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TMI Blog2020 (2) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case the learned CIT (A) without any show-cause notice, without following the due process of law grossly erred in directing the learned Assessing Officer to further disallow the processing fees of Rs. 95,316/- paid by the assessee appellant on the loan taken by it during the year under consideration. 5. That on the facts and in the circumstances of the case the learned lower authorities grossly erred in disallowing the rent paid by the assessee appellant of Rs. 27,50,000/- during the year under consideration. 6. That on the facts and in the circumstances of the case, the learned Lower Authorities grossly erred in making addition of Rs. 27,54,000/- on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961. 6.1 That in the show cause notice a query was made by the learned AO regarding cash deposit of Rs. 13,77,000/- but while passing the order he grossly erred in making an addition of Rs. 27,54,000/- which is 200% of the cash deposited and the learned CIT(A) erred in confirming the same which is illegal and bad in law. 7. That on the facts and in the circumstances of the case, the learned CIT (A) grossly erred in disallowing the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has wrongly claimed depreciation on the vehicle purchase by Shri Jitendra Agarwal. Similarly the claim of the assessee for cash sale is not verifiable from the books of account and the assessee has not explained any reason for showing lower GP rate & N.P. rate, therefore, not disclosing true and correct trading results during the course of assessment proceedings. Accordingly, the books were rejected invoking provision of Section 145(3) of the Act and addition of Rs. 4,49,539/- was made applying GP rate of 26% to the declared turnover of the assessee firm. 5. Being aggrieved, the assessee carried the matter in appear before the ld. CIT(A). As per ld. CIT(A) though the assessee has maintained stock register but the qualitative details were not maintained. It is noted from some of the cash sale bills filed by the assessee that for diamond Jewellery items, no separate rates of gold and diamonds were stated therein and only one consolidated figures of sales amount is mention. Further, in respect of jewellery manufactured on job work basis as it issued gold to kariagars, it is noted that it has not shown any work in progress in its opening or closing stock. Further, referri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Jewellery 18 Cts., Diamond Fusion Jewellery 14 Cts. Hence in view of these comprehensive details there should not remain any doubt that assessee is not maintaining qualitative as well as quantitative stock details. Basis of Books rejection by AO: (c) Stock items taken inward and outward in the stock register is not fully verifiable in respect of purchases, manufacturing, goods under process etc. Submission (i) The Ld.CIT(A) recorded his finding at Page-12, Para 3.2.2(iii) of the order that the assessee has been maintaining the stock register but Qualitative details are not maintained. Therefore, in his own words it is an admitted fact that the stock register has been maintained by the assessee, therefore, the observations of the AO contrary to this finding stands vitiated to that extent. (ii) As regards, the allegation that purchase and sale details are not verifiable from stock registers, it is submitted that all purchase and sale bill are reflecting in stock register along with reference of their Bill No. Complete Sale and Purchase bills were submitted before the lower authorities to facilitate the verification. However, no specific instance of entry not found i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also maintaining the complete qualitative details of all sales and respective components have been shown in the respective stock item at the time of sales. Ld.CIT(A) failed to appreciate the complete detail given in the stock records and trade practice. Moreover, draw the adverse inference merely on the basis of suspicion, surmises contrary to the facts available on record. (h) The appellant is getting jewellery manufactured on job work basis as it issued gold to Karigars. It is noted that it has not shown any work in progress in its opening or closing stock. Submission: The allegation of the AO and CIT(A) that no details of Work in progress has been given is completely wrong on the face of it. The assessee filed ledger account of work in progress vide letter dated 16.03.2016 (Point No.8). However, the AO as well as CIT(A) did not make any adverse remark on the same. The assessee was holding opening balance in stock with Karigars shown as "Stock with EJC" and separately disclosed the same in Form 3CD also. The assessee was not having any Closing Balance in job work, therefore, it was Nil. (i) The assessee purchased diamond in the range of 11,500/- to 12,000/- per cara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) that insignificant mistakes cannot afford a ground for restoring to this section." (iv) The basis of such adverse inference is rate difference. Although we have explained herein above that good sold is Diamond Polkhi not Diamond. Even otherwise for sake of argument if we presumed diamond has been sold at lesser price, more particularly of export, which has been gone through custom authorities it cannot be a basis to draw adverse inference since in the business price depends upon various factors and circumstances. Basis of Books rejection by AO: (j) GP and NP are lower than last year. (k) Purchase and sales are not fully verifiable from stock register in terms of raw material, goods under process of manufacturing and finished goods in respect of each item of purchase and sales adversely affecting to the trading results. (l) The assessee failed to substantiate the claim to show reasonable and true and correct GP and NP ratio from the books of accounts in this line of trade. Submission: (i) Perusal of the order and submission made before him, Ld.AO pointed out certain deficiencies but it is important to note that almost every time, such alleged deficiencies are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of the assessee to maintain the fixed margins. Results are better: It is submitted that Ld.AO as well CIT(A) both estimated the GP by applying an average rate of GP without giving any weightage to the trend line between increase in turnover and declares in GP. Naturally to increase the turnover the assessee had to forgo some margins. Turnover, GP, along with increase and decrease in GP Rate is depicted by way of a table given below:- AY Sales Turnover GP GP Rate Increase in Turnover (%) Decrease in GP Rate (%) 2011-12 1,92,93,967/- 55,90,497/- 28.98% - - 2012-13 3,11,62,210/- 78,45,880/- 25.18% 61.51% 13.11% 2013-14 3,90,42,302/- 97,10,459/- 24.85% 25.29% 5.39% (Expected Rate of Reduction in GP) Therefore, following the simple trend line also the GP Rate of assessee was expected to decrease by 5.39% i.e. the GP Rate was expected to remain at 23.82% (25.18%-1.36%), whereas the assessee has declared the GP Rate of 24.85% which is much better. Hence, there was not reduction in GP Rate if we compare it with increase in turnover. It is further submitted that the assessee has been assessed u/s 143(3) for AY 2006-07 vide order dated 28.03.2008, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above loan of Rs. 1.50 crore taken from HDFC Bank and a sum of Rs. 95,316/- as loan processing fee. The AO has disallowed the interest of Rs. 15,19,571/- paid to HDFC Bank by treating the same as not incurred for the purposes of the business of the assessee firm. 11. On appeal, the ld. CIT(A) held that the loan of Rs. 1.50 crore taken by the assessee firm from HDFC Bank was used for the purposes of acquisition of a showroom by the two partners and their three family members and therefore, loan so taken and interest expense so incurred cannot be treated as incurred wholly and exclusively for the purposes of business of the assessee firm, therefore, the disallowance of Rs. 15,19,571/- was sustained. Further, the AO was directed to disallow a sum of Rs. 95,316/- towards processing charges. Against the said findings, the assessee is in appeal before us. 12. During the course of hearing, the ld. AR submitted that during the year under consideration, partners along with family members purchased a show room for consideration of Rs. 4.11 Crore. Same was subsequently given on rent to the assessee firm. Out of total consideration, Rs. 2.61 Crore were paid by the purchaser directly and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take risk. However, considering the need of the firm the partners prepared other family members to purchase the showroom and accordingly partners and relatives put their own resources immediately to the extent of Rs. 2.61 Crores and remaining amount were raised by the firm as secured loan and given on behalf of these persons. It is important to note that loan was also raised on the basis of collectoral securities of immovable properties owned by these persons in their individual capacity. In nutshell, firm neither took any risk since amount given on behalf of these people were recoverable and in case of default that was recoverable from their properties. Under the facts and circumstances, property was purchased for use of firm without any risk and responsibility therefore, holding that same is not for business purpose is without appreciating the complete facts in right perspective. 15. As far as interest payment by firm on that secured loan is concerned, it was submitted that it is an admitted position that same has been used for purchase of showroom property on behalf of buyers. For sake of convenience, these buyers have been bifurcated in two categories. One is partners and sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds taken from HDFC Bank @12 % and given to the family members. Notably the assessee has been charging the same rate of interest from these family members hence there is no justification for making the disallowance of entire amount of interest paid to HDFC Bank Limited holding that the same has not been used for business purpose. 16. It was further submitted that the Ld. CIT(A) has also noted his finding of fact that assessee has been charging interest @ 12% from these family members at Page-22, Para-3.3 of Order. The relevant Para is reproduced hereunder for sake of convenience:- ".....it was observed that the appellant has charged interest @12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mittal whereas, it has paid interest @15 % to them and no interest appears to be paid to Ms. Sangeeta Mittal. In view of these facts, the interest is to be allowed @ 12% to these entities." Once the AO himself has proved the nexus between borrowed funds taken from HDFC Bank and giving to family members, and this fact has also been admitted by the lower authorities that the assessee has been charging the interest @12% from these family members, then no disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged and on loan given to two partners, they were having sufficient opening credit balance in their capital account on which they were eligible for 12% rate of interest and given that the assessee firm has not paid any interest on such credit balance, non-charging of interest on loan advanced on their behalf is tax neutral. We find force in the arguments of the ld AR that where the assessee firm has charged interest from the family members and has not paid interest which it was supposed to pay on the opening credit balance in partners' capital account which stay invested in the assessee's firm throughout the year, the interest paid to the bank shall be offset from the said recovery of interest and there should not be any disallowance to extent of such recovery. Therefore, for the limited purposes of determining the interest paid to the bank and interest recovered from family members/interest saved on partner's capital account for the period their opening capital remain invested and not withdrawn, the matter is remanded to the file of the Assessing officer who shall verify and allow set off of interest recovered from family members/interest saved on partner's capital account fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not found reasonable and justified in view of the provisions of the Act and the same was disallowed. 22. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has sustained the said disallowance. The ld. CIT(A) observed that since the showroom was inaugurated on 13.05.2013, no business activities were carried out from the rented space at Maa Upasana during the year under consideration. Further, he referred to the provisions of Section 30 of the Act wherein it has been provided that the rent is allowed in respect of premises, which is occupied and used for the purposes of the business or profession of the assessee firm. It was held by the ld. CIT(A) that on 01.05.2012 i.e. the date on which the premises under consideration was claimed to be taken on rent, it was not fit to use for the purposes of the business of the assessee firm of running a showroom and the assessee could not commence its business activities thereon till the end of the year under consideration as the showroom was inaugurated on 13.05.2013 only. Further, he relied on the decision of Hon'ble M.P. High Court in case of Nashirwan and Co. Pvt. Ltd. vs. CIT 77 ITR 822 as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and storage, display counters, lightings, Air Conditioner Installation, Civil work etc. all are for business purpose not for any personal or other purposes. Further the concept of put to use is relevant for the purpose of section 32 only. In section 30 the word "used for the purpose of business" is used which is a very wider term and specific. In support of our contention we rely upon the decision of Hon'ble Kolkata HC in the case of CIT Vs Eveready Industries (India) Ltd. (2018) 258 Taxmann 0313 (Cal.), wherein, it was held as under:- "8. Mr. Agarwal, learned counsel for the Revenue argues that the assessee had not been in possession of the property and a dispute was going on between them and the lessor. The keys of the premises were lying with the police. Therefore, the application of Section 30 was dependent upon the findings whether the assessee was a tenant, paying rent and using the demised premises for the purpose of its business. We find on an examination of the order of the Tribunal that all these factual issues have been answered in favour of the assessee. Now, when these facts are in favour of the assessee, it is not within the domain of a Court exercising jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their business prudence to make attractive interior and install other amenities to attract the customers, as the Jaipur is a tourist centric place so having attractive showroom is an essential need to run a jewellery show room. Other relied case of Sony India Pvt. Ltd. Vs CIT (2006) 285 ITR 213 (Delhi) is also distinguishable as the expenses is fully allowable to the assessee U/s 30 itself, whereas, in that case expense was not allowable u/s 37 of the Act. Hence, in view of forgoing facts and circumstances, the impugned disallowance of Rs. 27,50,000/- kindly be deleted in full. 27. The ld DR is heard who has relied on the findings of the lower authorities. 28. We have heard the rival contentions and perused the material available on record. The relevant provisions of section 30 which are under consideration reads as under: "30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business99 or profession, the following deductions shall be allowed- (a) where the premises are occupied by the assessee- (i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of repairs to the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed even prior to the date of formal inauguration, the assessee shall be eligible for claim of rental payments which is however not the case before us. 30. Having said that, the question is where there is no dispute that the rent payment has been made by the assessee firm for taking on rent premises for setting up a new showroom and thereby, expanding its existing business, can the same be allowed in the year the premises are ready to be used. Given that in the instant case, the assessee has also incurred expenditure on fit-outs/improvements on such leased premises, and has accumulated and shown the same under the head "work-in-progress", drawing similar analogy, we are of the view that rent payment, pertaining to the period the premises are not ready to be used, can be accumulated and the same can be claimed and will be allowed in the year in which the premises were ready to be used i.e, next assessment year 2014-15. The ground of appeal is disposed off in light of aforesaid directions. 31. In ground No. 6 the assessee has challenged the sustenance of addition of Rs. 27,54,000/- on account of unexplained cash credit U/s 68 of the IT Act. 32. Briefly the facts of the case are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in its bank at Hyderabad, Bangalore, Lakhimpur, Tinsukia etc. The story appears to be feasible on paper but not in reality. Further, it appears that some of the names were repeating, the appellant has not filed any confirmation from them to substantiate its contention. It is interesting to note that in these cases, as per the sale invoices, no cash payment was made in part at the sale counter of the appellant and the entire amount was deposited at the places of the buyers. Therefore, it is held that the appellant could not explain the source of cash deposits in its bank accounts at different places of the country satisfactory and thus the AO was justified in making the impugned addition under consideration. (iv) The contention of the appellant that it is maintaining its records on Tally software and immediately on sale and purchase of trading items, it gets reflected in all the related places, appears not be correct factually, it is noted that the appellant was issuing invoices manually and not through tally software and its stock register, apparently was not maintained on tally software." 34. Against the said findings, the assessee is in appeal before us and has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000/- Cash Sale made on 26.09.2012 totaling to Rs. 4,39,045/-. PBP-53-54 2. 01.10.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash Rs. 86,632/- and Cash Sale of the day Rs. 1,20,000/-. PBP-55 3. 31.10.2012 Cash Deposited 2,30,000/- Directly deposited by customer towards cash sale vide Bill Nos. 185 & 186. PBP-51 4. 01.11.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash at Rs. 12,83,665/- (Sale of Rs. 56000/- on 27.10.2012, Rs. 1,57,700/- on 29.10.2012 and Rs. 1,47,906/- on 31.10.2012 ) PBP-55-57 5. 06.12.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash on 01.12.2012 Rs. 11,74,957/- and Cash Sale of Rs. 1,90,202 on 03.12.2012. PBP-58 6. 05.01.2013 Cash Deposited 2,00,000/- Out of Opening Balance of Cash on 01.01.2013 Rs. 15,07,765/- and Cash Sale of Rs. 1,02,000/- on 04.01.2013 PBP-60 Total Cash Deposited 13,77,000/- 37. It was further submitted that the CIT(A) made the observation that cash deposited by parties directly in the bank account of assessee is difficult to believe. It is submitted that there is nothing wrong if the purchaser is depositing the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh sales has been made by revenue. This had resulted into double taxation. Once the AO has accepted the turnover declared by the assessee then cash deposit out of that amount shall not be treated as unexplained. In support reliance was placed on the following decision:- * R.B. Jessaram Fatehcahnd (Sugar Dept.) vs. CIT, Bombay City-II - 1969 (7) TMI 10 (Bom HC) * Shri Naresh Dayanand Chandani Vs. ACIT in ITA No.5339/Del /2017 vide order dated 25.05.2018. Alternatively and without prejudice to the above, it was submitted that addition u/s 68 is not sustainable once books of accounts have been rejected by the AO u/s 145(3) and in support, reliance was placed on various decisions. 40. The ld DR is heard who has relied on the findings of the lower authorities. 41. We have heard the rival contentions and perused the material available on record. Firstly, it is noted that there seems to an arithmetical error given the details of cash deposits on various dated not found satisfactorily explained totaling to Rs. 13,77,000 and the addition finally made by the AO totaling to Rs. 27,54,000. Therefore, to this extent, the addition stand modified and the limited issue relates to addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en used for business purpose. During the course of first appeal, Ld. CIT(A) restricted the interest paid to the family members to 12% by holding as under:- "I have duly considered the submissions of the appellant, assessment order and the material placed on record. During the appellate proceedings, the AR was required to submit the rates at which interest has been charged and paid to the above persons and from the details furnished, it was observed that the appellant has charged interest @ 12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mittal whereas, it has paid interest @15% to them and no interest appears to be paid to Ms. Sangeeta Mittal. In view of these facts, the interest is to be allowed @ 12% to these entities. The appellant has allowed interest of Rs. 7,85,404/- to the above three persons @15% which is being restricted to 12% which would result in addition of Rs. 1,57,081/- to the income of the appellant against disallowance of Rs. 7,06,363/-. It may be mentioned that loans to these persons were provided by the appellant firm on account of purchase of showroom at Maan Upasana Mall, the interest on which has been disallowed by the AO and upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh borrowings from family members during the year but arising out of past borrowings on which the assessee has been paying interest @ 15% in the earlier years as well and which has been accepted by the Revenue. The fresh borrowing during the year from HDFC bank has been utilized for advancing to the partners and the family members and there is thus a direct nexus which has been established between the said borrowing and advancing the funds to the family members and has no nexus with the past borrowings. Further, the assessee has contended that the borrowing from family members being unsecured as compared to bank borrowings which was claimed to be taken on collateral of personal property of the partners and family members and thus carries a differential rate of interest. We find that the internal comparable relied upon by the Revenue is not appropriate given the qualitative difference in the two loan transactions and it would have been appropriate to compare the related party transaction with an independent third party transaction carrying the same qualitative unsecured loan parameters. In absence of the same, the addition so sustained by the ld CIT(A) is hereby directed to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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