SRI.VINU SELVARAJ M/S. RADHAS TEXTILES,KOLLAM vs. THE ITO, WD-4, KOLLAM

Per GEORGE GEORGE K.,JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of

CIT(A), Trivandrum dated 04/10/2019. The relevant assessment year is 2011-12.

assessment year 2011-12, the return of income was filed on 17.02.2012

declaring total income of Rs.9,27,050/-. The assessment was taken up for

scrutiny by issuance of notice u/s. 143(3) of the I.T. Act. The assessment was

completed u/s. 143(3) of the I.T. Act vide order dated 31/01/2014, determining

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the total income at Rs.39,49,670/- as against the returned income of

Rs.9,27,050/- . In completing the said assessment, the Assessing Officer made

the following additions:

S.No. Item Amount(Rs.) Reason 1. Disallowance u/s. 40A(3) 20,44,371 Cash payment 2. Disallowance u/s. 40A(2) 5,40,000 Excessive payment 3. Car Expenses 2,42,941 Personal use 4. Depreciation on building 43,982 5. Adhoc disallowance 1,50,000 Possible inflation 6. Interest u/s. 244A 1,330 Not disclosed

before the first appellate authority. The CIT(A) partly allowed the appeal of the

assessee by deleting the adhoc disallowance of Rs.1,50,000/-.

Tribunal raising the following grounds of appeal:

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Disallowance of Rs.20,44,371/- : (Ground Nos. 1 to 5)

5.1 During the course of assessment proceedings, it was noticed that the

assessee purchased textile goods from SPM & Sons, Kollam for a sum of

Rs.20,44,371/. It was further noticed by the Assessing Officer that the entire

payment for these purchases were in cash. The Assessing Officer show caused

the assessee as to why the said cash payments made to SPM & Sons, Kollam

should not be disallowed by invoking the provisions of section 40A(3) of the I.T.

Act. The assessee filed his reply dated 13/12/2013 wherein it was contended

that the purchases were made for effecting reduction sale after Onam season. It

was stated that in order to avoid delay in getting goods, the purchases were

made beyond banking hours in cash. It was also stated that the payments were

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made in cash, since the dealer did not accept cheques. It was contended that

the individual bills were below Rs.20,000/- and further, it was covered under the

exemption provided under Rule 6DD of the I.T. Act. The contentions of the

assessee were rejected and the Assessing Officer disallowed the entire cash

payment made to SPM & Sons, Kollam. by invoking the provisions of section

40A(3) of the Act.

5.2 Aggrieved by the order of the Assessing Officer by making disallowance

u/s. 40A(3) of the I.T. Act, the assessee preferred the appeal before the first

appellate authority. Before the CIT(A), apart from reiterating the submissions

made before the Assessing Officer, the assessee has relied on the following

judicial pronouncements:

5.3 The CIT(A) rejected the contentions raised by the assessee and confirmed

the view taken by the Assessing Officer . The relevant finding of the CIT(A)

reads as follows:

“4.1.3. The learned AR also relied on the decision of Hon'ble High Court of Rajasthan in the case of Harshila Chordia, 298 ITR 349 and on the decision of ITAT, Delhi in the case of KGL Network P Ltd dated 02.07,2018. The facts, the ground of appeal and the arguments of the learned AR have been considered. It is evident from the assessment order that purchases were made from a leading textile dealer in Kollam Town where Banking facilities are available. Further, learned AR, except stating that the goods are sold only on cash, has not produced any evidence from the payee that the payee insisted on cash payment. The learned AR has also not explained how the payments are covered by rule 6DD of the I.T.

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Rules, 1962. In this regard it would be relevant to place on record the observations of jurisdictional High Court in the case of MRS Roadways, 52 taxmann.com 99 and the relevant part is as under:

''7. As far as the case on hand is concerned, the assessee is neither the owner of the goods nor the owner of the vehicle carrying the goods. If the assessee has to claim exemption under section 40A(3), necessarily he has to comply with the statutory provision and the rules framed thereunder. Only in instances where the assessee falls under any of the exemptions covered in rule 6DD, he is entitled to claim the said amount as an exemption under section 40A(3)."

4.1.4. In the light of the observations of Hon'ble High Court, as above and as the Appellant is not covered by the exceptions stated under rule 6DD, the disallowance of Rs.20,44,171 is upheld and the ground raised on this issue is dismissed.

