TaxTMI 
TaxTMI 
2020 (2) TMI 316
X X X X Extracts X X X X
X X X X Extracts X X X X
....er consideration. 4. That on the facts and in the circumstances of the case the learned CIT (A) without any show-cause notice, without following the due process of law grossly erred in directing the learned Assessing Officer to further disallow the processing fees of Rs. 95,316/- paid by the assessee appellant on the loan taken by it during the year under consideration. 5. That on the facts and in the circumstances of the case the learned lower authorities grossly erred in disallowing the rent paid by the assessee appellant of Rs. 27,50,000/- during the year under consideration. 6. That on the facts and in the circumstances of the case, the learned Lower Authorities grossly erred in making addition of Rs. 27,54,000/- on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961. 6.1 That in the show cause notice a query was made by the learned AO regarding cash deposit of Rs. 13,77,000/- but while passing the order he grossly erred in making an addition of Rs. 27,54,000/- which is 200% of the cash deposited and the learned CIT(A) erred in confirming the same which is illegal and bad in law. 7. That on the facts and in the circ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenses are not fully subject to verification with proper bills and vouchers. Further, the assessee has wrongly claimed depreciation on the vehicle purchase by Shri Jitendra Agarwal. Similarly the claim of the assessee for cash sale is not verifiable from the books of account and the assessee has not explained any reason for showing lower GP rate & N.P. rate, therefore, not disclosing true and correct trading results during the course of assessment proceedings. Accordingly, the books were rejected invoking provision of Section 145(3) of the Act and addition of Rs. 4,49,539/- was made applying GP rate of 26% to the declared turnover of the assessee firm. 5. Being aggrieved, the assessee carried the matter in appear before the ld. CIT(A). As per ld. CIT(A) though the assessee has maintained stock register but the qualitative details were not maintained. It is noted from some of the cash sale bills filed by the assessee that for diamond Jewellery items, no separate rates of gold and diamonds were stated therein and only one consolidated figures of sales amount is mention. Further, in respect of jewellery manufactured on job work basis as it issued gold to kariagars, it is noted tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Jewellery 22 Cts., Diamond Jewellery 18 Cts., Polky Jewellery 22 Cts. ,Diamond Jewellery 14 Cts., Polky Jewellery 18 Cts., Kundan Jewellery 18 Cts., Diamond Fusion Jewellery 14 Cts. Hence in view of these comprehensive details there should not remain any doubt that assessee is not maintaining qualitative as well as quantitative stock details. Basis of Books rejection by AO: (c) Stock items taken inward and outward in the stock register is not fully verifiable in respect of purchases, manufacturing, goods under process etc. Submission (i) The Ld.CIT(A) recorded his finding at Page-12, Para 3.2.2(iii) of the order that the assessee has been maintaining the stock register but Qualitative details are not maintained. Therefore, in his own words it is an admitted fact that the stock register has been maintained by the assessee, therefore, the observations of the AO contrary to this finding stands vitiated to that extent. (ii) As regards, the allegation that purchase and sale details are not verifiable from stock registers, it is submitted that all purchase and sale bill are reflecting in stock register along with reference of their Bill No. Complete S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the sales invoice until/unless asked by the customer. The customer is satisfied with the form of the sales invoice. Under the facts and circumstances no adverse view can be taken. Assessee is also maintaining the complete qualitative details of all sales and respective components have been shown in the respective stock item at the time of sales. Ld.CIT(A) failed to appreciate the complete detail given in the stock records and trade practice. Moreover, draw the adverse inference merely on the basis of suspicion, surmises contrary to the facts available on record. (h) The appellant is getting jewellery manufactured on job work basis as it issued gold to Karigars. It is noted that it has not shown any work in progress in its opening or closing stock. Submission: The allegation of the AO and CIT(A) that no details of Work in progress has been given is completely wrong on the face of it. The assessee filed ledger account of work in progress vide letter dated 16.03.2016 (Point No.8). However, the AO as well as CIT(A) did not make any adverse remark on the same. The assessee was holding opening balance in stock with Karigars shown as "Stock with EJC" and separately dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plain the same. On this ground itself the rejection is liable to be knocked down and as regards the nature of irregularity pointed out, the Hon'ble Supreme Court has held in the case of CIT vs Padamchand Ramgopal (1970) 76 ITR 719 (SC) that insignificant mistakes cannot afford a ground for restoring to this section." (iv) The basis of such adverse inference is rate difference. Although we have explained herein above that good sold is Diamond Polkhi not Diamond. Even otherwise for sake of argument if we presumed diamond has been sold at lesser price, more particularly of export, which has been gone through custom authorities it cannot be a basis to draw adverse inference since in the business price depends upon various factors and circumstances. Basis of Books rejection by AO: (j) GP and NP are lower than last year. (k) Purchase and sales are not fully verifiable from stock register in terms of raw material, goods under process of manufacturing and finished goods in respect of each item of purchase and sales adversely affecting to the trading results. (l) The assessee failed to substantiate the claim to show reasonable and true and correct GP a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Lower GP: The assessee is engaged in jewellery business where gold prices are decided in the international markets and assessee had to sale the items at the prevalent price only whereas, stock represents historic price. Any adverse fluctuation effects the GP. Hence there remains no control in the hands of the assessee to maintain the fixed margins. Results are better: It is submitted that Ld.AO as well CIT(A) both estimated the GP by applying an average rate of GP without giving any weightage to the trend line between increase in turnover and declares in GP. Naturally to increase the turnover the assessee had to forgo some margins. Turnover, GP, along with increase and decrease in GP Rate is depicted by way of a table given below:- AY Sales Turnover GP GP Rate Increase in Turnover (%) Decrease in GP Rate (%) 2011-12 1,92,93,967/- 55,90,497/- 28.98% - - 2012-13 3,11,62,210/- 78,45,880/- 25.18% 61.51% 13.11% 2013-14 3,90,42,302/- 97,10,459/- 24.85% 25.29% 5.39% (Expected Rate of Reduction in GP) Therefore, following the simple trend line also the GP Rate of assessee was expected to decrease by 5.39% i.e.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee firm raised a secured loan Rs. 1.50 crore from HDFC Bank and on behalf of the five co-owners of the aforesaid property, Rs. 75 Lac was paid to M/s Krishna Gopal Rangota Pvt. Ltd. and Rs. 75 lac was paid to M/s Upasana Colonizers. During the year under consideration, the assessee has incurred a sum of Rs. 15,19,571/- as interest on the above loan of Rs. 1.50 crore taken from HDFC Bank and a sum of Rs. 95,316/- as loan processing fee. The AO has disallowed the interest of Rs. 15,19,571/- paid to HDFC Bank by treating the same as not incurred for the purposes of the business of the assessee firm. 11. On appeal, the ld. CIT(A) held that the loan of Rs. 1.50 crore taken by the assessee firm from HDFC Bank was used for the purposes of acquisition of a showroom by the two partners and their three family members and therefore, loan so taken and interest expense so incurred cannot be treated as incurred wholly and exclusively for the purposes of business of the assessee firm, therefore, the disallowance of Rs. 15,19,571/- was sustained. Further, the AO was directed to disallow a sum of Rs. 95,316/- towards processing charges. Against the said findings, the assessee is in appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... submitted by the ld AR that the firm was not having showroom at any visible prominent place. At that time, a prominent place suitable for showroom come to their knowledge which were available for sale. The firm based upon the business expediency and commercial prudence willing not to put entire resources to buy the showroom. The partners and the firm were also not having that much of resources or willing to take risk. However, considering the need of the firm the partners prepared other family members to purchase the showroom and accordingly partners and relatives put their own resources immediately to the extent of Rs. 2.61 Crores and remaining amount were raised by the firm as secured loan and given on behalf of these persons. It is important to note that loan was also raised on the basis of collectoral securities of immovable properties owned by these persons in their individual capacity. In nutshell, firm neither took any risk since amount given on behalf of these people were recoverable and in case of default that was recoverable from their properties. Under the facts and circumstances, property was purchased for use of firm without any risk and responsibility therefore, hold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eir capital account is not warranted. Hence, disallowance of Rs. 6,07,828/- kindly be deleted in full. (b) Loans Given to Family Members: (i) Remaining amount of Rs. 90 Lakh was given on behalf of family members of partners and debited in their accounts and interest @ 12% was charged thereon. (ii) Admittedly these loans had been given out of money received from HDFC Loan Account hence there was a direct nexus between the borrowed funds taken from HDFC Bank @12 % and given to the family members. Notably the assessee has been charging the same rate of interest from these family members hence there is no justification for making the disallowance of entire amount of interest paid to HDFC Bank Limited holding that the same has not been used for business purpose. 16. It was further submitted that the Ld. CIT(A) has also noted his finding of fact that assessee has been charging interest @ 12% from these family members at Page-22, Para-3.3 of Order. The relevant Para is reproduced hereunder for sake of convenience:- ".....it was observed that the appellant has charged interest @12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the ld AR that the interest expense has been incurred on funds borrowed wholly and exclusively for the purposes of business cannot be accepted. Coming to another contention of the ld AR that where the assessee firm has charged interest on such funds from the family members, the same shall be eligible for setoff and no disallowance of interest paid to bank should be made. In this regard, it has been submitted that on loan given to family members, interest @ 12% has been charged and on loan given to two partners, they were having sufficient opening credit balance in their capital account on which they were eligible for 12% rate of interest and given that the assessee firm has not paid any interest on such credit balance, non-charging of interest on loan advanced on their behalf is tax neutral. We find force in the arguments of the ld AR that where the assessee firm has charged interest from the family members and has not paid interest which it was supposed to pay on the opening credit balance in partners' capital account which stay invested in the assessee's firm throughout the year, the interest paid to the bank shall be offset from the said recovery of interest and there should ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yment has been shown for 11 months whereas the agreement has been prepared only in the August, 2012. Further, the rent payment also appears to be on higher side which has benefited the family members and the partners of the assessee's firm, therefore, the AO has held that the assessee has failed to prove the said building was put to use for business purposes and justification & basis for the determination of the rent. Accordingly, the assessee's rent claim of Rs. 27,50,000/- was not found reasonable and justified in view of the provisions of the Act and the same was disallowed. 22. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has sustained the said disallowance. The ld. CIT(A) observed that since the showroom was inaugurated on 13.05.2013, no business activities were carried out from the rented space at Maa Upasana during the year under consideration. Further, he referred to the provisions of Section 30 of the Act wherein it has been provided that the rent is allowed in respect of premises, which is occupied and used for the purposes of the business or profession of the assessee firm. It was held by the ld. CIT(A) that on 01.05.2012 i.e. t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be interpreted in a manner that use for business purpose shall start from the day of inauguration of show room as held by CIT(A). A business does not involve just open a shop and start selling the goods. There are so many activities which are compulsorily required to be done to reach up to the point of inauguration. On the contrary, taking possession, making plan, design, interior, furniture fixtures, installation of security systems, exterior look and design, safety vaults and storage, display counters, lightings, Air Conditioner Installation, Civil work etc. all are for business purpose not for any personal or other purposes. Further the concept of put to use is relevant for the purpose of section 32 only. In section 30 the word "used for the purpose of business" is used which is a very wider term and specific. In support of our contention we rely upon the decision of Hon'ble Kolkata HC in the case of CIT Vs Eveready Industries (India) Ltd. (2018) 258 Taxmann 0313 (Cal.), wherein, it was held as under:- "8. Mr. Agarwal, learned counsel for the Revenue argues that the assessee had not been in possession of the property and a dispute was going on between them and the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n accepted. 26. It was further submitted that the case laws cited by the Revenue are distinguishable. In the case of Noshirwan & Co. Pvt. Ltd. Vs CIT (1970) 77 ITR 822 (MP), the building was under construction and payment of rent was used as a device to finance the construction of building. The assessee took the completed property on rent with electricity connection and some other facilities. The building was fit to use and mall was running at full swing but the assessee firm decided in their business prudence to make attractive interior and install other amenities to attract the customers, as the Jaipur is a tourist centric place so having attractive showroom is an essential need to run a jewellery show room. Other relied case of Sony India Pvt. Ltd. Vs CIT (2006) 285 ITR 213 (Delhi) is also distinguishable as the expenses is fully allowable to the assessee U/s 30 itself, whereas, in that case expense was not allowable u/s 37 of the Act. Hence, in view of forgoing facts and circumstances, the impugned disallowance of Rs. 27,50,000/- kindly be deleted in full. 27. The ld DR is heard who has relied on the findings of the lower authorities. 28. We have heard the rival conten....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee could have started operating the showroom in terms of physical facilities for display and storage of jewellery, whether the customers could visit the showroom and there are related facilities for their sitting and other conveniences, whether air-conditioning system has been installed and appropriate furniture/fixtures installed, etc. Therefore, we agree that the day the showroom was formally inaugurated, it doesn't necessarily mean that showroom was not ready to be used prior to that. If the showroom was ready to be used even prior to the date of formal inauguration, the assessee shall be eligible for claim of rental payments which is however not the case before us. 30. Having said that, the question is where there is no dispute that the rent payment has been made by the assessee firm for taking on rent premises for setting up a new showroom and thereby, expanding its existing business, can the same be allowed in the year the premises are ready to be used. Given that in the instant case, the assessee has also incurred expenditure on fit-outs/improvements on such leased premises, and has accumulated and shown the same under the head "work-in-progress", drawing simila....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties deposited cash in its bank account at their station and the delivery of the goods was only given after receiving the money. For instance, vide invoice no. 7 dated 28.04.2012, jewelry for a sum of Rs. 40,000/- was sold to Smt. Lata Agarwal of Mumbai and on the same date, a sum of Rs. 40,000/- was deposited in the bank account of the appellant at Mumbai. I fail to believe that after purchasing the jewelry from the appellant on 28.04.2012 at Jaipur, Smt. Lata Agarwal deposited Rs. 40,000/- at Mumbai. Similar, are the cases of cash deposited in its bank at Hyderabad, Bangalore, Lakhimpur, Tinsukia etc. The story appears to be feasible on paper but not in reality. Further, it appears that some of the names were repeating, the appellant has not filed any confirmation from them to substantiate its contention. It is interesting to note that in these cases, as per the sale invoices, no cash payment was made in part at the sale counter of the appellant and the entire amount was deposited at the places of the buyers. Therefore, it is held that the appellant could not explain the source of cash deposits in its bank accounts at different places of the country satisfactory and thus the AO w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its which were alleged to remained unexplained, along with complete sale bills. The assessee trades in Gold Jewellery on whole sale and retail basis. The nature of business is such where cash sales is obvious and most of the retail sales happens in cash only. The assessee deposits such cash in his bank account. The AO asked specific query regarding the cash deposited on specific dates which was explained with cash book and complete sale invoices. The source of the cash deposits is explained hereunder:- S.No. Date Particulars Amount Source PBP 1. 28.09.2012 Cash Deposited 3,47,000/- Cash Sale made on 26.09.2012 totaling to Rs. 4,39,045/-. PBP-53-54 2. 01.10.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash Rs. 86,632/- and Cash Sale of the day Rs. 1,20,000/-. PBP-55 3. 31.10.2012 Cash Deposited 2,30,000/- Directly deposited by customer towards cash sale vide Bill Nos. 185 & 186. PBP-51 4. 01.11.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash at Rs. 12,83,665/- (Sale of Rs. 56000/- on 27.10.2012, Rs. 1,57,700/- on 29.10.2012 and Rs. 1,47,906/- on 31.10.2012 ) PBP-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l as CIT(A) never asked the assessee to file any confirmation. Without prejudice to the above, alternatively, the assessee is not required to file any confirmation once the turnover has been accepted, sale invoices has been issued and the assessee was having stock for that sales. In the decision of CIT vs Jindal Dyechem Industry Limited, it was held that the trader is not required to record name and addresses of the persons to whom cash sales has been made. Hence, no adverse inference can be drawn on account of cash sale made. On one hand, the revenue has accepted and assessed the turnover declared by the assessee and on other hand addition of cash deposited arising out of cash sales has been made by revenue. This had resulted into double taxation. Once the AO has accepted the turnover declared by the assessee then cash deposit out of that amount shall not be treated as unexplained. In support reliance was placed on the following decision:- • R.B. Jessaram Fatehcahnd (Sugar Dept.) vs. CIT, Bombay City-II - 1969 (7) TMI 10 (Bom HC) • Shri Naresh Dayanand Chandani Vs. ACIT in ITA No.5339/Del /2017 vide order dated 25.05.2018. Alternatively and without pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be in order, allow the necessary relief to the assessee firm. The ground of appeal is disposed off in light of above directions. 42. In ground No. 7, the assessee has challenged the sustenance of disallowance of interest of Rs. 1,57,081/-. In this regard, briefly the facts of the case are that the assessee had taken unsecured loans from the family members of the partners in the earlier years and paying interest @ 15% on the same. During the year, interest @ 12% was charged from the family members on the amount given on behalf of them for the purchase of showroom. The AO made the addition of entire amount of interest of Rs. 7,06,363/- paid to family members holding that the borrowings have not been used for business purpose. During the course of first appeal, Ld. CIT(A) restricted the interest paid to the family members to 12% by holding as under:- "I have duly considered the submissions of the appellant, assessment order and the material placed on record. During the appellate proceedings, the AR was required to submit the rates at which interest has been charged and paid to the above persons and from the details furnished, it was observed that the appellant has charged....