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Income Tax Appellate Tribunal, JAIPUR BENCH ’B’, JAIPUR
Before: SHRI RAMESH C. SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 781 & 782/JP/2018
PER VIJAY PAL RAO, JM :
These two appeals by the assessee are directed against two separate orders of ld. CIT (A)-2, Jaipur dated 12.03.2018 and 15.03.2018 for the assessment years 2011-12 and 2014-15 respectively. For the assessment year 2011-12, the assessee has raised the following grounds :-
“ 1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) has grossly erred in confirming the addition of Rs. 5,50,000/- u/s 68 of the Income Tax Act, 1961, made by ld. A.O. on account of bona fide unsecured loans accepted by the assessee.
2. On the facts and in the circumstances of the case and in law, the ld. CIT (A) has grossly erred in confirming the part of addition made by the ld. A.O. on account of disallowance of genuine business expenses of Rs. 72,852/-. The disallowance
has been made of depreciation, vehicle running & maintenance expenses and telephone expenses.
3) That the appellant craves the leave to amend/alter any or all of the grounds of this appeal on or before the hearing of the matter.
Ground No. 1 is regarding addition made under section 68 of the I.T. Act.
The assessee has received loan of Rs. 26,00,000/- from Smt. Nidhi Goyal which was also repaid during the year under consideration. The AO verified and examined the relevant record including the bank statement of the loan creditor and noted that there was a cash deposit of Rs. 5,50,000/- in the bank account of the loan creditor on 09.12.2010 just before the cheque given to the assessee of Rs. 6,00,000/- on 10.12.2010. The AO also recorded the statement of the loan creditor under section 131 of the IT Act and finally made the addition of the said amount of Rs. 5,50,000/- under section 68 of the IT Act. The assessee challenged the action of the AO before the ld. CIT (A) but could not succeed.
Before us, the ld. A/R of the assessee has submitted that the AO has accepted the loan to the extent of Rs. 20,50,000/- out of the total loan of Rs. 26,00,000/- taken from Smt. Nidhi Goyal. The entire loan was repaid by the assessee during the year under consideration and, therefore, there was no outstanding of loan as on 31st March, 2011. He has further submitted that the AO has examined the loan creditor who has admitted the transaction of loan to the assessee and also explained the source of the cash of Rs. 5,50,000/- being his withdrawal from the bank of Rs. 4,50,000/- as well as tuition fee income of loan creditor. The assessee has also produced the books of account and balance sheet of the loan creditor to show the creditworthiness of the loan creditor. Thus the ld. A/R has submitted that once the loan creditor herself in her statement recorded under section 131 has explained the source of the said cash deposit in the bank and also accepted the transaction of loan, then in the absence of any contrary record, the said addition made by the AO is not justified. He has relied upon the following decisions of Hon’ble Jurisdictional High Court :-
Aravali Trading Co. vs. ITO 187 Taxman 338 (Raj.). CIT vs. Bhawani Oil Mills (P) Ltd. 20 Taxman.com 441 (Raj.) CIT vs. Heeralal Chaganlal 257 ITR 281 (Raj.)
On the other hand, the ld. D/R has submitted that the loan creditor has explained the source of cash deposit as withdrawal from the bank on some earlier occasion. However, the nexus of said withdrawal and re-depositing in the bank account was not proved. Therefore, the assessee has failed to explain the source of the loan transaction when there is a cash of Rs. 5,50,000/- deposited just prior to the loan given to the assessee. He has relied upon the orders of the authorities below.
We have considered the rival submissions as well as the relevant material on record. The AO has noted that the assessee has received Rs. 26,00,000/- as loan from one Smt. Nidhi Goyal. The details of the said loan as reproduced by the AO at page 3 of his order are as under :-
Date on which loan was given Amount Rs.
13.10.2010 10,00,000/- 14.10.2010 10,00,000/- 10.12.2010 6,00,000/- ------------------------ Total: 26,00,000/- ------------------------ The AO has accepted the transactions of Rs. 10,00,000/- each on 13.10.2010 and 14.10.2010. However, the loan of Rs. 6,00,000/- on 10.12.2010 was doubted by the AO on the ground that in the bank account of the loan creditor a sum of Rs. 5,50,000/- was deposited in cash just prior to the said transaction of loan. The AO accordingly issued summon under section 131 of the IT Act to the loan creditor and recorded her statement under section 131. We note that in the said statement the loan creditor has confirmed the transaction of loan of Rs. 26,00,000/- to the assessee. She has also explained the source of deposit of Rs. 5,50,000/- as a sum of Rs. 4,50,000/- was withdrawn from the bank on 23rd September, 2010 and the balance was on account of tuition fee received by her. The statement clearly established the fact that the loan creditor has given the specific details of the withdrawal on 23rd September, 2010 on account of some investment in property but the said transaction could not be materialized. Therefore, she has deposited the said amount along with the tuition fee in the bank on 09.12.2010. This factual explanation of the loan creditor has not been controverted by the AO by bringing any material or facts on record. Once the AO has examined the loan creditor under section 131 of the IT Act and the assessee has also produced the Income Tax Return as well as the other details including the Balance Sheet of the loan creditor to show the creditworthiness of the loan creditor, then merely because the loan creditor has made some deposit in the bank would not ipso facto lead to the conclusion that the said cash deposit belongs to the assessee and the same has come to the assessee in the form of loan. Even otherwise, the AO has not disputed the loan transaction to the extent of Rs. 20,50,000/- and further the entire loan was repaid by the assessee during the year under consideration. Thus the addition made by the AO and sustained by the ld. CIT (A) is not justified. Accordingly, in the facts and circumstances of the case, the said addition of Rs. 5,50,000/- made under section 68 of the Act is deleted.
Ground No. 2 is regarding disallowance of expenses on account of depreciation, vehicle running & maintenance as well as telephone expenses.
The AO noted that the assessee has claimed Rs. 1,38,221/- in the Profit & Loss Account as vehicle running and maintenance expenses. The AO observed that the same vehicles are used by the assessee for his personal use also. Since the assessee has not maintained log book regarding use of the vehicle, therefore, the AO has made disallowance of 20% of such expenses. The AO also made disallowance of 20% in respect of depreciation on vehicle and telephone expenses.
Thus all these three disallowances were made by the AO on the identical ground of personal use of the vehicle and telephone. On appeal, the ld. CIT (A) has restricted the disallowance to 10% as against 20% made by the AO.
We have heard the ld. A/R as well as the ld. D/R and considered the relevant material on record. The assessee is doing the business as proprietor of M/s.
Agarwal & Sons. So far as the vehicle running and maintenance expenses are concerned, if the assessee has not established the fact that the personal vehicle is separate from the vehicle used for business purposes, then the element of personal use of the vehicle cannot be ruled out. Therefore, in the facts and circumstances of the case, we find that 10% disallowance confirmed by the ld. CIT (A) is just and proper. As regards the depreciation, since the depreciation is allowable as per the provisions of the Act and not as per the duration of use of vehicle, therefore, the adhoc part of disallowance of depreciation is not permitted on the ground of personal use when the vehicle running and maintenance expenses are already considered on personal use. Accordingly, the disallowance of depreciation on vehicle is deleted.
7.1 As regards the telephone expenses, the AO has disallowed the adhoc disallowance of 20% on account of personal use. However, now a days every person is having his own mobile for personal use and it is hardly a case when making a call from the official telephone of personal nature when all the details of personal calls are recorded in the personal mobile phones. Therefore, in the facts and circumstances of the case, when a separate mobile is maintained by the assessee, the disallowance on account of personal use merely on suspicion is not permissible. Accordingly, the said disallowance made by the AO and sustained by the ld. CIT (A) is deleted. For the assessment year 2014-15, the assessee has raised the following grounds :- “ 1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) has grossly erred in confirming the part of addition made by the ld. AO on account of disallowance of genuine business expenses of Rs. 18,23,874/-. The disallowance has been made of firewood expenses which is a direct expense incurred on the manufacturing of final product. As a matter of fact the ratio of expenditure to sales has reduced considerably during the year under consideration as compared to that of earlier year.
2. On the facts and in the circumstances of the case and in law, the ld. CIT (A) has grossly erred in confirming the part of addition made by the ld. A.O. on account of disallowance of genuine business expenses of Rs. 1,96,223/-. The disallowance has been made of repair & maintenance expenses, staff welfare expenses, vehicle running & maintenance expenses, telephone expenses, travelling expenses, general expenses and miscellaneous expenses.
3. That the appellant craves the leave to add/alter any or all of the grounds of this appeal on or before the hearing of the matter.
Ground No. 1 is regarding disallowance on account of firewood expenses.
The assessee is in the business of manufacturing and trading of sugar products such as Bura, Patasha, Mishri etc. The AO noted that the assessee has claimed firewood expenses of Rs. 1,82,38,746/-. In order to verify the expenses, the AO asked the assessee to produce ledger with bills and vouchers of those expenses. The AO noted that most of the payments were made in cash and not fully supported by bills and vouchers as the same are self handmade without giving full address of the recipient. Accordingly, the AO made disallowance of 20% of the total expenses debited to the Profit & Loss account and consequently an addition of Rs. 37,37,472/- was made to the income of the assessee. On appeal, the ld. CIT (A) has restricted the disallowance to 10%.
Before us, the ld. A/R of the assessee has submitted that the assessee has been doing his business for the past more than 15 years. The assessee also produced the comparative details of the firewood expenses per bag of finished goods. Thus the expenses for the year under consideration are less or in line with the expenditure. In the earlier years, the AO has not disturbed or doubted the expenditure. He has further submitted that all the expenditure on the firewood are fully vouched which were produced for verification of the AO. The accounts of the assessee are also subjected to audit under section 44AB of the IT Act. The ld. A/R has also referred to the comparative GP and NP declared by the assessee for the year under consideration and in the preceding years and submitted that the GP declared by the assessee for the year under consideration is higher than the preceding years. Hence, when the AO has not found that the assessee has inflated the expenses, then merely because the payment was made in cash cannot be a reason for such adhoc disallowance. He has relied upon the following decisions :-
CIT vs. Inani Marbles Pvt. Ltd. 316 ITR 125 (Raj.)
CIT vs. Gotan Lime Khaniz Udyog 256 ITR 243 (Raj.)
On the other hand, the ld. D/R has submitted that the assessee has not produced the supporting bills and vouchers to substantiate the claim. Therefore, the assessee has failed to establish that the expenditure has been incurred wholly and exclusively for the business of the assessee. He has relied upon the orders of the authorities below.
We have considered the rival submissions as well as the relevant material on record. There is no dispute that in the business of the assessee the firewood used is an essential consumable item being fuel for preparation of finished goods from sugar. Once the expenditure incurred on the firewood is essential and inevitable for doing the business activity of manufacturing of the goods from sugar, then even if the said payment is made by the assessee in cash, if the claim of expenditure is not found to be excessive or inflated, then the disallowance made by the AO of 20% is without any basis. The ld. CIT (A) though restricted the disallowance to 10% of the expenses, however, there is no allegation by the AO or ld. CIT (A) that the assessee has inflated the expenses on account of firewood purchases. We further note that in the preceding year the AO has not made any disallowance of expenditure claimed which is part of the trading account of the assessee though some disallowances were made by the AO in respect of vehicle expenses on account of personal use.
However, the trading results were not disturbed by the AO. We further note that the expenditure on firewood for the year under consideration comes to Rs.80.47 per bag of finished product in comparison to Rs. 91.57 per bag for the assessment year 2013-14 and Rs. 78.49 per bag for the assessment year 2012-13. The details of these expenditure are as under :-
A.Y. No. of bags Firewood Expenses Firewood expenses per % to produced (100 kg (In Rs.) bag of production (In each) Rs.) Turnover (1) (2) (3)=(2)/(1) 2012-13 200191.45 1,57,13,254.00 78.49 1.89% 2013-14 167324.16 1,53,21,953.00 91.57 1.86% 2014-15 222060.30 1,78,69,678.00 80.47 1.76% Thus it is clear from the details that the expenditure for the year on account of firewood purchase of per bag of finished goods is in line or rather less than the immediately preceding year and even less than the average of the preceding years.
We further note that the GP and NP of the year under consideration are also in the line or more than the preceding year. The details of the comparative GP and NP are as under :-
A.Y. Turnover Gross Profit % Net profit %
2011-12 Rs. 65.41 crore 3.03 0.43 2012-13 Rs. 83.29 crore 2.91 028 2013-14 Rs. 81.86 crore 3.00 0.39 2014-15 Rs. 100..69 crore 3.09 0.41 From these details it can be noticed that the claim of expenditure on firewood is not excessive or inflated as the GP and NP declared by the assessee during the year under consideration is in line as in the preceding years and, therefore, when the said expenditure is essential for the business activity, then having regard to the nature of the expenditure for purchase of firewood in cash cannot be doubted in the absence of any material. Accordingly, in the facts and circumstances of the case, we are of the considered view that the adhoc disallowance made by the AO and sustained by the ld. CIT (A) is not justified. Accordingly the same is deleted.
