Income Tax Appellate Tribunal - Jaipur
Devendra Agarwal, Alwar vs Department Of Income Tax on 22 June, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM
vk;dj vihy la-@ITA No. 771/JP/2013
fu/kZkj.k o"kZ@Assessment Year : 2009-10.
Income Tax Officer, cuke Shri Devendra Agarwal
Ward 1(3), Vs. Prop. M/s. Mahadev Prasad Agarwal
Alwar. Communications & M.P. Food Products,
49,Ganesh Market, Alwar.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. ADRPA 2402 Q
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 767/JP/2013
fu/kZkj.k o"kZ@Assessment Year : 2009-10.
Shri Devendra Agarwal cuke Income Tax Officer,
Prop. M/s. Mahadev Prasad Agarwal Vs. Ward 1(3),
Communications & M.P. Food Alwar.
Products, 49,Ganesh Market, Alwar.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. ADRPA 2402 Q
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Shri S.K. Jain (JCIT)
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Mahesh Jain (C.A)
lquokbZ dh rkjh[k@ Date of Hearing : 02.05.2016.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 22 /06/2016.
vkns'k@ ORDER
PER SHRI LALIET KUMAR, J.M.
These are two cross appeals filed by the revenue and assessee against the order of ld. CIT (Appeals), Alwar dated 01.08.2013 for the A.Y. 2009-10. The grounds raised by the revenue are as under :-
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ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal
1. That the commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in deleting the addition of Rs. 17,34,227/- in respect of disallowance u/s 40A(3) of the I.T. Act 1961 in the concern M/s. Mahadev Prasad Agarwal Communications.
2. That the commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in restricting the addition of Rs. 1,25,000/- to Rs. 50,000/- made by the AO by disallowing out of discount allowed in the concern M/s.
Mahadev Prasad Agarwal Communications.
3. That the commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in restricting the addition of Rs. 2,19,250/- to Rs. 1,00,000/- made by the AO out of excessive salary paid to family members and near relatives in the concern M/s. Mahadev Prasad Agarwal Communications.
4. That the commissioner of Income Tax (Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in deleting the trading addition of Rs. 50,000/- made by the AO in the concern M/s. Mahadev Prasad Agarwal Communications. The grounds raised by the assessee are as under :-
1. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition to the extent of Rs.
4,26,944/- on account of the accounting treatment of purchases given in the books.
2. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the disallowance of Rs. 50,000/- on account of discount provided to customers.
3. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 1,00,000/- on account of excessive salary payment u/s 40A(2)(b).
4. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 9232/- on account of telephone expenses and Rs. 19,893/- on account of car maintenance and depreciation.
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ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal
5. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 8077/- on account of telephone expenses.
6. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 26,312/- on account of business promotion expenses.
7. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 4378/- on account of expenses of capital nature.
8. The ld. Commissioner of Income Tax (Appeals), Alwar has erred on facts and in law in confirming the addition of Rs. 44,000/- on account of low household withdrawals.
2. Brief facts of the case are that the assessee is an individual deriving income from proprietorship concern in the name and style of M/s. Mahadeo Prasad Agarwal Communications which has taken Franchisee of BSNL. The assessee has filed his return on 30.09.2009 declaring income of Rs. 8,86,360/- for the year under consideration. The case of the assessee was scrutinized under section 143(3) of the IT Act and the assessment was completed on 30.12.2011 at an income of Rs. 34,92,010/-.
During the course of assessment proceedings, the AO discussed the matter with the A/R of the assessee. Accordingly, the assessee was asked to furnish the details of expenses incurred along with the evidences in support thereof. The AO dealt with the matter ground-wise as under :
Ground no. 1 relates to deletion of addition of Rs. 17,34,227/- in respect of disallowance u/s 40A(3) of the IT Act. The AO on perusal of the copy of account of BSNL in the books of the assessee, noticed that out of total payments made of Rs. 4
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal 13,13,93,127/- against purchases, the following payment to the BSNL have been made in a day in cash, i.e. other than by way of account payee cheque drawn on a bank or account payee bank draft, exceeds Rs. 20,000/- which are in contravention of the provisions of section 40A(3) of the IT Act, 1961 :-
Date Mode of Payment made Amount in rupees
17.05.2008 Cash Rs. 6,39,579/-
24.07.2008 Cash deposited in PNB of Rs. 5,27,500/-
BSNL account
12.12.2008 -do- Rs. 5,32,500/-
12.12.2008 -do- Rs. 34,648/-
Rs. 17,34,227/-
On being confronted on this issue, the ld. A/R of the assessee vide written reply dated 19.12.2011 has submitted that during the year under consideration assessee has made cash payment to BSNL against purchases made of amounting to Rs. 17.00 lacs (approx.). The ld. A/R submitted that since BSNL is a Government company and as per rule 6DD(b) read with section 40A(3) of the IT Act, if any payment exceeding Rs. 20,000/- is made otherwise than by an account payee cheque or demand draft to Government (both Central and State) then the payment is very much allowable and nothing is disallowed under sec. 40A(3). Therefore, cash payment made to BSNL is allowable and nothing is taxable at this point of time. The ld. A/R further submitted vide letter dated 27.12.2011 that as regards the payment to BSNL through their Bank account, as per Rule 6DD of the IT Rules, 1962, it specifies the cases and circumstances in which a payment exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft. The said rule clearly states that no disallowance under sub-section (3) of section 40A shall be made and 5 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) of section 40A where a payment or aggregate of payments exceeding twenty thousand rupees is made to the Government. The ld. A/R further submitted that in the instant case, payment has been made to BSNL, which is a Government Company under section 617 of the Companies Act, 1956, thus the exception specified in Rule 6DD would apply to payment made to BSNL and the payment made by the assessee by way of depositing the same in account of BSNL should not be disallowed. In support of his argument, the ld. A/R placed reliance on the decision of coordinate Bench in the case of Maheshwari Industries vs. ACIT (95 TTJ 111)(ITAT Jodhpur).
The AO considered the submissions made by the ld. A/R of the assessee, but he found it not convincing for the reasons that (1) BSNL is a Government owned company and not a government department, hence the exception given under rule 6DD is not applicable in the case of the assessee, (2) the case of the assessee does not squarely covered by the decision of ITAT relied by the ld. A/R, (3) there is no exception under rule 6DD in respect of the payment made in cash by a person by way of cash deposited in the bank account to whom the payment is being made. Therefore, in view of the facts mentioned above and keeping in mind provisions of section 40A(3), the AO disallowed the cash payments aggregating to Rs. 17,34,227/- and added to the total income of the assessee.
Being aggrieved, the assessee has filed appeal before ld. CIT (A) who after discussing the matter in detail at pages 11 to 15 of his order, allowed the claim of 6 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal the assessee by deleting the addition made by the AO. The relevant observations of the ld. CIT (A) are as under :-
"(i) I have gone through the submissions and find that though the provisions of Rule 6DD have been amended by the IT (seventh amendment) Rules 2008, w.e.f. assessment year 2009-10, to provide for specific circumstances under which payments made in cash are to be allowed as a deduction. These Rules do not leave any discretion with any authority in their application. But in view of the judgment of the Hon'ble Tribunal cited above, wherein all the aspects of Rule 6DD and section 40A(3) of the It Act have been considered in detail and a finding has been given that in the case of an assessee working as a franchisee (agent) of BSNL, the said payments made in cash, do not fall within the ambit of the provisions of section 40A(3) of the IT Act, the contentions of the appellant are accepted. The facts and circumstances in the above mentioned case are identical to the facts in this case. Further, it is brought on record by the AR that in a similar case of another agent of BSNL, my ld. Predecessor had vide order in appeal No. 261/11-12, dated 16.05.2013, deleted the addition made u/s 40A(3) of the IT Act on account of cash payments made to BSNL.
In view of the above discussion, I delete the addition made by the AO of Rs. 17,34,227/- u/s 40A(3) of the IT Act."
Now the revenue is in appeal before us.
The ld. D/R supported the order of the AO.
On the other hand, the ld. A/R for the assessee reiterated the submissions as made before ld. CIT (A) who has passed a justified order to the extent of deleting the addition made by the AO and prayed that the order of ld. CIT (A) be confirmed.
We have heard rival contentions and perused the material on record. The ld. CIT (A) while dealing with the issue has relied on the decisions of the coordinate Bench of the Tribunal in the cases of S. Rahumathulla vs. ACIT (2011) 135 TTJ (Coch) 720 and Vodafone Essar Cellular Ltd. Vs. Asst. CIT (2010) 129 TTJ (Coch) 222 wherein all the aspects of rule 6DD and section 40A(3) of the IT Act have been 7 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal considered in detail and a finding has been given that in the case of an assessee working as a franchisee (agent) of BSNL, the said payments made in cash, do not fall within the ambit of the provisions of section 40A(3) of the Act and the claim of the assessee was accepted. Since in the case in hand, the facts and circumstances are exactly the same, we do not find any infirmity in the order of ld. CIT (A). The same is hereby upheld. The ground of the department is dismissed.
Ground No. 2 relates to restricting the addition of Rs. 1,25,000/- to Rs. 50,000/- in respect of discount allowed. During the assessment proceedings, on perusal of trading account of communication business, the AO noticed that the assessee has debited a sum of Rs. 44,62,358/- under the head "Discount". On examination of the details and evidences furnished by the assessee, the AO found that a large amount of discount has been given on cash vouchers without mentioning the name of customer and the same is not subject to proper verification. The AO also noted that in the preceding assessment year similar disallowance of Rs. 1,00,000/- was made on the basis of past history of the assessee that in a preceding assessment year, the ld. CIT (A), Alwar confirmed the disallowance of Rs. 36,000/- out of Rs. 54,000/- made on similar basis. In the year under consideration, assessee has debited a sum of Rs. 44,62,358/- under the head "Discount" in comparison to a sum of Rs. 22,62,364/- for the preceding assessment year. Accordingly, despite the quantum of discount enhanced during the year, the AO disallowed a sum of Rs. 1,25,000/- out of total payment of discount.
On appeal, the ld. CIT (A) allowed the claim of the assessee partly by restricting the disallowance to Rs. 50,000/- by observing as under :- 8
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal " I have gone through the assessment order and submissions made by the AR and also some of the photo copies of the bills in support of the discount given to the customers. Keeping in view the past history of the case, as mentioned in the assessment order, a disallowance of Rs. 50,000/- is confirmed to prevent any leakages of revenue on this account and the remaining addition of Rs. 75,000/- is deleted." Now the assessee is in appeal before us.
The ld. D/R for the revenue supported the order of AO. On the other hand, the ld. A/R for the assessee submitted that the assessee has incurred the amount of Rs. 44,62,358/- under the head "Discount" which was given to the customers in order to compete in the market. The same was supported with full vouchers and has been given to the customers in the bills only. The ld. A/R also submitted that the discount was given by the assessee as per the directions of the BSNL. Therefore, the ld. A/R requested that the ground of the revenue is liable to be rejected.
We have heard rival contentions and perused the material available on record. Looking to the past history of the assessee's case, facts and circumstances in the year under consideration being same, therefore, to prevent any possible leakage of revenue, the ld. CIT (A) has rightly sustained the disallowance to the extent of Rs. 50,000/-. Therefore, we find no reason to interfere into the order of ld. CIT (A). The same is hereby upheld. The ground is dismissed.
Ground No. 3 relates to restricting the addition of Rs. 2,19,250/- to Rs. 1,00,000/- in respect of excessive salary paid to family members. On perusal of the Profit & Loss account, the AO noticed that the assessee has debited a sum of Rs. 11,06,420/- in the year under consideration, in comparison to Rs. 4,76,343/-in the 9 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal preceding year, which is 132% hike, whereas the sales made during the year under consideration is reduced by 10%. It revealed from the details of salary payment that most the salary increased has been paid to the family members/near relatives. On asking the assessee to justify the increase in salary, the ld. A/R for the assessee submitted the reasons for increase in salary as under :-
(i) Permanent nature employee increased from 3 persons to 5 persons.
(ii) Increment in salary in comparison to previous year.
(iii) Increase in the load of work as earlier it was the practice of BSNL to prepare complete files while in the relevant year they shifted the burden on the assessee to make, prepare and complete the file of the customer to submit to BSNL, so major work was shifted to assessee part. So to meet out the work burden additional employees were recruited, hence salary burden increased.
The AO considered the reply of the assessee and found it not convincing for the reason that during last year, the number of total employees were 14 (including 4 family persons/near relatives). During the year the assessee has increased the total number of employees to 29 (including 5 family members/near relatives). This is evident that the assessee has increased his employees other than family members/near relatives during the year to 24 from 10 of last year. The AO compared the salary paid to the employees during the year in comparison to last year as under :-
Current Year :
1. No. of employees (other than family members & near 24 relatives)
(a)Total salary paid to them Rs. 4,18,420/-
(b)Average salary paid per employee Rs. 17,434/-
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ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal
2. No. of employees who are family members/near relatives 5
(a) Total salary paid to them Rs. 6,88,000/-
(b) Average salary paid per employee Rs. 1,37,600/- Last year :
1. No. of employees (other than family members & near 10 relatives)
(a)Total salary paid to them Rs. 1,76,363/-
(b)Average salary paid per employee Rs. 17,636/-
2. No. of employees who are family members/near relatives 4
(a) Total salary paid to them Rs. 3,00,000/-
(b) Average salary paid per employee Rs. 75,000/-
From the above chart, it clearly revealed that the payment of average salary made to per family member/near relative is increased from Rs. 75,000/- to Rs. 1,37,600/- which gives an increase of 183%. On the other hand, average salary paid to an employee other than the family members has almost same as was paid in last year. As regards the assessee's claim of burden of work load of BSNL shifted on the assessee, the same is covered in the number of employees increased during the year. The AO also noted that the salary paid to family members/near relatives is generally not paid. After crediting the same in their respective account of unsecured loan account, the interest is also allowed in next year on two times in December & March. This fact clearly shows that the payment of salary made to the family members is not real expenses incurred, is fictitious expenses and merely an appropriation of the profit derived during the year which is diverted towards the family members/near relatives, in their hands either the tax is not chargeable or the tax is charged at lower rate of tax. In view of the above facts, after making 11 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal calculation at page 9 of his order, the AO disallowed a sum of Rs. 2,19,250/- and added the same to the income of the assessee.
Being aggrieved by the order of AO, the assessee preferred appeal before ld. CIT (A) who restricted the disallowance to Rs. 1,00,000/- by observing as under :-
" I have gone through the assessment order and submissions made by the AR and find that the salaries paid during the year have increased by 132% as compared to the preceding year, whereas the sales have decreased by 10% as compared to the last year. The appellant has justified the increase in salaries on account of shift of some work burden from BSNL to the assessee as regards preparation of files of the customers. The AO has done a comparative analysis of the percentage increase in the salaries of family members/relatives of assessee vis-a-vis the salaries of other employees and worked out the excessive payment made to the relatives/family members of the assessee u/s 40A(2)(b). Even after considering the fact that the family members may have contributed more in terms of work effort and other circumstances, I still find force in the arguments of the AO as the appellant has also failed to lead any evidence of contribution being made by the persons specified in the ambit of the provisions of section 40A(2)(b) of the IT Act. Thus, I hold that the payments made to relatives are excessive and not justifiable. Accordingly, I confirm an addition of Rs 1 lakh on account of excessive salary payment u/s 40A(2)(b) and delete the balance addition of Rs. 1,19,250/- by giving due regard to the arguments of the appellant as stated above."
Now the revenue is in appeal before us.
The ld. D/R for the revenue supported the order of AO. On the other hand, the ld. A/R for the assessee reiterated the submissions as made before ld. CIT (A) who has passed a justified order to the extent of deleting the addition made by the AO and prayed that the order of ld. CIT (A) be confirmed.
We have heard the rival contentions and perused the material available on record. On going through the facts and circumstances of the case, it is observed 12 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal that the excessive salary increase has been made to the family members / near relatives only that too when the business of the assessee was reduced by 10% of the total sales of the preceding year. The assessee has also failed to lead any evidence of contribution being made by the persons specified in the ambit of the provisions of section 40A(2)(b) of the IT Act. On analyzing the facts and circumstances of the case, we are of the view that the assessee was not justified in making payment of excessive salary increase to the family members/ near relatives without proving their extra contribution towards business of the assessee. We, therefore, restore the order of AO to the extent of addition of Rs. 2,19,250/-. The ground of the revenue is allowed.
Ground No. 4 relates to deletion of trading addition of Rs.50,000/- made by the AO. During the course of assessment proceedings, on examination of the details furnished in respect of M/s. M.P. Food Products, another concern of the assessee, the AO found that ratio of gross profit rate of the assessee has been decreased in comparison to preceding year, as under :-
A.Y. Sales G.P. G.P. Ratio N.P. N.P. Ratio 2009-10 4,91,90,394 80,07,503 16.28% 1,75,095 0.36% 2008-09 3,93,38,394 68,91,538 17.52% 1,20,101 0.31% 2007-08 3,51,45,886 53,39,764 15.19% (-) 53,599 NIL (loss)
On asking the reasons for fall in gross profit rate, the ld. A/R for the assessee vide reply dated 22.11.2011 has submitted that G.P rate has been decreased because of increase in sales. The ld. A/R submitted that to remain stable in the present competitive market, these trends are to be followed. 13
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal The AO considered the submissions. On perusal of the details of the valuation of closing stock of raw material, packing material and bread, the AO found that the valuation of a few items has been shown less than the average Inward (purchase) and Outward (consumed/sale) rates per unit, as under :-
Stock Rates :
Item Inward Rate Outward Rate Closing
Acetic Acid N 55.24 53.42 51.00
Poly 400 Gm N 140.76 145.96 136.69
Bread Taj 10.56 12.21 9.00
Mahal
The AO, therefore, held that the discrepancy noticed in the valuation of the closing stock, the trading results declared by the assessee cannot be treated fully and truly shown. Therefore, invoking provisions of section 145(3) of the Act, he made a lump sum trading addition of Rs. 50,000/- to the income of the assessee to cover up any possible leakage of revenue to the department.
On appeal by the assessee, the ld. CIT (A) deleted the addition by observing as under :-
" I have gone through the assessment order and submissions made by the AR and find that AO had made the addition on the ground of fall in the GP rate during the year and on account of variation in the valuation of closing stock. It has been stated that slight fall in the gross profit rate during the year is on account of increase in the turnover of the business by more than Rs. 90 lac, during the year. I hold that in the absence of any specific infirmity in the books of accounts of the appellant, the AO was not justified in making a trading addition, I accordingly delete an addition of Rs. 50,000/- made on this account."
Now the revenue is in appeal before us.
14
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal The ld. D/R supported the order of AO.
On the other hand, the ld. A/R for the assessee reiterated the submissions as made before ld. CIT (A) who has passed a justified order to the extent of deleting the addition made by the AO and prayed that the order of ld. CIT (A) be confirmed.
We have heard the rival contentions and perused the material available on record. The AO had made the trading addition of Rs. 50,000/- on the ground that the discrepancy was noticed in the valuation of closing stock. The trading result declared by the assessee cannot be accepted as true and correct. Therefore, by invoking provisions of section 145(3) of the Act, lump sum addition of Rs. 50,000/- was made by the AO. However, the ld. CIT (A) has deleted the trading addition of Rs. 50,000/- and also held that invocation of provisions of section 145(3) was not in accordance with law. However, while filing the appeal before us, the revenue has not challenged the order of ld. CIT (A) whereby the invocation of provisions of section 145(3) was held not in accordance with law as books of accounts were duly maintained by the assessee. Since the revenue has not challenged the order of ld. CIT (A) on 145(3), therefore, the trading addition deleted by the ld. CIT (A), in our view was in accordance with law and, therefore, the appeal of the revenue is required to be dismissed.
Though we have discussed the grounds of appeal of the revenue on merits, however, the CBDT Circular issued by the revenue on 10.12.2015 clearly provides withdrawal of appeal where the tax effect is less than Rs. 10 lakhs. In view thereof, the appeal of the revenue is required to be dismissed. 15
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal In the result, appeal of the revenue is dismissed.
Now we take up the assessee's appeal.
Ground No. 1 relates to confirming addition of Rs. 4,26,944/- on account of accounting treatment of purchases given in the books. During the course of assessment proceedings, the AO on going through the Balance Sheet as on 31.03.2009 of Franchisee business, noticed that the assessee has shown the sundry creditors at Rs. 13,52,063/- which also includes a liability of Rs. 4,27,280/- payable to BSNL. Whereas, perusal of copy of BSNL account in the books of the assessee reveals that each and every payment of Recharge & Activation card purchases from the BSNBL was made regularly at the time of items issued by BSNL, except the credit entry of Rs. 4,27,280/- recorded on 19.04.2008 by the assessee on account of Recharge & Activation card purchases (claim received for rate down). Going through the entire facts in this regard, the AO noticed that on such date the BSNL supplied the Recharge & Activation card etc. to the assessee without charging any cost of such items issued on account of the sale rate of the items issued to the assessee earlier reduced to such extent by the BSNL, meaning thereby that the stock of the assessee on such date increased in quantity/volume, but not in cost/value of purchases. Whereas, the assessee has also got the value of the purchases made from BSNL increased by the value of the items of purchases which were issued to the assessee to compensate the reduction in the sale rate allowed earlier.
On asking the assessee to furnish the proof in respect of the liability of the BSNL in the year in which the same was met out, the ld. A/R of the assessee vide 16 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal written reply dated 19.12.2011 has submitted that this liability is adjusted in the F.Y. 2010-11 against purchases. In support, he furnished the extract of the ledger account of the BSNL in the books of the assessee.
On perusal of these details in the ledger, it clearly revealed that the bogus liability payable to BSNL shown by the assessee during the year has ultimately been corrected/adjusted in the books of account without making any payment to the BSNL. This fact is evident that the purchases of the assessee during the year are inflated by the amount of Rs. 4,27,280/- by way of raising bogus liability of the BSNL which resulted in gross profit arrived low by this amount. Information u/s 133(6) of the Act called from the Accounts Officer (CMTS) O/o GMTD, BSNL, Alwar vide his letter dated 20.12.2011 has also confirmed that as per record of their office, 3815 TOP UP were issued on 19.04.2008 for adjustment of rate reduction in price of Excell SIM Cards on 31.08.2006 midnight for costing of Rs. 4,27,280/- (3815*112) and no cost has been charged in this regard on 19.04.2008 and there is no such recovery against M/s. Mahadeo Prasad Agarwal Communications was outstanding as on 31.03.2009. In view of the above position, the AO made an addition of Rs. 4,27,280/- and added to the total income of the assessee.
Being aggrieved by the order of AO, the assessee preferred appeal before ld. CIT (A), who has confirmed the addition of Rs. 4,26,944/- by observing as under :-
"5.4.(i) 3815 Top Up Sim Cards were issued by the BSNL to the appellant on 19.04.2008. The purpose was to issue these cards as an add on to the existing cards so as to enhance the benefit to the customer.17
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal
(ii) the appellant booked the cost of these top Up Sim Cards at their face value of Rs. 4,27,280/- (3815x112) by passing journal entries in the books of account as a regular purchase.
(iii) In the closing stock, as on 31.03.2009 only, 3 Sim Cards out of 3815 were left with the appellant having value of Rs. 336 (3x112).
(iv) In the balance sheet of the appellant as on 31/03/2009, on the liability side, an amount of Rs. 4,27,280/- has been shown as payable to MTNL.
(v) This amount of liability of Rs. 4,27,280 has been written off by the assessee in the next financial year.
5.5. Let us first analyze the impact of the accounting treatment which has been given by the assessee in his books of accounts on the profits declared, before deciding on the correctness of the claim.
(a) the AR has stated in the submissions that even if the purchases were debited in the Trading account, it had no impact on the profits declared by him as the same amount was included in the closing stock. Further in the Balance Sheet on the liabilities side there is an amount of Rs. 4,27,280/- occurring as payable to BSNL and on the asset side same amount would be included in the closing stock, thus making really no difference to the profits so declared.
(b) Logiclaly speaking what is stated in (a) ab ove should be true, provided the figures are same in all the four headings (i.e. purchases, stock, liabilities & assets), so stated.
(c) However, a closer look would reveal that it is not so. This for the reason that in the purchases account an amount of Rs. 4,27,280 has been debited, and in the closing stock only an amount of Rs. 336 is included (as on 31.03.2009). The appellant has admitted in para 5.3 above, that out of the 3815 Top Up Sim cards of Rs. 4,27,280/-, only 3 Top Up Sim cards of the value of Rs. 335.71 were left in the closing stock of 8,06,920/- as on 31.03.2009. Therefore, by making this entry in the books for the value of stock for which no amount was charged by the BSNL, the profits get under stated by an amount of Rs. 4,26,944/- (427280-336).
(f) Thus, the entries made in the books of accounts on 19.04.2008 showing an amount of Rs. 4,27,280/- as payable to BSNL on account of SIM Cards issued by it are not correct. Further, Accounts Officer, BSNL, Alwar has also confirmed (vide his letter dated 20.12.11) during the course of assessment proceedings that no cost was charged from the appellant while issuing the SIM Cards on 19.04.2008. In fact 3815 Top Up were issued for adjustment of rate reduction in the price of Excel SIM Cards which had originally been issued on 31.08.2006 and 18 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal the value of this Top Up was Rs. 4,27,280/- (3815x112). Therefore, it was submitted by the Accounts Officer, BSNL that no payment was pending from M/s. Mahadeo Prasad Agarwal Communications on 31st March, 2009.
(g) The submissions made during the course of appellate proceedings that this amount has been written off by the assessee in the next financial year, has no force as the liability did not exist in the period under consideration.
In view of these facts, I hold that profits declared by the appellant are understated by an amount of Rs. 4,26,944/- made on account of the accounting treatment given in the books. The appellant would accordingly get a relief of Rs. 336/- on this account." Now the assessee is in appeal before us.
The ld. A/R for the assessee reiterated the submissions as made before ld. CIT (A) and prayed that the order of ld. CIT (A) be set aside by deleting the additions confirmed by him.
On the other hand, the ld. D/R for the revenue supported the order of the ld. CIT (A) to the extent of confirming the addition.
We have heard rival contentions and perused the material available on record. We have gone through the orders of the authorities below. The issue in question has been discussed in detail by the ld. CIT (A) judiciously in his order. After considering the detailed records viz. Trading account, profit & loss account, closing stock, liabilities shown in the balance sheet and the statement of BSNL officials, we do not find any infirmity in the order of ld. CIT (A), who has rightly sustained the addition. Therefore, we confirm his order. The ground of the assessee is rejected.
19
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal Ground No. 2 relates to confirming disallowance of Rs. 50,000/- on account of discount provided to customers.
Since we have decided this issue in the appeal of the revenue by dismissing the ground of the revenue, therefore, the ground of the assessee has become infructuous and the same is dismissed.
Ground No. 3 relates to confirming an addition of Rs. 1,00,000/- on account of excessive salary payment u/s 40A(2)(b).
This ground we have decided in the appeal of the revenue by dismissing the ground of the revenue. Therefore, this ground of the assessee has become infructuous and the same is dismissed as infructuous.
Ground No. 4 relates to confirming an addition of Rs. 9232/- on account of telephone expenses and Rs. 19,893/- on account of car maintenance and depreciation.
During assessment proceedings, the AO noticed that the assessee has debited a sum of Rs. 92,320/- to Profit & Loss account. No details/Log book is maintained showing that telephone was used only for business purposes. Therefore, use of telephone for personal and non-business purposes cannot be ruled out. In the immediately preceding year also 10% of such expenses were disallowed which was confirmed by ld. CIT (A). Thus the AO disallowed telephone expenses to the extent of 10% which comes to Rs. 9,232/-.
20
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal Similarly, the assessee debited a sum of Rs. 69,624/- on account of repair and maintenance expenses of cars and Rs. 1,29,306/- on account of depreciation on car. On verification of the details submitted by the assessee, the AO held that use of this facility for personal & non business purposes cannot be ruled out. In the immediately last year also, 10% of such expenses were disallowed by the AO and the same was confirmed by ld. CIT (A). Therefore, for this year also, the AO disallowed 10% of such expenses which comes to Rs. 19,893/- i.e. 10% of (Rs. 69,624 + Rs. 1,29,306/-) out of car expenses and car depreciation.
Aggrieved by the order of AO, the assessee preferred appeal before ld. CIT (A) who confirmed the disallowances by observing as under :-
" I have gone through the assessment order and submissions made by the AR and keeping in view the past history of the case, no interference in the order of AO is called for. Accordingly, the additions of Rs. 9,232/- on account of telephone expenses and additions of Rs. 19,893/- on account of car maintenance and depreciation are confirmed."
Now the assessee is in appeal before us.
We have heard the rival contentions and perused the material available on record. Considering the facts and circumstances of the case and the past history of the assessee, we are of the view that possibility of use of telephone and car for personal and non-business purposes cannot be denied. Therefore we do not find any infirmity in the order of ld. CIT (A) which is upheld. The ground of the assessee is dismissed.
21
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal Ground No. 5 relates to confirming the addition of Rs. 8077/- on account telephone expenses. (M.P. Food Products).
The assessee debited a sum of Rs. 80,767/- under the head Profit & Loss account during the year. The AO observed that this facility for personal and non- business purposes cannot be ruled out. In the last year also, 10% of such expenses were disallowed and the ld. CIT (A) confirmed the same. Similarly, the AO disallowed a sum of Rs. 8,077/- i.e. 10% of the telephone expenses in this year.
On appeal, the ld. CIT (A) confirmed the same observing that " keeping in view the past history of the case and appellate orders for the preceding year, an addition of 10% of the expenses i.e. Rs. 8,077/- is confirmed."
We have heard the rival contentions and gone through the orders of the lower authorities. After considering the past history of the case and personal use of telephone cannot be denied, we do not find any infirmity in the order of ld. CIT (A). Therefore, the addition sustained by ld. CIT (A) is confirmed.
Ground No. 6 relates to confirming addition of Rs. 26,312/- on account of business promotion expenses.
During assessment proceedings, the AO noted that the assessee has debited a sum of Rs. 2,63,117/- under the head Business Promotion expenses. The AO noted that in the immediately preceding assessment year 10% of such expenses were disallowed by the AO and the ld. CIT (A) vide his order dated 25.03.2010 has confirmed the same. The AO taking into consideration that the facts involved in this 22 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal year are same and the expenses are not verifiable, therefore, disallowed Rs. 26,312/- i.e. 10% of such expenses and added the same to the total income of the assessee.
On appeal, ld. CIT (A) confirmed the disallowance by observing as under :-
" I have gone through the submissions made in this regard and keeping in view the past history of the case and appellate orders for the preceding year, an addition of 10% of the expenses i.e. Rs. 26,312/- is confirmed."
We have heard the rival contentions and perused the material on record. Considering that the expenses incurred by the assessee under this head are not verifiable and also looking to the past history of the case, we do not find any infirmity in the order of ld. CIT (A). Therefore, the disallowance is confirmed.
Ground No. 7 relates to confirming the addition of Rs. 4378/- on account of expenses on capital nature.
The AO noticed that the assessee has debited a sum of Rs. 5,150/- under the head Travelling expenses on account of Mobile purchased on 20.04.2008. He treated this expenditure as capital in nature. Therefore, the AO after allowing depreciation @ 15%, added a sum of Rs. 4,378/- to the total income of the assessee.
On appeal, the ld. CIT (A) confirmed the addition of Rs. 4,378/- treating the expenditure as capital in nature after allowing depreciation @ 15%. 23
ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal Ground No. 8 relates to confirming addition of Rs. 44,000/- on account of low household withdrawals.
The AO noted that as per capital account, the assessee has shown household expenses at Rs. 85,500/- only as against Rs. 1,20,000/- shown in the immediately preceding year. The assessee's family consist of self, wife and minor son. The AO, keeping in view the quantum of household withdrawals of the last year, the household withdrawals of the assessee for the year under consideration has estimated at Rs. 1,30,000/- being a small family. Thus the difference of Rs. Rs. 44,500/- (1,30,000 - 85,500) was required to be added to the income of the assessee, but no separate addition was made in this regard in view of the trading addition made of Rs. 50,000/-.
On appeal, the ld. CIT (A) confirmed the proposed addition by observing as under :-
" I have gone through the order of the AO and submission of AR and find that in final computation no separate addition was made by AO on account of the fact that a trading addition of Rs. 50,000/- had been made. A finding with regard to trading addition has already been given separately in this order. However, keeping in view the level of total household withdrawals shown by the appellant during the year and comparing the same to the withdrawals shown in the preceding years, I confirm the proposed addition of Rs. 44,000/- on account of low household withdrawals."
Now the assessee is in appeal before us.
We have heard rival contentions and perused the material available on record. Considering the facts and circumstances of the case and past history of the 24 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal assessee, we are of the view that the ld. CIT (A) has rightly confirmed the proposed addition on account of household withdrawals. The household expenses shown for the year under consideration is on a very lower side. We do not find any infirmity in the order of ld. CIT (A) and the same is confirmed.
17. In the result, appeal of the revenue is dismissed whereas the appeal of the assessee is partly allowed.
Order pronounced in the open court on 22/06/2016.
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6. xkMZ QkbZy@ Guard File (ITA No. 771(2)/JP/2013) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar 25 ITA No. 771(2)/JP/2013 ITO vs. Shri Devendra Agarwal