Income Tax Appellate Tribunal - Ahmedabad
Jadia Jewellers, Ahmedabad vs Assessee on 20 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
" D " BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.A. No. 2837/ Ahd/2010
(Assessment year 2007-08)
M/s. Jadia Jewellers, Vs. DCIT, Circle 10,
Cellar Sejal Shopping Centre, Ahmedabad
Opp. Lal Banglow, C G Road,
Ahmedabad
PAN/GIR No. : AADFJ0866C
(APPELLANT) .. (RESPONDENT)
Appellant by: Shri N.C. Amin, AR
Respondent by: Shri B L Yadav, Sr. DR
Date of hearing: 20.03.2012
Date of pronouncement: 27.04.2012
ORDER
PER SHRI A. K. GARODIA, AM:-
This is assessee's appeal directed against the order of Ld. CIT(A) XV, Ahmedabad dated 01.09.2010 for the assessment year 2007-08.
2. Grounds No.1 & 2 are interconnected which read as under:
"1. That the learned CIT(A) has erred both in law and on the facts of the case in confirming disallowance out of remuneration granted to Partner shri Bhavin Jadia amounting to Rs.1,80,000/- even though the appellant has claimed partner's remuneration as per the terms and conditions of Partnership Deed and Provisions of sec. 40(b) of the I.T.Act
2. That the learned A.O. as well as CIT(A) both have accepted that the partner Bhavin J. Jadia is a working partner and therefore there is no any reasoning to disallow of remuneration paid to him as per terms of partnership deed and as per section 40(b) of the I.T. Act and therefore 2 I.T.A.No.2837 /Ahd/2010 disallowance of Rs.1,80,000/- made by Ld. A.O. and CIT(A) may be deleted."
3. Brief facts till the assessment stage are noted by Ld. CIT(A) in para 2.1 of his order which is reproduced below:
"2,1 This is regarding disallowance of Rs. 180000, out of remuneration paid to partner. In the assessment order the AO has stated that there is a change in the partnership firm Constitution. Mr. Bhavin Jadia became major and was admitted as a partner. He has been paid partners remuneration under section 40[b]. The AO asked the assessee to justify the claim. The assessee stated that. Bhavin is a commerce graduate and looks after key business activities and administration of the firm. He has inherited the art of jewelry making as this is the family business. The remuneration paid to the partner is governed by the provisions of section 40[b] and this payment has been made as per the income tax act as and is as within the limits specified under the provisions of section 40[b], The AO did not accept this explanation and that the new partner is born in 1988 and has just completed 18 years, as on the date of joining the partnership firm. He has been paid to Rs. 3 lakhs as partners remuneration. Though the partnership data provides for this remuneration, out the amount paid, is not reasonable considering the services rendered by him. The AO further stated that it is not correct for the appellant to say that the partner has completed the graduation of commerce, se he is only 18 years, and at that age of eighteen it cannot be passed. The A.O., therefore, stated that the reasonable amount of remuneration will be Rs.10,000/- per month and he disallowed the balance of Rs.1,80,000/-."
4. It was submitted b y the Ld. A.R. that as per the requirement of Section 40(b) there are only these requirements for payment of remuneration to a partner that he is a working partner and the payment of remuneration is authorized by the partnership deed and the same was paid in accordance with the terms of partnership deed and there is a restriction as per the provisions of this section regarding allowability of maximum amount of remuneration to the partner depending on the amount of book profit but there is no such requirement that the assessee has to establish that rendering of services by the 3 I.T.A.No.2837 /Ahd/2010 partner should be commensurate with the payment of remuneration. Reliance was placed by him on the judgement of Hon'ble Himachal Pradesh High Court rendered in the case of CIT Vs Anil Hardware Store as reported in 323 ITR
368.
5. Ld. D.R. of the revenue supported the orders of authorities below.
6. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement cited by the Ld. A.R. of the assessee. We find that an amount of Rs.3 lacs was paid to Shri Bhavin Jadia, who became major in that year and was admitted as a partner. Out of this payment of Rs.3 lacs, the A.O. has allowed deduction to the extent of Rs.1.80 lacs and hence, it is the admitted position of the facts that Shri Bhavin Jadia is a working partner of the assessee firm. This is not the objection of the A.O. and Ld. CIT(A) that the remuneration paid by the firm to this partner was not as per the provisions of partnership deed and that the same is in excess of the amount allowable as per the provisions of Section 40(b). The objection of the A.O. is this that the amount paid is not reasonable considering services rendered by him. But there is no provision in the relevant section 40(b) that the assessee has to establish that the services rendered by the partner are commensurate with the amount of remuneration paid by the firm. The amount of remuneration allowable in the hands of the firm is depending on the amount of profit earned by the assessee. If a partner is working as working partner of a firm and remuneration is being paid to him, such payment of remuneration will go up or will go down depending upon the profits earned by the assessee firm but the services rendered by him to the firm will not vary according to the change in the profits earned by the firm and hence, it is apparent that it is not necessary for the assessee to establish that the services rendered by the partner are commensurate with the amount of remuneration 4 I.T.A.No.2837 /Ahd/2010 paid by the firm to him. Hence, the very basis adopted by the A.O. to make part disallowance of remuneration paid by the assessee firm to a partner is not proper. Hence, we delete this disallowance because the same is without any basis. This ground of the assessee stands allowed.
7. Although the assessee has raised many grounds starting from ground No.3 to ground No.12 but the only grievance of the assessee is regarding addition made by the A.O. of Rs.1,29,60,611/- by alleging that there is Under valuation of closing stock. It was submitted by the assessee that the grounds No. 5, 6, 8 & 9 can be considered for this issue and the remaining grounds No.3, 4, 7 and 10 are only arguments and ground No.11 is consequential and ground 12 is premature. Regarding ground No.13 to 16 also, it was submitted that these are general. We, therefore, reproduce grounds No.3- 10 in this regard:
"3. That the learned CIT(A) has further erred in confirming additions of Rs. 1,29,60,611/-holding it as alleged under valuation of closing stock even though the appellant has maintained regular books of accounts which are ^itedJJ/s_44AB and in audit report in column 9(b) it has been specifically mentioned regarding maintenance of books of accounts etc. wherein it is specifically mentioned for maintenance of stock ledger and karigar ledger. However on unwanted material and without considering the facts, the additions made for alleged under valuation of closing stock is not valid in law.
4. That the learned CIT(A) has taken statement on oath of Auditor and in the statement also the auditor has accepted that he has verified original record and also prepared 3CD report on the basis of stock record verified by him even though the learned CIT(A) has confirmed the alleged under valuation of closing stock of Rs. 1,29,60,6117-. Further the auditor has specifically mentioned in clause 28(a) of the tax audit report in form no. 3CD regarding maintenance of quantitative details as " As per Annexure - 10", however the Ld. A.O. as well as CIT(A) has misread and on mistaken belief and facts the GP additions made amounting to Rs. 1,29,60,6117- by preparing trading account on his own, the addition deserves to be deleted.5 I.T.A.No.2837 /Ahd/2010
5. That the appellant has shown closing stock of Rs. 1,24,72,6267- as per stock register, As against that the Ld. A.O. has worked out it's own value of closing stock of Rs. 2,54,28,2567- and there by difference added as GP additions of Rs. 1,29,60,6117-deserves to be deleted i.r.o the facts that quantitative details has been accepted in toto, however valuation has been made without any basis and there for unwanted addition made by Ld. A.O. and confirmed by CIT(A) be deleted.
6. That the G.P, shown by the appellant is quite reasonable, fair in comparison to the market trend and learned A.O. as well as CIT(A) has not brought any comparable instance and merely on account of slight variation in rate of G.P. the finding given that profit cannot be deduced correctly on the finding that stock register is not reliable which against the material value on record and therefore the additions made by learned A.O. deserves to be deleted.
7. That the A.O. as well as CIT(A) failed to appreciate the fact that the sales has been increased by Rs. 2,38,30,026 and other direct and indirect expenditures have also increased which has been totally overlooked by learned A,O, and CIT(A) before confirming the additions made by learned A.O. which deserves to be deleted.
8. That the learned A.O. as well as CIT(A) has accepted opening stock, purchases, sales and there is no reasoning to disbelieve the closing stock and made heavy additions of G.P. of Rs. 1,29,60,6117- by preparing his own Trading Account and putting the valuation of closing stock at Rs.2,54,28,2567- as against closing stock shown by the appellant at Rs. 1,29,60,6117-and confirmed by CIT(A) which is unfair, unjust and illegal.
9. That the appellant has supplied details of purchases and sales with running average stock for the complete year and shown closing stock to the learned A.O. during the course of assessment proceedings and method adopted by appellant is running average cost method which is consistently followed in preceding years was accepted and therefore the learned A.O. made heavy G.P. additions of Rs. 1,29,60,611/- and confirmed by CIT(A), Even though without giving corresponding effects to the opening stock of same year at the same method applied by the Ld. A.O. for closing stock V valuation and therefore the action of the Ld. A.O. is contrary to the provisions of the Act, which was confirmed by CIT(A) is requires to be considered in proper perspective and addition deserves to be deleted.
10. On the facts and circumstances of the case of the appellant the G.P. additions made by learned A.O. on unwanted grounds deserves to be deleted."6 I.T.A.No.2837 /Ahd/2010
8. Brief facts till the assessment stage are noted by Ld. CIT(A) in para 3.1.1 to 3.1.3 of his order which are reproduced below:
"3.1.1 These are regarding addition of Rs. 1,29,60,611 for undervaluation of closing stock. In the assessment order, the AO has stated that the assessee is engaged in the business of manufacturing and trading of gold and silver ornaments on wholesale basis. The assessee also carries on job work on behalf of other traders. During the year the assessee has shown turnover of Rs. 7.35 crores and has shown GP rate of 8.17% and net profit rate of 2,47% as against last year's GP rate of 10.43% and net profit rate off 4.74%. The AO has made the addition on account of under valuation of closing stock for the following reasons: -
l)The AO stated that the assessee has not maintained any Jay-to-day stock register, as seen from the audit report. The remark of the auditor in column number 28 of form number 3CD is that "as per the information given to us by partner/proprietor/director. It is not practicable and possible to keep quantitative stock. At the end of the year closing stock has been taken, valued and certified by the proprietor/partner/director at cost/The AO stated that during the course of assessment proceeding, the appellant has stated that the remark made by the auditor was wrong and inadvertently this remark was made. The assessee furnished the copy of stock register is before the AO as an evidence. The AO noted that the stock register produced were not audited by the auditor. The registers were not supported by any kind of evidence such as purchases and sales bills, delivery memos to the laborers and receipt of the same from the laborers.
2) The reasons for fall in the GP rate, as well as net profit rate compared to last year, has not been explained satisfactorily. The assessee only stated that due to higher volatility in prices and increase in labor costs, the sale margin has been less. There is an increase in . indirect expenses of petrol, dies-el and electricity, which has led to the decrease in the profit. The AO stated that the reply given by the appellant was absolutely general.
3) Majority of the sales made by the assessee are to its sister concern which operates from the same business premises and the assessee has not justified the rates of sales made to the sister concern.
4) The total labor income is received only from one party, and labor charges paid to the party, which is its sister concern.
5) The AO examined a stock register produced and compared the same or with the income tax return. He noticed the following discrepancies, which has been collected by the AO in the table reproduced here under:-7 I.T.A.No.2837 /Ahd/2010
Sr Name of As per return cf income As per stock register Difference in No the item Rs.
Clg net wt Rate Clg value Clg net wt Rate Clg value
1 22 Crt 931.190 841 782812 931.190 934 869424 -86612
ornam nts
2 24 Crt 1 7015.000 894 6273281 7015.000 879 616618 5 107096
Kg bar
3 Gold loose 219.640 910 227131 249.640 955 238294 -11162
4 H M Mina 100.230 832 83409 100.230 971 97353 -13944
& Chilai
Gold Scrap
5 FD Villandi 1022.270 2740 2801211 1022 270 1450 148229 2 1318920
6 Pana Manek 29360.620 56 1650450 29460.62 0 90 265145 6 -1001006
Pukhraj
7 Mani Real 69946.340 7 481592 69946.34 0 183 128106 72 12329080
8 Pearls 3600.097 30 107726 3600.097 290 104402 8 -936302
9 Basara moti 25.280 321 4909 15.280 550 8404 -3495
10 Gold fitting 60.515 911 55124 60.515 994 60148 -5024
material
11 Silver 630.480 8 4981 630.480 0 0 0
113031.66 2 12472626 113031.6 62 254282 56 12960611
3.1.2 In view of the discrepancy mentioned in the above table and noted in
above paras the AO asked the assessee as to why the books of accounts be not rejected. The assessee in its letter 22/12/2009 replied that the difference is due to the fact that the stock has been valued, on average basis, which m an allowable method and the same has been consistently followed by the firm. Whereas in the stock register the closing stock has been shown at the purchase price based on purchases made in the month of March, 2007. However the assessee filed another letter dated 24/12/2009 and stated that there was a mistake in the letter dated 22/12/2009 in which it was seated that valuation of 8 I.T.A.No.2837 /Ahd/2010 the stock was made at an average price. However, on verification of the stock record, it is seen that the valuation of the stock has been carried out at cost price on FIFO basis. The assessee stated that the method of valuation in the show cause notice is not correct as the AO has taken average, whereas the assessee has taken closing stock as per FIFO method.
3.1.3 The AO did not accept this explanation saying that assessee's explanation is general. The assessee has been changing its the stand. Initial it stated that it was following average method, and then it stated that it was following FIFO method. Similarly with respect to the stock register initially the assessee had stated that it is not maintained and later on, it produced the stock register, which was not audited and it did not bear remarks of the auditor. In view of the above reasons, the AO rejected the books of accounts and made the addition of Rs.12960611 as undervaluation of closing stock."
9. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
10. It was submitted by the Ld. A.R. that the assessee has adopted FIFO basis of valuation of closing stock whereas the A.O. has applied his rates without any notice to the assessee. He further submitted that the A.O. has not specified that as to from where he has adopted the rates of closing stock in the chart prepared by him showing the value of closing stock at Rs.2,54,28,256/-. He also submitted that purchase and sale are accounted for as per bills and the A.O. is not disputing about the quantity of closing stock because for the value of Rs.2,54,28,256/- adopted by the A.O. for valuing the closing stock and the quantity as per valuation by the assessee is the same being 113031.662 gms. He further submitted that on page 391-392 is the working of stock valuation done by the A.O. He pointed out that on page 392 is working of the A.O. as per which addition was made by him of Rs.1,23,29,080/- in respect of "money real". He further submitted that value of opening stock of this item was Rs.2,97,050/- and value of purchase was only Rs.13,18,292/-. He submitted that as per the working of the assessee, value of closing stock of this item was 9 I.T.A.No.2837 /Ahd/2010 4,81,592/- but the A.O. has worked out the value of closing stock of this item at Rs.123.29 lacs which is apparently wrong because even if the total amount of opening stock and purchases are added, the value will be of Rs.16.15 lacs only. It is submitted that in the light of these facts, the matter should go back to the file of the A.O. for a fresh decision.
11. Ld. D.R. of the revenue supported the orders of authorities below.
12. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that the A.O. ha worked out the value of closing stock of "money real" at Rs.1,23,29,080/- in the chart reproduced by Ld. CIT(A) and by us also in the above para. The quantity of closing stock is the same as per the return of income and as per the stock register i.e. 69946.340 gms. As per the return of income, the rate adopted was Rs.7 whereas, the A.O. has adopted the rate of Rs.183. As per the details available on page 392 of the paper book, even the total value of opening stock and purchase is only Rs.16.15 lacs and hence, closing stock cannot be more than that even if there is no use for manufacturing or sale. The use for manufacturing or sale is admitted by the A.O. also because after deduction of 7893.38 gms., the closing stock quantity was worked out by the assessee at 69946.340 gms. and as per the A.O. valuation also, the quantity is the same. Now, the value of closing stock should be somewhat lesser than the total value of opening stock and purchases. The same may be more than the value adopted by the assessee of Rs.4,81,592/- but it cannot be at the amount adopted by the A.O. at Rs.123.29 lacs. Since, the substantial difference in value of closing stock is in this item only, we feel that under these facts, this issue should go back to the file of the A.O. for a fresh decision after working out the correct value of closing stock as per an accepted method of valuation of closing stock which is being followed by the assessee consistently. We, therefore, set aside 10 I.T.A.No.2837 /Ahd/2010 the order of Ld. CIT(A) on this issue and restore the matter back to the file of the A.O. for a fresh decision. The A.O. should indicate the basis of rates adopted by him for valuation of closing stock and the same should be as per the accepted method of valuation of closing stock which is consistently followed by the assessee. The A.O. should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee.
13. Regarding the grounds raised by the assessee in respect of GP addition, we find that although the A.O. has stated that he is making addition on account of GP addition but in fact, he has made addition on difference in value of closing stock and this issue has been restored back by us to the file of the A.O. for a fresh decision and, therefore, no adjudication is called for at this stage regarding the GP addition because no such addition was in fact made by the A.O. apart from addition in respect of difference in value of closing stock.
14. In the result, appeal of the assessee stands allowed in the terms indicated above.
15. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(KUL BHARAT) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
11 I.T.A.No.2837 /Ahd/2010
1. Date of dictation......25/4.
2. Date on which the typed draft is placed before the
Dictating Member.........26/4.......Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S.
4. Date on which the fair order is placed before the Dictating Member for pronouncement ............27/4/12
5. Date on which the fair order comes back to the Sr. P.S./P.S.27/4/12
6. Date on which the file goes to the Bench Clerk ...27/4/12......
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................