Income Tax Appellate Tribunal - Mumbai
Vivek Shyam Johri, Mumbai vs Assessee on 26 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" Bench, Mumbai
Before Shri Jason P. Boaz, Accountant Member
and Shri Sandeep Gosain, Judicial Member
ITA No. 4892/Mum/2014
(Assessment Year: 2011-12)
Shri Vivek Shyam Johri Income Tax Officer-14(3)(4)
rd
3 Floor, Kadel Mansion Earnest House, Nariman Point
Vs.
65-67, Cawel Cross Lane-3 Mumbai 400002
Ramwadi, Mumbai 400053
PAN - AJDPJ8746K
Appellant Respondent
Assessee by: None
Revenue by: Shri Anil Kumar
Date of Hearing: 26.04.2016
Date of Pronouncement: 26.04.2016
ORDER
Per Jason P. Boaz, A.M.
This appeal by the assessee is directed against the order of the CIT(A)-25, Mumbai dated 08.05.2014 for A.Y. 2011-12.
2. The facts of the case, briefly, are as under: -
2.1 The assessee, engaged in the business of retail trade in diamonds, filed his return of income for A.Y. 2011-12 on 30.09.2011 declaring income of `8,42,531/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 28.02.2014 wherein the income of the assessee was determined at `41,95,542/- in view of the following additions/ disallowances: -
(i) Disallowance under section 40A(3) `3,00,000/-
(ii) Addition on account of low household expenses `36,000/-
(iii) Addition on account of low G.P. `29,67,013/-
2 ITA 4892/Mum/2014 Shri Vivek Shyam Johri 2.2 Aggrieved by the order of assessment for A.Y. 2011-12 dated 28.02.2014, the assessee preferred an appeal before the CIT(A)-25, Mumbai. The learned CIT(A) disposed off the assessee's appeal vide the impugned order dated 08.05.2014, allowing the assessee partial relief by deleting the addition of `36,000/- made on account of household expenses. The learned CIT(A), however, upheld the Assessing Officer's (AO) action in disallowance of `3,00,000/- under section 40A(3) of the Act and the addition of `29,67,013/- on account of low G.P.
3. Aggrieved by the order of the CIT(A)-25, Mumbai dated 08.05.2014 for A.Y. 2011-12, the assessee has preferred this appeal raising the following grounds: -
"I) Rejection of Books of accounts and estimation of G P
1. On the facts and under the circumstances of the case, the Ld. CIT (A) erred in upholding the decision of the AO in estimating G P @ 0.5% against the G P declared by the appellant of 0.26% after rejecting the books of accounts. The same is bad in law and against equity, natural justice, good conscience and fair play.
2. The Ld. CIT (A) failed to consider that the appellant had maintained proper books of accounts while following accounting principles and procedures. The accounts were audited u/s 44A of Income Tax Act, 1961. The appellant had also maintained proper stock register quantity wise. The profit could well be deduced from the accounts maintained and therefore the rejection of books of accounts was highly unjustifiable.
3. The Ld. CIT (A) should have also considered that the normal practice in the diamond trade is to import mixed diamonds in lots and to sell the same to various customers according to requirements. The quantity-wise tally has been always maintained by the appellant and as such the correct profit was correctly worked out.
4. The Ld. CIT (A) ought to have also considered that the appellant had to work under a most competitive market at Surat where the goods were to be sold at the minimum rate of G.P and sometimes even below the cost in order to have big turnover. The sales were made at lower rates while considering the gain in foreign exchange. II) Disallowance for Salary Expenses
1. The Ld. CIT (A) also erred in upholding the decision of the A.O in disallowing the genuine and proper salary expenses of Rs. 300000/-
which were paid to two employees for taking the specialized services from them in ordinary course of business. The same is bad in law.
3 ITA 4892/Mum/2014 Shri Vivek Shyam Johri
2. The Ld. CIT (A) ought to have considered that the appellant had engaged employees and had taken the work from them and paid the salary by account payee cheques and as such the disallowance made by AO u/s 40A(3) was basically wrong.
3. The Ld. CIT (A) also wrongly agreed with the AO who held that the salary paid to two employees were at higher rate than paid to other employees and therefore was disallowable.
4. The Ld. CIT (A) also wrongly agreed with AO for disallowance of salary on account of payments made by account payee cheques earlier as advance salary and later on transferred to salary account by passing journal entry.
5. The Ld. C1T (A) also erred in upholding the decision of the AO that salary for the month in the next year is not generally payable. It is the prerogative of businessman as to how business is to be run and when payment is to be made to the employees The appellant craves leave to add, amend, substitute or modify any of the grounds on or before the date of hearing."
4. After affording the assessee opportunities of hearing on a number of occasions none was present for the hearings and no application for adjournment of hearing was filed by the assessee. Even the notice issued by RPAD was returned back unserved with the remark "Left". Even today, i.e. 26.04.2016 when the case was called for hearing, none was present on behalf of the assessee, but the learned D.R. for Revenue was present and ready to present Revenue's case. In these circumstances, we are of the view that the assessee is not seriously interested in pursuing this appeal and we, therefore, proceed to dispose off this appeal with the assistance of the learned D.R. and the material on record.
5. Grounds I (1 to 4) - Rejection of Books and estimation of G.P. 5.1 In these grounds (supra), the assessee contends that the learned CIT(A) had erred in upholding the decision of the AO in estimating the G.P. @0.5% as against the G.P. of 0.26% declared by the assessee after rejecting the assessee's books of account. It is contended that the assessee had maintained proper books of account, which were audited under section 44AB of the Act and the profits of the assessee's business being discernable from the accounts maintained, the rejection of the books of accounts was unjustified. The assessee further contends that the learned CIT(A) did not appreciate the fact that the assessee's work was carried out 4 ITA 4892/Mum/2014 Shri Vivek Shyam Johri at Surat, which was a very competitive market, and therefore the goods were sold at a very low rate of G.P. and sometimes even at a loss in order to increase the turnover and earn profits on gains in foreign exchange.
5.2 The learned D.R. submitted that all the contentions raised by the assessee in the aforesaid grounds of appeal were raised by the assessee before the learned CIT(A) who has already considered the same while adjudicating on this issue in the impugned order. It is submitted by the learned D.R. that since the assessee has not been able to bring on record any material to controvert the findings of the learned CIT(A) on this issue of restriction of G.P. in the impugned order, the grounds raised by the assessee ought to be dismissed.
5.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record on the issue of rejection of the assessee's books of account and the estimation of G.P. The learned CIT(A) has dealt with this issue at paras 4.1 to 4.3 of the impugned order as under: -
"4.1 AO observed from the data reported in Trading account of assessee's proprietary concern, M/s. Lumionus Diamond that the assessee had shown gross profit of Rs.32,19,551/- on a total sales of Rs. 123.73 crores, resulting in apparent G.P. Ratio to be 0.26%. This was as against G.P. Ratio of 0.24% achieved at gross profit of Rs.22,10,661/- on total sales of Rs.91.15 crores achieved in preceding previous year. The AO further observed that G.P. ratio of 0.26% was achieved only because of Exchange Gain difference of Rs.1,57,59,827/- credited to Trading account which was not due to physical movement of goods, and excluding which the assessee suffered a huge loss of Rs. 1,25,40,277/-. It was also seen from stock summary filed by assessee that uniform rate was applied for valuation of cut and polished diamonds as well as rough diamonds, though the diamonds were bought in mixed qualities, and diamonds differed in shape, size, color, dimension and clarity. The stock register was maintained quantity wise, and not quality wise. In view of these findings, the assessee was asked as to why the books of account shouldn't be rejected and overall G.P. rate be taken a0.5% of total sales of Rs.123.73 crores. In response, the AR of assessee submitted that the accounts are regularly maintained, which are consistent and results of profits/losses could be well deduced, hence the question of rejection of books of accounts didn't arise.
The aforesaid submission of assessee was not found satisfactory and 5 ITA 4892/Mum/2014 Shri Vivek Shyam Johri acceptable by the AO. He pointed out that the assessee failed to prove the nexus by correlating the purchase cost of a particular lot of diamonds and its corresponding sales value showing that the G.P. margin in the transaction was very low. The assessee's arguments that the accounts were audited and maintenance of stock register is not mandatory were also rejected by AO. The AO observed that in preceding A.Y. 2010-11, the G.P. ratio of 0.24% was achieved due to Exchange Loss Difference of Rs.2,29,51,911/-, excluding which the assessee had made huge gross profit of Rs.2,49,42,743/-. Hence, there was a vide variation in the reported business results for these two years. The AO rejected various other arguments of the assessee. Finally, the AO rejected the books of accounts and estimated the G.P. ratio of 0.5% on total sales of Rs. 123.73 lakhs, worked out to Rs.61,86,562/- and after giving credit for already declared G.P. amount of Rs.32,19,550/- and the difference amount of Rs.29,67,013/- was added to total income of the assessee. 4.2 During appellate proceedings, the AR of appellant made written submissions vide letter dated 07.05.2014, the relevant portion of which is reproduced as under:
I. Rejection of books and estimation of G.P :
Our client was assessed by learned I.T.O. for A.Y. 2011-12 wherein he has estimated the G.P. @ 0.5% against the G.P declared @ 0.26% by rejecting the book results. The said estimation was made arbitrarily without considering the accounts properly maintained by our client. In this respect our client says as follows.
"1. He had maintained perfect and complete accounts on the basis of accounting: principles and procedure.
2. The accounts were duly audited U/S 44AB of Income tax act after complete and perfect checking.
3. He had also maintained stock register on quantity basis showing receipts and issues correctly quantity wise.
4. His purchase of diamonds was mostly imports in lot of mixed diamonds. This practice is quite prevalent in diamond trade.
5. He had sold the diamonds to different costumers as per requirements out of lots purchased. The quantity wise account was well maintained by him.
6. From the accounts the result of profit or loss could be well deduced correctly.
7. The valuation of diamonds at the end of the year was made at market rate prevailing at that time of each item of diamonds.
8. All the books of accounts including stock register were duly produced before the learned I.T.O. He had verified the same and no discrepancy was found out.
6 ITA 4892/Mum/2014 Shri Vivek Shyam Johri
9. Accounts were maintained so perfectly that the same were to be accepted in toto. There was no scope for rejection of accounts.
10. He was earlier assessed u/s 143(3) for A.Y. 2009-10 wherein G.P. addition was made 0.5%. In appeal before CIT(A) the same was reduced and kept the addition @ 0.1%. Hence the order of CIT(14) for A.Y. 2009-10 may he considered and the G.P. rate should not be increased more than 0.1% in any case. (copy of order of CIT(A) filed).
11. However our client further says that there should not be any addition on account of estimation of G.P. and the results shown by the books of accounts be accepted. Our client further says that diamond trade was passing through peculiar condition wherein trade has become so competitive that traders do business at the lowest margin of profit i.e. 0.1% or sometimes at loss in order to exist in the market."
4.3 I have perused the facts of case and submissions of appellant very carefully. For easy understanding, the comparative figures available on records for three assessment years are tabulated below:
(Rs. in crores) A.Y. 2011-12 A.Y. A.Y. 2009-
Particulars (under
2010-11 10
consideration)
Sales 123.73 91.15 51.17
Gross Profit/(Loss) 0.32 0.22 0.20
G.P. Ratio shown by appellant 0.26% 0.24% 0.30%
Exchange Profit/(Loss)
Difference included in Gross 1.57 (2.29) (2.29)
Profit
Gross Profit/(Loss), excluding
Exchange Profit/Loss (1.25) 2.51 2.49
Difference
Resultant G.P. Ratio -1.01% 2.76% 4.87%
It can be observe from the above, that the appellant's sales has grown from Rs.91.15 crores in A.Y. 2010-11 to Rs.123.73 crores in A.Y. 2011- 12 under consideration, still the gross profit ratio excluding the Exchange Difference has decreased from 2.76% to -1.01%. The appellant has however maintained to show the G.P. ratio in positive in A.Y. 2011-12 under consideration, after accounting for Exchange Profit of Rs.1.57 crores. Now the question arises as to when the appellant's sales has increased substantially from Rs.91.15 crores in preceding assessment year to Rs.123.73 crores in current assessment year, and also the Exchange Difference included therein converted from a loss of Rs. (2.29) crores to a profit of Rs.1.57 crores, still why the appellant could not show good profits as compared to previous assessment year?
I find that the appellant in his written submissions has not given any explanation for sharp decrease in his profits excluding the exchange 7 ITA 4892/Mum/2014 Shri Vivek Shyam Johri difference. The only contention of appellant is that the accounts are duly maintained and are audited, from which results of profit or loss could be deduced. I feel that when the AO had doubted the books of accounts on grounds of the appellant not showing adequate profits, the onus was heavily on the appellant to justify with facts and figures the reasons of sharp fall in profits, however the appellant has failed in providing any such details or explanation during assessment as well during present appellate proceedings. The AO has specifically pointed out that the appellant is not maintaining quality-wise stock register, which also justifies the action of AO in rejecting the books of accounts, and the appellant has failed to give any satisfactory explanation as to the method of keeping proper stock records. In these circumstances, the rejection of books of accounts by the AO is not unjustified. Now as regards the estimation of profits, the AO has estimated the gross profits @0.5% of total sales of Rs. 123.73 crores i.e. at Rs.61,86,562/-, as against @0.32% declared by the appellant amounting to Rs.32,195550/-, and thereby made net additions of Rs.61,86,562 - 32,19,550 = Rs.29,67,013/-. The appellant in his written submissions has said that in A.Y. 2009-10, the addition of 0.5% to G.P. had been reduced to 0.1% by CIT(A), and hence the same may be considered for the year under consideration. I find that in A.Y. 2009-10, it was a gross addition of 0.5% of sales without giving any credit of G.P. already declared by the appellant, which addition was subsequently reduced to 0.1% of sales by CIT(A); whereas in the assessment year under consideration, the net addition to G.P. is only 0.5% - 0.32% = 0.18% of sales. Moreover, in current assessment year there is Exchange Difference profit of Rs.1.57 crores as against Exchange, Difference loss of Rs. (2.29) crores in A.Y. 2009-10, the full effect of which is hardly reflected in the net additions made by AO @0.18%, as against 0.1% confirmed for A.Y. 2009-10. In the aggregate of aforesaid discussions, I do not find the estimation made by the AO unreasonable, and hence there is no need to interfere with the same. Therefore, the addition made of Rs.29,67,013/- is confirmed and the ground no. I of appeal is dismissed."
5.3.2 We find that, as contended by the learned D.R. the learned CIT(A) has addressed the issue in detail in the impugned order (supra) covering all the grounds raised at S.No. I (1 to 4) before us (supra). We further observe that the assessee has failed to place on record material evidence to controvert the findings of the learned CIT(A) on the issue of rejection of books and estimation of G.P. In this view of the matter, we are of the considered opinion that there is no cause for us to interfere with or deviate from the decision of the learned CIT(A) and therefore uphold his findings on rejection of the assessee's books of account and the estimation of G.P. 8 ITA 4892/Mum/2014 Shri Vivek Shyam Johri @0.5% consequently leading to the addition of `29,67,013/-. Accordingly ground I (1 to 4) of the assessee's appeal is dismissed.
6. Ground No. 2 (1 to 5): Disallowance of Expenditure on salary -
`3,00,000/-
6.1 In these grounds, the assessee assails the impugned order of the learned CIT(A) in disallowing salary expenditure of `3,00,000/- paid to two employees for specialized services performed by them in the ordinary course of the assessee's business and therefore ought not to have been disallowed under section 40A(3) of the Act. It is submitted that these expenses were genuine and were paid by account payee cheques, though they were, paid at a higher rate than other employees were paid. It is also contended that it is the prerogative of the businessman/assessee as to how his business is to be run and how and when payment is to be made to employees.
6.2 The learned D.R. for Revenue was heard in support of this finding of the learned D.R. in the impugned order in respect of the disallowance of `3,00,000/- under section 40A(3) of the Act in respect of salary expenditure claimed as paid to two employees, Shri Mahesh Verma and Shri Milind Dighe. It is submitted that all the arguments put forth in the grounds raised by the assessee (supra) had been considered by the learned CIT(A) while passing the impugned order. The learned D.R. strongly argued that since no material evidence has been brought on record by the assessee to controvert the findings of the learned CIT(A) on this issue in the impugned order, the grounds raised by the assessee ought to be dismissed.
6.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record on the issue of the disallowance of salary expenditure of `3,00,000/- claimed as having been paid to two employees of the assessee. The learned CIT(A) has dealt with this issue at paras 5.1 to 5.3 of the impugned order as under: -
"5.1 The AO observed that the assessee had passed certain Journal entries aggregating to Rs.3,00,000/- debiting the salary account. On being show caused as to why the said salary payment shouldn't be 9 ITA 4892/Mum/2014 Shri Vivek Shyam Johri brought to tax u/s 40A(3), the assessee submitted that the payment of Rs.1,50,000/- was made to Mahesh Verma & Milind Dighe initially by account payee cheques only, which was not as salary but as an advance; and subsequently, in January, February and March, 2011, the said amount in 3 equal installments were transferred from their advance account to salary account. The AO did not find the said explanation of appellant as tenable in law. According to him, the question that since they became a salaried employee of assessee only w.e.f. 01.01.2011, then what was the necessity for the assessee to advance an amount to any unknown person, remained unanswered by the assessee. The assessee's contention that salaries were paid at random from time to time and journal entries passed for different months was also not acceptable since the amount was so paid to Mahesh Verma on only two occasions, and to Mr. Milind Dighe at only one occasion. The assessee's arguments that payment of Rs.50,000/- to Milind Dighe included in Rs.2,00,000/- given on 13.01.2011 by cheque) was for the month of April, 2011 was also far from truth, since the said amount was not reflected in Loans & Advances in assessee's balance sheet as on 31.03.2011. The assessee's submissions also lacked justification for having made high end payment of salary of Rs.50,000/- to both of them, especially when the rests each of 16 employees had been paid less than Rs.20,000/-. In view of the above, the said amount of salary of Rs.3,00,000/- Out of Rs. 16.48 lakhs was disallowed and added to total income of the assessee. 5.2 During appellate proceedings, the AR of appellant made written submissions vide letter dated 07.05.2014, the relevant portion of which is reproduced as under:
"II. Disallowance of salaries paid to employees of Rs 3,00,000/- Our client says that he had engaged some employees for looking after assortment and to determine the quality of diamonds. The persons engaged were well expert in the line of trade. His business requirement was absolute. As these persons were expert he had engaged them and even paid them salaries in advance. Advance salaries were paid to two persons, Mr. Mahesh Verma and Mr. Milind Dighe of Rs1,50,000/- each at the rate of Rs 50,000/- per month. Both the persons had worked for him. Salary paid to them was squared up since both had worked up to March 2011. (copy of salary register (muster book) was duly filed with I.T.O.) Mr. Milind Dighe was paid one additional salary by account payee cheque for the month of April 2011. The said amount remained outstanding as advance as on 31st March 2011. The same was duly shown in the balance sheet as advance to Mr. Milind Dighe. The salaries were paid in due course of business and was purely for business purposes. The business man knows the exigencies of business and acts upon the same accordingly. The salary paid being for business purposes should be allowed in toto. The disallowance made on this account is wrong and unjustifiable. Further while computing the income Rs.3,00,000/- has been disallowed u/s 40A (3) of IT Act. The same is wrong since all the payments were paid by 10 ITA 4892/Mum/2014 Shri Vivek Shyam Johri accounts payee cheques only. This fact is also recorded by I.T.O. in his assessment order. Further Mr. Milind Dighe's name for advances given to him is duly reflected in the balance sheet as on 31' March 2011. A copy of balance sheet with schedules is also filed here with. 5.3 On perusal of the facts of case, I find that the amount of Rs.1,50,000/- was advanced to Mr. Mahesh Verma on 21.08.2010 (Rs.1,00,000/-), and on 16.10.2010 (Rs.50,000/-) and to Mr. Milind Dighe on 13.01.2011 (Rs.2,00,000/-). The employments of both were shown since 01.01.2011. The appellant has submitted that both the persons were expert and hence he had engaged them and even paid the salaries in advance. I find that the appellant has neither submitted any documentary evidence in support of their expertise in the field of Diamonds to justify the higher salaries paid to them compared to other employees, nor any contract with the employees to show that the said amounts were being paid towards advance salaries. In normal circumstances, the payment of advance salaries for several months, that too even before appointment in one case, certainly raises doubt as to the genuineness of expenses booked by appellant. In the case of Milind Dighe, the advance payment is shown upto April, 2011 i.e. extending to next financial year, which certainly would be avoided by any businessman under normal circumstances. Such advance payment of Rs.50,000/- appearing as on 31.03.2011 in name of Mr. Milind Dighe under the head "Advance to Suppliers" does not by itself prove the genuineness of expenses booked by the appellant. The appellant has not submitted sufficient evidence to prove that the said payments were genuinely made towards salaries. Also the appellant's contention that the AO should not make separate addition on account of disallowance of salary when he has estimated the G.P. as a whole is not acceptable, since the salaries is a charge after calculating the Gross Profits.
In view of above, I confirm the disallowance of Rs.3,00,000/- and therefore, the ground no. 2 of appeal is dismissed."
6.3.2 We find that, as contended by the learned D.R. for Revenue, the learned CIT(A) has addressed the issue in detail in the impugned order ' (supra) which addresses all the grounds raised at S.No. II (1 to 5) before us (supra). We further observe that the assessee has failed to place on record any material evidence to controvert the findings of the learned CIT(A) on the issue of disallowance of expenditure of `3,00,000/- claimed as paid as salary to two employees by the assessee. In this view of the matter, we are of the considered opinion that there is no cause for us to interfere with or deviate from the decision of the learned CIT(A) on this issue and therefore conform and uphold the same. Accordingly, ground No. 11 (1 to 5) of the assessee's appeal is dismissed.
11 ITA 4892/Mum/2014 Shri Vivek Shyam Johri
7. In the result, the assessee's appeal for A.Y. 2011-12 is dismissed.
Order pronounced in the open court on 26th April, 2016.
Sd/- Sd/-
(Sandeep Gosain) (Jason P. Boaz)
Judicial Member Accountant Member
Mumbai, Dated: 26th April, 2016
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) -25, Mumbai
4. The CIT - 14, Mumbai
5. The DR, "F" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.