TaxTMI 
TaxTMI 
2011 (1) TMI 55
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....and that of the Assessing Officer be restored." ITA No.2056/Ahd/2008: AY 2005-06: 1. " The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs. 8,11,902 on account of interest paid to partners under section 40A(2)(b) of the Income tax Act, 1961. 2. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.73,844 on account of interest paid to depositors. 3. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs. 1,26,705 on account of disallowance of foreign travel expenses. 4. On the facts and in the circumstances of the case, the Ld. Commissioner of Income tax (A)-XI, Ahmedabad ought to have upheld the order of the Assessing Officer. 5. It is therefore prayed that the order of the Ld. Commissioner of Income tax (A)-XI, Ahmedabad may be set aside and that of the Assessing Officer be restored." ITA No.2055/Ahd/2008: AY 2002-03: 2. Adverting first to ground Nos. 1 & 2 in this appea....
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....es were at the prevailing market rates. Accordingly, the AO estimated GP @ 26% as against 28.13% declared during the immediately preceding year and added an amount of Rs. 13,33,320 (32088120 - 30754800) to the total income. 3. On appeal, the assessee contended that GP rate in the FY2000-01 was exceptionally high and the rate compared favorably with the GP of FY 1998-99 and FY 1999-00 as detailed hereunder: FY 1998-99 1999-2000 2000-01 2001-02 Rate of GP 24.30% 25.51% 28.13% 24.92% While referring to a detailed note submitted vide letter dated 24-02-2005, the assessee submitted following working of increase in sales prices vis-a-vis cost : Particulars FY 00-01 FY 01-02 Increase in % Sales Price 875.92 904.50 3.26 % Tobacco Cost 496.83 526.17 5.91% Packing Materials Cost 127.87 169.33 32.42% Cost of Finished Goods 627.70 695.50 11.33% The assessee explained that they could increase the sale price by 3.26% only as against the increased cost of 11.33%, resulting in reduction in gross profit. Raw material-tobacco cost increased by 5.91% while packing cost by 32.42%. Since no defects were p....
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.... by the assessee. We find from the assessment order that the AO did not point out any defects in the books of account while ignoring the book results nor brought any material on record regarding the genuineness of purchases, sales or expenditure incurred by the assessee before discarding the book results . Hon'ble Gauhati High Court in Aluminium Industries (P.) Ltd. v. CIT (I.T.R. No. 12 of 1990) observed that a lower rate of gross profit declared by the assessee as compared to the previous year, would not in itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition of profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhusan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 I....
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....esented in the books, then it is not open to revenue to contend that what is shown by the entries is not the real state of affairs. In the light of these observations of the Hon'ble jurisdictional High Court, we uphold the findings of the ld. CIT(A). Consequently, ground Nos. 1 and 2 are dismissed. ITA No.2056/Ahd/2008: AY 2005-06: 6. Coming now to ground Nos.1 & 2 in the appeal of the revenue for the AY 2005-06, facts, in brief, as per relevant orders are that the return declaring income of Rs. 3,20,33,280 filed on 27-10-2005 by the assessee, after being processed on 3.1.2006 u/s 143(1)(a) of the Act, was taken up for scrutiny with the issue of a notice u/s 143(2) of the Act on 17.1.2007. During the course of assessment proceedings, the AO noticed that the assessee received loans and deposits from Shri Rameshchandra B Patel (HUF), an entity, covered u/s 40A(2)(b) to the extent of Rs. 22,15,136 and paid interest of Rs. 2,95,326 thereon @ 12%. Similarly, the assessee also paid interest of Rs. 19,48,565 @ 12% on the credit balance of the partners' capital account and @ 7% on trade deposits from its stockists. Besides, the assessee also advanced loans of Rs. 46.48 lakhs to one M....
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....ia Sea Brins Ltd. an outsider party, the AO, relying on the decision of the Hon'ble Bombay High Court in the case of CIT v. Shatruja Diamonds (2003) 261 ITR 258, disallowed an amount of Rs.73,844 on the ground that the justification given by the assessee on the basis of their past practice was general, vague and without any substance. 7. On appeal, the ld. CIT(A) deleted the disallowance in the following terms: "3.2.1. Having considered the facts and circumstances of the case, I am of the view that the reasoning given by the A.O. for invoking the provisions of section 40A(2)(b) on the facts of the case appears to be not justified. The appellant is right in contending that the comparison of security deposits with partners' capital for determining the reasonableness of interest paid in the context of the provisions of section 40A(2)(b) is clearly not justified. In fact, the A.O. ought to have appreciated that the interest rate of 12% per annum prescribed u/s. 40(b) for payment of interest on partners' capital cannot be considered as excessive or unreasonable. Even in respect of the interest paid on deposit in the name of the HUF of the partner, there is no convincing ground for....
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....iness or profession of the assessee or the benefit derived by or accruing to the assessee therefrom. Hon'ble jurisdictional high Court recently observed in Coronation Flour Mills v. ACIT, 188 Taxman 257 that in relation to the disallowance under the provisions of section 40A(2) of the Act, a plain reading of the provision reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable i....
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....usiness of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. Not a whisper has been made by the AO in respect of any of these three ingredients in his assessment order. There is nothing to suggest that the AO ever brought any material on record on this aspect in respect of the fair market value of the facilities, for which the payment had been made, before concluding that expenditure was excessive or unreasonable. We are of the opinion that disallowance under section 40A(2) is to be considered vis-a-vis the market value of the services or facilities or on fulfilment of any of the other ingredients mentioned hereinbefore and not the individual action of the assessee in charging or paying interest. In view thereof, we are not inclined to interfere with the conclusion drawn by the ld. CIT(A). Therefore, ground Nos. 1 & 2 in this appeal are dismissed. 10. Ground No. 3 in this appeal relates to deletion of disallowance of Rs. 1,26,705 on account of foreign travel expenditure of Shri Pranav R Patel, partner of the firm. The AO found that the assessee incurred expenditure of Rs. 1,26,705 on foreign travel of Shri Pranav ....
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.... appellant's business was already debited to the partner's capital account as personal expenditure. However, while making the above addition, the assessing officer has not brought on record any material evidence to show that the said expenditure have been incurred for personal trip of the partner. Therefore, having considered the facts and circumstances of the case, I am of the view that there is no justification for making the disallowance on account of foreign travel expenses. The A.O. is, therefore, directed to allow the foreign travel expenditure of Rs. 1,26,705 as business revenue expenditure. This ground is, therefore, allowed." 12. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned DR while inviting our attention to the findings of the AO pointed out that the partner of the assessee firm visited not only Germany but even Zurich, Geneva, Paris and UK etc. Since the purpose of visit to these places and complete details of expenditure incurred by the assessee at each of these places is not evident from the impugned order nor the ld. CIT(A) recorded any findings on visit to these places, the ld. CIT(A) was not justified in del....