Hari Chand Prop., Hoshiarpur vs Department Of Income Tax

The Assistant Vs. Sh. Hari Chand Prop. Hari Chand Commissioner of Income & Sons, 17-Sabzi Mandi, Tax, Hoshiarpur Circle, Hoshiarpur. Hoshiarpur PAN:ACWPC7651B(Respondent) (Appellant)

Appellant by: Sh. Tarsem Lal,DR Respondent by: Sh. V.K. Malhotra, Adv.

Date of hearing: 09.12.2014 Date of pronouncement: 02.01.2015

ORDER

PER: B.P. JAIN (AM):

This appeal of the revenue is arising from the order of

Learned CIT(A)-Jalandhar, dated 11.11.2013 for the Assessment

Year 2007-08.

2. The revenue has raised the following grounds of appeal.

"1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting the trading addition of Rs.5,08,272/-.

2. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of Rs.2,04,000/- out of total addition Rs.2,40,000/- rightly made by

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the A.O. on account of disallowance of interest out of interest charges claimed by the assessee.

3. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of Rs.11,12,508/- made by the A.O. out of receipt of labour charges treated as commission income of the assessee.

4. That, it is prayed that the order of the Ld. CIT(A) be set- aside and that of the Assessing Officer restored.

5. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

3. As regards Ground No.1:- The learned CIT(A) has deleted the

additions of Rs.5,08,272/- under three different headings as under:

(i) Trading results and Commission Income Rs.2,18,530/- .

(ii) Trading results and Commission income from Brahanpur Branch Rs.2.03,755/-.

(iii) Trading results and Commission income from Jalgaon Branch Rs.85,987/-.

Total Income of Rs.5,08,272/-

4. The brief facts with regard to the Trading results and business

income in (i) is that the assessee is basically selling goods i.e.,

fruits, sent by the outstation/ out of state parties for sale in fruit

market (Mandi) of Hoshiarpur. The assessee gets a commission of 5%

besides the profit for the goods sold by the assessee for purchases

shown in its own name out of such goods in other Mandis around

Hosiarpur and even in Himachal Pradesh. The assessee has declared

Gross turnover/gross receipts at Rs.82,67,729/- at G.P rate(1.35%)

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and Commission received at Rs.29,70,053/- during the impugned year

as compared to the Gross turnover/gross receipts at Rs.87,40,023/- at

G.P rate (1.24%) and Commission received at Rs.30,44,833/- in the

preceding year. The books result were examined by the AO with

regard to the 500 boxes for of "chiku" for sale from M/s Mangu bahi

and Sons, Ahmedabad in specific, where a G.P rate of 11.01% has

been found. Similarly, with regard to the consignment of 3182 Boxes

of "grapes" for sale from M/s. Pandit Kutchre Asuande, Nasik a G.P.

rate of 3.49% was found by the AO. Thus on random basis a G.P rate

of 11.01% and 3.49% was declared by the assessee, whereas overall

G.P. declared by the assessee in the books of account was 1.35%

only. The assessee came out with explanation of certain instances

where only losses had occurred. However, the AO was of the view

that since the assessee had earned commission of 5% on the

commission Sales and goods which were not consumed in the open

auction, but were purchased by assessee at a lesser rate and sent to

other markets for sale, in such a situation the assessee was bound to

earn profits even better than 5%. Accordingly, as per the AO, a G.P

rate of 1.35% was not at all reflecting the correct and complete

picture of the various transactions and even the Auditor had given

the following comments in Col. 28(a) of his audit report.

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"No day to day quantitative details are maintained by the assessee."

Accordingly, the AO applied a G.P rate of 4% on the Sales of

Rs.82,67,729/- and made addition of Rs.2,18,530/- in the trading

result of M/s. Hari Chand and Sons.

5. As regards Trading results and commission income from

Brahanpur Branch, the assessee has declared the trading of Kela

where purchase of Rs.49,43,542/- and sale of Rs.49,37,278/- at a

gross loss of Rs.6,264/- had been declared. Out of said sale the

assessee had declared a sale of Rs.41,76,418/- in cash. The

explanation with regard to the said loss was submitted by the

assessee vide letter dated 25.11.2009 that the assessee receives ripe

bananas which do not allow the dealer to fetch maximum price as

compared to Kacha (raw) Banana and in such circumstances left over

Bananas of poor quality and small size are sold in the market at some

price, else the assessee will loose the customer permanently. He

submitted that their sales and purchases are fully vouched.

6. The AO after considering the explanation of the assessee made

the addition of Rs.2,03,755/- by considering that barring one or two

instances, where consignments got delayed due to accidents, the

other consignments were dispatched as regular sales from the origin

of the Produce so there is no question of making any kind of distress

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selling. Moreover, from the same consignment i.e.Truck, the assessee

has made sale of some goods to regular dealers/traders and balance

has been shown cash sales e.g. out of 134 qtls purchased 22.07.2006

on 22.07.2006 for Rs.82,661/20, the assessee sold 34.43 qtls on

22.07.2006 to M/s. Gian Chand and Sons at Rs. 28,293/- and balance

about 99.57 qtls in cash for Rs.31.985/- only. Similar was the

position in other consignments. There was no specific reason for the

assessee to make such kind of distress selling. In fact through cash

Sales, the name of the real buyers and exact rate is not disclosed and

Sales are booked at much less rate for cash sales on the pretext of

perishable nature of goods. How come that assessee has made sales

of just 15.41% (Rs.760860 out of Rs.49,37,278/-) to regular traders

on profit and rest of cash sales to the tune of Rs.84.59%

(Rs.41,76,418 out of Rs. 49,37,278/-) as compulsive and distress

selling on the pretext of perishable nature of goods. It is not out of

place to mention that assessee is very well experienced and in this

line of business since long. He has sufficient man power to manage

the affairs so there is no occasion to fault in regular dealings.

Distress selling would be covered only due to most unavoidable

circumstances like accidents, natural calamities, Bands etc which

would delay the consignment and not in day to day affair of the

assessee's business. In view of these facts and circumstances, the

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assessee's trading results were considered to be incorrect and

incomplete and also manipulated in cash transactions. So by taking

recourse to the provisions of section 145(3) of I.T. Act,1961 the

profits from the sale of Rs.49,37,278/- were determined at

Rs.1,97,491/- by applying rate of 4% on sale of Rs.49,37,278/-

instead of loss of Rs.6,264/- which would result in addition of

Rs.2,03,755/- on this account.

7. As regards Trading results and commission income from

Jalgaon Branch, the findings of the AO are at page 10 which read as

under:

"In this branch the assessee has shown sales to the tune of

Rs.2,20,248/- against the purchases of Rs.3,06,235/- thus

claiming gross loss of Rs.85,987/-. The assessee justified the

sales at lower rate due to market conditions. From the details

of these accounts it is revealed that assessee had made

purchases only in the months of April, 06 December, 2006,

January,07 and Feb,07 and every time the sales were shown at

the rate less than purchases. However, in the absence of

complete evidence of purchases and sales, the loss claimed in

this account is not considered as justified and as such addition

of the amount of loss of Rs. 85,987/- is made by rejecting the

trading results u/s 145(3) of I.T. Act,1961. Penalty proceedings

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u/s. 271(1 (c ) of the I.T. Act., 1961 for concealment of income

and furnishing inaccurate particulars of income are being

initiated separately."

8. The learned CIT(A) as regards the addition of Rs.2,18,530/-

observed that the AO has totally ignored explanation of the assessee

that he has also incurred losses in the sale of fruits in part of the

transaction and the assessee has not pointed out any other fault in the

books of account and has also not disputed the sales and purchases

and the AO has not rejected the books of account before making an y

G.P addition. Accordingly, he observed that the AO was not justified

in making any addition on account of trading and Commission. Thus,

he deleted the addition of Rs.2,18,530/-.

9. As regards the addition of Rs.2,03,755/- and Rs.85,987/- the

learned CIT(A) after considering the submission of the assessee

observed that the AO has ignored the explanation of the assessee that

the assessee had incurred losses in the sale of goods perishable in the

nature. The purchases and sales have not been doubted. Accordingly,

the learned CIT(A) observed that the AO was not justified in

rejecting the books of account and accordingly deleted the addition

of Rs.2,03,755/- and Rs.85,987/-.

10. The learned DR relied upon the order of the AO and the learned

AR relied upon the submissions made before the learned CIT(A).

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11. We have heard the rival contentions and perused the facts of

the case. As regards the addition of Rs.2,18,530/- with regard to M/s

Hari Chand & Sons, the AO had picked up two instances where G.P

rates of 11.01% and 3.49% had been earned by the assessee, as

evident at page 2 of the AO's order, which is not disputed. The

explanation of the assessee with regard to the instances where loss

has been incurred, the AO has considered the same at page 3 of his

order that the assessee had earned commission of 5% of commission

on sales and goods are purchased by the assessee at a lesser rate and

sent to other markets for sale. In such a situation the assessee is

bound to earn profits even better than 5% which is also apparent

from various sale instances quoted by the AO. The AO ver y

categorically had given finding that the gross profit declared by the

assessee is not at all reflective of the correct and complete picture of

the various transactions by quoting the auditor's comments that 'No

day to day quantitative details are maintained by the assessee.' This

finding of the AO tantamounts to rejecting the books of account in

sum and substance and it is treated as invoking the provisions of

Section 145(3) of the Act. Accordingly the findings of the learned

CIT(A) that no defect in books of account have been pointed out is

oblivious of the facts as narrated by the AO in his order at page 2 &

3. Moreover, the specific instances of the losses have not been

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brought on record by the learned CIT(A) or even before us for our

perusal whether there are actual losses in such transactions as

claimed by the assessee. In the absence of the same, the findings of

the AO at page 3 as mentioned herein above are found to be correct

that assessee has earned profit better than 5% as compared to G.P of

1.35% declared by the assessee. Regarding the argument of learned

Counsel for the assessee that no trading addition have been made in

the preceding year and also in the following assessment year 2009-

10, we are of the view in the circumstances and facts of the present

case that the past history and the results of following year cannot be

a guide in the impugned year, since every year is independent year

and on facts earlier history or the following years cannot be an

indicator for the impugned year results being peculiar and

independent circumstances in the present year. However, looking to

the facts and circumstances of the case and to meet the ends of

justice we direct the AO to apply a G.P rate of 2% on the sales of

Rs.82,67,729/-. The orders of both the authorities are modified

accordingly. Thus, ground No.1 of the revenue is partly allowed.

12. As regards Ground No.2 of the revenue:- The brief facts of the

case are that as per the order of the AO which is reproduced herein

below.

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"The assessee has claimed expenses on account of interest

charges of Rs.4,35,940/- in P&L account. These charges have

been paid for bank loans and unsecured loans from family

members. On the other side the assessee has shown amount of

Rs. 12 lack in imprest A/c with the proprietor or assessee,

besides cash in hand of Rs.10,92,463/- as on 31.03.2007. Still

further, assessee has given interest free loan of Rs. 3 lac to Sh.

Neeraj Gupta on 03.04.2006. The assessee has claimed all

these transactions as genuine business transactions in the

interest of business. However, assessee could not justify as to

how the interest free loan of Rs.3 lac to Sh. Neeraj Gupta could

be called as business loan. No such confirmation has been

produced which could justify the commercial expediency.

Similarly the huge imprest amount of Rs. 12 lac with the

proprietor which is over and above huge cash in hand of Rs.

10.92 lacs besides bank balance of about 4.72 lac, does not get

explained by saying that the same is as per business needs.

Since the assessee has himself claimed that he is working as

commission Agent for outstation parties who send their goods

for auction, so assessee is no way dealing with the farmers

directly where it needs to make cash payments. Rather in

assessee's case, the sale proceeds are sent to supplier of goods

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only after selling in the market on commission basis or on

account of sale of self purchased goods. In the totality of facts

and circumstances and in the light of the judgment of Hon'ble

Punjab and Haryana High Court in the case of CIT vs Abhishek

Industries Ltd. 286 ITR 1 (P&H) (2006), it is considered

appropriate to make disallowance of interest at the notional

interest of 12% on the sum of Rs. 12 lack of imprest account,

Rs.5 lacks from cash in hand and Rs. 3 lac as interest free

advance to Sh. Neeraj Gupta. This would result in disallowance

of interest to the tune of Rs.2,40,000/- (12% of Rs.20 lac) from

the interest claim and this would be added to the income of the

assessee."

13. The learned CIT(A) after considering the submissions of the

assessee deleted the additions and his finding in para 7.4 and 7.5 are

reproduce as under :

"7.4 In my opinion, the action of the Assessing Officer is not

justified in disallowing interest by taking into account the

amount lying in imprest account or on the basis of cash in hand

as he has not brought anything on record to establish that the

cash in hand or cash in imprest account is not actually

available with the assessee or it has been utilized by the

proprietor for his personal purposes or for the purposes other

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than the business. However, in my considered opinion he is

justified in disallowing part of the interest on the basis of

interest free advance to Sh. Neeraj Gupta by applying the ratio

of the decision in the case of Abhishek Industries. In my

considered opinion, none of the case laws relied upon by the

assessee firm supported its case as the facts of those cases are

entirely different from that of the assessee. Moreover, it has

not been demonstrated that as to how the facts of the case of

the assessee are similar to that of the case laws relied upon by

the assessee.

7.5. In the above stated facts and in the circumstances of the

case, addition made by the Assessing Officer to the extent of

Rs.36,000/- is confirmed out of total addition of Rs. 2,40,000/-

and balance addition of Rs.2,04,000/- is directed to be deleted.

In the result, ground of appeal No.3 taken by the assessee is,

therefore, partly allowed."

14. We have heard the rival contentions and perused the facts of

the case. We concur with the views of the learned CIT(A) that AO is

not justified in disallowing interest on the imprest account or cash in

hand since, there is nothing on record that the assessee has used a

said sum for personal purposes. The AO is justified in disallowing

part of interest on the basis of interest free advance to Sh. Neeraj

- 13 - ITA No.64/Asr/2014

Gupta. Accordingly, we find no infirmity in the order of learned

CIT(A) in deleting the addition of Rs.2,04,000/-. Thus, Ground No.2

of the revenue is dismissed.

15. As regards Ground No.3 of the revenue: The brief facts of the

case are as per AO's order at page 9 & 10 which is reproduced herein

below:

" The assessee's claim that labour charged from buyer and

paid to the labourers as per the market rules and regulation is

not supported by any kind of evidence except its own sale bills.

Moreover, the assessee has already included all the expenses

paid to the commission Agent, in its own Bill. The said bill of

Commission Agent very well mentions the number of truck as

well on which goods are loaded, which is evident from above

example and this is a regular feature. At the time of raising of

bill the assessee is entitled only for his own commission or any

other expense incurred over and above the consignment

expenses like truck advance and that too on the basis of a

receipt from the transporter. There is not any kind of

independent evidence of payment to labourers and any kind of

confirmation from the Mandi Authorities to the effect that as a

commission Agent/supplier of goods he has to incur labour

expenses @400/- per truck. On a random checking of bills

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issued by the assessee it has been found that in Sale bill

No.474 dated 01/08/2006 issued to M/s Nav Jeevan Fruits Co.

Kurali, the assessee has not shown any labour charges and

even commission on these sales have been charged at Rs.420/-

only instead of charges of Rs.620/-. Similarly there are other

bills as well where assessee has shown less commission and

even commission on these sales have been charged at Rs.420/-

only instead of charges of Rs.620/-. Similarly there are other

bills as well whether assessee has shown less commission and

hence lesser labour charges even for full truck load. In the

Burhanpur labour account the assessee has credited the

amounts of Rs.400/- charged per truck from the buyer but it has

debited this account through Burhanpur imprest account with

the narration, cash paid to labour. The assessee has failed to

substantiate if at all any labour payment has been his liability,

over and above the expenses paid to the commission Agent and

the advance in some cases to the transporter. It is a well known

principle that the commission Agent charges every expenses in

his bill including labour for loading of the crop (Banana in this

case) in trucks of the buyer and shows the same in the bill

raised for the purpose. In such situation, where assessee has

not been able to give any kind of evidence of payment made for

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so called labour expenses and in the absence of any

confirmation from the buyers, majority of which are unknown

due to cash sales by the assessee and no subjected to any kind

of verification and further in the absence of any confirmation

from Mandi Authorities or the Commission Agents regarding

any such payment being made by the assessee over and above

the charges shown by the local commission agent of the Mandi

in his bill, the claim of the assessee towards labour charges

payments remains unverified. As such the assessee's book

results are treated to be incomplete and incorrect within the

provisions of section 145(3) of I.T.Act,1961 and these labour

charges received from customers are treated as assessee's own

income, set off against the pseudo claim of labour expenses. In

view of these findings addition of Rs.9,24,108/- (as shown in

labour A/c) is made to commission account from Brhanpur Kela

Account. Penalty proceedings u/s 271(1)© of the Act are

initiated for concealment of income and furnishing inaccurate

particulars of income.

Like the Burhanpur Branch in this branch also, the

assessee has shown commission income from supply of

bananas. The assessee has shown commission of Rs.2,92,020/-

from total sale of Rs.1,33,70,102/-. This comes to 2.18%. In

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this case also the assessee has shown fixed commission of

Rs.620/- per truck and like in Burhanpur case, claimed labour

charges of Rs.400/- Once again the assessee failed to give any

evidence or confirmation from the sellers, buyers, Mandi

Authorities, or the actual recipients of the labour charges. For

the detailed reasons given in the case of Burhanpur, here also

the assessee's claim of labour chares is considered to be device

to set off the commission earned from the buyers which are

mainly the unknown parties due to cash sales. As such the

labour charges of Rs.1,88,400/-. (Calculated in the ratio of

400/620 of the commission income because as against

commission of 620/- labour chares as shown at 400/-) is added

to assessee's income as commission income. Penalty

proceedings u/s. 271(1)(c) of the Act, for concealment of

income and furnishing of inaccurate particulars of income are

being initiated separately."

17. The learned CIT(A) deleted the additions vide para 10.3,10.4 &

10.5 which is reproduced for the sake of convenience as under:

" 10.3. At the outset, it has been stated that no separate

addition on this account can be made in the case of Jalgaon

branch as the assessee has paid total labour charges of

Rs.9,24,108/- and combined account has been maintained in

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respect of HO & BO. The submissions of the assessee are found

to be correct. Hence addition of Rs. 1,88,000/- is deleted

subject to verification by the Assessing Officer. In the result,

Ground of Appeal No.8 is allowed.

10.4. As regards the addition of Rs. 9,24,108/-, I am of the

opinion that the Assessing Officer has not brought anything on

record which will suggest that the assessee has not paid any

labour charges which he has received from the buyers. The

additions again have been found to be made on conjectures and

surmises. The receipt of labour charges cannot be treated as

commission in the absence of any positive material which will

justify the action of the Assessing Officer.

10.5. In the above stated facts and in the circumstances of the

case, I am of the considered opinion that the Assessing Officer

is not justified in making impugned addition of Rs.9,24,108/-

and addition made is, therefore, directed to be deleted. In the

result, ground of appeal No.6 taken by the assessee is allowed.

18. We have heard the rival contention and perused the facts of the

case. The claim of the assessee is that labour is charged from the

buyer and paid to the labourers as per the market rules and

regulations. Though, the same is not supported by any kind of

evidence. As regards the labour charges from the buyer, the same is

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recovered from the buyer. As regards the labour paid as per market

rule and regulations, no such market rule and regulations have been

brought on record and no evidence of any payment to the labour has

been brought on record on any basis. The AO found that in sale bill

No.474 dated 01/08/2006 issued to M/s Nav Jeevan Fruit Co. Kurali,

the assessee has not shown any labour charges whereas commission

on these sales have been charged at Rs.420 only instead of Rs.620.

Similarly in other bills the AO has noted similar instance of the

absence of any evidence of payment of labour and the absence of any

confirmation from the buyers, majority of which are unknown due to

cash sales by the assessee. The claim of the assessee towards labour

charges payments remains unverified and accordingly the AO has

rightly invoked the provisions of Section 145(3) of the Act with

regards to the Burhanpur and Jalgaon branch. The findings of the

learned CIT(A) that the assessee has paid total labour charges of

Rs.9,24,108/- and combined account in respect of Head Office and

Branch Office has been maintained on one hand in para 10.3 and on

the other hand the learned CIT(A) has given finding that there is no

labour charges have been paid as against the abour charges received

from buyers which is a conflicting finding. Therefore, the findings of

the learned CIT(A) that the AO had made the addition on conjecture

and surmises are without any basis.

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The AO has given clear cut findings that the assessee has

claimed the labour charges from buyers but the AO has ignored that

actual payment to the labours certainly must have been made though

there no evidence on record to this extent whether such charges have

actually been paid or if paid how much have been paid. As mentioned

herein above without paying labour charges there cannot be an y

loading or unloading and certainly against the labour charges

received, the labour payment has to be allowed as an expense as

against the AO has totally ignored such labour payment. In the

circumstances and the facts of the case, as against the labour charges

received at Burhanpur and Jalgaon Branch totaling to Rs.11,12,508

and in the interest of justice we allow 75% of the labour charges as

an expense and AO is directed to disallow the remaining and retain

the said addition. Accordingly, the orders of both the authorities are

modified. Thus, Ground No.3 of revenue is partly allowed.

19. In the result, appeal of the revenue is partly allowed.

Order pronounced in the open Court on 2 n d January, 2015.

Sd/- Sd/- (A.D. JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 02.01.2015 Pk. P - 20 - ITA No.64/Asr/2014

Copy of the order forwarded to:

1. The Assessee: Sh. Hari Chand Prop. Hari Chand & Sons,

2. The Assist. Commissioner of Income Tax, Hoshiarpur Circle, Hoshiarpur.

3. The CIT(A),

4. The CIT,

5. The SR DR, I.T.A.T.,

True copy

By order

(Assistant Registrar) Income Tax Appellate Tribunal, Amritsar Bench: Amritsar.