TMI Blog2016 (4) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... m assessment year 2008-09 onwards. We have observed that the assessee-firm has worked the disallowance based upon the total expenditure claimed of ₹ 11,09,724/, after excluding the voluntary disallowances made by the assessee-firm of sales promotion of ₹ 5,42,800/-, STT of ₹ 6,036/- and necessary adjustment for depreciation as debited in P & L A/c vis-ŕ-vis allowance as per the Act and then worked out the disallowance u/s 14A of the Act which is based upon the proportion of the exempt income to the total income as per audited financial statement, which in our considered view, is a reasonable basis as total expenses claimed by the assessee-firm as revenue expenditure was to the tune of ₹ 11,09,724/- in the return of income filed with the Revenue and not ₹ 16,58,665/- as contended by the authorities below , which amount of ₹ 11,09,724/- was arrived at after the disallowance voluntarily made by the assessee-firm as set out above. Thus, we hold that disallowance of ₹ 1,27,914/- as worked out by the assessee-firm u/s. 14A of the Act is quite reasonable and is correct disallowance worked out by the assessee-firm . The orders of the CIT(A) upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have directed the Assessing Officer to restrict the disallowance under section 14A of the Act at ₹ 1,27,914/-. 3. The brief facts of the case are that the assessee is engaged in the business of trading in grey cloth. 4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act , the AO observed that the assessee-firm has shown purchases of cloth from M/s. Divya Fabrics amounting to ₹ 18,83,061/- and from M/s. N.M. Corporation amounting to ₹ 16,96,163/-. Notices were issued by the AO u/s 133(6) of the Act, to both these parties to verify the genuineness of the transaction. However, these notices have returned unserved with the remarks of postal authorities as Not Known and accordingly the assessee-firm was asked to explain why these purchases should not be treated as bogus and the addition should be made accordingly. In reply, the assessee-firm has submitted that these parties are genuine, however they have closed their shops and the present whereabouts are not known. The A.O. rejected the contention of the assessee-firm as the parties are not traceable on the given address and also due to the reason that the copies of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the assessee-firm submitted that assessee-firm has asked for the present addresses from the two parties and are expecting the reply from the parties within ten days. The assessee-firm submitted that the parties have acknowledged the copy of duplicate bills when they have delivered the goods to us, therefore the question of original delivery challan etc. does not arise. Since the goods have been purchased from Mumbai therefore the question of Octroi receipts etc. are not applicable. The copy of details of payment made to the parties was submitted along with the copy of bank statement. The assessee-firm further vide its letter dated 23/03/2010 submitted the letters received from Mr. Rakesh Gupta stating to be a Prop. of M/s. N.M. Corporation and M/s. Divya Fabrics to the assessee-firm stating that the businesses have been discontinued due to huge losses. Subsequently the notices u/s 133(6) of the Act were sent by the AO on the addresses appearing on the letter heads of the parties. The notices sent on these addresses also received back with the remark Not Known from the postal authorities. The AO in remand proceedings noted that there is no change in addresses at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The assessee-firm submitted that the company purchased 6550.40 and 5661.40 meters of cloth from the above parties respectively. The assessee-firm submitted that the quantities of cloth so purchased were sold to M/s Astha Silk Industries and M/s. Shree Ram Sales and Synthetics at various dates during the financial year involved. A statement summarizing the quantity of goods purchased, purchase value, vis-a-vis goods sold, sales amount and the gross profit generated thereon was filed and it was submitted that it is impossible to effect the sales aggregating to ₹ 43,96,524/- and realize the gross profit of ₹ 8,17,300/- there-from on these purchases from M/s. N. M. Corporation and M/s. Divya Fabrics. The amount realized from sale of quantities of cloth which is alleged as 'bogus purchases' has been offered for tax and has been assessed as business income, therefore, in case the purchases are construed as bogus or not-genuine then the corresponding sales should not be subjected to tax. The payment for the said purchases was made by the assessee-firm through crossed account payee cheques and the details of bank account statement, ledger accounts and other details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and sales duly reconciled were submitted. The assessee-firm also sold the goods valuing ₹ 43,96,524/- with respect to these purchases, and realized gross profit of ₹ 8,17,300/- with respect to the afore-stated purchases made from these two parties, which profit was offered to taxation in the return of income filed with the Revenue. The Revenue has not doubted the sales made and profit realized on sales of these goods which were purchases from these two parties , while the revenue is only doubting purchases which is not permissible. The accounts of the assessee-firm were duly audited. The books of accounts are not rejected by the Revenue. The stock reconciliation was duly submitted. The goods so purchased from these two parties yielded gross profit of ₹ 8,17,300/- which was offered for taxation. The ld. Counsel submitted that without making purchases, it is impossible to effect the sales aggregating ₹ 43,96,524/- and realize the gross profit of ₹ 8,17,300/- and the said profit has been offered for taxation. It was also submitted that fabric is exempt from MVAT and thus there was no requirement for the suppliers to get themselves registered under the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 35,79,224/- made from these two parties. The assessee-firm had submitted that it earned gross profit of ₹ 8,17,300/- from the sale transactions with respect to transactions of purchases with these two parties namely M/s Divya Fabrics and M/s. N M Corporation and the amount of profit has been duly offered for taxation. These facts have remained uncontroverted by the Revenue. As per the assessee-firm , trading in fabrics is exempt from the levy of Maharashtra Value Added Tax(MVAT) for which copies of the notification by MVAT department is placed in paper book and the assessee-firm submitted in view of exemption from MVAT on fabrics , there was no requirement for these two suppliers of fabric to obtain registration under MVAT/CST with respect to the items supplied to the assessee-firm by these two parties. The assessee-firm s books of account were duly audited u/s. 44AB of the Act and the copies of audited accounts were submitted, which are placed in the paper book filed by the assessee-firm before us. We have observed that the notices sent by the Revenue Authorities to the parties have been returned un-served. In this regard the assessee-firm submitted that the sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be added to the income of the assessee-firm to fasten liability of taxation and we are of the considered view that the CIT(A) erred in confirming and sustaining the addition of ₹ 35,79,224/- to the income of the assessee-firm on account of purchases made by the assessee-firm from M/s Divya Fabrics and M/s N M Corporation as made by the AO in the assessment order and we delete the additions of ₹ 35,79,224/- made by the A.O. and as confirmed /sustained by the CIT(A) to the income of the assessee-firm. We order accordingly. 11. During course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the AO observed that assessee-firm has claimed exempt income amounting to ₹ 19,96,264/- and has debited other expenses amounting to ₹ 16,32,455/-. The assessee-firm was asked to explain whether the disallowance u/s 14A of the Act has been worked out as per Rule 8D of the Income Tax Rules, 1962. In reply, the assessee-firm , without prejudice, submitted the revised computation of disallowance u/s 14A of the Act as per Rule 8D of Income Tax Rules, 1962 , amounting to ₹ 3,31,780/-. The A.O. while relying upon the decision of Special Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional and other administrative purposes which are necessary for the purpose of running of the business and there is no nexus between the expenditure such as rent and amenities, sales promotion expenses etc. and the earning of tax exempt dividend income and long term capital gains. The assessee-firm relied on the decision of Hon ble Punjab and Haryana High Court in the case of CIT v. M/s Hero Cycles Ltd (ITA No. 331 of 2009 - 4 November 2009) and the decision of Hon ble Bombay High Court in the case of CIT v. Mirza Ataullaha Baig (1992) (202 ITR 291) which supports the view that as Rule 8D of Income Tax Rules,1962 is inserted from 24 March 2008 without any express mention about the retrospective amendment, the same would be applicable only from the assessment year 2008-09. The CIT(A) observed that the A.O. has worked out disallowance under section 14A of the Act in terms of the method prescribed under Rule 8D of the Income Tax Rules, 1962 . The Hon ble Bombay High Court in a recent judgment dated 12/08/2010 in Godrej Boyce Mfg. Co. Ltd v. DCIT in IT Appeal No. 626 of 2010 and WP No.758 of 2010 (( 2010) 328 ITR 81(Bom.HC)) has held that Rule 8D of the Income Tax Rules, 1962 is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 1,27,914/- . The assessee-firm submitted that the total expenditure debited to Profit and Loss A/c is ₹ 16,58,665/- (inclusive of interest , administrative, operative expenses and depreciation ) out of which the assessee-firm has suo-moto disallowed of its own volition ₹ 5,42,880/- on account of sales promotions , STT of ₹ 6,036/- and necessary adjustment for depreciation as debited in P L A/c vis- -vis allowance as per the Act and the benefit of such expenses as revenue expenditure per-se of the business carried on by the assessee-firm was not claimed in the return of income filed with the Revenue, and the expenditure of ₹ 11,09,724/- only was claimed as revenue expenditure in the return of income filed with the Revenue , the working along with audited financial statements are placed in paper book pages 11-27 filed with the Tribunal. The ld. counsel submitted that then the proportionate disallowance u/s 14A of the Act was further worked out in proportion of exempt income to the total income of the assessee-firm as per audited financial statements. The ld. Counsel contended that the Rule 8D of Income Tax Rules, 1962 applied by the A.O. is not correct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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