ADDL CIT 12(1), MUMBAI vs. RAJESHWAR PRASAD DUBEY, MUMBAI

Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of custom house agent and transport operator. During the year under consideration return was filed at income of Rs.1.01 crores which was assessed by the AO at Rs. 6.62 crores, wherein various additions were made on account of disallowance of vehicle repair, diesel and fuel, travelling and telephone. Addition was also made u/s 68 in respect of unaccounted cash credit. Sundry creditors were also added on the plea of bogus expenses leading to bogus liability amounting to Rs. 92.91 lacs and cessation of liability u/s. 41(1). Interest expense was also disallowed on the plea that there was diversion of interest bearing funds to sister concerns. The AO also treated long term capital gains as ‘income from other sources’.

By the impugned order, CIT(A) allowed assessee’s claim of long term capital gains and unexplained cash credit u/s 68. However, CIT(A) confirmed the disallowance of expenditure under the head ‘vehicle repairs and maintenance’, ‘travelling and conveyance’, ‘telephone & mobile charges’, ‘coolie charges’, ‘sales promotion’, ‘sundry expenses’, ‘staff welfare expenses’, ‘repairs and maintenance’. The CIT(A) has also confirmed disallowance of Rs.13,41,516/- out of reimbursable expenses in line with the stand taken by the Tribunal in earlier years. Addition of Rs.32,27,360/- was upheld on account of Sunland Alloys on the presumption that this party was assessee’s supplier on whose account bogus expenditure are booked. Addition of Rs.7,84,219/- was upheld on account of Radha Krishna Shipping Pvt. Ltd. on the presumption that 3 Rajeshwar Prasad Dubey & 5132/Mum/2010 this party was assessee’s supplier on whose account bogus expenditure are booked by the assessee. The CIT(A) also confirmed addition of Rs.17,54,540/- on account of cessation of liability of Datta Tyre Retreading Services u/s. 41(1) on the plea that this liability no more exists. This addition was on protective basis. Similarly, addition of Rs.7,28,434/- was made on account of cessation of liability of M/s. Nishu Transport on protective basis. Similarly, protective addition was made on account of cessation of liability of M/s. Suman Automobile, M/s. S.S. Transport, M/s. S.R. Roadlines, M/s. Travancore Tyres, M/s. Royal Transport, M/s. M.S. Transport, M/s. Nandi Transport, M/s. Jayem Retreads Pvt. Ltd., M/s. K.K. Transport, M/s. Joshi Transport, M/s. Pingle Transport, M/s. Sanjay Metal Corporation, M/s. Shakti Enterprises, M/s. Swill Ltd., M/s. Vimal Transport, M/s. Bhagwati Naresh Sethia and M/s. International Express Co. Disallowance was also upheld by CIT(A) out of expenses claimed under the head ‘interest’ amounting to Rs.10,75,846/-.

Against the above order of CIT(A), both the assessee and the revenue are in appeal before us. It was argued by the ld. AR that the actual bills and vouchers could not be presented before the AO as they were lying under seizure with various authorities such as DGCEI, Zonal Unit, Mumbai, CBI, Mumbai Unit, etc. and the appellant had brought this fact before the AO. This fact was also recorded by the officials of Income Tax Department during the survey action u/s 133A carried out on the appellant on 23rd January, 2007. The inability of the appellant to produce the actual bills and vouchers before the AO under the given circumstances should not be taken as an excuse for disallowance of 4 Rajeshwar Prasad Dubey & 5132/Mum/2010 genuine expenses which are incurred in the normal course of business. This point becomes all the more significant in this case given the fact that the total income earned and net profit declared by the appellant for the year under consideration is the highest ever declared by him. The appellant has a fleet of 56 commercial vehicles and the total expenses under the head 'Vehicle Repairs & Maintenance' incurred in cash is Rs. 13,91,088/- only. On average basis the cash expenses will work out to hardly Rs. 2,000/- per month / per vehicle which cannot be held to be excessive.

We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the AO has basically made disallowance on the plea that expenses were incurred in cash and there is personal element in the expenditure so incurred. By the impugned order, CIT(A) restricted the disallowance to the extent of 10% of the expenses. Keeping in view the totality of the facts we do not find any infirmity in the order of the CIT(A) for restricting the disallowance to 10%. Thus, with regard to the disallowance under the head ‘vehicle repairs and maintenance’, ‘travelling expenses’, ‘telephone and mobile expenses’, ‘coolie & cartage’, ‘reimbursable expense’, we do not find any infirmity in the order of the CIT(A). Accordingly, we uphold the additions so sustained by the CIT(A).

