2017 (11) TMI 2042 - AT - Income Tax

Disallowance u/s 40A - payment of packing expenses and advertising expenses - as submitted assessee has made payment to two companies for manufacture of purses and bags and manufacturing activities are done on a very small basis from his own house and the activities are in the nature of cottage industries - HELD THAT - As correctly decided by CIT(A) expenditures of more than ₹ 20,000/- have been incurred in cash and the same was disallowed by the AO under section 40A(3). In the present proceedings, it was stated that parties to whom payment made are manufacturer of purses and bags on small basis and are in the nature of cottage industries. However, no evidence to that effect was produced by the Authorized Representative, further it was also not stated as to how they are covered under the exception to the provisions and hence, the disallowance made by the Assessing Officer is confirmed. The ground of appeal is dismissed. Unexplained cash - HELD THAT - As correctly decided by CIT(A) Authorized Representative claimed that the cash bill of sale of articles dated 20.01.2012 had been produced but since the sale was in cash the address was not available with the assessee and neither any confirmation was produced nor the party could be produced for the verification. It is seen that the books of accounts are audited and hence the mistake would have been detected. Secondly, no advance has been found recorded in the name of Jai Singh Kumawat on 13.03.2012, further no evidence in the form of confirmation or producing the party was undertaken and in fact the authorized Representative submitted that his address was also not available. In view of the above facts, the explanation of the appellant cannot be accepted and the addition made is confirmed. Disallowance of various expenses - expenses are not properly vouched, some of payment in cash, personal use etc. - HELD THAT - Assessee placed reliance on the Coordinate Bench decision 2016 (4) TMI 658 - ITAT JAIPUR in the case of Shri Anil Kumar Agarwal vs. ITO wherein similar additions on identical facts have been deleted. In the present case the AO has not rejected the books of accounts of the assessee. The additions made merely on adhoc basis is not sustainable. We, therefore, delete the addition. Valuation of surrendered stock during survey - income from other sources or income from business - HELD THAT - At the time of hearing, Assessee drew our attention to various details of gold and diamonds ornaments and valuation thereof are mentioned. After considering these details, we find that the details mentioned in the annexure require verification whether the stock surrendered was restricted to gold or diamond as claimed by the assessee. We, therefore, set aside the order of the ld. CIT (A) and restore the file to the AO for decision afresh after making verification of the stocks surrendered. The grounds of the assessee are allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of packing and advertising expenses under Section 40A(3).
2. Addition of unexplained cash balance.
3. Ad hoc disallowance of various expenses.
4. Valuation and nature of surrendered stock.
5. Classification of surrendered stock as business income or income from other sources.

Detailed Analysis:

1. Disallowance of Packing and Advertising Expenses:
The assessee challenged the disallowance of ?1,23,917/- for packing and advertising expenses under Section 40A(3) of the Income Tax Act. The assessee argued that payments were made to manufacturers operating as cottage industries without the aid of power, thus qualifying for an exception under Rule 6DD(f). However, the CIT(A) confirmed the disallowance due to the lack of evidence supporting the claim that the manufacturers were cottage industries. The Tribunal upheld the CIT(A)'s decision, noting the absence of any evidence to contradict the findings.

2. Addition of Unexplained Cash Balance:
The assessee contested the addition of ?2,34,498/- as unexplained cash. The assessee explained that a customer had left ?4,00,000/- in cash for future purchases, which was later deposited in the bank. The CIT(A) upheld the addition, citing the lack of recorded advance in the books and the inability to produce the customer for verification. The Tribunal affirmed the CIT(A)'s decision, finding no reason to interfere due to the absence of contrary evidence from the assessee.

3. Ad Hoc Disallowance of Various Expenses:
The AO disallowed 10% of conveyance, office, general, and telephone expenses on an ad hoc basis, totaling ?24,587/-. The assessee argued that the disallowance was made without specific evidence of non-business use. The Tribunal noted that the AO did not reject the books of accounts and made the disallowance on an ad hoc basis. Citing a similar case where such additions were deleted, the Tribunal deleted the ad hoc disallowance, allowing the assessee's ground.

4. Valuation and Nature of Surrendered Stock:
The assessee disputed the valuation of surrendered stock, arguing that the AO incorrectly included the value of stones, resulting in an inflated addition of ?50,48,751/-. The assessee contended that only gold stock was surrendered, as per the statements during the survey. The Tribunal found that the details required verification to determine whether the surrendered stock included diamonds or was restricted to gold as claimed. The Tribunal set aside the CIT(A)'s order and remanded the matter to the AO for fresh verification.

5. Classification of Surrendered Stock as Business Income or Income from Other Sources:
The AO classified the surrendered stock as income from other sources, disallowing partner remuneration of ?64,10,000/-. The assessee argued that the surrendered stock was business income, citing judicial precedents where excess stock found during surveys was treated as business income. The Tribunal noted the need for verification of the surrendered stock's nature and remanded the issue to the AO for a fresh decision, directing the AO to consider the stock as business income if it related to the business.

Conclusion:
The Tribunal partly allowed the appeal for the assessment year 2012-13, deleting the ad hoc disallowance of expenses and upholding other additions. For the assessment year 2013-14, the Tribunal remanded the issues of stock valuation and classification to the AO for fresh verification and decision, allowing the appeal for statistical purposes.