SHRI HABIB KHAN,JAIPUR vs. INCOME TAX OFFICER, WARD-2-5, JAIPUR

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.

2 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.

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/-

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).

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

13 ITA No. 239/JP/2018. Shri Habeeb Khan, Jaipur.