The AO has also made addition on account of some of the suppliers of the assessee on the plea that the expenditure so booked were bogus, whereas the contention of the ld. AR was that all these

The CIT(A) has also upheld the addition on account of cash payment made to M/s. KGN Auto Electricals and M/s. Datta Tyre Retreading Services. The mere fact of making cash payment cannot be made the reason for disallowance, more particularly when the income offered by the assessee during the year under consideration was the highest as compared to the expenditure incurred in succeeding and earlier years. In the interest of justice, both these grounds are also restored to the file of the AO for deciding afresh the genuineness of the expenditure and to find out whether the expenditure were actually incurred for the purpose of business or otherwise. We direct accordingly.

In ground nos. 12 to 30, the assessee has agitated additions made by the AO u/s 41(1) on protective basis by holding that liability no more exists.

The liability was pertaining to the following parties :

It was argued by the ld. DR that the assessee has been given various opportunities to explain the sustenance of liability in all these cases. He could not prove the same. He also failed to produce the copies of bill/vouchers for the assessment year in which these liabilities have arisen. Regarding repayment also the assessee could not furnish any details. Hence all these liabilities were treated as non-existing and the same were added u/s.41(1) towards cessation of liability.

By the impugned order, CIT(A) confirmed the addition by observing as under :

It was the contention of the ld. AR that these liabilities actually existed during the year and were subsequently paid. Therefore, there is no reason to hold that there was cessation of any liability. He further submitted that since the records were seized by various departments, assessee could not fully substantiate its claim. In the interest of justice and fair play, we set-aside the protective addition made on account of cessation of liability and the matter is restored back to the file of the AO for deciding afresh. The assessee is also directed to produce details of actual payment made to these parties in subsequent years and also confirmation from these parties as to whether the liability was continuing or ceased. We direct accordingly.

Ground no. 31 relates to disallowance of Rs.10,75,846/- out of expenses claimed under the head ‘interest’. It was the contention of the ld. AR that interest of Rs.8,25,545/- was on hire purchase of commercial vehicles, Rs. 2,18,909/- was paid on overdraft facility and Rs.4,392/- was for delayed payment made to creditors. As per the ld. AR all are business expenses. Our attention was also invited to the capital and 9 Rajeshwar Prasad Dubey & 5132/Mum/2010 free funds available to the assessee which was alleged to be used for these payments. Relying on the decision of the jurisdictional High Court in the case of M/s. Reliance Utility it was contended by the ld. AR that no disallowance should be made.

We have considered the rival contentions and found that prima facie interest appears to be incurred for the purpose of business. In the interest of justice, we restore this matter back to the file of the AO for verifying the actual transaction of payment and nature of payment. The AO is also to verify availability of interest free funds with the assessee and to decide the issue afresh as per the proposition of law laid down by the jurisdictional High Court in the case of M/s. Reliance Utility. We direct accordingly.

In the result, appeal of the assessee is allowed in part.

In the appeal so filed, revenue is aggrieved by action of CIT(A) directing to allow exemption u/s 10(38) on long term capital gains.

With regard to long term capital gains offered by the assessee as exempt u/s. 10(38), the AO noted that in the computation of income, the assessee has stated that he had long term capital gains on sale of shares exempt u/s.10(38) (as per statement attached). But no such statement was attached and even on the return of income against the column ‘profits & gains from transactions chargeable to STT’ the amount was mentioned as ‘nil’.

By the impugned order, CIT(A) allowed assessee’s claim of long term capital gains after observing as under :

We have considered the rival contentions and found that a clear finding has been recorded by CIT(A) to the effect that both sale and purchase of shares were supported by contract note and also reflected in the demat account and Form 10DB. Accordingly, there is no justification for declining assessee’s claim of long term capital gains. The findings so recorded by CIT(A) has not been controverted by the ld. DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of CIT(A) directing to allow long term capital gains after verification of Form No.10DB.

The revenue is also aggrieved for deleting the addition made by the AO in respect of cash received from sister concern as unexplained credit u/s. 68. In this respect, the AO found that M/s. Sainath Industries the sister concern of the assessee is engaged in the manufacturing of Aluminum ingots. The assessee renders transportation services for the materials of the sister concern. The AO held that assessee’s version that the account copy of the Sainath Industries filed on 7.11.2008 is only a rough copy cannot be accepted because –

By the impugned order, CIT(A) deleted the addition after observing as under :

We have considered the rival contentions and found that the amounts so raised by assessee from sister concern was duly reflected in the books of sister concern as well as in the books of assessee. The addition was made by the AO on the plea that copy of account of sister concern, M/s. Sainath Industries was not furnished by assessee and that alteration in account could be made at will as all accounts were computerized. In the absence of copy of account and confirmation by sister concern regarding payment of these amount, we do not find any justification in the order of CIT(A) deleting the addition made u/s.68 without giving any finding on genuineness and creditworthiness. In the interest of justice, we set aside the order of CIT(A) on this issue and restore the matter back to the file of AO for deciding afresh after giving due opportunities to the assessee. We direct accordingly.

In the result, the appeal of revenue as well as appeal of the assessee is allowed in part for statistical purposes.