Ground No. 2 is regarding disallowance on account of repair and maintenance expenses of vehicle, staff welfare expenses, vehicle running & maintenance expenses, telephone, travel and general expenses etc.
The AO has made disallowance of 20% of the various expenses debited by the assessee in the Profit & Loss account. The details of the disallowance made by the AO are as under :-
S.No. Particulars Amount disallowed by AO 1. Telephone expenses 29,191.20 2. Vehicle Running & 33,735.40 Maintenance expenses 3. Repair & maintenance 2,26,431.60 expenses 4. Travelling expenses 13,363.80 5. Staff Welfare expenses 20,880.00
6. General expenses 32,378.00 7. Miscellaneous expenses 36,464.60 Total 3,92,445.00 On appeal, the ld. CIT (A) has restricted the disallowance to 10% of the expenses claimed by the assessee.
Before us, the ld. A/R has submitted that the AO has made an adhoc disallowance which is partly sustained by the ld. CIT (A) without giving a finding that the claim of expenditure is either excessive or bogus. He has relied upon the decision of Hon’ble Supreme Court in case of Indian Molasses Co. Pvt. Ltd. vs. CIT, 37 ITR 66 (SC) as well as in case of S.A. Builders Ltd. vs. CIT, 288 ITR 1 (SC).
On the other hand, the ld. D/R has relied upon the orders of the authorities below and submitted that the assessee has failed to substantiate the claim by producing the supporting evidence. Therefore, the 10% disallowance restricted by the ld. CIT (A) is just and proper.
We have considered the rival submissions as well as the relevant material on record. The AO has made the disallowance of 20% of the telephone expenses, vehicle running and maintenance expenses, repair and maintenance expenses as well as travelling expenses as under :-
“ 4. On perusal of the books of accounts, it was found that the assessee had debited Telephone Expenses of Rs. 145956/-, vehicle running and maintenance expenses of Rs. 168677/-, Repair and maintenance expenses of Rs. 11,32,158/- and travelling expenses of Rs. 66,819/- totaling to Rs. 15,13,610/- in the P & L Account. The above claimed expense can be attributed to be used for other than business purposes which means for personal purposes. Madras High Court in the case of Sundram Industries Ltd. (239 ITR 405) has observed that disallowance out of such expenses on account of personal nature is justified. Moreover, specific details such as log book for the vehicle; call directory for telephone calls has not been maintained. Therefore, in view of above facts 20% of total amount is hereby disallowed out of above expenses is made and added back to the income of the assessee. This will result in addition of Rs. 3,02,722/- to the total income of the assessee.”
Thus it is clear that the AO has made the disallowance on account of personal element on these expenses. We find that as far as the vehicle expenses and travelling expenses are concerned, when the assessee has failed to establish that separate vehicle is used for personal purposes and the travelling expenses are not including personal visits and trips, then in such a situation the personal element in the claim of expenses cannot be ruled out. Accordingly, the 10% disallowance sustained by the ld. CIT (A) on vehicle running and travelling expenses is just and proper. The disallowance of telephone expenses on personal element is common as for the assessment year 2011-12. Accordingly, in view of our finding in the preceding year, the said disallowance is deleted.
15.1. So far as miscellaneous expenses and postage & courier expenses, the AO has made the disallowance for want of supporting bills and vouchers and the payments were made in cash. We find that as far as the miscellaneous expenses and general expenses are concerned, the same are incurred on daily basis and very petty amount. Therefore, the payment made in cash in respect of those expenses cannot be a reason for disallowance. However, since the assessee has not produced the supporting bills and vouchers, therefore, the disallowance sustained by the ld. CIT (A) is upheld. Similarly, the postage and courier expenses should be supported by bills/receipts issued by the Post Office as well as Courier Co. In the absence of such receipts in support of the expenditure, we do not find any error or illegality in the order of the ld. CIT (A) in sustaining 10% of such claim.
In the result, both the appeals of the assessee are partly allowed.
Order is pronounced in the open court on 03/07/2019.