5.4 Aggrieved by the order of the CIT(A), the assessee has raised this issue

before the Tribunal. The Ld. AR submitted that the only reason for the CIT(A) to

confirm the disallowance made u/s. 40A(3) of the I.T. Act was that the assessee

has failed to produce any evidence from the payee that the it had insisted for

payment in cash. For the above purpose, the assessee has produced a letter

from SPM & Sons, Kollam.(seller of the goods to the assessee ) stating that they

had insisted on cash payment. The assessee has filed brief written submission

wherein it was stated that the assessee ‘s concern is in Punalur and purchases

were made in Kollam from SPM & Sons, Kollam, beyond the banking hours and

on insistence of the settler, namely SPM & Sons, Kollam, the assessee was forced

to make cash payments. It was further contended that since the cash payments

were made beyond banking hours, the same would fall under Rule 6DD(j) of

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Income Tax Rules, 1962. The Ld. DR on the other hand supported the orders

passed by the Income Tax authorities.

5.5 I have heard the rival submissions and perused the material on record. The

primary reason for the CIT(A) to confirm the disallowance made under section

40A(3) is that the assessee had failed to produce evidence from the payee, i.e.,

SPM & Sons, Kollam that it insisted on cash payments. The assessee has now

produced a letter from SPM & Sons, Kollam wherein it was stated that it had

insisted for cash payments in view of the fact that the goods sold to them were

mill goods, which is in high demand. Further, it was stated that the assessee’s

Bank account was located at Punalur and for encashing the cheque/draft would

require time. It was further mentioned in the said letter of SPM & Sons, Kollam

that the purchases were effected in most of the days after the banking hours.

Rule 6DD(j) of the I.T. Rules states that when payments are required to be made

on dates on which the Banks are closed either on account of holiday or strike,

such cash payments would not be liable for disallowance u/s. 40A(3) of the I.T.

Act. The assessee has to prove the circumstances under which the assessee was

forced to make cash payments and such circumstance falls within one of the

conditions enumerated under Rule 6DD of the I.T. Rules. In the interest of

justice and equity, I am of the view that one more opportunity should be granted

to the assessee to prove his case that he was forced to make cash payments

under the compelling circumstances and assessee’s case falls in one of situation

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enumerated under Rule 6DD of the I.T. Rules. For the above purpose, this issue

is restored to the file of the Assessing Officer. Accordingly, Ground Nos. 1 to 5

of the assessee are allowed for statistical purposes.

Disallowance u/s. 40A(2) amounting to Rs.5,40,000/- (Ground Nos. 6 & 7)

assessee had paid salary to his mother, his wife and his two brothers in total

amounting to Rs.10.80 lakhs. The Assessing Officer held that the assessee had

made payments to persons covered u/s. 40A(2) in excess of market value and

disallowed 50% of such expenditure. Accordingly salary expenditure was

disallowed to the extent of Rs.5.40 lakhs. The relevant finding of the Assessing

Officer in making disallowance of 50% of such expenses by invoking the

provisions of section 40A(2) reads as follows:

“From the facts and circumstances mentioned above, it is seen that the payment by way of salary to the above relatives of the assessee is excessive or unreasonable having regard to the fair market value of the services rendered by them. The burden of proving the reasonableness of the salary paid to the relatives vests with the assessee. The explanation furnished by the assessee did not prove the reasonableness of salary paid to the relatives for the services rendered by them. Part of the salary paid to the relatives is compensation in lieu of their entitlement to share in the business. Therefore 50% of the salary paid to the above relatives of the assessee is considered to be excessive or unreasonable having regard to the fair market value of the services rendered by them and is disallowed under section -40A(2) of the Income Tax Act 1961 and added to the total income of the assessee under the head income from business and profession."

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6.1 The assessee being aggrieved filed appeal to the CIT(A). The CIT(A)

dismissed the appeal of the assessee on this issue. The relevant finding of the

CIT(A) reads as follows:

“During the appeal proceedings, the learned AR repeated the same arguments made before the Assessing Officer that they were family members entitled to business profits and the Appellant has utilized their services in conduct of business. The arguments of the learned AR are considered. It is for the Appellant to explain what services were rendered by the family members against the payments received by them. The learned AR has not furnished any documentary evidence to prove the same. Considering these facts, the disallowance of 50% of these payments under section 40A(2) of the Act is reasonable and the same is upheld. The ground raised on this issue is dismissed.”

6.2 Aggrieved by the order of the CIT(A), the assessee has raised this issue

before the Tribunal. The Ld. AR reiterated the submissions made before the

Income Tax authorities. The Ld. DR on the other hand strongly supported the

orders of the Assessing Officer and CIT(A).

6.3 I have heard the rival submissions and perused the record. The assessee

has filed brief written submissions. The contents of the same is that the

assessee’s father Late Shri R. Selvaraj was running the proprietary concern and

on account of his premature death, the assessee was forced to take over the

reins of business at a very young age since his brothers were studying for other

professional courses. The assessee was a student and had to discontinue his

studies to attend to the business run by his late father. In the process, the

assessee’s mother who was assisting his late father, has helped the assessee in

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the day to day affairs of the business. Since the assessee was frequently going

out on tour for business purposes, the shop had to be attended by his mother for

which adequate remuneration was paid. Later, his brothers also joined business

after their studies. Further, the assessee’s father died interstate and the

assessee took over the business for helping other members of the family.

