ITO, NEW DELHI vs. SH. MOHENDER KUMAR GARG, DELHI

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER :

2. Brief facts of the case are that the assessee (since expired) was an individual and was doing business in the name of M/s Mahender Flour Mills. For the impugned assessment year, the assessee filed a return of income declaring a taxable income of Rs. 9,04,654/- and declared gross profit rate of 2.88% and net profit rate of 0.54%. The assessment was completed u/s 144 of the Income Tax Act, 1961 (hereinafter called 'the Act'). As the assessee could file only details in part and had also failed to produce books of accounts, in absence of details of closing stock, the Assessing Officer was of the opinion that in such nature of trade, the normal profit varied between 5% to 7% and he proceeded to make an addition of Rs. 37,13,384/- being 2% of the turnover to the income of the assessee. The Assessing Officer also made an ad hoc disallowance of expenses to the tune of Rs. 2,94,521/- and a further disallowance of Rs. 1,80,265/- under Trade Mark, discount and miscellaneous expenses. A further addition was made of Rs. 5 lakh on account of credit card expenses and Rs. 20,50,000/- on account of unconfirmed unsecured loans. The assessment was completed at an income of Rs. 77,42,820/-. The aggrieved assessee approached the Ld. Commissioner of Income Tax (A) and challenged the disallowances/additions. The Ld. Commissioner of Income Tax (A)deleted the addition on account of 2% of gross profit as well as deleted the addition on account of credit card expenses, unsecured loans and also a part of the ad hoc disallowances amounting to Rs. 2,94,521/-.

2.1 Now aggrieved, the department is before the ITAT and has challenged the deletion by the Ld. Commissioner of Income Tax (A) by raising the following grounds of appeal:-

“1. Whether the Ld. CIT(A) on the facts and circumstances of the case and in law was correct in deleting the addition of Rs. 37,13,384/- made by the Assessing Officer on account of trading result @ 2% of Gross Profit.

3. Whether the Ld. CIT(A) on the facts and circumstances of the case and in law was correct in deleting the addition of Rs. 2,0,50,000/- made by the Assessing Officer on account of disallowance of unconfirmed unsecured loans.

4. Whether the Ld. CIT(A) on the facts and circumstances of the case and in law was correct in deleting the addition of R.s 2,94,521/- made by the Assessing Officer on account of disallowance of unverifiable expenses.

5. In spite of ample opportunity provided to the assessee, the assessee did not cooperated and neither produced the bills and vouchers before the Assessing Officer during the course of assessment proceedings nor any remand report was sought by the Ld. CIT(A) in any of the issues.

Assessment year 2011-12 6. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of hearing.”

The Ld. AR submitted that audited financial statements were available before the AO and that no defects in the said financial statements and auditor’s report have been pointed out by the Assessing Officer. The Ld. AR submitted that the method of accounting employed by the assessee is being consistently followed in all the assessment years and the financial statements as well as books of accounts for preceding years were duly accepted and no addition due to difference in GP rate was made.

She submitted that the addition is merely on the basis of guesswork and estimations of the Assessing Officer.

4.1 Coming to the addition of Rs. 5 lakh on account of credit card expenses, it was submitted by the Ld. AR that there is no finding of the Assessing Officer in the assessment order with regard to the addition of credit card expenses. During the course of assessment proceedings, the assessee submitted a copy of ledger of Citi Bank credit card payable a/c and a copy of credit card statement. However, no further details were called by the AO with reference to the expenses of credit card and moreover, no show cause notice was issued thereby, not giving the assessee an opportunity of being heard. It was submitted that all expenses were incurred wholly and exclusively for the purposes of business only. She further submitted that the relevant information was available with the AO and not even a single discrepancy was pointed out by the AO in the details furnished before him. In view of absence of any satisfaction recorded in the assessment order and not granting any opportunity of being heard to the assessee, no disallowance can be called for.

4.2 As far as the addition of Rs. 20,50,000/- on account of unconfirmed unsecured loans is concerned, it was submitted by the Ld. AR that there is no finding of the AO in the assessment order with regard to the addition of unconfirmed unsecured loans. She submitted that it is to be appreciated that the unsecured loan of Rs. 20,50,000/- are arising from the earlier year and that no transaction for unsecured loans has been carried out during the year under consideration. Thus, when no unsecured loans have been received during the year, no addition in this regard is called for. It was submitted that during the course of assessment proceedings, the assessee had submitted the confirmations of the loans from various parties. However, no further query was raised by the AO in this regard. Also, no show cause notice was issued to the assessee in this regard before making the addition. The assessee having submitted the copy of confirmations from various parties has duly discharged his onus of substantiating the claim of unsecured loans.

4.3 With regard to the addition of Rs. 2,94,521/- on account of unverifiable expenses, it was submitted by the Ld. AR that the Ld. CIT (A) has given a relief of Rs. 2,09,712/- out of the addition of Rs. 2,94,521/-. Though, in the department’s appeal, they have raised the ground for the whole amount of Rs. 2,94,521/-, however only Rs. 84,809/- was confirmed by CIT(A) and the assessee has not raised any further appeal against the said disallowance. Therefore, this ground relates to only ad hoc disallowances of expenses of Salary and Labour Charges which were deleted by the Ld. CIT (A). She submitted that it is to be appreciated that the expenses relating to salary and labour charges cannot be said to have any element of personal nature.

Thus, it is observed that there is no substantial fall in the GP rate and the same has been increasing continuously. We also note that nothing specific has been brought on record by the Assessing Officer before making addition of extra 2% on account of GP rate. The Assessing Officer has not given any reasons for enhancing the gross profit rate except for mentioning that in the nature of business being carried on by the assessee, the net profit rate would vary between 5% and 7%. Although the Income Tax Act does empower the Assessing Officer to complete the assessment based on best judgment, the same is not an arbitrary power and the best judgment assessment should also be based on some relevant material. It is undisputed that the Assessing Officer had audited financial statements before him which had not been adversely qualified by the auditor. Further, the method of accounting followed by the assessee was also being followed consistently since past many assessment years and financial results for the preceding assessment years were duly accepted by the department u/s 143(3) of the Act and no addition on account of difference in GP rate was made. It is apparent that this addition has been made merely on the basis of assumptions and guess work on the part of the Assessing Officer without bringing any cogent evidence on record in support of the assumptions made by the Assessing Officer. Therefore, we find no reason to interfere with the findings of the Ld. CIT (A) on this issue and we dismiss the ground raised by the department in this regard.

5.1 Coming to the addition of Rs. 5 lakh on account of credit card expenses which has been deleted by the Ld. CIT (A), it is seen that the Ld. CIT (A) has deleted the addition by observing that the Assessing Officer has not made any specific discussion or recorded any categorical finding regarding the credit card expenses. This observation of the Ld. CIT (A) is correct. It is seen that the Assessing Officer has not pointed out even a single discrepancy in the details which were furnished before him by the assessee in respect of the credit card expenses. Therefore, in absence of any defect having been pointed out by the Assessing Officer, no disallowance could have been legally made. Therefore, we find no reason to interfere on this issue also and we uphold the order of the Ld. CIT (A) and dismiss the ground raised by the department.

5.2 Coming to the deletion of addition of Rs. 20,50,000/- on account of unconfirmed unsecured loans, it has again been observed by the Ld. CIT (A) that the amount has been added back by the Assessing Officer without any discussion on the issue and this observation of the Ld. CIT (A) is also correct. The Ld. CIT (A) has given a categorical finding that the balance of Rs. 20,50,000/- pertains to unsecured loans which were brought forward from earlier assessment years and there was no transaction/s of raising fresh unsecured loans during the year under consideration. This fact is also verifiable from Form 3CD which has been filed by the assessee along with the tax audit report. The Ld. Sr. DR has also not been able to negate this factual finding of the Ld. CIT (A). Therefore, on facts, we find no reason to interfere on this issue also and we uphold the order of the Ld. CIT (A) and dismiss the ground raised by the department.

5.3 The last challenge of the department is against the deletion of addition of Rs. 2,94,521/- being ad hoc disallowance out of salary, labour charges, repair and maintenance and staff welfare expense and the Ld. CIT (A) has deleted the amounts pertaining 10 to salary and labour charges by holding that the expenses on salary and labour charges cannot involve any element of personal nature. Thus, the Ld. CIT (A) has only deleted Rs. 2,09,712/- out of Rs. 2,94,521/- and the balance amount of Rs. 84,809/- stands confirmed by the Ld. CIT (A). However, the department has challenged the entire amount of Rs. 2,94,521/- as having been deleted by the Ld. CIT (A) which is factually incorrect. We agree with the contention of the Ld. CIT (A) that no personal element could be inferred to be involved in payment of salary and labour charges. It is also seen that the Assessing Officer has made the disallowance on the ground that the expenses remained unverifiable and that they may contain an element of personal nature. We are unable to agree with the findings of the Assessing Officer in this regard and agree with the observations of the Ld. CIT (A) that labour charges and salary expenses will not have an element of personal nature unless a specific finding has been recorded by the Assessing Officer in this regard. Therefore, we find ourselves in agreement with the Ld. CIT (A) on this issue also and we dismiss the ground raised by the department.

5.4 Before parting, we also would like to observe that the Ld. Sr.

DR has submitted before us that the Ld. CIT (A) should have called for a remand report from the Assessing Officer before proceeding to delete the disallowances which are under challenge before us. However, a perusal of the impugned order shows that the Ld. CIT (A) has deleted the additions entirely on the facts which were before the Assessing Officer also during the course of assessment proceedings and no fresh evidence had been admitted by the Ld. CIT (A) in this regard. Therefore, it is our considered opinion that there was no requirement on the part of the Ld. CIT (A) to call for a remand report from the Assessing Officer and we opine that the Ld. CIT (A) is entirely justified in proceeding to adjudicate the issues before him on the basis of facts which were before him and were also undisputedly before the Assessing Officer also.

Order pronounced in the open court on 11th September, 2018.