2016 (8) TMI 1276 - AT - Income Tax

Disallowance of loss of sale of assets on the ground that the same is of capital in nature - the same is allowed by CIT (A) by considering the same in the block of assets as per Income-tax law - Held that - We are of the considered view that during assessment proceedings, assessee has filed revised depreciation chart which has been rejected by the AO without any reason. CIT (A) has rightly directed the AO to consider the same in the block of assets. Even otherwise, keeping in view the smallness of the amount, no interference is required at this stage. So, ground no.1 is determined against the revenue. Disallowance of travelling expenses incurred by Smt. Meena Bhasin, one of the directors - Held that - Claim allowed by the ld. CIT (A) by taking into account the fact that the assessee company has substantial trading in diamonds for which supplies come from Mumbai, a biggest wholesale market in India and a tour to Mumbai for survey of diamond market, quality of diamond and prevailing prices would be a normal business proposition. AO merely disallowed these expenses on the ground that Smt. Meena Bhasin is not a working director but this is not permissible because a director though not a working director has substantial interest in the working and profit of the company, so CIT (A) has rightly deleted the addition made by the AO. Disallowance of depreciation on new car - AO has merely disallowed the depreciation on the ground that car in question has been registered with registering authority on 08.04.2004 - Held that - When assessee has duly proved that the delivery of the car was taken on 29.03.2004 as per purchase invoice and gate-pass issued by Suhrit Hyundai, the depreciation has been rightly claimed as registration of the vehicle will relate back to the date of actual delivery of the car i.e. 29.03.2004 in question by the assessee company. Likewise, the CIT (A) has rightly directed the AO to allow depreciation on insurance premium capitalized in respect of new car because the same was proved to put to use w.e.f. 29.03.2004. Disallowance of 1/5th of the car maintenance expenses - car in question was used by the directors, their family members, relative and friends for personal use - Held that - We are of the considered view that no such maintenance expenses can be disallowed on account of personal use of director and family members. Moreover, AO has not brought on record any evidence to prove the element of personal use of the car particularly when the same has been purchased in the name of the company and stated to have been used for the company by the assessee. So, finding no illegality and perversity in the finding returned by the ld. CIT (A). Disallowance of fee paid in respect of preparation and filing of incometax return and in respect of sales-tax fee - CIT-A allowed claim - Held that - No illegality and perversity in the findings returned by the ld. CIT (A) on the ground that preparation and filing of income-tax and sales-tax return can only be made by an expert hand i.e. Chartered Accountant whose services are available only on payment. Addition on unsecured loan from M/s. Bhawana Jewellers on the ground that the assessee company has failed to prove the capacity of the creditor and the genuineness of the transaction - CIT-A deleted the addition - Held that - Merely because of the fact that lender, M/s. Bhawana Jewellers, is living in LIG flat and has shown an income of ₹ 54,620/- only by paying tax of ₹ 462/- during the relevant assessment year and that he was already in debt of ₹ 5,00,000/- qua the loan taken from Shri Anand Jain and Anita Jain, creditworthiness and genuineness of the transaction cannot be doubted. Moreover, the amount of ₹ 5,00,000/- was returned by the assessee company by way of cheque on 09.09.2004 and this fact has not been disputed by the AO. So, findings returned by the ld. CIT (A) are hereby affirmed Unexplained credit entry in the current account of Smt. Meena Bhasin - CIT-A allowed claim - Held that - CIT (A) after entertaining additional evidence under Rules 46A of the Incometax Rules, 1962 deleted the addition on the ground that from the evidences in the form of delivery receipt and cash receipt which corroborates the affidavit already filed by Smt. Meena Bhasin, the amount of ₹ 2,50,000/- in her current account stands explained. The contention of the ld. AR that since AO has not been given an opportunity to file reply to the application for additional evidence under Rule 46A of the Income-tax Rules, 1962, the matter should be remitted to the AO is not tenable because the AO was given sufficient time by CIT (A) during appellate proceedings but he has not preferred to raise any objection to the application for additional evidence. Moreover, the documents entertained by CIT (A) in additional evidence were merely to substantiate the affidavit already filed by Smt. Meena Bhasin and was not ordinarily requiring verification. So, finding no illegality or infirmity in the findings returned by ld. CIT (A) Depreciation claim on photocopy machine and finance charges - AO disallowed the claim on the sole ground that the assessee has failed to get the purchase bill verified during the assessment proceedings - Held that - As during appellate proceedings, assessee proved that photocopier machine was purchased in installment for ₹ 1,11,000/- and purchase bill thereof has been filed with CIT (A). So, the CIT (A) has rightly allowed the depreciation on photocopy machine and finance charges, which needs no interference Disallowance of the staff welfare expenses - Held that - CIT (A) allowed the staff welfare expenses on the ground that in the last year, expenses under this head were ₹ 74,980/- and in view of the nature of assessee s business, disallowance made by the AO is unreasonable, hence deleted. In the given circumstances, we find no ground to interfere in the findings returned by the ld. CIT (A) Disallowance of electricity expenses - electricity meter no.930424 is in the name of Shri Tilak Raj Bhasin who is neither Director nor employee of the assessee company nor address of 2300, Subzi Mandi is mentioned on any document - Held that - Findings returned by the AO are well-reasoned and based on cogent evidence that neither Shri Tilak Raj Bhasin is director nor employee of the assessee company nor address bearing no.2300, Subzi Mandi pertains to assessee company in any manner and it is undisputed fact that during survey proceedings, only address of assessee s company is 2298, Subzi Mandi. So, when the electric meter is installed at some other place the same cannot be considered to have been used for business purpose by the assessee company. So, the CIT (A) has erred in deleting the disallowance made by the AO Addition of legal charges debited by the assessee company to P&L account - addition on the ground that the same are apparently on very high side which cannot be said to be wholly incurred for business purposes - CIT (A) deleted the disallowance on the ground that since the assessee company has been consistently following the mercantile method of accounting making a provision