Having regard to the fact that the assessee’s mother, wife and two brothers had

experience in this line of trade, salary was paid to them as compensation for

market value of services rendered by them. I am of the view that disallowance

of 50% of salary on facts and circumstances of the instant case is excessive. In

order to meet the ends of justice, out of Rs.5,40,000/-, I hold that assessee is to

be granted further deduction of Rs.2,70,000/- on account of salary paid to close

relatives, for the reason that assessee‘s father was the previous owner of the

business, on his passing away, all his children and his wife were entitled to

business. Moreover, it is also a fact that assessee’s mother, wife and his two

brothers were assisting the assessee in running the day to day business affairs of

the assessee. Accordingly, I grant further deduction of Rs.2,70,000/- and

confirm the disallowance of Rs.2,70,000/- out of the total disallowance of

Rs.5,40,000/- made by the Assessing Officer which was confirmed by the CIT(A).

It is ordered accordingly. Thus, Ground Nos. 6 & 7 are partly allowed.

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Disallowance of Car Expenses 7. The Assessing Officer disallowed 1/3rd of the expenses claimed on account of

four cars owned by the Appellant. The relevant part of the order is as under:

"Since the assessee is doing a proprietary business and the business having no branches, claim of the assessee for deduction of the entire expenses of all the four cars is found to be not in order. At the time of hearing, this matter was discussed with the authorised representative. A letter was issued to the assessee on 10.12.2013 proposing to disallow two third of the entire expenses on these cars. The assessee filed a reply, in which, it is stated that one car is used by the assessee and the other three cars are used by the assessee's two brothers and mother. It is also stated that the brothers use these cars for purchases from distant places and the mother uses the car for attending business.

The cars owned by the assessee and family members for both business and personal purposes. Since the cars are used by family members and also for personal purposes, the claim of the assessee for deduction of the entire expenses of all four cars is not allowable. Therefore one third of the entire expenses is disallowed and added to the total income of the assessee under the head income from business and profession."

7.1 The view taken by the AO was confirmed by the CIT(A) . The relevant

finding of the CIT(A) reads as follows:

4.3.2. During the appeal proceedings, the learned AR argued that the Appellant had four relatives who were attending to the business and each of them was given a car for attending business and therefore, the disallowance is not warranted. The arguments of the learned AR are considered. The learned AR could not produce any documentary evidence to prove that four cars are necessary to maintain a proprietary business which has no branches. Further, the services rendered by the four relatives has not been proved. Considering these facts, the disallowance of 1/3rd expenses debited to P&L account on account of four cars is upheld and the ground raised on this issue is dismissed.

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7.2 Aggrieved by the order of the CIT(A), the assessee has raised this issue

before the Tribunal. Before the Tribunal, the assessee has contended that disallowance of 1/3rd expenses on car, depreciation and interest on loan is very

excessive . The Ld. AR submitted that according to the Assessing Officer, the

assessee being proprietor, it was not necessary for him to maintain four cars

especially when he had no branches. The Ld. AR submitted that the Assessing

Officer did not consider the fact that the assessee had four relatives who were

attending to the business and each of them were given a car for attending

business and for its utilization. Further, it was submitted that the assessee had

to go to other places such as Tamil Nadu and Bangalore for purchases required

for the business. Therefore, it was submitted that expenditure claimed for cars

is justified. The Ld. DR on the other hand strongly supported the orders of the

Income Tax authorities.

7.3 I have heard the rival submissions and perused the material on record. It

is an admitted fact that that the assessee has four relatives who were attending

to business and each of them was given a car for business and for its utilization.

The assessee has also to go to other places such as Tamil Nadu and Bangalore for making purchases. Taking into these facts, I am of the view that 1/3rd

disallowance of car expenses is excessive. In the facts and circumstances of the case, I restrict the disallowance to 1/4th of the car expenses claimed by the

assessee. It is ordered accordingly. Thus, Ground No. 8 is partly allowed.

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adjudication is required on the same.

purposes. Pronounced in the open court on 27th -01-2020.

sd/- (GEORGE GEORGE K.) JUDICIAL MEMBER

Place: Kochi Dated: 27th January, 2020 GJ Copy to: 1. Shri Vinu Selvaraj, Radhas Textiles, Chowka Road, Punalur, Kollam. 2. The Income Tax Officer, Ward-4, Kollam. 3. The Commissioner of Income-tax(Appeals), Trivandrum. 4. The Pr. Commissioner of Income-tax, Trivandrum. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin

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