FRAKIN A DAVID, MUMBAI V. JCIT RG 23(2), MUMBAI

ITA 3658/MUM/2011

• Counselvise Citation: 365819914 RSA 2011
• Duration Of Justice: 2 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 11-09-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 06-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SODHI SINGH
• Assessee Lawyers: DHANESH SHAH
• Keywords: Gift; Business income; Depreciation; Income from undisclosed sources; Salary income
• Section: 68; 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . , , , BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER . / ITA NO. 3658 /MUM./ 2011 ( / ASSESSMENT YEAR : 20 05 06 ) FRANKLIN A. DAVID 401, MARATHON GALAXY I L.B.S. MARG, MULUND (W) MUMBAI 400 080 .. / APP ELLANT V/S JT. COMMISSIONER OF INCOME TAX RANGE 23(2), MUMBAI .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AAEPD2363H / ASSESSEE BY : MR. DHANESH SHAH / RE VE NUE BY : MR. SODHI SINGH / DATE O F HEARING 2 3 .0 1 .201 4 / DATE OF ORDE R 12.02.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER DATED 28 TH FEBRUARY 2 011, PASSED BY THE LEARNED COMMISSIONER (APPEALS) XXXIII, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 FRANKLIN A. DAVID 2 (FOR SHORT 'THE ACT' ) FOR THE ASSESSMENT YEAR 2005 06 ON THE FOLLOWING GROUNDS: 1. THE LD. COMMISSIONER OF I NCOME - TAX (APPEALS) HAS ERRED IN LAW AND IN FACTS IN PASSING THE ORDER U/S. 250 OF THE ACT PARTIALLY CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER . 2. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ADD ITION OF RS.19,08,L16/ - OUT OF RS .4 7,29,975/ - ON ACCOUNT OF ESTIMATED GROSS PROFIT. 3. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE OF RS.1,25,054/ - , OUT OF THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER AMOUNTING TO RS. 4 ,75,918/ - . 4. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN LAW AND FACTS IN CONFIRMING THE ADDITION OF RS.28,OOO/ - ON ACCOUNT OF UNEXPLAINED AGRICULTURAL INCOME. 5. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN LAW AND FACTS IN CONFIRMING THE FOLLOWING DISALLOWANCES: A ) RS. 1,533 OUT OF GENERAL EXPENSES. B ) RS.3,63,293 OUT OF TRAVELLING AND CONVEYANCE C ) RS. 2,49,736 OUT OF ADVERTISING, CONFERENCE AND SALES PROMOTION EXPENSES. THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN CONFIRMING THE DISALLOWANCE OF RS.26,665 U/S 40(A)(IA) . 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS IN CONFIRMING THE DISALLOWANCE OF ` 26,665 U/S 40(A)(IA) OF THE ACT. 2 . FACTS IN BRIEF : - THE ASSESSEE IS AN INDIVIDUAL WHO HAS FILED HIS RE TURN OF INCOME ON 31 ST OCTOBER 2005, DECLARING TOTAL INCOME OF ` 1,00,19,843. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAD SHOWN INCOME FROM SALARY, INCOME FROM BUSINESS, INCOME FROM HOUSE PROPERTY AND INCOME FROM OTHER SOURCES. UNDER THE HEAD BUSINESS INCOME , THE ASSESSEE HAS SHOWN NET PROFIT OF ` 98,73,074 FROM HIS PROPRIETORSHIP CONCERN, M/S. LIFECARE MEDICAL SYSTEM , WHICH DEALS IN MEDIC AL EQUIPMENT AND ALSO UNDERTAKES MAINTENANCE AND CONTRACT OF SUCH MEDICAL EQUIPMENT. IN ADDITION T O THIS, THE ASSES SEE ALSO RECEIVES COMMISSION INCOME. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FRANKLIN A. DAVID 3 SUBMIT THE PROFIT & LOSS ACCOUNT TO SHOW AS TO HOW THE ASSESSEE HAS SHOWN THE RESULT FROM HIS TRADING ACTIVITY. FROM SUCH DETAILS, HE NOTED THAT THE ASSESSEE IS INCURRING A GROSS LOSS ON THE TRADING ACCOUNT AND FROM THE TOTAL COMMISSION RECEIVED AT ` 1.86 CRORES, THE ASSESSEE HAD SHOWN VERY NEGLIGIBLE PROFIT. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT UNDER THE HEAD BUSINESS INCOME , OVERALL THERE IS PROFIT OF ` 9,74,655 AND NOT LOSS . THE ASSESSEES NATURE OF BUSINESS OF ACTIVITY IS COMBINATION OF TRADING OF GOODS, PROVIDING ANNUAL MAINTENANCE, SUPPLYING OF GOODS AND COMMISSION INCOME. THE PURCHASE OF GOODS ALSO INCLUDES THE PARTS / EQUIPMENTS WHICH AR E USED BY THE ASSESSEE IN EARNING THE ANNUAL MAINTENANCE INCOME AS WELL AS THE COMMISSION INCOME. THE PURCHASES OF ` 71,65,232, INCLUDE D THE FOLLOWING: - A. SPARES SUPPLIED AGAINST COMPREHENSIVE MAINTENANCE CONTRACTS (CMC) AS PART OF THE TERMS OF SUCH CONT RACTS; B. LOCAL PARTS AND SPARES SUPPLIED AS PART OF TERMS OF QUOTATION FOR SUPPLY OF VENTILATOR. THE COMMISSION INCOME RECEIVED BY THE APPELLANT TAKES CARE OF THE EXPENSES INCURRED BY THE APPELLANT FOR SUCH LOCAL SUP PLIES; C. THE FREE REPLACEMENT OF SPA RES DURING WARRANTY PERIOD FOR DAMAGED OR DEFECTIVE SPARES; D. THE FREE SAMPLES OF SPARES FOR PROCURING ORDER FOR SPARES. 3 . THUS, THE PURCHASES MADE AND THE EXPENDITURE INCURRED AGAINST THE ANNUAL MAINTENANCE INCOME AND COMMISSION INCOME WERE ALSO INCLUDE D IN THE AGGREGATE PURCHASES. THERE IS NO TRADING LOSS AFTER FRANKLIN A. DAVID 4 CONSIDERING THE SUPPLY A ND SPARE PARTS MADE AS PER THE A MC AND OTHER SUPPLIES AS PART OF THE TERMS OF CONTRACT. THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE A SSESSEES EXPLANATION AND DISAL LOWED THE GROSS LOSS OF ` 37,55,321, IN THE TRADING ACCOUNT IN THE FOLLOWING MANNER: - GOODS TRADED IN ` 71,65,232.26 INCLUDES, IN ADDITION TO PURCHASES MADE AGAINST SALES, THE FOLLOWING: ( A ) SPARES SUPPLIED AGAINST COMPREHENSIVE MAINTENANCE CONTRACTS AS PA RT OF THE TERMS OF SUCH CONTRACTS (SAMPLE COPY OF CONTRACT & SERVICE REPORTS ENCLOSED); ( B ) LOCAL PARTS AND SPARES SUPPLIED AS PART OF TERMS OF QUOTATION FOR SUPPLY OF VENTILATOR (COPY OF QUOTATIONS ENCLOSED). COMMISSION RECEIVED BY THE ASSESSEE TAKES CARE OF THE EXPENSES INCURRED BY THE ASSESSEE FOR SUCH LOCAL SUPPLIED. ( C ) FREE REPLACEMENT OF SPARS DURING WARRANTY PERIOD FOR DAMAGED OR DEFECTIVE SPARES. ( D ) FREE SAMPLES OR SPARES FOR PRODUCING ORDER OF SPARES. ( E ) THERE IS NO TRADING LOSS AS ALLEGED AFTER CONSIDERING SUPPLY OF SPARES AND PART MADE AS PER CMC AND OTHER SUPPLIED AS PART OF TERMS OF CONTRACT AS EXPLAINED ABOVE. ALSO ENCLOSED SAMPLES OF SALES INVOICES WITH RELATED PURCHASE BILLS FOR YOUR RECORD. TRADING ACCOUNT AS ON 31 ST MARCH 2005 PURCHASES ` 71,65, 232 SALES ` 56,73,192 OTHER EXPENSES ` 22,63,281 GROSS LOSS ` 37,55,321 ` 94,28,513 ` 94,28,513 4 . THE ASSESSING OFFICER ALSO NOTED THAT IN THE IMMEDIATELY PRECEDING YEAR, THE ASSESSEE HAD SHOWN GROSS PROFIT OF ` 1657620 WHICH GIVES THE GROSS PROFIT RAT E OF 17.18%. ACCORDINGLY, HE ADOPTED THE EARLIER YEARS GROSS PROFIT RATE OF 17.18% AND IGNORED THE LOSS. THUS, HE MADE AN ADDITION OF ` 9,74,654 ON ACCOUNT OF GROSS PROFIT RATE FRANKLIN A. DAVID 5 AND IN ADDITION TO THIS, FURTHER DISALLOWANCE OF ` 37,55,321 ON ACCOUNT OF LOS S. THUS, THE AGGREGATE ADDITION IN THE TRADING ACCOU NT WAS MADE AT ` 42,29,975. THE ASSESSING OFFICER FURTHER NOTED THAT IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAS DEBITED SEVERAL EXPENSES WHICH ARE OF PERSONAL IN NATURE. THESE PERSONAL EXPENSES AGGREG ATED TO ` 4,75,918. HE ALSO ADDED THE AGRICULTURAL INCOME OF ` 28,000 AS THE ASSESSEE COULD NOT PRODUCE THE EVIDENCE WITH REGARD TO THE AGRICULTURAL PRODUCE AND TREATED THE SAME UNDER THE HEAD INCOME FROM UNDISCLOSED SOURCES AND ADDED THE SAME UNDER SECT ION 68 OF THE ACT. BESIDES THIS, HE ALSO MADE FOLLOWING DISALLOWANCES: - PURCHASES U/S 40(A)(IA) ` 24,496 INTEREST ON TDS ` 2,169 GENERAL EXP. ` 15,733 TRAVELLING AND CONVEYANCE EXPENSES ` 3,63,293 ADVERTISEMENT CONFERENCE & SALES PROMOTION ` 2,49,756 5 . THE ASSESSEE, BEFORE THE LEARNED COMMISSIONER (APPEALS), SUBMITTED THAT THE GROSS PROFIT OF 17.81% WHICH HAS BEEN APPLIED BY THE ASSESSING OFFICER BASED ON EARLIER YEARS IS NOT CORRECT. THE ASSESSING OFFICER WHILE WORKING THE GROSS PROFIT RATE HAS REDUC ED THE ENTIRE PURCHASES MADE DURING THE EARLIER YEAR WHICH GIVES INCORRECT PICTURE. IN FACT, IN THIS YEAR, THE ASSESSEES BUSINESS RECEIPTS ARE FAR MORE WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE HAD SHOWN COMMISSION INCOME OF ` 1.83 CRORES AS AGAINS T ` 72.66 LAKHS SHOWN IN THE EARLIER YEARS. SIMILARLY, ANNUAL MAINTENANCE INCOME HAS BEEN SHOWN AT ` 35 LAKHS WHICH IN THE EARLIER YEAR WAS ` 16.90 LAKHS. THE FRANKLIN A. DAVID 6 ASSESSEE, THEREAFTER, RECASTED HIS TRADING ACCOUNT SPECIFIC TO THE TRADING OF GOODS IN THE FOLLOW ING MANNER: - PARTICULARS AMOUNT ( ` ) PARTICULARS AMOUNT ( ` ) PURCHASES 35,63,380 SALES 57,42,556 GROSS PROFIT 21,79,176 57,42,556 57,42,556 THE ASSESSEE ALSO SUBMITTED OVER ALL GROSS PROFIT CONSIDERING ALL THE ACTIVITIES OF THE ASSESSEE AS COMPAR ED TO THE EARLIER YEARS IN THE FOLLOWING MANNER: - PARTICULARS A.Y. 04 05 ( ` ) A.Y. 05 06 ( ` ) PARTICULARS A.Y. 04 05 ( ` ) A.Y. 05 06 ( ` ) PURCHASES 6152952 7165232 SALES 9646336 5742556 DIRECT EXPENSES 1835765 2263282 ANNUAL MAINTENANCE 1689102 3504868 GRO SS PROFIT 10613239 18178976 COMMISSION INCOME 7266518 18360066 18601956 27607490 18601956 27607490 THUS, IT WAS POINTED OUT THAT THE ASSESSEE HAS EARNED VERY HIGH GROSS PROFIT MARGIN AS COMPARED TO THE EARLIER YEARS. 6 . THE LEARNED COMMISSIONER (APPEAL S) REMANDED THE MATTER TO THE ASSESSING OFFICER TO VERIFY THE ASSESSEES CONTENTION. THE ASSESSING OFFICER SUBMITTED HIS REMAND REPORT , EXTRACT OF WHICH HAS BEEN GIVEN AT PAGE - 5 OF THE APPELLATE ORDER. THE SUM AND SUBSTANCE OF THE ASSESSING OFFICERS SUBMI SSIONS WAS THAT THE ASSESSEE HAD SHOWN HIGHER GROSS PROFIT MARGIN ONLY BECAUSE OF THE COMMISSION INCOME AND INCREASE IN MAINTENANCE CONTRACT. FURTHER, THE ASSESSEE HAD SHOWN EXPENSES OF ANNUAL MAINTENANCE CONTRACT WHICH HAS BEEN DEBITED IN THE TRADING FRANKLIN A. DAVID 7 ACCO UNT OF SALE AND PURCHASE OF GOODS , WHICH DOES NOT GIVE A TRUE PICTURE. AFTER CALLING FOR THE ASSESSEES COMMENTS, THE LEARNED COMMISSIONER (APPEALS) AGAIN REMANDED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER. IN RESPONSE TO THE SAME, A DETAIL REMA ND REPORT WAS GIVEN BY THE ASSESSING OFFICER, THE RELEVANT PORTION OF WHICH ARE AS UNDER: - 2. IN THE SUBMISSIONS MADE BEFORE YOUR HONOUR AS PER LETTER DATED 22.10.2008, THE ASSESSEE HAS GIVEN JUSTIFICATION REGARDING TRADING RESULTS DECLARED BY HIM FOR T HE YEAR AND POINTED OUT THAT THE PURCHASES INCLUDE ITEM PURCHASED IN CONNECTION WITH EARNING COMMISSION INCOME, BY WAY OF A MC , ITEMS FREELY SUPPLIED TO DOCTORS, ITEMS PURCHASED FOR THE PURPOSE OF DEMO ETC. THE BIFURCATION OF THESE PURCHASES GIVEN BY THE AS SESSEE ARE AS UNDER: MATERIALS SUPPLIED FREE OF COST IN INSTALLATION IN CONNECTION WITH COMMISSION INCOME EARNED ` 1425314.21 DETAILS OF MATERIALS SUPPLIED UNDER WARRANTY ` 242543.53 MATERIAL PURCHASED AND MAINTENANCE CONTRACT ` 447422.93 PURCHASE U SED IN DEMO ` 270022.85 FAULTY MATERIALS DELETED FROM STOCK ` 326585.94 DETAILS OF MATERIAL SUPPLIED FREE OF COST ` 880962.45 TOTAL ` 3592851.91 3. IF THE TRADING ACCOUNT AS PER ASSESSING OFFICER IS RECASTED TO CONSIDER THE ABOVE PURCHASES EXPLAINED THEN IT WILL GIVE PICTURE LIKE DEPICTED BELOW: PURCHASES (7165232 3601851) ` 3563301 SALES ` 5673192 OTHER EXPENSES AS PER A.O. ` 2263821 GROSS LOSS ` 153470 4. FROM THE ABOVE, IT CAN BE SEEN THAT - THERE IS STILL GROSS LOSS IN TRADING ACTIVITY ALONE . THIS HAS TO BE CONSIDERED BY KEEPING IN MIND THE FACT THAT IN SPITE OF ALL PURCHASES RELATING TO ANNUAL MAINTENANCE CONTRACT, ETC. INCLUDED IN THE LAST YEAR TRADING ACCOUNT, ASSESSEE HAS GROSS PROFIT OF RS. 16,57,620 . FRANKLIN A. DAVID 8 5. THOUGH ASSESSEE HAS DECLARED IN COME FROM A MC , COMMISSION INCOME ETC., THE ABOVE TRADING RESULTS CANNOT BE IGNORED AT ALL. IT MAY BE MENTIONED THAT OUT OF PURCHASES EXCLUDED AS PER ASSESSEE'S SUBMISSION ALSO THERE ARE FOLLOWING PURCHASES CANNOT BE CONFIRMED FROM OTHER PARTIES. I. FAUL T MATERIALS DELETED FROM STOCK RS. 326585 II. DETAILS OF MATERIAL SUPPLIED FREE OF COST RS.880962 III. PURCHASES USED IN DEMO RS. 279022 TOTAL RS. 1486569 6. SINCE THE ABOVE CLAIM OF THE ASSESSEE CANNOT BE VERIFIED, IF THESE PURCHASES ARE NOT EXCLUDED WHILE RECASTING THE TRADING ACCOUNT FOR CURRENT YEAR LOSS WILL GO UP BY THIS AMOUNT AND TOTAL GROSS LOSS FOR 2005 - 06 IN TRADING ACTIVITY WILL WORK OUT TO RS. 16,40,039/ - . 7. EVEN WITHOUT ANY VERIFICATION OF OTHER PURCHASES, ITEM MENTIONED BY TH E ASSESSEE FOR EARNING COMMISSION INCOME & AMC ETC . AS THEY ARE CLAIMED, STILL ASSESSEE HAS TO SATISFACTORILY EXPLAIN ABOVE GROSS LOSS. 8. HENCE, IT IS SUBMITTED THAT THE ADDITION MADE BY THE A.O. TOWARDS GROSS PROFIT ADDITION OF TRADING RESULTS DECLARED BY THE ASSESSEE MAY BE CONSIDERED KEEPING IN VIEW THE ABOVE FACTS DISCUSSED. FURTHER, REPORT REGARDING PURCHASES RELATING TO EARNING OF COMMISSION INCOME, AMC IS BEING VERIFIED BY DEPUTING THE INSPECTOR OF THIS CIRCLE AND THE SAME WILL BE REPORTED AS SOON AS ENQUIRIES ARE COMPLETED.' 7 . THE ASSESSEE, IN RESPONSE TO THE SAID REMAND REPORT, FILED HIS REJOINDER SUBMISSIONS WHICH HAVE BEEN DEALT BY THE LEARNED C IT(A) AT PAGE - 7 AND 8. THE BREAK - UPS OF GROSS RECEIPTS AND THE BREAK - UP OF AGGREGATE PURCHASES AS WELL AS THE CORRESPONDING EXPENDITURE INCURRED AGAINST VARIOUS INCOME EARNED WERE AS UNDER A . RECEIPTS NATURE OF RECEIPTS AMOUNT ( ` ) COMMISSION INCOME 1,83,60,066 ANNUAL MAINTENANCE CHARGES 35,04,868 TRADING SALES 56,73,192 FRANKLIN A. DAVID 9 B. PURCHASES A MATERIALS PURCHASED AND CONSUMED FOR THE PURPOSE OF AMC ` 4,47,422.93 B PURCHASE RELATING TO TRADING SALES ` 35,63,380.35 C MATERIAL SUPPLIED FREE OF COST IN CONNECTION WITH COMMISSION INCOME EARNED ` 14,25,314.21 D MATERIAL SUPPLIED UNDER WARRANTY ` 2,42,543.53 E. MATERIAL USED IN DEMO MACHINES ` 2,79,022.85 F. MATERIAL SUPPLIED FREE OF COST ` 8,80,962.45 G. FAULTY AND OBSOLETE MATERIALS DELETED FROM STOCKS ` 3,26,585.94 TOTAL PURCHASES ` 71,65,232.26 C. DIRECT EXPENSES 8 . AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND THE REMAND REPORT OF THE ASSESSING OFFICER, THE LEARNED COMMISSIONER (APPEALS) DEALT THE ISSUE IN GREA T DETAIL AND REJECTED THE ASSESSEES BOOKS OF ACCOUNT & TRADING RESULTS AND THEREAFTER APPLIED GROSS PROFIT RATE OF 5% AND ESTIMATED THE INCOME AT ` 2,83,659 ON TRADING ACCOUNT. BESIDES THIS, AFTER RELYING UPON THE REMAND REPORT OF THE ASSESSING OFFICER, S HE ALSO DISALLOWED EXPENDITURE UNDER THE VARIOUS HEADS AGGREGATING TO ` SR NO. PARTICULARS AMOUNT (RS.) REMARK I. SERVICE CHARGES PAID 18,17,427 EXPENSES INCURRED AGAINST COMMISSION INCOME FOR VENTILATORS AND INSTALLATION OF FOR MAINTENANCE WORK CARRIED OUT AGAINST AMC. 2. CLEARING CHARGES PAID 2,72,293 EXPENSES INCURRED AGAINST COMMISS ION INCOME. 3. CUSTOM DUTY PAID 1,73,561 EXPENSES INCURRED AGAINST COMMISSION INCOME. FRANKLIN A. DAVID 10 10,16,550, FURTHER SUM OF ` 4,45,854 ON ACCOUNT OF CLEARING CHARGES ON CUSTOM DUTY AND ALSO THE DISALLOWANCE OF GROSS LOSS OF ` 1,62,073 WHICH WAS ARRIVED BY HER AFTER RECASTING THE TR ADING ACCOUNT. THE RECASTED TRADING ACCOUNT, ALONG WITH VARIOUS ADDITIONS HAVE BEEN SUMMED UP BY THE LEARNED COMMISSIONER (APPEALS) AS UNDER: - PURCHASES (REVISED) ` 3563380 SALES ` 5673192 FREE OF COST MATERIAL ` 880962 DEMO MACHINES ` 279022 PROPO RTIONATE SERVICE CHARGES ` 1111901 GROSS LOSS ` (162073) ` 5835265 ` 5835265 IT IS SEEN THAT STILL THERE IS GROSS LOSS IN THE TRADING. THUS TOTAL ADDITION OF ` 10,16,550 DISALLOWED UNDER THE HEAD PURCHASES AND ` 4,45,854 DISALLOWED AS CLEARING CH ARGES AND CUSTOM DUTY PAID ARE ADDED IN THE INCOME. FURTHER THE FIGURE OF LOSS OF ` 1,62,073 BEING NOT TENABLE IS REJECTED. THE APPELLANT HAS CHALLENGED GP ADDITION ALSO ON THE GROUND THAT BOOKS OF ACCOUNT HAVE NOT BEEN REJECTED. SINCE THESE DEMO MACHINES ARE FORMING PART PURCHASES BUT NOT REFLECTED ANY WHERE AS CLOSING STOCK IS ALWAYS SHOWN AT NIL BY APPELLANT, THE BOOKS OF ACCOUNT ARE DEFECTIVE TO THIS EXTENT AND HENCE APPELLANTS PLEA THAT GP CAN NOT BE ESTIMATED AS BOOKS OF ACCOUNT ARE NOT REJECTED HAS NO LEG TO STAND. THIS PLEA IS ALSO REJECTED. ACCORDINGLY, GP AT 5% IS ESTIMATED AT ` 2,83,659 AND ADDED IN THE INCOME. THUS, IN ALL ADDITION TO THE EXTENT OF ` 19,08,116 (AMC MATERIAL ` 447422 + MATERIAL SUPPLIED UNDER WARRANTY ` 242523 + OBSOLETE MATERIA L ` 326585 + CLEARING CHARGES ` 272293 + CUSTOM DUTY ` 173561 + GROSS LOSS ` 162073 + GP ESTIMATED ` 283659) IS SUSTAINED AGAINST THE ADDITION MADE. 9 . THUS, THE ADDITION TO THE EXTENT OF ` 19,08,116 WAS SUSTAINED . B EFORE US, THE LEARNED COUNSEL MADE A DETA IL SUBMISSIONS WITH REGARD TO THE VARIOUS OBJECTIONS AND CONCLUSIONS DRAWN BY THE LEARNED COMMISSIONER (APPEALS). BESIDES THIS, HE ALSO SUBMITTED THAT ONCE THE BOOKS OF ACCOUNT HAS BEEN REJECTED AND THE GROSS PROFIT HAS BEEN APPLIED THEN NO FURTHER DISALLO WANCE SHOULD HAVE BEEN MADE ON FRANKLIN A. DAVID 11 ACCOUNT OF DIRECT HEADS OF EXPENDITURE. IN SUPPORT OF HIS CONTENTION, HE STRONGLY RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S DHEERAJ R. RUNGTA, [2013] 40 TAXMAN.COM 284 (BOM.). 10 . THE LEARNED D EPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, AFTER REFERRING TO THE VARIOUS REMAND REPORT OF THE ASSESSING OFFICER AS INCORPORATED IN THE APPELLATE ORDER AND THE CONCLUSION AND THE REASONS GIVEN IN THE IMPUGNED ORDER, SUBMITTED THAT THE LEARNED COMMISSIO NER (APPEALS) HAS DONE VERY FAIR ESTIMATE OF THE INCOME OF THE ASSESSEE AFTER CONSIDERING EACH AND EVERY HEAD OF PURCHASES AND THE REASONS FOR REJECTING THE BOOKS OF ACCOUNT. HE THUS, STRONGLY RELIED UPON THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS). 11 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL PLACED ON RECORD. THE ASSESSING OFFICER HAS DISALLOWED THE GROSS LOSS AS PER HIS WORKING GIVEN ON ACCOUNT OF TRADING ACCOUNT OF MEDICAL EQUIP MENT. THE ASSESSEES CASE HAS BEEN THAT ALL ITS BUSINESS ACTIVITIES ARE COMPOSITE VIZ. TRADING OF MEDICAL EQUIPMENT, ANNUAL MAINTENANCE CHARGES AND COMMISSION INCOME WHICH CANNOT BE SEGREGATED . IN THE TRADING ACCOUNT, THE ASSESSEE HAS DEBITED ENTIRE PURCHA SES AND OTHER EXPENSES WHICH HAS BEEN DEBITED AGAINST THE SALE OF GOODS AND HAS SEPARATELY SHOWN COMMISSION INCOME AND AMC. THE LEARNED COMMISSIONER (APPEALS), AFTER DETAIL EXERCISE, HAS COME TO A CONCLUSION THAT AGGREGATION OF PURCHASES REFLECTED IN ASSES SEES BOOKS OF ACCOUNT AND TRADING RESULTS ARE NOT RELIABLE AND THE SAME ARE LIABLE TO BE REJECTED. FIRST OF ALL, SHE RECASTED THE TRADING ACCOUNT , WHEREIN THE LOSS OF ` 1,62,073 WAS DETERMINED. THEREAFTER, SHE DISALLOWED THE GROSS LOSS AND APPLIED GROSS P ROFIT RATE OF 5% ON THE SALES OF ` 56,73,193. S HE FURTHER PROCEEDED TO FRANKLIN A. DAVID 12 DISALLOW CERTAIN PURCHASES AGGREGATING TO ` 10,16,553 AND ALSO CUSTOM DUTY AND CLEARING CHARGES OF ` 4,45,854 BASED ON REMAND REPORT OF THE ASSESSING OFFICER. FROM THE RECORDS, IT I S SEEN THAT T HE ASSESSEE HA S SHOWN BUSINESS RECEIPTS FROM THE FOLLOWING SOURCES. TRADING SALES ` 56,73,192 COMMISSION INCOME ` 1,83,60,066 INCOME FROM AMC ` 35,04,868 TOTAL: - ` 2,75,38,126 AS AGAINST THIS, THE ASSESSEE HAD SHOWN FOLLOWING PURCHASES A GAINST THE AFORESAID BUSINESS INCOME. PURCHASES AGAINST TRADING INCOME ` 35,63,380 PURCHASES AGAINST COMMISSION AND AMC INCOME ` 36,01,851 TOTAL: - ` 36,01,851 BESIDES THIS, THE ASSESSEE HAS ALSO CLAIMED CUSTOM DUTY AND CLEARING CHARGES OF ` 4,45,854 A ND SERVICE CHARGES OF ` 18,17,427. THUS, THE TOTAL COST DEBITED UNDER THE DIRECT HEADS OF EXPENDITURE WERE ` 94,28,514. 12 . IN THIS CASE, THE ASSESSING OFFICER PROCEEDED TO DOUBT THE GROSS PROFIT RESULT ON THE TRADING OF GOODS , WHEREAS THE LEARNED COMMISSIONE R (APPEALS) HAS NOT ONLY REJECTED THE TRADING RESULT OF TRADING IN GOODS BUT ALSO DISALLOWED DIRECT EXPENSES RELATING TO COMMISSION AND AMC INCOME ALSO. ONCE THE LEARNED COMMISSIONER (APPEALS) HAS REJECTED THE ENTIRE TRADING RESULTS AND THE BOOKS OF ACCOUN T PERTAINING TO ALL THE THREE RECEIPTS, THEN THE BEST COURSE WAS TO APPLY GROSS PROFIT RATE ONLY AND NOT TO PICK - UP SOME OF THE DIRECT COST AND DISALLOW THE SAME ON THE GROUND THAT THE SAME DO NOT PERTAIN TO FRANKLIN A. DAVID 13 PARTICULAR BUSINESS RECEIPTS OR ACTIVITY BUT TO DIFFERENT ACTIVITY. ONCE THE BOOKS OF ACCOUNT HAS BEEN REJECTED AS A WHOLE FOR THE ENTIRE BUSINESS, THEN THE SAME BOOKS OF ACCOUNT CANNOT BE HELD TO BE RELIABLE FOR MAKING FURTHER ADDITIONS BY DISALLOWING VARIOUS DIRECT COST S DEBITED IN THE SAID BOOKS. ONC E THE FIGURE OF SALES IS AVAILABLE AND GROSS PROFIT RATE IS APPLIED, THEN IT TAKES CARE OF DIRECT EXPENSE S BECAUSE THE GROSS PROFIT IS THE BALANCING FIGURE OF THE DIRECT COST S DEBITED AND SALES CREDITED. WE DO NOT FIND ANY REASON TO UPHOLD THE ADDITIONS ON ACCOUNT OF DIRECT COSTS ONCE THE BOOKS OF ACCOUNT HAS BEEN REJECTED AND THE GROSS PROFIT RATE HAS BEEN APPLIED . IN SUCH A SITUATION, THERE IS NO FURTHER REQUIREMENT OF DISALLOWING THE COST OR PURCHASES. IN OUR OPINION, THE LEARNED COMMISSIONER (APPEALS) O UGHT TO HAVE RESTRICTED THE ADDITION TO THE EXTENT OF ESTIMATE OF GROSS PROFIT WHEN SHE HAS FOUND THAT BOOKS OF ACCOUNT ARE TO BE REJECTED AND THE TRADING RESULTS AS A WHOLE SHOWN BY THE ASSESSEE ARE NOT RELIABLE. THIS PROPOSITION IS DULY SUPPORTED BY THE DECISION OF GUJARAT HIGH COURT IN DHEERAJ R. RUNGTA (SUPRA). ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO APPLY THE GROSS PROFIT RATE OF 5% AS APPLIED BY THE LEARNED COMMISSIONER (APPEALS) ON SALES. THE BALANCE ADDITION S UNDER VARIOUS HEADS OF PURCHASES OR COST AGAINST COMMISSION AND AMC INCOME ARE NOT CALLED FOR. ACCORDINGLY, THE GROUND NO.1 AND 2 ARE TREATED AS PARTLY ALLOWED. 13 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ` 1,25,054 ON ACCOUNT OF EXPENDITURE S UNDER THE VARIOUS HEADS . 14 . THE LEARNED COMMISSIONER (APPEALS) HAS CONFIRMED 1/5 TH OF VARIOUS EXPENSES AS PERSONAL EXPENSES. THE RELEVANT FINDINGS AND OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS) ARE AS UNDER: GROUND NO.2 DEALS WITH DISALLOWANCE OF EXPENSES AGGREGATING TO RS.4,75,918/ - . THE ASSESSING OFFICER HAS FRANKLIN A. DAVID 14 REPORTED IN THE REMAND PROCEEDINGS THAT APPELLANT DID NOT FURNISH ANY EVIDENCE TO SUPPORT THE SAME AND MOREOVER PERSONAL USE OF CAR AND MOTOR CAR EXPENSES ARE NOT DENIED AND HENCE 1/5 TH MOTOR CAR EXPENSES HAVE BE EN DISALLOWED. THE APPELLANT HAS STATED THAT THOUGH FOR MOTOR CAR EXPENSES 1/ 5 TH OF EXPENSES HAS BEEN DISALLOWED INTEREST ON CAR LOAN AND DEPRECIATION HAD BEEN DISALLOWED IN TOTO. IN VIEW OF THIS, 1/5 TH MOTOR CAR EXPENSES UNDER THE HEAD INTEREST ON CAR OF RS.32,303/ - I.E. RS.6,460/ - AND MOTOR CAR DEPRECIATION OF RS.2,79,494/ - I.E. RS.55,898/ - ARE SUSTAINED ALONG WITH 1/5 TH MOTOR CAR EXPENSES AT RS. 39,067/ - , I.E. AN AMOUNT OF RS.1,01,425/ - UNDER THESE THREE HEADS. OTHER DISALLOWED AMOUNT ARE RS.68,601/ - UN DER PROFESSIONAL CHARGES DISALLOWED U/S 4 0(A)(IA), WC TAX RS.4,213 AND PROFESSION TAX RS.2,240/ - . THUS, AN AMOUNT OF RS.1,25,054/ - IS SUSTAINED AGAINST THE ADDITION MADE OF RS.4,75,918/ - . THIS GROUND IS PARTLY ALLOWED. 15 . AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT INSOFAR AS THE DISALLOWANCE OF 1/5 TH PORTION OF EXPENSES UNDER THE HEADS MOTORCAR EXPENSES , INTEREST ON CAR LOAN AND DEPRECIATION IS CONCERNED, THE SAID DISALLOWANCE OF 1/5 TH IS RESTRICTED TO 1/10 TH , AS THE ELEMENT OF PERSONA L NATURE OF EXPENSES HAS NOT BEEN REBUTTED BEFORE US. WITH REGARD TO THE AMOUNT DISALLOWED UNDER THE PROFESSIONAL CHARGES AFTER INVOKING THE PROVISIONS OF SECTION 40(A)(IA), WC TAX AND PROFESSIONAL TAX ARE CONCERNED, THE SAME ARE HEREBY CONFIRMED , AS THE A SSESSEE COULD NOT JUSTIFY THIS CLAIM BEFORE US . THIS GROUND IS THUS, TREATED AS PARTLY ALLOWED. 16 . GROUND NO.4, RELATES TO DISALLOWANCE OF ` 28,000 ON ACCOUNT OF UNEXPLAINED AGRICULTURAL INCOME. 17 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT HE DID NOT WISH TO PRESS THIS GROUND. THE LEARNED DEPARTMENTAL REPRESENTATIVE DID NOT OBJECT TO THE SUBMISSIONS OF THE LEARNED FRANKLIN A. DAVID 15 COUNSEL. CONSEQUENTLY, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED . 18 . IN GROUND NO.5, THE ASSESSEE HAS CHALLE NGED THE DISALLOWANCE OF ` 1,533 OUT OF GENERAL EXPENSES OF ` 3,63,293 OUT OF TRAVELLING AND CONVEYANCE AND ` 2,49,736 OUT OF ADVERTISEMENT, CONVEYANCE AND SALES PROMOTION. 19 . THE LEARNED COMMISSIONER (APPEALS) HAS CONFIRMED THESE DISALLOWANCES @ 20% AFTER O BSERVING AND HOLDING AS UNDER: GROUND NOS. 4 AND 5 DEALS WITH 20% DISALLOWANCE OUT OF TRAVELING AND CONVEYANCE AND THEN OUT OF ADVERTISING CONFERENCE AND SALES PROMOTION. THE ASSESSING OFFICER HAS MENTIONED IN PARA 8 OF THE ASSESSMENT ORDER THAT VERIFIC ATION OF THE DETAILS FILED SHOW THAT ITEMS ARE APPEARING FOR AIR TICKETS GIVEN TO DOCTOR AND GIFTS. THEN THERE ARE HOTEL BILLS FOR THEM DEBITED UNDER THESE HEADS. IN VIEW OF THIS, THE DISALLOWANCES WERE MADE. THE APPELLANT IS RELYING ON THE DOCUMENTS SHOWI NG THE BILLS FOR THE AMOUNT. HOWEVER, THERE IS NO DENIAL OF THE FACT THAT THESE EXPENSES WERE INCURRED FOR GIFTS AND ARRANGING AIR TICKETS FOR THE DOCTORS AND FOOTING THEIR HOTEL BILLS. IN VIEW OF THIS, ADDITIONS MADE BY WAY OF 20% DISALLOWANCES OF GENERAL EXPENSES FOR AN AMOUNT OF RS.15,733/ - , TRAVELING EXPENSES OF RS.3,63,293/ - AND ADVERTISING, CONFERENCE AND SALES PROMOTION OF RS.2,49,736/ - ARE SUSTAINED. 20 . AFTER HEARING BOTH THE PARTIES, WE FIND THAT THESE ARE AD HOC DISALLOWANCE WHEREBY THE ASSESSING O FFICER AND THE LEARNED COMMISSIONER (APPEALS) H AS DISALLOWED ALL SUCH EXPENSES @ 20%. 21 . LOOKING TO THE FACT THAT THE DISALLOWANCE HAS BEEN MADE ON THE GROUND THAT SOME OF THE EXPENSES RELATES TO GIFTS AND OBLIGATIONS FOR THE DOCTORS FOR WHICH THERE IS NO QU ANTIFICATION OF SUCH EXPENSES FROM THE BILLS WHICH WERE PRODUCED. WE ARE OF THE OPINION THAT THE REASONS FOR DISALLOWANCE BY THE ASSESSING OFFICER AS WELL AS THE LEARNED COMMISSIONER (APPEALS) ARE JUSTIFIED. THUS, THE MAJOR EXPENSES WHICH FRANKLIN A. DAVID 16 RELATES TO ADVERT ISEMENT, TRAVELLING AND SALES PROMOTION, CONVEYANCE, WHEREIN NO SUCH QUANTIFICATION HAS BEEN DONE EITHER BY THE ASSESSEE OR BY THE ASSESSING OFFICER WITH REGARD TO NON ADMISSIBLE EXPENSES , THEREFORE, ON FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE DISALLOWANCE OF 10% UNDER THESE HEADS WILL MEET THE ENDS OF JUSTICE. 22 . 2 2 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 12 TH FEBRUARY 201 4 ORDER PRONOUNCED IN THE OPEN COURT O N 12 TH FEBRUARY 2014 SD/ - . . R.C. SHARMA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 12 TH FEBRUARY 2014 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY O RDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI