Income Tax Appellate Tribunal - Bangalore
Sathayanarayana Gupta, Mysore vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA Nos. 1330 to 1333/Bang/2008
Assessment years : 2002-03 to 2005-06
Sri H.P. Sathyanarayana Gupta,
Prop. Sri Balaji Agro Traders,
No.267/D1/1, Deshika Road,
Near Jaganmohan Palace,
Mysore. : APPELLANT
Vs.
The Dy. Commissioner of
Income Tax,
Circle 1(1),
Mysore. : RESPONDENT
Appellant by : Shri Ravindranath
Respondent by : Smt. V.S. Sreelekha
ORDER
Per A. Mohan Alankamony, Accountant Member
These are four appeals preferred by the assessee which are directed against the consolidated order of the Ld. CIT(A), Mysore in ITA Nos:85 to 88/Mys/CIT(A)/07-08 for the assessment years 2002-03, 03-04, 04-05 and 05-06 respectively.
2. The assessee has raised eight identical grounds for all the assessment years under dispute except for the AY 05-06 wherein one ITA No.1330 to 1333/B/08 Page 2 of 20 more issue has been raised. The grounds raised were in exhaustive and illustrative in nature. Subsequently, the assessee has come up with concise grounds of appeal. On a perusal, the cruxes of the issues, for the sake of clarity, are reformulated as under:
For the AYs 2002-03, 03-04 & 04-05:
(i) disallowance of expenditure under purchases; &
(ii) disallowance of interest on loan For the AY 2005-06:
(i) disallowance of expenditure under purchases;
(ii) disallowance of interest on loan; &
(iii) disallowance of salary paid to assessee's son
3. Since the issues raised in all the AYs under dispute are similar and identical, these appeals are heard, considered together and disposed off, for the sake of clarity and convenience, in this common order. Brief:
4. The assessee, an individual, was a dealer in fertilizers, seeds and pesticides under the name of Sri Balaji Agro Traders. The issue involved in these appeals is addition on account of inflated purchases as made by the AO:
Asst. year Amount
2002-03 Rs. 1293872
2003-04 1905650
2004-05 1168811
2005-06 1667925
4.1. The assessee's business premises were subjected to action u/s 133A of the Act on 15.3.2006 and during the course of which, it was noticed that the assessee had inflated the expenditure under the head ITA No.1330 to 1333/B/08 Page 3 of 20 'purchases debited to trading account' for the AYs under dispute which were worked out to Rs.1293872, Rs.1905650, Rs.1168811 & Rs.1667925/- respectively. Subsequently, the assessments for the AYs 2002-03 to 04- 05 were reopened by issuance of notices u/s 148 of the Act. In response to which, the assessee had offered additional GP and other additional incomes for all the AYs and for the AY 05-06, a revised return was furnished. In the statement recorded on 15.3.2006, the assessee had admitted that to suppress the business profits he had inflated the purchases to some extent for which purpose, he got blank invoices printed locally at Mysore and used them to the extent required. He had further admitted that such inflation was made for the FYs 2001-02 to 2004-05 and according to which, such inflation be not less than Rs.10 lakhs approximately every year. However, while furnishing the returns of income, the assessee had retracted and that no inflated purchases were returned as income. After a protracted enquires in respect of parties from whom the alleged inflated purchases were made, the AO came to the conclusion that "it is evident that the assessee had inflated the purchases to the extent recorded in his books of accounts........The fact that there is inflation of purchases, has also been accepted by the assessee on more than two to three occasions." While analyzing the books of accounts, the AO noticed that there were insertion, over-writing on the original entries in the general ledgers. It was further noticed that in the party's ledger the names of parties in whose name bogus purchases were effected, appeared at the end of all other names and, thus, the assessee had manipulated the books of accounts as "The subsequent opening of the folios indicates that dummy ITA No.1330 to 1333/B/08 Page 4 of 20 purchases in their names have been inserted subsequently as an afterthought."
4.2. All the bogus purchases were credit purchases and the accounts have been squared up by showing cash payments of less than Rs.20000/- on various occasions. The assessee's further claim was that to the extent of dummy purchases, there were dummy sales, justifying his claim in returning additional GP in stead of additional income on account of bogus purchases in the Returns of income furnished in compliance to notices u/s 148.
4.3. Summarily rejecting the assessee's fresh offer of accepting the bogus purchases to the extent added by the AO in the assessment orders under dispute, but, for pleading for that only peak credits on account of purchases be added, the AO went ahead with the additions as referred supra for the elaborate reasons set-out in the impugned assessment orders.
4.4. With regard to the claim of interest at 18% and 15% on borrowed capital for all the AYs under dispute, the AO after verifying the same with the relevant provisions of the Act and also taking cue from the finding of the Delhi High Court reported in 249 ITR 235, the AO had slashed the interest allowable to the extent on the principal amounts or/and subsequent amounts lent.
ITA No.1330 to 1333/B/08 Page 5 of 20 4.5. For the AY 2005-06, the claim of salary of Rs.112000/- paid to the assessee's son was disallowed on the ground that the services rendered by his son was not established.
5. Aggrieved, the assessee took up the issues with the Ld. CIT(A) for relief. After considering the submissions made by the assessee, the CIT (A) had virtually confirmed the additions made by the AO. The relevant portions of the observations of the CIT (A) are extracted as under:
"(On page 6) The appellant has challenged the AO's finding that application of funds has been made out of undisclosed income on account of bogus purchases. He has sought to negate the AO's finding with certain facts, details and evidence many of which constitute additional evidence. Since, no case is made out for admission of additional evidence under rule 46A, and since the assessment has been made after providing adequate opportunity to the appellant, this additional evidence is not considered.
In respect of item Nos.6 & 7 of application of funds as seen in page 18 of the assessment order, no fresh facts are led by the appellant and the facts given by AO are not denied. In respect of item No.8, the plea taken is that income has already been offered to tax in different years net of expenditure.
The main point which needs to be noted is that the case regarding application of funds is only an additional case made out by the AO regarding where the undisclosed money earned out of bogus purchases has gone. There is no onus on the AO to prove application of funds as there are countless ways in which undisclosed income may be spent or invested. These grounds raising doubt on some of the application cannot serve as sufficient ground for rejection of main case of the AO. Ground No.2 is, therefore, dismissed. In AY 2005-06, this issue has been raised vide ground Nos.2 & 3 both of which are dismissed for the reasons given above.
For the AY 2005-06: (On page 7) The AO has discussed in detail in the order as to why the appellant's claim on bogus sales could not be accepted. He has discussed the statement recorded from the appellant on the issue and has also shown the appellant had no evidence in respect of this plea. The appellant has given no facts or details or even arguments to counter the reasons given by the AO. This ground is, therefore, dismissed.
ITA No.1330 to 1333/B/08 Page 6 of 20 5.1. In respect of restricting interest on borrowed capital, ld. CIT(A) observed (on page 9) that:
"I have considered the Delhi High court decision. Interest was claimed in that case in respect of un-disbursed salary that interest deduction u/s 36(1)(iii) is relatable to only money borrowed and not debt. However, in the present case, the interest being claimed is in respect of interest relatable to money borrowed only. Compounding of interest is a well known financial practice and there cannot be any case for disallowance unless there was no agreement for charging compound interest and only simple interest was to be charged. This is not the case of the AO. The decision of Delhi High Court does not seem to cover a case like this involving charging of compounding interest. This pointing is, therefore, decided in favour of the appellant.
The second component of disallowance made by the AO is on the ground that the interest paid @ 18% is excessive and therefore, disallowable is attracted u/s 40A(2)(a). The appellant disputes this arguing that 18% interest is reasonable on the ground that banks and financial institutions charge interest @ 13.5% for secured loan while loan in question is unsecured loan. However, the AO has rightly pointed out that loan has been taken from close relatives. In view of this, the loan can be seen as quite secured. The AO has taken the yield in Government security as a yardstick. When deciding a reasonable rate of interest, one needs to look at the secured investments and prime lending rate of banks. The rate of interest @ 12% p.a. on compound interest basis appears to be reasonable and the disallowance of balance interest is, therefore, confirmed."
6. Disappointed with the finding of the Ld. CIT (A), the assessee came up with the present appeals. During the course of filing the appeals for the AYs under dispute, the assessee had furnished identical additional grounds of appeal with a prayer to admit the same in the interest of justice and equity.
6.1. The identical additional grounds of appeal (for AY 2002-03) are as under:
"1. AO has erred in bringing nexus between the declared and accounted unsecured loans from relatives or associated concerns with that of fictitious suppressed profits. In fact, profit has not been suppressed because of the fact that both sales and purchases are included with that of ITA No.1330 to 1333/B/08 Page 7 of 20 fictitious/accommodation transactions; as such there is neither physical movement of cash nor stock. The list of loan creditors linked wrongly by the AO at page No.:18 from para 1 to 8 in chronological order with asssessee's counter remarks/comments are as under:
Name of the fund Asst.year Loan Assessee's comments creditor/Head of amount account Loan creditors 2003-04 200000 Recd by cheque on 27.12.02 and the same
1.Varsha Gupta is shown in the B/s as on 31.3.03
2.Chandrika Gupta 2004-05 405000 Recd by cheque from her own source as she is a partner in Balaji Enterprises.
After payment, balance shown in B/s is
3.S.D.Chandrashekar 2005-06 700000 Rs.349704 with interest.
4.Varun 2005-06 100000 Recd by cheque from his own source.
Balance o/s is shown in B/s.Recd by cheque from his own source. Bal. o/s is shown in B/S Others for AY 2006- 07:
5.Daughter's marriage 2006-07 1200000 This refers to AY 06-07- pending for exp. of about disposal
6.Accomodation loan 2006-07 260000 to M.S.Nagaraj Gupta Applicable for AY 2006-07
7.Exp. incurred 2006-07 200000 pending accounting Applicable for AY 2006-07
8.introduction of cash 2006-7 984669 Applicable for AY 2006-07 6.2. It was submitted by the Ld. A R that the issues raised in the additional grounds of appeal are paramount in deciding the assessee's appeals and, therefore, pleaded for admission of the same.
6.3. After due consideration of the Ld.A.R's argument, the additional grounds raised are admitted for adjudication.
6.4. The Ld. A.R's reiterations were revolved around what has been urged before the first appellate authority. In furtherance to the above, the submissions of the Ld. A R are summarized as under:
(i) the assessee's customers were mainly farmers, Agricultural Department and nurseries. In this line of business, it was ITA No.1330 to 1333/B/08 Page 8 of 20 necessary to issue inflated/bogus sale bills to the farmers which would facilitate them to avail more credit facilities for their agricultural purpose;
(ii) While issuing such bogus sales bills only MRP rate (inclusive of GP margin at 5% on an average sale) was charged and hence more quantity in sale bills were shown;
- once such bogus/inflated sales bills were issued, it was necessary to enter in the sales register and make corresponding entry in the stock register which would be verified by the Government agencies and to attest the stock register otherwise the licence to deal in fertilizer would be terminated under EC Act. Attested stock registers were available with the AO. To make good, inflated/bogus sales, inflated/bogus purchasers were raised;
- in such a action, there was neither any physical movement of cash or stocks;
(iii) while making the assessment after a survey operation, the AO had wrongly concluded that -
- 'assessee has earned an income and to suppress the income so earned value of purchases are inflated/dummy purchases are accounted. The income so suppress are brought into books of the assessee either in the current year or in subsequent years and, accordingly added a sum of Rs.1293872 for the AY 2002-03. Comments of the AO are refutable as -
(a) the assessee had introduced Rs.2 lakhs as new loan given by his daughter Varsha Gupta. This loan was drawn by an account payee cheque and she has been an income-tax assessee [PAN ABCPH 3524 R]. Conditions laid down u/s 269SS were duly satisfied. The interest paid on the said loan was subject to TDS. While allowing the interest debited to P & L account, the loan proceeds were added to the income of the assessee.
(b) During AY 03-04, the assessee had received Rs.405000/- as a loan from his wife - Smt. Chandrika Gupta - who is an income- tax assessee. She had income from proprietary business of Sri Balaji Enterprises, but, later on, the proprietary business was converted into a partnership business in which the assessee was not a partner. From her independent source of income, the said loan was obtained through an account payee cheque. The interest paid on the said loan was subject to TDS. While allowing the interest debited to P & L account, the loan proceeds were added to the income of the assessee.
ITA No.1330 to 1333/B/08 Page 9 of 20
(c) During AY 05-06, a sum of Rs.7 lakhs was shown as having been received from one S.D.Chandrashekar, Devp. Officer, LIC, Mysore through an account payee cheque drawn on P & Sind Bank, Mysore. On oath, Chandrashekar had affirmed that he had lent loan to the assessee which he had received back through a cheque.
(d) During FY 04-05, the AO's assertion was that 'there was a loan of Rs.1 lakh shown to have been received from his son Varun who was born in 1986 and a student of BBM during 04- 05 for which, the assessee's rebuttal was that -
- the amount was borrowed through an a/c payee cheque and that during the FY 04-05 Varun was a student of BBM attending classes up-to 12 noon excluding holidays/Sundays after that he was working in the assessee's shop till 8 p.m. or till the closure of the shop and such he was remunerated of Rs.8000/month through cheques. The accumulated salary and other savings in his S.B.Account was lent to the assessee through an a/c payee cheque. While concluding the assessment u/s 143(3) for the AY 05-06, the salary made to Varun was accepted and, thus, the AO is now at fault.
(e) the AO's assertion that the assessee had incurred his daughter's marriage expenses of about Rs.12 lakhs was out of inflated purchases. The marriage expenses had, in fact, met as under:
- with the assessee:
Cash balance as per books as on survey date 825575 Less: Physical cash available in the business with the assessee 52200 Business expenses pending accounting 200000 573375 Amount drawn from the assessee's HUF account 180000 Amount contributed by the assessee's wife 200000 Amount contributed by daughter 200000 Total 1153375
(f) with regard to the business expenditure of Rs.2 lakhs which were not entered in the books of account, the assessee's contention is that the expenses incurred for pending recording of accounting entries which cannot be treated as suppressed income;
(g) in respect of alleged introduction of Rs.984669/- under the guise of sale of fertilizers without actually effecting sales, on a compromise formula, the assessee had agreed to offer for taxation subject to deduction of expenditure of Rs.2 lakhs, pending recording of entries which are as under:
ITA No.1330 to 1333/B/08 Page 10 of 20
- for AY 2002-03 Rs.1,25,000 and for the AYs. 03-04, 04-05 & 05-06 of Rs.2 lakhs each.
(h) the AO had erred in cross verifying/enquiring inflated/bogus/dummy purchase only, but, should have enquired into the extent of dummy sales also;
(i) in the interest of justice and to buy peace, the AO was requested vide the assessee's letter dt.12.12.07 to treat the peak credits on account of purchases for the AY 2002-03 Rs.1293872/- and the balance of Rs.611778 for the AY 03-04 totaling to Rs.1905650/-. These inflated purchases were only to balance the inflated sales caused on account of accommodation sales to the customers who have availed the loans from the financial institutions/banks.
(j) With regard to restricting the interest on borrowed capital u/s 40A(2)(a), the assessee contented that
- the loan paid and received were enforceable as per the provisions of s.3 of Indian Contract Act 1872;
- interest charged was not exorbitant or unreasonable as per s.40A(2)(a)
- interest credited to account on accrual basis which was subject to TDS provision as per s.194A of the Act;
- the case law cited by The AO was distinguishable since in that case for non-payment of the salaries and interest on such arrears of salary was claimed by the claimant and hence arrears of salary can not be claimed as borrowed debit within the meaning of s.2(28A);
- interest credit to account, if not drawn by the lender, shall automatically become part of principal loan which is entitled for interest and these principles are being followed by most of the financial institutions; &
(k) Relies on the following case laws:
- ITAT, Chennai Bench C in the case of DCIT, CC I, Coimbatore v. M/s.
Krishnaveni Carbon Products (P) Ltd. and others in ITA No:1809/Mds/08 dated: 20.11.2009; &
- N.K.Proteins ltd. v. DCIT reported in (2004) 83 TTJ (Ahmd) 904.
6.5. On her part, the Ld. D R was very vehement in her resolve that the AO had found evidence of inflated expenditure for each of the four assessment years under dispute during the survey operation and after giving due weight-age to the additional GP and certain additional incomes ITA No.1330 to 1333/B/08 Page 11 of 20 returned by the assessee and for the reasons set-out exhaustively in the impugned assessment orders under dispute, the disallowances of expenditure under bogus purchases have been resorted to. The well reasoning of the AO also found favour with the CIT(A) who had literally sustained the additions in toto. It was, therefore, contended that the finding of the Ld.CIT(A) requires to be upheld.
7. We have carefully considered the rival submissions, perused the relevant records and also the voluminous paper books furnished by the Ld. A R during the course of hearing.
7.1. It is an undeniable fact which has been admitted by the assessee himself that he had issued inflated/bogus sale bills to accommodate some of the customers and to cover up such inflated sales, purchases to the extent of Rs.12.93 lakhs for instance, for the AY 2002-03, were also inflated.
7.2. After analyzing the issue extensively and also cross-verifying the purchases claimed by the assessee with reference to the various parties as detailed in the impugned order, the AO went ahead with a specific analyzation of how the suppressed profits of the year have been reintroduced in the books of the assessee either in the current year or in the subsequent years, the details of which, in brief, and countered by the assessee, are as under:
(i) By the AO: Varsha Gupta, daughter of the assessee, who was born in 1981 and was studying B.Sc. course during the FY 01-02. she was a fund ITA No.1330 to 1333/B/08 Page 12 of 20 creditor in the books of the assessee for a nominal account and during Dec.
02, Rs.2 lakhs was shown as a new loan given.
Assessee's contention: She is an income-tax assessee - received by cheque on 27.12.02 and the same was shown in the B/s as on 31.3.2003 [Page 108 - 110 of PB - asst. order for AY 03-04 u/s 143(1), computation of income & Capital account ]
(ii) By the AO: smt.Chandika Gupta, wife of the assessee - for the FY loan of Rs.4.05 lakhs Assessee's contention: she is an income-tax assessee - received by cheque -
from own source as she was a partner in Balaji Enterprises [Page 88 - 91 of PB - asst. order for AY 03-04 u/s 143(1), computation of income & Capital account. After repayment balance shown in B/S was Rs.3.49 lakhs with interest ]
(iii) By the AO: During F.Y 04-05 Rs.7 lakhs was shown as loan from S.D.Chandrasekhar, Devp.Officer, LIC, Mysore. A finding has been given in the AY 05-06 as to why the loan of Rs.7 lakhs cannot be accepted as genuine.
Assessee's contention: He was a Development Officer, LIC, Mysore. In his sworn statement, he admitted that he was drawing a gross salary of Rs.15.98 lakhs and his PAN AGWPC 52301B and lent a loan of Rs.7 lakhs through a cheque and received one year back through a cheque. 7.3. Brushing aside the explanation offered by the assessee from time to time during the course of assessment proceedings, the AO went ahead with the additions by disallowing the expenditure under purchases of Rs.1293872/-, Rs.1905650/-, Rs.1168811/- and Rs.1666925/- for the assessment years 2002-03, 03-04, 04-05 and 05-06 respectively.
ITA No.1330 to 1333/B/08 Page 13 of 20 7.4. On a close reading of the impugned order of the Ld. CIT (A), one could form an inference that instead of analyzing the issues before him independently with reference to the submissions/contentions of either party, the CIT (A) relied heavily on the impugned orders of the AO without taking into account the ground realities. The finding of the CIT (A), put it mildly, is rather waning and cryptic.
7.5. Reverting back to the main issues, it was a fact that during the course of survey, the Revenue had unearthed dummy purchase invoices to the tune of around Rs.80 lakhs for the assessment years under dispute. The purchase invoices were actually printed by the assessee himself and the payments to the said parties, according to the assessee's version, were made through cash payments below Rs.20,000/-. 7.6 The assessee being a dealer in fertilizers, pesticides and seeds and his main purchasers were of the farmers' community. It is not uncommon practice prevalent in this line of business that the customers would try to get inflated sale bills with known dealers so as to fetch higher loans from the banks/agricultural societies and so on so forth. If he doesn't oblige to fulfill the need of his customers, as pointed out by the assessee, he stands to lose his customers thereby losing the business itself. To cope up with the business and to keep the customers' happy, the business community does indulge in such activity, though unethical in the eyes of law. To strike a balance for inflated sale bills and dummy profits, in the present case, the assessee had inflated the purchases by creating purchase invoices himself. The assessee's contention is that if there were ITA No.1330 to 1333/B/08 Page 14 of 20 dummy purchases, naturally there should be dummy sales too and, hence, no addition could be made on such dummy purchases. If addition were to be made, it should be in the form of gross profit only on such dummy purchases and dummy sales.
7.7. After a close analyzing of the assessee's argument, what is emerging from such analyze is that these purchases were unproved but the sales were above the board, the only alternative left is to estimate the sales. Such being the situation, the question of looking at the books of account would be a futile exercise. The Hon'ble Tribunals have also categorically opined that the profit on such undisclosed sales is liable to be taxed and not the entire sales entered in the books. 7.8. A similar issue was before the Hon'ble I.T.A.T, Chennai C Bench in ITA No.1809/Mds/08 dated: 20.11.2009 in the case of DCIT, CC-I, Coimbatore v. Krishnaveni Carbon products (P) Ltd. and other appeals on similar issues. The issue before the Hon'ble Bench was, in brief, that there was a search in the assessee's and its Directors' residential premises and the books found during the search seized. The assessee company was engaged in the business of manufacture and supply of carbon bearings, carbon seals, thrust pads etc., which were used in an electrical motor. The allegation of the Revenue was that with a view to reduce the incidence of tax, the company had inflated purchases by preparing bogus purchase bills, prepared stationery got printed by itself etc., After deliberating the issue at length and also taken into account the rival submissions, the Hon'ble Tribunal has observed thus -
ITA No.1330 to 1333/B/08 Page 15 of 20 "8. The invoices relating to import receipt for payment referring only to consignee. From blank invoices no concrete evidence against the assessee can be gathered as there is a probability that these might have been left with the assessee inadvertently. Thus, we are of the considered opinion that all the points recorded by the assessing officer to arrive at his conclusion that the purchases are inflated are not such that from which a valid conclusion can b drawn against the claim of the assessee. The decisions relied on by the Ld. A R definitely help the case of the assessee. These decisions are M/s. Shri Rama Multi Tech Ltd. 92 TTJ (Ahd) 568 M/s.Rainbow Metals (India) S3 Taxman 160 (Bom) M/s.Liyakat ali Mohd. Sadik 81 TTJ (JD)769 M/s.Sunsteel 92 TTJ (Ahd) 1126 M/s.Leaders Valves (P) Ltd. 285 TTR 435 (P&H)
9. To conclude, when the sales have been accepted and quantitative details filed by the assessee regarding consumption of raw (sic) material has not been disputed or disturbed and the net profit rate of the year is found to be better than the subsequent and other years, we are not able to accept the allegation of the Assessing Officer that the purchases are inflated. In this regard, the finding of the CIT(A) are confirmed who has deleted the addition made on account of inflated purchases. In so far as invoking the provisions of section 40A(3) is concerned, we are not in agreement with the Ld. CIT(A) as his action is not valid in the given facts and circumstances of the case. The Ld. CIT(A) has not given any notice to the assessee for invoking such a provision. He has mainly invoked this provision on the basis of assumption only which have no sound basis. Consequently, the sustained addition is also baseless and cannot survive being devoid of merit."
7.9 With due respects, we have perused the above finding of the Hon'ble Tribunal. The issue dealt by the Tribunal is similar to that of the issue on hand. We are in total agreement with the above finding which is squarely applicable to the present case.
7.10 The strong plea of the assessee that there were dummy sales [sales bills] to the extent of dummy purchases [purchase bills] justifying his ITA No.1330 to 1333/B/08 Page 16 of 20 stand in offering the additional gross profit instead of additional income on account of bogus purchases weighs worth consideration. 7.11. In an overall consideration of the facts and circumstances of the issues as deliberated in the fore-going paragraphs which in conformity with the finding of the Hon'ble Tribunal, Chennai 'C' Bench referred supra, we are of the considered view that the authorities below were not justified in their stand and, thus, the disallowance of expenditure claimed under such purchases to the extent of Rs.1293872/-, Rs.1905650/-, Rs.1168811/- and Rs.1667925/- for the AYS. 2002-03, 2003-04, 2004-05 and 2005-06 respectively are deleted.
