VISHWAMITRA GOLASH,KOLKATA vs. THE ITO, WD-36(4), KOLKATA, KOLKATA

The assessee in the present case is an individual, who is engaged in the business of wholesale and retail trading of aluminium extrusions, sheet, coil, etc. under the name and style of his proprietor concern M/s. R. Kumar & Co. The return of income for the year under consideration was filed by him on 31.10.2006 declaring total income of Rs.1,12,700/-. During the course of assessment proceedings, it was noticed by the ./2014 Assessment year: 2006-2007 Page 2 of 8 Assessing Officer that due to abnormal increase of price in aluminium, the assessee had earned super-natural profit, but the same was reduced by under valuation of closing stock. In this regard, he noted that the average cost of aluminium purchased by the assessee during the year under consideration was Rs.152.76 per kg., whereas the closing stock of aluminium was valued by the assessee at the rate of Rs.99.65 per kg. In order to verify the correctness of the valuation of closing stock, the assessee was called upon by the Assessing Officer to furnish the item- wise quantitative details. In reply, it was submitted by the assessee that there being wide variety of aluminium products dealt with by him, produce-wise details were not maintained and the entire stock of aluminium products was maintained under one category in kilogram. It was also submitted by the assessee that his turnover being less than Rs.40,00,000/- and the net profit offered by him being more than 5%, i.e. 5.15% of the turnover, the same was liable to be accepted as per the provisions of section 44AF of the Act. This stand of the assessee was not found acceptable by the Assessing Officer, as according to him, the gross turnover of the assessee was Rs.40.12 lakhs and the provisions of section 44AF, therefore, were not applicable in the case of the assessee. He also rejected the claim of the assessee that the closing stock of aluminium valued at Rs.99.65 per kg., was at market value being the scrap value. In this regard, he noted that the last purchase of aluminium was made by the assessee on 27.02.2006 in the year under consideration at the rate of Rs.181/- per kg. The Assessing Officer, therefore, rejected the valuation of closing stock made by the Assessing Officer and proceeded to determine the valuation of closing stock of the assessee on his own. In this regard, he noted that the average cost of opening stock of aluminium was Rs.83.82 per kg., while the average cost of aluminium purchased by the assessee was Rs.152.76 per kg. Accordingly, following the FIFO method, the value of closing stock of aluminium lying with the assessee was worked out by the Assessing Officer at Rs.50,02,894/- as against the value of Rs.39,61,500/- shown by the assessee and the difference of Rs.10,41,394/- was added by him to the total income of the assessee. ./2014 Assessment year: 2006-2007 Page 3 of 8

In the Profit & Loss Account, a sum of Rs.45,529/- was debited by the assessee towards building reconstruction cost under the head “miscellaneous expenses”. In this regard, it was explained by the assessee that as per the order of the Hon’ble Calcutta High Court and agreement between building owners and tenants, the reconstruction cost of the building was to be paid by the tenants including the assessee. Accordingly, the share of the assessee in the construction cost amounting to Rs.4,59,529/- was to be paid in equal instalments and one of the instalments so paid amounting to Rs.45,529/- was claimed as deduction in the year under consideration. It was contended that this expenditure was not a capital expenditure as the building (godown) was not owned by the assessee and the reconstruction cost was incurred by him as tenant as per the decision of the Hon’ble Calcutta High Court. This stand of the assessee was not found acceptable by the Assessing Officer and keeping in view the advantage of enduring nature occurring in favour of the assessee, he disallowed the expenditure of Rs.45,529/- claimed by the assessee treating the same as capital in nature. He also disallowed rent of Rs.10,320/- claimed to be paid by the assessee for the said godown on the ground that due to the reconstruction activity, the godown building was not available to be used for the purpose of assessee’s business. Similarly expenditure of Rs.17,632/- claimed by the assessee towards maintenance of elevator of his residence at 23B/8A, D.H. Road, New Alipore, was disallowed by the Assessing Officer on the ground that the same was not incurred for the purpose of assessee’s business as found by him on the basis of report submitted by his Inspector. The expenses claimed by the assessee on account of maintenance of motor cars were also disallowed by the Assessing Officer to the extent of 20% for the personal use of the assessee since the assessee could not produce the relevant documentary evidence in the form of log book, etc. to show that the same were wholly and exclusively incurred for the purpose of business. Accordingly, the total income of the assessee was determined by ./2014 Assessment year: 2006-2007 Page 4 of 8 the Assessing Officer at Rs.12,66,330/- in the assessment completed under section 143(3) vide an order dated 18.12.2008.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) confirmed all the additions/ disallowances made by the Assessing Officer except the disallowance of 20% made by the Assessing Officer out of car expenses and depreciation, which was restricted by him to 10%. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal on the following grounds:- (1) For that Hon’ble CIT(A) not justified in not allowing the assessee to calculate the profit of his business as per section 44AF of the Income Tax Act, 1961.

I have heard the arguments of both the sides and also perused the relevant material available on record. As regards the issue involved in Grounds No. 1 & 2 relating to the assessee’s claim for applying the provisions of section 44AF, it is observed from the Trading and Profit & Loss A/c. of the assessee that although the amount of Rs.39.82 lakhs is credited on account of sales, the same is a net amount after deducting expenditure incurred by the assesese on turnover tax and VAT. Since what has to be taken into consideration for applicability of section 44AF is gross turnover and the same is more than Rs.40 lakhs, as is evident from the Profit & Loss A/c., I am of the view that the provisions of section 44AF are not applicable in the case of the assessee, as rightly held by the authorities below. I, therefore, find no merit in Grounds No. 1 & 2 of the assessee’s appeal and dismiss the same.

As regards the issue involved in Ground No. 3 relating to the addition made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of under-valuation of stock, ld. Counsel for the assessee has submitted that the assessee is consistently following the method of valuing the stock at cost or market price, whichever is lower and since the market value of the aluminium lying in stock was less, the same was adopted by the assessee. In this regard, he has invited our attention to the MEX list of aluminium price published showing the market value of aluminium at Rs.111.1 per Kg, and submitted that the same may be adopted to value the closing stock of aluminium. I find it difficult to accept this contention of the ld. Counsel for the assessee. It is observed that the last purchase of aluminium, as pointed out by the Assessing Officer, was made by the assessee on 27.02.2006 @ Rs.181/- per kg. Moreover, the assessee by his own admission was dealing with wide variety of aluminium products and in the absence of any product- wise details maintained by him, it is difficult to apply the rate of one ./2014 Assessment year: 2006-2007 Page 6 of 8 product to value the closing stock of the assessee. It is also worthwhile to note here that the rate of Rs.99.65 per Kg. was indicated by the assessee himself as the scrap value of products and it is, therefore, difficult to accept the claim of the assessee that the market value of the aluminium products dealt with by him was only Rs.111/- per kg. On the other hand, the method followed by the Assessing Officer for valuation of closing stock, in my opinion, is more scientific as he has taken into consideration the average cost of opening stock as well as the average cost of products purchased by the assessee during the year under consideration and by following FIFO method, he has determined the value of closing stock of the assessee, which in the facts and circumstances of the case cannot be found with any fault. I, therefore, confirm the order of the ld. CIT(Appeals) on this issue and dismiss the Ground No. 3 of the assessee’s appeal.

As regards the issue involved in Ground No. 4 relating to the deduction claimed by the assessee on account of expenses incurred on reconstruction of house/godown, it is observed that the same is disallowed by the Assessing Officer and confirmed by the ld. CIT(Appeals) by holding that the relevant expenditure incurred by the assessee is of capital nature. As submitted by the ld. Counsel for the assessee, a similar deduction claimed by the assessee, however, is allowed by the Assessing Officer himself in the earlier years as well as in the subsequent years even in the assessment completed under section 143(3) and since the ld. D.R. has not been able to dispute this position, I decide this issue in favour of the assessee by following the rule of consistency. Ground no. 4 is accordingly allowed.

As regards the issue involved in Ground No. 5 relating to the disallowance of Rs.10,320/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of rent, it is observed that this disallowance was made by the authorities below on the ground that the building being under construction, the same could not have been used by ./2014 Assessment year: 2006-2007 Page 7 of 8 the assessee for the purpose of business. However, as rightly contended by the ld. Counsel for the assessee, the expenditure in question was undoubtedly incurred by the assessee for the purpose of his business in order to retain his right over the building for use of the same in future for the purpose of business. Accordingly, I delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on this issue and allow Ground No. 5 of the assessee’s appeal.

As regards the issue raised in Ground No. 6 relating to the disallowance of Rs.17,632/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of expenses incurred by the assessee for maintenance of elevators, it is observed that the said expenses were incurred by the assessee in respect of his residential house and in the absence of any evidence produced by the assessee to show that his residential house was used for the purpose of business, I find no justifiable reason to interfere with the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on this issue. Ground No. 6 is accordingly dismissed.

As regards the issue involved in Ground No. 7 relating to the disallowance of 10% made out of car expenses and depreciation claimed by the assessee, it is observed that in the absence of any record maintained by the assessee to show that the car was exclusively used for the purpose of business, disallowance to the extent of 20% out of the car expenses and depreciation was made by the Assessing Officer for involvement of personal element. On appeal, ld. CIT(Appeals) found the same to be excessive and restricted the same to 10%. Having regard to all the facts and circumstances of the case, I am of the view that the disallowance sustained by the ld. CIT(Appeals) to the extent of 10% of the car expenses and depreciation is fair and reasonable and upholding his impugned order on this issue, I dismiss Ground No. 7 of the assessee’s appeal. ./2014 Assessment year: 2006-2007 Page 8 of 8

In the result, the appeal of the assessee is partly allowed as indicated above.