THE ITO, WARD-2(2),, SURAT vs. M/S. PRESIDENCY EXPORTS,, SURAT

Firstly, we will take up the appeal of the assessee wherein it has taken the following grounds of appeal: “1 On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming addition made by assessing officer of Rs.8,14,608/- under section 40A(2)(b) of the Act. 2 On the facts and in circumstances of the case as well as law on the subject, the learned commissioner of Income-tax (appeals) has erred in confirming adhoc disallowance @ 20% amount to Rs.1,31,030/- out of depreciation and vehicle charges made by assessing officer.” 3. In Ground No.1, the assessee has challenged the sustenance of disallowance under section 40A(2)(b) of the Act. Briefly stated, the facts of the case are that during the year under consideration, the assessee has purchased finished cloth amounting to Rs.32,99,204/- from its sister concern M/s. Gurera Textiles Pvt. Ltd., admittedly which is a related person u/s 40A(2)(b) of the Act. The Assessing Officer, during the course of assessment proceedings, observed that the assessee has made purchases of finished goods including from the aforesaid sister concern at an average price of Rs. 37.42 per metres and against that the assessee has made sales at an average price of Rs. 30.31 per metres. It was accordingly held that the purchases made from the sister concern were on a higher side and an amount of Rs.8,14,608/- was worked out by the Assessing Officer as an excess payment made to the sister concern towards purchase of the finished cloth which was disallowed u/s.40A(2)(b) of the Act.

Being aggrieved, the assessee carried the matter in appeal before the learned CIT(A) who after calling for the remand report from the Assessing officer and considering the submission of the assessee has

During the course of the hearing, the ld AR contended that there is a one to one correlation between the purchases made from the sister concern M/s.Gurera Textiles Pvt. Ltd., and subsequent exports made out of said purchases and if the figures of purchases and sales are considered, the assessee has earned a profit of Rs.4,13,256/-. It was accordingly submitted that where there is a direct linkage which has been established between the purchases made from the sister concern and the subsequent sales made by the assessee and in the process, the assessee has disclosed the net profit, there is no basis for the Assessing Officer to carry out the comparison at the entity level in terms of the purchases and the subsequent sale made by the assessee.

The ld Sr DR was heard who has vehemently argued the matter and taken us through the findings of the lower authorities.

We have heard the rival contentions and pursued the material available on record. We find force in the aforesaid contention of the ld AR and are of the view that where the assessee has demonstrated the linkage of purchases from its sister concern and subsequent sales thereof and there is a realisation of net profit, and in absence of any comparable data relating to goods of similar nature wherein the net profit so disclosed by the assessee has been found to be on a lower side as compared to the third party, we do not see any justifiable basis for the disallowance which has been made by the Assessing Officer u/s.40A(2)(b) of the Act. In the result, Ground No.1 taken by the assessee is allowed.

In Ground No. 2, the assessee has challenged the sustenance of disallowance of 20% of depreciation and vehicle running expenses. During the course of assessment proceedings, the Assessing Officer observed that the assessee firm owns four cars and given that there are three partners in the firm and one of them being a lady and another being a minor, the personal use of the cars cannot ruled out. Further, the assessee has also not maintained any log book for usage of the cars. Accordingly, 1/5th of the depreciation claim and vehicle running expenses were held to be for non-business purposes and an amount of Rs.1,31,030/- was disallowed. On appeal, the ld CIT(A) has sustained the said disallowance holding that the log book is the only document through which the Assessing Officer is in a position to examine the business requirement of the vehicle expenses and in absence thereof, the personal usage of the vehicle cannot be ruled out.

During the course of hearing, no specific arguments have been taken by both the parties except that the ld AR has said that the disallowance is on a higher side and should be reduced to 5 to 10% whereas the ld DR supported the findings of the lower Authorities.

Heard both the parties and pursued the material available on record. As far as the disallowance of the vehicle running expenses, the disallowance made by the Assessing Officer is confirmed as the assessee has failed to substantiate that the vehicles have been used wholly and excludively for the purposes of the business. However, as far as the depreciation on the vehicles is concerned, once the vehicles are owned by the assessee firm and used for the purposes of the business, the depreciation has to be necessary allowed as a claim of the depreciation

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

We now taken up the appeal of the Revenue wherein the Revenue has taken the following grounds of appeal:

Briefly stated, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has paid processing charges to Jai Bharat Dying and Printing Pvt. Ltd., at an average rate of Rs.10.51 per mtr while processing charges paid to other parties namely Agarwal Textiles Mill was @ Rs 9 per mtr

Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). As per the ld.CIT(A) the disallowance has not been made u/s.40A(2)(b) of the Act and the Assessing Officer has compared the charges paid to M/s. Jai Bharat Dying and Printing Pvt. Ltd and the other parties on the basis of one bill which is ridiculous and unreasonable. It was further held by the ld.CIT(A) that the Assessing Officer in his remand report has himself mentioned that the addition had not been made u/s.40A(2)(b) of the Act. Further, the Assessing Officer in the remand report has not made any comments on the various bills which have been submitted by the assessee wherein M/s. Jai Bharat Dying and Printing Pvt. Ltd. has been paid an amount of Rs.10.53 per metre and above by various other parties. As per the ld.CIT(A), the Assessing Officer has not brought on record anything to prove that the payments made to the said company was sham or bogus or any other defect which reveal that undue favour has been given. As per the ld.CIT(A) once it is proved beyond

Heard both the parties and pursued the material available on record. Firstly, we find that the Assessing officer has made the addition on account of excess payment of processing charges to M/s. Jai Bharat Dying and Printing Pvt. Ltd holding it to be an associated concern of the assessee firm u/s 40A(2)(b) of the Act. As per the Assessing Officer, M/s. Jai Bharat Dying and Printing Pvt. Ltd., is an associated concern of the assessee firm since Shri J. K. Arya holds 19.05% of shareholding in M/s. Jai Bharat Dying and Printing Pvt. Ltd., and he is also the relative of one of the partners of the assessee firm. At the same time, in Para 6.7 of the assessment order, the Assessing officer has stated that it has already been proved that the assessee is a group concern and in order to avoid applicability of section 40A(2)(b), shareholding of Mr J.K Arya has been deliberately restricted to 19.05%. Whether such shareholding has been deliberately restricted to such level and whether the said act has any linkages with the transactions with the assessee concern, there is no finding recorded by the Assessing officer to support the same, therefore, the fact of the matter is that Shri J. K. Arya holds 19.05% of shareholding in M/s. Jai Bharat Dying and Printing Pvt. Ltd. which doesn’t qualify as holding a substantial interest in M/s. Jai Bharat Dying and Printing Pvt. Ltd and even though he is a relative of one of the partners of the assessee firm, M/s. Jai Bharat Dying and Printing Pvt. Ltd. doesn’t quaify as an associated concern of the assessee firm under section 40A(2)(b) of the Act. The case of the Revenue which is built on this basic premise doesn’t

In Ground No. 2, the Revenue has challenged the deletion of addition of Rs.2,88,036/- on account of foreign travel expenses. During the course of assessment proceedings, the Assessing Officer observed that the assessee has incurred foreign travel expenses on tour of Shri J.K.Arya and Shri Alok Arya and neither copy of the account was furnished nor business exigency was established. On appeal, the ld CIT(A) has held that the assessee is in the business of exports and foreign travel is of essential requirement of export business and pursual of details and bills furnished shows that the assessee has business transactions in London. It was further held by the ld CIT(A) that the Assessing Officer has disallowed the expenses in an adhoc manner without bringing on record any material to prove that the transaction is of non-business nature or the expenses have been incurred in relation to foreign travel of family members rather the expenses pertain to partner and employee of the assessee concern.

Heard both the parties and pursued the material available on record. We find that the ld CIT(A) has examined the details of foreign travel expenses incurred by the assessee firm. Once the details are on record and it has been established that the expenses have been incurred for the purposes of the assessee’s business, we donot see any infirmity in the findings of the ld CIT(A) and the same is hereby confirmed. In the result, the ground no. 2 of the Revenue’s appeal is dismissed.

In Ground No.3, the Revenue has challenged the deletion of addition of Rs.69,473/- on account of telephone expenses. The Assessing Officer disallowed an amount of Rs.69,473/- stating that the said expenses have been claimed in the name of other persons. During the course of appeal proceedings, the assessee submitted the bills in the name of J. Arya who is an employee of the assessee firm. The ld CIT(A) has held that the telephone expenses have been incurred for business purposes and it is a common practice for the employees using their personal phones for business purposes and subsequently the said expenses are reimbursed by the employer. Further, the Assessing Officer has not brought on record any material to show that the expenses have been incurred for non-business purposes.

Heard both the parties and pursued the material available on record. Given that the expenses have been incurred on reimbursement of telephone expenses of one of the employees of assessee firm and the said expenses have been held to be for business purposes, there is no infirmity in the findings of the ld CIT(A) and the same is here by confirmed. Ground No.3 taken by the Revenue is dismissed.

In Ground No.4, the Revenue has challenged the deletion of addition of Rs.3,10,930/- made on account of enhancement of Gross Profit Rate. The ld CIT(A) has held that the Assessing Officer made enhancement in the Gross Profit rate in an adhoc manner without pointing out any defects in the books of accounts nor the books of accounts have been rejected by the Assessing Officer. In view of the same, the addition on account of increase in the Gross Profit Rate by Rs.3,10,930/- was deleted.

We have gone through the contentions of both the parties and perused the material available on record. Given that the books of accounts have not been rejected which effectively means the trading results so declared by the assessee have been accepted, we do not see any justifiable basis for addition by way of enhancement of Gross Profit rate in the hands of the assessee. Therefore, the addition so made by the Assessing Officer has been rightly deleted by ld CIT(A). Hence the Ground of appeal No.4 taken by the Revenue is dismissed.