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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 239/JP/2018
PER VIJAY PAL RAO, JM :
This appeal by the assessee is directed against the order dated 11th
November, 2017 of ld. CIT (A)-1, Jaipur for the assessment year 2012-13. The
assessee has raised the following grounds :-
“ 1. The ld. CIT (A) has erred on facts and in law in deciding the appeal ex-parte without providing adequate opportunity of hearing to the assessee.
The ld. CIT (A) has erred on facts and in law in rejecting the books of accounts by applying the provisions of section 145(3) of IT Act, 1961.
The ld. CIT (A) has erred on facts and in law in confirming the trading addition of Rs. 9,95,984/- by applying average G.P. rate of three year i.e. 12.13% as against G.P. rate of 10.41% declared by the assessee.
2 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
The ld. CIT (A) has erred on facts and in law in confirming the disallowance out of following expenses :-
Particulars Amount claimed (in Rs.) Amount of expenses disallowed (in Rs.) Salary expenses 6.46,500/- 64,650/- Telephone expenses 68,033/- 6,800/- General Expenses 97,493/- 9,750/- Travelling expenses 14,68,820/- 1,00,000/- Total 22,80,846/- 1,81,200/-
The ld. CIT (A) has erred on facts and in law in confirming the addition of Rs. 60,000/- u/s 68 of the IT Act by treating the amount payable to creditor M/s. Gems & Jewellery Information Centre as unexplained income of the assessee.
the assessee craves to amend, alter and modify any of the grounds of appeal.
Necessary cost be allowed to the assessee.
At the time of hearing, the ld. A/R of the assessee has stated at bar that the
assessee does not want to press ground no.1 of the assessee’s appeal and the same
may be dismissed as not pressed. The ld. D/R has raised no objection if the ground
no. 1 of the assessee’s appeal is dismissed as not pressed. Accordingly, ground no. 1
of the assessee’s appeal is dismissed being not pressed.
Ground No. 2 is regarding the rejection of books of account under
section 145(3) invoked by the ld. CIT (A).
The ld. A/R of the assessee has submitted that though the AO has made a
trading addition by applying GP rate of 12.13% as against the declared GP rate of
10.41% by the assessee, however, there was no rejection of books of account as
the AO has duly examined and verified the books of account and all other supporting
evidence. He has referred to the relevant finding of the AO at page 3 and submitted
3 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
that the AO has recorded that on verification he was satisfied about the value of
stock, quantification and stock register. The sales and purchases made were also
verified by the AO from purchase & sales register and bill/invoices produced by the
assessee. Thus once the A.O. did not find any infirmity or deficiency in the books of
account of the assessee, then without pointing out any defect by the ld. CIT (A) the
rejection of books of account is not justified. Hence the ld. A/R has contended that
invoking the provisions of section 145(3) by the ld. CIT (A) is illegal as there is
nothing to conclude that the books of account of the assessee suffer from any defect
or deficiency.
On the other hand, the ld. D/R has submitted that though the AO has not
rejected the books of account, however it was a mistake on the part of the AO and
inadvertently the books were not rejected. However, in substance the AO while
making the trading addition has rejected the book result. The said mistake in the
assessment order is now made up by the ld. CIT (A) having coterminous power with
that of the AO. He has relied upon the order of the ld. CIT (A).
