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2016 (10) TMI 921

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..... - Decided in favour of assessee Disallowance of Telephone expenses and staff welfare expenses and travelling expenses - Held that:- Considering the submission of assessee that it has paid FBT on telephone, staff welfare and travelling expenses and when the same have been considered for the purposes of Fringe Benefit Tax (FBT), the same are provided by the employer to its employees as part of its employment/contractual relationship and the same have been incurred wholly and exclusively for the purpose of business and has relied on the CBDT Circular No.8/2005 dated 29/8/2005 we agree with the contention of the assessee and in any case, these are adhoc disallowances.- Decided in favour of assessee - ITA No.448/JP/15 - - - Dated:- 5-10-2016 - SHRI KUL BHARAT, JM AND SHRI VIKRAM SINGH YADAV, AM For The Assessee : Shri Praveen Saraswat (CA) For The Revenue : Shri R.S. Dagur(Add.CIT) ORDER PER SHRI VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of Ld. CIT(A)-II, Jaipur dated 27.03.2015 wherein the assessee has taken following grounds of appeal: (i) The ld. CIT(A) has erred by confirming disallowance of trading losses .....

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..... oduced from SMP etc. are completely shown in the consumption/sales or in closing stock. Further the valuation of each of the items lying in closing stock is not verifiable. There is contradiction in various details given at two different occasions when the details initially furnished were found suitable that new details were prepared and furnished which were favourable to him. But those details could not be verified due to non maintenance of day to day stock records. During the appeal hearing the AR for the appellant reiterated the submission filed before the AO. The appellant does not explain the issue properly. Hence considering the entire facts and circumstances of the case the addition made by the AO is held to be justified and the same is sustained. The appellant fails on this ground. 2.2 At the outset, the ld AR submitted that the assessee incurred manufacturing/trading loss of ₹ 62,77,969/- and net loss of ₹ 1,58,67,382/- as a result of following reasons: 1.1 In the first year of operations, operating staff of the plant was untrained and there were higher losses due to milk-quality rejections 1.2 On the purchase side, assessee found it difficult to cr .....

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..... ent to milk vendors was made in cash. Even, the Rule 6DD of Income Tax Rules, 1962 permits the cash payment in excess of ₹ 20000/- per day for dairy produce (including milk) as under: No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, where the payment is made for the purchase of (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or Further, it was not possible for the assessee to ensure the presence of milk vendors at a short notice of Ld. AO on 16/12/2008, that too at the fag end of assessment proceedings, especially when the assessee had stopped milk purchases from these villagers after 31/03/2007 in view of the heavy losses. ALLEGATION BY LD. AO (Serial No. 1.2 on Page No. 2 of the Assessment Order): 1.6 The assessee has not maintained any quantitative day to day stock .....

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..... s. of Milk, Chach and Lassi as per the details furnished to the Ld. AO on 10/11/2008 (See PB No. 27 to 28) ALLEGATION BY LD. AO ( Serial No. 1.7 on Page No. 2 of the Assessment Order): 1.9 It is noticed that for sale of milk and other items also the assessee has made the self made vouchers without mentioning name and complete addresses of the Booth Holder/customers. Further the collection from them are mostly by way of cash, hence, the sale rate / sale value shown by the assessee also remains unverifiable. SUBMISSION OF APPELLANT : Assessee had appointed various retail booths/kirana shops for sale of its products. Dues from such debtors (running into more than 289 Nos. as on 31/03/2006) amounted to ₹ 26,53,749/46 as per audited accounts (See PB No. 29 to 34). Therefore the question of non-availability of name and addresses of these booth-holders /customers did not arise. Further as to the collection in cash from debtors, Ld AO seems to be oblivious of the practical aspect that in dairy business, cash is collected in the afternoon by delivery persons alongwith the empty milk crates for the next morning supply. Such practice is prevalent in most parts of India. .....

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..... KGs) TOTAL CHART(14/10/2008) 3109170 274275 CHART(10/11/2008) 3097443 265332 SHORTAGE CALCULATED BY Ld. AO 11727 8943 20670 KGS. PROCESSING AND HANDLING LOSS 99277 KGS Ld. AO finally concluded at the end of the page No. 4 of his assessment order that closing stock shown by assessee is short by 21389 Kgs of Milk ( including 20670 Kgs.). Even if AO conclusion is accepted at the face value for once, the addition by enhancing Closing Stock should had not exceeded 224584/- (21389 Kgs. multiplied by sales rate of ₹ 10/50 per kg.). But the Ld. AO s action of disallowing Gross Loss of ₹ 62,77,969/- is highly arbitrary, without logic and deserves to be quashed. Assessee has claimed the process loss of 99277 Kgs. out of the total milk handled quantity of 3362775 Kgs which works out to 2.95% and compares favorably with the industry standards. 1.12 Further the .....

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..... udgment in the matter. A best judgment assessment is not a punitive assessment. In making best judgment assessment, the AO does not possess absolute arbitrary authority to assess at any figure he likes. He must be guided by the rule of justice, equity and good conscience. 1.14 Besides the so-called factual defects in the books of accounts, Ld. AO also relied upon following case laws of Hon ble Supreme Court to justify the rejection of books of accounts of assessee: S. N O. Case Laws relied upon the by Ld. AO Factual Matrix of Assessee vis- -vis case law a) N. Namasivayam Chettiar Vs. CIT(1960) ITR 579(SC) which deals with a situation where assessee had failed to maintain the Manufacturing A/c, Quantitative Tally, vouchers etc., and therefore after comparing the profits of similarly placed traders, Higher rate of NP was applied. Assessee has maintained complete books of accounts, Qtally, vouchers etc. and Ld. AO did not dispute the same. No comparable GP Rate was brought on record by Ld. AO b) CIT Vs. British Paints (I) Ltd. 188 ITR 44 (SC) .....

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..... e, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal . 1.15.3 Dhakeswari Cotton Mills Ltd., v/s. CIT (1954) 26 ITR 775, Hon ble Supreme Court concluded: The rule of law on this subject has been well settled that estimates framed without giving the basis for their fixation or without furnishing to the assessee the material on which the rate of gross profit is arrived at or without giving an opportunity to the asses .....

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..... r realization of milk sold. Further there was lower utilization of installed capacity in the instant year. However, the assessee achieved the turnover of ₹ 10.85 crores in the next financial year as compared to ₹ 3.79 crores in the instant year after stabilization of its operation and the losses have been reduced in the subsequent years. Regarding each of the contentions raised by the AO while rejecting the books of account u/s 145(3) of the Act, the assessee has filed detailed submissions. Regarding purchase of raw milk from the various villages, the assessee has submitted that complete details of milk purchases including ledger account of milk vendors and sample vouchers were submitted to the AO and given the nature of procurement which happens on a daily basis, the payments to milk vendors were made in cash which is even accepted under Rule 6DD of the IT rules. Regarding AO s contentions that assessee has not maintained quantity wise day to day stock register, the assessee has submitted that it has duly kept quantitative records and submitted before the AO the quantitative tally on 14.10.2008 and thereafter on 10.11.2008. Regarding self made vouchers for sale of milk .....

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..... mined by the AO. Regarding the processing and handling loss of 99,277/- Kgs, the ld AR has submitted that the details were submitted as part of quantitative tally filed with the AO on 10.11.2008 and the same worked out to 2.95 %of the total milk quantity handled by the assessee of 33,62,775 Kgs. and the same is comparable to the established industry standard of 0.82 to 2.6%. The ld. AR has further submitted that there are other direct expenses in the nature of water, electricity expenses processing charges, packing material, chemical, etc. which have been incurred and duly supported by the books of accounts and the AO has not challenged these expenses and in the absence of that, there is no basis for the AO to disallow the whole of the manufacturing/trading loss which includes all these expenses as well. In light of above, we are of the view that being the first year of operation, there are certain inherent challenges in terms of procurement and supply of milk and related products as well as pricing thereof given the market dynamics which have been encountered by the assessee and duly explained in the instant year which has resulted in manufacturing/ trading losses which have been .....

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