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Income Tax Appellate Tribunal - Ahmedabad
Star Rays,, Surat vs Department Of Income Tax on 7 January, 2008

IN THE INCOME TAX APPELLATE TRIBUNAL : D' BENCH : AHMEDABAD

Camp at Surat

(Before Hon'ble Shri T.K. Sharma, J.M. & Hon'ble Shri D.C. Agrawal , A.M.)

I.T.A. No. 1212/AHD./2008

Assessment Year : 2005-2006

M/s. Star Rays, Surat -vs.- Assistant Commissioner of Income Tax, (PAN : AAMFS 1942 B) Circle-5, Surat (Appellant) (Respondent) &

I.T.A. No. 1108/AHD./2008

Assessment Year : 2005-2006

Assistant Commissioner of Income Tax, -vs.- M/s. Star Rays, Surat Circle-5, Surat

(Appellant) (Respondent)

Assessee by : Shri Hiren Vepari

Department by : Smt. Jyoti Laxmi, Sr. D.R. ORDER

Per Shri T.K. Sharma, Judicial Member :

This cross appeal are against the order dated 07.01.2008 of Learned Commissioner of Income Tax(Appeals)-III, Surat for the assessment year 2005-06.

2. Various grounds raised by the assessee in its appeal are as under :-

(1) The ld. CIT(A.) erred in confirming disallowance @ 20% out of the following expenses which were incurred for the purpose of the business.

Telephone expenses Rs.5,85,588/- Mobile expenses Rs.4,19,433/- Motor car depreciation Rs.6,98,384/- Motor car insurance Rs. 63,222/- Car repairing Rs. 49,809

(2) The ld. CIT(A.) erred in sustaining disallowance of Rs.50,000/- out of conveyance and staff welfare expenses in place of 20% disallowance made by the Assessing Officer.

(3) The ld. CIT(A.) erred in sustaining disallowance of Rs.25,000/- out of office expenses in place of 10% out of office expenses. 2

ITA No.1212 & 1108/AHD/2008

2.1. Various grounds raised by the Revenue in its appeal are as under :- (1) On the facts and in the circumstances of the case and in law, the ld. CIT(A.) has erred in restricting the addition to Rs.50,000/- instead of the addition of Rs.1,53,544/- made by the A.O. on account of conveyance and staff welfare expenses.

(2) On the facts and in the circumstances of case and in law, the ld. CIT(A.) has erred in deleting the addition of Rs.4,85,341/- out of foreign travel expenses made by the A.O.

(3) On the facts and in the circumstances of case and in law, the ld. CIT(A.) has erred in restricting addition to Rs.25,000/- instead of the addition of Rs.67,708/- made by the A.O. on account of office expenses.

3. Briefly stated the facts are that the assessee is a firm engaged in the business of import of rough diamonds and export of polished diamonds. For the assessment year under appeals, it filed the return of income on 31.10.2005 declaring total income at Rs.4,41,83,474/- alongwith audited accounts in Form No. 3CB and 3CD and Profit & Loss A/c., Balance-sheet, Capital A/c., computation of income, etc. In the assessment order, the Assessing Officer disallowed Rs.5,15,833/- being 20% of total expenses amounting to Rs.25,79,164/- as follows :-

Telephone expenses Rs.5,85,588/-

Mobile expenses Rs.4,19,433/-

Motor car depreciation Rs.6,98,384/-

Conveyance Rs.4,01,476/-

Motor car insurance Rs. 63,222/-

Staff welfare expenses Rs.3,61,252/-

Car repairing expenses Rs. 49,809/-

Total Rs.25,79,164/-

3.1. Apart from above, the Assessing Officer disallowed foreign travel expenses amounting to Rs.4,85,341/- and Rs.6,77,081/- out of office expenses.

4. On appeals, in the impugned order the ld. Learned Commissioner of Income Tax(Appeals) confirmed the 1/5th disallowance in respect of telephone expenses, mobile expenses, depreciation on motor car expenses, insurance expenses on motor car and car repairing 3

ITA No.1212 & 1108/AHD/2008

expenses. Aggrieved by the order of Learned Commissioner of Income Tax(Appeals), the assessee is in appeal vide Ground No. 1 before the Tribunal.

5. However, in respect of conveyance expenses and staff welfare expenses, the Learned Commissioner of Income Tax(Appeals) found that disallowance made by the Assessing Officer is disproportionate as it was made only on the basis of some bills and vouchers being defective. He, therefore, took the view that it would be fair and reasonable if lumpsum disallowance of 50,000/- is made out of these expenses totaling to Rs.7,62,728/- [conveyance expenses Rs.4,01,476/- + Staff welfare expenses Rs.3,61,252/-]. Aggrieved by this order of Learned Commissioner of Income Tax(Appeals), both the sides are in appeals. The assessee being aggrieved has come in appeal vide Ground No.2, whereas the Department being aggrieved has come in appeal vide Ground No. 1

5.1. With regard to disallowance of 10% out of foreign travelling expenses, the Learned Commissioner of Income Tax(Appeals) observed that this issue arose in the assessment year 2004-05 also. In that year, the said disallowance was deleted. Following the said order, the Learned Commissioner of Income Tax(Appeals) deleted the ad hoc disallowance on foreign travelling expenses amounting to Rs.4,85,341/-. Aggrieved by this disallowance, the Revenue is in appeal before the Tribunal vide Ground No. 2.

5.2. With regard to disallowance of office expenses amounting to Rs.67,708/- made by the Assessing Officer being 10% of Rs.6,77,080/-, the Learned Commissioner of Income Tax(Appeals) observed that it is on higher side and a lumpsum disallowance of Rs.25,000/- would be justified. He accordingly restricted the disallowance to Rs.25,000/-. Being aggrieved, both sides are in appeals before the Tribunal. The assessee is aggrieved against confirming the disallowance to the extent of Rs.25,000/- vide Ground No. 3 and Revenue is in appeal against deletion of disallowance to the extent of Rs.42,708/- vide Ground No. 3.

6. At the time of hearing before us, on behalf of assessee Shri Hiren Vepari, ld. counsel appeared and contended that the asesee is an exporter of diamonds and its turnover has steadily increased as under :-

4

ITA No.1212 & 1108/AHD/2008

A.Y. 2003-04 Rs.2,433.54 lacs

A.Y. 2004-05 Rs.8,990.70 lacs

A.Y. 2005-06 Rs.13,065.75 lacs

The ld. counsel of the assessee pointed out that similar disallowances were also made in earlier years, appeals were heard and the decision was taken. The view taken in appeal is given in a chart which is placed on record. On the basis of the chart and keeping in view the past history of the case and the steady increase in the turnover, appropriate relief be allowed to the assessee.

7. On the other hand, Smt. Jyoti Laxmi, ld. Sr. D.R. appearing on behalf of the Revenue vehemently supported the order of Assessing Officer. The ld. D.R. pointed out that the Learned Commissioner of Income Tax(Appeals) should have confirmed the various additions/ disallowances, which were made by the Assessing Officer because these were fair and reasonable.

8. Having heard both the sides, we have carefully gone through the orders of authorities below and perused the chart placed on record by the ld. counsel of the assessee. Our decision in respect of various additions/ disallowances is as under :-

(a)Foreign travelling expenses :- In the immediately preceding assessment years, the Assessing Officer disallowed 10% of foreign travelling expenses. These were deleted by the Tribunal vide order dated 17.05.2010 in ITA No. 3774/AHD/2007. This year also, the Learned Commissioner of Income Tax(Appeals) deleted the said disallowance following his order for the assessment year 2004-05. We, therefore, decline to interfere. Resultantly, Ground No. 2 of Revenue's appeal is rejected.

(b) Depreciation on motor car/ motor car insurance and car repairing expenses :- In the assessment year 2003-04, no disallowance out of motor car insurance, motor car repairing expenses and motor car depreciation was made. In the assessment year 2004-05, ad hoc disallowance out of motor car depreciation was made. Against this, no appeal was filed by the assessee. In the assessment year 2004-05, no disallowance out of motor car insurance and motor car repairing was made. This year, the Assessing Officer has disallowed 20% of these expenses. Looking to the past history of the case, steady increase in the turnover, in our opinion, it will 5

ITA No.1212 & 1108/AHD/2008

meet the end of justice, if disallowance out of these expenses is restricted to 1/6th of the expenses. We direct the Assessing Officer to re-work out the disallowance accordingly.

(c) Telephone expenses (including mobile) :- From the chart filed by the assessee, disallowance sustained was 10% of total telephone expenses. In the assessment year under appeal, the Learned Commissioner of Income Tax(Appeals) sustained the disallowance to 20%. Keeping in view the decision of appellate authority in earlier year, disallowance out of telephone expenses is restricted to 10% i.e. Rs.1,00,502/- (10% of Rs.10,05,021/-) of total expenses.

(d) Staff welfare and office expenses :- In the assessment year 2003-04, no disallowance was made out of these expenses In the assessment year 2004-05, 10% of the expenses was disallowed from staff welfare expenses and no disallowance was made out of conveyance expenses. In the assessment year under appeal, the Assessing Officer disallowed 20%. However, the Learned Commissioner of Income Tax(Appeals) restricted the same to Rs.50,000/-. Aggrieved by this order of Learned Commissioner of Income Tax(Appeals), both the sides are in appeals. The total conveyance expenses is Rs.4,01,476/-. In the earlier years, conveyance expenses were never disallowed. Only in the assessment year 2004-05, 10% of staff welfare expenses were disallowed. In the assessment year under appeal, total staff welfare expenses incurred was Rs.3,61,252/-. Looking to the past history, we are of the view that no disallowance out of conveyance expenses is called for because disallowance out of motor car expenses has been separately made and partially confirmed by us (supra).

With regard to staff welfare expenses, we are of the view that it will meet the end of justice, if disallowance is restricted to 10% as was done in the assessment year 2004-05. Accordingly, this disallowance is restricted to Rs.35,000/- (which is approximately 10% of total expenses of Rs.3,61,252/-). The Assessing Officer is accordingly directed to restrict the disallowance out of staff welfare and conveyance to Rs.35,000/-.

(e) Office maintenance and Office expenses :- From the chart, it can be seen that in the assessment year 2003-04, no disallowance was made out of office maintenance and office expenses. In the assessment year 2004-05, disallowance was restricted to 10%. In the assessment year under appeal, the Assessing Officer disallowed 20% of total office maintenance and office expenses and in the impugned order, the Learned Commissioner of Income Tax(Appeals) 6

ITA No.1212 & 1108/AHD/2008

restricted the disallowance to 25%. Keeping in view the totality of the facts, disallowance restricted by the Learned Commissioner of Income Tax(Appeals) to the extent of Rs.25,000/- is fair and reasonable, therefore, no interference is called for. Ground No. 3 of both the appeals is rejected.

9. In the result, for statistical purposes, the appeal filed by the Revenue as well by the assessee are partly allowed as indicated above.

The Order was pronounced in the Court on 30.07.2010

Sd/- Sd/- (D.C. Agrawal) (T.K. Sharma) Accountant Member Judicial Member DATED : 30 / 07 / 2010

Copy of the order is forwarded to :

1) The Assessee

(2) The Department.

3) CIT(A) concerned, (4) CIT concerned, (5) D.R., ITAT, Ahmedabad. True Copy

By Order

Deputy Registrar, ITAT, Ahmedabad

Laha/Sr.P.S.