JHANDI PRASAD HIMMATRAMKA,JAIPUR vs. ITO, JHUNJHUNU

PER BHAGCHAND, AM The assessee has filed an appeal against the order of the ld. CIT(A)-35, New Delhi (Camp Office at Jaipur), dated 09-09-2016 for the assessment year 2010-11 raising therein following grounds:-

2 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu .

in the business of trading of Sugar on wholesale basis in the name and style of M/s. Madhav Trading Co. at Chirawa. The AO on perusal of the books of account of the assessee noticed that the assessee during the year

under consideration had declared the gross profit of Rs. 16,06,125/- on declared total sales of Rs. 21,59,60,250/- in trading account by showing a gross profit rate of 0.74% only which is very low as compared to last

year’s declared gross profit rate @ 1.14%. The AO on scrutiny of books

of account noticed various defects that the assessee had not maintained

day to day stock register and quantity-wise details of items. The AO

further noted that the assessee had not furnished complete bills and 3 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . vouchers regarding purchase expenses in trading account. The AO noted

that the auditor in audit report had commented that no internal vouchers

had been maintained for cash expenses. The AO observed that in the absence of these defects, trading results declared by the assessee cannot

be ascertained and true gross profit and closing stock cannot be deduced.

In such a situation, the assessee was offered opportunity by the AO to show cause as to why provisions of Section 145(3) of the Act may not be invoked and gross profit @ 1.14% as declared in last year may not be applied on declared turnover of Rs. 21,59,60,250/-. The assessee

submitted the reply before the AO who observed the reply of the assessee

as routine reply and it had no force. The AO also noted that the assessee

had neither produced the day to day stock register nor quantitative details

of the commodities. In such a situation, the AO had invoked the provisions of Section 145(3) of the Act and applied the gross profit rate

@ 1.14% on declared turnover of Rs. 21,59,60,250/-. The AO thus

worked out the gross profit at Rs. 24,61,947/- instead of Rs. 16,06,125/-

declared by the assessee. The AO thus added the difference amount of Rs.

8,55,822/- to the total income of the assessee.

the action of the AO by observing as under:-

4 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . ‘’5. 10. In the present case, the gross profit rate has fallen but justification for the same has not been provided. Moreover, the appellant company has not maintained bills/ vouchers stock register which can substantiate its various claims. In the circumstances, the AO has no option but to estimate the trading account. Moreover, the AO has estimated the G.P. of 1.14% which is similar to the rate declared by the appellant in earlier years. I find the action of the AO as reasonable.

In view of the above discussion, Ground No. 2 is dismissed.

that the AO has wrongly applied the provisions of Section 145(3) of the Act as the assessee vide his letter dated 25-07-2011 had submitted the final quantitative tally in respect of the items dealt with by him giving

complete quantitative details of the goods involved. The ld. AR further

submitted that AO while rejecting the plea of the assessee had neither

pointed out a specific discrepancy in the quantitative details so submitted

nor he had given any comparable case wherein a higher gross profit rate

than the assessee had been shown. The ld. AR of the assessee relied on the decision of Hon'ble Jurisdictional High Court in the case Bhawani

Silicate Industries , 236 Taxman 596. The ld. AR of the assessee

submitted the gross profit rate chart for the last three years as under:-

A.Y. Sales G.P. % 2008-09 11,74,35,192.00 0.98 2009-10 14,75,80,854.00 1.14 2010-11 21,59,60,250.00 0.74

5 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . The ld. AR of the further assessee relied on following case laws:-

have wrongly invoked the provisions of Section 145(3) of the Act. He

further submitted that the results declared by the assessee may be accepted and the trading addition of Rs. 8,55,822/- made by the AO by estimating the gross profit rate at 1.14% as against 0.74% as declared by the assessee may be directed to be deleted.

authorities.

available on record. It is noted from the records that the assessee had not maintained the day to day stock register or quantitative details of commodities. It is also noted from the assessment order that the auditor in the audit report had commented that no internal vouchers had been maintained for cash expenses. It is also noted that the assessee had not 6 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . furnished complete bills and vouchers regarding purchases claimed in trading account. The AO thus invoked the provisions of Section 145(3) of the Act and applied the gross profit rate of 1.14% on total turnover of Rs.

21,59,60,250/- declared by the assessee on which gross profit comes to Rs. 16,06,125/-. However, the assessee had declared the gross profit rate

at 0.74% on which gross profit comes to Rs. 16,06,125/-. The AO thus

added a difference of Rs.8,55,822/- (Rs. 24,61,947 minus Rs. 16,06,125-)

which in first appeal has been confirmed by the ld. CIT(A). In appeal

before the Tribunal, it is observed from the facts available on records that the lower authorities have rightly invoked the provisions Section 145(3)

of the Act. As regards the sustenance of addition of Rs. 8,55,822/-, it is noted that the gross profit rate of the assessee for the last three years i.e.

2008-09-, 2009-10 and 2010-11 are at 0.98%, 1.14% and 0.74%

respectively. Thus looking to the past history of the assessee and assessee

being engaged in the trading of sugar on wholesale basis, the addition is sustained to the extent of Rs. 2.00 lacs only. Thus the assessee will get the partial relief of Rs. 6,55,822/-.

the year under consideration had observed that the assessee had debited a sum of Rs. 34,672/- on account of telephone expenses, debited a sum of 7 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . Rs. 36,847/- on account of traveling expenses, claimed a sum of Rs.

1,27,025/- on account of depreciation on two cars and motor cycle and claimed a sum of Rs. 1,36,459/- on account of vehicle expenses. The AO

observed that the assessee had neither maintained the call register in respect of telephone nor maintained the log book for running of cars. The AO further noted that the assessee had not furnished complete bills,

vouchers and documents in support of claim of these expenses and thus

the use of telephone, cars & motor cycle and vehicle and traveling

expenses exclusively for business purposes could not ascertained.. The AO asked the assessee to submit the complete details / documents and vouchers in respect of these expenses but the assessee could not furnish

complete bill, details/ vouchers/documents in support of these expenses

claimed by him in the profit and loss account. The AO further observed

that in the absence of complete details/ vouchers and considering the nature of these expenses, personal usage of the same cannot be ruled out

and thus there are chances of inflating the expenses by the assessee and in order to cover up any possible leakage on this account, he disallowed

20% out of the above expenses i.e. Rs. 67,001/- (20% of Rs. 3,35,003/-,

[34,672+36847+127025+136459] and added the same to the total income

8 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . of the assessee which in first appeal has been confirmed by the ld. CIT(A)

by observing as under:-

‘’5.11 Ground No.3: is with respect to disallowance out of office expenses, out of telephone expenses and out of motor car expenses. From the assessment order, it is observed that the AO has made such adhoc additions to cover up the element of personal uses of such assets and facilities. Regarding these addition, it is a common belief that in absence of proper records, the possibility of involvement of personal usage in such type of expenses cannot be ruled out. The Hon'ble Rajasthan High Court in the case of Shri Kanhailal Jangid (217 CTR 354) also approved the concept of adhoc addition on lump sum basis, if the relevant details are not found available to support of the expenses claimed by the assessee. In view of the same, I find the disallowance which is only 20% of these expenses as justified. Consequently, Ground 3 of appeal is dismissed.’’

CIT(A). The ld. AR of the submitted that during the course of assessment

proceedings, the books of account were submitted before the AO who had not pointed out any specific defect and generalized the same by disallowing the expenses. The expenses were incurred wholly and exclusively for the purpose of business and under the business

expediency. The ld. AR of the assessee further submitted that the proportion of expenses to the total turnover declared and accepted also reveals that the same are quite reasonable and there is no room for any personal expenses being included in the same for which he submitted the details as under:-

9 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . Name of Expenses Amount % of Turnover claimed Rs. 21,59,60,250 Telephone expenses 34,672.00 0.016% Depreciation on car and motorcycle 1,27,025.00 0.059% Travelling expenses 36,847.00 0.017% Vehicle expenses 1,36,459.00 0.063%

The ld. AR of the assessee to this effect relied on following case laws:-

1,27,025/- on account of depreciation on two cars and motor cycle and claimed a sum of Rs. 1,36,459/- on account of vehicle expenses. The AO

10 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . for want of complete bills, details/ vouchers, documents and considering

the nature of these expenses disallowed 20% of the total expenses of Rs.

3,35,003/- which comes to Rs. 67,001/- and in first appeal the ld. CIT(A)

has confirmed the action of the AO. In appeal before the Tribunal, it is noted that since the books of account of the assessee has been rejected,

therefore, the estimated addition has been made. It is also noted that the ld. AR of the assessee to this effect relied on various case laws including

the decision of Hon'ble Supreme Court in the case of S.A. Builders vs. view of above decisions and various others decisions of Hon'ble High

Court, no separate adhoc disallowance out of the expenses debited in the profit and loss account under the heads telephone expenses, depreciation

on car and motorcycle, traveling expenses and vehicle expenses is not justified.. Hence, looking to the present facts and circumstances of the case, I direct to delete the adhoc disallowance of Rs. 67,001/- confirmed

by the ld. CIT(A). Thus Ground No. 2 of the assessee is allowed.

during the year under consideration had observed that the assessee had debited a sum of Rs. 1,57,324/- on account of labour expense in the profit and loss account. The AO required the assessee to submit the 11 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . complete details/documents and vouchers in support of these expenses

but the assessee could not furnish the complete bill, details/vouchers/

documents in support of these expenses claimed by him in the profit and loss account. The AO observed that there are chances of inflating the expenses by the assessee and in order to cover up any possible leakage,

he disallowed 10% out of the above expenses i.e. Rs. 15,732/- (10% of 1,57,324/- and added the same to the total income of the assessee which in first appeal has been confirmed by the ld. CIT(A) by observing as under:-

‘’5. 14. Ground No. 6: is regarding disallowance of 10% labour expenses to the tune of Rs. 15,732/- on the ground of lack of supporting vouchers. Since supporting evidence could not be furnished, disallowance of 10% appears to be reasonable. Ground No. 6 is dismissed.’’

submission.

‘’During the year under consideration, the appellant had claimed a sum of Rs. 1,57,324/- on account of labour expenses in P&L account. However, the Ld. AO disallowed 10% of the expense claimed by the appellant alleging the same as inflated expenses without bringing any material on record or pointing out any specific defect. The Ld. CIT(A) upheld the disallowance of 10% as reasonable since supporting evidences could not be furnished. In this regard, it is submitted that the Ld. AO has made very general and vague observations which are not sufficient to doubt the genuineness of the expenses claimed by appellant. It is submitted that the appellant has maintained complete record of the payments made to labour in the shape of vouchers. Most of the labour are casual in nature and are not permanent

12 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . employees of appellant and therefore to maintain proper record of them is neither practical nor required. While making the impugned allegations, the Ld. AO has failed to understand the ground realities of the business in which appellant is engaged wherein making of payments to labour is a usual feature in as much as labour in no case will be willing to accept payment from any mode other than cash. These payments are of petty amounts and cannot be made through cheques. It must be noted that these payments have not been made to any labour contractor but to labour directly and therefore, had to be made in cash. Further, there can be no bills / vouchers with regard to the payments made to individual labourers which are engaged on daily basis. It is well understood that labourers will not issue any bill for the work done by them and therefore, practically only self made vouchers for the cash payments made to labourers are maintained. Therefore, the allegations of the Ld. AO are baseless and do not lead to any conclusion. Further, it cannot be denied that the nature of work undertaken by appellant requires extensive use of labour, therefore, disbursement of a considerable amount as labour charges is consequential in such circumstances. Thus, based on above the appellant humbly submits that the labour expenses incurred by him are quite reasonable considering the nature of business and thus the entire expenses deserve to be allowed and is being prayed accordingly.’’

authorities.

available on record. It is noted from the assessment records that the assessee had debited a sum of Rs. 1,57,324/-on account of labour

expenses in the profit and loss account for which the AO required the assessee to submit the complete bills, details / vouchers/documents in support of these expenses claimed by him. However, for want of complete details /bills/ vouchers and records etc. the AO made adhoc

disallowance of 10% of total expenses of Rs. 1,57,324/- which comes to 13 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . Rs. 15,732/- and added the same to the total income of the assessee. In first appeal, the ld. CIT(A) has confirmed the action of the AO. In appeal

before ITAT, the ld. AR of the assessee submitted that the assessee had maintained complete records of the payments made to labour in the shape

of vouchers and most of the labour are casual in nature and are not permanent employee of the assessee and therefore, it was not practical for the assessee to maintain proper records. The ld. AR of the assessee

submitted that these payments made to the labour are petty amounts and cannot be made through cheque. The ld. AR further submitted that these

cash payments had not been made to any labour contractor but to labour

directly who are engaged on daily basis. It is observed that since the books of account of the assessee has been rejected, therefore, the estimation addition has been made. The ld. AR of the assessee also relied

on the decision of Hon'ble Supreme Court in the case of S.A. Builders view of above decisions and various others decisions of Hon'ble High

Court, no separate adhoc disallowance out of the expenses debited in the profit and loss account under the head labour expenses is not justified.

Hence, looking to the present facts and circumstances of the case, I direct

14 Shri Jhandi Prasad Himmatramka vs. ITO, Ward- 2 , Jhunjhunu . to delete the adhoc disallowance of Rs. 15,732/- confirmed by the ld. CIT(A). Thus Ground No. 3 of the assessee is allowed.

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