for legal charges to attend the post survey proceedings for the year under consideration are valid one - Held that - When the AO himself has not disputed the fact that legal charges in such proceedings are required to be paid the same cannot be disallowed on the basis of conjectures and surmises that the same are on higher side. Moreover, when provision has been made under the mercantile method of accounting for legal charges as held by CIT (A) the disallowance made by the AO is not sustainable. Hence, we find no ground to interfere with the findings returned by the ld. CIT (A) Addition of bogus salary expenses - salary expenses for six persons were claimed whose names were not appearing in the list of employees furnished by the assessee - Held that - CIT (A) deleted the addition after perusal of attendance register, salary payment register, provident fund register and ESI record and observed that in the face of aforesaid documents, possibility of omission of including these persons in the list prepared at the time of survey proceedings cannot be ruled out. When the names of the aforesaid six employees are appearing in PF and ESI record prepared in the due course of official duties by the concerned department, the salary bill cannot be treated as bogus. So, the CIT (A) has rightly deleted the addition Addition on purchase of electrical goods - assessee has failed to produce Shri Veer Sen Chopra to prove job charges etc. by treating the same as bogus expenses - Held that - CIT (A) on the basis of facts and documentary evidence found the expenditure genuine being the annual maintenance charges paid vide bill duly placed before the AO by the assessee. So finding no ground to interfere. Addition of interest and finance charges - when the assessee has himself given interest free advances the funds cannot be treated to have availed for business purpose - CIT-A allowed claim - Held that - CIT (A) deleted the addition of ₹ 3,00,000/- on the ground that when the interest free advances given by the assessee company to is ex-directors and relatives are old one and are to the tune of ₹ 19,76,000/-. The assessee company has also got interest free loans/advances from its directors and relatives to the tune of ₹ 75,55,000/- on which no interest has been paid, addition is not sustainable. Even otherwise, the interest on account of interest free loans cannot be disallowed primarily on the ground that the assessee had sufficient funds out of which advances have been made. So, in the given circumstances, we find no ground to interfere in the findings returned by ld. CIT (A) Allowance of revised depreciation as per the Companies Act - AO declined the revised depreciation on the sole ground that the revised chart is not signed by the Authorized Representative - Held that - CIT (A) has rightly allowed the claim of the assessee on the ground that in the given circumstances, AO was required to ask the AR to sign the revised depreciation chart, which is otherwise not disputed by the AO during the assessment proceedings. So again, we find no ground to interfere into the findings returned by the ld. CIT (A). Addition on account of sale of car - AO has made the addition merely on the ground that there is over writing in the books of account.- Held that - CIT (A) after perusing the cash receipt and delivery receipt of the sale of the car for ₹ 1,00,000/- and copies of cash book and ledger where the total tally with the figure of ₹ 1,00,000/- deleted the addition, which requires no interference by the Tribunal. Addition on account of packaging charges - addition as summons issued u/s 131 of the Act to some parties were received back unserved - CIT-A allowed claim - Held that - CIT (A) after perusing the packing expenses account, copies of bills/vouchers and in view of the customary and factual evidence, came to the conclusion that expenses in question were incurred for business requirement as gold and diamond jewellery has to be sold in jewellery boxes, purses, pouches, etc. which are commensurate with the turnover of the assessee company to the tune of ₹ 2.64 crores. So again, we find no ground to interfere into the findings returned by the ld. CIT(A) Addition on advertisement expenses - Held that When the amount claimed by the assessee has not been got verified by the AO during assessment proceedings, the CIT (A) has rightly set aside the matter to AO to decide afresh. So, we find no ground to interfere into the findings returned by the ld. CIT (A) and AO to proceed as per directions issued by the ld. CIT (A). Addition of cash purchases u/s 40(A)(3) - Held that - AO chooses to invoke provisions contained u/s 40(A)(3) clubbed the cash purchases of gold made in a single day which is not permissible when the record of gold register is maintained on a regular basis wherein each cash purchase of gold through purchase voucher, weight-wise has been entered. So, in the given circumstances, the CIT (A) has rightly deleted the addition made by the AO. Addition on account of non-furnishing of books of account, relevant documents and stock inventory - CIT-A allowed claim - Held that - e CIT (A) has after examining the matter threadbare came to the conclusion that the books of account and requisite documents have been produced before AO and photocopies of the sale vouchers, cash book, ledger and bank book were also filed and as such, the allegation of non-producing the books of account is without any basis. When the AO has not disputed the account books the CIT (A) has rightly deleted the addition. So, we find no ground to interfere with the findings returned by the ld. CIT (A) Disallowing the remuneration alleged to have been paid to Ms. Sonika Bhasin, one of the Directors of the assessee company - Held that - There are inherent contradiction in the statement of Mr. Rawat, Accountant of the firm with his subsequent affidavit filed during assessment proceedings which has failed to substantiate the services rendered by Sonika Bhasin, the addition made by AO has been rightly affirmed by ld. CIT (A). Even otherwise, Sonika Bhasin, director of a company having turnover of ₹ 2.64 crores is not proved to have assigned any substantial role to run the business of the assessee company as no such document has come on record nor such remuneration has earlier been claimed by the assessee company. So, in these circumstances, we find no ground to interfere into the findings returned by the ld. CIT (A). Adjustment of cash payment against gold purchase - Held that - When the assessee has categorically pleaded that on the sale bill, it is specifically written that ₹ 66,000/- vide receipt no.511 dated 30.03.2004 is on account of adjustment of cash payment, the addition cannot be made merely on the basis of reply by Smt. Nidhi without providing opportunity to cross examine her by the assessee. This fact has also not been taken care of by the ld. CIT (A) when the sale bill no.98 dated 18.04.2004 and adjusting cash payment of ₹ 66,000/- vide receipt no.511 dated 30.03.2004 has not been disputed by the AO nor has disputed the books of account, this addition is not sustainable in the eyes of law.

Summary

Issues Involved:
1. Loss on sale of assets
2. Disallowance of traveling expenses
3. Disallowance of depreciation on new car
4. Depreciation on insurance premium capitalized for new car
5. Disallowance of car maintenance expenses
6. Disallowance of fee for preparation and filing of Income Tax return
7. Disallowance of fee for preparation of Sales Tax return
8. Addition under Section 68 for interest-free loan
9. Addition under Section 68 for deposits in the current account
10. Addition under Section 68 for unexplained credit entries
11. Disallowance of depreciation on a photocopy machine
12. Disallowance of finance charges for photocopy machine
13. Disallowance of staff welfare expenses
14. Disallowance of electricity expenses
15. Disallowance of legal charges
16. Disallowance of bogus salary expenses
17. Disallowance of repairs and maintenance expenses
18. Disallowance of interest and finance charges
19. Allowance of revised depreciation
20. Addition on account of sale of car
21. Addition on account of packing charges
22. Disallowance of advertisement expenses
23. Disallowance of cash purchases under Section 40A(3)
24. Addition on account of trading
25. Cross objection regarding reconciliation works under accounting charges
26. Cross objection regarding remuneration to the Director
27. Cross objection regarding cash advance under Section 68
28. Cross objection regarding unexplained expenditure under Section 69

Detailed Analysis:

Issue 1: Loss on Sale of Assets
- AO disallowed ?5,166/- on the grounds that it was capital in nature. CIT(A) allowed it by considering it in the block of assets. Tribunal upheld CIT(A)'s decision, noting the smallness of the amount.

Issue 2: Disallowance of Traveling Expenses
- AO disallowed ?24,210/- for travel expenses of a director, claiming it was personal. CIT(A) allowed it, recognizing the business necessity of travel to Mumbai for diamond trading. Tribunal upheld CIT(A)'s decision.

Issues 3 & 4: Depreciation on New Car and Insurance Premium
- AO disallowed depreciation on a new car registered after the accounting year. CIT(A) allowed it, noting the car was delivered before the year's end. Tribunal upheld this, also allowing depreciation on the capitalized insurance premium.

Issue 5: Car Maintenance Expenses
- AO disallowed 1/5th of expenses for personal use. CIT(A) allowed the full amount, and the Tribunal upheld this, noting no evidence of personal use.

Issues 6 & 7: Fees for Income Tax and Sales Tax Return Preparation
- AO disallowed ?11,000/- and ?2,500/- for these fees. CIT(A) allowed them, recognizing the necessity of professional services. Tribunal upheld CIT(A)'s decision.

Issue 8: Addition under Section 68 for Interest-Free Loan
- AO added ?5,00,000/- as unexplained. CIT(A) deleted the addition, confirming the identity, creditworthiness, and genuineness of the transaction. Tribunal upheld CIT(A)'s decision.

Issue 9: Addition under Section 68 for Deposits
- AO added ?2,50,000/- as unexplained. CIT(A) deleted the addition after considering additional evidence. Tribunal upheld CIT(A)'s decision, noting the AO had an opportunity to object but did not.

Issues 10, 11 & 12: Addition under Section 68 for Unexplained Credit Entries
- AO added ?8,40,000/-, ?5,30,000/-, and ?1,00,000/- for unexplained credits. CIT(A) deleted these additions after considering additional evidence. Tribunal upheld CIT(A)'s decision, noting the AO had opportunities to object.

Issues 13 & 14: Disallowance of Depreciation and Finance Charges on Photocopy Machine
- AO disallowed ?13,875/- and ?12,356/-. CIT(A) allowed them after verifying the purchase. Tribunal upheld CIT(A)'s decision.

Issue 15: Disallowance of Staff Welfare Expenses
- AO disallowed 1/3rd of expenses. CIT(A) allowed the full amount, finding the disallowance unreasonable. Tribunal upheld CIT(A)'s decision.

Issue 16: Disallowance of Electricity Expenses
- AO disallowed ?1,18,726/- for an electric meter not linked to the business address. CIT(A) allowed it. Tribunal reversed CIT(A), siding with AO's evidence.

Issue 17: Disallowance of Legal Charges
- AO disallowed ?1,22,000/-. CIT(A) allowed it, recognizing the provision under mercantile accounting. Tribunal upheld CIT(A)'s decision.

Issue 18: Disallowance of Bogus Salary Expenses
- AO disallowed ?2,63,025/-. CIT(A) allowed it after verifying attendance and payment records. Tribunal upheld CIT(A)'s decision.

Issue 19: Disallowance of Repairs and Maintenance Expenses
- AO disallowed ?43,895/-. CIT(A) allowed it, finding the expenses genuine. Tribunal upheld CIT(A)'s decision.

Issue 20: Disallowance of Interest and Finance Charges
- AO disallowed ?3,00,000/-. CIT(A) allowed it, noting sufficient interest-free funds. Tribunal upheld CIT(A)'s decision.

Issue 21: Allowance of Revised Depreciation
- AO rejected revised depreciation chart. CIT(A) allowed it, noting AO should have requested a signed chart. Tribunal upheld CIT(A)'s decision.

Issue 22: Addition on Account of Sale of Car
- AO added ?60,000/- due to book discrepancies. CIT(A) deleted the addition after verifying receipts. Tribunal upheld CIT(A)'s decision.

Issue 23: Addition on Account of Packing Charges
- AO added ?80,175/- due to unserved summons. CIT(A) allowed it, recognizing business necessity. Tribunal upheld CIT(A)'s decision.

Issue 24: Disallowance of Advertisement Expenses
- AO disallowed ?1,22,540/-. CIT(A) allowed ?11,000/- and remanded the rest for fresh inquiry. Tribunal upheld CIT(A)'s decision.

Issue 25: Disallowance of Cash Purchases under Section 40A(3)
- AO disallowed ?2,11,994/-. CIT(A) deleted the addition, noting proper record-keeping. Tribunal upheld CIT(A)'s decision.

Issue 26: Addition on Account of Trading
- AO added ?10,00,000/- for non-furnishing of documents. CIT(A) deleted the addition, noting proper production of documents. Tribunal upheld CIT(A)'s decision.

Cross Objections:
- Grounds 1 & 4: Not pressed by the assessee.
- Ground 2: Disallowance of ?1,20,000/- for director's remuneration upheld by Tribunal due to lack of substantiation.
- Ground 3: Addition of ?66,000/- deleted by Tribunal, noting lack of opportunity for cross-examination and undisputed records.

Conclusion:
- The Tribunal partly allowed the revenue's appeal for statistical purposes and partly allowed the assessee's cross objection.