Income Tax Appellate Tribunal - Jodhpur
Jupiter Textile vs Income Tax Officer on 19 November, 2001
ORDER
B.L. Khatri, A.M.
1. This appeal by the assessee is directed against the order of CIT(A), Jodhpur, dt. 5th Sept., 1994, for asst. yr. 1982-83. The appellant has agitated on various grounds against the order of CIT(A).
2. Ground No. 1 is against confirming the validity of the assessment completed after issue of notice under Section 143(2) when the assessment was already completed under Section 143(1). This ground of appeal is not pressed. Hence, this ground is dismissed.
3. Ground No. 2 is against the trading addition of Rs. 55,258 made by the AO by applying gross profit rate of 17 per cent by invoking the proviso to Section 145 of the IT Act, 1961. The brief facts of the case are that the assessee is a partnership firm carrying on the business of job work as well as processing of its own cloth. During the year under consideration the assessee has shown job work receipt of Rs. 4,95,075 and sales of Rs. 4,02,173. Thus, the total turnover came to Rs. 8,97,218 and the gross profit rate of 16.61 per cent was declared. However, the AO rejected the trading account as well as books of account and applied g.p. rate at 17 per cent of its turnover for the following reasons :
(1) Since the assessee is doing all the processing activity by itself the g.p. is bound to be more than in other cases.
(2) The cost of screen and designs charged to P&L a/c as depreciation instead of charging the same to trading account with a view to show higher g.p. rate and if this amount of Rs. 51,773 is reduced from g.p., the g.p. rate remains only 10.84 per cent.
(3) Under the head of coal account, the assessee has debited Rs. 10,600 which is either unvouched or improperly vouched.
(4) On the security of Dhulai expenses (Rs. 20,797), processing expenses Rs. 5,368), light and water expenses (Rs. 10,576) it is found that these expenses are partly unvouched.
(5) The entire purchase of wood and coal is made from villagers and not from regular dealers.
(6) The expenses under the head of freight are also found totally unvouched.
(7) Under the head of wages the assessee has claimed Rs. 63,324. On requisition, the assessee filed chart where 28 labourers were shown. Accordingly, the assessee was required to show ESI register, etc. However, the same has not been produced.
(8) The assessee debited Rs. 3,47,207 on account of colour and chemicals during the month of November and December. The -purchase of chemicals is not in proportion to the job receipt. The assessee has not shown any stock of sodium silicate whereas number of purchases of sodium silicates were made at the fag end of the year.
4. The learned CIT(A) confirmed the action of the AO as discussed at p. 2 of his order. The AO found that the appellant had debited an expenditure of Rs. 51,773 on screen frames and claimed the same in the P&L a/c. The AO therefore, recast the trading account and debited the expenditure on account of screen frames at Rs. 51,773 to the trading account as it was wrongly debited to the P&L a/c. The g.p. rate on recast trading account came to 10.8 per cent. The learned authorised representative submitted that the AO was not justified in rejecting the book results and estimating the g.p. rate of 17 per cent for the following reasons :
(i) Rejection of books of accounts on the basis of giving vague observation that the expenditure are not properly vouched or partly unvouched is not correct. The assessee submitted all the details of expenditure debited and if at all the AO was not satisfied about genuineness of any expenditure he may have disallowed the same in spite of respecting which books results. Reliance is placed on the decision of Hon'ble Allahabad High Court in case of Ram Arora v. CIT (1971) 80 ITR 78 (All) wherein it was held that where an item of expenditure claimed is not established, it can be disallowed but there is no reason to reject the books of account on this ground.
(ii) The assessee had no stock of sodium silicate at the end of the year. Whatever sodium silicate was purchased had been consumed. The AO has not taken into consideration the following facts :
(a) Closing stock of Rs. 78,900 of processed and finished goods at the end of the year.
(b) last bill of Stenter process (which is process after silicate process) on 31st Dec., 1981, from J. Finishing Works.
(c) Assessee processed the goods on job work. Assessee has issued bill of process on 1st day of next year.
In view of above, the rejection of books of accounts by the AO was not at all justified.
5. As regards, the applicability of 17 per cent g.p, rate the learned authorised representative submitted that the AO has not cited any comparable cases. The AO has taken the rate on surmises and conjectures. In fact, the AO was guided by 16.61 per cent g.p. rate declared by the assessee. After alleging that the assessee has not shown the cost of designs and screens in its trading account to show its g.p. rate on a higher side. He has presumed the g.p. rate of 17 per cent in the business of the assessee. This is the first year of the assessee's business and the assessee had no such intention of showing any high rate of gross profit.
6. We have considered the rival submissions and perused the facts of the case. We are of the opinion that the AO has rightly invoked the proviso to Section 145 of IT Act for the detailed defects pointed out by him in the order and as discussed above. Though in this case the invocation of proviso to Section 145(1) is upheld yet we find that the AO could not make out any case for application of higher g.p. rate. The appellant has claimed g.p. shown by him was higher in comparison to other cases. The AO had failed to peep into the past history of the case. He has not quoted any comparable cases to justify the application of higher g.p. rate, that is 17 per cent. Therefore, keeping in view the judgment of Hon'ble Rajasthan High Court in the case of the CIT v. Gotan Lime Khanij Udhyog, it is not necessary that the addition should be made on rejection of books. The AO had no material in his possession to justify higher g.p. rate. Therefore, the addition of Rs. 55,258 made by AO and sustained by CIT(A) is hereby deleted.
7. Ground No. 3 is against disallowance of Rs. 37,268 under Section 40A(3) of IT Act. The AO observed that the appellant had made cash payments exceeding Rs. 2,500 to various parties and the same were not covered under Rule 6DD(j) of IT Rules.
8. It was argued before CIT(A) that the payments were made against supply of goods and that the identity of the parties had been established with documentary evidence in the form of confirmatory letters from these parties. Besides, these parties, insisted upon cash payments because they refused to accept cheques or drafts from the assessee. It was also urged that most of the parties were not having bank accounts at Jodhpur. The learned CIT(A) confirmed the disallowance made by AO on the ground that the identity of the parties is not sufficient and another aspect has to be looked into is the special circumstances under which the payments were made in cash. The appellant had stated that the parties refused to accept cheques/drafts. However, this is not the special circumstance to justify the violation of law. It was also not clear as to whether none of the parties was having account in any of the banks having its branch at Jodhpur. Jodhpur is the 2nd big city in Rajasthan State and it cannot be accepted that the parties did not have any account in any bank which is not having its branch at Jodhpur. Therefore, the learned CIT(A) upheld the order of AO on this count.
9. The learned authorised representative submitted that the provision of Section 40A(3) of the Act prescribes disallowance of certain expenditure over Rs. 2,500 payment for which is made otherwise than by crossed cheque or crossed bank draft. However, Rule 6DD(j) of IT Rules provides certain exceptions to these provisions where disallowance cannot be made. Rule 6DD(j) reads as under :
"6DD. No disallowance under Sub-section (3) of Section 40A shall be made where any payment in a sum of exceeding two thousand five hundred rupees is made otherwise than by crossed cheque drawn on a bank or by a crossed bank draft in the cases and circumstances specified hereunder namely :
(j) in any other case, where the assessee satisfies the ITO that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft :
(1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the ITO as to the genuineness of the payment and identify of the payee."
10. We have considered the rival submissions. In this case the learned authorised representative has made specific reference to Board's Circular No. 220, dt. 31st May, 1977, reported in (1977) 108 ITR (St) 8. He has also made a specific reference to para (ii) of the circular which reads as under :
"The transactions are made at a place where either the purchaser or the seller does not have a bank account."
As regards the payments mentioned at item Nos. (a), (b), (c) and (e) are concerned, we find that either the purchaser or the seller are not having their bank account at their respective places. Therefore, these payments are covered by Board's circular, referred to above. Therefore, the disallowances made under Section 40A(3) in respect of the persons mentioned at si. No. (a), (b), (c) and (e) are deleted.
As regards the payment of Rs. 14,000 paid to Marda Trust, we are of the opinion that these payment is neither covered by the Board's circular nor by the exceptions or unavoidable circumstances mentioned in Rule 6DD(j). The appellant could not explain as to how the payment if not made in the aforesaid manner which would cause genuine difficulty to the payee having regard to the nature of the transaction and the necessity for expeditious settlement thereof. We also find that the assessee could not furnish evidence to the satisfaction of the ITO as to the genuineness of the payment and the identity of the payee also. Therefore, the disallowance of Rs. 14,000 is confirmed. Thus, the appellant gets a relief of Rs. 23,268. Without prejudice to above, the learned authorised representative submitted that if the rejection of books of accounts is held justified, and gross profit is estimated then no further disallowance can be made under Section 40A(3) as held by the Hon'ble Allahabad High Court in CIT v. Banwari Lal Bansidhar (1998) 229 1TR 229 (All), etc. We have considered this plea of the appellant also. In this case, though invocation of proviso to Section 145(1) has been upheld by us, however, the addition made by AO on this count has been deleted. Therefore, no benefit as held by the Hon'ble Allahabad High Court (supra), can be given in this case as no separate trading addition has been made in this case. Therefore, the addition to the tune of Rs. 14,000 has already been sustained under Section 40A(3) of the Act.
11. Ground No. 4 is against the addition for unexplained cash credit of Rs. 27,934. The appellant had shown cash deposits of Rs. 27,934 in the following names :
(1) Sh. Khetmal Pokardas Rs. 7,684 (2) Sh. Mahesh Kumar Rs. 3,169 (3) Sh. Jagdish Chand Jain Rs. 2,100 (4) Sh. Bhanwar Lal Rathore Rs. 4,400 (5) Smt. Santosh Devi Rs. 5,401 (6) Sh. Mukanraj Kanstia Rs. 5,080 The AO has asked the appellant to produce the creditors in person for examination before him. The appellant, however, expressed his inability to do so because according to his own admission, the creditors were not available at the given addresses. Therefore, in view of the fact that the creditors were not available at the given addresses, the appellant's request to the AO to issue summons to the creditors was uncalled for and misconceived. It is beyond imagination as to how the AO could serve the summons to the creditors without their addresses given by the appellant. Therefore, the CIT(A) held that the appellant had failed to discharge its onus to prove the genuineness of the creditors by producing the creditors in person before the AO or by leading clinching evidence with regard to their sources. Therefore, the addition made by AO was confirmed by CIT(A).
12. The learned authorised representative has made the following submissions :
(i) Sh. Khetmal Pokardas : The creditor is an existing assessee of the income-tax. The confirmation letter was submitted before CIT(A) (P.B. p. 30). The assessee has shown its inability to produce the creditor, however, at the same time, it requested the AO to issue summons directly to the creditor. However, no such effect has been made by the AO.
(ii) Sh. Mahesh Kumar: The confirmation letter was submitted on 16th March, 1985, before AO and has accepted it no further evidence was required by him. The assessee has shown its inability to produce the creditor, however, at the same time it requested the AO to issue summons directly to the creditor. However, no such effort has been made by the AO.
(iii) Sh. Jagdish Chand Jain : The amount was received by the assessee through DD from the above creditor. The confirmation letter was submitted before CIT(A). The assessee has shown its inability to produce the creditor, however, at the same time, it requested the AO to issue summons directly to the creditor. However, no such effort has been made by the AO.
(iv) Sh. Bhanwai Lal Rathore and (v) Smt. Santosh Devi : The deposit in the aforesaid accounts was supplied by transferring this deposit to M/s Jupiter Chemical Industries. The said deposit was finally settled by them by supply of chemicals to M/s Kalpatura Enterprises. The assessee has shown its inability to produce the creditors, however, at the same time, it requested the AO, to issue summons directly to the creditors. However, no such effort has been made by the AO.
(vi) Sh. Mukanraj Kanstia : The above cash creditor expired on 16th March, 1983. The death certificate is available in paper book (P.B. p. 37). Therefore, the assessee was unable to obtain confirmation letter from the above cash creditor. The assessee has shown its inability to produce the creditor, however, at the same time, it requested the AO to issue summons directly to the creditors. However, no such effort has been made by the AO.
13. We have considered the rival submissions. We are of the opinion that the assessee has legal obligation to explain the source and nature of such credits. On being asked by the AO the assessee failed to produce the cash creditors at the relevant time before the AO for cross-examination. If the assessee fails to tender evidence or burkes an enquiry, then the AO is justified in rejecting the explanation and holding that the income is from an undisclosed source. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in its books of account. Such proof includes proof of the identity of its creditor, the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. Therefore, keeping in view the reasons given by the AO and the CIT(A) and all the reasons given above by us, we decline to interfere with the order of the CIT(A) on this count.
14. Ground No. 5 is against the disallowance out of the following expenses :
(i) Factory expenses Rs. 1,000
(ii) Vehicle expenses Rs. 600
(iii) Depreciation Rs. 175 We find that after careful consideration the CIT(A) has confirmed the disallowances at 1/4th of the claim of vehicle expenses and depreciation for personal element for use by the partners and their family members. As regards the factory expenses, the CIT(A) allowed reduction of Rs. 500 to meet the end of justice. Keeping in view the facts of the case, we decline to interfere with the order of CIT(A) on this score.
15. In the result, this appeal of the assessee is allowed in part.