M/s. Rajmal Lakhichand, Jalgaon V. Joint CIT, Range - 1, Jalgaon

ITA 663/PUN/2013

• Counselvise Citation: 66324514 RSA 2013
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: SUNIL PATHAK
• Keywords: Rejection of books of accounts; Capital asset; Business income; Depreciation; Opportunity of being heard; Earning of tax free income; Proportionate interest; Additional evidence; Corroborative evidences; Notional interest; Commercial expediency; Unabsorbed depreciation
• Section: 14A; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.532 & 663/PN/2013 (ASSESSMENT YEAR 2009-10) M/S. RAJMAL LAKHICHAND, 169, BALAJIPETH, JALGAON 425 001 PAN NO.AACFR8609L .. APPELLANT VS. JCIT, RANGE-1, JALGAON .. RESPONDENT ITA NO.607/PN/2013 (ASSESSMENT YEAR 2009-10) DCIT, CIRCLE-1, JALGAON .. APPELLANT VS. M/S. RAJMAL LAKHICHAND, 169, BALAJIPETH, JALGAON 425 001 PAN NO.AACFR8609L .. RESPONDENT ASSESSEE BY : SHRI SUNIL PATHAK REVENUE BY : SHRI A.K. MODI DATE OF HEARING : 17-12-2014 DATE OF PRONOUNCEMENT : 16-01-2015 ORDER PER R.K. PANDA, AM : ITA NO.532/PN/2013 FILED BY THE ASSESSEE AND ITA NO.607/PN/2013 FILED BY THE REVENUE ARE CROSS APPEA LS AND ARE DIRECTED AGAINST THE ORDER DATED 04-01-2013 OF THE CIT(A)-II, NASHIK RELATING TO ASSESSMENT YEAR 2009-10. ITA NO. 663/PN/2013 2 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 04-02-2013 OF THE CIT(A)-II, NASHIK RELATING TO ASSESSMENT YEA R 2009-10 REJECTING THE APPLICATION OF THE ASSESSEE U/S.154 O F THE I.T. ACT. FOR THE SAKE OF CONVENIENCE, ALL THESE APPEALS WERE HEA RD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM AND IS ONE OF THE CONCERNS OF WELL KNOW RAJMAL LAKHICHAND GROUP OF CASES OF JALGAON. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF GOLD AND SILVER, MAKING OF ORNAMENT S AS WELL AS SELLING BULLIONS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 25-09- 2009 DECLARING NIL INCOME. THE ASSESSING OFFICER C OMPLETED THE ASSESSMENT U/S.143(3) VIDE ORDER DATED 26-02-2011 D ETERMINING THE TOTAL INCOME AT RS.8,76,65,079/- BY MAKING THE FOLL OWING ADDITIONS: I. PROPERTY INCOME AS PER RETURN : RS. 2,40,254 /- II. BUSINESS INCOME AS PER RETURN : RS.1,28,71,890/- ADD : ADDITIONS/DISALLOWANCES : (I) SALES TO SISTER CONCERN : RS.12,01,63,323/- (II) ON ACCOUNT OF MELTING GAIN : RS. 84,89,937 /- (III) PROPERTY INCOME : RS. 22,62,889/- (IV) DISALLOWANCE U/S.14A-8D : RS. 4,53,72,146/- (V) DEPRECIATION VEHICLES : RS. 8,14,855/- (VI) DRIVERS SALARY : RS. 32,086/- (VII) INTEREST U/S.36(1)(III) : RS. 3,00,000/- (VIII) DIFF. IN TRADE CREDITORS : RS. 1,10,537 /- (IX) ADVERTISEMENT EXPENSES : RS. 1,26,607/- (X) INT. PAID ON GDS (PARTNERS) : RS. 18,92,421/- (XI) INT. UNDER GDS : RS. 1,44,856/- (XII) VERIFICATION UNDER GDS : RS.1,61,06,612/- (XIII) BOGUS LIABILITY : RS, 1,32,772/- (XIV) DIFFERENCE IN CONSTRUCTION : RS. 1,60,335 /- (XV) DEPRECIATION AS PER CLAIM : RS.2,57,16,912/- CONSIDERED SEPARATELY ---------------------- RS.22,18,26,288/- III. INCOME OTHER SOURCES, AS PER RETURN : RS. 3,04,447/- ------------------------------- RS.23,52,42,879/- ------------------------------- 3 LESS : DEPRECIATION AS WORKED OUT BY THE ASSESSEE AFTER CONSIDERING THE APPEAL EFFECT TO BE GIVEN FOR A.YR. 2008-09 AS PER CIT(A)S ORDER RS.2,56,85,7 79/- -------------------------------- LESS : UNABSORBED DEPRECIATION LOSS : A.YR. 2006-07 RS. 69,44,206/- A.YRS.2007-08 RS.2,77,56,261/- A.YR.2008-09 RS.8,71,91,554/- RS.12,18,92,021/- -------------------------------- ASSESSED INCOME : RS.8,76,65,079/- -------------------------------- 2.1 SUBSEQUENTLY, THE ASSESSING OFFICER VIDE ORDER DATED 29-12- 2011 PASSED U/S.154 OF THE I.T. ACT DETERMINED THE REVISED TOTAL INCOME AT RS.73,40,88,070/- BY MAKING THE FOLLOWING ADDITION WHICH WAS OMITTED TO BE ADDED IN THE ORIGINAL ASSES SMENT ORDER ALTHOUGH DISCUSSED IN THE BODY OF THE ASSESSMENT OR DER AND DISALLOWED. PURCHASES MADE FROM SISTER CONCERNS U/S.40A(2)(5) AS PER PARA 10 PAGE 44 OF THE ASSESSMENT ORDER PASSED ON 26-12-2011 : RS.64,64,22,989/- 2.2 SUBSEQUENTLY, IN YET ANOTHER ORDER PASSED U/S. 154 OF THE I.T. ACT ON 23-01-2012 THE ASSESSING OFFICER DETERMINED THE TOTAL INCOME AT RS.73,42,67,410/- BY MAKING THE FOLLOWING RECTIFICATION : (A) ON ACCOUNT OF DISALLOWANCE OUT OF GENERATOR MAINTENANCE EXPENSES : RS.8,65,481/- LESS : EXCESS ADDITION IN PROPERTY INCOME : RS.6,86,140 /- 2.3 THE ASSESSEE FILED AN APPEAL BEFORE THE LD.CIT( A) WHO GAVE PART RELIEF TO THE ASSESSEE. SO FAR AS ADDITION MA DE TO THE TRADING ACCOUNT IS CONCERNED, THE LD.CIT(A) DIRECTED THE AS SESSING OFFICER TO ESTIMATE THE PROFIT BY ADOPTING THE GP RATE OF 5 .71% ON TURNOVER 4 OF RS.5,65,51,47,570/- THEREBY SUSTAINING THE ADDIT ION OF RS.21,49,93,482/-. HE ALSO GAVE CERTAIN RELIEF ON ACCOUNT OF ADDITION TO THE PROPERTY INCOME, DIFFERENCE IN TRAD E CREDITORS, SALARY TO DRIVERS, DEPRECIATION ON VEHICLES, ADDITION MADE ON ACCOUNT OF DIFFERENCE OF INTEREST UNDER GDS, ADDITION ON ACCOU NT OF BOGUS LIABILITY, ETC. 3. AGGRIEVED WITH SUCH PART RELIEF GIVEN BY THE CIT (A) BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFOR E US WITH THE FOLLOWING GROUNDS : ITA NO.532/PN/2013 (GROUNDS BY ASSESSEE) : THE FOLLOWING GROUNDS ARE TAKEN WITHOUT PREJUDICE T O EACH OTHER ON FACTS AND IN LAW, 1] THE LD.CIT(A) ERRED IN CONFIRMING THE FOLLOWING ADDITIONS : A. GP ESTIMATED @ 5.71% RESULTING IN ADDITION OF RS.21,49,93,482/-. B. DISALLOWANCE U/S.14A OF RS.4,53,72,146/- C. DISALLOWANCE U/S.36(1)(III) ON ACCOUNT OF INVESTMEN T IN GROUP COMPANIES OF RS.4,82,82,028/- INCLUDING THE DISALLOWANCE U/S.14A. D. PROPERTY INCOME OF RS.3,15,102/-. E. DISALLOWANCE OUT OF GENERATOR MAINTENANCE EXPENSE S OF RS.2,44,644/-. F. ADDITION U/S.36(1)(III) ON ACCOUNT OF INTEREST ON LOAN TO R.K. OSWAL GRAPHICS P. LTD., RS.3 LAKHS G. DISALLOWANCE OF INTEREST ON FUNDS INVESTED IN THE GU EST HOUSE RS.7,51,171/-. H. ADDITION ON ACCOUNT OF DIFFERENCES IN CREDITORS BA LANCES 67,900/- I. INTEREST TO PARTNER RS.18,92,421/- J. OUT OF DEPRECIATION ON WINDMILL RS.31,133/- ACCORDINGLY, THE LD.CIT(A) ERRED IN CONFIRMING THE ABOVE ADDITIONS TOTALLING RS. 26,70,38,006/-. 2] G. P. ADDITION OF RS.21,49,93,482/- 2.1] THE LD. CIT(A) ERRED IN ENHANCING G. P. ADD ITION OF RS. 21,49,93,482/- IN THE HANDS OF THE APPELLANT. 5 2.2] THE LD. CIT(A) WHILE CONFIRMING/ ENHANCING THE ABOVE ADDITION HAS ERRED IN HOLDING THAT A. THE ASSESSEE'S BOOKS WERE DEFECTIVE AND THEY HAD TO B E REJECTED U/S 145. B. THE APPELLANT HAD PAID A HIGHER PRICE FOR THE PU RCHASES MADE FROM THE SISTER CONCERNS AND IT HAD CHARGED A LOWER SAL E PRICE FOR THE SALES EFFECTED TO THEM, THUS, DIVERTING ITS PROFITS TO THE SISTER CONCERNS. C. THE SISTER CONCERNS HAVE BEEN FLOATED IN ORDER TO D IVERT PROFITS TO THEM. D. ONLY 25% OF THE TRANSACTIONS WITH THE SISTER CONCERN S COULD BE CONSIDERED TO BE GENUINE AND BALANCE WERE FICTITIOUS I.E. ONLY ON PAPER. E. THE APPELLANT HAD DIVERTED ITS PROFITS TO THE SIST ER CONCERNS WHEN IN REALITY, THE A.O. IN THOSE CASES HAD MADE ADDITIONS TO THE PROFITS SHOWN BY THEM IN THEIR HANDS. 2.3] THE LD. CIT(A) FAILED TO APPRECIATE THAT A. THERE WERE NO DEFECTS IN THE ACCOUNTS WARRANTING REJECTION THEREOF. EVEN IN THE PAST YEARS, THE BOOKS WERE ACCEPT ED BY THE DEPT. B. ALL THE TRANSACTIONS OF PURCHASES AND SALES WITH THE SISTER CONCERNS WERE GENUINE AND THEY WERE NOT MADE FOR DIV ERTING PROFITS OF THE APPELLANT TO THE SISTER CONCERNS. C. ALL THE CONCERNS HAD DULY ACCOUNTED FOR THE SALE A ND PURCHASE TRANSACTIONS IN THE GROUP AND THE SAME WERE DULY ACCOU NTED FOR VAT ON THE TRANSACTIONS EFFECTED. D. THE TRANSACTIONS WERE EXECUTED WITH THE SISTER CON CERNS AT THE MARKET RATES ONLY AND EVEN OTHERWISE, THERE WAS NO REA SON TO WARRANT A CONCLUSION THAT THE APPELLANT MUST HAVE SOLD THE STOCKS TO THE SISTER CONCERNS AT LESSER PRICE THAN THE MARKET V ALUE. E. THERE WERE SUBSTANTIAL PURCHASES OF ORNAMENTS AND BUL LION FROM THE SISTER CONCERNS WHICH WERE ACQUIRED FOR TRADI NG BY THE APPELLANT AND HENCE THE PROFIT MARGIN THEREON WAS LO W. THERE WERE MANY TRANSACTIONS OF PURCHASES BY THE APPELLANT FROM TH E SISTER CONCERNS WHEREIN THE PRICE PAID WAS LESSER THAN BOMBAY BULLION RATES AND HENCE IT COULD NOT BE INFERRED THAT THE AP PELLANT HAD REDUCED ITS PROFITS. F. THE SISTER CONCERNS ENJOYED THE BIGGER BANK FINANCE LIMITS AND THEY COULD PURCHASE GOLD AND THEREFORE THE APPEL LANT PURCHASED FROM THEM AS ON ITS OWN, THE APPELLANT WOUL D NOT HAVE GOT THE BANK FINANCE FOR THE PURCHASES. G. THE WEIGHT GAIN NOTED IN THE TRADING ACCOUNT ON PAGE 53 OF THE CIT(A) ORDER IS NOT DUE TO ANY DEFECT IN THE ACC OUNTS BUT IT IS DUE TO THE PURITY GAIN RESULTING IN HIGHER PROFITS FO R THE ASSESSEE. 6 H. THE G.P. ESTIMATED AT 5.71% WAS VERY HIGH AND EVE N THE G.P. EARNED BY THE APPELLANT IN THE PAST YEARS WAS NOT TAKE N INTO ACCOUNT. I. THE TRADING ACCOUNT IGNORING SALES/PURCHASES FROM THE SISTER CONCERNS IN PARA 12 ON PAGE 44 MADE BY HIM WAS INCORR ECT AND G.P. WAS WRONGLY TAKEN THEREIN AT RS.60,86,47,985/- AS AGA INST THE CORRECT FIGURE OF RS. 50,57,29,312/- 2.4] WITHOUT PREJUDICE, THE G.P. ADDITION CONFIR MED WAS ON A VERY HIGH SIDE AND THE APPELLANT REQUESTS FOR SUBSTANTIAL RE DUCTION THEREIN. 3] DISALLOWANCE U/S 14A OF RS. 4,53,72,146/- AND DISALLOWANCE U/S 36(1)(III) ON ACCOUNT OF INVESTMENT IN GROUP COMP ANIES OF RS. 4,82,82,028/- INCLUDING THE DISALLOWANCE U/S 14A. 3.1] THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE U/S 36(1)(III) OF RS.4,82,82,028/- WHICH IS INCLUDING THE DISALLOWANCE U/S 14A OF RS.4,53,72,146/-. 3.2] THE LEARNED CIT(A) WAS NOT JUSTIFIED IN HOLDIN G THAT - A. EVEN THOUGH, THERE WAS NO DIVIDEND INCOME RECEIVE D DURING THE YEAR, THE INTEREST COULD BE DISALLOWED U/S 14A. B. THE APPELLANT HAD NOT PROVED THE BUSINESS NECESSITY O F GIVING FUNDS TO THE SISTER CONCERNS OR INVESTING IN THE SHARES OF THE GROUP COMPANY. 3.3] THE LEARNED CIT(A) FAILED TO APPRECIATE THA T A. THE APPELLANT HAD EXPLAINED THE BUSINESS EXIGENCY I N MAKING INVESTMENTS IN THE SHARES OF THE SISTER CONCERNS AND THER EFORE, IT WAS NOT CORRECT TO HOLD THAT THE INVESTMENTS WITH THE M WERE NOT MADE WITH A BUSINESS MOTIVE. B. THE APPELLANT ON ITS OWN WOULD NOT HAVE RECEIVED THE INCREASED BANK FINANCE LIMITS AND THE ONLY WAY FOR GETTING THE FINANCE FOR THE INCREASE IN BUSINESS WAS TO FLOAT THE COMPANIES OF THE G ROUP. C. WHEN THERE WAS NO DIVIDEND RECEIVED ON THE SHARES, THE QUESTION OF MAKING A DISALLOWANCE U/S 14A COULD NOT ARISE. D. THE BUSINESS EXIGENCIES REQUIRED THE APPELLANT TO I NVEST IN THE SHARES OF THE GROUP COMPANIES AND THUS, NO DISALLOWANCE OF INTEREST IS WARRANTED U/S 36 OR SEC. 14 A OF THE ACT. 3.4] WITHOUT PREJUDICE, THE LEARNED CIT (A) ERRED IN MAKING EXCESSIVE DISALLOWANCE OF INTEREST BY CONSIDERING HIGH I NTEREST BEARING LOANS WERE UTILIZED FOR INVESTMENT IN THE SHAR ES, WHEN IT WAS NOT SO AND CONSIDERING THE INVESTMENTS AT THE END OF THE YEAR INSTEAD OF PROPERLY CONSIDERING THE DATES OF VARIOUS IN VESTMENTS. 4] PROPERTY INCOME OF RS. 3,15,102/- 4.1] THE LEARNED CIT(A) ERRED IN MAKING FOLLOWIN G ADDITIONS 7 A. DISALLOWANCE OF ELECTRICITY EXPENSES FOR THE USE FOR PARTNER'S RESIDENCE -RS.81,906/-(PARA31). B. ADDITIONAL DISALLOWANCE OF THE TELEPHONE EXPENSES - RS.3 8,012/- (PARA 31.1). C. ADDITIONAL ELECTRICITY AND TELEPHONE EXPENSES - RS. 1,95,1847- (PARA 31.2) 4.2] THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE APPELLANT ON ITS OWN HAD MADE THE DISALLOWANCES FOR THE USE OF THE ABOVE ASSETS FOR PERSONAL PURPOSES IN THE RETURN AND THE BASIS ADOPTE D WAS THE SAME AS THAT IN THE PAST ASSTS. AND THUS, THERE WAS NO REAS ON TO MAKE FURTHER DISALLOWANCES ON THE BASIS OF PRESUMPTIONS AND SURMISES. 4.3] THE LEARNED CIT (A) FAILED TO APPRECIATE TH AT THE ABOVE ADDITIONS WERE NOT CALLED FOR IN VIEW OF THE FACT TH AT THE RENT CHARGED BY THE APPELLANT WAS INCLUSIVE OF THE ABOVE C HARGES. 4.4] WITHOUT PREJUDICE, THE APPELLANT SUBMITS THAT THE DISALLOWANCES MADE ARE VERY HIGH AND THE SAME SHOULD BE REDUCED CONSIDERING THE PAST RECORDS. 5] DISALLOWANCE OUT OF GENERATOR MAINTENANCE EXP ENSES OF RS.2,44,644/- (PARA NO. 32) 5.1] THE LEARNED CIT(A) ERRED IN CONFIRMING THE D ISALLOWANCE OF RS,2,44,644/- OUT OF THE GENERATOR MAINTENANCE EXPEN SES ON THE GROUND THAT THE GENERATOR IS ALSO USED FOR THE PERSONAL RESIDENCE OF THE PARTNERS WHICH IS IN THE PREMISES OF THE FIRM. 5.2] THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE GENERATOR HAD TO BE USED FOR THE FIRM AND THERE WAS HARDLY ANY SPECIAL USER THEREOF FOR THE RESIDENCE OF THE PARTNERS AND HENCE, NO DISALLOWANCE IS WARRANTED. 5.3] THE FIRM HAD CHARGED RENT TO THE TENANTS FOR THE PROPERTY WHICH WAS INCLUSIVE OF THE FACILITY OF THE GENERATOR AND HENCE, THE RENT RECEIVED COVERED SUCH EXPENSES AND NO DISALLOWANCE ON THIS ACCOUNT IS JUSTIFIED. 6] ADDITION U/S 36(L)(III) ON ACCOUNT OF INTER EST ON LOAN TO R. K. OSWAL GRAPHICS P. LTD. RS.3 LAKHS (PARA NO. B, PAGE 81) - 6.1] THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 3 LAKHS AS NOTIONAL INTEREST WHICH THE ASSESSEE SHOULD HAVE C HARGED TO THE BALANCE OUTSTANDING WITH R. K. OSWAL GRAPHICS P . LTD.. HE FAILED TO APPRECIATE THAT SUCH INCOME COULD NOT BE F ORCED UPON THE ASSESSEE. 6.2] THE LEARNED CIT (A) FAILED TO APPRECIATE THA T THE ADVANCE GIVEN TO R. K. OSWAL GRAPHICS P. LTD. WAS FOR BUSINESS PU RPOSES ONLY AND THEREFORE, NO ADDITION COULD BE MADE ON THIS ACC OUNT. 7] DISALLOWANCE OF INTEREST ON FUNDS INVESTED IN T HE GUEST HOUSE RS.7,51,171/- (PARA 38) 8 7.1] THE LEARNED CIT(A) ERRED IN DISALLOWING THE INTEREST OF RS.7,51,171/- ON THE FUNDS USED FOR THE CONSTRUCTION OF THE GUEST HOUSE ON THE PRESUMPTION THAT THE GUEST HOUSE MIGHT BE USED NOT ONLY BY THE APPELLANT BUT BY THE OTHER GROUP CONCER NS. 7.2] THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE A.O. HAD ALREADY INCLUDED THE INVESTMENT IN THE GUEST HOUSE WHI LE MAKING THE DISALLOWANCE U/S 14A AND HENCE, NO SEPARATE DISALLO WANCE WAS REQUIRED. 8] ADDITION ON ACCOUNT OF DIFFERENCES IN CREDI TORS' BALANCES - RS.67,690/- 8.1] THE LEARNED CIT (A) FAILED TO APPRECIATE TH AT THE APPELLANT HAD OFFERED THE ABOVE DIFFERENCE TO TAX IN THE NEXT YEAR AND HENCE NO ADDITION WAS REQUIRED IN THIS YEAR. 9] INTEREST TO PARTNER - RS. 18,92,421/- 9.1] THE LEARNED CIT (A) ERRED IN DISALLOWING INT EREST OF RS. 18,92,421/- PAID TO PARTNER WHEN THE INTEREST WAS PAI D TO HIM IN TERMS OF PARTNERSHIP DEED AND THE SAME WAS ALLOWABLE AS PER THE PROVISIONS OF SEC. 40 (B) OF THE ACT. 9.2] THE LEARNED CIT (A) FAILED TO APPRECIATE TH AT THERE WAS NO DEVICE, MUCH LESS COLORABLE DEVICE TO EVADE TAX. 9.3] THE LEARNED CIT(A) DID NOT APPRECIATE THE F ACTS OF THE CASE AND CONSEQUENTLY ERRED IN APPLYING THE PROVISIONS OF SE C 40(A) (2) (B) WITH RESPECT TO INTEREST PAID TO PARTNER WHICH WA S IN ACCORDANCE WITH LAW. 9.4] THE LEARNED CIT (A) FAILED TO APPRECIATE TH AT THE QUANTUM OF INTEREST PAID BY THE PARTNER TO THE PARTIES FROM WHOM HE HAD RECEIVED GOLD HAD NOTHING TO DO WITH THE APPELLANT' S CLAIM FOR DEDUCTION U/S 40 (B) OF THE ACT. 10] OUT OF DEPRECIATION ON WINDMILL - RS.31,133/ - 10.1] THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE DEPRECIATION ON PART OF THE STRUCTURE OF WIND MI LL BY APPLYING THE RATE OF 10% AS APPLICABLE TO BUILDINGS AND HE FAI LED TO APPRECIATE THAT THIS STRUCTURE WAS PART OF THE WIND MI LL ELIGIBLE FOR DEPRECIATION @ 80% 11] THE APPELLANT REQUESTS FOR ADMISSION OF ADDITIONAL EVIDENCES IF ANY REQUIRED IN DECIDING THE ABOVE GROU NDS OF APPEAL. 12] THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 9 ITA NO.607/PN/2013 (CONCISE GROUNDS OF APPEAL BY R EVENUE) : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN MAKING THE ESTIMATION OF GP AND NOT UPHOLDING THE ADDITION MADE BY THE A.O. WHOLLY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT(A) ERRED IN HOLDING THAT THE ADDITION OF RS.12,01,63,323/- ON ACCOUNT OF ALLEGED DIVERSION OF PROFIT CANNOT BE UPHELD AS PER PARA 24 OF THE APPEAL ORDER . 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE PART ADDITIONS OF RS. 12,62,567/- OUT OF RS. 22,62,2889/-, ON A/C OF PROPERTY INCOME AND DISALLOWANCE OF PROPORTIONATE EXPENSES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD CIT(A) ERRED IN PARTLY DELETING OF RS. 42,847/- OUT OF RS. 1,10,537/- ON A/C OF DIFFERENCE IN TRADE CREDITORS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT(A) ERRED IN ADDITION MADE ON ACCOUNT OF DRIVER'S SALARY OF RS. 32,086/-. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION M ADE ON ACCOUNT OF DEPRECIATION ON VEHICLES OF RS. 8,14,855/-. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,44,856/- ON ACCOUNT OF DISALLOWANCE OF INTEREST UNDER GDS. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,61,06,612/- ON ACCOUNT OF VERIFICATION UNDER G DS. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,32,772/- ON ACCOUNT OF BOGUS LIABILITY. 10. THE LD. CIT(A) HAS ERRED IN UPHOLDING THE ADDITIO N SEPARATELY MADE U/S 14A READ WITH RULE 8D OF RS. 4,53,72,146/- AS PER THE NOTE ON PAGE NO. 96 OF THE CIT(A)'S ORDE R.. 4. GROUNDS OF APPEAL NO.1(A) AND 2 BY THE ASSESSEE AND GROUNDS OF APPEAL NO. 1 TO 3 BY THE REVENUE RELATE TO THE P ART RELIEF GIVEN BY THE LD.CIT(A) OUT OF THE ADDITION MADE BY THE ASSES SING OFFICER. 10 4.1 FACTS OF THE CASE, IN BRIEF, ARE THAT DURING TH E ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT THE COMPARATIVE POSITION OF TRADING RESULT OF THE ASSESSEE IS AS UN DER : A.Y. TURNOVER GROSS PROFIT RATE OF GP NET PROFIT RATE OF NP 2009 - 10 9557881767 107915450 1.13% 9099920 0.09% 2008 - 09 3041859685 67478528 2.22% 3469506 0.11% 2007 - 08 82550087 9 31311929 3.79% 6671486 0.81% 4.2 FROM THE ABOVE, HE NOTED THAT ON A TOTAL TURNOV ER OF RS.955.78 CRORES, THE ASSESSEE HAS DECLARED GROSS P ROFIT @ 1.13% AND NET PROFIT @ 0.9%. HE ANALYSED THE COMPARATIVE POSITION OF GP AND NP OF THE OTHER GROUP CONCERNS, THE DETAILS OF WHICH ARE AS UNDER : M/S.RAJMAL LAKHICHAND JEWELLERS PVT. LTD. A.YR. TURNOVER PERCENTAGE OF GROSS PROFIT SHOWN PERCENTAGE OF NET PROFIT SHOWN. 2009 - 10 432,72,13,041 4.28% 2.35% M/S. MANRAJ JEWELLERS PVT. LTD. A.YR. TURNOVER PERCENTAGE OF GROSS PROFIT SHOWN PERCENTAGE OF NET PROFIT SHOWN. 2009 - 10 303,54,99,144 2.80% 0.76% M/S.R.L. GOLD PVT. LTD. A.YR. TURNOVER PERCENTAGE OF GROSS PROFIT SHOWN PERCENTAGE OF NET PROFIT SHOWN. 2009 - 10 176,79,37,815 2.96% 1.36% M/S.MANVI HOLDINGS PVT. LTD. A.YR. TURNOVER PERCENTAGE OF GROSS PROFIT SHOWN PERCENTAGE OF NET PROFIT SHOWN. 2009 - 10 141,57,76,690 1.41% NA BEING LOSS HE, THEREFORE, ASKED THE ASSESSEE TO FURNISH THE VA RIOUS DETAILS AS PER NOTICE ISSUED U/S.142(1) TO WHICH THE ASSESSEE REPLIED. 11 4.3 FROM THE VARIOUS DETAILS FURNISHED BY THE ASSES SEE THE ASSESSING OFFICER NOTED THAT THE ASSESSEE FIRM SOLD GOLD ORNAMENTS TO SISTERS CONCERNS AT LOWER PRICE THAN SOLD TO OTH ER PARTIES BY RS.40.36/GRAM. HE NOTED FROM THE VARIOUS DETAILS F URNISHED BY THE ASSESSEE THAT ON THE OTHER DATES EITHER IT HAS BEEN SOLD BELOW THE COST PRICE OR SLIGHTLY ABOVE THE COST PRICE AND IN THIS WAY THE ASSESSEE FIRM HAS DIVERTED ITS PROFIT TO SISTERS CO NCERNS BY MAKING SALE AT LOWER RATES. HE OBSERVED THAT NO UNIFORM M ETHOD IS APPLIED BY THE ASSESSEE FOR SALES TO SISTER CONCERNS AND TH E RATES ARE DECIDED AT ITS OWN SWEET WILL. KEEPING ALL THESE FACTS IN MIND, THE ASSESSING OFFICER CONSIDERED THE AVERAGE RATE AS MA DE TO THE OTHER PARTIES THAN THE SISTERS CONCERNS AND ADDED THE DIF FERENCE OF RS.40.36/GRAM ON ENTIRE SALE OF 29,77,287.493 GRAMS MADE TO SISTER CONCERNS. SUCH DETAILS ARE ANNEXED TO THE ASSESSME NT ORDER AS ANNEXURE-I. THUS, HE MADE AN ADDITION OF RS.12,01, 63,323/- TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF SALES MA DE AT LOWER RATES TO SISTERS CONCERNS. 4.4 THE ASSESSING OFFICER FURTHER NOTED THAT THE AS SESSEE HAS PURCHASED BULLION @ 1313.82/GRAM FROM SISTER CONCER NS WHEREAS HE HAS PURCHASED FROM OTHERS @ 1166.10/GRAM. SIMILARL Y, GOLD ORNAMENTS WAS PURCHASED FROM OTHER PARTIES @ 1285.0 8/GRAM WHEREAS FROM SISTER CONCERNS IT WAS PURCHASED @ 133 6.39/GRAM. SUCH DETAILS ARE ANNEXED TO THE ASSESSMENT ORDER AS ANNEXURE-2. FROM THE ABOVE, THE ASSESSING OFFICER NOTED THAT TH E ASSESSEE HAS PAID MORE PAYMENT TO SISTER CONCERNS THAN OTHERS. HE, THEREFORE, 12 INVOKED THE PROVISIONS OF SECTION 40A(2)(B) AND MAD E ADDITION OF RS.64,64,22,989/- TO THE TOTAL INCOME OF THE ASSESS EE U/S.40A(2)(B), THE DETAILS OF WHICH ARE AS UNDER : PURCHASES FROM FROM OTHERS SISTER CONCERN BULLION GOLD 1313.82 1166.10 THE DIFFERENCE OF RS.147.76/- PER GRAM OVER THE QUAN TITY OF 31,95,845.50 GRAMS WORKS OUT AT RS.47,22,18,131/-. ORNAMENTS GOLD 1336.39 1285.08 THE DIFFERENCE OF RS.51.31/- PER GRAM OVER THE QUANT ITY OF 33,95,144.391 GRAMS WORKS OUT AT RS.17,42,04,858/-. 4.5 THE ASSESSING OFFICER FURTHER NOTED THAT THE AS SESSEE HAD MANUFACTURED ORNAMENTS NOT ONLY FROM GOLD & BULLION BUT ALSO FROM URD PURCHASES. HE THEREFORE ASKED THE ASSESSE E TO GIVE THE DETAILS OF URD PURCHASES SUCH AS NAMES AND ADDRESSE S OF THE PERSONS CONCERNED, DETAILS OF PAYMENT, QUANTITY PUR CHASED, PURITY OF GOLD, ITEMS PURCHASED, SO ALSO SIZES OF THE ORNA MENTS. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, HE OBSER VED THAT THESE PURCHASES ARE OF DIFFERENT KARAT. IT WAS EXPLAINED BY THE ASSESSEE THAT AFTER RUBBING THE ORNAMENTS ON KASAUTI THE K ARAT PERCENTAGE IS DETERMINED. IT WAS FURTHER EXPLAINED THAT AS A MEA SURE OF PRECAUTION 0.5% TO 1% IS DEDUCTED FROM THE TOTAL QU ANTITY ON ACCOUNT OF PURITY. FROM THE ABOVE, THE ASSESSING O FFICER NOTED THAT THE PURCHASES OF URD SHOWN BY THE ASSESSEE ARE NOT PROPERLY VOUCHED WITH SUPPORTING EVIDENCE. HE THEREFORE ASK ED THE ASSESSEE TO SUBSTANTIATE WITH EVIDENCE THE DETAILS OF MELTIN G GAIN ON ACCOUNT OF METHOD FOLLOWED BY THE ASSESSEE FOR PURCHASE OF GOLD ORNAMENTS 13 FROM UNREGISTERED DEALERS. FROM THE DETAILS FURNIS HED BY THE ASSESSEE, HE OBSERVED THAT THE PERCENTAGE OF MELTIN G GAIN IS FLUCTUATING BETWEEN 1.30% TO 14.54%. FROM THE VARI OUS DETAILS FURNISHED BY THE ASSESSEE, HE OBSERVED THAT THERE I S ONLY ONE SOLITARY INSTANCE OF 1.30% OF MELTING GAIN AND ANOTHER SOLIT ARY INSTANCE OF 14.54% MELTING GAIN WHEREAS IN THE MAXIMUM NUMBER O F OCCASIONS MELTING GAIN HAVE BEEN MORE THAN 9% TO 10%. HOWEVE R, THE ASSESSEE HAS SHOWN MELTING GAIN AT 7.83%. REJECTIN G THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE, THE ASSESSING O FFICER ESTIMATED MELTING GAIN AT 10% OF THE GOLD ISSUED WEIGHING 259 088.002 GRAMS WHICH COMES TO 25908.800 GRAMS AS AGAINST MELTING G AIN SHOWN AT 20288.186 GRAMS. ACCORDINGLY, HE HELD THAT GOLD WE IGHING 5620.6014 GRAMS HAS BEEN SUPPRESSED AND THE ASSESSE E GOT MANUFACTURED NEW ORNAMENTS ITSELF THAT ARE SOLD OUT SIDE THE BOOKS OF ACCOUNT. THE AVERAGE RATE/GRAM FROM THE QUANTIT ATIVE DETAILS OF SALES COMES TO 1510.50/GRAM. BY APPLYING THE SAME RATE, THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAD EARNED INCOME OF RS.84,89,937/- ON ACCOUNT OF SALE. HE ACCORDINGLY BROUGHT TO TAX AN AMOUNT OF RS.84,89,937/- AS INCOME ON ACCOUNT OF MELTING GAIN. 4.6 THE ASSESSING OFFICER FURTHER NOTED THAT THE VA RIOUS KARIGARS ARE DOING THE WORK FOR MAXIMUM NUMBER OF CASES OF R AJMAL LAKHICHAND GROUP. NONE OF THE KARIGARS WERE FOUND TO BE HAVING KNOWLEDGE AS TO FROM WHICH COMPANY THEY ARE RECEIVI NG THE GOLD FOR PREPARING THE ORNAMENTS. NONE OF THE KARIGARS I S HAVING KNOWLEDGE AS TO HOW MUCH LABOUR CHARGES HE RECEIVED FROM WHICH 14 COMPANY. THEY FAILED TO GIVE THE DETAILS OF THE CO MPANY-WISE RECEIPTS. FROM THE ABOVE, HE OBSERVED THAT ALL THE SE KARIGARS ARE NOTHING BUT PUPPETS OF THE ASSESSEE AND THEY DO NOT UNDERSTAND THE INTRICACY OF THE LAW OR ACCOUNT. BY NOT MAINTAININ G SUCH RECORDS THEY HAVE ACTED HANDS IN GLOVES WITH THE ASSESSEE S O THAT THE CORRECT BOOK RESULT OF THE ASSESSEE CANNOT BE PUT TO VERIFI CATION. 4.7 HE FURTHER NOTED THAT ALTHOUGH ORNAMENTS OF DIF FERENT PURITY WERE GOT PREPARED BY SENDING THE PURE GOLD TO KARIG ARS, NO DETAILS OF COPPER EITHER PURCHASED BY THE ASSESSEE OR BY THE K ARIGARS WAS GIVEN. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER HELD THAT PURCHASE AND SALE OF GOLD COULD NOT BE VERIFIED. H E FURTHER NOTED THAT NO SALE BILLS WERE FOUND TO BE HAVING THE DETA ILS OF THE ORNAMENT MAKING OR THE DETAILS OF ORNAMENT CHARGES. THIS ACCORDING TO THE ASSESSING OFFICER WOULD HAVE HELPE D IN DETERMINING WHETHER LABOUR PAYMENTS COLLECTED AND O RNAMENT MAKING CHARGES WERE COMMENSURATE WITH EACH OTHER. IN ABSENCE OF SUCH DETAILS, HE HELD THAT THE BOOK RESULTS SHOWN B Y THE ASSESSEE COULD NOT BE ACCEPTED TO BE REFLECTING TRUE AND COR RECT PICTURE OF THE BUSINESS. IN VIEW OF THE ABOVE, HE MADE THE ADDITI ON OF RS.77,50,76,249/-, I.E. (12,01,63,323 + 64,64,22,98 9 + 84,89,937). 5. BEFORE CIT(A) THE ASSESSEE MADE ELABORATE SUBMIS SIONS BASED ON WHICH THE LD.CIT(A) CALLED FOR A REMAND RE PORT FROM THE ASSESSING OFFICER. AFTER ANALYSING THE VARIOUS PURC HASES AND SALES MADE BY THE ASSESSEE THROUGH THE SISTER CONCERNS HE OBSERVED THAT MANY TRANSACTIONS WITH THE SISTER CONCERNS ARE ONLY ON PAPER AND ARE 15 FICTITIOUS. HE OBSERVED THAT THE PURCHASE OF BULLI ON AND ORNAMENTS FROM THE SISTER CONCERNS ARE MADE AT HIGHER PRICE A ND ORNAMENTS ARE SOLD AT LOWER RATES BY THE ASSESSEE TO THE SISTER C ONCERNS AS COMPARED TO THE SALE OF ORNAMENTS TO THIRD PARTIES. AFTER ANALYSING THE OVERALL PRICE OF BULLION AND ORNAMENTS, VIS-A-V IS AVERAGE PURCHASE PRICE PAID TO THE THIRD PARTIES HE ARRIVED AT THE CONCLUSION THAT ALL CONCERNS EXCEPT RAJMAL LAKHICHAND JEWELLER S PVT. LTD., HAVE PAID HIGHER AVERAGE PRICE FOR 10 GM OF BULLION TO THE SISTER CONCERNS, VIS-A-VIS THE PURCHASES FROM THIRD PARTIE S AND SIMILARLY RAJMAL LAKHICHAND GOLD PVT. LTD., AND R.L. PRIVATE LTD., PAID MUCH HIGHER PRICE FOR ORNAMENTS, VIS-A-VIS THE PURC HASES FROM THE THIRD PARTIES. IN NUTSHELL HE OBSERVED THAT THE SA LE AND PURCHASE WITH THE SISTER CONCERNS WERE NOT AT PAR WITH THE P RICE CHARGED TO THIRD PARTIES. AFTER ANALYSING THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE RELATING TO ITSELF AS WELL AS OF THE VARIO US GROUP CONCERNS HE PREPARED A CONSOLIDATED TRADING ACCOUNT OF ALL T HE CONCERNS WHICH SHOW SALE OF RS.2219.54 CRORES WHILE THE SALE S ACTUALLY MADE TO THE THIRD PARTIES ARE ONLY RS.679.66 CRORES. FU RTHER, HE ALSO COMPARED THE PURCHASE PRICE PAID TO THE SISTER CONC ERNS FOR BULLION, VIS-A-VIS MARKET PRICE AS PER MUMBAI BULLION ASSOCI ATION AND NOTED THAT THE ASSESSEE HAS PAID HIGHER PURCHASE PRICE OF RS.3,10,10,720/- TO THE SISTER CONCERNS. SIMILARLY, HE COMPARED THE PURCHASE OF ORNAMENTS FROM THE SISTER CONCERNS, VIS-AVIS THIRD PARTIES AND NOTED THAT THE ASSESSEE HAS MADE EXCESS PAYMENT OF RS.18 CRORE TO THE SISTER CONCERNS, VIS-A-VIS THIRD PARTIES. HE OBSER VED THAT THE 16 ASSESSEE CHARGED AN AVERAGE PRICE OF RS.13,350/- PE R 10 GM FOR THE ORNAMENTS SOLD TO THE SISTER CONCERNS AS AGAINST TH E AVERAGE PRICE OF RS.13,906/- PER 10 GM CHARGED TO THIRD PARTIES. TH US, THE DIFFERENCE COMES TO RS.55.60 PER GM. HE NOTED THAT THE REGIST ER FOR ISSUE AND RECEIPT OF GOLD ARE NOT SUPPORTED BY KARIGARS TO WH OM THE GOLD WAS GIVEN AND THEREFORE THE REGISTER CANNOT BE ACCEPTED . SIMILARLY, HE ALSO REJECTED THE CONTENTION OF THE ASSESSEE THAT T HE MELTING GAIN SHOWN IN THE BOOKS WAS SUPPORTED BY QUANTITATIVE RE CORDS AND HENCE SHOULD BE ACCEPTED. BASED ON HIS VARIOUS OBS ERVATIONS, HE REITERATED THAT THE ASSESSEE BY AND LARGE HAS ENTER ED INTO FICTITIOUS TRANSACTIONS WITH THE GROUP CONCERNS AND THEREFORE THE BOOKS OF ACCOUNTS DO NOT GIVE TRUE AND CORRECT PROFIT FOR TH E IMPUGNED ASSESSMENT YEAR. HE, THEREFORE, MADE A QUANTITATIV E TRADING ACCOUNT OF THE ASSESSEE AND NOTED THAT THERE IS A DIFFERENC E IN THE STOCK TO THE EXTENT OF 12 KGS OF ORNAMENTS IN THE TRADING ACCOUN T. SIMILARLY, HE ALSO ANALYSED THE TURNOVER OF THE VARIOUS GROUP CON CERNS FOR THE IMPUGNED ASSESSMENT YEAR AND THEIR GROSS PROFIT AND NOTED THAT THE AVERAGE GP OF ALL THE CONCERNS TAKEN TOGETHER ON A CONSOLIDATED BASIS COMES TO 2.25%. HE OBSERVED THAT THE ASSESSE E EVADED THE TAX BY INFLATING THE PURCHASES AND SUPPRESSING THE SALE S IN TRANSACTIONS WITH THE SISTER CONCERNS. SINCE MOST OF THE TRANSA CTIONS WITH THE SISTER CONCERNS ARE FICTITIOUS, HE HELD THAT ONLY 2 5% OF THE TRANSACTIONS WITH THE SISTER CONCERNS CAN BE CONSID ERED AS GENUINE. CONSIDERING THE ADDITION MADE BY THE ASSESSING OFFI CER WHICH GIVES A GP RATE OF 9.2% WHICH ACCORDING TO LD.CIT(A ) IS VERY HIGH, 17 HE DIRECTED THE ASSESSING OFFICER TO ADOPT THE GP R ATE OF 5.71% ON ESTIMATED TURNOVER OF RS.565,51,47,670/-. FOR ARRI VING AT THE GP RATE OF 5.71% THE LD.CIT(A) ADOPTED THE FOLLOWING M ETHOD : TRADING ACCOUNT TAKING 25% OF TOTAL SALES/PURCHASES AM ONG SISTER CONCERNS OPENING STOCK 90,60,32,980 SALES TO 3 RD PARTIES 679,66,42,975 PURCHASES FROM 3 RD PARTIES 6,37,83,76,995 SALES OF BULLION AND ORNAMENT TO SISTER CONCERNS ESTIMATED AT 25% OF TOTAL SALES TO SISTER CONCERNS 385,66,55,894 1065,32,98,959 PURCHASES OF GOLD BULLION AND ORNAMENT FROM SISTER CONCERNS ESTIMATED AT 25% OF TOTAL PURCHASE FROM SISTER CONCERNS 3,85,66,57,143 1023,50,34,138 LABOUR CHARGES 33,40,024 DIRECT EXPENSES 4,83,59,948 DIRECT INCOME (MTF GAIN) 25,50,87,766 CLOSING STOCK 88,63,47,143 GROSS PROFIT 60,86,46,826 1179,80,73,892 1179,80,73,892 GP RATE 5.71% 5.1 THUS, THE LD.CIT(A) ARRIVED AT GP OF RS.32,29,0 8,931/- AS AGAINST GP OF RS.10,79,15,449/- SHOWN BY THE ASSESS EE. ACCORDINGLY, HE SUSTAINED ADDITION OF RS.21,49,93,4 82/- GIVING RELIEF TO THE ASSESSEE AMOUNTING TO RS.56,00,82,766 /-. ACCORDING TO HIM, THIS ADDITION OF RS.21,49,93,482/- WILL TAKE C ARE OF THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF SALES/P URCHASES FROM SISTER CONCERNS AND MELTING GAINS. THIS WOULD ALSO TAKE CARE OF EXCESS PRICE PAID ON PURCHASE OF BULLION AND ORNAME NTS FROM SISTER CONCERNS WHICH WAS SHOWN EARLIER TO THE TUNE OF RS. 3.10 CRORES AND 15.21 CRORES RESPECTIVELY WHEN COMPARED WITH BOMBAY BULLION EXCHANGE RATES. 18 5.2 AGGRIEVED WITH SUCH ORDER OF CIT(A) THE ASSESSE E AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OBJECT ED TO THE ORDER OF THE CIT(A). HE SUBMITTED THAT ALL THE SIS TER CONCERNS OF THE ASSESSEE ARE BASED IN JALGAON. THE ASSESSEE HAS FR OM TIME TO TIME MADE PURCHASES OF BULLION FROM THE SISTER CONCERNS EXCEPT IN A FEW CASES WHERE IT HAS PURCHASED FROM OUTSIDE PARTIES. HE SUBMITTED THAT LIKE THE STOCK MARKET, DURING A DAY, THE GOLD PRICES FLUCTUATE AND DAILY CLOSING RATES OF MUMBAI BULLION ARE PUBLI SHED IN THE PAPERS. THE AO COMPARED THE RATES PAID BY THE ASSE SSEE, VIS--VIS THE BOMBAY RATES AND HELD THAT THE ASSESSEE HAS PAI D THE EXCESS PRICE TO THE SISTER CONCERNS AND ACCORDINGLY INVOKE D THE PROVISIONS OF SECTION 40A(2) FOR MAKING THE ADDITION. HE SUBM ITTED THAT SINCE THE ASSESSEE IS MAKING PURCHASES AT JALGAON, THEREF ORE, THERE IS NO REASON TO COMPARE THE RATES OF MUMBAI WITH THE PURC HASES RATE OF THE ASSESSEE. THE AO SHOULD HAVE COMPARED THE RATE OF PURCHASES VIS-A-VIS JALGAON, I.E. THE LOCAL RATES. HE SUBMI TTED THAT ALTHOUGH THIS CONTENTION WAS RAISED BEFORE THE CIT(A), HOWEV ER, HE ALSO DID NOT ACCEPT THIS CONTENTION. REFERRING TO PAGE 1 TO 6 OF PAPER BOOK NO.2 HE DREW THE ATTENTION OF THE BENCH TO THE COMP ARABLE RATES OF MUMBAI MARKET AND JALGAON MARKET. REFERRING TO THE SAID, HE SUBMITTED THAT THE ASSESSEE BY AND LARGE HAS PAID T HE RATES TO THE SISTER CONCERNS FOR PURCHASE OF BULLION WHICH ARE L ESSER THAN THE JALGAON MARKET RATES. REFERRING TO PAGES 42 TO 45 OF PAPER BOOK NO.1 HE DREW THE ATTENTION OF THE BENCH, THE DETAIL S OF DIFFERENCE 19 VIS--VIS JALGAON RATES AND SUBMITTED THAT IN OVERA LL THE ASSESSEE HAS PAID RS.1,01,15,553/- LESS PRICE TO THE SISTER CONC ERNS THAN THE PURCHASE PRICE PAYABLE AT JALGAON RATES. THEREFORE , THE VERY BASIS ADOPTED BY THE AO IN BASING THE COMPARISON FOR THE PURCHASE RATES, VIS--VIS THE BOMBAY BULLION RATES IS GROSSLY INCOR RECT AND THEREFORE THE ADDITION ON THIS BASIS IS NOT JUSTIFI ED. 6.1 AS REGARDS THE REASON FOR HIGHER RATE AT JALGAO N THAN THE MUMBAI PRICE HE SUBMITTED THAT GOLD IS BROUGHT TO J ALGAON FROM MUMBAI. THEREFORE, THE TRANSPORTATION COST GETS ADD ED TO THE PRICE IN MUMBAI FOR DETERMINING THE PRICE IN JALGAON. FU RTHER, THERE IS FLUCTUATION OF RATE IN JALGAON MARKET BECAUSE SOMET IMES THE RATES OFFERED ARE OF THE EARLIER DAY AS THE JALGAON RATES ARE NOT AVAILABLE TO THE ASSESSEE. THIS LED TO THE DIFFERENCE IN THE RA TES PAID VIS--VIS ACTUAL CLOSING RATES AT JALGAON. HOWEVER, HE SUBMI TTED THAT THE ASSESSEE HAS NOT PAID ANY EXCESS PRICE TO THE SISTE R CONCERNS DURING THE YEAR AS PER PAGES 42 TO 45 OF THE PAPER BOOK. 6.2 SO FAR AS THE DIFFERENCE OF AVERAGE PURCHASE RA TE OF GOLD BETWEEN SISTER CONCERNS AND THE OUTSIDERS, HE SUBMI TTED THAT PRICE FOR PURCHASE IS THE PRICE AS ON THAT DATE. THE ASS ESSEE HAS PAID THE PRICE AS PER THE JALGAON RATE TO THE SISTER CONCERN S. THEREFORE, THE VERY BASIS OF COMPARING THE AVERAGE RATE OF THE YEA R FOR PURCHASE IS INCORRECT. REFERRING TO PAGE 599 OF THE PAPER BOOK HE DREW THE ATTENTION OF THE BENCH TO THE ASSESSMENT ORDER FOR A.Y. 2011-12 WHERE THE AO HAS ACCEPTED THE COMPARISON WITH JALGA ON RATES INSTEAD OF MUMBAI RATES. HE SUBMITTED THAT THERE A RE ONLY TWO 20 TRANSACTIONS FOR PURCHASES FROM THIRD PARTIES DURI NG THE YEAR WHICH SHOW THAT THE RATE PAID TO THEM WAS THE MARKET RATE . THEREFORE, WHEN THERE ARE ONLY 2 TRANSACTIONS DURING THE YEAR, THEIR AVERAGE WORKED OUT TO A VERY LOW LEVEL, I.E. THE AVERAGE PR ICE PAID TO THE SISTER CONCERNS. THEREFORE, THIS BASIS IS ALSO NOT JUSTIFIED FOR JUDGING AS TO WHETHER THE PURCHASE PRICE PAID BY TH E ASSESSEE TO THE SISTER CONCERNS WAS THE MARKET PRICE OR NOT. HE SU BMITTED THAT THE ASSESSEE HAS CONCLUSIVELY SHOWN THAT THE PRICE PAID TO THE SISTER CONCERNS WAS THE PREVALENT MARKET RATES AND IT WAS NOT EXCESSIVE AND THEREFORE THE DISALLOWANCE U/S.40A(2) IS NOT JU STIFIED. 6.3 REFERRING TO THE COPY OF THE ASSESSMENT ORDER O F THE GROUP CONCERNS PLACED AT PAPER BOOK 254 TO 364 OF PAPER B OOK NO.1, HE SUBMITTED THAT IN OTHER CONCERNS THE AO HAS INVOKED THE PROVISIONS OF SECTION 40A(2) TO HOLD THAT IT HAS PAID EXCESS P RICE TO THE OTHER CONCERNS FOR PURCHASES. REFERRING TO THE ASSESSMEN T ORDER OF M/S. MANVI HOLDING PVT. LTD., PLACED AT PAPER BOOK PAGE 274 HE SUBMITTED THAT THIS IS CONTRADICTORY TO THE STAND T AKEN IN THE ASSESSEES CASE, BECAUSE ON ONE SIDE IN THE HANDS O F THE ASSESSEE, THE AO HOLDS THAT THE ASSESSEE HAS PAID EXCESS PRIC E TO MANVI HOLDINGS. HE ACCORDINGLY SUBMITTED THAT THE DISALL OWANCE U/S.40A(2) IS NOT JUSTIFIED IN RESPECT OF THE PURCH ASES OF BULLION FROM THE SISTER CONCERNS. 6.4 AS REGARDS THE ALLEGATION OF THE AO THAT ASSESS EE HAS PAID EXCESSIVE PRICE FOR PURCHASE OF ORNAMENTS TO THE SI STER CONCERNS, HE SUBMITTED THAT THE PURCHASES AND SALES WITH THE SIS TER CONCERNS ARE 21 ENTERED INTO BY THE ASSESSEE MAINLY TO OBTAIN BANK FINANCE. IF THIS WAS NOT DONE THE GROUP WOULD NOT HAVE GOT THE BANK FINANCE AND IT WOULD NOT HAVE BEEN ABLE TO ACHIEVE THE GROWTH. TH EREFORE, THESE PURCHASE OF NEW ORNAMENTS MADE BY THE ASSESSEE ARE ROUTED THROUGH THE SISTER CONCERNS MAINLY FOR THAT PURPOSE. THESE CONCERNS DO NOT HAVE A SHOP. THE ASSESSEE IS HAVING A SHOP FOR SAL E OF ORNAMENTS. HE SUBMITTED THAT THE BUSINESS OF THE SISTER CONCER NS IS A WHOLESALE BUSINESS OF PURCHASES AND SALES OF NEW ORNAMENTS. THEY HAVE PHYSICALLY SOLD THE NEW ORNAMENTS MADE FROM THE KAR IGARS IN THE GROUP ITSELF. BUT ON ALL THESE TRANSACTIONS VAT HA S BEEN PAID . THE RESPECTIVE CONCERNS HAVE ACCOUNTED FOR THE PROFIT O N SALE OF ORNAMENTS TO EACH OTHER IN THEIR HANDS WHICH HAS BE EN SHOWN IN THEIR RESPECTIVE RETURNS AND ASSESSED TO TAX IN THE IR HANDS. (FOR THIS PURPOSE, HE DREW THE ATTENTION OF THE BENCH TO THE ASSESSMENT ORDERS OF THE SISTER CONCERNS WHICH ARE PLACED AT P AGES 254 TO 364 OF THE PAPER BOOK). 6.5 SECONDLY, THE BILLS OF SALES AND PURCHASES OF T HE NEW ORNAMENTS BETWEEN THE ASSESSEE AND THE GROUP CONCERNS INDICAT E A GROSS AMOUNT INCLUSIVE OF LABOUR CHARGES AND THEY ARE NOT SEPARA TELY MENTIONED. THE PURCHASES AND SALES ARE MADE ON A WHOLESALE BAS IS. THIRDLY, THE PURCHASES AND SALES OF ORNAMENTS ARE ONLY OF THE NE W ORNAMENTS MADE BY THE KARIGARS. THEY ARE NOT OF OLD ORNAMENTS . AS REGARDS THE QUESTION AS TO WHETHER THERE IS ANY INCOME TAX AVOI DANCE IN THESE TRANSACTIONS, HE REFERRED TO PAGES 46 TO 51 OF THE PAPER BOOK 1 WHERE THE ASSESSEE HAS GIVEN CHART OF PURCHASES OF NEW ORNAMENTS 22 MADE FROM THE SISTER CONCERNS AND SUBMITTED THAT OV ER ALL, DURING THE YEAR, THE ASSESSEE HAS PAID A LESSER AMOUNT OF RS.9 ,50,66,682/- TO THE SISTER CONCERNS TOWARDS PURCHASES OF NEW ORNAMENTS. THE ASSESSEE HAS GIVEN THE COMPARISON WITH JALGAON RATES IN THIS CHART. FROM THIS CHART, IT IS CLEAR THAT THE DECISION OF THE A.O. TH AT THE ASSESSEE HAS PAID A HIGHER PRICE FOR PURCHASE OF NEW ORNAMENTS T O SISTER CONCERNS IS GROSSLY INCORRECT. 6.6 HE SUBMITTED THAT THE A.O / CIT(A) HAVE COMPARE D THE RATE PAID TO THE SISTER CONCERNS VIS-A-VIS THE RATES PAI D FOR THE OLD ORNAMENTS TO THIRD PARTIES. IN RESPECT OF THE OLD O RNAMENTS, THE RATES ARE BOUND TO BE LOWER BECAUSE THE SAME ARE NOT READ ILY SALEABLE AND HAVE TO BE MELTED AND FROM THE PURE GOLD OBTAINED A FTER MELTING, THE NEW ORNAMENTS ARE MANUFACTURED THROUGH KARAGIRS AND LABOUR CHARGES ARE REQUIRED TO BE PAID TO THE KARAGIRS FOR MANUFAC TURING THE ORNAMENTS. THIS IS THE BUSINESS OF ALL THE JEWELLER S TO PURCHASE OLD ORNAMENTS (MOD) AT A LOWER RATE AND AFTER CONVERTIN G THEM INTO NEW ORNAMENT SALE AT A HIGHER RATE. THIS ONLY WILL BRIN G PROFIT TO ANY JEWELLER. THEREFORE THE PURCHASE RATES OF OLD ORNAM ENTS ARE MUCH LOWER. SO FAR AS THE NEW ORNAMENTS ARE CONCERNED, T HEY ARE MADE ON THE INSTRUCTION OF THE ASSESSEE FROM BULLION OR GOL D GIVEN TO THE KARIGARS. 6.7 HE SUBMITTED THAT THE A.O. / CIT(A) HAS AGAIN C OMPARED THE RATES OF THE NEW ORNAMENTS BY CONSIDERING THE BOMBA Y BULLION RATES. HE REITERATED THAT BASICALLY BOMBAY BULLION RATES SHOULD NOT BE ADOPTED FOR COMPARISON OF PURCHASES AND THE YARD STICK SHOULD BE 23 BASED ON JALGAON RATES. IF JALGAON RATES ARE CONSI DERED, THE ASSESSEE HAS INFACT PAID LESSER PRICE AND THEREFORE QUESTION OF DISALLOWANCE U/S.40A(2) IS NOT WARRANTED. 6.8 AS REGARDS THE ALLEGATION OF THE REVENUE THAT T HE ASSESSEE HAS TRANSFERRED PROFITS TO THE SISTER CONCERNS BY PAYIN G A HIGHER PRICE FOR PURCHASES AND CHARGING A LOWER PRICE FOR THE SALES EFFECTED TO SISTER CONCERNS HE SUBMITTED THAT THIS FINDING IS ALSO WRO NG. REFERRING TO PAGE 52 OF PAPER BOOK 1, HE DREW THE ATTENTION OF T HE BENCH TO THE CHART GIVING THE DETAILS OF SALES OF BULLION EFFECT ED TO SISTER CONCERNS AND SUBMITTED THAT THESE SALES HAVE FETCHED EXCESS PRICE OF RS.L,13,57,471/- TO THE ASSESSEE DURING THE YEAR. T HUS, THE CONTENTION OF THE A.O IS WRONG. ASSESSEE HAS NOT PA SSED PROFITS ON SALE OF BULLION TO THE SISTER CONCERNS AT ALL. 6.9 AS REGARDS THE SALE OF NEW ORNAMENTS TO SISTER CONCERNS IS CONCERNED, HE DREW THE ATTENTION OF THE BENCH TO TH E CHART ON PAGE 53 TO 55 AND SUBMITTED THAT THE ASSESSEE HAS CHARGED A LESSER AMOUNT OF RS.9,12,81,127/- WHEN THE PRICES OF THE ORNAMENTS A RE COMPARED WITH THOSE AS PER JALGAON RATES. REFERRING TO PAG E 46 TO 51 OF THE PAPER BOOK HE SUBMITTED THAT THE ASSESSEE HAS PAID LESSER AMOUNT FOR PURCHASES AND THE DIFFERENCE IS RS.9,50,66,682/-. T HUS, THE ASSESSEE HAS PAID LESSER AMOUNT FOR PURCHASES AND HAS ALSO R ECEIVED A LESSER AMOUNT FOR SALES TO SISTER CONCERNS. THERE IS NO SI PHONING OFF PROFITS FROM THE ASSESSEE TO THE SISTER CONCERNS IF THE ABO VE DIFFERENCES IN SALES AND PURCHASES ARE NETTED OUT. HE SUBMITTED T HAT THE DIFFERENCES HAVE ARISEN AS FOR COMPARISON, THE ASSESSEE HAS TAK EN THE LABOUR 24 CHARGES SEPARATELY AND ADDED TO JALGAON RATES. ON T HE OTHER HAND, THE PURCHASES AND SALES OF NEW ORNAMENTS TO THE SISTER CONCERNS ARE EFFECTED AT GROSS FIGURES. THIS ACCORDING TO THE LD . AUTHORISED REPRESENTATIVE INDICATES THAT THE CONTENTION OF TH E A.O. AND THE CIT(A) ARE WRONG AND THE FINDING THAT THE ASSESSEE HAS SIPHONED OFF THE PROFITS TO THE SISTER CONCERNS IS NOT JUSTIFIED AND IT IS INCORRECT. 6.10 AS REGARDS MELTING GAIN IS CONCERNED HE SUBMIT TED THAT THE ASSESSEE PURCHASES OLD ORNAMENTS FROM THE CUSTOMERS AND AT THE TIME OF PURCHASE, HE ESTIMATES THE CONTENT OF GOLD ON KARAT BASIS IN THE ORNAMENTS AND ACCORDINGLY, THE PAYMENT IS MADE FOR PURCHASES. LATER ON, THE ORNAMENT IS GIVEN FOR REFINING AND TH E CONTENT OF GOLD MAY PROVE TO BE DIFFERENT FROM WHAT IS ESTIMATED BY THE ASSESSEE AT THE TIME OF PURCHASE. 6.11 REFERRING TO PAGE 369 OF PAPER BOOK 2 HE DREW THE ATTENTION OF THE BENCH TO THE CHART OF THE MELTING GAIN OVER THE LAST THREE YEARS AND SUBMITTED THAT THE MELTING GAIN FOR THIS YEAR I S COMPARABLE AND LITTLE MORE THAN THE EARLIER TWO YEARS IN WHICH THE MELTING GAIN WAS ACCEPTED. THE VERY BASIS OF THE DECISION OF CIT(A) AND THE A.O. IS WRONG. THEY HAVE REJECTED THE ASSESSEE'S VERSION WI THOUT ANY EVIDENCE OR PROOF. THERE IS NO FIXED PERCENTAGE OF MELTING GAIN WHICH CAN BE VISUALIZED IN THE OLD ORNAMENTS. SUCH GAIN D EPENDS UPON THE GOLD CONTENT IN THE OLD ORNAMENTS. THAT CANNOT BE C OMPUTED EXACTLY WHILE PURCHASING THE OLD ORNAMENTS WHERE EACH ITEM IS DIFFERENT FROM THE OTHER. WHATEVER IS OBTAINED AS MELTING GAIN, I S ACCOUNTED FOR BY 25 THE ASSESSEE. HE SUBMITTED THAT THE ASSESSEE HAS MA INTAINED PROPER RECORDS. THEREFORE, THE ADDITION ON THIS BASIS IS A LSO NOT JUSTIFIED. 6.12 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSEE HAS MAINTAINED THE BOOKS OF ACCOUNTS WHICH ARE CLOS ED AND SUPPORTED BY BALANCE SHEET. ALL SALES AND PURCHASES ARE VOUCHED AND THE PURCHASES ARE MADE THROUGH BANKING CHANNELS. DA Y TO DAY STOCK RECORDS ARE MAINTAINED AND ACCOUNTS ARE AUDIT ED. THERE ARE NO ADVERSE COMMENTS BY THE AUDITORS. IN THE PAST YEARS ALSO, THE RESULTS SHOWN BY THE ASSESSEE ARE BY AND LARGE ACCEPTED. TH E A.O. HAD RAISED MANY POINTS ABOUT REJECTING THE BOOKS OF ACC OUNTS AND THE SAME HAVE BEEN ANSWERED BY THE ASSESSEE PROPERLY. T HE POINTS RAISED BY THE A.O. WERE REPLIED POINT-WISE BEFORE C IT(A). THEREFORE, IT IS GROSSLY INCORRECT ON THE PART OF T HE CIT(A) TO HOLD THAT THE ASSESSEE'S BOOKS OF ACCOUNTS SUFFER FROM C ERTAIN DEFECTS. ACCORDINGLY, THE REJECTION OF BOOKS OF ACCOUNTS IS NOT WARRANTED AND SECONDLY, THE ESTIMATION OF G.P. AT SUCH A HIGH FIG URE IS NOT JUSTIFIED. 6.13 HE SUBMITTED THAT THE ASSESSEE HAS RECONCILED THE CLOSING STOCK AS ON 31.03.2009 WITH THE STOCK REPORTED TO THE BAN K ON 28.02.2009 AND THE RECONCILIATION STATEMENT IS GIVEN ON PAGE 3 81 OF PAPER BOOK 2. IN PARA 19, ON PAGE 53, THE CIT(A) HAS GIVEN THE QUANTITATIVE STOCK ACCOUNT IN WHICH HE FINDS THAT THE QUANTITATI VE STOCK DOES NOT TALLY. THE SALES AND THE CLOSING STOCK ARE HIGHER T HAN THE PURCHASES AND THE OPENING STOCK. THE REASON IS THAT THE MELTI NG GAIN IS INCLUDED AND THEREFORE, THE QUANTITATIVE STOCK OF S ALES AND CLOSING STOCK IS HIGHER THAN THE OPENING STOCK AND PURCHASE S. THE POINT TO BE 26 NOTED IS THAT THE QUANTITY OF SALES AND CLOSING STO CK IS MORE THAN THE QUANTITY OF PURCHASES AND OPENING STOCK. THEREFORE, THERE IS NO REASON TO MAKE ANY ADDITION ON THIS ACCOUNT. 6.14 AS REGARDS REASONABLENESS OF GP IS CONCERNED, HE SUBMITTED THAT THE ASSESSEE WAS NOT GETTING THE BANK FINANCE. IN ORDER TO EXPAND ITS BUSINESS, BANK FINANCE WAS REQUIRED. THE SISTER CONCERNS WERE ENTITLED TO BANK FINANCE AND FOR WHICH PURPOSE, THE BUSINESS IN THE HANDS OF SISTER CONCERNS HAD TO BE SHOWN. THEREFORE , IN SOME OF THESE CONCERNS, THE WHOLESALE BUSINESS OF PURCHASE AND SA LE OF BULLION AND NEW ORNAMENTS HAS BEEN SHOWN. HE SUBMITTED THAT BE CAUSE OF THE BANK FINANCE, THE ASSESSEE'S TURNOVER INCREASED FRO M RS.82.55 CRS. IN A.Y. 2007-08 TO RS.955.78 CRS. IN A.Y. 2009-10. HOWEVER, WHEN THE TURNOVER HAS INCREASED SO MUCH, THE G.P. H AS COME DOWN FROM 3.79% IN A.Y. 2007 - 08 TO 1.13% IN THIS YEAR. 6.15 HE SUBMITTED THAT THE ASSESSEE ALSO DOES NOT D ENY THAT THE TRANSACTIONS WITH THE SISTER CONCERNS HAVE BEEN ENT ERED INTO FOR SHOWING WHOLESALE BUSINESS IN THEIR HANDS IN ORDER TO OBTAIN BANK FINANCE AND THAT IS ALSO ONE MAJOR REASON FOR FALL IN GP AS THESE ARE NOT REAL TRADING TRANSACTIONS. HOWEVER, THE SISTER CONCERNS HAVE ALSO MAINTAINED PROPER ACCOUNTS AND THEIR QUANTITATIVE T RADING ACCOUNTS ARE GIVEN ON PAGES 365 TO 368 OF THE PAPER BOOK 2. ON ALL SUCH SALES AND PURCHASES VAT HAS BEEN PAID AND THE A.O. ALSO H AS ASSESSED THE PROFITS SHOWN BY THE SISTER CONCERNS IN THEIR HANDS . THEIR ASST. ORDERS ARE PLACED IN THE PAPER BOOK 1 ON PAGES 254 TO 364. IN VIEW 27 OF THESE FACTS, THERE IS NO JUSTIFICATION TO ESTIMA TE PROFITS OF THE ASSESSEE WHICH THE CIT(A) HAS GIVEN. 6.16 HE SUBMITTED THAT THE ASSESSEE HAS NOT SIPHONE D OFF THE PROFITS TO THE SISTER CONCERNS. THE CIT(A) HAS ESTIMATED 25 % OF PURCHASES AND SALES WITH THE SISTER CONCERNS AS GENUINE AND F URTHER, HE HAS ESTIMATED THE G.P. OF 5.71%. ACCORDINGLY, HE HAS CA LCULATED G.P. @ 5.71% ON ESTIMATED TURNOVER OF RS5,65,51,47,670/ - AND ARRIVED AT RS.32,29,08,931/- AS AGAINST THE G.P. OF RS.L0,79,1 5,449/- AND MADE AN ADDITION OF RS.21,49,93,482/-. HE SUBMITTED THAT IN VIEW OF THE FACTS AND CIRCUMSTANCES MENTIONED ABOVE, THERE IS N O JUSTIFICATION FOR REJECTING THE BOOKS OF ACCOUNTS AND FOR ESTIMAT ING THE G.P. 6.17 HE SUBMITTED THE REASONS FOR FALL IN G.P. IN T HIS YEAR ARE DUE TO THE FOLLOWING : A. THE TURNOVER HAS INCREASED SUBSTANTIALLY OVER THE EARLIER TWO YEARS AND HENCE, THERE IS A FALL IN G.P. B. THE GOLD PRICES WENT ON INCREASING DURING THE YE AR. REFERRING TO PAGE 55A HE SUBMITTED THAT THE ASSESSE E HAS GIVEN THE CHART WHICH INDICATES THAT ON 1 ST APRIL, 2008 THE GOLD RATE WAS RS. 11,750/- PER 10 GMS WHILE ON 31 ST MARCH, IT WAS RS.L5,250/- PER 10 GMS (PAGE 55F). THE ASSESSEE HAD TAKEN GOLD DEPOSITS AND IT HAD TO RETURN GOLD TO TH E DEPOSITORS IN THIS YEAR (PAGES 386 TO 501 OF PAPER BOOK 1). TH US, WHEN THE GOLD DEPOSIT WAS ACCEPTED, IT WAS AT A LOWER PR ICE AND THE GOLD HAD TO BE RETURNED TO THEM WHEN THE PRICES HAD GONE UP. THIS IS THE REASON WHY, THE G.P. HAS COME DOWN. 6.18 REFERRING TO THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF CIT VS. CALCUTTA DISCOUNT COMPANY LTD., REP ORTED IN 91 ITR 8 AND THE DECISION IN THE CASE OF CIT VS. A. RA MAN & CO., REPORTED IN 67 ITR 11 HE SUBMITTED THAT A TRADER CA NNOT BE 28 COMPELLED TO MAXIMIZE THE PROFITS. IF THE TRADER H AS SOLD THE GOODS AT A PARTICULAR PRICE, THE AO CANNOT MAKE AN ADDITI ON ON NOTIONAL BASIS THAT THE SALE PRICE SHOULD HAVE BEEN HIGHER. THEREFORE, THE ASSESSEE CANNOT BE COMPELLED TO SELL THE GOODS TO T HE SISTER CONCERNS AT A HIGHER RATE. HE SUBMITTED THAT WHEN THE REVEN UE STATES THAT SOME OF THE TRANSACTIONS WITH THE SISTER CONCERNS A RE PAPER TRANSACTIONS, THEREFORE, ADDITION OF GP ON SUCH TRA NSACTIONS IS NOT JUSTIFIED. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND STRONGLY SUPPORTED THE ORDER OF THE AO. HE SUBMITT ED THAT THE AO HAS GIVEN ELABORATE REASONS AS TO HOW THE PROFIT OF THE ASSESSEE FIRM HAS BEEN SIPHONED OFF TO THE SISTER CONCERNS BY PUR CHASING THE BULLION AND ORNAMENTS AT HIGHER RATE AND SELLING TH EM AT A LOWER RATE. SIMILARLY, THE ASSESSEE HAS NOT MAINTAINED P ROPER RECORDS FOR THE PURPOSE OF MELTING GAIN. UNDER THESE CIRCUMSTA NCES AND IN VIEW OF THE REASONS GIVEN BY THE AO IN THE ASSESSME NT ORDER THE ENTIRE ADDITION HAS TO BE SUSTAINED. THE LD.CIT(A) INCORRECTLY HAS GIVEN RELIEF TO THE ASSESSEE WHICH IS NOT JUSTIFIED . HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE SET-ASIDE AND THAT THE ORDER OF THE AO BE RESTORED. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE PARTIES, PERUSED THE ORDERS OF THE AO & CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONS IDERED THE VARIOUS DECISIONS CITED BEFORE US. IN THIS CASE, T HE ASSESSEE FIRM IS ONE OF THE CONCERNS OF RAJMAL LAKHICHAND GROUP OF C ASES IN 29 JALGAON. THE ASSESSEE FIRM IS THE OLDEST FIRM WHIC H WAS ESTABLISHED MORE THAN 150 YEARS AGO. THE ASSESSEE IS ENGAGED I N THE BUSINESS OF MANUFACTURING AND TRADING IN GOLD, BULLION, JEWE LLERY AND ORNAMENTS. THE AO COMPLETED THE ASSESSMENT OF THE ASSESSEE FIRM U/S.143(3) OF THE I.T. ACT. IN THIS CASE, ADMITTED LY THERE IS NO SURVEY OR SEARCH ACTION AND THE ENTIRE ASSESSMENT I S BASED ONLY ON THE DATA PROVIDED DURING THE COURSE OF THE NORMAL S CRUTINY PROCEEDINGS. THERE ARE 2 MAJOR ISSUES, I.E. (1) RE JECTION OF BOOKS OF ACCOUNT AS THE AO RESORTED TO THE PROVISIONS OF SEC TION 145(3) OF THE ACT AND (2) VERY HIGH PITCH ADDITIONS MADE BY T HE AO ON THE ALLEGED PURCHASES OF THE BULLION AND ORNAMENTS BY G IVING HIGHER PRICES AS COMPARED WITH THE PRICES PREVAILING AT TH E MUMBAI BULLION MARKET AND THE ADDITION TOWARDS ALLEGED SELLING OF BULLION AND ORNAMENTS TO ITS SISTER CONCERNS BELOW THE RATE PRE VAILING IN THE MARKET THEREBY SIPHONING OFF THE PROFITS OF THE ASS ESSEE FIRM TO THE INTRA GROUP COMPANIES AND MORE PARTICULARLY TO M/S. RAJMAL LAKHICHAND JEWELLERS PVT. LTD. 8.1 WE FIND THE LD.CIT(A) HAS TAKEN EFFORTS TO BRIN G ON RECORD THE SHAREHOLDING OF THE LAKHICHAND FAMILY WHO IS HA VING THE ABSOLUTE CONTROL ON THE MANAGEMENT AND BUSINESS OF THE RAJMAL LAKHICHAND GROUP OF COMPANIES. FOR THE SAKE OF CON VENIENCE, WE REPRODUCE SOME OF THE TABLES GIVING THE DETAILS OF SHAREHOLDING OF SHRI ISHWARLAL S.LALWANI AND HIS FAMILY MEMBERS IN THE DIFFERENT COMPANIES WHICH ARE AS UNDER : 30 6. I HAVE CAREFULLY GONE THROUGH THE ASSESSMENT ORDER, REMAND REPORT OF THE A.O. DETAILED SUBMISSION OF THE APPELLAN T AND THE MATERIAL AVAILABLE ON RECORD. BEFORE ADJUDICATING THE VARIOUS ISSUES RAISED IN THE APPEAL, I WOULD GIVE A BACK GROUND OF THE APPELLANT FIRM AND THE R.L. GROUP M/S. RAJMAL LAKHICHAND, IS A REGISTERED FIRM, WITH 3 PARTNERS NAMELY SHRI ISHWARLAL S. LALWAN I, SHRI AMRISH I. LALWANI AND SMT. NEETIKA M. LALWANI WITH PROFIT/ LOSS SHARING OF 40%, 30% AND 30% RESPECTIVELY. IT IS THE FLAGSHIP CON CERN OF R.L. GROUP. DETAILS OF VARIOUS OTHER CONCERNS OF R.L. GROU P AND THEIR RETURNED INCOME/LOSS FOR A.Y. 2009-10 ARE GIVEN IN TA BLE, I , II, AND III BELOW : SL . NO. NAME OF THE PERSONS MANRAJ JEWELLERS (%) RAJMAL LAKHICHAND JEWELLERS PVT. LTD. R. L. GOLD PVT. LTD. (%) MANAVI HOLDING SPVT. LTD. (%) MANARAJ MOTORS PVT. LTD. (%) 1. SHRI. ISHWARLAL S. LALWANI 86.90 84.64 99.38 99,16 6.75 2. SHRI. MANISH I. LALWANI 3.88 1.36 0.05 0.10 25.08 3. SHRI. AMRISH I. LALWANI 3.22 6.76 0.05 0.74 32.75 4. MRS. PUSHPADEVI I. JAIN 5.26 0.73 -- -- 5.08 TABLE-II: PARTICULARS OF PARTNERS AND THEIR PROFIT SHARING RATIOS SR. NO. NAME OF THE PARTNERS M/S RAJMAL LAKHICHAND M/S RAJMAL LAKHICHAND AND SONS 1. SMT. PUSHPADEVI I. LALWANI -- 30% 2. SHRI. MANISH I. LALWANI - 40% 3. SMT. RUCHI A. LALWANI - 30% 3. SHRI. ISHWARLAL S. LALWANI 40% - 4. SHRI. AMRISH I. LALWANI 30% -- 5. SMT. NEETIKA M. LALWANI 30% 8.2 WE FIND THE AO REJECTED THE BOOKS OF ACCOUNTS O F THE ASSESSEE BY POINTING OUT THE FOLLOWING DEFECTS : (I) NON SUBMISSION OF STOCK STATEMENT TO BANK AS ON 31-03 - 2009. (II) NON FURNISHING OF DETAILS OF SALE MADE ON 31-03-2 009 FOR RECONCILIATION OF STOCK STATEMENT. (III) NON AVAILABILITY OF DETAILS OF ORNAMENT MAKING CHARGES, HENCE FOR VALUING CLOSING STOCK, NO JUSTIFICATION FOR ADDED MANUFACTURING EXPENSES. (IV) FAILURE ON PART OF THE ASSESSEE TO PROVE CONCLUSIVE LY THE MOVEMENT OF GOODS FROM ONE LOCATION TO OTHER. (V) GENUINENESS OF PAID LABOUR CHARGES FOR WANT OF NEC ESSARY RECORDS MAINTAINED BY CONCERNED LABOURS. 31 (VI) INABILITY OF THE LABOURS TO FURNISH THE DETAILS O F CASE-WISE LABOUR CHARGES RECEIVED BY THEM. (VII) NON MAINTENANCE OF RECORD RELATED TO PURCHASE OF COPPER/ALLOY EITHER BY ASSESSEE OR BY LABOURS. (VIII) NON-AVAILABILITY OF RECORD RELATED TO ITEMWI SE, PURITY WISE DETAILS OF ORNAMENTS MANUFACTURING AND SOLD DURING THE YEAR (IX) FAILURE ON PART OF THE ASSESSEE TO EXPLAIN SATISFACT ORILY THE DEFECTS POINTED OUT VIDE VARIOUS SHOW CAUSE LETTERS (X) NON MAINTENANCE OF PROPER RECORD REGARDING MELT ING GAIN. 8.3 WE FIND, THE AO, DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, SOUGHT INFORMATION FROM THE ASSESSEE O N DIFFERENT ISSUES. THE AO ASKED THE ASSESSEE IN RESPECT OF TH E STOCK STATEMENT FURNISHED TO THE BANK FOR AVAILING OF THE CC LIMIT AS ON 31-03-2009 AND IT WAS FOUND THAT THE LAST STOCK STATEMENT FURN ISHED BY THE ASSESSEE WAS FOR 20-02-2009. ON THAT BASIS, THE AO CAME TO THE CONCLUSION THAT IT WAS A DELIBERATE ACT ON THE PART OF THE ASSESSEE FOR NOT FURNISHING THE STOCK STATEMENT TO THE BANK. DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO SOUGHT THE EXPLANATI ON OF THE BANK ALSO . ACCORDING TO THE AO, WHERE THERE IS A STOCK AUDIT, THE BANK IS BOUND TO CARRY OUT THE STOCK AUDIT ON THE LAST DATE OF THE FINANCIAL YEAR OR ATLEAST THEREAFTER IMMEDIATELY. THE ASSESS EE HAS FILED THE DETAILS GIVING THE CASH CREDIT FACILITY FROM THE JA LGAON PEOPLES COOPERATIVE SOCIETY LTD., AGAINST THE HYPOTHETICATI ON OF THE STOCK AND DEBTORS. ON THIS ASPECT THE AO CONCLUDED THAT THE BOOK RESULTS ARE NOT RELIABLE. THE AO HAS ALSO GIVEN ANOTHER RE ASON THAT THE ASSESSEE FAILED TO FILE RECONCILIATION OF THE STOC K STATEMENT IN RESPECT OF THE SALES MADE ON 31-03-2009. THE AO HA S ALSO RESERVATION AS THE ASSESSEE COULD NOT PROVE CONCLUS IVELY THE 32 MOVEMENT OF THE GOODS FROM ONE LOCATION TO ANOTHER, I.E. FROM ONE OF THE GROUP COMPANIES TO THE ASSESSEES LOCATION A ND VICE VERSA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESSEE TO PROVE THAT THE PAYMENT OF THE LABOUR CH ARGES ARE GENUINE. THE AO ALSO NOTED THAT THERE IS EXPENSES TOWARDS PURCHASE OF THE COPPER BY THE ASSESSEE AND NO SEPAR ATE MAKING CHARGES WERE MENTIONED ON THE SALE BILLS AND HENCE THE BOOK RESULTS WERE NOT RELIABLE. THE AO ISSUED NOTICES TO SOME O F THE KARIGARS WHO ARE INVOLVED IN REFINING OF THE OLD ORNAMENTS A S WELL AS MAKING OF THE JEWELLERY. AS NOTED BY THE AO ALL OF THEM R ESPONDED BUT STATED THAT NO RECORD FOR RECEIPT OF SOLD OR PREPAR ED ORNAMENTS ARE MAINTAINED BY ANY OF THEM. AS STATED BY THE KARIGA RS, THE LABOUR CHARGES ARE RECEIVED IN CASH. IT APPEARS THAT ALON G WITH THE LETTER OF KARIGARS THE ASSESSEE FILED COPY OF THE ACCOUNT OF ONE OF THE GROUP CONCERN, I.E. MANRAJ JEWELLERS PVT. LTD. AND THE SA ID FACT TEMPTED THE AO TO OBSERVE THAT ALL THOSE KARIGARS ARE SIMPL Y NAME LENDERS. THE AO HAD ALSO STRONG OBJECTION ON MODALITY OF ISS UING OF GOLD TO THE KARIGARS. THE AO NOTED THAT THE ASSESSEE HAS N OT MAINTAINED THE ITEM-WISE AND PURITY-WISE DETAILS OF ORNAMENTS MANUFACTURED AND SOLD DURING THE YEAR. SIMILARLY, THE AO ALSO N OTED THAT ASSESSEE HAS NOT MAINTAINED PROPER RECORD REGARDING THE MELT ING GAIN. MELTING GAIN MEANS THE ASSESSEE IS PURCHASING THE O LD ORNAMENTS (MOD) FROM THE CUSTOMERS AT THE TIME WHEN THE CUSTO MER COMES TO SHOP FOR BUYING NEW ORNAMENTS OR FOR SELLING THE OL D ORNAMENTS IN CASE OF NEED OF MONEY. THE ASSESSEE EXPLAINED TO T HE AO THAT 33 WHEN THE OLD ORNAMENTS ARE PURCHASED THE PURITY IS DETERMINED ONLY ON THE BASIS OF ONE STONE WHICH IS CALLED KASAUTI IN THE GOLD MARKET AND ON THAT BASIS PRICE OF THE ORNAMENTS IS PAID TO THE CUSTOMER. HE ALSO EXPLAINED THAT ON MANY OCCASIONS THE ESTIMATION MADE BY THE ASSESSEE ALSO FAILS AND THEY DID NOT GE T THE REQUIRED YIELD WHILE REFINING THE GOLD TO MAKE IT STANDARD G OLD AS 99.50 WHICH IS BELOW AS KNOWN IN THE GOLD MARKET. IMPURI TIES IN THE OLD ORNAMENTS IN THE FORM OF COPPER AND OTHER ALLIED ME TALS ARE REMOVED AND IN THAT PROCESS ON MANY OCCASIONS THE A SSESSEE DID NOT GET THE ESTIMATED YIELD. 8.4 BUT THE AO WAS NOT SATISFIED WITH THE EXPLANATI ON OF THE ASSESSEE. IN THIS BACKGROUND, THE AO REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE AND PROCEEDED TO INDEPENDENTLY DETE RMINE THE GP OF THE ASSESSEE. THE AO ALSO QUESTIONED THE GENUINENE SS OF THE PURCHASE OF GOLD AS WELL AS THE OCTROI PAYMENT. TH E AO HAS GIVEN THE EXAMPLE OF ONE OF THE GROUP CONCERN M/S. RAJMAL LAKHICHAND JEWELLERY PVT. LTD. STATING THAT THE SAID CONCERN W AS PURCHASING THE GOLD FROM SBI BUT IT WAS ALSO NOTICED THAT THE SAID COMPANY HAS ALSO PURCHASED GOLD FROM BRINKS ARYA INDIA PVT. LT D. TO THE EXTENT OF 13 KG GOLD BARS. IN THE OPINION OF THE AO, WHEN THE ASSESSEE PURCHASES GOLD FROM BANK IT IS NOT UNDERSTOOD AS TO HOW THE GOLD HAS BEEN PURCHASED FROM THE ABOVE COMPANY. 8.5 WE FIND THE AO MADE ADDITION OF RS.64,64,22,989 /- BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT FOR ALLEGED BUSINESS OF GOLD AND ORNAMENT FROM ITS GROUP COMPAN IES OR SISTER 34 CONCERNS BY GIVING THEM HIGHER PRICE AS COMPARED TO THE PRICES DECLARED BY THE MUMBAI BULLION ASSOCIATION. SIMILAR LY, THE AO ALSO MADE ADDITION OF RS.12,01,53,323/- FOR ALLEGED SALE TO THE SISTER CONCERNS OF THE ORNAMENTS AND THE BULLION AT A PRIC E WHICH ARE ALLEGEDLY LESSER AS COMPARED TO THE RATES DECLARED BY THE MUMBAI BULLION ASSOCIATION. 8.6 PARA 10 IS THE ONLY PARAGRAPH IN THE ASSESSMENT ORDER WHERE THE AO HAS GIVEN HIS REASONS AND FINDINGS ON ACCOUN T OF THE ABOVE TWO ADDITIONS. FOR THE SAKE OF CONVENIENCE WE REPR ODUCE HERE THE RELEVANT PARAGRAPHS FROM THE ASSESSMENT ORDER WHER E THE AO HAS MADE THE ADDITION : 10. SALES TO SISTER CONCERN- THE ASSESSEE VIDE ITS LETTER DATED NIL SUBMITTED THE DETAILS OF TOTAL SALES FOR THE PE RIOD UNDER CONSIDERATION MADE TO SISTER CONCERN AND OTHER PART IES, WHICH IS ENCLOSED WITH THIS OFFICE AS ANNEXURE-1. FROM THE DETAILS FURNISHED, IT CAN BE SEEN THAT THE ASSESSEE FIRM SOL D GOLD ORNAMENTS TO SISTER CONCERN AT LOWER PRICE THAN SOL D TO OTHER PARTIES BY RS.40.36 PER GRAM, FURTHER, IT CAN ALSO BE S EEN THAT ON THE OTHER DATES EITHER IT HAS BEEN SOLD BELOW TH E COST PRICE OR SLIGHTLY ABOVE THE COST PRICE AND IN THIS WAY TH E ASSESSEE FIRM HAS DIVERTED ITS PROFIT TO SISTER CONCERN BY MAKING SALE AT LOWER RATES. THE ABOVE FIGURES ALSO SPEAKS THAT NO UNIFORM METHOD IS APPLIED AND RATES ARE DECIDED AT ITS OWN SWEET WILL . HENCE, KEEPING ALL THESE FACTS IN MIND, I HEREBY CONSIDER T HE AVERAGE RATE AS MADE TO THE OTHER PARTIES THAN THE SISTER C ONCERN AND ADD THE DIFFERENCE OF RS,40,36 PER GRAM ON ENTIRE SAL E MADE TO SISTER CONCERN. THUS, THE ADDITION ON THIS ACCOUNT WI LL COME TO RS. 12,01,63,323/- (2977287.493 X 40,36) WHICH WILL BE ADDED TOWARDS THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF SALE MADE AT LOWER RATES TO SISTER CONCERN. SIMILARLY, ASSESSEE HAS PURCHASED BULLION @1313.82 PE R GRAM FROM SISTER CONCERN AND WHEREAS PURCHASES FROM OTHERS IS @1166.10 PER GRAM. SIMILARLY, GOLD ORNAMENT WAS PUR CHASED FROM OTHER PARTIES @1285.08 PER GRAM WHEREAS FROM SI STER CONCERN IT WAS PURCHASED @1336.39 PER GRAM. THE SAID CHART OF PURCHASES AS FURNISHED BY THE ASSESSEE IS ANNEXE D TO THIS ORDER AS ANNEXURE-2 WHICH WILL FORM A PART OF THE ORDER. IN THIS WAY, ASSESSEE HAS PAID MORE PAYMENT TO SISTER CONCE RN THAN OTHERS. HENCE, BY INVOKING PROVISIONS OF SECTION 40A( 2)(B), EXCESS PAYMENT MADE TO SISTER CONCERN IS DISALLOWED . THE DISALLOWANCE WORKS OUT AS UNDER- PURCHASES FROM 35 SISTER CONCERN FROM OTHERS BULLION GOLD 1313.82 1166.10 THE DIFFERENCE OF RS.147.76/- PER GRAM OVER THE QUA NTITY OF 31,95,845.50 GRAMS WORKS OUT AT RS.47,22,18,131/-, ORNAMENTS GOLD 1336.39 1285.08 THE DIFFERENCE OF RS.51.31/- PER GRAM OVER THE QUAN TITY OF 33,95,144.391 GRAMS WORKS OUT AT RS.17,42,04,858/-. IN VIEW OF THE ABOVE, AN ADDITION OF RS.64,64,22,98 9/- (472218131 + 174204858) IS HEREBY MADE AND ADDED TO THE TOTAL IN COME OF THE ASSESSEE. 8.7 THE AO HAS ATTACHED THE 2 ANNEXURES TO THE ASSE SSMENT ORDER SHOWING THE DETAILS OF TOTAL SALES (ANNEXURE-1) AND DETAILS OF THE TOTAL PURCHASES (ANNEXURE-2) WHICH ARE AS UNDER. ANNEXURE-1 RAJMAL LAKHICHAND 169, BALAJI PETH, JALGAON DETAILS OF TOTAL SALES FOR THE PERIOD 01-04-08 TO 31- 03-09 PARTICULAR SISTER CONCERN OTHER PARTIES TOTAL WGT AMT AVERAGE RATE WGT AMT AVERAGE RATE WGT AMT BULLION GOLD 859390.500 1229087840 1,372.68 2473435.98 4 3207646556 1,296.84 3368826.484 4436734396 ORNAMENT GOLD 2977287.493 3974557623 1,334.96 806309.915 11089367 90 1,375.32 3783597.408 5083494413 DIAMONDS STONES 436820 GOLD & STONES 37171166 37607986 PLATINUM 15,582 44972 2,886.15 15.582 44972 TOTAL 3872677.993 5204082283 3279761.48 1 4353799484 7152439.474 9557881767 ANNEXURE-2 RAJMAL LAKHICHAND 169, BALAJI PETH, JALGAON DETAILS OF TOTAL PURCHASES FOR THE PERIOD 01-04-08 TO 31-03-09 PARTICULAR SISTER CONCERN OTHER PARTIES TOTAL WGT AMT AVERAGE RATE WGT AMT AVERAGE RATE WGT AMT BULLION GOLD 3195845.500 41987753600 1,313.82 25000 .000 29152500 1,166.10 3220845.500 4227927860 ORNAMENT GOLD 3395144.391 4537241930 1,336.39 436566.496 56102226 7 1,285.08 3831710.887 5098264197 DIAMONDS GOLD & STONES 27440728 STONES 446147 2,441.66 27886875 PLATINUM 0 0 15,582 38046 15.582 38046 TOTAL 6590989.891 8763458018 461582.078 590658960 7052571.969 9354116978 36 8.8 THE AO ALSO MADE ADDITION TOWARDS THE MELTING G AIN AND THE REASONS GIVEN BY THE AO FOR MAKING THE SAID ADDITIO N ARE AS UNDER : 17. MELTING GAIN- AS DISCUSSED ABOVE, THE ASSESSEE HAS N OT PROPERLY MAINTAINED RECORD WHICH CAN BE PUT TO TEST ABOUT CORRECTNESS OF THE CLAIMED MELTING GAIN, SHOWN MELTING GAIN AT 7.83% CANNOT BE ACCEPTED TO BE DEPICTING THE CORREC T PICTURE OF THE MELTING GAIN. THE ABOVE ENCLOSED CHART ON CLOSE SC RUTINY SHOWS THAT MELTING GAIN SHOWN AT 1.30% IS SOLITARY INSTA NCE, SO ALSO MELTING GAIN SHOWN AT 14.54% IS ALSO ONLY ONCE, WH EREAS, IN THE MAXIMUM NUMBER OF OCCASIONS, MELTING GAIN HAVE BE EN MORE THAN 9% TO 10%. THEREFORE, THE MELTING GAIN IS ESTIM ATED AT 10% OF THE ISSUED GOLD WEIGHING 259088.002 GRAMS WHICH COM ES AT 25908.800 GRAMS AS AGAINST SHOWN GAIN AT 20288.186 GRAM S. ACCORDINGLY, THE GOLD WEIGHING 5620.6014 GRAMS HAS B EEN SUPPRESSED AND THE ASSESSEE GOT MANUFACTURED THE NEW ORNAMENTS OUT OF THAT AND SOLD OUTSIDE THE BOOKS OF ACC OUNTS. THE AVERAGE RATE PER GRAM AS PER THE QUANTITATIVE DETAIL S ON SALE COMES TO RS. 1510.50 PER GRAM, BY APPLYING THE SAME RA TE, THE ASSESSEE HAD EARNED INCOME OF RS.84,89,937/- ON ACCOUNT OF SALE. THE ENTIRE SALE CONSIDERATION IS TAXED AS INCOME BECAUSE THE EXPENDITURE INCURRED TOWARDS ITS PURCHASES, REFINING C HARGES ETC. HAVE ALREADY BEEN DEBITED. IN SUM AND SUBSTANCE IN THE OPINION OF THE AO THE A VERAGE OF THE MELTING GAIN DECLARED BY THE ASSESSEE AT 7.3% WAS N OT ACCEPTABLE AS IN SOME OF THE MONTHS THE MELTING GAIN PERCENTAGE W AS RANGING FROM 10.31% TO 14.54%. THE AO, THEREFORE, ESTIMATE D THE MELTING GAIN AT 10% OF THE GOLD ISSUED WEIGHING 259088 GRAM S AND ACCORDINGLY MADE ADDITION OF RS.84,89,937/-. 8.9 THE ASSESSEE CHALLENGED ALL THE ABOVE ADDITIONS BEFORE THE LD.CIT(A) AND SUCCEEDED IN GETTING PART RELIEF. BE FORE GOING TO THE APPROACH ADOPTED BY THE LD.CIT(A) FOR REJECTING THE ESTIMATION MADE BY THE AO, IT IS NECESSARY TO BRING ON RECORD THE FACTS AND FIGURES OF THE TURNOVER OF THE ASSESSEES GROUP COM PANIES AND INTRA GROUP TRANSACTIONS OF THE SALES AND PURCHASES. 37 8.10 THE LD.CIT(A) OBSERVED THAT THE TOTAL TURNOVER OF THE GROUP IS SHOWN AT RS. 2219.54 CRORE WITH R L'S (ASSESSEE) CONTRIBUTION AT RS. 955.78 CRORE I.E. 43.06% OF THE TOTAL TURNOVER OF THE GROUP. TOTAL PURCHASES OF THE GROUP ARE SHOWN AT RS.2188.0 1 CRORE WITH RL CONTRIBUTING TO 935.41 CRORE TOWARDS PURCHASES (42.75%). DETAILS OF TOTAL PURCHASES AND SALES OF THE ENTIRE GROUP IS ANNEXED WITH THE ORDER AS ANNEXURE-I. THE ASSESSEE HAS SHOW N A GROSS PROFIT OF 1.13% AS AGAINST GROUP'S CONSOLIDATED GP OF 2.25 %. HE OBSERVED THAT THE GROUP IS CONTROLLED BY SHRI ISHWA RLAL S. LALWANI AND HIS SONS SHRI AMRISH I. LALWANI AND SHRI MANISH I. LALWANI. SHRI ISHWARLAL S. LALWANI HOLDS 99.38% SHAREHOLDING OF R L GOLD (P) LTD., 99.16% SHAREHOLDING OF MANVIHOLDING (P) L TD.; 84.64% SHAREHOLDING OF M/S RAJMAL LAKHICHAND JEWELLERS (P) LTD, AND 86.90% SHAREHOLDING OF M/S. MANRAJ JEWELLERS (P) LT D.. HIS SHARE IN PROFIT/LOSS IN THE ASSESSEE FIRM IS TO THE EXTEN T OF 40%. IN A NUTSHELL, SHRI. ISHWARLAL S. LALWANI IS THE SOLE CO NTROLLING AUTHORITY OF THE ENTIRE GROUP. 8.11 THE LD.CIT(A) FURTHER OBSERVED THAT A PERUSAL OF PURCHASE AND SALE OF BULLION AND ORNAMENTS SHOWS THAT PURCHA SES WORTH RS.1542.66 CRORE I.E. 71.22 % OF TOTAL PURCHASES HA VE BEEN MADE WITHIN THE GROUP CONCERNS. SALES WITHIN THE GROUP C ONCERNS ARE AT RS. 1542.66/- CRORE I.E. 70.39% OF TOTAL SALES. OFF ICES OF ALL THE CONCERNS OF THE GROUP OPERATE FROM THE SAME ADDRESS I.E. 169, BALAJI PETH, JALGAON. OF THE 6 CONCERNS ENGAGED IN THE BUSINESS OF GOLD, ONLY 2 CONCERNS NAMELY RAJMAL LAKHICHAND (APP ELLANT) AND 38 M/S RAJMAL LAKHICHAND JEWELLERS( P) LTD. (RLJPL). H AVE OUTLETS FOR DIRECT SALE TO CUSTOMERS. WHILE THE ASSESSEE HA S SHOWROOM AT JALGAON, M/S RLJPL HAS SHOWROOMS AT NASHIK AND THAN E. HE NOTED THAT THE ASSESSEE FIRM'S PURCHASES OF BULLION AND ORNAMENT FROM THE SISTER CONCERNS AMOUNTS TO RS.873.60 CRORE I.E. 93.67% OF TOTAL PURCHASES. REMAINING 6.32% PURCHASES ARE MADE FROM OTHER PARTIES INCLUDING BANK. THE ASSESSEE FIRM HAS SHOWN TO HAVE PURCHASED BULLION WORTH RS.419.87CRORE FROM SISTER CONCERNS REPRESENTING 99.30% OF TOTAL BULLION PURCHASED. THE ASSESSEE HAS PURCHASED ONLY 25KG BULLION VALUING RS. 2.91CRORE F ROM OTHER PARTIES. SIMILARLY, THE ASSESSEE HAS PURCHASED NEW ORNAMENTS WORTH RS. 453.72 CRORE FROM THE SISTER CONCERNS REPRESENT ING 88.99% OF THE TOTAL ORNAMENT PURCHASES. THE ASSESSEE FIRM HAS PURCHASED OLD ORNAMENTS (MOD) WORTH RS.56.10 CRORE FROM THIRD PAR TIES. AS REGARDS SALE OF BULLION, THE ASSESSEE FIRM HAS SOLD BULLION WORTH RS. 122.90 CRORE REPRESENTING 27.7% OF TOTAL SALES OF B ULLION TO ITS SISTER CONCERNS AS AGAINST SALE OF BULLION WORTH RS . 320.76 CRORE TO OTHER PARTIES. THE ASSESSEE HAS SOLD ORNAMENTS WORT H RS. 397.45 CRORE (78.18%) TO ITS SISTER CONCERNS AS AGAINST RS . 110.89 CRORE (21.81%) TO OTHER PARTIES. HE NOTED THAT APART FRO M THE ASSESSEE FIRM, ONLY M/S RAJMAL LAKHICHAND JEWELLER (P) LTD. SELLS BULLION AND GOLD ORNAMENTS DIRECTLY TO THE CUSTOMERS THROUG H ITS 3 SHOWROOMS LOCATED AT SURAT, NASHIK AND THANE. ACCO RDING TO HIM IT IS RATHER SURPRISING THAT THE ASSESSEE FIRM IS E NGAGED IN HUNDREDS OF TRANSACTIONS OF PURCHASE AND SALE OF ORNAMENTS W ITH THE SISTER 39 CONCERNS WHICH DO NOT SELL ORNAMENTS TO THE CUSTOME RS DIRECTLY. THE STATEMENT OF ACCOUNTS OF SALE/PURCHASE OF GOLD AND ORNAMENTS WITH SISTER CONCERNS REVEAL ONE MORE INTERESTING FA CT THAT WHILE THE ASSESSEE FIRM ON 24/05/2008 HAD SOLD ORNAMENTS WORT H RS.7,05,88,193/- TO M/S. MANRAJ JEWELLERS (P) LTD., ON THE VERY NEXT DAY I.E. 25/05/2008 IT PURCHASED ORNAMENTS WOR TH RS. 10,33,05,894/- (RS. 7,13,37,743/- + RS.3,19,88,151/ -) FROM M/S. MANRAJ JEWELLERS (P) LTD. AGAIN, ON 28/05/2008 THE ASSESSEE SOLD ORNAMENTS WORTH RS.9,04,41,125/- TO MANRAJ JEWELLER S (P) LTD. AND PURCHASED ORNAMENTS WORTH RS. 6,23,08,620/- (RS.4,2 8,33,295/- + RS.1,94,75,325/-). SIMILAR TYPE OF TRANSACTIONS ARE FOUND VIS-A-VIS OTHER SISTER CONCERNS BOTH IN RESPECT OF BULLION AS WELL AS ORNAMENTS. 8.12 FROM THE ORDER OF CIT(A) WE FIND THE DETAILS O F THE VARIOUS COMPANIES/ENTITIES IN THE RAJMAL LAKHICHAND GROUP A RE AS UNDER : SR.NO. NAME OF THE PERSONS STATUS 1 RAJMAL LAKHICHAND FIRM 2 RAJMAL LAKHICHAND AND SONS FIRM 3 RAJMAL LAKHICHAND JEWELLERS PVT. LTD., COMPANY 4 MANVI HOLDING PVT. LTD., COMPANY 5 R L GOLD PVT. LTD,. COMPANY 6 MANRAJ JEWELLERS PVT. LTD., COMPANY 8.13 SIMILARLY, ASSESSEE FIRM HAS SOLD AND PURCHASE D BULLIONS AND ORNAMENTS TO THE GROUP CONCERNS, THE DETAILS OF WHI CH ARE AS UNDER : 40 FOR A.Y. 2008-09 : RAJMAL LAKHICHAND & SONS SALES 1,73,31,75,542 PURCHASES 1,99,01,06,699 RL GOLD PVT. LTD. SALES 75,00,23,376 PURCHASES 142,39,55,648 MANRAJ JEWELLERS PVT. LTD., SALES 176,14,28,070 PURCHASES 259,81,05,525 MANVI HOLDINGS PVT. LTD., JALGAON SALES 10,16,92,698 PURCHASES 48,00,09,791 RAJMAL LAKHICHAND JEWELLERS PVT. LTD., JALGAON SALES 91,00,16,585 PURCHASES 235,89,09,972 8.14 AFTER EXAMINING THE PURCHASES MADE FROM THE TH IRD PARTIES IN RESPECT OF THE BULLION AS WELL AS ORNAMENTS, THE LD .CIT(A) NOTED THAT THE AVERAGE RATE OF PURCHASE OF BULLION FROM T HIRD PARTIES IS RS.11,661/10 GRAMS AS AGAINST RS.13,138/10 GRAMS FR OM THE SISTER CONCERNS. IN RESPECT OF THE PURCHASE OF ORNAMENTS, THE LD.CIT(A) OBSERVED THAT THE AVERAGE PRICE PAID FOR 10 GRAMS T O THIRD PARTY IS RS.12,851/- AS AGAINST RS.13,364/10 GMS TO SISTER C ONCERNS. IN RESPECT OF THE SALE PRICE OF ORNAMENTS, AFTER VERI FYING THE SALE BILLS THE LD.CIT(A) CONCLUDED THAT THE ASSESSEE HAS SOLD GOLD ORNAMENTS AT RS.13,906/10 GMS TO THIRD PARTIES AS AGAINST RS. 13,350/10 GMS TO THE SISTER CONCERNS. THE LD.CIT(A) ALSO WORKED OUT AVERAGE SALE PRICE OF THE ORNAMENTS IN THE ENTIRE GROUP AND HAS OBSERVED THAT THE GROUPS AVERAGE SALE PRICE OF ORNAMENTS TO THIRD PAR TIES IS RS.13,726/10 GMS AS AGAINST RS.13,410/10 GMS TO THE INTRA GROUP TRANSACTIONS. THE LD.CIT(A) THEREFORE OBSERVED THA T PRIMA-FACIE IT APPEARS THAT WHILE PURCHASE OF THE BULLION AND ORNA MENTS FROM 41 SISTER CONCERNS WERE MADE AT HIGHER RATE, SALE OF O RNAMENTS TO SISTER CONCERNS WAS MADE AT A LOWER RATE AS COMPARED TO TH E SALE OF ORNAMENTS TO THIRD PARTIES. 8.15 TO UNDERSTAND THE CONTROVERSY WE REPRODUCE HER E THE COMPARATIVE CHART SHOWING THE AVERAGE PRICES TOWARD S THE PURCHASE OF THE ORNAMENTS AND BULLION (PARA 10 OF CIT(A)S ORDER): NAME OF THE CONCERN AV. PRICE PAID TO SISTER CONCERN AV. PRICE PAID TO 3 RD PARTIES BULLION RS./10 GMS ORNAMENT RS./10 GMS BULLION RS./10 GMS ORNAMENT RS./10 GMS RAJMAL LAKHICHAND AND SONS 13,876 13,021 13,577 0 R L GOLD PVT. LTD., 14,268 13,250 13,772 11,338 MANVI HOLDING PVT. LTD. 15,223 15,104 13,218 0 RAJMAL LAKHICHAND JEWELLERS PVT. LTD 12,307 13,810 13,837 13,048 MANRAJ JEWELLERS PVT. LTD 13,736 13,278 13,515 0 8.16 AS OBSERVED BY THE LD. CIT(A) ALL THE ABOVE CO NCERNS OF THE GROUP, EXCEPT M/S. RAJMAL LAKHICHAND JEWELLERS PVT. LTD. HAS PAID HIGHER AVERAGE PRICE/GM OF BULLION TO SISTER CONCER NS, VIS--VIS PURCHASES FROM THE THIRD PARTIES. HE HAS FURTHER O BSERVED THAT IN RESPECT OF THE ORNAMENTS WHILE RAJMAL LAKHICHAND A ND SONS, MANVI HOLDINGS PVT. LTD. R.L. GOLD PVT. LTD., AND R AJMAL LAKHICHAND JEWELLERS PVT. LTD., DID NOT PURCHASE OR NAMENTS FROM THIRD PARTIES, R.L. GOLD PVT. LTD. AND RAJMAL LAKHI CHAND JEWELLERS PVT. LTD. ARE PAID HIGHER PRICE/10GMS TO SISTER CON CERNS, VIS--VIS PURCHASE FROM THIRD PARTIES. IT APPEARS THAT THE L D.CIT(A) AFTER OBTAINING A LOT OF DATA FROM THE ASSESSEE IN RESPEC T OF THE INTRA GROUP TRANSACTIONS OF THE SALES AND PURCHASES NOTED THAT IN RESPECT 42 OF THE PURCHASES MADE FROM INTRA GROUP COMPANIES TH E PRICE PAID WAS 5.83% HIGHER IN THE CASE OF RAJMAL LAKHICHAND J EWELLERS PVT. LTD.AND 14% IN THE CASE OF R.L. GOLD (P) LTD. AS O BSERVED BY THE LD.CIT(A) MANVI HOLDINGS PVT. LTD. HAS SOLD GOLD OR NAMENTS TO THIRD PARTIES AT RS.15232/10 GMS AS AGAINST RS.13,6 10/10 GMS TO SISTER CONCERNS. IN CASE OF AVERAGE PRICE OF THE B ULLION, R.L. GOLD PVT. LTD. HAS SOLD BULLION AT RS.13,310/10 GMS TO T HIRD PARTIES AS AGAINST RS.13,051/10 GMS TO ITS SISTER CONCERNS. MANVI HOLDINGS PVT. LTD. HAS SOLD BULLION AT RS.14,091/10 GMS TO T HIRD PARTIES AS AGAINST RS.13,777/10 GMS TO ITS SISTER CONCERNS. T HE LD.CIT(A) NOTED THAT RAJMAL LAKHICHAND JEWELLERS PVT. LTD. H AS SOLD BULLION AT AVERAGE RATE OF RS.13,086/10 GMS TO ITS SISTER C ONCERNS. 8.17 ON THE BASIS OF THE ABOVE, THE LD.CIT(A) CONCL UDED THAT AVERAGE SALE AND PURCHASE PRICE OF THE ASSESSEE WIT H THE SISTER CONCERNS ARE NOT AT PAR WITH THE MARKET PRICE AS CO MPARED TO THE PRICE OF THE TRANSACTIONS WITH THE THIRD PARTIERS. THE LD.CIT(A) ALSO BROUGHT ON RECORD THE QUANTITY-WISE DETAILS OF THE BULLION AND ORNAMENTS OF THE INTRA GROUP ENTITIES ARE WELL AS T HE ENTIRE GROUP WHICH IS RECORDED IN PARA 11 OF THE ORDER OF THE CI T(A). FOR THE SAKE OF CLARITY, THE SAID PARA IS REPRODUCED HEREUN DER : 11. AS REGARDS QUANTITATIVE ANALYSIS OF PURCHASE AND SAL E OF BULLION AND GOLD ORNAMENTS, I FIND THAT THE ENTIRE G ROUP PURCHASED 3810.44KG OF BULLION FROM THE BANKS AND OTH ER 3 RD PARTIES. TOTAL ORNAMENTS INCLUDING OLD JEWELLERY (MOD ) PURCHASED FROM 3 RD PARTIES STOOD AT 813.90KG. ALL CONCERNS OF THE GROUP TOGETHER PURCHASED 4624.36KG OF BULLION AND GO LD ORNAMENTS FROM 3 RD PARTIES. WHILE THE OPENING STOCK OF BULLION AND GOLD ORNAMENTS WITH THE ENTIRE GROUP IS SHOWN AT 365.89KG, CLOSING STOCK OF BULLION AND GOLD ORNAMENTS WITH THE 6 CONCERNS OF THE GROUP WAS AT 436KG. THE CLOSING STOCK OF BULLIO N AND GOLD 43 ORNAMENTS IS SHOWN AT 27.29 KG WITH RL, 18.83 KG WITH RL GOLD(P)LTD.; 42.16 KG WITH MANRAJ JEWELLERS (P) LTD. ; 6.5 KG WITH M/S RAJMAL LAKHICHAND & SONS; 314.73KG WITH RAJMAL LAKHICHAND (J) PVT. LTD. AND 26.52 KG WITH MANVI HOLDING (P)LTD. THIS CLOSING STOCK DOES NOT INCLUDE GOLD RECEIVED UNDE R CDS OR FROM PUNE CONCERN. THERE WAS ROUGHLY NET AVAILABILIT Y OF 5KG OF GOLD UNDER GDS. THUS THE TOTAL AVAILABILITY OF GOLD ORNAMENTS AND BULLION WAS APPROX. AT 4559.2KG WITH THE ENTIRE GROUP. HOWEVER, TOTAL SALES OF BULLION AND ORNAMENTS IS SHOWN AT 16415.77KG (BULLION AT 7423.29KG AND ORNAMENTS AT 8992.48KG). THE POSITION OF TRADING OF BULLION AND G OLD THAT EMERGES IN RESPECT OF RL GROUP AS A WHOLE IS AS FOLLOWS : I) TOTAL PURCHASES OF BULLION AND GOLD(KG) FROM 3 RD PARTIES : 4624.36 KG ADD: A) OPENING STOCK : 365.89 KG B) GOLD UNDER GDS : 5.00 KG II) TOTAL AVAILABILITY OF BULLION AND ORNAMENTS : 4 995.26 KG III) CLOSING STOCK : 436.00 KG IV) BULLION AND ORNAMENTS AVAILABLE FOR SALE (II)-(III) : 4559.23 KG V) TOTAL SALE OF BULLION AND JEWELLERY SHOWN BY THE GROUP : 16415.77 KG AFTER RECORDING THE ABOVE FACTS AND FIGURES THE LD. CIT(A) CONCLUDED THAT THE ENTIRE GROUP HAS SHOWN INFLATED TURNOVER IN THE FORM OF FICTITIOUS PURCHASES AND FICTITIOUS SALES I N THE NAME OF THE SISTER CONCERNS. HE ALSO OBSERVED THAT THE BULLION AND ORNAMENTS TO THE EXTENT OF 4559.23 KGS ARE ROTATED MORE THAN 3.6 TIMES BY SHOWING SALES TO THE SISTER CONCERNS WHICH ACCORDIN G TO THE LD.CIT(A) ARE ONLY PAPER TRANSACTIONS. ACCORDING T O THE LD.CIT(A) THERE ARE FEW TRANSACTIONS OF PHYSICAL PU RCHASE AND SALES WITHIN THE GROUP CONCERNS. THE LD.CIT(A) CONCLUDED THAT THE ASSESSEE HAS INFLATED THE TURNOVER BY SHOWING THE I NTRA GROUP TRANSACTIONS TO RAISE FUNDS FROM THE FINANCIAL INST ITUTIONS APART FROM DIVERSION OF PROFIT. THE LD.CIT(A) ASKED THE ASSES SEE TO PREPARE A CONSOLIDATED ACCOUNT OF THE ENTIRE GROUP SALE AND A LSO ANOTHER TRADING ACCOUNT WITHOUT TAKING INTO CONSIDERATION P URCHASE AND SALE 44 TRANSACTIONS MADE WITHIN THE GROUP CONCERNS. AS PE R THE WORKING MADE ON THE BASIS OF THE CONSOLIDATED TRADING ACCOU NT OF THE ENTIRE GROUP, THE GP PERCENTAGE WAS WORKED OUT AT 2.27% AN D IN RESPECT OF THE TRADING ACCOUNT EXCLUDING SALE AND PURCHASES AMONG THE SISTER CONCERNS, THE GP WAS WORKED OUT AT 8.95%. T HE LD.CIT(A) HAS GIVEN A CHART IN THE IMPUGNED ORDER AT PAGE 45 TO 47 IN RESPECT OF ALL THE GROUP CONCERNS OF THE RAJMAL LAKHICHAND GROUP IN RESPECT OF THE BULLION (99.50 PURITY) SHOWING THE PURCHASE PRICE PAID BY THE ASSESSEE TO ITS GROUP CONCERNS AS WELL AS THE RATE OF GOLD ON THAT DATE AS PER THE MUMBAI BULLION ASSOCIATION. AFTER COMPA RING THE RATES ON DIFFERENT DATES OF MUMBAI BULLION ASSOCIATION WI TH THAT OF JALGAON RATE, THE LD.CIT(A) CONCLUDED THAT THE ASSE SSEE HAS PAID HIGHER PRICE AS GIVEN BY MUMBAI BULLION ASSOCIATION . IN RESPECT OF THE PURCHASE OF THE ORNAMENTS AFTER COMPARING THE A VERAGE RATE PAID BY THE ASSESSEE TO ITS SISTER CONCERNS HE CONCLUDED THAT PRIMA-FACIE THE ASSESSEE HAS ALSO PAID EXCESS PRICE FOR PURCHAS ING THE ORNAMENTS FROM ITS SISTER CONCERNS. IN THE LIGHT OF THE PRIC ES PREVAILING ON VARIOUS DATES AS PER PRICE GIVEN BY THE MUMBAI BULL ION ASSOCIATION, THE LD.CIT(A) ALSO TEST CHECKED SOME O F THE TRANSACTIONS OF THE OTHER GROUP CONCERNS, MORE PART ICULARLY, MANRAJ JEWELLERS PVT. LTD. IN RESPECT OF THEIR PURCHASE OF THE BULLION FROM THE MUMBAI BULLION ASSOCIATION AND FINALLY HE CONCL UDED THAT THE ASSESSEES PLEA THAT IT HAS NOT PAID ANY EXCESS PRI CE IN RESPECT OF PURCHASE OF THE BULLION FROM ITS SISTER CONCERNS CA NNOT BE ACCEPTED. 45 8.18 IN RESPECT OF THE ALLEGED DIVERSION OF THE PRO FIT OF RS.12,01,63,323/- WHICH WAS FOR ALLEGEDLY SELLING T HE ORNAMENTS TO ITS SISTER CONCERNS AT AN AVERAGE LOWER PRICE AS CO MPARED TO THE AVERAGE PRICE OF THE ORNAMENTS SOLD TO UNRELATED PA RTIES/THIRD PARTIES, THE LD.CIT(A) HAS OBSERVED THAT THE ASSESS EE HAS CHARGED AN AVERAGE PRICE OF RS.13,350/10 GMS FROM SISTER CO NCERNS AS AGAINST THE AVERAGE PRICE OF RS.13,906/10 GMS CHARG ED FROM OTHER PARTIES FOR SALE OF GOLD ORNAMENTS. AS NOTED BY TH E LD.CIT(A) THE DIFFERENCE IN THE AVERAGE SALE PRICE WORKED OUT TO RS.55.60/GM AS AGAINST RS.40.96/GM TAKEN BY THE AO IN THE ASSESSME NT ORDER. THE LD.CIT(A) HAS ALSO OBSERVED THAT ALTHOUGH THERE IS NO PROVISION IN THE INCOME TAX UNLIKE SECTION 40A(2)(B) WHICH IS IN RESPECT OF THE EXPENDITURE BUT THE SAID ASPECT ALSO CANNOT BE IGNO RED WHICH HAS AFFECTED THE GROSS PROFIT AND SUGGEST THAT BOOKS OF ACCOUNT DO NOT DEPICT THE CORRECT PICTURE. 8.19 IN RESPECT OF THE MELTING GAIN ADDITION OF RS. 84,89,937/-, THE LD.CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS PURCHA SED GOLD ORNAMENTS WEIGHING 436.56 KG MAINLY COMPRISING OF M OD (OLD ORNAMENTS) FROM THE THIRD PARTIES AND ASSESSEE HAS SHOWN THE MELTING GAIN IN RESPECT OF 259.08 KG ONLY. THE RES T WAS USED AS BULLION OR NEW ORNAMENTS. THE ASSESSEE FILED THE C HART SHOWING THE GROSS WEIGHT OF THE ORNAMENTS, NET WEIGHT OF THE OR NAMENTS AND NET WEIGHT AFTER REFINING OF THE ORNAMENTS AND ACCORDIN G TO THE ASSESSEE THE AVERAGE MELTING GAIN COMES TO 7.83%. THE AO HA S ALREADY 46 REJECTED THE SAID PLEA OF THE ASSESSEE AND ESTIMATE D THE MELTING GAIN AT 10% OF THE TOTAL GOLD REFINED. 8.20 ON THE BASIS OF THE ABOVE FACTS AND FIGURES TH E LD.CIT(A) CONCLUDED THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE NOT RELIABLE. HE ALSO OBSERVED THAT IN HIS OPINION THE ASSESSEE B Y AND LARGE ENGAGED IN FICTITIOUS SALES AND PURCHASES WITHIN TH E GROUP CONCERNS. HE ALSO OBSERVED THAT THE BOOKS OF ACCOUNT OF THE A SSESSEE DID NOT GIVE TRUE AND CORRECT PROFIT FOR THE A.Y. 2009-10 E VEN THOUGH THEY ARE AUDITED U/S.44AB OF THE ACT. THE LD.CIT(A) CO NFIRMED THE ACTION OF THE AO FOR REJECTION OF BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE LD.CI T(A) HAS GIVEN ALSO SOME INSTANCES IN RESPECT OF THE TRANSACTIONS OF THE ASSESSEE FIRM WITH M/S. MANRAJ JEWELLERS PVT. LTD. AS NOTED BY THE LD.CIT(A) THE ASSESSEE HAS SHOWN THE SALE OF ORNAME NTS WORTH RS.24.42 CRORES TO MANRAJ JEWELLERS PVT. LTD., ON 30-03-2009 AND IT HAS ALSO SHOWN THE PURCHASE OF THE ORNAMENTS OF RS. 20.47 CRORES ON 31-03-2009 VIDE BILL NOS. 50, 51 AND 52 FROM MANRAJ JEWELLERS (P) LTD. THE LD.CIT(A) HAS ALSO NOTED THAT THE ASSESSE E FIRM HAS SHOWN TO HAVE SOLD GOLD ORNAMENTS WORTH RS.7,56,80, 705/- TO M/S. RAJMAL LAKHICHAND JEWELLERS PVT. LTD., GOLD WORTH R S.7,67,05,308/- TO RAJMAL LAKHICHAND AND SONS AND ORNAMENTS WORTH RS.2,28,23,551/- TO M/S. R.L. GOLD PVT. LTD. AND AL L THE SALE TRANSACTIONS ARE SHOWN ON 31-03-2009 ITSELF. 8.21 WE AGREE WITH THE FINDING OF THE LD.CIT(A) THA T THE WAY THE TRANSACTIONS ARE ENTERED, I.E. SALE AND PURCHASE OF THE BULLION AND 47 ORNAMENTS WITHIN THE GROUP CONCERNS ARE ONLY PAPER TRANSACTIONS WITHOUT INVOLVING ANY REAL TRANSFER OF BULLION/ORNA MENTS. THE ASSESSEE HAS ENTERED INTO FICTITIOUS TRANSACTIONS W ITHIN THE GROUP TO INFLATE THE PURCHASES AND SALES OF ALL THE GROUP CO NCERNS. NOTHING HAS BEEN BROUGHT ON RECORD BY THE AO ON THIS ASPECT . SINCE THE LD. COUNSEL FOR THE ASSESSEE ALSO FAIRLY ADMITTED THAT IT HAS ENTERED INTO SUCH TRANSACTIONS TO INFLATE THE PURCHASE AND SALES TO OBTAIN HIGHER BANK FINANCE, THEREFORE, IT HAS TO BE HELD THAT THE ASSESSEE HAS INDULGED IN FICTITIOUS TRANSACTIONS WITHIN THE GROU P. FROM THE DETAILS FILED BY THE ASSESSEE IN THE PAPER BOOK, WE FIND THERE IS A STEEP INCREASE IN THE TURNOVER OF THE ASSESSEE FIRM FROM RS.82.55 CRORES IN A.Y. 2007-08 TO RS.955.78 CRORES IN A.Y. 2009-10 AND THE SAID INFLATED TURNOVER COMPRISE MAJOR PART OF THE T RANSACTIONS WITH THE INTRA GROUP COMPANIES. AS PER THE EXPLANATION OF THE ASSESSEE, THE TRANSACTIONS IN THE OTHER COMPANIES WERE INFLAT ED TO GET THE BANK FINANCE AS THE ASSESSEE WAS HAVING LIMITED CC LIMIT . IT IS ALSO SEEN THAT ASSESSEE HAS SOLD ORNAMENTS TO M/S. MANRAJ JEW ELLERS PVT. LTD. ON 30-03-2009 TO THE EXTENT OF RS.24.41 CRORES AND PURCHASED ORNAMENTS TO THE EXTENT OF RS.20.47 CRORES ON 31-03 -2009 THE SAID MANRAJ JEWELLERS PVT. LTD. HAS NO SHOWROOM BUT HAS SHOWN THE PURCHASE OF 959.66KG OF ORNAMENT AT MARKET VALUE OF RS.127.42 CRORES FROM THE SISTER CONCERNS. THE LD.CIT(A) HAS ALSO BROUGHT MOST OF THE DATA, FACTS AND FIGURES TO SHOW AS TO H OW THE ASSESSEE AS WELL AS OTHER GROUP COMPANIES IN THE LAKHICHAND JEW ELLERS GROUP ARE INVOLVED IN INFLATING THE TURNOVER BY SHOWING O NLY PAPER 48 TRANSACTIONS OF SALE AND PURCHASES OF BULLION AS WE LL AS ORNAMENTS. EVEN IT IS ALSO STRANGE TO NOTE THAT IN THE CASE OF MANRAJ JEWELLERS PVT. LTD. AND OTHER FEW ENTITIES THEY DO NOT HAVE A NY SHOWROOM, BUT THEY HAVE SHOWN/DECLARED SUCH TRANSACTIONS. IN VIE W OF THE ABOVE, THE BOOKS OF ACCOUNT OF THE ASSESSEE, IN OUR OPINIO N, DO NOT GIVE THE CORRECT PICTURE AND THEREFORE ARE LIABLE TO BE REJE CTED. 8.22 ONCE WE HOLD THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE DO NOT REFLECT THE CORRECT PICTURE OF ITS TRUE STATE O F FINANCIAL AFFAIRS THEN THE NEXT QUESTION WILL BE WHETHER THE AO IS JU STIFIED IN MAKING THE ADDITION OF RS.64.66 CRORES U/S.40A(2)(B) OF TH E ACT FOR ALLEGEDLY MAKING EXCESS PRICE TO ITS INTRA GROUP CO MPANIES FOR PURCHASE OF THE BULLION AND ORNAMENTS AND ALSO WHET HER THE AO WAS JUSTIFIED IN MAKING THE ADDITION OF RS.12.12 CRORES WITH THE CHARGE OF SIPHONING OFF THE PROFITS BY THE ASSESSEE BY SHO WING THE SALE OF THE ORNAMENTS AS WELL AS BULLION AT A LOWER PRICE A S COMPARED TO THE RATES PREVAILING IN THE BULLION AND JEWELLERY MARKE T AS GIVEN BY THE MUMBAI BULLION ASSOCIATION. IT IS TRUE THAT THE EN TIRE CASE IS BASED ONLY ON THE STATISTICS AND THE FIGURES OF THE JALGA ON BULLION AND GOLD MARKET AS WELL AS MUMBAI MARKET. BOTH THE AUTHORIT IES BELOW HAVE PLACED HEAVY RELIANCE ON THE RATES GIVEN BY THE MUM BAI BULLION ASSOCIATION IN RESPECT OF THE TRADING IN THE GOLD O N RESPECTIVE DATES. SO FAR AS THE APPROACH OF THE LD.CIT(A) IS CONCERNE D EVEN THOUGH HE HAS REJECTED THE BOOKS OF ACCOUNT BUT AT THE SAM E TIME HE HAS NOT PROVED THAT THE ACTION OF THE AO FOR MAKING THE ADD ITION U/S.40A(2)(B) TO THE EXTENT OF RS.64,64,22,989/- AN D FOR ALLEGED 49 SIPHONING OFF THE PROFIT TO THE EXTENT OF RS.12,01, 63,323/- IS CORRECT. THE LD.CIT(A) IS OF THE OPINION THAT ONLY 25% OF TH E TOTAL SALE AND PURCHASES WITH THE SISTER CONCERNS ARE GENUINE AND HENCE GP RATE OF 2.27% CANNOT BE APPLIED ON TOTAL SALES SHOWN BY THE ASSESSEE. 8.23 IT IS NECESSARY TO CONSIDER THE TRADING ACCOUN T RECASTED BY THE LD.CIT(A). IN THE OPINION OF THE LD.CIT(A) GP RATE OF 1.27% SHOULD BE WORKED OUT ONLY ON THE GENUINE TURNOVER E XCLUDING 75% INFLATED/FICTITIOUS TURNOVER BETWEEN THE ASSESSEE A ND THE INTRA GROUP COMPANIES. THE LD.CIT(A) FINALLY HELD THAT SOME ES TIMATION IS REQUIRED TO BE MADE BUT THERE IS NO JUSTIFICATION T O CONSIDER THE ENTIRE TURNOVER OF THE ASSESSEE INCLUDING THE TURNO VER WITH THE INTRA GROUP ENTITIES. HE HELD THAT GP RATE 5.71% ON TOTA L ESTIMATED TURNOVER OF RS.565,51,47,670/- (INCLUDING DIAMOND) [THIRD PARTY SALES OF RS.435,42,36,305/- +25% OF SALES TO SISTER CONCERNS, I.E. RS.130,09,11,365] WILL BE FAIR AND REASONABLE AND R EALISTIC. HE WORKED OUT TOTAL GP TAKING RATE 5.71% ON THE SALES TURNOVER OF RS.565.51 CRORES AND WORKED OUT THE GP AT RS.32,29, 08,931/- WHICH ACCORDING TO THE CIT(A) IS THE REASONABLE AND FAIR GP AND HE REDUCED THE GP DECLARED BY THE ASSESSEE FROM THE SA ID FIGURE OF RS.10,79,15,449/-. HE FINALLY SUSTAINED ADDITION OF RS.21,49,93,482/- AS AGAINST TOTAL ADDITION OF RS.7 7,50,76,249/- MADE BY THE ASSESSING OFFICER, I.E. ON ACCOUNT OF P URCHASES FROM THE SISTER CONCERNS RS.64,64,22,989/-, DIVERSION OF PROFIT TO SISTER CONCERNS RS.12,01,63,323/- AND MELTING GAIN OF RS.8 4,89,937/-. 50 8.24 IN THE PRESENT CASE, THE ENTIRE GP ADDITION IS BASED ON THE LOCAL MARKET RATE OF THE BULLION IN JALGAON AND MUM BAI MARKET RATE WHICH ARE GIVEN BY THE MUMBAI BULLION ASSOCIATION. IN THE PRESENT CASE, THE COMMODITY IS GOLD AND BOTH THE AUTHORITIE S BELOW HAVE WORKED OUT THE AVERAGE PRICE OF THE BULLION AS WELL AS THE ORNAMENTS/GM FOR MAKING THE COMPARISON OF THE MARKE T RATE IN JALGAON AND MARKET RATE IN MUMBAI. THERE IS NO DIS PUTE ABOUT THE FACT THAT THERE ARE LOT OF INTRA GROUP TRANSACTIONS IN RESPECT OF THE BULLION AS WELL AS THE ORNAMENTS. AS PER THE RECOR D, IT IS SEEN THAT THE ASSESSEE IS DEALING IN THE 99.50 (STANDARD GOLD -BULLION) AND THEY WERE COMPARED WITH THE TURNOVER OF THE ASSESSEE, SH AREHOLDING OF THE BULLION IN THE TOTAL SALES IS RS.443.63 CRORES WHICH IS 46.40% OF THE TOTAL SALES TURNOVER, I.E. RS.955.78 CRORES. S AME WAY THE SHARE OF THE SALE OF THE ORNAMENTS IN THE TOTAL SALE WORK ED OUT TO 53%. THERE IS AN ELEMENT OF DIAMOND SALE ALSO AS PER THE CHART ENCLOSED WITH THE ASSESSMENT ORDER BEING ANNEXURE NO.2. 8.25 IN THIS CASE, EVEN IF THE BOOKS OF ACCOUNT ARE REJECTED BY THE AO BUT ULTIMATELY THE ASSESSMENT IS FRAMED U/S.143( 3) OF THE ACT BY MAKING ADDITION U/S.40A(2)(B) AND THE ADDITION TOWA RDS SIPHONING OF THE ALLEGED PROFIT. 8.26 WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNS EL FOR THE ASSESSEE THAT BOTH THE AUTHORITIES BELOW HAVE NOT C ORRECTLY UNDERSTOOD THE TRADING IN THE GOLD. ACCORDING TO H IM GOLD IS A COMMODITY HAVING HIGH LIQUIDITY AND THERE ARE FLUCT UATIONS OF PRICES 51 IN THE OPEN MARKET. IN OUR OPINION, THE ABOVE SUBM ISSION CANNOT BE SIMPLY DISCARDED. THE ASSESSEE HAS FILED THE NEWSP APER CUTTINGS, PAGE 7 TO 25 OF THE PAPER BOOK NO.3, MORE PARTICULA RLY THOSE ARE DAILY LOCAL MARATHI NEWSPAPERS, I.E. LOKMAT AND SAK AL OF JALGAON EDITION WHERE THE ASSESSEE IS BASED. IT IS TRUE TH AT RATES GIVEN ON THE NEWSPAPERS MAY NOT BE ACTUAL AND THERE IS LIKELY TO BE SOME VARIATION. AT THE SAME TIME AS THE ENTIRE ASSESSME NT IS BASED ON THE LOCAL MARKET, VIS--VIS MUMBAI MARKET OF THE BILLIO N, HENCE THESE NEWSPAPER CUTTINGS ARE HELPFUL TO ATLEAST EXAMINE T HE VARIATIONS IN THE TREND IN THE BULLION MARKET. AS PER THE PAPER CUTTING DATED 03- 04-2008 OF LOKMAT THE RATE OF STANDARD GOLD FOR 10G MS IS SHOWN AS RS.12150. SIMILARLY ON 08-04-2008 (PAGE 8 OF THE C OMPILATION PAPER BOOK NO.3) THE RATE OF THE STANDARD 10 GMS GO LD IS SHOWN AS RS.12.450/10 GMS. ON 11-04-2008 THE RATE OF STANDA RD GOLD IS SHOWN AS RS.12,600/10 GMS. AGAIN ON 06-05-2008 THE RATE OF STANDARD GOLD IS SHOWN AS RS.11900/10 GMS. AGAIN O N 05-06-2008 THE RATE OF THE STANDARD GOLD IS SHOWN AS RS.12,500 /10 GMS. ON 21- 06-2008 THE RATE OF THE STANDARD GOLD IS SHOWN AS R S.13.450/10 GMS. THERE IS INCREASE AND DECREASE IN THE RATE OF STANDARD GOLD (BULLION-99.50). 8.27 WE NOW DEAL WITH THE APPLICABILITY OF THE PROV ISIONS OF SECTION 40A(2)(B) OF THE ACT. IN THIS CASE, THE AS SESSEE HAS ENTERED INTO THE TRANSACTIONS WITH THE GROUP ENTITIES. HEN CE, PRIMA-FACIE THE PROPOSITION ARE APPLICABLE. THERE IS NO DISPUTE AB OUT THIS LEGAL POSITION BUT THE CORE QUESTION IS WHETHER THE ASSES SEE HAS PAID 52 EXCESS PRICE THAN THE MARKET RATE TO THE RELATED PA RTIES OR TO THE SISTER CONCERNS FOR THE PURCHASE OF THE BULLION (99 .50-STANDARD GOLD). AS PER THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE, EVEN IF THERE IS A MARGINAL DIFFERENCE IN THE MARKE T PRICE OF THE MUMBAI AND THE JALGAON BUT THAT PRICES ARE COVERED IN THE TRANSPORTATION AND DELIVERY. THE ASSESSEE HAS FILE D A CHART AT PAGES 42 TO 55 OF PAPER BOOK NO.1 IN WHICH ASSESSEE HAS G IVEN NAMES OF THE SISTER CONCERNS, GOLD WEIGHT, RATE PAID, TOTAL VALUE, SALES, JALGAON RATE ON THE SAME DAY AND THE MUMBAI RATE. AS PER T HE SAID CHART ON 09-04-2008 FOR THE STANDARD GOLD- (99.50), THE ASSE SSEE HAS PAID RS.12400/10 GMS WHEN THE JALGAON RATE WAS RS.11805/ 10 GMS. HENCE, THERE IS A DIFFERENCE OF RS.595/- . SO ASSE SSEE HAS MADE EXCESS PAYMENT. THE ASSESSEE HAS ALSO GIVEN EXAMPL ES ON 03-05- 208 AND 06-05-2008, AS PER THE CHART COMPARED TO TH E EVEN LOCAL MARKET THE ASSESSEE HAS MADE THE PAYMENT IN EXCESS OF THE LOCAL MARKET RATES. IMMEDIATELY THEREAFTER ASSESSEE HAS GIVEN THE SAMPLE EXAMPLES ON 08-05-2008, 26-05-2008 IN RESPECT OF TH E GOLD PURCHASES FROM SISTER CONCERNS R.L. GOLD PVT. LTD., RAJMAL LAKHICHAND AND SONS, RAJMAL LAKHICHAND JEWELLERS PV T. LTD., MANRAJ JEWELLERS PVT. LTD., ETC. AS PER THE FIGURE S GIVEN BY THE ASSESSEE, THE ASSESSEE HAS PAID THE PRICE WHICH IS LESS THAN THE MARKET RATE. ON THE PERUSAL OF THE SAID CHART, WE FIND THAT ON SOME OCCASIONS, ON SOME DATES, THERE IS EXCESS PAYMENTS AND ON SOME DATES, THERE IS LESSER PAYMENT. AS PER THE TRANSAC TIONS GIVEN IN THE CHART, IT IS SEEN THAT IF WE CONSIDER THE TOTAL TRA NSACTIONS IN A YEAR, 53 I.E. PURCHASE OF THE BULLION FROM THE SISTER CONCER NS, IT IS SEEN THAT THE ASSESSEE HAS PAID LESS AMOUNT TO THE EXTENT OF RS.1,01,14,553/- IF WE GO WITH THE THEORY OF THE AO, I.E., COMPARING THE LOCAL MARKET RATE OF JALGAON AND RATES DECLARED BY THE MUMBAI BU LLION ASSOCIATION. SO FAR AS THE AO IS CONCERNED, HE HAS ADOPTED THE SHORT CUT METHOD WITHOUT UNDERSTANDING THE TRADI NG IN THE BULLION AND FLUCTUATIONS IN THE MARKET IN THE PRICES AND WO RKED OUT THE AVERAGE RATE BY COMPARING THE SAME TRANSACTION ON S AME DATES AND ACCORDINGLY WORKED OUT THE ALLEGED DIFFERENCE. IN OUR OPINION, THE APPROACH OF THE AO IS TOTALLY ERRONEOUS AS HE HAS T OTALLY DISCARDED THE TRADING IN THE BULLION THAT TAKES PLACE. HE HAS ALSO NOT CONSIDERED THE STATEMENT OF THE ASSESSEE THAT THERE ARE VARIATIONS AND FLUCTUATIONS IN THE BULLION MARKET AND EVEN IN THE INTRA DAY TRANSACTIONS RATE CAN BE CHANGED AND SOMETIMES RATE S MAY BE STABLE AND RATES MAY SWING LIKE A WIND. 8.28 WHEN THE MATTER REACHED BEFORE THE LD.CIT(A) T HOUGH HE DID NOT AGREE WITH THE APPROACH OF THE AO BUT HE ALSO M ADE THE SAME MISTAKE. HE HAS AGAIN GONE ON THE AVERAGE METHOD ADOPTED BY THE AO. IN THIS CASE IT IS ALSO CONSIDERED BY THE ASSE SSEE THAT MANY OF THE INTRA ENTITY TRANSACTIONS ARE NOT CORRECT OR FI CTITIOUS AND THAT IS ALSO CLEAR EVEN FROM THE CHART AND FIGURES GIVEN BY THE LD.CIT(A) IN HIS ORDER IN RESPECT OF THE TRANSACTIONS BETWEEN THE ASSESSEE AND INTRA GROUP ENTITIES. ANOTHER ASPECT TO BE CONSIDE RED HERE IS THAT ASSESSEE IS A VERY OLD FIRM IN THE GOLD MARKET BUT IN THE PRECEDING TWO YEARS SPAN THE TURNOVER OF THE ASSESSEE HAS EXC EEDED 11.5 TIMES 54 FROM 82.55 CRORES IN A.Y. 2007-08 TO 955.78 CRORES IN A.Y. 2009- 10. THE ASSESSEE HAS GIVEN THE JUSTIFICATION OF TH E SAME. FICTITIOUS TRANSACTIONS WERE SHOWN FOR INFLATING THE TURNOVER OF THE ASSESSEE. THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS THAT IT WAS DONE TO FACILITATE TO OBTAIN THE FINANCE. IT IS PERTIN ENT TO NOTE HERE THAT ASSESSEE HAS FILED THE CHART SHOWING THE LOANS AVAI LED BY THE ASSESSEE AND OTHER GROUP CONCERNS, WHICH IS PLACED AT PAGES 711 TO 714 OF THE PAPER BOOK. THE ASSESSEE WAS ENJOYING T HE CC LIMIT OF RS.5.56 CRORES. AT THE SAME TIME, THE OTHER GROUP CONCERNS/SISTER CONCERNS WERE ENJOYING THE CC LIMIT OF RS.52.81 CRO RES. THE ASSESSEE HAS ALSO FILED A LETTER DATED 25-04-2008 O F THE SBI (PAGE 712 OF PAPER BOOK) IN WHICH ONE OF THE GROUP CONCE RNS M/S. R.L. GOLD PVT. LTD. HAS OBTAINED A GOLD LOAN UNDER THE D OMESTIC JEWELLERY INDUSTRY SCHEME FROM THE SBI TO THE EXTEN T OF 30 KG. IT ALSO SUPPORTS THE CASE OF THE ASSESSEE THAT WITH T HE MEAGER CASH CREDIT LIMIT OF RS.5 CRORE THE ASSESSEE BY NO STRET CH OF IMAGINATION CAN REACH TO THE TURNOVER OF RS.955 CRORE. AS PER THE STATISTICS GIVEN BY THE LD.CIT(A) IN HIS ORDER, IT IS SEEN THA T THERE IS HIGH FREQUENCY OF TRANSACTIONS BETWEEN THE ASSESSEE AND INTRA GROUP ENTITIES. EVEN IN SOME OF THE CASES BULLION IS PUR CHASED AND SOLD EITHER ON THE SAME DATE OR IMMEDIATELY ON THE NEXT DAY. IF THE ASSESSEE HAS NOT EARNED ANY INCOME, THEN CAN IT BE TAXED IS ANOTHER QUESTION. FOR INVOKING THE PROVISIONS OF SECTION 4 0A(2)(B) THE AO HAS TO ESTABLISH THAT THE PAYMENT MADE TO THE RELAT ED PARTY IS NOT REASONABLE AT ALL CONSIDERING THE LOCAL MARKET COND ITIONS. IN OUR 55 OPINION BOTH THE AUTHORITIES BELOW HAVE NOT AT ALL CONSIDERED THE LOCAL CONDITIONS OF THE GOLD MARKET. THE METHOD OF AVERAGE PRICE OF THE YEAR IN OUR OPINION IS NOT THE CORRECT METHOD T O DETERMINE THE REASONABLENESS OF THE AMOUNT PAID FOR PURCHASING TH E BULLION FROM THE SISTER CONCERNS FOR THE REASONS NARRATED HEREIN ABOVE THAT THERE IS VARIATION IN THE PRICE OF THE BULLION. WE ALSO FIND FROM THE CHART FILED BY THE ASSESSEE THAT THE ASSESSEE HAS PAID LE SSER PRICE IN SOME CASES AS COMPARED TO THE LOCAL MARKET AND MUMBAI MA RKET TO THE SISTER CONCERNS. BUT THAT IS NOT CONSIDERED BY BOT H THE AUTHORITIES BELOW. WHEN THE AVERAGE PRICE METHOD IS ADOPTED, T HEN WHERE EVER THERE IS A LESSER PRICE PAID THAT IS ALSO TO BE CON SIDERED AND NOT THE EXCESS PRICE ONLY. IN OUR OPINION, THE AVERAGE PRI CE METHOD ADOPTED BY BOTH THE AUTHORITIES IS TOTALLY ERRONEOU S CONSIDERING THE MARKET CONDITIONS OF THE BULLION. 8.29 IT IS NOW AN ADMITTED FACT THAT THE FREQUENCY OF THE TRANSACTIONS IN THE BULLION ARE PAPER TRANSACTIONS WITHOUT DELIVERY AND ARE FICTITIOUS. THE ARGUMENT OF THE ASSESSEE T HAT FOR GETTING THE FINANCE/LOANS FROM THE BANK, THE TURNOVER WAS INFLA TED. WE FIND SOME FORCE IN THE ARGUMENT OF THE LD. COUNSEL FOR T HE ASSESSEE ON THIS POINT. AS WE HAVE ALREADY OBSERVED HEREINABOV E, THE ASSESSEE WAS ENJOYING THE CASH CREDIT LIMIT OF RS.5 CRORES A ND IN OUR OPINION ASSESSEE CANNOT ACHIEVE TURNOVER OF RS.955 CRORES W ITH THAT SMALL CASH CREDIT LIMIT. AT THE SAME TIME, WE HAVE SEEN THAT THE OTHER SISTER CONCERNS OR INTRA GROUP ENTITIES HAVE ALSO O BTAINED GOLD LOAN FROM THE SBI. IN THIS SITUATION, IN OUR OPINION, E VEN IF THE ASSESSEE 56 HAS SHOWN SOME EXCESS PRICE FOR PURCHASE OF BULLION FROM THE SISTER CONCERNS, IT CAN BE TREATED AS BUSINESS REQUIREMENT . 8.30 WE FIND WHEN THE MATTER WAS CARRIED BEFORE THE LD.CIT(A), HE ADOPTED A DIFFERENT FORMULA BY HOLDING THAT OUT OF THE TOTAL SALES/ TURNOVER WITH THE SISTER CONCERNS 75% OF TURNOVER I S FICTITIOUS AND ONLY 25% TURNOVER IS GENUINE TURNOVER. ULTIMATELY THIS ALSO IS GUESS WORK AND IT IS NOT SUPPORTED BY ANY STATISTIC S OR ANY DATA. WE FIND THAT THERE ARE MISTAKES IN THE RECASTED TRADIN G ACCOUNT PREPARED BY THE LD.CIT(A) AS THE TOTAL TURNOVER OF THE ASSES SEE IS SHOWN AT RS.1065.32 CRORES WHEN THE SAME IS ACTUALLY 955.78 CRORES. SAME WAY, THE TRANSACTIONS WITH THE THIRD PARTIES INCLUD ING BULLION AND GOLD ARE TO THE EXTENT OF RS.435.37 CRORES BUT AS P ER THE TRADING ACCOUNT PREPARED BY THE LD.CIT(A) THE SAME IS SHOWN AS RS.679.66 CRORES. HENCE, PRIMA-FACIE THERE ARE MISTAKES IN T HE RECASTED TRADING ACCOUNT AND THE SAME CANNOT BE PUT TO TEST. 8.31 THE NEXT AREA OF THE TRANSACTIONS IS GOLD ORNA MENTS. ADMITTEDLY, THE ASSESSEE IS ALSO MANUFACTURING AND SELLING GOLD ORNAMENTS. THE ASSESSEE IS ALSO ENGAGED IN BUYING GOLD ORNAMENTS AND AFTER REFINING THE SAME, SAID GOLD IS USED IN T HE MANUFACTURING OF THE JEWELLERY. THERE ARE INTRA ENTITY TRANSACTI ONS OF THE ORNAMENTS BY THE ASSESSEE AS WELL AS TRANSACTIONS W ITH THE THIRD PARTY. AS PER THE CHART ATTACHED TO THE ASSESSMENT ORDER, THE TOTAL SALE OF THE ORNAMENTS TO SISTER CONCERNS IS TO THE EXTENT OF RS.397.45 CRORES AND TO THE THIRD PARTIES RS.110.89 CRORES. AS PER THE STATISTICS GIVEN IN THE IMPUGNED ORDER, IT IS SEEN THAT THE AS SESSEE HAS SOLD THE 57 ORNAMENTS TO THE SISTER CONCERNS AND IMMEDIATELY ON THE NEXT DAY ORNAMENTS ARE PURCHASED. (PAGE 28 OF THE LD.CIT(A) S ORDER - TRANSACTIONS WITH RAJMAL LAKHICHAND AND SONS). SAM E WAY ASSESSEE HAS SOLD ORNAMENTS OF RS.1,01,32,168/- TO RAJMAL LAKHICHAND AND SONS, JALGAON ON 30-07-2008 AS AGAIN ST PURCHASE OF THE ORNAMENTS TO THE EXTENT OF RS.12,57,96,131/-. AGAIN ON 23-07- 2008 ASSESSEE HAS SHOWN SALE OF ORNAMENTS TO RAJMAL LAKHICHAND AND SONS RS.6,97,15,876/- AND HAS SHOWN THE PURCHAS ES OF RS.7,05,87,330/- ON 25-08-2008 AND AGAIN SHOWN THE SALE OF ORNAMENTS TO THE SAME ENTITY, I.E. RAJMAL LAKHICHAN D AND SONS ON 28-08-2008 TO THE EXTENT OF RS.7,13,52,664/-. AGAIN WITH THE SAME ENTITY THERE IS FREQUENCY OF TRANSACTIONS OF THE SA LE AND PURCHASE OF ORNAMENTS WITH THE SHORT GAP OF 1 OR 2 DAYS. THIS SUGGESTS THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS SISTER CONCERNS/GROUP ENTITIES MAY NOT BE FOR THE GENUINE TRADING PURPOSE BUT TO INFLATE THE TURNOVER. 8.32 WE ALSO FIND THAT AGAIN WHILE MAKING THE ADDIT ION IN RESPECT OF SALE OF ORNAMENTS TO THE GROUP CONCERNS/SISTER C ONCERNS, BOTH THE AUTHORITIES BELOW HAVE ADOPTED THE COMPARISON FORMU LA BASED ON THE SALE OF ORNAMENTS TO THE UNRELATED PARTIES AND SALE OF ORNAMENTS TO THE RELATED PARTIES. IT IS STATED THAT IF THE A VERAGE PRICE IS TAKEN THEN THE ASSESSEE HAS CHARGED RS.10,350/10 GMS ON T HE SALE TO THE SISTER CONCERNS AS AGAINST THE AVERAGE PRICE OF RS. 13,906/10 GMS CHARGED TO THE THIRD PARTIES/UNRELATED PARTIES ON T HE SALE OF GOLD ORNAMENTS. THE AO HAS WORKED OUT THE DIFFERENCE OF RS.40.96/GM 58 BUT THE LD.CIT(A) HAS WORKED OUT THE DIFFERENCE AT RS.55.60/GM. THE LD.CIT(A) HAS ALSO OBSERVED THAT UNLIKE SECTION 40A(2)(B) OF THE I.T. ACT, THERE IS NO PROVISION EVEN IF THERE I S A SALE AT LOWER PRICE COMPARING WITH THE PREVAILING MARKET PRICES O F THE COMMODITY OR GOODS. IN OUR OPINION AS FAR AS THE ISSUE OF ORNAMENTS IS CONCERNED, APPROACH OF BOTH THE AUTHOR ITIES BELOW ADOPTING THE AVERAGE PRICE FORMULA IS NOT CORRECT. AS FAR AS THE ORNAMENTS ARE CONCERNED, THE PRICE MAY VARY FROM DE SIGN TO DESIGN, FROM ITEM TO ITEM, FROM PURITY OF GOLD ETC. IN CAS E OF THE ORNAMENTS NORMALLY THE SALES ARE MADE FROM THE 916 TOUNCH (22 KARAT). THE ORNAMENTS MAY BE OF 18KARAT, 20 KARAT AND 21 KARAT ALSO. WE CANNOT TAKE THE AVERAGE PRICE OF THE ORNAMENTS TO T HE ENTIRE SALE OF THE YEAR AS DIFFERENT FACTORS ARE ALSO INVOLVED AS MENTIONED ABOVE WHICH CHANGES THE PRICE OF THE ORNAMENTS. MOREOVER , THERE MAY BE VARIATION IN THE LABOUR CHARGES ALSO. HENCE, WE DO NOT AGREE WITH THE AVERAGE PRICE FORMULA ADOPTED BY BOTH THE AUTHO RITIES BELOW FOR MAKING THE ADDITION OF RS.12,01,63,323/- ON ALLEGED SELLING OF THE ORNAMENTS TO THE SISTER CONCERNS AT LOWER PRICE THA N THE PRICE CHARGED TO THE UNRELATED PARTIES. 8.33 WE ALSO FIND THAT THE TRADING ACCOUNT PREPARED BY THE LD.CIT(A) (PAGE 58 OF HIS ORDER WHICH HAS ALREADY B EEN REPRODUCED AT PARA 5 OF THE IMPUGNED ORDER) ALSO INCLUDES DI RECT INCOME (MTF GAIN). AS PER THE CHART PLACED BEFORE US, WE FIND THAT THE ASSESSEE FIRM IS NOT INVOLVED IN THE MARGINAL TRADING AND FO RWARDING CONTRACTS. BUT AT THE SAME TIME OTHER INTRA GROUP ENTITIES, I.E. R.L. 59 GOLD PVT.LTD. RAJMAL LAKHICHAND JEWELLERS PVT. LTD. , MANRAJ JEWELLERS PVT. LTD., R.L. GOLD PVT. LTD. HAVE DECLA RED SUBSTANTIAL AMOUNT OF MTF GAIN AND THE SAME IS INCLUDED IN THE GROSS PROFIT OF THE RESPECTIVE CONCERNS. WE FAIL TO UNDERSTAND WHE N THE ASSESSEE FIRM IS NOT INVOLVED NOR HAS EARNED ANY MTF GAIN, T HEN HOW THE LD.CIT(A) HAS INCLUDED THE MTF GAIN OF RS.25,50,87, 766/. THE ASSESSEE HAS FILED THE COPY OF THE AUDITED STATEMEN T OF ACCOUNT IN THE COMPILATION AND THE PROFIT AND LOSS ACCOUNT IS AT PAGE 27 OF PAPER BOOK NO.1 FOR THE A.Y. 2008-09. WE FIND THAT THE ASSESSEE HAS NOT DISCLOSED ANY INCOME FROM MTF GAIN. THAT IS ALSO O NE OF THE REASON IN RESPECT OF THE OTHER GROUP ENTITIES W HERE GROSS PROFIT MARGIN IS AT HIGHER LEVEL. 8.34 FROM THE FOLLOWING CONSOLIDATED TRADING ACCOUN T CHART OF THE GROUP ENTITIES FOR THE F.Y. 2008-09 WHICH CLEARLY S HOWS THAT IN CASE OF RAJMAL LAKHICHAND JEWELLERS PVT. LTD. AND MANRAJ JEWELLERS PVT. LTD., MTF GAIN DECLARED IS RS.3,11,19,833/- AND RS. 8,59,77,676/- RESPECTIVELY. AS PER THE CHART ALSO, WE FIND THE H IGHER GP IN THE OTHER GROUP ENTITIES IS DUE TO ELEMENT OF THE MTF G AIN. PARTICULARS RL GOLD PVT. RLJPL MHPL RL MJPL RL&SONS AMOUNT 3 AMOUNTS AMOUNT 3 AMOUNT 3 AMOUNT 3 AMOUNT 3 SALES BULLION TO SISTER CONCERN 745,512,100 1,983,827,683 296,725,660 1,228,817,751 1,002,529,500 563,232,427 BANKS - - - - - - 3 RD PARTIES 4,685,150 1,417,979,076 287,585,700 3,207,646,557 373,584,461 59,279,978 ORNAMENTS TO SISTER CONCERN 901,412,851 828,668,584 819,940,200 3,975,475,586 1,642,657,208 1,513,747,607 BANKS - - - - - - 3 RD PARTIES 17,646,832 96,737,697 11,525,129 1,145,941,87 3 16,727,975 53,576,346 1,669,256,933 4,327,213,040 1,415,776,6 9 0 9,557,881,767 3,035,499,144 2,189,836,358 LABOUR CHARGES 3,340,024 - - - - - CLOSING STOCK 34,163,339 645,978,383 41,981,462 76,624,617 64,215,659 23,383,683 60 DIR ECT INCOMES (MTFGAIN) 95,340,858 31,119,833 - - 85,977,676 42,649,399 SUB TOTAL 1,802,101,154 5,004,311,256 1,457,758,152 9,634,506,384 3,185,692,479 2,255,869,440 OPENING STOCK 52,263,352 575,306,146 - 168,551,291 84,52 2,861 25,389,330 ADD : PURCHASES BULLION FROM SISTER CONCERN 162,659,000 402,937,239 219,803,839 4,198,775,360 469,757,500 366,712,183 BANKS 914,455,727 1,622,200,585 921,322,881 590,174,769 1,280,312,596 362,748,024 3 RD PA RTIES - 49,643,799 4,998 - - 2,743,919 ORNAMENTS SISTER CONCERN 602,718,403 1,555,923,248 294,502,157 4,564,682,655 1,274,230,686 1,389,844,889 BANKS - - - - - 55,916,116 3 RD PARTIES 15,919,638 554,236,936 - 4 84,194 - 7,405,184 DIRECT EXPENSES 3,473,361 27,691,626 2,223,288 3,922,666 8,602,431 2,446,576 SUB - TOTAL 1,751,489,481 4,787,939,579 1,437,857,163 9,526,590,935 3,117,426,174 2,213,206,221 GROSS PROFIT & LOSS A/C. (LOSS) 50,611,673 216,371,677 19,900,989 107,915,449 68,266,305 42,663,219 2.86% 4.96% 1.41% 1.13% 2.19% 1.91% 8.35 IN THE LIGHT OF OUR ABOVE DISCUSSION, WE ARE O F THE OPINION THAT APPROACH OF BOTH THE AUTHORITIES BELOW IS NOT CORRECT FOR MAKING HIGH PITCH ADDITIONS IN THE HANDS OF THE ASSESSEE B Y INVOKING PROVISIONS OF SECTION 40A(2)(B) AND FOR ALLEGED SEL LING OF THE ORNAMENTS TO THE RELATED ENTITIES AT A LOWER PRICE. AS PER THE FINANCIAL ACCOUNTS OF THE ASSESSEE, THE GP WORKED O UT AT 1.13%. THE POSSIBILITY OF PURCHASING THE BULLION AND ORNAM ENTS FROM THE GROUP ENTITIES AT A HIGHER PRICE CANNOT BE RULED OU T EVEN THOUGH THERE IS NO STRICT PROOF AGAINST THE ASSESSEE. EVE N THE EXERCISE DONE BY BOTH THE AUTHORITIES BELOW IS NOT BASED ON ANY S CIENTIFIC METHOD. WE THEREFORE ARE OF THE OPINION THAT ADOPTION OF GP RATE OF 1.20% AS AGAINST 1.13% DISCLOSED BY THE ASSESSEE WILL MEE T THE ENDS OF JUSTICE. WE HOLD AND DIRECT ACCORDINGLY. WE ACCOR DINGLY SET-ASIDE THE ORDER OF THE LD.CIT(A) AND DIRECT THE AO TO WOR K OUT THE GP @1.20% ON THE TOTAL SALE OF RS.955,78,81,767/- AS PER AUDITED ACCOUNTS. AFTER REDUCING THE GP DECLARED BY THE AS SESSEE AT RS.10,79,15,449/-, THE BALANCE GP IS TO BE ADDED TO THE TOTAL INCOME 61 OF THE ASSESSEE. THIS COVERS THE GROUNDS ON THE AD DITION MADE BY INVOKING PROVISIONS OF SECTION 40A(2)(B), I.E. PURC HASE OF BULLION FROM THE SISTER CONCERNS/RELATED ENTITIES BY PAYING HIGHER PRICE AS WELL AS SALE OF THE ORNAMENTS AT LOWER PRICE. ACCO RDINGLY, THE RELEVANT GROUNDS TAKEN BY THE ASSESSEE ARE PARTLY A LLOWED AND THE GROUNDS OF APPEAL NO. 1 AND 2 BY THE REVENUE ARE DI SMISSED. 8.36 THE NEXT ISSUE IS REGARDING THE ADDITION ON AC COUNT OF MELTING GAIN. THE AO HAS MADE THE ADDITION OF RS.8 4,89,937/- TOWARDS THE SUPPRESSION OF THE MELTING GAIN. THOUG H THE LD.CIT(A) CONFIRMED THE ADDITION BUT HE DID NOT MAK E ANY SEPARATE ADDITION ON THE REASON THAT THE ADDITION SUSTAINED TOWARDS PURCHASE OF THE BULLION AT HIGHER PRICE AND DIVERSION OF THE PROFIT WILL COVER THE ESTIMATED MELTING GAIN. THE AO HAS OBSERVED TH AT THE ASSESSEE HAS SHOWN MELTING GAIN OF 7.83% WHICH WAS NOT ACCEP TABLE TO THE AO. HE ADOPTED 10% ON ESTIMATE BASIS AS MELTING GA IN AND ADDITION WAS MADE IN RESPECT OF THE DIFFERENCE TO T HE INCOME OF THE ASSESSEE. AS NOTED BY THE AO ON THE GROSS GOLD (MO D) OLD ORNAMENTS WEIGHING 259088 GMS ASSESSEE HAD SHOWN GA IN AT 20288.186 GMS WHICH IS AVERAGE 7.83%. THE AO WORKE D OUT THE GAIN AT 25908 GMS WHICH IS AT 10% OF THE GROSS WEIG HT OF THE OLD ORNAMENTS GIVEN TO THE REFINERY AND ACCORDINGLY MAD E ADDITION BY HOLDING THAT THE ASSESSEE HAS SUPPRESSED THE MELTIN G GAIN TO THE EXTENT OF 5620.60 GMS. THE AO ADOPTED THE AVERAGE PRICE/GM AT RS.1510.50 AND ACCORDINGLY MADE ADDITION OF RS.84,8 9,937/-. THE LD.CIT(A) CONFIRMED THE ADDITION. 62 8.37 THE CONTENTION OF THE ASSESSEE IS THAT RECORDS ARE MAINTAINED BY THE ASSESSEE FIRM IN RESPECT OF THE ORNAMENTS G IVEN FOR REFINING. HOWEVER, IF THE KARIGARS HAVE NOT MAINTAINED THE RE CORD THE ASSESSEE CANNOT BE HELD RESPONSIBLE FOR THAT. ANOT HER PLANK OF ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS THA T ASSESSEE IS FOLLOWING A PARTICULAR METHOD OF MAINTAINING THE RE CORD WHICH IS AS PER THE QUANTITATIVE DETAILS AND THE SAME HAS BEEN ACCEPTED FOR NUMBER OF YEARS BY THE DEPARTMENT WITHOUT QUESTIONI NG ANYTHING AND THERE IS NO JUSTIFICATION IN THE A.Y. 2009-010 TO ABRUPTLY REJECT THE METHOD ADOPTED BY THE ASSESSEE AND ESTIMATE THE ALLEGED SUPPRESSED MELTING GAIN. FROM THE CHART FILED BY T HE ASSESSEE WE FIND THAT ASSESSEE HAS MAINTAINED THE RECORD AS UND ER : SUMMA RISED FORMAT RAW MATERIAL/DIAMON D RAW MATERIAL BULLION ORNAMENTS BALANCE WITH KARIGAR BALANCE WITH POLICE TOTAL LESS: OUTSTANDING UNDER GOLD DEPOSIT SCHEME/PUNE STOCK ONE STOCK DETAILS OPENING STOCK 4,935.248 155,458.192 173,318.024 -- 965.450 334,676.91 215871.367 118,805.55 PURCHASES/RECEIPTS (INCLUDING MELTING GAIN) 497,849.573 4,027,115.753 3,895,818.847 458,643.310 8,879,427.48 392438.505 8,486,988.98 TOTAL 502,784.821 4,182,573.945 4,069,136.871 458,643.310 965.450 9,214,104.39 7 608,309. 872 8,605,794.525 SALES/ISSUES 497,603.831 4,048,277.378 3,864,068.97 426,854.95 8,836,805.12 276145.968 8,560,659.16 CLOSING BALANCE 5,180.990 134,296.567 205,067.906 31,788.360 965.450 377,299.27 332163.904 45,135.37 8.38 WE FIND FORCE IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. WE HAVE PERUSED THE MONTH-WISE BREAK UP OF THE MELTING GAIN DECLARED BY THE ASSESSEE AND FIND THAT THERE IS VARIATION. WE ALSO FIND FORCE IN THE ARGUMENT OF T HE LD. COUNSEL FOR THE ASSESSEE THAT WHEN ASSESSEE IS MAINTAINING THE RECORD SHOWING THE OLD ORNAMENTS ISSUED FOR REFINING PURPO SE ON THE WEIGHT BASIS, THEN THERE SHOULD HAVE BEEN NO JUSTIF ICATION FOR 63 REJECTING THE SAID RECORD. THE LD.CIT(A) HAS MECHA NICALLY APPROVED THE APPROACH OF THE AO FOR HOLDING THAT AO HAS CORRECTLY WORKED OUT THE MELTING GAIN. WE FIND THAT THE AO H AS ATTACHED THE CHART TO THE ASSESSMENT ORDER BEING ANNEXURE-3 FOR THE PERIOD APRIL 2008 TO MARCH 209. WE ALSO FIND THAT AO HAS MADE B REAK UP FOR TWO PERIODS, I.E. 01-04-2008 TO 28-11-2008 AND 28-1 1-2008 TO 31- 03-2009. HOW THE PERIOD CAN BE BIFURCATED FOR WORK ING OUT THE YEARLY AVERAGE IS NOT KNOWN . WE ALSO FIND FORCE I N THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT WHEN OLD O RNAMENTS ARE PURCHASED FROM THE THIRD PARTIES, THE PURITY OF THE GOLD IS DETERMINED BY USING KASAUTI WHICH IS ONE STONE. TH ERE IS NO OTHER SCIENTIFIC METHOD WHEREBY IT CAN BE CONCLUDED THAT THE GAIN ESTIMATED AT THE TIME OF PURCHASE OF THE OLD ORNAME NT (MOD) WAS PERFECT. MOREOVER, THE ASSESSEE IS CONSISTENTLY FO LLOWING THE PARTICULAR METHOD AND THAT METHOD HAS NEVER BEEN QU ESTIONED BY THE REVENUE. IN OUR OPINION, THERE IS NO JUSTIFICATION TO SUPPORT THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LD.CIT (A) IN RESPECT OF ALLEGED SUPPRESSION OF THE MELTING GAIN. WE ACCORDINGLY DELETE THE SAID ADDITION. IN THE RESULT, RESPECTIV E GROUNDS TAKEN BY THE ASSESSEE ARE ALLOWED. 9. GROUNDS OF APPEAL NO.1(E) AND 5 TO 5.3 FILED BY THE ASSESSEE RELATES TO THE DISALLOWANCE OF GENERATOR MAINTENANC E. EXPENSES OF RS.12,44,644/-. 9.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE HAD INCURRED AN EXPENDITURE OF RS.16,30,963/- ON THE RUNNING AND MAINTENANCE OF 64 GENERATOR AS AGAINST RS.5,11,074/- AND RS.5,99,972/ - RESPECTIVELY INCURRED IN THE PRECEDING 2 YEARS. OUT OF THE ABOV E AMOUNT, THE ASSESSING OFFICER TREATED RS. 1 LAKH TOWARDS RESIDE NTIAL PORTION AND REST RS.15,30,963/- TOWARDS BUSINESS PURPOSES FOR S ELF AND FOR SISTER CONCERNS. SINCE THE ASSESSEE HAS NOT RECOVERED ANY AMOUNT FROM THE SISTER CONCERNS, THE ASSESSING OFFICER DISALLOW ED 50% OF THE SAME PRESUMING THAT IT SHOULD HAVE BEEN RECOVERED B Y THE ASSESSEE FROM SISTER CONCERNS. THUS, THE ASSESSING OFFICER MADE ADDITION OF RS. 1 LAKH PLUS RS.7,65,481/-, I.E. RS.8,65,481/-. 9.2 IN APPEAL THE LD.CIT(A) REDUCED THE ABOVE DISAL LOWANCE FROM 50% TO 15% OF THE TOTAL EXPENDITURE INCURRED O N GENERATOR EXPENSES BY OBSERVING AS UNDER : 33. THE AO HAD DISALLOWED RS.8,65,481/- VIDE PARA 19 OF HIS ORDER. HOWEVER, IT WAS NOT ADDED BACK WHILE COMPUTI NG THE TOTAL INCOME. LATER, THE ERROR WAS RECTIFIED VIDE AN ORDER DT. 23/01/2012 U/S. 154 OF THE ACT. FACTS OF THE CASE REVEAL THAT GR OUND FLOOR AND 2 ND FLOOR WERE USED BY GROUP CONCERNS AND PARTNERS RESP ECTIVELY. TENANTS ARE PAYING RENT WHICH ACCORDING TO THE APPE LLANT IS AN ALL INCLUSIVE RENT. HOWEVER, KEEPING IN VIEW THE QUANTU M OF RENT RECEIVED FROM THE TENANT SISTER CONCERNS, APPELLANT 'S ARGUMENT THAT THE RENT ALSO INCLUDED PROVIDING GENERATOR SERVICES DOES NOT SOUND CONVINCING. TAKING SIMILAR STAND AS WAS TAKEN IN TH E CASE OF ELECTRICITY AND TELEPHONE EXPENSES, I AM OF THE OPINION THAT DI SALLOWANCE OF 15% OF EXPENSES WILL MEET THE END OF THE JUSTICE. HENC E, 15% OF TOTAL EXPENSES OF RS.16,30,963/- I.E. RS.2,44,644/ - IS DISALLOWED. APPELLANT GETS A RELIEF OF RS. 6,20,837/-. 9.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 9.4 THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALL ENGED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE CIT(A) HAS NOT GIVEN ANY BASIS OR JUSTIFICATION FOR SUSTAINING THE ADDI TION. HE SUBMITTED THAT THE ASSESSEE OWNS 2 SHOWROOMS AT 169, 189 JOHR I BAZAR, 65 JALGAON, ONE IS NEWLY CONSTRUCTED AND THE OTHER IS OLD ONE. SECOND FLOOR OF THE BUILDING WHICH IS APPROXIMATELY 1/3 RD AREA IS USED FOR RESIDENCE OF THE PARTNERS. THE GROUND FLOOR WHICH IS ALSO APPROXIMATELY 1/3 RD AREA HAS BEEN LET OUT TO SISTER CONCERNS AND FIRST FLOOR IS USED FOR OWN BUSINESS. THE NEW SHOWROOM I S FULLY USED FOR BUSINESS PURPOSES. HE SUBMITTED THAT THE GENERATOR HAD TO BE USED FOR THE FIRM AND THERE WAS HARDLY ANY SUBSTANTIAL U SE THEREOF FOR THE RESIDENCE OF THE PARTNERS/TENANTS AND THEREFORE NO DISALLOWANCE IS WARRANTED. THE INCREASE IN EXPENDITURE WAS DUE TO LONG USE OF LOAD SHEDDING BESIDES INCREASED COST OF DIESEL ETC., HE SUBMITTED THAT THE ASSESSEE HAS CHARGED RENT TO THE TENANTS FOR TH E PROPERTY LET OUT WHICH WAS INCLUSIVE OF THE FACILITY OF GENERATOR AN D HENCE THE RENT RECEIVED COVERS SUCH EXPENSES AND THEREFORE NO DISA LLOWANCE ON THIS ACCOUNT IS JUSTIFIED. FURTHER, NO SUCH DISALL OWANCE IS MADE IN THE PAST. THEREFORE, THE DISALLOWANCE OF RS.2,44,6 44/- CONFIRMED BY THE CIT(A) BEING RESULT OF ESTIMATE WITHOUT ANY BAS IS SHOULD BE CANCELLED. 9.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A) ON THIS I SSUE. 9.6 AFTER HEARING BOTH THE SIDES, WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF THE CIT(A). WE FIND FORCE IN THE OBSE RVATION OF THE LD.CIT(A) THAT THE ARGUMENT OF THE ASSESSEE THAT RE NT ALSO INCLUDED PROVIDING GENERATOR SERVICES DOES NOT SOUND CONVINC ING. IN ANY CASE, THE LD.CIT(A) HAS ALREADY RESTRICTED THE DISA LLOWANCE TO 15% OF THE TOTAL EXPENSES OF RS.16,30,963/-, WHICH IN O UR OPINION, IS 66 REASONABLE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, THE AB OVE GROUNDS BY THE ASSESSEE ARE DISMISSED. 10. GROUNDS OF APPEAL NO.1(F) AND 6 TO 6.2 BY THE A SSESSEE RELATE TO DISALLOWANCE OF INTEREST ON LOAN TO R.K. OSWAL G RAPHICS PVT. LTD., AMOUNTING TO RS.3 LAKHS. 10.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED T HAT THE ASSESSEE HAS ADVANCED A SUM OF RS.25 LAKHS TO R.K. OSWAL GRA PHICS PVT. LTD., ON 29-09-208 AND NO INTEREST HAS BEEN CHARGED . ON BEING QUESTIONED BY THE ASSESSING OFFICER, IT WAS SUBMITT ED THAT THE ASSESSEE HAD ADVANCED A SUM OF RS.25 LAKHS TO R.K. OSWAL GRAPHICS PVT. LTD., FOR THE PURPOSE OF PRINTING CAL ENDARS, HOWEVER, THE TRANSACTION DID NOT MATERIALISE AND THE BALANCE REMAINED OUTSTANDING. CONSIDERING THE TRADING NATURE OF THE ADVANCE GIVEN, THE ASSESSEE HAS NOT CHARGED ANY INTEREST TO THE SA ID PARTY. HOWEVER, IN SUBSEQUENT YEARS IT HAS CHARGED 12% PER ANNUM TO THE SAID PARTY. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT THE CHARGING OF INTEREST NEXT YEAR DOES NOT COMPENSATE THE NON CHARGING OF INTEREST DURING THE YEAR. HE ACCORDINGLY DISALL OWED AN AMOUNT OF RS.3 LAKHS BEING INTEREST @12% ON RS.25 LAKHS. 10.2 IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF T HE ASSESSING OFFICER. HE OBSERVED THAT THE ASSESSEE DID NOT EXPL AIN SATISFACTORILY 67 THE TRADING NATURE OF ADVANCE AS CLAIMED BY IT. SIN CE THE ASSESSEE HAS PAID INTEREST ON BORROWED FUNDS AND HAS CHARGED INTEREST FROM R.K. OSWAL GRAPHICS PVT. LTD. IN SUBSEQUENT YEARS, THEREFORE, THERE WAS NO JUSTIFICATION FOR NOT CHARGING INTEREST FOR THIS YEAR. HE ACCORDINGLY UPHELD THE ACTION OF THE ASSESSING OFFI CER. 10.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 10.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T CERTAIN ADVANCES HAVE TO BE GIVEN IN THE NORMAL COURSE OF B USINESS. THESE ADVANCES DO NOT CONSTITUTE LOANS FOR THE PURPOSE OF CHARGING INTEREST. IN THIS CASE ALSO, THE ADVANCE WAS GIVEN FOR PRINTING OF CALENDARS IN THE ORDINARY COURSE OF BUSINESS. HOWE VER, WHEN THE TRANSACTION DID NOT MATERIALISE, THE ASSESSEE ON IT S OWN IN SUBSEQUENT YEARS HAD STARTED CHARGING INTEREST. SI NCE THE ADVANCE GIVEN WAS A TRADE ADVANCE, THEREFORE, THE QUESTION OF CHARGING INTEREST DO NOT ARISE AND AS SUCH THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) IS UNWAR RANTED. 10.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICE R AND THE CIT(A). 10.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. THE SUBMISSION OF THE ASSESSEE BEFORE THE ASSESSING OFF ICER THAT AN ADVANCE OF RS.25 LAKHS WAS GIVEN TO R.K. OSWAL GRAP HICS PVT. LTD. 68 FOR THE PURPOSE OF PRINTING CALENDARS IS NOT DISPUT ED BY THE REVENUE. THE GRIEVANCE OF THE REVENUE IS THAT BORROWED FUNDS HAVE BEEN GIVEN TO A PARTY AND NO INTEREST HAS BEEN CHARGED F OR THE YEAR WHEREAS THE ASSESSEE HAS CHARGED INTEREST IN SUBSEQ UENT YEARS FROM THE SAID PARTY. WE DO NOT FIND ANY LOGIC OF THE RE VENUE ON THIS ISSUE. ONCE THE ADVANCE IS CONSIDERED AS A TRADE A DVANCE, THEN NOTIONAL INTEREST ON SUCH ADVANCE IN OUR OPINION CA NNOT BE ADDED. SINCE THE PARTY DID NOT FULFIL THE CONTRACTUAL OBLI GATIONS THE ASSESSEE HAS CHARGED INTEREST IN SUBSEQUENT YEARS. HOWEVER, FOR THE IMPUGNED YEAR, WE FIND NO JUSTIFICATION ON THE PART OF THE REVENUE TO FORCE THE ASSESSEE TO CHARGE INTEREST ON SUCH TRADE ADVANCE. IN THIS VIEW OF THE MATTER, WE SET-ASIDE THE ORDER OF THE L D.CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION . 11. GROUNDS OF APPEAL NO.1(G) AND 7 TO 7.2 BY THE A SSESSEE RELATES TO DISALLOWANCE OF INTEREST AMOUNTING TO RS .7,51,171/-. 11.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED T HAT THE ASSESSEE HAS INVESTED THE BUSINESS FUNDS TOWARDS CONSTRUCTIO N OF GUEST HOUSE. THE OPENING BALANCE WAS RS.93,07,328/- AND THE CLOSING BALANCE WAS RS.1,57,31,726/-. ON BEING QUESTIONED BY THE ASSESSING OFFICER, IT WAS SUBMITTED THAT THE EXPEND ITURE WAS INCURRED FOR CONSTRUCTING THE GUEST HOUSE AND NOT F OR EXPANSION OF EXISTING BUSINESS OR STARTING ANY NEW BUSINESS AND THEREFORE WERE NOT CAPITALISED. THEREFORE, THE PROVISIONS OF SECT ION 36(1)(III) WILL NOT APPLY. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH 69 THE EXPLANATION GIVEN BY THE ASSESSEE. HE HELD THA T IF THE BORROWED FUNDS WERE NOT UTILISED FOR CONSTRUCTION OF THE GUE ST HOUSE THE FIRM WOULD NOT HAVE REQUIRED THE BORROWED FUNDS TO THIS EXTENT. HE, THEREFORE, DISALLOWED PROPORTIONATE INTEREST AMOUNT ING TO RS.15,02,342/- U/S.14A OF THE I.T. ACT. 11.2 IN APPEAL THE LD.CIT(A) DELETED THE ADDITION M ADE U/S.14A. HOWEVER, HE DISALLOWED AN AMOUNT OF RS.7,51,151/- B EING 50% OF THE INTEREST PAID OF RS.15,02,342/- ON THE PRESUMPT ION OF POSSIBLE USE OF THE GUEST HOUSE BY THE SISTER CONCERNS U/S.3 6(1)(III) OF THE I.T. ACT. 11.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 11.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE WORK OF CONSTRUCTION OF THE GUEST HOUSE/STAFF QUARTERS WAS IN PROGRESS AS ON 31-03-2009 AND THEREFORE THE QUESTION OF ITS POSSIB LE USE BY THE SISTER CONCERNS DOES NOT ARISE. THEREFORE, WHEN TH E CIT(A) AND THE ASSESSING OFFICER ACCEPTED THAT THE GUEST HOUSE WAS FOR THE USE OF THE ASSESSEE, NO DISALLOWANCE WAS WARRANTED OF THE INTEREST FOR THE REASON THAT THE QUESTION OF USING BY THE SISTER CON CERNS DOES NOT ARISE AT ALL. THEREFORE, THE ADDITION OF RS.7,51,1 51/- SUSTAINED BY THE CIT(A) SHOULD BE DELETED. IN HIS ALTERNATE CON TENTION THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT OF DISALLOWANCE OF INTEREST BE TREATED AS PART OF COST OF THE GUEST HOUSE AND 70 DEPRECIATION SHOULD BE ALLOWED THEREON DURING THE Y EAR OF COMPLETION OF THE GUEST HOUSE. 11.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND STRONGLY RELIED ON THE ORDER OF THE ASSESSING OFFIC ER AND CIT(A) ON THIS ISSUE. 11.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. ADMITTEDLY, THE CONSTRUCTION WORK OF THE GU EST HOUSE/STAFF QUARTERS AS STATED BY THE LD. COUNSEL FOR THE ASSES SEE WAS IN PROGRESS. SINCE THE BORROWED FUNDS WERE UTILISED F OR CONSTRUCTION OF A CAPITAL ASSET, THEREFORE, SUCH INTEREST HAS TO BE DEBITED TO THE CAPITAL ASSET AND NOT TO THE REVENUE ACCOUNT. SO F AR AS THE CLAIM OF DEPRECIATION ON THE GUEST HOUSE IS CONCERNED THE AS SESSEE MAY RAISE THE ISSUE BEFORE THE ASSESSING OFFICER ONCE CONSTRU CTION OF THE SAME IS COMPLETED AND THE ASSESSING OFFICER MAY TAKE A V IEW AT THAT TIME. SINCE THIS PLEA OF THE LD. COUNSEL FOR THE A SSESSEE IS PREMATURE AT THIS TIME, THEREFORE, WE CANNOT GIVE A NY DIRECTION ON THIS ISSUE. THE ASSESSEE MAY RAISE THIS PLEA AT AP PROPRIATE TIME AT APPROPRIATE LEVEL. THIS GROUND BY THE ASSESSEE IS ACCORDINGLY DISMISSED. 12. GROUNDS OF APPEAL NO.1(I) AND 9 TO 9.4 BY THE A SSESSEE RELATE TO DISALLOWANCE OF INTEREST TO PARTNERS AMOUNTING T O RS.18,92,421/-. 12.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT THE ASSESSEE FIRM HAS PAID INTEREST ON GDS TO PARTNER S HRI ISHWARLAL I. 71 LALWANI AT RS.45,31,460/- WHEREAS ISHWARLAL HAS PAI D INTEREST TO GOLD DEPOSITORS AT RS.26,39,039/-. HE OBSERVED THA T THE PARTNER DOES NOT DEAL WITH GOLD ORNAMENTS BUSINESS IN HIS I NDIVIDUAL CAPACITY. IT IS THE FIRM WHICH DEALS WITH GOLD ORN AMENTS BUSINESS. THE FIRM AND ISHWARLAL LALWANI OBTAINED THE GOLD FR OM THE PUBLIC ON SAME TERMS AND CONDITIONS AND PAY INTEREST ON SA ME RATE BUT CERTAIN GOLD IS ACCEPTED IN THE PARTNERS ACCOUNT B Y THE STAFF OF THE FIRM AND THEN THE PARTNER GIVES IT TO THE FIRM ON H IGHER RATE AND IN THIS WAY THE FIRM PAYS MORE INTEREST TO THE PARTNER . ACCORDING TO THE ASSESSING OFFICER, IF THE SAME GOLD WAS DIRECTL Y ROUTED THROUGH THE FIRM, THE FIRM WOULD HAVE PAID ONLY RS.26,39,03 9/-. THUS, FIRM HAS PAID MORE INTEREST TO THE PARTNER THAN REQUIRED IN THE GARB OF CAPITAL BROUGHT IN BY THE PARTNER IN THE FIRM AS GD S. ON BEING QUESTIONED BY THE ASSESSING OFFICER, IT WAS STATED THAT THE ASSESSEE HAS PAID INTEREST @9% PER ANNUM ON GDS TO ISHWARLAL LALWANI AS PER TERMS OF THE PARTNERSHIP DEED AND IT IS BELOW 1 2% WHICH IS PERMISSIBLE U/S.40(B) OF THE I.T ACT. THEREFORE, T HE QUESTION OF DISALLOWANCE OF ANY INTEREST TO PARTNERS DOES NOT A RISE. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EX PLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT IT IS ONLY A COL OURABLE DEVICE AND HENCE THE EXCESS INTEREST PAID IS DISALLOWABLE EVEN U/S.40A(2)(B). RELYING ON VARIOUS DECISIONS THE AO DISALLOWED THE DIFFERENCE OF RS.18,92,421/- BEING EXCESS INTEREST PAID TO THE PA RTNER. 12.2 IN APPEAL THE LD.CIT(A) CALLED FOR A REMAND RE PORT FROM THE ASSESSING OFFICER ON THE BASIS OF VARIOUS SUBMISSIO NS MADE BEFORE 72 HIM. AFTER CONSIDERING THE REMAND REPORT AND THE S UBMISSION OF THE ASSESSEE TO SUCH REMAND REPORT HE UPHELD THE DISALL OWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER : 42. I HAVE GONE THROUGH THE AO'S ORDER, REMAND REP ORT AND APPELLANT'S SUBMISSIONS. THE AO HAS ALLOWED INTERES T ON THE PARTNER'S CONTRIBUTING CAPITAL IN THE FORM OF GOLD (RECEIVED BY HIM UNDER HIS GOLD DEPOSIT SCHEME) ONLY TO THE EXTENT HE HAS PAID TO HIS DEPOSITORS. HE HAS ACCORDINGLY DISALLOWED THE DIFFERENCE OF RS.1 8,92,421/-. WHILE IT IS NOT UNCOMMON OR UNUSUAL IN PARTNER'S CONTR IBUTING CAPITAL IN THE FIRM BY MAKING PERSONAL BORROWING, HE WOULD BE ENTITLED TO RECEIVE INTEREST FROM FIRM AT THE RATE SP ECIFIED IN THE PARTNERSHIP DEED, SUBJECT TO PROVISIONS OF SECTION 4 0 (B) OF THE ACT AND HE MAY IN TURN CLAIM DEDUCTION IN HIS PERSONAL RE TURN FOR THE INTEREST PAID BY HIM TO THE PARTIES FROM WHOM HE HAS BORROWED FUNDS AND UTILIZED IN DEPOSITING THE SAME WITH THE FIRM. HOWEVER, IN THIS CASE THE APPELLANT FIRM IS ALSO ACCEPTING GOLD DEPOSITS UNDER ITS GDS WHILE ONE OF THE PARTNERS HAS ALSO INTRODUCED SUCH A SCHEME. IF THIS IS REGARDED AS PART OF APPELLANT FIRM'S SCHEME ONLY IT WOULD HAVE GOT DEDUCTION ONLY TO THE TENT INTEREST IS PAID TO THE DEPOSITORS. PARTNER TAKING GOLD UNDER GDS AND INTRO DUCING THE SAME AS CAPITAL IN THE APPELLANT FIRM AND CHARGING IN TEREST @9% ON THE PREVAILING VALUE OF GOLD AS AGAINST PAYMENT OF IN TEREST TO THE DEPOSITORS AT THE VALUE OF RS.2,750 PER 10GMS IS NOTHING BUT A COLOURABLE DEVICE TO EVADE TAX. THE FIRM IS ACCEPT ING GOLD FROM PARTNER BUT GDS. HENCE, THE FIRM CANNOT RESORT TO T WO DIFFERENT PRACTICES, I.E. PAYING INTEREST @9% ON THE PREVAILING VALUE OF GOLD TO THE PARTNER AND PAYING INTEREST @9-16.5% ON QUARTERL Y BASIS ON A FIXED VALUE OF RS.2,750 PER 10GM TO OTHER DEPOSITORS. LOOKING THE MATTER FROM THIS ANGLE, IN MY OPINION, THE AO IS JUSTI FIED IN DISALLOWING THE EXCESS INTEREST OF RS.18,92,421/- APPLYI NG THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT. THE DISALLOWA NCE OF RS.18,92,421/- OUT OF INTEREST PAID TO THE PARTNER IS ACCORDINGLY, CONFIRMED. 12.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 12.4 THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OPPO SED THE ORDER OF THE CIT(A). HE SUBMITTED THAT AS FAR AS THE FIR M AND PARTNER ARE CONCERNED, THE INTEREST ON THE CAPITAL CONTRIBUTED BY THE PARTNER IS GOVERNED BY SECTION 40(B) OF THE ACT WHICH PROVIDES THAT SIMPLE INTEREST UPTO 12% PER ANNUM ON THE CAPITAL CONTRIBU TED BY THE PARTNER WILL BE ALLOWED AS DEDUCTION WHILE COMPUTIN G THE INCOME OF 73 THE FIRM. WHETHER THE CAPITAL IS OUT OF OWN FUNDS O F THE PARTNERS OR IS BORROWED BY THE PARTNER HAS GOT NOTHING TO DO WI TH THE RATE AT WHICH INTEREST IS ALLOWABLE TO THE PARTNER U/S.40A( B). SINCE THE ASSESSEE FIRM HAD PAID INTEREST @9% P.A. TO ONE OF ITS PARTNERS WHICH IS ALSO IN ACCORDANCE WITH THE PARTNERSHIP DE ED AND IT IS WITHIN THE LIMIT PRESCRIBED U/S.40(B), THEREFORE, T HE QUESTION OF DISALLOWANCE OF INTEREST PAID BY THE FIRM TO ITS PA RTNER DOES NOT ARISE. HE SUBMITTED THAT FOR ALLOWING INTEREST TO T HE PARTNER THE REASONABLENESS OF SUCH AMOUNT IS NOT TO BE LOOKED I NTO AND ANY AMOUNT PAID BELOW THE CEILING OF 12% INTEREST IS AL LOWABLE AS A DEDUCTION. HE SUBMITTED THAT THE ASSESSEE FIRM COU LD RECEIVE ADDITIONAL GOLD DEPOSITS THAN WHAT IT COULD HAVE RE CEIVED UNDER ITS OWN GOLD DEPOSIT SCHEME ON ACCOUNT OF GDS STARTED B Y ONE OF ITS PARTNERS. THIS HAS RATHER BENEFITTED THE FIRM AS T HE INTEREST PAID BY IT TO THE PARTNER @9% WAS CERTAINLY MUCH LESS THAN THE INTEREST WHICH IT WOULD HAVE PAID TO THE BANK FOR GETTING LO AN TO PURCHASE THAT MUCH QUANTITY OF GOLD. THEREFORE, THE PROVISI ONS OF SECTION 40A(2)(B) WOULD NOT APPLY THERE. HE ACCORDINGLY SU BMITTED THAT THE DISALLOWANCE SHOULD BE DELETED. 12.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A) 12.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND IN THE INSTANT CASE THE ASSESSING OFFICER MADE ADDITION OF RS.18,92,421/- 74 BEING THE DIFFERENCE BETWEEN THE INTEREST PAID BY T HE FIRM TO THE PARTNER AT RS.45,31,460/- AND THE INTEREST PAID BY THE PARTNER SHRI ISHWARLAL I. LALWANI TO THE CUSTOMERS ON GDS. ACCO RDING TO THE ASSESSING OFFICER, IF THE GOLD WOULD HAVE BEEN DIR ECTLY ROUTED THROUGH THE FIRM, THE FIRM WOULD HAVE SAVED RS.18,9 2,421/-. ALTHOUGH THE FIRM HAS PAID INTEREST @9%, HOWEVER, I NDIRECTLY IT HAS BENEFITTED THE PARTNER AND THEREFORE THIS IS A COLO URABLE DEVICE AND THE FIRM GAVE EXCESS INTEREST OF RS.19,82,421/- TO THE PARTNER. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SINCE THE ASSESSEE FIRM HAD GIVEN INTEREST @9% ON THE GOLD DE POSIT BY THE PARTNER WHICH IS BELOW THE PRESCRIBED LIMIT OF 12% AS PER THE PARTNERSHIP DEED, THEREFORE, THERE SHOULD NOT BE AN Y DISALLOWANCE U/S.40A(2)(B). FURTHER, ACCORDING TO THE LD. COUNS EL FOR THE ASSESSEE, THE ASSESSEE FIRM COULD RECEIVE ADDITIONA L GOLD DEPOSIT THAN WHAT IT COULD HAVE RECEIVED UNDER ITS OWN GOLD DEPOSIT SCHEME ON ACCOUNT OF GOLD DEPOSIT SCHEME STARTED BY ONE OF ITS PARTNER. IT IS ALSO THE SUBMISSION OF THE LD. COUNSEL FOR THE A SSESSEE THAT THE FIRM WOULD HAVE PAID HIGHER AMOUNT OF BANK INTEREST BY GETTING THAT MUCH QUANTITY OF GOLD THAN IT PAID TO THE PARTNER O N ACCOUNT OF SUCH QUANTITY OF GOLD. 12.7 WE FIND MERIT IN THE ABOVE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE. THERE IS NO BAR FOR THE PARTNER TO O BTAIN THE GOLD UNDER THE GOLD DEPOSIT SCHEME WHICH WAS SIMULTANEOU SLY DONE BY THE ASSESSEE FIRM ALSO. AS LONG AS THE INTEREST PA ID TO THE PARTNER ON SUCH GOLD UNDER THE GOLD DEPOSIT SCHEME IS WITHIN T HE PERMISSIBLE 75 LIMIT, THERE SHOULD NOT BE ANY DISALLOWANCE. SINCE IN THE INSTANT CASE THE FIRM HAS PAID INTEREST @9% ON THE GOLD DEP OSITED BY THE PARTNER OBTAINED FROM THE CUSTOMERS UNDER THE GOLD DEPOSIT SCHEME ACCOUNT, THEREFORE, IT IS IMMATERIAL AS TO AT WHAT RATE OF INTEREST THE PARTNER HAS PAID TO THE CUSTOMERS. IN THIS VIEW OF THE MATTER, WE SET-ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION. THIS GRO UND BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 13. GROUNDS OF APPEAL NO.1(J) AND 10 TO 12 BY THE A SSESSEE RELATE TO DENIAL OF DEPRECIATION ON WINDMILL AMOUNTING TO RS.31,133/-. 13.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT DEPRECIATION ON ADDITION TO WINDMILLS WERE DISALLOW ED IN THE A.Y. 2008-09. THE ASSESSEE FIRM HAD PREFERRED AN APPEAL . BEFORE FINALISING THE ASSESSMENT FOR THE IMPUGNED ASSESSME NT YEAR, THE ASSESSING OFFICER RECEIVED THE ORDER OF THE CIT(A) FOR A.Y. 2008- 09 ACCORDING TO WHICH HE ALLOWED DEPRECIATION IN RE SPECT OF THOSE ADDITIONAL ITEMS AT 10%, I.E. THE RATE APPLICABLE T O BUILDING AND NOT AT 80% BEING THE RATE APPLICABLE TO WINDMILL. FOLL OWING THE ORDER OF THE CIT(A) FOR A.Y. 2008-09, THE ASSESSING OFFIC ER ASKED THE ASSESSEE TO FILE A REVISED COMPUTATION ON THE BASIS OF THE ORDER OF THE CIT(A). THE ASSESSING OFFICER ACCORDINGLY ALLO WED DEPRECIATION OF RS.2,56,85,779/- AS AGAINST RS.2,57 ,16,912/- CLAIMED BY THE ASSESSEE. 76 13.2 IN APPEAL THE LD.CIT(A) FOLLOWING HIS ORDER FO R A.Y. 2008- 09 IN ASSESSEES OWN CASE CONFIRMED THE DISALLOWANC E OF RS.31,133/-. 13.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 13.4 THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PAGES 520 TO 524 OF THE PAPER BOOK DREW THE ATTENTION OF THE BEN CH TO THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 200 8-09 WHEREIN THE TRIBUNAL HAS RESTRICTED THE RATE OF DEPRECIATIO N OF PREPARATION OF APPROACH ROADS TO 10% AND ALLOWED THE DEPRECIATION ON ELECTRICAL YARD FENCING AT 80% AS CLAIMED BY THE ASSESSEE. HE ACCORDINGLY REQUESTED THAT THE ASSESSING OFFICER MAY BE DIRECTE D TO FOLLOW THE ORDER OF THE TRIBUNAL AND ALLOW DEPRECIATION ACCORD INGLY. 13.5 THE LD. DEPARTMENTAL REPRESENTATIVE WHILE SUPP ORTING THE ORDER OF THE CIT(A) FAIRLY SUBMITTED THAT HE HAS NO OBJECTION IF THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFF ICER TO FOLLOW THE DIRECTION OF THE TRIBUNAL AND ALLOW DEPRECIATION AS PER LAW. 13.6 AFTER HEARING BOTH THE SIDES, WE FIND THE ASSE SSING OFFICER FOLLOWING THE ORDER OF THE CIT(A) FOR A.Y. 2008-09 DISALLOWED AN AMOUNT OF RS.31,133/- OUT OF DEPRECIATION ON WINDMI LLS. THE CIT(A) FOLLOWING THE ORDER FOR A.Y. 2008-09 UPHELD SUCH DISALLOWANCE. WE FIND THE TRIBUNAL IN ASSESSEES O WN CASE FOR A.Y. 2008-09 HAS DIRECTED THE ASSESSING OFFICER TO CALCU LATE DEPRECIATION ON PREPARATION OF APPROACH ROADS TO 10% AND ALLOW D EPRECIATION ON 77 ELECTRICAL YARD FENCING AT 80%. WE, THEREFORE, RES TORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO RECOMPUTE THE DEPRECIATION ON WINDMILL IN THE LIGHT OF THE DIRECT ION OF THE TRIBUNAL FOR A.Y. 2008-09. WE HOLD AND DIRECT ACCORDINGLY. THIS GROUND BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 14. GROUNDS OF APPEAL NO.1(B) AND 1(C) AND 3 TO 3.4 BY THE ASSESSEE AND GROUNDS OF APPEAL NO.1 BY THE REVENUE RELATE TO THE DISALLOWANCE U/S.14A AND 36(1)(III) OF THE I.T. ACT . 14.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT THE ASSESSEE HAS INVESTED RS.42.75 CRORES TOWARDS SHARE APPLICATION MONEY IN RAJMAL LAKHICHAND JEWELLERS PVT. LTD., OUT OF WHICH OPENING BALANCE WAS RS.28 CRORES AND DURING THE YEA R FURTHER AMOUNT OF RS.14.77 CRORES WAS INVESTED. HE OBSERVE D THAT THE ASSESSEE IS NOT ONLY UTILISING THE BUSINESS FUNDS O F THE FIRM BUT ALSO UTILISING THE SERVICES OF THE EMPLOYEES, ELECTRICIT Y, TELEPHONE, FURNITURE, COMPUTER, STATIONERY ETC. FOR MAKING THE ENTRIES IN BOOKS OF ACCOUNT. THUS, BUSINESS FUNDS AND SERVICES OF T HE DRIVERS ARE USED FOR BUSINESS PURPOSE FOR TAXABLE INCOME AND IN VESTMENT IN SHARES WHICH WILL YIELD DIVIDEND INCOME AND WHICH I S EXEMPT U/S.10(38) OF THE I.T. ACT. HE, THEREFORE, ASKED TH E ASSESSEE AS TO WHY DISALLOWANCE SHOULD NOT BE MADE U/S.14A R.W. RU LE 8D. IT WAS EXPLAINED BY THE ASSESSEE THAT IT HAS NO SUCH INCOM E WHICH IS EXEMPT AND DOES NOT FORM PART OF THE TOTAL INCOME. THEREFORE, THE QUESTION OF DISALLOWANCE U/S.14A DOES NOT ARISE. H OWEVER, AS 78 REQUIRED BY THE ASSESSING OFFICER, DISALLOWANCE U/S .14A WAS CALCULATED AND FURNISHED BEFORE THE ASSESSING OFFIC ER WHICH ACCORDING TO THE ASSESSEE WAS RS.4,53,72,146/-. TH E ASSESSING OFFICER ACCORDINGLY MADE DISALLOWANCE OF RS.4,53,72 ,146/- U/S.14A TO THE TOTAL INCOME OF THE ASSESSEE. 14.2 IN APPEAL THE LD.CIT(A) JUSTIFIED THE ACTION O F THE ASSESSING OFFICER IN INVOKING THE PROVISIONS OF SECTION 14A O F THE I.T. ACT. HE, HOWEVER, OBSERVED THAT BECAUSE OF DISALLOWANCE U/S.14A, THE ASSESSING OFFICER DID NOT MAKE ANY SEPARATE DISALLO WANCE U/S.36(1)(III) OF THE I.T. ACT. HE OBSERVED THAT A SSESSEE HAS USED BORROWED FUNDS FOR MAKING INVESTMENT OF RS.42.75 CR ORES TOWARDS SHARE CAPITAL OF M/S. RAJMAL LAKHICHAND JEWELLERS P VT. LTD., A GROUP CONCERN TOWARDS SHARE CAPITAL. WHILE RS.28 CR ORE WAS INVESTED TILL 31/03/2008, RS.14.75 CRORE WAS INVEST ED IN JANUARY 2009(AY 2009-10). SHRI. ISHWAR S. LALWANI, WHO IS P ARTNER IN THE ASSESSEE FIRM WITH 40% SHARE IN PROFIT/LOSS HOLDS 8 4.64% SHARE HOLDING OF M/S RLJPL. THE ASSESSEE FIRM HAS ALSO MA DE INVESTMENTS IN SHARES OF OTHER GROUP CONCERNS NAMEL Y RL GOLD (P) LTD. (RS.10,49,69,000); M/S MANRAJ JEWELLERS (P) LT D. (RS. 1,18,25,000) AND M/S MANVI HOLDING (P) LTD. (RS.15, 22,50,000). SHRI. ISHWARLAL LALWANI HOLDS 86.90% SHARES IN M/S MANRAJ JEWELLERS, 99.38% IN M/S R L GOLD (P) LTD AND 99.16 % SHARES IN M/S MANVI HOLDINGS (P) LTD. IN SUM AND SUBSTANCE TH E ASSESSEE FIRM HAS MADE TOTAL INVESTMENT OF RS.84,90,50.800/- . THE ASSESSEE FIRM HAS STATED THAT THE BORROWED FUNDS WERE USED A S INVESTMENTS IN 79 THE GROUP COMPANIES FOR THE PURPOSE OF BUSINESS. H OWEVER, THE. ASSESSEE FIRM'S SUBMISSION IS NOT TENABLE ON MERIT. IT IS ENGAGED IN THE BUSINESS OF JEWELLERY AND INVESTMENT IN SHARES OF THE GROUP CONCERNS IS NOT ITS BUSINESS. THE ASSESSEE HAS TO M AKE OUT A CASE OF BUSINESS EXPEDIENCY. A PERUSAL OF THE BALANCE SHEE T REVEALS PARTNER'S CAPITAL ACCOUNT AT RS.21,14,935/- ONLY ON WHICH ALSO THE FIRM IS PAYING INTEREST. WHILE SECURED LOANS ACCOUN T FOR RS. 16.66 CRORE, UNSECURED LOANS ACCOUNT FOR RS. 6.36 CRORE O NLY. SUNDRY CREDITORS AMOUNTING TO RS.196.95 CRORE INCLUDE M/S MANRAJ JEWELLERS (P) LTD. (RS. 60.83 CRORE); MANVI HOLDING S (P) LTD. (RS. 4.94 CRORE); R L GOLD (P) LTD (RS. 50.26); R L & SO NS (RS.17.70 CRORE) AND RLJPL (RS. 61.96 CRORE). THIS ACCORDING TO LD.CIT(A) SHOWS CLEARLY THAT THE FIRM HAS USED BORROWED FUNDS FOR MAKING INVESTMENT IN THE GROUP COMPANIES. THE FIRM HAS ALS O ACCEPTED THE FACT THAT BORROWED FUNDS HAVE BEEN USED FOR INVESTM ENT IN SHARES OF ITS CLOSELY HELD GROUP COMPANIES. THE FIRM IS PAYIN G INTEREST ON THE ABOVE MENTIONED FUNDS INCLUDING SUNDRY CREDITORS. T HE APPELLANT ACCORDING TO LD.CIT(A) HAS ALSO MADE LOANS AND ADVA NCES TO THE TUNE OF RS.97.53 CRORE. THE APPELLANT HAS PAID TOTA L INTEREST AMOUNTING TO RS.12.52 CRORE AND RECEIVED AN INTERES T OF RS. 6.44 CRORE. THE APPELLANT HAS FAILED TO PROVE THAT THE S AID INVESTMENT WAS MADE FOR BUSINESS EXPEDIENCY. ALL THE GROUP COMPANI ES IN WHICH INVESTMENTS HAVE BEEN MADE ARE CLOSELY HELD COMPANI ES, BY AND LARGE CONTROLLED BY SHRI. ISHWAR S. LALWANI WHO IS ALSO A PARTNER IN THE APPELLANT FIRM (40% SHARE IN PROFIT/LOSS). THE APPELLANT IS 80 ENGAGED IN TRADING OF BULLION/ORNAMENTS AND MAKING SUCH INVESTMENT IS NOT AN INTEGRAL PART OF ITS BUSINESS. 14.3 ACCORDING TO HIM THE ASSESSEE COULD NOT JUSTIF Y AS TO HOW THE INVESTMENTS IN THE GROUP CONCERNS IN THE FORM OF SH ARE CAPITAL ARE IN THE BUSINESS INTEREST OF THE ASSESSEE AND WHY THE B ORROWED FUNDS INVESTED IN GROUP CONCERNS COULD NOT BE TREATED AS DIVERSION OF BORROWED FUNDS FOR NON BUSINESS PURPOSES AND WHY TH E INTEREST PAID ON THAT SHOULD NOT BE DISALLOWED. AFTER CONSIDERIN G THE VARIOUS SUBMISSIONS FURNISHED BY THE ASSESSEE HE OBSERVED T HAT FUNDS AMOUNTING TO RS.84.90 CRORES HAVE BEEN USED FOR NON BUSINESS PURPOSE IN THE FORM OF INVESTMENT IN SHARE APPLICAT ION MONEY IN GROUP COMPANIES INCLUDING RAJMAL LAKHICHAND JEWELLE RS PVT. LTD., WHILE THE ASSESSEE IS PAYING INTEREST @6% TO SUNDRY CREDITORS THE INTEREST RATE FOR BANK COMES TO BE APPROXIMATELY 13 % (INTEREST OF RS.2.23 CRORE ON BANK LOAN OF RS.16.66 CRORE). HOW EVER, TAKING INTO CONSIDERATION THAT THE ASSESSEE MUST HAVE ALSO USED OTHER FUNDS, AN AVERAGE COST OF BORROWING WAS CALCULATED AS UNDE R : TOTAL INTEREST : RS.12,52,16,339/- BORROWED FUNDS INCLUDING SUNDRY CREDITORS : RS.2,20,19,58,724/- HENCE, ACCORDING TO CIT(A) INTEREST ON RS. 84,90,50 ,800 CRORE COMES OUT TO BE RS.4,82,82,028/-. THE SAID INTEREST OF RS.4,82,82,028/- ACCORDING TO HIM IS DISALLOWABLE U /S 36(1)(III) OF THE ACT FOR USING BORROWED FUNDS FOR NON-BUSINESS P URPOSES. HE NOTED THAT WHILE THE AO IS JUSTIFIED IN DISALLOWING RS. 4,53,72,146/- 81 U/S 14A OF THE ACT, HOWEVER, DISALLOWANCE U/S 36(L) (III) COMES OUT TO BE RS. 4,82,82,028/- I.E. HIGHER BY RS.29,09,882 /-. WHILE INTEREST IS DISALLOWABLE BOTH U/S 14A AND SEC. 36(1)(III) OF THE ACT, IN VIEW OF HIGHER DISALLOWANCE U/S 36(1)(III), WHICH IS FAV OURABLE TO REVENUE, AN ENHANCEMENT NOTICE DATED 02/01/2013 WAS ISSUED BY LD.CIT(A) TO THE ASSESSEE WHO VIDE ITS LETTER DATED 03/01/2013 HAVE REITERATED THAT NO DISALLOWANCE OUT OF INTEREST PAI D WAS JUSTIFIED AND AS SUCH OBJECTED TO THE PROPOSED ENHANCEMENT BY LD. CIT(A). WHILE AOS ACTION U/S.14A WAS HELD AS JUSTIFIED, DI SALLOWANCE OF INTEREST OF RS.4,82,82,028/- HAS BEEN MADE U/S.36(1 )(III) OF THE ACT AS IT IS BENEFICIAL TO THE REVENUE. LD.CIT(A) ACCO RDINGLY MADE ADDITION OF RS.29,09,882/- AND NO SEPARATE ADDITIO N U/S.14A WAS MADE. 14.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 14.5 THE ASSESSEE HAS ALSO TAKEN THE FOLLOWING ADDI TIONAL GROUND : 1] ASSUMING WITHOUT ADMITTING THAT THE INTEREST OF RS.4,82,82,028/- IS DISALLOWABLE U/S 36(L)(III) AS THE BORROWINGS ARE UTILISED FOR INVESTMENT IN SHARES OF THE GROUP COMP ANIES, THE LEARNED CIT(A) FAILED TO APPRECIATE THAT - A. THE ABOVE INTEREST IS ALLOWABLE AS A DEDUCTION UNDE R THE HEAD 'INCOME FROM OTHER SOURCES' AND EVEN THOUGH, THERE I S NO DIVIDEND RECEIVED FROM THESE COMPANIES, THE INTERES T IS ALLOWABLE IN VIEW OF SUPREME COURT DECISION IN [115 ITR 519]. B. THE ALLOWANCE OF THIS INTEREST WOULD RESULT IN THE LOSS UNDER THE HEAD 'INCOME FROM OTHER SOURCES' AND THE SAME OUGHT TO HAVE BEEN SET OFF AGAINST INCOME FROM BUSINESS U/S 71. C. ACCORDINGLY, THERE IS NO ADDITION REQUIRED OF THE ABOVE AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE. 82 THE ASSESSEE SUBMITS THAT THE ADDITIONAL GROUND RAISED IS L EGAL IN NATURE AND AS ALL THE FACTS ARE ON RECORD, THE ASSESSEE R EQUESTS FOR ADMISSION OF THE ABOVE GROUND. 14.6 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ADDITIONAL GROUND IS LEGAL IN NATURE AND ALL THE FA CTS ARE ALSO ON RECORD. RELYING ON THE DECISIONS OF THE HONBLE SU PREME COURT IN THE CASE OF NTPC VS. CIT REPORTED IN 229 ITR 383 (S C) AND IN THE CASE OF JUTE CORPORATION OF INDIA LTD. VS. CIT & AN OTHER REPORTED IN 187 ITR 688 AND THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF AHMEDABAD ELECTRICITY COMPANY REPORTED IN 119 ITR 351 HE SUBMITTED THAT THE ADDITIONAL GROUND S SHOULD BE ADMITTED. 14.7 AFTER HEARING BOTH THE SIDES AND CONSIDERING T HE ADDITIONAL GROUNDS BEING LEGAL IN NATURE, WE ADMIT THE ADDITIO NAL GROUNDS RAISED BY THE ASSESSEE FOLLOWING THE PRINCIPLES LAI D DOWN IN CASE OF NATIONAL THERMAL POWER CORPORATION (SUPRA). 14.8 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T ASSESSEE HAS INVESTED AN AMOUNT OF RS.84,95,15,900/- IN THE SHAR ES OF THE GROUP COMPANIES FROM WHICH NO DIVIDEND WAS RECEIVED. THE DETAILS OF SUCH INVESTMENTS ARE AS UNDER : (A) RAJMAL LAKHICHAND JEWELLERS PVT. LTD. RS.42.75 C RORES (B) R.L. GOLD PVT. LTD., RS.10.49 CRORES (C) MANRAJ JEWELLERS PVT. LTD., RS. 1.18 CRORES (D) MANVI HOLDING PVT. LTD., RS.15.12 CRORES 14.9 REFERRING TO THE BALANCE SHEET AT PAGE 28 OF T HE PAPER BOOK HE SUBMITTED THAT THE CAPITAL OF THE PARTNERS WAS SHOW N AT RS.21,14,935/-, SECURED LOAN AT RS.16.66 CRORES, UN SECURED LOAN AT 83 RS.6.36 CRORES AND SUNDRY CREDITORS OF RS.196.95 CR ORES. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS NO DIVID END IS RECEIVED BY THE ASSESSEE ON THE SHARES HELD IN THE GROUP COM PANIES AND THERE BEING NO EXEMPT INCOME, THEREFORE, THE QUESTION OF DISALLOWANCE U/S.14A DOES NOT ARISE. FOR THE ABOVE PROPOSITION, HE REFERRED TO THE FOLLOWING DECISIONS : I. SHIVA INDUSTRIES AND HOLDINGS LTD. [59 DTK 182 (I TAT CHENNAI)] II. ACIT V. LAFARGE INDIA HOLDING LTD. [19 SOT 121 (MUM)] III. SHRI SHAMKAMAL FINANCE AND LEASING CO. [21 SOT 42 (MUM)] IV. ITAT, PUNE SHRI GOYAL ISHWARCHAND KISHORILAL [ITA NO. 422/PN/13] HE FURTHER SUBMITTED THAT THE INVESTMENT IN GROUP C OMPANIES WAS MADE FROM THE BUSINESS INCOME ONLY. THEY COULD OBT AIN THE BANK LOAN FOR THEIR BUSINESS PURPOSES AND IN TURN THEY C OULD SUPPLY BULLION AND ORNAMENTS TO THE ASSESSEE. THEREFORE, THE ASSESSEE COULD INCREASE ITS TURNOVER SUBSTANTIALLY. HE SUBM ITTED THAT THE INTENTION BEHIND MAKING INVESTMENT IN THE GROUP COM PANIES WAS OBTAINING THE BANK FINANCE. THE RESULTS OF THE TRA NSACTION WITH THE GROUP COMPANIES ARE VERY CLEAR IN THAT THE TURNOVER OF THE ASSESSEE HAS INCREASED SUBSTANTIALLY OVER THE PERIOD OF LAST 3 YEARS. THEREFORE, THIS INVESTMENT IS MADE FOR BUSINESS PUR POSES ONLY, THEREFORE, DISALLOWANCE IS NOT JUSTIFIED. 14.10 IN HIS ALTERNATE CONTENTION, HE SUBMITTED THA T SINCE THE ASSESSEE HAD SUBSTANTIAL NON-INTEREST BEARING FUNDS IN THE FORM OF CAPITAL AND THE SUNDRY CREDITORS WHICH EXCEEDS THE AMOUNTS OF INVESTMENT IN THE SISTER CONCERNS, THEREFORE, FOLLO WING THE DECISION 84 OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., REPORTED IN 313 ITR 340 N O DISALLOWANCE OF INTEREST IS CALLED FOR. IN HIS YET ANOTHER ALTE RNATE CONTENTION THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE INT EREST INCOME IS TO BE ALLOWED AS DEDUCTION UNDER THE HEAD INCOME FROM OTHER SOURCES AS THE SHARE INVESTMENT IN THE GROUP CONCE RNS WOULD YIELD DIVIDEND INCOME WHICH IS TAXABLE UNDER THIS HEAD. NOW IN THIS YEAR ALTHOUGH THERE IS NO DIVIDEND INCOME, INTEREST IS A LLOWABLE AS DEDUCTION UNDER THIS HEAD IN VIEW OF THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RAJENDRA PRASA D MOODY REPORTED IN 45 ITR 519. ACCORDINGLY, TO THE EXTENT OF INTEREST, I.E. RS.4,82,82,028/- THERE WOULD BE LOSS UNDER THIS HEA D AND THE SAME HAS TO BE SET OFF AGAINST INCOME FROM BUSINESS DURI NG THE YEAR U/S.71. THIS WOULD RESULT IN THE SAME DEDUCTION AS CLAIMED BY THE ASSESSEE U/S.36(1)(III) FOR THE INTEREST PAYMENT. THE LOSS TO THAT EXTENT WOULD HAVE TO BE SET OFF AGAINST THE BUSINES S INCOME WITH THE RESULT THAT THERE WILL NOT BE ANY ADDITION IN THE H ANDS OF THE ASSESSEE. HE ACCORDINGLY SUBMITTED THAT THE ADDITI ONAL GROUNDS RAISED BY THE ASSESSEE HAS TO BE ALLOWED. 14.11 REFERRING TO THE DECISION OF THE HONBLE PUNJ AB & HARYANA HIGH COURT IN THE CASE OF CIT VS. MARUDHAR CHEMICAL S AND PHARMACEUTICALS PVT. LTD. REPORTED IN 319 ITR 75 HE SUBMITTED THAT THE HONBLE HIGH COURT FOLLOWING THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. REPORTED IN 288 ITR 1 (SC) HAS HELD THAT BEFORE DISALLOWING THE DEDUCTION OF I NTEREST PERTAINING 85 TO THE INTEREST FREE LOAN ADVANCED TO THE SISTER CO NCERNS OR ITS DIRECTORS IT WAS INCUMBENT ON THE AUTHORITIES TO RE CORD A FINDING WHETHER IT WAS NOT GIVEN AS A MEASURE OF COMMERCIAL EXPEDIENCY. SINCE THE TRIBUNAL HAD NOT RECORDED SUCH A FINDING, THE HONBLE HIGH COURT RESTORED THE ISSUE TO THE FILE OF THE TR IBUNAL FOR FRESH ADJUDICATION. HOWEVER, THE RATIO OF THE DECISION I S APPLICABLE TO THE CASE OF THE ASSESSEE SINCE THE INVESTMENT IN THE SI STER CONCERNS WAS AS A MEASURE OF COMMERCIAL EXPEDIENCY. 14.12 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OT HER HAND SUBMITTED THAT THE ISSUE OF DISALLOWANCE U/S.14A HA S TO BE DECIDED IN FAVOUR OF THE ASSESSEE. SO FAR AS THE ALLOWABIL ITY OF DEDUCTION U/S.36(1)(III) IS CONCERNED, HE SUBMITTED THAT IT I S NOT THE BUSINESS OF THE ASSESSEE TO INVEST IN SHARES OF THE SISTER CONC ERNS AND THEREFORE THERE IS NO COMMERCIAL EXPEDIENCY. HE SUBMITTED T HAT EVEN IF THE QUESTION OF COMMERCIAL EXPEDIENCY IS CONSIDERED, TH E DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILD ERS (SUPRA) IS NOT A GOOD LAW SINCE SLP FILED IN THE CASE OF TULIP STAR HOTELS LTD. HAS BEEN ADMITTED BY THE HONBLE SUPREME COURT ON 3 0-04-2012. 14.13 THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOI NDER SUBMITTED THAT PROVISIONS OF SECTION 115(O) ARE APPLICABLE TO A PRIVATE LIMITED COMPANY. 14.14 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE B Y BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED BY THE ASSESSEE. WE HAVE ALSO CONSIDERED 86 THE VARIOUS DECISIONS RELIED ON BY BOTH THE SIDES. THE ASSESSEE IN THE ADDITIONAL GROUNDS HAS CLAIMED THAT THE INTERES T INCOME IS TO BE ALLOWED AS A DEDUCTION UNDER THE HEAD INCOME FROM OTHER SOURCES AS THE SHARE INVESTMENTS IN THE GROUP CONCERNS WOUL D YIELD DIVIDEND INCOME WHICH IS TAXABLE UNDER THIS HEAD. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE ALTHOUGH NO DIVIDEND INCOM E HAS BEEN RECEIVED DURING THE YEAR, HOWEVER, SUCH INTEREST IS ALLOWABLE AS A DEDUCTION AND THEREFORE THERE WILL BE LOSS TO THE E XTENT OF RS.4,82,82,028/- WHICH CAN BE SET OFF AGAINST BUSIN ESS INCOME DURING THE YEAR U/S.71 OF THE I.T. ACT. HOWEVER, T HIS ALTERNATE CONTENTION AS PER THE ADDITIONAL GROUNDS OF APPEAL WAS NOT EXAMINED BY THE LOWER AUTHORITIES SINCE THE ASSESSE E HAS RAISED THIS ISSUE FOR THE FIRST TIME BEFORE THE TRIBUNAL AS ADD ITIONAL GROUNDS AND THE LOWER AUTHORITIES HAD NO BENEFIT OF DECIDING TH E ISSUE FROM THIS ANGLE. THEREFORE, WE IN THE INTEREST OF JUSTICE DE EM IT PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFF ICER FOR FRESH ADJUDICATION. THE ASSESSING OFFICER SHALL DECIDE T HE ISSUE AS PER FACT AND LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. SINCE W E ARE RESTORING THE ADDITIONAL GROUNDS TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION, WE REFRAIN OURSELVES FROM ADJUDICATIN G THE GROUNDS OF APPEAL NO.1(B) AND 1(C) BY THE ASSESSEE AND GROUNDS OF APPEAL NO.10 OF THE REVENUE WHICH ARE KEPT OPEN. ACCORDIN GLY, THE ABOVE GROUNDS ARE ALLOWED FOR STATISTICAL PURPOSES. 87 15. GROUND OF APPEAL NO.3 BY THE REVENUE AND GROUND OF APPEAL NO.1(D) BY THE ASSESSEE RELATE TO PART RELIEF GIVEN BY THE LD.CIT(A) ON ACCOUNT OF PROPERTY INCOME. 15.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERV ED THAT ASSESSEE HAS GIVEN 1/3 RD OF OLD SHOW ROOM PROPERTY ON RENT TO OTHER BUSINES S CONCERN AND 1/3 RD OF THE PROPERTY BEING USED BY THE PARTNERS FOR THEIR RESIDENCE. THE AREA OF OLD BUILDING IS 1078. 35/SQ.MTR. THUS, 2/3 RD OF THE BUILDING IS NOT USED FOR OWN BUSINESS. HE OBSERVED THAT THE ASSESSEE HAS RECOVERED ONLY RS.4,72,800/- FROM SISTER CONCERNS FOR THE USE OF BUSINESS PREMISES, ELECTRICITY AND T ELEPHONE AND FOR THE RESIDENTIAL USE ONLY 5% OF ELECTRICITY CHARGES AND 3% OF TELEPHONE CHARGES HAVE BEEN RECOVERED FOR PERSONAL USE. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE, HE OBSER VED THAT THE ELECTRICITY CHARGES PAID FOR OLD SHOW ROOM IS RS.12 ,14,088/- AND TELEPHONE CHARGES RS.3,16,767/-. FROM THE ABOVE, H E OBSERVED THAT NEITHER THE ASSESSEE HAS CHARGED PROPER RENT FOR TH E PREMISES NOR PROPER DEDUCTION ON ACCOUNT OF ELECTRICITY AND TELE PHONE HAS BEEN MADE. IN VIEW OF THE ABOVE, HE ESTIMATED THE USE O F ELECTRICITY AND TELEPHONE CHARGES FOR THE USE OF PARTNERS FOR THEIR RESIDENCE AT 15% OF TOTAL EXPENSES CLAIMED UNDER BOTH THE HEADS. TH E BALANCE OF THE EXPENSES WAS ALLOCATED TO THE ASSESSEE FIRM AND OTH ER SISTER CONCERNS. AFTER OBSERVING THAT THE ASSESSEE HAS DI SALLOWED AN AMOUNT OF RS.1,09,710/- THE ASSESSING OFFICER MADE FURTHER ADDITION OF RS.1,19,918/- TOWARDS SUCH ELECTRICITY AND TELEPHONE 88 CHARGES BY THE PARTNERS. SIMILARLY, OUT OF THE BAL ANCE OF EXPENSES, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS.6, 50,613/- BEING USED BY THE SISTER CONCERN FROM WHOM NO CHARGES ON THIS ACCOUNT HAS BEEN RECOVERED. THE ASSESSING OFFICER SIMILARL Y NOTED THAT THE MARKET RATE/SQ.FT. OF THE PROPERTY WILL BE RS.20/- PER SQ.FT. AND THE RENTAL INCOME SHOULD HAVE BEEN RS.9,28,244/-. HOWE VER, THE ASSESSEE HAS CHARGED ONLY RS.4,72,800/-. THEREFORE , THE DIFFERENCE IS RS.4,56,244/-. SIMILARLY, IN ABSENCE OF ANY REN T RECEIVED FROM PARTNERS HE DETERMINED THE RENTAL INCOME OF THE RES IDENTIAL PORTION AT RS.6,96,183/-. THUS, THE GROSS TOTAL INCOME WAS DETERMINED BY THE ASSESSING OFFICER AT RS.16,24,427/-. AFTER DED UCTING THE MUNICIPAL TAX AND 30% DEDUCTION U/S.24, HE DETERMIN ED THE INCOME FROM HOUSE PROPERTY AT RS.10,46,392/-. AFTER DEDUC TING THE RENTAL INCOME DISCLOSED BY THE ASSESSEE AT RS.2,40,254/- T HE ASSESSING OFFICER MADE ADDITION OF RS.8,06,138/-. THUS, HE M ADE A TOTAL ADDITION OF RS.15,76,669/- ( RS.1,19,918 + 6,50,613 + 8,06,139). ORIGINAL ADDITION WAS RS.22,62,889/- WHICH WAS SUBS EQUENTLY RECTIFIED TO RS.15,76,669/-. 15.2 IN APPEAL THE LD. CIT(A) DELETED SOME OF THE A DDITIONS LIKE ALLEGED RENT OF RS.8,06,138/- AND REDUCED THE DISAL LOWANCE ON ACCOUNT OF USE OF TELEPHONE AND ELECTRICITY BY TENA NTS FROM 50% MADE BY THE ASSESSING OFFICER TO 15% AND DETERMINED THE DISALLOWANCE ON ACCOUNT OF PERSONAL USE OF PARTNERS OF 15% OF THE TELEPHONE AND ELECTRICITY CHARGES AS DETERMINED BY THE ASSESSING OFFICER. THE RELEVANT OBSERVATION OF THE LD.CIT(A) READS AS UNDER : 89 31. THE FACTS REVEAL THAT RENT IS RECOVERED FROM THE SISTER CONCERNS AND AGAIN THE APPELLANT ITSELF AS PER THE PAST PRACTICE HAS DISALLOWED PART OF THE, ELECTRICITY AND TELEPHONE CH ARGES. NO ADDITION ON THIS SCORE IS MADE IN THE PAST EVEN IN SCRUT INY ASSESSMENTS. TAKING INTO ACCOUNT THE FACTS OF THE CASE AND PAST RECORDS, IN MY OPINION IN THE ABSENCE OF ANY MATERIAL /EVIDENCE ON RECORD, ESTIMATING RENT AT A HIGHER AMOUNT COULD NOT BE JUSTIFIED. WHILE THERE IS NO BASIS FOR ESTIMATING THE EXPENSES FOR P ERSONAL USE AT A HIGHER PERCENTAGE, FROM THE FACTS OF THE CASE AN D SUBMISSIONS MADE IT IS SEEN THAT THE PART OF THE ELECTRICITY EXPE NSES THOUGH DISALLOWED BY THE APPELLANT ARE NOT ADEQUATE, ESPECIA LLY TAKING INTO CONSIDERATION THE AREA USED BY THE PARTNERS. ELECTRICI TY BILL FOR OLD SHOWROOM OF WHICH 1/3 PORTION IS BEING OCCUPIED BY TH E PARTNERS WAS RS.10,41,860/-. IN VIEW OF THE ABOVE, I FIND NO E RROR IN AO'S MAKING FURTHER DISALLOWANCE OF RS. 81,906/- WHICH IS C ONFIRMED. 31.1 SIMILARLY, TELEPHONE EXPENSES OF RS.9,503/- ARE DISALLOWED BY THE APPELLANT ITSELF. HOWEVER, THE AO HAS ESTIMATE D THE PERSONAL USE AT 15% OF RS.3,16,767/- I.E. RS. 47,515/- AND ADD ED THE DIFFERENCE OF RS. 38,012/-. THIS ALSO ON FACTS APPEARS TO BE FAIR. I THEREFORE, CONFIRM THE ADDITIONAL DISALLOWANCE OF RS. 38,012/- OUT OF TELEPHONE EXPENSES, 31.2 THE AO IN ADDITION TO ABOVE, HAS MADE AN ADDITI ON OF RS. 6,50,613/- BEING 50% OF THE BALANCE AMOUNT OF ELECTRICITY/TELEPHONE EXPENSES. IN MY OPINION THERE I S NO JUSTIFICATION FOR ADDITIONAL DISALLOWANCE AS HIGH AS @ 50% AS THE BUILDING IS PRIMARILY NEED BY THE APPELLANT FOR RUNN ING ITS BUSINESS FROM THE 1ST FLOOR. IT IS NOT IN DISPUTE THAT ELECTRIC ITY CONSUMPTION FOR A JEWELLERY SHOWROOM WOULD BE MUCH HIGHER THAN E LECTRICITY CONSUMPTION FOR AN OFFICE. SIMILARLY, THE APPELLANT FIRM WOULD USE MUCH MORE TELEPHONE FACILITY THAN THE OFFICE ON THE GROUND FLOOR. IN VIEW OF THIS, I AM OF THE OPINION THAT DISALLOWANCE @ 15% OF THE BALANCE AMOUNT I.E. 1,95,184/- (15% OF RS. 13,01,22 7/-) WOULD MEET THE END OF THE JUSTICE. DISALLOWANCE @15% ALSO SEEMS TO BE RATIONAL IN VIEW OF THE FACT THAT RENT IS ALSO BEING RECOVERED FROM TENANT SISTER CONCERNS. THE APPELLANT GETS A RELIEF OF RS.4,55,429/-. 31.3 AS REGARDS THE REMAINING ADDITION OF RS.8,06,138/ - ON ACCOUNT OF ALLEGED SHORT RENT RECEIPT, IT SEEMS TO BE RESULTING FROM A GUESS WORK. THERE ARE MANY OTHER PERSONAL AND BUSINESS CONSIDERATION FOR NOT LETTING OUT THE PREMISES TO AN O UTSIDER ESPECIALLY WHEN PARTNERS THEMSELVES ARE RESIDING IN THE BUILDING. THE AO HAS NOT BROUGHT ON RECORD ANY MATERIAL IN SUPP ORT OF THIS ADDITION. I AM THEREFORE OF THE OPINION THAT THERE IS NO JUSTIFICATION FOR THE SAID ADDITION WHICH IS HEREBY DELETED. IN SHOR T OUT OF THE AGGREGATE ADDITION OF RS.15,76,669/-, THE DISALLOWANC ES OF RS. 3,15,102 (RS. 81,906 + RS.38,012+ RS. 1,95,184) ARE CO NFIRMED, WHILE THE ADDITION OF RS. 12.61.567/- (RS. 4,56,429 + RS. 8,06,138) IS DELETED. 15.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 90 15.4 THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHAL LENGED THE ORDER OF THE CIT(A) ON THIS ISSUE. HE SUBMITTED TH AT WITHOUT ANY BASIS OR REASONS THE EXPENSES TOWARDS PERSONAL USE ARE ESTIMATED AT 15% AND THE ADDITIONS HAVE BEEN MADE. HE SUBMITTED THAT NO SUCH DISALLOWANCE WAS MADE IN EARLIER ASSESSMENTS. THE RENT CHARGED TO THE SISTER CONCERN WAS INCLUSIVE OF ALL AND THEREFO RE THE QUESTION OF ANY DISALLOWANCE OF EXPENSES DOES NOT ARISE. HE AC CORDINGLY SUBMITTED THAT THE DISALLOWANCE BEING ON THE HIGHER SIDE SHOULD BE DELETED. 15.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFIC ER. 15.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). IT IS AN ADMITTED FACT THAT NO ADDITION ON ACCOUNT OF ELECTRICITY AND TELEPHONE CHARGES WERE MADE IN THE PAST ON THIS ISSUE. HOWEVER, THAT CANNO T BE A PRECEDENT SINCE EVERY ASSESSMENT YEAR IS SEPARATE AND DISTINC T. MERELY BECAUSE SOME ADDITION WAS NOT MADE IN THE PAST CANN OT BE THE BASIS FOR NOT MAKING ADDITION IN THE CURRENT ASSESSMENT Y EAR ESPECIALLY WHEN PERSONAL ELEMENT OF THE EXPENSES CANNOT BE RUL ED OUT. FURTHER, SINCE THE PARTNERS ARE OCCUPYING THE SAME BUILDING FROM WHERE THE BUSINESS OF THE ASSESSEE IS BEING CARRIED OUT, THEREFORE, DISALLOWANCE OF ELECTRICITY EXPENSES IS JUSTIFIED. HOWEVER, SINCE THE AMOUNT DISALLOWED BY THE ASSESSING OFFICER WAS ON T HE HIGHER SIDE, 91 THE LD.CIT(A) CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE HAS RESTRICTED SUCH DISALLOWANCE TO 15% OF THE EXPENSES , WHICH IN OUR OPINION IS REASONABLE. 15.7 AS REGARDS TELEPHONE EXPENSES ARE CONCERNED WE FIND THE DISALLOWANCE HAS BEEN RESTRICTED TO 15% OF THE TOTA L EXPENSES WHICH UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE IS RE ASONABLE. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) ON THIS IS SUE. 15.8 AS REGARDS THE ADDITION ON ACCOUNT OF SHORT RE CEIPT OF RENT, WE FIND THE LD.CIT(A) HAS RIGHTLY HELD THAT THERE A RE MANY PERSONAL AS WELL AS BUSINESS CONSIDERATION FOR NOT LETTING O UT THE PREMISES TO AN OUTSIDER ESPECIALLY WHEN PARTNERS THEMSELVES ARE RESIDING IN THE BUILDING. FURTHER, THE PARTNERS ARE ENGAGED IN A S ENSITIVE BUSINESS SUCH AS GOLD, BULLION AND JEWELLERY, THEREFORE, THE Y CANNOT LET OUT THE PREMISES TO OUTSIDERS AT THE RISK OF THEIR LIVE S AND BUSINESS FOR GETTING HIGHER RENT WHICH AGAIN IS BASED ON PRESUMP TIONS AND SURMISES. THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY EVIDENCE TO SHOW THAT IS THE MARKET RENT OF THE PRE MISES OF SIMILAR TYPE LOCATED IN SAME AREA. THEREFORE, WE FIND NO I NFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, TH E SAME IS UPHELD. GROUNDS RAISED BY THE ASSESSEE AS WELL AS THE REVEN UE ARE ACCORDINGLY DISMISSED. 16. REVISED GROUND OF APPEAL NO.4 BY THE REVENUE AN D GROUND OF APPEAL NO.1(H) AND 8.1 BY THE ASSESSEE RELATE TO PART RELIEF GIVEN BY THE LD.CIT(A) OUT OF ADDITION ON ACCOUNT OF DIFF ERENCE IN TRADE CREDITORS. 92 16.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THERE I S DIFFERENCE IN THE CLOSING BALANCE OF TWO CREDITORS NAMELY, SUNNY FORESIGHT PVT. LTD., MUMBAI RS.42,847/- AND HARMONY MULTI MEDIA PV T. LTD., SURAT RS.67,690/-. ON BEING QUESTIONED BY THE AO, THE ASSESSEE SUBMITTED THAT THE BALANCE DUE BY THE ASSESSEE TO S UNNY FORESIGHT PVT. LTD., AS ON 31-03-2009 WAS RS.1,12,273/- WHERE AS THE DUES SHOWN BY THE ASSESSEE WAS RS.1,55,120/-. IT WAS SU BMITTED THAT DURING F.Y. 2009-10 THE ENTIRE DUES HAS BEEN CLEARE D BY ACCOUNT PAYEE CHEQUE. THE DUES WERE CLEARED ON 28-07-2009. SO FAR AS HARMONY MULTI MEDIA PVT. LTD., SURAT IS CONCERNED, IT WAS EXPLAINED THAT THE DIFFERENCE WAS DUE TO A BILL OF RS.67,690/- RECORDED TWICE. IT WAS ARGUED THAT THE ERROR HAS B EEN RECTIFIED IN THE F.Y. 2009-10 BY REVERSAL OF THE ENTRY. HOWEVER, TH E ASSESSING OFFICER DID NOT AGREE AND MADE ADDITION OF RS.1,10, 537/- ON THE GROUND THAT THE PAYMENT DURING SUBSEQUENT YEAR AND REVERSAL OF ENTRY IN NEXT YEAR DOES NOT ALTER THE FACTS OF THE CASE SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG. 16.2 IN APPEAL THE LD.CIT(A) DELETED THE ADDITION O F RS.42,847/- BEING THE DIFFERENCE IN THE ACCOUNT OF SUNNY FORESI GHT PVT. LTD. WHILE DOING SO, HE NOTED THAT THE ASSESSEE HAS CLEA RED ITS ACCOUNTS IN THE NEXT YEAR. HOWEVER, IN THE CASE OF HARMONY M ULTI MEDIA PVT. LTD. HE NOTED THAT THE BILL WAS RECORDED TWICE. AC CORDING TO HIM, ALTHOUGH THE ERROR WAS RECTIFIED IN THE NEXT YEAR, HOWEVER, DOUBLE 93 DEDUCTION SHOULD NOT BE ALLOWED IN THIS YEAR. HE A CCORDINGLY CONFIRMED THE ADDITION. 16.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE AS WELL AS THE ASSESSEE ARE IN APPEAL BEFORE US. 16.4 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS RECORDED A BILL OF RS.67,690/- TWICE. SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND SINCE CORRECT METHOD OF ACCOUNTING H AS TO BE FOLLOWED TO DETERMINE THE TRUE INCOME, THEREFORE, T HE ASSESSEE CANNOT BE ALLOWED TO CLAIM THE EXPENDITURE TWICE IN THIS YEAR. UNDER THESE CIRCUMSTANCES, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDINGLY, SAME IS UPHELD. 16.5 SO FAR AS DELETION OF RS.42,847/- IS CONCERNED , THE LD.CIT(A) DELETED THE SAME ON THE BASIS OF THE REMAND REPORT OF THE AO, ACCORDING TO WHICH THE SAME HAS BEEN CLEARED IN THE SUBSEQUENT YEAR. THEREFORE, WE FIND NO INFIRMITY IN THE ORDE R OF THE CIT(A) DELETING THE ADDITION OF RS.42,847/- BEING THE AMOU NT PAYABLE TO SUNNY FORESIGHT PVT. LTD. GROUNDS OF APPEAL NO.8.1 BY THE ASSESSEE AS WELL AS GROUND OF APPEAL NO.4 BY THE RE VENUE ARE ACCORDINGLY DISMISSED. 94 17. GROUND OF APPEAL NO.5 BY THE REVENUE READS AS U NDER : 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD CIT(A) ERRED IN ADDITION MADE ON ACCOUNT OF DRIVER'S SALARY OF RS. 32,086/-. 17.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER IN THE ASSESSMENT DISALLOWED 1/3 RD SALARY OF THE DRIVERS AMOUNTING TO RS.32,086/- OUT OF THE SALARY AND BONUS PAID TO ONE SRI RAMDAS KARDILLE AMOUNTING TO RS.96,258/- BEING ATTRIBUTABL E TO PERSONAL USE. IN APPEAL THE LD.CIT(A) DELETED THE ADDITION HOLDING THAT THE DRIVERS SALARY IS NOT AN ITEM COVERED BY ANY OF THE PROVISIONS OF SECTION 38(2). FURTHER, SALARY TO DRIVER BEING FIX ED SUCH EXPENDITURE REMAINS SAME WHETHER THE VEHICLE IS USED FOR PERSON AL PURPOSE OR NOT. THE PROVISIONS OF SECTION 38(2) RELIED UPON B Y THE ASSESSING OFFICER ACCORDING TO THE LD.CIT(A) ALSO SUPPORTS TH E CONTENTION OF THE ASSESSEE. HE ACCORDINGLY DELETED THE DISALLOWA NCE OF RS.32,086/- OUT OF DRIVERS SALARY ON THE GROUND TH AT THE SAME IS NOT IN ACCORDANCE WITH LAW. THE LD. DEPARTMENTAL REPRES ENTATIVE COULD NOT POINT OUT ANY MISTAKE IN THE ABOVE FINDING OF T HE LD.CIT(A). IN VIEW OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDE R OF THE LD.CIT(A). ACCORDINGLY, SAME IS UPHELD AND THE GRO UND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 18. GROUND OF APPEAL NO.6 BY THE REVENUE READS AS U NDER : 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION MADE O N ACCOUNT OF DEPRECIATION ON VEHICLES OF RS.8,14,855/-. 95 18.1 FACTS OF THE CASE, IN BRIEF, ARE THAT OUT OF T OTAL DEPRECIATION ON VEHICLES AMOUNTING TO RS.24,44,656/- THE ASSESSEE S UOMOTO DISALLOWED 1/3 RD OF DEPRECIATION AMOUNTING TO RS.8,14,885/- AND CLAIMED DEPRECIATION OF RS.16,29,770/-. THE ASSESS EE ACCORDINGLY DETERMINED THE WDV AS ON 31-03-2009 AT RS.1,46,67,9 33/-, THE DETAILS OF WHICH ARE AS UNDER : WDV AS ON 01-04-2008 RS.1,62,97,704 DEPRECIATION ON VEHICLES @15% RS. 24,44,656 LESS : 1/3 RD DISALLOWED RS. 8,14,885 DEPRECIATION ACTUALLY CLAIMED RS. 16,29,770 --------------------- WDV AS ON 31-03-2009 RS.1,46,67,773/- --------------------- 18.2 THE ASSESSING OFFICER HOWEVER WORKED OUT THE W DV AS ON 31-03-2009 AT RS.1,38,53,048/- BY DEDUCTING THE DEP RECIATION @ 15% AMOUNTING TO RS.24,44,656/- OUT OF THE WDV OF RS.1,62,97,704/-. THE ASSESSING OFFICER THUS MADE ADDITION OF RS.8,14,855/- TO THE TOTAL INCOME OF THE ASSESSEE B EING DIFFERENCE IN THE CLOSING WDV, I.E. RS.1,46,67,933 RS.1,38,53,0 48/-. 18.3 BEFORE CIT(A) THE ASSESSEE BROUGHT TO HIS NOTI CE THE PROVISIONS OF SECTION 43(6) AND SUBMITTED THAT THE ASSESSING OFFICER HAS TAKEN AN INCORRECT VIEW IN THE MATTER OF WORKIN G OF THE WDV. THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS. CHIRANGILAL REPORTED IN 74 ITR 80 AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SUMAN TE A AND PLYWOOD INDUSTRIES REPORTED IN 204 ITR 719 WERE REL IED UPON. THE LD.CIT(A) CALLED FOR A REMAND REPORT FROM THE ASSES SING OFFICER. HOWEVER, NO SPECIFIC COMMENTS WERE GIVEN BY THE ASS ESSING 96 OFFICER ON THIS ISSUE BUT THE ASSESSING OFFICER REI TERATED THE FINDING OF THE PREDECESSOR ASSESSING OFFICER. AFTER CONSID ERING THE REMAND REPORT THE LD.CIT(A) DELETED THE DISALLOWANCE BY OB SERVING AS UNDER : 35. THE ASSESSING OFFICER IS IN ERROR WHILE DETERMINING WDV IN TERMS OF SEC.43(6) OF THE ACT. PROVISIONS OF THE LAW ARE VERY CLEAR. ONLY DEPRECIATION ACTUALLY ALLOWED IS TO BE DEDUCTED (AND NOT ALLOWABLE DEPRECIATION) WHILE DETERMINING THE WDV. CASES RELIED UPON BY THE APPELLANTS A/R ALSO SUPPORT THE CORRECTNE SS OF APPELLANTS STAND IN THIS RESPECT. AO HAS NOT BROUGHT ON RECORD ANY CONTRARY DECISION. THE APPELLANTS WORKING BEING IN ACCORDANCE WITH LAW, NO DISALLOWANCE WAS CALLED FOR. THE ADDITI ON OF RS.8,14,855/- IS THEREFORE, DELETED; WHILE THE CLOSING WDV WOULD BE RS.1,46,67,933/- AND NOT RS.1,38,53,048/- AS WORKED OU T BY THE AO. 18.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 18.5 AFTER HEARING BOTH THE SIDES, WE FIND NO INFIR MITY IN THE ORDER OF THE CIT(A) WHO DECIDED THE ISSUE ON THE BASIS OF THE PROVISIONS OF SECTION 43(6) AS WELL AS THE DECISIONS CITED BEF ORE HIM. IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOT ICE BY THE LD. DEPARTMENTAL REPRESENTATIVE, WE FIND NO INFIRMITY I N THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 19. GROUND OF APPEAL NO.7 BY THE REVENUE READS AS U NDER : 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,44,856/- ON ACCOUNT OF DISALLOWANCE OF INTEREST UNDER GDS. 97 19.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT A SUM OF RS.1,44,856/- BEING POST DATED CHEQUES ISSUED BY TH E ASSESSEE TO THE DEPOSITORS UNDER GDS ARE OUTSTANDING SINCE 1998 TO 30-03-2008. ON BEING QUESTIONED BY THE ASSESSING OFFICER, IT WA S SUBMITTED THAT IT HAS NOT BEEN CLEARED UPTO 15-12-2011 NOR ANY FRE SH CHEQUES HAVE BEEN ISSUED TO THEM. ON BEING FURTHER QUESTIONED BY THE ASSESSING OFFICER, IT WAS EXPLAINED AS UNDER : AS ALREADY STATED, WE ISSUE POST DATED CHEQUES TO THE DE POSITORS UNDER GDS. IN CASE IF CHEQUES BECOME TIME BARRED, WE REVALIDATE THE SAME WHEN THE DEPOSITOR APPROACHES US. HOWEVER, IN CASE OF FEW PARTIES CHEQUES ARE NEITHER PRESENTED NOR THE PART IES HAVE APPROACHED US FOR REVALIDATION, FOR THE REASONS NOT KN OWN TO US. WE ARE OF COURSE BOUND TO MAKE PAYMENT AS AND WHEN SUC H PARTIES APPROACH US. DETAILS OF AMOUNT OF CHEQUES IN RESPECT O F INTEREST FALLING DUE FOR PAYMENT, SIX MONTHS BEFORE 31-03-200 9 AND NOT ENCASHED/NOT REVALIDATED TILL TODAY AGGREGATING TO R S.1,44,856/- APPEAR IN THE STATEMENT ENCLOSED. 19.2 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFI ED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND ADDED AN AMOU NT OF RS.1,44,856/- U/S.41((1) OF THE I.T. ACT. 19.3 BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE LIABILITY DID NOT CEASE TO EXIST NOR WAS THERE UNILATERAL ACT BY THE ASSESSEE WHICH COULD SUGGEST THAT THE ASSESSEE MADE AN ENTRY IN TH E BOOKS OF ACCOUNT WHICH HAS LED TO REDUCTION OF ITS LIABILITY . THE LIABILITY CONTINUES TO EXIST AND APPEARS IN THE BALANCE SHEET . THE ASSESSEE HAS TO REVALIDATE THE CHEQUES ISSUED TO THE DEPOSIT ORS OR THEIR LEGAL HEIRS AS AND WHEN THEY COME FOR REVALIDATION. THE REMAND REPORT OF THE ASSESSING OFFICER ON THIS ISSUE WAS SILENT. 98 19.4 BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSE E THE LD.CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDE R : 44. THE APPELLANT IS RUNNING A SCHEME CALLED GOLD DE POSIT SCHEME UNDER WHICH DEPOSITS ARE RECEIVED FROM SEVERAL PARTIES STATIONED AT DIFFERENT PLACES. SOMETIMES DUE TO LOSS OF ORIGINAL RECEIPT/DEATH ETC. THE DEPOSIT REMAINS TO BE COLLEC TED BY THE CONCERNED DEPOSITOR/HIS HEIR. HOWEVER, THE LIABILIT Y ON THE PART OF APPELLANT FIRM DOES NOT CEASE. AGAIN, IT IS A MATTER OF TRUST WHICH THE APPELLANT FIRM ENJOYS. THIS IS EVIDENT FROM THE FA CT THAT IT HAD COLLECTED MORE THAN 160 KG. OF GOLD UNDER THE SCHEM E WITHOUT OFFERING ANY SECURITY. AGAIN, THE APPELLANT HAS NOT WRITTEN BACK ITS LIABILITY IN ITS BOOKS OF ACCOUNT AND THE SAME CONTIN UES TO APPEAR IN THE BALANCE SHEET. AS HELD BY THE HON'BLE P & H HIGH COURT IN CIT V. SITA DEVI JUNEJA (325, ITR, 593) AND HON'BLE DELHI HIGH COURT IN CIT V. JAIPUR JEWELLERS (187, TAXMAN, 169) THE FACT THAT TH E LIABILITY WAS OLD WOULD NOT MAKE ANY GROUND FOR ADDITION. SO LONG AS THERE WAS NO CESSATION OF LIABILITY BY WRITING BACK THE SAME, NO ADDITION COULD BE MADE UNDER SECTION 41(1). TO THE SAME EFFECT IS T HE DECISION OF HON'BLE ITAT MUMBAI IN THOMAS COOK (I) LTD., V. DY. CIT (105, TTJ, 317) WHEREIN THE ISSUE WAS DECIDED IN ASSESSEE'S FAVOUR THO UGH THE LIABILITIES WERE UNILATERALLY WRITTEN BACK. IN THIS C ASE THE APPELLANT HAS NOT WRITTEN BACK ANY SUCH LIABILITY. THEREFORE EXPLANATION 1 TO SEC. 41 (1) IS ALSO NOT APPLICABLE TO THE FACTS IN QUE STION. CONSIDERING THE FACTS OF THE CASE AND THE JUDICIAL D ECISIONS, I AM OF THE OPINION THAT THE ADDITION OF RS. 1,44,856/- U/S. 41 (1) HAS NO MERIT AND THE SAME IS DELETED. 19.5 AGGRIEVED WITH SUCH ORDER OF THE LD.CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 19.6 AFTER HEARING BOTH THE SIDES, WE FIND NO INFIR MITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION. ADMITTEDLY, T HE ASSESSEE HAS NOT WRITTEN OFF THE LIABILITY ENTRIES IN ITS BOOKS OF ACCOUNT AND THE SAME CONTINUES TO APPEAR IN THE BALANCE SHEET. MER ELY BECAUSE THE LIABILITY WAS OLD, THE SAME CANNOT BE A GROUND FOR MAKING ADDITION SO LONG AS THERE WAS NO CESSATION OF LIABILITY BY W RITING BACK THE SAME. VARIOUS DECISIONS RELIED ON BY THE LD.CIT(A) ALSO SUPPORTS THE CASE OF THE ASSESSEE. IN VIEW OF THE ABOVE AND IN VIEW OF THE 99 DETAILED REASONING GIVEN BY THE LD.CIT(A) ON THIS I SSUE AND IN ABSENCE OF ANY DISTINGUISHABLE FEATURES BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE, WE FIND NO INFIRMI TY IN THE SAME. ACCORDINGLY, SAME IS UPHELD AND THE GROUND RAISED B Y THE REVENUE IS DISMISSED. 20. GROUND OF APPEAL NO.8 BY THE REVENUE READS AS U NDER : 8. ON THE FACTS .AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION OF RS.1 ,61,06,612/- ON ACCOUNT OF VERIFICATION UNDER GDS. 20.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER ISSUED LETTERS U/S.133(6) TO 331 PARTIES WHO HAD DE POSITED GOLD WITH THE ASSESSEE, OUT OF WHICH 50 LETTERS WERE RETURNED UNDELIVERED DUE TO WRONG NAME/ADDRESS ON THE ENVELOPE OR CHANGE OF ADDRESS. THE CORRECT QUANTITY OF DEPOSIT OF GOLD FROM SUCH PARTI ES WAS 10663.610 GRAMS. THE ASSESSING OFFICER CONFRONTED THE SAME T O THE ASSESSEE, WHO SUBMITTED THAT OUT OF THE 331 PARTIES WHO HAD D EPOSITED IN THE GOLD DEPOSIT SCHEME (GDS), 132 PARTIES HAVE ALREADY CONFIRMED THE FACT OF THEIR HAVING DEPOSITED GOLD WITH THE AS SESSEE UNDER THE GDS WHILE NO REPLY WAS RECEIVED FROM 149 PARTIES. THE LETTERS SENT TO 50 PARTIES WERE RETURNED UNSERVED. HOWEVER, THE RE IS NO BALANCE OF GOLD REMAINING UNRETURNED IN CASES WHERE THE DEP OSIT WAS MATURED AND NOT RENEWED TILL DATE. THE ASSESSEE FU RNISHED THE LIST OF SUCH PERSONS. HOWEVER, THE ASSESSING OFFICER WA S NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND CONC LUDED THAT THE SAID QUANTITY DID NOT BELONG TO THE CONCERNED DEPOS ITORS BUT WAS 100 BELONGING TO THE ASSESSEE. HE ACCORDINGLY VALUED T HE SAID QUANTITY AT 15105.10 GRAMS AND ADDED RS.1,61,06, 612/- TO TH E TOTAL INCOME OF THE ASSESSEE. 20.2 BEFORE CIT(A) IT WAS SUBMITTED THAT MERELY BEC AUSE SOME OF THE LETTERS SENT TO THE DEPOSITORS WERE RETURNED BA CK DUE TO WRONG QUOTING OF NAME/ADDRESS ON THE ENVELOPE OR CHANGE O F ADDRESS AND FOR SIMILAR OTHER REASONS, THE SAME DOES NOT MEAN T HAT THE DEPOSITS ARE BOGUS. THE ASSESSEE SUBMITTED THAT BEFORE THE ASSESSING OFFICER IT WAS EXPLAINED THAT FEW OF THE DEPOSITORS HAVE TAKEN BACK THEIR GOLD SUBSEQUENTLY AFTER 31-03-2009 AND THE CO PIES OF RECEIPTS OF SUCH PARTIES WERE ALSO PRODUCED DURING THE COURS E OF ASSESSMENT PROCEEDINGS. SINCE THE PHOTOGRAPHS/IDENTITY PROOF OF THE DEPOSITORS ARE NOT IN DISPUTE IN 281 LETTERS OUT OF 331 LETTER S SENT BY THE ASSESSING OFFICER, THEREFORE, THE GENUINENESS OF TH E DEPOSITORS IS PROVED. THE LD. CIT(A) CALLED FOR A REMAND REPORT FROM THE ASSESSING OFFICER ON THIS ISSUE. IN THE REMAND REP ORT SUBMITTED BY THE ASSESSING OFFICER HE WAS SILENT ON THIS ISSUE. 20.3 BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSE E LD.CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER : 46. THE GDS INTRODUCED BY THE APPELLANT FIRM IS IN OPERATION SINCE 1993. IT HAS BEEN BROUGHT TO MY NOTICE THAT SO F AR THERE IS NO COMPLAINT FROM ANY OF THE DEPOSITORS REGARDING THE NO N RECEIPT OF GOLD EITHER ON MATURITY OR AT ANYTIME THEREAFTER IR RESPECTIVE OF THE TIME THAT MIGHT HAVE PASSED AFTER THE DATE OF MATUR ITY. THE APPELLANT HAS ALSO PLACED ON RECORD COPIES OF RELEVANT RECEIP TS ETC. IN RESPECT OF ALL DEPOSITORS INCLUDING 50 DEPOSITORS TO WHOM LETTE RS ARE STATED TO HAVE NOT BEEN SERVED. AGAIN AS PER THE REGULAR PRA CTICE THE APPELLANT ISSUES POST DATED CHEQUES TO THE DEPOSITORS AGAI NST INTEREST. IT IS CLAIMED THAT SUCH CHEQUES ARE DULY ENCA SHED AND NONE 101 OF THEM HAS BEEN DISHONORED OR BOUNCED BACK. I HAVE P ERUSED THE RECORDS AND FIND THAT THERE ARE LARGE NUMBER OF DEPO SITORS FROM DIFFERENT AREA AND THAT THE SCHEME IS IN OPERATION SIN CE LAST MORE THAN 18/19 YEARS. AGAIN THE GENUINENESS OF THE SCHE ME HAS BEEN VERIFIED SEVERAL TIMES AND NO ADDITION ON THIS SCOR E IS EVER MADE IN THE PAST ASSESSMENTS COMPLETED U/S. 143 (3) OF THE A CT. IN FACT, IN FEW OF THE CASES GOLD HAS ALREADY BEEN RETURNED/ RENEW ED. THE APPELLANT HAS FILED THE NECESSARY DETAILS. AO SEEMS TO H AVE MADE ADDITION WITHOUT BRINGING SUFFICIENT EVIDENCE ON REC ORD. MERELY BECAUSE SOME LETTERS RETURNED UNDELIVERED WOULD NOT LE AD TO ADVERSE INFERENCE UNTIL CORROBORATED BY SUBSEQUENT FINDINGS/INVESTIGATIONS. IT SEEMS AO WAS RUNNING OUT OF TIME HENCE COULD NOT TAKE THE MATTER FURTHER. BUT THE SAID ADD ITION WITHOUT BRINGING ON RECORD ANY EVIDENCE TO SUPPORT THAT 10.6 KG GOLD BELONGED TO THE FIRM AND IT HAS INTRODUCED THE SAME I N FICTITIOUS NAMES WOULD BE LEGALLY UNTENABLE. AO WAS REQUIRED TO MAKE FURTHER ENQUIRIES FROM THE BANK ACCOUNT OF THE APPELLANT WH ETHER THE INTEREST CHEQUES ISSUED TO THESE PERSONS (WHERE, LETTERS RE TURNED UNDELIVERED) WERE STILL PENDING OR WITHDRAWN BY THE APPELLANT ITSELF. THIS APART, NO ADDITION COULD BE MADE IN TH E YEAR UNDER APPEAL WHEN ADMITTEDLY DEPOSITS HAD BEEN RECEIVED IN EARLIE R YEARS. THE AO HAS ALSO ERRED IN APPLYING THE RATE AS ON 31/03/200 9. IN THIS VIEW OF THE MATTER, ADDITION OF RS.1,61,06,612/- CA NNOT BE SUSTAINED EITHER ON FACTS OR IN LAW. THE SAME IS DELETED. 20.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 20.5 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. FROM THE COPY OF THE ASSESSMENT ORDER ITSELF, WE FIND OUT OF 331 PARTIES TO WHOM NOTICE U/S.133(6) WERE SENT 132 PARTIES HAVE CONFIR MED THE FACT OF THEIR HAVING DEPOSITED GOLD WITH THE ASSESSEE UNDER THE GOLD DEPOSIT SCHEME. SIMILARLY, 149 PARTIES WHO HAVE RE CEIVED THE NOTICE HAVE NOT REPLIED TO THE NOTICE ISSUED U/S.13 3(6) OF THE I.T. ACT. HOWEVER, THEY ARE ALSO NOT DISPUTING ABOUT TH E DEPOSIT OF THEIR GOLD WITH THE ASSESSEE FIRM AND THAT LEAVES US WITH BALANCE 50 102 PARTIES IN WHOSE CASE THE NOTICE ISSUED U/S.133(6) WERE RETURNED UNSERVED. THE GOLD DEPOSIT SCHEME FLOATED BY THE A SSESSEE IS IN OPERATION SINCE LAST 18 TO 19 YEARS AND IN THE PAST ASSESSMENTS COMPLETED U/S.143(3) NO SUCH ADDITION HAS BEEN MADE ON THIS ACCOUNT. FURTHER, THE FINDING GIVEN BY THE LD.CIT( A) THAT NO ADDITION COULD BE MADE IN THE YEAR UNDER APPEAL WHE N DEPOSITS HAD BEEN RECEIVED IN EARLIER YEARS COULD NOT BE CONTROV ERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. IN THIS VIEW OF THE M ATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE LD.CIT( A) WHILE DELETING THE ADDITION, WE FIND NO INFIRMITY IN THE SAME. ACCORDINGLY, SAME IS UPHELD AND THE GROUND RAISED B Y THE REVENUE IS DISMISSED. 21. GROUNDS OF APPEAL NO.9 BY THE REVENUE RELATES T O THE ORDER OF THE CIT(A) IN DELETING ADDITION OF RS.1,32,772/- ON ACCOUNT OF BOGUS LIABILITY. 21.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS SENT NO TICE U/S.133(6) TO VARIOUS PARTIES. HOWEVER, NO REPLY WAS RECEIVED FROM MR. GHULABCHAND M. RAJUR OF AHMEDABAD. THE ASSESSEE FU RNISHED THE COPY OF THE LEDGER FOR F.Y. 2009-10 ACCORDING TO WH ICH THE PAYMENT HAS BEEN SHOWN IN CASH ON DIFFERENT DATES B ELOW RS.20,000/- EACH FROM 08-04-2009 TO 13-07-2009 AND RS.12,772/0 HAS BEEN SHOWN AS OUTSTANDING AS ON 31-03-2010. SI NCE NO EVIDENCE OF RECEIPT OF PAYMENT BY GHULABCHAND RAJUR IA WAS PRODUCED, THE ASSESSING OFFICER DOUBTED THE GENUINE NESS OF THE 103 PAYMENT MADE IN F.Y. 2009-10. HOW AND WHO GAVE THE PAYMENT HAS ALSO NOT BEEN PRODUCED BY THE ASSESSEE BEFORE T HE ASSESSING OFFICER. THE ASSESSING OFFICER NOTED THAT ALTHOUGH THE PARTY IS IN AHMEDABAD AND ASSESSEE IS AT JALGAON, HOWEVER, NO T RAVELLING EXPENSES WAS DEBITED ON THESE DATES FOR AHMEDABAD A ND NO CASH HAS GONE FROM JALGAON TO AHMEDABAD. THE ASSESSING OFFICER, THEREFORE, TREATED THE LIABILITY AS BOGUS AND MADE ADDITION OF RS.1,32,772/- U/S. 68 OF THE I.T. ACT. 21.2 BEFORE CIT(A) IT WAS SUBMITTED THAT THE ASSESS EE FIRM HAD GIVEN A CONTRACT FOR SOME WORK TO ONE GHULABCHAND R AJURIA FROM AHMEDABAD IN RELATION TO THE CONSTRUCTION OF THE NE W SHOW ROOM AT JALGAON. TAX WAS DEDUCTED U/S.194C OF THE INCOME T AX ACT IN RESPECT OF THE PAYMENT TO THE SAID PARTY. AN AMOUN T OF RS.1,32,772/- WAS DUE TO BE PAID TO THE SAID PARTY AS ON 31-03-2009. THE SERVICES OF THE SAID PARTY WAS ALSO HIRED FOR T HE CONSTRUCTION OF THE STAFF QUARTERS/GUEST HOUSE WHICH WAS IN PROGRES S DURING THE LATER YEARS AND FOR SOME WORK IN RELATION TO OLD SHOW ROO M. UNDER INSTRUCTION FROM THE SAID PARTY, THE ASSESSEE HAS P AID AN AMOUNT OF RS.1,20,000/- IN INSTALMENTS FROM 08-04-2009 TO 13- 07-2009. UNPAID BALANCE OF RS.12,772/- WAS CARRIED FORWARD B UT OFFERED TO TAX IN THE A.Y. 2001-12 BEING LIABILITY NOT PAYABLE . THE CONFIRMATION FROM THE SAID PARTY WAS ALSO OBTAINED BUT THE SAME HAS BEEN OBTAINED AFTER THE ASSESSMENT WAS OVER. 21.3 BASED ON THE ABOVE SUBMISSIONS MADE BY THE ASS ESSEE, THE LD.CIT(A) CALLED FOR A REMAND REPORT FROM THE ASSES SING OFFICER 104 WHO REITERATED HIS EARLIER STAND. AFTER CONSIDERIN G THE SAME THE LD.CIT(A) DELETED THE ADDITION BY OBSERVING THAT TH E ASSESSEE HAS FILED THE ACCOUNT EXTRACTS FOR SUBSEQUENT YEARS CON FIRMING THE PAYMENTS. THEREFORE, THERE IS NO REASON TO TREAT UN PAID LIABILITY OF RS.1,32,772/- AS BOGUS. 21.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 21.5 AFTER HEARING BOTH THE SIDES, WE DO NOT FIND A NY INFIRMITY IN THE ORDER OF THE CIT(A). THE ADDITION MADE BY THE ASSESSING OFFICER IN OUR OPINION IS MERELY ON PRESUMPTION BAS IS. SINCE THE ASSESSEE HAS FILED THE LEDGER ACCOUNT OF THE SAID P ARTY AND HAS SHOWN TO HAVE MADE THE PAYMENT OF RS.1,20,000/- SUB SEQUENTLY WHICH WAS BEFORE THE COMPLETION OF THE ASSESSMENT F OR THE IMPUGNED ASSESSMENT YEAR, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION. NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL R EPRESENTATIVE AGAINST THE REASONED FINDINGS GIVEN BY THE CIT(A). ACCORDINGLY, THE SAME IS UPHELD. GROUND RAISED BY THE REVENUE I S ACCORDINGLY DISMISSED. ITA NO.663/PN/2013 (U/S.154) (A.Y. 2009-10) : 22. FACTS OF THE CASE, IN BRIEF, ARE THAT AFTER THE LD.CIT(A) PASSED THE ORDER THE ASSESSEE MOVED A RECTIFICATION PETITI ON U/S.154 BEFORE HIM STATING THAT THERE ARE CERTAIN ERRORS WHILE WOR KING OUT THE GP RATIO WHICH SHOULD HAVE BEEN 4.67% AS AGAINST 5.71% DETERMINED 105 BY HIM. SIMILARLY, THE ASSESSEE ALSO SUBMITTED THA T THE SALES TO THIRD PARTIES WAS RS.6,69,79,16,774/- AND NOT RS.679,66,4 2,775/- AS CONSIDERED BY THE LD.CIT(A). HOWEVER, THE LD.CIT(A ) HELD THAT THERE IS NO MISTAKE APPARENT FROM RECORD AS FAR AS GP RATE OF 5.71% HAS BEEN CONSIDERED BY HIM. IT WAS ESTIMATED BY HI M AFTER REJECTING THE ASSESSEES BOOKS OF ACCOUNT U/S.145(3) OF THE I .T. ACT AND VARIOUS EXERCISES WERE UNDERTAKEN BY HIM TO ARRIVE AT FAIR ESTIMATE OF INCOME. IN VIEW OF THE ABOVE, HE REJECTED THE 1 54 PETITION FILED BEFORE HIM. 22.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE A SSESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : THE GROUNDS OF APPEAL STATED BELOW ARE WITHOUT PREJ UDICE TO EACH OTHER. 1. THE LEARNED CIT (A) ERRED IN REJECTING APPELLANT'S APPLICATION U/S. 154 OF THE ACT. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, TH E CIT (A) BE DIRECTED TO RECTIFY THE MISTAKE WHICH IS APPARENT FROM T HE FACE OF RECORDS. 2. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT FRO M THE DATA ALREADY ON RECORD G.P. MARGIN, IF WORKED OUT ON THE B ASIS OF CORRECT FIGURES, WOULD BE 4.67% AND NOT 5.71%. 3. THE ACTION OF THE LEARNED CIT (A) IN REFUSING TO R ECTIFY THE ERROR IN APPLYING G. P. MARGIN TO SALES, WHILE ACCEPTING THE ERROR IN ARRIVING AT THE FIGURE OF SALES TO THIRD PARTIES WHICH W AS RS.6,69,29,16,774 AND NOT RS. 6,79,66,42,975 AS INAD VERTENTLY CONSIDERED, CANNOT BE JUSTIFIED. 4. GENERAL 4.1 THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY ONE OR MORE OF THE GROUNDS OF APPEALS AS MAY BE REQUIR ED IN THE NATURE AND CIRCUMSTANCES OF THE CASE. 4.2 THE APPELLANT PRAYS LEAVE TO ADDUCE SUCH FURTHER EVIDENCE TO SUBSTANTIATE ITS CASE AS THE OCCASION MAY DEMAND. 106 22.2 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. SINCE IN THE APPEAL FILED BY THE ASSESSEE W E HAVE ALREADY DIRECTED THE ASSESSING OFFICER TO ADOPT THE GP RATE OF 1.20% ON THE TURNOVER DISCLOSED BY THE ASSESSEE IN THE AUDITED B OOKS OF ACCOUNT, THEREFORE, THE ABOVE GROUNDS BECOME INFRUCTUOUS. A CCORDINGLY, THESE GROUNDS ARE DISMISSED. 23. IN THE RESULT, ITA NO.532/PN/2013 FILED BY THE ASSESSEE AND ITA NO.607/PN/2013 FILED BY THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.663/PN/2013 FILED BY THE ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 16-01-2015. SD/- SD/- (R.S.PADVEKAR) (R. K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMB ER PUNE DATED: 16 TH JANUARY, 2015 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-II, NASHIK 4. THE CIT-II, NASHIK 5. THE D.R, B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE DETAILS OF TOTAL PURCHASES AND SALES OF THE ENTIRE GROUP IS ENCLOSED ANNE-1 DETAILS OF GOLD PURCHASE FROM SISTER CONCERN & OTHE R PARTIES FOR THE F.Y.2008-09 COMPANY NAME SISTER CONCERN OTHER PARTIES GRAND TOTAL BULLION ORNAMENTS BULLION ORNAMENTS BULLION ORNAMENTS QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE QTY. VALUE AVERAGE RATE RAJMAL LAKHICHAND 3195845.500 4,198,775,360 13138 3395145.191 4,537,241,927 13364 25000.000 29,152,500 11661 436566.496 561,022,267 12851 3220845.500 4,227,527,860 13127 3831711.687 5,098,264,194 13305 RAJMAL LAKHICHAND & SONS 253000.000 351,070,500 13876 1067407.809 1,389,844,889 13021 267170.854 362,748,024 13577 0.000 0 0 520170.854 713,818,524 13723 1067407.809 1,389,844,889 13021 R.L.GOLD PVT.LTD. 114000.000 162,659,000 14268 454874.021 602,718,403 13250 664000.000 914,455,727 13772 14041.046 15,919,638 11338 778000.000 1,077,114,727 13845 468915.067 618,638,041 13193 MANVI HOLDING PVT. LTD 144390.500 219,808,837 15223 194984.230 294,502,157 15103.9 697000.000 921,322,881 13218 0.000 0 0 841390.500 1,141,131,718 13562 194984.230 294,502,157 15104 RAJMAL LAKHICHAND JEWE.P.LTD. 320000.000 393,820,000 12307 1109513.863 1,532,199,315 13810 1210000.000 1,674,282,065 13837 363293.556 474,017,510 13048 1530000.000 2,068,102,065 13517 1472807.419 2,006,216,825 13622 MANRAJ JEWELLERS PVT.LTD. 342000.000 469,757,500 13736 959665.662 1,274,230,686 13278 947295.625 1,280,312,696 13515 0.000 0 0 1289295.625 1,750,070,196 13574 959665.662 1,274,230,686 13278 4369236.000 5795891197 13265 7181590.776 9630737377 13410 3810466.479 5182273893 13600 813901.098 1050959415 12913 8179702.479 10978165090 13421 7995491.874 10681696792 13360 DETAILS OF GOLD SALES TO SISTER CONCERN & OTHER PARTIES FO R THE F.Y.2008-09 SISTER CONCERN OTHER PARTIES GRAND TOTAL COMPANY NAME BULLION ORNAMENTS BULLION ORNAMENTS BULLION ORNAMENTS QTY VALUE AVERAGE RATE QTY VALUE AVENGE RATE QTY VALUE AVERAGE QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE QTY VALUE AVERAGE RATE RAJMAL LAKHICHAND 895390.500 1,229,087,840 13727 2977287.493 3,974,557,622 13350 2473435.984 3,207,646,557 12968 797474.383 1,108,336,789 13906 3368826.484 4,436,734,397 13170 3774761.876 5,083,494,411 13467 RAJMAL LAKHICHAND & SONS 417250.000 553,845,100 13274 1143453.583 1,490,941,641 13039 34060.302 41,609,000 12216 0.000 0 0 451310.302 595,454,100 13194 1143453.583 1,490,941,641 13039 R.L.GOLD PVT.LTD. 571220.000 745,512,100 13051 693461.412 901,412,851 12999 3568.219 4,685,150 13130 14041.046 17,646,832 12568 574788.219 750,197,250 13052 707502.458 919,059,683 12990 MANVI HOLDING PVT.LTD. 215375.500 296,725,660 13777 602462.230 819,940,200 13610 204085.000 287,585,700 14091 7566.440 11,525,129 15232 419460.500 584,311,360 13930 610028.670 831,465,329 13630 RAJMAL . LAKHICHAND JEWE. P. LTD. 1504000.000 1,968,186,000 13086 531179.700 801,227,854 15084 64061.000 87,229,574 13617 979000.890 1,330,749,503 13593 1568061.000 2,055,415,574 13108 1510180.590 2,131,977,357 14117 MANRAJ JEWELLERS PVT.LTD. 766000.000 1,002,529,500 13088 1233746.358 1,642,657,208 13314 274853.460 373,584,461 13592 12809.410 16,727.975 13059 1040853.460 1,376,113,961 13221 1246555.768 1,659,385,183 13312 4369236.000 5795886200 13265 7181590.776 9630737376 13410 3054063.965 4002340442 13105 1810892.169 2485586228 13725 7423299.965 9798226642 13199 8992482.945 12116323604 13474