TMI Blog2014 (5) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... motorcar expenses”, “interest on car loan” and “depreciation” , it should be restricted at 1/10th, as the element of personal nature of expenses has not been rebutted - With regard to the amount disallowed under the professional charges after invoking the provisions of section 40(a)(ia), WC tax and professional tax are concerned, the order of the CIT(A) is upheld – Decided partly in favour of Assessee. Disallowance of Expenses - General expenses, travelling and conveyance expenses and advertising conference and sales promotion expenses – Held that:- The disallowance has been made on the ground that some of the expenses relates to gifts and obligations for the doctors for which there is no quantification of such expenses from the bills which were produced - the reasons for disallowance by the AO as well as the CIT(A) are justified - the major expenses which relates to advertisement, travelling and sales promotion, conveyance, wherein no such quantification has been done either by the assessee – thus, the disallowance of 10% under the heads would sustained – Decided partly in favour of Assessee. - ITA No.3658/Mum/2011 - - - Dated:- 12-2-2014 - SHRI R.C. SHARMA AND SHRI AMIT SHU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion income. The Assessing Officer required the assessee to submit the Profit Loss account to show as to how the assessee has shown the result from his trading activity. From such details, he noted that the assessee is incurring a gross loss on the trading account and from the total commission received at Rs.1.86 crores, the assessee had shown very negligible profit. In response to the show cause notice, the assessee submitted that under the head business income , overall there is profit of Rs.9,74,655 and not loss. The assessee s nature of business of activity is combination of trading of goods, providing annual maintenance, supplying of goods and commission income. The purchase of goods also includes the parts / equipments which are used by the assessee in earning the annual maintenance income as well as the commission income. The purchases of Rs.71,65,232, included the following:- a. spares supplied against Comprehensive Maintenance Contracts (CMC) as part of the terms of such contracts; b. Local parts and spares supplied as part of terms of quotation for supply of Ventilator. The commission income received by the appellant takes care of the expenses incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to this, further disallowance of Rs.37,55,321 on account of loss. Thus, the aggregate addition in the trading account was made at Rs. 42,29,975. The Assessing Officer further noted that in the Profit Loss account, the assessee has debited several expenses which are of personal in nature. These personal expenses aggregated to Rs. 4,75,918. He also added the agricultural income of Rs. 28,000 as the assessee could not produce the evidence with regard to the agricultural produce and treated the same under the head income from undisclosed sources and added the same under section 68 of the Act. Besides this, he also made following disallowances:- Purchases u/s 40(a)(ia) Rs. 24,496 Interest on TDS Rs. 2,169 General Exp. Rs. 15,733 Travelling and Conveyance expenses Rs. 3,63,293 Advertisement Conference Sales Promotion Rs. 2,49,756 5. The assessee, before the learned Commissioner (Appeals), submitted that the gross profit of 17.81% which has been applied by the Assessing Officer b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellate order. The sum and substance of the Assessing Officer s submissions was that the assessee had shown higher gross profit margin only because of the commission income and increase in maintenance contract. Further, the assessee had shown expenses of annual maintenance contract which has been debited in the trading account of sale and purchase of goods, which does not give a true picture. After calling for the assessee s comments, the learned Commissioner (Appeals) again remanded the matter back to the file of the Assessing Officer. In response to the same, a detail remand report was given by the Assessing Officer, the relevant portion of which are as under:- 2. In the submissions made before your honour as per letter dated 22.10.2008, the assessee has given justification regarding trading results declared by him for the year and pointed out that the purchases include item purchased in connection with earning commission income, by way of AMC, items freely supplied to doctors, items purchased for the purpose of demo etc. The bifurcation of these purchases given by the assessee are as under:- Materials supplied free of cost in installation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion income AMC etc. as they are claimed, still assessee has to satisfactorily explain above gross loss. 8. Hence, it is submitted that the addition made by the A.O. towards gross profit addition of trading results declared by the assessee may be considered keeping in view the above facts discussed. Further, report regarding purchases relating to earning of commission income, AMC is being verified by deputing the Inspector of this Circle and the same will be reported as soon as enquiries are completed. 7. The assessee, in response to the said remand report, filed his rejoinder submissions which have been dealt by the learned CIT(A) at Page-7 and 8. The break-ups of gross receipts and the break-up of aggregate purchases as well as the corresponding expenditure incurred against various income earned were as under A. Receipts Nature of receipts Amount (Rs.) Commission Income 1,83,60,066 Annual Maintenance Charges 35,04,868 Trading Sales 56,73,192 B. Purchases A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchases (revised) Rs. 3563380 Sales Rs. 5673192 Free of cost material Rs. 880962 Demo machines Rs. 279022 Proportionate Service charges Rs. 1111901 Gross Loss Rs. (162073) Rs. 5835265 Rs. 5835265 It is seen that still there is gross loss in the trading. Thus total addition of Rs. 10,16,550 disallowed under the head purchases and Rs. 4,45,854 disallowed as clearing charges and custom duty paid are added in the income. Further the figure of loss of Rs. 1,62,073 being not tenable is rejected. The appellant has challenged GP addition also on the ground that books of account have not been rejected. Since these demo machines are forming part purchases but not reflected anywhere as closing stock is always shown at Nil by appellant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after detail exercise, has come to a conclusion that aggregation of purchases reflected in assessee s books of account and trading results are not reliable and the same are liable to be rejected. First of all, she recasted the trading account, wherein the loss of Rs. 1,62,073 was determined. Thereafter, she disallowed the gross loss and applied gross profit rate of 5% on the sales of Rs. 56,73,193. She further proceeded to disallow certain purchases aggregating to Rs. 10,16,553 and also custom duty and clearing charges of Rs. 4,45,854 based on remand report of the Assessing Officer. From the records, it is seen that the assessee has shown business receipts from the following sources. Trading sales Rs. 56,73,192 Commission income Rs. 1,83,60,066 Income from AMC Rs. 35,04,868 Total:- Rs. 2,75,38,126 As against this, the assessee had shown following purchases against the aforesaid business income. Purchases against trading income Rs.35,63,380 Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as partly allowed. 13. In ground no.3, the assessee has challenged the disallowance of Rs. 1,25,054 on account of expenditures under the various heads. 14. The learned Commissioner (Appeals) has confirmed 1/5th of various expenses as personal expenses. The relevant findings and observations of the learned Commissioner (Appeals) are as under:- Ground No.2 deals with disallowance of expenses aggregating to Rs.4,75,918/-. The Assessing Officer has reported in the remand proceedings that appellant did not furnish any evidence to support the same and moreover personal use of car and motor car expenses are not denied and hence 1/5th motor car expenses have been disallowed. The appellant has stated that though for motor car expenses 1/5th of expenses has been disallowed interest on car loan and depreciation had been disallowed in toto. In view of this, 1/5th motor car expenses under the head interest on car of Rs.32,303/- i.e. Rs.6,460/- and motor car depreciation of Rs.2,79,494/- i.e. Rs.55,898/- are sustained along with 1/5th motor car expenses at Rs. 39,067/-, i.e. an amount of Rs.1,01,425/- under these three heads. Other disallowed amount are Rs.68,601/- u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of Rs.3,63,293/- and advertising, conference and sales promotion of Rs.2,49,736/- are sustained. 20. After hearing both the parties, we find that these are ad-hoc disallowance whereby the Assessing Officer and the learned Commissioner (Appeals) has disallowed all such expenses @ 20%. 21. Looking to the fact that the disallowance has been made on the ground that some of the expenses relates to gifts and obligations for the doctors for which there is no quantification of such expenses from the bills which were produced. We are of the opinion that the reasons for disallowance by the Assessing Officer as well as the learned Commissioner (Appeals) are justified. Thus, the major expenses which relates to advertisement, travelling and sales promotion, conveyance, wherein no such quantification has been done either by the assessee or by the Assessing Officer with regard to non-admissible expenses, therefore, on facts and circumstances of the case, we hold that the disallowance of 10% under these heads will meet the ends of justice. 22. In the result, assessee s appeal is partly allowed for statistical purposes. (Order pronounced in the open Court on 12.2.2014) - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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