TMI Blog2011 (6) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... hase price to its sister concern - As he suffer no losses - AO estimating GP rate at 15% and attached Provision of 40A(2) HELD THAT:- It is not apprehensible that the assessee has entered into a new venture and had made investment in the purchase of stock which was sold with no margin of profit to its sister concern. In each line of business some margin of profit is earned by the person trading in the business and in the absence of any such profits, we are in agreement with the order of the authorities below that the provisions of section 40A(2) are attracted in the case because the transaction was with a sister concern and not at the market rate as the goods were sold at its cost price. However, we find the rate of 15% applied by the AO to be excessive and direct the Assessing Officer to apply net profit rate of 5% to the transactions to determine the additional income in the hands of the assessee. Non genuine Expenses in Profit and Loss Account - CIT(A) confirmed the addition of 10% of expenses as debited to the profit loss account - HELD THAT:- In the first instance, there is no merit in such disallowance of the expenses, in cases where an estimation of income is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited u/s 44AB of the Act. The Assessing Officer noted from the purchase bills and the details of valuation of stock that most part of the jewellery was purchased during the year 2005. As per the Assessing Officer the rates in financial year 2005-06 of gold had increased year by year and there was not a single instance that the rate of gold / jewellery came down. The Assessing Officer noted from the trading account of the assessee under Gold jewellery, that assessee had opening stock of Gold Jewellery more the purchases made during the year and observed that the purchases made in the earlier years were at lower rates as compared to the current year. 6. Similarly, the assessee had shown the sales lesser than as compared to the closing stock available with the assessee at the end of the year. In his reply dated 7.12.2009, the assessee claimed that it was engaged in trading of gold jewellery where ready made jewellery was purchased and sold as such as could be verified from the purchases and sale bills. The Assessing Officer noted the assessee to have shown income from labour charges at ₹ 7,36,693/- and concluded that the assessee during the year had manufactured about 6139 gm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and the same basis of valuation of opening and closing stock has been followed by the assessee and accepted from year to year. Further, in respect of the labour charges, it was pointed out that such charges are charged in each and every sale bill and the same are shown as part of its receipts. In the absence of any evidence found of purchase / sales being made outside the books of account there was no merit in the rejection of accounts. 8. Further, it was explained that if jewellery was purchased in the year 2005-06, the same if not sold, is lying with the assessee in its stock and even if there is increase in the rate of gold, the profit on the same would be reflected in the year when it is sold. Further, reliance was placed on various judicial pronouncements which shall be referred by us in the paras herein below. The Ld. DR for the Revenue relying on the order of the Assessing Officer and CIT(A) pointed out that the assessee was maintaining cash book and ledger and no stock register was maintained by the assessee. The Ld. DR further pointed out that though assessee claims to have maintained bill wise details of the stock but no such record was produced. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is valued at cost or market price, whichever is less. The assessee in its notes of accounts had declared the valuation of stock at cost or market price, whichever is less. The break up of the valuation of closing stock is placed at pages 30 31 of the paper book, in which the assessee has furnished the details of weight/quantity, its value, date of purchase, bill numbers and the name of the party/suppliers. The perusal of the list of stock of gold reflects that the stock shown by the assessee was purchased either in the preceding year or during the corresponding year. Even if we accept the observation of the Assessing Officer that the rate of gold had increased form 2005 to 2007, because the assessee was declaring certain stock which was purchased in 2005 as part of its stock, does not warrant the addition on account of rise in the price of gold. The stock shown by the assessee is being valued either on cost or market price, whichever is less and in case there is a rise in the gold price, the stock would continue to be valued at cost and would not effect the current profits shown by the assessee. 10. The next objection of the Assessing Officer was that despite the incr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - in its Profit and loss account and the Assessing Officer was of the view that as the assessee was engaged in the trading of gold and jewellery and there was no relevance of income shown from labour charges. The Assessing Officer was thus of the view that the assessee had engaged in the manufacturing of gold jewellery, which was sold outside the books of account for which the said labour charges were received. The explanation of the assessee in this regard was that in addition to the sales reflected in its sale bills, the assessee sometimes was recovering job charges, which was shown as part of its receipts in the trading account. The assessee during the year had shown sale of diamond jewellery at ₹ 12.87 lacs, gold jewellery at ₹ 1.15 crores, silver jewellery at ₹ 2.66 crores and had against the above said sale consideration had received labour charges at 7,36,693/-. The said labour charges were duly reflected in the sale bills alongwith the sale of jewellery items and we find no merit in the observation of the Assessing Officer in estimating the value of gold jewellery manufactured by the assessee and sold outside the books of account, in relation to the labour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are that the assessee in addition to the carrying on its business of sale and purchase of gold and gold jewellery had also carried on the business of sale of cloth. The said business was started during the year under consideration and total purchases of ₹ 21,87,993/- were made by the assessee. The sales were made to its sister concern M/s Babu Design Pvt Ltd. at the same price. The assessee was show caused as to why GP rate of 15 to20% on the sale should not be adopted. The Assessing Officer was of the view that though the assessee was carrying on the said business on different floor but it was required to maintain separate accounts for the said business, which were not done. The Assessing Officer invoked the provisions of section 40A(2) of the Act and observed that interest on the advances made to the sister concern, being the sale consideration of the cloth sold by the assessee was chargeable in the hands of the assessee. Accordingly, the addition of ₹ 3,28,200/- was made by applying the rate of 15% on the sale value of cloth. The CIT(A) uphold the addition made by the Assessing Officer. The assessee is in appeal against the aforesaid addition. 18. On the perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) observed that there was an element of personal use in Car, telephone expenses, depreciation, etc and also there was a likelihood of unvouched expenses for tea, food, misc. expenses etc and accordingly the addition made by the Assessing Officer was held to be justified. 21. We have heard the rival contentions and perused the records. The assessee has furnished on record the profit and loss account for the year under consideration under which various expenses have been claimed on account of the expenses claimed to be incurred for carrying on of the business of the assessee. The Assessing Officer made an adhoc disallowance of the 10% of the expenses since the books of account were rejected in the case of the assessee. In the first instance, there is no merit in such disallowance of the expenses, in cases where an estimation of income is made by rejecting the books of account. Further, the Assessing Officer has failed to point out the exact expenses which are not verifiable. Taking note of the expenses claimed by the assessee during the year under consideration, we find that major expenses relating to salary, salary of partners, depreciation, interest, rent account and ele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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