Sandeep R. Vedant, Navi Mumbai vs Assessee

सव ी जी.एस. प नू, लेखा सद य एवं ी संजय गग , या यक सद य BEFORE SHRI G.S.PANNU, AM AND SHRI SANJAY GARG, JM आयकर अपील सं./I.T.A. No. 30/Mum/2011 ( नधा रण वष / Assessment Year: 2006-07)

Shri Sandeep R. Vedant The Income Tax Officer, Ward Flat no 202,Om Tower Co-operative 22(3)(4) Tower No 6, 3rd Floor, बनाम/ Housing Society ,Plot No 83,Sector- Vashi railway Station Building, 8,Koparkhairane,Navi Mumbai Vs. Vashi-400706 400709 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAEPV9187F (अपीलाथ /Appellant) : ( यथ / Respondent) आयकर अपील सं./I.T.A. No. 871/Mum/2011 ( नधा रण वष / Assessment Year: 2006-07) The Income Tax Officer, Ward Shri Sandeep R. Vedant 22(3)(4) Tower No 6, 3 rd Floor, Flat No. 202,Om Tower Co-

Vashi railway Station Building, बनाम/ operative Housing Society ,Plot Vashi-400706 Vs. No 83,Sector- 8,Koparkhairane,Navi Mumbai 400709

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAEPV9187F (अपीलाथ /Appellant) : ( यथ / Respondent)

Assessee by : Shri Anuj Kisnadwale Revenue by : Shri Jeetendra Kumar,DR

सन ु वाई क# तार%ख / : 20-05-2015 Date of Hearing घोषणा क# तार%ख / : 31.07.2015 Date of Pronouncement 2 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

आदे श / O R D E R Per G S Pannu, A. M.:

The captioned cross-appeals filed by the assessee and Revenue pertaining to A.Y. 2006-07 are directed against an order passed by Ld. CIT(A)- 33, Mumbai dated 22/10/2010, which in turn arises out of an order passed by AO under section 143(3) of the Income Tax Act, 1961 (the Act) dated 29/12/2008. The grounds of appeal raised by the assessee read as under:

'1. The learned Commissioner of Income Tax (Appeal) ( "The Ld CIT(A)") has legally erred in estimating the rent income to be `3,12,960/- against `1,14,000/- actually received.

2. The Ld. CIT(A) has legally erred in treating purchase made from M/s Keshav Enterprises and M/s Narayani Textiles to the tune of `9,15,564/- as Bogus purchases.

3. The learned CIT(A) has legally erred in treating sales made to M/s Supreme Agencies, Samudra Polycoats, G L Investments & Joshi Advertising to the tune of `16,05,440/- as Bogus Sales.

4. The learned CIT(A) erred in stating that the appellant was earning only Commission.

5. The learned CIT(A) erred in treating `9,98,000 as unexplained cash credit u/s 68.

The assessee has moved an Additional Ground of appeal also which reads as as under :

"The learned erred in not allowing the interest of `1,99,302 deductible u/s 24(b)."

2. The facts of the case are that the assessee derives income from salary , income from house property and income from his proprietary concern Surya Enterprises.

3 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

3. Ground No 1 relates to Rental Income - The assessee has rented out Industrial Galas ie unit No 302 having area of above 710 square feet and gala no 303 having area of 920 square feet at Navyug Industrial Estate, Sewri , Mumbai to M/s Ashpura Garments Private Limited who is a related party. The said Gala was purchased for Rs. 80,88,565 by assessee and the said Gala was given on rent to company M/s Ashpura Garments Private Limited of which assessee and his wife are shareholders . The assessee is also Executive Director of the said company and also undertaking trading transaction with said company. The Assessing Officer while considering that the assessee is shareholder and director of the company to whom the said galas were given on rent held that Galas were given on meager rent of Rs.9500 per month(Rs.4750 X 2) to an associated/related concern while cost of acquisition was `80.88 lacs . The assessing officer made enquiries and based on the same arrived at a conclusion that the prevailing rent in the area is Rs.1,20,000 per month for both the Galas and held that the fair rent value ought to be adopted Rs. 14,40,000 per annum as rental for both the Galas.

3.1 Aggrieved by the order of Assessing Officer, the assessee carried the matter to first appellant authority(hereinafter called FAA) by filing first appeal and made written submissions . The remand report was called by FAA from the Assessing Officer . In the remand report, the Assessing Officer submitted that information u/s 133(6) of the Act was called from Navyug Industrial Premises Co-op. Society Limited who has furnished information but the same is incomplete and selective. The assessing officer also stated that one party Sh Bharat Raste , in whose case rent was stated by the society at Rs 9500 per month , is assessed by Revenue at rental income of Rs 1,10,000 per month . Further, the said assessee Sh Bharat Raste has not challenged the addition in appeal and paid taxes on the same. Hence, The Revenue has rightly assessed the assessee at Rs 120000 per month. The assessee in reply to remand report s stated that the society has furnished the information in response to notice u/s 4 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

133(6) of the Act and details given by the society reveals the rent per month as also the municipal rateable values were as under:

Name of the Gala No. Area Rent P.M. ENR Owner P.M.(Rateable Area) Mrs. Gulabi 10-A 300 sq ft 5000/- 113.60 Shetty Bharat 206 & 1130 sq.ft. 9500/- 1448.10 Vedant 207 Bharat Raste 407 657 sq. ft 4750/- 875.75 Sachin 301 1310 sq.ft 4750/- 1540.57 Adaicha Hitesh Vedant 114 565 sq. ft. 4750/- 741.70

3.2 The assessee's counsel also submitted that in case of Sh Bharat Ratne , the appeal is already pending with Tribunal.The FAA after considering the contention of the assessee and material on record held that the rent in the area was fluctuating from Rs 3.62 per square feet to Rs 16 per square feet per month. The FAA held that it will be reasonable to hold the rent to be Rs 16 per square feet per month, being comparable rent in the same area. The FAA also held that municipal rateable value being lower than actual rent cannot be accepted.The FAA thus reduced the rent to be chargeable to tax at Rs 312960 instead of Rs 14,40,000 held by the Assessing Officer.

3.3 Aggrieved by the orders of FAA, the assessee is before us . The assessee contended that the actual rent being higher than the municipal rateable value, the actual rent received shall be accepted as income from rent of the two Gala which is Rs114000 per annum for both the galas (Rs 4750 X2). The assessee also relied upon the decision of the4 Hon'ble Bombay High Court Bombay High Court in the case of CIT vs. Tip Top Typography, 368 ITR 330 (Bom). CIT v. Tip Top Typography.

5 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

3.4 In the cross appeal, Revenue is agitated by action of the CIT(A) in restricting the ALV of the property to Rs.3,12,960/- instead of Rs.14,40,000/- considered by the AO. Since the said cross ground of the Revenue is similar to the ground of appeal of the assessee, the cross grounds are being taken together.

4. The Ld. DR relied upon the orders of the Assessing Officer in support of the case of Revenue.

5. We have heard the rival contentions and perused the material on record . We have observed that the actual rent received by the assessee is higher than municipal rateable value . The FAA has accepted the rent @Rs 16 per square feet per month based on the information submitted in remand proceedings to the Assessing Officer by the Navyug Co-op Society where the Galas of the assessee are situated. We have also observed that the Assessing Officer adopted the rent of Rs 120000 per month without bringing on record any evidence or cogent material on record . The FAA on the other hand has relied upon cogent material and evidences being information supplied by the society where's Galas are situated to arrive at the figure of fair rent Rs 16 per square feet per month based on the rent agreement entered in April 2006 by parties not related to each other in the same society; which, appear to be rightly adopted by CIT(A) more so the assessee has given the Galas on rent to related party being a company in which assessee and his wife hold substantial amount of shares and the assessee is also Executive Director . In 368 the case of CIT vs. Tip Top Typography (supra), Hon'ble Bombay High Court has clearly held that if the Assessing Officer believes that the rent is inflated or deflated, he is not barred from making investigations and enquiry to bring on record cogent material to ascertain the going rental rates of similar properties. Though the Hon'ble Bombay High Court in the case of CIT vs. Tip Top Typography (supra) has upheld the application of Municipal Ratable Value as the Annual Letting 6 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

Value(ALV), so however, it was also observed that the AO is competent to disregard the Municipal Ratable Value if it is shown by way of cogent material that adoption of the Municipal Ratable Value does not qualify to be the value for which the property can be reasonably accepted to be let out for the purpose of section 23(1) of the Act. IN this case the peculiar factors have been lucidly brought out by the AO. Moreover, a perusal of the impugned orders reveal that though assessee relied upon Municipal Ratable Value on the same does not appear to have been furnished. Even before us the figure of the Municipal Ratable Value has not been brought out. Under these circumstances the action of CIT(A) in basing ALV for the property for the purpose of section 23(1) of the Act is quite justified which based on the prevailing rentals in the same building. Thus we hold that income from rent should be charged to tax at Rs 16 per square feet per month being fair rent rate for comparable properties as submitted by society itself where the assessee flat is situated and hence total rental income to be brought to tax shall be Rs 312960 as held by FAA. We uphold the findings of FAA. We order accordingly.

6. Ground No 2 relates to the bogus purchase for amount of Rs 915564 made by the asseseee from M/s Keshav Enterprises and M/s Narayani Textiles while ground no 3 relate to the bogus sales made to M/s Supreme Aagencies, Samudra Polycoats,G L Investments and Joshi Advertising to the tune of Rs 16,05,440. The assessee was asked to substantiate these purchases and sales by Assessing Officer. The assessee merely submitted copy of ledger account and invoices of these parties. Thus , the assessee failed to submit the delivery challans, bank statement, IT particulars etc as desired by Assessing Officer to substantiate these sales and purchases. The Assessing Officer , made addition of bogus purchase of Rs 915564 . The Assessing Officer also held that bogus sales to the tune of Rs1605440 to be reduced from total sales in the assessment of the assessee. The assessee carried the matter to the FAA who called for remand report from Assessing Officer and again no details except 7 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

ledger account and invoices were submitted by the assessee.. The FAA held that both bogus purchase to the tune of Rs 915564 and also bogus sales of Rs 1605440 are to be added to the income of the assessee . The FAA held that the sales are being credited in the books of accounts of the assessee and is treated as un-explained credit u/s 68 of the Act as income of the assessee.

6.1 Aggrieved by the orders of FAA, the assessee is in appeal before us. The Ld. Representative for the assessee contended that these are genuine purchases and sales are made in normal course of business. The assessee's counsel submitted that ledger accounts and invoices were duly submitted before the authorities below. Our attention was also invited to the various other parties with whom assessee has entered into transaction for purchase/sale and with respect to which no addition is made by Assessing Officer.

7. On the other hand Ld. DR appearing for the Revenue has referred to the discussion made in the orders of the Authorities Below which clearly bring out that the onus is on the assessee to explain the transaction which have not een discharge.

8. We have heard the rival contentions and perused the material on record. The assessee is engaged in the business of trading of fabric under name and style of proerietory concern Surya Enterprises. The assessee has made purchase and sale with the parties as mentioned above and hence primary onus is on the assessee to establish that these purchase/sale are genuine. The assessee has merely produced invoices and ledger account. The ledger account of M/s Samundra Polycoats and Supreme Agencies(only these two ledger accounts are submitted before us) reveal that there was an opening balance existing as credit to these parties as on 1-4-2005 which has been mainly squared with the sale of fabric transaction in the month of March 2006, ie at 8 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

the fag end of financial year(even there is no mention of invoice details). The assessee has made no attempt to substantiate by evidences and cogent material such as delivery challan and proof of movement of goods, IT particulars of these parties, VAT returns filed with respect to these transactions, bank statements, financial statements, etc. In view of the above discussion, we hold that FAA has rightly treated these purchases of Rs 915564 and sales of Rs 1605440 as bogus and added the same as income of the assessee chargeable to tax. Since we have already held that sales to the tune of Rs 1605440 is income of the assessee chargeable to tax , it will be fair that the said income of Rs 1605440 is reduced from sales declared and disclosed by the assessee in the return of income filed with the Revenue otherwise it will be leading to taxing the same amount twice. We order accordingly.

9. Ground No 5 relates to holding by CIT(A) that there is unexplained credit u/s 68 of the Act of Rs.9,88,000.00 which is shown as advance received on account of sales made. The assessee submitted that the sales made to Josh Advertising of Rs.688000 and M/s G L Investment of Rs 3,00,000 aggregating to Rs 9,88,000 is already treated as bogus sales and added u/s 68 of the Act by FAA and hence the same cannot be added again which will lead to double addition of the same amount.

10. Ld DR had relied upon the order of CIT(A) in support of the case of Revenue.

11. We have perused the material on record and heard contentions of rival parties. It is not clear from the records that the addition of Rs.9,88,000 is the same addition as held to be bogus sale as referred to in ground no 3 of ground of appeal with respect to sales made to Josh Advertising of Rs.688000 and M/s G L Investment of Rs 3,00,000 aggregating to Rs 9,88,000 .We set aside the 9 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

addition and restore the matter to the file of Assessing Officer to verify that the addition of Rs.9,88,000 is same as is held to be bogus sale to Josh Advertising of Rs.688000 and M/s G L Investment of Rs 3,00,000 aggregating to Rs 9,88,000 as per ground no3 of ground of appeal. If it be so , then the addition would stand deleted, as otherwise it will lead to adding the same amount twice.We order accordingly..

