Case Law Details
Brief of the Case
ITAT Jaipur held In the case of Balbir Singh vs, ACIT that it is not open for the AO to make addition on estimation basis without verifying that said expenses are genuine or not. Mere fact that payments were made in cash on self made vouchers, not a conclusive evidence to disallow the expenses. In the give case, the Assessing Officer had not brought on record any adverse evidence that expenses are not genuine. He simply disallowed the expenses on estimate basis, which is not allowed.
Facts of the Case
Disallowance of salary payment
The assessee is a real estate agent trading in land and plot etc. The assessee filed his return on 31/3/2009 declaring income of Rs. 1,08,28,030/- and had shown agricultural income or Rs. 60,400/-. The case was scrutinized u/s 143(3). The assessee furnished details required by the assessee during the assessment proceedings and also produced accounts book and vouchers etc. which was test checked by the A.O. The assessed claimed salary expenses of Rs. 19,20,000/- at the rate of 1,60,000/- per month in cash, to various persons for which he had maintained salary sheets. The assessee furnished a list of 24 persons to whom he paid salary but had not submitted complete postal addresses and duties assigned to each of them
The Assessing Officer asked to produced 10 persons for cross verification vide letter dated 27/12/2010. The assessee produced six employees before the ld Assessing Officer who had examined them but four persons were not made available for cross examination by the assessee. The Assessing Officer further observed that the assessee had done the brokerage work on behalf of only three parties of two groups of Kolkata and had failed to produced number of employees for examination, therefore, he treated the salary payment excessive. The Assessing Officer allowed salary expenses of Rs. 15 lacs and remaining amount of Rs. 4,20,000/- was added back in the income of the assessee on estimate basis being unproved and unsubstantiated.
Disallowance of commission expenses
The Assessing Officer observed that the assessee had claimed total commission expenses at Rs. 10,20,000/-, in cash, for acquisition of land for the three parties of Kolkata. The Assessing Officer asked the assessee to give details of brokerage payment and to produce relevant documentary evidence and vouchers etc. with regard to brokerage payment. The assessee had furnished list of 21 persons to whom the brokerage was paid. The assessee was requested by the Assessing Officer to produce four persons for examination for test check basis to whom commission paid.
The assessee out of four persons, two persons were produced, statement of both the persons was recorded and remaining two persons could not be produced by the assessee for examination. The Assessing Officer held that the assessee did not maintain or produce any specific details and the basis on which said payment was paid in cash to various brokers. All the vouchers relating to the brokerage payment was self made only. The ld Assessing Officer observed that the assessee had not fully proved the brokerage payment and was also not fully verifiable. Therefore, he allowed the commission payment of Rs. 7,50,000/- for business purpose and remaining amount of Rs. 2,70,000/- was added back to the income of the assessee.
Disallowance of various expenses
The ld Assessing Officer observed that the assessee had claimed various expenses under legal fees for registry, travelling expenses, staff welfare expenses, advertisement expenses, telephone expenses, printing and stationery expenses, land map preparing expenses, festival expenses, general expenses and guest house expenses to the tune of Rs. 18,76,340/-. The assessee was asked to prove the expenses with the help of necessary documents/evidence by supporting vouchers by the Assessing Officer. The assessee produced the vouchers of self made only for all the above expenses and did not produce any documentary evidence or supporting vouchers in respect of all the expenses. The Assessing Officer allowed 12 lacs expenses looking to the volume of business but remaining expenses of Rs. 6,76,340/- was found by the Assessing Officer unproved/unverifiable and unsubstantiated.
Addition on account of sale of agricultural land
The ld Assessing Officer observed that the assessee had made transactions of sale of agricultural land worth total Rs. 39,46,950/-, which were purchased for Rs. 19,37,589/- in the assessment year under consideration and the preceding assessment year, resulting in profit of Rs. 20,09,361/-. The ld Assessing Officer gave reasonable opportunity of being heard on this issue. The assessee submitted before the Assessing Officer that he had shown profit of Rs. 20,09,361/- on sale of agricultural land, which had not been included in the income and had obviously been claimed as exempt. These lands are purely agricultural and recorded as such in the revenue record of the State Govt. The agricultural lands are very well covered U/s 2(14), in which capital asset is denied.
AO submitted that the assessee has purchased and sold the said lands with sole motive of earning profit and not for doing any agricultural operations. “If a ‘transaction’ is related to the business which is normally carried on by the assessee, though not directly a part of it, an intention to launch upon an advernture in the nature of trade may readily be inferred. Accordingly, the profit of Rs. 20,09,361/- earned by the assessee is held to be profit earned from trade of purchase and sale of land is taxable. The addition of Rs. 20,09,361/- has been added back to the income of the assessee.
Contention of the Assessee
Disallowance of salary payment
The ld counsel of the assessee submitted that the assessee vide letter dated 07/12/2010 has furnished list of 24 persons to whom salary payment were made and explained that no specific duties were assigned to them. He has further reiterated the submissions made by the assessee before the Assessing Officer that employees were engaged in field work like identification of land, its owners, obtaining land records from government offices etc.. The complete postal address of the employees were given inasmuch as all the employees belong to nearby villages and in villages, the house number or name of locality generally does not exist.
He further submitted that the assessee filed letter dated 27/12/2010 had explained that four out of ten employees who could not be produced for examination are either out of station or have left the job. The assessee was trying to produce them but due to time constraint, he could not produce them before 31/12/2010. Thus, merely non-production of four employees cannot be a ground for disallowance of salary payment.
He further submitted that the finding of the CIT (A) was without any basis. The cash payment of salary did not mean that salary was not genuine. The assessee has taken details of expenses and signature on receipts, which was available with the assessee, thus no adverse inference can be drawn by the lower authorities. There is no evidence that salary expenses claimed by the assessee was not paid and had come back to the assessee. He relied upon the decision of Hon’ble Supreme Court in the case of CIT Vs. Dhanrajgiri Narain Singh Girji 91 ITR 544 wherein it has been held that it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.
Further the Hon’ble Patna High Court in the case of Jamshedpur Motor Accessories Stores Vs. CIT 95 Taxman 664 has held that a lesser amount then the amount expended cannot be allowed merely because the Assessing Officer thinks that assessee could have managed by paying a lesser amount as a prudent businessman. The authorities can examine genuineness of the expenditure and the purpose for which it was expended. If the purpose for which it is expended is eligible for deduction, no discretion is left to be authority to surmise the quantum that ought to have been spent.
Disallowance of commission expenses
The ld counsel of the assessee submitted that assessee vide letter dated 27.12.2010 had explained that 2 out of 4 brokers, who cannot be produced for examination are either out of station or have left the job and assessee is trying to produce them but due to time constraint, he could not produce them before 31.12.2010. Thus, merely non-production of 2 brokers cannot be a ground for disallowance of commission payment. Therefore, the CIT (A)’s observation made in the order is uncalled for.
Payment in cash does not mean that the expenses were not genuine. In respect of cash payment, the vouchers containing the detail of expenses and signature of the recipient are available. He further relied upon the case law referred for the salary expenses and argued that same are squarely applicable on this payment also. Thus, he prayed to delete the addition.
Disallowance of various expenses
The ld counsel of the assessee submitted that assessee vide letter dated 27.12.2010 had explained that the expenses have been incurred during the regular course of business to perform the various works as per details submitted before the Assessing Officer. The assessee had declared N.P. rate @ 60.34% which is very much reasonable. The nature of these expenses is such that pakka bills are not possible and therefore payments were made through vouchers. Each payment had been supported by the signature of the recipient on the vouchers and are verifiable.
Addition on account of sale of agricultural land
The ld counsel of the assessee submitted that only because agricultural activities were not carried out or that the person to whom the land was sold has no intention to carry out the agricultural activities on the land sold or that the land is sold within a short period would not mean that the agricultural land held by the assessee is not for investment but for adventure in the nature of trade. In various cases, it has been held that this is not a decisive factor to held that gain from sale of such land is to be assessed as business income.
He also submitted that the AO has accepted that assessee has hold the agricultural land as an investment in A.Y. 07-08 and therefore there is no reason to consider the same as business asset in A.Y. 08-09.
Contention of the Revenue
The ld counsel of the revenue supported the order of the lower authorities and prayed to uphold the order of the CIT (A).
Held by CIT (A)
Disallowance of salary payment
CIT (A) confirmed the addition by observing that the Assessing Officer had made inquiry by way of random verification of persons to whom salary was paid in cash and four out of ten persons could not be produced for examination and verification. This constitutes 40% of the sample of ten persons selected by the Assessing Officer. Considering the payments have been made in cash and the appellant has failed to verify the salary payments in the course of verification by the Assessing Officer made on random basis. He held that the observations made by the Assessing Officer are about 22% of salary payment. Thus, disallowance assessed to be quite reasonable. Accordingly, he confirmed the addition.
Disallowance of commission expenses
CIT (A) confirmed the addition by observing that the assessee paid brokerage of Rs.10,20,000/- in cash to 21 persons only by self made vouchers. The appellant has not maintained or produced specific details of transaction regarding the purchase/sale of land for which claim of commission/brokerage payment has been made. The appellant has also failed to produce all the persons called for examination in the course of random verification. He held that the expenses claimed by the assessee were not fully verifiable, thus he confirmed the addition.
Disallowance of various expenses
CIT (A) allowed the appeal partly by observing that self made vouchers cannot be the sole basis for claim of expenses on the ground that the expenses were reasonable considering the gross amount of commission received. It is possible that for some of the items the appellant may not be able to get supporting bills or vouchers but that should normally be a small percentage of the total expenses claimed.
It is an admitted fact that no supporting vouchers or any other details were furnished by the appellant in support of its claim of various expenditure. In absence of proper supporting bills and vouchers these expenses were not verifiable. Therefore, he found the disallowances justified. However, he held that the disallowance was higher side, thus he restricted the disallowance out of total various expenses @ 30% at Rs. 5,62,900/- and he allowed the relief to the tune of Rs. 1,13,440/-
Addition on account of sale of agricultural land
CIT (A) confirmed the addition. He held that the real use of land is very relevant and material for deciding the true intention of the assessee in acquiring the land and selling the same. To apply the exception of capital; asset as per section 2(14), the charter of land being agriculture has to be decided with reference to the intention and purpose of acquiring the land. Once it is borne out from the facts and circumstances of the case that the intention of the assessee was not to put to the land for agricultural use and accordingly, it was not used for agriculture purpose by the assessee as well as even by the purchaser, who is a builder, then the provisions of Section 2(14)(iii) would not apply in the case of the assessee.
Held by ITAT
Disallowance of salary payment
We find that the assessee was asked to furnish details of employees on 07/12/2010, which was submitted with name, address and salary paid, to the Assessing Officer. He also explained the work done and duties assigned to them. It is undisputed fact that the payment of salary was made in cash. The business of the assessee as such that local people are required to make available the details of land available for sale, owners of the land, market rate of that area, other factual/title information to make agreement with support of the advocate etc. The assessee had disclosed more than Rs. one crore returned income on which he had claimed salary expenditure of Rs.More than 19 lacs, which is very nominal.
The Assessing Officer up to 27/12/2010 had recoded the statement of six persons and no adverse inference had been drawn by him. The other four persons were not made available by the assessee as claimed by him that they left the job and are not traceable. The time given by the Assessing Officer is very short. The CIT (A) had not asked the assessee to produce the remaining employees for verification at the time of appellate proceedings. Therefore, we do not find any reason to confirm the addition to this head. Accordingly, we allow this ground of assessee’s appeal.
Disallowance of commission expenses
It is a fact that time given by the Assessing Officer was not sufficient. However, the assessee produced two brokers for verification. The details of brokerage have been submitted alongwith letter dated 07/12/2010. The details furnished before the Assessing Officer showed that they are villagers of nearby area who provided the services to make available the land in that area. It is undisputed fact that payments were made in cash on self made vouchers, the Assessing Officer had not brought on record any adverse evidence that brokerage payment is not genuine. He simply disallowed the expenses on estimate basis. Therefore, we do not find any reason to confirm the disallowance out of brokerage expenses. Accordingly, this ground of appeal is allowed.
Disallowance of various expenses
We have noted that the assessee’s business is as such that no pakka vouchers can be collected from the recipients of payments. The ld Assessing Officer also had not verified the details given by the assessee and also he sought the information on 27/12/2010 and completed the assessment on 31/12/2010 hurriedly. It is difficult to provide the full particulars of expenses. It is also a fact that non business purposes, the expenditure can be ruled out in absence of third party evidence. The addition confirmed by the CIT (A) appears to be higher side. Therefore, in the interest of justice, we consider reasonable disallowance out of travelling expenses, staff welfare expenses, telephone expenses, festival expenses, general expenses and guest house expenses @ 10% out of total expenses claimed. We do not require to be disallowed any expenses out of legal fees for registry, advertisement expenses, printing and stationary expenses, land maping and preparing expenses. Thus we confirm the addition of Rs. 14,000/- out of total disallowances made by the CIT(A) at Rs. 5,62,900/-. Accordingly, this ground of assessee’s appeal is partly allowed.
Addition on account of sale of agricultural land
During the year under consideration, the assessee has claimed exempted income on account of purchasing and selling of agricultural land at Rs. 20,09,361/-. The intention of the assessee was to get capital appreciation on purchase and sale of agricultural land. The assessee had shown separately brokerage income earned on trading of land as business income. All the purchases and sales of the agricultural land beyond 8 km from the municipal area had been shown in the fixed assets as investment not in stock in trade. The assessee’s case has scrutinized continuously and in past also these additions were made by the Assessing Officer but the Coordinate Bench has set aside the issue to the Assessing Officer.
Further in A.Y. 2007-08, the assessee had shown exempted capital given of Rs. 83,11,740/-, which has been accepted by the Assessing Officer himself. The rule of res judi cata is not applicable in the case of income tax proceedings but the Hon’ble Supreme Court in the case of Radhaswami Satsang Vs. CIT 193 ITR 321 has held that rule of consistency is to be followed to settle the repeated issue. The facts and circumstances of the case are identical to A.Y. 2007-08, therefore, we do not find any reason to hold exempted agricultural capital gain as adventure in nature of trade i.e. business income. The book entries are to be examined for deciding the nature of transaction. Accordingly, we reverse the order of the CIT (A) on this ground. Thus, this ground of appeal is allowed in favour of the assessee.
Accordingly appeal of the assessee partly allowed.
