Income Tax Appellate Tribunal - Mumbai
Ajit Babaji Mhade, Mumbai vs Acit 17(3), Mumbai on 30 November, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL "A", BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM ITA No.4589/Mum/2015 (Assessment Year :2009-10) ITA No.4590/Mum/2015 (Assessment Year :2011-12) Shri Ajit Babaji Mhade Vs. ACIT 17(3) 10/7, Marwadi Wadi, Mumbai New Chawl Near Half Keen Institute G.D. Ambedkar Marg Parel, Mumbai - 400 012 PAN/GIR No.AHCPM7393P Appellant) .. Respondent) ITA No.4889/Mum/2015 (Assessment Year :2011-12) ACIT 17(3) Vs. Shri Ajit Babaji Mhade Mumbai 10/7, Marwadi Wadi, New Chawl Near Half Keen Institute G.D. Ambedkar Marg Parel, Mumbai - 400 012 PAN/GIR No. AHCPM7393P Appellant) .. Respondent) ITA No.4587/Mum/2015 (Assessment Year :2011-12) Smt. Sanjana Santosh Mhade Vs. ITO 17(3)(4), 603, A-Wing, Nirlep House Mumbai G.D. Ambedkar Marg Parel, Mumbai - 400 012 PAN/GIR No.AIEPM5416A Appellant) .. Respondent) ITA No.4876/Mum/2015 (Assessment Year :2011-12) ACIT 20(3), Vs. Smt. Sanjana Santosh Mhade th R.No.615, 6 Floor 603, A-Wing, Nirlep House Piramal Chambers, G.D. Ambedkar Marg Parel, Mumbai - 400 012 Parel, Mumbai - 400 012 PAN/GIR No. AIEPM5416A Appellant) .. Respondent) 2 ITA No.4589/Mum/2015 and Other appeals ITA No.4591/Mum/2015 (Assessment Year :2011-12) Smt. Subhadra Babaji Mhade Vs. ACIT - 17(3) 10/7, Marwadi Wadi Mumbai New Chawl, Near Half Keen Institute, G.D. Ambedkar Marg, Parel, Mumbai - 400 012 PAN/GIR No.ALVPM2070Q Appellant) .. Respondent) ITA No.4875/Mum/2015 (Assessment Year :2011-12) ACIT - 20(3) Vs. Smt. Subhadra Babaji Mhade Mumbai 10/7, Marwadi Wadi New Chawl, Near Half Keen Institute, G.D. Ambedkar Marg, Parel, Mumbai - 400 012 PAN/GIR No. ALVPM2070Q Appellant) .. Respondent) Assessee by Shri Hari Raheja & Shri Mani Jain Revenue by Shri Chaitanya Anjaria Date of Hearing 05/09/2018 Date of Pronouncement 30/11/2018 आदे श / O R D E R PER R.C.SHARMA (A.M):
These are the cross appeals filed by the assessee and Revenue against the order of CIT(A)-32, Mumbai dated 04/06/2015 for A.Y.2009- 10 and 2011-12 in respect of different assessees of the same group. 3 ITA No.4589/Mum/2015 and Other appeals
2. As the facts and circumstances in case of all the assessees are same, we hereby deal with the facts in the case of Shri Ajit Babaji Mhade for the A.Y.2009-10. The assessee got associated with a company Royal Twinkle Star Club Limited, Twinkle Envirotech Limited, Citrus Check Inns Limited as marketing associate. Then, the assessee also became marketing associate and presently is Chief Marketing Advisor of Twinkle Envirotech Limited, Royal Twinkle Star Club Limited and Citrus Check Inns Limited. The assessee sells membership on time sharing basis for use of hotel properties at various places as per various schemes launched by the said companies (products). The commission income depends upon the tenure of association with the said companies and the points earned in each year by selling the time sharing products directly i.e. direct commission which ranges between 9.70% to 28.24% and through chain of sub-agents i.e. overriding commission which ranges between 3.25% to 0.11%. The said commission is received through banking channels. While performing the said activity, the assessee is required to incur various expenditures in order to advertise its schemes and earn business.The assessee is an individual, filed return of income for A.Y. 2009-10 on 07.08.2009 declaring total income of Rs.59,60,754/-. The assessment order u/s 143(3) was passed on 30.12.2011, determining total income at Rs.61,20,940/-. Subsequently, the case was reopened by issue of notice u/s 148 on 01.05.2013. The assessee was in receipt of commission income, and had claimed various expenses against it. During the course 4 ITA No.4589/Mum/2015 and Other appeals of reassessment proceedings, the AR was asked to submit books of accounts and supporting evidences. The AO noted that the assessee could not establish the genuineness of various expenses claimed, and hence he made ad-hoc disallowance @ 25%, and in some cases even @100% out of the same. The AO also made addition on account of unexplained difference in net profit, Loans & Advances taken, Sundry Creditors etc. Besides, other additions were made on account of some interest income and rent receipts not offered to tax. The total disallowance/addition was accordingly made at Rs.4,68,07,278/- to Income from Business & Profession, Rs.69,256/- to Income from other sources and Rs.2,52,000/- to income from house property. Finally income was assessed at Rs.5,30,95,290/-.
3. The summary of various disallowances/additions made by the AO to business income is as under:
S.No. Nature of Disallowance/ Addition Amount % age Disallowance of Expenditure 1 Salary & Wages 54,41,365 100% 2 Electricity Charges 60,642 25% 3 Staff Welfare expenses 1,16,995 25% 4 Business Promotion Expenses 2,58,828 25% 5 Hall Rent for seminar 3,15,713 25% 6 Commission ceded expenses 1,47,63,560 100% 7 Legal, Accounting & Professional 91,742 25% charges 8 Conveyance & Travelling expenses 2,46,517 25% 5 ITA No.4589/Mum/2015 and Other appeals 9 Difference between the net profit shown in 2,46,26,916 capital account and return of income 10 Loans & Advances taken 3,50,000 11 Sundry Creditors 1,35,000 4,64,07,278 Totaling error by AO in additions made 4,00,000 (balancing figure) Total 4,68,07,278
4. By the impugned order, CIT(A) partly confirmed the action of the AO against which assessee is in further appeal before us.
5. Following common grounds have been taken by the assessee in the A.Y.2009-10 & 2011-12.
"1. On the facts and circumstances of the Appellant's case and in law the Ld CIT(A) erred in estimating the business income of the appellant @65% of the Gross Commission receipts.
2. The Appellant crave leaves to add, amend, alter, modify and or withdraw any of the above grounds of appeal, which are without prejudice to one another.
The appellant prays this Hon'ble Tribunal to quash the impugned order or delete the additions made by the A.O. and confirmed by the learned C1T (A)."
6. We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that the assessee was engaged in the business of selling membership on time sharing basis for use of hotel properties at various places as per various schemes launched by the said companies (products). Assessee was in 6 ITA No.4589/Mum/2015 and Other appeals receipt of commission on such sales. The commission income depends upon the tenure of association with the said companies and the points earned in each year by selling the time sharing products directly i.e. direct commission which ranges between 9.70% to 28.24% and through chain of sub-agents i.e. overriding commission which ranges between 3.25% to 0.11%. The said commission is received through banking channels.
7. From the record we also found that for the purpose of carrying out its business the assessee had to carry out regular meetings and seminars for appointing marketing associates, to educate the schemes of the companies, the commission and incentives that they would earn on sale of products, ways and methods of convincing the customers, marketing strategies and further appointment of marketing associates below them in order to multiply the business and expanding of business and in turn earn more commission by way of overriding commission. For own sale the assessee has to also conduct seminars and meeting of various group of customers and business groups and also door to door publicity to popularise the time sharing concept of holidaying amongst the people. For this purpose, expenses on travelling and conveyance, halls and hotels for conferences and seminars, mandap decoration expenses, business promotion, etc has to be incurred. The said expenses are incurred either directly by the assessee or through the agents to whom the expenses are reimbursed. It is the business necessity and exigency that the above mentioned expenses are to be incurred. However, the AO has disallowed 7 ITA No.4589/Mum/2015 and Other appeals the expenses so incurred as mentioned above, against which assessee approached to CIT(A) who estimated income at 65% of gross receipts. Assessee in is further appeal before us.
8. It was argued by learned AR that the assessee has provided the data to its former tax consultant who is an Income Tax Practitioner (ITP) and not a qualified Chartered Accountant. The tax consultant has compiled the data, carried out Tax Audit himself and has filed the return of Income up to AY 2011-12. The profit and loss account and balance sheets submitted at the time of assessment proceeding for the A.Y 2009- 10 has been prepared and submitted by the tax consultant and it has been stated by him that he used to prepare the same without preparing, any accounts. All the facts and figures mentioned in the balance sheet and profit and loss account have been arrived on his own calculation without maintaining proper books of accounts. As per learned AR, the assessee has been under a bona-fide belief that the income disclosed by the tax consultant was as per records, facts and circumstances of the case. The assessee is not aware of intricacies of the tax law. It is only on receipt of the assessment order passed u/s 143(3) for the AY 2011-12 and 2009-10 that the assessee came to know about the statutory requirements of maintaining detailed records and serious errors committed by the said ITP while filing her returns of income.
9. It was further submitted by learned AR that the records prepared by the ITP are not reliable. Even the Tax Audit Report issued is not by an 8 ITA No.4589/Mum/2015 and Other appeals authorised person and is not based on proper records maintained. In view of the above the books of account do not depict the correct and real income and hence the same need to be rejected. We found that the AO has passed very high pitched assessment without taking into account and considering the peculiarity of the nature of the business, the facts and circumstances of the case. Based on the assessment made the reassessment proceedings have been initiated for the 4 years i.e. AY 2007-08, 2008-09, 2010-11 and AY 2012-13. The assessee has redrafted the books of accounts from the A.Y 2007-08 to 2012-13 and accordingly offered the additional Income before the Hon'ble Settlement Commission Mumbai. The Hon'ble Settlement Commission has accepted the petition filed by the assessee vide order dated 01.04.2015 the copy of the same was placed on record. Thus the additions made by the A. O are based on earlier books of accounts, the same have been redrafted by the assessee and the petition so filed has been accepted by the settlement commission.
10. The AO made the following additions and disallowances in the A.Y.2009-10.
Sr. Additions/Disallowance by A.O. Amount (In Rs.) No.
1. Addition/ Disallowance of expenses 2,12,95,362
2. Reduction in the balance of capital account 2,46,26,916
3. Loans & advances taken 3,50,000
4. Sundry creditors 1,35,000
5. Other income 69,256 9 ITA No.4589/Mum/2015 and Other appeals
6. Unaccounted rent income 2,52,000 TOTAL 4,68,07,278
11. CIT(A) confirmed addition of Sr. No 3, 5 & 6 and no appeal has been preferred by the assessee. Further, CIT(A) deleted addition listed at serial nos. 2, 3 & 4 and no appeal has been preferred by the department.
12. With regard to estimation of income and Disallowance of expenses of Rs.2,12,95,362/- in the assessment order the AO observed that against the income earned from commission, the assessee has claimed various expenses such as commission ceded, salary, etc. During the assessment proceedings, it was explained before the AO that the assessee has not made any books of accounts and has not maintained proper supporting of expenses. In the assessment order, AO disallowed the entire expenses relating to commission and salaries amounting to Rs.2,02,04,925/- and 25% of other expenses amounting to Rs. 10,90,437/- aggregating to Rs.2,12,95,362/-.
13. Before CIT(A), it was submitted that the receipts of the assessee have not been doubted since the same are through cheque and have been duly disclosed in the returns filed. The only issue which remains to be adjudicated is the expenses which can be allowed against the said income.
14. It was also explained that the assessee was unaware of keeping the complete records in support of the expenses. However, incurring of 10 ITA No.4589/Mum/2015 and Other appeals the expenditure cannot be doubted in lieu of the above explanation. Therefore, it was submitted that the real income is required to be computed and determined. Further, it was submitted that in the case of Santosh Mhade i. e. assessee's brother, Ld. A.O based on the same set of facts has rejected the books of accounts and estimated income @50% of the receipts. Similarly, it was submitted that on identical facts in case of Anita Ghadge vide IT A no. 919/M/2013, Hon'ble ITAT has estimated a total disallowance of 40% on commission expenses and 30% of other expenses, thereby confirming net profit @ 37.2% of total receipts.
15. In the petition filed before the Settlement Commission, assessee had disclosed an average net profit of 65% on its entire receipts.
16. By the impugned order, CIT(A) held as under:-
The Ld. CIT(A) observed that the assessee had earned gross commission of Rs. 3,06,24,415/- and declared net income from the said activity of Rs. 59,97,496/-. The Ld. AO made disallowance of Rs. 2,14,30,3627- (Rs. 2,12,95,362 - disallowances of expenses & Rs. 1,35,000-sundry creditors) which directly relates to the business which is over and above the income declared from the said business activity thus making a very high pitched assessment.
Ld. CIT(A) held that it is admitted that the assessee had not maintained regular books of accounts and failed to produce the supporting of the expenses. C1T(A) held that it is therefore necessary to estimate the income of the assessee on just and fair basis. However, CIT(A) observed that the income assessed by AO was not logical, reasonable & on a higher side. Further, Ld. CIT(A) observed that there were 4 possible estimations available on similar facts which are as under:-
a. Income offered by the appellant @ 44.58% in its return of income filed u/s 147 for the assessment years filed before Settlement Commission, 11 ITA No.4589/Mum/2015 and Other appeals b. Income offered in the petition filed before Settlement Commission ranging from 11% to 68% thereby taking average income offered @ 65%.
c. Income assessed in the case of Shri Santosh Mhade by the Assessing Officer @ 50%.
d. Income confirmed by the IT AT in the case of Anita Ghadge @ 37.2% of the total receipts.
Considering the above possible view, Id. CIT(A) held that income offered in the Settlement Commission is the most appropriate view and accordingly, he held that income of the assessee was to be estimated @ 65% of its net receipts. The working of the same is as under:-
Business income at 65% works out to be
(Rs. 3,06,24,415 *65/100) 1,99,05,870
Less: Income already declared
_(59,97,496)
Addition confirmed 1,39,08,374
17. Before us, assessee is aggrieved by the action of CIT(A) for estimating income at 65%. After going through the records we observe that department also agrees that the income of the assessee needs to be estimated on a reasonable basis. It is submitted that the action of the CIT(A) in adopting the profit percentage offered in the Settlement Commission is not correct. It is submitted that it is natural for assesses to offer additional income before the Settlement Commission which is over and above the normal income, in order to be eligible for admission and eventually settle its case. The assesses are required to offer a higher income to show that they are willing to cooperate with the department and come clean off its affairs & settle the case. Thus, the income offered by an assessee in Settlement Commission is always on a higher side.
Therefore, mechanically adopting the percentage offered by the assessee 12 ITA No.4589/Mum/2015 and Other appeals before the Settlement Commission cannot be basis for estimating income in other years.
18. From the record we found that the assessee sells membership on time sharing basis for use of hotel properties at various places as per various schemes launched by the said companies (products). The assessee has to carry out regular meetings and seminars for appointing marketing associates, to educate the schemes of the companies, the commission and incentives that they would earn on sale of products, ways and methods of convincing the customers, marketing strategies and further appointment of marketing associates below them in order to multiply the business and expanding of business and in turn earn more commission by way of overriding commission. For its own sale the assessee has to also conduct seminars and meeting of various group of customers and business groups and also door to door publicity to popularise the time sharing concept of holidaying amongst the people. For the same huge expenses on travelling and conveyance, halls and hotels for conferences and seminars, mandap decoration expenses, business promotion, etc. has to be incurred. The said expenses are incurred either directly by the assessee or through the agents to whom the expenses are reimbursed. It is the business necessity and exigency that the above mentioned expenses are to be incurred. Furthermore, Hon'ble ITAT, Mumbai in the case of Shri Anita Ghadge, who was engaged with the same companies as a marketing agent, has estimated 13 ITA No.4589/Mum/2015 and Other appeals income @ 37.2%. As the facts and circumstances of the instant case are perimateria to the case of Anita Ghadge, we respectfully following the same and direct the AO to estimate income at 37.2% of the gross receipts, we direct accordingly.
Ajit Mhade (A.Y.2011-12)
21. The AO made the following additions and disallowances:
Sr. Additions/Disallowance by A.O. Amount(In Rs.) No.
1. Addition/ Disallowance of expenses 82,59,759
2. Sundry creditors 37,82,886
3. Reduction in the balance of capital account 4,64,41,355
4. Loans & advances taken 22,01,972
5. Other income 64,617
6. Savings Bank interest 90,072
7. Unaccounted rent income 4,20,000 TOTAL 6,12,60,661
22. CIT(A) confirmed addition of Sr. No 4-7 and assessee didn't prefer an appeal. Assessee is in appeal before us against disallowance of expenses and estimating of income. However, revenue is in further appeal before us against deletion of addition mentioned at Sl. No.2 & 3.
23. We have considered rival contentions. In the assessment order, AO observed that against the income earned from commission, the assessee has claimed various expenses such as commission ceded, salary, etc. 14 ITA No.4589/Mum/2015 and Other appeals During the assessment proceedings, it was explained before the AO that the assessee has not made any books of accounts and has not maintained proper supporting of expenses. In the assessment order, AO disallowed the entire expenses relating to commission and salaries amounting to Rs.79,32,312/- and 25% of other expenses amounting to Rs. 3,27,447/-, aggregating to total disallowance of Rs.82,59,759/-.
24. As the facts and circumstances in the case are same as in the case of Anita Ghadge who was engaged in the same companies as marketing agent, respectfully following the decision of Co-ordinate Bench, we direct the AO to estimate income of this assessee also at 37.2% of the gross receipts.
25. In the appeal filed by the department in Ground No.2, the department has disputed CIT(A)'s action in accepting additional evidence in the form of decision of Hon'ble Settlement Commission. In this regard, we observe that the petition filed before the Settlement Commission was very much part of the records of the AO and the AO has actively participated before the Settlement Commission. Therefore, the petition cannot be termed as additional evidence as alleged by the department and deserves to be rejected.
26. In Ground No.3, Department is aggrieved for reduction in Capital of Rs.4,64,41,355/-. In this regard, we observe that in the assessment proceedings, A.O. relied upon the incorrect balance sheet prepared by the ITP as explained above. A.O. compared the opening balance of the year 15 ITA No.4589/Mum/2015 and Other appeals i.e. 01.04.2010 of Rs.7,33,62,226/- with the closing balance at 31.03.2009 of Rs.2,69,20,871/-. He held that the difference of Rs.4,64,41,355/- is unexplained and deserves to be added as unexplained.
27. Before the CIT(A), it was explained that AO has erred in relying on the incorrect balance since it has not been prepared on the basis of correct books of accounts. It was further explained that assessee has seriously erred in comparing opening balance of 01.04.2010 with the closing balance of 31,03.2009 which leaves a period of one year in between which A.O. has failed to consider. CIT(A) in his order held that AO has failed to take cognizance of transition of FY 2009-10 and therefore, the addition made of Rs.4,64,41,355/- is incorrect.
28. We observe that finding of CIT(A) is correct and as per material placed on record, since exercise of comparison made by the AO is faulty. Accordingly, we confirm the action of CIT(A) in deleting addition of Rs.4,64,41,355/-.
29. Department is also aggrieved for deleting addition made on account of sundry creditors of Rs.37,82,886/-. In this regard, we observe that in the assessment proceedings, A.O. made an addition of outstanding sundry creditors amounting to Rs.37,82,886/- holding that the assessee failed to provide any details regarding the same. In the appellate proceedings, CIT(A) observed that the said sundry creditors are on 16 ITA No.4589/Mum/2015 and Other appeals account of outstanding expenses claimed in the P & L account. CIT(A) held that once the expenses are disallowed by the A.O., addition on account of sundry creditors will amount to double addition. Further, he held that once the income of the assessee has been estimated, no addition on account of sundry creditors is warranted. Accordingly, he deleted the addition of Rs,37,82,886/-.
30. We observe that finding of the CIT(A) is correct since once the estimation of income is made, no corresponding addition on account of outstanding expense can be made. Accordingly, we confirm the action of CIT(A) for deleting the addition of Rs.37,82,886/-.
31. In the result, appeal of the Revenue is dismissed whereas appeal of assessee is allowed in part.
Smt. Subhadra Babaji Mhade (A.Y. 2011-12)
32. Facts in the case of Smt. Subhadra Babaji Mhade is similar as discussed in the case of Ajit Mhade. For the year under consideration, the assessee filed its return of income on 24.08.2011 declaring total income at Rs.98,98,754/-. Thereafter assessment order u/s 143(3) was passed on 26.03.2014 assessing total income at Rs. 6,03,13,200/-. The AO made the following additions and disallowances:
Sr. Additions/Disallowance by A.O. Amount(In Rs.) No.
1. Addition/ Disallowance of expenses 2,94,63,887
2. Provisions & commission payable 84,37,122
3. Loan given to Sanjana Mhade 93,00,000 17 ITA No.4589/Mum/2015 and Other appeals
4. Amount paid to Santosh Mhade 30,00,000
5. Savings Bank interest 3,28,437 TOTAL 5,02,01,009
33. CIT(A) confirmed addition at Sr. No 5 and assessee didn't prefer an appeal for such confirmation.
34. With regard to estimation of income and disallowance of expenses, we observe that in the assessment order, AO observed that against the income earned from commission, the assessee has claimed various expenses such as commission ceded, salary, etc. During the assessment proceedings, it was explained before the AO that the assessee has not made any books of accounts and has not maintained proper supporting of expenses. In the assessment order, AO disallowed the entire expenses relating to commission and salaries amounting to Rs.2,75,09,359/- and 25% of other expenses amounting to Rs. 19,54,528/- aggregating to total disallowance of Rs.2,94,63,887/-
35. Considering the facts discussed in the case of Ajit Mhade, the CIT(A) estimated income at 65% of the net receipt.
36. The working of the same is as under:-
Business income at 65% works out to be (Rs.4,52,22,640 * 65/100) 2,93,94,716 Less: Income already declared 97,31,171)
37. We have considered rival contentions and carefully gone through the orders of authorities below. From the record we found that the 18 ITA No.4589/Mum/2015 and Other appeals assessee got associated with company Royal Twinkle Start Club Limited, Twinkle Environtech Limited, & Citrus Check Inns Limited as marketing associate. The assessee also became marketing associate and presently is Chief Marketing Advisor of the three companies. The above companies are engaged in the hospitality industry and are \having hotels at various places. In order to enhance its business, the said companies sell membership for holidays on time share basis. The membership is granted through company appointed marketing associate. The main job as marketing associate is to make members by selling time share, for which services the marketing associate gets commission from the company. The marketing associate in order to enhance its own business builds chain network by engaging various persons as sub-agents, who further appoint sub-agents, and in that process a wide chain of web net of marketing associates is developed. The commission rate increases depending upon the tenure of association with the company and development of the web net. The marketing associate also gets overriding commission for sales made by sub-agents appointed under him. The assessee, along with other family members, developed her own web net from year to year. The direct commission ranges between 9.70% to 28.24%, and overriding commission through chain of sub-agents ranges between 3.25% to 0.11%, and the commission is received through banking channel. The assessee has to carry out regular meetings and seminars for appointing marketing associates, to educate the schemes of the companies, the 19 ITA No.4589/Mum/2015 and Other appeals commission and incentives that they would earn on sale of products, ways; and methods of convincing the customers, marketing strategies and further appointment of marketing associates below them in order to multiply the business. For own sale, the assessee has to conduct seminars and meetings of various group of customers and business groups and also door to door publicity to popularize the time sharing concept of holiday amongst the people. For the same, huge expenses on travelling and conveyance, halls and hotels for conferences and seminars, mandap decoration expenses, business promotion etc. has to be incurred, either directly or through the sub-agents to whom the expenses are reimbursed.
The assessee had provided the data to its former tax consultant (ITP) who filed the return without maintaining proper books of accounts. The assessee came to know the serious errors committed by the ITP only on receipt of assessment order passed u/s 143(3) for A.Y. 2009-10 & 2011-
12. The records prepared by the ITP are not reliable, and even the Tax Audit Report issued is not by an authorized person and is not based on proper records maintained, hence the books of accounts do not depict the correct and real income and hence the same need to be rejected. The assessee submitted that the real income is to be compute and determined and the same is to be assessed. The AO has passed very high pitch assessment without taking into account and considering the peculiarity of the nature of business, and the facts and circumstances of the case. The assessee has recasted the books of accounts from A.Y. 2007-08 to A.Y. 20 ITA No.4589/Mum/2015 and Other appeals 2012-13 and accordingly offered the additional income before the Settlement Commission, Mumbai. The Hon'ble Settlement Commission has accepted the petition filed by the assessee vide order dated 01.04.2015. However, the CIT(A) did not accept assessee's contention and observed that it cannot be denied that the assessee in order to perform its duty has to organize regular meetings and seminars for appointing marketing associates, to educate the schemes of the companies, the commission and incentives that they would earn on sale of products, ways and methods of convincing- the customers, marketing strategies and further appointment of marketing associates below them in order to multiply the business and expanding of business and in turn earn more commission by way of overriding commission. Facts of Ajit Babaji Mhade as discussed above, following the same reasoning, we direct the AO to estimate income at 37.2% of gross receipts.
38. Further, department has raised a ground through ground no. 2, disputing the action of the CIT(A) in admitting as evidence the petition filed by the assessee before the Hon'ble Settlement Commission in contravention of rule 46A of the IT Act.
39. As per our considered view, the petition filed before the Settlement Commission was very much part of the records of the AO and he has actively participated before the Settlement Commission. Therefore, the petition cannot be termed as additional evidence as alleged by the department and deserves to be rejected.
21ITA No.4589/Mum/2015 and Other appeals
40. In the A.Y.2011-12, the Revenue is aggrieved for deleting addition of Rs. 84,37,122/- on account of provisions and commission payable. From the record we found that the assessee had shown provisions amounting to Rs. 8,08,250/- and commission payable amounting to Rs. 76,28,872/- In the assessment proceedings, A.O. made an addition of the provisions & commission payable amounting to Rs.84,37,122/- holding that the assessee failed to provide completed details of the liabilities. In the appellate proceedings, CIT(A) observed that the said liabilities are on account of outstanding expenses claimed in the P & L account. Accordingly, the CIT(A) held that once the expenses are disallowed by the A.O., addition on account of sundry creditors will amount to double addition. Further, he held that once the income of the assessee has been estimated, no addition on account of sundry creditors is warranted. Accordingly, he deleted the addition of Rs.84,37,122/-.
41. We are in agreement with the finding of CIT(A) to the effect that once the estimation of income is made, no corresponding addition on account of outstanding expenses can be made. Accordingly Ground taken by the Revenue is dismissed.
42. Revenue is also aggrieved for deleting the addition made on account of payment made to Santosh Mhade amounting to Rs.30 lakhs. In this regard, we observe that in the assessment proceedings, the Ld. A.O observed that the assessee had paid an amount of Rs. 30,00,000/- to Santosh Mhade which is not reflected in the balance sheet of the 22 ITA No.4589/Mum/2015 and Other appeals assessee. Further, the Ld. AO stated that there was no commission paid by the assessee as per the statement of commission submitted by the assessee and therefore made an addition of Rs. 30,00,000/-Before the CIT(A), it was explained that AO has erred in relying on the incorrect balance sheet since it has not been prepared on the basis of correct books of accounts.
43. Before the Id. CIT(A), it was submitted that while filing the original return of income/ the assessee had provided the data to its former tax consultant who is an Income Tax Practitioner (ITP) and not a qualified Chartered Accountant. The tax consultant has compiled the data, carried out Tax Audit himself and has filed the return of Income up to AY. 2009-
10.
44. From the record we found that the profit and loss account and balance sheets submitted at the time of assessment proceeding for the A.Y 2009-10 has been prepared and submitted by the ITP and it has been stated by him that he used to prepare the same without preparing any accounts. All the facts and figures mentioned in the balance sheet and profit and loss account have been arrived on his own calculation without maintaining proper books of accounts. It was thus explained that the records prepared by the ITP are not reliable. Even the Tax Audit Report issued is not by an authorised person and is not based on proper records maintained. In view of the above the books of account do not depict the correct and real income and hence the same need to be rejected. 23 ITA No.4589/Mum/2015 and Other appeals
45. From the record we also found that after the closure of the assessment proceedings for the current year, assessee has redrafted the books of accounts for the assessment years starting from AY 2007-08 to 2012-13. For the assessment years in which the assessment proceedings were pending i.e. AY 2007-08, 2008-09, 2010-11 & 2012-13, the assessee has approached Hon'ble Income Tax Settlement Commission and offered the income on the basis of redrafted books of accounts. The said petition was admitted by order u/s 245D(1) of the Act dated 01.04.2015 of the Commission. Accordingly, there is no infirmity in the action of CIT(A) for deleting addition made on account of payment made to Santosh Mhade amounting to Rs.30 lakhs.
46. In the result, appeal of the Revenue is dismissed whereas appeal of assessee is allowed in part.
49. Department is also aggrieved for deleting addition of Rs.93 lakhs on account of loan given to Smt. Sanjana Mhade.
50. We have considered rival contentions and found from record that based on the information received from ITO17(3)(4), the Ld A.O. made an addition of Rs. 93,00,000/- on account of loan given to Sanjana Mhade holding that the same was not being reflected in the balance sheet of the assessee. Before the CIT(A), it was explained that AO has erred in relying on the incorrect balance sheet since it has not been prepared on the basis of correct books of accounts. Therefore, addition on the said basis cannot be made.
24ITA No.4589/Mum/2015 and Other appeals
51. From the record we found that after the closure of the assessment proceedings for the current year, assessee has redrafted the books of accounts for the assessment years starting from AY 2007-08 to 2012-13. For the assessment years in which the assessment proceedings were pending i.e. AY 2007-08, 2008-09, 2010-11 & 2012-13, the assessee has approached Hon'ble Income Tax Settlement Commission and offered the income on the basis of redrafted books of accounts. The said petition was admitted by order u/s 245D(1) of the Act dated 01.04.2015 of the Commission. CIT(A) in his order held that the Ld. AO failed to issue notice u/s 133(6) to the counter party. Further, the CIT(A) held that loan given by the assessee not reflecting in the balance sheet cannot be considered as income of the assessee and therefore, the addition made of Rs. 93,00,000/- is incorrect.
52. As per our considered view finding of the CIT(A) is correct since the AO has mechanically made the addition without verifying the information received by him. In any case, that the said loan is duly taken care of, in the balance sheet prepared and accepted by the Settlement Commission. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the addition of Rs.93 lakhs.
53. Revenue is also aggrieved for deleting addition of Rs.30 lakhs. The addition so made by the AO has been deleted by CIT(A) after observing that this transaction is reflected in the bank statement of the assessee and that payment made by the assessee cannot be considered as the 25 ITA No.4589/Mum/2015 and Other appeals income of the assessee and hence the addition of Rs. 30,00,000/- is not justifiable.
54. As per our considered view, finding of the CIT(A) is correct since the amount debited in the bank statement cannot be held as income. In any case, the said loan is duly taken care of, in the balance sheet prepared and accepted by the Settlement Commission. Accordingly, we do not find any infirmity in the order of CIT(A).
55. In the result, appeal of the Revenue is dismissed whereas appeal of assessee is allowed in part.
Smt. Sanjana Santosh Mhade (A.Y.2011-12)
56. In the assessment order, AO observed that against the income earned from commission, the assessee has claimed various expenses such as commission ceded, salary, etc. During the assessment proceedings, it was explained before the AO that the assessee has not made any books of accounts and has not maintained proper supporting of expenses. In the assessment order, AO disallowed the entire expenses relating to commission and salaries amounting to Rs.2,09,69,895/- and 25% of other expenses amounting to Rs. 10,59,388/-aggregating to total disallowance of Rs.2,20,29,283/-.
57. The AO made the following additions and disallowances:
Sr. No. Additions/Disallowance by A.O. Amount(In Rs.)
1. Addition /Disallowance of expenses 2,20,29,283
2. Unexplained expenditure 1,67,53,372 26 ITA No.4589/Mum/2015 and Other appeals
3. Loans & advances taken 5,31,19,868
4. Provisions & commission payable 57,00,000
5. Interest u/s 244 A 1,75,648
6. Savings Bank interest 3,80,390 TOTAL 9,76,02,523
58. CIT(A) confirmed addition of Sr. No 5 & 6 and assessee didn't prefer an appeal.
59. Before Id. CIT(A), it was submitted that the receipts of the assessee have not been doubted since the same are through cheque and have been duly disclosed in the returns filed. The only issue which remains to be adjudicated is the expenses which can be allowed against the said income. It was explained that the assessee sells membership on time sharing basis for use of hotel properties at various places as per various schemes launched by the said companies (products). The assessee has to carry out regular meetings and seminars for appointing marketing associates, to educate the schemes of the companies, the commission and incentives that they would earn on sale of products, ways and methods of convincing the customers, marketing strategies and further appointment of marketing associates below them in order to multiply the business and expanding of business and in turn earn more commission by way of overriding commission. For its own sale the assessee has to also conduct seminars and meeting of various group of 27 ITA No.4589/Mum/2015 and Other appeals customers and business groups and also door to door publicity to popularise the time sharing concept of holidaying amongst the people. For the same huge expenses on travelling and conveyance, halls and hotels for conferences and seminars, mandap decoration expenses, business promotion, etc. has to be incurred. The said expenses are incurred cither directly by the assessee or through the agents to whom the expenses are reimbursed. It is the business necessity and exigency that the above mentioned expenses are to be incurred.
60. The CIT(A) estimated net profit at 65% of gross receipts. The working of the same is as under:-
Business income at 65% works out to be (Rs.2,67,19,463 *65/100) 1,73,67,651/-
Less: Income already declared (14,81,677) Addition confirmed 1,58,85,974/-
61. We have considered rival contentions and carefully gone through the orders of lower authorities. As the facts and circumstances are same as discussed hereinabove in the case of Ajit Babaji Mhade, we direct the AO to estimate income at 37.2% of the gross receipts.
62. Ground No.2 of department is with regard to admitting Settlement Commission order as additional evidence, has already been discussed hereinabove and same is not in contravention of Rule 46A.
63. In the Ground No.3, department is aggrieved for deletion of addition of Rs.5,31,19,868/- on account of loans and advances. 28 ITA No.4589/Mum/2015 and Other appeals
64. We have considered rival contentions and found from record that the assessee had shown Loans & Advances amounting of Rs.
5,31,19,868/- in the Balance sheet prepared by the ITP. The Ld. AO made an addition of the loans and advances taken by the assessee from various parties since no evidence was submitted in respect of the loans taken by the assessee. Before the CIT(A), it was explained that AO has erred in relying on the incorrect balance sheet since it has not been prepared on the basis of correct books of accounts. Therefore, addition on the said basis cannot be made.
65. CIT(A) in his order held that no discrepancies were found in the balances after going through the tallied balance sheet of the assessee and hence the addition made is incorrect. It was further held that the redrafted books have been admitted by the Settlement Commission and no discrepancy has been pointed out. Further, the actual loans during the year are duly explained. Accordingly, he deleted the addition made on account of loans taken.
66. The department is in appeal against the above deletion. We have considered rival contentions and found from record that the balance sheet prepared by ITP was incorrect since the same was not supported by proper books of accounts. The assessee has subsequently made proper books of accounts which has been submitted before the Settlement Commission, Such books had been accepted by order of Settlement Commission u/s 245D(1) which was submitted before Ld. CIT(A). Further, 29 ITA No.4589/Mum/2015 and Other appeals it is pertinent to mention that on the basis of said books of accounts, Settlement Commission has finally accepted the income offered by the assessee and final order u/s 245D(4) has been passed dated 29.09.2016. The copy of the said order is also placed on record. Further, with respect to loans taken during the year, the same was duly explained and a clear finding has been given by the CIT(A). Accordingly, we do not find any merit in the ground raised by the Revenue.
67. The department is also aggrieved for deleting addition of Rs.57 lakhs on account of provisions and commission payable. In this regard we observe that the assessee had shown provisions amounting to Rs. 7,00,000/- and commission SUV payable amounting to Rs. 50,00,000/- In the assessment proceedings, A.O. made an addition of the provisions & commission payable amounting to Rs.57,00,000/- holding that the assessee failed to provide complete details of the liabilities. In the appellate proceedings, CIT(A) observed that the said liabilities are on account of outstanding expenses claimed in the P & L account. CIT(A) held that once the expenses are disallowed by the A.O., addition on account of sundry creditors will amount to double addition. Further, he held that once the income of the assessee has been estimated, no addition on account of sundry creditors is warranted. Accordingly, he deleted the addition of Rs.57,00,000/-.
30ITA No.4589/Mum/2015 and Other appeals
68. We have considered rival contentions and found that the finding of the CIT(A) is correct since once the estimation of income is made, no corresponding addition on account of outstanding expense can be made.
69. Department is also aggrieved for deleting addition of Rs.1,67,53,372/- on account of unexplained expenditure. In this regard, AO observed that the assessee had earned gross commission of Rs. 2,67,19,463/- and declared net income from the said activity of Rs. 14,81,677/- after debiting expenses of Rs. 2,52,37,784/-. The Ld. AO observed that the expenses incurred were in cash and that the assessee had shown sundry creditors amounting to Rs. 57,00,000/-. In the assessment proceedings, A.O. relied upon the incorrect balance sheet prepared by the ITP as explained above. A.O. compared the total balance of cash available during the year of Rs.27,84,412/- with the cash expenses made amounting to Rs.l,95,37,784/-(difference between expenses debited to P&L amounting to 2,52,37,784/- and sundry creditors amounting to Rs. 57,00,000/-) and held that the difference of Rs.1,67,53,372/- is unexplained and since the source remained unexplained, deserves to be added as unexplained expenditure. Before the CIT(A), it was explained that AO has erred in relying on the incorrect balance sheet since it has not been prepared on the basis of correct books of accounts. Further, during the appellate proceedings, assessee explained that it has prepared correct books of account which has been admitted by the Settlement Commission. As per the said books of 31 ITA No.4589/Mum/2015 and Other appeals accounts, there is no shortage of cash and accordingly, expenses are duly explained.
70. By the impugned order, CIT(A) deleted the addition after observing that AO has relied upon the incorrect balance sheet and that tallied balance sheet was submitted by the assessee explaining the source of cash expenditure and therefore, the addition made of Rs.1,67,53,372/- is incorrect. He thus held that the source of the cash was explained. We do not find any infirmity in the order of CIT(A). From the record we found that the balance sheet prepared by ITP was incorrect since the same was not supported by proper books of accounts. The assessee has subsequently made proper books of accounts which has been submitted before the Settlement Commission. Such books had been accepted by order u/s 245D(1) which was submitted before Ld. CIT(A). Further, it is pertinent to mention that on the basis of said books of accounts, Settlement Commission has finally accepted the income offered by the assessee and final order u/s 245D(4) has been passed dated 29.09.2016. Therefore, once the said books are considered, there is no shortage of cash and expenses are duly explained. Accordingly, there is no infirmity in the order of CIT(A) for deleting the alleged unexplained expenditure of Rs.1,67,53,372/-.
71. In the result appeal of the assessee is allowed in part whereas appeal of Revenue is dismissed.
32ITA No.4589/Mum/2015 and Other appeals
72. In the result appeals of the assessee are allowed in part whereas appeals of Revenue are dismissed.
Order pronounced in the open court on this 30/11/2018
Sd/- Sd/-
(AMARJIT SINGH) (R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated 30/11/2018
Karuna Sr.PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
DR, ITAT, Mumbai
5.
BY ORDER,
6. Guard file.
सत्यापित प्रतत //True Copy//
(Asstt. Registrar)
ITAT, Mumbai