8. The other grievance of the assessee is with regard to the disallowance of interest on loan. We have duly considered the assessee's contention on this point. As could be seen from the finding of the Ld.CIT (A) in his impugned order which is in dispute, he had dealt with the issue at length and considering the well reasoning of the CIT (A), we are of the considered view that there is no any infirmity which invites our intervention. Accordingly, we decline to accede to the assessee's request on this count. This ground is, accordingly, dismissed for all the AYs under dispute.
9. For the assessment year 2005-06, the grievance of the assessee is against the CIT (A)'s stand in disallowing the payment of salary of Rs.112000/- to Varun Gupta, the assessee's son. However, on a perusal of the impugned order of the CIT (A), we find that this issue was NOT at all dealt with by the first appellate authority, perhaps, by over-sight, even though the assessee had agitated the same as one of the issues in ITA No.1330 to 1333/B/08 Page 17 of 20 the grounds of appeal raised before the CIT (A). As the assessee in his grounds of appeal before this Bench has agitated the issue as "Ground No.7 - CIT (A) and AO has erred in disallowing genuine payment of salary of Rs.112000/- to assessee's son Varun Gupta, we proceed to adjudicate the issue, accordingly.
9.1. On going through the impugned order of the AY under dispute, the AO's observation was that "During the FY 04-05, he was a student which fact has been admitted by the assessee and he had just attained majority during March 2004. Immediately on attaining majority in the very next FY, the assessee has debited salary and bonus of Rs.112000/- in his name. Except claiming that after College hours Varun was assisting the father in his business, no other material evidences have been produced, justifying salary payment of Rs.8000/- p.m . The claim so made by the assessee has been verified with reference to salary paid to other staff. Though in the case of other staff salary has been paid every month and in the case of Varun through journal monthly salary have been provided and credited to his account, and such credits are treated as loan and interest also provided on it. Varun is a person who fits in to the definition of person as defined in s.40A(2)(b). the services rendered by this person to fetch him salary of Rs.8000/- p.m has not been established......." 9.2. We have duly considered the finding of the AO, but, unable to fall in line with AO's stand. As admitted by the AO, Varun Gupta had attained majority during March, 2004. Varun's services were requisitioned ITA No.1330 to 1333/B/08 Page 18 of 20 by the assessee after the college hours to lessen his burden and also to assist him in business for which he was compensated with a salary and the same has been duly reflected in the books of account of the assessee. It was a fact that Varun was being paid a salary to commensurate the services rendered by him. The salary must have been credited to his account on his specific request - prerogative of an individual which cannot be questioned. More than this, what sort of material evidence is required to substantiate or justify the salary payment? The AO has taken sanctuary under the provisions of s. 40A (2)(b) of the Act to disallow the claim. We have duly perused the relevant section.
9.3. For ready reference, we quote the relevant portion of s.40A (2)(b):
40A (2)(b) The persons referred to in clause (a) are the following namely: -
(i) Where the assessee is an any relative of the assessee Individual
(ii) .......... ........
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual.
No doubt, any individual who has a substantial interest in the business or profession of the assessee to whom "(2)(a) the assessee incurs any expenditure in respect of which any payment has been or is to be made to any person referred to in clause (b) of this sub-section and the assessing officer is of the opinion that such expenditure is excessive or ITA No.1330 to 1333/B/08 Page 19 of 20 unreasonable.................so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." 9.4. However, in the present case, the assessing officer had not established with any discreet documentary evidence to prove that Varun had a substantial interest in the business or profession of the assessee except to a fact that he was the son of the assessee which, in our considered view, cannot be a sole reason to resort to invoke the provisions of s. 40A(2)(b) of the Act. In a legal parlance, the benefit of doubt shall always be in favour of the defendant/ plaintiff (incidentally, the assessee). 9.5. In view of the above, the AO was not justified in invoking the provisions of s.40A (2)(b) of the Act. It is ordered accordingly.
10. In the result, the assessee's appeals for the assessment years 2002-03, 2003-04, 2004-05 and 2005-06 are partly allowed.
Pronounced in the open court on this 5th day of March, 2010.
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(SHAILENDRA KUMAR YADAV ) (A. MOHAN ALANKAMONY ) Judicial Member Accountant Member Bangalore, Dated, the 5th March, 2010.
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ITA No.1330 to 1333/B/08 Page 20 of 20 Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1) By order Assistant Registrar ITAT, Bangalore.