Income Tax Appellate Tribunal - Ahmedabad
Virat Gems, Surat vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before Shri N.S.SAINI, ACCOUNTANT MEMBER and
Shri MAHAVIR SINGH, JUDICIAL MEMBER
ITA No.3541 & 3756/ Ahd/2008
Assessment Year:2005-06
Date of hearing:28.1010 Drafted:15.11.10
Asstt. Commissioner of V/s. M/s. Virat Gems, Plot
Income-tax, Circle-8, No.11-12, Opp.
Room No.4114, Aayakar Communit y Hall, Vasta
Bhavan, Majurat Gate, Devdi Road, Katargam,
Surat Surat
Virat Gems, Plot No.11- V/s. Asst. Commissioner of
12, Opp. Community Income-tax, Circle-8,
Hall, Vasta Devdi Road, Surat
Katargam, Surat
PAN No. AADFV6938P
(Appellant) .. (Respondent)
Assessee by :- Shri Sapnesh Sheth, AR
Revenue by:- Shri K Madhususan, SR-DR
ORDER
PER Mahavir Singh Judicial Member:-
These cross-appeals by Revenue and assessee are arising out of the order of Commissioner of Income-tax (Appeals)-V, Surat in appeal No. CAS-V/315/07-08 dated 27-08-2008. The assessment was framed by ACIT, Circle-8, Surat u/s143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 28-12-2007 for assessment year 2005-06.
First we will deal with Revenue's appeal in ITA No.3541/Ahd/2008.
2. The first issue in this appeal of the Revenue is against the order of CIT(A) in deleting addition of Rs.34,88,675/-, thereby allowing the remuneration and interest to partners u/s.40(b) of the Act. For this, Revenue has raised the following ground No.1:-
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), without appreciating facts of the case, has erred in deleting the addition of Rs.34,88,675/- and allowing remuneration and interest to partners u/s 40(b)."
ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 2
3. The brief facts leading to the above issue are that assessee is a partnership firm engaged in the business of import-export of manufacturing of cut and polished diamonds and trading. The assessee filed return of income on 08-08-2005 declaring total income of Rs.41,39,960/-. A survey action u/s 133A of the Act was conducted on 01-03-2005 by the Assessing Officer and during survey proceedings the assessee-firm disclosed unaccounted income of Rs.70 lakh under various head i.e. investment in building, furniture, machinery account, staff members, miscellaneous receivable and cash. Subsequently, assessment proceedings were finalized u/s.143(3) and the total income was determined at Rs.86,33,746/- by making total addition of Rs.80,88,509/-. The assessee claimed remuneration to partners and interest on capital on the additional income of Rs.70 lakh disclosed during the course of survey action. The Assessing Officer rejected the claim on the ground that the additional income was not part of business income but income from other sources as the source of income was not explained as disclosure was made under various heads. The assessee stated the disclosed amount is the application of undisclosed income and that amount disclosed under various heads is not the source of income but it is the mode of investment. The AO did not accept the contention of the assessee and stated that assessee failed to furnish any evidence regarding books of account of prior period survey and post period survey, comparative details of balance sheet, trading account, profit and loss account etc. Hence, AO treated the undisclosed income of Rs.70 lakh as "income from other sources" and disallowed the claim of interest and remuneration to partners. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) deleted the disclosed income by holding that it form part of the book profit and the remuneration should be allowed to the partners u/s 40(b) by giving following findings in page-4-6 of his appellate order:-
"I have gone through the contention of the appellant as well as that of the AO. In so far as the disallowance of interest to partners is concerned I do not find any merit in the AO's case since where or not disclosure is made by the appellant interest to partners is not dependent on the percentage of book profit and therefore in so far as interest to partners is concerned it would be dependent on various other factors like provision of payment of interest to partners in partnership deed, rate of interest etc. And therefore in so far as it is not in dispute that the appellant had met with those criteria there is no reason for such disallowance.
Section 40(b) which deals with disallowance in certain cases enumerates disallowance in respect of interest reads as under:-
ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06
ACIT, Cir-8, Surat v. M/s. Virat Gems Page 3
(b) in the case of any firm assessable as such:-
(i) any payment of salary, bonus, commission or remuneration, by
whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner; or
(ii) any payment or remuneration to any partner who is a working partner; or of interest to any partner, which, in either case, is not authorized by, or is not in accordance with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is ins accordance with, the terms of the partnership\deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnerships deed, so, however, that the period of authorization for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
(iv) any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deduction in so far as such amount exceeds the amount calculated at the rate of twelve per cent, simple interest per annum; or From a plain reading of the corresponding provisions it is clear that interest to partners is not dependent on book profit and therefore the AO is directed to allow interest to partners in accordance with the provision of law in this regard.
As far as remuneration to partner is concerned the question arises as to under which head the income should be assessed. It is not in dispute that the appellant had known source of income as that from business of gold and silver and that there was no other source of income disclosed or for that matter found during the course of survey or otherwise, and therefore inconsonance with the proposition of practical notion as has been held by the jurisdictional high court in line with judgement of apex court what is material is as to when the appellant did not have any other known source of income the probability of preponderance also suggests the income from known source of income. It under these circumstances and laid down law I am in agreement with the appellant that the income in the instant case should be treated as business income. Further I am unable to agree with the AO that undisclosed income was sough to be charged on the basis of investment since the question of investment even during the curse of survey was raised after declaration of source. This evident from the question raised by the survey team as stated by the appellant reads as under:-
'can you tell us as to in which form unaccounted income of Rs.70,00,000/- disclosed by the firm invested' ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 4 Plain reading of aforesaid question clearly indicate that it was the disclosed source which was offered to tax and not the investment since there was no findings of fact on such account as to investment. Thus the AO's stand that since the income was disclosed in the form of investment is far from reality of the case and therefore considering these facts of the case I am not inclined to accept the argument of the appellant that income in this case was taxable u/s 56 of the Act.
Now having come to the conclusion that the income is chargeable to tax under the head business and profession I am also inclined to accept the argument of the appellant that since the income form part of the book profit the remuneration should be computed in accordance with the provisions of section 40(b), in the instant case the only rejection of remuneration was head of income and nothing else I am in agreement with the appellant that income in the instant case should be computed after allowing the deduction u/s.40(b) including the income disclosed under survey. In this regard the cue is taken from the decision of ITAT Banglore in the case of Royal Sunrise V ITO 99 TTJ 1305, Deepa Agro Agencies V ITO 99 TTJ 766 (Bang), Gujarat High Court in the case of ACIT V Prabhudas S Parikh case No.18759/2001 decided on 27- 6-2001, IAT Rajkot in the case of ACIT v Prabhudas Shantilal Parekh, ITA No.2408/Ahd/1993.Thus this ground of appeal is held in favour of the appellant."
Aggrieved, Revenue came in appeal before the Tribunal.
4. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that during the course of survey disclosure of unaccounted income of Rs.70 lakh was made by the partner of the assessee-firm as income of the firm. Further, in response to a question asked to one the partner of the firm requiring him to provide detail of investment made out of the unaccounted income and the following reply was made:-
""Can you tell us as to in which form unaccounted income of Rs.70 lacs disclosed by the firm invested?
Above referred Rs.70 lacs is invested as follows:-
Particulars Amount
Unaccounted investment in building 32,50,000
Unaccounted investment in Furniture 3,00,000
Unaccounted investment in Machinery 3,00,000
Advance to staff 6,50,000
Miscellaneous receivables 20,00,000
Cash 5,00,000
Total 70,00,000
ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06
ACIT, Cir-8, Surat v. M/s. Virat Gems Page 5
The relevant portion of statement of Shri Ravjibhai Parsuriya recorded on 01-03- 2005 (translation in English from vernacular filed before us) and the relevant Q. No.26 reads as under:-
"Q.26 Do you want to make declaration of any other thing on the basis of above things.
A.28 For the mental peace of myself and m partners, I declare additional income of Rs.70,00,000/- which is over and above regular income of my firm, Virat Gems for difference in stock, building construction, land purchase and any other difference if found. I request you not to levy any penalty or any other charges on this. And I will pay due taxes on this on or before 31st march, i.e. by end of this month."
We find that the assessee-firm was engaged in the business of diamonds and accordingly it had no other source of income and as per the disclosure made during the course of survey it had disclosed amount of Rs.70 lacs as 'income disclosed u/s.133A of the Act' under the head 'income from operations' in its profit and loss account, whatever was found at the time of survey is in the nature of business income which was not disclosed by the assessee before the survey. The assessee claimed that the additional income was disclosed which has direct nexus with the business of the assessee and further contended that the words 'book profit' defined in Section 40(b) of the Act means net profit as shown in profit and loss account computed in the manner laid down in Chapter-IV-D. The assessee-firm included the income disclosed u/s.133A in is profit and loss account under the year consideration and book profit computed in the manner laid down in Chapter-IV-D. We find that the subject income forms part of book profit and assessee-firm is not carrying on any other business and has no other source of income and whatever income arising to the assessee-firm is business income and hence, computation is in accordance with Chapter-IV-D. Even otherwise, this issue is covered by the decision of Hon'ble jurisdictional High Court in the case of ACIT v. Prabhudas Parekh case No.18759/2001 decided on 27-06-2001 has dismissed the appeal of the Revenue filed against the order of the Tribunal and in this case The Tribunal in ITA No.2408/Ahd/1993 vide order dated 19-12-1999 while dismissing the appeal of the Revenue has held as follows:-
"... ... Therefore, as laid down by Hon'ble Supreme Court in the case of mentioned above, the practical noting must be applied to find out the head of income. The head of income has to be determined from the nature of the business the assessee was carrying on at the time of search. In this particular ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 6 case, the assessee was not carrying on any other activity for earning the income. Therefore, the income disclosed by the assessee u/s.132(4) has to be assessed under business income from the common notion of a practical man. The head "income from other sources" is a residual head and the income has to be assessed under that head only if the same is not covered under any other head."
From the above facts and proposition laid down by Hon'ble jurisdictional High Court, we hold that the income disclosed by the assessee-firm during the course of search was business income and the assessee is eligible for deduction of remuneration and interest paid to partners in terms of Section 40(b) of the Act. We uphold the order of CIT(A) on this issue and Revenue's issue is dismissed.
5. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the addition of electricity expenses amounting to Rs.2,72,870/-. For this, Revenue has raised the following ground No.2:-
"2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), without appreciating facts of the case, has erred in deleting the addition of electricity expenses of Rs.2,72,870/-."
6. The brief facts leading to the above issue are that during the course of assessment proceedings the Assessing Officer observed that electricity expenses claimed by the assessee were in different name and AO further noticed that the premises in respect of which electricity expenses claimed by the assessee was in the name of partner and not in the name of the firm. The assessee could not explain whether the expenses were incurred for the purpose of business and accordingly AO disallowed the claim of electricity expenses. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) deleted the electric expenses by giving following findings in page-7-8 of his appellate order:-
"I have considered the issue before me in light with the statement recorded during the course of survey where it has been categorically mentioned that the appellant was doing business from two premises. In respect of which the electricity expenses are claimed. The AO has merely relied on subjective satisfaction than the objective adherence. Further the fact that the appellant was carrying o the business from these premises is evident from the body of order itself where in para 1 of the order the AO has clearly stated that survey was conducted at the business premises of the assessee situated - Opp Community hall Vastadevi Road Surat and 206 Thakordwar Appeartment Gotlawaid Surat. Thus it is clear that the department was well aware of both the places of the business and therefore if the appellant has claimed the electricity bills of the said premises sit wou8ld not alter the allowability of such ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 7 expenses merely because the bills were in the names of some one else unless there is brought on record the said electricity meters were actually used by those in whose names the same were appearing. It is also not denied the payments of such bills were made by the appellant firm by account payee cheques. Further had such electricity9 bills not being paid it would lead to the other conclusion that no business of the nature stated was carried out from the said premises by the assessee and therefore income disclosed in respect of such premises would also belong to such other persons. But having accepted the income and production from the said premises the AO should not have disallowed the claim of the appellant merely on technical ground. Thus looking to the overall facts of the case disallowance made by the AO is deleted."
Aggrieved, Revenue came in appeal before the Tribunal.
7. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has its factory at two places referred to herein below:-
"1. Opp. Community Hall, Vastadevdi Road, Surat ; and
2. 206, Thakordwar Apartment, Gotalawadi, Surat"
The Assessing Officer noticed from the electricity bill that factory located at 206, Thakordwar Apartment Gotalawadi was in the name of other persons other than the partners of the firm or the firm and accordingly he disallowed electricity expenses at Rs.1,73,040/- and in respect to factory located at Opposite Community Hall, Vastadevi Road, Surat, the bills were in the name of third party and accordingly he disallowed a sum of Rs.99,830/-. The assessee's main contention is that the factory at Gotalwadi was acquired but still the electricity connection and municipal tax are in the name of earlier owners but claimed that firm had commenced its business from the factory at Gotalwadi which as even been intimated to the Department while making application for PAN, TAN in the partnership deed of the firm, import-export code issued by DGFT etc. in this regard the copy of said submission along with relevant documentary evidence was submitted before the lower authorities. In respect to factory at Vastadevdi Road, in the initial two bills for the financial year in the name of the previous owners were described, which on correspondence being made by the assessee-firm to the electricity company was changed in the name of the partners of the firm. We find from the above facts that both the premises were utilized by the assessee-firm as its factory's and the lower authorities merely that ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 8 name of the previous owners were on electricity bills disallowed the electricity expenses. We find no infirmity in the order of CIT(A) allowing the claim of the assessee and accordingly we confirm the same. This issue of the Revenue's appeal is dismissed.
Coming to assessee'a appeal in ITA No.3756/Ahd/2008.
8. The first issue in this appeal of assessee `is against the order of CIT(A) confirming the disallowance of depreciation. For this, assessee has raised the following ground No.1 but subsequently filed modified ground which reads as under:-
"2. On the facts and in the circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer in making disallowance of Rs.2,22,500/- on account of depreciation."
The assessee has also raised alternative ground that the Assessing Officer should have allowed enhanced depreciation on enhanced value of disclosure of assets like building, furniture and machines. For this, assessee has raised the following alternative ground:-
"On the facts and in the circumstances of the case as well as law on the subject, the learned assessing officer has erred I not deducting the amount of Rs.38,50,000/- from total income being assessee's disclosure on account of building Rs.32,500/-, furniture Rs.3,00,000/- and machine Rs.3,00,000/- when he didn't allow the depreciation on enhanced value of these items."
9. The brief facts leading to the above issue are that during the course of assessment proceedings the Assessing Officer disallowed the depreciation on the ground that assessee could not file any proper bills during the course of survey and two machineries purchased during that year. The assessee claimed before us that it has submitted vouchers regarding purchase of machineries on 05-04-2004 and duly backed by bills and payments were made through account payee cheques. We find that the assessee-firm had made additions to factory building, plant & machinery and furniture and fittings along with certain other fixed assets and the details of additions made. Even during the course of survey, the assessee has disclosed on account of capital expenditure, addition to factory building for Rs.32.50 lakh, plant & machinery at Rs.3 lakh and furniture and fittings at Rs.3 lakh were made out of the income disclosed in survey. The depreciation on addition to plant & machinery for Rs.9.55 lakh was also disallowed by the Assessing Officer and said disallowance out of the ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 9 depreciation was made on the ground that the assessee-firm did not furnish necessary details for allowance of depreciation that in respect of addition to plant & machinery for Rs.9.55 lakh but assessee-firm had submitted all relevant documentary evidences inform of copy of ledger account, bills of respective items of machinery, copy of bank statement of the assessee-firm. We find that these documents i.e. bills of machinery needs verification at the level of the Assessing Officer and accordingly this issue is set aside to the file of Assessing Officer. In respect to disclosure made on account of plant and machinery, furniture and building, the Assessing Officer will verify the actual amount disclosed in the respective account and will allow depreciation on the enhanced value of the respective assets. Accordingly, this issue of assessee's appeal is allowed for statistical purposes.
10. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made on account of variation of closing stock. For this assessee has raised the following ground No.3:-
"3. ces of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in making addition of Rs.1,34,317/- on account of variation of stock."
11. The brief facts leading to the above issue are that during the course of assessment proceedings Assessing Officer noticed that during the course of survey, there was discrepancy in respect of polished diamond as well as rough diamond of 11.83 carats of polished diamond and 12477.47 carats of rough diamonds. Accordingly AO added a sum of Rs.1,34,317/- in respect of finished diamond and Rs.1,82,167/- in respect of rough diamond. The CIT(A) deleted the addition on account of rough diamond but sustained the addition on account of variation in stock of finished diamond at Rs.1,37,317/- by giving following finding in page-11 of his appellate order:-
"I am unable to accede to the argument of the appellant since the appellant has simply applied mathematical formulae and shown entire difference of 18.74 cts as process loss. If the appellant's plea is considered it would mean that there should not have been any stock of rejected diamonds since entire rejection would form the part of process loss. However by its own admission in the form of quantity of rejected diamonds what is stated in the instant case is merely and after thought and nothing else. Save and except the submission of this kind the appellant has not brought on record any material to shown that ITA No.3541 & 3756/Ahd/2008 A.Y 2005-06 ACIT, Cir-8, Surat v. M/s. Virat Gems Page 10 such polished diamonds were actually made from such rough diamonds and therefore considering the overall facts of the case addition made by the AO in this regard is therefore confirmed."
We find that even now before us assessee could not find any fault with the findings of CIT(A) that there is no rejection or process loss in respect of finished diamond. Accordingly, we confirm the findings of CIT(A) and this issue of assessee's appeal is dismissed.
12. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the disallowance of expense at 20%. For this, assessee has raised the following ground No.4:-
"4. On the facts and in the circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in making disallowance of Rs.32,910/- being 20% of other expenses."
13. We have heard the rival contentions and going through the facts and circumstances of the case. We find that the Assessing Officer disallowed 20% out of other expenses on account of personal in nature. Before the CIT(A) assessee has not pressed this issue and now before us the same has not been pressed by assessee. Accordingly, this issue of assessee's appeal is dismissed.
14. In the result, Revenue's appeal is dismissed and that of assessee's appeal is partly allowed for statistical purposes.
Order pronounced in Open Court on 19/11/2010
Sd/- Sd/-
(N.S.Saini) (Mahavir Singh)
Accountant Member Judicial Member
Ahmedabad,
Dated : /11/2010
*Dkp
Copy of the Order forwarded to :
1. The Assessee. 4. The CIT concerns.
2. The Revenue. 5. The DR, ITAT, Ahmedabad
3. The CIT(Appeals)-V, Surat 6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad