The assessee failed to demonstrate as to what services have been rendered by her husband or the daughter to whom salaries have been paid. Therefore, the salary claimed by the assessee towards husband and daughter deserves to be disallowed.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
Present appeal is directed at the instance of the assessee against order of ld.CIT(A), Gandhinagar, Ahmedabad dated 27.10.2015 passed for the Asstt.Year 2011-12.
2. Grounds of appeal taken by the assessee are not in consonance with the Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963 – they are descriptive and argumentative in nature. In brief grievance of the assessee is that the ld.CIT(A)has erred in confirming addition of Rs. 9,61,133/-.
3. Brief facts of the case are that the assessee- firm has filed its return of income on 3.9.2011 declaring total income at Rs. 8,16,431/-. The assessee at the relevant time was engaged in the business of trading in cotton bails and seeds. It has achieved turnover of Rs. 19.56 crores and disclosed a net profit at 0.42% which is far less in comparison to 0.91% and 1.26% achieved in Asst. Year 2010-11 and 2009-10 respectively. Hence, the AO investigated accounts of the assessee. The ld.AO highlighted various discrepancies, and thereafter he rejected book results, estimated net profit at 0.91% which worked out Rs. 17,80,750/-. He made addition of Rs. 9,61,133/-. The ld.CIT(A) has issued a show cause notice for enhancement of income. In the opinion of the ld.CIT(A) fall in net profit rate would be one corroborative circumstance for rejecting book results among st others. The ld.CIT(A) was of view that various additions with respect to discrepancies noticed by the AO deserve to be made independently. However, after taking into consideration cumulative setting of all facts, the ld.CIT(A) confirmed the addition equivalent to the one made by the AO.
4. Before me, the ld.counsel for the assessee submitted details on comparative table and pointed out that the AO noticed discrepancies on eight counts. Out of that most of the discrepancies have been reconciled and accepted by the ld.CIT(A). In these circumstances, the ld.CIT(A) ought to have not confirmed the addition. He emphasised that on account of decline in net profit rate, audited books of accounts cannot be rejected. In support of his contentions, he relied upon the following decisions.
i. CIT Vs. Smt. Poonam Rani, 192 taxmann 167 (Delhi)
ii. CIT Vs. JAS Jack Elegance Exports, 191 Taxman 386 (Delhi)
iii. DCIT Vs. Hanuman Sugar (Khandsari) Mills P.Ltd., 38 taxmnna.com 53 (All)
iv. ITO Vs. Girish M. Mehta, 105 ITD 585 (Rajkot)
On the other hand, the ld.RE relied upon the orders of the Revenue authorities.
5. Section 145 of the Income Tax Act is the relevant provision for this issue, therefore, it is pertinent to take note of this section. It reads as under :
“145. (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time [accounting standards] to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee], the Assessing Officer may make an assessment in the manner provided in section ]”
6. A bare reading of Section 145 would reveal that it provide the mechanism how to compute the income of the Assessee. According to sub-section 1, the income chargeable under the head profit and gains of business or profession or income from other source shall be computed in accordance with the method of accountancy employed by an Assessee regularly, subject to sub-section 2 of Section 145 of the Act. Sub-section 2 provides that the Central Government may notify in the official gazette from time to time, the Accounting Standard required to be followed by any class of Assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an Assessee i.e. cash or mercantile, such method has to be followed keeping in view the Accounting Standard notified by the Central Government from time to time. Sub clause 3 provides a situation, that is, if the Assessing Officer is unable to deduce the true income. On the basis of method of accountancy followed by an Assessee than he can reject the book result and the assessee’ s income according to his estimation or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of Assessee and required to seek explanation of the Assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income. Thus, the case of law of ld.counsel are of no help.
7. During the course of assessment proceedings, the ld.AO has noticed various discrepancies. These have been tabulated by the ld.cousnel for the assessee. They read as under:
|Sr. No.||Ground Raised by Assessing Officer||Contention of C1T (Appeals) while passing the order|
|1.||Reduction in Gross Profit and Net Profit Margin as compared to previous financial year.||No Comment of CIT(A) in his order. Refer Para 2. land Para 4.2.|
|2||For non attendence of Mukeshbhai S. Chaudhary and Vinodbhai M. Chaudhary for verification of purchases of Rs. 9,59,762/-.||CIT(A) agreed for purchases of Rs. 5,33,558 (Rs. 9,59,762 – Rs. 4,26,204). Submission not accepted for Rs. 4,26,204/-. (Page No. 9)|
|3||Additional Rent of Rs. 66,000/- paid by cheque for using the godown.||Appellant’s submission not accepted. (Page No. 10)|
|4||Payment of commission Rs. 4,12,584/- by cheque to daughters of the assessee.||Appellant’s submission not accepted. (Page No. 11)|
|5||Salary of Rs. 2,16,000/- paid to husaband Shri Ramjibhai M. Chaudhary||Appellant’s submission not accepted. (Page No. 9)|
|6||Pressing and Processing Charges of Rs. 18,13,757/- Paid to related concern.||Appellant’s submission is accepted. (Ref. Para no. 4.3 on Page No. 8)|
|7||Non Acceptance of reply of Ramanlal K. Chaudhary in response to notice u/s 133(6) of the Income Tax Act as regards to purchases of||Appellant’s submission is accepted. (Page No. 10)|
|8||Proposed dis allowance for interest of Rs. 2,99,999/- for not submitting confirmation of Govindbhai A. Patel.||Appellant’s submission was accepted. The point of interest dis allowance was not taken in the show cause notice issued by hon’ble CIT(A)|
8. I have examined record carefully and gone through order of the CIT(A), in the light of the above discrepancy and explanation of the assessee. To my mind, the assessee failed to show any justification for payment of additional rent because there was no agreement between the assessee and landlord for payment of additional rent. The assessee could obtain a confirmation exhibiting additional space required as well as additional rent paid. But no such steps were taken. Similarly, the assessee failed to demonstrate as to what services have been rendered by her husband or the daughter to whom salaries have been paid. Therefore, the salary claimed by the assessee towards husband and daughter deserves to be disallowed. Out of total addition confirmed by the ld.CIT(A) I hereby confirm addition of Rs. 66,000/-, Rs. 4,12,584 and Rs. 2,16,000/-. As far as addition of Rs. 4,26,204 with respect to purchase made from Vinod M. Chaudhar are concerned, the turnover of assessee is of Rs. 19.55 crores. Her sales have been accepted. Therefore, a small amount of purchases could not be doubted merely on the ground that farmer was not produced before the ld.AO. It is quite difficult for an assessee to locate each and every small supplier. Therefore, I delete this addition.
9. In the result, appeal of the assessee is partly allowed.
Pronounced in the Open Court on 16th Feb., 2018.