SHRI GOVIND RAM MODI,KOTA vs. JOINT COMMISSIONER OF INCOME TAX, KOTA

In the assessee has taken the following grounds of appeal:-

Ground No. 1 was not pressed by the ld. AR during the course of hearing. Hence, the same is dismissed as not pressed.

Regarding Ground No. 2, briefly stated, the facts of the case are that the assessee derives income from mining, processing and trading of Kota stones and has disclosed sales of Rs. 93,79,614/- on which gross profit of Rs. 9,13,557/- was disclosed giving GP rate of 9.74%. During the course of assessment proceedings the ld. Assessing Officer observed that expenses of Jharai and Katai of Rs. 80,84,040/- were not supported by vouchers, production expenses were also not verifiable, hire charges of Rs. 33,86,000/- were covered u/s 40A(2)(b) and were excessive and unreasonable and there were overwriting in the production register. In view of the aforesaid defects, the AO rejected the books of accounts U/S 145(3) and increased the GP rate by 5% and made addition of Rs. 3,99,589/-. On appeal, the ld CIT(A) upheld the finding of the AO regarding rejection of books of accounts and application of section 145(3). However, on noticing that the AO had increased GP rate by 5% on the basis of some comparable cases but such cases have not been specified nor assessee was given any opportunity, restricted the trading addition to Rs. 150,000/- only. Thus as against application of GP rate of 14.74% by the AO, the ld. CIT(A) has restricted the same to 11.34% and the addition of Rs. 1,50,000/- was confirmed. Now, the assessee is in appeal before us.

It was further submitted by the ld AR that both the Assessing Officer as well as the Learned CIT(A) erred in rejecting the books of accounts and in applying the provisions of section 145(3). The assessee has maintained regular books of accounts which are also audited u/s 44AB. The assessee has maintained cashbook, ledger, production register, journal and supporting vouchers. The auditors have not pointed out any defect in the maintenance of regular books of accounts. It was further 4 & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota submitted that the assessee maintained production register supervised by the Mining Department. The Mining Department has not found any discrepancy in the maintenance of stock register. In the case of the assessee's business, the production register is the soul of it. Once production stands accepted by the mining department, there remains no case for any addition. The Learned Assessing Officer wrongly rejected the books of accounts including the production register observing that there were cuttings and overwriting in the production register. In this regard it is submitted that overwriting is sometime done to correct a mistake, so is also the case of cuttings it is not the case of the Assessing Officer that overwriting and cuttings were prejudicial to the interest of the Revenue. There is no cutting or overwriting so as to have any impact on the production of goods. In view of this mere observation of the Assessing Officer that there were cuttings and overwriting is of no help. It was further submitted that the Assessing Officer has also erred in observing that the expenses of jhirai, katai and production were not supported by vouchers. It is submitted that assessee has got complete vouchers of all the expenditure incurred in respect of jhirai, and production. The Learned Assessing Officer in fact never made any effort to verify the expenditure. In respect of labour payment and amani expenditures and hire charges of machineries which included JCB, Tata Hitachi and Dumpers etc. The assessee is submitting copies of all these vouchers available at APB 31-78. The Learned Assessing Officer has wrongly observed that the expenditure incurred on hire charges is excessive and unreasonable and is covered u/s 40A(2)(b). The Learned Assessing Officer has not given the market value of the expenditure incurred by the & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota assessee on hire charges on various machineries without bringing on record the market value of services obtained by the assessee, the Learned Assessing Officer was not justified in holding that the payment of hire charges was excessive and reasonable. In view of this it is submitted that the finding of the Learned Assessing Officer was erroneous. The assessee had made payments of hire charges as per prevailing market rates. In view of the aforesaid submissions, it is stated that there was no case for rejecting the books of accounts by the Learned Assessing Officer u/s 145(3). The Learned CIT(A) also erred in confirming the finding of the Learned Assessing Officer. In view of the aforesaid facts it is submitted that the Learned Assessing Officer erred in rejecting the books of accounts and making trading additions. The Learned CIT(A) further erred in confirming the finding of the Learned Assessing Officer of rejecting the books of accounts. The Learned CIT(A) also erred in upholding trading addition of Rs. 1,50,000/-. It is the submission of the assessee that complete records and accounts have been maintained which are duly supported by vouchers. The production register is regularly supervised by the mining authority. On top of all, the GP rate disclosed by the assessee is the highest so far disclosed by him. In view of this, the trading addition sustained by the Learned CIT(A) deserves to be deleted.

We have heard the rival contentions and purused the material available on record. For the detailed reasoning given by the AO and the ld CIT(A), the books of accounts have rightly been rejected and the same is upheld. Regarding estimation of gross profit rate, the AO has cited some comparable case where gross & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota profit rate of 14% has been declared but the details thereof are not available on record as rightly noticed by the ld CIT(A) and the basis thus adopted by the AO was rightly rejected by the ld CIT(A). At the same time, the ld CIT(A) has restricted the trading addition to Rs 1.5 lacs. However, we find that even the ld CIT(A) has not given any basis as to how the said estimation has been arrived at. It is a settled legal position that once the books of accounts are rejected, the Assessing officer is required to estimate the gross profit rate and such estimation should have some rationale basis. In the instant case, we find that both the lower authorities have not specified the basis for their estimation and thus, the addition so made is directed to be deleted. In the result, the ground of appeal is allowed.

We have heard the rival contentions and perused the material available on record. The assessee has purchased a piece of land which is used for loading and unloading debris in connection with his mining activities and has spread the expenditure of Rs. 9,00,400/- on purchase of such land over five years and has claimed a sum of Rs. 1,80,080/- as part of production expenditure during the year under consideration. In our view, once the assessee has acquired the ownership rights over a piece of land, such right is coupled with the right of usage and right of subsequent disposal and any expenditure incurred in acquiring such rights is on capital field and thus cannot be claimed as revenue expenditure. The usage of such piece of land could be for actual mining activity or for ancillary activity of dumping the debris so produced during the course of mining. Merely because the usage is for ancillary activity of dumping the debris so produced during the course of mining, the same will not change the ownership rights of the & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota assessee over such land and thus the expenditure so incurred is clearly a capital expenditure and cannot be claimed as revenue expenditure. In the result, ground of appeal is dismissed.

In the result, the appeal of the assessee is partly allowed.

In the assessee has taken the following grounds of appeal:-

The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234B & 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full.”

Ground no. 1 was not pressed during the course of hearing and hence, the same is dismissed as not pressed.

Regarding Ground No. 2, the ld AR stated that assessee owns mines at Kota and for the purposes of excavation/production, various machineries are employed. These include JCB, Tata Hitachi, Dumper etc. besides expenditure on labour. During the year under consideration, the assessee incurred total expenditure of Rs. 83,58,351/- on production expenses. Out of this, rent on machinery which included JCB, Tata Hitachi and Dumper was of 11 & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota Rs. 28,53,000/-. The expenditure is fully vouched and vouchers are available on record. The expenditure on diesel alone is of Rs. 16,18,441/-. The rest of expenditure which is of Rs. 38,86,910/-. Complete vouchers of hire charges of JCB, Tata Hitachi, Dumper, Diesel and on salaries of mechanics, kuli, beldar, jhiri and katai work are available. Despite all this the Learned Assessing Officer disallowed a sum of Rs. 1,00,000/-purely on adhoc basis on the ground that vouchers were self-made and nature of expenditure was not mentioned nor the name and address of the recipient. The observations of the Learned Assessing Officer were false. The vouchers of higher charges are all from Modi Flooring Stone Co. Prop. Ram Ratan Modi and this fact is self-evident from the vouchers itself. The vouchers of higher charges are of Rs. 28,53,000/-. Similarly the vouchers of diesel for running the machines are of Rs. 16,18,441/- and entire diesel has been purchased from M/s Pipalia Filling Station, Jhalawar Road, Pipaliya. This fact is also self-evident from the voucher of diesel. Therefore it is incorrect on part of Assessing Officer to state that vouchers did not contain the name and address of the recipient or the nature of expenditure.

It was further submitted that the Ld CIT(A) has confirmed the addition on the ground that such disallowance was justified to cover any discrepancy. Obviously the Ld CIT(A) has confirmed the addition on assumption and presumption that there may be some discrepancy. However on record neither the Learned Assessing Officer nor the Learned CIT(A) has brought any discrepancy. In view of this the disallowance made by the Learned Assessing Officer and so confirmed by the Learned 12 & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota CIT(A) is most unjustified. The entire expenditure is exclusively for the purposes of business. The same therefore deserves to be allowed. The addition confirmed by the learned CIT(A) may kindly be deleted.

Regarding Ground No. 3, the ld AR submitted that the assessee had claimed a sum of Rs. 6,37,201/- under the head Amani Expenses. Copy of Stock Amani Register is available on record. The expenditure is on stacking. The work involved shifting of Kota Stones from one place to another on the basis of their sizes. The main work was to take the stones from the place where trucks unload it and carry it to the place of its size. The labour was paid for this and the complete expenditure is vouched as per Amani Register. In the assessment order the Learned Assessing Officer has disallowed 10% of the expenditure purely on estimate basis and on the sole ground that the vouchers are self-made. It is submitted that expenditure cannot be disallowed on the ground that the vouchers are self- made. The Learned Assessing Officer has not made out any case that the vouchers were bogus or that the expenditure was excessive and unreasonable. As the Amani Register kept for the purposes is having stamped signatures of the recipients. No effort was made by the Learned Assessing Officer to go through the Amani Register. It may be mentioned that the payment to labourers was always below Rs. 10000/- as such the same was paid in cash. The payment was in accordance with law and did not violate the provisions of section 40A(3). Therefore it was a futile observation of the Learned Assessing Officer that the payment was made in cash. It is submitted that against the payment of each & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota person details of work done by him are mentioned. Therefore it is the submission of the assessee that the Amani expenditure was fully laid out wholly and exclusively for the purposes of business. The same was fully vouched. The Learned CIT(A) erred in confirming the expenditure to cover any possible discrepancy. The addition has been confirmed by the Learned CIT(A) purely on presumption of some discrepancy without pointing out any such discrepancy. No addition is called for on assumption, presumption and surmises. It is therefore submitted the addition may kindly be deleted.

Regarding Ground No. 4, the ld AR submitted that the assessee claimed expenditure of Rs. 56,982/- on running of car and its maintenance and insurance and also claimed depreciation of Rs. 80,441/-. The Learned Assessing Officer disallowed 30% of the expenditure and made addition of Rs. 41,227/- (56982+80441). The Learned Assessing Officer disallowed the expenditure simply on the ground of personal use of vehicle for family use. The Learned CIT(A) has restricted the expenditure to 10% and confirmed addition of Rs. 13700/-.

It was submitted by the ld AR that the claim of depreciation of Rs. 80,441/- which is statutory even if the vehicle is put to use even for a day in the year the depreciation is allowance. Therefore no disallowance should have been made on such statutory allowance available to the assessee u/s 32 of the Income Tax Act, 1961. Hence both the Learned Assessing Officer and the Learned CIT(A) erred in making disallowance of depreciation. It is submitted that the Jaipur Bench has held in & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota the case of Shri Kailash Chand Gupta Vs. Deputy Commissioner of Income Tax 35 Taxworld 36 that depreciation is allowed under statutory provision, no part of it can be disallowed even if the assets is used partly for personal purposes. In view of these facts the Learned Assessing Officer was not justified in making disallowance out of depreciation. It was submitted that remaining vehicle running expenditure comes to Rs. 56982/- in respect of which the AO could have done the disallowance. The Learned CIT(A) has restricted the disallowance to 10% and as such the disallowance works out to Rs. 5698/- as against Rs. 13,700/- sustained by the Learned CIT(A). It is therefore submitted that looking to the business needs, no disallowance is required to be made as the same works out to a paltry amount of Rs. 5689/-.

We have heard the rival contentions and perused the material available on record. We find that disallowance of production expenses, stock anami expense and car running & maintenance expenses have been done by the Assessing officer on purely an adhoc basis and we donot find any justifiable basis to sustain the said disallowances. Hence, all these additions are hereby directed to be deleted and ground no 2-4 are hereby allowed.

Ground no. 5 is regarding levy of interest u/s 234A, 234B, 234C etc and the same being consequential in nature, doesn’t require any separate adjudication. Hence, the same is dismissed.

In the result, the appeal of the assessee is partly allowed. & 770/JP/2017 Shri Govind Ram Modi, Kota vs. The ITO, Kota In the result, both the appeals filed by the assessee are partly allowed.