We have considered the rival submissions as well as the relevant material on
record. The AO in the assessment proceedings has given the comparative details of
sales, GP ratio and net profit of the assessee at page 2 as under :-
Particulars Asstt. Year Asstt. Year Asstt. Year 2012-13 2011-12 2010-11 Sales 58135710 41188848 35627645 Gross Profit 6055878 5290323 4682088 GP Ratio 10.41% 12.84% 13.14% Net profit 2075581 14311479 1230888 Net profit ratio 3.57% 3.47% 3.45%
4 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
Since there was a decline in the GP ratio for the year under consideration in
comparison to the preceding two years, the AO undertook to verify the reasons for
such decline. The AO has observed at page 3 of the assessment order as under :-
“I have considered the submission made by the AR of assessee which revealed that the assessee has declared net profit in increasing manner as compared to preceding years but the GP rate found less by 2.43% in comparison to just preceding assessment year. The assessee produced the books of accounts consisting purchase and sales registers related sale/purchase invoice. On verification it has found that value of the stock has been quantified and duly been recorded in the stock register for which details of the same obtained. The Sales & purchases made are verifiable from sale and purchase registers and bills/invoices produced and the same are supported by VAT quarterly returns furnished by the assessee before the Sales Tax Deptt. The trading account is supported by the sale and purchase books which are duly audited under section 44AB of I.T. Act, 1961. On going through the details and invoices of sale and purchase produced during assessment proceedings, it is observed that rate of diamonds are varied in each invoice and no specification of diamond/stones and its quality is recorded on it. Therefore correct value of item sold cannot be ascertained in correct manner. In the year under review, the assessee has also declared GP rate on lower side in comparison to earlier 2 financial years which shows that assessee has suppressed his profit by claiming direct expenses. In view of above discussion and facts of the case trading results declared bythe assessee are not acceptable. I
5 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
therefore applied an average GP rate @ 12.13% on total turnover of Rs. 5,81,35,710/- which works out a trading addition of Rs. 9,95,984/- (Rs. 70,51,862- Rs. 60,55,878) to cover up all possible leakage of revenue for the year and added back to the total income.”
It is evident from the finding recorded by the AO that the assessee produced books
of account along with all other relevant record including stock register, sales &
purchase register, bills/vouchers as well as sales-tax record for verification and
examination of the AO. The AO did not find any defect or deficiency in the record
produced by the assessee which were duly audited under section 44 AB of the IT
Act, however, the AO made a trading addition only because there is a decline in the
GP ratio for the year under consideration in comparison to the earlier years. It is
settled proposition of law that decline in GP cannot be a basis for rejection of books
of account until and unless the AO on verification of books of account as well as
other relevant record was satisfied that the books of account of the assessee are not
reflecting the true and correct state of affairs and are suffering from defect and
deficiency. Since the AO has not given any adverse finding or observation recording
the deficiency or defects in the books of account, therefore, the provisions of section
145(3) cannot be invoked in this case. The ld. CIT (A) has invoked the said
provision under section 145(3) by citing the reason that the AO has inadvertently not
rejected the books in the assessment order. It is pertinent to note that the ld. CIT
(A) has not given a separate finding on the correctness of the books of account but
has repeated the observation as recorded by the AO in the assessment order.
6 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
Therefore, without disputing the powers of ld. CIT (A) having coterminous with that
of the AO but in the absence of any material or finding that the books of assessee
are suffering from defect or deficiency, the provisions of section 145(3) cannot be
invoked. Accordingly, we set aside the impugned order of the ld. CIT (A) qua this
issue of rejection of books of account.
Ground No. 3 is regarding trading addition.
This ground is consequential to the ground no. 2 as the AO has made the
trading addition without rejection of books of account and we have decided the issue
of rejection of books in favour of the assessee. Accordingly no addition can be made
on account of decline in the GP rate until and unless the books of accounts are
rejected. Hence we delete the trading addition made by the AO and confirmed by
the ld. CIT (A).
Ground No. 4 is regarding disallowance of various expenses.
The AO in the assessment order has made disallowance of 10% of various
expenses, namely, salary, telephone, general expenses and a lump sum of Rs. 1 lac
was disallowed on account of travelling expenses. The ld. A/R of the assessee has
submitted that the adhoc disallowance made by the AO for want of supporting
evidence as the assessee produced self made vouchers and further the telephone
expenses were disallowed on account of personal use. However, it is not the case of
the AO that the expenses are not incurred for the purpose of business. The ld. A/R
has submitted that when all the expenses are incurred for the purpose of business
and are duly supported by vouchers then an adhoc disallowance is not justified for
want of vouchers from the parties. The nature of expenses are such that the
invoices/bills from the other parties is not possible and, therefore, the assessee 6
7 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
produced self made vouchers in support of the expenses. The AO has not pointed
out that the expenses are excessive or bogus and, therefore, only because the
assessee has produced self made vouchers the AO has made adhoc disallowance.
As regards the travelling expenses, the AO has made a lump sum disallowance
without giving a finding that the claim of the assessee is excessive or bogus. In
support of his contention, he has relied upon the decision of Mumbai Benches of the
Tribunal in case of DCIT vs. ABC Bearing Ltd., 157 DTR 242 (Mum. Trib.) as well as
Hon’ble Jurisdictional High Court in case of CIT vs. Premier Vegetable Products Ltd.,
97 DTR 230 (Raj.). Hence the ld. A/R has submitted that the disallowances made by
the AO may be deleted.
On the other hand, the ld. D/R has relied upon the orders of the authorities
below and submitted that the AO has given the finding that the assessee has not
produced the supporting evidences to substantiate the claim of expenses, only self
made vouchers were produced by the assessee in support of the claim, therefore,
the AO was very liberal and reasonable in making the 10% disallowance of claim of
the assessee. Hence, the ld. D/R has submitted that the assessee has failed to
discharge his onus that the expenditure claimed by the assessee are incurred wholly
and exclusively for the purposes of business of the assessee.
We have considered the rival submissions as well as the relevant material on
record. The assessee has claimed total expenditure of Rs. 41,45,992/- under the
head selling & distribution which includes expenses of salary, travelling, telephone,
conveyance and other administrative expenses . The AO dealt with the claim of the
assessee in the assessment order in para 4 to 7 as under :-
8 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
“4. Salary expenses:- In the profit & loss account the assessee has debited the salary expenses of Rs 646500/- for which the AR of the assessee produced vouchers on verification of which it is found that most of the vouchers are self made and no payment evidence has been produced during assessment proceedings, therefore the expenses claimed and seems without basis and the same are fully not allowable therefore out of above a sum of Rs. 64650/- (being 10% of Rs. 646500/-) are disallowed and added to the total income.
Telephone expenses:- During the year under consideration the assessee has debited in the P&L account Rs. 68033/- for the telephone expenses. As the personal use of telephone is cannot be denied in the day to day life by the proprietor of the business therefore a lump sum addition of Rs. 6800/- is hereby made on this account being personal involvement and to cover up the leakage of revenue.
General expenses:- During the year under consideration the assessee has debited in the P&L account Rs.97493/- as general expenses. As the details and nature of expenses are found in general in nature which is required and essential in this type of business but payment made cash and vouchers are also found self made therefore an addition of 10% of above sum is hereby made resulting addition of Rs. 9,750/- added to the total income to cover up the leakage of revenue.
Travelling expenses:- In the profit & loss account the assessee has debited the salary expenses of Rs. 1468820/- for which the AO of the assessee produced vouchers on verification of which it is found that some of the vouchers are self made and no payment evidence
9 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
has been produced during assessment proceedings, therefore the expenses claimed which seems without basis and possibility f leakage of revenue attracted and in view the same claim of expenses fully not allowable therefore out of above a lump sum disallowance of Rs. 1,00,000/- on this head and added to the total income.”
Thus it is clear that the assessee has produced only self made vouchers in respect of
salary expenses, general expenses and traveling expenses. Further these expenses
were paid in cash and, therefore, in the absence of any supporting evidence the AO
made disallowance of 10% of these expenses. There is no dispute that if some
petty expenses are incurred by the assessee and the nature of expenses are such
that it is not possible and practical to take the bills/vouchers for each and every item
of expenditure, then if the expenditures are not found to be excessive or bogus, the
same cannot be disallowed for want of verifiable supporting evidence. However, the
expenses on account of salary, general expenditure and travelling expenses are not
in the category of petty, general and misc. expenditure. Therefore, the assessee is
duty bound and under obligation to establish that the expenditure is incurred wholly
and exclusively for the purpose of business of the assessee. Therefore, it is a clear
case of failure on the part of the assessee to produce the verifiable supporting
evidence in respect of these expenditures. However, the AO has not given the
finding of bogus or excessive claim of expenditure, therefore, having regard to the
facts and circumstances of the case, we restrict the disallowance to 5% of these
three expenses.
10 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
As regards the telephone expenses, the AO has made the disallowance of Rs.
