ACIT, NEW DELHI vs. SMT. RAJNI JAIN, NEW DELHI

The assessee is an individual and proprietor of M/s Quality Marketing Group engaged in the business of trading in mattresses etc. The total income for the year was declared at Rs.22,34,720/-. The assessment was finalised u/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘The Act’) after making the following disallowances:-

The disallowance towards purchase was made @5% of the total purchase because as per the Assessing Officer, the assessee had produced purchase bills for verification for one month only.

Aggrieved, the assessee went into appeal. On the issue of ad hoc disallowance @5% on purchases, the ld. CIT(A) noted that the Assessing Officer had not identified any single bill of Assessment year 2009-10 purchases produced to point out any deficiencies in the purchases. He also noted that the Assessing Officer had disallowed 5% of the total purchases without disturbing the sales, meaning thereby that the Assessing Officer had accepted the gross profit as declared by the assessee. The ld. CIT(A), while allowing the assessee’s appeal on this ground, observed that in absence of any material brought out by the Assessing Officer, the addition could not be sustained. On the issue of disallowance of expenditure on ad hoc basis @25%, the ld. CIT(A) has observed that the Assessing Officer did not examine the bills on record and insisted that the nature and purpose of expenses be proved. As

The ld. CIT(A) also observed that the Assessing Officer did not reject the books of account on the ground that the accounts were unverifiable. However, while partly allowing the assessee’s ground, the ld. CIT(A) observed that out of the various expenses debited to the profit/loss account, conveyance and travelling expenses, entertainment expenses, telephone expenses and car expenses were of such nature that the personal element could not be ruled out. He then proceeded to restrict the disallowance Assessment year 2009-10 to 20% but only on these four items of expenditure and the disallowance pertaining to the other heads of expenditure was deleted. On the issue of disallowance of Rs.1,80,000/- u/s 40A(2)(b) of the Act, the ld. CIT(A) noted that the Assessing Officer has not brought on record the relationship between the assessee and Shri Mohit Jain. He also noted that to determine that the payment was unreasonable or excessive, the Assessing Officer has not brought any material giving a comparable specific instance to contradict the claim of the assessee. He also noted that from the material on record, it is seen that Shri Mohit Jain has no substantial interest in the business of the assessee. The ground pertaining to this disallowance was also allowed.

In the present appeal before us, the Department has contested the deletion of the additions on all the three counts.

Ld. AR, in response, while supporting the order of the ld. CIT(A), submitted that the Assessing Officer had made the 4 Assessment year 2009-10 addition on surmises and guesses without pointing out any defect in the books of account. He submitted that the sales, purchases, gross profit and net profit figures had been progressive over the previous years and he submitted a chart in support of his contention. On a specific query from the Bench, he fairly submitted that the earlier assessments had been made u/s 143(1) of the Act. He also submitted that the Assessing Officer could have asked for the books of account and bills for other months if it was so desired, instead of proceeding with the disallowance and making it appear as if the assessee was at fault.

We have heard the rival submissions and carefully perused the relevant material placed on record. As far as the issue of 5% of disallowance on the total purchases is concerned, the Ld. CIT(A) has given a categorical finding that he had requisitioned the assessment records also wherein although the assessment proceedings were initiated on 25.8.2010 but the first hearing was recorded on 13.10.2011. The Ld. CIT(A) has observed that in the intervening period, the case was not pursued and no efforts were made by the Assessing Officer to ensure the assessee’s attendance. It was only in the last leg of the limitation period that the assessment proceedings were pursued with fervour. The Ld. CIT(A) has also noted that the assessee had made purchases mainly and only from two parties, M/s Sheela Foam (P) Ltd. and M/s Karna Associates. On going through the assessment records, the Ld. CIT(A) has also observed that the assessee had submitted the account statements of the entire year which duly reflected bill numbers and cheque payments to the above parties from whom the purchases were made. The Ld. CIT(A) has given a finding that the Assessing Officer has not examined the copy Assessment year 2009-10 of statement and co-related the same to the purchase bills produced by the assessee. The Ld. CIT(A) has also noted that as

On the issue of the disallowance u/s 40A(2)(b), it is an admitted fact that the person to whom the payment has been made i.e. Shri Mohit Jain was a student of CA final and he has been stated to have rendered management/consultancy services to the assessee. However, the Assessing Officer has only objected that the said person was not qualified to render the service claimed. He has not brought on record as to how the payment made Assessment year 2009-10 was excessive. The scheme of section 40A(2) stipulates that the expenditure can be disallowed in the following situations:-

The Assessing Officer has not denied that the payment was genuine. However, the Assessing Officer has not brought anything on record to demonstrate as to how the payment was excessive. The Assessing Officer has also not established that Shri Mohit Jain was related to the assessee. Thus, the onus was on the Assessing Officer to prove that the payment was unreasonable or excessive which he has failed to discharge.

In the result, the appeal filed by the Department is dismissed.