2023 (4) TMI 146 - AT - Income Tax

Unexplained capital contribution made - Capital contribution by way of sale of gold ornaments of spouse during the year - HELD THAT - We note that assessee has given details of purchase of ornaments weighing 555.86 gms. The quantity sold is 704 gms which cannot be doubted in lieu of these purchase details as there are several occasions in family life when gifts in the form of gold ornaments are received. Considering the financial status and standing of the assessee coupled with regular returns filed by the spouse of the assessee having income from business, sale of ornaments of 704 gms cannot be doubted and the capital contribution made from this is therefore, accepted as explained. We also refer to the CBDT Circular no. 1916 (supra) wherein gold ornaments up to 500 gms for a married woman are accepted as permissible. Thus, the addition made in this respect is directed to be deleted. Capital contribution out of gift received from the deceased father of the assessee - As the contents of the gift deed as narrated by the Ld. Counsel explains the nature and source of the said gift made to the assessee. The deceased father was an income tax assessee having PAN. Considering these facts on record, capital contribution by way of gift from the deceased father is accepted and the addition made thereon is directed to be deleted. Other two components of surrender value from mutual fund of LIC and from personal savings and drawings of the past, nothing has been brought on record to demonstrate about the nature and source of these amounts. Accordingly, the addition made in respect of these two amounts is sustained. Ad-hoc disallowance by adopting rate of 20% in respect of expenses claimed by the assessee - As we note that assessee has claimed these expenses on the strength of vouchers which are self made and most of these expenses are not verifiable. Expenses include administrative and selling expenses, conveyance deed expenses, staff and welfare allowances, staff tea and Tiffin and staff food and clothe. The mode of payment of all these expenses is in cash. Assessee has merely submitted copies of ledger accounts from its books to substantiate the claim of these expenses. We do note that there is an increase in the turnover of the assessee as stated above, which is one of the reasons stated by the assessee for incurring these expenses. Before us also Ld. Counsel could not bring anything on record except for copies of ledger accounts forming part of the paper book - we find it proper to restrict the disallowance to the extent of 10% instead of 20% adopted by the Ld. AO and confirmed by the Ld. CIT(A). Accordingly, assessee gets a relief on the disallowance of these expenses up to 10% and the balance is sustained. Appeal of the assessee is partly allowed.

Summary

Issues involved:
The issues involved in the judgment are related to the arbitrary order, denial of natural justice, addition to capital fund, disallowance of expenditure, rejection of the principle of mutuality, and entries addition on account disallowance.

Arbitrary Order and Natural Justice:
The appeal was filed against the order of Ld. CIT(A)-13, Kolkata, which was observed to have a gap of more than one and a half years in the timeline. The service of the order on the assessee was confirmed through a "Tear off acknowledgment slip." Despite the delay, the appeal was taken for adjudication by the Tribunal.

Capital Contribution and Expenditure Disallowance:
The assessee, engaged in manufacturing industrial products, faced inquiries regarding the introduction of capital and expenses incurred. The Ld. AO made additions towards capital fund and ad-hoc disallowance of expenses. The assessee explained the source of capital contribution, including the sale of gold ornaments and a gift from the deceased father. The Tribunal accepted the explanations for these components and directed the deletion of the additions. However, the additions related to surrender value from mutual funds and personal savings were sustained. The disallowance of expenses at a rate of 20% was reduced to 10% by the Tribunal, considering the turnover increase and lack of verifiable vouchers.

Principle of Mutuality and Entries Disallowance:
The rejection of the applicability of the principle of mutuality by the assessing officer was contested. The Tribunal examined the details provided by the assessee, including the purchase and sale of gold ornaments, and accepted the explanations for capital contributions. The entries addition on account disallowance was deemed unjustified and directed to be deleted partially, providing relief to the assessee.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, directing the deletion of certain additions related to capital contributions and reducing the disallowance of expenses. The judgment was pronounced in the open court on 27th March 2023.