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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI PAWAN SINGH
These are cross appeals by the assessee and the Revenue against the very same order of the Ld. CIT(A)-27, Mumbai dated 20.8.2013 pertaining to assessment year 2009-10. As grievance raised by both sides relate to the same set of facts, these appeals were heard together and disposed of by this common order for the sake of convenience.
ITA No. 6771/M/2013- Assessee’s appeal
The first ground relates to the adhoc disallowance of 10% of various expenses claimed by the assessee.
2.1. This issue find place at page-6 of the assessment order where the AO has mentioned that after verification of the books and vouchers, it was seen that many of the expenses were claimed on the self made vouchers which were not supported with the bills. The assesse was asked to explain the genuineness of the expenses and why disallowance of part expenses should not be made. On receiving no plausible reply, the AO proceeded by disallowing 20% of Rs. 24,58,419/- and made an addition of Rs. 4,91,684/-.
The matter was carried before the Ld. CIT(A) and CIT(A) has considered this issue at para-2.4.10 and at page-11 of his order, the Ld. CIT(A) has mentioned that the representative of the assessee has admitted that though certain disallowance could be made but the adhoc disallowance of 20% is on the higher side. Accepting this contention, the Ld. CIT(A) reduced the disallowance to 10% and confirmed the addition aof Rs. 4,27,824/-.
Aggrieved by this, the assessee is before us.
The Ld. Counsel for the assessee drew our attention to page-3 of the paper book and pointed out that the bifurcation of all the expenses were given to the AO. It is the say of the Ld. Counsel that certain expenses are always supported by internal vouchers.
We have given a thoughtful consideration to the contention of the Ld. Counsel qua the findings of the Revenue authorities. Admittedly, certain expenses are supported by internal vouchers and there cannot be any dispute having certain personal element in these expenses. Therefore, disallowance of 10% is fair and reasonable and therefore no interference is called for. Ground No. 1 is dismissed.
Ground No. 2 relates to the addition of Rs. 45 lakhs.
7.1. Facts behind this addition relate to a survey action conducted at the business premises u/s. 133A of the Act on 26.2.2009. During the course of the survey proceedings, discrepancies in the stock of the assessee was found and to make up the discrepancies, the assessee has made declaration of Rs. 45 lakhs on account of difference in the stock. However, while scrutinizing the return of income, the AO did not find any addition on account of income offered during the course of the survey proceedings. The AO found that as per the trading, profit & loss account drawn on the date of survey, the closing stock was at Rs. 1,64,95,450/-. The trading account drawn as on 26.2.2009 is as under:
Particular Amount Particular Amount To Opening stock 14143774 By sales 65981801 To purchases 47603434 By closing stock 12260857 To gross profit 16495450 78242658 78242658
The revised gross profit after considering the excess stock is as under: To gross profit 20995450 By gross profit 16495450 after unaccounted stock After unaccounted 20995450 By unaccounted 4500000 stock stock 20995450
During the course of the assessment proceedings, the assessee claimed that import purchases of Rs. 1.39 crores were not entered in the purchases on the date of survey and sales amounting to Rs. 7,90,139/- had also remained to be entered. The assessee was asked to give the details of these missing purchase and sales. On receiving no plausible reply, the AO proceeded with the assessment proceedings comparing the profit ratio as exhibited at para-5 of the assessment order. The AO noticed that the assessee has included the commission in the gross profit chart which was not included in the trading account furnished to the survey party. The AO also found discrepancy in purchases as mentioned in the profit and loss account and as reflected in the books of account. The AO also found discrepancy in the secured and unsecured loans. The AO was convinced that the books of the assessee are not reliable. The AO then took samples of purchase and sale vouchers and from these samples computed the gross profit at 37% and computed the gross profit at Rs. 2,61,82,385/-. The AO also made addition on account of purchases not pertaining to this year at Rs. 15,37,298/-. Addition on account of excess stock found during the survey at Rs. 45 lakhs was also made.
The assessee carried the matter before the Ld. CIT(A) and strongly objected to the rejection of books of account and estimation of the gross profit. It was strongly contended that the figures of opening stock and purchases were taken by the AO for rejection of the books of account are not correct. It was mentioned to the Ld. CIT(A) that purchases amounting to Rs. 1.39 crores have not been properly entered. It was explained that at the time of survey, the assessee was not in a position to reconcile huge number of purchase invoices and inventory items and therefore the assessee surrendered Rs. 45 lakhs. The working of gross profit was also questioned on the ground that it was based on only 5 invoices.
9.1. After considering the facts and the submissions and the details furnished, the Ld. CIT(A) was convinced that the bills relating to the purchases which has been claimed to be not entered in the books pertain to the year under consideration. The Ld. CIT(A) was also convinced that there was some typing error. The Ld. CIT(A) was also convinced that the estimation of GP based on 5 items is also not correct. Since the assessee has offered Rs. 45 lakhs by making addition to the closing stock of inventories, the Ld. CIT(A) deleted the addition made on the basis of gross profit estimation.
9.2. In so far as the addition of Rs. 45 lakhs is concerned, the Ld. CIT(A) has considered this issue at para-2.4.18 on page-14 oof his order wherein the Ld. CIT(A) observed that the assessee has claimed to have included Rs. 45 lakhs in the closing stock inventory as on 31.3.2009. However, the Ld. CIT(A) observed that on verification of the return of income, there is no specific item which reflects the additional income of Rs. 45 lakhs. The Ld. CIT(A) was of the opinion that once the assessee has offered additional income which has not been offered under duress or due to misrepresentation of facts, the assessee should honor the declaration. After discussing certain judicial discussions, the Ld. CIT(A) concluded by holding that the confession made by the assessee during survey is binding upon him and in the absence of any evidence, the said addition of Rs. 45 lakhs is sustained.
9.3. Against the deletion of the gross profit addition, the Revenue is in appeal and against the addition of Rs. 45 lakhs upheld by the Ld. CIT(A), the assessee is in appeal.
Before us, the Ld. Counsel for the assessee drew our attention to page-31 of the paper book which exhibits Schedule-K of the balance sheet wherein it is mentioned that inventory at the yearend includes an amount of Rs. 45 lakhs being excess inventory found in the course of survey. It is the say of the Ld. Counsel that once the assessee has included Rs. 45 lakhs in its closing stock, an addition of Rs. 45 lakhs once again would amount to double taxation.
Per contra, the Ld. Departmental Representative strongly supported the findings of the Revenue authorities reiterating that though the notes to the accounts refers to the inclusion of Rs. 45 lakhs in the closing inventories but at the same time there is no documentary evidence to support.
We have given a thoughtful consideration to the orders of the authorities below. We have also gone through the relevant documentary evidences brought on record before us. Let us first consider the relevant question and the answer which is the basis of the surrender.
Q. 14. Since purchases cannot be traced will you offer the value of these items as additional income for Income-tax?
Ans. Yes. I offer these as additional income. The valuation of each entry is not possible, hence I am giving value of each category/supplier. The total value of these items is Rs. 45 lakhs. I offer this as additional income over and above my normal income.
A simple perusal of this question and answer shows that the assessee agreed to offer additional income of Rs. 45 lakhs. However, assuming what the assessee is claiming is correct then what the assessee has offered is only an addition to the closing stock of inventories which could only increase the gross profit ratio.
13.1 In our understanding of the facts, this action of the assessee has to be neutralized by removing Rs. 45 lakhs from the closing stock of inventories and thereafter the profitability ratio has to be re- determined and Rs. 45 lakhs should be separately added to the income of the assessee. We, therefore, restore this issue to the file of the AO. The AO is directed to recompute the profitability ratio by excluding Rs. 45 lakhs from the closing stock of inventory and after determining the profitability ratio by comparing the past years ratios. The AO will determine the profit to which addition of Rs. 45 lakhs as additional income offered during the course of survey should be added. Needless to mention, the assessee should get a reasonable and fair opportunity of being heard. Ground No. 2 is accordingly allowed for statistical purpose and with this ground No. 1 of Revenue’s appeal in is also treated as allowed for statistical purpose.
The third ground in assessee’s appeal relates to the adhoc disallowance made u/s. 14A of the Act.
14.1. During the course of the scrutiny assessment proceedings, the AO found that the assessee has not allocated any expense incurred for earning the tax free income. Drawing support from the provisions of Sec. 14A r.w. Rule 8D, the AO computed the disallowance at Rs. 6,89,174/-.
14.2. The assessee carried the matter before the Ld. CIT(A). This issue has been considered by the Ld. CIT(A) at para-2.4.26 on page- 17 of his order. The assessee claimed that the books of account are audited u/s. 44AB of the Act, therefore there should not be any disallowance on account of interest expenditure. After considering the facts and the submissions, the Ld. CIT(A) restricted the disallowance to Rs. 50,000/- holding that the interest expenditure was made for business purposes.
Aggrieved by this both the Revenue and the assessee are in appeal before us.
The Ld. Counsel for the assessee drew our attention to page-23 of the Paper Book which is the balance sheet of the proprietary concern of the assessee. Drawing our attention to page-20 which is the computation of income. The Ld. Counsel pointed out that the only exempt income earned by the assessee is interest on PPF account which requires no expenditure for earning. The Ld. Counsel concluded by holding that the disallowance of Rs. 50,000/- is on the higher side.
Per contra, justifying the action of the AO, the Ld. DR stated that the disallowance has to be computed as per the provisions of Sec. 14A r.w. Rule 8D therefore, there is no justification in restricting the disallowance to Rs. 50,000/-. The action of the AO should be upheld.
We have given a thoughtful consideration to the facts in issue before us. There is no dispute that the only exempt income is interest on PPF deposits amounting to Rs. 1,46,963/-. In our considered opinion, the addition of Rs. 50,000/- made by the Ld. CIT(A) should meet the ends of justice. Upholding the action of the Ld. CIT(A), appeal of the assessee and the Revenue on this ground are dismissed.
In the result, the appeal filed by the assessee and the cross appeal filed by the Revenue are partly allowed.
Order pronounced in the open court on 16th December, 2015.