2016 (2) TMI 168 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - CIT(A) deleted the addition - whether the advance made by M/s Adampur Distributors Pvt. Ltd. is for business transaction or it is a loan or advance? - Held that - The ledger extract of M/s Adampur Distributors Pvt. Ltd. clearly establishes that M/s Adampur Distributors Pvt. Ltd. purchased gold from M/s Mustafa Gold Mart, a proprietary concern of the assessee. It is also not in dispute that upto 2007-08, M/s Adampur Distributors Pvt. Ltd. engaged in the business of jewellery and later on, the business was diversified. To revive the gold jewellery business, M/s Adampur Distributors Pvt. Ltd. advanced money to M/s Mustafa Gold Mart for purchasing gold jewellery. In fact, M/s Mustafa Gold Mart delivered gold jewellery to M/s Adampur Distributors Pvt. Ltd. In those circumstances, it is obvious that the transaction between M/s Adampur Distributors Pvt. Ltd. and M/s Mustafa Gold Mart, is a business transaction. Hence, the advance paid by M/s Adampur Distributors Pvt. Ltd. to M/s Mustafa Gold Mart cannot be construed either as loan or advance. Therefore, this Tribunal is of the considered opinion that the provisions of Section 2(22)(e) of the Act cannot be applied to a business transaction. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority. Accordingly, the order of the CIT(Appeals) is confirmed. - Decided in favour of assessee Disallowance under Section 40A(2)(b) commission paid to Shri Ishtiaq Ahmed - CIT(A) deleted the disallowance - Held that - It is for the assessee to decide whether commission is to be paid to any particular individual or not. In the interest of the assessee and for promoting the business, if the assessee comes to a conclusion that payment of commission is required, then the Assessing Officer cannot step into the shoes of the assessee and say that the payment of commission is not required. In this case, it is not the case of the Revenue that the payment of commission is not required. The only contention of the Assessing Officer is that the payment is unreasonable and excessive. As rightly submitted by the Ld.counsel for the assessee, the recipient Shri Ishtiaq Ahmed has disclosed the receipt of commission and paid taxes. The Assessing Officer accepted the income declared by the above said Shri Ishtiaq Ahmed as commission. In those circumstances, as rightly found by the CIT(Appeals), the disallowance made in the hands of the assessee is not justified.- Decided in favour of assessee Addition under Section 41(1) - CIT(A) deleted the addition - Held that - Assessing Officer made deduction on the ground that the sundry credit existed for more than 7 years, therefore, the liability ceased to exist. This Tribunal is of the considered opinion that merely because the credit existed for more than 7 years, the liability cannot cease automatically. Time for legal suit to recover the amount may be barred under the provisions of Limitation Act, however, the right of the creditor to recover the amount still exists by other modes. In other words, what is barred is filing civil suit to recover the money but the other means are not barred at all. Moreover, the liability is shown in the year under consideration also. Therefore, the assessee accepted liability during the year under consideration. When the assessee accepted the liability, the period of limitation gets extended. In those circumstances, there is no question of any cessation of liability. It is not the case of the Revenue that the creditors waived the amount due to them. In those circumstances, the CIT(Appeals) has rightly deleted the addition - Decided in favour of assessee Addition made on account of unexplained jewellery - CIT(A) deleted the addition - Held that - The quantity of gold jewellery depends upon the status of the assessee in the society. The assessee, being a businessman, commands respect in the locality where he resides. Therefore, naturally the parents of the girl would give gold jewellery as Sthreedhan property. This is a customary practice which prevails in the country. The customary practice that prevails in this part of the country cannot be brushed aside by the Assessing Officer to disbelieve the claim of the assessee. By taking into consideration the customary practice prevails in the country and the society of the assessee where he resides, this Tribunal is of the considered opinion that the assessee s wife would have received gold jewellery as Sthreedhan property during her marriage and also would have received gifts on the occasions like marriage, birthday, etc. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly deleted the addition made by the Assessing Officer - Decided in favour of assessee Disallowance of expenses - Held that - In the absence of proper vouchers, the CIT(A) has correctly restricted the disallowance to 20% claimed by the assessee. Disallowance made in respect of exemption claimed under Section 10 - assessee has also claimed travelling allowance as exempted - Held that - The uniform allowance and conveyance allowance to the extent of ₹ 42,000/- and ₹ 9,600/- respectively have to be allowed since it is for the purpose of business or the employment carried out by the assessee. In respect of travelling expenses, the claim of the assessee was that he had to travel for advertisement at many places in the city of Chennai. This Tribunal is of the considered opinion that while claiming expenditure for the commission, the assessee has claimed salary and other expenses for making advertisement. Therefore, it may not be correct to say that the assessee had to travel for advertisement purpose. In other words, the travelling expenses for making advertisement was included in the expenditure claimed by the assessee for commission receipt. Therefore, another claim of ₹ 1,16,700/- is not justified. Accordingly, the order of the CIT(Appeals) is set aside in respect of travelling allowance to the extent of ₹ 1,16,700/- and the Assessing Officer is directed to make addition of ₹ 1,16,700/- towards travelling expenses. Charging of interest under Section 234B - Held that - The return filed consequent to the notice issued under Section 153A has to be taken for computing interest under Section 234B of the Act.

Summary

Issues Involved:
1. Addition under Section 2(22)(e) of the Income-tax Act, 1961.
2. Disallowance under Section 40A(2)(b) of the Act.
3. Addition under Section 41(1) of the Act.
4. Addition of unexplained jewellery.
5. Disallowance of expenses.
6. Disallowance of exemption claimed under Section 10 of the Act.
7. Charging of interest under Section 234B of the Act.

Issue-wise Detailed Analysis:

1. Addition under Section 2(22)(e) of the Income-tax Act, 1961:
The first issue addressed was the addition made by the Assessing Officer (AO) under Section 2(22)(e) of the Income-tax Act, 1961, treating funds advanced to the assessee as deemed dividend. The AO argued that the transaction between the assessee's proprietary concern, M/s Mustafa Gold Mart, and M/s Adampur Distributors Pvt. Ltd., was not a business transaction but a loan or advance. However, the CIT(Appeals) found that the advance was a trade transaction for purchasing gold jewellery, which was supported by ledger accounts. The Tribunal confirmed the CIT(Appeals)'s decision, stating that the advance was for business purposes and not a loan or advance, thus Section 2(22)(e) did not apply.

2. Disallowance under Section 40A(2)(b) of the Act:
For the assessment years 2010-11 and 2011-12, the AO disallowed commission payments to Shri Ishtiaq Ahmed under Section 40A(2)(b), considering them excessive and unreasonable. The AO noted that no commission was paid in previous years and there was no agreement for the commission. The CIT(Appeals) found that the payment was for services rendered, and the recipient disclosed and paid taxes on the commission. The Tribunal agreed with the CIT(Appeals), stating that the AO cannot determine the necessity of commission payments and confirmed the deletion of the disallowance.

3. Addition under Section 41(1) of the Act:
The AO added Rs. 5,61,53,855/- as income under Section 41(1), considering it as ceased liability since the credit was outstanding for more than seven years. The CIT(Appeals) deleted the addition, noting that the liability existed since the assessment year 2005-06 and was not waived by creditors. The Tribunal upheld the CIT(Appeals)'s decision, stating that mere passage of time does not extinguish liability, and the right to recover remains unless waived by creditors.

4. Addition of unexplained jewellery:
During a search operation, gold jewellery was found in the assessee's locker and residence, leading to an addition of Rs. 21.49 lakhs. The AO made the addition due to the lack of purchase bills. The CIT(Appeals) deleted the addition, considering the customary practice of gifting jewellery during marriage. The Tribunal agreed, emphasizing the cultural context and the lack of documentary evidence for such gifts, confirming the deletion.

5. Disallowance of expenses:
The AO disallowed Rs. 22,04,085/- claimed as expenses against commission receipts due to lack of proper vouchers and evidence. The CIT(Appeals) restricted the disallowance to 20% of the claimed expenses. The Tribunal upheld this decision, acknowledging the practical difficulties in obtaining vouchers for casual labor and advertising expenses.

6. Disallowance of exemption claimed under Section 10 of the Act:
The assessee claimed exemptions totaling Rs. 1,68,000/- under Section 10, which the AO disallowed due to lack of details. The CIT(Appeals) allowed the claim based on Form 16A. The Tribunal partially set aside the CIT(Appeals)'s order, allowing uniform and conveyance allowances but disallowing the travelling allowance of Rs. 1,16,700/-, as it was included in the commission expenses.

7. Charging of interest under Section 234B of the Act:
The AO charged interest under Section 234B from the date of the original return filed under Section 139(1). The CIT(Appeals) directed the AO to compute interest from the date of the return filed in response to the notice under Section 153A. The Tribunal confirmed the CIT(Appeals)'s direction, following the precedent set in Kalyani Jayakumar's case.

Conclusion:
The Tribunal dismissed the Revenue's appeals in I.T.A. Nos.1676 to 1679/Mds/2013, confirming the CIT(Appeals)'s orders. However, the appeal in I.T.A. No.1680/Mds/2013 was partly allowed, with specific adjustments to the disallowance of exemption claimed under Section 10. The judgment was pronounced on 7th January 2016 at Chennai.