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Income Tax Appellate Tribunal, BENCH “SMC”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM]
This is an appeal by the assessee against the order dated 19.09.2012 of CIT(A)-XIV, Kolkata relating to A.Y.2007-08.
Ground No.1 raised by the assessee reads as follows :- “1. That on the facts and circumstances of the case the Ld. CIT(A) erred in confirming the disallowance of interest of Rs.1,95,266/- paid to Bank on overdraft amount utilized for the purpose of the appellant’s business only.”
The assessee is an individual. He is engaged in the business of running a bar and restaurant by name M/s. Duke Bar & Restaurant. AO noticed that assessee had claimed as deduction in the profit and loss account a sum of Rs.1,95,226/- being interest paid on bank overdraft from Syndicate bank. He noticed that the borrowed funds on which interest was paid by the Assessee and claimed as deduction in computing income from business, had been routed through the partners capital account and withdrawn by the assessee. The AO therefore held that the borrowed funds on which interest was paid were not used for the purpose of business of the assessee and accordingly the conditions necessary for allowing deduction u/s 36(1)(iii)
Shri Tripti Kumar Chatterjee A.Yr.2007-08 of the Act were not fulfilled. The assessee put forth the plea before the AO that there was a devastating fire in the restaurant on 9.11.1995 and extensive damage to the restaurant building due to fire and the funds withdrawn were used for renovation and repairing work of the restaurant. The Assessee thus submitted that the borrowed funds had be used for renovation of the business premises and therefore used for the purpose of business of the Assessee. According to AO assessee could not substantiate the aforesaid plea and accordingly AO disallowed the claim of the assessee for deduction which was confirmed by the CIT(A).
Before me the ld. Counsel for the assessee submitted the break- up of capital account since 2006-07. It was his submission that the expenditure were incurred over a period of time and it was not possible for the assessee to produce concrete proof for having carried out repairs and maintenance. According to the assessee since the repairs and maintenance were carried out at the premises the conditions allowing for deduction u/s 36(1)(iii) of the Act were fully satisfied.
We have considered the submissions of the learned counsel of the assessee and are of the view that the contentions put forth before us are general and are not substantiated by any evidence. In the light of the admitted position that the borrowed funds were routed to the capital account and in the absence of utilization of the funds withdrawn from the capital account for the purpose of business, I hold that the disallowance was rightly made by the revenue authorities.
Ground No.2 raised by the assessee reads as follows :- “2. That on the facts and circumstances of the case the Ld. CIT(A) erred in confirming the addition of Rs.2,48,950/- being 21.58% of cash purchase made by the appellant.”
Ground No. 2 of the appeal relates to disallowance of Rs.2,48,950/- on account of cash purchases made. During the period relevant to above assessment year the Assessee incurred cash expenditure of Rs.11,53,319/- for purchase of raw materials. For running his Restaurant the Assessee had to purchase green vegetables, fish, eggs, chicken, meat etc. from the open market on the basis of day to day consumption.
Shri Tripti Kumar Chatterjee A.Yr.2007-08 According to the Assessee, as the aforesaid goods are highly perishable, it is unwise to purchase the same in huge quantity and store the same for future consumption. The Assessee explained that it purchases the same from different sellers in the open market. For such purchases no seller issues any Bill/Cash Memo. Recording of the aforesaid cash purchases are made in the Books of Accounts maintained on the basis of self-made vouchers supported with slips submitted by the concerned persons entrusted with the job of purchasing the aforesaid raw materials. The said self made vouchers were produced before the A.O. during the course of assessment proceedings. But the A. O. insisted on production of party-wise details and Bills in support of cash purchases made for purchases of all the aforesaid raw materials. According to the Assessee it was quite impractical in the line of business carried on by the Assessee to comply with the requirement as called for by the AO. It was explained before the A.O. that recording of cash purchases of Raw Materials in the Line of Hotel and Restaurant business are made in the similar manner as followed by the Assessee. The A.O. did not accept the submission made on behalf of the Assessee. According to the AO, Assessee’s in similar line of business were earning 6% margin on turnover. According to the AO, the profit margin on that basis in the case of the Assessee would be Rs.4,61,331 (6% on turnover of Rs.76,88,857) as against Rs.17,115/- declared by the Assessee. The AO accordingly disallowed Rs.2,48,950/- which was 21.58% of Rs.11,53,319 expenditure on purchase of fish, chicken, vegetables etc. on estimate basis.
Before CIT(A), the Assessee submitted that the addition was made arbitrarily out of suspicion and surmise and on an erroneous assumption that net 'profit of the Assessee should be 6%. of the Turnover. It was contended that earning of net profit depends on various aspects and the AO is not the competent authority to decide what should be net profit in a particular business. Net profit declared by the Assessee was based on Books of A/cs. maintained and which is duly audited by the Chartered Accountant. Hence, there was no justification on the part of the A.O. to estimate net profit on his own and to justify the same to disallow expenditure on estimate basis. The disallowance made by the A.O. without considering the practical .difficulties, is.
Shri Tripti Kumar Chatterjee A.Yr.2007-08 contrary to Law. The entire expenditure incurred by the Assessee for purchase of raw materials is wholly and exclusively for the purpose of his business. Hence, in. the interest of justice, disallowance made by the A. O. arbitrarily should be deleted.
The CIT(A) however confirmed the order of the AO. Aggrieved by the order of the CIT(A) the Assessee has raised ground No.2 before the Tribunal.
I have heard the submissions of the learned counsel for the Assessee who reiterated the contentions as put forth before the CIT(A). The learned DR relied on the order of the CIT(A).
11. I have considered the rival submissions. In my view the disallowance was arbitrary and cannot be sustained in law. The AO has not brought on record any evidence to show that the Assessee’s profit margins were less than what was declared in the past, so as to draw any inference of attempt to suppress profits. The books of accounts were not rejected. The profit margin earned by Assessee’s engaged in similar line of business cannot be the basis to come to a conclusion that the Assessee was suppressing profits. As rightly contended by the Assessee it is no possible to produce bills for purchases made on a day to day basis from small traders. Considering the nature of business and the needs of business and scale of business of the Assessee, we are of the view that the addition made cannot be sustained. The same is directed to be deleted. Gr.No.2 raised by the Assessee is allowed.
In the result, the appeal by the Assessee is partly allowed.
Order pronounced in the court on 9.12.2015.