TMI Blog2020 (10) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... e s accounts were duly audited wherein various stock register as well as quantitative details of traded goods were furnished. As uncontroverted fact that not even a single piece of diamond was found at the premises of the suspicious suppliers which came to light during search / survey proceedings. The said aforesaid facts would justify the stand of AO in rejecting the profits shown on these purchases and make estimated additions to account for undeclared profit element earned by the assessee on these purchase transactions. As rightly concluded that the said purchase-sale transactions recorded in the books would not reflect true picture of profits earned by the assessee on these transactions and purchase rate as mentioned in the supplier s sale invoices could not be accepted. Estimation of profit - assessee has reflected overall Gross profit (GP) Rate of 6.65% during the year as against corresponding rate of 6.11% in preceding year. AR has stated that since the profit earned on these suspicious transactions is 7.25%, no further addition should be made. We are not inclined to accept the said plea. Assessee was dealing in low margin commodity like diamond which attract lower VAT ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re funded out of credit float enjoyed by the assessee. Further, the assessee has reflected taxable income of ₹ 204.42 Lacs which could be said to have accrued evenly throughout the year. Therefore, unless direct nexus of borrowed funds vis- -vis capital withdrawals was established, no such disallowance u/s 36(1)(iii) could have been made. We find that Ld. AO has failed to bring on record this nexus - Decided in favour of assessee. - ITA No. 4434/Mum/2018 And ITA No. 4435/Mum/2018 And ITA No. 4436/Mum/2018 - - - Dated:- 22-10-2020 - Hon ble Shri Amarjit Singh, JM And Hon ble Shri Manoj Kumar Aggarwal, AM For the Assessee : Shri Suchek Anchaliya, Ld. AR For the Revenue : Shri Michael Jerald-Ld. DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1.1 Aforesaid appeals are recalled matter since the appeals were earlier disposed-off vide order dated 27/03/2019. However, the order has subsequently been recalled, upon assessee s misc. application MA Nos. 413-415/Mum/2019 order dated 09/12/2019. Accordingly, the appeals have come up for fresh hearing before this bench. Facts as well as issues are stated to be pari-materia the same in all the three years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the expenses of ₹ 2,24,398/- attributed for exempt income as per Section 14A r.w.r 8D of the Income Tax, 1961. 10. The Ld. CIT(A) erred in confirming charging of interest under Section 234A, 234B, 234C and 234D of the Income Tax Act 1961. 11. The Ld. CIT(A) erred in confirming the initiation of the penalty proceeding under Section 274 rws 271(l)(c) of the Income Tax Act, 1961 As evident, the assessee is aggrieved by certain additions / disallowances as made by Ld. AO while framing the assessment which has subsequently been confirmed by Ld. first appellate authority. 1.3 The Ld. Authorized Representative for Assessee, Shri Suchek Anchaliya, advanced arguments in support of various grounds of appeal. Our attention has been drawn to the documents as placed in the paper-book. Reliance has been placed on certain judicial decisions, the copies of which has been placed before us. The Ld. Departmental Representative (DR), Shri Michael Jerald, on the other hand, drawing attention to the finding of lower authorities, pleaded for dismissal of appeal. 1.4 We have carefully considered the rival submissions, perused relevant material on record and deliberated on vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that the assessee purchased polished diamond from M/s Daksh Diamonds and exported the same after earning Gross profit Rate of 7.2% on such sales. The assessee controverted the statements made during search proceedings on the said group by submitting that the statements were general, self-contradictory and a unilateral act. As against this, to support the purchase transactions, the assessee filed documentary evidences in the shape of ledger extracts, account confirmation copy, Income Tax Return as well audited financial statements of M/s Daksh Diamond. The bank statements evidencing payment to the suppliers through banking channels was also produced. The attention was drawn to the fact the confirmation was given on 01/08/2015 i.e. much after the date of recording of the statements and hence, the same would amount to retraction of the statement. Reliance was placed on the decision of Hon ble Supreme Court in the case of Kishanchand Chellaram V/s CIT 125 ITR 713 for the submission that the assessee should have been confronted with the evidences being relied upon by the department. Similar documentary evidences were submitted with respect to purchase as well as unsec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO worked out aggregate disallowance of ₹ 2.24 Lacs in terms of Rule 8D(2) which comprised-off of interest disallowance u/r 8D(2)(ii) for ₹ 1.98 Lacs and indirect expense disallowance u/r 8D(2)(iii) for ₹ 0.26 Lacs. 3. Although the assessee preferred further appeal before Ld.CIT(A) and assailed the various additions / disallowances by way of elaborate written submissions, the same could not find favor with Ld.CIT(A) who upheld the action of Ld. AO in making various additions / disallowances. Aggrieved, the assessee is in further appeal before us. After careful consideration of lower authorities, documentary evidences and various judicial pronouncements, our adjudication to the various issues would be as given in succeeding paragraphs Validity of reassessment proceedings Rejection of Books 4. Upon perusal of reasons recorded to initiate reassessment proceedings as placed in the paper-book, it is evident that the reassessment proceedings have been triggered pursuant to receipt of certain information from DGIT (investigation), Mumbai that the assessee obtained bogus loans from certain entities managed and controlled by Shri Bhanwarlal Jain Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as the estimation of profit is concerned, we find that the assessee has reflected overall Gross profit (GP) Rate of 6.65% during the year as against corresponding rate of 6.11% in preceding year. The Ld. AR has stated that since the profit earned on these suspicious transactions is 7.25%, no further addition should be made. However, in the background of facts as enumerated by us on this issue, we are not inclined to accept the said plea. Keeping in view the fact that the assessee was dealing in low margin commodity like diamond which attract lower VAT rate of 1% and in view of the overall GP rate reflected during the year, we restrict the estimation to 2% of aggregate purchase of ₹ 3,36,45,197/-. The same comes to ₹ 6,72,904/-. The impugned additions, thus made by Ld. AO, stand restricted to that extent. Ground No.5 stands partly allowed. Addition of Unsecured Loans, interest commission 6. Ground Nos. 6 to 8 assails captioned additions. From the order of Ld. AO, we find that the unsecured loans have been treated as unexplained cash credit primarily relying upon third party statements made during the course of search operations. In terms of Section 68, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest disallowance as well as commission / brokerage addition as made against the same would not survive. We order so. These grounds stand allowed. Disallowance u/s 14A 7. Upon perusal of computation of income, it transpires that the assessee has earned exempt dividend income of ₹ 40,972/- during the year. Upon perusal of material on record, we find that the assessee has opening investment in shares as ₹ 41.25 Lacs whereas the closing value is ₹ 62.93 Lacs i.e. there is an increment of ₹ 21.68 Lacs during the year. However, the opening share investment which have fetched dividend is ₹ 5.38 Lacs and the closing value of such investment is ₹ 6.11 Lacs. The average of two works out to be ₹ 5.74 Lacs. In our opinion, while computing the said disallowance, only those investments which have fetched exempt income during the year are to be considered. Further, the overall disallowance could not exceed the exempt income earned by the assessee during the year. Therefore, we direct Ld. AO to re-compute the said disallowance considering only those investments which have fetched exempt income during the year. Ground No.9 stands partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance u/s 14A after considering exempt income yielding investments only. The overall disallowance u/s 14A would not exceed the exempt income earned by the assessee. 10.2 The interest disallowance u/s 36(1)(iii) stem from the fact that partners closing capital account had debit balance of ₹ 109.46 Lacs and it had advanced interest free loans of ₹ 7 Lacs. However, the assessee was having secured / unsecured loans and it incurred interest expenditure of ₹ 68.89 Lacs during the year. The Ld. AO formed an opinion that interest bearing funds were withdrawn from the firm being capital withdrawn by the partners and interest free advances. 10.3 The assessee submitted that the capital balances had credit balances in all the earlier three years. The firm did not provide any interest on credit balances nor charged any interest on debit balances. The funds were stated to be withdrawn for commercial expediency. However, not convinced Ld. AO, applying rate of 12%, computed interest disallowance of 5.32 Lacs. The stand of Ld. AO, upon confirmation by Ld. CIT(A), is under challenge before us. 10.4 Upon careful consideration, it is quite evident that the firm has not p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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