Sri Ganesh Bottles Pvt Ltd., Hyd, Hyderabad V. DCIT, Central Circle-1(3), Hyd, Hyderabad

ITA 619/HYD/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2635 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-03-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 11-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANJALA SAHU
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Gross profit estimation; Depreciation; Business expenditure; Source of fund; Commercial expediency
• Section: 69C; 40A(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 616, 617, 618 AND 619/HYD/2015 ASSESSMENT YEARS: 2007-08, 2008-09, 2009-10 & 2010- 11 SRI GANESH BOTTLES PVT. LTD., , HYDERABAD. PAN AAECS 9962 J VS. DY. COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE 1(3), HYD. (APPELLANT) (RESPONDENT) ITA NO. 580/HYD/15 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE 1(3), HYD. VS. SRI GANESH BOTTLES PVT. LTD., , HYDERABAD. PAN AAECS 9962 J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.A. SAIPRASAD REVENUE BY : SMT. ANJALA SAHU DATE OF HEARING : 06-07-2017 DATE OF PRONOUNCEMENT : 30-08-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: ALL THESE APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS REVENUE DIRECTED AGAINST A COMMON ORDER OF THE LEAR NED COMMISSIONER OF INCOME-TAX (A) XI, HYDERABAD, DA TED 25/02/2015 FOR AYS 2007-08 TO 2011-12. AS IDENTICAL ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLUBBED AND HEARD TOGETHER AND T HEREFORE A COMMON ORDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 2. ON PERUSAL OF RECORD, WE FIND THAT THERE WAS A D ELAY OF 3 DAYS IN FILING OF THESE APPEALS BY THE ASSESSEE. TO THIS EFFECT, THE ASSESSEE FILED A PETITION FOR CONDONATION OF THE SA ID DELAY AS WELL AS AN AFFIDAVIT AFFIRMING THE REASON FOR FILING THE AP PEALS WITH A DELAY OF THREE DAYS THAT THE CA WHO IS LOOKING AFTER THE CAS ES OF THE ASSESSEE FELL ILL DURING THE RELEVANT POINT OF TIME, THEREFO RE THE DELAY OCCURRED. AS THE ASSESSEE WAS PREVENTED BY SUFFICIENT CAUSE I N FILING THE APPEALS WITHIN THE STIPULATED TIME, WE CONDONE THE SAID DELAY OF THREE DAYS AND ADMIT THE APPEALS FOR ADJUDICATION. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF USED LIQUOR BOTTLES AND BROKEN GLASS. IT HAD FILED ITS RETURN OF INCOME ADM ITTING TOTAL INCOME OF RS.10,57,471/-; RS.19,84,742/-; RS.21,55,949/- AND RS. 22,23,019/-FOR AYS 2007-08, 2008-09, 2010-11 & 2011-12 RESPECTIVEL Y. THIS CASE WAS SELECTED FOR SCRUTINY. ACCORDINGLY, NOTICE U/S. 143(2) WAS ISSUED AND SERVED ON ASSESSEE CALLING FOR VARIOUS DETAILS. ON THE BASIS OF INFORMATION FURNISHED BY THE ASSESSEE, THE ASSESSIN G OFFICER COMPLETED THE ASSESSMENTS AND DISALLOWED PART OF IN TEREST ON BORROWED CAPITAL DEBITED IN THE P&L ACCOUNT, 10% OF EXPENDITURE FOR A.Y. 2007-08 & 2010-11 & 15% OF EXPENDITURE FOR A.Y . 2011-12 AND PAYMENTS U/S. 40A(3) FOR A.Y. 2008-09. 4. AS REGARDS THE DISALLOWANCE OF PART OF INTEREST DEBITED TO P&L A/C, WHICH IS A COMMON GROUND IN ALL THE APPEALS UN DER CONSIDERATION, THE AO HAD DISALLOWED INTEREST OUT OF THE TOTAL AM OUNT DEBITED BY THE ASSESSEE TOWARDS INTEREST ON BORROWED FUNDS. THE AS SESSING OFFICER FOUND THAT THE ASSESSEE HAD GIVEN ADVANCES/INTEREST FREE LOANS TO ASSOCIATED PERSONS/CONCERNS FOR AYS 2007-08, 2008-0 9, 2010-11& 2011-12 AS GIVEN UNDER: 3 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. A) P. VENKATAIAH RS. 2, 50,000 B) M/S. RAJALAKSHMI GLASS PVT. LTD. RS.21,33,777 C) M/S. SOWBHAGYA CONSTRUCTIONS RS. 1,00,000 TOTAL RS.24,83,777 IN THE AY 2011-12, INTEREST FREE ADVANCE OF RS.1,00 ,000/- WAS ALSO GIVEN TO ONE MORE CONCERN VIZ. M/S. RAJALAKSHMI BOT TLES MERCHANTS MAKING THE TOTAL INTEREST FREE ADVANCE FOR THE YEAR MAKING THE TOTAL INTEREST FREE ADVANCE FOR THE YEAR AT RS. 25,83,777 / -. 5. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSE E HAD PAID INTEREST @15% TO THE BANK AND OTHERS ON THE BORROWE D FUNDS. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCES TO THE ABOVE-MENTIONED PERSONS AND IN TURN WAS PAYING INTEREST ON THE AMOUNTS BORROWED BY IT. HE THEREFOR E CALCULATED INTEREST @15% ON THE INTEREST FREE ADVANCES/LOANS A ND DISALLOWED OUT OF INTEREST PAID AMOUNTS OF RS.3,68,066/- FOR A.Y. 2007-08; RS.3,68,066/- FOR A.Y. 2008-09; RS.3,68,066/- FOR A .Y. 2010-11 AND RS.3,98,067 FOR A.Y. 2011-12 AS EXCESSIVE INTEREST PAID. 6. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE SUBMITTED THAT THE INTEREST FREE ADVANCE WAS GIVEN TO SRI P. VENKA TAIAH BECAUSE HE HAD 50 YEARS EXPERIENCE IN GLASS BUSINESS AND HAD H ELPED THE ASSESSEE TO GET ORDERS FROM VARIOUS COMPANIES. RAJA LAKSHMI GLASS PVT. LTD. HAD HELPED THE ASSESSEE IN GETTING ORDERS FOR BROKEN GLASS. M/S. SOWBHAGYA CONSTRUCTIONS WAS GIVEN ADVANCE FOR PURCHASE OF PROPERTY BUT THE DEAL DID NOT MATERIALISE. THE ASSE SSEE ALSO STATED THAT AT THE TIME WHEN ADVANCES WERE PAID TO THE DIF FERENT PARTIES, IT HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH I T. IN SUPPORT OF ITS CONTENTION, THE ASSESSEE RELIED ON THE FOLLOWING IT AT DECISIONS: A) S.P. JAISWAL ESTATES (P) LTD. VS. ACIT ~ITA NO. 488 & 525 (KOL.) OF 2011. B) CIT VS. PREMIER AUTO FINANCE PVT. LTD. {(1981) 1 28 ITR 540 (DEL.)} C) ACIT VS. VADILAL FINANCE CO. (P) LTD. 74 TIJ 933 (AHD.) 4 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 7. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) SUSTAINED THE ADDITIONS MADE BY THE AO IN ALL THE Y EARS UNDER CONSIDERATION BY OBSERVING AS UNDER: 5.3 THE ASSESSMENT ORDERS AND THE SUBMISSIONS OF T HE ASSESSEE WERE CONSIDERED CAREFULLY. IT IS SEEN THAT OUT OF THE TOTAL INTEREST FREE ADVANCES, THE SUBSTANTIAL PART OF THE ADVANCE IS OF RS. 21,33,777/- AND THAT WAS GIVEN TO ITS SIS TER CONCERN M/S. RAJALAKSHMI GLASS PVT. LTD. DURING THE F.Y. 20 02-03. THE ASSESSEE HAS NOT BEEN ABLE TO GIVE ANY PROOF OF BUS INESS EXPEDIENCY AND HAS NOT SHOWN HOW ITS SISTER CONCERN HAD HELPED IT IN GETTING WORK ORDERS FOR BROKEN GLASS. NOTWITHSTANDING, EVEN IF AT THE TIME OF ADVANCING S UCH INTEREST FREE LOANS THE ASSESSEE HAD INTEREST FREE FUND AVAI LABLE WITH IT, THE FACT THAT IT HAD PAID INTEREST @ 15% DURING THE YEARS TO BANKS AND OTHERS CANNOT BE DENIED. ANY PRUDENT BUSI NESSMAN WOULD NOT PAY INTEREST ON LOANS, WHILE IT GIVES ITS OWN FUNDS TO OTHERS WITHOUT CHARGING INTEREST. IT IS ONLY SURPLU S FUNDS WHICH ARE AVAILABLE WITH THE ASSESSEE THAT MAY BE USED FO R GIVING INTEREST FREE ADVANCES. IT WOULD BE QUITE ABSURD TH AT THE ASSESSEE HAD TO BORROW MONEY AND PAY INTEREST ON IT FOR CONDUCTING ITS REGULAR BUSINESS, WHILE IT ADVANCED INTEREST FREE LOANS. IF THE ASSESSEE HAD GOT SURPLUS FUND OF ITS OWN THEN IT WOULD NOT NEED EXPENSIVE LOANS. BUT INSTEAD OF RE-P AYING THESE LOANS, IT CHOSE TO UTILIZE THE FUNDS FOR GIVING INT EREST FREE LOANS. THIS IN TURN SHOWS THAT INTEREST EXPENDITURE WAS NO T INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THERE CANNOT BE A GENERAL PROPOSITION OF LAW THAT IN A BU SINESS, FUNDS ARE BORROWED AND INTEREST IS PAID ON IT WHILE OWN F UNDS OF THE BUSINESS ARE KEPT ELSEWHERE YEAR AFTER YEAR WITHOUT CHARGING INTEREST ON IT. IN A NON TAX SITUATION A PERSON CAN INDULGE IN SUCH WHIMSICAL ACTS OF GIVING INTEREST FREE LOANS A ND GIVE MONEY AS HE DEEMS FIT BUT IN A TAX SITUATION THIS C ANNOT BE SAID TO MEET THE REQUIREMENT OF LAW SPECIALLY WHEN THE P ERSON CLAIMS INTEREST PAID