TMI Blog2011 (1) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... e u/s 40A(3) - There is nothing to suggest that the AO ever brought any material on record on this aspect in respect of the fair market value of the facilities, for which the payment had been made, before concluding that expenditure was excessive or unreasonable. We are of the opinion that disallowance under section 40A(2) is to be considered vis-a-vis the market value of the services or facilities or on fulfilment of any of the other ingredients mentioned hereinbefore and not the individual action of the assessee in charging or paying interest. Regarding Addition on account of suppressed GP - Since the AO had not recorded any findings for rejecting the book results and applying the gross profit rate of 26% in the year under consideration, we are of the opinion that the ld. CIT(A) was justified in deleting the addition. Even the Revenue have not placed before us any material controverting the aforesaid findings of facts recorded by the ld. CIT(A). If there was no challenge to the transactions represented in the books, then it is not open to revenue to contend that what is shown by the entries is not the real state of affairs. - ITA NOS. 2055 & 2056/AHD/2008 - - - Dated:- 7-1-201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crutiny. The assessment in this case was completed on the returned income on 16.2.2005. Subsequently on examination of records, the ld. CIX-III, Ahmedabad found the aforesaid order dated 16.2.2005 erroneous insofar as prejudicial to the interest of Revenue and accordingly, vide his order dated 09-01-2007 u/s 263 of the Act, directed the Assessing Officer (AO) to examine the issue of fall in Gross Profit, claim of shortage in tobacco and packing material and genuineness of advances received by the assessee from customers and thereafter, make a fresh assessment after giving opportunity to the assessee. In pursuance to these directions of the ld. CIT, the AO on enquiries noticed that GP rate in the year under consideration declined to 24.92% vis-a-vis 28.13% of the preceding year. To a query by the AO, the assessee explained that : (a) the average purchase price of raw tobacco increased during the year under consideration from Rs.36.67 to 37.48 per kg. as compared to the last year. (b) the cost of packing material also increased by 19% during the year as compared to the last year due to use of higher quality of packing material, resulting in increase in cost from Rs. 1.35 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 TTJ 165 (Mum.) and Pushpanjali Dyes Printing Mills Pvt. Ltd. v. Jt. CIT 72 TTJ 86 (Ahd.). In the light of these submissions, the learned CIT(A) deleted the addition in the following terms: "3.2.1. On careful consideration of the submissions made by the AR of the appellant, I am of the opinion that the addition made on account of suppressed GP is not justified in view of the facts of the appellant's case and more particularly when the appellant had logically explained the elaborate reasons for the fall in GP during the year under consideration. Further, I am of the view that the appellant's case is also squarely covered by the ratio of the above ITAT decisions (supra) which are relied upon by the AR of the appellant. Having considered the facts and circumstances of the case, I am of the view that without pointing out any specific defects in the books of account maintained by the assessee the invocation of the provisions of section 145(3) is not justified. 3.2.2. Therefore having considered the facts and circumstances of the case and in the light of the above discussion, as well as the ratio laid down in the above referred ITAT decisions, I am of the opinion that the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon'ble Gujarat High Court in the case of CIT v. Amitbhai Gunwantbhai, 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guesswork. The AO, without recording any finding that the books of account maintained by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2007 that interest was paid @ 7% on trade deposits, which were of the nature of security deposits obtained from their dealers and , therefore, could not be considered at par with the normal loans and advances received by them from the persons covered u/s 40A(2)(b) of the Act. It was also contended that in several business circles, even no interest was paid on such trade deposits and whenever interest was required to be paid, it was paid at nominal rates. As regards higher rate of interest paid to the partners, it was submitted that this was paid in accordance with the terms and conditions of the partnership deed and was well within the limits prescribed u/s 40(b) of the Act. Therefore, it could not be considered as violation of section 40A(2)(b) of the Act. For the interest paid to the HUF of one of the partner @ 12%, it was pointed out that this had been paid on the basis of past practice of the assessee's firm. Accordingly, it was argued that interest paid to the partners and the other person covered u/s 40A(2)(b) of the Act was not excessive or unreasonable and therefore, no disallowance was called for. After considering these submissions, the AO concluded that if the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case as discussed above and also relying upon the decisions of the Hon'ble ITAT in case of Ranjit Soap and the decision of Hon'ble Madras ITAT in the case of DCIT v. India Cine Agencies - IT Appeal Nos. 499 500 (Mad.) of 1991 dated February 10, 1995, I am inclined to accept the arguments advanced by the authorized representative. Hence, the A.O. is directed to delete the addition made by him at Rs. 8,11,902. Similarly, the addition made by the A.O. at Rs.73,844 is also deleted." 8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The learned DR supported the order of the AO while the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A). 9. We have heard both the parties and gone through the facts of the case. The issue in the first ground raised by the Revenue is as to whether or not the question of allowing or disallowing interest or part thereof to a partner is covered by the provisions of section 40A(2)(a) of the Act? For this matter, we may refer to the provisions of section 40A(2)(a) of the Act, the relevant portion of which reads as follows : "40A(2)(a). Where the assessee incurs any e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Steel Manufacturing Engineering Co. (P.) Ltd., 117 ITR 569 (SC). The provisions of section 40A(2)(a) came up for consideration before the Hon'ble Karnataka High Court in T.T. Pvt. Ltd. v. ITO [1980] 121 ITR 551, and Venkataramaiah J., at pages 567 to 570 of the reported judgment, considered the scope of the aforesaid provision in the light of the extant provisions of section 40 and observed that the goods, services and facilities referred to in section 40A(2)(a) are those which have a market value and which are commercial in character. In the case of Chhajed Steel Corporation v. Asstt. CIT (2000) 69 TTJ (Ahd.) 232 : (2001) 77 ITD 419 (Ahd.) it was held that the provisions of sections 40(b) and 40A(2) operate in different fields and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res and other details about the exhibition in its support. On perusal of the same, the AO observed that the said trade exhibition related to "Printing Industries" and did not relate to the business of the assessee. But, the assessee explained that the exhibition "DRUPA 2004" was not a seminar for printing industry only and it was one of the largest International Trade Fair for "Printing and Packing Industry". It was argued that such foreign travel expenditure was incurred in connection with its business activity only and, correctly claimed as allowable expenses. However, the AO while relying on decisions in Cooper Engineering Ltd. v. CIT 135 ITR 597 (Mumbai), Sarabhai Technological Development Syndicate Pvt. Ltd. v. CIT 254 ITR 84 (Guj.), Ambica Mills Ltd. v. CIT, 54 ITR 167(Guj.), Gujarat Mc-Gaw Ravindrakumar Laboratories v. CIT, 207 ITR 239(Guj.) and Saraswati Industrial Syndicate Ltd. v. CIT(A), 84 ITR 544 (P H) concluded that the foreign travel expenses of Rs. 1,26,705 incurred for the partner travel towards DRUPA 2004 exhibition was in no way related to the assessee's own business, especially when the partner also visited other tourist places like Zurich, Switzerland, Geneva, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties and gone through the facts. As is apparent from the facts of the case, the AO disallowed the claim for expenditure incurred on foreign visit of the partner of the firm on the ground that expenses of Rs. 1,26,705 incurred by the partner towards DRUPA 2004 fair for printing and packing industry in Germany was in no way related to the assessee's own business while the partner also visited other tourist places like Zurich, Switzerland, Geneva, UK and Paris etc. On appeal, the ld. CIT(A) deleted the disallowance on the ground that printing and packing was an integral part of business activity of the assessee and that the visit to the DRUPA Trade Fair by its partner was certainly of an advantage to the business of the firm. The ld. CIT(A) also found, that the expenditure incurred in connection with the visit to U.K., was separately debited to the partner's capital account as personal expenditure. The learned DR did not place any material before us controverting these findings of the ld. CIT(A) except pointing out that the partner visited many other places like Zurich, Geneva and Paris etc. and there is nothing to suggest that expenditure on visit to these places was in any way c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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