12. The assessee has raised additional ground of appeal relating to allowance of Interest of Rs 199302 u/s 24(b) of the Act. The ld DR has not opposed to the admission of additional ground of appeal and the additional ground of appeal is admitted. The Assessing Officer has observed that the assessee has raised loan from M/s Abhudaya Co-operative Bank Limited for purchase of 2 Galas bearing number unit 302 admeasuring 710 sq feet and unit 303 having area of 920 sq feet at Navyug Industrial Estate, Sewri , Mumbai . The Assessing Officer has observed that the loan has become Non Performing Asset (NPA) and the assessee has not paid any interest during the year and only made provision for the interest. The Assessing Officer held that there is neither any actual payment of interest nor there is any intention on the part of the assessee to pay the interest to bank as the loan is already classified by bank as NPA. The assessee chose not to file any appeal against such disallowance before the FAA. The assessee has raised this additional ground of appeal before us for the first time and the said additional ground is admitted by us and the same was also not objected by DR.

13. The Ld. Representative for the assessee vehemently argued that despite the loan becoming NPA , the interest liability accrues on the loan payable by the assessee. The assessee will be liable to pay to the bank the liability of upto date interest at the time of making payment to bank . As per Section 24(b) of the Act , it is the interest payable which is allowed as deduction and even if the interest is not paid, the deduction is to be allowed u/s 24(b) in order to compute income from house property.

10 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

14. The Ld DR supported the order of Assessing Officer by placing reliance thereon.

15. We have heard rival contentions and perused the material on record. The assessee has borrowed funds for purchase of 2 Galas bearing number unit 302 admeasuring 710 sq feet and unit 303 having area of 920 sq feet at Navyug Industrial Estate, Sewri , Mumbai. The assessee is liable to pay interest on such borrowings , however, no interest is paid during the impugned assessment year and the loan is stated to have become NPA, but as per therecord liability of interest is accruing on the loan borrowed. As per Section 24(b), the deduction of interest is allowed on the interest payable on borrowing for purchase, construction , repair etc of house property . However, from the records,it is not clear about the quantum of interest payable and also about the property on which the assessee is intending to claim deduction u/s 24(b) of the Act vide additional ground raised before us. We restore this issue to the file of assessing officer to verify the claim of the assessee as to the quantum of interest payable and also the property with respect to which such interest is claimed to have been payable before allowing the claim of the assessee for deduction u/s 24(b) of the Act . We order accordingly.

16. In the cross appeal of the Revenue, the only other issue remaining is arising from the action of the AO of rejecting the financial results shown in the books of accounts under section 143(3) of the Act and estimating gross profit at 5% of the total turnover. The CIT(A) noticed that the Assessing Officer had made specific additions on various points and, therefore, the overall addition made by application of 5% to the turnover were not justified.

11 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

16.1 At the time of hearing Ld.D.R submitted that the Assessing Officer had found various discrepancies in the books account maintained and, therefore, the rejection of the books of account and application of a flat rate of 5% on sales as profit was justified.

16.2 On the other hand, Ld. Representative for the assessee submitted that whatever discrepancies that were noticed by the AO the corresponding specific additions were made and, therefore, there was no justification for making any adhoc computation of income based on 5% of G.P. rate.

16.3 We have carefully considered the rival submissions. The CIT(A) has categorically noted that Assessing Officer has made specific enquiries and treated the relevant purchases and sales as bogus. At the same time the AO also rejected the books of accounts maintained and estimated gross profit. As per the CIT(A) making of specific additions on one hand and estimating gross profits after rejecting the books of account cannot be done simultaneously. We find no error in the said approach of the CIT(A), which we hereby affirm. Thus, on this aspect Revenue fails.

17. Resultantly, the appeal of the assessee is partly allowed and cross appeal of the Revenue is dismissed.

प+रणामतः नधा +रती क# अपील खा+रज क# जाती है ।

Order pronounced in the open court on July 31st July, 2015

Sd/- Sd/-

(SANJAY GARG) ( G.S.PANNU) या यक सद य / Judicial Member लेखा सद य / Accountant Member

मुंबई Mumbai; 3दनांक Dated : 31.07.2015 व. न.स./VM Sr. PS 12 ITA No. 30/Mum/2011) Sandeep R Vedant vs. ITO

आदेश क ! त#ल$प अ%े$षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent

3. आयकर आयु4त(अपील) / The CIT(A)

4. आयकर आयु4त / CIT - concerned

5. 5वभागीय त न7ध, आयकर अपील%य अ7धकरण, मंुबई / DR, ITAT, Mumbai

6. गाड फाईल / Guard File आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar)

आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai