of which payment in excess of Rs,20,000 is made otherwise than by an account payee cheque or account payee bank draft, such expenditure is not allowed as a deduction, 19.2 Given the special circumstances of transport operators for incurring expenditure on long haul journeys, the Act has been amended to raise the limit of payment to such transport operators otherwise than by an account payee cheque or 9
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account payee bank draft to Rs.35,000 from the existing limit of Rs. 20,000. For this purpose a new proviso has been inserted after the proviso in sub-section (3 A) of section 40A of the Income-tax Act. 19.3 The existing limit for other categories of payments will remain at Rs.20,000 subject to the exceptions declared in rule 6DD of the Income-tax Rules.”
As per para no. 19.2 of the circular, it is explained that enhanced limit of Rs.35,000/- is applicable for the payment to the transport operators and in other cases the limit of payment remains at Rs.20,000/-. Therefore, there is no ambiguity in the provision of Section 40A(3) and third proviso as well as the explanatory note issue by CBDT. Accordingly, in view of the third proviso to Section 40A(3), the payment made in cash to the transport operators which is less than Rs.35,000/- would not attract this proviso of section 40A(3) of the I. T. Act, 1961 and consequently no disallowance is called for. The Assessing Officer has given the details of the payment at page no. 4 of the assessment order as under.:-
S. No. Date of payment Amount (Rs.) 1 12.10.2012 27,000 2 15.11.2012 22,000 3 16.11.2012 22,000 4 19.11.2012 22,000 22,000 5 27.11.2012 21,000 6 20.11.2012 21,000 7 22.12.2015 21,000 8 26.12.2012 21,000 9 21.01.2013 21,000 10 26.01.2012 21,000 11 02.02.2013 21,000 12 13.02.2013 21,000 13 02.03.2013 21,000 14 31.03.2013 21,000 Total 3,31,500
None of these payments are exceeding Rs.35,000/-, therefore, the disallowance made by Assessing Officer is not sustainable and the same is deleted.
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In the result, appeal filed by the assessee is partly allowed. (Order pronounced on 15/07/2021 at Allahabad in the open Court through Video Conferencing) Sd/- [VIJAY PAL RAO] JUDICIAL MEMBER Dated: 15/07/2021 Allahabad Vijay Pal Singh (Sr. PS) Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT(A) , Allahabad 4. CIT 5. DR – //True Copy// By order Assistant Registrar