Income Tax Appellate Tribunal - Chandigarh
Sh. Satyaveer Singh Kothari, ... vs Department Of Income Tax on 17 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH 'B', CHANDIGARH BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA No.1169/Chd/2010 ( Assessment Years : 2007-08) Income Tax Officer, Vs. Sh.Satyaveer Singh Kothari, Ward 4 (4), Prop. M/s Chandigarh Chemicals Inds. Chandigarh. SCO 375, Sector 32-D, Chandigarh. PAN: ABJPK4237H (Appellant) (Respondent) Appellant by : Smt.Jaishree Sharma, DR Respondent by : Shri Parikshit Aggarwal Date of hearing : 17.11.2011 Date of Pronouncement : 13.12.2011 O R D E R Per SUSHMA CHOWLA, J.M. :
The appeal by the Revenue is against the order of the Commissioner of Income Tax (Appeals), Chandigarh dated 01.06.2010 relating to assessment year 2007-08 against the order passed u/s 143(3) of Income Tax Act, 1961.
2. Ground No.1 raised by the Revenue being general is dismissed.
3. The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer.
4. The learned A.R. for the assessee placed reliance on the order of the CIT (Appeals).
5. We have heard the rival contentions and perused the record. We proceed to dispose off all the grounds of appeal raised by the Revenue as under.
6. Ground No.2 raised by the Revenue is as under:
"2. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs.15,03,502/- on account of G.P. rate at an average of three preceding year i.e. difference of 2.31% of sales and added back to taxable income."
7. The addition of Rs.15,03,502/- was made by the Assessing Officer on account of GP rate. During the year under consideration the assessee had declared GP rate of 15.91% on sales of Rs.6.50 crores as against GP rate of 17.90% declared for assessment year 2006-07 and 21.02% declared for assessment year 2005-06. The assessee explained that the fall in GP rate was due to increase in the sales. The Assessing Officer rejected the explanation of the assessee and applied an average of all the three years at 18.27% and worked out an addition of Rs.15,03,502/-. The assessee placed reliance on the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Om Overseas [315 ITR 185 (P&H)]. The CIT (Appeals) vide para 6 held as under :
"6. After carefully considering the contentions and material on record. I find that No defects have been pointed out in the books of accounts. Rather to quote, the Assessing Officer in para-1 of the assessment order "the books of accounts and vouchers produced which were cross verified".
I further find that explanation of the assessee that increase in sales has resulted in lower GP was also brushed aside without giving any justification. The only reason given for estimation of profits is higher rate shown in preceding years.
In my considered opinion, this cannot be the only reason for estimating profit at higher rate since no business will ever give constant results. The profits should have been made to ascertain reasons for decrease in profit rates rather than finding as easier way out. This issue has been well settled by Hon'ble Punjab & Haryana High Court in the case of K.S. Bhatia (2003) 179 CTR [P&H] 41 wherein the Hon'ble Court has upheld the finding of the Tribunal that:
"In the absence of a definite finding that the case of the assessee comes within the ken of the first provisio to section 145(1), it is not possible for the Assessing Officer to reject the books results and make addition to the gross profit. The mere fact that the profits are law compared to the earlier year is not a circumstance or material aliunde which could justify an estimate in the circumstances of the case. We are clearly of the view that no referable question arises from the order of the Tribunal and that it was right in rejecting the reference application filed by the Department."
8. We find that the Assessing Officer has failed to point out any mistake in the books of account and only reason for the aforesaid addition was the lower GP rate declared by the assessee. Admittedly, the GP rate of the business cannot remain constant and varies from year to year. In the absence of any defect being pointed out in the books of account by the Assessing Officer, we find no merit in the aforesaid addition made on account of fall in GP rate. We find support from the order of the Hon'ble Punjab & Haryana High Court in CIT Vs. Om Overseas (supra). Accordingly, Ground No.2 raised by the Revenue is dismissed.
9. Ground No.3 raised by the Revenue is as under :
"3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. of Rs.8,06,441/- by disallowing depreciation on car of Rs.5,09,124, interest on loan for car of Rs.2,97,137/-, insurance on car of Rs.22,853/- being 50% of total insurance of Rs.45,707/- and traveling expenditure of Rs.3,77,603/- being 50% of total traveling expenditure of Rs.7,55,206/- as these were being used for personal purposes."
10. The Assessing Officer during the assessment proceedings asked the assessee to justify the use of six cars by an owner of a proprietorship concern. The explanation of the assessee in this regard was that the cars were being used by the proprietor himself and his employees for business work. The Assessing Officer also noticed that none of the family members of the assessee had any car in their names. The assessee owned vehicle such as Mercedes, Pajero and Scorpio and the element of usage by the family members of the assessee could not be ruled out. The Assessing Officer accordingly made disallowance out of car depreciation as under :
Car Depreciation Interest Mercedes Rs.3,37,350/- Rs.2,45,095/-
Swift Rs. 62,022/- Rs. 28,206/-
Skoda Rs.1,09,752/- Rs. 24,016/-
11. Further disallowance was made out of car interest. The said disallowance out of car interest and depreciation on cars for personal use was worked out at Rs.8,06,441/-. The Assessing Officer also disallowed 50% out of the insurance on vehicles at Rs.45,707/-, resulting in disallowance of Rs.22,853/-. The CIT (Appeals) noted the Assessing Officer to have made disallowance out of three cars and restricted the disallowance to 1/5th of the total expenses observing as under :
"10 After considering the rival contentions and material on record, I find that the Assessing Officer has made addition by holding that 3 cars i.e. Mercedes, Pajero and Scorpio have been used by the appellant and his family members for their personal use. Why & how only these 3 cars were marked for personal use is not clear from the assessment order. There is no denying the fact that the assessee's family comprises of wife and 2 school going children and having no car registered in the name of family members, usage of vehicle for personal purposes cannot be entirely ruled out but a disallowance of 66.70% does not seem justified on facts of the case.
11. Expenditure of personal nature must be disallowed at a reasonable scale. I restrict the addition to 1/5th of the total expenses of Rs. 18,09,473/- claimed under the head car depreciation, interest on car loans, car insurance and traveling expenses. This ground of the assessee is therefore partly allowed."
12. The assessee has failed to point out that any appeal has been filed by the assessee against the order of the CIT (Appeals). In view thereof and also on account of the facts and circumstances of the present case, we are in conformity with the disallowance of 1/5th out of total car expenses being relatable to personal use by the assessee and his family members. The ground No.3 raised by the Revenue is thus dismissed.
13. Ground No.4 raised by the Revenue is as under :
"4. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. of Rs.90,903/- on account of telephone expenses being 50% of Rs.1,81,806/- by holding that entire expenditure has not been incurred for the purpose of business."
14. The issue in the present ground of appeal is in respect of disallowance out of 10 telephones/mobiles expenses debited for the year at Rs.1,81,806/-. 50% of the said expenditure at Rs.90,903/- was disallowed by the Assessing Officer being not relatable to the business. The CIT (Appeals) vide para 14 observed as under :
"14. After hearing the rival contentions, I find that the appellant had debited an amount of Rs. 181806/- under the hear 'telephone expenses' of which 50% has been disallowed. I find the disallowance unreasonable since the use of mobiles is not the most important means of communication which every employer provides to his employees for a stricter supervision and an easy access to employees. Agreeing that the expenses of personal nature cannot be ruled out, I restrict the disallowance to 1/5th of the total expenses of Rs. 181806/- claimed under this heard, partly allowing assessee's appeal."
15. We are in agreement with the order of the CIT (Appeals) in restricting the disallowance to 1/5th of the total expenditure. The learned A.R. for the assessee has not pointed out any appeal being filed by the assessee. Accordingly, upholding the order of the CIT (Appeals) we dismiss the ground No.4 raised by the Revenue.
16. Ground No.5 raised by the Revenue is as under :
"5. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. of Rs.3,95,758/- u/s 40(a)(ia)/194C of the Income Tax Act, 1961 as the assessee in some payments had failed to furnish even the names and affidavit to justify that the payments were made to different person."
17. The issue in the present ground of appeal is against the deletion of addition made by the Assessing Officer under section 40(a)(ia)/194C of the Income Tax Act. The assessee had debited a sum of Rs.3,95,758/- on account of labour charges. During the course of assessment proceedings, the assessee furnished two names i.e. Shri Roshan and Shri Sunil to whom payments were made. The assessee in some payments failed to furnish even the names and affidavits to justify the payments being made to different persons. The Assessing Officer thus presumed that the payment was made to these two persons alone and in view of non-deduction of tax out of such payments, provisions of section 40(a)(ia)/194C of the Income Tax Act were attracted.
18. The assessee in the appellate proceedings has claimed that the said sum of Rs.3,95,578/- was paid to various persons and payment to none of the said persons exceeded Rs.50,000/- in the relevant year. Hence the provisions of section 194C of the Act were not applicable.
19. The CIT (Appeals) vide para 20 observed as under :
"14. I have carefully considered the rival contentions and material on record. A copy of ledger account of labour charges was produced along with person-wise summary of labour charges by the Counsel of the appellant. Perusal of the same reveals that no single payment exceeded Rs. 20000/- and the aggregate payments to any one party did not exceed Rs. 50000/- in a year. I am of the view that the appellant was not liable to deduct tax at source u/s 194. As such, the addition of Rs. 395758/- on account of disallowance of labour charges is deleted, allowing assessee's plea on this ground."
20. The learned D.R. for the Revenue has failed to controvert the finding of the CIT (Appeals) that no single payment exceeded Rs.20,000/- and the aggregate payment to one party exceeded Rs.50,000/- in the financial year. In view of the above said finding of the CIT (Appeals) we find no merit in invoking the provisions of section 40(a)(ia) of the Act in the facts and circumstances of the present case. Upholding the order of the CIT (Appeals) we dismiss ground No.5 raised by the Revenue.
21. Ground No.6 raised by the Revenue is as under :
"6. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. of Rs.2,32,327/- on account of bad debts debited whereas the assessee failed to produce any evidence regarding the period since when the debits were standing and what efforts were made to recover the same."
22. The issue in the present ground is against the claim of deduction on account of bad debts written off. The assessee had written off the said debts in the case of M/s Siroga International Pvt. Ltd., Ludhiana amounting to Rs.2,32,327/-. The Assessing Officer noted the assessee to have failed to produce the evidence regarding the party to which the said debts related and what efforts were made to recover the same. In the absence of any justification the write off of the bad debts of Rs.2,32,327/- were not allowed as deduction. The CIT (Appeals) vide paras 25 and 26 held as under :
"25. In the instant case, the Assessing Officer disallowed a sum of Rs. 232327.25 as bad debts written off by holding that there was no evidence regarding the period since when the debts were irrecoverable and efforts made to recover the same. It is important to note here that after the removal of word 'established' the assessee is only required to prove that debts have been written off in the books of accounts as irrecoverable. The ledger account of M/s Siroga International Pvt. Ltd. was produced before me which clearly states the amount of debts as unrecovered for more than 5 years. In order to substantiate his claim, the appellant also relied upon the case of TRF Ltd. Vs. CIT (2010) CTR14 (SC) which settled the issue of bad debts by holding as under:
"After 1st April 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee............
This position in law is well settled. After 1st April, 1989, if is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer."
In view of the above discussion, emanating from well settled position on the issue, the appeal on this ground is allowed."
23. We find that the issue in the present case stands covered by the ratio laid down by the Hon'ble Supreme Court in TRF Ltd. Vs. CIT (2010) [230 CTR 14 (SC)]. Where bad debts have been written off in the books of account as irrecoverable, in view of the amended provisions of the Act, the same is to be allowed as deduction in the year of write off, in case the income relating to such amount due had been offered to tax. We find that the assessee had explained that the amount recoverable from party was written off in its books of account and in view of the ratio laid down by the Supreme Court in TRF Limited Vs. CIT (supra), the claim of the assessee is to be allowed on write off of the said amount and no further enquiry is warranted in the said cases. Upholding the order of the CIT (Appeals) we dismiss ground No.6 raised by the Revenue.
24. Ground No.7 raised by the Revenue is as under :
"7. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. of Rs.5,40,000/- u/s 56(2)(vii) of the Income Tax Act, 1961 as the assessee could not justify unsecured interest free loans."
25. The assessee had raised unsecured interest free loans from different parties and as the amount in each case exceeded Rs.50,000/-, the Assessing Officer had invoked provisions of section 56(2)(vi) of the Income Tax Act and made an addition of Rs.5.40 lacs as income from other sources. The contention of the assessee before the CIT (Appeals) was as under :
"29. During the appellant proceedings, the Learned. Counsel submitted that these amounts were already paid off through account payee cheques. The Learned. Counsel brought the following cases to my attention :
* ITO Vs. Sh.Saranpal Singh Appeal No.380/P/08-09 dt.20.04.2009.
* Hon'ble Mumbai ITAT in Chandrakaant H.Shah Vs. ITO (2009) 121 TTJ 145."
26. The CIT (Appeals) held as under :
"30. I have considered the rival contentions. Copies of ledger accounts of all the three persons have been perused. The amounts received have been paid off by August, 2009. Further, the case of Saranpal Singh [supra] quoted by the Assessing Officer is squarely applicable to the facts of the case. As such, the addition of Rs.540000/- made u/s 56(2)(vi) is deleted, allowing assessee's appeal."
27. The issue in the present appeal stands covered by the ratio laid down by the Tribunal in ITO Vs. Sh.Saranpal Singh Appeal No.380/P/08-09 dated 20.04.2009. In view thereof we find no merit in the present addition made by the Assessing Officer by invoking provisions of section 56(2)(vi) of the Income Tax Act. Accordingly, ground No.7 raised by the Revenue is dismissed.
28. Ground No.8 raised by the Revenue is as under :
"8. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. on account of business promotion expenses and guest expenses, (i.e. Rs.3,57,250 + 357,855/-) whereas the assessee failed to furnish justification of these payments and added 1/5th of these expenses."
29. The disallowance in the case was made out of business promotion expenses of Rs.3,57,250/- and business guest expenses of Rs.3,57,855/-. The Assessing Officer had disallowed 1/5th of the said expenses as the assessee has failed to furnish justification for the said expenses. The CIT (Appeals) vide para 33 observed as under :
"After considering rival contentions, I find that business promotion expenses are very closely associated with the sales & during the relevant year, appellant had shown sale of Rs. 65086651/- as compared to which business promotion expenses are Rs. 357250/- which comes to 0.54% of total sales. If find that on one hand the business promotion expenses are quite low and reasonable and on the other hand no discrepancies have been pointed out which could lead to disallowances of 20% of the expenses. Not entirely ruling out the personal element involved, the disallowance of expenses is restricted to 10%, partly allowing assessee's plea on this issue."
30. The nature of the business expenditure claimed by the assessee on account of business promotion and business guest expenses cannot be held to be non-business purposes. In view of the total turnover declared at Rs.6.50 crores and the total expenditure being low, we are in agreement with the order of the CIT (Appeals) in restricting the disallowance to 10% of the expenses. Ground No.8 raised by the Revenue is thus dismissed.
31. Ground No.9 raised by the Revenue is as under :
"9. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by the A.O. on account of conveyance expenses being 1/5th of total expenses of Rs.325,665/-."
32. The disallowance of 1/5th of the total expenditure debited under the head 'conveyance expenses' for employees, was made by the Assessing Officer. The CIT (Appeals) vide para 37 held as under :
"37. During the appellate proceedings, the details of conveyance expenses was produced before me, perusal of which shows that the amount has been reimbursed to employees and has not been incurred by the appellant. Since the appellant had debited conveyance expenses and taxi charges, the issue of debit of personal expenses cannot be ruled out. I, therefore, restrict the disallowance to 1/10th of the total expenses claimed under this head, partly allowing assessee's appeal."
33. The total expenditure claimed by the assessee was on account of reimbursement to the employees on account of conveyance expenses. The CIT (Appeals) restricted the said disallowance to 10% of the total expenses claimed.
34. In the totality of facts and circumstances of the case we uphold the order of the CIT (Appeals) in this regard and dismiss the ground of appeal raised by the Revenue.
35. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on this 13th day of December, 2011.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated 13th December, 2011
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
True Copy
By Order
Assistant Registrar, ITAT, Chandigarh
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