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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 ..... observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding 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.- Decided against revenue Disallowance of the salary/incentives under section 40A(2)(b) - Held that:- We find that the assessee submitted the qualification, experience and the services rendered by both the relatives of the assessee and demonstrated that the salary and incentive paid was not excessive or unreasonable having regard to the market value of the services and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of ₹ 18,90,349/-, out of expenditure incurred on foreign travel by the employees 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 ₹ 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 ₹ 6,18,048/-, when lease agreement specifically states the monthly rent of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld a genuine by the learned Commissioner of Income-tax (Appeals). 3.2 We have heard the rival submissions and perused the material on record. During the scrutiny proceedings, the AO observed that purchases of ₹ 67,99,974/- and ₹ 40,66,650/- from M/s. Ma Durga Traders and M/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 fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate from the bank of the appellant that the payments for the purchases had been made by account payee cheques. The appellant submitted that it could not produce the parties as it had no business dealings with them currently, however the Assessing Officer was requested to enforce their attendance through 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 4,22,929/-out of the disallowance of ₹ 23,13,278/-and therefore no further disallowance is required in respect of expenses on foreign travel. 4.2 We have heard the rival submissions and perused the material on record. The Assessing Officer observed from the foreign travel expenses detail of the assessee, that 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 ₹ 4,22,929/- out of the disallowance of ₹ 23,13,278/-. The relevant findings of the learned Commissioner of Incometax( Appeals) are as under: 6. At ground of appeal n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racket. Considering all the above reasons, the disallowance made u/s 40A(2)(b) of ₹ 6,44,589/- is deleted. 5.3 We find that the assessee submitted the qualification, experience and the services rendered by both the relatives of the assessee and demonstrated that the salary and incentive paid was not excessive or unreasonable having regard to the market value of the services and 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 ₹ 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 obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00sq feet for purposes of storage, and for supervision of the production activities of M/s Ess Aar Fashion. As argued by the appellant, no query was raised by the Assessing Officer before making the disallowance and the appellant had no opportunity to justify the expenditure. In the remand report, the Assessing Officer has simply reiterated that the lease agreement between the appellant and M/s Magnolia Clothing Co. Pvt. Ltd. does not provide for more than ₹ 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 ₹ 46,82,075/- to M/s Ess Aar F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricity and water charges etc, he rejected the books of accounts invoking section 145 (3) of the Act and estimated the gross profit of ₹ 6,81,49,150/-applying the gross profit rate of 18% on the turnover of the proprietary concern and after reducing the gross profit of ₹ 4,91,05,248/-, he made addition for the difference amount of ₹ 1,90,43,902/-. The Assessing Officer did not make separate addition for the disallowances as the telescoped in the addition 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 ₹ 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 Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer that the books of account are unreliable as the stock register was not produced, requires to be rejected as the Assessing Officer never called for the production of stock register. However quantitative details of consumption of raw material and of manufacture of finished goods, including details of opening and closing stock, were prepared and audited, as evidenced from the audit report in form no. 3CD. It is argued that maintenance of daily stock register which shows 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esign and development and sampling has increased as customers have to be shown samples of latest trends and designs as per the market requirement, and such expenditure cannot be maintained at fixed levels. Moreover expenditure of fabrication, dyeing and printing, etc. would also vary depending on the nature of orders. It is noted that the purchases and manufacturing costs are subject to audit and no defects have been pointed out by the auditors. There is no denying that fall in the gross profit 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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