The ITO, Ward-6(4), Surat V. M/s. Shree Saraswati Medical Agencies, Surat

ITA 769/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0998 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 24-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 10-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: MITESH S MODI
• Keywords: Gross profit estimation; Business expenditure; Question of law; Revenue expenditure
• Section: 80C; 10(10D); 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER ./ ITA.NO.769/AHD/2011 / ASSTT. YEAR: 2007-2008 ITO, WARD - 6(4) SURAT. VS M/S.SHREE SARASWATI MEDICAL AGENCIES 12/1492, YOGESHWAR AAVAS SHAHPORE, SURAT. PAN : AAKFS 5323 A. ! / (APPELLANT) '# ! / (RESPONDENT) REVENUE BY : SHRI DINESH SINGH, SR.DR ASSESSEE BY : SHRI MITESH S. MODI, AR / DATE OF HEARING : 24/06/2016 / DATE OF PRONOUNCEMENT: 15/07/2016 $%/ O R D E R THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL AGAINS T THE ORDER OF THE LD.CIT(A)-IV, SURAT DATED 16.11.2010 PASSED FOR THE ASSTT.YEAR 2007-08. 2. IN BRIEF, THE GRIEVANCE OF THE REVENUE RELATES T O DELETION OF THE FOLLOWING ADDITIONS/DISALLOWANCE MADE BY THE AO: 1. DISALLOWANCE OF COMMISSION RS.9,99,500/- 2. ADDITION ON ACCOUNT OF LOW GP RS.12,06,924/- 3. DISALLOWANCE OF LOSS DUE TO FLOOD RS.10,86,016/- 4. DISALLOWANCE OUT OF VARIOUS EXPENSES RS.35,687/- 5. ADDITION ON ACCOUNT OF KEYMAN INSURANCE RS.2,66,774 /- ITA NO.769/AHD/2011 2 3. FIRST OF ALL, I TAKE THE ISSUE WITH REGARD TO TH E ADDITION MADE ON ACCOUNT OF LOW GP SHOWN BY THE ASSESSEE. 4. THE ASSESSEES FIRM HAS FILED ITS RETURN OF INCO ME ON 28.10.2007 DECLARING TOTAL INCOME AT RS.2,13,070/-. ON SCRUTI NY OF THE ACCOUNTS, THE LD.AO FOUND THAT THE ASSESSEE HAD REGISTERED A FALL IN GP AT THE RATE OF 1.8%. HE DIRECTED THE ASSESSEE TO EXPLAIN THE REASON FOR DECLINE OF SUCH GP. IT WAS CONTENDED BY THE ASSESSEE THAT APPROXIMATELY 40 DAY S OF BUSINESS HAD BEEN LOST DUE TO FLOOD IN THE CITY OF SURAT. THE ASSESS EE HAD TO DESTROY STOCK OF RS.1,18,58,134/- AS PER NOTIFICATION ISSUED BY THE GOVERNMENT. AGAINST THIS LOSS OF STOCK, THE ASSESSEE COULD RECOVER A SUM OF RS.1,07,72,118/- FROM THE INSURANCE COMPANY. THE ASSESSEE HAS SUFFERED A LOS S OF PROFIT OF STOCK DESTROYED. THERE WERE LOTS OF COMPETITION AND OTHE R PROBLEMS FACED BY THE ASSESSEE. THE LD.AO WAS NOT SATISFIED WITH THE EXP LANATION OF THE ASSESSEE. HE OBSERVED THAT THE ASSESSEE HAD NOT MAINTAINED TH E STOCK REGISTER, ORDER PLACEMENT REGISTER AND GOODS RECEIVED REGISTER, THE REFORE, THE FAILURE OF THE ASSESSEE ON THIS FRONT WOULD AUTOMATICALLY LEAD TO REJECTION OF THE BOOKS OF ACCOUNTS. HE, ACCORDINGLY, REJECTED THE BOOK RESUL TS OF THE ASSESSEE AND APPLIED GP RATE OF 5.57%. THIS RATE HAS BEEN ADOPT ED BY THE AO AFTER TAKING AVERAGE GP OF THREE YEARS. IN THIS WAY, HE MADE AD DITION OF RS.12,06,924/-. THE LD.CIT(A) HAS DELETED THE ADDITION BY OBSERVING AS UNDER: 3.2. I HAVE GONE THROUGH THE ASSESSMENT ORDER, REAS ONS OF THE A.O. FOR REJECTING THE BOOKS OF ACCOUNTS, SUBMISSIONS OF THE APPELLANT AND EVIDENCES. IT IS SEEN THAT THE ONLY REASON FOR NOT ACCEPTING THE BOOK RESULTS WAS NON-MAINTENANCE OF STOCK REGISTERS; PUR CHASE REGISTERS AND GOODS RECEIPT REGISTERS. NO OTHER DISCREPANCIES HAD BEEN POINTED OUT BY THE A.O. ON THE OTHER HAND. THE APPELLANT HAS GIVEN COGENT REASONS FOR FALL IN G.P RATE IT IS SEEN THAT THE REASON GIVEN B Y THE AO. I.ET NON- MAINTENANCE OF STOCK REGISTERS, ETC. IS NOT CORRECT . THE APPELLANT HAS MAINTAINED THIS AND THE DETAILS ARE AVAILABLE ONLIN E. THE BUSINESS OF THE APPELLANT IS SUBJECT TO INSPECTION AND UNDER THE DI RECT CONTROL OF DRUG AUTHORITIES AND CANNOT BE CONDUCTED WITHOUT MAINTAI NING PROPER STOCK ITA NO.769/AHD/2011 3 RECORDS. THE BOOK RESULTS WERE CORROBORATED BY THE VAT AUDIT AND THESE WERE BEFORE THE A.O. IT IS ALSO OBSERVED THAT THE APPELLANT WAS NOT REQUIRED BY THE A.O TO PRODUCE THE STOCK RECORDS AN D THEREFORE IT CANNOT BE HELD AGAINST HIM. MERELY BECAUSE THE G.P. RATIO HAS DECREASED, BOOKS CANNOT BE REJECTED. BOOKS OF ACCOU NTS CAN BE REJECTED ONLY IF SPECIFIC DISCREPANCIES ARE OBSERVED AND THI S REMAINS UNRECONCILED. IN THE CASE OF THE APPELLANT, THE MET HOD OF ACCOUNTING AS ACCEPTED IN PREVIOUS YEARS BY THE DEPARTMENT HAS BE EN FOLLOWED AND NO SPECIFIC DISCREPANCIES HAVE BEEN POINTED OUT BY THE A.O AND THEREFORE THERE WAS NO REASON FOR REJECTING THE BOO K OF ACCOUNTS OF THE APPELLANT AND ESTIMATING PROFITS. THE ADDITION MADE ON ACCOUNT OF LOW G.P. (RS.12,06,924/-) IS THEREFORE DELETED. THIS GR OUND OF APPELLANT IS ALLOWED. 5. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, I HAVE GONE THROUGH THE RECORD CAREFULLY. THE SOLE OBJECTION OF THE AO WAS THAT THE ASSESSEE HAS NOT BEEN MAINTAINING STOCK REGISTER AND ALSO ORDER PLAC EMENT REGISTERS. ACCORDING TO HIM, THE ABSENCE OF THESE TWO DOCUMENT S WOULD PUT A FETTER ON THE AO TO INVESTIGATE PROPERLY THE AFFAIRS OF THE A SSESSEE. THE LD.CIT(A) DID NOT FIND FORCE IN THIS CONTENTION OF THE AO. ACCOR DING TO THE LD.CIT(A), THE ASSESSEE HAS BEEN MAINTAINING STOCK REGISTER ON-LIN E. ITS ACCOUNTS ARE SUBJECT TO INSPECTION UNDER DIRECT CONTROL OF DRUG AUTHORIT IES, WHICH COULD NOT BE CONDUCTED WITHOUT MAINTENANCE OF PROPER STOCK RECOR DS. AS FAR AS FALL IN GP IS CONCERNED, THE LD.CIT(A) WAS SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. AFTER TAKING INTO CONSIDERATION ALL THES E FACTS AND CIRCUMSTANCES, I DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE LD.CIT(A) ON THIS ISSUE. 6. NEXT ISSUE PERTAINS TO DELETION OF RS.9,99,500/- . IT EMERGES OUT FROM THE RECORD THAT THE ASSESSEE HAD MADE PAYMENT OF CO MMISSION AT THE RATE OF 1% ON SALE TURNOVER TO SHRI KRUNAL P. GHAEL, TEJAS T. GHAEL, KEYUR GHAEL AND DHAVAL M. GHAEL. ALL THESE PERSONS HAVE SHOWN THIS COMMISSION INCOME IN THEIR RETURN OF INCOME. THE LD.AO HAS DISALLOWE D THIS CLAIM TO THE ASSESSEE FOR THE REASONS THAT THEY FALL WITHIN THE AMBIT OF SECTION 40A(2) OF THE INCOME ITA NO.769/AHD/2011 4 TAX ACT. ACCORDING TO THE AO, THE COMMISSION GIVEN TO THEM IS ON THE HIGHER SIDE. ON APPEAL, THE LD.CIT(A) HAS DELETED THE DISALLOWANCE. 7. BEFORE ME, THE LD.COUNSEL FOR THE ASSESSEE CONTE NDED THAT ALL THE PERSONS TO WHOM COMMISSION WAS PAID WERE BORN BEFOR E 1983. THEY ARE MAJOR. THEY ARE GRADUATES AND THEY WERE ASSISTING THE BUSINESS OF THE ASSESSEE. IN THE LAST YEAR, SUCH DISALLOWANCE WA S DELETED BY THE LD.CIT(A), AND THE REVENUE DID NOT PREFER ANY APPEAL. 8. ON THE OTHER HAND, LD.DR RELIED UPON THE ORDER O F THE AO. 9. I HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GON E THROUGH THE RECORD CAREFULLY. SECTION 40A(2)(B) CONTEMPLATES THAT IF PERSONS BY VIRTUE OF THEIR RELATIONSHIP OR POSITION WITH THE MANAGEMENT PERSUA DE THE ASSESSEE TO PAY A HIGHER AMOUNT OF REMUNERATION IN LIEU OF SERVICES, THEN SUCH HIGHER AMOUNT OF REMUNERATION COULD BE DISALLOWED. IN OTHER WORDS, IF THOSE SERVICES COULD BE AVAILED FROM THE OPEN MARKET AT A LOWER RATE, THEN, EXCESS PAYMENT IS TO BE DISALLOWED. IN THE PRESENT CASE, THE ASSESSEE HAS PAID COMMISSION TO FOUR PERSONS. THE OBJECTION OF THE AO IS THAT THEY ARE SIMPLE GRADUATES AND THEY COULD NOT EARN THIS MUCH OF INCOME. BUT I FAILED T O UNDERSTAND THE REASONING OF THE AO, BECAUSE, HE HAS NOT GIVEN ANY BASIS FOR DOUBTING THE CAPABILITY OF ALL FOUR PERSONS. AO HAS NOT REFERRED ANY MATERIAL AS TO HOW SERVICES RENDERED BY THEM COULD BE AVAILED AT A LOWER RATE F ROM THE MARKET. THE LD.CIT(A) HAS RIGHTLY DELETED THE ADDITION, THEREFO RE, I DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF REVENUE. IT IS REJECTED. 10. IN THE NEXT ISSUE, THE GRIEVANCE OF THE REVENUE IS THAT LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.10,86,016/-. ITA NO.769/AHD/2011 5 11. BRIEF FACTS OF THE CASE ARE THAT GOODS HAVING V ALUE OF RS.1,18,58,134/- WAS DESTROYED IN FLOODS. THE INSURANCE COMPANY ALL OWED THE CLAIM OF THE ASSESSEE TO THE EXTENT OF RS.1,07,72,118/-. THE DI FFERENCE OF RS.10,86,016/- WAS CLAIMED BY THE ASSESSEE AS LOSS DUE TO FLOOD. THIS LOSS WAS NOT ALLOWED BY THE AO. THE AO CONSTRUED THAT THE VALUE OF STOC K DESTROYED MUST BE EQUAL TO THE AMOUNT OF CLAIM ADMITTED BY THE INSURANCE CO MPANY. THE LD.FIRST APPELLATE AUTHORITY DID NOT CONCUR WITH THIS CONCLU SION OF THE AO ON THE GROUND THAT, IF THIS TYPE OF PLEA IS BEING ACCEPTED , THEN, THERE COULD NOT BE ANY LOSS TO ANY CONCERN. THE ACCEPTANCE OF THE INSURAN CE COMPANY COULD NOT BE A GUIDING FACTORY FOR GAUGING THE LOSS OF ANY ASSESSE E. AFTER TAKING INTO CONSIDERATION THE FINDING OF THE CIT(A), I DO NOT F IND ANY REASON TO INTERFERE IN IT. 12. IN THE NEXT GROUND OF APPEAL, THE GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 35,687 /-. 13. THE LD.AO HAS MADE DISALLOWANCE OUT OF MISCELLA NEOUS EXPENSES AT THE RATE OF 20%. ON APPEAL, THE LD.CIT(A) DELETED SUCH DISALLOWANCE ON THE GROUND THAT MISC. EXPENSES CLAIMED BY THE ASSESSEE ARE ONLY 0.16% OF THE TURNOVER. IN OTHER WORDS, THE LD.CIT(A) WAS SATISF IED THAT THE ASSESSEE HAS NOT DEBITED ANY PERSONAL EXPENDITURE OR OTHER EXPENDITU RE, WHICH ARE NOT LINKED WITH THE BUSINESS IN THE MISC. EXPENSES. AFTER CON SIDERING THE SMALLNESS OF THE EXPENDITURE AND THE REASON ASSIGNED BY THE LD.C IT(A), I DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) ON THIS ISSUE. THIS GROUND IS REJECTED. 14. IN THE NEXT GROUND OF APPEAL, THE GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF KEYMAN INSURANCE PREMIUM AMOUNTING TO RS.2,66,744/-. ITA NO.769/AHD/2011 6 15. BRIEF FACTS OF THE CASE OF THE ASSESSEE IS THAT ASSESSEE-FIRM HAD TAKEN KEYMAN INSURANCE POLICY (KIP FOR SHORT)FOR THE LI FE OF PARTNER, SHRI MUKESH JAYANTILAL GHAEL. IT HAD PAID PREMIUM OF RS .2,66,744/-. THIS CLAIM WAS DISALLOWED BY THE AO. ON APPEAL, THE LD.CIT(A) HAS ALLOWED CLAIM BY FOLLOWING THE ORDER OF THE ITAT, MUMBAI BENCH IN TH E CASE OF MODI MOTORS, 126 TTJ 495. 16. THE LD.COUNSEL FOR THE ASSESSEE, AT THE OUTSET, SUBMITTED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. GEM ART, 22 TAXMANN .COM 243 (GUJ). ON THE OTHER HAND, THE LD.DR RELIED UPON THE ORDER OF THE AO. 17. I HAVE CONSIDERED RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. THE ORDER OF THE HONBLE GUJARAT HIGH C OURT IN THE CASE OF GEM ART (SUPRA) IS VERY BRIEF ORDER, BUT DIRECTLY ON TH E POINT. THE RELEVANT PART OF HIS ORDER READ AS UNDER: 3. THE ONLY POINT RAISED BY THE REVENUE IN THIS AP PEAL IS WHETHER THE TRIBUNAL BELOW COMMITTED SUBSTANTIAL ERROR OF L AW IN HOLDING THE THE PREMIUM PAID FOR THE PARTNERS UNDER THE KEYMAN INSURANCE POLICY WAS A REVENUE EXPENDITURE DEDUCTIBLE UNDER SECTION 37 OF THE INCOME TAX ACT. 4. IN ORDER TO APPRECIATE THE AFORESAID QUESTION, I T WOULD BE PROFITABLE TO REFER TO THE PROVISIONS CONTAINED IN SECTION 10(10D) OF THE ACT, WHICH ARE QUOTED BELOW : '10. IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YE AR OF ANY PERSON, ANY INCOME FALLING WITHIN ANY OF THE FOLLOW ING CLAUSES SHALL NOT BE INCLUDED (1) TO (10CC) .. ... ... ... ... (10D) ANY SUM RECEIVED UNDER A LIFE INSURANCE POLIC Y, INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY, O THER THAN ITA NO.769/AHD/2011 7 (A) ANY SUM RECEIVED UNDER SUB-SECTION (3) OF SECTI ON 80DD OR SUB-SECTION (3) OF SECTION 80DDA; OR (B) ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLIC Y; OR (C) ANY SUM RECEIVED UNDER AN INSURANCE POLICY ISSU ED ON OR AFTER THE 1ST DAY OF APRIL, 2003 IN RESPECT OF WHIC H THE PREMIUM PAYABLE FOR ANY OF THE YEARS DURING THE TERM OF THE POLICY EXCEEDS TWENTY PER CENT OF THE ACTUAL CAPITAL SUM ASSURED: PROVIDED THAT THE PROVISIONS OF THIS SUBCLAUSE SHAL L NOT APPLY TO ANY SUM RECEIVED ON THE DEATH OF A PERSON: PROVIDED FURTHER THAT FOR THE PURPOSE OF CALCULATIN G THE ACTUAL CAPITAL SUM ASSURED UNDER THIS SUBCLAUSE, EFFECT SH ALL BE GIVEN TO THE EXPLANATION TO SUBSECTION (3) OF SECTION 80C OR THE EXPLANATION TO SUB-SECTION (2A) OF SECTION 88, AS T HE CASE MAY BE. EXPLANATION.- FOR THE PURPOSES OF THIS CLAUSE, 'KEY MAN INSURANCE POLICY' MEANS A LIFE INSURANCE POLICY TAK EN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRSTMENTIONED PERSON OR IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE FIRSTMEN TIONED PERSON.' 5. AFTER GOING THROUGH THE EXPLANATION GIVEN IN THE SAID SECTION, WE ARE OF THE VIEW THAT PARTNER DEFINITELY COMES WITHI N THE PURVIEW OF THE PERSON WHO IS CONNECTED WITH IN ANY MANNER WHATSOEV ER WITH THE BUSINESS OF THE FIRM. 6. APART FROM THE AFORESAID FACT, IT APPEARS THAT T HE FINANCE ACT, 1996 INDICATES THAT SUMS RECEIVED BY ORGANISATION O F KEYMAN POLICY SHOULD BE TAXED AS BUSINESS PROFITS, THE SURRENDER VALUE OF POLICY ENDORSED IN FAVOUR OF THE EMPLOYEE (KEYMAN) OR THE SUM RECEIVED BY HIM AT THE TIME OF RETIREMENT BE TAKEN AS 'PROFITS IN LIEU OF SALARY' FOR TAX PURPOSES; AND IN CASE OF OTHER PERSONS HAVING N O EMPLOYER- EMPLOYEE RELATIONSHIP, THE SURRENDER VALUE OF THE P OLICY OF THE SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FROM O THER SOURCES AND TAXED ACCORDINGLY. THE PREMIUM PAID ON THE KEYMAN I NSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE. THE AMENDMENT H AD TAKEN EFFECT FROM OCTOBER 1, 1996. ITA NO.769/AHD/2011 8 7. THUS, WE ARE OF THE VIEW THAT THE TRIBUNAL WAS Q UITE JUSTIFIED IN HOLDING THAT THE PREMIUM PAID FOR A PARTNER WAS DED UCTIBLE WITHIN THE MEANING OF SECTION 37 OF THE ACT. WE THUS FIND THAT NO SUBSTANTIAL QUESTION OF LAW IS INVOLVED IN THIS APPEAL. THE APP EAL IS THUS DISMISSED. 18. RESPECTFULLY FOLLOWING THE ABOVE ORDER, I AM OF THE VIEW THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION OF THE PREMIUM P AID ON THE KIP FOR THE PARTNER. THE LD.CIT(A)HAS RIGHTLY DELETED THE IMPU GNED ADDITION. THIS GROUND OF APPEAL IS REJECTED. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE COURT ON 15 TH JULY, 2016 AT AHMEDABAD. SD/- (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 15/07/2016