TMI Blog2020 (2) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... terest paid to the bank shall be offset from the said recovery of interest and there should not be any disallowance to extent of such recovery. Therefore, for the limited purposes of determining the interest paid to the bank and interest recovered from family members/interest saved on partner s capital account for the period their opening capital remain invested and not withdrawn, the matter is remanded to the file of the Assessing officer who shall verify and allow set off of interest recovered from family members/interest saved on partner s capital account from interest on bank loan and balance, if any of interest expense shall only be brought to tax. In the result, the ground is disposed off in light of above directions. Disallowance of loan processing fee paid to HDFC loan - As submitted by the ld AR that no such disallowance was made by the AO and the ld CIT(A) without issuing any show-cause as required u/s 251(2) has enhanced the income by disallowing the said claim of the assessee firm. From perusal of order of ld CIT(A) and material on record, we find that no such show-cause was issued by the assessee firm and being a mandatory requirement u/s 251(2) before any enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have not been used for business purpose - HELD THAT:- Fresh borrowing during the year from HDFC bank has been utilized for advancing to the partners and the family members and there is thus a direct nexus which has been established between the said borrowing and advancing the funds to the family members and has no nexus with the past borrowings. Further, the assessee has contended that the borrowing from family members being unsecured as compared to bank borrowings which was claimed to be taken on collateral of personal property of the partners and family members and thus carries a differential rate of interest. We find that the internal comparable relied upon by the Revenue is not appropriate given the qualitative difference in the two loan transactions and it would have been appropriate to compare the related party transaction with an independent third party transaction carrying the same qualitative unsecured loan parameters. In absence of the same, the addition so sustained by the ld CIT(A) is hereby directed to be deleted. - ITA. No. 393/JP/2017 - - - Dated:- 27-1-2020 - SHRI VIJAY PAL RAO AND SHRI VIKRAM SINGH YADAV, JJ. Appellant by : Shri Vinod Kumar Gupta (C.A.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of manufacturing, trading, import and export of precious and semi precious stones, jewellery etc. The assessee filed its return of income declaring total income of ₹ 2,46,230/- and the same was selected for scrutiny and the assessment order was passed U/s 143(3) of the Act 28.03.2016 at an assessed income of ₹ 1,35,62,580/-. On appeal, the ld. CIT(A) has granted partial relief to the assessee and against the addition sustained by the ld. CIT(A), the assessee is in appeal before us. 3. In ground No. 1 the assessee has challenged the rejection of books of account by the assessee U/s 145(3) of the IT Act and in ground No. 2, the assessee has challenged the trading addition of ₹ 3,85,880/-. 4. Briefly the facts of the case are that during the course of assessment proceedings, on perusal of the audited financial statements and details of trading results furnished by the assessee, the Assessing Officer observed that the assessee has shown low G.P rate of 24.85% and low N.P rate of 0.62% in comparison to immediately preceding two years. Further, the AO observed that the purchase and sale are not fully subject to verifiable from the stock register in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the assessee not showing true and correct income of the assessee. Further, the assessee has not provided any reasons for fall in GP rate as compared to the earlier years and therefore, he upheld rejection of books of accounts U/s 145(3) of the Act and has thereafter applied weighted average GP rate of 25.86% against 26.33% applied by the AO. Therefore, out of trading addition of ₹ 4,49,539/- made by the AO, the assessee firm was granted relief of ₹ 63,659/- and the balance addition of ₹ 3,85,880/- was sustained. Against the said finding, the assessee is in appeal before us. 6. During the course of hearing, the ld. AR submitted in respect of basis/deficiencies as pointed out by AO and CIT(A) as under:- Basis of Books rejection by AO CIT(A): (a) Purchase and sales in respect of different quality are not verifiable from stock inventory details. (b) Assessee has maintained the stock register but the qualitative details were not maintained. Submission: (i) Day wise complete stock register was produced along with letter dated 18.03.2016 but AO did not point out any specific items for which qualitative and quantitative details are not av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016, but the AO never pointed out any