ON BORROWED FUNDS AS BUSINESS EXPENDI TURE AND GETS DEDUCTION ON IT. A PERSON TO CLAIM BENEFIT OF DEDUCTION HAS TO PROVE WHAT WAS THE NEED TO KEEP HIS FUNDS LOCKED OVER THE PERIOD WITHOUT EARNING ANY BENEFIT OUT OF IT BY WAY OF INTEREST OR OTHERWISE. AS DISCUSSED ABOVE THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THE BUSINESS EXPEDIENCY AND REASONS FOR PAYING INTEREST WHILE NOT CHARGING INTEREST ON LOANS GIVEN TO OTHERS, I FIND NO INFIRMITY IN THE ACTION OF THE ASSESSING OF FICER IN MAKING DISALLOWANCE FOR ALL THE ASSESSMENT YEARS VIZ. 2007 -08, 2008- 09, 2010-11 AND 2011-12. THE ADDITIONS ARE SUSTAINE D. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 5 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 9. LD. AR SUBMITTED THAT THE ASSESSEE JUSTIFIED THE INTEREST FREE ADVANCES AND EXPLAINED THAT THE ADVANCES ARE GIVEN FOR THE ASSESSEES BUSINESS NEEDS ONLY, AS SHRI P VENKAIAH HAS 50 YEARS EXPERIENCE IN THE BUSINESS AND HELPS THE ASSESSEE G ETTING ORDERS FROM THE COMPANIES. HE SUBMITTED THAT M/S RAJALAKSH MI GLASS PVT. LTD. WAS IN PROCUREMENT OF BROKEN GLASS AND HELPS T HE ASSESSEE IN GETTING THE ORDERS FOR BROKEN GLASS AND THE ADVANCE TO M/S SOWBHAGYA CONSTRUCTIONS WAS GIVEN FOR PROPERTY WHIC H DID NOT MATERIALIZE. COPY OF LETTER FILED WITH AO PLACE AT PAGES 24-27 OF THE PAPER BOOK. IT IS SUBMITTED THAT THE ADVANCES WERE GIVEN PRIOR TO FY 2006-07 AND THE FINANCIAL YEAR WISE DETAILS OF ADVA NCES GIVEN ARE AS UNDER: 9.1 DETAILS OF ADVANCES GIVEN DURING FY 2011-12 AND INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE ARE AS UNDER: FUNDS AVAILABLE DURING THE YEAR INTEREST FREE ADVAN CES GIVEN DURING THE YEAR SOURCE OF FUNDS AMOUNT RS. NAME OF THE PARTY AMOUNT RS PROFITS AFTER TAX + DEPRECIATION 15,20,482 SOWBHAGYA CONSTRUCTIONS 1,00,000 9.2 DETAILS OF ADVANCES GIVEN DURING FY 2002-03 AND INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE ARE AS UNDER: FUNDS AVAILABLE DURING THE YEAR INTEREST FREE ADVAN CES GIVEN DURING THE YEAR SOURCE OF FUNDS AMOUNT RS. NAME OF THE PARTY AMOUNT RS SHARE CAPITAL 24,25,000 RAJALAXMI GLASS PVT. LTD. 21,33,777 PROFITS AFTER TAX + DEPRECIATION 19,74,186 INTEREST FREE ADVANCES FROM PROMOTERS 1,50,00,000 INTEREST FREE LOANS FROM PROMOTERS 50,08,312 6 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. LOANS FROM BANKS 1,65,49,882 9.2 DETAILS OF ADVANCES GIVEN DURING FY 2004-05 AND INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE ARE AS UNDER: FUNDS AVAILABLE DURING THE YEAR INTEREST FREE ADVAN CES GIVEN DURING THE YEAR SOURCE OF FUNDS AMOUNT RS. NAME OF THE PARTY AMOUNT RS PROFITS AFTER TAX, BEFORE DEPRECIATION 13,83,621 P. VENKATAIAH 2,50,000 9.3. LD. AR REFERRING TO THE ABOVE TABLES SUBMITTED THAT THE ADVANCES WERE PAID MOSTLY FROM OUT OF THE YEARLY PR OFITS ONLY. IT IS SUBMITTED THAT SINCE THE ADVANCES WERE GIVEN OUT OF ANNUAL PROFITS AND THE AO HAS NOT PROVED ANY DIRECT NEXUS BETWEEN THE ADVANCES PAID AND THE BANK BORROWALS AND MADE DISALLOWANCE O NLY ON AN INFERENCE DERIVED FROM THE OVERALL FINANCIAL STATUS AS CAN BE READ FROM THE BALANCE SHEET AS ON 31/03/2007, THE DISALL OWANCE IS INCORRECT AND NOT JUSTIFIED. FOR THE PROPOSITION TH AT NO DISALLOWANCE IS WARRANTED IF ADVANCES ARE PAID FROM OUT OF ANNUAL P ROFITS, THE LD. AR RELIED ON THE FOLLOWING DECISIONS: 1. JAISWAL ESTATES (P) LTD. VS. ACIT, 488 & 525 (K OL) OF 2011. 