RATAN SINGH ROR,KARNAL vs. ITO, KARNAL

The grounds of appeal are as follows:-

The assessee derived income from trading of poultry feed. The assessee filed return declaring income of Rs. 3,78,970/- from business plus agricultural income of Rs. 1,05,000/- on 07.09.2010. The assessee claimed conveyance and collection expenses at Rs. 1,74,652/-. The Assessing Officer observed that the expenses were entirely in cash and no supporting evidence or bills etc was produced to verify the authenticity of expenses claimed. The Assessing Officer further noticed that there was substantial increase in expenses as compared to preceding year where the expenses claimed were only at Rs.24,160/-. The Assessing Officer further mentioned that the assessee could not explain satisfactorily the manifold increase in expenses except stating that the expenditure was due to increase in turn-over. The Assessing Officer made observation that the increase in turn-over was by 77% and not to the extent of increase in expenses under the head conveyance and collection and held that the increase claimed cannot be said to be due to genuine needs of business. Thus considering the facts of the case and possible inflation of expenses a disallowance of Rs. 50,000/- was made.

The assessee has shown loans and advances of Rs. 2 lacs as per schedule 8 forming part of balance sheet. As per assessee, Rs. 2 lacs were advanced to Deepak Mehla which was shown as opening balance as on 01.04.2008. The Assessee was called upon to explain the nature of advance and also to state whether any interest was charged on the above advance. The assessee submitted that the advance was given to Deepak Mehla in the year 2007-08 for the purchase of Makki which remains outstanding till date and he was facing difficulty to recover the same. The Assessing Officer noted that no evidence about the purchase of Makki was filed. The Assessing Officer further observed that no interest on the above advance was charged although the assessee claimed expenses of Rs. 2,64,369/- by way of interest on the funds borrowed from the bank and whereas on the other hand interst free advance was made to Shri Deepak Mehla. The Assessing Officer draws the inference that the interest bearing borrowed funds were not utilized for business purposes only and a part of it was diverted for making interest free advances. Therefore, the Assessing Officer held that interest attributable to the advance of Rs. 2 lacs for the period 01.04.2008 to 31.03.2009 @ 12% per annum works out to Rs. 24,000/- and is disallowed out of interest claimed in view of Section 36(1)(ii) and also the ratio of judgment of Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries and accordingly disallowed Rs. 24,000/-.

The assessee claimed expenditure of Rs. 2,64,369/- by way of interest paid to Canara Bank on cash credit limit. The assessee produced the cash book during the course of assessment proceedings. The Assessing Officer observed that on the dates when the cheques were issued to the parties, the assessee had sufficient cash-in-hand and there could be no business expediency in making over-draft from the bank when the assessee’s cash book showed sufficient cash balance. While replying the said query the assessee submitted that the business of the assessee is such that they recover cash which is usually in small denomination and bank does not accept cash in small denomination. Thus, some part of cash goes on accumulating. Another reason given by the assessee was that collections from small farmers was in cash and cash-in-hand was accumulation of receipt from the small farmers on daily basis and no cash is withdrawn from the bank during the year. The assessee submitted break up wise minimum balance of cash in respect of April to March and tried to demonstrate that money was in business circulation. The Assessing Officer gave a finding that there is no justification for payment of interest without there being any business expediency and as such the deduction for interest claimed at Rs. 2,64,369/- was held not allowable expenditure and disallowance was made to the extent of Rs.2,40,369/-

The assessee had shown withdrawals of Rs. 83,000/- on household expenses, besides withdrawal of Rs. 10,860/- on the education of son. Thus making total withdrawal of Rs. 94,860/-. The Assessing Officer held that the expenses shown were inadequate and made addition of Rs. 50,000/- for low household withdrawals.

The assessee claimed freight expenses of Rs. 8,87,130/- as against NIL of the immediate preceding year and Rs. 38,300/- only of the Assessment Year 2007-08. Necessary details was furnished by the Assessee before the Assessing Officer. The assessee was called upon to confirm whether any tax was deducted at source on the payments of freight made to the aforesaid parties in view of proviso to sub-section (5) of Section 194C of the Income Tax Act when tax was shown to have been deducted in the cases of other parties as per details of freight filed i.e. M/s. Chaudhary Transport. Vide written reply dated 12.10.2011, the assessee submitted that the assessee usually deduct tax from the owner of the truck wherever, it is applicable. The assessee further submitted that as individual truck freight was below Rs. 20,000/-, no TDS was deducted. The Assessing Officer observed that aggregate of payments exceeds Rs. 50,000/- and by not deducting tax at source, there is clear violation of Section 194C(5) of the Act and thus, total expenditure of Rs. 2,35,804 was disallowed.

The Assessing Officer further observed that the assessee incurred expenditure in cash exceeding Rs. 20,000/- in violation of provisions of Section 40A(3) of the Act in respect of freight expenses. Since the assessee could not give any explanation the said payments made in cash was held in violation of Section 40A(3) of the Act or exceptions provided under Rule 6DD of the Income Tax Rules. Accordingly, disallowed the expenditure to Rs. 3,44,530/-.

The Assessing Officer while going through the trading account filed along with the return, noticed that the assessee has shown value of closing stock at Rs. 63,63,113/-. As per Annexure I enclosed with the Audit Report, the assessee furnished quantity- wise details of closing stock along with valuation. During the year, the assessee was having cash credit limit from Canara Bank against hypothecation of stock where the amount payable to bank as on 31.03.2009 was shown at Rs. 51,94,891/-. As the amount payable to the bank by the assessee was more than 50 lacs enquiries were made from the Canara Bank, Karnal u/s. 133(6) of the Act and Banking authorities were requested to provide the copy of stock statements filed by the assessee as on 20.11.2008 and 31.03.2009. The bank submitted the copy of stock statement filed by the assessee showing the position of stock as on 31.03.2009 at Rs. 75,65,625/-. After taking into consideration of the assessee’s reply the Assessing Officer observed that the figures submitted to Bank are the real figures and the value of closing stock shown to the bank is correct value. The difference of Rs. 12,02,512/- was treated as income of the assessee from other sources by the Assessing Officer.

Aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT (A) while confirming the Assessment Order held that for each expenses which was claimed by the assessee there was no evidence given by the assessee.

We have perused all the records and heard both the parties. The assessee has given all the relevant material before the Assessing Officer as well as before the CIT (A). There are five grounds contested by the assessee in the present appeal. Ground No.1 is on the issue of ad-hoc disallowance of conveyance expenses. The assessee has paid the entire amount of expenses related to conveyance and collection in cash. The assessee before the Assessing Officer made written submissions that the disallowance of this expenses were made on estimated basis but the same are incurred for business purpose by the assessee. The assessee submitted that the supporting evidence towards incurring expenditure was produced before the Assessing Officer. It is seen from the paper book that the evidence to the extent of expenses incurred on conveyance and collection was before the adjudicating and appellate authorities but the same was not taken into account by both the authorities. The disallowance was on ad-hoc basis. This is in our view arbitrary. Hence we delete the disallowance. Ground No. 1 is allowed.

Ground No. 2 relates to the disallowance of interest for utilizing bank loan for making interest free advance. The assessee submitted that the loan was taken for business purpose and thus the interest was paid / incurred for business. The assessee submitted the relevant documents before the authorities, but the same was not taken cognizance. The Assessing Officer and the CIT (A) proceeded on the premise that the assessee has failed to produce any evidence in support of his claim. This is not a correct position as the paper book submitted by the assessee along with the loans statement for the period 1/4/2008 to 31/3/2009 was produced before the Assessing Officer as well as CIT (A). Both the authorities failed to take cognizance of the said loan statement. It is not in dispute that the loan was taken for business purpose. The money was also advanced for business purpose. Hence the disallowance is bad in law. Ground No. 2 is allowed.

Ground No.3 relates to disallowance of interest on account of not utilizing cash available in hand for business purposes and resorting to payment from bank cash credit limit. The CIT (A) has simply stated that there was no evidence produced by the assessee. We find that there is no merit in the disallowance. The said statement is incorrect. It is not for the Assessing Officer to decide how an assessee can use a cash credit limit with the Bank. Hence, Ground No. 3 is allowed.

Ground No.4 relates to whether the assessee has given proper reasoning before the authorities regarding house hold expenses. We find that Rs. 90,000/- is not a reasonable amount for monthly expenses of any person and his family. The addition in our view is not warranted. Ground No. 4 is allowed.

Ground No. 5 relates to disallowance in respect of freight expenses of Rs. 2,35,804/- u/s 40AI (a) of the Act on account of non-deduction of TDS u/s 194C (5) on payment made to transporters. The assessee submitted all the details related to the payment made to the transport and the authorities fail to look into the same. As each payment is less than Rs.20,000/-, TDS Provisions are not attracted. In light of this, the Ground No. 5 is allowed.

Ground No. 6 is regarding the disallowance u/s. 40A(3). The CIT (A) held that there was no evidence filed by the assessee. The disallowance was confirmed by the CIT (A). Before us the assessee demonstrated that the payments are covered under the exceptions specified under Rule 6DD. A chart is filed. We are convinced with the same. Hence we delete the disallowance. Ground No. 6 is allowed.

Ground No. 6(a) and 6(b) is regarding addition of Rs. 12,02,512/- on account of variation in the value of closing stock between the value declared in the accounts and the value declared to the Bank. The Assessee has given the books at the relevant time to the Assessing Officer to verify the same and the books were also subjected to the audit under Section 44AB of the Act to support the value of closing stock. The finding of the CIT(A) that the assessee has not produced complete sale vouchers and also quantity wise details of opening and closing stock, is not factually correct. It was clear from the records that the same was produced before the Assessing Officer at the relevant time.

This addition of Rs. 12,02,512/- was also made by rejecting the books under Section 145(3) of the Act for non production of sales vouchers and quality-wise details of opening and closing stock. It was never the case of the revenue that purchase / sale during the year did not take place. The assessee submitted month wise purchase and sale details before the Assessing Officer. It was clear from the records that the same all quantitative details were produced before the Assessing Officer. The rejection of books is bad in law as no defects are pointed out. The assessee demonstrated with evidence that the closing stock declared in the books of account is correct. Hence no addition can be made on this account. We allow Ground No. 6(a) and 6(b).

In result, appeal of the assessee is allowed.