TMI Blog2016 (6) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... nd uphold the same. - Decided against assessee. - ITA No. 4892/Mum/2014 - - - Dated:- 26-4-2016 - Shri Jason P. Boaz, Accountant Member and Shri Sandeep Gosain, Judicial Member For The Assessee : None For The Revenue : Shri Anil Kumar ORDER Per Jason P. Boaz, A.M. This appeal by the assessee is directed against the order of the CIT(A)-25, Mumbai dated 08.05.2014 for A.Y. 2011-12. 2. The facts of the case, briefly, are as under: - 2.1 The assessee, engaged in the business of retail trade in diamonds, filed his return of income for A.Y. 2011-12 on 30.09.2011 declaring income of ₹ 8,42,531/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 28.02.2014 wherein the income of the assessee was determined at ₹ 41,95,542/- in view of the following additions/ disallowances: - (i) Disallowance under section 40A(3) ₹ 3,00,000/- (ii) Addition on account of low household expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses 1. The Ld. CIT (A) also erred in upholding the decision of the A.O in disallowing the genuine and proper salary expenses of ₹ 300000/- which were paid to two employees for taking the specialized services from them in ordinary course of business. The same is bad in law. 2. The Ld. CIT (A) ought to have considered that the appellant had engaged employees and had taken the work from them and paid the salary by account payee cheques and as such the disallowance made by AO u/s 40A(3) was basically wrong. 3. The Ld. CIT (A) also wrongly agreed with the AO who held that the salary paid to two employees were at higher rate than paid to other employees and therefore was disallowable. 4. The Ld. CIT (A) also wrongly agreed with AO for disallowance of salary on account of payments made by account payee cheques earlier as advance salary and later on transferred to salary account by passing journal entry. 5. The Ld. C1T (A) also erred in upholding the decision of the AO that salary for the month in the next year is not generally payable. It is the prerogative of businessman as to how business is to be run and when payment is to be made to the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial on record on the issue of rejection of the assessee s books of account and the estimation of G.P. The learned CIT(A) has dealt with this issue at paras 4.1 to 4.3 of the impugned order as under: - 4.1 AO observed from the data reported in Trading account of assessee's proprietary concern, M/s. Lumionus Diamond that the assessee had shown gross profit of ₹ 32,19,551/- on a total sales of ₹ 123.73 crores, resulting in apparent G.P. Ratio to be 0.26%. This was as against G.P. Ratio of 0.24% achieved at gross profit of ₹ 22,10,661/- on total sales of ₹ 91.15 crores achieved in preceding previous year. The AO further observed that G.P. ratio of 0.26% was achieved only because of Exchange Gain difference of ₹ 1,57,59,827/- credited to Trading account which was not due to physical movement of goods, and excluding which the assessee suffered a huge loss of ₹ 1,25,40,277/-. It was also seen from stock summary filed by assessee that uniform rate was applied for valuation of cut and polished diamonds as well as rough diamonds, though the diamonds were bought in mixed qualities, and diamonds differed in shape, size, color, dimension and clari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. 3. He had also maintained stock register on quantity basis showing receipts and issues correctly quantity wise. 4. His purchase of diamonds was mostly imports in lot of mixed diamonds. This practice is quite prevalent in diamond trade. 5. He had sold the diamonds to different costumers as per requirements out of lots purchased. The quantity wise account was well maintained by him. 6. From the accounts the result of profit or loss could be well deduced correctly. 7. The valuation of diamonds at the end of the year was made at market rate prevailing at that time of each item of diamonds. 8. All the books of accounts including stock register were duly produced before the learned I.T.O. He had verified the same and no discrepancy was found out. 9. Accounts were maintained so perfectly that the same were to be accepted in toto. There was no scope for rejection of accounts. 10. He was earlier assessed u/s 143(3) for A.Y. 2009-10 wherein G.P. addition was made 0.5%. In appeal before CIT(A) the same was reduced and kept the addition @ 0.1%. Hence the order of CIT(14) for A.Y. 2009-10 may he considered and the G.P. rate should not be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores to a profit of ₹ 1.57 crores, still why the appellant could not show good profits as compared to previous assessment year? I find that the appellant in his written submissions has not given any explanation for sharp decrease in his profits excluding the exchange difference. The only contention of appellant is that the accounts are duly maintained and are audited, from which results of profit or loss could be deduced. I feel that when the AO had doubted the books of accounts on grounds of the appellant not showing adequate profits, the onus was heavily on the appellant to justify with facts and figures the reasons of sharp fall in profits, however the appellant has failed in providing any such details or explanation during assessment as well during present appellate proceedings. The AO has specifically pointed out that the appellant is not maintaining quality-wise stock register, which also justifies the action of AO in rejecting the books of accounts, and the appellant has failed to give any satisfactory explanation as to the method of keeping proper stock records. In these circumstances, the rejection of books of accounts by the AO is not unjustified. Now as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) in disallowing salary expenditure of ₹ 3,00,000/- paid to two employees for specialized services performed by them in the ordinary course of the assessee s business and therefore ought not to have been disallowed under section 40A(3) of the Act. It is submitted that these expenses were genuine and were paid by account payee cheques, though they were, paid at a higher rate than other employees were paid. It is also contended that it is the prerogative of the businessman/assessee as to how his business is to be run and how and when payment is to be made to employees. 6.2 The learned D.R. for Revenue was heard in support of this finding of the learned D.R. in the impugned order in respect of the disallowance of ₹ 3,00,000/- under section 40A(3) of the Act in respect of salary expenditure claimed as paid to two employees, Shri Mahesh Verma and Shri Milind Dighe. It is submitted that all the arguments put forth in the grounds raised by the assessee (supra) had been considered by the learned CIT(A) while passing the impugned order. The learned D.R. strongly argued that since no material evidence has been brought on record by the assessee to controvert the findings of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de letter dated 07.05.2014, the relevant portion of which is reproduced as under: II. Disallowance of salaries paid to employees of ₹ 3,00,000/- Our client says that he had engaged some employees for looking after assortment and to determine the quality of diamonds. The persons engaged were well expert in the line of trade. His business requirement was absolute. As these persons were expert he had engaged them and even paid them salaries in advance. Advance salaries were paid to two persons, Mr. Mahesh Verma and Mr. Milind Dighe of ₹ 1,50,000/- each at the rate of ₹ 50,000/- per month. Both the persons had worked for him. Salary paid to them was squared up since both had worked up to March 2011. (copy of salary register (muster book) was duly filed with I.T.O.) Mr. Milind Dighe was paid one additional salary by account payee cheque for the month of April 2011. The said amount remained outstanding as advance as on 31 st March 2011. The same was duly shown in the balance sheet as advance to Mr. Milind Dighe. The salaries were paid in due course of business and was purely for business purposes. The business man knows the exigencies of business and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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