COGENT JEWELLERY P.LTD,MUMBAI vs. DCIT CIR 6(2), MUMBAI

We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the assessment order that the assessee himself calculated the amount in regard to interest free advances for disallowance of interest under section 36(1)(iii) of the Act amounting to Rs. 11,27,850/- and agreed for disallowance. The AO stopped the investigation and he is not proceeded further to find out nexus of interest free advances made out by the assessee as whether interest free funds or interest bearing funds are invested in the interest free advances given by the assessee. Needless to say, in case the AO is not able to prove the nexus, the issue is covered by the decision of CIT vs. Reliance Utilities and power Ltd. (2009) 313 ITR 340 (Bom) wherein, it is held that if there were funds available both interest free & interest bearing mixed funds and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest free funds were sufficient to meet the advances given by assessee. In this case, the facts are peculiar that the assessee himself stopped the AO from making further inquiry into nexus by admitting this disallowance. When this amount was contested by assessee in appeals, we are of the view that let the AO be also given fair opportunity to examine the nexus. In case he could not be able to establish the nexus he has to follow the decision of Hon’ble High Court in the case of Reliance Utilities and Power Limited (supra). In term of the above, we remand the matter back to the file of AO for fresh adjudication.

The second issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of commission for short deduction of TDS under section 194H of the Act, thereby invoking the provisions of section 40(a)(ia) of the Act. For this assessee has raised following ground No. 2:-

We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has filed the details of TDS deducted and only from one party i.e. Sohum Shoppy Ltd. to whom a commission of Rs. 33,725/- was paid no TDS was deducted. Except this party from other three parties which were disallowed by the AO of Rs. 17,13,478/- , the assessee as already deducted TDS but a short deduction was made. The relevant information of TDS is as under:-

In view of the above facts, the learned Counsel for the assessee stated that as regards to the short deduction of TDS no disallowance under section 40(a)(ia) of the Act can be made in view of the decision of Hon’ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal 361 ITR 432 (Cal) and also Hon’ble Karnataka High Court in the case of CIT vs. Kishore Rao and Others (HUF) 387 ITR 196(Karn). As the issue is squarely covered in favour of assessee by these two high court decisions in the case of S.K. Tekriwal & Kishore Rao and Others (HUF), & no contrary decision was brought to our notice by the revenue, respectfully following the same, we direct the AO to delete the disallowance.

The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing Signage Charges for non- deduction of TDS by invoking the provisions of section 40(a)(ia) of the Act. For this assessee has raised the following ground No. 3:-

At the outset, the learned Counsel for the assessee stated that he has instructions from the assessee not to press this ground. Hence, the same is dismissed as not pressed.

The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making adhoc disallowance by invoking the provisions of section 40(a)(2b) of the Act being payments made to related parties. For this assessee has raised the following ground No.4:

Briefly stated facts are that the assessee has made payment on account of purchase of jewellery from Say India Jewellers Pvt. Ltd, a company covered under the provisions of section 40A(2b) of the Act. Further, the assessee also acquired/ purchased jewellery from Nascent Jewellery Private Limited, which is also covered under the provisions of section 40(a)(2b) of the Act. The AO noted that the assessee has made entire purchase of Rs. 4,07,67,591/- from group of companies and booked net loss of Rs. 2,54,59,777/-. According to AO, the businessman has take into consideration various variable or fixed expenses required for retail sales while purchasing goods in bulk. According to AO, the assessee has disclosed margin of profit i.e. GP at 43.68% and out of the sum around 29% to sale consideration was paid to various parties. According to AO, the effective GP rate comes around 14.63%. Therefore, according to AO, the purchase price paid to persons specified under section 40A(2b) of the Act, the assessee failed to justify the same. Accordingly, he disallowed & the CIT(A) also confirmed the same. Aggrieved, now assessee is in second appeal.

We find that assessee is engaged in the business of sale of jewellery of its own brand. The said jewellery is acquired primarily from Say India jewellers Private Limited, a company covered by the provisions of Section 40A(2)(b) of the Act. Further, during the year, the assessee company also acquired a small quantum of jewellery aggregating from Nascent jewellery Private Limited which is also a company covered by the provisions of Section 40A(2)(b) of the Act.

After going through the facts in entirety, we are of the view that the prices paid for purchase of jewellery by the assessee company seems to be fair and reasonable and therefore, no part of such price is required to be disallowed by invoking the provisions of Section 40A(2)(a) of the Act for the reason that the AO is unable to bring anything on record which proves that the price paid by assessee is excessive or unreasonable. Accordingly, we delete the disallowance and allow this issue of assessee’s appeal.

The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO and disallowance of service charges on adhoc basis. For this assessee has raised the following ground No. 5:-

Brief facts are that the assessee has debited service charges of ₹ 1,52,09,793/- to P & L account on account of payment made to parties namely Ashapura Enterprises and corporate care. The first of all the AO required the assessee to explain as to why the claim of the assessee be not disallowed. The assessee furnished form No. 16A, copies of IT Return, computation of balance sheets of these parties, ledger account confirmations, copies of bills and list of persons to whom supplies/ work done in response to query by the AO. It was also asked whether any service tax was charged by the party or not. The assessee submitted the details in the form of 16A issued to these parties and sample copy of invoices. The AO noted that from the sample bill of Ashapura Enterprises that the service charges in the month of August 2010 at Rs. 9,66,857/- on which service tax was deducted at Rs. 48,343/-. In the case of corporate care, the service tax has been deducted at the rate of 10.30% on the amount of 1,92,614/- at Rs. 19,839/-. The AO noted that no details were submitted about the deployment of specific number of persons at individual stores, salary range and sale from these stores to justify the expenses of service charges. Accordingly, the AO made the adhoc disallowance at the rate of 25% of service of Rs. 152.20 lacs i.e. Rs. 38 lacs. Accordingly, the AO disallowed Rs. 38 lacs on this issue. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO and the relevant observation of the CIT(A) reads as under:-

Before us, the learned Counsel for the assessee filed statement showing the details of service charges for the year ended 39-03-2011 and the details are enclosed at assessee’s paper book at page 84. This clearly shows that the assessee has deducted TDS under section 194C on the amounts paid by assessee by account payee cheque. The reason for payment to these parties is that these are service charges in respect of supply of contractors for various stores chains. Even copies of invoices raised by Ashapura Enterprises and corporate care the assessee submitted including form No. 16A issued to them. The entire details are enclosed in assessee’s paper book at pages 85 -95. We find that the AO has not given any finding about the non-genuineness of expenditure and the books of accounts are also not rejected by the AO. The basis for disallowance of 25%, the AO has not given any reasons. Before us, the learned Counsel for the assessee relied on the order of the Hon’ble Delhi High Court in the case of CIT vs DLF Hilton Hotels (2016) 240 taxman 495/69 taxmann.com 300 (delhi) wherein Hon’ble High Court has confirmed the deletion of disallowance by observing in Para 7 as under: -.

On the facts of the case, we are of the view that the AO is unable to prove the non-genuineness of the expenditure despite the fact that the assessee has deducted TDS on this expenditure and also paid service charges. Further, entire details were available with the AO and he has not carried out any examination of any of the parties and without that adhoc disallowance at the rate of 25% of the expenditure was made. It means, that the AO has accepted the genuineness of the expenditure and once genuineness of the expenditure is accepted, the AO cannot disallow the same on adhoc basis. We delete the disallowance and allow this issue of assessee’s appeal.

In the Result, the appeal of the Assessee is partly allowed for statistical purposes.