2015 (4) TMI 533 - AT - Income Tax

Unverifiable purchases - assessee is in trading of the precious and semi precious stones - Assessing Officer held that closing stock of assessee had been shown on estimate basis, which partly included cost mentioned in bogus bills also and as such no realistic verification could be possible - CIT(A) confirmed the disallowance made by the Assessing Officer @ 25% on unverifiable purchases - Held that - The material available on record established that in Jaipur, a rampant practice is in vogue to get and issue accommodation bills of purchases to deflate the profit. The learned Assessing Officer made disallowance @ 25% of such bogus purchases on the basis of decision in the case of Sanjay Oil Cake Industries 2008 (3) TMI 323 - GUJARAT HIGH COURT and Vijay Protein Ltd. (1996 (1) TMI 144 - ITAT AHMEDABAD-C ). In our view the 25% disallowance appears to be higher side, therefore, keeping in view of the facts of the assessee's case as well as other cases as discussed above, we feel that 15% disallowance out of bogus purchases is reasonable on unverifiable purchases and will meet the ends of justice. The rejection of books of account is justified. The assessee gets relief partly. - Decided partly in favour of assessee. Disallowance of business expenses @ 20% - Held that - There is no past history in this case that such disallowance was made by the Assessing Officer on estimation basis but it is a fact that these expenditures were incurred mostly in cash and it is difficult to collect the third party evidence in each and every item of expenses. Therefore, we confirm this disallowance @ 10%. The assessee gets relief partly on this ground. - Decided partly in favour of assessee. Trading addition - CIT(A) deleted part addition - Held that - Filing of some confirmation with PAN and TIN number are not sufficient to prove the purchases are genuine as they are to be supported by other facts including delivery of goods, as held by the various courts. The appellant cannot directly or indirectly put blinkers on investigations of the Assessing Officer to compel him to do it as per sweet will of the assessee. It is not permissible that the assessee will direct the Assessing Officer to enquire his case at his own way, which is not required by law. The assessee wanted to shift his onus on the Assessing Officer on flimsy ground. It is rampant practice in gems and jewellery business in Jaipur that the assessee has been getting accommodation bills to reduce the profitability which has been established by the department. The Hon'ble Rajasthan High Court recently in the case of Venus Arts & Gems Vs. ITO 2015 (2) TMI 721 - RAJASTHAN HIGH COURT has also confirmed the addition on unverifiable purchases @ 21.96% and also found order of the ITAT being purely a finding of fact by the two appellate authorities as to what should be a reasonable G.P. rate after rejection of books of account and various infirmities noticed by the lower authorities and in their view no question of law much less substantial question of law can be said to emerge out of the order of the Tribunal.The Assessing Officer disallowed 25% of bogus purchases in Unit-1. However, looking at the entirety of facts, competition in trade, possibility of advantage, derived a lenient view as plead by lawyers by alternate please, deserves to be considered while arriving at the estimate. We are of the conscious view that 15% disallowance out of unverifiable purchase is reasonable in keeping in view the facts and circumstances of the case for both the units on unverifiable purchases of ₹ 69,71,080/- in Unit-I and ₹ 2,07,73,625/- in Unit-II. Accordingly, the revenue's appeal is partly allowed. Disallowance u/s 40(a)(ia) - payments are nothing but commission as defined in Section 194H as held by CIT(A) - Held that - Section 194H is applicable where any commission has been paid by the Principal to the commission agent. This is not a case of commission agent as assessee sold its goods through credit card and on presentation of bill issued against credit card, the bank makes payment to the assessee after deducting agreed fees as per terms and conditions in case of credit card. This is not a commission payment but a fees deducted by the bank. If there is an agreement, that is agreement between the credit cardholder and the bank. Bank is a Principal and to spread over its business, a scheme is floated by bank i.e. issuance of credit cards. Therefore, in our considered view, there is no such relation between the bank and the shop keeper which establishes the relationship of a Principal and Commission Agent. Technically it may be written that bank will charge certain percentage of commission but this is not a commission because assessee sells its goods against credit cards, and on presentation of bills, the bank has to make the payment. It is not the case that bank has advised the assessee to sell their goods to its customers then he will pay the commission. It is reversed in a situation as bank issued credit cards to the credit card holders on certain fees or whatever the case may be and the card holder purchases material from the market through his credit card without making any payment and that shop keeper presents the bill to the bank against whose credit card the goods were sold and on presentation of bill as stated above the bank makes the payment. Therefore, in our considered view, provisions of section 194H are not attracted in this type of transaction. - Decided in favour of assessee. Disallowance of telephone expenses - Held that - 10% disallowance reasonable out of total telephone expenses at ₹ 93,433/-. Thus, the assessee gets part relief. - Decided partly in favour of assessee. Capital gain arising from transfer of business of the assessee to its group company - short term capital gain on account slump sale - Held that - The learned CIT(A) had accepted the actual date of transfer of business on 21/8/2007 whereas learned Assessing Officer had concluded that date of allotment of the shares was November, 2007 and February, 2008 and value has been taken by the assessee as on 31/3/2007. The learned CIT(A) has not given specific finding why she has accepted date of transfer i.e. 21/8/2007. It has not been come out from the order of the learned CIT(A) and submission made before her that Rule 11U(a) of the Rules has been applied meticulously. The valuation date defines in Rule 11U(j) of the Rules i.e. valuation date means the date on which the property or consideration as the case may received by the assessee, which was amended w.e.f. 29/11/2012 prior to its substitution clause (j) read as Valuation date means the date on which the respective property is received by the assessee. It is immaterial whether transferee company has supported its business or not or having any income from the trading of gems and jewellery, which has not been excluded or explained in rule itself. Therefore, this issue is set aside to the Assessing Officer and he is directed to compute fair market value of unquoted share as per the Rule 11U(a) of the I.T. Rules on the valuation date. - Decided in favour of revenue for statistical purposes. Disallowance of deduction U/s 80HHC on trading addition - Held that - The assessee has not claimed deduction U/s 80HHC of the Act before the Assessing Officer in prescribed proforma as mentioned by the learned DR alongwith the return. There is no evidence alongwith paper book, which shows that the assessee calculated deduction U/s 80HHC of the Act in computation of income. Even there is no note in the computation in case of addition made on account of any reasons, the deduction would be allowed. Addition u/s 69B on account of on money interest earned - CIT(A) deleted addition - Held that - The Coordinate Bench in assessee's own case for A.Y. 2007-08 wherein held that the information contained in the statement recorded during the course of survey can be used but it cannot be conclusive evidence against the assessee. The A.O. has not collected any material from the purchaser of the shops to show that the assessee has received on money. The sale of shop is evidenced by the sale deed. There is no documentary evidence in respect of sale price of the shops . according to the provisions of the Indian Evidence Act, 1872 when terms of a contract, grant or other disposition of property have been reduced to the form of a document then no evidence is permissible to be given in proof of any such term or such grant or disposition of the property except the document itself and no oral agreement contradicting/varying the terms of a document could be offered. Once the assessee contended before the A.O. during the course of assessment proceedings that he has not received on money then the A.O. should have collected evidence to hold that assessee has received on money - Decided against revenue. Disallowance of traveling expenses - Held that - The total turnover was ₹ 12,14,550/- as compared to preceding year. The assessee's sale has gone down substantially from ₹ 2.88 crores to 12 lacs. In absence of any evidence, foreign travelling expenses cannot be allowed. Therefore, we confirm the order of the learned CIT(A) for disallowance made on travelling expenses. - Decided against assessee. Disallowance of prior period expenses - Held that - As evident from the date of bills of purchases as well as custom duty clearance and goods received, it proves that liability was crystallized during the year. The assessee has not revised the income for the assessment year 2006-07. The genuineness of the expenses has not been doubted by the lower authorities. Therefore, we allow the prior period expenses during the year under consideration. Decided in favour of assessee.

Summary

Issues Involved:
1. Unverifiable Purchases
2. Rejection of Books of Account under Section 145(3)
3. Estimation of Income and Gross Profit (G.P.) Rate
4. Disallowance of Business Expenses
5. Treatment of Income from Sale of Commercial Complex
6. Addition on Account of "On Money" Received
7. Prior Period Expenses

Issue-wise Detailed Analysis:

1. Unverifiable Purchases:
The appeals involved the common issue of unverifiable purchases in the gems and jewellery business in Jaipur. The Income Tax Department conducted searches and surveys, revealing that many dealers were obtaining fake purchase bills to reduce tax liabilities. The modus operandi included issuing sale bills without actual delivery of goods and withdrawing the cheque amounts in cash. The Assessing Officers rejected the books of account under Section 145(3) of the Income Tax Act due to unverifiable purchases, leading to the estimation of income.

2. Rejection of Books of Account under Section 145(3):
The Assessing Officers found several defects in the maintenance of books of account, such as the absence of a quantitative stock register, valuation of stock on an estimated basis, and failure to produce bogus bill providers for examination. Consequently, the books of account were rejected under Section 145(3) of the Act. The appellants did not contest the rejection of book results in their appeals.

3. Estimation of Income and Gross Profit (G.P.) Rate:
After rejecting the books of account, the Assessing Officers estimated the income based on the best judgment assessment under Section 144 of the Act. The estimation of income varied, with some Assessing Officers applying a 25% disallowance on unverifiable purchases, while others applied a Gross Profit (G.P.) rate based on past history. The ITAT, in several cases, found that a 25% disallowance was on the higher side and reduced it to 15%, considering the facts and circumstances of each case.

4. Disallowance of Business Expenses:
The Assessing Officers disallowed certain business expenses, such as telephone, vehicle fuel, traveling, and office expenses, on the grounds of personal and non-business use, lack of proper vouchers, and self-made vouchers. The ITAT, in some cases, confirmed the disallowance but reduced the percentage to a more reasonable rate, such as 10%.

5. Treatment of Income from Sale of Commercial Complex:
In the case of Ravi Sancheti, the Assessing Officer treated the income from the sale of a commercial complex as business income, while the CIT(A) and ITAT treated it as capital gain. The ITAT followed the decision in the assessee's own case for the previous assessment year, holding that the profit from the sale of shops should be taxed under the head "capital gain."

6. Addition on Account of "On Money" Received:
The Assessing Officer made additions for "on money" received on the sale of shops based on the assessee's admission during the survey. The CIT(A) and ITAT deleted the addition, following the decision in the assessee's own case for the previous assessment year, where the ITAT held that the statement recorded during the survey could not be conclusive evidence without corroborative material.

7. Prior Period Expenses:
In the case of M/s Silvex Images, the Assessing Officer disallowed prior period expenses, which were confirmed by the CIT(A). The ITAT allowed the prior period expenses, holding that the liability was crystallized during the year under consideration, and the genuineness of the expenses was not doubted by the lower authorities.

Conclusion:
The ITAT Jaipur Bench dealt with various appeals involving unverifiable purchases, rejection of books of account, estimation of income, disallowance of business expenses, treatment of income from the sale of commercial complexes, addition on account of "on money" received, and prior period expenses. The ITAT provided relief in several cases by reducing the disallowance percentage, confirming the treatment of income as capital gain, deleting additions for "on money," and allowing prior period expenses.