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Income Tax Appellate Tribunal, DELHI BENCH ‘SMC-2’, NEW DELHI
Before: SH.R.K. PANDA
आदेश / ORDER आदेश आदेश आदेश PER R. K. Panda, AM: This appeal filed by the assessee is directed against the order dated 15/02/2019 of the CIT(A)-15, New Delhi, relating to Assessment Year 2012- 13.
Although a number of grounds have been raised by the assessee these all relate to the additions partly sustained by the CIT(A) out of the various additions made by the Assessing Officer on account of disallowance of certain expenses.
Facts of the case, in brief, are that the assessee is an individual and runs the business of exports of garments under the name and style of proprietary concern M/s Designer’s Orchid Inc. and is engaged in the business of manufacturing & exporting of garments. He filed his return of income on 30/09/2012 declaring total income at Rs.5,15,500/-. The AO completed the assessment u/s 143(3) of the Act on 30.03.2015, determining the total income of the assessee at Rs.31,60,340/- by making the following disallowances/additions :-
i. Disallowance of interest paid Rs. 9,58,626 ii. Disallowance of shortage expenses Rs. 10,05,579 iii. Household withdrawing Rs. 2,50,000 iv. Disallowance of expenses Rs. 8,11,938 v. Late deposit of ESI & EPF Rs. 1,34,194
In appeal, the Ld. CIT(A) deleted the disallowance of Rs.1,34,194/- being late deposit of EPF & ESI. In so far as interest paid disallowed at Rs.9,58,626/- by the Assessing Officer is concerned, the CIT(A) deleted Rs. 8,18,324/- and sustained Rs.1,40,300/-. The other disallowances/additions were confirmed by the Ld. CIT(A).
Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.
The first issue raised by the assessee in the grounds of appeal relates to the order of the CIT(A) in sustaining an amount of Rs.1,40,300/- out of disallowance of Rs.9,58,626/- made by the Assessing Officer on account of interest paid.
Facts of the case, in brief, are that the AO during the course of assessment proceedings observed that assessee has claimed financial expenses at Rs.10,38,602/-, the details of which are as under:-
i. Bank Charges Rs. 59,355/- ii. TDS interest paid Rs. 20,620/- iii. Interest to bank Rs. 9,58,626/- 8 He noted that the assessee has taken loan from Magma Housing Finance. The other loan is from HDFC Bank which is auto loan. The assessee has also incurred interest on credit card at Rs.1,40,300/-. He asked the assessee to explain as to why the interest should not be disallowed and also asked the assessee to furnish the details such as the amount borrowed, utilization thereof, name of the financial company/institution from which borrowed, rate of interest, etc. Since, the assessee did not file any details nor produced the books of accounts to substantiate the claim of such expenses, the AO disallowed the interest debited to the Profit & Loss Account amounting to Rs.9,58,626/-.
Before CIT(A), the assessee submitted that the assessee has paid interest in regard to working capital loan taken from Magma Housing Finance against the mortgage of house as collateral security, auto loan and credit card from the bank. The interest paid was on amounts utilized for business purposes. The assessee produced the loan interest account statement to substantiate that such amount was utilized for the purpose of business. It was clarified before the Ld. CIT(A) that the AO was absolutely wrong in his order by assuming that the loan from Magma Housing Finance is housing loan.
Based on the arguments advanced by the assessee, the Ld. CIT(A) called for a remand report from the AO. After considering the remand report and rejoinder of the assessee to such remand report, the Ld. CIT(A) deleted the amount of Rs.7,04,522/- being the amount borrowed from Magma Housing Finance which was utilized for the purpose of business and an amount of Rs.1,13,802 being interest paid to HDFC bank for purchasing of Skoda car, which was appearing in the schedule of fixed assets. He, however, confirmed the amount of Rs.1,40,300/- being interest paid on credit card dues.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee referring to page 87 of the paper book drew the attention of the bench to the interest on credit card.
Referring to page 56 of the paper book, he submitted that the assessee has explained before the AO that the assessee used credit cards for business related expenses and as such interest payment on late payment of credit cards were made by the assessee for business purpose only. The credit card so used are just like temporary loans, therefore, interest charged by banks for late payment of credit card dues were accounted for in the books of accounts as business expenditure. He submitted that despite the submission made before the Ld. CIT(A) that the various expenditure Page 4 of 18 incurred through credit cards were for the purpose of business and such expenditures have been debited in the P & L Account, therefore, merely because there was delay in payment of credit card dues for which the bank charged interest for late payment of credit card, the same cannot be disallowed.
The Ld. DR on the other hand, heavily relied on the order of the Ld. CIT(A). He drew the attention of the Bench to the observation of the Ld. CIT(A) while disallowing the same which reads as under:-
“Regarding the Interest on Credit Card Dues, it is submitted by the AO in his remand report that Rs. 1,40,300/- is paid as interest on credit card dues. Meaning of this payment is that first assessee is making purchases/payments through credit cards owned by it, and thereafter repaying to credit card companies as per his convenience for which interest is paid on such outstanding dues. Contentions raised have been examined. Perusal of ledger account of this item is showing payment of interest /charges to various issuing concerns. However, no other supporting bills/vouchers have been produced to suggest that the credit card dues on which such interest is paid were actually spent for the business purposes of the assessee. Secondly, the credit card company do not charge any interest if the payment is made within the credit period allowed by them. Interest is charged only when the dues are cleared beyond the allowable period of credit. In the circumstances when it is not known made clear/proved that the original expenses incurred through credit card were for business purposes the question of allowing such interest, as eligible business expenditure, on such overdue credit card payments does not arise. Therefore, considering the facts and circumstances of the case, the disallowance of interest paid on credit card dues amounting to Rs. 1,40,300/- is hereby confirmed.”
He submitted that the assessee has not corelated the item wise expenses incurred through credit cards with the books of accounts, therefore, he has no objection if the matter is restored to the file of the AO with the direction to the assessee to reconcile the various payments made through credit card vis-à-vis books of accounts of the assessee.
I have considered the rival arguments made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed on behalf of the assessee. I find the assessee, before the AO as well as CIT(A), has explained that credit cards were used for business related expenses and therefore such interest on late payment of credit card dues has to be allowed as business purposes. I find merit in the above argument of the ld. Counsel for the assessee. The various expenses so incurred for which payments made through credit card were claimed as business expenses and no such disallowance has been made by the AO. Therefore, merely because there is delay in payment of credit card for which interest has been charged by the bank for late payment of credit cards, the same in my opinion, cannot be disallowed. I find merit in the arguments of the ld. Counsel that the amount used through credit cards are just like temporary loans and therefore interest charged by banks for late payment of credit card dues partakes the character of business expenses. In this view of the matter, I set-aside the order of the Ld. CIT(A) and direct the AO to delete the addition.
The second issue raised by the assessee in the grounds of appeal relates to the addition of Rs.10,05,579/- on account of disallowance of wastage and shrinkage expenses. Page 6 of 18
Facts of the case, in brief, are that the assessee claimed wastage and shrinkage expenses at Rs.10,05,579/-. The Assessing Officer asked the assessee during the course of assessment proceedings to file the details of percentage at which the shortage/wastage was claimed and the nature of work on which shortage/wastage claimed. In absence of any details to his satisfaction, the Assessing Officer disallowed the entire amount of Rs.10,05,579/-.
Before the Ld. CIT(A), it was submitted that during the course of assessment proceedings, it was explained before the Assessing Officer that the wastage and shrinkage of Rs.10,05,579/- is normal against the total turnover of Rs.1,06,03,084/-. It was explained that in garments export and manufacturing business, there is also wastage of cloth on every step i.e. while cutting as per specification, then shrinkage in dying, bleaching, rejections at the time of finishing process and then rejections at the time of checking of each and every piece before shipment of consignment by the agents of the buyers.
Based on the arguments advanced by the assessee, the Ld. CIT(A) called for a remand report from the Assessing Officer. The Assessing Officer in his remand report stated that the bills of dyers who are dying the cloths of the assessee have mentioned that the shrinkage is only 3%. He, therefore, held that the shrinkage to the extent of 3% can be allowed. After confronting to the assessee, the Ld. CIT(A) sustained the addition of Rs.10,05,579/- by observing as under:-
“In the rejoinder submitted against the remand report, appellant's AR has not been able to controvert any of the findings of the AO. Absolutely no supporting documents have been provided which could controvert the findings of AO. Further to the rejoinder submitted by the appellant's AR, an opportunity for hearing was provided to the appellant and in response appellant's AR appeared on 29.01.2018. He was specifically asked whether he has any documentary support to controvert the findings of the AO. His attention was specifically drawn to the finding given to the AO in the remand report that even the tax auditor has not specified the relevant figures in the audit report. Had such figures been specified, it would have been easy to calculate the shrinkage and wastage. AR submitted that AO has himself allowed shrinkage to the extent of 3% in the remand report. Considering the remand report of the AO, and the submissions made by the AR in which he has relied only on remand report, the disallowance of Rs. 10,05,579/- is hereby confirmed.
Aggrieved by such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee referring to page-79 of the paper book drew the attention of the Bench to the submissions given before the Ld. CIT(A) on account of wastage and shrinkage. He also drew the attention of the Bench to page-16 of the paper book which is the remand report. He submitted that the Assessing Officer held that shrinkage is allowable to the extent of 3% but he has not given any comment on wastage. He submitted that in any garments manufacturing unit, there cannot be 100% output because the cloths are to be manufactured for different category of people and there is bound to be wastage and shrinkage. He submitted that it is a matter of commonsense in garments manufacturing business that there is wastage of cloth in every step i.e. while cutting as per specification, then shrinkage in dying, bleaching and rejections at the time of finishing process.
There is also rejection at the time of checking of each and every piece before shipment of consignment. He accordingly submitted that the lower authorities have not applied their mind properly to the nature of the business of the assessee and sustained the addition of Rs.10,05,579/- which is not justified under the facts and circumstances of the case.
The Ld. DR on the other hand, heavily relied upon the orders of the Assessing Officer and the Ld. CIT(A). He submitted that the Ld. CIT(A) has given valid reasons while upholding the order of the Assessing Officer on this issue. He accordingly submitted that the order of the CIT(A) should be upheld.
I have considered the rival arguments made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed on behalf of the assessee. I find the Assessing Officer in the instant case made an addition of Rs.10,05,557/- being the claim of wastage and shrinkage shown by the assessee in the P & L Account on the ground that the assessee failed to furnish the details or documents in support of the claim nor produced books of accounts. I find the learned CIT(A) after obtaining the remand report from the Assessing Officer and considering the rejoinder to such remand report, sustained the addition the reason of which is already reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that in garment industry, there is bound to be wastage on account of cutting of cloths for specific purposes. There is also shrinkage due to dying and bleaching. It is also his submission that there is wastage due to rejection at the time of finishing process and then rejection Page 9 of 18 at the time of checking of each and every piece before shipment of consignment. I find merit in then above argument of the Ld. Counsel for the assessee. While the Assessing Officer in his remand report has given his comment that shrinkage is possible to the extent of 3%, however, he is silent in his comments on wastage. As earlier mentioned, there is bound to be some wastage while cutting the cloths for making of dresses in a garment factory. The lower authorities have completely closed their eyes on this issue. The ld. Counsel for the assessee also filed various articles showing that there is wastage of cloths to the extent of ranging from 16 to 20% in garments industry. Since, the assessee in the instant case has shown about 10% of the wastage and shrinkage, therefore, I am of the considered opinion that the same is reasonable under the facts and circumstances of the case and no disallowance is called for on this issue. The order of the CIT(A) is accordingly set-aside and the Assessing Officer is directed to delete the addition.
The next issue raised by the assessee in grounds of appeal relates to the ad-hoc disallowance of Rs.2,50,000/- on account of household withdrawing.
Facts of the case, in brief, are that the Assessing Officer during the assessment proceedings noted that the assessee has shown withdrawal of Rs.93,632/- from his capital account. He noted from the details furnished by the assessee that his family consists of the assessee, his spouse and her daughter who is an income tax assessee. From the copy of the ITR filed during the course of assessment proceedings, he noted that the daughter of Page 10 of 18 the assessee declared total income of Rs.1,80,480/-. However, no mention of any drawings so made by her was submitted. Since the assessee was showing withdrawal of Rs.93,932/- only which according to the Assessing Officer is insufficient for maintenance of the family, he made ad-hoc addition of Rs.2,50,000/- on account of household expenses.
In appeal, the CIT(A) after obtaining the remand report from the Assessing Officer and rejoinder of the assessee to such remand report confirmed the additions made by the Assessing Officer by observing as under:-
“In the rejoinder of the remand report, appellant's AR has not controverted the findings of the AO in the remand report. Even during the course of appellate proceedings, appellant's AR has failed to furnish the details of individual contribution towards household expenses made by the appellant's wife and his daughter. In view of these facts on record, I am in agreement with the AO that household withdrawals amounting to Rs.93632/- , for a family of three persons cannot be said to be adequate. The AO has made addition of Rs.2,50,000/-. This works out to the average monthly expenses of Rs.28,636/- (Rs.2,50,000/- plus Rs.93632 divided by 12). Considering the nature of business of the appellant, being an exporter having a turnover of 1.06 crores, the monthly expenses of Rs.28,636/- are a reasonable estimate. Accordingly, the addition made by the AO amounting to Rs.2,50,000/- is confirmed. The appellant's appeal is failed on this ground of appeal.”
27. Aggrieved by such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee submitted that the family size of the assessee consists of the assessee, his wife and his daughter. All the three persons are income tax assessees. Under these circumstances, the Page 11 of 18 disallowances of Rs.2,50,000/- made by the AO and upheld the CIT(A) is uncalled for.
The Ld. DR on the other hand, heavily relied on the order of the AO and the Ld. CIT(A).
I have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find the Assessing Officer in the instant case, made addition of Rs.2,50,000/- on the ground that the withdrawals shown by the assessee at Rs. 93,632/- for household expenses is insufficient. I find the CIT(A) upheld the addition made by the AO, the reason of which has already been reproduced in the preceding paragraph. It is submission of the Ld. Counsel for the assessee that the family of the assessee consists of the assessee, his wife and daughter. The wife and daughter are tax payers and are also contributing towards the house hold expenses. However, on a pointed query by the Bench as to what is the amount shown by the wife and the daughter of the assessee for household expenses, the learned counsel for the assessee was not in a position to substantiate the same. Therefore, the contention of the assessee that the amount of Rs.93,632/- shown by the assessee as withdrawals for household expenses is sufficient to run the family along with the withdrawals shown by the wife and the daughter of the assessee cannot be accepted in full. At the same time, the estimation made by the Assessing Officer at Rs.2,50,000/- in absence of any material in his hand to show any lavish life style of the assessee appears to be on the higher side. Page 12 of 18 Considering the totality of the facts of the case and in the interest of justice, I am of the considered opinion that disallowance of Rs.1 lakh lump sum on ad-hoc basis on the facts and circumstances of the case will meet the ends of the justice. I hold and direct accordingly. The order of the CIT(A) is accordingly modified and the Assessing Officer is directed to restrict the disallowance at Rs.1 lakh as against Rs.2,50,000/- sustained by the CIT(A).
The last issue in the ground raised by the assessee relates to the order of the CIT(A) in confirming the addition of Rs.8,11,938/- being 10% of all the Direct & Indirect expenditure of Rs.81,19,386/-.
Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted that the assessee has claimed expenses of Rs.27,49,254/- which is indirect expenses and Rs.63,28,758/- as direct expenses. The total expenses claimed was at Rs.90,78,012/-.
Since, the assessee did not produce the books of accounts/bills & vouchers, therefore, the Assessing Officer held that genuineness of the expenses claimed, nexus with the business and justification thereof remain unverified. Observing that interest expenses to the nature of Rs.9,58,626/- has already been disallowed, remaining expenses comes to Rs.81,19,386/-.
He, therefore, disallowed an amount of Rs.8,11,938/- being 10% of such expenses on ad-hoc basis.
In appeal, the Ld. CIT(A) confirmed the addition so made by the Assessing Officer by observing as under:-
“4.5 Ground no. 4 is against the addition of Rs.8,11,938/- being 10% of all the Direct & Indirect expenditure Page 13 of 18
Rs.81,19,386/- (beside Bank Interest Rs.9,58,626/-), disallowed by AO. In the remand report, it is mentioned that an amount of Rs.8,11,938/- is disallowed and added to the total income by the Assessing Officer in the absence of books of account/bills/vouchers. This disallowance was made out of aggregate of direct and indirect expenses, amounting to Rs. 81,19,386/- minus the claim of interest, as the same is disallowed full. This addition is made as per discussion made in paragraph No.8. It is submitted by the AO that as far as incurring of direct and indirect expenses is concerned, there is no denying the fact that expenses have to be incurred to run the business and to earn the income. Furthermore, it is seen from the details available in the assessment records that on many occasions payment under various heads had been made in cash. As such leakage of Revenue on account of un- vouched expenses cannot be ruled out.
As far as indirect expenses are concerned, bills/vouchers of these were also not produced before the AO. It is also a matter of fact that an element of personal user of car telephone by the assessee, his staff and family members can never be ruled. Comments of the Tax Auditor mentioned in this regard also buttress this possibility. Assessee has not produced any log book of telephone/car that these were used exclusively and solely for the purposes of business. As such proportionate disallowance of car running expenses, car maintenance expenses, car depreciation, car interest, staff welfare expenses, telephone expenses deserves to be sustained in any case. Therefore, considering the facts and circumstances of the case, the disallowance of Rs. 8,11,938/- made by the AO is hereby confirmed.”
Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal.
The Ld. Counsel for the assessee strongly challenged the order of the Ld. CIT(A) in confirming the disallowance made by the Assessing Officer. He submitted that since the books of accounts were audited and the auditors have not pointed out any mistakes, therefore, the disallowance of expenses on ad-hoc basis is unjustified. He submitted that the Assessing Officer has not invoked the provisions of section 145 by rejecting the books.
He submitted that before the CIT(A), the assessee has produced books of accounts and he has called for a remand report from the Assessing Officer.
Referring to the decision of the Hon’ble Madras High Court in the case of V.C. Arunai Vadivelan vs ACIT vide TCA No.612 of 2019 order dated 05/02/2021, he submitted that without rejecting the books of accounts, ad- hoc disallowance is not justified. Relying on various decisions placed in the paper book, he submitted that there cannot be ad-hoc disallowance out of expenses when the accounts are audited and such accounts were not rejected and the Assessing Officer has not pointed out any specific discrepancy.
The Ld. DR on the other hand, heavily relied upon the order of the Assessing Officer and the learned CIT(A). He submitted that when the assessee has not produced any log book of telephone/car that these were used exclusively and solely for the purposes of business, therefore, proportionate disallowance of car running expenses, car maintenance expenses, car depreciation, car interest, staff welfare expenses, telephone expenses deserve to be sustained in any case. Since the order of the CIT(A) is just and proper, therefore, the same should be upheld.
I have considered the rival arguments made by both the sides, perused the order of the Assessing Officer and Ld. CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find that the Assessing Officer in the instant case, Page 15 of 18 disallowed an amount of Rs.8,11,938/- being 10% of the direct and indirect expenses debited in the Profit & Loss Account excluding bank interest on the ground that the assessee failed to substantiate with evidence to his satisfaction regarding the allowability of such expenses for the purpose of business. I find the CIT(A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the learned counsel for the assessee that although the books of accounts are audited and the auditors have not pointed out any mistake and such books of accounts were also produced before the learned CIT(A) and the remand report has been called for but the fact remains that the Assessing Officer has not invoked provisions of section 145 of the Act by rejecting the book results and not a single discrepancy in any bills and vouchers has been pointed out. Therefore, no ad-hoc disallowance is called for. I find some force in the above arguments of the learned counsel for the assessee. Admittedly, the accounts of the assessee are audited and no discrepancies have been pointed out by the auditors. The Assessing Officer has not invoked the provisions of section 145 of the Act and has straightway applied the rate of 10% for making ad-hoc disallowance. He has not pointed out any mistake in any of the bills/vouchers. Since, the accounts of the assessee are audited and the auditors have not pointed out any discrepancy and since the books of accounts were also produced before the CIT(A) and no discrepancy was found by him and considering the fact that books were also not rejected by the Assessing Officer by invoking the provisions of section 145 of the Act, therefore, I am of the considered opinion that no ad-hoc disallowance is called for. In this view of the matter, I set-aside the order of the CIT(A) and direct the AO to delete the disallowance.
In the result, appeal of the assessee is partly allowed.
Oder pronounced in the open court on 25/02/2021.