M/S RAMESH CHEMICALS INDS,,BILASPUR(CG) vs. I.T.O. WARD 1(2), BILASPUR(CG)

Succinctly stated, the assessee firm which is engaged in the business of trading in Agarbatti, (i.e. incense sticks) had filed its return of income for A.Y.2005- 06 on 28.10.2005, declaring a net loss of Rs. (-) 28,370/-. The return of income filed by the assessee firm was processed as such u/s. 143(1) of the Act on 12.01.2006.

Survey u/s. 133A of the Act was conducted on the assessee firm on 31.01.2005. During the course of survey proceedings, the stock found at the business premises of the assessee firm (including stock of Rs.40,700/- lying in the business premises of its sister concern i.e. M/s. Jalaram Trading Company) was inventorised at a value of Rs.20,31,767/-. However, as per the trading account furnished by the assessee firm the stock as on 30.01.2005 worked out at a value of Rs.17,72,567/-. On being queried about the excess stock of Rs.2,59,200/-, the partner of the assessee firm in his statement recorded on 09.02.2005 stated that the said discrepancy in the stock, inter alia, pertained to the inferior quality of goods which were received from its supplier, viz., M/s. Mamta Industries, Raipur, and as the same were to be returned back; therefore, the same were not accounted for in the books of accounts. The details of inferior quality of stock was furnished by the assessee firm, as under:

Apart from that, the A.O observed that a perusal of “State purchase account” revealed that the assessee firm had made cash purchases of Rs.1,88,370/- from M/s. Ram Shyam & Sons Trading, Raipur (Proprietor : Shri Ramchand Nerwani). The assessee firm on being queried as to why the aforesaid cash purchase transactions may not be disallowed u/s. 40A(3) of the Act, submitted that as the payments were made to its agent, viz. Shri Ram Shayam and Sons Trading, Raipur

The A.O in order to verify the authenticity of the aforesaid purchase transactions directed the assessee firm to produce the aforesaid party, viz., Shri Ramchand Nerwani (supra). In reply, it was the claim of the assessee firm that as the aforementioned person, viz. Shri Ramchand Nerwani (supra) had gone out of station, therefore, he could not be produced. Considering the aforesaid facts, the A.O concluded that the alleged cash purchases amounting to Rs.1,88,370/- were sham, false and fabricated and not genuine. The reasons leading to the aforesaid conclusion of the A.O are culled out as under: “(i) A perusal of the bill reveals that the alleged M/s Ram Shyam & Sons Trading is a trader and not at all an agent., (ii) The bill does not contain address, telephone number and Sales-Tax registration number of the party., (iii) Letter addressed to M/s Ram Shyam & Sons Trading, Raipur on 13-7- 2006 on the address given in the bill has been returned by the postal authorities with the remarks 'Incomplete Address".,

Also, the A.O while framing the assessment observed that the assessee firm had raised a claim for deduction of salary of Rs.1,33,800/-. As the assessee firm had not maintained any salary register and had supported its claim for deduction of the aforesaid expenditure on the basis of internal vouchers, the A.O doubted the genuineness of the claim of expenditure. Apart from that, the A.O observed that the assessee firm had not paid salary regularly on a monthly basis but had paid the same on a lumpsum basis and most of the said payments were made after the date of survey. On being queried, it was the claim of the assessee firm that as most of the employees were the relative of the partners, therefore, in order to make good

Also, the A.O taking cognizance of the fact that the assessee firm had though raised a claim of depreciation on van/vehicles of Rs.1,50,015/- but not maintained any log book in respect of the said vehicles; hence, holding a conviction that the personal usage of the said vehicles could not be ruled out disallowed 20% of the assessee’s claim for depreciation and made a consequential addition/ disallowance of Rs. 30,003/-. Also, the A.O backed by his aforesaid conviction disallowed 20% of the van expenses of Rs.25,865/- and made a consequential addition/disallowance of Rs.5,173/-.

Further, the A.O observed that the assessee firm had made payment of Rs.1,56,252/- to M/s. Nishant Enterprises as against bill of Rs.1,55,252/-. On being queried, it was though stated by the assessee firm that the said infirmity had crept in due to a clerical mistake, but the A.O did not find favour with the said claim and made an addition of Rs.1,000/- to the assessee’s returned income. The A.O, after inter alia, making the aforesaid additions/disallowances, vide his order passed u/s.

Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) but without success in so far the aforesaid additions/disallowance were concerned.

The assessee firm being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal.

I have heard the ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.

Shri G.S. Agrawal, Ld. Authorized Representative (for short ‘AR’) for the assessee firm at the very outset submitted that both the lower authorities had grossly erred in making/sustaining the additions/disallowances on the basis of misconceived facts and perverse observations. Adverting to the addition/disallowance made by the A.O, which, thereafter, had been sustained by the CIT(Appeals), the Ld. AR took me through the orders of the lower authorities. Apropos the addition made by the A.O towards excess stock of Rs.2,59,200/- (supra), the Ld. AR submitted that the assessee since inception, i.e., in the course of his statement recorded during the course of survey proceedings, and, thereafter,

Per contra, the Ld. Departmental Representative (for short ‘DR’) relied on the orders of the lower authorities.

I have given a thoughtful consideration to the issue in hand, i.e., sustainability of the addition of Rs.2,59,200/- (supra) that was made by the A.O on account of excess stock found in the course of survey proceedings. As observed by me hereinabove, it has been the claim of the assessee firm since the date of survey that the excess stock had surfaced because the raw agarbattis which it had received on three occasions from M/s. Mamta Industries, Raipur, being of an inferior quality were to be returned back, and, thus, were not accounted for in its books of account. As is discernible from the record, I find that the A.O in the course of assessment proceedings vide his letter dated 13.07.2016 had issued a notice u/s. 133(6) of the Act to M/s. Mamta Industries, Raipur wherein it was directed to furnish copy of the account of the assessee firm as appearing in its books of

Elaborating further on his aforesaid contention, the Ld. AR submitted that the impugned variance in the respective amount of purchases (three purchase

I have thoughtfully considered the aforesaid claim of the Ld. AR in the backdrop of the material available on record. At the threshold, I may herein observe that though the A.O in the course of the assessment proceedings vide his notice u/s. 133(6) of the Act had called upon M/s. Mamta Industries, Raipur to place on record the copy of account of the assessee firm as appearing in its books of account, Page 28 of APB, in compliance whereto, the said supplier party, viz. M/s. Mamta Industries, Raipur had vide its covering letter dated Nil furnished a copy of the ledger account of the assessee firm as appearing in its books of account, Page 34 of APB but strangely there is no reference about the same in the body of the assessment order. As is discernible from the copy of the account of the assessee firm as appearing in the books of account of the supplier party, viz. M/s. Mamta Industries, Raipur (supra), the purchase of goods in question by the assessee firm aggregating to an amount of Rs.2,59,200/- (supra) therein found to be duly accounted, Page 33 of APB. Although the return of the aforesaid goods are also recorded in the books of account of the supplier party on 21.12.2005 at Rs.2,57,800/-, i.e., an amount which is in variance against their purchase value of Rs.2,59,200/-, but the said difference had been reconciled by the assessee on the basis of a “Chart” that has been filed before me by Shri G.S. Agrawal, the Ld. AR. On a careful perusal of the reconciliation filed by the assessee firm as had been culled out by me herein above, the impugned variance in the value of goods received vide Challan No.101, Page 1 of APB is stated to be on account of a calculation mistake as regards the value that was initially taken at Rs.86,400/-, i.e.,

I shall now deal with the grievance of the assessee firm that the CIT(Appeals) had erred in sustaining the addition of Rs.1,88,370/- made by the A.O by treating the purchases as sham/ingenuine.

As observed by me hereinabove, the A.O with respect to the aforesaid cash purchase transactions had initially called upon the assessee firm to explain as to why the same may not be disallowed u/s. 40A(3) of the Act. However, the A.O after perusing the bill/cash memo dated 11.10.2004 that was filed by the assessee firm with him had serious doubts as regards the genuineness of the said purchase transaction. Although the A.O in order to verify the veracity of the purchase transaction had directed the assessee firm to produce Shri Ram Chand Nerwani ,i.e., proprietor of the sister concern, but the latter was not produced before him for the reason that he at the relevant point of time was not available in town.

Before me, Shri G.S. Agrawal, Ld. AR had placed on record an “affidavit” of shri Ramchand Nerwani, S/o. Shri Narumal Nerwani, resident of Raipur wherein he had categorically admitted of having supplied goods, i.e., raw material of Rs.1,88,370/- on 11.10.2004 to the assessee firm. For the sake of clarity, the “affidavit” of Shri Ramchand Nerwani (supra) is culled out as under:

Per contra, the Ld. DR relied on the orders of the lower authorities.

I have thoughtfully considered the aforesaid issue in hand, i.e., sustainability of the view taken by the lower authorities who have held the purchase of raw agarbatti of Rs.1,88,370/- made by the assessee firm from/through Shri Ramchand Nerwani (supra) as a bogus and sham transaction and had made addition/disallowance of the said amount in its hands. Admittedly, it is a matter of fact borne from record that the assessee firm in the course of proceedings before the lower authorities had failed to produce Shri Ramchand Nerwani, i.e., the supplier party, and thus, the A.O had no occasion to verify the veracity of the aforesaid claim of the assessee firm of having made purchases from/through the aforementioned person. Although, the assessee as per Rule 10 of the Income Tax Appellate Tribunal Rules, 1963 had filed an “affidavit” of Shri Ramchand Nerwani (supra) wherein he had deposed of having supplied goods, i.e., raw agarbatti of Rs.1,88,370/- on 11.10.2004 to the assessee firm’, and had also stated that he as a commission agent had procured goods from small time manufacturers of raw agarbatti to whom payments as insisted by them, were made in cash, but at the same time I cannot remain oblivion of the fact that as the said “affidavit” filed by the assessee before me was not there before the lower authorities, thus, they had no

Before parting with the issue in hand, I may herein observe that in case the claim of Shri Ramchand Nerwani (supra) that he had supplied goods, i.e., raw agarbatti, i.e., cottage industry product, to the assessee firm by procuring the same in the status of a commission agent from small manufacturers who had insisted for the purchase consideration in cash, is found to be in order, then, as stated by the Ld. AR, and rightly so, the said purchase transaction as per Rule 6DD(k) would be saved by rigors of Section 40A(3) of the Act. Apart from that, the A.O in the course of the set-aside proceedings is also directed to consider the assessee’s claim that the cash payments made towards purchase of raw agarbatti would even otherwise be saved by Rule 6DD(f) of the Income Tax Rules, 1962 w.r.t. applicability of Section 40A(3) of the Act.

I, thus, in terms of the aforesaid observations set-aside the matter to the file of the A.O who shall re-adjudicate the same after considering the aforesaid “affidavit” of Shri Ramchand Nerwani as had been filed by the assessee firm before me. Needless to say, the A.O shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee firm which shall remain at a liberty to substantiate its claim on the basis of fresh documentary

Now I shall deal with the claim of the Ld. AR that the CIT(Appeals) had erred in disallowing on an ad-hoc basis 50% of the assessee’s claim of salary expenses of Rs.66,900/- (out of Rs.1,33,800/-).

Although, the A.O had observed that the assessee firm had not maintained daily attendance register or salary register and its claim for salary expenses was merely supported by internal vouchers, but the same in my considered view would not suffice to disallow any part of the said expenditure in absence of there being any whisper of any such expenditure that was not found to be in order. Although not maintenance of attendance register or salary register for the purpose of disbursement of salary can lead to certain doubts in the mind of A.O about the authenticity of the salary expenditure but the same on such standalone basis cannot justifiably form a basis for disallowing any part of the said claim. In so far the view taken by the A.O that the assessee has supported his claim of salary on the basis of internal vouchers, I find that except for so stating, he had not referred to any single instance of any such payment to the employees which was either not found to be incurred by the assessee firm wholly and exclusively for the purpose of its business; or in any way was not found to be in order. Merely, on the basis of a generalized observation the assessee’s claim for deduction of salary expenses could not have been disallowed on an ad hoc basis by the A.O.

Although the A.O had observed that the claim of the assessee firm that it had paid lumpsum salary to the employees as majority of them were his relatives was incomprehensible, as no employee would work for the whole month without salary being paid, but the same has not been brought to a logical end by the A.O by carrying out the requisite enquiries from the employees or placing on record any material which would dislodge the authenticity of the said claim so raised by the assessee firm. Accordingly, I do not concur with the adhoc disallowance of 50% of the assessee’s claim for salary expenses and thus, vacate the addition/disallowance of Rs.66,900/-.

Apropos the disallowance of 20% of the assessee’s claim for depreciation on van/vehicles of Rs.30,003/- (out of Rs.1,50,015/-), I find that the very fact that the partners of the assessee firm were having a personal car substantially supports the claim of the assessee that the van/vehicles would not have been put to use for personal purpose. At the same time, as the assessee had failed to maintain a log book in respect of van/vehicles, therefore, personal usage of the same cannot be ruled out. Accordingly, in all fairness, I restrict the addition/disallowance to the extent of 10%, and thus, sustain the addition to the extent of Rs.15,002/-. On the same footing, disallowance of vehicles expenses is also upheld to the extent of 10%, i.e., Rs.2,587/-. As the Ld. AR had not placed any contention with respect to the addition of Rs.1000/- made by the A.O, therefore, the same is sustained. Thus,

As the Ld. AR had not pressed the Ground of appeal No.4, accordingly, the same is dismissed as not pressed.

Ground of appeal No.5 being general in nature is dismissed as not pressed.

In the result, appeal of the assessee is partly allowed for statistical purposes in terms of the aforesaid observations. Order pronounced in open court on 05th day of December, 2023. Sd/- (रवीश सूद /RAVISH SOOD) �या�यक सद�य/JUDICIAL MEMBER रायपुर/ RAIPUR ; �दनांक / Dated : 05th December, 2023. SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent. 3. The CIT(Appeals), Bilaspur (C.G) 4. The Pr. CIT-1, Raipur (C.G) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण,रायपुर ब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // �नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, रायपुर / ITAT, Raipur.