Harish Chand Jagwayan, Jaipur vs Assessee

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 850/JP/2011 fu/kZkj.k o"kZ@Assessment Year : 2007-08

Shri Harish Chand cuke The ACIT Jagwayan Vs. Circle- 4 F-79A, Road No. 6C, Jaipur VKIA ,Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AANPJ 9220 G vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajesh Gupta, CA jktLo dh vksj ls@ Revenue by :Smt. Neena Jeph, JCIT

lquokbZ dh rkjh[k@ Date of Hearing : 12/05/2015 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 12 /06/2015

vkns'k@ ORDER PER R.P. TOLANI, JM

This is an appeal filed by the assessee against the order of the ld.

CIT(A) -II, Jaipur dated 12-07-2011 for the assessment year 2007-08

wherein the assessee has filed the concise grounds as under:-

''1. That the ld. CIT(A) has erred in law and in facts in confirming disallowance made by AO of salary and bonus to the extent of 15% paid to Smt. Sweety Jagwayan and further in enhancing it to 100% of salary and bonus without taking into consideration that her salary and bonus are very reasonable looking to her work, responsibility and performance and no opportunity is allowed before making enhancement.

2 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

2. That the ld. CIT(A) has erred in law and in facts in confirming disallowance made by AO of whole of salary and bonus for Rs. 1,74,000/- paid to Shri Utkarsh Jagwayan without considering new facts of the year.

3. That the ld. CIT(A) has erred in law and in facts in confirming 15% disallowance out of 20% allowance made by AO for vehicle running and maintenance expense, conveyance expenses, scooter expenses and depreciation on vehicle only as per assumption and presumption without any positive finding.

4. That the ld. CIT(A) has erred in law and in facts in confirming 15% of disallowance out of 20% disallowance made by AO out of telephone expenses and depreciation of telephone instrument only as per assumption and presumption without any positive finding, ignoring the facts mentioned in assessee's reply.

5. The ld. CIT(A) has erred in law and in facts in confirming 15% disallowance out of 20% disallowance made by AO on depreciation on vehicle and telephone.''

2.1 Brief facts are - the assessee claimed payment of salary and bonus

to Smt. Sweety Jagwayan i.e. son's wife and Shri Ishu Jagwayan, elder

son, being related person specified in terms of Section 40(2)(b) of the

Act, ld. AO disallowed 15% of such payments in case of Smt. Sweety and

50% in case of son holding the payments to be excessive and

unreasonable. The AO was of the view as to Shri Utkarsh Jagwayan,

second son of the assessee that he was regular student of B.Com (Second

Year) having no past adequate experience and knowledge of the business 3 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

and he could not devote more time in the business. Therefore, the 15%

disallowance was made as excessive.

2.2 Apropos Smt. Sweety Jagwayan, daughter-in-law of the assessee

was a commerce graduate claiming to be looking after the accounting and

financial management of the assessee. She was given salary of Rs.

55,000/- and Rs. bonus of Rs. 11,000/- during the year. It was claimed

that her salary and disallowance were disallowed by 50% by the AO .

2.3 Aggrieved, the assessee preferred first appeal contending that both

of them were working and rendering the actual services for the assessee's

business. Son was in-charge of production of the factory and was looking

after the quality of production and plant performance and Sweety was

looking after accounts department and administration. The payment in

question were made through cheques on regular basis. After sometime,

the son has established his own factory which was earning good profits. It

shows that he was skilled and possessed good experience acquired while

managing assessee's business. The statement of Shri Ishu Jagwayan was

recorded who confirmed the rendering of services and receiving the

payment of salary and bonus by cheques in the case of Smt. Sweety

Jagwayan The disallowances were enhanced to acquire salary and bonus

by following observations ;

4 ITA No. 850/JP/2011

Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

''3.2. As far as salary to Smt. Sweety Jagwayan is concerned, the appellant has merely submitted a general explanation that she was a commerce graduate and was looking after accounting and financial management. However, no evidence of rendering actual services has been filed. Further, late on she has allegedly left the services of the appellant and joined the business of her husband. The counsel of the appellant has failed to furnish any appointment letter in her name. The terms of employment and nature of work have not been specified by the appellant. The fact that she was looking after financial management without an iota of evidence will not entitle the assessee to claim salary in the name of a housewife. Even otherwise doing B.Com just means that she is educated but it is doubtful whether she is professionally competent to do the job entrusted to her i.e. accounting and financial management. The appellant was unable to produce satisfactory evidence to show that Smt. Sweety Jagwayan being a housewife had rendered actual services commensurate to her high salary. It is not understood as to what her responsibility and if that is not known, how her performance and results thereof could be evaluated.

3.3 In the present case, the appellant has failed to submit any evidence as regards the rendering of any service by Smt. Sweety Jagwayan. I am therefore, constrained to disallow salary and bonus of Rs. 66,000/- paid to her since same is in the nature of an expenditure for non-business purposes. I, therefore, direct the AO to enhance the addition to Rs. 66,000/- instead of Rs. 9900/- made by him. This ground of appeal is dismissed and enhanced. Since the total income after giving effect to the present appellate order does not exceed the assessed income, notice for enhancement of income is not necessary.

5 ITA No. 850/JP/2011

Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

2.4 The ld. CIT(A) relied on the following case laws:-

(i) Bally Jute Co. Ltd. vs. CIT (158 ITR 736), Kol.

(ii) Birla Jute Mfg. Co. Ltd. vs. CIT , 128 ITR 234

2.5 Apropos Shri Utkarsh Jagwayan, the ld. CIT(A) reproduced the

assessee's contentions as under:-

''4. In the second ground of appeal, the appellant has challenged the addition of Rs. 1,74,400/- being disallowance of whole of the salary of Rs. 1,45,000/- and bonus of Rs. 29,400/- paid to Shri Utkarsh Jagwayan during the year under consideration. Before me, the counsel of the appellant has argued that the AO had erred in law and in facts in making disallowance of whole of the salary and bonus for Rs. 1,74,000/- paid to Shri Utkarsh Jagwayan following judgment of my predecessor in assessment year 2006-07 without taking into consideration that Shri Utkarsh Jagwayan has fully devoted in assessee's business after completion of his studies and he attended assessment proceedings and offered suitable copies of replies of the AO and his statement was not record even through A.R. of the assessee offered for the same. Shri Utkarsh Jagwayan, son of the assessee was looking after general administration and performance of labour/ staff. The salary of Rs. 10,000/- per month for part of the year and Rs. 15,000/- per month thereafter was allowed to him. In addition, bonus of Rs. 29,400/- was also being to him. The payments wee made through cheques on regular basis. Now a days, he was fully responsible for day to day working in the assessee's factory. Shri Utkarsh Jagwayan was a part time employee of the assessee during earlier two assessment years. He was a regular student of B.Com (2nd year) and B.Com (3rd year) during the period covered under assessment year 2005-06 and 2006-07 respectively. He was attending assessee's office 6 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

between 2.00pm to 8.00 pm regularly on those years. His salary was disallowed on the basis of misconception that he was not working at all and he did not have experience or knowledge about assessee's working. In Private sector salary is determined on the basis of responsibility, performance and results. Therefore, salary payments were very reasonable and could not be compared with emoluments of other irresponsible employees. The Hon'ble Income Tax Appellate Tribunal vide their judgement dated 10-09-2010 in ITA No. 1654/JP/2008 for assessment year 2005-06 restored back the matter of disallowance of salary of Shri Utkarsh Jagwayan to the AO for consideration afresh. It was prayed to delete the impugned addition.''

2.6 The ld. CIT(A) however, observed that :-

(i) ''4.1....... Shri Utkarsh was studying in second year B.com and that too as a regular basis by joining the college, it is not possible to work on full time basis unless it is proved with supporting evidence. During the course of statement recorded as well as in assessment proceedings besides the statement, no evidence could be given that whether genuinely he was serving the business of appellant particularly when his elder brother as well as other employees were given salary which was claimed as a deduction.

(ii) 4.2.... Shri Utkarsh Jagwayan had completed his graduation and therefore, salary and bonus paid to him could not be disallowed. I do not agree with this contention of the appellant. There is no evidence that Shri Utkarsh Jagwayan was rendering any service to the appellant. A person with B.Com. degree is not professionally competent to look after overall management or labour relations. This kind of job can be looked after only by a professional holding MBA degree or a person having requisite experience. It is obvious that this kind of explanation that Shri Utkarsh Jagwayan was looking after the management 7 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

and performance of labour, is totally preposterous and cannot be accepted. Further he was paid salary of Rs.

1,74,000/- which is quite substantial as compared to his educational qualifications. Even in assessment year 2005-06, he could not reply satisfactory to the various queries put to him by the AO. The counsel of appellant has argued that sales of the assessee had increased from Rs. 2.55 crores to Rs. 12.24 crores due to the efforts made by Shri Utkarsh Jagwayan. I do not consider it necessary to comment upon this aspect since it is nothing more than a self serving statement which remains unsubstantiated. The counsel of the appellant has failed to furnish any appointment letter in his name. The terms of employment and nature of work have not been specified by the appellant. The fact that he was looking after general management without an iota of evidence will not entitle the assessee to claim salary in the name of his son.

(iii) ''4.3 Following the order of my predecessor for assessment year 2005-06 & assessment year 2006-07 and the decision of Kolkata High Court in the case of Birla Jute Manufacturing. Co. Ltd. (supra), I do not find any reason to interfere with the findings of the AO. The addition of Rs. 1,74,000/- made by the AO is confirmed. This ground of appeal is dismissed.''

2.7 Apropos 20% disallowance out of vehicle expenses, telephone

expenses and depreciation, the ld. CIT(A) restricted it to 15% following

the ITAT judgment in assessee's own case in assessment year 2006-07.

2.8 The ld. Counsel for the assessee at the outset contends that while

making enhancement in the case of Smt. Sweety Jagwayan, no

enhancement notice was served on the assessee nor any opportunity was 8 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

provided in this behalf. The addition is made without confronting the

enhancement proposal to the assessee.

2.9 Apropos the issue of Shri Utkarsh Jagwayan, the ITAT has set

aside the issue back to the file of the AO for the assessment years 2005-

06 and 2006-07. The ld. CIT(A) has failed to appreciate this aspect and

assessee's further explanation that business acumen of Shri Utkarsh

Jagwayan can be inferred from the fact that subsequently he left

assessee's employment and started own factory which clearly shows that

he was capable of rendering services and the expenditure was wholly and

exclusively incurred for the purpose of business with regard to payment

of salary and bonus to paid to Shri Utkarsh Jagwayan on his actual

rendering of services. This Bench of ITAT has set aside the issue to find

out that Shri Utkarsh Jagwayan had started his independent business or

not and the ld. CIT(A) ought to have taken all these crucial aspects on

merits and decide it afresh.

2.10 Apropos remaining grounds in respect of vehicle maintenance,

depreciation and telephone expenses, it is pleaded that 15% disallowance

as retained by the ld. CIT(A) is excessive.

2.11 The ld. DR is heard.

9 ITA No. 850/JP/2011

Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

2.12 We have heard the rival contentions and perused the materials

available on record. Apropos ground above Smt. Sweety Jagwayan, the

ld. DR could not demonstrate that the assessee was either heard on this

aspect or notice as to enhancement of the amount was served on him.

Under these circumstances, the enhancement cannot be sustained.

Consequently, we set aside the issue back to the file of the ld. CIT(A) to

decide it afresh in accordance with law.

2.13 Apropos the issue of Shri Utkarsh Jagwayan, the ITAT order in

earlier years was cited by the assessee which should have been carefully

considered. The pleadings of the assessee as to gainful employment of

Shri Utkarsh Jagwayan and his independent working of establishing the

factory was to be properly taken into consideration besides the outcome

in earlier years set aside order should also have been considered.

Therefore, we are inclined to set aside the issue back to the file of the AO

to decide the same afresh in view of above observations.

2.14 Apropos remaining grounds on account of 15% disallowance in

vehicle expenses, depreciation and telephone expenses, the assessee has

accepted the ITAT order and no specific case is made out before us as to

how the view adopted should be deviated. Thus in the entirety of the facts

and circumstances, we are unable to confirm the order of the ld. CIT(A) 10 ITA No. 850/JP/2011 Shri Harish Chand Jangwayan vs. ACIT, Circle- 4 , Jaipur

on this issue of disallowance. Remaining grounds on these misc.

disallowance issues are dismissed.

3.0 In the result, the appeal of the assessee is partly allowed for

statistical purposes.

Order pronounced in the open court on 12/06/2015.

Sd/- Sd/- ¼Vh-vkj-ehuk½ ¼vkj-ih-rksykuh½ (T.R. Meena) (R.P.Tolani) ys[kk lnL;@ Accountant Member U;kf;d lnL;@Judicial Member

Tk;iqj@Jaipur fnukad@Dated:- 12 /06/2015

*Mishra

vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:

1. vihykFkhZ@The Appellant- Shri Harish Chand Jagwayan, Jaipur

2. izR;FkhZ@ The Respondent- The ACIT, Circle- 4, Jaipur

3. vk;dj vk;qDr¼vihy½@ CIT(A).

4. vk;dj vk;qDr@ CIT,

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No.850/JP/2011)

vkns'kkuqlkj@ By order,

lgk;d iathdkj@ Assistant. Registrar