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2016 (5) TMI 276 - ITAT DELHI

2016 (5) TMI 276 - ITAT DELHI - TMI - Disallowance of purchases - Held that:- The assessee filed confirmations from both the concerns with their PAN and changed address. The assessee produced certificate from bank that the assessee made payments to those parties through account payee cheque, however could not produce the parties as the assessee was not having any business dealings during the assessment period, but the assessee requested the AO to enforce their attendance through section 133(6)/1 .....

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Disallowance of expenditure incurred on foreign travel by the employees of the assessee concern - Held that:- From the observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding of the learned Commissioner .....

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rket value of the services and no finding were given by the Assessing Officer whether the payment was excessive or unreasonable having regard to the fair market value. We donít find any infirmity in the finding of the learned Commissioner of Income-tax(Appeals), on the issue is dispute, and thus, we uphold his finding on the issue in dispute - Decided against revenue

Disallowance on electricity and water expenses - Held that:- The fact of the tripartite agreement among the parties was .....

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f estimation of gross profit by the AO after rejecting books of accounts of the assessee - Held that:- The assessee has demonstrated the reasons for fall in gross profit rate and explained that there was no inconsistency in the inventory and also explained for non-maintenance of consumption of raw material as the assessee was engaged in production of garments for foreign buyers involving number of raw materials and multiple stages of production. The defects in respect of disallowance of unverifi .....

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or The Appellant : Sh. P. DAM Kanunjna, Sr. DR For The Respondent : S/sh. Sunil Gandhi & N.K. Bansal, CA ORDER PER O.P. KANT, A.M.: This appeal of the Revenue is directed against the order dated 28/03/2013 of the ld. Commissioner of Income-tax( Appeals) for assessment year 2008-09 raising following grounds of appeal: 1. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of purchases amounting to ₹ 1,08,66,5 .....

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mmissioner of Income Tax(Appeals) has erred in deleting the disallowance of ₹ 6,44,589/-, out of salary and incentive u/s 40A(2)(b). 4. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) has erred in deleting the disallowance of electricity and water expenses of ₹ 6,18,048/-, when lease agreement specifically states the monthly rent of ₹ 2500/- inclusive of electricity and water expenses. 5. On the facts and circumstances of the case, th .....

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g and export of ready-made garments in the name of proprietorship concern M/s Magnolia Blossom. For the year under consideration, the assessee filed return of income declaring income of ₹ 1,16,28,712/- on 29/09/2008. The case was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (in short the Act ) was issued and served within stipulated period. In the scrutiny assessment order under Section 143(3) of the Act, the ld. Assessing Officer (in short the AO" .....

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#8377; 1,90,43,902/- by applying the gross profit rate of 18% on the turnover of ₹ 37,86,06,390/-. The ld. AO telescoped all the disallowances against the addition of gross profit of ₹ 1,90,43,902/-and no separate addition in respect of the disallowances mentioned above was made. Aggrieved, the assessee filed appeal before the ld. Commissioner of Income-tax (Appeals), who in impugned order, partly allowed the appeal of the assessee. Aggrieved with the relief allowed to the assessee, .....

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submitted that all the documentary evidence including confirmation of the parties, their PAN, current address, payments through bank, purchase bills having inward stamp, goods receipt note, fabric inspection report etc. were filed and, therefore, the purchases were duly held a genuine by the learned Commissioner of Income-tax (Appeals). 3.2 We have heard the rival submissions and perused the material on record. During the scrutiny proceedings, the AO observed that purchases of ₹ 67,99,974/ .....

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was brought to the notice of the assessee, and the assessee was asked to produce these two parties along with supporting evidences. In response, the assessee submitted that the property belonged to Sri Ram Krishnan Sharma and he had given a part of the property on rent during the year 2007 and when he came to know that the tenant was using premises for business purposes he got the property vacated from these two firms. The assessee further submitted that these facts may be he verified through th .....

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staying at the above stated premises and he was dealing in the fabrics in the name of M/s Ma Durga Traders and M/s Vikas Udyog, whereas the confirmation letters in respect of M/s Maa Durga Traders was signed by Mr. Kaushik Dass and the confirmation letter in respect of M/s Vikas Udyog was signed by Mr. Uma Shankar Ojha, who claimed to be the proprietor of the said concern. The AO further observed that copy of letters furnished by the above two concerns to the assessee intimating change of their .....

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disallowance of purchases of ₹ 67,99,974/- from M/s Ma Durga Traders and of ₹ 40,66,550/- from M/s Vikash Udyog. The Assessing Officer has relied on the office inspector's report that such parties were not found at the given address, and the occupant of the house, Sh. Sandeep Sharma, had denied that any such business had been carried on there. The appellant on the other hand obtained an affidavit of the owner of the house, Sh. Ram Kishan Sharma, that the house had been rented to .....

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hat it could not produce the parties as it had no business dealings with them currently, however the Assessing Officer was requested to enforce their attendance through section 133(6)/131. The appellant has aptly relied on the judgement of the Delhi High Court in the case of CIT Vs. Jas Jack Elegance Exports (supra), wherein the Court held that the Assessing Officer was at liberty to summon the parties to whom payments had been made for fabrication, embroidery, etc. to verify the genuineness of .....

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ic inspection report of the items of purchase from M/s Ma Durga Traders and M/s Vikash Udyog. The ledger accounts of these parties show that the entire payments were made during the year, and were made by cheques. The Assessing Officer has not rebutted any of these evidences in the remand report. Considering that the appellant has produced the confirmations of the parties, with their PAN and current addresses, and payments have been made to them through banks, no basis is found for sustaining th .....

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usiness dealings during the assessment period, but the assessee requested the AO to enforce their attendance through section 133(6)/131 of the Act. The assessee also produced bills bearing the inward stamp of the proprietary concern, goods received note, fabric inspection reports in respect of purchases from those two parties. Thus, in our opinion, the assessee has demonstrated sufficient proof of genuineness of the purchases, and therefore the findings of the learned Commissioner of Income-tax( .....

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f associated concerns and therefore the disallowance made by the AO was justified. Whereas, on the other hand, learned Authorized Representative relying on the order of the learned Commissioner of Income-tax(Appeals), submitted that the companies, in which Mr Sidhartha Mohan was director were not doing any business during the period under consideration and the learned Commissioner of Income-tax (Appeals) has already confirmed the disallowance of ₹ 4,22,929/-out of the disallowance of ͅ .....

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5% of the foreign travelling expenses claimed by the assessee on the ground that Sh. Sidhartha Mohan happened to the director in other concerns/companies of the family and the assessee could not produce any evidence in support of the claim that foreign travelling expenses were incurred only for the assessee. The learned Commissioner of Income-tax(Appeals) after considering the submission and examination of the details of the expenses, sustained disallowance of ₹ 4,22,929/- out of the disal .....

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line of business. The Assessing Officer has concluded that some part of the expenditure on foreign travel was incurred in relation to the business of the other concerns. The appellant has placed on record the Certificates of Incorporation, and balance sheets as on 31.03.2008, of M/5 Magnolia Textiles Pvt. Ltd. and of M/s Jacaranda Textiles Pvt. Ltd. to show that both companies were incorporated late in March 2008, and had no business turnover in that year. Moreover, both concerns have had no ex .....

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ng expenses debited in that case amount to ₹ 30,93,221/-. Hence there is no material basis for holding that foreign travel expenses of the associate concerns have been claimed in the accounts of the appellant. The counsel for the appellant was required to file details of the foreign travel expenses and to justify that the expenses were incurred wholly and exclusively for the purposes of business. It is seen that Sh. Siddharth Mohan and Smt. Pallavi Mohan have travelled to Hong Kong, France .....

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rt at this ground of appeal. 4.3 From the above observation of the learned Commissioner of Income-tax (Appeals), we find that he has examined the expenses incurred under the head foreign travel expenses and sustained the disallowance, where the expenses were not found to be wholly and exclusively related to the business of the assessee in terms of section 37 (1) of the Act. In our view the finding of the learned Commissioner of Income-tax (Appeals) are well reasoned. Accordingly, we uphold his f .....

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s not justified as per the provisions of the Act because he failed to establish that the expenses were excessive or unreasonable having regard to the market value of the services for which the payment was made. 5.2 We have heard the rival submissions and perused the material on record. The Assessing Officer has made disallowance of 25% out of the salary and incentive paid to Sh. Sidhartha Mohan, son of the assessee and Smt. Pallavi Mohan, daughter-in-law of the assessee on the reasons similar to .....

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0,000/- respectively. The Assessing Officer has not provided any specific ground for the disallowance of 25% of the salary and incentive paid, apart from observing that Sh. Siddharth Mohan is associated with a number of sister concerns. As discussed at paragraph no. 6 above, 3 of the 4 concerns referred to by the Assessing Officer had no business activity during the Assessment Year 2008-09, and the remaining concern, M/s Magnolia Clothing Co. Pvt. Ltd., has paid director's remuneration to di .....

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excessive or unreasonable having regard to the fair market value of the services for which the payment is made, or the legitimate needs of the business, or the benefit derived by the appellant. The appellant has relied on a number of case laws to argue that merely making payment to a relative will not call for disallowance u/s 40A(2)(b), and disallowance is not justified without bringing any comparable case on record. It is also argued that the reasonableness of the expenditure is to be examine .....

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vices and no finding were given by the Assessing Officer whether the payment was excessive or unreasonable having regard to the fair market value. We don t find any infirmity in the finding of the learned Commissioner of Income-tax(Appeals), on the issue is dispute, and thus, we uphold his finding on the issue in dispute. The ground of the appeal is accordingly dismissed. 5.4 The ground No. 4 raised by the Revenue is in respect of deletion of the disallowance on electricity and water expenses of .....

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ia clothing company private limited, a related concern. But the Assessing Officer also noticed that in addition to the rent of ₹ 30,000/- paid, the assessee also paid ₹ 6,18,048/-towards electricity and water expenses to M/s Magnolia clothing private limited. According to Assessing Officer this payment towards electricity and water charges was not as per the agreement, and therefore he disallowed the said expenses paid by the assessee. Before the learned Commissioner of Incometax( Ap .....

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s Ess Aar fashions and balance 50% by M/s Magnolia clothing company private limited. In view of the submissions and the evidences furnished, the learned Commissioner of Incometax( Appeals) allowed the grounds of the assessee with finding as under: 9. At ground of appeal no. 7, the disallowance of electricity and water expenses of ₹ 6,18,048/- to M/s Magnolia Clothing Co. Pvt. Ltd. has been contested. The Assessing Officer has based the disallowance on the lease rent agreement of the appell .....

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haring of the electricity and water charges by the appellant and M/s Magnolia Clothing Co. Pvt. Ltd. It is submitted that the rent of ₹ 2,500/- is paid only in respect of a small space of about 500sq feet for purposes of storage, and for supervision of the production activities of M/s Ess Aar Fashion. As argued by the appellant, no query was raised by the Assessing Officer before making the disallowance and the appellant had no opportunity to justify the expenditure. In the remand report, .....

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a Blossom, and M/s Magnolia Clothing Co. Pvt. Ltd. The appellant was required to submit copy of the ledger account of M/s Ess Aar Fashion in the books of the appellant, and to show deduction of tax on the contract payments. From the ledger account, it is seen that -the appellant has paid fabrication expenses and washing and finishing charges of a total amount of ₹ 46,82,075/- to M/s Ess Aar Fashion, including the opening balance of ₹ 14,90,413/-. Tax has been deducted at source on th .....

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ods of the assessee and the assessee also deducted tax at source on the payments made to the party. In our view, the findings of the learned Commissioner of Income-tax( Appeals) on the issue in dispute are well reasoned and no interference on our part is required. We thus uphold his findings on the issue in dispute. Accordingly the ground of the appeal is dismissed. 6. In ground No. 5, the Revenue has challenged the deletion of addition of ₹ 1,90,43,902/- on account of estimation of gross .....

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profit and that too without providing any opportunity. 6.2 We have heard the rival submissions and perused the material on record. The Assessing Officer observed fall in gross profit rate of the proprietary concern from 19.87% in AY 2006-07 to 17.71% in AY 2007-08 to 12.97% in the year under consideration. The Assessing Officer also analyzed the expenses on various heads including purchase of fabric, accessories, design and development, dying printing etc and observed that some expenses have gon .....

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e proprietary concern and after reducing the gross profit of ₹ 4,91,05,248/-, he made addition for the difference amount of ₹ 1,90,43,902/-. The Assessing Officer did not make separate addition for the disallowances as the telescoped in the addition for the gross profit. 6.3 The assessee submitted before the learned Commissioner of Incometax( Appeals) justification for the fall in gross profit rate mainly as global recession in the export market. The findings of the learned Commissio .....

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that no explanation or justification for the fall in gross profit has been furnished. Moreover it can be seen from the record that the appellant was not allowed an opportunity to rebut the estimate of gross profit. The various observations made by the Assessing Officer have been refuted by the appellant during the appellate proceedings. It has been explained that the fall in gross profit ratio is mainly on account of the export market being hit by global recession in the year under consideratio .....

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t rate has fallen by 5% is incorrect. It is further argued that the sales turnover had increased by 14.18% but the manufacturing sales had in fact decreased by 4.94% as the appellant had begun purchasing readymade garments during the year. The appellant has stated that the profit margins are lower on trading sales than on manufacturing sales; the appellant has computed the gross profit on trading sales at 3.86% as against gross profit of 14.77% on the manufacturing sales. It is argued moreover t .....

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3.38%. It is argued that expenditure on design and development and sampling material are similar in nature, incurred to obtain business both from existing and new customers, and the increase of expenditure on this account of 35.95% was on account of attempts to obtain orders in a highly competitive market. 10.1 The appellant has further submitted that the observation of the Assessing Officer that the books of account are unreliable as the stock register was not produced, requires to be rejected .....

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appellant, wherein at each stage of production there is a process loss/wastage, change in nature of input to stock in process, to finished goods. The finished goods very considerably as per the specifications of the buyers, and the fabrics and accessories used, and dyeing/printing, cutting, stitching and finishing processes are correspondingly variable. It is not possible to maintain a stock register for each stage of the manufacturing process, however the stock of fabric, accessories, packing m .....

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assessee. It is reiterated that the Assessing Officer did not ask for the details of physical inventory, hence they were not produced during the assessment proceedings, however no adverse comments have been offered on the same by the Assessing Officer in the remand report. 10.2 It is seen that the Assessing .Officer has based the rejection of the books of account, partially on the finding that the purchases from M/s Ma Durga Traders and M/s Vikash Udyog were not genuine. As discussed in earlier .....

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of the multiple stages involved, as well as the variations in the finished products depending on the requirements of buyers. However the quantitative details of consumption of raw material and production of finished garments have been incorporated in the audit report, and in the absence of inherent defects in the stock statements, the finding of the Assessing Officer that the accounts are not reliable on this account cannot be sustained. The Assessing Officer has also stated that the manufacturi .....

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has increased as customers have to be shown samples of latest trends and designs as per the market requirement, and such expenditure cannot be maintained at fixed levels. Moreover expenditure of fabrication, dyeing and printing, etc. would also vary depending on the nature of orders. It is noted that the purchases and manufacturing costs are subject to audit and no defects have been pointed out by the auditors. There is no denying that fall in the gross profit rate could be for various reasons .....

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