specific defect (AO Page 8, Para 4.2) in stock records. (iii) All the material issued to job worker and received from job worker are separately entered in respective stock item ledger. Moreover, payment to job worker has been made after due deduction of TDS and same has also accepted a genuine by Ld.AO himself. (d) Assessee maintained the stock details with reference to the total quantity and total value as shown in audit report only. Submission: Stock register was maintained by the assessee on day to day basis whereas in the Tax Audit Report quantitative stock details were reported for the year on total basis. It is beyond our understanding how day to day stock register can be prepared on the basis of the details reported in Tax Audit Report. (e) The expenses are not fully subject to verification. It was never pointed out which expense is not subject to verification. (f) Cash Sales is not subject to verification. Submission: The nature of business is such that some cash sale is obvious. The assessee submitted complete sale bills containing name and address of customers. Every sale has been entered into stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alued at US$ 10218.57 i.e. around ₹ 8,060/- per carat, which is much lower than the purchase price. Submission: (i) We are submitting the export bill under consideration before the Hon ble Bench for kind perusal. A perusal of the same will reveal that a consolidated bill was issued for the said export assignment and Packing List was attached with the bill as mentioned under terms and condition of Invoice. In packing list it was clearly mentioned that the assessee has sold 78.61 Carats Diamond Polkhi. The Diamond Polkhi is another type of diamond having lesser value in comparison to diamond. The respective outward has also been shown in stock register of Polky Diamond Jewellery 22 Cts on 10.01.2013 showing 78.61 Carats sales mentioning the Invoice Number. The CIT(A) made the observation just by looking at the face of invoice and not going into facts and supporting documents in form of packing slip and stock item register. (ii) Now coming on the rate aspect of Diamond Polkhi, it is submitted that the assessee has been maintaining separate register for Diamond Polkhi and last purchase of Diamond Polkhi was on 04.12.2012 at the rate of 6850 Per Carat whereas as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to submit that assessee during the assessment proceedings time and again requested to inform specific deficiencies rather than general comments(Reproduced at AO Page 9, Para 4.2). Despite these requests Ld.AO keep repeating same deficiencies in general words without any specific defects. It emerges from his findings that rejection of books is prompted only due to reduction in GP. We have already addressed the general deficiencies observed by him under forgoing paragraphs. (ii) As far as rejection of books only due to reduction in GP Rate is concerned same cannot be done since assessee was maintaining complete day to day inventory and we place our reliance on following case laws in this regard:- ACIT vs Mewar Polytex P. Ltd. (1995), 51 TTJ 628 (Jaipur Trib.), wherein, it was held as under:- Thus if in earlier years correct income as per law could be deduced, it is surprising the find as to why it could not be done so in the year under appeal. It appears that low rate of gross profit as compared to the immediately preceding year prompted the assessing officer to do so. But since mere low gross profit rate by itself is not a ground at all for rejection of books, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82% (25.18%-1.36%), whereas the assessee has declared the GP Rate of 24.85% which is much better. Hence, there was not reduction in GP Rate if we compare it with increase in turnover. It is further submitted that the assessee has been assessed u/s 143(3) for AY 2006-07 vide order dated 28.03.2008, wherein declared GP Rate of 15.22% on total turnover of 94,52,346/- has been accepted by the AO. Whereas, current year GP Rate is 24.85% which is much higher than this, therefore, rejection of books prompted by reduction in GP kindly be deleted. One very important point to consider here is that the AO asked the details of Labour Charges as much as two times in a single query letter dated 10.03.2016 and the same was submitted. No defect was found therein. Once the Labour Charges has been accepted then resultantly the quantity of production stands proved so the amount of gross profits as well. 7. The ld DR is heard who has relied on the findings of the lower authorities which we have already noted above. 8. We have heard the rival contentions and perused the material available on record. The ld CIT(A) has referred to non-maintenance of qualitative stock details, no separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in appeal before us. 12. During the course of hearing, the ld. AR submitted that during the year under consideration, partners along with family members purchased a show room for consideration of ₹ 4.11 Crore. Same was subsequently given on rent to the assessee firm. Out of total consideration, ₹ 2.61 Crore were paid by the purchaser directly and remaining 1.50 Crore paid by firm on behalf of these purchasers. It is relevant to mention here that for this purpose, firm raised a secured loan of ₹ 1.50 Crore from HDFC Bank Limited. The payment made directly by the firm was debited to the respective person on behalf of whom such payments were made. The details are as follows:- S.No. Name Amount Debited Proportionate Interest Disallowed Relation with Firm 1. Shubhang Mittal 30,00,000/- 3,03,914/- Partner 2. Brij Kishore Mittal 30,00,000/- 3,03,914/- Partner 3. Girir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were raised by the firm as secured loan and given on behalf of these persons. It is important to note that loan was also raised on the basis of collectoral securities of immovable properties owned by these persons in their individual capacity. In nutshell, firm neither took any risk since amount given on behalf of these people were recoverable and in case of default that was recoverable from their properties. Under the facts and circumstances, property was purchased for use of firm without any risk and responsibility therefore, holding that same is not for business purpose is without appreciating the complete facts in right perspective. 15. As far as interest payment by firm on that secured loan is concerned, it was submitted that it is an admitted position that same has been used for purchase of showroom property on behalf of buyers. For sake of convenience, these buyers have been bifurcated in two categories. One is partners and second is relatives. Same have been dealt separately as follows:- (a) Interest payment on loan used on behalf of partners: (i) The partners were having credit balance in their account on 01.04.2012 of ₹ 77,16,667/- (Shri Shubhang Mittal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of entire amount of interest paid to HDFC Bank Limited holding that the same has not been used for business purpose. 16. It was further submitted that the Ld. CIT(A) has also noted his finding of fact that assessee has been charging interest @ 12% from these family members at Page-22, Para-3.3 of Order. The relevant Para is reproduced hereunder for sake of convenience:- ..it was observed that the appellant has charged interest @12% from Ms. Shikha Mittal, Shri Giriraj Prasad Mittal and Ms. Sangeeta Mittal whereas, it has paid interest @15 % to them and no interest appears to be paid to Ms. Sangeeta Mittal. In view of these facts, the interest is to be allowed @ 12% to these entities. Once the AO himself has proved the nexus between borrowed funds taken from HDFC Bank and giving to family members, and this fact has also been admitted by the lower authorities that the assessee has been charging the interest @12% from these family members, then no disallowance was warranted. 17. It was accordingly submitted that under the facts and circumstances in the instant case, the assessee firm on borrowed money has equally earned the interest or reduced its interest e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not paid any interest on such credit balance, non-charging of interest on loan advanced on their behalf is tax neutral. We find force in the arguments of the ld AR that where the assessee firm has charged interest from the family members and has not paid interest which it was supposed to pay on the opening credit balance in partners capital account which stay invested in the assessee s firm throughout the year, the interest paid to the bank shall be offset from the said recovery of interest and there should not be any disallowance to extent of such recovery. Therefore, for the limited purposes of determining the interest paid to the bank and interest recovered from family members/interest saved on partner s capital account for the period their opening capital remain invested and not withdrawn, the matter is remanded to the file of the Assessing officer who shall verify and allow set off of interest recovered from family members/interest saved on partner s capital account from interest on bank loan and balance, if any of interest expense shall only be brought to tax. In the result, the ground is disposed off in light of above directions. 19. In ground no. 4, the assessee has ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) who has sustained the said disallowance. The ld. CIT(A) observed that since the showroom was inaugurated on 13.05.2013, no business activities were carried out from the rented space at Maa Upasana during the year under consideration. Further, he referred to the provisions of Section 30 of the Act wherein it has been provided that the rent is allowed in respect of premises, which is occupied and used for the purposes of the business or profession of the assessee firm. It was held by the ld. CIT(A) that on 01.05.2012 i.e. the date on which the premises under consideration was claimed to be taken on rent, it was not fit to use for the purposes of the business of the assessee firm of running a showroom and the assessee could not commence its business activities thereon till the end of the year under consideration as the showroom was inaugurated on 13.05.2013 only. Further, he relied on the decision of Hon ble M.P. High Court in case of Nashirwan and Co. Pvt. Ltd. vs. CIT 77 ITR 822 as well as the decision of Hon ble Delhi High Court in case Sony India P. Ltd. vs. CIT 285 ITR 213. He accordingly upheld the disallowance of the rent expenses so claimed by the assessee as the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut to use is relevant for the purpose of section 32 only. In section 30 the word used for the purpose of business is used which is a very wider term and specific. In support of our contention we rely upon the decision of Hon ble Kolkata HC in the case of CIT Vs Eveready Industries (India) Ltd. (2018) 258 Taxmann 0313 (Cal.), wherein, it was held as under:- 8. Mr. Agarwal, learned counsel for the Revenue argues that the assessee had not been in possession of the property and a dispute was going on between them and the lessor. The keys of the premises were lying with the police. Therefore, the application of Section 30 was dependent upon the findings whether the assessee was a tenant, paying rent and using the demised premises for the purpose of its business. We find on an examination of the order of the Tribunal that all these factual issues have been answered in favour of the assessee. Now, when these facts are in favour of the assessee, it is not within the domain of a Court exercising jurisdiction under Section 260A to enquire into the correctness of that fact finding and return a contrary finding that the assessee was not a tenant, and was not in using the premises for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... howroom is an essential need to run a jewellery show room. Other relied case of Sony India Pvt. Ltd. Vs CIT (2006) 285 ITR 213 (Delhi) is also distinguishable as the expenses is fully allowable to the assessee U/s 30 itself, whereas, in that case expense was not allowable u/s 37 of the Act. Hence, in view of forgoing facts and circumstances, the impugned disallowance of ₹ 27,50,000/- kindly be deleted in full. 27. The ld DR is heard who has relied on the findings of the lower authorities. 28. We have heard the rival contentions and perused the material available on record. The relevant provisions of section 30 which are under consideration reads as under: 30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business99 or profession, the following deductions shall be allowed- (a) where the premises are occupied by the assessee- (i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs ; (ii) otherwise than as a tenant, the amount paid by him on account of current repairs99 to the prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us. 30. Having said that, the question is where there is no dispute that the rent payment has been made by the assessee firm for taking on rent premises for setting up a new showroom and thereby, expanding its existing business, can the same be allowed in the year the premises are ready to be used. Given that in the instant case, the assessee has also incurred expenditure on fit-outs/improvements on such leased premises, and has accumulated and shown the same under the head work-in-progress , drawing similar analogy, we are of the view that rent payment, pertaining to the period the premises are not ready to be used, can be accumulated and the same can be claimed and will be allowed in the year in which the premises were ready to be used i.e, next assessment year 2014-15. The ground of appeal is disposed off in light of aforesaid directions. 31. In ground No. 6 the assessee has challenged the sustenance of addition of ₹ 27,54,000/- on account of unexplained cash credit U/s 68 of the IT Act. 32. Briefly the facts of the case are that during the course of assessment proceeding, the Assessing Officer on perusal of the HDFC Bank account and CIB/AIR/ITS details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper but not in reality. Further, it appears that some of the names were repeating, the appellant has not filed any confirmation from them to substantiate its contention. It is interesting to note that in these cases, as per the sale invoices, no cash payment was made in part at the sale counter of the appellant and the entire amount was deposited at the places of the buyers. Therefore, it is held that the appellant could not explain the source of cash deposits in its bank accounts at different places of the country satisfactory and thus the AO was justified in making the impugned addition under consideration. (iv) The contention of the appellant that it is maintaining its records on Tally software and immediately on sale and purchase of trading items, it gets reflected in all the related places, appears not be correct factually, it is noted that the appellant was issuing invoices manually and not through tally software and its stock register, apparently was not maintained on tally software. 34. Against the said findings, the assessee is in appeal before us and has submitted that during the year consideration, assessee deposited total cash of ₹ 57,36,540/- in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of business is such where cash sales is obvious and most of the retail sales happens in cash only. The assessee deposits such cash in his bank account. The AO asked specific query regarding the cash deposited on specific dates which was explained with cash book and complete sale invoices. The source of the cash deposits is explained hereunder:- S.No. Date Particulars Amount Source PBP 1. 28.09.2012 Cash Deposited 3,47,000/- Cash Sale made on 26.09.2012 totaling to ₹ 4,39,045/-. PBP-53-54 2. 01.10.2012 Cash Deposited 2,00,000/- Out of Opening Balance of Cash ₹ 86,632/- and Cash Sale of the day ₹ 1,20,000/-. PBP-55 3. 31.10.2012 Cash Deposited 2,30,000/- Directly deposited by customer towards cash sale vide Bill Nos. 185 186. PBP-51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bullion to whom the cash sales of gold and silver were made. The learned counsel for the revenue stated that there was no such requirement in law at the relevant time. Consequently, no adverse inference could have been drawn by the Assessing Officer on account of the fact that the assessee was not in a position to furnish the names of the persons to whom the cash sales of the bullion were made 39. It was further submitted that the allegation that no confirmation was filed from these parties is based on suspicion only. Ld. AO as well as CIT(A) never asked the assessee to file any confirmation. Without prejudice to the above, alternatively, the assessee is not required to file any confirmation once the turnover has been accepted, sale invoices has been issued and the assessee was having stock for that sales. In the decision of CIT vs Jindal Dyechem Industry Limited, it was held that the trader is not required to record name and addresses of the persons to whom cash sales has been made. Hence, no adverse inference can be drawn on account of cash sale made. On one hand, the revenue has accepted and assessed the turnover declared by the assessee and on other hand addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t source of cash deposits of ₹ 13,77,000 on the specific dates were submitted along with cash book and sale bills for verification during the assessment proceedings as we have noted in para 36 above and however, there doesn t seem to be any specific finding by the Assessing officer. We therefore deem it appropriate to set-aside the matter to the file of the AO for the limited purposes of verification of source of cash deposits of ₹ 13,77,000 as submitted by the assessee firm as we have noted in para 36 above and where the same is found to be in order, allow the necessary relief to the assessee firm. The ground of appeal is disposed off in light of above directions. 42. In ground No. 7, the assessee has challenged the sustenance of disallowance of interest of ₹ 1,57,081/-. In this regard, briefly the facts of the case are that the assessee had taken unsecured loans from the family members of the partners in the earlier years and paying interest @ 15% on the same. During the year, interest @ 12% was charged from the family members on the amount given on behalf of them for the purchase of showroom. The AO made the addition of entire amount of interest of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hand, the subjected amount of borrowing from family members of the assessee was in earlier years for business purposes and it was at discretion of the assessee to use these funds as and where required. Therefore, at that time looking into need of funds and other circumstances, the rate was decided at 15%. Now both the transactions cannot be equated as both are of different perspective and were entered into for different purpose at different point of time. Hence, considering presence of these peculiar facts in this transaction, both not to be equated. In the instant case, assessee borrowed fund from bank @ 12% that loan is secured whereas borrowing from family members are unsecured in nature. The secured loans have to be paid as per pre-determined repayment schedule whereas unsecured loans under consideration can be paid as per flexibility of the assessee. Under these circumstances, interest rate paid @15% is reasonable and at prevailing market rate of unsecured loans. Therefore, it is requested that interest kindly be allowed @ 15% instead of 12% as restricted by Ld. CIT(A). 44. The ld DR is heard who has relied on the findings of the lower authorities. 45. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X
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