Nirman Associates, New Delhi vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.4272 /Del/2011 Assessment year : 2008-09 ACIT, Circle 33(1), Vs. M/s. Nirman Associates, New Delhi 20/25, West Patel Nagar, New Delhi. GIR / PAN:AAEFN1614P (Appellant) (Respondent)

Appellant by : Shri P Dam Kanunjha, Sr. DR Respondent by : Shri K Sampath, Adv Shri V Rajkumar, Adv.

Date of hearing : 18.03.2015 Date of pronouncement : 31.03.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal filed by Revenue against the order of Ld. CIT(A) dated 27.06.2011. At the outset, Ld. D.R. invited our attention to revised grounds of appeal which read as under:

"1. Whether in the facts and circumstances of the case, the CIT(A) has erred in deleting the addition made under section 40A(3) of the Act, as all additions made come within the purview of section 40A(3) as per clear findings given in the assessment order."

"2. Whether in the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 4,60,462/- made on account of difference of salary between salary sheet submitted and P&L a/c citing that the difference of Rs. 72,153/- was on account of arrears paid b to employees which were duly verified by the AO from the 2 ITA No.4272/Del/2011

books of accounts disregarding the fact that such was not the case and the difference of salary (Faridabad Branch) between salary sheet submitted and P&L account amount in to Rs.4,60,462/- was disallowed since even though vide submission dated 13.12.2010, assessee submitted that the difference is due to salary paid to two employees not covered under the ESI Act, upon examination of contention, it was found that without prejudice, even if the contention of the assessee was conside4red, there was still a difference of Rs.72,461/- since the salary amount paid to two employees is Rs.3,88,0001- and accordingly, it was clear that the assesses' s explanation was incorrect and difference of salary (Faridabad Branch) between salary sheet submitted and P&L account amounting to Rs.4,60,462/- was not due to the reason adduced by the assessee. "3. Whether in the facts and circumstances of the case, the CIT(A) has erred in deleting addition of Rs.I,88,412/- on account of disallowance of loss on fire stock holding that the AO was not justified in making addition on account of difference between stock loss claimed and insurance claim made by assessee as the terms of the insurance policy did not allow for claiming the tax paid on such stock; since the CIT(A) has not given a finding as to whether he examined the terms of the insurance policy and whether the tax paid on the stock could be added to loss claimed due to fire for the purpose deduction.

"4. Whether in the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 11,76,487/- on account of unsubstantial rent expenses in the absence of rent agreements citing that the rent claimed had been paid by account payee cheques and TDS made wherever payments exceeded specified limits and that the assessee furnished the details of rent paid before the AO as well as in the appellate proceedings and that all the deposits are registered with the VAT department in the respective states which is not acceptable since merely that some expense is claimed on the basis of payments made by way of account payee cheques does not substantiate the expense and claimed "details" made by assessee have to be substantiated with evidence to be allowable and in this case the rent expenses claim have not been substantiate."

3 ITA No.4272/Del/2011 2. Ld. D.R. invited our attention to various observations of A.O. read relevant findings of A.O. and submitted that the A.O. had rightly made addition and Ld. CIT(A) was not justified in deleting the same. He heavily placed his reliance on the order of A.O.

3. Ld. A.R. on the other hand heavily placed reliance on the order of Ld. CIT(A) and submitted his argument ground wise. Regarding 1st addition made by A.O. in respect of violation of provisions of Section 40A(3) the Ld. A.R. submitted that the assessee had made payments through imprest account and each individual payment was less than Rs.20,000/- and in this respect he invited our attention to paper book page 10 onward wherein office expenses amounting to Rs.26,442/- were debited and imprest account was credited with the similar amount. Ld. A.R. further submitted that pages 11 to 15 also comprised of payments made through imprest account and each individual payment was less than Rs.20,000/-. Similarly, he took us to paper book page 18, wherein Rs.22,000/- was debited and imprest account was credited with the similar amount therefore, in view of above Ld. A.R. submitted that individual payments were less than Rs.20,000/- except a payment of Rs.45,000/- which was made for sales promotion expenses. Ld. A.R. submitted that the supplier was new to the assessee and, therefore, assessee had to make payments in cash as the supplier was not accepting payments through banking channel and such payment was covered by exceptions.

3.1 Arguing upon 2nd ground of appeal, Ld. A.R. submitted that difference in salary account was due to the fact that assessee had employed persons for which EPF was being deducted and, there was another group of people from the salary of whom no PF was deducted. He submitted that remaining 4 ITA No.4272/Del/2011

difference as pointed out by A.O. was on account of arrears of salary. He submitted that complete reconciliation was submitted before Ld. CIT(A) and Ld. CIT(A) had dealt with the issue and therefore, had rightly allowed the relief.

3.2 Regarding 3rd ground of appeal, Ld. A.R. submitted that there was a fire in the premises of the assessee and the loss suffered by assessee could not be fully recovered from insurance company and, therefore, the difference of Rs.1,88,412/- which could not be recovered, was debited to profit & loss account.

3.3 Regarding 4th ground, which is in respect of addition on account of rent, Ld. A.R. submitted that the rent claimed was paid through a/c payee cheque and the tax wherever applicable, was deducted and complete details of rent were submitted before A.O. as well as Ld. CIT(A) and, therefore, Ld. CIT(A) had rightly allowed the relief.

4. We have heard rival parties and have gone through the material placed on record. The relief granted by Ld. CIT(A) ground wise as contained in Ld. CIT(A)'s order is reproduced below:

"7. Grounds No.2 & 3 relate to the addition of Rs.2,35,995/- on account of disallowances under section 40A(3).

It has been observed by the Assessing Officer that vide order sheet entry dated 01.12.2010, the assessee was asked to show cause why disallowance u/s 40A(3) not be made (cash payment greater than Rs. 20,000/- having been made as evident from perusal of Cash Book in respect of the said expenses- photo copy of relevant portion of Cash Book submitted under signature of AR during hearing and placed on assessment folder) in respect of the following cash payments. Vide submission dated 13.12.2010, the assessee gave certain submissions in respect of the said expenses, the said submissions have been examined and remarks thereon are delineated below in tabular form:

5 ITA No.4272/Del/2011 Date Expense Assessee's contention Remarks 22.05.2007 Rs. 26,442/- cash Vide submission dt. The Cash Book shows a paid to Kalinga 13.12.10 Assessee single Voucher no.052203,

international submitted that the dt. 22.05.2007. The expense pertains to seven purported Bills submitted different Bills on different now are not mentioned on dates. the Voucher. Accordingly, assessee's contention cannot be accepted. ~ Expense is accordingly disallowed u/s 40A(3).

06.07.2007 Rs. 22,000/- cash Vide submission Since the expense comes paid to Sharma dt.13.12.2010 within the purview of Transport on Assessee submitted that section 40A(3) and does not account of Van the expense is due to come within the exceptions hire Business exigency. to section 40A(3) carved out in Rule 600. Accordingly, assessee's contention cannot be accepted.

Expense is accordingly disallowed u/s 40A(3).

05.10.2007 Rs. 40,000/- paid Vide submission Since the expense comes to kamlesh dt.13.12.2010 within the purview of Bansal Assessee submitted that section 40A(3) and does not the expense due to come within the exceptions payment made on behalf to section 40A(3) carved out of the Land Lady to clear in Rule 600. Accordingly, her house tax assessee's contention outstandings. cannot be accepted.

Expense is accordingly disallowed u/s 40A(3).

20.11.2007 Rs. 29,528/- cash Assessee made no Clearly assessee has nothing paid to Harish Submission. to say. Expense is Express Service. accordingly disallowed u/s 40A(3).

29.03.2008 Rs. 28,400/- cash Vide submission Since the Cash Book paid to Modern dt.13.12.2010 narration clearly mentioned Sport for hire Assessee submitted that that Rs. 28,400/- cash paid Cricket kit for the expense is not to Modern Spot for hire match practice disallowable as the same Cricket Kit for match 6 ITA No.4272/Del/2011

has been made over a practice, assessee's period of days for a contention is incorrect., variety of expenses. Accordingly, assessee's contention cannot be accepted. Expense is accordingly disallowed u/s 40A(3). 29.03.2008 Rs. 44,625/- cash Vide submission From the Cash Book paid to Sumer Lal dt.13.12.2010 narration it is clear that the

Caterer for break Assessee submitted that expense has not been made fast & lunch the expense is not over a period of days for a during Cricket disallowable as the same variety of expenses.

match. has been made over a Accordingly, assessee's period of days for a contention cannot be variety of expenses. accepted. Expense is accordingly disallowed u/s 40A(3). 29.03.2008 Rs. 45,000/- cash Vide submission The said expense is not paid for dt.13.12.2010 covered under Rule 600(j). purchasing T.V. Assessee submitted that Assessee contention cannot for gift. the expense is not be accepted. Expense is

disallowable as per Rule accordingly disallowed u/s 6dd(J) 40A(3).

In view of the remarks above, the Assessing Officer added the aggregate of the said sums Rs. 2,35,995/- u/s 40A(3) to the income of the assessee.