6800/- which is about 10% of the expenditure on the ground of personal use of
telephone. The AO has disallowed the expenditure only on the basis of suspicion
and without giving a definite and concluding finding that the telephone was used for
personal purposes and not for business purposes. Therefore, on verification of the
record the telephones are not found to be used other than the business hours, then
no disallowance can be made on this account. Accordingly, the disallowance made
only on the suspicion is not sustainable and the same is deleted.
Ground No. 5 is regarding an addition of Rs. 60,000/- made under
section 68 of the IT Act.
The AO noted that in the Balance Sheet, the assessee has shown sundry
creditors of Rs. 9,49,96,902/-. On verification of the ledger account and confirmation
of new cash creditors on test check basis, the AO observed that a sum of Rs.
60,000/- has been shown as amount payable to the creditor M/s. Gems & jewellery
Information Centre. On verification from the said creditor, it was informed that no
transaction was made with the assessee during the year. Accordingly, the AO made
the addition of Rs. 60,000/- under section 68 of the Act. On appeal, the ld. CIT (A)
has confirmed the addition by observing that the ld. A/R appearing on behalf of the
assessee could not explain its case.
Before us, the ld. A/R of the assessee has submitted that the assessee
booked an advertisement with M/s. Gems & Jewellery Information Centre for which
the assessee submitted a copy of bill. However, due to the dispute between the
parties, the payment was not made. The ld. A/R has referred to the copy of bill dated 31st January, 2001 for a sum of rs. 90,000/-. However, due to certain dispute 10
11 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
the bill was not accounted for the financial year 2000-01 and thereafter in the
assessment year 2006-07 this bill was accounted for in the books of account at Rs.
60,000/- after some negotiations with the other party. The ld. A/R has also
submitted that the payment was also made by the assessee during the subsequent
assessment year i.e. 2014-15. Hence, the ld. A/R has submitted that this is not the
amount introduced or created during the year under consideration but it is opening
balance brought forward from the earlier years and, therefore, the same cannot be
added as unexplained cash credit under section 68 of the Act.
On the other hand, the ld. D/R has submitted that the AO has conducted an
enquiry from the alleged creditor who has clearly stated that there was no
transaction with the assessee. Further the assessee has not explained anything
before the ld. CIT (A) in support of the claim. Now the assessee has referred to a
bill of 2001 that too for a sum of Rs. 90,000/- and not for Rs. 60,000/-. The ld. D/R
has submitted that the claim of the assessee is not acceptable as the explanation of
the assessee is not matching with the entry in the books of account.
We have considered the rival submissions as well as the relevant material on
record. The assessee has shown the outstanding of sundry creditors including Rs.
60,000/- to M/s. Gems & Jewllery Information Centre. The AO has conducted an
enquiry from the said creditor and found that there was no transaction with the said
party during the year under consideration. The assessee has admitted the fact that
there was no transaction with the said creditor M/s. Gems & Jewellery Information
Centre during the year under consideration. However, the ld. A/R has referred to an invoice of 31st January, 2001 for a sum of Rs. 90,000/-. Further, the assessee has
contended that there was a dispute about the amount and finally the parties have 11
12 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.
settled for Rs. 60,000/- which was recorded in the books of account for the
assessment year 2006-07. Thus it is the claim of the assessee that the amount
which was accounted in the books for the assessment year 2006-07 is being carried
forward and there is no new entry or introduction of cash credit during the year
under consideration. Further the assessee has submitted that the said amount was
paid in the subsequent year i.e. 2014-15. We find that all these expenses were not
furnished before the authorities below. Therefore, this issue requires a proper
verification of relevant record as well as the fact of repayment of the amount by the
assessee. Accordingly, in the facts and circumstances of the case, we set aside this
issue to the record of the AO for proper verification and examination and re-
adjudicate the same after affording an opportunity of hearing to the assessee.
In the result, appeal of the assessee is partly allowed.
Order is pronounced in the open court on 17/10/2018.
Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur Dated:- 17/10/2018. Das/ आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
The Appellant- Shri Habeeb Khan, Jaipur. 2. The Respondent – The ITO, Ward-2(5), Jaipur. 3. The CIT(A). 4. The CIT, 5. The DR, ITAT, Jaipur 6. Guard File (ITA No. 239/JP/2018) vkns'kkuqlkj@ By order,
सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत
13 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.