Moolachand Maganlal Jain, Surat vs Department Of Income Tax

DCIT, Shri Moolchand Maganlal Central Circle 2, Jain, Shed no. 10, Ground Surat-395001 Vs Floor, Veerprabha, (Appellant) Anjiniwadi, Vasta Devdi Road, Surat-395004 PAN: AAQPJ6844B (Respondent)

Revenue by: Smt. Sonia Kumar, Sr. D.R. Assessee by: Shri S.B. Vaidya, A.R.

Date of heari ng : 17-06-2015 Date of pronouncement : 24-07-2015

आदेश /ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

Revenue is in appeal before us against the order of ld. Commissioner of Income Tax (Appeals) dated 27-12-2011 passed for assessment year 2009-10.

I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 2 DCIT vs. Shri Moolchand Maganlal Jain

2. In the first ground of appeal, revenue has pleaded that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 3,23,646/-.

3. The brief facts of the case are that assessee is an individual engaged in the manufacturing and trading of grey cloth. He has filed his return of income for Assessment Year 2009-10 on 2nd September, 2009 declaring total income of Rs. 12,47,340/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee has shown himself as a member of six HUFs. The share of income from these HUFs has been shown at Rs. 3,23,646/-. The Ld. Assessing Officer observed that these HUFs appear to have been ceased and, therefore, these HUFs are being treated as AOP. Accordingly, ld. Assessing Officer has made addition of Rs. 3,23,646/- in the hands of the assesseee.

4. On appeal, ld. Commissioner of Income Tax (Appeals) has deleted the addition by observing as under:-

"2.3 I have carefully considered the facts of the issue. From the submissions of the appellant it is clear that all the HUFs have been filing their returns of income for several years in the past and no objections were raised by AOs questioning the genuineness during their assessment proceedings. The assessee has filed the copy of intimation u/s. 143(1) as old as for A.Y. 1986-87 which proves the genuineness and existence of the HUFs. On the other hands, AO has drawn his conclusions only on presumptions. He could not give any specific reason to treat these HUFs as bogus or ingenuine. Further, these HUFs are being assessed with the different AOs and treating them as AOP would tantamount to double taxation. Moreover, creating the separate HUFs have been held legally tenable and accepted by department in the earlier years which justify I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 3 DCIT vs. Shri Moolchand Maganlal Jain

the existence of these HUFs as independent entities. In such situation, treating them as AOP by AO and adding the proportionate shares to the income of appellant is not justifiable, therefore addition made by AO is deleted. This ground is allowed."

5. With the assistance of ld. representatives, we have gone through record carefully. Section 171 of the Income Tax Act provides assessment after partition of a Hindu undivided family. As per sub-section 1, a Hindu family hitherto assessed as undivided shall be deemed for the purpose of this act to continue to be a Hindu undivided family, except where and in so far as finding of partition has been given under this section in respect of the Hindu undivided family. Sub-section 2 contemplates an inquiry required to be made by the Assessing Officer and sub-section 3 further contemplates that on the completion of the inquiry, the Assessing Officer shall record a finding as to whether there has been a total or partial partition of the joint family property and, if, there has been such a partition, the date on which it has taken place. In the present case, the ld. Assessing Officer did not adhere to any such proceedings. He simply observed that assessee failed to prove that HUFs were existing prior to 31st March, 1978. The Commissioner of Income Tax (Appeals) on other hand has observed that assessee has produced the copy of intimation u/s. 143(1) as old as for Assessment Year 1986-87. According to the assessee, he has filed the details of income tax return filed by the HUF and the intimation sent by the department, the assessee has been treating the existence of HUF in the past. In our opinion, the action of the Assessing Officer is only of denial of any fact. He himself did not bring any evidence on the record which could demonstrate the stand of the assessee as false. Therefore, after looking to the finding of Commissioner of Income Tax (Appeals) as well as the written submissions of the assessee reproduced by Commissioner of I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 4 DCIT vs. Shri Moolchand Maganlal Jain

Income Tax (Appeals) in para no. 2.2, we do not see any reason to interfere in this ground of appeal. It is rejected.

6. Ground No. 2. In this ground of appeal, the grievance of the revenue is that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 16,13,022/- which added by the Assessing Officer by making a disallowance of 50% of labour charges paid by the assessee. The ld. Assessing Officer has observed that assessee has claimed labour expenses of Rs. 32,26,044/-. The assessee has paid labour charges to five family members. These family members have purchased the machinery in the current year and have carried out the job work for the assessee. The Assessing Officer formed an opinion that assessee syphoned his profit in the shape of job work to the family members and accordingly, he disallowed 50% of the job work charges.

7. On appeal, ld. Commissioner of Income Tax (Appeals) has deleted the disallowance. The finding recorded by the Commissioner of Income Tax (Appeals) reads as under:-

"3.3 I have carefully considered the facts of the issue. From the submission of the appellant, it is clear that appellant had produced all the relevant evidence in respect of expenses claimed by him. It is also submitted that all the four family members are separately assessed and have taken separate registrations with SMC, have executed separate rent deeds, bills raised separately and purchased machines independently. The appellant produced the proof of individually filling the returns by each family member. The AO has not been able to controvert these documentary evidences. Moreover, the conclusion drawn by him is self contradictory. At one hand, he is saying that the assessee has schemed to bifurcate the income generated by him by showing the labour expenses paid to family members, on the other hand he is not able to reject the documentary evidences in respect of independent and separate business activity carried on by family members as I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 5 DCIT vs. Shri Moolchand Maganlal Jain

distinct entities. The AO has failed to establish that it was not a tax planning rather it was tax evasion by assessee. Further, if the labour expenses have wrongly being claimed by assessee, them why only 50% was disallowed by AO. He should have disallowed whole of the expenses. Moreover, the books of account and bills and vouchers produced by appellant in respect of labour expenses have been accepted by AO and no specific defect has been brought on record by him. In such situation it is held that AO has wrongly disallowed the 50% of labour charges paid by appellant which the appellant is entitled to be allowed. Therefore, the addition made by AO is deleted and ground of appeal is allowed."

8. With the assistance of ld. representatives, we have gone through the record carefully. We find that Assessing Officer, except, making a reference of payment of labour charges to family members did not collect any specific evidence falsifying the stand of the assessee. All the family members have recognized these labour charges as their income. They are also assessed to tax. The treatment of payment of 50% charges as bogus at the end of Ld. Assessing Officer is based upon his assumption only without making reference to any concrete material. On the other hand, ld. first appellate authority has appreciated the controversy in right perspective and recorded a finding of fact. Before us, except reiteration of the assessment order nothing has been brought to our notice by the department. Therefore, after looking to the submissions of the assessee reproduced by Commissioner of Income Tax (Appeals) and the finding extracted (supra), we do not see any reason to interfere in the order of Commissioner of Income Tax (Appeals) on this issue. This ground of appeal is rejected.

9. In ground no. 3, the revenue has pleaded that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 4,65,960/-.

I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 6 DCIT vs. Shri Moolchand Maganlal Jain

10. The brief facts of the case are that assessee has paid job work charges to Mrs Vaishali Tarun Jain and Mrs Vishakha Ritesh Jain. They are the daughters in law of the assessee. The Assessing Officer formed an opinion that assessee has planned his activities in such a way that tax burden would minimize, therefore, he distributed his taxable income amongst the family members by making payment of larbour chases. The income in the hands of daughters in law requires to be clubbed with the income of the assessee u/s. 64(1) of the income tax act, 1961. Accordingly, ld. Assessing Officer has clubbed the income of these two daughters in law with the income of the assessee and made an addition of Rs. 4,60,560/-.

11. On appeal, ld. Commissioner of Income Tax (Appeals) has deleted the addition by observing as under:-

"4.3 I have considered the facts on the issue and found that, as explained by appellant, daughters-in-law of the assessee namely Smt. Vaishali Jain and Vishakha Jain are not beneficiaries of assessee. Any movable and/or immovable asset has not been transferred by appellant to them. Rather, as per evidences given by appellant, it reflects that Smt. Vaishali and Smt. Vishakha have advanced loans to the appellant in his business activity styled as "Arham Arts" as shown in the balance sheet. So, as per provisions of section 64(1), unless the assessee has transferred the income generating assets or funded to daughters-in-law in purchasing the income generating assets, their income cannot be clubbed in the hands of appellant. Thus, the addition has been made by AO without any base and against the provisions of law therefore deserves to deleted. I, therefore, delete the addition made by AO and allow the appeal."

12. With the assistance of ld. representatives, we have gone through the record carefully. The ld. Assessing Officer failed to bring any evidence on the record demonstrating the fact that assessee has transferred any I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 7 DCIT vs. Shri Moolchand Maganlal Jain

income generating asset to the daughters in law. He simply harboured a belief that assessee has distributed his profit to his daughters in law. The Assessing Officer failed to collect any evidence for substantiating his belief. Ld. Commissioner of Income Tax (Appeals) has rightly held that unless it is proved that income earning asset were transferred by the assessee to the daughters in law, their income cannot be clubbed in the hands of the assessee. Looking to the finding of Commissioner of Income Tax (Appeals) extracted (supra), we do not find any error in it. This ground of appeal is rejected.

13. In ground no. 04, revenue has pleaded that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 26,30,205/-.

14. The brief facts of the case are that Assessing Officer has rejected the book result of assessee and estimated the GP and made an addition of this amount.

15. On appeal, ld. Commissioner of Income Tax (Appeals) has deleted the addition by observing as under:-

"5.3 I have considered the facts on the issue and found that the AO has estimated the gross profit on the basis of misplaced grounds. He has not given any specific comparable case to show that the GP shown by appellant is less than any other case of the same line of business. He has made general remarks that in the line of this business, GP of 5 to 15% are shown. Further, for rejecting the books of account, he has taken the grounds of other disallowances made in the assessment order which have already been deleted while deciding the other grounds of appeal. In respect of cash sales also, conclusion drawn by AO is general and weeping. He could not prove that cash sales are bogus or ingenuine. Just by saying that in the month of March cash sales are made for the amount if more than 10 lacs, does not I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 8 DCIT vs. Shri Moolchand Maganlal Jain

prove that the accounts of assessee are lliable to be rejected. Similarly, the conclusion of AO in respect of transport expenses and vatav kasar expenses is also vague and irrelevant. No specific defect has been found by him in the books of account and bills and vouchers produced by the appellant. In view all these observations, it is held that the addition made by AO on account of low GP is without any basis and deserves to be deleted. Therefore, I, delete the addition of Rs. 26,30,205/- and allow the ground taken by appellant. Thus ground is allowed."

16. With the assistance of ld. representatives, we have gone through the

record carefully. Section 145 has a direct bearing on the controversy, therefore,

it is salutary upon us to take note of this provision.

"145(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."

17. From the bare reading of this section, it would reveal that it provides the

mechanism how to compute the income of the assessee. According to sub-

clause (i), the income chargeable under the head "Profits and gains of the I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 9 DCIT vs. Shri Moolchand Maganlal Jain

business or professions or income from other sources" shall be computed in

accordance with the method of accountancy employed by an assessee regularly

subject to the sub-section (2) of section 145 of the Act. Sub-section (2) provides

that the Central Government may notify in the Official Gazette from time to time

the accounting standard required to be followed by any class of assessee in

respect of any class of income. Thus, it indicates that income has to be

computed in accordance with the method of accountancy followed by an

assessee, i.e., cash or mercantile. Such method has to be followed keeping in

view the accounting standard notified by the Central Government from time to

time. Sub-clause (3) provides a situation, i.e., if the Assessing Officer is unable to

deduce the true income on the basis of method of accountancy followed by an

assessee then he can reject the book results and assess the income according

to his estimate or according to his best judgment. The Assessing Officer in that

case is required to point out the defects in the accounts of assessee and require

to seek explanation of the assessee qua those defects. If the assessee failed to

explain the defects then on the basis of the book results, income cannot be

determined and Assessing Officer would compute the income according to his

estimation keeping in view the guiding factor for estimating such income.

18. In the light of above, let us examine the facts of present case. From perusal of the assessment order, it will reveal that Assessing Officer has basically assigned three reasons. The first reason assigned by him is that assessee has shown low GP. The second reason assigned by him is that transport charges incurred by the assessee are being taken as a part of I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 10 DCIT vs. Shri Moolchand Maganlal Jain

sales. According to the understanding of the Assessing Officer, in the city of Surat, there is a practice where goods are being supplied and the purchaser would got released from transporter after payment of transport charges. Therefore, according to the Assessing Officer, the transport charges should be borne by the purchaser. The third reason assigned by him is that vatav and kasar expenses are taken in profit and loss account. As far as the first reason is concerned, this is the first year of assessee's business in this line. So, there is no comparative result available for the assessee. The result can be compared with any other similarly situated assessee. But ld. Assessing Officer has not made reference to any such similarly situated assessee in the impugned order. He also observed that profit margin in grey manufacturing activity remains between 5 to 15%. What is the basis of this reference not discernable. The Assessing Officer ought to have referred the cases of similarly situated assessee but he failed. The next reason assigned by him is of transport charges. In the understanding of the Assessing Officer, these charges are to be borne by the purchaser and not by the assessee as a seller. This is a factual question. The Assessing Officer has neither called for confirmation from a single purchaser of the assessee, nor identify, whether that purchaser has borne the expenses or not? This is such an issue which is dependent upon a person how to carry his business. We failed to understand the approach of Assessing Officer, without collecting any evidence, how he can assume that this expenditure ought not to have been incurred by the assessee. The third reason is also similar which is taken by the Assessing Officer on the basis of his experience of dealing with the assessees engaged in grey cloth marketing in Surat. In particular, he has not referred any detail or specific circumstances. Thus, the Assessing Officer could not bring any specific material which can point out a particular defect in the I.T.A No. 747/Ahd/2013 A.Y. 2009-10 Page No 11 DCIT vs. Shri Moolchand Maganlal Jain

books of accounts of the assessee. He failed to make reference about specific defect in the accounts, which prohibits him to deduce the income from the accounts. The ld. Commissioner of Income Tax (Appeals) has considered this aspect and thereafter deleted the addition. We do not find any error in the order of Commissioner of Income Tax (Appeals). This ground of appeal is rejected.

19. Ground no. 5 and 6 are general grounds of appeal which do not spell out any specific grievance of the Assessing Officer. Therefore, no specific finding is required at the end of Tribunal. These grounds are rejected.

20. In the result, appeal of the revenue is dismissed.

Order pronounced in the open court on 24-07-2015

Sd/- Sd/- (G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 24/07/2015 ak आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद