Income Tax Appellate Tribunal - Jaipur
Shree Jee Jewellers, Jaipur vs Ito, Jaipur on 27 January, 2020
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,"B" JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA. No. 393/JP/2017
fu/kZkj.k o"kZ@Assessment Years : 2013-14
Shree Jee Jewellers cuke The ITO,
20, Haldiyon Ka Rasta, Vs. Ward-2(1),
Jaipur- 302003. Jaipur.
ToLFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAHFS0887 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj l@
s Assessee by : Shri Vinod Kumar Gupta (C.A.)
jktLo dh vksj ls@ Revenue by : Smt. Roonipal (JCIT)
lquokbZ dh rkjh[k@ Date of Hearing : 13/12/2019
mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 27/01/2020
vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-I, Jaipur dated 31.03.2017 for the Assessment Year 2013-14 wherein the assessee has taken following grounds of appeal:-
"1. That on the facts and in the circumstances of the case the learned lower authorities grossly erred in rejecting the books of accounts by invoking the provision of Section 145(3) of the Act.
2. That on the facts and in the circumstances of the case, the learned CIT(A) grossly erred in confirming the trading addition to the extent of Rs. 3,85,880/-2 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
3. That on the facts and in the circumstances of the case the learned lower authorities grossly erred in disallowing the interest paid by the assessee appellant of Rs. 15,19,571/- on the loan taken by it during the year under consideration.
4. That on the facts and in the circumstances of the case the learned CIT (A) without any show-cause notice, without following the due process of law grossly erred in directing the learned Assessing Officer to further disallow the processing fees of Rs. 95,316/- paid by the assessee appellant on the loan taken by it during the year under consideration.
5. That on the facts and in the circumstances of the case the learned lower authorities grossly erred in disallowing the rent paid by the assessee appellant of Rs. 27,50,000/- during the year under consideration.
6. That on the facts and in the circumstances of the case, the learned Lower Authorities grossly erred in making addition of Rs. 27,54,000/- on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961.
6.1 That in the show cause notice a query was made by the learned AO regarding cash deposit of Rs. 13,77,000/- but while passing the order he grossly erred in making an addition of Rs. 27,54,000/- which is 200% of the cash deposited and the learned CIT(A) erred in confirming the same which is illegal and bad in law.
7. That on the facts and in the circumstances of the case, the learned CIT (A) grossly erred in disallowing the interest to the extent of Rs. 1,57,081/- paid by the assessee appellant to the partners during the year under consideration."3 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
2. Briefly the facts of the case are that the assessee is a partnership firm which is engaged in the business of manufacturing, trading, import and export of precious and semi precious stones, jewellery etc. The assessee filed its return of income declaring total income of Rs. 2,46,230/- and the same was selected for scrutiny and the assessment order was passed U/s 143(3) of the Act 28.03.2016 at an assessed income of Rs. 1,35,62,580/-. On appeal, the ld. CIT(A) has granted partial relief to the assessee and against the addition sustained by the ld. CIT(A), the assessee is in appeal before us.
3. In ground No. 1 the assessee has challenged the rejection of books of account by the assessee U/s 145(3) of the IT Act and in ground No. 2, the assessee has challenged the trading addition of Rs. 3,85,880/-.
4. Briefly the facts of the case are that during the course of assessment proceedings, on perusal of the audited financial statements and details of trading results furnished by the assessee, the Assessing Officer observed that the assessee has shown low G.P rate of 24.85% and low N.P rate of 0.62% in comparison to immediately preceding two years. Further, the AO observed that the purchase and sale are not fully subject to verifiable from the stock register in terms of raw material, goods under process of manufacturing and finished goods in respect of each item of purchase and sales adversely effecting the trading results. Further, expenses have been partly found verifiable and most of the expenses have been found supported by self made vouchers, the cash sales are not fully subject to verification, therefore, a show cause was 4 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO issued to the assessee as to why the books of account should not be rejected by invoking the provisions of Section 145(3) of the Act and by apply GP rate of 26% as against 24.85% on the declared turnover by the assessee firm. The submissions so filed by the assessee were not found acceptable by the AO as the purchase and sales are not fully verifiable from the stock inventory/details in terms of qualitative and quantitative details of raw material, goods manufacturing process, finished goods and goods sold out during the year, the expenses are not fully subject to verification with proper bills and vouchers. Further, the assessee has wrongly claimed depreciation on the vehicle purchase by Shri Jitendra Agarwal. Similarly the claim of the assessee for cash sale is not verifiable from the books of account and the assessee has not explained any reason for showing lower GP rate & N.P. rate, therefore, not disclosing true and correct trading results during the course of assessment proceedings. Accordingly, the books were rejected invoking provision of Section 145(3) of the Act and addition of Rs. 4,49,539/- was made applying GP rate of 26% to the declared turnover of the assessee firm.
5. Being aggrieved, the assessee carried the matter in appear before the ld. CIT(A). As per ld. CIT(A) though the assessee has maintained stock register but the qualitative details were not maintained. It is noted from some of the cash sale bills filed by the assessee that for diamond Jewellery items, no separate rates of gold and diamonds were stated therein and only one consolidated figures of sales amount is mention. Further, in respect of jewellery manufactured on job work basis as it issued gold to kariagars, it is noted that it has not shown any work in 5 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO progress in its opening or closing stock. Further, referring to one of the inventory invoice dated 10.01.2013 it was noted that diamond were sold at the rate of much lower than the purchase price of the assessee which clearly indicate that the books of account of the assessee not showing true and correct income of the assessee. Further, the assessee has not provided any reasons for fall in GP rate as compared to the earlier years and therefore, he upheld rejection of books of accounts U/s 145(3) of the Act and has thereafter applied weighted average GP rate of 25.86% against 26.33% applied by the AO. Therefore, out of trading addition of Rs. 4,49,539/- made by the AO, the assessee firm was granted relief of Rs. 63,659/- and the balance addition of Rs. 3,85,880/- was sustained. Against the said finding, the assessee is in appeal before us.
6. During the course of hearing, the ld. AR submitted in respect of basis/deficiencies as pointed out by AO and CIT(A) as under:-
"Basis of Books rejection by AO & CIT(A):
(a) Purchase and sales in respect of different quality are not verifiable from stock inventory details.
(b) Assessee has maintained the stock register but the qualitative details were not maintained.
Submission:
(i) Day wise complete stock register was produced along with letter dated 18.03.2016 but AO did not point out any specific items for which qualitative and quantitative details are not available.
(ii) Assessee is maintaining category wise day to day inventory of the Raw Material like Gold Bar TT, Old Gold Ornaments, Loose 6 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO Diamonds, Diamond Polky, wherein, complete inward and outward has been shown.
(iii) Assessee is also maintaining day to day inventory of issue and receipt of material to Karigars for manufacturing. For instance, in case of Gold TT Bar 100.54 Grams of Gold has been issued to Karigar on 01.05.2012, which has been used towards making of Kundan Jewellery. Similarly, goods received from Karigars after manufacturing has been entered into respective Finished Goods Stock mentioning Date, Gross Weight, Carats and Net Weight received.
(iv) Assessee is also maintaining day to day qualitative as well quantitative inventory of finished goods classified in various categories according to their purities and standards like :Kundan Jewellery 22 Cts., Gold Jewellery 22 Cts., Diamond Jewellery 18 Cts., Polky Jewellery 22 Cts. ,Diamond Jewellery 14 Cts. , Polky Jewellery 18 Cts., Kundan Jewellery 18 Cts., Diamond Fusion Jewellery 14 Cts.
Hence in view of these comprehensive details there should not remain any doubt that assessee is not maintaining qualitative as well as quantitative stock details.
Basis of Books rejection by AO:
(c) Stock items taken inward and outward in the stock register is not fully verifiable in respect of purchases, manufacturing, goods under process etc. Submission
(i) The Ld.CIT(A) recorded his finding at Page-12, Para 3.2.2(iii) of the order that the assessee has been maintaining the stock register but Qualitative details are not maintained. Therefore, in his own words it is an admitted fact that the stock register has been maintained by the assessee, therefore, the observations of the AO contrary to this finding stands vitiated to that extent.7 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
(ii) As regards, the allegation that purchase and sale details are not verifiable from stock registers, it is submitted that all purchase and sale bill are reflecting in stock register along with reference of their Bill No. Complete Sale and Purchase bills were submitted before the lower authorities to facilitate the verification. However, no specific instance of entry not found in stock register was brought into the notice of assessee whereas the assessee kept on asking to point out such specific defect vide letters dated 16.3.2016 and 21.3.2016, but the AO never pointed out any specific defect (AO Page 8, Para 4.2) in stock records.
(iii) All the material issued to job worker and received from job worker are separately entered in respective stock item ledger. Moreover, payment to job worker has been made after due deduction of TDS and same has also accepted a genuine by Ld.AO himself.
(d) Assessee maintained the stock details with reference to the total quantity and total value as shown in audit report only.
Submission:
Stock register was maintained by the assessee on day to day basis whereas in the Tax Audit Report quantitative stock details were reported for the year on total basis. It is beyond our understanding how day to day stock register can be prepared on the basis of the details reported in Tax Audit Report.
(e) The expenses are not fully subject to verification.
It was never pointed out which expense is not subject to verification.
(f) Cash Sales is not subject to verification.
Submission:
The nature of business is such that some cash sale is obvious. The assessee submitted complete sale bills containing name and address of customers. Every sale has been entered into stock register with reference to Bill Number. Further details were submitted along with 8 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO total cash sales bifurcated into two parts; Counter cash sale and sale made for which direct cash was deposited by customer in the bank account of assessee. Lower authorities never asked the assessee for any verification of the same, however declared turnover was accepted and assessed.
Basis of CIT(A) for sustaining Books rejection:
(g) In case of cash sale of diamond jewellery no separate rate of gold and diamond were stated and only one consolidated figure of sale amount is mentioned therein.
Submission:
It is an admitted fact that assessee is engaged in the retail business of jewellery. It is the practice of the assessee as well as of the trade at large of issuing sales invoice for item sold. There was no need to mention the value of each component on the sales invoice until/unless asked by the customer. The customer is satisfied with the form of the sales invoice. Under the facts and circumstances no adverse view can be taken. Assessee is also maintaining the complete qualitative details of all sales and respective components have been shown in the respective stock item at the time of sales.
Ld.CIT(A) failed to appreciate the complete detail given in the stock records and trade practice. Moreover, draw the adverse inference merely on the basis of suspicion, surmises contrary to the facts available on record.
(h) The appellant is getting jewellery manufactured on job work basis as it issued gold to Karigars. It is noted that it has not shown any work in progress in its opening or closing stock.
Submission:
The allegation of the AO and CIT(A) that no details of Work in progress has been given is completely wrong on the face of it. The assessee filed ledger account of work in progress vide letter dated 16.03.2016 (Point No.8). However, the AO as well as CIT(A) did not make any adverse 9 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO remark on the same. The assessee was holding opening balance in stock with Karigars shown as "Stock with EJC" and separately disclosed the same in Form 3CD also. The assessee was not having any Closing Balance in job work, therefore, it was Nil.
(i) The assessee purchased diamond in the range of 11,500/- to 12,000/- per carat, whereas as per export invoice dated 10.01.2013, it exported diamond and other jewellery containing 78.61 Carats of diamond which were valued at US$ 10218.57 i.e. around Rs.8,060/- per carat, which is much lower than the purchase price.
Submission:
(i) We are submitting the export bill under consideration before the Hon'ble Bench for kind perusal. A perusal of the same will reveal that a consolidated bill was issued for the said export assignment and Packing List was attached with the bill as mentioned under terms and condition of Invoice. In packing list it was clearly mentioned that the assessee has sold 78.61 Carats Diamond Polkhi. The Diamond Polkhi is another type of diamond having lesser value in comparison to diamond. The respective outward has also been shown in stock register of "Polky Diamond Jewellery 22 Cts" on 10.01.2013 showing 78.61 Carats sales mentioning the Invoice Number. The CIT(A) made the observation just by looking at the face of invoice and not going into facts and supporting documents in form of packing slip and stock item register.
(ii) Now coming on the rate aspect of Diamond Polkhi, it is submitted that the assessee has been maintaining separate register for Diamond Polkhi and last purchase of Diamond Polkhi was on 04.12.2012 at the rate of 6850 Per Carat whereas as per CIT(A)'s own calculation the same has been sold at Rs.8,060/- per carat.
Without prejudicial to above, 10 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO
(iii) Furthermore, this alleged irregularity was never confronted to the assessee neither any explanation was asked. Hence on this ground also rejection of books of accounts in not justified as held in the case of ACIT vs Mewar Polytex P. Ltd. (1995) 51 TTJ 628 (Jaipur Trib.) wherein it was held as under:-
"The next observation is regarding an error found in one of the folio of the cash book, which made the assessing officer comment that this clearly shows the irregularity in maintaining books of accounts. First of all, only one irregularity cannot justify the rejection of entire books of accounts. Further the assessee was never confronted about this irregularity and, hence was not provided with an opportunity to explain the same. On this ground itself the rejection is liable to be knocked down and as regards the nature of irregularity pointed out, the Hon'ble Supreme Court has held in the case of CIT vs Padamchand Ramgopal (1970) 76 ITR 719 (SC) that insignificant mistakes cannot afford a ground for restoring to this section."
(iv) The basis of such adverse inference is rate difference. Although we have explained herein above that good sold is Diamond Polkhi not Diamond. Even otherwise for sake of argument if we presumed diamond has been sold at lesser price, more particularly of export, which has been gone through custom authorities it cannot be a basis to draw adverse inference since in the business price depends upon various factors and circumstances.
Basis of Books rejection by AO:
(j) GP and NP are lower than last year.
(k) Purchase and sales are not fully verifiable from stock register in terms of raw material, goods under process of manufacturing and finished goods in respect of each item of purchase and sales adversely affecting to the trading results.11 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
(l) The assessee failed to substantiate the claim to show reasonable and true and correct GP and NP ratio from the books of accounts in this line of trade.
Submission:
(i) Perusal of the order and submission made before him, Ld.AO pointed out certain deficiencies but it is important to note that almost every time, such alleged deficiencies are followed by the observation that GP rate during the year under consideration has come down. Here, we would like to submit that assessee during the assessment proceedings time and again requested to inform specific deficiencies rather than general comments(Reproduced at AO Page 9, Para 4.2). Despite these requests Ld.AO keep repeating same deficiencies in general words without any specific defects. It emerges from his findings that rejection of books is prompted only due to reduction in GP. We have already addressed the general deficiencies observed by him under forgoing paragraphs.
(ii) As far as rejection of books only due to reduction in GP Rate is concerned same cannot be done since assessee was maintaining complete day to day inventory and we place our reliance on following case laws in this regard:-
ACIT vs Mewar Polytex P. Ltd. (1995), 51 TTJ 628 (Jaipur Trib.), wherein, it was held as under:-
"Thus if in earlier years correct income as per law could be deduced, it is surprising the find as to why it could not be done so in the year under appeal. It appears that low rate of gross profit as compared to the immediately preceding year prompted the assessing officer to do so. But since mere low gross profit rate by itself is not a ground at all for rejection of books, he has tried to justify the same by alleging serious irregularities in the accounts."12 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO CIT v/s Poonam Rani (2010) 326 ITR 223 (Del), "Assessee having furnished complete details, including quantitative data in respect of purchase of raw material, manufacture of copper wire and sale of finished products and the AO having not pointed out any particular defect or discrepancy in the books of account maintained by the assessee, fall in GP rate alone could not by itself be a ground to reject the accounts by invoking s. 145(3); CIT(A) and the Tribunal having accepted the explanation given by the assessee for the fall in GP rate and the finding of fact recorded by them having not been shown to be perverse in any manner, no substantial question of law arises for consideration."
Reason of Lower GP: The assessee is engaged in jewellery business where gold prices are decided in the international markets and assessee had to sale the items at the prevalent price only whereas, stock represents historic price. Any adverse fluctuation effects the GP. Hence there remains no control in the hands of the assessee to maintain the fixed margins.
Results are better: It is submitted that Ld.AO as well CIT(A) both estimated the GP by applying an average rate of GP without giving any weightage to the trend line between increase in turnover and declares in GP. Naturally to increase the turnover the assessee had to forgo some margins. Turnover, GP, along with increase and decrease in GP Rate is depicted by way of a table given below:-
AY Sales GP GP Rate Increase Decrease in
Turnover in GP Rate
Turnover (%)
(%)
2011- 1,92,93,967/- 55,90,497/- 28.98% - -
12
13 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
2012- 3,11,62,210/- 78,45,880/- 25.18% 61.51% 13.11%
13
2013- 3,90,42,302/- 97,10,459/- 24.85% 25.29% 5.39%
14 (Expected
Rate of
Reduction
in GP)
Therefore, following the simple trend line also the GP Rate of assessee was expected to decrease by 5.39% i.e. the GP Rate was expected to remain at 23.82% (25.18%-1.36%), whereas the assessee has declared the GP Rate of 24.85% which is much better. Hence, there was not reduction in GP Rate if we compare it with increase in turnover.
It is further submitted that the assessee has been assessed u/s 143(3) for AY 2006-07 vide order dated 28.03.2008, wherein declared GP Rate of 15.22% on total turnover of 94,52,346/- has been accepted by the AO. Whereas, current year GP Rate is 24.85% which is much higher than this, therefore, rejection of books prompted by reduction in GP kindly be deleted.
One very important point to consider here is that the AO asked the details of Labour Charges as much as two times in a single query letter dated 10.03.2016 and the same was submitted. No defect was found therein. Once the Labour Charges has been accepted then resultantly the quantity of production stands proved so the amount of gross profits as well."
7. The ld DR is heard who has relied on the findings of the lower authorities which we have already noted above.
8. We have heard the rival contentions and perused the material available on record. The ld CIT(A) has referred to non-maintenance of 14 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO qualitative stock details, no separate rates for gold and diamond, non-
reflection of work-in-progress and valuation of diamond in one of the export invoice. We find that each of these matters have been satisfactorily explained by the ld AR in his written submissions we have taken note above and hence, we are of the view that there is no justifiable basis for rejection of books of accounts in the instant case. In the result, the trading addition so made on rejection of books results is deleted and both the grounds are allowed.
9. In ground No. 3, the assessee has challenged the sustenance of disallowance of interest paid on secured loan taken from the HDFC Bank and disallowance of processing charges relating to bank loan.
10. In this regard, briefly the facts of the case are that during the year under consideration, two partners of the assessee firm namely Shri Shubhang Mittal & Shri Brij Kishore Mittal along with three of their family members have purchased a showroom space measuring total built up area of 1779 Sq. ft. at C-44, Sardar Patel Marg, C-scheme, Jaipur from M/s Krishna Gopal Rangota Pvt. Ltd. and M/s Maa Upasana Colonizers for a consideration of Rs. 4.11 crores. The assessee firm raised a secured loan Rs. 1.50 crore from HDFC Bank and on behalf of the five co-owners of the aforesaid property, Rs. 75 Lac was paid to M/s Krishna Gopal Rangota Pvt. Ltd. and Rs. 75 lac was paid to M/s Upasana Colonizers. During the year under consideration, the assessee has incurred a sum of Rs. 15,19,571/- as interest on the above loan of Rs. 1.50 crore taken from HDFC Bank and a sum of Rs. 95,316/- as loan processing fee. The AO has disallowed the interest of Rs. 15,19,571/-
15 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO paid to HDFC Bank by treating the same as not incurred for the purposes of the business of the assessee firm.
11. On appeal, the ld. CIT(A) held that the loan of Rs. 1.50 crore taken by the assessee firm from HDFC Bank was used for the purposes of acquisition of a showroom by the two partners and their three family members and therefore, loan so taken and interest expense so incurred cannot be treated as incurred wholly and exclusively for the purposes of business of the assessee firm, therefore, the disallowance of Rs. 15,19,571/- was sustained. Further, the AO was directed to disallow a sum of Rs. 95,316/- towards processing charges. Against the said findings, the assessee is in appeal before us.
12. During the course of hearing, the ld. AR submitted that during the year under consideration, partners along with family members purchased a show room for consideration of Rs.4.11 Crore. Same was subsequently given on rent to the assessee firm. Out of total consideration, Rs 2.61 Crore were paid by the purchaser directly and remaining 1.50 Crore paid by firm on behalf of these purchasers. It is relevant to mention here that for this purpose, firm raised a secured loan of Rs.1.50 Crore from HDFC Bank Limited. The payment made directly by the firm was debited to the respective person on behalf of whom such payments were made. The details are as follows:-
S.No. Name Amount Proportionate Relation
Debited with Firm
Interest
16 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
Disallowed
1. Shubhang 30,00,000/- 3,03,914/- Partner
Mittal
2. Brij Kishore 30,00,000/- 3,03,914/- Partner
Mittal
3. Giriraj Prasad 30,00,000/- 3,03,914/- Relative of
Mittal Partner
4. Madhuri Mittal 30,00,000/- 3,03,914/- Relative of
Partner
5. Shikha Mittal 30,00,000/- 3,09,915/- Relative of
Partner
Total 1,50,00,000/- 15,19,571/-
The total interest paid on the above referred loan during the year by the firm was Rs. 15,19,571/-. The AO made the disallowance of entire amount of interest paid on such loan by holding as under:-
" Considering the facts of the case, the reply of the assessee has not been found reasonable and satisfactory. It is evident that the assessee has taken a commercial loan of Rs.1,50,00,000/- from the HDFC Bank and the amount has been advanced to the above companies instead of utilizing the above funds in business purposes. Under the facts and circumstances of the case, it is constructed that the claim of the assessee for interest expenses to the extent of Rs.15,19,571/- paid on account of above loan used for non business purpose is not allowable as per the law. In view of the above claim of interest expenses of Rs.15,19,571/- is not 17 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO justified and the same is disallowed and added to the total income of the assessee."
13. During the course of first appeal, the disallowance so made by AO was confirmed by the CIT(A) and relevant finding has been given by CIT(A) at Page 13 Para 7 of order dated 28.03.2016.
14. In the above factual background, it was submitted by the ld AR that the firm was not having showroom at any visible prominent place. At that time, a prominent place suitable for showroom come to their knowledge which were available for sale. The firm based upon the business expediency and commercial prudence willing not to put entire resources to buy the showroom. The partners and the firm were also not having that much of resources or willing to take risk. However, considering the need of the firm the partners prepared other family members to purchase the showroom and accordingly partners and relatives put their own resources immediately to the extent of Rs.2.61 Crores and remaining amount were raised by the firm as secured loan and given on behalf of these persons. It is important to note that loan was also raised on the basis of collectoral securities of immovable properties owned by these persons in their individual capacity. In nutshell, firm neither took any risk since amount given on behalf of these people were recoverable and in case of default that was recoverable from their properties. Under the facts and circumstances, property was purchased for use of firm without any risk and responsibility therefore, holding that same is not for business purpose is without appreciating the complete facts in right perspective.
18 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO
15. As far as interest payment by firm on that secured loan is concerned, it was submitted that it is an admitted position that same has been used for purchase of showroom property on behalf of buyers. For sake of convenience, these buyers have been bifurcated in two categories. One is partners and second is relatives. Same have been dealt separately as follows:-
(a) Interest payment on loan used on behalf of partners:
(i) The partners were having credit balance in their account on 01.04.2012 of Rs. 77,16,667/- (Shri Shubhang Mittal Rs. 42,23,557/- & Shri Brij Kishore Mittal Rs. 34,93,110/-
) and even after debiting this withdrawal there was credit balance in Partners Capital Account.
(ii) This is not the case where drawing were made by the partners out of their capital account which was having debit balance and no interest has been charged upon them. The partners were having credit balances in their capital account on which they were getting interest @12%, hence, if the partners made drawings out of their own capital account which is having credit balance then it is beyond the jurisdiction of the AO to look in to the fact whether this drawing was made for the business purpose or not. Certainly, disallowance of interest was warranted in the condition where partners were having debit balance after drawings and no interest has been charged by the firm on debit balance of the partners.
19 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO
(iii) This is a completely tax neutral transaction. The partners were having credit balance in their account on which they were getting interest @12% on day to day basis. In place of making drawing from the firm if they could have arranged the money from somewhere else then certainly, they would have getting interest @12% on their capital account. The interest to partners has been paid on day to day balance and since the amount has been paid on their behalf, no interest was paid to the partners on this amount from the date on which such sum was paid.
Hence from firm point view there is no change in the profitability due to this transaction.
(iv) Hence, in view of forgoing facts and circumstances disallowance of interest calculated on the amount of Rs. 60 Lakhs(Rs.6,07,828/-) being the amount withdrawn by the partners out of their capital account is not warranted. Hence, disallowance of Rs. 6,07,828/- kindly be deleted in full.
(b) Loans Given to Family Members:
(i) Remaining amount of Rs.90 Lakh was given on behalf of family members of partners and debited in their accounts and interest @ 12% was charged thereon.
(ii) Admittedly these loans had been given out of money received from HDFC Loan Account hence there was a 20 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO direct nexus between the borrowed funds taken from HDFC Bank @12 % and given to the family members.
Notably the assessee has been charging the same rate of interest from these family members hence there is no justification for making the disallowance of entire amount of interest paid to HDFC Bank Limited holding that the same has not been used for business purpose.
16. It was further submitted that the Ld. CIT(A) has also noted his finding of fact that assessee has been charging interest @ 12% from these family members at Page-22, Para-3.3 of Order. The relevant Para is reproduced hereunder for sake of convenience:-
".....it was observed that the appellant has charged interest @12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mittal whereas, it has paid interest @15 % to them and no interest appears to be paid to Ms. Sangeeta Mittal. In view of these facts, the interest is to be allowed @ 12% to these entities."
Once the AO himself has proved the nexus between borrowed funds taken from HDFC Bank and giving to family members, and this fact has also been admitted by the lower authorities that the assessee has been charging the interest @12% from these family members, then no disallowance was warranted.
17. It was accordingly submitted that under the facts and circumstances in the instant case, the assessee firm on borrowed money has equally earned the interest or reduced its interest expense. The borrowed money has been laid out for specific purpose on which 21 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO equal amount has been earned or saved. The lower authorities disallowed the interest at one hand and taxed the interest income or saving implying that same has been earned without applying said borrowed money which is contradictory to the fact or without appreciating the entire facts. Hence, the impugned disallowance be deleted in full.
18. We have heard the rival contentions and perused the material available on record. The limited issue under consideration relates to allowability of interest expenditure on the loan taken by the assessee firm from HDFC Bank. It is an undisputed fact that the property has been purchased by the two partners and their family members in their individual capacity and the loan amount so raised by the assessee firm has been paid directly to the two entities on behalf of these purchasers. Therefore, the loan amount has been used to part fund the property purchased by the partners and their family members. Therefore, as far as immediate and proximate beneficiary of such funds is concerned, it is clearly the partners and their family members. At the same time, given the understanding that the property so purchased shall be used by the assessee firm for its showroom, the assessee firm has also benefitted in some way from such an arrangement. However, such benefit is limited to easy availability of property through which it can carry on its business activities as the assessee firm shall be paying rentals on such property and it has not been demonstrated that any benefit by way of lower rentals has accrued to the assessee firm vis-à-vis prevailing market rate. Therefore, the contention of the ld AR that the interest expense has been incurred on funds borrowed wholly and exclusively for the purposes of business cannot be accepted. Coming to another 22 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO contention of the ld AR that where the assessee firm has charged interest on such funds from the family members, the same shall be eligible for setoff and no disallowance of interest paid to bank should be made. In this regard, it has been submitted that on loan given to family members, interest @ 12% has been charged and on loan given to two partners, they were having sufficient opening credit balance in their capital account on which they were eligible for 12% rate of interest and given that the assessee firm has not paid any interest on such credit balance, non-charging of interest on loan advanced on their behalf is tax neutral. We find force in the arguments of the ld AR that where the assessee firm has charged interest from the family members and has not paid interest which it was supposed to pay on the opening credit balance in partners' capital account which stay invested in the assessee's firm throughout the year, the interest paid to the bank shall be offset from the said recovery of interest and there should not be any disallowance to extent of such recovery. Therefore, for the limited purposes of determining the interest paid to the bank and interest recovered from family members/interest saved on partner's capital account for the period their opening capital remain invested and not withdrawn, the matter is remanded to the file of the Assessing officer who shall verify and allow set off of interest recovered from family members/interest saved on partner's capital account from interest on bank loan and balance, if any of interest expense shall only be brought to tax. In the result, the ground is disposed off in light of above directions.
23 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO
19. In ground no. 4, the assessee has challenged the disallowance of loan processing fee of Rs 95,316 paid to HDFC loan. It was submitted by the ld AR that no such disallowance was made by the AO and the ld CIT(A) without issuing any show-cause as required u/s 251(2) has enhanced the income by disallowing the said claim of the assessee firm. From perusal of order of ld CIT(A) and material on record, we find that no such show-cause was issued by the assessee firm and being a mandatory requirement u/s 251(2) before any enhancement being made by the ld CIT(A), the same cannot be dispensed with and in absence thereof, the addition so made by the ld CIT(A) is directed to be deleted. In the result, the ground of appeal is allowed.
20. In ground No. 5, the assessee has challenged the disallowance of rent on showroom premises which was paid during the year under consideration.
21. In this regard, briefly the facts of the case are that during the course of assessment proceeding, the Assessing Officer observed that an amount of Rs. 27,50,000/- under the head "rent expenses" has been claimed by the assessee firm. As per the Assessing Officer, the assessee has taken on rent showroom premises in Man Upasana from the family members and partners of the assessee firm and the said premises have not been put to use during the year under consideration. The AO observed that the same is verifiable from the scehdule of fixed asset as on 31.03.2013 whereas the assessee has shown work in progress amounting to Rs. 10,90,412/- in relation to the said showroom premises. The Assessing Officer further held that the payment has been 24 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO shown in name of one person whereas the agreement has been prepared in name of five members of the family, further payment has been shown for 11 months whereas the agreement has been prepared only in the August, 2012. Further, the rent payment also appears to be on higher side which has benefited the family members and the partners of the assessee's firm, therefore, the AO has held that the assessee has failed to prove the said building was put to use for business purposes and justification & basis for the determination of the rent. Accordingly, the assessee's rent claim of Rs. 27,50,000/- was not found reasonable and justified in view of the provisions of the Act and the same was disallowed.
22. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has sustained the said disallowance. The ld. CIT(A) observed that since the showroom was inaugurated on 13.05.2013, no business activities were carried out from the rented space at Maa Upasana during the year under consideration. Further, he referred to the provisions of Section 30 of the Act wherein it has been provided that the rent is allowed in respect of premises, which is occupied and used for the purposes of the business or profession of the assessee firm. It was held by the ld. CIT(A) that on 01.05.2012 i.e. the date on which the premises under consideration was claimed to be taken on rent, it was not fit to use for the purposes of the business of the assessee firm of running a showroom and the assessee could not commence its business activities thereon till the end of the year under consideration as the showroom was inaugurated on 13.05.2013 only. Further, he relied on the decision of Hon'ble M.P. High Court in case of 25 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO Nashirwan and Co. Pvt. Ltd. vs. CIT 77 ITR 822 as well as the decision of Hon'ble Delhi High Court in case Sony India P. Ltd. vs. CIT 285 ITR
213. He accordingly upheld the disallowance of the rent expenses so claimed by the assessee as the same is neither allowable U/s 30 nor u/s 37 of the Act. Against the said findings, the assessee is in appeal before us.
23. During the course of hearing, the ld. AR submitted that the assessee firm got the showroom on rent from partners and their family member w.e.f. 01.05.2012 and a lease deed was entered between the assessee and all co-owners of property in the month of August, 2012 and the rent was credited in respective ledger accounts of the family members on monthly basis. The AO disallowed the rent on the ground that the showroom was not put to use during the year under consideration, the agreement has been made on 01.08.2012 whereas the rent has been paid from 01.05.2012 from the facts that the rent appears to be on higher side. However, during the course of appellate proceedings, the addition was sustained by the ld. CIT(A) only on the sole ground that the assessee had not used the showroom for its business purposes as inauguration of the showroom was made on 13.05.2013.
24. The ld. AR submitted that the limited question that arises for consideration is whether use for business purpose shall be started from the day of inauguration or from the day on which premises was taken and the assessee started its work there. The AO as well as CIT(A) termed the meaning of "used for the business purpose" U/s 30 in a very 26 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO confined way. Section 30 deals with the allowability of rent for premises used for the purpose of business and says that rent shall be allowed of a premise occupied by the assessee as a tenant. In the instant case it is not in dispute that premises were in occupation of the assessee as tenant and rent was paid for the period under consideration. The word "used for the purpose of business" cannot be interpreted in a manner that use for business purpose shall start from the day of inauguration of show room as held by CIT(A). A business does not involve just open a shop and start selling the goods. There are so many activities which are compulsorily required to be done to reach up to the point of inauguration. On the contrary, taking possession, making plan, design, interior, furniture fixtures, installation of security systems, exterior look and design, safety vaults and storage, display counters, lightings, Air Conditioner Installation, Civil work etc. all are for business purpose not for any personal or other purposes. Further the concept of put to use is relevant for the purpose of section 32 only. In section 30 the word "used for the purpose of business" is used which is a very wider term and specific. In support of our contention we rely upon the decision of Hon'ble Kolkata HC in the case of CIT Vs Eveready Industries (India) Ltd. (2018) 258 Taxmann 0313 (Cal.), wherein, it was held as under:-
"8. Mr. Agarwal, learned counsel for the Revenue argues that the assessee had not been in possession of the property and a dispute was going on between them and the lessor. The keys of the premises were lying with the police. Therefore, the application of Section 30 was dependent upon the findings whether the assessee was a tenant, paying rent and using the demised premises for the purpose of its business. We find on an examination of the order of 27 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO the Tribunal that all these factual issues have been answered in favour of the assessee. Now, when these facts are in favour of the assessee, it is not within the domain of a Court exercising jurisdiction under Section 260A to enquire into the correctness of that fact finding and return a contrary finding that the assessee was not a tenant, and was not in using the premises for business purposes, overturning the ruling of the Tribunal. On this issue also, we are not inclined to interfere with the finding of the Tribunal."
In the case referred above, the Hon'ble High Court has allowed deduction of rent even in the case where property was not in the possession of the assessee but the intended use was for the purpose of business. Whereas in our case, the property was in possession as well as assessee was carrying on certain activities there related to the business of assessee. Hence looking into the merit of the case, it is requested that the expenses towards rent kindly to be allowed.
25. It was further submitted that regarding the observation of the AO that rent agreement was entered in August 2012 whereas rent has been paid for 11 Months, it was submitted that although the lease agreement was entered on 01.08.2012 but the assessee took the possession of property and started its work w.e.f. 1st May itself. This fact is also mentioned in the said lease agreement the AO just looked upon the date of entering of Lease Agreement without reading the agreement in its entirety. Taking the possession of property and starting working therein from may itself is also evident from finding of the AO Order. The Ld.AO closely scrutinize the ledger of interior work 28 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO shown as Work in Progress in Fixed assets. The ledger reveals that the first entry of purchase of wood was made in this account on 11.06.2012, which proves beyond any doubt that the Show Room was in possession of assessee before entering lease agreement. Hence, the AO adopted contradictory approach as at one hand use of showroom w.e.f. 01.05.2012 is denied and on other hand work carried out there from month of May itself has been accepted.
26. It was further submitted that the case laws cited by the Revenue are distinguishable. In the case of Noshirwan & Co. Pvt. Ltd. Vs CIT (1970) 77 ITR 822 (MP), the building was under construction and payment of rent was used as a device to finance the construction of building. The assessee took the completed property on rent with electricity connection and some other facilities. The building was fit to use and mall was running at full swing but the assessee firm decided in their business prudence to make attractive interior and install other amenities to attract the customers, as the Jaipur is a tourist centric place so having attractive showroom is an essential need to run a jewellery show room. Other relied case of Sony India Pvt. Ltd. Vs CIT (2006) 285 ITR 213 (Delhi) is also distinguishable as the expenses is fully allowable to the assessee U/s 30 itself, whereas, in that case expense was not allowable u/s 37 of the Act. Hence, in view of forgoing facts and circumstances, the impugned disallowance of Rs. 27,50,000/- kindly be deleted in full.
27. The ld DR is heard who has relied on the findings of the lower authorities.
29 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO
28. We have heard the rival contentions and perused the material available on record. The relevant provisions of section 30 which are under consideration reads as under:
"30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business99 or profession, the following deductions shall be allowed--
(a) where the premises are occupied by the assessee--
(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs99 to the premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes ;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises.
Explanation.--For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repairs referred to in sub-clause
(i), and the amount paid on account of current repairs referred to in sub-clause (ii), of clause (a), shall not include any expenditure in the nature of capital expenditure."
29. It thus provides that where the premises are used for purposes of business and the premises are occupied by the assessee as a tenant, the rent paid for such premises shall be allowed as deduction. In the present case, we find that the assessee was carrying out certain improvements/fit-outs in the premises in form of interiors, furniture, air- conditioning system, strong room, etc and the expenses thereof were 30 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO shown under work-in-progress as on the close of the financial year. Therefore, the premises were not ready to be used by the assessee firm as on close of the financial year as the necessary improvements/fit-outs activities were being carried on. Mere possession over the rented premises is not sufficient. What is equally relevant is that the premises are used for purposes of business. The term "used for purposes of business" doesn't necessary mean in the literal sense of actual usage for purposes of business. It has to be understood in the sense that the premises were atleast ready to be used for purposes of business. In other words, can it be said that all necessary facilities which are required to run a jewellery showroom were in place and if required, the assessee could have started operating the showroom in terms of physical facilities for display and storage of jewellery, whether the customers could visit the showroom and there are related facilities for their sitting and other conveniences, whether air-conditioning system has been installed and appropriate furniture/fixtures installed, etc. Therefore, we agree that the day the showroom was formally inaugurated, it doesn't necessarily mean that showroom was not ready to be used prior to that. If the showroom was ready to be used even prior to the date of formal inauguration, the assessee shall be eligible for claim of rental payments which is however not the case before us.
30. Having said that, the question is where there is no dispute that the rent payment has been made by the assessee firm for taking on rent premises for setting up a new showroom and thereby, expanding its existing business, can the same be allowed in the year the premises are ready to be used. Given that in the instant case, the assessee has 31 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO also incurred expenditure on fit-outs/improvements on such leased premises, and has accumulated and shown the same under the head "work-in-progress", drawing similar analogy, we are of the view that rent payment, pertaining to the period the premises are not ready to be used, can be accumulated and the same can be claimed and will be allowed in the year in which the premises were ready to be used i.e, next assessment year 2014-15. The ground of appeal is disposed off in light of aforesaid directions.
31. In ground No. 6 the assessee has challenged the sustenance of addition of Rs. 27,54,000/- on account of unexplained cash credit U/s 68 of the IT Act.
32. Briefly the facts of the case are that during the course of assessment proceeding, the Assessing Officer on perusal of the HDFC Bank account and CIB/AIR/ITS details noticed that the assessee has deposited cash of Rs. 57,36,540/- on various dates in its bank account and a show cause was issued to the assessee to provide necessary explanation. In response vide its letter dated 21.03.2016, the assessee firm submitted that the cash deposits were made out of cash sale proceeds from goods sold and further submitted that the cash were deposited by the customers against the sale of goods and filed cash memo prepared in accordance with the cash deposits. The Assessing Officer on perusal of the cash memo, noted that the memos are printed and prepared in hand writing and the same have not found subject to verification from the books of account and stock register/inventory since no such bill books has been produced for examination. It was 32 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO accordingly held by the Assessing Officer that the assessee has failed to explain the source of cash deposit to the extent of Rs 27,54,000 on various dated as detailed in the assessment order and no proper, reasonable and acceptable explanation to the source of cash credit of Rs. 27,54,000/- in the bank account has been submitted u/s 68 and accordingly, the credit of Rs. 27,54,000/- is treated as unexplained income of the assessee out of undisclosed sources of income and the same was added to the total income of the assessee.
33. Being aggrieved, the assessee carried the matter in appeal before the ld.CIT(A). The ld. CIT(A) sustained the addition and the relevant findings are contained in para 3.6.2 of his order which are reproduced as under:-
"(iii) I have duly considered the submissions of the appellant, assessment order and the material placed on record. It is difficult to believe the story of the appellant that outside parties deposited cash in its bank account at their station and the delivery of the goods was only given after receiving the money. For instance, vide invoice no. 7 dated 28.04.2012, jewelry for a sum of Rs. 40,000/- was sold to Smt. Lata Agarwal of Mumbai and on the same date, a sum of Rs.
40,000/- was deposited in the bank account of the appellant at Mumbai. I fail to believe that after purchasing the jewelry from the appellant on 28.04.2012 at Jaipur, Smt. Lata Agarwal deposited Rs. 40,000/- at Mumbai. Similar, are the cases of cash deposited in its bank at Hyderabad, Bangalore, Lakhimpur, Tinsukia etc. The story appears to be feasible on paper but not in reality. Further, it appears that some of the names were repeating, the appellant has not filed any confirmation from them to substantiate its contention. It is interesting to note that in these cases, as per the sale 33 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO invoices, no cash payment was made in part at the sale counter of the appellant and the entire amount was deposited at the places of the buyers. Therefore, it is held that the appellant could not explain the source of cash deposits in its bank accounts at different places of the country satisfactory and thus the AO was justified in making the impugned addition under consideration.
(iv) The contention of the appellant that it is maintaining its records on Tally software and immediately on sale and purchase of trading items, it gets reflected in all the related places, appears not be correct factually, it is noted that the appellant was issuing invoices manually and not through tally software and its stock register, apparently was not maintained on tally software."
34. Against the said findings, the assessee is in appeal before us and has submitted that during the year consideration, assessee deposited total cash of Rs. 57,36,540/- in its bank account. The Ld. AO asked the explanation vide Point Nos. 4 & 5 of notice dated 10.03.2016 in this regard. It was explained out of that amount Rs. 13,77,000/- was deposited out of counter cash sale and Rs. 27,72,540/- directly deposited by the customers to the bank account of the assessee against the sales. Alongwith explanation, Ld. AO was also provided with corresponding sales bills. He was also having stock register for verification. After considering (Refer Page 16 of AO Order) the explanation Ld. AO made the addition of Rs. 27,54,000/- which is 200% of the cash deposited out of counter sale. The details of such deposit out of counter sale added by Ld. AO are as follows:-
S.No. Date Particulars Amount
1. 28.09.2012 Cash Deposited 3,47,000/-
34 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
2. 01.10.2012 Cash Deposited 2,00,000/-
3. 31.10.2012 Cash Deposited 2,30,000/-
4. 01.11.2012 Cash Deposited 2,00,000/-
5. 06.12.2012 Cash Deposited 2,00,000/-
6 05.01.2013 Cash Deposited 2,00,000/-
Total Cash Deposited 13,77,000/-
35. It was further submitted that the ld. CIT(A) on the other hand doubted the cash deposited directly by the customer to the assessee account (refer Page 37 Para 3.6.2(iii) of CIT(A) Order) and confirmed the addition. From the perusal of the fact, it is clear that AO was made addition for cash deposit having nature of counter sale whereas action of the CIT(A) lead to confirming addition of cash deposit having different nature i.e. direct deposit by customers means the addition by CIT(A) is of different deposit from the addition made by AO.
36. It was submitted that the assessee submitted the complete details in respect of these cash deposits which were alleged to remained unexplained, along with complete sale bills. The assessee trades in Gold Jewellery on whole sale and retail basis. The nature of business is such where cash sales is obvious and most of the retail sales happens in cash only.The assessee deposits such cash in his bank account. The AO asked specific query regarding the cash deposited on specific dates which was explained with cash book and complete sale invoices. The source of the cash deposits is explained hereunder:-
S.No. Date Particulars Amount Source PBP
1. 28.09.2012 Cash Deposited 3,47,000/- Cash Sale made PBP-53-
on 26.09.2012
35 ITA No. 393/JP/2017
Shree Jee Jewellers vs. ITO
totaling to Rs. 54
4,39,045/-.
2. 01.10.2012 Cash Deposited 2,00,000/- Out of Opening PBP-55
Balance of Cash
Rs. 86,632/- and
Cash Sale of the
day Rs.
1,20,000/-.
3. 31.10.2012 Cash Deposited 2,30,000/- Directly deposited PBP-51
by customer
towards cash sale
vide Bill Nos. 185
& 186.
4. 01.11.2012 Cash Deposited 2,00,000/- Out of Opening PBP-55-
Balance of Cash 57
at Rs. 12,83,665/-
(Sale of Rs.
56000/- on
27.10.2012, Rs.
1,57,700/- on
29.10.2012 and
Rs. 1,47,906/- on
31.10.2012 )
5. 06.12.2012 Cash Deposited 2,00,000/- Out of Opening PBP-58
Balance of Cash
on 01.12.2012 Rs.
11,74,957/- and
Cash Sale of Rs.
1,90,202 on
03.12.2012.
6 05.01.2013 Cash Deposited 2,00,000/- Out of Opening PBP-60
Balance of Cash
on 01.01.2013 Rs.
15,07,765/- and
Cash Sale of Rs.
1,02,000/- on
04.01.2013
Total Cash 13,77,000/-
Deposited
37. It was further submitted that the CIT(A) made the observation that cash deposited by parties directly in the bank account of assessee is difficult to believe. It is submitted that there is nothing wrong if the 36 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO purchaser is depositing the cash in assessee's bank account. In retail sales this is a prevailing practice. Jaipur is a well-known tourist destination, some people are coming to see the Jewellery and if they want to buy, they asked the other family member to deposit the cash so that they can buy the jewellery. Some other are not carrying the cash after selecting the jewellery ensuring the deposition of cash. Hence, doubting the sale on the sole ground that cash was deposited on very same day of sale is nothing more than suspicion. This is the lookout of the buyer to make arrangements of the payments on very same day and assessee is not concerned with this in any manner.
38. It was submitted that the trader is not barred under any law to make sale in cash nor he was required to record name and address of the persons to whom cash sale has been made. In support of our contention we rely upon the decision of Hon'ble Delhi High Court in the case of CIT vs Jindal Dyechem Industry Limited holding as under:-
"11. We may also point out that we had enquired from the learned counsel for the appellant as to whether there was any requirement in law of recording the names of the purchasers of the bullion to whom the cash sales of gold and silver were made. The learned counsel for the revenue stated that there was no such requirement in law at the relevant time. Consequently, no adverse inference could have been drawn by the Assessing Officer on account of the fact that the assessee was not in a position to furnish the names of the persons to whom the cash sales of the bullion were made"
39. It was further submitted that the allegation that no confirmation was filed from these parties is based on suspicion only. Ld. AO as well 37 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO as CIT(A) never asked the assessee to file any confirmation. Without prejudice to the above, alternatively, the assessee is not required to file any confirmation once the turnover has been accepted, sale invoices has been issued and the assessee was having stock for that sales. In the decision of CIT vs Jindal Dyechem Industry Limited, it was held that the trader is not required to record name and addresses of the persons to whom cash sales has been made. Hence, no adverse inference can be drawn on account of cash sale made. On one hand, the revenue has accepted and assessed the turnover declared by the assessee and on other hand addition of cash deposited arising out of cash sales has been made by revenue. This had resulted into double taxation. Once the AO has accepted the turnover declared by the assessee then cash deposit out of that amount shall not be treated as unexplained. In support reliance was placed on the following decision:-
R.B. Jessaram Fatehcahnd (Sugar Dept.) vs. CIT, Bombay City-II - 1969 (7) TMI 10 (Bom HC) Shri Naresh Dayanand Chandani Vs. ACIT in ITA No.5339/Del /2017 vide order dated 25.05.2018.
Alternatively and without prejudice to the above, it was submitted that addition u/s 68 is not sustainable once books of accounts have been rejected by the AO u/s 145(3) and in support, reliance was placed on various decisions.
40. The ld DR is heard who has relied on the findings of the lower authorities.
38 ITA No. 393/JP/2017Shree Jee Jewellers vs. ITO
41. We have heard the rival contentions and perused the material available on record. Firstly, it is noted that there seems to an arithmetical error given the details of cash deposits on various dated not found satisfactorily explained totaling to Rs 13,77,000 and the addition finally made by the AO totaling to Rs 27,54,000. Therefore, to this extent, the addition stand modified and the limited issue relates to addition of Rs 13,77,000. The assessee's contention is that the same represent cash deposited out of counter sales made by the assessee firm and sale bills and stock register were produced during the course of assessment proceedings and once the sales/turnover so declared by the assessee has been accepted, the deposit so made stand explained and no addition should be made in hands of assessee firm. In contrast, the case of the Revenue is that the Assessing Officer has pursued the cash memos during the assessment proceedings and noted that the memos are printed and prepared in hand writing and the same have not found subject to verification from the books of account and stock register/inventory since no such bill books has been produced for examination. There is no dispute on the proposition that where the cash so deposited represent the cash sales made by the assessee firm and such cash sales are duly recorded in the books of accounts, no addition can be made in the hands of the assessee firm. However, such a claim need to be substantiated by the assessee firm and to be verified by the Assessing officer. In this regard, we find that source of cash deposits of Rs 13,77,000 on the specific dates were submitted along with cash book and sale bills for verification during the assessment proceedings as we have noted in para 36 above and however, there doesn't seem to be any specific finding by the Assessing officer. We therefore deem it 39 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO appropriate to set-aside the matter to the file of the AO for the limited purposes of verification of source of cash deposits of Rs 13,77,000 as submitted by the assessee firm as we have noted in para 36 above and where the same is found to be in order, allow the necessary relief to the assessee firm. The ground of appeal is disposed off in light of above directions.
42. In ground No. 7, the assessee has challenged the sustenance of disallowance of interest of Rs. 1,57,081/-. In this regard, briefly the facts of the case are that the assessee had taken unsecured loans from the family members of the partners in the earlier years and paying interest @ 15% on the same. During the year, interest @ 12% was charged from the family members on the amount given on behalf of them for the purchase of showroom. The AO made the addition of entire amount of interest of Rs. 7,06,363/- paid to family members holding that the borrowings have not been used for business purpose. During the course of first appeal, Ld. CIT(A) restricted the interest paid to the family members to 12% by holding as under:-
"I have duly considered the submissions of the appellant, assessment order and the material placed on record. During the appellate proceedings, the AR was required to submit the rates at which interest has been charged and paid to the above persons and from the details furnished, it was observed that the appellant has charged interest @ 12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mittal whereas, it has paid interest @15% to them and no interest appears to be paid to Ms. Sangeeta 40 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO Mittal. In view of these facts, the interest is to be allowed @ 12% to these entities. The appellant has allowed interest of Rs. 7,85,404/- to the above three persons @15% which is being restricted to 12% which would result in addition of Rs. 1,57,081/- to the income of the appellant against disallowance of Rs. 7,06,363/-. It may be mentioned that loans to these persons were provided by the appellant firm on account of purchase of showroom at Maan Upasana Mall, the interest on which has been disallowed by the AO and upheld by me in the earlier ground of appeal. Therefore, this ground of appeal is party allowed."
43. During the course of hearing, the ld. AR submitted that the addition has been sustained by the CIT(A) on the ground that assessee has charged the interest from family members at 12% for the loans given to buy the show room therefore paying them the interest @ 15% is excessive. It is important to note that said loans were given to the family members of partners for a very specific purpose i.e for purchase of showroom to be used by the firm and this arrangement was made to facilitate the assessee to get a show room to run its business. The bank loan was obtained on the collateral of personal property of the partners and their family members. The firm had given only 1.50 Crore, whereas the showroom was purchased for 4.11 Cores, which means 2.61 Crore were arranged by the partners and family members out of their own sources to facilitate the firm. The firm got the showroom without paying any security deposit. The said transaction is having peculiar facts and based upon commercial expediency. On the other hand, the subjected amount of borrowing from family members of the assessee was in earlier years for business purposes and it was at discretion of the 41 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO assessee to use these funds as and where required. Therefore, at that time looking into need of funds and other circumstances, the rate was decided at 15%. Now both the transactions cannot be equated as both are of different perspective and were entered into for different purpose at different point of time. Hence, considering presence of these peculiar facts in this transaction, both not to be equated. In the instant case, assessee borrowed fund from bank @ 12% that loan is secured whereas borrowing from family members are unsecured in nature. The secured loans have to be paid as per pre-determined repayment schedule whereas unsecured loans under consideration can be paid as per flexibility of the assessee. Under these circumstances, interest rate paid @15% is reasonable and at prevailing market rate of unsecured loans. Therefore, it is requested that interest kindly be allowed @ 15% instead of 12% as restricted by Ld. CIT(A).
44. The ld DR is heard who has relied on the findings of the lower authorities.
45. We have heard the rival contentions and perused the material available on record. We find that there are no fresh borrowings from family members during the year but arising out of past borrowings on which the assessee has been paying interest @ 15% in the earlier years as well and which has been accepted by the Revenue. The fresh borrowing during the year from HDFC bank has been utilized for advancing to the partners and the family members and there is thus a direct nexus which has been established between the said borrowing and advancing the funds to the family members and has no nexus with the past borrowings. Further, the assessee has contended that the 42 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO borrowing from family members being unsecured as compared to bank borrowings which was claimed to be taken on collateral of personal property of the partners and family members and thus carries a differential rate of interest. We find that the internal comparable relied upon by the Revenue is not appropriate given the qualitative difference in the two loan transactions and it would have been appropriate to compare the related party transaction with an independent third party transaction carrying the same qualitative unsecured loan parameters. In absence of the same, the addition so sustained by the ld CIT(A) is hereby directed to be deleted.
In the result, the appeal filed by the assessee is disposed off in light of aforesaid directions.
Order pronounced in the open Court on 27/01/2020.
Sd/- Sd/-
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(Vijay Pal Rao) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur
fnukad@Dated:- 27/01/2020.
*Santosh
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shree Jee Jewellers, Jaipur.
2. izR;FkhZ@ The Respondent- ITO, Ward-2(1), Jaipur.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur.
6. xkMZ QkbZy@ Guard File { ITA No. 393/JP/2017} vkns'kkuqlkj@ By order, 43 ITA No. 393/JP/2017 Shree Jee Jewellers vs. ITO lgk;d iathdkj@Asst. Registrar