INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “F”: NEW DELHI

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND

SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
(Through Video Conferencing)

ITA No. 1546/De/2017

(Assessment Year: 2012-13)

Rajesh Kumar Prop, Vs. ACIT,

N. W. Overseas, 42,Devi Murti Panipat Circle,

Coloy, Panipat Haryana

(Appellant) (Respondent)

Assessee by : Shri Rakesh Jain, Adv
Shri Gurjeet Singh, CA
Revenue by: Shri Ramesh Kumar, SR. DR
Date of Hearing
Date of pronouncement 24/11/2020
02/12/2020

O R D E R

PER PRASHANT MAHARISHI, A. M.

1. This appeal is filed by the assessee against the order of the ld CIT(A),
Karnal [ the ld CIT (A) ] dated 17.01.2017 for the Assessment Year
2012-13 wherein appeal filed by the assessee against the order passed
by the Asst Commissioner of income tax, Panipat Circle Panipat [ The
ld AO ] u/s 143 (3) of The Income Tax Act 1961 (The Act) dated 30
March 2015 assessing the total income of the assessee at Rs
1,77,77,567/– against the returned income of the assessee at ₹
5,296,930/– making disallowance of Rs 1,24,80,637/– was reduced to
50% of the disallowance partly allowing the appeal.

2. The assessee has raised the following grounds of appeal:-

“1. Because the action for making disallowance of commission expenses
for Rs. 41,19,626/- (50% of Rs 82,39,253/-), is being challenged on
facts & law alongwith the challenge to percentage of disallowance.

2. Because the action for disallowance of installation charges Rs.
2,75,375/- (25% of Rs. 11,01,500/-) is being challenged on facts & law
alongwith the challenge to percentage of disallowance.

3. Because the action for declining the benefit of deduction is being
challenged on facts & law for non deduction of TDS on the amount of
Rs. 1,12,768/- u/s 40(a)(ia) r.w 194C.
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4. Because the action for declining the claim of interest expenses of ?
1,00,000/- is being challenged on facts & law.

5. Because the action for upholding the disallowance of payment of
interest of Rs. 2,85,600/- (12% of 23,80,000/-) u/s 36(l)(iii) is being
challenged on facts & law pursuant to the principle of commercial
expediency and business exigency.

6. Because the action for total disallowances of Rs. 14,54,692/- on under
mentioned expenses are being challenged on facts & law alongwith
percentage of disallowances:-

- Expenses of Diwali Rs. 64,141 /- (10% of 6,41,415/-)

- Business promotion Rs. 76,058/- (10% of 7,60,576/-)

- Conference charges Rs. 1,83,654/- (10% of 18,36,544/-)

- Conveyance Rs. 1,03,578/- (10% of 10,35,775/-)

- Entertainment Rs. 31,955/- (10% of 3,19,550/-)

- Travelling Rs. 9,95,007/- (10% of 99,50,068/-)

7. Because the action for total disallowances of Rs. 50,275Jf- (Rs.
2,55,953/-1/10th of expenses less 1/12th already disallowed by
assessee amounting Rs. 2,05,678/-) relating to Car & Scooter
maintenance expenses, Car Depreciation, Car Insurance & Telephone
expenses.”

3. Brief facts of the case shows that assessee is an individual who filed

his return of income at ₹ 2,355,800 on 30 September 2012. The

assessee revised his return on 22/8/2013 declaring a total income of

₹ 5,296,930. The reason for revision of the return was that the

assessee since tax liability of ₹ 3,091,133/– was not paid to the date

of filing of the income tax return and therefore applying the provisions

of Section 43B of the income tax act the above disallowance was made

in the revised return filed by the assessee.

4. The assessee is engaged in the business of dealing in surgical

equipments and accessories, linen etc in the name of his proprietary

concern N W overseas. He is dealing with the government department

as well as private hospital and also carrying on liaison of work for

their principle in India and abroad. It is also providing services for

maintenance of the equipments and the proprietary concern is purely

a trading concerned. For the year assessee has shown a gross profit of

₹ 51,998,524/– on total sales of ₹ 156,343,839/–. Against the above

assessee has shown Net profit of ₹ 2,266,569 only. The assessee has

also shown the income as service charges of ₹ 2,702,553, AMC

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charges of ₹ 78,142, commission of ₹ 680,198, and interest on fixed
deposit receipt of ₹ 276,660, interest income of ₹ 28,158 and
miscellaneous income of ₹ 7544. Assessee has also shown
professional charges of ₹ 24 lakhs in the profit and loss account.
Thus according to ld AO assessee has shown loss in the business. SO
ld AO examined various expenses claimed by the assessee. The
learned assessing officer noted that assessee has claimed commission
on sales of ₹ 8,239,253 for the year against ₹ 958,802 in the
preceding assessment year. On examination of the month wise details
for commission on sale AO noted that the claim of huge commission
expenditure in the month of March 2012 raises a serious doubt about
the genuineness of the claim. The learned assessing officer examines
this claim. The assessee submitted the detailed of the commission
paid with the name of the party, permanent account number, address
and the date of the credit of the commission expenditure as well as
the amount of commission paid. The learned assessing officer noted
that assessee has not furnished details as to services rendered by
each such party however assessee submitted the confirmation of all
those parties. The learned assessing officer noted that the gross profit
rate for the year under consideration has declined from 35.74% in the
immediately preceding previous year to 33.25% for the year under
consideration and not satisfied by the submission of the assessee he
held that commission expenditure of ₹ 8,239,253 is held to be bogus
and therefore he disallowed the same. He further examined the details
of the interest expenditure of ₹ 3,409,650 unsecured loan rates from
the family members. He noted that assessee has paid interest at the
rate of 18% to these parties which are covered u/s 40A (2) (b) of the
income tax act when the funds from the banks are available at much
lower rate. He noted that assessee is also paying interest at the rate of
15% to 2 different parties. Accordingly he held that in the normal
circumstances the funds are available from banks at the rate of 12%
and therefore the interest paid to the above related parties is allowed
to the extent of ₹ 12 percent which works out to ₹ 2,312,981 and
therefore the excessive interest paid of ₹ 1,096,669 was disallowed.

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AO also asked about the details of payment made to person covered
u/s 40A (2) (b) of the income tax act and found that assessee has paid
salary to the relatives. Assessee submitted the details of the amount
of salary paid to all these persons. The learned assessing officer noted
that all these persons are doing their independent business activity
and they would not be able to give their full time to this employer and
that the same time no employer allows employees to carry on with his
independent business activity also unless the employee is a part-time
employee or a consultant. Therefore the payment of salary to these
relatives is held to be excessive by the learned assessing officer and
not justified therefore he disallowed 50% of the salary paid to these
parties holding them to be excessive and disallowed ₹ 420,000.
Assessee has also debited a sum of ₹ 1,101,500 in his trading
account under the head installation charges. The assessee was asked
to furnish the details. Assessee furnished such details to these parties
stating that those expenses are incurred for rendering professional
services to Kirloskar technology private limited and for installation of
other machines with different departments. As the assessee did not
furnish the details of the address and permanent account number of
these parties except in some of the cases, the learned assessing
officer disallowed 50% of such expenses amounting to ₹ 550,750/–.
The learned assessing officer further disallowed out of freight and
cartage expenses claimed of ₹ 847,601/-, that ₹ 112,678 are paid to
Blue Dart as courier charges which is not transportation charges and
therefore he disallowed the same. The learned assessing officer further
disallowed a sum of ₹ 1 lakh out of the other expenditure incurred by
the assessee of ₹ 278,738 in absence of proper detail. AO further
noted that assessee has given interest free loans of ₹ 2,380,000 to
certain parties on which interest has not been charged and therefore
he calculated interest the rate of 12% on the above-mentioned
advances and made an addition of ₹ 285,600 disallowing the interest
expenditure claimed in the profit and loss account. He found that
assessee has further debited business promotion expenditure,
Conveyance expenses, entertainment expenses, conference expenses

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and conveyance expenses totaling in to ₹ 4,596,860 and disallowed
1/10 of the above expenses of ₹ 459,686 for personal expenses. The
AO further disallowed a sum of ₹ 995,007 out of travelling
expenditure of ₹ 9,950,068/– being 10% of such expenses since the
assessee is an individual and possibility of personal/non business
element cannot be ruled out. He further noted that assessee has
debited Rs 25,59,539 on account of car and Scooter maintenance
expenditure, car depreciation, car insurance and telephone
expenditure. He disallowed 1/6 of the total expenditure of eight ₹
426,590 out of that on account of personal expenditure. Assessee has
already disallowed of ₹ 205,679 in the computation of the total
income and therefore he made an act disallowance of ₹ 220,912 out of
the same. Accordingly the total disallowance of expenditure of Rs 1,
24,80,637 was made and the returned income of ₹ 5,296,930 was
assessed at Rs 1, 77,77,567 by passing an order u/s 143 (3) of the act
on 30 March 2015.
5. Assessee being aggrieved with the order of the learned assessing
officer preferred an appeal of the learned CIT – A. The learned CIT-A
restricted the disallowance of commission expenditure of ₹ 8,239,253
to ₹ 4,119,626. He further restricted the disallowance out of the
installation charges of ₹ 1,101,502 to ₹ 275,375. With respect to the
non-deduction of tax at source on various installation charges paid by
the assessee he restricted/confirmed disallowance of ₹ 112,678. He
further confirmed the disallowance of ₹ 1 lakh out of the interest
expenditure. The learned CIT – A also confirmed the disallowance of ₹
285,600 u/s 36 (1) (iii) of the act on the advances given to the various
parties. With respect to the disallowances out of the business
promotion expenditure conference charges, conveyance expenses
entertainment expenses and travelling expenses, he restricted
disallowance to ₹ 4,054,692. Out of the car maintenance and Scooter
maintenance expenditure for which the disallowance of ₹ 255,953 was
made by the learned assessing officer, he confirmed the disallowance
of ₹ 50,275. In nutshell, the learned CIT – A restricted the

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disallowance made by the learned assessing officer. Assessee being
aggrieved with the above order has preferred this appeal.
6. The learned authorised representative and the learned senior
departmental representative were heard on the various aspects of the
issue involved in the appeal.
7. We have heard the rival contentions, perused the orders of the lower
authorities and the paper book submitted by the assessee. The claim
of the assessee is that he has submitted the requisite details before
the learned assessing officer and therefore the disallowance made by
the learned assessing officer cannot be sustained. He referred to page
number [1] of assessment order where the learned assessing officer
has maintained that the authorised representative of the
representative of the assessee produced the books of accounts
including Ledger, cash book, purchase bill, since built, bank
statement before the assessing officer. All these expenditure are
debited in the books of accounts and therefore supported by the bills
and vouchers place therein. He stated that the learned assessing
officer has made the disallowance merely because some of the bills
and vouchers could not be produced before him. The assessee
submitted that these are the disallowances made by the learned
assessing officer and confirmed by the learned CIT – A for the first
time in the case of the assessee for the reason of lower net profit. He
submitted a detailed chart from assessment year 2007 – 08 to
assessment year 2013 – 14 wherein the assessee has been assessed
in most of the cases u/s 143 (3) of the income tax act. He further
submitted that in none of these cases such disallowance has been
made. He further stated that the disallowance made in the
assessment for this year are merely for the reason of the fact that the
assessee’s net profit and the gross profit rate has gone down in the
current year. He submitted a detailed chart wherein the details of the
gross profit and the net profit has been provided since AY 2007 – 08
till A Y 2013 – 14. Such chart was produced by the assessee. On
careful analysis of the facts it is noted that for assessment year 2012
– 13 the assessee has clocked the turnover of ₹ 156,343,839 and

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gross profit of ₹ 51,998,524 resulting into the gross profit rate of

33.26%. This gross profit compared to the previous year assessment

year 2011 – 12 was found to be at 35.74%. Further the net profit for

the year assessment year 2010 – 11 was found to be 1.77 percent

whereas for the current year the net profit rate was only 1.45%. It is

also the fact that the learned assessing officer has made the

disallowances only because of the reason that in the current year the

assessee has shown lesson net profit compared to earlier years.

Therefore it is necessary to look into the past assessment history of

the assessee as well as for the subsequent year to the impugned

assessment year. Profitability chart of the assessee for all those years

is as Under:-

Assessment Turnover Gross Net Profit whether
Year Profit Rate Rate assessed u/s
143 (3) of the
act on the
date of order

2007 – 08 2,85,91,943 30.06% 2.99% N A

2008 – 09 5,84,80,077 24.99% 1.48% Assessment
dated

1/12/2010

2009 – 10 4,11,27,844 29.82% 2.16% N A
2010 – 11 8,55,83,487 33.40% 1.82%
Assessment
order dated
4/12/2012

2011 – 12 9,15,81,879 35.74% 1.77% N A
2012 – 13 15,63,43,839 33.26% 1.45%
Impugned
assessment
year in the
appeal

2013 – 14 11,53,50,490 28.20% 1.34% assessment

order passed

on 31

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December
2015

2014 – 15 14,61,19,917 24.86% 1.69% Pending

It is also the fact that in most of the cases the assessee has been
assessed u/s 143 (3) of the income tax act and no such disallowances
as has been made in the current year are made in those years. It is
also the fact that the learned assessing officer has not disallowed any
of the expenditure on the basis of the individual instances of such
expenditure and holding that those are not incurred for the purposes
of the business and therefore same are not allowable to the assessee
u/s 37 (1) of the income tax act as they are not fully and exclusively
incurred for the purposes of the business. In most of the
disallowances the learned assessing officer has made ad hoc
disallowance is out of those expenditure. Therefore, in the interest of
justice it would be proper and just if the net profit ratio of the
assessee is assessed at certain percentage which will also take care of
the lower net profit shown by the assessee. It is also required to be
appreciated that for the impugned assessment year the assessee’s
turnover has clocked at more than ₹ 15 crores, which is the highest
among all those years stipulated above. If the average of the net profit
as computed for all these 8 years, such net profit percentage would be
1.83 percentage of the total turnover. Further it is also the fact that
the learned assessing officer was not shown all the bills and vouchers
of expenses incurred by the assessee. Therefore it is not the case of
the assessee that all those expenditure incurred by the assessee are
wholly and exclusively incurred by the assessee, as without
production of them it would not be possible for the learned assessing
officer test this expenditure on those criteria. Further, it is also not
the case of the learned assessing officer that assessee has not
produced details before him. The learned AO has completely verified
the books of accounts, sales bills, purchase bills, bank statements et
cetera during the course of the assessment proceedings and did not
find any defect in them. Furthermore the learned assessing officer has

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made certain disallowance holding them to be excessive and
unreasonable by applying the provisions of Section 40 A (2) of the act
without finding that to what extent they are unreasonable or excessive
having regard to the market price of such services. In any case, if the
learned assessing officer would have rejected the books of accounts
then naturally he would have as the assessee at the net profit rate. In
view of this, we direct the learned assessing officer to restrict the net
income of the assessee at 1.90 percentage of the total turnover of
15.63 crores which would be ₹ 2,970,532 compared to the net profit
shown by the assessee of ₹ 23,55,800/–. The AO is directed to assess
the total income of the assessee at ₹ 2,970,532 plus a sum of ₹
3,091,133/–[ 43B disallowance ] totaling to Rs 6,061,665/–. In view
of this, all the grounds raised by the assessee are disposed of
accordingly.
8. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court on 02/12/2020.

-Sd/- -Sd/-
(AMIT SHUKLA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 02/12/2020
A K Keot

Copy forwarded to

1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT

ASSISTANT REGISTRAR
ITAT, New Delhi

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