It has been submitted by the Ld. Counsel in this regard that the appellant had made certain payments in cash during the year. However, the AO disallowed them on the ground that the payment has exceeded a sum of Rs. 20,000/-, and thus, could not be allowed in view of section 40A(3) of the Income-tax Act, 1961. However, the AO has disregarded the submissions of the appellant in respect of facts of the instant case. All disallowances under the above provisions have been discussed in detail below.

⦁ Rs.26,442/- cash paid to Kalinga International- The expenses pertained to, 7 cash bills (pertaining to different dates) and just the fact that one voucher has been prepared cannot result in conclusion of the fact that cash payment had been paid exceeding sum of Rs. 20,000 in a single transaction. One of the employees in the appellant's 7 ITA No.4272/Del/2011

firm was given imprest to make payments on account of certain expenses and the above payments had been made on different dates out of such advance. Copy of the voucher along with purchase bills had already been furnished in the course of assessment proceedings and the same are again furnished in support which have been placed on record. The voucher clearly proves the fact that imprest had been used for making the payments on different dates.

⦁ Rs.22,000/- cash paid to Sharma Transport on account of van hire - This amount has also been paid out of imprest on different dates. This practice is commensurate with the trade norms in the business. The pick-up van was hired by the appellant for 20 days in the month for picking up local supplies. While the fuel payment was made by the appellant's employees from their imprest account, the final payment was then adjusted to that extent. Had the payment of fuel not been made by the appellant's employees, the smooth running of van would not have been possible which, in turn, would have resulted in loss of business to the appellant. Also, the payments were made on periodic basis. However, single voucher was prepared to book the amount which does not mean that entire payment was made in a single day.

⦁ Rs.40,000/- paid on behalf of Kamlesh Bansal - The rented premises of the appellant caught fire. However, the insurance company was not releasing the claim, until outstanding house tax payments were made. The majority of above expense, i.e., Rs.28,S07/- is on account of house tax payments made on behalf of the land lady, while the balance amount is in relation to other expenses incurred in this regard. Finally, the amount was adjusted from the rent paid in subsequent periods. Since, the payment is for making statutory payments to the government, and is duly evidenced by supporting documents, the same cannot be considered for disallowance under section 40A(3) of the Act.

⦁ Rs. 29,528/- cash paid to Harish Express service - So far as the said addition is concerned, the appellant is not pressing for the same.

8 ITA No.4272/Del/2011 ⦁ Rs.28,400/- cash paid to Modern Sport Hire Cricket kit for match practice -

There was a cricket match organized by the appellant for which certain equipments (such as cricket kit, i.e., gloves, pads, wickets, ball, matting, net, etc) were hired from M/s Modern Sports who was unknown to the appellant. The event went on for 4 days (i.e. from March 7_10th, 2008). The above payments were being made to the vendors 0(1 a milestone basis. Further, payments were made on different dates from the imprest account. The voucher clearly proves the fact that imprest had been used for making the payments. The details of imprest were provided by the person (maintaining the account) on March 31st, 2008, whereas the tournament was held from March 7-10, 2008. Also, there were 2 umpires, whose charges were fixed at Rs. 1,000 per umpire per day. These payments were made directly to the umpires on daily basis. However, single voucher was prepared to book the amount which does not mean that entire payment was made in a single day.

⦁ Rs.44,625/- cash paid to Sumer Lal Caterer for breakfast and lunch during cricket match - The caterer was hired for the aforesaid tournament and even in his case, the entire payment was effected on milestone basis.

Further, payments were made on different dates from the imprest account.

The voucher clearly proves the fact that imprest had been used for making the payments. The caterer was unknown to the appellant and there was no reason to pay the entire payment upfront. Also, it is the normal practice of trade, wherein payments to caterers are released on periodic basis over the entire contract period. However, single voucher was prepared to book the amount which does not mean that entire payment was made in a single day.

⦁ Rs.45,000/- cash paid for purchasing TV for gift - The appellant had provided for sales promotion program for 3 business executives. The scheme was that the one who would achieve the targets would receive TV as gift. One of the executives won the scheme. The 9 ITA No.4272/Del/2011

appellant had to make the payment in cash as there was no other way the person could have purchased the television (considering that a lot of shopkeepers do not accept cheques and want down payment of cash). In this regard, the appellant had also relied on the decision of High Court of Calcutta in Girdharilal Goenka v. CIT [1989] 179 ITR 122 wherein it has been held that the ITO should take a practical approach to problems and strike a balance between the direction of law and hardship to the appellant. He should not enmesh himself in technicalities. After all, the object is not to deprive the appellant of the deduction which he is otherwise entitled to claim.

In view of the above submissions and documents placed on record, it is clear that the payments are not covered under the provisions of section 40A(3) of the Act, except the payments of Rs.11,493/- (40,000- 28,507) paid on behalf of Kamlesh Bansal and Rs.29,528/- paid in cash to Harish Express service which are hereby confirmed. The balance addition of Rs.1,94,974/- [2,35,995/ - (29,528+11,493)] made on this count is, accordingly, hereby deleted."

5. In respect of Ground No.5, Ld. CIT(A) observed as under:

"9. Ground No.5 relates to the addition of Rs.4,60562/- on account of difference of salary between salary sheet submitted and profit and loss account. It has been observed by the Assessing Officer that vide order sheet entry dated 01.12.2010, the assessee was asked to show cause why difference of salary (Faridabad Branch) between salary sheet submitted and profit and loss account amounting to Rs. 4,60462/- not be disallowed. Vide submission dated 13.12.2010, the assessee submitted that the difference is due to salary paid to two employees not covered under the ESI Act. Assessee's contention has been examined. Without prejudice, even if the contention of the assessee is considered, there is still a difference of Rs.72,153/- since the salary amount paid to two employees is Rs.3,88,OOO/- Accordingly, it is clear that the assessee's explanation is incorrect and difference of salary (Faridabad Branch) between salary sheet submitted and P&L account amounting to Rs.4,60462/- is not due to the reason adduced by the assessee, and accordingly, addition of Rs.4,60462/- is made to the income of the assessee.

10 ITA No.4272/Del/2011 It has been submitted by the Ld. Counsel in this regard that the salary register was submitted to the AO which totaled to Rs.1,31,33,634. However, the profit and loss account showed a debit amount of Rs.1,35,21,634/-. The AO disallowed Rs.4,60462. In this regard, it is to be noted that firstly, the difference of Rs.3,88,OOO was on account of the fact that salary register being maintained was for ESI purposes and did not cover the salary of two employees (i.e. Gunjan Chhabra and Vandana Desai) working in Faridabad branch (as they were not covered under the purview of same). The month-wise and branch- wise charts of salary for both as per salary register and books of accounts were submitted to the AO. The above difference was also explained by way of another chart wherein details of salary paid to the 2 employees not covered under ESI were also shown. Also, it is pertinent to note that both of these employees have been paid by cheques and they are assessed to income tax. Further, the difference of Rs.72,153/- was on account of arrears paid to employees which were duly verified by the AO from the books of account during the course of assessment proceedings.

In view of the above submissions and documents placed on record, it is hereby held that the Assessing Officer was not justified in making addition on account of difference of salary as above. The addition of Rs.4,60,462/- made on this count is, accordingly, hereby deleted.

10. Ground No. 6 relates to the disallowance of Rs.l,88,412/- on account of difference between stock loss claimed and insurance claim made by assessee. It has been observed by the Assessing Officer that vide order sheet entry dated 01.12.2010, the assessee was asked to show cause why loss on fire stock not be disallowed. Vide submission dated 13.12.2010, the assessee submitted that estimated cost of loss due to fire was Rs. 23 lakh and received less claim by Rs.4,04,483.94 which had been debited to P&L account. In this regard, it is noted from the documents submitted by the assessee along with submission dated 13.12.2010, that the claim made to the insurance company was Rs.21,ll,588/-, and estimated cost of loss due to fire was Rs.23 lakh and received less claim by Rs.4,04,483.94 which had been debited to P&L account. Accordingly, the difference between Rs. 23 lakh and claim made to, the insurance company Rs.21,11,588/- i.e. Rs.l,88,412/- is disallowed and added back to income.

11 ITA No.4272/Del/2011 It has been submitted by the Ld. Counsel in this regard that the appellant's stock was lost by fire and a sum of Rs.23,75,536/- was booked. However, as the claim filed before insurance company was only Rs.21,ll,588/-. The claim filed before the insurance company was lower on account of the fact that the terms of the policy didn't allow for claiming the tax paid on such stocks. Due to this reason, the claim was on a lower side. However, that does not disentitle the appellant's claim. The aforesaid has been explained by way of a table below:

Particulars As Actual considered by AO computation

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Total value of Stock which 23,00,000 23,75,536 caught fire (A) Less: Claim filed before the 21,11,588 21,11,588 insurance company (8) Claim disallowed by AO [(C}=(A)- 1,88,412 (B)] Input credit which anyways is 2,63,948 • not allowable by Insurance company while granting claim (D) Claim filed with Insurance 21,11,588 company (B) Less: Approved by Insurance Co. 19,71,052 (E) Loss on account of unapproved 1,40,536 claim (F) Total loss as claimed by the 404,484 appellant [(G)=(D)+(F)]

The essence of VAT legislation is that it provides credit/ set-off for input tax, i.e. tax paid on purchases, against the output tax, i.e. tax payable on sales. VAT credit is available in respect of all purchases made and taxes paid thereon within the state. It is pertinent to note the fact that the concerned VAT legislation does not provide for availability of input credit against the output tax liability in case of loss of stock by fire, etc. Moreover, the input credit is even not available in a case where there has been normal loss, like evaporation credit is available only in respect of goods which have been or would 12 ITA No.4272/Del/2011

be actually sold by the dealer. It is on the premise that where the goods have not been disposed by way of sale and there is no output tax liability in respect of such goods, the dealer is not entitled to get the benefit of input tax credit. Thus, the input tax credit is also a loss for the dealer, as VAT department does not allow the availability in view of specific provisions in the Act and the insurance company does not make the payment on account of same in the event of loss. In essence, that also means that in view of input credit reversal, the same is added back to the purchase price and is not available as credit for set-off against output tax liability. Accordingly, the loss on account of fire would need to be calculated based on the purchase price only.

Thus, the appellant has satisfactorily explained the difference between stock Loss claimed and insurance claim made by assessee.

In view of the above discussion, it is hereby held that the Assessing Officer was not justified in making addition on account of difference between stock loss claimed and insurance claim made by assessee as above. The addition of Rs.1,88,412/- made on this count is, accordingly, hereby deleted.

11. Grounds No.7 & 8 relate to the disallowance of Rs.11,76,487/- on account of disallowance of rent expenses.

It has been observed by the Assessing Officer that it is seen that the assessee has debited Rent Expense Rs. 16,82,887/- to the P&L A/e. Vide order sheet entry dated 01.12.2010, the assessee was asked to furnish copies of Rent Agreement and to show cause why rent payments in respect of which no agreements are submitted or in excess of rent agreements not be disallowed.

Vide submission dated 13.12.2010, assessee only submitted rent agreement for a total annual rent expenditure of Rs. 5,06,400/- Accordingly, rent expense in which rent agreements are not produced i.e. unsubstantiated rent expense Rs.11J6A87/- is disallowed and added to income.

It has been submitted by the Ld. Counsel in this regard that the appellant has been carrying on the business operations from 13 places, which are on rent.

The AO has allowed the rent only in respect of the properties situated in Faridabad, Karnal and Chandigarh, based on the rent agreements.

13 ITA No.4272/Del/2011 However, the AO has failed to note the fact that these agreements had an escalation clause and accordingly the rent actually being paid by the appellant after escalation was a sum of Rs.8,ll,072/-. Further, the other rent payments have also been made by account payee cheques. Tax has been deducted at source under section 1941 of the Act, wherever the payments exceeded the specified limits. The premises-wise details of rent paid by the appellant have been furnished during the course of the assessment proceedings as well as in the appellate proceedings, which have been placed on record. Also, all the depots are registered with the VAT department in the respective states.

In view of the above discussion, it is hereby held that the Assessing Officer was not justified in making addition on account of rent expenses as above. The addition of Rs.11,76487/- made on this count is, accordingly, hereby deleted."

6. From the above findings of Ld. CIT(A), we find that for each and every addition made by A.O. on the basis of submissions of assessee, Ld. CIT(A) has analyzed the facts and figures and has very rightly allowed the relief to assessee during appellate proceedings. In respect of first addition made u/s 40A(3), Ld. CIT(A) has analyzed each transaction and has held that individual payments made through imprest account were less than Rs.20,000/-. In respect of items of expenditure exceeding Rs.20,000/-, he has upheld the addition. Similarly, the addition on account of salaries paid to employees was well explained by assessee. Similarly, loss claimed by assessee on account of lower claim received from insurance company has been fully analyzed by Ld. CIT(A). In respect of last addition on account of rent paid, the Ld. CIT(A) has held that payments against rent were made through account payee cheques and taxes wherever applicable were deducted and he further held that various depots for which rents were paid, were duly registered with VATA department. Before us, Ld. D.R. was not 14 ITA No.4272/Del/2011

able to controvert any of the findings of Ld. CIT(A). We find that Ld. CIT(A) has passed a well reasoned and speaking order in which we do not find any infirmity.

7. In view of above, appeal filed by Revenue is dismissed.

8. Order pronounced in the open court on 31st March, 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER Date: 31.03. 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 24/3 Sr. PS/PS 2 Draft placed before author 25, Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 31/3 Sr. PS/PS 6 Kept for pronouncement 31/3 Sr. PS/PS 7 File sent to Bench Clerk 31/3/15 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order