Income Tax Appellate Tribunal - Jaipur
Vikram Singh , Jaipur vs Assessee on 6 November, 2015
1 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur
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IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI R.P. TOLANI, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 349/JP/2012
fu/kZkj.k o"kZ@Assessment Year : 2007-08
Shri Vikram Singh cuke The Addl. CIT
Prop. Vikram Singh Associates Vs. Range -3
1-Thaltara, Sirsi Road, Khatipura, Jaipur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFPPSS 1181 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 432/JP/2012
fu/kZkj.k o"kZ@Assessment Year : 2007-08
The ACIT cuke Shri Vikram Singh
Circle- 3 Vs. Prop. Vikram Singh Associates
Jaipur 1-Thaltara, Sirsi Road, Khatipura, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFPPSS 1181 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajeev Sogani, CAa
jktLo dh vksj ls@ Revenue by : Shri Raj Mehra , JIT- DR
lquokbZ dh rkjh[k@ Date of Hearing : 06/10/2015
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 06/11/2015
vkns'k@ ORDER
PER VIKRAM SINGH YADAV:-
These are the cross appeals against the order of the ld. CIT(A) -1, Jaipur dated 10-02-2012 for the assessment years 2007-08.2 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur
2.1 The grounds raised by the assessee are as under-
''1. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the AO in rejecting the books of account of the assessee by invoking the provisions of Section 145(3) of the Act and thereafter confirming, in part, the trading addition of Rs. 5,92,194 against the total addition of Rs. 11,79,652/- made by the AO. The action of the ld. CIT(A) is illegal , unjustified, arbitrary and against the facts of the case. Relief may please be granted by accepting the book results and deleting the trading addition of Rs. 5,92,194/-
2. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming , in part, the action of the AO in making the disallowance of Rs. 1,67,919/- of the interest expenses out of the total disallowance of Rs. 5,41,778/- made by the AO. The action of the ld. CIT(A) is illegal , unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the said disallowance of Rs. 1,67,919/-
3. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the AO in not allowing deduction u/s 80IB on the alleged duty draw back and DEPB of Rs. 1,05,102/-. The action of the ld. CIT(A) is illegal , unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the deduction u/s 80IB of Rs. 1,05,102/- on export incentive.
3.1 The grounds raised by the Revenue are as under:-
''Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) is justified in"
(i) Reduction the trading addition of Rs. 11,79,652/-
to Rs. 5,92,194/- by applying gross profit rate of 40.40% against applied gross profit rate of 42.36% by the AO on total 3 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur sales of Rs. 302 lacs by invoking the provision of Section 145(3) of the Act.
(ii) Deleting the addition of Rs. 61,149/- made by the AO on account of varies expenses
(iii) Reduction the addition of Rs. 5,41,778/- to Rs. 1,67,919/- made by the AO on account of disallowance of interest.'' 4.1 During the course of hearing, the ld. AR of the assessee has not pressed the matter of rejection of books of account 145(3) of the Act as mentioned in Ground No. 1 and has also not pressed Ground No.3 relating to allowance of deduction u/s 80IB. Accordingly, Ground No. 1 of the assessee (in part) in respect of rejection of books of account and Ground No. 3 of the assessee are dismissed being not pressed. 5.1 Now we take up the ground 1 of the assessee relating to trading addition of Rs. 5,92,194 and Ground No. 1 of the Revenue relating to reduction of trading addition from Rs. 11,79,652/- to Rs. 5,92,194/- by applying the gross profit rate of 40.40% against applied gross profit rate of 42.36% by the AO on total sales of Rs. 302 lacs by invoking the provision of Section 145(3)of the Act.
5.2 Brief facts of the case are that the assessee is engaged in the business of manufacturing and export of all type of artistic handicrafts items mainly 4 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur made of the wood. The return of income was filed by the assessee on 30-10- 2007 through E-filing declaring total income of Rs. 612,73,640/- The case of the assessee was selected for scrutiny u/s 143(2) of the Act. On scrutiny of the details/ informations produced by the assessee the AO observed that the business results shown by the assessee in comparison to immediately last two years are as under:-
Asstt.Year Turnover Gross profit
(Rs. in lacs) rate
2007-08 302.00 38.45%
2006-07 375.70 40.34%
2005-06 472.20 44.39%
The AO from the trading results observed that the gross profit rate has fallen down from 40.34% to 38.45% and the AO asked for the reasons from the assessee for fall in gross profit rate. The assessee submitted that the fall in gross profit rate was due to not getting the orders from the foreign buyers and the assessee had to introduce new items to sustain in the market which affected the profits margins of the assessee. Further, the assessee submitted that there was escalation of input costs like raw material, labour etc.. Considering the submission of the assessee and documents available on record at the time of assessment proceedings, the AO observed the defects in the books of account of the assessee and therefore, he applied the provision 5 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur of Section 145(3) of the Act and the AO took the mean of last two years of gross profit rate and applied the gross profit rate of 42.36% against the gross profit rate of 38.45% shown by the assessee which resulted in trading addition of Rs. 11,79,652/-.
5.3 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who confirmed the rejection of books of account u/s 145(3) and also estimated the gross profit rate of 40.40% which resulted into trading addition of Rs. 5,92,194/- by following observations.
''4.3 ....
Regarding estimation of income, I have carefully perused the submission of the appellant; there is possibility that the profit margins may have been affected by the rise in cost of basic raw material and the fact that a new range of products were introduced. But at the same time, a comparative analysis has not been given regarding how these new products were received in the market and whether the profit margins on these new products were better. Therefore, reliance is placed on the findings of Gotan Lime Khanij Udyog, 256 ITR 243 (Raj.) to hold that the past history is the best method for estimating gross profit rate of the appellant. From the comparative gross profit chart submitted by the appellant, it is seen that the assessee had declared gross profit rate of 40.34% on total turnover of Rs. 375.70 lacs in the immediately preceding assessment year and has shown gross profit rate of 38.45% on the total turnover of Rs. 302.00 lacs during this assessment year. The gross profit rate of 40.40% is estimated which resulted in a confirmation of trading addition of Rs. 5,92,194/-. 6 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur 5.4 The ld. AR of the assessee supported the order of the ld. CIT(A) for granting relief to the assessee but prayed for deletion of addition confirmed by him amounting to Rs. 5,92,194/- and reiterated the submission made before the ld. CIT(A).
5.5 The ld. DR supported the order of the AO.
5.6 We have heard the rival contentions and perused the material on record. The Ld AR has not pressed the ground relating to rejection of books of account. Therefore, the limited issue for consideration is what should the reasonable basis for estimation of G.P. rate and whether estimation done by the lower authorities call for any interference. The A.O. has applied average G.P. rate of last two years @ 42.36%. The ld. CIT(A) by following the G.P. rate of last year has brought the same down and applied G.P. rate of 40.40%. Apparently, both the AO as well as ld. CIT(A) are guided by assessee's past history. At the same time, it is observed from the order of the ld. CIT(A) that he has considered the unusual business conditions prevalent during the subject matter in terms of profit margins getting effected by increase in cost of raw material, introduction of new products in the market and fact that some of the assessee's customers did not place orders during the year resulting in fall in turnover from Rs. 375.70 lacs to Rs. 302 lacs during the year. In our view, the view of the ld. CIT(A) is fair and reasonable which 7 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur has factored in the business environment prevalent during the year and at the same guided by assessee's past history, applied gross profit rate of 40.40% as against 42.36% applied by the AO. In light of above, we do not see any infirmity in the order of the ld. CIT(A) which calls for our interference. Thus Ground No. 1 of the assessee as well as Ground No. 1 of the Revenue are dismissed.
6.1 Now we take up Ground No. 2 of the assessee and the Ground No. 3 of the Revenue wherein the ld. CIT(A) has reduced the disallowance of interest expenses from Rs. 5,41,778/- to Rs. 1,67,919/- 6.2 Brief facts relevant for this ground are that the AO during the course of assessment proceedings observed that the assessee had debited amount of Rs. 5,41,778/- in the profit and loss account on secured loans taken by him. The AO held that interest bearing funds were utilized for the purpose of investments in shares and Mutual Funds to earn exempt income. Therefore, interest paid on these borrowings could not be allowed to be claimed as an expenses. The AO further observed at page 11 of his assessment order that the assessee had advanced interest free personal loans of Rs. 70,44,460/- to 12 parties during the assessment year. The AO observed that neither the business expediency was established for such lending by the assessee nor the assessee was able to furnish any evidence that his own surplus capital or 8 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur reserves were utilized for the purpose of the aforementioned interest free advances. Thus the AO disallowed interest of Rs. 5,41,778/-. 6.3 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who after considering the submissions of the assessee reduced the disallowance of interest to Rs. 1,67,919/- by following observations.
''6.3 I have carefully perused the order of the AO and the submissions of the A.R. On verification of the facts, it is seen that the appellant has not used interest bearing funds from his business account for investment in Mutual Fund in his personal account. It was also verified that during the assessment year only Rs. 27,70,262/- were advanced as interest free loans to different parties out of which Rs. 16,44,654/- were received back by the appellant during the year itself. Since the appellant had admitted that it was not possible to verify the nexus between the interest free advances with the funds/ cash reserves available with him, the facts of the case of the appellant come within the purview of the order of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. (2006) 156 Taxman (P&H) 257/ The Hon'ble Punjab & Haryana High Court has held that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concern without interest is on the assessee and not on the Revenue. Since the appellant has not been ale to discharge his onus, benefit cannot be given to him of the available of capital reserves in his account. Moreover, the appellant has also not been able to establish that the interest free funds advanced were for commercial expediency of the business. Therefore, the findings of the Apex Court in the case of S.A. Builders vs. CIT (2007) 158 Taxman 74 (SC), is also applicable to the facts of the case of the appellant. Interest @15% on net interest free advances of Rs. 1,19,460/- made during this year is to be disallowed. Therefore, the impugned disallowance of Rs. 5,41,778/- is reduced to Rs. 1,67,919/-.'' 9 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur 6.4 During the course of hearing, the ld. AR of the assessee relied on ITAT Coordinate Bench decision dated 31-07-2008 in the case of Satish Katta vs. ACIT (ITA No. 370/JP/2008) for the assessment year 2004-05 praying therein to quash the disallowance partly confirmed by the ld. CIT(A). The observations of this Coordinate Bench in the case of Satish Katta vs. ACIT (supra) is as under:-
''39. We have heard the rival contentions and perused the facts of the case. At the outset, we are convinced with the arguments of the ld. AR that the assessee is having the opening capital of Rs.8,00,84,031/- as on 1-4-2003 (PB
31). The assessee was having the interest free funds available with him. The assessee is a Proprietorship concern and had the assessee withdrawn the surplus capital and then the same would have been invested and declared in the personal balance sheet , there would not have been any allegation on the assessee for using the interest bearing funds of the business. This vital fact has been ignored by both the authorities below. The assessee is having the surplus capital and any investment made out of own capital of the assessee , cannot be a subject for disallowance of interest paid to the banks. The cases relied upon by the authorities below are no help to the Revenue as submitted by the ld. AR . The cases relied upon by Mr. Rajeev Sogani in the case of Radico Khaitan Ltd., Prem Heavy Engineering Works (P) Ltd., Britannia Industries Ltd., supra support our views and therefore, no disallowance on account of interest can be made.
Therefore, the disallowance confirmed by the ld. CIT(A) is directed to be deleted. Thus Ground No. 4 of the assessee is allowed.
Further the ld. AR of the assessee relied on Hon'ble Rajasthan High Court decision in the case of CIT vs. Vijay Solvex Ltd. (2015) 59 Taxmann.com 294 (Raj.) wherein the relevant portion to this case is as under:-
''2. The appeal was admitted on the following question of law:-
''Whether under the facts and circumstances of the case and in law the findings o the Tribunals are perverse 10 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur on account of deletion of addition of Rs. 5,80,215/- confirmed by the CIT (A) towards disallowance of interest as interest free advances were given to its sister concerns?'' .....
16. In view of the authoritative pronouncement of the Apex Court and other judgement referred supra, in our view, the assessee admittedly had its own funds, as referred to earlier, and admittedly such funds/ reserves being substantially higher than, even otherwise, the advances to the debtors, no notional interest or hypothetical interest could have been disallowed on such facts. The Revenue has failed to prove nexus. In our view, the Tribunal has correctly appreciated the facts and law. 6.5 The ld. DR relied on the order of the AO.
6.6 We have heard the rival contentions and perused the material available on record. Firstly, regarding investment in shares and Mutual Funds, the ld. AR submitted that such investments have been made out of the personal saving bank account of the assessee and the assessee has not utilized any funds from his business account for the investment in such shares and Mutual Funds. In this regard, the ld. CIT(A) has given finding that the assessee has not used interest borrowing funds from his business account for investment in shares and Mutual Funds and said investments are made from his personal account. The ld. DR has not controverted the said findings of the ld. CIT(A). Hence, we do not see any reason to interfere with the said findings of the ld. CIT(A).11 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur 6.6.1 Now coming to the issue of giving interest free loans to various parties amounting to Rs. 27,70,762, the assessee has submitted that the said advances were also in the nature of personal advances and the assessee had sufficient share capital out of which those advances have been made. In this regard, the ld. CIT(A) has held that out of Rs. 27,70,262/- , Rs. 16,44,654/- have been received back by the assessee during the year. Further, the assessee has failed to establish the nexus between interest free advances with the funds/ cash reserves available with the assessee and in light of that, interest @ 15% on net interest free advances of Rs. 11,19,460/- made during the year was disallowed. In this regard, it is noted from the financial statements on record that the assessee had opening balance in the capital account amounting to Rs. 2,44,55,398/- and against that, the advance of Rs. 27,70,262/-is made by the assessee during the year. Secondly, it is for the Revenue to prove that interest free advances are out of borrowed funds and not from own funds which Revenue has failed to prove in the instant case. Thirdly, this Bench has consistently taken a view that where the assessee has borrowed funds as well as own funds, there would be a presumption that the amount given on loan are out of his own funds and not from the borrowed funds. It is further noted that Hon'ble Rajasthan High Court in the case of CIT vs. Vijay Solvex Ltd. (supra) has taken a view that if the assessee has 12 ITA No.349/JP/2012 Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur own sufficient funds and the Revenue is unable to prove the nexus between the borrowed funds and the advances given by the assessee, notional interest cannot be disallowed in the hands of the assessee which squarely applies in the instant case. In the light of above and respectfully following the decision of Hon'ble High Court in the case of CIT vs. Vijay Solvex Ltd. (supra), we are of the considered view that there is no basis for disallowance of interest amounting to Rs. 5,41,778/- in the hands of the assessee. Thus Ground No. 2 of the assessee is allowed and Ground No. 3 of the Revenue is dismissed. 7.1 The Ground No. 2 of the Revenue is regarding deletion of addition of Rs. 61,149/- made by the AO on account of various expenses. 7.2 Brief facts of the case are that the assessee claimed various expenses in his books of account. However, on verification of the records, the AO observed that the assessee claimed the expense under the heard - telephone (Rs., 1,03,227/-, conveyance (Rs.82,081/-), repairs and maintenance expenses and depreciation on car (Rs.73,257/-), staff welfare expenses (Rs. 2,10,902/-), traveling expense (Rs. 97,158/-) and foreign expenses (Rs. 93,184/-/ The AO noticed that the assessee had claimed some of the expenses on the basis of self made vouchers and without any supporting evidence. The AO therefore, disallowed 10% of the expenses resulting in a disallowance of Rs. 61,149/- out of total claim of Rs. 6,59,809/-. 13 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur 7.3 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who deleted the disallowance of Rs. 61,149/- made by the AO by following observations.
''5.3 I have carefully perused the order of the AO and the submissions of the A.R. The AO made an ad hoc disallowance @ 10% under the heads - telephone expenses of Rs. 10,323/-, conveyance, repairs and maintenance and depreciation expenses of Rs. 19,736/-, staff welfare expenses of Rs. 21,090/- and traveling expenses of Rs. 10,000/- claimed in the profit and loss account by the assessee. The AO did not bring on record any specific evidence that these expenses were inflated, bogus or were for non-business purposes, the lumpsum 10% disallowance made by the AO under these heads appears to be unjustified. Therefore, the impugned disallowance of Rs. 61,149/- claimed under various heads in the profit and loss account is deleted.'' 7.4 The ld. AR relied on the order of the ld. CIT(A). 7.5 On the other hand, the ld. DR relied on the order of the AO. 7.6 We have heard the rival contentions and perused the materials available on record. We find no infirmity in the order of the ld. CIT(A) in deleting the adhoc disallowance. Thus Ground No. 2 of the Revenue is dismissed.
14 ITA No.349/JP/2012
Shri Vikram Singh vs. Addl. CIT, Range-3, Jaipur 8.0 In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.
Order pronounced in the open court on 06 /11/2015.
Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼ foØe flag ;kno ½ (R.P.Tolani) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@ Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 06 /11/ 2015 *Mishra
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shri Vikram Singh Jaipur
2. izR;FkhZ@ The Respondent- The Addl. CIT, Range-3/ ACIT, Circle- 3, Jaipur
3. vk;dj vk;qDr¼vihy½@ CIT(A).
4. vk;dj vk;qDr@ CIT,
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.349/JP/2012) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar