Income Tax Appellate Tribunal - Mumbai
Parekh Corporation, Mumbai vs Department Of Income Tax on 30 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "C", MUMBAI
Before Shri R.S.Syal, AM and Shri Vivek Varma, JM
ITA No.3293/Mum/2008 : Asst. Year 2005-2006
M/s.Parekh Corporation The Asstt.Commissioner of Income-tax
United India Building Circle 12(3)
2nd Floor, Sir P.M.Road, Fort Mumbai.
Vs.
Mumbai - 400 001.
PAN : AAEFP2916Q.
(Appellant) (Respondent)
ITA No.3939/Mum/2008 : Asst. Year 2005-2006
The Asstt.Commissioner of Income-tax M/s.Parekh Corporation
Circle 12(3) United India Building
Mumbai. 2nd Floor, Sir P.M.Road, Fort
Vs.
Mumbai - 400 001.
(Appellant) (Respondent)
ITA No.3294/Mum/2008 : Asst. Year 2005-2006
M/s.Parekh Distributors The Asstt.Commissioner of Income-tax
United India Building Circle 12(3)
2nd Floor, Sir P.M.Road, Fort Mumbai.
Vs.
Mumbai - 400 001.
PAN : AAAFP8148A.
(Appellant) (Respondent)
ITA No.3910/Mum/2008 : Asst. Year 2005-2006
The Asstt.Commissioner of Income-tax M/s.Parekh Distributors
Circle 12(3) United India Building
Mumbai. 2nd Floor, Sir P.M.Road, Fort
Vs.
Mumbai - 400 001.
(Appellant) (Respondent)
Revenue by : Shri Aatiq Ahmed
Assessee by : S/Shri Nitesh Joshi & S.S.Jhunjhuwala
Date of Hearing : 23.05.2012 Date of Pronouncement : 30.05.2012
ORDER
Per Bench :
These four cross appeals by two different but connected assessees relate to assessment year 2005-2006. Since common issues are raised in these appeals, 2 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
we are, therefore, disposing them off by this consolidate order for the sake of convenience.
M/s.Parekh Corporation
2. Ground nos. 1 and 2 of the assessee's appeal are against confirmation of ad hoc disallowance of `2 lakh out of conveyance expenses, staff welfare expenses, sundry expenses and traveling expenses. Briefly stated the facts of these grounds are that the assessee debited following expenses to its Profit and loss account:-
(i) Conveyance charges `9,08,230
(ii) Staff Welfare expenses `9,54,367
(iii) Sundry expenses `4,08,910
(iv) Travelling expenses `16,89,771
-------------
`39,61,278
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3. During the course of assessment proceedings the assessee was required to justify the above claims by furnishing documentary evidence in the shape of bills/vouchers. In the absence of proper corroborative documentary evidence adduced on behalf of the assessee, the A.O. disallowed 10% of such expenses. Such disallowance resulted into an addition of `3,96,128. Before the first appellate authority it was argued by the assessee : "that merely because certain expenses are not supported by third party vouchers, that does not establish that the claims are bogus". Apart from that it was also argued that the disallowance made was excessive and unreasonable. The learned CIT(A) reduced the addition to `2 lakh thereby granting relief of `1,96,128. The assessee is aggrieved against the sustenance of the remaining addition. Though the 3 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
Revenue has filed an appeal but the relief allowed by the ld. CIT(A) on this score has not been challenged.
4. After considering the rival submissions and perusing the relevant material on record it is observed from page 30 of the Paper book that for the immediately preceding assessment year 2004-2005, the Assessing Officer disallowed 10% of motor car expenses, staff welfare expenses, office expenses etc. and that for a year prior to that i.e. assessment year 2003-2004, the A.O. disallowed 10% of motor car expenses, staff welfare expenses, sundry expenses, repairs and maintenance, depreciation on motor car and 20% out of telephone expenses. On a pertinent query raised from the bench, the learned AR admitted that the assessee did not file any appeal against the disallowance made by the A.O. in the immediately preceding year. When we consider the facts of the instant case vis-à-vis those of the preceding year, it is found that the learned CIT(A) has reduced the addition by around 50% of that made by the A.O., which, in turn, was at the rate of 10%, being the same rate as was applied for disallowing some expenses for the assessment year 2004-2005. In our considered opinion the view taken by the learned CIT(A) on this issue does not require any interference because of the fact that the assessee itself admitted before the learned CIT(A), as reproduced above, that certain expenses were not supported by third party vouchers. These grounds are, therefore, not allowed.
5. Ground nos. 3 to 6 are against the confirmation of disallowance of `5,40,773 being 20% out of cash expenses incurred on behalf of customers. The Revenue's appeal deals with the deletion of disallowance made by the A.O. on account of freight paid amounting to `49.48 lakh and also the relief of `1.51 crore allowed by the CIT(A) under the head "Other expenses". Facts apropos these grounds are that the assessee is engaged in the business of clearing and forwarding agent and also financing business. During the course of assessment 4 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
proceedings the assessee was requested to submit copy of ledger account of its principals and details of reimbursement of expenses incurred on their behalf. The assessee filed copies of ledger account of its principal companies. On going through the accounts of principal companies, the Assessing Officer found that certain expenses were incurred during the year which were later reimbursed. By reducing the opening balance from total of all debits during the year in the ledger account of the principal companies, the A.O. worked out total amount at `5,36,45,166 which was debited by the assessee in such accounts. Thereafter the A.O. recorded on page 4 that : "All these expenses are recorded in the ledger account of the principals and after receiving the reimbursements, the net amount is shown in the balance sheet. No debits or credits related to these expenses are taken to the profit and loss account". The assessee was required to produce sample bills/vouchers in order to verify these expenses. The assessee submitted the necessary bills/supports attached along with Debit notes issued by it. The A.O. observed that in many cases supports were provided by the principal companies themselves and signed by the assessee. It was also noticed that many of these expenses were incurred in cash. The A.O., therefore, disallowed 10% of total of such expenses which resulted into an addition of `53.64 lakh and added the same to the income of assessee u/s 69C by treating it as unexplained expenditure. The learned CIT(A) observed the details of total debit notes issued by the assessee segregated under following heads:-
Nature of debit Amount (`)
Service charges and commission income 3,07,94,478
Octroi paid 27,82,004
Freight paid 49,48,722
Others 1,56,52,460
Total 5,36,45,166
=========
5 ITA Nos.3293, 3939, 3294 & 3910/M/2008
M/s.Parekh Corporation & Parekh Distributors.
6. From such detail it was observed that the assessee issued debit notes in respect of service charges and commission income of `3.07 crore, which was taken to the credit side of the Profit and loss account. In the opinion of the learned first appellate authority there was no basis for disallowing 10% of such amount which was already shown as income. He came to hold that octroi paid worth `27.82 lakh and freight paid worth `49.48 lakh did not require any disallowance because these represented actual expenditure incurred. He, therefore, deleted such additions. The last component being a sum of `1.56 crore was considered by the learned CIT(A) as calling for some addition. He noted that though the contention of the assessee was that its client reimbursed the entire expenditure, still the assessee gained some amount by getting reimbursement for expenses more than what it actually incurred. He illustrated by observing that if the assessee incurred a sum of `80 for any service rendered on behalf of the client but inflated the same to `100 for which he gets the 100% reimbursement from his client, the assessee in this way made a profit of `20 on this transaction. He, therefore, sustained the disallowance at 20% of such cash expenses which resulted into confirmation of addition to the tune of `27.03 lakh. Both the sides are in appeal against their respective stands.
7. After considering the rival submissions and perusing the relevant material on record it is found as an admitted position that the assessee issued Debit notes to its principal companies for `5.36 crore towards service charges and commission income to the tune of `3.07 crore and reimbursement of expenses worth `2.29 crore. The Assessing Officer deduced the figure of `5.36 crore from the accounts of the principals appearing in the ledger account of the assessee. This amply proves that the amounts were promptly displayed in the books of account. Insofar as the application of section 69C is concerned, we find that the same cannot be attracted because section 69C applies where in any 6 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by the assessee is not satisfactory. It is then that the amount covered by such expenditure or part thereof is deemed as income of the assessee for such financial year. The bedrock for making any addition u/s 69C is that there must have been some expenditure incurred by the assessee, the source of which is not disclosed. If however such expenditure is recorded in the books of account, there cannot be any reason to invoke the provisions of section 69C of the Act. In that view of the matter it is held that the provisions of section 69C were wrongly resorted to by the A.O. for making this addition.
8. Now coming to the second contention of the Revenue being the incurring of such expenses by the assessee in cash etc. calling for disallowance, we find that there is no force in making or sustaining any such disallowance in this regard. The essence of the matter is that the Assessing Officer started working out sum of `5.36 crore by considering the accounts of the principals in respect of which the assessee had issued Debit notes. It, therefore, transpires that by issuing Debit notes, the assessee credited the income account or the respective expenditure account to that extent. The ld. CIT(A) has deleted the addition in respect of `.3.07 crore on the ground that it represented income credited by the assessee to its Profit and loss account and as such there is no warrant to make addition at the rate of 10% of such income. In this process, he overlooked that there is no qualitative difference between the sum of `.3.07 credited to income account and `.2.29 crore credited to the respective expenditure account. It is obvious that credit to any expenditure account itself means the reduction of expenditure, which can be construed as equivalent of income to that extent. When such `2.29 crore being reimbursement of octroi, freight and other expenses represents credit to the accounts of octroi, freight and other expenses, there cannot be any question of making disallowance on account of cash 7 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
payments. Admittedly this amount represents reimbursement of expenses which are already finding place in the debit side of the respective expenditure account. By crediting such amount of `.2.29 crore to the respective expenditure accounts, the assessee did not incur any expenditure requiring any disallowance, but indeed reduced the expenditure on getting reimbursement of such expenses from its principal companies. By passing the entries to the tune of `2.29 crore, the assessee recovered such expenses already incurred thereby leaving neither any profit nor any loss in this regard. The view point of the learned CIT(A) that the assessee must have saved 20% out of such reimbursement is unfounded because it is for the principal companies to verify the actual expenditure incurred by the assessee on their behalf and then make reimbursement of the same. By adopting such a view and sustaining the disallowance at `27.03 lakh, the ld. CIT(A), in fact, stepped into the shoes of the principals for verifying the correctness of the claim lodged by the assessee towards reimbursement of expenses incurred on their behalf. Obviously this course of action is not permitted. When the principal companies have reimbursed the expenditure to the tune of `2.29 crore, in our considered opinion, there cannot be any presumption that the assessee must have saved some money out of the same. We, therefore, order for the deletion of entire addition. The grounds raised by the assessee in this regard are allowed and those by the Revenue are dismissed.
9. In the result, the appeal by the assessee is partly allowed and that of the Revenue is dismissed.
M/s.Parekh Distributors :
10. Ground nos. 1 and 2 of the assessee's appeal are against confirmation of disallowance of `1,50,000 out of conveyance expenses, staff welfare expenses, sundry expenses and traveling expenses. The facts of these grounds are that the 8 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
A.O. made disallowance at the rate of 10% of such expenditure on account of insufficient supporting vouchers, which resulted into the addition of `2.98 lakh. The learned CIT(A) reduced such addition to `1.50 lakh. Both the sides are in agreement that the facts and circumstances of these grounds are similar to those of ground nos. 1 and 2 of the other assessee i.e. M/s.Parekh Corporation, whose appeal has been disposed off above. Following the view taken hereinabove, we uphold the impugned order and dismiss these two grounds.
11. Ground nos.3 to 7 of the assessee's appeal and Ground nos.1 and 2 of the Revenue's appeal are towards reimbursement of expenses by the principals. Here again both the sides are in agreement that the facts and circumstances of these grounds are mutatis mutandis similar to those in the case of M/s. Parekh Corporation. Following the view taken hereinabove, we allow the grounds taken by the assessee and dismiss the grounds by the Revenue.
12. The only other ground which survives for our consideration in the assessee's appeal is against dismissing the assessee's ground about the reference made by the A.O. to the Valuation Officer u/s 142A. The facts of this ground are that the Assessing Officer in para 9 recorded as under:-
"A reference u/s 142A of the I.T.Act, 1961 was sent to the Valuation Officer, Mumbai. The reply has not yet been received. Subject to the valuation report to be received, the total income of the assessee is computed as under:"
13. Since no addition was made by the A.O., the learned CIT(A) held that the ground taken by the assessee against the above finding of the A.O. was premature.
9 ITA Nos.3293, 3939, 3294 & 3910/M/2008M/s.Parekh Corporation & Parekh Distributors.
14. After considering the rival submissions and perusing the relevant material on record it is observed that no addition has been made by the Assessing Officer in respect of the said reference made u/s 142A. The assessment order was passed on 27.12.2007. On a pertinent query, the learned AR admitted that till date no addition has been made on this issue. As admittedly no addition was made in this regard by the Assessing Officer in the assessment order, in our considered opinion, the learned CIT(A) was justified in rejecting this ground as not arising out of the assessment order. We uphold the view taken by the learned CIT(A) and dismiss this ground.
15. The only remaining effective ground in the Revenue's appeal reads as follows :-
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs.18,70,649 made by the AO as unexplained expenditure u/s 69C of I.T. Act without giving any valid reason for doing so."
16. Briefly stated the facts of this ground are that the assessee had shown addition to fixed assets to the tune of `18,70,649 as Building improvement at Mahabaleshwar. The A.O. observed that this property belonged to Smt. Sujata Parekh and Shri Sunil Sevantilal Parekh, partners in the assessee-firm. The assessee submitted rent agreement in respect of the said property. On being called upon to justify the business purpose in taking such property on rent, the assessee stated that during the year various employees visited this place. It was also explained that since there was severe monsoon, the building was badly damaged and the assessee had to spend `18.70 lakh for renovating the bungalow. The assessee claimed depreciation at the rate of 5% on the above amount. The Assessing Officer deputed Inspectors to inspect the guest house at 10 ITA Nos.3293, 3939, 3294 & 3910/M/2008 M/s.Parekh Corporation & Parekh Distributors.
Mahabaleshwar. They submitted their report after visiting the site by mentioning that the bungalow was managed by a gardener and her husband who was employee with Mahabaleshwar Municipal Corporation. Since the premises were locked and the keys were not available, the Inspector peeped through the window glass and observed that no renovation work was carried out. The Assessing Officer came to hold that the guest house was not used for business purposes nor any renovation work was carried out. He, therefore, made addition u/s 69C towards the expenses on renovation claimed by the assessee at `18.70 lakh. When the matter came up before the learned CIT(A), he held that no addition was called for u/s 69C because the amount was recorded by the assessee in its books of account. The learned CIT(A), however, reduced the claim of depreciation by 50% on account of the use of bungalow for personal purposes also. The Revenue is aggrieved against the deletion of addition of `18,70,649 which was made by the A.O. u/s 69C of the Act. There is no ground regarding deletion of partial depreciation or the non-business use of bungalow. The assessee has also not challenged the sustenance of disallowance of depreciation by 50% on account of personal use by the partners. In view of the subject matter of the ground by the Revenue before us, which has been reproduced above, we have to simply adjudicate as to whether any addition u/s 69C was called for or not. Admittedly the assessee spent `18.70 lakh and showed it in its balance sheet by way of addition to fixed assets. As discussed above the prescription of section 69C applies where a particular expenditure is incurred but the source thereof is not properly explained. When the amount is incorporated in the books of account, obviously there cannot be any question of applying the provisions of section 69C. As the assessee included the amount of `18.70 lakh in its books of account by properly including it in the balance sheet, in our considered opinion, the provisions of section 69C cannot apply. To this extent we uphold the impugned order.
11 ITA Nos.3293, 3939, 3294 & 3910/M/2008M/s.Parekh Corporation & Parekh Distributors.
17. In the result, the assessee's appeal is partly allowed and that of Revenue is dismissed.
Order pronounced on this 30th day of May, 2012.
Sd/- Sd/-
(Vivek Varma) (R.S.Syal)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai : 30th May, 2012.
Devdas*
Copy to :
1. The Appellant.
2. The Respondent.
3. The CIT concerned
4. The CIT(A) - XII, Mumbai.
5. The DR/ITAT, Mumbai.
6. Guard File.
TRUE COPY.
By Order
Assistant Registrar, ITAT, Mumbai.