ITO WARD 15 (3) vs. RAWALPINDI JEWELLERS PVT. LTD,

PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in both the aforesaid appeal and cross objection, the same are being discussion.

3. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the disallowance of depreciation on new car amounting to Rs.38742 made by A.O without appreciating the fact that the date of registration of the said car was 8/4/2004 i.e after closing of previous year.

4. L'd CIT(A) has erred in law and in facts and circumstances of the case in directing AO to allow depreciation on insurance premium capitalised in respect of new car as assessee company failed to prove that the car was put to use in the previous year under consideration.

5. L’d CIT(A) has erred in law and in facts and circumstances of the case in deleting the disallowance of Rs.7395l-made by AO on account of car maintenance expenses.

6. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition of Rs.11000/-made by AO in ./2007 CO No.392/Del./2007 respect of fee paid for preparation and filling of Income Tax return .

7. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition of Rs.2500/-made by AO on accounts of fee paid in respect of preparation of Sales Tax return.

8. L'd CIT( A) has erred in law and in facts and circumstances of the case in deleting the addition of Rs.500000/- made by AO u/s 68 of Income Tax act 1961 in respect of interest free loan taken from Shri Budh Singh proprietor of M/s.Bhawna jewellers.

11. L'd CIT(A) has erred in law and in fact and circumstances of the case in deleting the addition of Rs.530,000/-made by AO u/s 68 of Income tax Act 1961in respect of unexplained credit entries in the account of Sh. Jagdish Lal Bhasin, without giving an opportunity to AO while admitting the additional evidence under Rule 46A of Income tax Rules 1962.

12. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition of Rs.100000/- made by A.O u/s 68 of Income tax Act 1961in respect of unexplained credit entry in the account of M/s Mahindra fastener Ltd. without giving an opportunity to AO while admitting the additional evidence under Rule 46A of Income tax Rules 1962.

13. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition of Rs.13875/- made by out of depreciation claimed on Photo Copy Machine .

14. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the disallowance of finance charges amounting to Rs.12356/- allegedly incurred in respect of purchase of Photo Copy machine despite the fact that the purchase of said machine remained unproved, 15. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the reasonable 1/3rd disallowance made by A.O Out of Staff Welfare expenses to the tune of Rs.24903/-.

16. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the disallowance of Rs.118726/- made by A.O Out of Electricity expenses pertaining to electricity meter installed at premise No.2300, Subzi Mandi without taking into account the fact that the there is no mention of such address in the return of income, Audit report, bill issued, letter head of the assessee or any other documents .

17. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.122000/- made by A.O on account of Legal charges.

18. L’d CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.263025/-made b A.O on account of bogus Salary expenses. 19. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.43,895/- made by A.O on account of repairs and maintenance. 20. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.300000/- made by A.O on account of Interest and finance charges. 21. L'd CIT(A) has erred in law and in facts and circumstances of Case in directing the A.O to allow the depreciation as per revised Chart.

22. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.60000/- made by A.O on account of sale of car.

23. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition amounting to Rs.80175/- made by A.O on account of packing charges ignoring the fact that the parties to whom alleged payment were made were found now existent as per remarks of postal authorities.

24. On the facts and circumstances of the case L'd CIT (A) has erred to set aside the disallowance as to advertisement expenses to the tune of Rs.111540/- for making fresh enquiries non- withstanding in fact that as per postal remarks either the given address does not exist or at the given address the impugned concern did not exist.

25. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the addition out of cash purchases ./2007 CO No.392/Del./2007 amounting to Rs.211994/- made by A.O u/s 40A(3) of Income tax Act 1961. 26. L'd CIT(A) has erred in law and in facts and circumstances of the case in deleting the trading addition amounting to Rs.1000000/- made by AO. 27. The appellant craves to be allowed to amend, delete of add any other grounds of appeal during the course of hearing of this appeal.”

3. The Objector, by filing the present cross objection, sought to set aside the impugned order dated 28.06.2007 passed by the Commissioner of Income-tax (Appeals)-XVIII, New Delhi qua the assessment year 2004-05 on the ground that :-

“1. That the learned Commissioner of Income-tax (Appeals) has erred in not allowing amount of Rs.30,000/- paid towards reconciliation works under the head Accounting Charges.

2. That the learned Commissioner of Income-tax (Appeals) has erred in holding services rendered by the Director of the company as unsubstantiated thereby disallowing her remuneration amounting to Rs.120,000/-.

4. That the learned Commissioner of Income-tax (Appeals) has erred in holding addition of Rs.36,000/- as unexplained expenditure under section 69 of the Income-tax Act, 1961.”

Kakkar, CA/AR of the assessee put in appearance during scrutiny proceedings and filed necessary details. Assessee is into the business of sale and purchase of gold and diamond jewellery. A tax Act, 1961 (for short ‘the Act’) on 31.10.2003 leading to the recovery of unaccounted excess stock and in this regard, assessee surrendered a sum of Rs.30,18,369/- and admitted to declare it as an additional income for assessment year 2004-05. Excess unaccounted cash of Rs.5,00,030/- was also recovered which the assessee agreed to declare as additional income for AY 2004-05.

9. Assessee debited an amount of Rs.11,000/- on account of Income-tax fee and Rs.2,500/- on account of sales-tax fee in the P&L account being charges of preparation and filing of income-tax return and sales-tax return which has been disallowed by the AO on the ground that fee paid to Chartered Accountant for preparing and filing of income and sales cannot be considered as an expenditure laid out wholly and exclusive for the purpose of business or for earning income and thereby made an addition of Rs.11,000/- and Rs.2,500/- respectively. unsecured loan of Rs.5,00,000/- from M/s. Bhawana Jewellers whose name was shown in the list of sundry creditors. AO made an addition of Rs.5,00,000/- on the ground that the assessee has failed to prove the capacity of M/s. Bhawana Jewellers whose assessed income for AY 2004-05 was only Rs.54,620/- on which it has paid meager tax to the tune of Rs.462/-.

Shri Ankush Bhasin along with documentary evidence AO made an addition of Rs.8,40,000/- to the income of the assessee.

AO noticed that on 31.03.2006, entire liability of Rs.1,22,000/- was outstanding. So, the said unascertained and unaccrued provision was made on the penultimate date of accounting to reduce the additional income declared. AO came to the conclusion that it was a case where an expense of Rs.1,22,000/- has been claimed but corresponding tax on the income is to be paid even after lapse of about 33 months from the date of provision and thereby disallowed the same.

Assessee has also failed to get the cash purchases verified as names of the seller were not even mentioned

GROUND NO.1 of loss of sale of assets on the ground that the same is of capital in nature. However, the same is allowed by CIT (A) by considering the same in the block of assets as per Income-tax law. We are of the considered view that during assessment proceedings, assessee has filed revised depreciation chart which has been rejected by the AO without any reason. CIT (A) has rightly directed the AO to consider the same in the block of assets. Even otherwise, keeping in view the smallness of the amount, no interference is required at this stage. So, ground no.1 is determined against the revenue.

GROUND NO.2 31. The amount of Rs.24,210/- disallowed as travelling expenses stated to have been incurred by Smt. Meena Bhasin, one of the directors, has been allowed by the ld. CIT (A) by taking into account the fact that the assessee company has substantial trading in diamonds for which supplies come from Mumbai, a biggest wholesale market in India and a tour to Mumbai for survey of diamond market, quality of diamond and prevailing prices would be a normal business proposition. AO merely disallowed these expenses on the ground that Smt. Meena Bhasin is not a working director but this is not permissible because a director though not a of the company, so CIT (A) has rightly deleted the addition of Rs.24,210/- made by the AO.

GROUNDS NO.3 & 4 32. AO disallowed depreciation on new car to the tune of Rs.38,472/- which has been deleted by the ld. CIT (A) vide the impugned order. AO has merely disallowed the depreciation on the ground that car in question has been registered with registering authority on 08.04.2004. However, when assessee has duly proved that the delivery of the car was taken on 29.03.2004 as per purchase invoice and gate-pass issued by Suhrit Hyundai, the depreciation has been rightly claimed as registration of the vehicle will relate back to the date of actual delivery of the car i.e. 29.03.2004 in question by the assessee company. Likewise, the CIT (A) has rightly directed the AO to allow depreciation of Rs.5,606/- on insurance premium capitalized in respect of new car because the same was proved to put to use w.e.f. 29.03.2004. We find no ground to interfere in the findings returned by the ld. CTI (A) and consequently, grounds no.3 & 4 are determined against the revenue.

AO has disallowed 1/5th of the car maintenance expenses on 33. the ground that car in question was used by the directors, their family members, relative and friends for personal use. But we are of the considered view that no such maintenance expenses can be disallowed on account of personal use of director and family members. Moreover, AO has not brought on record any evidence to prove the element of personal use of the car particularly when the same has been purchased in the name of the company and stated to have been used for the company by the assessee. So, finding no illegality and perversity in the finding returned by the ld. CIT (A), ground no.5 is also determined against the revenue.

GROUND NOS.6 & 7

GROUND NO.8 35. AO made an addition of Rs.5,00,000/- taken by the assessee as unsecured loan from M/s. Bhawana Jewellers on the ground that the assessee company has failed to prove the capacity of the creditor and the genuineness of the transaction. However, the addition has been deleted by the CIT A) on the grounds inter alia that when the identity, creditworthiness and genuineness of the transaction is established; that the loan is proved to have been given / returned through account payee cheque which has been verified by the AO and that M/s. Bhawana Jewellers have duly confirmed advancement of the loan, in the given circumstances, we are of the considered view that merely because of the fact that lender, M/s. Bhawana Jewellers, is living in LIG flat and has shown an income of Rs.54,620/- only by paying tax of Rs.462/- during the relevant assessment year and that he was already in debt of Rs.5,00,000/- qua the loan taken from Shri Anand Jain and Anita Jain, creditworthiness and genuineness of the transaction cannot be doubted. Moreover, the amount of Rs.5,00,000/- was and this fact has not been disputed by the AO. So, findings returned by the ld. CIT (A) are hereby affirmed and the ground no.8 is determined against the revenue.

GROUND NO.9 36. AO made an addition of Rs.2,50,000/- being unexplained credit entry in the current account of Smt. Meena Bhasin. Assessee company claimed that the said amount was credited being the sale proceeds of car bearing registration no.DL0065. AO made an addition on the grounds inter alia that model and make of the car is not mentioned; that name and address of the purchaser of the car is not disclosed; that proof of purchase of car in installments not filed; that it is not believable that the car having original value of about Rs.3,00,000/- was sold after four years at the sale consideration of Rs.2,50,000/-. However, CIT (A) after entertaining additional evidence under Rules 46A of the Income- tax Rules, 1962 deleted the addition on the ground that from the evidences in the form of delivery receipt and cash receipt which corroborates the affidavit already filed by Smt. Meena Bhasin, the amount of Rs.2,50,000/- in her current account stands explained.

The contention of the ld. AR that since AO has not been given an under Rule 46A of the Income-tax Rules, 1962, the matter should be remitted to the AO is not tenable because the AO was given sufficient time by CIT (A) during appellate proceedings but he has not preferred to raise any objection to the application for additional evidence. Moreover, the documents entertained by CIT (A) in additional evidence were merely to substantiate the affidavit already filed by Smt. Meena Bhasin and was not ordinarily requiring verification. So, finding no illegality or infirmity in the findings returned by ld. CIT (A), ground no.9 is also determined against the revenue.

GROUND NOS.10, 11 & 12 37. CIT (A) deleted an addition of Rs.8,40,000/- made by the AO u/s 68 of the Act by entertaining application for additional evidence. AO had noticed that on 17.07.2003, an amount of Rs.7,50,000/- was given to assessee company by Shri Ankush Bhasin and another credit entry of Rs.90,000/- dated 16.03.2004 was also noticed from Shri Ankush Bhasin to assessee company and since the assessee company has failed to furnish bank statement of Shri Ankush Bhasin along with documentary evidence made addition of Rs.8,40,000/- (Rs.7,50,000/- + Rs.90,000/-).

GROUND NO.15 CIT (A) deleted the amount of Rs.24,903/- being 1/3rd 43. disallowance made by the AO out of the staff welfare expenses incurred by the assessee. AO disallowed 1/3rd of the staff welfare expenses on the ground that only internal vouchers were produced allowed the staff welfare expenses on the ground that in the last year, expenses under this head were Rs.74,980/- and in view of the nature of assessee’s business, disallowance made by the AO is unreasonable, hence deleted. In the given circumstances, we find no ground to interfere in the findings returned by the ld. CIT (A), hence ground no.15 is determined against the revenue.

GROUND NO.16 44. Ld. CIT (A) deleted the disallowance of Rs.1,18,726/- made by the AO out of electricity expenses on the ground that electricity meter no.930424 is in the name of Shri Tilak Raj Bhasin who is neither Director nor employee of the assessee company nor address of 2300, Subzi Mandi is mentioned on any document. However, findings returned by the AO are well-reasoned and based on cogent evidence that neither Shri Tilak Raj Bhasin is director nor employee of the assessee company nor address bearing no.2300, Subzi Mandi pertains to assessee company in any manner and it is undisputed fact that during survey proceedings, only address of assessee’s company is 2298, Subzi Mandi. So, when the electric meter is installed at some other place the same cannot be considered to have been used for business purpose by the assessee made by the AO. So, ground no.16 is determined in favour of the revenue.

GROUND NO.17 45. CIT (A) deleted the addition of Rs.1,22,000/- made by the AO on account of legal charges debited by the assessee company to P&L account. AO disallowed the legal charges on the ground that the same are apparently on very high side which cannot be said to be wholly incurred for business purposes. However, CIT (A) deleted the disallowance on the ground that since the assessee company has been consistently following the mercantile method of accounting making a provision for legal charges to attend the post survey proceedings for the year under consideration are valid one. When the AO himself has not disputed the fact that legal charges in such proceedings are required to be paid the same cannot be disallowed on the basis of conjectures and surmises that the same are on higher side. Moreover, when provision has been made under the mercantile method of accounting for legal charges as held by CIT (A) the disallowance made by the AO is not sustainable. Hence, we find no ground to interfere with the against the revenue.

GROUND NO.18 46. Ld. CIT (A) deleted the addition of Rs.2,63,025/- made by the AO on account of bogus salary expenses. AO made this addition on the ground that salary expenses for six persons were claimed whose names were not appearing in the list of employees furnished by the assessee during assessment proceedings nor the assessee company furnished the photocopies of appointment letter of those employees. However, CIT (A) deleted the addition after perusal of attendance register, salary payment register, provident fund register and ESI record and observed that in the face of aforesaid documents, possibility of omission of including these persons in the list prepared at the time of survey proceedings cannot be ruled out. When the names of the aforesaid six employees are appearing in PF and ESI record prepared in the due course of official duties by the concerned department, the salary bill cannot be treated as bogus. So, the CIT (A) has rightly deleted the addition made on this account, hence ground no.18 is returned against the revenue.

AO being the amount claimed to have incurred by the assessee for purchase of electrical goods from M/s. Vishal Electricals and M/s.

Krishna Enterprises on the ground that assessee has failed to produce Shri Veer Sen Chopra to prove job charges etc. by treating the same as bogus expenses. However, CIT (A) on the basis of facts and documentary evidence found the expenditure genuine being the annual maintenance charges paid vide bill duly placed before the AO by the assessee. So finding no ground to interfere, we hereby decide ground no.19 against the revenue.

GROUND NO.20 48. Ld. CIT (A) deleted the addition of Rs.3,00,000/- made by the AO on account of interest and finance charges claimed by the assessee. AO made addition on the ground that when the assessee has himself given interest free advances to M/s. Bhasin Properties, Sanjay Bhasin, Tilak Raj Bhasin and Anju Bhasin of Rs.15,17,541/-, Rs.1,42,919/-, Rs.2,99,663/- and Rs.15,916/- respectively, the funds cannot be treated to have availed for business purpose. on the ground that when the interest free advances given by the assessee company to is ex-directors and relatives are old one and are to the tune of Rs.19,76,000/-. The assessee company has also got interest free loans/advances from its directors and relatives to the tune of Rs.75,55,000/- on which no interest has been paid, addition is not sustainable. Even otherwise, the interest on account of interest free loans cannot be disallowed primarily on the ground that the assessee had sufficient funds out of which advances have been made. So, in the given circumstances, we find no ground to interfere in the findings returned by ld. CIT (A), hence ground no.20 is determined against the revenue.

GROUND NO.21 50. Ld. CIT (A) directed the AO to allow the revised depreciation as per the Companies Act to the tune of Rs.1,43,315/- involving an amount of Rs.25,911/-. AO declined the revised depreciation on the sole ground that the revised chart is not signed by the Authorized Representative. However, in the given circumstances, the CIT (A) has rightly allowed the claim of the assessee on the ground that in the given circumstances, AO was required to ask the AR to sign the revised depreciation chart, which proceedings. So again, we find no ground to interfere into the findings returned by the ld. CIT (A). Ground No.21 is determined against the revenue.

GROUND NO.22 51. Ld. CIT (A) deleted the addition of Rs.60,000/- made by the AO on account of sale of car. AO has made the addition merely on the ground that there is over writing in the books of account.

However, CIT (A) after perusing the cash receipt and delivery receipt of the sale of the car for Rs.1,00,000/- and copies of cash book and ledger where the total tally with the figure of Rs.1,00,000/- deleted the addition, which requires no interference by the Tribunal, hence ground no.22 is also determined against the revenue.

GROUND NO.23 52. CIT (A) has deleted the addition of Rs.80,175/- made by the AO on account of packaging charges. AO made the addition only on the ground that the summons issued u/s 131 of the Act to some parties were received back unserved. However, CIT (A) after perusing the packing expenses account, copies of bills/vouchers conclusion that expenses in question were incurred for business requirement as gold and diamond jewellery has to be sold in jewellery boxes, purses, pouches, etc. which are commensurate with the turnover of the assessee company to the tune of Rs.2.64 crores. So again, we find no ground to interfere into the findings returned by the ld. CIT (A), hence ground no.23 is determined against the revenue.

GROUND NO.24 53. Assessee has claimed an amount of Rs.1,97,180/- under head ‘advertisement expenses” out of which Rs.1,22,540/- has been disallowed by the AO on the ground that summons issued to two parties received back unserved. However, out of disallowance of Rs.1,22540/-, CIT (A) allowed the amount of Rs.11,000/- paid to the Ramlila Committee and qua the remaining additions set aside the matter and directed the AO for fresh enquiry through Inspector by giving an opportunity to the assessee. We are of the considered view that when the amount claimed by the assessee has not been got verified by the AO during assessment proceedings, the CIT (A) has rightly set aside the matter to AO to decide afresh. So, we find no ground to interfere into the findings returned by the ld. CIT (A) ground no.24 is determined against the revenue.

GROUND NO.25

“ AO observations and assessee submissions have been gone through. It is noted that the AO has clubbed the cash purchases of gold made on a single day which were less than Rs.20,000/- each in order to invoke the provision of section 40(A)(3). This is contrary to the record of gold register kept on a regular basis where each cash purchase of gold through serialed purchase voucher weight wise has been entered. Thus, clubbing of these purchases is arbitrary and is based on surmises. The addition therefore is deleted.”

GROUND NO.26

“A.O.'s observation and assessee's submission have been gone through. As regards the allegation of non-furnishing of the books of accounts, the assessee company has furnished the photocopy of the notings of order sheet in the assessment proceedings which clearly indicate that the books of accounts and documents as called for from time to time have been produced before the A.O. Photocopy of the documents including purchase and sale vouchers, cash book., ledger, Bank Book have been filed wherefrom the A.O have pointed out further enquiries. Thus, the allegation that books of accounts have not been produced is without any basis. As regard the furnishing of inventory the assessee company have given the basis of valuation consistently followed by it and others in the trade of gold/diamonds viz weight of gold/diamonds as per stock register kept on regular basis along with monthwise purchase and sale of gold / diamonds in weight in grams / carat. There is no change in the basis of valuation. The A.O. has not pointed out any discrepancy in this regard. It is also noted that G.P. Rate declared during this is better over last year- gold 18.22% as against 16.73% last year, diamond 29.57% as against 26.30% last year. The assessing officer has not pointed any defect / discrepancy in accounts. In view of the above discussion, in my considered opinion, the trading addition of Rs.10 lac made by the A.O. is not sustainable and therefore, directed to be deleted.”

CO NO.392/DEL./2007 GROUNDS NO.1 & 4

GROUND NO.2

“The rival position has been carefully considered. It is noted that there is contradiction in the statement of Shri Rawat, accountant of the firm as recorded by the A.O. and his subsequent affidavit filed before him. The lady director has not been produced for examination for whatever reason advanced by the company. The services rendered by the lady remain unsubstantiated and therefore, A.O. was justified in disallowing the remuneration of Rs.120,000/- paid to her. The addition is, therefore, upheld.”

(A) goes to prove that there are inherent contradiction in the statement of Mr. Rawat, Accountant of the firm with his subsequent affidavit filed during assessment proceedings which has failed to substantiate the services rendered by Sonika Bhasin, the addition made by AO has been rightly affirmed by ld. CIT (A).

Even otherwise, Sonika Bhasin, director of a company having turnover of Rs.2.64 crores is not proved to have assigned any substantial role to run the business of the assessee company as no such document has come on record nor such remuneration has earlier been claimed by the assessee company. So, in these circumstances, we find no ground to interfere into the findings returned by the ld. CIT (A), hence ground no.2 is determined against the assessee.

GROUND NO.3 61. As regards addition of Rs.66,000/-, it is noticed that the assessee company claimed that it has received amount of Rs.66,000/- from Smt. Nidhi on 30.03.2004 for purchasing gold worth Rs.1,06,278/- vide sale bill no.98 dated 18.04.2004 and the said advance was adjusted. AO merely made an addition on the basis of reply received from Smt. Nidhi u/s 133 (6) stating therein ./2007 CO No.392/Del./2007 that she has given old gold and not cash of Rs.66,000/-. When the assessee has categorically pleaded that on the sale bill, it is specifically written that Rs.66,000/- vide receipt no.511 dated 30.03.2004 is on account of adjustment of cash payment, the addition cannot be made merely on the basis of reply by Smt. Nidhi without providing opportunity to cross examine her by the assessee. This fact has also not been taken care of by the ld. CIT (A) when the sale bill no.98 dated 18.04.2004 and adjusting cash payment of Rs.66,000/- vide receipt no.511 dated 30.03.2004 has not been disputed by the AO nor has disputed the books of account, this addition is not sustainable in the eyes of law. Hence, ground no.3 of the cross objection is allowed in favour of the cross objector/assessee.