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2019 (9) TMI 599

..... the transactions and creditworthiness of the lenders. Assessee has taken a loan in the assessment year 2005- 06 from Shri Shushibhai Patel which was not doubted by the Revenue in the assessment proceedings framed under section 143(3) of the Act. Thus it is clear that the Revenue doubted the loan taken by the assessee in the year under consideration whereas the Revenue did not doubt the loan taken by the assessee from the same party in the subsequent year. Thus it is clear that the Revenue has taken the contradictory stand in two different assessment years. Lenders are non-resident Indians and the loan was given to the assessee out of the NRE accounts. This fact has not been doubted by the authorities below. It is an established the fact that the income in an NRE account can be deposited only from the foreign countries. The fund cannot be deposited in NRE accounts from India. No allegation of the Revenue that the assessee has provided funds from his unaccounted fund to the lenders to get its unaccounted fund in the accounting form. In the absence of any adverse remarks by the Revenue on this issue lenders have provided funds to the assessee out of their sources generated by them. Lo .....

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..... ies below. Thus we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Ad-hoc disallowance for traveling and conveyance expenses - HELD THAT:- Onus lie on the assessee to prove that the expenses were incurred wholly and exclusively for the purpose of the business. But the assessee in the case before us failed to do so. Therefore we justify the disallowances made by the authority below. Hence the ground of appeal of the assessee is dismissed. Nature of expenses - treating the trademark expenses as capital expenditure - HELD THAT:- It is an undisputed fact that the trademark represents the intangible assets of the company and duly covered within the definition of assets as provided under section 32 of the Act. Therefore we are of the view that the expenditure incurred on the registration of the trademark cannot be treated as revenue in nature. See L & T DEMAG PLASTICS MACHINERY (P) LIMITED. VERSUS INCOME TAX OFFICER. [2009 (1) TMI 299 - ITAT BOMBAY-J] - thus we hold that the expenditure incurred in connection with the registration of trademark represents the intangible assets. - decided aga .....

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..... dhumita Roy, Judicial Member For the Assessee : Shri Parimal Parmar, A.R For the Revenue : Shri Apoorva Bhardwaj, Sr.DR ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)- 5, Ahmedabad[CIT(A) in short] vide appeal no.CAB/5-637/2014-15, dated 04/10/2016 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to Assessment Year (AY) 2004-05. 2. The assessee has raised the concise grounds of appeal as detailed under: The appellant craves liberty to place on record concise grounds of appeal as follows in line with Rule 8 of the Income-tax (Appellate Tribunal) Rules, 1963: 1. The Ld. CIT(A) has erred, both in law and on the facts of the case, in confirming the addition of ₹ 13,70,000/-made under section 68 of the Act. 2. The Ld. CIT(A) has erred, both in law and on the facts of the case, in confirming addition of ₹ 33,594/- in respect of bad debts written-off. 3. The Ld. CIT(A) has erred, both in law and on the facts of the case, in partly confirming the ad hoc .....

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..... the business of Pharmaceuticals. The assessee during the year has taken loans from the parties as detailed under: Sr.No. Name of Party Amount 1. P.R. Pankhania 2,95,000/- 2. Sushilbhai Patel 10,75,000/- 4.1 The assessee claimed that both the parties are non-resident Indians and therefore they do not have any source of income in India. 4.2 The assessee in support of above loans filed the Xerox copies of the confirmation letters from both the lenders bearing dated 05/03/2004 and 17/02/2004. 4.3 However, the AO observed that the confirmation letters given by the lenders are hand-written by the single person. Accordingly, the AO did not believe the confirmations filed by the assessee. The AO also observed that the assessee failed to furnish the identity, genuineness, and creditworthiness of the lenders. Therefore the AO treated the amount of loan of ₹ 13,70,000/- as unexplained cash credit u/s 68 of the Act and added to the total income of the assessee. 5. Aggrieved assessee preferred an appeal to Ld.CIT (A). The assessee before Ld.CIT (A) submitted that it had filed confirmations, PAN of the lenders and copies of cheques issued by the lenders. In case of any doubt, the AO could .....

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..... /2012 which is placed at pages 55 to 58 of the paper book. In such a remand report, the AO has not stated anything worth substance in rebuttal to evidence furnished by the assessee. 7.5 However, Ld.CIT (A) wrote a letter dated 15/05/2012 to AO stating that it is not good on the part of AO to send a report on the basis of his personal opinion when there are means to verify the correctness of the claim of the assessee. Accordingly, Ld.CIT(A) requested AO to furnish a supplementary report. However, no such report has been furnished by AO. 7.6 As regards to Identity of the lender, the ''Ld.AR submitted that same stands proved from confirmation, cheque and relevant extract of NRE account. With regard to the genuineness of transactions the ''Ld.AR submitted that stands proved from the fact that funds have been received by cheque and also creditworthiness of lender, the same stands proved from bank statement wherein there were sufficient funds prior to the amount being lent to the assessee. Thus all the three ingredients as prescribed u/s 68 are proved by the assessee. 7.7 Ld.AR, stated that section 68 of the Act cast an initial burden on the assessee to prove identity, ge .....

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..... to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently, the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, it was to be presumed that the transactions were genuine. It was not for the ITO to find out by making investigation from the bank accounts unless the assessee proved the identity of the creditors and their creditworthiness. Mere payment by account payee cheque was not sacrosanct nor could it make a non-genuine transaction genuine. 9.2 In the case on hand, we find that the assessee has provided the following documents: i. Bank statement of NRE accounts of both the lenders. ii. Confirmation letters from both the lenders on the plain papers dated 17-2-2004 and 5-3-2004. iii. Copy of cheque issued to the assessee by both the lenders. iv. PAN of one lender namely Sushibhai Patel, the PAN of the other lender namely P.R. Pankhania was not furnished. v. Confirmatio .....

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..... it is not so hit. Therefore, section 68 cannot be invoked. The revenue has not been able to show in any manner the factual finding recorded by Tribunal is perverse in any manner. 9.7 In view of the above we hold that the assessee has duly discharged his duty by establishing the genuineness of the transactions. 9.8 Now the 3rd requirement of the assessee is to prove the creditworthiness of the lenders, as there was sufficient balance in both the accounts of the lenders before transferring the loan amount to the assessee. Therefore the creditworthiness of the lenders cannot be questioned. As such the assessee is liable to justify the source of money in his bank accounts. The assessee is not expected to justify the source of funds in the hands of the lenders. In this connection, we place our reliance on the judgment of Hon ble Gujarat High Court in the case of DCIT Vs. Rohini builders reported in 256 ITR 360 wherein it was held as under: It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposit .....

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..... d. 10. The second ground raised by the assessee is that Ld.CIT (A) erred in confirming the addition of ₹ 33,594 in respect of bad debts written-off. 11. The assessee during the year has written-off bad debts amounting to ₹ 33,594/- only. However, on the question by the AO about the supporting evidence the assessee failed to file the necessary details as desired by the AO. Therefore, the AO disallowed the claim of the assessee and added the bad debts written-off amount to ₹ 33,594/- as the total income of the assessee. 12. Aggrieved assessee preferred an appeal to the Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that it has wrongly claimed the deduction of ₹ 33,594/- under the head bad debts . As such the amount represents advance given to the parties which were written-off in the year under consideration on the ground that there was nothing recoverable from such parties. The assessee furnished the details of advances as reproduced below: Sr.No. Name of Party Nature of Advance Amount in Rs. 1. American Quality Assessor India Pvt Ltd Professional Fees paid to obtain ISO 9001 certification work 8500 2. Kanubhai B Mali Paid for building Renovation 86 .....

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..... after taking necessary steps for recovery of the same and also preferring civil suits and criminal suits, wherever possible, as the case may be. The assessee had also enclosed the necessary evidences in this regard before the Assessing Officer. Hence, it would be factually incorrect to state that no legal steps were taken by the assessee for recovery of the dues. The relevant evidences with regard to steps taken by the assessee for recovery of these advances and consequential write off thereon are enclosed. The issue under dispute is squarely covered by the Co-ordinate Bench decision of this Tribunal in favour of the assessee in assessee's own case for the assessment year 2009-10 in Dy. CIT v. J. Thomas & Co. (P.) Ltd. [I.T. Appeal No. 275/Kol/2014, dated 28-2-2017] 16.3 However, on the perusal of Ld. CIT(A) order we find that the claim of the assessee was denied due to non-furnishing of supporting evidence by the assessee. Though, the assessee claimed in the submission before the Ld. CIT(A) that the copies of the ledgers of the parties were filed vide letter dated 13 January 2012. 16.4 From the preceding discussion, we find a contradiction in the submission of the assessee .....

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..... 20% of the total expenses. 20. Being aggrieved by the order of Ld.CIT (A) assessee is in appeal before us. 21. The Ld.AR submitted that the AO and Ld.CIT (A) failed to appreciate that the assessee is in the business of manufacturing pharmaceutical formulations and hence, it was to incur huge expenditure in relation to marketing and sale promotion to survive in the environment of cut-throat competition. Such expenses have been incurred wholly and exclusively for the business. Ld.AR further submitted that AO and Ld.CIT (A) cannot sit in the chair of the businessman and decide the reasonableness of any business expense. The details of such expense appear in the audited books of account running from pages 21 to 40 of a paper book. Under such circumstances, Ld.CIT (A) ought to have deleted the impugned addition in toto. 22. On the other hand the Ld.DR vehemently supported the order of authorities below. 23. We have heard the rival contentions and perused the materials available on record. The assessee in the instant case has claimed sales promotion expenses amounting to ₹ 6,90,065/-only. However, the AO was of the view that the expenses claimed by the assessee under the head sales .....

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..... the manufacturing of pharmaceuticals. Thus there will be a regular business dealing of the assessee with its creditors and debtors. But there will not be any regular dealing with the parties from whom the assessee is purchasing gift items. Accordingly, when the assessee approaches any party for the purchases of the gift items, it needs to make the payment instantly. It is because there can be a possibility that the assessee and the party are unknown to each other. Thus the party will not supply the gift items to the assessee without receiving the payment at the time of delivery of the gift items. Thus the assessee has no option except to make the payment in cash against the purchases of the gift items. So we are of the view that there prevail certain situations and circumstances where assessee cannot make the payment through banking channel. Therefore we are of the view that the gift expenses incurred by the assessee cannot be disallowed merely on the ground that these were incurred in cash and without establishing the fact that these were not incurred wholly for the purpose of the business. 24.8 We also find that the Hon ble Calcutta High Court in the case of Cheviot Co Ltd versus .....

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..... be denied and therefore made disallowance of ₹ 47,508/- being 20% of ₹ 2,37,540/-. Thus, the difference amount of ₹ 18,318/- (47,508 - 29,190) was disallowed and added to the total income of the assessee. 27. The aggrieved assessee preferred an appeal to Ld.CIT (A). The assessee before Ld.CIT (A) submitted that there could not be any personal element in the car insurance and depreciation allowance. Therefore this cannot be considered for the disallowance at the rate of 20%. 27.1 It has already made disallowance in the computation of income and therefore no further disallowance on ad-hoc basis can be made. However, the Ld.CIT (A) did not agree with the submission of the assessee on the ground that the assessee failed to furnish evidence in the form of the logbook for the vehicle and call details of the telephone expenses. Therefore he confirmed the disallowance made by the AO. 28. Being aggrieved by the order of the Ld.CIT (A) the assessee is in appeal before us. 29. The Ld.AR before us submitted that these expenses comprise of car insurance, vehicle repairs, depreciation on vehicles and telephone expenses which has been incurred wholly and exclusively for the bus .....

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..... the disallowance of ₹ 14,930/- being 20% of ₹ 74,648/- only. Thus, the amount of ₹ 14,390/- was added to the total income of the assessee. 35. The aggrieved assessee filed an appeal to Ld.CIT (A). The assessee before Ld.CIT (A) submitted that it had furnished all the relevant supporting evidence to the AO during the assessment proceedings. The AO without pointing out any defect in the details filed by it has made ad-hoc disallowance. 35.1 The books of accounts of the assessee were duly audited, and no defect whatsoever was pointed out by the Auditor. 35.2 The Ld.CIT (A) after considering the submission of the assessee restricted the addition to 10% by observing that the element of personal used cannot be denied. 36. Being aggrieved by the order of Ld.CIT (A) the assessee is in appeal before us. 37. The Ld.AR, before us, submitted that such expenses had been incurred wholly and exclusively for the business, and also such expenses appear in audited books o accounts running from pages 21 to 40 of the paper book. Under such circumstances the Ld.CIT (A) ought to have deleted the impugned addition in toto. Alternatively, some token disallowance may be confirmed. 38. On .....

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..... the same should be treated as revenue expenses. 42.1 However, the Ld.CIT (A) disregarded the contentions of the assessee by observing that the trademark expenditure is creating an intangible asset and therefore the same is treated as capital in nature. 43. Being aggrieved by the order of Ld. CIT (A) assessee is in appeal before us. 44. The Ld.AR, before us, submitted that it is mandatory to get the products registered under trademark laws. Such expenses have neither resulted into any capital asset, not any enduring benefit to the assessee to hold that such expenses are capital in nature. Such expense has been incurred wholly and exclusively for the business. Under such circumstances, Ld.CIT (A) ought to have deleted impugned addition. 45. On the other hand the Ld.DR vehemently supported the order of the authorities below. 46. We have heard the rival contentions and perused the materials available on record. The assessee has incurred expenses for the registration of the trademark of its product amounting to ₹ 52,000/- Only. The assessee claimed such expenses as in the nature of revenue and accordingly debited the same in the profit and loss account. However, the AO was of the .....

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..... sset of the company, all expenses incurred in relation to acquiring such assets could only be considered as capital in nature. Therefore, the order of the Commissioner (Appeals) was to be confirmed 46.2 In view of the above we hold that the expenditure incurred in connection with the registration of trademark represents the intangible assets. Accordingly, such expenses need to be capitalized. Therefore we do not find any infirmity in the order of authorities below. Hence the ground of appeal of the assessee is dismissed. 47. The seventh ground raised by the assessee is that Ld.CIT (A) erred in confirming disallowance of interest expenses of ₹ 17,404/- u/s.36(1)(iii) of the Act. 48. The assessee during the year has given advance to the following parties: Sr. No. Name of party Amount 1. Shalini D Patel 1,00,000/- 2. V.M. Ganatara 16024/- 48.1 The assessee in respect to such loans has not charged any interest. However, the assessee claimed that the advances were given during the normal business transaction, out of internal accruals and it was for a very short period. Therefore no interest was charged on such advances. 48.2 However, the AO observed that the assessee has been show .....

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..... med as a deduction to the extent of the funds diverted for interest-free advances will be disallowed under the provisions of section 36(1)(iii) of the Act. In view of the above we do not find any infirmity in the order of Ld. CIT(A). Hence the ground of appeal of the assessee is dismissed. 54. The eight ground raised by the assessee is that Ld.CIT (A) erred in partly confirming the ad-hoc disallowance of ₹ 23,241/- for factory and welfare expenses. 55. During the year assessee has claimed expenses of ₹ 76,771.00 and 1,55,645/- for factory and welfare expenses. The assessee claimed that these expenses were incurred for providing lunch, biscuits, snacks, etc. As per the assessee, these expenses were incurred exclusively for the purpose of the business. 55.1 However, the AO was of the view that the personal element out of these expenses cannot be ruled out. Therefore he made the disallowance of ₹ 46,483/- being 20% of ₹ 2,32,426/- and added to the total income of the assessee. 56. The aggrieved assessee preferred an appeal to Ld.CIT (A). The assessee before Ld. CIT (A) submitted that the disallowance had been made on an ad-hoc basis and without pointing out any .....

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