2. MUNJAL SALES CORPORATION VS. CIT [2008] 298 ITR 298 3. CIT VS. RELIANCE UTILITIES AND POWER LTD., [200 9] 313 ITR 340 (BOM.) 4. JK INDUSTRIES LTD. VS. CIT, [1999] 238 ITR 820 ( CAL.) 9.4 LD. AR SUBMITTED THAT THE ASSESSEE EXPLAINED TH E REASONS FOR ADVANCING THE SUMS AND THE RELATION OF SUCH ADVANCE S TO THE BUSINESS. IT IS SUBMITTED THAT THE ASSESSEE DEMONST RATED THE COMMERCIAL EXPEDIENCY IN GIVING SUCH ADVANCES, AS I N FACT, THE SALE IN FY 2007-08 OF BROKEN GLASS TO M/S AGI GLASPAC, H YDERABAD RS. 7,09,95,014/- A BUSINESS DEVELOPED THROUGH THE EFFO RTS OF M/S RAJALAXMI GLASS PVT. LTD. WHICH WAS PURCHASING GLAS S CONTAINERS FROM 7 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. AGI GLASPAC AND WHICH HAS GOOD BUSINESS RELATIONS. THE AR CONTENDED THAT THE AO IS INCORRECT IN REJECTING THE ASSESSEES SUBMISSIONS BY SIMPLY STATING THAT ITS EXPLANATION IS DEVOID OF ANY MERIT. IN THIS CONNECTION, HE INVITED THE BENCH ATT ENTION TO COPY OF ANNUAL REPORT OF RAJALAXMI GLASS PVT. LTD. FOR FY 2 001-02 PLACED AT PAGES 61-85 OF THE PAPER BOOK. THE LD. AR RELIED O N THE FOLLOWING CASES: 1. CIT VS. PREMIER AUTO FINANCES P. LTD., [1981] 12 8 ITR 540 (DEL.) 2. ACIT VS. VADILAL FINANCE CO. (P) LTD. 10. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 11. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. IT IS NOTICED THAT ASSESSEE HAS GIVEN FU NDS TO MR. P. VENKATAIAH AND M/S RAJALAKSHMI GLASS PVT. LTD., WHO ARE, AS PER LD. AR, IN THE SIMILAR BUSINESS AND HELPING ASSESSEE IN PROCUREMENT OF BROKEN BOTTLES AND SHOWING ORDERS FOR THE ASSESSEE. SINCE THESE PEOPLES ARE IN SIMILAR BUSINESS AND HELPING ASSESSE E IN CARRYING OUT THE BUSINESS, ASSESSEE CAN DIVERT FUNDS TO THESE P EOPLE ON BUSINESS CONNECTION. PARTICULARLY WHEN THE ASSESSEE HAS SUFF ICIENT INTEREST FREE FUNDS UNDER ITS DISPOSAL. MOREOVER, THE ASSESSEE HA S PAID INTEREST TO BANK ON THE CASH CREDIT LOAN, WHICH IS AGAINST THE STOCK, IT IS LINKED TO CURRENT ASSETS OF THE BUSINESS. HENCE, IT CANNOT BE SAID THAT ASSESSEE WOULD HAVE SAVED THE MONEY BY NOT DIVERTIN G THE FUNDS TO OTHER PURPOSE. IN OUR CONSIDERED VIEW, THE ASSESSEE CAN DIVERT INTEREST FREE FUNDS UNDER ITS DISPOSAL FOR THE PURP OSE OF ITS BUSINESS. WITH REGARD TO PAYMENT OF RS. 1,00,000/- TO SOWBHAG YA CONSTRUCITONS, IT IS FOR THE PURPOSE OF PURCHASE OF PROPERTY. ASSESSEE CAN GIVE ADVANCE FOR PURCHASE OF PROPERTY WHEN THE FUNDS ARE AVAILABLE AT ITS DISPOSAL. AO CANNOT DICTATE HOW TH E ASSESSEE SHOULD RUN THE BUSINESS. IN OUR VIEW, THE AO CANNOT DISALL OW PART OF THE INTEREST PAYMENT. ACCORDINGLY, THIS GROUND OF THE A SSESSEE IS ALLOWED. 8 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 12. AS REGARDS THE DISALLOWANCE OF EXPENSES FOR AY 2010-11 AND 2011-12, THE ASSESSING OFFICER STATED THAT THE ASSE SSEE HAD NOT COOPERATED IN THE ASSESSMENT PROCEEDINGS AND HAD FA ILED TO SUBMIT BOOKS OF ACCOUNTS AND VOUCHERS FOR VERIFICATION WIT H REGARD TO BUSINESS EXPENSES. THEREFORE, HOLDING THAT THE EXPE NDITURE CLAIMED IN THE P&L ACCOUNT WAS NOT SUBSTANTIATED, HE PROCEE DED TO DISALLOW 10% OF THE TOTAL EXPENSE OF RS.1,51,56,883/- RELATI NG TO SALARIES AND STAFF WELFARE, SELLING AND DISTRIBUTION EXPENSES, A DMINISTRATIVE EXPENSES, DEPRECIATION FOR AY 2010-11 AND 15% OF TH E TOTAL EXPENSE OF RS.1, 13,53,437/- RELATING TO SALARIES AND STAFF WELFARE, SELLING AND DISTRIBUTION EXPENSES, ADMINISTRATIVE EXPENSES, FOR AY 2011-12. 13. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE STATED THAT IT IS A COMPANY AND ITS COMPUTERISED BOOKS OF ACCOUNTS AR E AUDITED BOTH UNDER THE COMPANIES ACT AND IT ACT AND THAT IT HAD FILED AUDIT REPORTS ALSO. ACCORDING TO THE ASSESSEE THE ASSESSI NG OFFICER HAD NOT DOUBTED THE GENUINENESS AND THE NECESSITY OF EX PENDITURE AND HAD ONLY OBSERVED THAT THE ASSESSEE FAILED TO SUBMI T BOOKS OF ACCOUNT, VOUCHERS FOR VERIFICATION. THE ASSESSEE AL SO SUBMITTED THAT THE ADDITION WAS MADE ON SURMISES AND ON AN AD HOC BASIS, AND THIS ACTION IS NOT WARRANTED BY LAW. FURTHER, THE ASSESS EE STATED SUCH ADDITION WAS ALSO MADE DURING AY 2001-02 AND DEPART MENT'S APPEAL AGAINST ITS DELETION BY THE CIT(A) WAS DISMISSED BY THE HON'BLE ITAT, HYDERABAD IN ITA NO.1142/H/2005, DT.24.08.2007. 14. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) OBSERVED THAT THE ADDITIONS HAD BEEN MADE ON DIFFER ENT GROUNDS. IN THESE YEARS THE ASSESSEE HAD FAILED TO SUBMIT THE B OOKS OF ACCOUNTS WITH SUPPORTING VOUCHERS BEFORE THE ASSESSING OFFIC ER. HAVING NOT DONE SO, THE ASSESSEE FAILED TO DISCHARGE ITS INITI AL ONUS OF GIVING EVIDENCE IN SUPPORT OF ITS CLAIM. THE ASSESSING OFF ICER THEREFORE PROCEEDED TO DISALLOW 10% AND 15% OF THE EXPENSES. HE OBSERVED THAT THE DECISION OF THE HON'BLE ITAT (SUPRA) IS ON DIFFERENT FACTS. HE, 9 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. THEREFORE, OPINED THAT THE RATIO OF THE JUDGEMENT CANNOT BE APPLIED TO THE FACTS FOR THESE TWO ASSESSMENT YEARS UNDER CONS IDERATION. IN VIEW OF THE FACT THAT THE ASSESSEE HAD NOT PRODUCED THE RELEVANT BOOKS AND SUPPORTING BILLS/ VOUCHERS IN SUPPORT OF ITS CLAIM, THE CIT(A) HELD THAT THE DISALLOWANCE IS JUSTIFIED IN PRINCIPLE, BUT, CO NSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLO WANCE IS RESTRICTED TO 5% OF THE EXPENDITURE IN QUESTION. 15. LD. AR SUBMITTED THAT EVEN THOUGH LD. CIT(A) HA S RESTRICTED THE DISALLOWANCE TO 5% BY OBSERVING THAT ASSESSEE HAS N OT SUBMITTED ANY VOUCHERS/BOOKS. BUT, HE SUBMITTED THAT THE ASSESSEE HAS SUBMITTED SOFT COPY OF THE BOOKS. HE FURTHER SUBMITTED THAT T HE AO CANNOT DISALLOW DEPRECIATION, AS IT IS A STATUTORY DEDUCTI ON. 16. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 17. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. IT IS OBSERVED THAT AO HAS DISALLOWED TH E EXPENDITURE ON THE GROUND THAT ASSESSEE HAS NOT SUBSTANTIATED FOR CLAIMING THE EXPENDITURE. BUT, CIT(A) HAS RESTRICTED THE DISALLO WANCE AT 5% FROM 10/15% IN THE RESPECTIVE AYS BY OBSERVING THAT ASSE SSEE HAS NOT SUBMITTED ANY VOUCHERS/BOOKS OF ACCOUNT. NO DOUBT, ASSESSEE MUST HAVE SUBMITTED SOFT COPY OF BOOKS OF ACCOUNT BUT IT IS NOT COMING OUT OF THE RECORD THAT ASSESSEE HAS SUBMITTED THE VOUCH ERS. IN OUR VIEW, CONSIDERING THE OVERALL SITUATION, CIT(A) IS JUSTIF IED IN RESTRICTING THE DISALLOWANCE TO 5% ON OVERALL BASIS. BUT, IT SHOULD BE RESTRICTED TO ALL OTHER EXPENSES EXCEPT DEPRECIATION. ACCORDINGLY, GR OUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 18. AS REGARDS THE DISALLOWANCE U/S 40A(3) FOR AY 2 008-09, IT IS OBSERVED THAT THE ASSESSEE HAD PURCHASED BROKEN GLA SS FROM M/S BALAJI GLASS TRADERS AND MADE PAYMENTS IN CASH EXCE EDING RS. 10 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 20,000/- ON VARIOUS DATES AMOUNTING TO RS. 12,60,00 0/-. SINCE THE PAYMENTS WERE MADE TO M/S BALAJI GLASS TRADERS IN C ASH IN VIOLATION OF SECTION 40A(3) OF THE ACT, THE AO DISALLOWED THE TOTAL AMOUNT OF RS. 12,60,000/-. 19. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE SUBMITTED THAT THE PAYMENT WAS MADE TO A RELATED PA RTY VIZ. M/S. BALAJI GLASS TRADERS. THE SAID PARTY SUPPLIED BROKE N GLASS TO THE ASSESSEE. THE ASSESSEE STATED THAT FROM AY 2008-09 ONWARDS, THE PROVISIONS OF SECTION 40A(3) WERE CHANGED AND WERE MADE MORE PUNITIVE. TO MAKE IT WORK AS A DETERRENT THE QUANTU M OF DISALLOWANCE WAS INCREASED FROM 20% TO 100% OF THE PAYMENTS MADE IN EXCESS OF RS.20,000/-. THE ASSESSEE SUBMITTED THAT IN ITS OWN CASE IT HAD NEVER BEFORE PAID ANY AMOUNT IN EXCESS OF RS.20,000/- AND THIS WAS FOR THE FIRST TIME THAT PAYMENTS WERE MADE IN CASH AND THAT TO A KNOWN PARTY. THE TRADE CREDITOR M/S. BALAJI GLASS TRADERS WAS FA CING PROBLEMS IN BUSINESS AND ITS TURNOVER HAD FALLEN OVER THE YEARS . AS THE PAYMENTS WERE MADE TO A KNOWN PARTY, THE GENUINENESS OF THE TRANSACTION WAS NOT BELIEVED BY THE ASSESSING OFFICER FOR THAT HE H AD MADE ADDITION U/S. 40A(3). ACCORDING TO THE ASSESSEE, IF THE ASSE SSING OFFICER HAD ANY DOUBT ABOUT THE NATURE OF TRANSACTION HE COULD HAVE MADE FURTHER ENQUIRIES. AS THIS WAS NOT DONE SO, THE ASSESSEE SU BMITTED THAT THE ADDITION SHOULD BE DELETED. 20. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) CONFIRMED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 07.2. THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN CONSIDERED. RULE 6DD OF IT RULES PROVIDES ENUMERATES THE CIRCUMSTANCES UNDER WHICH A PAYMENT OR AGGREGATE OF PAYMENT EXCEEDING RS.20,000/- CAN BE M ADE TO A PERSON IN A DAY, OTHERWISE THAN BY AN ACCOUNT PAYEE CHEQUE/ BANK DRAFT. THE ASSESSEE HAS IN NO WAY ESTABLISHED UNDER WHAT CIRCUMSTANCES IT HAD MADE PAYMENTS IN CASH TO ITS T RADE CREDITOR. THE FACT THAT THE PAYEE WAS A KNOWN PARTY OR THAT IT WAS IN FINANCIAL STRESS IS ABSOLUTELY IRRELEVANT TO THE ISSUE UNDER CONSIDERATION. EVEN OTHERWISE, IT IS NOT UNDERSTOOD HOW THE 11 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. OTHER PARTY WOULD BE RELATIVELY DISADVANTAGED IF TH E PAYMENTS HAD BEEN MADE BY ACCOUNT PAYEE CHEQUES. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE GENUINENESS OF THE TRANSACTION WAS NOT DOUBTED BY THE ASSESSING OFFICE R AND THEREFORE ADDITION SHOULD BE DELETED IS NOT ACCEPTA BLE BECAUSE IF THE GENUINENESS WAS DOUBTED THEN THE ADDITION CO ULD HAVE BEEN MADE U/S 69C OF THE ACT. DISALLOWANCE U/S 40A( 3) IS MADE IN A SITUATION WHEN THE TRANSACTIONS ARE GENUINE BU T THE REQUIREMENT OF THAT SECTION HAS NOT BEEN MET. IT IS A DEEMING SECTION AND ITS PROVISIONS ARE MANDATORY IN NATURE. THE REASONING IS, THEREFORE, REJECTED. THE ASSESSEE HAS NOT BEEN ABLE TO BRING OUT BY WAY OF ANY DOCUMENTARY EVIDENC E OR OTHERWISE AS TO 'HOW IT WOULD BE COVERED IN ANY OF THE CLAUSES OF THE RULE 6DD. IN VIEW OF THIS, THE ADDITION MADE U/S. 40A(3) IS UPHELD. THE ADDITION OF RS.12,60,000/- MADE BY A SSESSING OFFICER FOR A.Y. 2008-09 IS HEREBY CONFIRMED. 21. LD. AR SUBMITTED THAT THE PAYMENT WAS MADE TO A RELATED PARTY AND DUE TO BUSINESS CONTINGENCIES. THE SAID PARTY S UPPLIED BROKEN GLASS TO THE ASSESSEE. IT WAS BEING PAID FOR THE S UPPLIES MADE BY WAY OF DIRECT PAYMENT OF VAT ON BEHALF OF THE TRADE CREDITED OR THROUGH DIRECT PAYMENTS TO ONE OF ITS SUPPLIER.(I.E . SKOL BREWERIES). IT IS SUBMITTED THAT IT IS ONLY IN THIS YEAR THAT T HE ASSESSEE HAS RESORTED TO CASH PAYMENTS. IT IS SUBMITTED THAT PUR CHASE OF BROKEN GLASS FROM OPEN MARKET IS A VERY UNORGANISED INDUST RY AND GENERALLY DONE THROUGH HAWKERS WHO DOES NOT HAVE ACCESS TO BA NKING. IT IS SUBMITTED THAT THE RECIPIENT'S CREDENTIALS WERE NEV ER DOUBTED, NO ADVERSE REMARKS WERE MADE, THE PURCHASES WERE NEVER DOUBTED AND THEIR SALE PRICE WAS ALSO NOT DOUBTED. THE LD. AR, THEREFORE, SUBMITTED THAT IN SUCH CIRCUMSTANCES, ADDITION U/S 40A(3) IS NOT WARRANTED AND THE ASSESSING OFFICER OUGHT TO HAVE T AKEN A PRAGMATIC AND LENIENT VIEW. 21.2 FURTHER, THE LD. AR SUBMITTED THAT THE PROVISI ONS WERE DRASTICALLY AMENDED W.E.F AY 2008-09. PRIOR TO - SU CH AMENDMENT DISALLOWANCE WAS TO THE TUNE OF ONLY 20% OF THE CAS H PAYMENTS IN EXCESS OF RS 20,000. HOWEVER FROM AY 2008-09 THE DI SALLOWANCE WAS 12 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. INCREASED FROM 20% TO 100% WITH THE FOLLOWING EXPLA NATION AS PER CBDT CIRCULAR NO 3 (299 ITR ST 8) DT 12.03.2008 AT POINT 25.3 THE PROVISIONS OF THE SAID SUB-SECTION WERE TO ACT AS AN ANTI- EVASION MEASURE. IT HAS COME TO NOTICE THAT SUBSTIT UTION OF THE DISALLOWANCE OF HUNDRED PER CENT BY TWENTY PER CENT HAS DILUTED THE DETERRENCE POTENTIAL OF THE PROVISIONS. THEREFO RE, TO RESTRENGTHEN THE DETERRENCE POTENTIAL, THE FINANCE ACT 2007 HAS SUBSTITUTED SUB-SECTION (3) OF SECTION 40A TO PROVI DE FOR HUNDRED PER CENT DISALLOWANCE OF PAYMENTS WHICH ARE MADE IN VIOLATION OF ITS PROVISIONS' REFERRING TO THE ABOVE, THE LD. AR SUBMITTED THAT THE PROVISIONS ARE MERELY TO WORK AS A DETERRENT AND THE EMPHASIS IS O N VERIFIABILITY OF SUCH TRANSACTIONS. IN SUCH CASES THE CONDUCT OF THE ASSESSEE HAS TO BE TAKEN ON RECORD. IT IS SUBMITTED THAT IN THE INS TANT CASE, THE ASSESSEE NEVER PAID ANY AMOUNT IN EXCESS OF RS 20,0 00 AND THIS IS THE FIRST YEAR SUCH ADDITION WAS MADE, THAT TOO, TO A RELATED PARTY. THAT ITSELF SPEAKS ABOUT THE BUSINESS CONTINGENCIES AND THE COMPELLING CIRCUMSTANCES LEADING TO SUCH PAYMENTS. FURTHER THE ASSESSING OFFICER COULD HAVE MADE ALL ENQUIRIES IN RELATION TO THE PAYMENTS MADE. IT IS SUBMITTED THAT THE TRADE CREDI TOR, M/S. BALAJI GLASS TRADERS WAS FACING PROBLEMS IN BUSINESS AND H IS TURNOVERS WERE FALLING DRASTICALLY AS CAN BE SEEN BELOW: F.Y.2006-07 RS.2,04,57,510/- F.Y.2007-08 RS. 17,81,113/- F.Y.2008-09 RS. 34,68,570/- F.Y.2009-10 RS. 22,51,118/- LD. AR SUBMITTED THAT TO SATISFY ITS SUPPLIERS AND AVERT BUSINESS BREAKDOWN AND CONSIDERING THE OVERALL BUSINESS EXIG ENCIES, THE ASSESSEE MADE CASH PAYMENTS. HE RELIED ON THE FOLLO WING CASES: 1. GIRIDHARLAL GOENKA VS. CIT, [1986] 179 ITR 122 ( CAL.) 2. WALFORD TRANSPORT (EASTERN INDIA) LTD. VS. CIT, [2002] 124 TAXMANN 538 (GAU.) 3. DCIT VS. OTS LTD., ITA NO. 186/KOL/2010 13 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. 22. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 23. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. AS PER THE PROVISIONS OF SECTION 40A(3), ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH A PAYMENT/AGGRE GATE OF PAYMENTS MADE TO A PERSON IN A DAY EXCEEDS RS. 20,000/- IN C ASH NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF SUCH EXPENDITURE UNL ESS, SUCH PAYMENTS ARE FALLING UNDER RULE 6DD. IN THE GIVEN C ASE, ASSESSEE HAS PAID SUCH PAYMENT IN CASH WHICH IS NOT COVERED UNDE R RULE 6DD, NO OTHER SITUATION SHALL BE CONSIDERED FOR ALLOWING DE DUCTION OF SUCH EXPENDITURE. IN OUR VIEW, THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 40A(3), HENCE, WE ARE IN AGREEMENT WITH THE FINDINGS OF CIT(A) AND ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED BY THE ASSESSEE. ITA NO. 580/HYD/2015 BY REVENUE FOR AY 2010-11 24. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS BOTH ON FAC TS AND IN LAW. 2. THE CIT(A) ERRED IN DELETING THE ADDITION ON ACC OUNT OF CASH PURCHASES OF RS.39,95,270/-, WHICH WERE SUPPORTED B Y SELF MADE VOUCHERS ONLY. 3. THE CIT (A) ERRED IN IGNORING THE FACT THAT THER E IS NO DIFFERENCE IN FACTS FOR A.Y. 2009-10 WHERE THE ASSE SSMENT WAS CONCLUDED ON SIMILAR LINES MAKING ADDITION OF RS.39 .89 LAKHS TOWARDS INFLATION OF EXPENDITURE UNDER PURCHASES AN D THE ASSESSEE HAS NOT PREFERRED APPEAL AGAINST THE SAID ADDITION. 25. THE ASSESSING OFFICER DISALLOWED EXPENSES TOWA RDS INFLATION OF EXPENDITURE UNDER PURCHASES OF RS.39,95,270/- IN A. Y. 2010-11. THE ASSESSING OFFICER HAD RELIED ON ITS OWN ASSESSMENT FOR AY 2009-10 AND FOUND THAT THERE WAS NO MATERIAL DIFFERENCE IN FACTS FOR THE YEAR 14 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. UNDER CONSIDERATION. DURING THE YEAR UNDER CONSIDER ATION ALSO 98% OF PAYMENT WAS MADE BY CASH, ALBEIT ALL VOUCHERS WERE BELOW RS.20,000/-. ALL PURCHASES WERE SUPPORTED BY SELF M ADE VOUCHERS ONLY. ASSESSEE ADMITTED NET PROFIT OF RS. 26,74,621 /-AND RS.21,55,949/- RESPECTIVELY BEFORE AND AFTER DEPREC IATION OUT OF THE TOTAL TURNOVER OF RS.39,94,27,383/- WHICH MADE NET PROFIT 0.67% AND 0.56% BEFORE AND AFTER DEPRECIATION RESPECTIVELY. A CCORDING TO THE ASSESSING OFFICER, THE ADMITTED NET PROFIT WAS VERY LOW AND NOT JUSTIFIABLE AND THE ONUS WAS ON THE ASSESSEE TO COM PLY WITH THE PROVISIONS OF THE IT ACT BY MAINTAINING PROPER DOCU MENTS FOR VERIFICATION. DURING THE COURSE OF APPEAL PROCEEDIN GS, THE ASSESSEE SUBMITTED THAT IF THE RESULTS OF THE PROFITS DECLA RED BY IT ARE COMPARED WITH ITS COMPETITOR M/S SUVARNADURGA BOTTLES (P) LT D, HYDERABAD THEN THE GROSS PROFITS EARNED BY THE ASSESSE WOULD BE SE EN TO BE ON A HIGHER SIDE. IT HAD SHOWN A PROFIT OF 0.97% WHILE T HE OTHER PARTY HAD SHOWN IT AT 0.90%. IT ALSO STATED THAT IN THE BUSIN ESS OF TRADING IN BROKEN GLASSES AND USED LIQUOR BOTTLES THERE WAS A ZERO VALUE ADDITION AND IT WAS A WORKING CAPITAL INTENSIVE BUS INESS WHERE THE BUYERS CALL THE SHOTS. THESE REASONS TOGETHER WITH THE FACT THAT IT HAS TO DEAL WITH HAWKERS AND SUB DEALERS RESULT IN LOW PROFITS. 26. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAD DISALLOWED RS. 39.94 LAKH AS INFLATION OF EXPENSES ON THE GROUNDS THAT THE ASSES SEE HAS SHOWN PROFIT OF 0.56% ONLY. FOR THIS HE HAS RELIED ON HIS OWN ASSESSMENT FOR AY 2009-10 IN WHICH THE SAME REASONING WAS ADOPTED THAT 98% OF PURCHASES WERE MADE BY CASH. HE OBSERVED THAT NO CO MPARATIVE ANALYSIS HAS BEEN DONE FOR THE PROFITS SHOWN BY THE ASSESSEE IN THE EARLIER YEARS AND WHETHER THE TURNOVER HAS INCREASE D OR DECREASED? AND WHAT ARE THE PROFITS SHOWN BY PERSONS IN THE SA ME LINE OF BUSINESS? IF THE ASSESSING OFFICER HAD REASONS TO D OUBT THE PURCHASES, HE SHOULD HAVE AT LEAST MADE SOME INDEPE NDENT INQUIRIES AND CONFRONTED THE ASSESSEE WITH ANY FINDINGS MADE BY HIM. IN VIEW 15 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. OF THE ABOVE OBSERVATIONS, THE CIT(A) HELD THAT THE AO FAILED TO DO THE ABOVE THINGS, INSTEAD ADDITION HAD BEEN MADE O N SURMISES AND SUSPICION AND SUCH HUGE AD-HOC DISALLOWANCES WITHOU T ANY FINDING CANNOT BE SUSTAINED. FURTHER, THE CIT(A) HELD THAT THE ASSESSEE HAS GIVEN A COMPARATIVE CASE IN SUPPORT OF ITS LOW GP R ATE, THEREFORE, THE DISALLOWANCE OF EXPENDITURE DISCUSSED ABOVE WOULD T AKE CARE OF DISCREPANCY, IF ANY, IN THE PROFIT REPORTED BY THE ASSESSEE. HE, THEREFORE, DELETED THE ADDITION OF RS. 39,95,270/-. 27. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. IN THIS TYPE OF INDUSTRIES, THE PURCHASE S ARE MADE ONLY IN CASH CONSIDERING THE FACT THAT THEY HAVE TO BUY BRO KEN BOTTLES FROM UNORGANIZED SECTOR. MERE PAYMENT BY CASH ALONE CANN OT BE THE REASON TO DISALLOW THE EXPENDITURE ON ADHOC BASIS. AO PROCEEDED TO DISALLOW THE EXPENSES ON HIS OWN ANALYSIS WITHOUT A NY COMPARATIVE STUDIES FROM THE MARKET BUT BY MERELY ANALYSING THE PREVIOUS YEAR DATA. WE ARE IN AGREEMENT WITH THE FINDINGS OF CIT( A) AND ACCORDINGLY DISMISS THE GROUND RAISED BY THE REVENUE. 28. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 29. TO SUM UP ALL THE APPEALS OF THE ASSESSEE ARE P ARTY ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30 TH AUGUST, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RA HMAN) JUDICIAL MEMBER AC COUNTANT MEMBER HYDERABAD, DATED: 30 TH AUGUST, 2017. KV 16 ITA NO. 616 TO 619/H/15 & 580/H/15 SHRI GANESH BOTTLES PVT. LTD., HYD. COPY TO:- 1) SHRI GANESH BOTTLES PVT. LTD., C/O CH. PARTHAS ARATHY & CO., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST. NO. 1, ASHOKNAGAR, HYDERABAD 500 020 2) DCIT, CENTRAL CIRCLE 6(PRESENTLY CENTRAL CIRCL E 1(3)), HYDERABAD. 3) CIT(A) - XI, HYDERABAD 4) PR. CIT(CENTRAL), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE