Raj Kumar, , Faridabad vs Department Of Income Tax

ACIT Vs Raj Kumar Circle-1, Block-I-B, Prop M/s. Raj Furniture, CGO Complex, NH-24, 16/5, Mathura Road, Faridabad Faridabad (Appellant) (Respondent)

ITA No.2785/Del/2010 (Assessment Year: 2007-08)

ACIT Vs Raj Kumar Circle-1, Block-I-B, Prop M/s. Raj Furniture, CGO Complex, NH-24, 16/5, Mathura Road, Faridabad Faridabad (Appellant) (Respondent)

Appellant by : Vikram Sahay, Sr. DR Respondent by : Vijay Gupta, CA

Date of Hearing 07 .05.2015 Date of pronouncement 22.05.2015

ORDER

PER A. T. VARKEY, JUDICIAL MEMBER

These appeals filed by the revenue are against the order dated

28.08.2009 of the ld CIT(A), Faridabad relevant to assessment years 2006-07 and

2007-2008.

Page 2 of 13

2. The revenue has raised the following grounds in appeal for the AY 2006-07

are as under:-

1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 10,00,000/- made by the Assessing Officer on account of purchases and vendor purchases even when the assessee had no evidence to support his claim.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs.6,33,432/- made by the Assessing Officer on account of expenses under the head Freight & Octroi, Staff & Workers welfare, traveling expenses, Diwali expenses, telephone expenses and Repair & maintenance even when the assessee had no evidence to support his claim that all these expenses were incurred wholly & exclusively for the purpose of business."

3. The brief facts of the case are that the assessee is the Proprietor of M/s.

Raj Furniture, a Contractor who is engaged in interior furnishing on contract basis

and sale of furniture. For the year in question, he filed his return of income at

Rs.1,43,52,382/- on 31.10.2006, which was processed as such u/s 143(1) of the

Income Tax Act, 1961 ( herein after 'the Act') on 31.03.2008. In the assessment

u/s 143(3), the final taxable income was determined at Rs.1,59,85,810/-, in which

certain disallowances were made by the AO, which were the subject matter of

the appeal before the Ld. CIT(A), who was pleased to allow the appeal in favor

of the assessee. Aggrieved by the order of the Ld. CIT(A) the Revenue is before

us.

4. Apropos ground No.1 which is against deletion of disallowance of

Rs.10,00,000/- under the head "Purchase and Vendor Purchases" made by the

AO.

Page 3 of 13

5. Ld. DR submitted that as per the P&L a/c of the assessee, amounts of Rs.

29,14,80,232/- and Rs. 7,75,91,523/- have been debited under the head

"Purchases & Vendor purchases" respectively. The assessee was asked by the

AO to furnish the evidences of the above purchases and to show its

genuineness. In response thereto, assessee has produced only ledger account &

cash book but no vouchers/bills were produced on the plea that all the

vouchers have been destroyed in a fire incident on 23.09.2007. Ld. DR pointed

out that the AO while going through the previous record of the assessee found

that in the preceding assessment year i.e. for A.Y 2005-06, an addition of Rs.

5,00,000 (five lacs ) was made by the AO under this head because of the fact

that assessee could not produce supporting evidences and surrendered the

said amount. So according to the Ld. DR, the AO rightly concluded that plea of

the assessee regarding loss of vouchers in fire incident may be true, but looking

at the track record of the assessee, it seems that assessee is in the habit of not

keeping the complete records of expenses/purchases, so the AO disallowed a

sum of Rs.1O,OO,OOO/- ( ten lacs ) under this head, which according to the DR

is reasonable and the Ld. CIT(A) erred in deleting the same, so he pleads that

the impugned order may be reversed and the AO's order be upheld.

6. On the other hand, the ld AR submitted that the AO in para-1 of her order

examined the genuineness of the amounts of Rs.29,14,80,232/- and

Rs.7,75,91,523/- debited under the head "Purchases and Vendor Purchases"

respectively. According to the A.O., for the verification of these amounts, the Page 4 of 13

assessee had produced only ledger account and cash book but no vouchers /

bills were produced on the plea that they had been lost in a fire incident

occurred in the premises of the assessee on 23.09.2007. To prove the

genuineness of the fire incident in the assessee's premises, the copies of FIR,

documents from Fire Station Officer, documents of insurance claim from

National Insurance Company Ltd., paper cuttings from leading newspapers

where news of fire incident on 23.09.2007 was reported on 24.09.2007, were

furnished before the AO for her examination. Also,it was pointed out that the AO

herself made "proper enquiries and investigation" under the provisions of section

131(1)(d) from the Additional Director of Income Tax, Faridabad (ADI, FBD) who

conducted enquiries in 10 selected cases and also enquires on the creditors

mentioned on page 3 of the impugned assessment order. However, no adverse

inferences were drawn by the AO from the extent of investigation conducted by

her. So according to the Ld. AR, when there was nothing against the assessee,

the AO went through the previous records of the assessee and noticed that in

the previous assessment year i.e. A.Y 2005-06, an addition of Rs. 5,00,000/-was

made by the AO under this head because of the fact that the assessee could

not produce supporting evidences and had surrendered the above amount.

Therefore, the AO on the basis of the previous conduct of the surrender made

as aforestated, she concluded that the assessee was in the habit of not

keeping the complete records of expenses / purchases. As a result, she made a

disallowance of Rs. 10,00,000/- under this head.

Page 5 of 13

6.1 The ld AR submitted that the AO made the addition primarily for not

producing vouchers which were destroyed during the accidental fire occurred

due to no fault of the assessee. The assessee submitted the proof of fire at his

premises by furnishing news paper cuttings and copy of FIR to substantiate his

claim which has been accepted by the AO. According to Ld. AR, the assessee's

genuine inability to produce the purchase voucher had been grossly ignored by

the AO. According to the Ld. AR, the books of accounts were duly audited u/s

44AB of the Act by the Chartered Accountant. The Section 131(d) had been

invoked by the ADI, FBD by letter no.1838 dt 04.12.2008 to find out the

genuineness of the creditors and purchase from them which has been

completed and there was no discrepancy found. According to ld AR, though

the AO remarked as "No addition is required under this head" in her order and

without rejecting the books of accounts maintained by the assessee, has made

addition which is per-se, arbitrary and is purely on estimate / guess work basis

without any legitimate basis or reason.

6.2 The Ld. AR pointed out that the NP rate declared in this instant year is

better being at 3.16 per cent as against 1.93 per cent in the immediately

preceding year. According to him, it is settled position of law that even when

the books of accounts are rejected, addition is not automatic, and if the NP rate

declared in the current year is better than the past year, no further addition can

be justified made in the declared results. According to him, AO cannot make

an assessment on pure guesswork without reference to any material evidence Page 6 of 13

as has been decided by Hon'ble Supreme Court in the case of DHAKESWARI

COTTON MILLS L TD VS CIT (1954) 26 ITR 775 (SC).

6.3 According to him, in order to find out real profit earned by assessee,

neither the AO can make crude guess nor proceed arbitrarily but should act

judicially in the light of relevant material as has been decided in the case of

BAJRANGBALI ENGG CO (Pvt.) L TD VS CIT (1967) 66 ITR 82 (CAL). So according

to the Ld. AR, the Ld. CIT(A) has correctly deleted the addition, so we need not

interfere in the said order of the Ld. CIT(A).

6.4 We have heard both the parties and gone through the records and case

laws cited before us. We find in the instant case, the AO had conducted

enquiries u/s. 131(1) (d) of the Act and as per the AO's own findings no addition

was required after the verification of the few creditors. Moreover, the incident

of fire at the assessee's business premise has also been accepted by the AO,

because the documents submitted in support of such accident has not been

disputed or found fault with by the AO. Yet we find that the AO has made the

disallowance of Rs. 10,00,000/- purely looking into the past history of the case

and that too, twice the amount surrendered in the last year. Neither the AO has

adduced any material, rational basis nor any justification for the doubling the

addition made during the year. We further find that the business results of the

assessee are certified by the audited accounts by the Auditors, M/s Vimla

Chand Jain & Co., Chartered Accountants as per the Tax Audit Report in Form

No. 3CB and 3 CD dated 28.10.2006. These audited reports clearly reflect that Page 7 of 13

on or before 28.10.2006, vouchers / bills were available with the assessee and on

the basis of which the audit of the accounts was conducted and report in Form

No. 3CB & 3CD alongwith the return of income was filed on 31.10.2006. But

since an accidental fire happened on 23.9.2007 i.e. after the audit was

conducted on 28.10.2006, it can be safely assumed that the Auditor had

prepared the Report based on the vouchers/ bills with the assessee and so it is

authentic, since the said audit report have not been challenged by the AO at

all. Therefore, simply on the ground that in previous year, the assessee made

surrender cannot be the basis for disallowance which smacks of arbitrariness,

which is the sworn enemy of Article 14 of the Constitution and the Ld. CIT(A) has

rightly deleted the adhoc disallowances, which does not need any interference

on our part, hence, we uphold the same by dismissing the ground no. 1 raised

by the Revenue.

7. Apropos ground No. 2, regarding deleting the disallowance of

Rs.6,33,432/- out of expenses under different heads.

8. Ld. DR submitted that the AO in Para-2 of her order has made the

addition, since vouchers were not produced by the assessee on the plea that it

was destroyed in the fire accident. The AO while considering the expenses

claimed by the assessee for freight and octroi, staff and workers' welfare,

traveling expenses, Diwali expenses, telephone expenses and repair and

maintenance expenses found it to be unverifiable in the absence of the

evidences to substantiate it. Therefore, "to protect the interest of the revenue", Page 8 of 13

she worked out the disallowance out of these expenses to the extent mentioned

against each head in the impugned assessment order, being "fair and

reasonable" to the assessee. The total disallowance thus amounted to

Rs.6,33,432/- which was added to the total income of the assessee.

9. On the other hand, Ld. AR relied upon the order of the CIT(A).

10. We have heard both the parties and have perused the records of the

case and we find that in respect of the addition made by the AO out of "vendor

purchases and other purchases", identical conclusions/approach have been

adopted by her in effecting adhoc disallowances as done in ground no. 1

(Supra) which Ld. CIT(A) deleted and we have confirmed it. We find that the

AO has resorted to adhoc disallowance without bringing out any specific

instances of expenditure. It was noticed by the Ld. CIT(A) that in the immediate

preceding assessment year, the disallowances were effected by the AO out of

(i) travelling expenses, (ii) sale promotion and staff welfare expenses and (iii)

repair & maintenance expenses and no disallowance was ever made out of

freight and octroi has been made by the AO in that year, since no defects were

found in the said claims. And the predecessor A.O. made a disallowance to the

extent of 1/10th out of staff and workers, welfare and travelling expenses only,

however AO in the instant year has simply made adhoc disallowance ignoring

the improved turnover and profits of the year under consideration which is

arbitrary. The Ld. CIT(A) has noted that Diwali Expenses are allowable under

section 37(1) of the Act, in view of the decisions in ACIT vs. Anil Alums (P) Ltd. Page 9 of 13

(2005) 98 TTJ (Asr) 56 and Mr. Maya J. Daryani vs. IAC (1994) 50 TTJ (Del) 510.

Travelling expenses are deductible under section 37(1) as per ratio in 5unita

Mine chem. Ind. vs ITO (2008) 14 TTJ (Jd.) 98 and Ganesh Foundry vs ACIT (2003)

78 TTJ (Jd.) 736. Ld. CIT(A) observes that all the disallowances out of expenses

listed have been made without any reason, and hence the disallowance was

not warranted in view of the decisions in Lavrids Knudsen Maskinfabrik (India)

Ltd. vs. Addl. CIT (2006)102 TTJ (Pune) 882 and 5ayaji Iron & Engg. Co. vs. CIT

(2002) 253 ITR 749 (Guj). Moreover,ld CIT(A) has rightly observed that

disallowances of any expense claimed on estimate basis without pinpointing

any discrepancies in the books of account are not tenable and the Ld. CIT(A)

has relied on the judgments viz. (i) Roger Enterprises Ltd. Vs. ITO (1995) 52TTJ(Del)

198 & (ii) Modi Exports Vs. ACIT (2008) 12 DTR-1 (Del Tribunal).

11. We concur with the Ld. CIT(A) that AO disallowed expenditure under

these heads without any material or reasons brought on record, so it is

unsustainable in the eyes of law. So, we are inclined to confirm the order of the

Ld. CIT(A) on this issue also and dismiss the ground no. 2 raised by the Revenue.

12. In the result, the Appeal No. 4165/Del/2009 for (AY 2006-07) stands

dismissed.

In ITA No.2785/Delhi/2010 (AY 2007-08)

13. The following grounds have been raised by the Revenue assailing the

decision of the Ld. CIT(A), Faridabad dated 31.3.2010 for the Asstt. Year 2007-08. Page 10 of 13

1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 15,00,000/- made by the Assessing Officer on account of purchases and vendor purchases disregarding the fact that the assessee had failed to produce any evidence from which genuineness of purchases could be verified.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs.8,26,378/- made by the Assessing Officer under the various heads of expenditure even though the assessee had failed to discharged the onus that the expenditure was incurred wholly and exclusively for the purposes of business.

3. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal.

14. Apropos ground No.1, which is regarding deletion of disallowance of

Rs.15,00,000/- under the head "Purchase and Vendor Purchases". Since this

ground is similar and identical in nature and the facts and circumstances which

led to the disallowance are the same, as that of ground no. 1 raised in ITA No.

4165/Del/2009 (A.Y. 2006-07)(supra), and since the Ld. DR could not point out

any change in facts and circumstances, which could persuade us to take a

different view, we uphold the order of the Ld. Commissioner of Income Tax

(Appeals) on this issue and decide the issue in favour of the assessee.

15. Apropos ground no. 2 regarding deletion of addition of Rs. 8,26,378/-

made by the AO under the various heads of expenditure even though the

assessee had failed to discharge the onus that the expenditure was incurred

wholly and exclusively for the purposes of business.

Page 11 of 13

15.1 A perusal of the assessment order reveals that the AO has disallowed the

expense under following different heads to the tune of Rs.9,07,350/- and

additions made thereof.

