Raj Kumar Arora, Muzaffarnagar vs Department Of Income Tax

PER I.C. SUDHIR: JUDICIAL MEMBER ITA No. 3404/Del/2010: The Revenue has questioned first appellate order on the following

grounds:

"1. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in law in deleting the addition of Rs.4,00,000 made by the Assessing Officer as unexplained liability without 2

appreciating the full facts of the case, as the assessee failed to prove the genuineness of the liability at the time of assessment and during the course of remand report except apart from filing of an affidavit.

2. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in law in deleting the disallowance of Rs.7,05,347 made by the Assessing Officer on account of generator expenses without appreciating the full facts of the case and as the bills in the name of M/s. Arora Engineering Co. and the expenses do not pertain to the assessee.

3. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in law in deleting the disallowance of Rs.37,607 out of disallowance of Rs.64,257 made by the Assessing Officer on account of vehicle running & depreciation, salary paid to driver and interest on car loan without appreciating the full facts of the case as the assessee failed to produce log books and other evidences in support of his claim.

4. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in law in deleting the disallowance of Rs.1,00,000 made by the Assessing Officer on account of salary expenses without appreciating the full facts of the case and the assessee did not produce books of account to verify the same at the time of assessment and during the course of remand report."

3 2. The assessee on the other hand objected the First Appellate Order on

the following basis:

"1. That the order passed under sec. 144/143(3) is illegal, bad in law, without jurisdiction and against the material available on record.

2. That the Assessing Officer has erred, in view of the facts and the circumstances, in law and on facts in rejecting the books of account by invoking the sec. 145 of the Act without pointing out any specific discrepancy in the books of account. The CIT(A) has erred in upheld the action of the Assessing Officer.

3. That the Assessing Officer has erred inh law and on facts in estimating the GP @ 14% as same 12.17% declared by the appellant and made the addition of Rs.1,37,147. The CIT(A) erred in upheld the same.

4. That the CIT(A) has erred, in view of the facts and circumstances of the case, in law and on facts in upholding the addition of Rs.3,07,418 on account of the unsecured loan at Rs.3,00,000 and interest paid Rs.7,418. The CIT(A) failed to appreciate that the assessee has deducted the TDS on the interest paid.

5. That the CIT(A) has erred, in view of the facts and circumstances of the case, in law and on facts in upholding the addition of Rs.2,50,000 made by the Assessing Officer on accounts of payment made to M/s. Kummins Engine Services Pvt. Ltd.

4 6. That the A.O. has erred in law and on facts of the case in making the ad hoc disallowance at 20% of total expenses at Rs.3,21,385 on account of vehicle running, depreciation on car and telephone expenses. The CIT(A) erred in upholding the ad hoc disallowance at 15% of the total expense without any basis.

7. That the various observations made by the A.O. and CIT(A) against the appellant are illegal, bad in law and contrary to facts, evidence and material on record.

8. That the evidence and explanation given by the appellant and the material available on record have not been properly considered and judiciously interpreted.

9. That the additions have been made on basis of mere surmises and conjectures and guesswork and contrary to facts and evidence on record and cannot be justified by any material on record."

3. Ground No.1 (Revenue): In support of the ground, the Learned

CIT(DR) has placed reliance on the assessment order. The Learned AR on

the other hand tried to justify First Appellate Order with the submission that

sufficient evidence was produced by the assessee in support of the claim.

4. Considering the above submissions, we find that during the course of

assessment proceedings, the Assessing Officer required the assessee to

furnish confirmed copies of accounts of sundry creditors/debtors having 5

balance exceeding Rs.3 lacs as on 31.3.2007. In compliance, the assessee

furnished copies of accounts as appearing in its books along with their

addresses. The Assessing Officer noted that the assessee has shown liability

of Rs.4 lacs in the case of M/s. Lakhani Steel Traders. The Assessing Officer

sought information under sec. 133(6) of the Act from the aforesaid concern

but no compliance was received. The assessee also did not respond the

Assessing Officer to establish the genuineness of the transaction. The

Assessing Officer on the perusal of the accounts of the said concern,

gathered that the assessee had made payment of Rs.3,28,000 during the year

in cash of varying amounts ranging from Rs.15,000 to Rs.20,000. Since the

assessee failed to prove the genuineness of the liability as it could not

furnish confirmed copy of accounts of the said concern, the Assessing

Officer held the liability of Rs.4 lacs as not genuine and added it to the

income of the assessee.

5. Before the Learned CIT(Appeals), the assessee contended that as on

01.04.2006, the credit balance of M/s. Lakhani Traders was at Rs.7,28,000

out of which the amount of Rs.3,28,000 was paid during the year and the

balance sum of Rs.4 lacs was paid in the next financial year. It was

submitted further that the firm had closed down its business and, therefore, 6

no information was sent by it to the Assessing Officer. The Learned

CIT(Appeals) called for the remand report from the Assessing Officer which

was furnished on 04.01.2011 and 24.02.2011. The Learned CIT(Appeals)

sought rejoinder of the assessee to those reports which was also filed. The

Learned CIT(Appeals) has deleted the addition of Rs.4 lacs with this finding

that the assessee had furnished copy of invoice issued by the firm M/s.

Lakhani Steels Traders dated 15.04.2005 as per which it had purchased

generator set at Rs.7,28,000. The amount of Rs.3,28,000 was paid during the

year and balance amount of Rs.4 lacs was shown as liability. The Learned

CIT(Appeals) noted further that the aforesaid firm had closed down its

business and that was the reason for non-compliance of notices issued by the

Assessing Officer. The Learned CIT(Appeals) has observed from the

documents filed by the assessee that the amount of Rs.4 lacs represented

liabilities against purchase of generator sets, thus, the assessee has been able

to show genuine liability at Rs.4 lacs. Under this background of the material

facts, we are of the view that the Learned CIT(Appeals) was justified in

directing the Assessing Officer to delete the addition of Rs.4 lacs. The same

is upheld. Ground No.1 is accordingly rejected.

7

6. Ground No.2 (Revenue): During the course of assessment

proceedings, the assessee noted that the assessee has shown credit balance of

Rs.12,61,815 in the name of Federal Mogul Automotive Products (India)

Pvt. Ltd. but the said party informed that there was no transaction in the

account of assessee proprietary concern as per their books. In response to the

query raised by the Assessing Officer, the assessee explained that goods

were purchased by him through Form No. 31 issued by Trade Tax but the

bills were wrongly made in the name of and on behalf of the firm M/s.

Arora Engineering Co., whose proprietor was assessee's father. The

Assessing Officer noted that the Federal Mogul Automotive Products (India)

Pvt. Ltd. maintained the accounts of M/s. Arora Engineering Co. and not

that of M/s. Arora Trading Co. In support, the assessee also enclosed copy of

accounts but the Assessing Officer did not agree with the explantion of the

assessee and held that the amount of Rs.7,05,347 in respect of the bills

received from Federal Mogul Automotive Products (India) Pvt. Ltd. did not

pertain to the assessee. The amount was thus disallowed and added to the

income of the assessee. The Learned CIT(Appeals) has, however, deleted the

disallowance.

7. In support of the grounds, the Learned DR placed reliance on the

assessment order. The Learned AR on the other hand tried to justify the First 8

Appellate Order with the submission that sufficient evidence was produced

in support of the claimed expenses.

8. Considering the above submission, we find that the Learned

CIT(Appeals) has deleted the disallowance of the claimed expenses of

Rs.7,05,347 in respect of the bills received from Federal Mogul Automotive

Products (I) Ltd. with this finding that sufficient evidence were produced by

the assessee in support of the claim. We also find that the assessee has filed

affidavit of his father in support of his contentions that M/s. Federal Mogul

Automotive Products (India) Pvt. Ltd. through Tax Trade Form No. 31 in the

name of assessee's proprietary concern against the goods purchased by the

assessee from them and the assessee had also made payments against bills

raised by the aforesaid concern but some of the invoices were wrongly

issued in the name of M/s. Arora Engineering Co., the proprietorship

concern of the assessee's father. The Assessing Officer has also admitted

this fact in his remand report dated 22.2.2011. Under the circumstances, we

are of the view that the Learned CIT(Appeals) has rightly deleted the

addition of Rs.7,05,347 made by the Assessing Officer. The First Appellate

Order in this regard is thus upheld. The ground is accordingly rejected. 9

9. Ground No. 3 (Revenue) & objection No.6 (Assessee): The Assessing

Officer made addition of Rs.64,257 being disallowance of expenses debited

under the heads vehicle running (Rs.38,348), depreciation on car

(Rs.1,39,316), salary to driver (Rs.53,000), interest on car loan (Rs.79,813)

@ 20% amounting to Rs.64,257 out of the total expenses claimed at

Rs.3,21,285. Before the Learned CIT(Appeals), the assessee contended that

the Assessing Officer has excessively disallowed such expenses debited

under the aforesaid heads. The Learned CIT(Appeals) called for the remand

report and the Assessing Officer reported that the above stated expenses

were such that personal element of use could not be denied. The Learned

CIT(Appeals) upheld the disallowance on account of personal user towards

vehicle running and depreciation of car in principle but restricted it to 15%

of the expenses of Rs.1,79,664 claimed under that head resulting into

disallowance of Rs.26,650 as against Rs.35,908 made by the Assessing

Officer.

10. Regarding salary paid to driver at Rs,53,000 and interest on car loan at

Rs.79,813 totaling to Rs.1,32,813, the Learned CIT(Appeals) held that the

disallowance made on account of personal use was untenable and the same

was deleted. The Revenue has questioned disallowance of Rs.37,607. The 10

assessee on the other hand objected the sustenance of disallowance out of

the vehicle running expenses and depreciation on car at 15% by the Learned

CIT(Appeals).

11. Parties have advanced their respective arguments in support of their

cases.

12. Considering the above submission, we are of the view that looking

into the turnover of the assessee, the expenses claimed on running of vehicle

and depreciation on car was not excessive but at the same time in absence of

maintenance of log book, the personal user of the vehicle/car cannot be

totally ruled out. We thus find it reasonable to restrict the disallowance at

10% of the total expenses claimed at Rs.1,79,664 under the head. So far as

disallowance made out of salary paid to driver at Rs.53,000 and payment of

interest on car loan at 79,813 totaling to Rs.1,32,813 is concerned, we do not

find infirmity in the First Appellate Order whereby the Learned

CIT(Appeals) has rightly deleted the same as the disallowance was made

without any convincing reasons. The ground No.3 (Revenue) is dismissed

and Objection No. 6 (assessee) is partly allowed.

11

13. Ground No. 4 (Revenue): During the course of assessment

proceedings, the Assessing Officer noted that the assessee had debited an

amount of Rs.10,51,400 under the head "salary". However, in absence of

books of account, the Assessing Officer disallowed the amount of

Rs.1,00,000. The Learned CIT(Appeals) has deleted the disallowance of

Rs.1,00,000 with this finding that the payment of Rs.10,51,400 during the

year have been recorded in the books of account and the assessee had also

furnished copy of account giving details of salary paid. The Learned

CIT(Appeals) had also called for remand report of the Assessing Officer

after verification of books of account and in the remand report dated

22.2.2011, the Assessing Officer had not commented on the veracity of

books of account. Under these circumstances, we are of the view that the

Learned CIT(Appeals) has rightly deleted the addition of Rs.1,00,000 made

by the Assessing Officer on account of disallowance from the payment of

claimed salary at Rs.10,51,400 by the assessee to its staff. The ground No. 4

is accordingly rejected.

14. During the course of hearing, the Learned AR did not press Objection

Nos. 1 and 2 of the cross objection. These objections are accordingly

rejected.

12

15. Objection No.3: It is against the trading addition of Rs.1,31,147 as a

result of application of g.p. rate at 14% on the declared sales of

Rs.71,75,996. The Learned CIT(Appeals) has upheld the same.

16. In support of the objection, the Learned AR submitted that the

assessee had shown better results at 12.17% of g.p. rate on the turnover of

Rs.71,75,996 resulting into the gross profit of Rs.8,73,492.33 and N.P. rate

of 9.47% in comparison to the g.p. of Rs.6,72,241 at the g.p. rate of 12.25%

on the turnover of Rs.54,89,054 during the last year. He pointed out further

that in the assessment year 2005-06, the Assessing Officer had accepted the

net profit declared at the rate of 5.46% as reasonable against which this year

the net profit shown at the rate of 9.47% was better. The Learned AR

submitted that the assessee had maintained regular books of account which

were in possession of the accountant whose fees were not paid by the

assessee due to heavy loss in business. As such, books of account could not

be produced before the Assessing Officer at the time of assessment

proceedings. The assessee had, however, pleaded that computerized books

of account were available with him which was readily available to present

for verification. The Learned CIT(Appeals) has upheld the trading addition

made by the Assessing Officer on the basis that complete books of account, 13

documents etc. were not produced before the Assessing Officer despite

sufficient opportunity and in the remand report, the Assessing Officer after

examining the books of account, documents etc. which were directed to be

produced before the Assessing Officer, the Assessing Officer had reported to

the Learned CIT(Appeals) that the gross profit rate has not been applied on

higher side to estimate the income in comparison to the earlier years. The

Assessing Officer reported that in the assessment year 2004-05 the assessee

had shown g.p. rate of 14.83% and in the assessment year 2005-06, it was

shown at 14.33%.

17. The Learned AR submitted further that the assessee had shown 31.%

increase in turnover in comparison to the preceding year and only less

shown g.p. rate by 0.08% was there in comparison to the last year. The

Learned DR on the other hand tried to justify the First Appellate Order on

the issue.

18. Considering the above submission in view of the orders of the

authorities below, we find that the Learned CIT(Appeals) has upheld the

trading addition on the basis that certain defects were found in the books of

account. These defects were that credit balance as per copy of accounts of 14

Kummins Engine Service Pvt. Ltd., Noida appearing in the books of

assessee was Rs.13,02,250 whereas copy of accounts furnished by the

aforesaid company, there was debit balance of Rs.10,48,250. The Assessing

Officer added the difference of the amount at Rs.2,54,000, which the

assessee did not object before the Learned CIT(Appeals). The Learned

CIT(Appeals) has also noted the defect about the claimed purchases made

from Federal Mugul Automotive Products (India) Pvt. Ltd. but the invoices

were issued in the name of proprietary concern of the father of the assessee.

We have already dealt with the defect No.2 while disposing of the ground

No. 2 of the Revenue in this regard and when the Learned CIT(Appeals)

himself has deleted the addition made out of the claimed expenses against

the invoices issued by Federal Mugul Automotive Products (India) Pvt. Ltd.,

he was not justified in noting the said defects while considering the

reasonableness of the estimation of profits made by the Assessing Officer by

applying g.p. rate of 14% on the turnover. Certainly, the assessee has shown

better turnover and N.P. rate during the year but at the same time the

assessee has also admitted the defects in the books of account by not

objecting the addition of Rs.2,54,000 made by the Assessing Officer as

discussed above. We are thus of the view that application of g.p. rate at 13%

will serve the purpose to reduce the leakages, if any, due to defects in the 15

accounts. The Assessing Officer is accordingly directed to compute the

profit by applyinjg g.p. rate at 13% on the turnover shown during the year.

The objection No.3 is accordingly partly allowed.

19. Objection No.4: The Assessing Officer made addition of Rs.6,15,000

on account of unexplained fresh unsecured loans and interest of Rs.32,301

paid thereupon under sec. 68 of the Act. The Learned CIT(Appeals) has

restricted the addition to Rs.3 lacs and interest paid at Rs.7,418 on the basis

that the assessee could not establish the genuineness of unsecured loans

claimed to have been taken from Shri Yogesh Diwan (Rs. 1lac), Smt. Shanti

Devi (Rs. 60,000) and Shri T.P. Singh (Rs.1, 40,000) and interest paid to

them at Rs.7,418.

20. In support of the objection, the Learned AR submitted that the

assessee had furnished all the necessary details and evidence in support of

the claimed unsecured loan from the parties. In this regard, he referred page

Nos. 50 to 56 of the paper book i.e. copies of ledger account, bank account

and income-tax return of Shri Yogesh Diwan and ledger accounts of Shri

T.P. Singh, Smt. Uma Kalra, Smt. Shanti Devi and Smt. Shakuntla Bhushan.

He also referred page Nos. 57 to 59 of the paper book i.e. details of interest 16

paid. The Learned AR also reiterated the submission made before the

authorities below. He contended further that only because Smt. Shanti Devi,

Shri T.P. Singh and Yogesh Diwan were not found on the given address

after a lapse of sufficient time, it does not mean that the claim was not

genuine specially when all the transactions have been made through banking

channel. He referred page No. 50 of the paper book with this contention that

Shri Yogesh Diwan had confirmed the deposit of Rs.1 lac as on 14.3.2007 as

it is evident from page No. 50 wherein along with his ledger account, his

PAN has also been given.

21. The Learned DR on the other hand placed reliance on the orders of the

authorities below.

22. Considering the above submission, we find that during the year the

assessee has taken unsecured loans from five persons i.e. Shri Yogesh

Diwan (Rs. 1 lac + interest paid at Rs.616 ), Smt. Shanti Devi (Rs.66,000 +

interest paid at Rs.2,400), Shri T.P. Singh (Rs.1,40,000 + interest paid

Rs.4,400), Smt. Uma Kalra (Rs.2,15,000 + interest paid at Rs.18,770) and

Smt. Shankuntala Bhushan (Rs.1 lac + interest paid at Rs. 6,115). The

Assessing Officer doubted the claim and added the amount of Rs.6,15,000 + 17

interest paid at Rs.32,301 under sec. 68 of the Act. The Assessing Officer

alleged that the assessee could not furnish any information in respect of T.P.

Singh, Smt. Uma Kalra and Smt. Shakuntala Bhushan. The assessee though

had filed copy account of Shri Yogesh Diwan. The Assessing Officer sought

information under sec. 133(6) of the Act from Shri Yogesh Diwan, however,

no compliance was made. The Assessing Officer noted further that the

assessee could not explain the source of aforesaid deposit and had merely

filed the copies of account of the aforesaid depositors as appearing in his

books of account. During the appellate proceedings, the assessee contended

that he had received such deposits through cheques and paid interest thereon

after deducting TDS amount and deposited in bank. The Learned

CIT(Appeals) called for remand report from the Assessing Officer twice. In

the remand report, the Assessing Officer accepted the claimed unsecured

loan and payment of interest thereupon to them by the assessee in the cases

of Smt. Shakuntala Bhushan and Smt. Uma Kalra but denied the remaining

claim relating to Smt. Shanti Devi, Shri T.P. Singh and Shri Yogesh Kumar

Diwan and on the basis that notices issued under sec. 133(6) of the Act to

them received back unserved with the postal remarks "wrong address". The

Learned CIT(Appeals) has upheld the addition relating to them at Rs.3 lacs

and interest paid to them at Rs.7,418 in question. We find that though they 18

were not found on their given address after a lapse of sufficient time in

between but the transactions with them have been made through banking

channel. The assessee had taken loan from them through cheques and had

paid interest by cheques, copies of their accounts were also enclosed. In case

of Shri Yogesh Diwan, the assessee had also furnished copy of his income-

tax return about which the Assessing Officer observed that he had declared

total income of Rs.95,640 only and just a day before transferring money to

the assessee, cash was deposited in his bank account. We thus find that

though they were not found on their given address by the postal authority but

all the other necessary evidence in support were filed by the assessee in

support of the genuineness of the unsecured loan procured from them. We

thus find that there were sufficient material with the assessee to establish the

genuineness of the claimed unsecured loans from these three persons and

veracity of those materials has not been examined before denying the claim

merely on the basis that those persons were not found on the given address.

The addition sustained by the Learned CIT(Appeals) at Rs. 3,07,418 is

accordingly deleted. The objection No. 4 is accordingly allowed.

23. Objection No. 5: The authorities below have made and upheld the

addition of Rs.2,54,000 i.e. amount in difference found in the account of

Cummins Engine Services (P) Ltd. and credit balance in the books of 19

assessee which was actually revealed as debit balance in the account of

aforesaid concern. The Assessing Officer noted from the account of the

aforesaid concern that there was debit balance of Rs.10,48,250 whereas a

credit balance of Rs.13,02,250 was shown in the books of assessee. The

Assessing Officer thus inferred that assessee had shown excess liability of

Rs.2,54,000 by debiting the hire/lease charge of Rs.1,28,500 vide Bill No.

121 dated 15.1.2007 and Rs.1,25,500 vide Bill No. 139 dated 05.02.2007.

The Assessing Officer was thus of the view that assessee had shown

fictitious liability of Rs.2,54,000. Before the first appellate authority, the

assessee did not press this ground and the Learned CIT(Appeals) has upheld

the same.

24. Before the ITAT, the Learned AR tried to submit that it was sundry

creditor and the matter should be sent back to the file of the Assessing

Officer for fresh consideration in view of the documents filed. The Learned

DR on the other hand placed reliance on the orders of the authorities below.

25. We do not find substance in the above contention of the Learned AR

especially when the issue raised in the ground was not agitated before the

Learned CIT(Appeals) nor the assessee has been able to improve its case 20

even before the ITAT. It has also been remained one of the major defects in

the books of account of the assessee on the basis of which books were

rejected and profit was estimated by applying a different g.p. rate. The

objection No. 5 is accordingly rejected.

26. In result, the appeal preferred by the Revenue is dismissed and the

cross objection of the assessee is partly allowed.

Decision pronounced in the open court on 26 .05.2015

Sd/- Sd/-

( N.K. SAINI ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 26 /05/2015 Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT(Appeals)

5) DR:ITAT

ASSISTANT REGISTRAR 21

Date Draft dictated on computer 25 .05.2015 Draft placed before author 25 .05.2015

Draft proposed & placed before the second 26.05.2015 member Draft discussed/approved by Second Member.

Approved Draft comes to the Sr.PS/PS 27.05.2015 Kept for pronouncement on 26.05.2015 File sent to the Bench Clerk 27.05.2015 Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.