Manoj Chandulal Shah, Ahmedabad vs Assessee

ी एन0एस0 सैनी, लेखा सद य एवं ी कुल भारत, या%यक सद य के सम& BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 2330/Ahd/2011 %नधा)रण वष)/Assessment Year: 2008-2009

Manoj Chandulal Shah JCIT, Range-10 Prop: Laxmi Dye Chem Vs Ahmedabad. 409, B-Ganesh Plaza Opp: Navrangpura Bus Stand Ahmedabad. PAN : AIOPS 9835 P

आयकर अपील सं./ ITA No. 2448/Ahd/2011 %नधा)रण वष)/Assessment Year: 2008-2009 ACIT, Circle -10 Manoj Chandulal Shah Ahmedabad. Vs Prop: Laxmi Dye Chem 409, B-Ganesh Plaza Opp: Navrangpura Bus Stand Ahmedabad.

अपीलाथ,/ (Appellant) -.यथ,/ (Respondent)

Assessee(s) by : Shri S.N. Divetia Revenue by : Shri M.K. Singh, Sr.DR

सन ु वाई क तार ख/ Dateof Hearing : 23/03/2015 घोषणा क तार ख / Date of Pronouncement: 10 /04/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: These are cross appeals

filed by the assessee and the Revenue against the order of the Commissioner of Income-Tax (Appeals)-XVI, Ahmedabad dated 20.7.2011.

2. The first issue involved in this appeal of the assessee is regarding the disallowance of sales promotion expenses of Rs.3,87,730/-.

ITA No.2330 and 2448/Ahd/2011 2

3. The AO observed that the assessee had incurred expenses of Rs.2,31,730/- on gold and silver coins, Rs.1,02,000/- on computer bags and Rs.54,000/- on calendars. The payment of all these expenses was made in cash. As the payments were in contravention of section 40A(3) of the Act, all the expenses claimed for sales promotion were disallowed and added to the income. Further, the AO also called for details in respect of the persons to whom the above items were given, and the same were not provided to the AO.

4. On appeal, the CIT(A) held that since the payment made was in contravention of section 40A(3) of the Act, the expenditure of Rs.3,87,730/- was not allowable, and confirmed the action of the AO.

5. Before us, the AR of the assessee relied on the order of the Hon'ble Gujarat High Court in the case of Anupam Tele Services V. ITO, (2014) 43 txmann.com 199 (Guj) wherein it was held that where the principal company insisted that on payment by cheque supply would be delayed, cash payment made by agent in bank account of principal had to be allowed.

6. On the other hand, DR supported the orders of the lower authorities.

7. We have heard rival submissions, perused the orders of the lower authorities and material available on record. We find that in the case of Anupam Tele Services (supra) the Hon'ble High Court observed that in that case the assessee was a distributor of recharge vouchers of Tata Tele Services P. Ltd. The Tata Tele Services P. Ltd. insisted for cash payment as cheque payments from a cooperative bank took a longer time for clearance. Further, non-cash payment by the assessee would have severely affected the business of the assessee inasmuch as the same would have resulted in delay of supply of recharge vouchers. In ITA No.2330 and 2448/Ahd/2011 3

these circumstances, it was the genuine expediency of business which required the assessee to make payment in cash which Tata Tele Services P. Ltd. promised to deposit in its bank account and no material was brought to show that the said promise was not fulfilled by Tata Tele Services P.Ltd. In the above circumstances, the Hon'ble High Court held that rigours of provision of section 40A(3) should not apply.

8. In the instant case, we find that no such material could be brought on record by the assessee. The assessee has not brought any material to show that the supplier of gold and silver coins, computer bags and calendars had insisted for cash payment and payment by cheque by the assessee would have severely affected the business of the assessee. In the above circumstances, the facts of the instant case are found to be distinguishable from the facts of the above cited case, inasmuch as, the assessee could not prove the business expediency for making of payments in cash by the assessee in excess of the limit prescribed under section 40A(3) of the Act. We, therefore, do not find any good reason to interfere with the findings of the CIT(A). Therefore, this ground of appeal of the assessee is dismissed.

9. The second issue involved is regarding the disallowance of expenditure of Rs.4,26,837/-.

10. The AO observed that the assessee was in receipt of certain exempt income. The provisions of section 14A was invoked and the disallowance under Rule 8D was worked out. In the absence of any satisfactory explanation, the expenses of Rs.4,26,837/- was disallowed and added to the income.

11. On appeal, the CIT(A) observed that there was no dispute about earning of dividend income as declared in the profit & loss account. The dividend income is exempt from income-tax. No expenditure for earning this exempt income was disallowed. It was admitted fact that ITA No.2330 and 2448/Ahd/2011 4

certain expenditure were incurred for earning dividend income, and therefore the provision of section 14A are clearly applicable. The CIT(A) observed that the Hon'ble Bombay High Court in the case of Godrej Boycee Mfg. Co. Ltd. Vs. DCIT, 328 ITR 81 (Bom) held that the dividend income and income from mutual funds falling within the ambit of section 10(33), as was applicable for the assessment year 2002-03, is not includible in computing the total income of the assessee, and consequently, no deduction can be allowed in respect of expenditure incurred by the assessee in relation to such income by virtue of the provisions of section 14A(1). He, therefore, held that the AO was justified in making the disallowance of proportionate expenses of Rs.4,26,837/- as computed under Rule 8D of the IT Rules.

12. Before us, the AR submitted that the disallowance was not justified as investment of Rs.53,02,298/- as on 31.3.2007 and Rs.81,17,311/- as on 31.3.2008 was made out of interest free funds available of Rs.1,41,60,707/- as on 31.3.2008 in his capital account, and the opening balance of Rs.83,52,269/- as on 31.3.2007 as per the balance sheet. Further, it was argued that on perusal of the details of investment will show that the same includes DEPB aggregating to Rs.5,36,882/-, which should have been excluded from the same.

13. DR supported the orders of the lower authorities.

14. We find that the DR could not dispute the contention of the assessee that the interest free funds available with the assessee were more than the investment giving rise to exempt dividend income. In these circumstances, the lower authorities were not justified in disallowing the proportionate interest expenditure under section 14A of the Act. The above view finds support from the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat State Fertilizers and Chemicals Ltd., (2013) 258 ITR 323 (Guj). Further, the DR fairly conceded before us that the DEPB should not have been taken into ITA No.2330 and 2448/Ahd/2011 5

consideration for making disallowance under section 14A of the Act. As the working of the amount of Rs.4,26,837/- which was disallowed under section 14A by the lower authorities is not brought on record nor filed before us by both the parties, we remit the matter back to the file of the AO for re-computing the amount disallowable under section 14A in the light of the observations made hereinabove. Thus, the ground of appeal of the assessee is partly allowed.

15. The Third issue involved in this appeal is regarding the disallowance out of personal set of books of Rs.69,096/-.

16. At the time of hearing, the AR of the submitted that he is not pressing this ground of appeal, and therefore, the same is dismissed, as not pressed.

17. The ground no.4 of the appeal of the assessee and the sole ground of the appeal of the Revenue is directed against the order of the CIT(A) in confirming the addition of Rs.8,86,933/- on account of under valuation of stock and deletion of addition of Rs.7,36,983/- made on account of under valuation of closing stock of other items on estimated basis.

18. The AO observed that the inspite of repeated request, the assessee had not furnished the details of quantity tally of opening stock, month-wise purchases and sales and closing stock. The AO verified the correctness of closing stock on the basis of some of the sale bills produced in the case of one item 'beta naphthol' for which closing stock was shown at 24,425 kgs., and the value had been declared at Rs.22,62,243/- and after reducing the gross profit from the sale value, the cost price of this item of 'beta naphthol' was arrived at Rs.144.330 per kg. The AO, thus, arrived at under valuation at Rs.51.71 (Rs.144.330 as per AO minus Rs.92.62 as per assessee). The undervaluation was thus determined at Rs.12,63,017/-. Since the ITA No.2330 and 2448/Ahd/2011 6

assessee failed to furnish the evidences in support of closing stock, the AO made addition of Rs.20.00 lakhs on account of under valuation of closing stock including the value of beta naphthol.

19. On appeal, the CIT(A) observed that the AO at place had mentioned that Shri Milan Gandhi, CA duly authorized representative of the assessee attended from time to time, and produced books of accounts and filed details, and on the other hand, he had alleged that the assessee had not furnished details even after repeated requests. Once the books of accounts are produced, it cannot be accepted that the certain details were not produced. The details can be collected from the books of account. He observed that it was noted from the audit report that no stock register was maintained. In the absence of the stock register, the closing stock cannot be ascertained on cost. The auditor had wrongly mentioned that the closing stock cannot be ascertained on cost price. He observed that it is the settled position of law that the closing stock can be valued at cost price or market price whichever is less. The AO tried to ascertain the cost price of the item beta naphthol but no exercise was carried out in the case of other items. He could have ascertained the cost price of the above crude method in case of atleast major items of stock. The AO had made the addition of Rs.7,36,983/- (Rs.20,00,000/- total estimated undervaluation in closing stock minus Rs.12,63,017/- closing stock of beta naphthol) on account of undervaluation of other items of closing stock, roughly valued by the assessee for Rs.1,81,99,401/- (Rs.2,04,61,644/- declared stock minus Rs.22,62,243/- closing stock of beta naphthol). He observed that there are 25 items of closing stock and of varying quantity. He observed that it was an admitted fact that the closing stock at the year end will be the opening stock of succeeding year. He observed that it was not understood how the amount of Rs.7,36,983/- can be bifurcated for arriving at the correct value of opening stock of succeeding year. Therefore, he observed that closing ITA No.2330 and 2448/Ahd/2011 7

stock can be ascertained only at cost price or market price whichever is less, and held that addition cannot be made on estimate basis. He observed that the AO had not given any reason to undervaluation of closing stock of other items, and therefore, deleted the addition of Rs.7,36,983/-.

20. Regarding closing stock of beta naphthol of 24,425 kgs., he observed that applying the FIFO method for sales, it can be reasonably concluded that the purchases of 15,500 kgs dated 21.3.2008 were available in the closing stock. The balance stock of 8,925 kgs. (24,425 kgs. declared closing stock minus 15,500 kgs. purchases dated 21.3.2008) was available out of the purchases of 10,500 kgs. dated 17.3.2008. If the quantity of 8,925 kgs. was valued at 116.45 per kg. and added to the value of purchases dated 21.3.2008, the correct value of closing stock of beta naphthol at cost price would be ascertained. The working on this basis will be for Rs.31,49,176/-. He observed that the assessee valued the closing stock at Rs.22,62,243/-, therefore, it was under valued by Rs.8,86,933/-, and therefore, he confirmed the addition to the extent of Rs.8,86,933/- and deleted the balance amount of addition.

21. Before us, the AR of the assessee argued that the AO had arrived at the cost of beta naphthol at a derived value by considering the sale price minus gross profit. This method of ascertaining cost is neither scientific nor accepted under accounting principles. It was submitted that the GP rate of 4.64% was the annual rate and the average profit earned from all the transactions throughout the year so that it cannot be said that the assessee would earn same rate of GP in all the transactions. Therefore, the method adopted by the AO should be rejected. Further, it was submitted that it would be noticed from some of the invoices annexed in the paper book that the normal rate was around Rs.107/- per kg and the cost price was never Rs.144.43 per kg.

ITA No.2330 and 2448/Ahd/2011 8

as worked out by the AO. Therefore, there as no undervaluation as alleged by the AO. It was further submitted that the CIT(A) was not justified in valuing the closing stock by applying FIFO method when the assessee was following average cost method.

22. On the other hand, the DR supported the order of the AO.

23. The DR could not point out any specific mistake in the findings of the CIT(A). The DR could not dispute the findings of the CIT(A) that the addition of Rs.7,36,983/- in respect of closing stock of items other than 'beta naphthol' was without any reason or basis to show that these were actually undervalued by the said amount. Thus, the CIT(A)'s finding in this respect requires no interference by us. Further, in respect of valuation of closing stock of 'beta naphthol', we find that the AO valued the same by taking instances of one sale as the sale price, and therefrom reducing the composite average gross profit rate of the completed year of all items as actual GP rate of the said instance of sale. No material was brought on record by the AO to show that the actual GP rate achieved by the assessee on that particular sale instance was 4.64%.

24. On the other hand, the CIT(A) calculated the cost of the closing stock of 'beta naphthol' on the basis of actual purchase price on the basis of last two invoices. In the circumstances, in our considered view, the method adopted by the CIT(A) was more proper than the method adopted by the AO. We, therefore, do not find any merit in this ground of appeal of the Revenue.

25. In respect the ground of appeal of the assessee, we find that the sole argument of the AR is that the CIT(A) valued the closing stock of 'beta naphthol' at cost by using FIFO formula, whereas, the CIT(A) should have adopted average cost formula. We find that no material was brought before us by the AR to show that the assessee was ITA No.2330 and 2448/Ahd/2011 9

consistently using average cost formula for valuing its closing stock at cost. Further, no working of the average cost of 'beta naphthol' could be furnished before us by the assessee to show that any prejudice was actually caused to the assessee. In the circumstances, we do not find any merit in this ground of appeal of the assessee as well. We, therefore, confirm the order of the CIT(A) and dismiss the ground of appeal of both the assessee as well as Revenue.

26. In the result, the appeal of the assessee is partly allowed for statistical purpose, and the appeal of the Revenue is dismissed.

Order pronounced in the Court on Friday, the 10th April, 2015 at Ahmedabad.

Sd/- Sd/-

(KUL BHARAT) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Ahmedabad; Dated 10 /04/2015

आदे श क0 -%त1ल2प अ3े2षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. संबं धत आयकर आयु!त / Concerned CIT

4. आयकर आयु!त(अपील) / The CIT(A)

5. $वभागीय 'त'न ध, आयकर अपील य अ धकरण / DR, ITAT,

6. गाड* फाईल / Guard file.

ु ार/ BY ORDER, आदे शानस

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad