Vildirect: IncomeTax-caselaws-2013-VIL-977-ITAT-JAI

2013-VIL-977-ITAT-JAI

Income Tax Appellate Tribunal JAIPUR

ITA No. 1023/JP/2011, ITA No. 1024/JP/2011

Date: 27.05.2013

SHRI MUKESH KUMAR JAIN PROP. M/s . SUNIL INDUSTRIES

THE ITO, TONK

For the Petitioner : Shri Mahendra Gargieya
For the Respondent : Miss. Roshanta Meena & Shri A. K. Khandelwal

BENCH

Shri B. R. Jain And Shri Vijay Pal Rao,JJ.

JUDGMENT

Per Vijay Pal Rao, JM:-

These two appeals by the assessees are directed against two different orders of the ld. CIT(A)-III, Jaipur dated 28-07-2011 for the assessment year 2007-08.

2.1 Since the facts in both the appeals are identical and the grounds raised therein are also common, therefore, for the sake of convenience, these two appeals are being disposed off by this composite order.

3.1 There is a delay of 32 days in filing these appeals. The concerned assessees have filed applications for condonation of delay supported by respective affidavit. The reasons stated in the applications as well as affidavits for not filing the appeals within the period of limitation are identical. It has been stated that impugned orders in the case of both the assessees were served upon to their counsel Shri Mahendra Gargieya on 24-08-2011 at Jaipur which was subsequently handed over to the employee of the assessee. Since the impugned order of the respective assessee was mistakenly left at the house of employee of the assessee, therefore, it could not be communicated to the assessee in time. After lapse of sometime when the assessee asked his employee about the impugned order received from the counsel, he realized that the same was left at his house and accordingly the assessee took necessary steps for filing the present appeals.

3.2 Having considered the rival submissions and the facts and circumstances of the case, we are satisfied that the assessee has explained the sufficient cause for not filing the appeals within the period of limitation. The reasons explained by the assessee are not found as malafide or a devise to cover the ulterior motive. Therefore, in the interest of justice, we condone the delay of 32 days in filing these appeals by the assessee.

4.1 Since the common grounds are raised in these appeals, therefore, the grounds raised in ITA No. 1023/JP/2011 for the assessment year 2007-08 in the case of Shri Mukesh Kumar Jain are reproduced as under:-

''1. The impugned additions and disallowances made in the order u/s 143(3) of the Act dated 14-12-2009 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.

2.1 The ld. CIT(A) erred in law as well as on the facts of the case in confirming the application of Section 145(3). The provision so invoked by the AO and confirmed by the ld. CIT(A) being contrary to the provisions of law and facts, the same kindly be quashed. Consequently, the trading addition of Rs. 3,98,128/- kindly be deleted in full.

Alternatively and without prejudice to above.

2.2.1 The ld. CIT(A) erred in law as well as on the facts on confirming the addition of Rs. 2,51,302/- by applying yield rate of 34.25% as against 3.95% shown by the appellant. The addition so made by the AO and confirmed by the ld. CIT(A) is contrary to the provision of law and facts on the record and hence the same kindly be deleted in full.

2.2.2 The ld. CIT(A) erred in law as well as on the facts of the case in confirming the addition of Rs.68,093/- by applying yield rate of 26.50% as against 26.39% shown by the appellant. The addition so made by the AO and confirmed by the ld. CIT(A) is contrary to the provision of law and facts on the record and hence the same kindly be deleted in full.

2.2.3 The ld. AO erred in law as well as on the facts of the case in confirming the addition of Rs. 78,733/- by applying yield rate of 51% as against 50.41% shown by the appellant. The addition so made by the AO and confirmed by the ld. CIT(A) is contrary to the provision of law and facts on the record and hence the same kindly be deleted in full.

3. The ld. CIT(A) erred in law as well as on the facts of the case in making disallowance u/s 40A(2)(b) of Rs. 2,03,320/- out of total payment of interest claimed of Rs. 4,05,756/- by allowing @ 15% only as against 18% and 24% claimed by the appellant. The disallowance so made by the ld AO and confirmed by the ld. CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full.

4. The ld. CIT(A) erred in law as well as on the facts of the case in making disallowance of depreciation @ 15% on the amount of subsidy of Rs. 1,90,640/- on the purchase of plant and machinery. The disallowance so made by the AO and confirmed by the ld. CIT(A) being totally contrary to the provision of law and facts of the case, kindly be deleted in full

5. The ld. CIT(A) erred in law as well as son the facts of the case in making the disallowance out of the following expenses.

S.N.	Head of expenses	Exp. Claimed by the assessee	10% disallowed by the AO	Sustained by the ld. CIT(A)
5.1	Factory expenses	Rs. 88,752/-	Rs. 8,875/-	Rs. 8,875/-
5.2	Telephone expenses	Rs. 76,797/-	Rs. 7,680/-	Rs. 7,680/-
5.3	Depreciation on vehicle exp.	Rs. 75,508/-	Rs. 7,551/-	Rs. 7,551/-
	Total expenses disallowed		Rs. 24,106/-	Rs. 24,106/-

The disallowance so made by the ld AO and confirmed by the ld. CIT(A) is being totally contrary to the provisions of law and facts of the case, kindly be deleted in full.

6. The ld. AO erred in law as well as on the facts of the case in charging interest u/s 123A(3), 234B, 234D. The appellant totally denies its liability of charging of any such interest. The interest so charged and the withdrawal of interest being contrary to the provisions of law and facts, kindly be deleted in full.

5.1 During the course of hearing, the ld. AR of the assessee has stated that the assessee does not press the Ground No. 1. Therefore, the same is dismissed being not pressed.

6.1 The Ground No. 2 of the assessee is regarding gross profit addition by applying the provisions of Section 145(3) of the Act.

6.2 The brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of edible oils and oil cakes and oil seeds. During the year under consideration, the assessee has declared the gross profit rate at 6% as against gross profit rate at 7.13% in the immediately preceding year. The AO noted that the assessee has declared yield at 33.95% from the production of mustard oil which is lower than the yield declared in earlier years ranging between 36% to 37%. Similarly, the yield declared by the assessee in respect of production of groundnut oil is 26.39% which is lower than the yield declared in the assessment year 2005-06, the yield is higher than the rate of 25.94% in the preceding year (i.e. assessment year 2006-07). The AO further noted certain defects in the books of account of the assessee with respect to stock register and production register which were not maintained separately for different qualities of seeds. The AO also noted that production register/ manufacturing register does not contain any day today details for shortage of various lots and therefore, due to these defects, verification of yield was not possible as expressed by the AO. The AO accordingly applied the provisions of Section 145(3) of the Act and made addition of Rs. 3,98,128/- towards gross profit rate.

6.3 On appeal, the ld. CIT(A) has confirmed the action of the AO.

6.4 Before us, the ld. AR of the assessee has submitted that though the AO has alleged some defects in maintaining stock register / production register, however none of them are such so as to be based for invoking Section 145 of the Act. He has contended that merely because the assessee is not maintaining the quantitative and qualitative details on day today basis in formal register cannot be a basis of rejection of books of account.

6.5 On the other hand, the ld. DR has relied on the orders of the authorities below and submitted that the AO has clearly pointed out that the assessee is not maintaining stock register /production register so as to verify monthwise quantitative and qualitative details of the seeds and yield from production of different products. The assessee has also not maintained monthwise consumption of fuel and power in the factory. Therefore, verification of consumption of power and fuel in the production activity was not possible.

6.6 Having considered the rival submissions and carefully gone through the relevant material on record, we find that the AO has pointed out certain defects and deficiencies in the record of the assessee as the assessee is not maintaining stock register and production register separately for different qualities of seeds. Further, the assessee is also not maintaining monthwise consumption of fuel and power for running the plant and machinery/ factory. Therefore, the AO expressed that verification of consumption of power and fuel in production activity was not possible. We find that non-maintenance of proper stock register and production register as well as the records showing monthwise consumption of fuel and power is certainly the defects in the books of account maintained by the assessee and therefore, in our view the AO was justified in rejecting the books of account by invoking the provision of Section 145(3) of the Act which has been confirmed by the ld. CIT(A).

6.7 As regards the addition made on account of lower yield in comparison to earlier years and applying gross profit rate which is higher than the rate declared by the assessee in the year under consideration, it is pertinent to note that the yield from a particular production / manufacturing activity cannot be expected at same rate as in earlier years or in subsequent years. There is always a possibility of some reasonable/ minor variation in the profit ratio of different years. In the case where the correct results of the activity of the assessee cannot be ascertained from the books of account due to certain defects then the only option left with the AO is to adopt the reasonable gross profit rate . In view of the facts and circumstances of the case, average gross profit rate for earlier years shall be taken as gross profit rate for the year under consideration instead of adopting the highest gross profit rate amongst earlier years. The AO is directed to take average of gross profit rate of earlier years which was accepted by the Revenue.

7.1 The Ground No. 3 of the assessee is regarding disallowance u/s 40A(2)(b) of the Act on account of excess interest payment.

7.2 The brief facts of the case are that the assessee has allowed interest @ 18% to 24% to the persons / members who are covered u/s 40A(2)(b) of the Act. The AO was of the view that prevailing bank rate and as per income tax Act, the rate of interest to the partners in the case of firm was around 12% only. Therefore, the interest paid by the assessee to the parties covered u/s 40A(2)(b) of the Act is excessive and accordingly, the AO disallowed the interest @ 3% which comes to Rs. 2,03,320/-.

7.3 On appeal, the ld. CIT(A) has confirmed the addition made by the AO.

7.4 The ld. AR of the assessee submitted that the loans were taken by the assessee in earlier years and there is no fresh loans taken from the related parties during the year under consideration. The ld. AR further contended that in earlier years, the AO allowed the interest payment made by the assessee at same rate. Therefore, there is no justification for disallowance of interest being excessive for the year under consideration. He has further submitted that when the loan taken from related parties for a longer period then interest rate @ 18% to 24% is justified.

7.5 On the other hand, the ld. DR submitted that the AO has pointed out that the assessee has taken loans from others which are not related parties and the interest paid by the assessee to non-related parties is considerably less than the interest paid to the related parties. Therefore, the AO is justified in disallowing the interest which is excessive in comparison to the fair interest rate prevailing in the market.

7.6 Having considered the rival submissions and carefully gone through the relevant material on record, we are of the view that the bank rate cannot be applied in the case of loan taken from related parties because of the reason that in case of bank loan, the assessee has to furnish guarantee as well as security whereas in the case of loan taken from related parties, the guarantee and physical security are not required. Accordingly, there is a difference in the rate of interest when the loan is taken without guarantee or security. In our view, the interest on the loan taken from relatives which is without guarantee and security as against bank loan is always higher and therefore, the reasonable rate of interest in such a case is justified @ 18%. Accordingly, we direct the AO to apply the fair market rate of interest at 18% while applying the provision of Section 40A(2)(b) of the Act.

8.1 Ground No. 4 of the assessee is regarding disallowance of depreciation on subsidy account.

8.2 The AO noted that the assessee has shown subsidy of Rs. 1,90,640/- which was received on purchase of plant and machinery. After considering the details and submissions filed by the assessee, the AO disallowed depreciation @ 15% on subsidy of Rs. 1,90,640/- and added the same to the income of the assessee. Accordingly, the addition of Rs. 28,596/- was made to the income of the assessee.

8.3 On appeal, the ld. CIT(A) has confirmed the addition made by the AO on this account.

8.4 Before us, the ld. AR of the assessee has submitted that subsidy was given by the State Govt. to promote the industrial growth and was not earmarked for the plant and machinery. Therefore, it cannot be reduced from the cost of the plant and machinery for the purpose of depreciation. He has relied on the following case laws.

1. CIT vs. Ambika Electrolytic (P) Ltd., 191 ITR 494 (Raj.)

2. CIT vs. P.J. Chemicals Ltd., 210 ITR 830 (SC)

3. CIT vs. Udaipur Development Mineral, 124 CTR 141 (Raj.)

8.5 On the other hand, the ld. DR has submitted that when the subsidy was given on purchase of plant and machinery then the cost of plant and machinery will be reduced by the amount of subsidy given by State Govt.

8.6 We have considered the rival submissions as well as the relevant material on record. The fact emerged from the record shows that the subsidy was granted by the State Govt. to the assessee towards the eligible fix capital investment of the proposed unit of the assessee. Even otherwise, the calculation of the subsidy is based on the cost of the plant and machinery which clearly suggests that object and scheme of subsidy was to promote capital investment and accordingly the subsidy amount was dependent on the amount of investment made by the assessee in purchase of plant and machinery. Thus it is evident that there is a clear nexus between subsidy received by the assessee and investment made in the plant and machinery. In view of the above facts and circumstances of the case, we do not find any error or illegality in the orders of the authorities below qua this issue. Accordingly, the order of the ld. CIT(A) is upheld on this issue.

9.1 The Ground No. 5 of the assessee is regarding disallowance on account of various expenses.

9.2 The AO has made 10% disallowance in respect of factory expenses, telephone expenses and depreciation on vehicle expenses on account of personal use/ element.

9.3 On appeal, the ld. CIT(A) has confirmed the disallowances so made by the AO.

9.4 We have heard the ld. AR as well as ld. DR and considered the relevant materials on record. The authorities below have disallowed 10% of the expenses on account of factory expenses, telephone expenses and depreciation on vehicle because the assessee failed to maintain proper records and made cash payment supported by self prepared vouchers. Therefore, the authorities below found that the element of personal use of such facilities was not ruled out. The findings of the ld. CIT(A) in para 5.3 are as under:-

''5.3 I have gone through the basis of the AO for making the adhoc additions in respect of the above expenditures and also rebuttal made by the ld. AR on these accounts. Main reasons for the opting for such partial disallowance are to cover up the findings of non-availability of proper records, cash payments towards self prepared vouchers and involvement of personal usage of such facilities on the part of the AO. Regarding the partial disallowance of factory expense is concerned, the issue of self prepared vouchers and cash payments thereof has made certainly an impossible task for the AO to verify the correctness and genuineness to full extent of such aspect Thus the partial disallowance of 10% on this account is found fair ad reasonable. Similarly, it is felt that the personal element always remains present in the expenditures like telephone expenses. Thus the disallowance of 10% of such expenses is justified to cover up this concerned, this is also found justified and in the line of the decisions of various Courts, which have held that such proposition, (i.e. partial disallowance of depreciation) is a valid in nature, in case of the usage of car etc. involves personal element also. The above ratio is upheld in following case laws:-

1. Jitendra Printing Works, 128 CTR 225 (Raj.)

2. Chitram & Co. 191 ITR 96 (Mad.)

3. Malyalam Plantation Ltd. 168 ITR 63 (Ker.

In the light of the above deliberation, I find that the AO was within his right to make such partial disallowances in respect of the expenses under consideration and no inference is made in this regard. The ground of appeal no. 5 is, thus rejected.''

9.5 Since the assessee has not maintained proper records with respect to the expenses of telephone and usage of vehicle, therefore, the personal use of telephone as well as vehicle cannot be ruled out because the assessee is not having separate private vehicle. Further since certain expense are claimed to be made in cash and supported by self prepared vouchers, therefore, adhoc disallowance of 10% made by the authorities below on this account is also justified. Accordingly, we do not find any error or illegality in the orders of the authorities below qua this issue.

10.1 Now we take up ITA No. 1024/JP/2011 for the assessment year 2007-08 in respect of Shri Padam Chand Jain wherein the grounds of the assessee is common with the grounds of appeal relating to Shri Mukesh Kumar Jain in ITA No. 1023/JP/2011 for the assessment year 2007-08.

10.2 Considering the similar facts and circumstance of the case relating to Shri Padam Chand Jain, we find that our findings as given in the case of Shri Mukesh Kumar Jain in ITA No. 1023/JP/2011 shall apply mutatis mutandis.

11. In the result, the appeals of the assessee are partly allowed.

Order pronounced in the open Court on 29-05-2013.

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