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TMI Blog2016 (5) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees related to the assessee. 3. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of Rs. 6,44,589/-, out of salary and incentive u/s 40A(2)(b). 4. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of electricity and water expenses of Rs. 6,18,048/-, when lease agreement specifically states the monthly rent of Rs. 2500/- inclusive of electricity and water expenses. 5. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the addition of Rs. 1,90,43,902/- on account of estimation of gross profit made by the Assessing Officer after rejecting books of accounts of assessee, wherein all the above disallowances were telescoped. 6. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal. 2. The facts in brief are that the assessee was engaged in the business of manufacturing and export of ready-made garments in the name of proprietorship concern M/s Magnolia Blossom. For the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Vikas Udyog respectively were shown, which were operating from same premises located at 3685, Gali No. -2, Dharampura, Gandhi Nagar, Delhi. Further, on verification of the premises by the Inspectors of the office of the AO, he found that address was a residential house and one of the occupants of the house, Sh. Sandeep Sharma, who was staying there for last 40 years, denied of having any knowledge of the aforesaid two firms. This fact was brought to the notice of the assessee, and the assessee was asked to produce these two parties along with supporting evidences. In response, the assessee submitted that the property belonged to Sri Ram Krishnan Sharma and he had given a part of the property on rent during the year 2007 and when he came to know that the tenant was using premises for business purposes he got the property vacated from these two firms. The assessee further submitted that these facts may be he verified through the Inspector or through notice or summon under the provisions of the income tax Act. The assessee further submitted that the payments to both the parties were made through account payee cheque. The assessee also filed confirmation of payments to these firms fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough section 133(6)/131. The appellant has aptly relied on the judgement of the Delhi High Court in the case of CIT Vs. Jas Jack Elegance Exports (supra), wherein the Court held that the Assessing Officer was at liberty to summon the parties to whom payments had been made for fabrication, embroidery, etc. to verify the genuineness of the payments, and in the absence of such course of action, the failure of the assessee to produce such persons could not have been a ground for rejecting the claim. During the appellate proceedings, the appellant was required to produce the ledger account of these parties in the books of account, with purchase bills and evidence of receipt of the goods in question. The appellant has filed copies of the purchase bills, bearing the inward stamp of M/s Magnolia Blossom, goods receipt note, and fabric inspection report of the items of purchase from M/s Ma Durga Traders and M/s Vikash Udyog. The ledger accounts of these parties show that the entire payments were made during the year, and were made by cheques. The Assessing Officer has not rebutted any of these evidences in the remand report. Considering that the appellant has produced the confirmations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee herself never visited any places and most of the foreign travelling expenses were related to her son Sh. Sidhartha Mohan and Mrs. Pallavi Mohan, daughter-in-law of the assessee. The Assessing Officer disallowed 25% of the foreign travelling expenses claimed by the assessee on the ground that Sh. Sidhartha Mohan happened to the director in other concerns/companies of the family and the assessee could not produce any evidence in support of the claim that foreign travelling expenses were incurred only for the assessee. The learned Commissioner of Income-tax(Appeals) after considering the submission and examination of the details of the expenses, sustained disallowance of Rs. 4,22,929/- out of the disallowance of Rs. 23,13,278/-. The relevant findings of the learned Commissioner of Incometax( Appeals) are as under: "6. At ground of appeal no. 4, the appellant has objected to the disallowance of Rs. 23,13,278/- out of the expenditure incurred on foreign travel by the employees who are related persons of the appellant. The Assessing Officer's case is based on the fact that Sh. Siddharth Mohan is also a director in, or associated with, a number of associate concerns e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the learned Commissioner of Income-tax (Appeals) are well reasoned. Accordingly, we uphold his finding on the issue in dispute, hence the ground of the appeal is dismissed. 5. In ground No. 3, the Revenue has agitated deleting the disallowance of Rs. 6,44,589/-out of the salary/incentives under section 40A(2)(b) of the Act. 5.1 The Ld. DR relying on the order of the AO submitted that disallowance was justified in terms of section 40A(2)(b) of the Act. On the other hand the Ld. AR relying on the order of the learned Commissioner of Income-tax( Appeals) submitted that action of the AO was not justified as per the provisions of the Act because he failed to establish that the expenses were excessive or unreasonable having regard to the market value of the services for which the payment was made. 5.2 We have heard the rival submissions and perused the material on record. The Assessing Officer has made disallowance of 25% out of the salary and incentive paid to Sh. Sidhartha Mohan, son of the assessee and Smt. Pallavi Mohan, daughter-in-law of the assessee on the reasons similar to the disallowance made on account of foreign travel expenses. The learned Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no finding were given by the Assessing Officer whether the payment was excessive or unreasonable having regard to the fair market value. We don't find any infirmity in the finding of the learned Commissioner of Income-tax(Appeals), on the issue is dispute, and thus, we uphold his finding on the issue in dispute. The ground of the appeal is accordingly dismissed. 5.4 The ground No. 4 raised by the Revenue is in respect of deletion of the disallowance on electricity and water expenses of Rs. 6,18,048/-. 5.5 The ld DR relied on the findings of the Assessing Officer, whereas, on the other hand the ld. AR relied on the finding of the learned Commissioner of Income-tax (Appeals). 5.6 We have heard the submissions of the parties and perused the material on record. The Assessing Officer observed that the assessee had taken property no. D-36, Okhla industrial area, phase 1, on lease for a sum of Rs. 2500 per month inclusive of electricity charges and everything from M/s Magnolia clothing company private limited, a related concern. But the Assessing Officer also noticed that in addition to the rent of Rs. 30,000/- paid, the assessee also paid Rs. 6,18,048/-towards electricity and water ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not provide for more than Rs. 2,500/- to be paid per month, including electricity charges. No comments have been offered regarding the tripartite agreement allowing the contractor M/s Ess Aar Fashion to use the basement and ground floor of the factory premises, on the understanding that the electricity and water charges shall be shared equally by M/s Magnolia Blossom, and M/s Magnolia Clothing Co. Pvt. Ltd. The appellant was required to submit copy of the ledger account of M/s Ess Aar Fashion in the books of the appellant, and to show deduction of tax on the contract payments. From the ledger account, it is seen that -the appellant has paid fabrication expenses and washing and finishing charges of a total amount of Rs. 46,82,075/- to M/s Ess Aar Fashion, including the opening balance of Rs. 14,90,413/-. Tax has been deducted at source on the amounts paid/credited of Rs. 31,91,662/- and copies of TDS certificates have been placed on record. After verifying the evidences furnished by the appellant, the disallowance of Rs. 6,18,048/- on account of electricity and water expenses is deleted." 5.7 The fact of the tripartite agreement among the parties was not disputed by the ld D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for the gross profit. 6.3 The assessee submitted before the learned Commissioner of Incometax( Appeals) justification for the fall in gross profit rate mainly as global recession in the export market. The findings of the learned Commissioner of Income-tax(Appeals) on the issue are as under: "10. Grounds of appeal nos. 9 and 10 pertain to the rejection of books of account and estimation of gross profit, resulting in an addition of Rs. 1,90,43,902/-. The Assessing Officer has estimated the gross profit at 18% as against the gross profit declared at 12.97%. The appellant has submitted that its explanation regarding the fall in gross profit rate, filed on) 14.06.2010, has been ignored, and the Assessing Officer has wrongly stated that no explanation or justification for the fall in gross profit has been furnished. Moreover it can be seen from the record that the appellant was not allowed an opportunity to rebut the estimate of gross profit. The various observations made by the Assessing Officer have been refuted by the appellant during the appellate proceedings. It has been explained that the fall in gross profit ratio is mainly on account of the export market being hit by global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s item wise consumption of raw material through to final production of finished goods is not feasible in the nature of business of the appellant, wherein at each stage of production there is a process loss/wastage, change in nature of input to stock in process, to finished goods. The finished goods very considerably as per the specifications of the buyers, and the fabrics and accessories used, and dyeing/printing, cutting, stitching and finishing processes are correspondingly variable. It is not possible to maintain a stock register for each stage of the manufacturing process, however the stock of fabric, accessories, packing material, and readymade garments is physically inventorised at the end of the year, and such statements were verified in audit. It is also argued by relying on the judgement of the Delhi High Court in the case of CIT Vs. Smt. Poonam Rani (supra) that there is no statutory requirement of maintenance of stock register, and even if no such register was being maintained, that by itself does not lead to the inference that it was not possible to deduce the true income from the accounts maintained by an assessee. It is reiterated that the Assessing Officer did not as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit rate could be for various reasons such as increase in cost of raw material, decrease in market price of finished goods, increase in the cost of processing, etc., and gross profit rate cannot be kept unchanged year upon year, as the business environment is subject to change. In the absence of inherent defects in the books of account, fall in gross profit rate by itself cannot be a justifiable reason for rejection of accounts. It is also taken note of that the appellant's accounts have been subjected to scrutiny in the Assessment Years 2003-04, 2004-05, 2005-06 and 2009-10, the last assessment having been completed by the Addl. CIT, Range 23, New Delhi, and no additions have been made to the gross profit, apart from disallowance out of administrative expenses. After carefully considering the evidences and arguments submitted, no basis is found for the finding that the accounts were not correct and complete, or that the income could not be properly determined and deduced from the books. Accordingly, the addition made of Rs. 1,90,43,902/- on account of estimation of gross profit is deleted." 6.4 The assessee has demonstrated the reasons for fall in gross profit rate and expla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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