1. Staff and workers welfare Rs.13,22,112/- Rs.2,64,422/- (@1/5th )

2. Diwali Expenses Rs.3,29,915/- Rs.1,64,957 (@50%)

3. Telephone expenses Rs.7,46,199/- Rs.1,49,240/-

4. Charity & Donation Rs.1,28,225/- Rs.1,28,225/- (@100%)

5. Vehicle maint. Exp. & Dep Rs.7,17,206/- Rs.1,19,534/-

6. Employees contribution to PF and ESI Rs.80,972/-

Total Rs.9,07,350/-

15.2 Assessee appealed before the Ld. CIT(A), who vide his impugned order

has deleted all the additions mentioned at serial No. 1 to 3 & 5 to 6 and

affirmed the action of the AO disallowing expenditure on account of charity

and donation of Rs. 1,28,225/- mentioned at serial no. 4 i.e. Rs. 9,07,350 - Rs.

1,28,225 = Rs. 7,79,125/- was deleted by the Ld. CIT(A).

15.3 Against the above order of the Ld. CIT(A), Revenue has raised the ground

no. 2 before us, but wrongly mentioned the amount of deletion of addition of

Rs. 8,26,378/- i.e. (Rs. 9,07,350 - Rs. 80,972 on account of Employees Contribution

to PF & ESI = Rs. 8,26,378), however, the same was Rs. 7,79,125/-, as stated in

para 15.2 of his order. This wrong mentioning of the addition amount in the

Revenue's appeal raised vide ground no. 2 shows that the Revenue has raised

the addition of Rs. 1,28,225/- again, which has already been upheld by the Ld.

CIT(A), hence, the issue raised against the head of 'charity and donation of Rs.

1,28,225/- has become infructuous. From the above, we find that the Revenue Page 12 of 13

has come against the following additions only which comes to Rs.6,98,153/- in

lieu of wrongly mentioned addition of Rs. 8,26,378/-.

1. Staff and workers welfare Rs.13,22,112/- Rs.2,64,422/- (@1/5th )

2. Diwali Expenses Rs.3,29,915/- Rs.1,64,957 (@50%)

3. Telephone expenses Rs.7,46,199/- Rs.1,49,240/-

4. Vehicle maint. Exp. & Dep Rs.7,17,206/- Rs.1,19,534/-

Total Rs.6,98,153/-

15.4 We have heard both the parties and perused the records. We find that

Ld. CIT(A) has rightly observed that the AO has made the additions purely on

the basis of previous year assessment without bringing any fresh facts or

material on record to justify adhoc disallowances out of the expenditure under

the various heads, except that of charity and donation which is not allowable

u/s. 37 of the Act. Hence, the disallowance of Rs. 1,28,225/- was rightly upheld

by the Ld. CIT(A). As for the other disallowances are concerned, all of them are

made without any basis and it is arbitrary exercise of power against the

assessee. Those expenses which were allowed last year is allowable this year

also uls 37(1), of the Act, and the Ld. CIT(A) relied on the decisions in Levrids

Knudson Maskinfabarik (India) Pvt. Ltd. vs Addl. CIT (2006) 102 TTJ 882 (Pune) and

Sayaji Iron & Engg. Co. Vs CIT (2002) 253 ITR 749 (Guj). We find that the Ld. CIT(A)

took note of the fact that the books of accounts have been duly audited as per

the provisions of section 44AB of the Act and the A.O. has failed to find any

discrepancy or any defect in the account books maintained by him. The Ld.

CIT(A)'s has rightly observed that without rejecting the audited books of

accounts, no disallowances could be framed, as held in Director of Income Tax Page 13 of 13

International Taxation Circle (i), Delhi vs Bumi Hiway (M) SDN, BHD, (2008) 21 SOT

311 (Delhi Trib); Mls Madnani Construction Corporation Pvt. Ltd. Vs. CIT 2008-

TMI- 3142(Gau.); CIT vs. Om Overseas, Shiv Sagar 2008- TMI-3790 (P&H).

16. In view of above, we find that adhoc disallowance without rejecting the

audited books of account and without pointing out any discrepancy in the

books, the disallowance of expenditure on adhoc basis is not valid in the eyes of

law and the Ld. CIT(A) has rightly deleted the impugned additions, which does

not need any interference on our part. Hence, we uphold the action of the Ld.

CIT(A) on the above cited additions mentioned at Serial No. 1 to 4 vide para

no. 15.3 of this order and dismiss the ground no. 2 raised by the Revenue. In the

result, the Revenue's appeal No. 2785/Del/2010 (AY 2007-08) stand dismissed.

17. In the result, both the Appeals filed by the Revenue stand dismissed.

Order pronounced in the Open Court on 22-5-2015.

Sd/- Sd/-

(J. S. REDDY) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22 /05/2015 A K Keot

Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi