HETAL RAMANLAL SHAH,,SURAT vs. THE INCOME TAX OFFICER, WARD-2(2),, SURAT

Hetal Ramanlal Shah v. ITO Wd-2(2) Surat /I.T.A. No.2188/AHD/2014/A.Y.08-09 Page 1 of 9

IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE SHRI RAM LAL NEGI, JUDICIAL MEMBER AND SHRI O. P. MEENA, ACCOUNTANT MEMBER I.T.A. No.2188/AHD/2014: Assessment Year: 2008-09 Shri Hetal Ramanlal Shah, Vs. Income Tax Officer, 129-B, Rupal Ind. Estate Ward- 2(2),Surat Vibhag-1, Surat 395007. [PAN:AFSPS 3691 C] Appellant Respondent

Assessee by Shri Mehul R. Shah, CA Revenue by Shri O. P. Meena. Sr. D.R. Date of hearing 29.03.2019 Date of pronouncement 30.04.2019

ORDER PER O. P. MEENA, AM 1. This appeal by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)-II, Surat (in short “the CIT (A)”) dated 09.05.2014 pertaining to Assessment Year 2008-09, which in turn has arisen from the assessment order passed under section 143 (3) dtd. 31.12.2010 of Income Tax Act, 1961 (in short ‘the Act’) by the Income Tax Officer, Ward- 2(2),Surat (in short “the AO”). 2. Ground no. 1 and 2 are against the confirmation of disallowance of Rs.18,27,989/- under section 40A(3)(a) and disallowance of Rs.15,45,212/- under section 40A(3)(b) of the Act. 3. Brief facts are that the assessee has made payment of Rs.13,38,224/- to five parties on account of labour charges and

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Rs.4,89,765/- to two parties on account of purchases exceeding Rs.20,000/- in violation to the provisions of section 40A(3)(a). Hence, the AO made disallowance of Rs.18,27,989/- under section 40A(3)(a) of the Act. Similarly, the assessee has also made payments to various parties exceeding Rs.20,000/- otherwise than by account payee cheques or account payee demand draft amounting to Rs.15,45,212/- hence, same were also disallowed under section 40A(3)(b) of the Act. 4. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). Wherein it was contended, the assessee has done mainly job work though outside parties. Besides this, the assessee has also done trading in cloth at a very small scale. It was further submitted that the GP margin of the appellant is only 7% and therefore, the real income of the appellant is much less than the assessed income of Rs.35,22,360/-. The appellant has also relied upon some case laws support the argument that the disallowance under section 40A(3) should not be made mechanically. However, the Ld. CIT(A) was of the view that these provisions have been introduced as “anti-evasion measures”. Unless the appellant establishes that the payments are covered by the exceptions provided in the Act/Rules, the same can be allowed. Consequently, the disallowance of Rs.18,27,989/- made under section 40A(3)(a) and disallowance of Rs.15,45,212/- made under section 40A(3)(b) was confirmed.

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Hetal Ramanlal Shah v. ITO Wd-2(2) Surat /I.T.A. No.2188/AHD/2014/A.Y.08-09 Page 4 of 9

in which it was held that where the assessee inflated purchase expenditure by raising bogus claim of cash purchases, exceeding Rs.20,000, profit element embedded therein should be brought tax, and that amount was not witnessed live under section 40A(3). It was further submitted that it has been laid down that once the purchases are doubted then provision of section 145 (3) is to be applied, and profit has to be estimated. The learned Counsel for the assessee further relied on the decision in the case of Amrut Textile v. ITO [2014] 51 Taxmann.com 535 (Ahmedabad-Trib) wherein it was observed that where after disallowance under section 40(a) (ia) of entire expenses, the gross profit ratio would worked out to more than 35% as against the gross profit of 2.91% shown by the assessee which is unrealistic. Thus, considering the peculiarities and totality of the facts, it is opined that the amount of the assessee do not reflect the correct state of affairs of the assessee and, therefore, end of Justice shall be met if the addition is made at Rs.20 lakhs in the trading result of the assessee. In view of this, the learned counsel for the assessee requested that the income of the assessee could be estimated @8% of turnover as the turnover of the assessee is below Rs. 40 lakhs. 6. The learned counsel for the assessee referred proviso to section 40A (3) which propounds two rule of thoughts- i.e. such circumstances as may be prescribed. Even if transaction does not fall under rule 6DD, disallowance could not be made under section 40A (3) if circumstances

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so warrants having regard to payments having been made to labourers hailing from Bihar, Orissa, and Uttar Pradesh not having banking facilities. Therefore, payments having been made due to business expediency. The learned counsel for the assessee relied in the case of Prabir Kumar Mullick v. ITO Wd-3(1) Asansol [2016] 70 taxmann.com 319 (Kol) in which it was laid down that payments in excess of prescribed limits due to exception provided in the provisions of section 40A (3) of the Act with regard to business expediency was applicable to the case of the assessee, and hence, the impugned disallowance were to be deleted. Similarly, reliance was also placed in the case of Anupam Tele Services v. ITO [2014] 43 taxmann.com 199 (Gujarat) in which it was held that where principle company insisted that on payment by cheque supply would be delayed , cash payments made to agent in bank account of principle had to be allowed. The learned counsel for the assessee further placed reliance in the case of Shri Anankumar Rawatram Joshi v. ITO Wd2(2) Surat [I.T.A.No. 1833/Ahd/2011 A.Y. 08-09 Dtd. 03.11.2011 ] of Ahmedabad Tribunal wherein it was held that no disallowance under section 40A(3) is called for where the payments related to liability which was incurred in assessment year and payment of which has been made in assessment year 2008-09 as the amended provisions in section 40A(3A) is applicable from liability incurred in assessment year 2008-09 and not in respect of opening liability brought forward as on 01.04.2008. The disallowance of

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Rs.15,45,212/- and opening creditors and outstanding balance brought forward falls under the said category. 7. The ld. Sr. D.R. vehemently supported the orders authorities below. 8. We have heard the rival submissions and perused the relevant material on record. We find that the assessee is engaged in the cloth business. The assessee has shown weaving labour income of Rs.29.57 lakhs as against expenses of Rs. 27.46 lakhs has been claimed. Similarly, sales have been shown at Rs. 5.74 Lakh against purchases of Rs. 4.97 Lakh. The AO has not disputed the genuineness of expenses as well as purchases, but he has considered that payments of expenses are made in violation of provision of 40A (3) of the Act. However, books of accounts were not rejected by the AO as required under section 145(3) of the Act. Thus, after disallowance under section 40A (3) of the Act, the profit of the assessee exceeded by more than 8%. It has been claimed the gross profit margin in the case of the assessee is 7% and turnover is below Rs. 40 Lakh. The assessee shown income of Rs.1,49,160/- whereas after disallowance it comes to Rs.35,22,360/- which giving absurd result as held by the Hon`ble Madras High Court in the case of CIT v. S Mohammad Dhurabudeen [2008] 4 DTR 218 (Mad) categorically held that when disallowance under section 40A (3) is made, the overall income should not exceed probable percentage of profit. The ratio of this decision is directly applicable to the case of the assessee. As the

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disallowance made by the AO resulted in to abnormal gross profit and not profit rate, which comes to almost hundred percent, which is clearly manifested that such a result is impossible. The learned Counsel for the assessee further submitted that if the accounts are believed to true and correct, then there is no violation under section 40A(3) of the Act as on the payments are that the loan of Rs. 20,000. If the accounts are not believed, then the AO should have estimated profit, which has not been done. We find that the AO has not rejected books of accounts by invoking the provisions of 145(3) of the Act. The learned Counsel has placed reliance in the case of Pr. CIT v. Juned B. Memon [2018] 95 Taxmann.com 20 (Gujarat) in which it was held that where the assessee inflated purchase expenditure by raising bogus claim of cash purchases, exceeding Rs.20,000, profit element embedded therein should be brought tax, and that amount was not witnessed live under section 40A(3). It was further submitted that it has been laid down that once the purchases are doubted then provision of section 145 (3) is to be applied, and profit has to be estimated. The learned Counsel for the assessee further relied on the decision in the case of Amrut Textile v. ITO [2014] 51 Taxmann.com 535 (Ahmedabad-Trib) wherein it was observed that where after disallowance under section 40(a)(ia) of entire expenses, the gross profit ratio would worked out to more than 35% as against the gross profit of 2.91% shown by the assessee which is unrealistic. Thus, considering the peculiarities and totality of the facts,

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it is opined that the amount of the assessee do not reflect the correct state of affairs of the assessee and, therefore, end of Justice shall be met if the addition is made at Rs.20 lakhs in the trading result of the assessee. In view of this, the learned counsel for the assessee requested that the income of the assessee could be estimated @8% of turnover as the turnover of the assessee is below Rs.40 lakhs. Further, the payments in relation to creditors 15,45,212 are pertaining to opening balance of earlier year in which liability was incurred in A.Y. 2007-08 and payment have been made during the assessment year under consideration. Such disallowance cannot be made under section 40A(3)(b) as amendment made is prospective and not retrospective as held by the Co-ordinate Bench of Ahmedabad tribunal in the case of Anankumar Rawatram Joshi v. ITO Wd2(2) Surat [I.T.A.No. 1833/Ahd/2011 A.Y. 08-09 Dtd. 03.11.2011 ] of Ahmedabad Tribunal. On careful consideration of facts, and having regard with nature of payments and peculiar circumstances, we are of the opinion that it would be interest of natural justice, judicial pronouncements discussed and cited above by the learned counsel for the assessee 0and considering the turnover is below Rs. 40 lakhs, the disallowance of all payments be restricted to 8% of total turnover. The AO is directed to recalculate the disallowance in respect of disallowance of Rs.18,27,989/- made under section 40A(3)(a) and disallowance of

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Rs.15,45,212/- under section 40A(3)(b) of the Act totaling to Rs.33,73,201/-. These grounds of appeal are therefore, partly allowed. 9. In the result, the appeal of the assessee is partly allowed. 10. The order pronounced in the open Court on 30.04.2019.

Sd/- Sd/- (RAM LAL NEGI) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat: Dated: 30th April, 2019/opm Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT(DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat